10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 1, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-25629

CARROLS CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	16-0958146
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
968 James Street Syracuse, New York	13203
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (315) 424-0513

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     ¨  No    x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes    ¨  No    x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x  No    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act, (Check one):

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  x    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)     Yes    ¨  No    x

The number of shares outstanding of the registrant’s common stock as of June 26, 2006 is 10.

DOCUMENTS INCORPORATED BY REFERENCE

None

CARROLS CORPORATION AND S UBSIDIARIES

FORM 10-K

YEAR ENDED DECEMBER 31, 2005

		Page
PART I
Item 1	Business	4
Item 1A	Risk Factors	22
Item 1B	Unresolved Staff Comments	33
Item 2	Properties	33
Item 3	Legal Proceedings	34
Item 4	Submission of Matters to a Vote of Security Holders	34
PART II
Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6	Selected Financial Data	35
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A	Quantitative and Qualitative Disclosures about Market Risks	54
Item 8	Financial Statements and Supplementary Data	55
Item 9	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	55
Item 9A	Controls and Procedures	55
Item 9B	Other Information	58
PART III
Item 10	Directors and Executive Officers of the Registrants	59
Item 11	Executive Compensation	61
Item 12	Security Ownership of Certain Beneficial owners and Management and Related Stockholder Matters	66
Item 13	Certain Relationships and Related Transactions	67
Item 14	Principal Accountant Fees and Services	69
Item 15	Exhibits and Financial Statement Schedules	70

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PART I

Throughout this Annual Report on Form 10-K, we refer to Carrols Corporation, a Delaware corporation incorporated in 1968, as “Carrols” and, together, with its consolidated operations, as “we”, “our” and “us” unless otherwise indicated. Any reference to “Carrols Holdings” or “Holdings” refers to our parent and sole stockholder, Carrols Holdings Corporation, a Delaware corporation, unless otherwise indicated.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. For convenience, all references herein to the fiscal years ended December 28, 2003, January 2, 2005 and January 1, 2006 will hereinafter be referred to as the fiscal years ended December 31, 2003, 2004 and 2005, respectively. Our fiscal year ended December 31, 2004 contained 53 weeks. Our fiscal years ended December 31, 2005 and 2003 each contained 52 weeks.

We use the terms “Segment EBITDA” and “Segment EBITDA margin” in our 2005 Annual Report on Form 10-K because as it is a financial indicator that is reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA (earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other income and expense and loss on extinguishment of debt) may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. See Note 13 to the accompanying consolidated financial statements.

We use the term “Consolidated Adjusted EBITDA” because we believe it is a useful financial indicator for our ability to service and/or incur indebtedness. Consolidated Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other income and expense and loss on extinguishment of debt) should not be considered as an alternative to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. Consolidated Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Management believes the most directly comparable measure to Consolidated Adjusted EBITDA calculated in accordance with generally accepted accounting principles (“GAAP”) is net cash provided from operating activities. See Item 6 “Selected Historical Financial Data” for a reconciliation of non-GAAP financial measures.

In this Annual Report on Form 10-K, we refer to information, forecasts and statistics regarding the restaurant industry. Unless otherwise indicated, all restaurant industry data in this Annual Report on Form 10-K refers to the U.S. restaurant industry and is taken from or based upon the Technomic Information Services (Technomic) 2006 report entitled “2006 Technomic Top 500 Chain Restaurant Report.” In this Annual Report on Form 10-K we also refer to information, forecasts and statistics from the U.S. Census Bureau, U.S. Bureau of Labor Statistics and BKC. Unless otherwise indicated, information regarding BKC in this Annual Report on Form 10-K has been made publicly available by BKC. Any reference to BKC in this Annual Report on Form 10-K refers to Burger King Holdings, Inc. and its wholly-owned subsidiaries, including Burger King Corporation. We believe that all of these sources are reliable, but we have not independently verified any of this information and cannot guarantee its accuracy or completeness. The information and statistics we have used from Technomic reflect rounding adjustments.

Forward-Looking Statements

This 2005 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. These statements are often identified by the words “may,” “might,” “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope” or similar expressions. In addition, expressions of our strategies, intentions or plans are also forward looking statements. These

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statements reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. We have identified significant factors that could cause actual results to differ materially from those stated or implied in the forward-looking statements. For more information, please see Item 1A – Risk Factors. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties discussed herein:

• Competitive conditions;

• Regulatory factors;

• Environmental conditions and regulations;

• General economic conditions, particularly at the retail level;

• Weather conditions;

• Fuel prices;

• Significant disruptions in service or supply by any of our suppliers or distributors;

• Changes in consumer perception of dietary health and food safety;

• Labor and employment benefit costs;

• The outcome of pending or yet-to-be instituted legal proceedings;

• Our ability to manage our growth and successfully implement our business strategy;

• The risks associated with the expansion of our business;

• General risks associated with the restaurant industry;

• Our inability to integrate any businesses we acquire;

• Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;

• The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;

• The risk of events similar to those of September 11, 2001 or an outbreak or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity;

• Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as recent publicity concerning the health implications of obesity and transfatty acids; and

• other risks and uncertainties that are discussed herein.

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ITE M 1. BUSINESS

Overview

Our Company

We are one of the largest restaurant companies in the United States operating three restaurant brands in the quick-casual and quick-service restaurant segments with 540 company-owned and operated restaurants in 17 states as of December 31, 2005 and 29 franchised restaurants in the United States, Puerto Rico and Ecuador. We own, operate and franchise two Hispanic restaurant brands, Taco Cabana^® and Pollo Tropical^® (together referred to by us as our Hispanic Brands) operating primarily in Texas and Florida, respectively. We are also the largest Burger King^® franchisee and have operated Burger King restaurants since 1976. We believe that the diversification of our restaurant brands and geographic dispersion of our restaurants provide us with financial stability. For the year ended December 31, 2005 we had total revenues of $706.9 million and Consolidated Adjusted EBITDA of $92.4 million. Net cash provided from operating activities for the year ended December 31, 2005 was $22.0 million.

Hispanic Brands

Our Hispanic Brands combine the convenience of quick-service restaurants with the menu variety, use of fresh ingredients, upscale decor and food quality of casual dining. As of December 31, 2005, our Hispanic Brands were comprised of 204 company-owned and 29 franchised restaurants and accounted for 49.0% of our consolidated revenues for the year ended December 31, 2005. Total revenues for our Hispanic brands were $346.8 million in 2005 and have increased from 42% of our consolidated revenues in 2001 to 49% in 2005. Aggregate Segment EBITDA for our two Hispanic brands was $60.6 million in 2005.

Taco Cabana. Taco Cabana restaurants combine fresh, high-quality Tex-Mex and traditional Mexican style food in a festive setting with the convenience and value of quick-service restaurants. Menu items include sizzling fajitas, quesadillas, enchiladas, other Tex-Mex dishes, fresh-made flour tortillas, frozen margaritas and beer. Most menu items are made fresh daily in each of our Taco Cabana restaurants. Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978. As of December 31, 2005, we owned and operated 135 Taco Cabana restaurants located in Texas, Oklahoma and New Mexico and franchised two Taco Cabana restaurants in New Mexico and one in Georgia. For the year ended December 31, 2005, our Taco Cabana restaurants generated total revenues of $209.8 million and Segment EBITDA of $31.9 million. In addition, for 2005, our company-owned Taco Cabana restaurants generated average annual sales per restaurant of $1,614,000, which we believe is among the highest in the quick-casual segment, and average Segment EBITDA per restaurant of $246,000.

Pollo Tropical. Pollo Tropical restaurants combine high quality distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants. Our Pollo Tropical restaurants feature fresh grilled chicken marinated in a proprietary blend of tropical fruit juices and spices and authentic “made from scratch” side dishes. Our menu also features other items including roast pork, a line of premium sandwiches and grilled ribs offered with a selection of sauces. Most menu items are made fresh daily in each of our Pollo Tropical restaurants. Pollo Tropical opened its first company-owned restaurant in 1988 in Miami. As of December 31, 2005, we owned and operated a total of 69 Pollo Tropical restaurants, 59 of which are located in south Florida and ten of which are located in central Florida. We also franchised 26 Pollo Tropical restaurants as of December 31, 2005, 22 of which are located in Puerto Rico, two in Ecuador and two in Florida. For the year ended December 31, 2005, our Pollo Tropical restaurants generated total revenues of $137.0 million and segment EBITDA of $28.7 million. In addition, for 2005, our company-owned Pollo Tropical restaurants generated average annual sales per restaurant of $2,092,000, which we believe is among the highest in the quick-casual segment, and average Segment EBITDA per restaurant of $442,000.

Burger King. Burger King is one of the largest hamburger restaurant chains in the world and we are the largest Burger King franchisee. Burger King restaurants are part of the quick-service segment. Technomic

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indicates that the U.S. restaurant industry is comprised of five major segments: quick-service, quick-casual, family/mid-scale, casual dining and fine dining restaurants. The quick-service segment is the largest of the five major segments of the U.S. restaurant industry based on 2005 sales. Burger King restaurants feature the popular flame-broiled WHOPPER^® sandwich as well as hamburgers and other sandwiches, fries, salads, breakfast items and other offerings typically found in quick-service hamburger restaurants. As of December 31, 2005, we operated 336 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. For the year ended December 31, 2005, our Burger King restaurants generated total revenues of $360.1 million and Segment EBITDA of $31.8 million. In addition, for 2005, our Burger King restaurants generated average annual sales per restaurant of $1,048,000 and average Segment EBITDA per restaurant of $92,000.

Industry

The Restaurant Market

According to Technomic, total restaurant industry revenues in the United States for 2005 were $330.8 billion, an increase of 5.6% over 2004. Sales in the overall U. S. restaurant industry are projected by Technomic to increase at a compound annual growth rate of 5.3% between 2005 and 2010.

Quick-Casual Restaurants

Our Hispanic Brands are part of the quick-casual restaurant segment, which combines the convenience of quick-service restaurants with the menu variety, use of fresh ingredients, upscale decor and food quality of casual dining. We believe that the quick-casual restaurant segment is one of the fastest growing segments of the restaurant industry. According to Technomic, sales growth in 2005 of quick-casual chains in the Top 500 restaurant chains was 11.8% as compared to 7.0% for the overall Top 500 restaurant chains, which includes all five major segments.

Quick-casual restaurants are primarily distinguished by the following characteristics:

• Quick-service or self-service format. Meals are purchased prior to receiving food. In some cases, payment may be made at a separate station from where the order was placed. Also, servers may bring orders to the customer’s table.

• Check averages between $7 and $10. Technomic reports that the average check at quick-casual restaurants in 2005 ranged between $7 and $10, which is generally higher than traditional quick-service restaurants.

• Food prepared to order. We believe that in quick-casual concepts, customization of orders and display cooking are common.

• Fresh ingredients. Many concepts use the word “fresh” in their concept positioning and feature very descriptive menus highlighting these upgraded components.

• Broader range of menu offerings. Typically quick-casual concepts provide greater variety and diversity in their menu offerings relative to traditional quick-service restaurants.

• Enhanced decor. Wooden tables, upholstered seating and track lighting are some of the design features commonly found in quick-casual establishments.

We believe that there is growing consumer demand for quick-casual restaurants because of food quality, value, differentiation of flavors, and the acceptance of ethnic foods, and we believe that our Hispanic Brands are positioned to benefit from these trends. We also believe that our Hispanic Brands will benefit from two significant factors; the population growth rates in regions in which our restaurants are currently located and the rate of growth of the Hispanic population in the United States.

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Our Burger King restaurants are part of the quick-service restaurant segment that Technomic indicates is the largest of the five major segments of the U.S. restaurant chain industry. Technomic identifies ten major types of restaurants comprising the quick-service segment: Hamburger; Pizza; Chicken; Other Sandwich; Mexican; Frozen Dessert; Donut, Beverage, Cafeteria/Buffet and Family Steak. According to Technomic, the quick-service restaurants included in the Top 100 quick-service restaurant chains in 2005 were divided by menu category based on sales as follows:

According to Technomic, sales at all quick-service restaurants in the United States were $168.8 billion in 2005, representing 51% of total U.S. restaurant industry sales. Sales in this segment are projected by Technomic to increase at a compound annual growth rate of 5.5% between 2005 and 2010.

Quick-service restaurants are distinguished by the following characteristics:

• High speed of service and customer use. It is estimated by Technomic that a customer of a typical quick-service restaurant will spend no more than 20 minutes on the total quick-service restaurant experience from the time of ordering to departure.

• Convenience. Quick-service restaurants are typically located in places that are easily accessed and convenient to customers’ homes, places of work and commuter routes.

• Limited menu choice and service. The menus at most quick-service restaurants have a limited number of standardized items. Typically, customers order at a counter or drive thru and pick up food that then is taken to a seating area or consumed off the restaurant premises.

• Value prices. At quick-service restaurants, average check amounts are generally lower than in the other major segments of the restaurant industry.

Our Burger King restaurants operate in the hamburger segment of the quick-service restaurant segment. The hamburger segment of the quick-service restaurant segment in the United States, which generated $56.4 billion in sales in 2005, is the largest segment of the quick-service restaurant segment in the United States according to Technomic. Sales in this segment are projected by Technomic to increase at a compound annual growth rate of 5.5% between 2005 and 2010.

We believe that the quick-service and quick-casual restaurant segments meet consumers’ desire for a convenient, reasonably priced restaurant experience. In addition, we believe that the consumers’ need for meals prepared outside of the home, including takeout, has increased significantly over historical levels as a result of the greater numbers of working women and single parent families. For example, according to the U.S. Bureau of Labor Statistics, the percentage of mothers with children under age six participating in the workforce has increased from 39% in 1975 to 64% in 2002. According to the U.S. Census Bureau, the number of children living in households with two parents has decreased from 80% to 69% over the same period.

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Competitive Strengths

We believe the following strengths differentiate us from our competitors:

Strong Hispanic Brands. We believe our restaurant concepts are highly recognized brands and appeal to a broad demographic base in their core market areas. We believe that the following factors have contributed to the success of our Hispanic Brands:

• strong brand awareness in their respective core markets;

• distinctive menu offerings that appeal to a broad and growing consumer base that we believe prefer freshly prepared food, menu variety and distinguishable flavor profiles;

• high quality food at attractive prices that provide consumers with convenience and value compared to casual dining and other full-service restaurants;

• concentrated store locations that enhance operating and marketing efficiencies;

• commitment to the development of new menu offerings of differentiated foods and beverages;

• ability to effectively manage brand awareness in our core markets, marketing and product development for our Hispanic Brands; and

• real estate locations which enhance brand awareness and facilitate convenience

Attractive Operating Metrics for our Hispanic Brands. We believe that we benefit from attractive restaurant level economics for our Hispanic Brands. In 2005, Taco Cabana and Pollo Tropical had average annual sales per company-owned restaurant of $1.6 million and $2.1 million, respectively, which we believe were among the highest in the quick-casual segment. In 2005, our company-owned Taco Cabana and Pollo Tropical restaurants also generated average Segment EBITDA per restaurant of $246,000 and $442,000, respectively. In 2005, our company-owned Taco Cabana and Pollo Tropical restaurants, on a combined basis, generated aggregate revenues of $346.8 million, aggregate Segment EBITDA of $60.6 million and aggregate Segment EBITDA margins of 17.5%.

Well Positioned to Continue to Capitalize on Growing Population in Our Core Markets Served by Our Hispanic Brands. Our Hispanic Brand restaurants operate primarily in Texas and Florida, two markets experiencing significant population growth. We expect sales from these restaurants to benefit from the continued population growth in these regions, which are projected by the U.S. Census Bureau to exceed the national average. According to the U.S. Census Bureau, the U.S. population is forecast to grow by 4.1% from 2005 to 2010 and the population in Texas and Florida is forecast to grow by 6.4% and 6.7%, respectively, during that same period.

Well Positioned to Continue to Capitalize on the Growth of the Hispanic Population in the United States. We expect that sales from our Hispanic Brand restaurants to benefit from the continued population growth of the U.S. Hispanic population which is projected by the U.S. Census Bureau to exceed the national average. According to the U.S. Census Bureau the growth of the Hispanic population is projected to outpace the overall population growth and increase from 11.8% of the total U.S. population in 2000 to 18.2% by 2025.

Largest Burger King Franchisee. We are Burger King’s largest franchisee and are well positioned to leverage the scale and marketing power of one of the most recognized brands in the restaurant industry. According to BKC, historically it has spent an annual amount between approximately 4% and 5% of its total system sales on advertising (a total of $2.3 billion over the past five years) to sustain and increase this high brand awareness. We also benefit from BKC’s recent award-winning marketing initiatives as well as its development and introduction of new menu items which we believe have enabled us to compete more effectively.

Stable, Diversified Operations. We believe that the diversity of our concepts and the geographic dispersion of our restaurants provide stability by reducing our dependence on any particular brand, commodity or geographic region. Taco Cabana and Pollo Tropical, with their restaurants primarily located in Texas and Florida, respectively, and our Burger King restaurants, provide us with geographic, brand and concept diversity. The

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historical stability and reliability of our operating cash flows has enabled us to fund new restaurant development and pay interest and principal on our borrowings. Over the past five years, our Consolidated Adjusted EBITDA margins (Consolidated Adjusted EBITDA as a percentage of total revenues) have ranged between 13.0% and 14.3% per year and averaged 13.6% per year. Over the same period, net cash provided from operating activities has ranged from $22.0 million to $59.2 million per year and averaged $45.6 million per year.

Experienced Management Team. We believe that our senior management team’s extensive experience in the restaurant industry, knowledge of the demographic and other characteristics of our core markets and its long and successful history of developing, acquiring, integrating and operating quick-service and quick-casual restaurants provides us with a competitive advantage.

Infrastructure in Place for Growth. We believe that our operating disciplines and management and operational infrastructure, corporate and restaurant management information systems and future comprehensive training and development programs will support the addition of newly developed or acquired restaurants.

Business Strategy

Our business strategy is to continue to increase revenues and cash flows through the development of new restaurants. Our business strategy also includes improvements in sales and profitability at our existing restaurants through our new product offerings and effective marketing activities and through our operating efficiencies as a result of our training and management information systems. We intend to pursue opportunities to expand our Hispanic Brands in additional markets within the United States that have demographics similar to the demographics of our existing markets:

Our strategy is based on continuing to leverage our strong brand names and our infrastructure. We realize significant benefits as an owner and operator of the Taco Cabana and Pollo Tropical restaurant concepts and as a Burger King franchisee. These benefits are the result of the following:

• strong recognition of the Taco Cabana and Pollo Tropical brands in their core markets;

• ability to effectively manage brand awareness, marketing and product development for our Hispanic Brands;

• widespread recognition of the Burger King brand and flagship WHOPPER^® product supported by a national advertising program;

• ability to capitalize on Burger King’s new product development capabilities; and

• ability to utilize our existing infrastructure to support the development of new restaurants.

Open Additional Restaurants. We believe that we have significant opportunities to develop new Taco Cabana and Pollo Tropical restaurants in their core markets of Texas and Florida, respectively, and in additional new markets. Our staff of real estate and development professionals is responsible for new restaurant development. Before developing a new restaurant, we conduct an extensive site selection and evaluation process that includes in-depth demographic, market and financial analyses. By selectively increasing the number of restaurants we operate in a particular market, we can continue to increase brand awareness and effectively leverage our field supervision, corporate infrastructure and marketing expenditures. We intend to continue to utilize real estate leasing as a means of minimizing the amount of cash invested in new restaurants. We believe that cash generated from operations, borrowings under our senior credit facility and leasing will enable us to continue to pursue our strategy of new restaurant development with respect to our existing brands.

In addition to opportunities for expansion of our Hispanic Brands within our core markets, we believe there are significant growth opportunities beyond such markets. We plan to open new restaurants in existing and new markets that may be either freestanding buildings or restaurants contained within strip shopping centers (in-line restaurants) to further leverage our existing brand awareness. Developing in-line restaurants allows us to

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selectively expand our brand penetration and visibility in certain of our existing markets, while doing so at a lower cost than developing a restaurant as a freestanding building. In addition, development of in-line restaurants permits us to further penetrate markets where freestanding opportunities may be limited. We also believe that there are a number of geographic regions in the United States outside of our core markets where the size and influence of the Hispanic population provide significant opportunities for development of additional Hispanic Brand restaurants. We are currently securing and pursuing locations in New Jersey and New York for new Pollo Tropical restaurants and evaluating the expansion of our Taco Cabana brand in new markets. We opened our first Pollo Tropical restaurant in the New York metropolitan area in northern New Jersey on March 10, 2006.

We believe there may also be opportunities to expand the number of Burger King restaurants we operate through selective acquisitions from other franchisees and through development of new restaurants in our existing markets. We believe that selective acquisitions of additional Burger King restaurants would result in the improved profitability of the acquired restaurants due to our proven abilities to reduce operating costs and achieve increased economies of scale by leveraging our infrastructure and operating systems.

Increase Same Store Sales. Our strategy is to grow sales in our existing restaurants by continuing to develop new products for our Hispanic Brands, develop and enhance the efficiency and quality of our proprietary advertising and promotional programs, improve the customer experience at all of our restaurants and further capitalize on attractive industry and demographic trends. We believe that our core customer base includes a growing Hispanic population with increasing amounts of income available to be spent on traditional foods prepared at restaurants rather than at home. We also believe that our Hispanic Brands appeal to a non-Hispanic customer base in search of new flavor profiles, healthier menu choices and a differentiated product offering in a more appealing atmosphere. We believe we have been successful in attracting new customers to our Hispanic Brand restaurants as a result of our efforts to improve the customer experience at all of those restaurants and to continue to develop and enhance the efficiency and quality of our proprietary advertising and promotional programs for our Hispanic Brands. We also believe that our Burger King restaurants are well-positioned to benefit from BKC’s recent initiatives with respect to the Burger King brand.

Continue to Improve Restaurant Profitability. We maintain a disciplined commitment to increasing the sales and profitability of our existing restaurants. We believe that our large base of restaurants, skilled management team, sophisticated management information and operating systems and training programs position us to enhance operating efficiencies and improve profitability at our existing restaurants. Our operating systems allow us to effectively manage restaurant labor and food costs, effectively manage our restaurant operations and ensure consistent application of operating controls through the use of our sophisticated management information and point-of-sale systems. Our size and, in the case of Burger King, the size of the Burger King system, enable us to realize benefits from improved bargaining power for purchasing and cost management initiatives. We believe these factors provide the basis for increased restaurant level and company profitability.

Overview of Restaurant Concepts

Taco Cabana Restaurants

Our Taco Cabana quick-casual restaurants combine generous portions of fresh, premium quality Tex-Mex and traditional Mexican style food with the convenience and value of quick-service restaurants. The restaurants typically provide interior, semi-enclosed and patio dining areas with a festive Mexican theme. Menu items include flame-grilled beef and chicken fajitas served on sizzling iron skillets, quesadillas, traditional Mexican and American breakfasts, other Tex-Mex dishes and fresh, hot flour tortillas. Our Taco Cabana restaurants also offer a variety of beverage choices, including margaritas and beer. Most of the menu items offered at Taco Cabana are prepared at each restaurant from fresh meat, chicken and produce ingredients delivered by suppliers to the restaurant, usually three times each week. Taco Cabana utilizes fresh, high quality ingredients and prepares many items “from scratch.” In order to simplify operations and provide a more consistent product, Taco Cabana also uses a number of pre-prepared items.

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Our typical Taco Cabana restaurants average approximately 3,200 square feet (exclusive of the exterior dining area) and provide seating for approximately 80 customers, with additional outside patio seating for approximately 50 customers. At December 31, 2005, all of our Taco Cabana restaurants were freestanding buildings except for three locations contained within a retail mall and one location contained within a strip shopping center. Taco Cabana restaurants are typically distinctive in appearance, conveying a Mexican theme and permitting easy identification by passing motorists. Our Taco Cabana restaurants feature rounded fronts, as well as Southwest accents such as a clay tile roof, heavy wood beams and a trellis that shades the patio area, and the use of bright colors outside and inside. Corrugated metal wall panels, aged wood finishes and distressed stainless steel counter tops are featured inside.

Taco Cabana’s interior restaurant design features display cooking that enables customers to observe fresh fajitas cooking on a grill, a machine making fresh, hot flour tortillas and the preparation of other food items. Upon entry, the customer places an order selected from an overhead menu board, proceeds down a service line to where the order is picked up, and then passes a salsa bar en route to the dining area. The distinctive salsa bar offers Taco Cabana customers freshly prepared, authentic Tex-Mex ingredients such as salsa de fuego (made with charred peppers and tomatoes), pico de gallo and salsa (all “made from scratch” throughout the day at each restaurant), cilantro, pickled jalapeno slices, crisp chopped onions and fresh sliced limes. Depending on the season, time of day and personal preference, our customers can choose to dine in the restaurant’s brightly colored and festive interior dining area or in either the semi-enclosed or outdoor patio areas.

Our Taco Cabana restaurants provide the convenience of drive-thru windows as well as the ability for customers to dine-in or take-out. A majority of our Taco Cabana restaurants are open 24 hours a day. Our hours of operation are continually evaluated for economic viability on a market and individual restaurant basis.

Pollo Tropical Restaurants

Our Pollo Tropical quick-casual restaurants combine high quality, distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants. Pollo Tropical restaurants offer a unique selection of food items reflecting tropical and Caribbean influences and feature grilled fresh chicken marinated in a proprietary blend of tropical fruit juices and spices. Chicken is grilled in view of customers on large, open-flame grills. Pollo Tropical also features additional menu items such as roast pork, a line of “TropiChops^®” (a bowl containing rice, black beans, chicken or pork), a line of premium sandwiches and grilled ribs that feature a selection of sauces. We also feature an array of distinctive and popular side dishes, including black beans and rice, yucatan fries and sweet plantains, as well as more traditional menu items such as french fries, corn and tossed and caesar salads. We also offer uniquely Hispanic desserts, such as flan and tres leches.

Our Pollo Tropical restaurants typically incorporate high ceilings, large windows, tropical plants, light colored woods, decorative tiles, a visually distinctive exterior entrance tower, lush landscaping and other signature architectural features, all designed to create an airy, inviting and tropical atmosphere. We design our restaurants to conveniently serve a high volume of customer traffic while retaining an inviting, casual atmosphere.

Our Pollo Tropical restaurants are generally open for lunch, dinner and late night orders seven days per week from 11:00 am to midnight and offer sit-down dining, counter take-out and drive-thru service to accommodate the varied schedules of families, business people and students. Our menu offers a variety of portion sizes to accommodate a single customer, family or large group. Pollo Tropical restaurants also offer an economical catering menu, with special prices and portions to serve parties in excess of 25 people.

Our Pollo Tropical restaurants typically provide seating for 80 to 100 customers and provide drive-thru service. At December 31, 2005 all of our company-owned Pollo Tropical restaurants were freestanding buildings except for five locations contained within strip shopping centers and one street-level storefront location in an office building. Our typical freestanding Pollo Tropical restaurant ranges between 2,800 and 3,200 square feet.

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Burger King Restaurants

Burger King Corporation (“BKC”) is one of the largest quick-service hamburger restaurant chains in the world. According to BKC, at March 31, 2006 there were a total of 11,109 restaurants in 65 countries and U.S. territories, including 7,262 or 65% located in the United States. According to BKC its total worldwide restaurant sales for the year ended June 30, 2005 were approximately $12.1 billion, of which approximately $8.4 billion were in the United States and Canada.

“Have It Your Way”^® service, flame broiling, generous portions and competitive prices characterize the Burger King system marketing strategy. Our Burger King restaurants feature flame-broiled hamburgers and other sandwiches, the most popular of which is the WHOPPER^® sandwich. The WHOPPER is a large, flame-broiled hamburger on a toasted bun garnished with mayonnaise, lettuce, onions, pickles and tomatoes. The basic menu of all Burger King restaurants consists of hamburgers, cheeseburgers, chicken and fish sandwiches, breakfast items, french fries, onion rings, salads, chili, shakes, desserts, soft drinks and other beverages. In addition, promotional menu items are introduced periodically for limited periods. We believe that BKC continually seeks to develop new products as it endeavors to enhance the menu and service of Burger King restaurants.

Our Burger King restaurants are typically open seven days per week with minimum operating hours from 6:00 am to 11:00 pm. Burger King restaurants are quick-service restaurants of distinctive design and are generally located in high-traffic areas throughout the United States. We believe that the primary competitive advantages of Burger King restaurants are:

• brand recognition;

• convenience of location;

• speed of service;

• quality; and

• price.

Burger King restaurants are designed to appeal to a broad spectrum of consumers, with multiple day-part meal segments targeted to different groups of consumers.

Our Burger King restaurants consist of one of several building types with various seating capacities. BKC’s traditional freestanding restaurant contains approximately 2,800 to 3,200 square feet with seating capacity for 90 to 100 customers, has drive-thru service windows, and has adjacent parking areas. As of December 31, 2005, 322 of our 336 Burger King restaurants were freestanding.

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Restaurant Economics

Selected restaurant operating data for our three restaurant concepts is as follows:

	Year Ended December 31,
	2003			2004			2005
Taco Cabana:
Average annual (52 weeks) sales per company-owned restaurant (in thousands)	$	1,523		$	1,604		$	1,614
Average sales transaction	$	6.66		$	6.88		$	7.08
Drive-through sales as a percentage of total sales		46.6	%		47.2	%		47.6	%
Day part sales percentages:
Breakfast		15.8	%		16.0	%		16.5	%
Lunch		22.7	%		23.1	%		23.2	%
Dinner		25.3	%		25.4	%		25.6	%
Late night (9 pm to midnight)		14.5	%		14.1	%		13.7	%
Other (2 pm to 5 pm and midnight to 6 am)		21.7	%		21.4	%		21.0	%
Pollo Tropical:
Average annual (52 weeks) sales per company-owned restaurant (in thousands)	$	1,838		$	2,018		$	2,092
Average sales transaction	$	8.18		$	8.25		$	8.72
Drive-through sales as a percentage of total sales		42.2	%		42.5	%		41.7	%
Day part sales percentages:
Lunch		45.9	%		45.7	%		45.8	%
Dinner and late night		54.1	%		54.3	%		54.2	%
Burger King:
Average annual (52 weeks) sales per restaurant (in thousands)	$	1,003		$	1,034		$	1,048
Average sales transaction	$	4.47		$	4.74		$	5.03
Drive-through sales as a percentage of total sales		61.8	%		61.8	%		62.3	%
Day part sales percentages:
Breakfast		14.6	%		14.4	%		14.6	%
Lunch		33.4	%		33.6	%		33.2	%
Dinner		26.9	%		26.9	%		26.9	%
Afternoon and late night		25.1	%		25.1	%		25.3	%

Restaurant Capital Costs

The cost of equipment, seating, signage and other interior costs of a standard new Taco Cabana restaurant currently is approximately $420,000 (excluding the cost of the land, building and site improvements). The cost of the land generally ranges from $650,000 to $800,000 and the cost of building and site improvements generally ranges from $800,000 to $850,000. We typically lease the real estate associated with our Taco Cabana restaurants.

The cost of equipment, seating, signage and other interior costs of a standard new Pollo Tropical restaurant currently is approximately $365,000 (excluding the cost of the land, building and site improvements). In our core markets, the cost of land generally ranges from $600,000 to $1,000,000 and the cost of building and site improvements generally ranges from $800,000 to $900,000. We typically lease the real estate associated with our Pollo Tropical restaurants.

The cost of the franchise fee, equipment, seating, signage and other interior costs of a standard new Burger King restaurant is approximately $385,000 (excluding the cost of the land, building and site improvements). The cost of land generally ranges from $400,000 to $525,000 and the cost of building and site improvements generally ranges from $550,000 to $625,000. We typically lease the real estate associated with our Burger King restaurants.

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The cost of developing and equipping new restaurants can vary significantly and depends on a number of factors, including the geographic location and size of those restaurants. Accordingly, the cost of opening new restaurants in the future may differ substantially from the historical cost of restaurants previously opened.

Seasonality

Our business is moderately seasonal due to regional weather conditions. Sales from our Taco Cabana restaurants (located in Texas, Oklahoma and New Mexico) and our Burger King restaurants (primarily located in the Northeast) are generally higher during the summer months than during the winter months. Sales from our Pollo Tropical restaurants (located in south and central Florida) are generally higher during the winter months than during the summer months. We believe this seasonal impact is not material to our business as a whole because our multiple concepts operating in diverse geographic areas enable us to reduce our dependence on the economic performance of any one particular region.

Restaurant Locations

As of December 31, 2005, we owned and operated 135 Taco Cabana restaurants and franchised three Taco Cabana restaurants located in the following states:

	Owned	Franchised	Total
Texas	129	—	129
Oklahoma	5	—	5
New Mexico	1	2	3
Georgia	—	1	1
Total	135	3	138

As of December 31, 2005, we owned and operated 69 Pollo Tropical restaurants, all located in Florida. In addition, of our 26 franchised Pollo Tropical restaurants, as of December 31, 2005, 22 are in Puerto Rico; two are in Ecuador and two are in Florida.

The following table details the locations of our 336 Burger King restaurants at December 31, 2005:

State	Total Restaurants
Connecticut	1
Indiana	5
Kentucky	9
Maine	4
Massachusetts	1
Michigan	25
New Jersey	2
New York	133
North Carolina	38
Ohio	84
Pennsylvania	12
South Carolina	21
Vermont	1
Total	336

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Operations

Management Structure

We conduct substantially all of our executive management, finance, marketing and operations support functions from our corporate headquarters in Syracuse, New York, our Taco Cabana division headquarters in San Antonio, Texas and our Pollo Tropical division headquarters in Miami, Florida. The management structure of Taco Cabana consists of an Executive Vice President of Operations, who has over 30 years of restaurant experience, and a Regional Vice President and two Regional Directors supported by 18 district supervisors. The management structure for Pollo Tropical consists of an Executive Vice President, who has over 30 years of experience in the restaurant industry, and a Vice President of Operations and a Regional Director supported by nine district supervisors. Our Burger King operations are overseen by five Regional Directors, three of whom are Vice Presidents, that have an average of 25 years of Burger King restaurant experience. Forty-four district supervisors that have an average of 22 years of restaurant management experience in the Burger King system support the Regional Directors.

For each of our concepts, a district supervisor is responsible for the direct oversight of the day-to-day operations of an average of approximately seven restaurants. Typically, district supervisors have previously served as restaurant managers at one of our restaurants. Regional directors, district supervisors and restaurant managers are compensated with a fixed salary plus an incentive bonus based upon the performance of the restaurants under their supervision. Typically, our restaurants are staffed with hourly employees who are supervised by a salaried manager and two or three salaried assistant managers.

Training

We maintain a comprehensive training and development program for all of our personnel and provide both classroom and in-restaurant training for our salaried and hourly personnel. The program emphasizes system-wide operating procedures, food preparation methods and customer service standards for each of the concepts. In addition, BKC’s training and development programs are also available to us as a franchisee.

Management Information Systems

Our management information systems, which we believe are more sophisticated than systems typically utilized by many small quick-casual/quick-service restaurant operators and many other Burger King franchisees, provide us with the ability to more efficiently and effectively manage our restaurants and to ensure consistent application of operating controls at our restaurants. Our size also affords us the ability to maintain an in-house staff of information and restaurant systems professionals dedicated to continuously enhancing our systems. In addition, these capabilities allow us to integrate newly developed or acquired restaurants and to leverage our investments in information technology over a larger base of restaurants.

Our restaurants generally employ touch-screen point-of-sale (POS) systems that are designed to facilitate accuracy and speed of order taking. These systems are user-friendly, require limited cashier training and improve speed-of-service through the use of conversational order-taking techniques. The POS systems are integrated with PC-based applications at the restaurant that are designed to facilitate financial and management control of our restaurant operations.

Our restaurant systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food data, and other key operating information for each restaurant. We electronically communicate with our restaurants on a daily basis, which enables us to collect this information for use in our corporate management systems. Our corporate and divisional administrative headquarters house client/server-based systems that support all of our accounting, operating and reporting systems. We also operate a 24-hour, seven-day help desk at our corporate headquarters that enables us to provide systems and operational support to our restaurant operations as required. Among other things, our restaurant information systems provide us with the ability to:

• monitor labor utilization and sales trends on a real-time basis at each restaurant, enabling the restaurant manager to effectively manage to our established labor standards on a timely basis;

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• reduce shrinkage using restaurant-level inventory management and centralized standard costing systems;

• analyze sales and product mix data to help restaurant management personnel forecast production levels;

• monitor day-part drive-thru speed of service at each of our restaurants;

• systematically communicate human resource and payroll data to our administrative offices for efficient centralized management of labor costing and payroll processing;

• employ centralized control over price, menu and inventory management activities at the restaurant utilizing the remote access capabilities of our systems;

• take advantage of electronic commerce including our ability to place orders with suppliers and to integrate detailed invoice, receiving and product data with our inventory and accounting systems; and

• provide analyses, reporting and tools to enable all levels of management to review a wide-range of financial and operational data.

Information from our systems is available daily to the restaurant manager, who is expected to react quickly to trends or situations in his or her restaurant. Our district supervisors also receive daily information for all restaurants under their control and have computer access to key operating data on a remote basis using our corporate intranet. Management personnel at all levels, from the restaurant manager through senior management, monitor key restaurant performance indicators.

Site Selection

We believe that the location of our restaurants is a critical component of each restaurant’s success. We evaluate potential new sites on many critical criteria including accessibility, visibility, costs, surrounding traffic patterns, competition and demographic characteristics. Our senior management determines the acceptability of all acquisition prospects and new sites, based upon analyses prepared by our real estate and financial professionals and operations personnel.

Burger King Franchise Agreements

Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Our franchise agreements with BKC generally require, among other things, that all restaurants comply with specified design criteria and be operated in a prescribed manner, including utilization of the standard Burger King menu. In addition, our Burger King franchise agreements generally require that our restaurants conform to BKC’s current image and provide for remodeling of our restaurants at the request of BKC during the tenth year of the agreements to conform to such current image. These franchise agreements with BKC generally provide for an initial term of 20 years and currently have an initial franchise fee of $50,000. Any franchise agreement, including renewals, can be extended at our discretion for an additional 20-year term, with BKC’s approval, provided the restaurant meets the then-current Burger King operating and image standards and the franchisee is not in default under the terms of the franchise agreement. The franchise agreement fee for subsequent renewals is currently $50,000. BKC may not cancel or terminate our franchise agreements unless we are in default of the terms of the agreements. We are not in default under any of the franchise agreements with BKC.

In order to obtain a successor franchise agreement with BKC, a franchisee is typically required to make capital improvements to the restaurant to bring it up to Burger King’s current design standards. The required capital improvements will vary widely depending upon the magnitude of the required changes and the degree to which we have made interim improvements to the restaurant. We have 18 franchise agreements expiring in 2006, 17 franchise agreements expiring in 2007 and 27 franchise agreements expiring in 2008. If we determine that a restaurant is under-performing, we may elect not to renew the franchise agreement. Of our franchise agreements expiring in 2006 and 2007, we currently anticipate that we would likely elect not to renew approximately six

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franchise agreements due to the cost of the required capital improvements that we would need to make as a result of such renewals relative to the profitability of such restaurants. In addition we currently plan to terminate four franchise agreements which are not expiring in 2006 and 2007. Based on the current profitability of such restaurants, we believe that the impact on our cash provided from operating activities as a result of such non-renewals will not be material. Our determination of whether to renew such franchise agreements is not final and is subject to further evaluation and may change, depending on many factors including our assessment of the anticipated future profitability of the subject restaurants and BKC’s requirements for renewing each such franchise. We anticipate our future costs of improving our Burger King restaurants in connection with franchise renewals to range from $200,000 to $400,000; however, these costs for each location can vary significantly and depend on a number of factors, including the geographic location and the size of those restaurants. In addition, the cost of capital improvements made in connection with future franchise agreement renewals may differ substantially from past franchise renewals.

We believe that we will be able to satisfy BKC’s normal franchise agreement renewal policies. Accordingly, we believe that renewal franchise agreements will be granted on a timely basis by BKC at the expiration of our existing franchise agreements. Historically, BKC has granted all of our requests for successor franchise agreements. However, there can be no assurances that BKC will grant this in the future.

In addition to the initial franchise fee, we generally pay to BKC a monthly royalty. For an explanation of the franchise fees and royalties see “—Franchise Fees, Royalties and Early Successor Program” below. We also contribute 4% of restaurant sales from our Burger King restaurants to fund BKC’s national and regional advertising. BKC engages in substantial national and regional advertising and promotional activities and other efforts to maintain and enhance the Burger King brand. We supplement from time to time BKC’s marketing with our own local advertising and promotional campaigns. See “Advertising and Promotion.”

Our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that franchises granted by BKC to third parties will not adversely affect any Burger King restaurants that we operate.

We are required to obtain BKC’s consent before we acquire existing Burger King restaurants from other franchisees or develop new Burger King restaurants. BKC also has the right of first refusal to purchase any Burger King restaurant that is being offered for sale by a franchisee. To date, BKC has approved all of our acquisitions of Burger King restaurants from other franchisees; however, in two instances, BKC exercised its right of first refusal and purchased restaurants we sought to acquire.

Franchise Fees, Royalties and Early Successor Program

On July 1, 2000, BKC increased its royalty and franchise fees for most new restaurants. The franchise fee for new restaurants increased from $40,000 to $50,000 for a 20-year agreement and the royalty rate increased from 3 ¹/2% of sales to 4 ¹/2% of sales, after a transitional period from July 1, 2000 through June 30, 2003. For franchise agreements entered into during the transitional period, the royalty rate is 4.0% of sales for the first ten years of the agreement and 4 ¹/2% of sales for the balance of the term. The advertising contribution remained at 4.0% of sales. The royalty rates for existing franchise agreements are not affected by these changes until the time of renewal.

BKC offered a voluntary program to encourage franchisees to accelerate the renewal of their franchise agreements. Franchisees that elected to participate in the Early Successor Incentive Program were required to make capital improvements in their restaurants to bring them up to Burger King’s then current design image. Franchise agreements entered into under this program contain special provisions regarding the royalty rates including a reduction in the royalty for a period of time.

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For commitments made prior to July 1, 2000 to renew franchise agreements under BKC’s Fiscal 2000 Early Successor Incentive Program, the renewal franchise fee remained at $40,000. The royalty rate under this program remained at 3 ¹/2% of sales through March 31, 2002, at which time it was reduced to 2 ³/4% of sales for the following five-year period. The royalty rate reverts back to 3 ¹/2% of sales effective April 1, 2007 for the remainder of any of the initial franchise term, and then increases to 4 ¹/2% of sales for the balance of the new agreement.

For commitments made between July 1, 2000 and June 30, 2001 to renew franchise agreements under BKC’s Fiscal 2001 Early Successor Incentive Program, the renewal franchise fee increased to $50,000. The royalty rate remained at 3 ¹/2% of sales through September 30, 2002, at which time it was reduced to 3% of sales for a three-year period. The royalty rate reverts back to 3 ¹/2% of sales effective October 1, 2005 for the remainder of any of the initial franchise term, and then increases to 4 ¹/2% of sales for the balance of the new franchise agreement.

After evaluating the applicable royalty reductions and the acceleration of the required capital improvements, in 2000 we elected to renew 48 franchise agreements under BKC’s Early Successor Incentive Program. Our capital expenditures relating to these renewals have been completed. Burger King royalties, as a percentage of our Burger King restaurant sales, were 3.5% in 2005 and 3.4% in 2004 and 2003.

Hispanic Brands Franchise Operations

As of December 31, 2005, Taco Cabana had two franchisees operating a total of three Taco Cabana restaurants. During the third quarter of 2005, we acquired four Taco Cabana restaurants from a franchisee in Texas. As of December 31, 2005, Pollo Tropical had three franchisees operating a total of 26 Pollo Tropical restaurants located in Puerto Rico, Ecuador and Miami. While our existing franchisees may open new restaurants from time to time, we are not actively expanding our franchise operations at the present time.

All franchisees are required to operate their restaurants in compliance with certain methods, standards and specifications developed by us regarding such matters as menu items, recipes, food preparation, materials, supplies, services, fixtures, furnishings, decor and signs. The franchisees have discretion to determine the prices to be charged to customers. In addition, all franchisees are required to purchase substantially all food, ingredients, supplies and materials from suppliers approved by us.

Advertising and Promotion

We believe our Hispanic Brands are among the most highly recognized quick-casual restaurant brands in their core markets of Texas and south and central Florida. Taco Cabana and Pollo Tropical utilize an integrated, multi-level marketing approach that includes periodic chain-wide promotions, direct mail, in-store promotions, local store marketing and other strategies, including the use of radio and television advertising in their major markets. Combination value meals are also utilized as well as limited time offer menu item promotions. Pollo Tropical advertises in both English and Spanish media throughout the year. As a percentage of our Taco Cabana restaurant sales, Taco Cabana’s advertising expenditures were 4.2% in 2005, 4.1% in 2004, 4.7% in 2003. Taco Cabana’s advertising expenditures, as a percentage of restaurant sales, were higher in 2003 than historical levels due to additional promotions in certain markets. As a percentage of restaurant sales, Pollo Tropical advertising expenditures were 1.9% in 2005 and 1.6% in 2004, due to lower television and radio advertising, and 3.6% in 2003.

The efficiency and quality of advertising and promotional programs can significantly affect quick-casual/quick-service restaurant businesses. We believe that one of the major advantages of being a Burger King franchisee is the value of the extensive regional and national advertising and promotional programs conducted by BKC. In addition to the benefits derived from BKC’s advertising spending, we supplement from time to time BKC’s advertising and promotional activities with our own local advertising and promotions, including the

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purchase of additional television, radio and print advertising. The concentration of our Burger King restaurants in many of our markets permits us to leverage advertising in those markets. We also utilize promotional programs, such as combination value meals and discounted prices, targeted to our customers, in order to create a flexible and directed marketing program.

We are generally required to contribute 4% of restaurant sales from our Burger King restaurants to an advertising fund utilized by BKC for its advertising, promotional programs and public relations activities. BKC’s advertising programs consist of national campaigns supplemented by local advertising. BKC’s advertising campaigns are generally carried on television, radio and in circulated print media (national and regional newspapers and magazines).

Product Development

Each of Taco Cabana and Pollo Tropical has separate and complete product research and development functions, comparable to other large multi-unit restaurant companies. These capabilities enable us to continually refine our menu offerings and develop new products for introduction in our Hispanic Brand restaurants. These functions include:

• fully equipped test kitchens;

• professional culinary and quality assurance team members;

• consumer research protocol;

• uniform and detailed product specification formats; and

• product development committees that integrate marketing, operations, financial analysis and procurement.

Taco Cabana’s test kitchen is located near our San Antonio division headquarters in leased commercial space. The facility includes a large test kitchen, with equipment that mirrors the capability of a Taco Cabana restaurant, office space for all R&D staff, and a large tasting and meeting room. There are three permanent staff positions, including a Director of R&D, a Manager of R&D and Quality Assurance and a staff assistant.

Pollo Tropical’s test kitchen is located in our Miami division headquarters. The facility includes cooking equipment that mirrors the capability of a Pollo Tropical restaurant and a tasting area. There are three permanent staff positions, including a Director of R&D, a Manager of R&D and a Quality Assurance and Purchasing assistant.

Suppliers and Distributors

For our Taco Cabana and Pollo Tropical restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies to ensure consistent quality and freshness and to obtain competitive prices. Taco Cabana and Pollo Tropical restaurants’ food and supplies are ordered from approved suppliers and are shipped via distributors to the restaurants. Both brands are responsible for monitoring quality control and supervision of these suppliers and conduct inspections to observe the preparation and quality of products purchased. For our Taco Cabana restaurants, SYGMA Network, Inc. (SYGMA) serves as our primary distributor of food and beverage products and supplies. SYGMA purchases, warehouses and distributes products for these restaurants under a distribution service agreement that expires on June 1, 2009. For our Pollo Tropical restaurants, Henry Lee, a division of Gordon Food Service, serves as our primary distributor of food and paper products under an agreement that expires on March 16, 2007. We rely significantly on these suppliers but, in general, if any such suppliers are unable to service us, we believe that we have significant alternative sources available to us to avoid any material disruption in service. However, we rely on Pilgrim’s Pride (formerly Conagra) and Gold Kist as our two suppliers of chicken for our Pollo Tropical restaurants and, although we believe that alternative sources of chicken are available to us, if either such supplier is unable to service us, this

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could lead to a material disruption of service or supply until a new supplier is engaged, which could have a material adverse effect on our business. With respect to our distributors for our Taco Cabana and Pollo Tropical restaurants, although we believe that alternative distributors are available to us, if any of our distributors are unable to service us, this could lead to a material disruption of service or supply until a new distributor is engaged, which could have a material adverse effect on our business.

We are a member of a national purchasing cooperative, Restaurant Services, Inc., created for the Burger King system. Restaurant Services is a non-profit independent cooperative that acts as the purchasing agent for approved distributors to the Burger King system and serves to negotiate the lowest cost for the system. We use our purchasing power to negotiate directly with certain other vendors, to obtain favorable pricing and terms for supplying our Burger King restaurants. For our Burger King restaurants, we are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers. We currently utilize four distributors to supply our Burger King restaurants with the majority of their foodstuffs in various geographical areas. We may purchase non-food items such as kitchen utensils, equipment maintenance tools and other supplies from any suitable source so long as such items meet BKC product uniformity standards. All BKC-approved distributors are required to purchase foodstuffs and supplies from BKC-approved manufacturers and purveyors. BKC is responsible for monitoring quality control and supervision of these manufacturers and conducts regular visits to observe the preparation of foodstuffs, and to run various tests to ensure that only high quality foodstuffs are sold to BKC-approved suppliers. In addition, BKC coordinates and supervises audits of approved suppliers and distributors to determine continuing product specification compliance and to ensure that manufacturing plant and distribution center standards are met. In the event these Burger King suppliers are unable to service us, we believe that we have significant alternative sources available to us to avoid any material disruption in service.

Quality Assurance

At each of our three concepts, our operational focus is closely monitored to achieve a high level of customer satisfaction via speed, order accuracy and quality of service. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with our operating policies, and with respect to our Burger King restaurants, BKC’s required operating procedures as well. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct. In order to maintain compliance with these operating standards and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance with various customer service standards and objectives, including the results of our “mystery shopper” program. These “mystery shopper” programs are conducted by an independent agency and consist of evaluations of speed, quality of service and other operational objectives including the cleanliness of our restaurants.

We also operate in accordance with quality assurance and health standards mandated by federal, state and local governmental laws and regulations. These standards include food preparation rules regarding, among other things, minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling guidelines and cleanliness. To maintain these standards, we conduct unscheduled inspections of our restaurants. In addition, restaurant managers conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis.

Trademarks

We believe that our names and logos for our Hispanic Brands are important to our operations. We have registered our principal Taco Cabana and Pollo Tropical logos and designs with the U.S. Patent and Trademark Office on the Principal Register as a service mark for our restaurant services. We also have secured or have applied for state and federal registrations of several other advertising or promotional marks, including variations of our principal marks, and have applied for or been granted registrations in foreign countries of our principal marks and several other marks. We intend to protect both Taco Cabana and Pollo Tropical trademarks by appropriate legal action whenever necessary. In certain foreign countries, we have been involved in trademark opposition proceedings to defend our rights to register certain trademarks.

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Other than the Taco Cabana and Pollo Tropical trademarks, we have no proprietary intellectual property other than the logo and trademark of Carrols Corporation. As a franchisee of Burger King, we also have contractual rights to use certain BKC-owned trademarks, service marks and other intellectual property relating to the Burger King concept.

Government Regulation

Various federal, state and local laws affect our business, including various health, sanitation, fire and safety standards. Restaurants to be constructed or remodeled are subject to state and local building code and zoning requirements. In connection with the development and remodeling of our restaurants, we may incur costs to meet certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities Act.

We are subject to the federal Fair Labor Standards Act and various state laws governing such matters as:

• minimum wage requirements;

• overtime; and

• other working conditions and citizenship requirements.

A significant number of our food service personnel are paid at rates related to the federal, and where applicable, state minimum wage and, accordingly, increases in the minimum wage have increased and in the future will increase wage rates at our restaurants.

We are also subject to various federal, state and local environmental laws, rules and regulations. We believe that we conduct our operations in substantial compliance with applicable environmental laws and regulations. None of the applicable environmental laws or regulations has had a material adverse effect on our consolidated operations, cash flows or financial condition.

Taco Cabana is subject to alcoholic beverage control regulations that require state, county or municipal licenses or permits to sell alcoholic beverages at each location. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Licensing entities, authorized with law enforcement authority, may issue violations and conduct audits and investigations of the restaurant’s records and procedures. Alcoholic beverage control regulations relate to numerous aspects of daily operations of Taco Cabana restaurants, including minimum age for consumption, certification requirements for employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. These regulations also prescribe certain required banking and accounting practices related to alcohol sales and purchasing.

Taco Cabana is subject to state “dram-shop” laws in the states in which it operates. Dram-shop laws provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We have specific insurance that covers claims arising under dram-shop laws. However, we cannot assure you that this insurance will be adequate to cover any claims that may be instituted against us.

With respect to the franchising of Taco Cabana and Pollo Tropical restaurants, we are subject to franchise and related regulations in the U.S. and certain foreign jurisdictions where we offer and sell franchises. These regulations include obligations to provide disclosure about our two concepts, the franchise agreements and the franchise system. The regulations also include obligations to register certain franchise documents in the U.S. and foreign jurisdictions, and obligations to disclose the substantive relationship between the parties to the agreements.

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Competition

The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low- and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in supermarkets, grocery stores, cafeterias and other purveyors of moderately priced and quickly prepared foods.

We believe that:

• product quality and taste;

• brand recognition;

• convenience of location;

• speed of service;

• menu variety;

• price; and

• ambiance

are the most important competitive factors in the quick-casual and quick-service restaurant segments and that our three concepts effectively compete in each category.

Taco Cabana’s restaurants, although part of the quick-casual segment of the restaurant industry, primarily compete in Texas, Oklahoma and New Mexico with quick-service restaurants, including those in the quick- service Mexican segment such as Taco Bell, quick-casual restaurants and traditional casual dining Mexican restaurants. We believe that Taco Cabana’s combination of freshly prepared food, distinctive ambiance and superior service help to distinguish Taco Cabana restaurants from quick-service operators, while Taco Cabana’s price-value relationship enables it to compete favorably with more expensive casual dining Mexican restaurants.

In addition to quick-service hamburger restaurant chains as well as other types of quick-casual restaurants, Pollo Tropical’s competitors include the south and central Florida locations of national chicken-based concepts, such as Boston Market and KFC, and regional grilled chicken concepts.

With respect to our Burger King restaurants, our largest competitors are McDonald’s and Wendy’s restaurants. According to publicly available information, McDonald’s restaurants had aggregate U.S. system wide sales of $25.6 billion for the year ended December 31, 2005 and operated 13,727 restaurants in the United States at that date, and Wendy’s restaurants had aggregate system wide sales of $7.7 billion for the year ended December 31, 2005 and operated 6,018 restaurants in the United States at that date.

Employees

As of December 31, 2005, we employed approximately 16,300 persons, of which approximately 300 were administrative personnel and approximately 16,000 were restaurant operations personnel. None of our employees is covered by collective bargaining agreements. We believe that our relations with our employees are good.

Availability of Information

The Company files annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

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The Company makes available through its internet website (www.carrols.com) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with the SEC. The reference to the Company’s website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.

IT EM 1A. RISK FACTORS

You should carefully consider the risks described below, as well as other information and data included in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, consolidated financial condition or results of operations.

Intense competition in the restaurant industry could make it more difficult to expand our business and could also have a negative impact on our operating results if customers favor our competitors or we are forced to change our pricing and other marketing strategies.

The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in grocery stores, supermarkets, cafeterias and other purveyors of moderately priced and quickly prepared food.

Pollo Tropical’s competitors include national and regional chicken-based concepts, such as Boston Market and Kentucky Fried Chicken (KFC), and regional grilled chicken concepts as well as quick-service hamburger restaurant chains and other types of quick-casual restaurants. Our Taco Cabana restaurants, although part of the quick-casual segment of the restaurant industry, compete with quick-service restaurants, including those in the quick-service Mexican segment such as Taco Bell, other quick-casual restaurants and traditional casual dining Mexican restaurants.

With respect to our Burger King restaurants, our largest competitors are McDonald’s and Wendy’s restaurants. According to Technomic, McDonald’s restaurants had aggregate U.S. system-wide sales of $25.6 billion in 2005 and operated 13,727 restaurants in the United States in 2005, and Wendy’s restaurants had aggregate system wide sales of $7.7 billion in 2005 and operated 6,018 restaurants in the United States in 2005.

To remain competitive, we, as well as certain of the other major quick-casual and quick-service restaurant chains, have increasingly offered selected food items and combination meals at discounted prices. These changes in pricing and other marketing strategies have had, and in the future may continue to have, a negative impact on our sales and earnings.

Factors specific to the quick-casual and quick-service restaurant segments may adversely affect our consolidated results of operations, which may cause a decrease in earnings and revenues.

The quick-casual and quick-service restaurant segments are highly competitive and can be materially adversely affected by many factors, including:

• changes in local, regional or national economic conditions;

• changes in demographic trends;

• changes in consumer tastes;

• changes in traffic patterns;

• increases in fuel prices, including a continuation of the current relatively higher levels of gasoline prices;

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• consumer concerns about health and nutrition;

• increases in the number of, and particular locations of, competing restaurants;

• inflation;

• increases in utility costs;

• increases in the cost of food, such as beef and chicken, and packaging;

• consumer dietary considerations;

• increased labor costs, including healthcare and minimum wage requirements;

• regional weather conditions; and

• the availability of experienced management and hourly-paid employees.

We are highly dependent on the Burger King system and our ability to renew our franchise agreements with Burger King Corporation. The failure to renew our franchise agreements or Burger King’s failure to compete effectively could materially adversely affect our consolidated results of operations.

For the year ended December 31, 2005, our Burger King restaurants contributed approximately 51% of our total revenues. Due to the nature of franchising and our agreements with BKC, our success is, to a large extent, directly related to the success of the nationwide Burger King system. In turn, the ability of the nationwide Burger King system to compete effectively depends upon the success of the management of the Burger King system and the success of its advertising programs and new products. We cannot assure you that Burger King will be able to compete effectively with other quick-service restaurants. As a result, any failure of Burger King to compete effectively would likely have a material adverse effect on our operating results.

Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Under our franchise agreements with BKC, we are required to comply with operational programs established by BKC. For example, our franchise agreements with BKC require that our restaurants comply with specified design criteria. In addition, BKC generally has the right to require us during the tenth year of a franchise agreement to remodel our restaurants to conform to the then-current image of Burger King, which may require the expenditure of considerable funds. In addition, although not required by the franchise agreements, we may not be able to avoid adopting menu price discount promotions instituted by BKC that may be unprofitable.

BKC’s consent is required for us to open new Burger King restaurants and acquire existing Burger King restaurants from other franchisees. BKC has a right of first refusal to acquire existing Burger King restaurants that we may seek to acquire from other franchisees. We cannot assure you that BKC will continue to consent to our development of new Burger King restaurants or our acquisitions of existing Burger King restaurants in the future or that it would not exercise its right of first refusal with regard to Burger King restaurants we seek to acquire. To date, BKC has approved all of our acquisitions of Burger King restaurants from other franchisees; however, in two instances, BKC exercised its right of first refusal and purchased restaurants we sought to acquire.

Our franchise agreements typically have a 20-year term after which BKC’s consent is required to receive a successor franchise agreement. As of December 31, 2005, we operated 336 Burger King restaurants. Our franchise agreements with BKC that are set to expire over the next three years are as follows:

• 18 of our franchise agreements with BKC are due to expire in 2006;

• 17 of our franchise agreements with BKC are due to expire in 2007; and

• 27 of our franchise agreements with BKC are due to expire in 2008.

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Although historically, BKC has granted all of our requests for successor franchise agreements, we cannot assure you that BKC will grant each of our requests for successor franchise agreements, and any failure of BKC to renew our franchise agreements could adversely affect our operating results. In addition, as a condition of approval of a successor franchise agreement, BKC may require us to make capital improvements to particular restaurants to bring them up to Burger King current design standards, which may require us to incur substantial costs.

In addition, our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that franchises granted by BKC to third parties will not adversely affect any Burger King restaurants that we operate.

Our continued growth depends on our ability to open and operate new restaurants profitably, which in turn depends on our continued access to capital, and newly acquired or developed restaurants may not perform as we expect and we cannot assure you that our growth and development plans will be achieved.

Our continued growth depends on our ability to develop additional Pollo Tropical and Taco Cabana restaurants and to selectively acquire and develop additional Burger King restaurants. Development involves substantial risks, including the following:

• the inability to fund development;

• development costs that exceed budgeted amounts;

• delays in completion of construction;

• the inability to obtain all necessary zoning and construction permits;

• the inability to identify, or the unavailability of, suitable sites on acceptable leasing or purchase terms;

• developed restaurants that do not achieve desired revenue or cash flow levels once opened;

• incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion;

• the inability to recruit, train and retain managers and other employees necessary to staff each new restaurant;

• changes in governmental rules, regulations and interpretations; and

• changes in general economic and business conditions.

We cannot assure you that our growth and development plans can be achieved. Our development plans will require additional management, operational and financial resources. For example, we will be required to recruit and train managers and other personnel for each new restaurant. We cannot assure you that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations. In addition, our ability to open new restaurants and to grow, as well as our ability to meet other anticipated capital needs, will depend on our continued access to external financing, including borrowings under our senior credit facility. We cannot assure you that we will have access to the capital we need on acceptable terms or at all, which could materially adversely affect our business.

Additionally, we may encounter difficulties growing beyond our presence in our existing core markets. We cannot assure you that we will be able to successfully grow our market presence beyond the current key regions within our existing markets, as we may encounter well-established competitors in new areas. In addition, we may be unable to find attractive locations or successfully market our products as we attempt to expand beyond our existing core markets, as the competitive circumstances and consumer characteristics in these new areas may differ substantially from those in areas in which we currently operate. As a result of the foregoing, we cannot assure you that we will be able to successfully integrate or profitably operate our new restaurants outside our core markets.

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We could be adversely affected by additional instances of “mad cow” disease, “avian” flu or other food-borne illness, as well as widespread negative publicity regarding food quality, illness, injury or other health concerns.

Negative publicity about food quality, illness, injury or other health concerns (including health implications of obesity and transfatty acids) or similar issues stemming from one restaurant or a number of restaurants could materially adversely affect us, regardless of whether they pertain to our own restaurants. For example, health concerns about the consumption of beef or chicken or by specific events such as the outbreak of Bovine Spongiform Encephalopathy (“mad cow” disease) or “avian” flu could lead to changes in consumer preferences, reduce consumption of our products and adversely affect our financial performance. These events could reduce the available supply of beef or chicken or significantly raise the price of beef or chicken.

In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing food-borne illnesses and other food safety issues that may affect our restaurants. Food-borne illness incidents could be caused by food suppliers and transporters and, therefore, would be outside of our control. Any publicity relating to health concerns or the perceived or specific outbreaks of food-borne illnesses or other food safety issues attributed to one or more of our restaurants, could result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations. In addition, similar publicity or occurrences with respect to other restaurants or restaurant chains could also decrease our guest traffic and have a similar material adverse effect on us.

Our substantial indebtedness could adversely affect our consolidated financial condition and our ability to operate our business.

We have a substantial amount of indebtedness. As of December 31, 2005, we had $504.6 million of outstanding indebtedness, including $211.8 million of indebtedness under our senior credit facility (excluding $11.1 million of outstanding letters of credit and $38.9 million of unused revolving credit borrowing availability under our senior credit facility), $180 million of notes, $110.9 million of lease financing obligations and $1.9 million of capital leases and other debt. As a result, we are a highly leveraged company. This level of indebtedness could have important consequences, including the following:

• it will limit our ability to borrow money to fund our working capital, capital expenditures, acquisitions and debt service requirements and other financing needs;

• our interest expense would increase if interest rates in general increase because a substantial portion of our indebtedness, including all of our indebtedness under our senior credit facility, bears interest at floating rates;

• it may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;

• we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

• it may make us more vulnerable to a downturn in our business, industry or the economy in general;

• a substantial portion of our cash flow from operations will be dedicated to the repayment of our indebtedness and related interest, including indebtedness we may incur in the future, and will not be available for other purposes; and

• there would be a material adverse effect on our business and consolidated financial condition if we were unable to service our indebtedness or obtain additional financing as needed.

Despite our substantial indebtedness, we may still incur significantly more debt, which could further exacerbate the risks described above.

Although covenants under our senior credit facility and the Indenture governing the notes limit our ability and the ability of our present and future restricted subsidiaries to incur additional indebtedness, the terms of our

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senior credit facility and the Indenture governing the notes permit us to incur significant additional indebtedness, including unused availability under our revolving credit facility. As of December 31, 2005 , we had $38.9 million available for additional borrowing under our revolving credit facility (after reserving for $11.1 million of letters of credit outstanding), subject to compliance with customary borrowing conditions. Also under the terms of the senior credit facility, we may borrow an additional $100.0 million, subject to certain conditions. In addition, neither the senior credit facility nor the Indenture governing the notes prevent us from incurring obligations that do not constitute indebtedness as defined in those documents. To the extent that we incur additional indebtedness or other obligations, the risks associated with our substantial leverage described above, including our possible inability to service our debt, would increase.

We may not be able to generate sufficient cash flows to meet our debt service obligations.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash from our future operations and on our continued access to external sources of financing. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Our business may not generate sufficient cash flow from operations and future borrowings under the senior credit facility or from other sources may not be available to us in an amount sufficient to enable us to repay our indebtedness or to fund our other liquidity needs, including capital expenditure requirements. If we complete an acquisition, our debt service requirements could increase. A substantial portion of our indebtedness, including all of our indebtedness under the senior credit facility, bears interest at floating rates, and therefore if interest rates increase, our debt service requirements will increase. We may need to refinance or restructure all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the senior credit facility and the notes, on commercially reasonable terms, or at all. If we cannot service or refinance our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.

In addition, upon the incurrence of specific kinds of change of control events, we must offer to purchase the notes at 101% of the principal amount thereof plus accrued and unpaid interest to the purchase date. We may not have sufficient funds available to make any required repurchases of the notes, and restrictions under our senior credit facility may not allow that repurchase. If we fail to repurchase the notes in that circumstance, we will be in default under the Indenture governing the notes and, under cross-default clauses, we will also be in default under the senior credit facility. In addition, certain change of control events will constitute an event of default under the senior credit facility. A default under the senior credit facility could result in an event of default under the Indenture if the administrative agent or the lenders accelerate the debt under the senior credit facility. In the event of a default under our senior credit facility or the Indenture, the holders of the applicable indebtedness generally would be able to declare all of that indebtedness to be due and payable as described in the following risk factor. Upon the occurrence of a change of control we could seek to refinance the indebtedness under the senior credit facility and the notes or obtain a waiver from the lenders or the noteholders. We cannot assure you, however, that we would be able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, if at all, in which case we might be required to sell assets to satisfy our repayment obligations. Any future debt that we incur may also contain restrictions on repayment of the notes or borrowings under our senior credit facility upon a change of control.

Restrictive covenants in the senior credit facility and the Indenture governing the notes may restrict our ability to operate our business and to pursue our business strategies; and defaults under our debt instruments may allow the lenders to declare borrowings due and payable.

The senior credit facility and the Indenture governing the notes limit our ability, among other things, to:

• incur additional indebtedness or issue preferred stock;

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• pay dividends or make distributions in respect of our capital stock or make certain other restricted payments or investments;

• sell assets, including capital stock of restricted subsidiaries;

• agree to limitations on our ability and the ability of our restricted subsidiaries to make distributions;

• enter into transactions with our subsidiaries and affiliates;

• incur liens;

• enter into new lines of business; and

• engage in consolidations, mergers or sales of substantially all of our assets.

In addition, the senior credit facility restricts our ability to prepay our other indebtedness while borrowings under the senior credit facility remain outstanding. The senior credit facility also requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control.

The restrictions contained in the Indenture governing the notes and the senior credit facility could:

• limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and

• adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in our interest.

As noted above, our ability to remain in compliance with agreements and covenants in our debt instruments depends upon our results of operations and may be affected by events beyond our control, including economic, financial and industry conditions. Accordingly, there can be no assurance that we will remain in compliance with those agreements and covenants. As a result of prior restatements of our financial statements, we have in the past been in default under our senior credit facility (which defaults have been waived) and, more recently, we were in default under our senior credit facility by failing to timely furnish to our lenders our annual audited financial statements for fiscal year 2005 and our unaudited quarterly financial statements for the third quarter of 2005 and the first quarter of 2006. On February 15, 2006, we obtained a waiver of such default from our lenders that extended the time period to deliver those financial statements to June 30, 2006. Accordingly there can be no assurance that we will remain in compliance with agreements and covenants in our debt instruments. In the event of a default under our senior credit facility or the Indenture, the holders of the applicable indebtedness generally would be able to declare all of that indebtedness, together with accrued interest, to be due and payable. In addition, borrowings under the senior credit facility are secured by a first priority lien on all of our assets and, in the event of a default under that facility, the lenders generally would be entitled to seize the collateral. In addition, default under one debt instrument could in turn permit lenders under other debt instruments to declare borrowings outstanding under those other instruments to be due and payable pursuant to cross default clauses. Moreover, upon the occurrence of an event of default under the senior credit facility, the commitment of the lenders to make any further loans to us would be terminated. Accordingly, the occurrence of a default under any debt instrument, unless cured or waived, would likely have a material adverse effect on our business.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. As discussed herein “Item 9A. Controls and Procedures”, we are

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continuing to work to improve our internal controls. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our consolidated operating results or cause us to fail to meet our reporting obligations and could also result in defaults under our senior credit facility and the indenture governing the notes.

There can be no assurance that we will not have to restate our financial statements.

We have completed several restatements of previously reported financial results. The details of these restatements and the periods in which they were reported are detailed in the following filings:

• Annual Report on Form 10- K for the year ended December 28, 2003;

• Annual Report on Form 10-K for the year ended January 2, 2005, as amended; and

• Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, as amended.

In response to this situation, we have taken what we believe to be the necessary measures to ensure that restatements will not occur in the future. However, there can be no certainty that future restatements will not be necessary due to evolving policies, revised or new accounting pronouncements or other factors.

Our failure to comply with the covenants contained in our senior credit facility, the Indenture governing the notes or our other debt agreements, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our operating results and financial condition.

Our senior credit facility requires us to maintain specified financial ratios, including fixed charge coverage, senior leverage and total leverage ratios (as such terms are defined in the senior credit facility). In addition, our senior credit facility and the Indenture governing the notes require us to comply with various operational and other covenants. If there were an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn would result in cross defaults under our other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated upon an event of default.

If, when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our senior credit facility, or if a default otherwise occurs, the lenders under our senior credit facility could elect to terminate their commitments thereunder, cease making further loans, declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, institute foreclosure proceedings against those assets that secure the borrowings under our senior credit facility and prevent us from making payments on the notes. Any such actions could force us into bankruptcy or liquidation, and we cannot provide any assurance that we could repay our obligations under the notes in such an event.

We may incur significant liability or reputational harm if claims are brought against us or against our franchisees.

We or our franchisees may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered in our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of quick service restaurants, alleging that they have failed to disclose the health risks associated with high-fat foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by

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governmental authorities, our employees and our franchisees, among others, based upon these and other matters. A significant judgment against us could have a material adverse effect on our financial performance or liquidity. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Future cases which may be filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any future cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations. See “Legal Proceedings.”

Our expansion into new markets may present increased risks due to our unfamiliarity with the area.

Some of our new restaurants will be located in areas where we have little or no meaningful experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new restaurants to be less successful than restaurants in our existing markets or to incur losses. An additional risk of expanding into new markets is the lack of market awareness of the Pollo Tropical or Taco Cabana brand. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets, and may have higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach average unit volumes, if at all, thereby adversely affecting our operating results.

Changes in consumer taste could negatively impact our business.

We obtain a significant portion of our revenues from the sale of hamburgers, chicken, various types of sandwiches, and Mexican and other ethnic foods. The quick-casual and quick-service restaurant segments are characterized by the frequent introduction of new products, often accompanied by substantial promotional campaigns and are subject to changing consumer preferences, tastes, and eating and purchasing habits. Our success depends on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well other factors affecting the restaurant industry, including new market entrants and demographic changes. We may be forced to make changes in our menu items in order to respond to changes in consumer tastes or dining patterns, and we may lose customers who do not prefer the new menu items. In recent years, numerous companies in the quick-casual and quick-service restaurant segments have introduced products positioned to capitalize on the growing consumer preference for food products that are, or are perceived to be, healthy, nutritious, low in calories and low in fat content. If we do not or, in the case of our Burger King restaurants, if BKC does not, continually develop and successfully introduce new menu offerings that appeal to changing consumer preferences or if we do not timely capitalize on new products, our operating results will suffer. In addition, any significant event that adversely affects consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our financial performance.

If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.

Our financial performance is dependent on our continuing ability to offer fresh, premium quality food at competitive prices. If a significant disruption in service or supply by certain of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on us.

For our Pollo Tropical and Taco Cabana restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies. Pollo Tropical and Taco Cabana

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restaurants’ food and supplies are ordered from approved suppliers and are shipped via distributors to the restaurants. For our Pollo Tropical restaurants, Henry Lee, a division of Gordon Food Service, serves as our primary distributor of food and paper products. For our Taco Cabana restaurants, SYGMA Network, Inc. serves as our primary distributor of food and beverage products and supplies. We also rely on Pilgrim’s Pride (formerly Conagra) and Gold Kist as our two suppliers of chicken for our Pollo Tropical restaurants and if either supplier is unable to service us, this could lead to a material disruption of service or supply until a new supplier is engaged. With respect to our distributors for our Pollo Tropical and Taco Cabana restaurants, if any of our distributors is unable to service us, this could lead to a material disruption of service or supply until a new distributor is engaged, which could have a material adverse effect on our business.

If labor costs increase, we may not be able to make a corresponding increase in our prices and our operating results may be adversely affected.

Wage rates for a substantial number of our employees are at or slightly above the minimum wage. As federal and/or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees but also the wages paid to the employees at wage rates which are above the minimum wage, which will increase our costs. To the extent that we are not able to raise our prices to compensate for increases in wage rates, this could have a material adverse effect on our operating results.

The efficiency and quality of our competitors’ advertising and promotional programs could have a material adverse effect on our consolidated results of operations and financial condition.

Should our competitors increase spending on advertising and promotion, should the cost of television or radio advertising increase, should our advertising funds materially decrease for any reason, or should our advertising and promotion be less effective than our competitors’, there could be a material adverse effect on our consolidated results of operations and financial condition.

Newly acquired or developed restaurants may reduce sales at our neighboring restaurants.

We intend to continue to open restaurants in our existing core markets, particularly the core markets served by our Pollo Tropical and Taco Cabana restaurants. To the extent that we open a new restaurant in the vicinity of one or more of our existing restaurants within the same chain, it is possible that some of the customers who previously patronized those existing restaurants may choose to patronize the new restaurant instead, reducing sales at those existing restaurants. Accordingly, to the extent we open new restaurants in our existing markets, sales at some of our existing restaurants in those markets may decline.

Our business is regional and we therefore face risks related to reliance on certain markets.

As of March 31, 2006, excluding our franchised locations, all but one of our Pollo Tropical restaurants were located in Florida and approximately 96% of our Taco Cabana restaurants were located in Texas. Also, as of March 31, 2006, 65% of our Burger King restaurants were located in New York and Ohio. Therefore, the economic conditions, state and local government regulations, weather conditions or other conditions affecting Florida, Texas, New York and Ohio and the tourism industry affecting Florida may have a material impact on the success of our restaurants in those locations. For example, the events of September 11, 2001 had a significant negative impact on tourism in Florida, which adversely impacted the revenues and operating results at our Pollo Tropical restaurants.

Many of our restaurants are located in regions that may be susceptible to severe weather conditions. As a result, adverse weather conditions in any of these areas could damage these restaurants, result in fewer guest visits to these restaurants and otherwise have a material adverse impact on our business. For example, our business was adversely impacted in the fourth quarter of fiscal 2005 and in the future may be adversely affected by hurricanes and severe weather in Florida and Texas.

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We cannot assure you that the current locations of our existing restaurants will continue to be economically viable or that additional locations will be acquired at reasonable costs.

The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to be economically viable or that additional locations can be acquired at reasonable costs. In addition, the economic environment where restaurants are located could decline in the future, which could result in potentially reduced sales in those locations. We cannot assure you that new sites will be as profitable as existing sites.

If the sale/leaseback market requires significantly higher yields, we may not enter into sale/leaseback transactions and as a result would not receive the related net proceeds.

From time to time, we sell our restaurant properties in sale-leaseback transactions. We historically have used, and intend to use, the net proceeds from such transactions to reduce outstanding debt and fund future capital expenditures for new restaurant development. However, the sale-leaseback market may cease to be a reliable source of additional cash flows for us in the future if capitalization rates become less attractive or other unfavorable market conditions develop. For example, should the sale-leaseback market require significantly higher yields, we may not enter into sale-leaseback transactions, which could adversely affect our ability to reduce outstanding debt and fund new capital expenditures for future restaurant development.

The loss of the services of our senior executives could have a material adverse effect on our business, consolidated financial condition or results of operations.

Our success depends to a large extent upon the continued services of our senior management, including Alan Vituli, Chairman of the Board and Chief Executive Officer, and Daniel T. Accordino, President and Chief Operating Officer, who have substantial experience in the restaurant industry. We believe that it would be extremely difficult to replace Messrs. Vituli and Accordino with individuals having comparable experience. Consequently, the loss of the services of Mr. Vituli or Mr. Accordino could have a material adverse effect on our business, consolidated financial condition or results of operations.

Government regulation could adversely affect our consolidated financial condition and results of operations.

We are subject to extensive laws and regulations relating to the development and operation of restaurants, including regulations relating to the following:

• zoning;

• the preparation and sale of food;

• liquor licenses which allow us to serve alcoholic beverages at our Taco Cabana restaurants;

• employer/employee relationships, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements;

• federal and state laws that prohibit discrimination and laws regulating design and operation of facilities, such as the Americans With Disabilities Act of 1990; and

• federal and state regulations governing the operations of franchises, including rules promulgated by the Federal Trade Commission.

In the event that legislation having a negative impact on our business is adopted, you should be aware that it could have a material adverse impact on us. For example, substantial increases in the minimum wage could adversely affect our consolidated financial condition and results of operations. Local zoning or building codes or regulations can cause substantial delays in our ability to build and open new restaurants.

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If one of our employees sells alcoholic beverages to an intoxicated or minor patron, we may be liable to third parties for the acts of the patron.

We serve alcoholic beverages at our Taco Cabana restaurants and are subject to the “dram-shop” statutes of the jurisdictions in which we serve alcoholic beverages. “Dram-shop” statutes generally provide that serving alcohol to an intoxicated or minor patron is a violation of the law.

In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated or minor patron we may be liable to third parties for the acts of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. Any increase in the number or size of “dram-shop” claims could have a material adverse effect on us as a result of the costs of defending against such claims; paying deductibles and increased insurance premium amounts; implementing improved training and heightened control procedures for our employees; and paying any damages or settlements on such claims.

Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our consolidated results of operations.

We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. We own and lease numerous parcels of real estate on which our restaurants are located.

Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law that could adversely affect our operations. Also, if contamination is discovered on properties owned or operated by us, including properties we owned or operated in the past, we can be held liable for severe penalties and costs of remediation. These penalties could adversely affect our consolidated results of operations.

We may, in the future, seek to pursue acquisitions and we may not find restaurant companies that are suitable acquisition candidates or successfully operate or integrate any restaurant companies we may acquire.

We may in the future seek to acquire other restaurant chains. Although we believe that opportunities for future acquisitions may be available from time to time, increased competition for acquisition candidates exists and may continue in the future. Consequently, there may be fewer acquisition opportunities available to us as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate acquired restaurant companies without substantial costs, delays or operational or financial problems. In the event we are able to acquire other restaurant companies, the integration and operation of the acquired restaurants may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. We also face the risk that our existing systems, procedures and financial controls will be inadequate to support any restaurant chains we may acquire and that we may be unable to successfully integrate the operations and financial systems of any chains we may acquire with our own systems. While we may evaluate and discuss potential acquisitions from time to time, we currently have no understandings, commitments or agreements with respect to any acquisitions. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing on acceptable terms or at all. Both the senior credit facility and the Indenture governing the notes contain restrictive covenants that may prevent us from incurring additional debt or acquiring additional restaurant chains.

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Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.

We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, including the Pollo Tropical name and logo and Taco Cabana name and logo, and proprietary rights relating to certain of our core menu offerings. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal fees.

We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and consolidated financial condition.

The interests of the stockholders of Holdings may be unique.

Madison Dearborn Partners, LLC and affiliated investment funds and BIB Holdings (Bermuda) Ltd. control Holdings, our company and each of the guarantors of the notes. Madison Dearborn and BIB together will continue to have the ability to designate a majority of the board of directors of our company and Carrols Holdings, and will be able to select our senior management team, determine our corporate and management policies and make decisions relating to fundamental corporate actions. The directors will have the authority to make decisions affecting our capital structure, including the issuance of additional debt and declaration of dividends. In addition, the directors may authorize transactions, such as acquisitions, that could enhance the equity investment of Madison Dearborn and BIB while involving risks to the interest of holders of the notes. The interests of Madison Dearborn and BIB may be unique and not be aligned with each other or any other party. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Certain Relationships and Related Transactions.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2. PROPERTIES

As of December 31, 2005, we owned or leased the following restaurant properties:

	Owned Land; Owned Building	Leased Land; Owned Building	Leased Land; Leased Building(1)	Total(2)
Restaurants:
Taco Cabana	8	22	105	135
Pollo Tropical	5	22	42	69
Burger King	12	25	299	336
Total operating restaurants	25	69	446	540

(1) Includes 23 restaurants located in mall shopping centers.

(2) Excludes restaurants operated by our franchisees. In addition, as of December 31, 2005, we had three restaurants under construction, eleven properties leased to third parties and three properties available for sale or lease.

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As of December 31, 2005, we leased 94% of our Taco Cabana restaurants, 93% of our Pollo Tropical restaurants and 96% of our Burger King restaurants. We typically enter into leases (including options to renew) ranging from 20 to 40 years. The average remaining term for all leases, including options, is approximately 24 years. Generally, we have been able to renew leases, upon or prior to their expiration, at the prevailing market rates.

Most of our Burger King restaurant leases are coterminous with the related franchise agreements. We believe that we generally will be able to renew, at commercially reasonable rates, the leases whose terms expire prior to the expiration of that location’s Burger King franchise agreement.

Most leases require us, as lessee, to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our mall locations, we are also required to pay certain other charges such as a pro rata share of the mall’s common area maintenance costs, insurance and security costs.

In addition to the restaurant locations set forth under “Restaurant Locations,” we own a building with approximately 25,300 square feet at 968 James Street, Syracuse, New York, which houses our executive offices and most of our administrative operations for our Burger King restaurants. We lease five small regional offices that support the management of our Burger King restaurants. We also lease approximately 13,500 square feet at 7300 North Kendall Drive, 8th Floor, Miami, Florida, which houses most of our administrative operations for our Pollo Tropical restaurants. In addition, we lease approximately 17,700 square feet of office space at 8918 Tesoro Drive, Suite 200, San Antonio, Texas, which houses most of our administrative operations for our Taco Cabana restaurants.

ITEM 3. LEGAL PROCEEDINGS

On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that the Company violated certain minimum wage laws under the federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. The Company has since filed a Motion for Summary Judgment as to the existing Plaintiffs that the Court has under consideration. The Plaintiffs have indicated they will re-file a Motion to certify and for National Discovery and the Company will oppose such Motion. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Consequently, it is not possible to predict what adverse impact, if any, this case could have on our consolidated financial condition or results of operations and cash flows. We intend to continue to contest this case vigorously.

We are a party to various other litigation matters incidental to the conduct of our business. We do not believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established trading market for our capital stock. Carrols Holdings owns 10 shares of our common stock (representing 100% of our capital stock).

On December 22, 2004, our Board of Directors approved a one-time cash dividend of $116.8 million to our sole stockholder, Carrols Holdings (which Carrols Holdings, in turn, paid to its stockholders as a dividend), from the net proceeds of the sale of $180 million of the notes, and the entering into a new senior credit facility with a new syndicate of lenders led by JP Morgan Chase Bank, N.A., which provided for $220 million of term loan B borrowings and a $50 million five-year revolving credit facility. The special cash dividend was paid on December 28, 2004.

We did not pay any cash dividends during fiscal 2005 and 2003. We have no present intention to declare or pay any cash dividends on shares in the foreseeable future. Certain restrictive covenants contained in agreements governing our long-term indebtedness currently limit our ability to make dividend payments and certain other payments.

ITEM 6. SELECTED FINANCIAL DATA

December 2004 Refinancing

On December 15, 2004, we completed the private placement of $180.0 million of our 9% Senior Subordinated Notes due 2013, which we refer to as the “notes.” Concurrently, we repaid all outstanding borrowings under our prior senior secured credit facility and amended and restated such senior credit facility with a new syndicate of lenders, which we refer to as the “new senior credit facility.” We received $400.0 million in total proceeds that included the issuance of the 9% senior subordinated notes and term loan B borrowings of $220.0 million under the new senior credit facility. The proceeds were primarily utilized to repay borrowings outstanding under the prior senior credit facility of $74.4 million, to retire all of our 9 ¹/2% senior subordinated notes due 2008 (including redemption premiums) in the amount of $175.9 million, to pay a dividend to Holdings, our sole stockholder, in the amount of $116.8 million (and Holdings concurrently paid a dividend to its stockholders in the aggregate amount of $116.8 million), to pay fees and expenses related to the refinancing of $8.8 million, and to pay a bonus to employees (including management) and a director, who owned options to purchase common stock of Holdings, totaling $20.9 million, which includes $0.6 million of payroll taxes. We also recorded an $8.9 million loss on early extinguishment of debt primarily from the write-off of previously deferred financing costs and premiums in conjunction with the retirement of the 9 ¹/2% senior subordinated notes.

The following table sets forth our selected consolidated financial data derived from our audited consolidated financial statements for each of the fiscal years ended December 31, 2001, 2002, 2003, 2004 and 2005. The information in the following table should be read together with our consolidated financial statements and accompanying notes as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this report. These historical results are not necessarily indicative of the results to be expected in the future.

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	Year Ended December 31,
	2001			2002			2003			2004			2005
	(Dollars in thousands)
Statements of operations data:
Revenues:
Restaurant sales	$	654,710		$	655,545		$	643,579		$	696,343		$	705,422
Franchise royalty revenues and fees		1,579			1,482			1,406			1,536			1,488
Total revenues		656,289			657,027			644,985			697,879			706,910
Costs and expenses:
Cost of sales		189,947			183,976			181,182			202,624			204,620
Restaurant wages and related expenses		192,918			196,258			194,315			206,732			204,611
Restaurant rent expense		31,459			30,940			31,089			34,606			34,668
Other restaurant operating expenses		86,435			87,335			89,880			92,891			102,921
Advertising expense		28,830			28,041			27,351			24,711			25,523
General and administrative (including stock-based compensation expense (income) of $101, $(151), $253, $1,818 and $16,432, respectively)		35,494			36,459			37,376			43,578			58,614
Depreciation and amortization		45,461			39,434			40,228			38,521			33,096
Impairment losses		578			1,285			4,151			1,544			1,468
Bonus to employees and director (1)		—			—			—			20,860			—
Other expense (income) (2)		8,841			—			—			2,320			—
Total operating expenses		619,963			603,728			605,572			668,387			665,521
Income from operations		36,326			53,299			39,413			29,492			41,389
Interest expense		44,559			39,329			37,334			35,383			42,972
Loss on extinguishment of debt		—			—			—			8,913			—
Income (loss) before income taxes		(8,233	)		13,970			2,079			(14,804	)		(1,583	)
Provision (benefit) for income taxes		(1,428	)		4,929			741			(6,720	)		2,760
Net income (loss)	$	(6,805	)	$	9,041		$	1,338		$	(8,084	)	$	(4,343	)
Other financial data:
Cash provided from operating activities	$	46,435		$	54,194		$	46,349		$	59,211		$	22,008
Cash provided by (used for) investing activities		(49,156	)		(46,636	)		14,581			(8,489	)		(33,908	)
Cash provided from (used for) financing activities		2,414			(7,425	)		(61,054	)		(21,670	)		(10,235	)
Capital expenditures, excluding acquisitions		47,575			54,155			30,371			19,073			38,849
Consolidated Adjusted EBITDA, as defined (3)		91,307			93,867			84,045			94,555			92,385
Operating statistics:
Total number of restaurants (end of period)		532			529			532			537			540
Taco Cabana (6):
Number of restaurants (at end of period)		120			116			121			126			135
Average number of restaurants		120.3			114.6			118.9			123.9			129.8
Revenues:
Restaurant sales	$	177,398		$	174,982		$	181,068		$	202,506		$	209,539
Franchise royalty revenues and fees		405			429			413			435			292
Total revenues		177,803			175,411			181,481			202,941			209,831
Average annual sales per restaurant (5)		1,475			1,527			1,523			1,604			1,614
Segment EBITDA		26,032			27,989			24,206			30,082			31,927
Segment EBITDA margin (4)		14.6	%		16.0	%		13.3	%		14.8	%		15.2	%
Change in comparable restaurant sales (6)		1.6	%		(0.2	)%		(3.0	)%		4.8	%		1.2	%

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	Year ended December 31,
	2001			2002			2003			2004			2005
	(Dollars in thousands)
Pollo Tropical:
Number of restaurants (at end of period)		53			58			60			63			69
Average number of restaurants		50.4			55.6			59.4			60.3			64.9
Revenues:
Restaurant sales	$	96,437		$	100,444		$	109,201		$	124,000		$	135,787
Franchise royalty revenues and fees		1,174			1,053			993			1,101			1,196
Total revenues		97,611			101,497			110,194			125,101			136,893
Average annual sales per restaurant (5)		1,913			1,807			1,838			2,018			2,092
Segment EBITDA		21,987			21,946			22,489			27,891			28,691
Segment EBITDA margin (4)		22.5	%		21.6	%		20.4	%		22.3	%		20.9	%
Change in comparable restaurant sales (6)		(0.3	)%		(4.2	)%		2.3	%		10.6	%		4.7	%
Burger King:
Number of restaurants (at end of period)		359			355			351			348			336
Average number of restaurants		353.3			355.6			352.2			350.9			343.5
Restaurant sales	$	380,875		$	380,119		$	353,310		$	369,837		$	360,096
Average annual sales per restaurant (5)		1,078			1,069			1,003			1,054			1,048
Segment EBITDA		43,288			43,932			37,350			36,582			31,767
Segment EBITDA margin (4)		11.4	%		11.6	%		10.6	%		9.9	%		8.8	%
Change in comparable restaurant sales (6)		1.3	%		(1.3	)%		(7.2	)%		2.9	%		1.0	%
Balance sheet data (at end of period):
Total assets	$	552,884		$	554,787		$	499,054		$	516,246		$	496,945
Working capital		(34,362	)		(33,971	)		(39,835	)		(24,515	)		(25,441	)
Debt:
Senior and senior subordinated debt	$	368,500		$	357,300		$	294,100		$	400,000		$	391,800
Capital leases and other debt		4,575			3,045			1,732			1,225			1,896
Lease financing obligations		96,660			102,738			106,808			111,715			110,898
Total debt	$	469,735		$	463,083		$	402,640		$	512,940		$	504,594
Stockholder’s equity (deficit)	$	(1,030	)	$	8,011		$	9,349		$	(115,529	)	$	(103,511	)

(1) In conjunction with the December 2004 refinancing, the Company approved a compensatory bonus payment to certain employees (including management) and a director. See Note 11 to the consolidated financial statements).

(2) Other expense in 2001 resulted from the closure of seven Taco Cabana restaurants in the Phoenix, Arizona market and the discontinuance of restaurant development in that market. See Note 5 to the consolidated financial statements. Other expense in 2004 resulted from the write off of costs incurred in connection with a registration statement on Form S-1 for an offering of Enhanced Yield Securities by Carrols Holdings comprised of common stock and senior subordinated notes that was withdrawn in 2004. See Note 9 to the consolidated financial statements.

(3) Reconciliation of Non-GAAP Financial Measures.

Consolidated Adjusted EBITDA is defined as income before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other income and expense and loss on extinguishment of debt. Consolidated Adjusted EBITDA is presented because we believe it is a useful financial indicator for the ability, on a consolidated basis, to service and/or incur indebtedness. The Company’s utilization of a non-GAAP measurement is not meant to be considered in isolation or as a substitute for net income, income from operations, cash flow, gross margin and other measures of financial performance prepared in accordance with GAAP. Consolidated Adjusted EBITDA is not necessarily

37

comparable to other similarly titled captions of other companies due to differences in methods of calculation. Management believes the most directly comparable measure to Consolidated Adjusted EBITDA calculated in accordance with generally accepted accounting principles is net cash provided from operating activities. However, Consolidated Adjusted EBITDA should not be considered as an alternative to consolidated cash flows as a measure of liquidity in accordance with generally accepted accounting principles.

A reconciliation of Consolidated Adjusted EBITDA to net cash provided from operating activities is presented below:

	Year Ended December 31,
	2001			2002			2003			2004			2005
	(Dollars in thousands)
Consolidated Adjusted EBITDA, as defined	$	91,307		$	93,867		$	84,045		$	94,555		$	92,385
Adjustments to reconcile Consolidated Adjusted EBITDA to net cash provided from operating activities:
Loss (gain) on sale of assets		390			24			(386	)		(176	)		(620	)
Cash portion of stock-based compensation expense		—			—			—			—			(122	)
Interest expense		(44,559	)		(39,329	)		(37,334	)		(35,383	)		(42,972	)
Amortization of deferred financing costs		1,527			1,528			1,540			1,527			1,529
Amortization of unearned purchase discounts		(2,014	)		(2,155	)		(2,146	)		(2,154	)		(2,156	)
Amortization of deferred gains from sale-leaseback transactions		(13	)		(21	)		(180	)		(458	)		(481	)
Accretion of interest on lease financing obligations		521			478			443			406			334
Benefit (provision) for income taxes		1,428			(4,929	)		(741	)		6,720			(2,760	)
Deferred income taxes		(3,117	)		4,888			(1,156	)		(6,466	)		1,036
Change in operating assets and liabilities		965			(157	)		2,264			2,960			(24,165	)
Other expense		—			—			—			(2,320	)		—
Net cash provided from operating activities	$	46,435		$	54,194		$	46,349		$	59,211		$	22,008

(4) Segment EBITDA margin is derived by dividing Segment EBITDA by total revenues applicable to the segment shown above.

(5) Average annual (52 weeks) sales per restaurant are derived by dividing restaurant sales for the applicable year by the average number of restaurants for the applicable year.

(6) The change in comparable restaurant sales is calculated using only those restaurants that have been open since the beginning of the earliest period being compared (12 months for Burger King and 18 months for Pollo Tropical and Taco Cabana).

ITEM 7. M ANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying financial statement notes appearing elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2005. The overview provides our perspective on the individual sections of MD&A, which include the following:

Executive Summary—an executive review of our performance for the years ended December 31, 2005 and 2004.

Company Overview—a general description of our three restaurant concepts and the markets in which they operate.

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Liquidity and Capital Resources—an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.

Results of Operations—an analysis of our results of operations for the years ended December 31, 2005 and 2004, including a review of the material items and known trends and uncertainties.

Application of Critical Accounting Policies—an overview of accounting policies that require critical judgments and estimates.

Effects of New Accounting Standards—a discussion of new accounting standards and any implications related to our financial statements.

Executive Summary

Total revenues for 2005 increased to $706.9 million in 2005 from $697.9 million in 2004.

Revenues from our Hispanic restaurant brands increased by approximately $18.8 million from $328.0 million in 2004 to $346.8 million in 2005. Sales due to the extra week in 2004 for our Hispanic restaurant brands was $6.1 million. We have continued to expand our Hispanic restaurant brands, and at the end of 2005, we were operating a total of 204 restaurants under the Pollo Tropical and Taco Cabana brand names. During 2005, we opened six new Pollo Tropical restaurants, six new Taco Cabana restaurants and we also acquired four Taco Cabana restaurants from a franchisee in Texas. Comparable restaurant sales for 2005 increased 4.7% over 2004 at Pollo Tropical and 1.2% at Taco Cabana.

Segment EBITDA (earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt) for our Hispanic Brands was $60.6 million in 2005 compared to $58.0 million in the prior year. Segment EBITDA for our Hispanic Brands in 2004 included $2.3 million attributable to the extra week in 2004.

During October of 2005 our Pollo Tropical restaurants were negatively impacted by hurricanes Katrina and Wilma, and our Taco Cabana restaurants in the Houston market were negatively impacted by hurricane Rita. Although the restaurants collectively suffered only minimal property damage, our estimate of lost revenues from restaurants temporarily closed were, in the aggregate, approximately $1.8 million. Consequently, comparable restaurant sales decreased 3.3% at Pollo Tropical and increased .9% at Taco Cabana during the fourth quarter of 2005 compared to the fourth quarter of 2004.

Revenues from our Burger King restaurants decreased to $360.1 million in 2005 from $369.8 million in 2004 due in part to one less week in 2005 compared to 2004 ($6.9 million effect) and from the closing of thirteen underperforming Burger King restaurants during the year. At the end of 2005, the Company was operating a total of 336 Burger King restaurants. Comparable restaurant sales for the Company’s Burger King restaurants increased 1.0% in 2005 over 2004. Segment EBITDA decreased from $36.6 million in 2004, which included $2.1 million of Segment EBITDA from the extra week in 2004, to $31.8 million in 2005. This change mostly reflected higher utility costs, higher audit fees and incremental transaction fees due to the rollout of credit cards at the Company’s Burger King restaurants.

Operating results for all three brands were negatively impacted by higher utility costs, which as a percentage of total revenues, increased approximately 0.6% in 2005 and 1.5% in the fourth quarter of 2005, representing the primary change in its operating margins. Higher commodity costs also impacted margins, particularly at Pollo Tropical.

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Our capital expenditures totaled $38.8 million in 2005 including $20.6 million for the construction of new restaurants, $4.2 million for the acquisition of four franchised Taco Cabana restaurants, $4.0 million for remodeling, and $10.0 million for maintenance and other capital expenditures. For 2006, the Company anticipates total capital expenditures of approximately $40 million including approximately $24 million related to its plans to open 7 to 8 new Pollo Tropical restaurants and 8 to 10 new Taco Cabana restaurants in 2006.

During 2005 we have lowered our outstanding borrowings under our senior credit facility. The total principal amount outstanding under our senior credit facility decreased from $220.0 million at December 31, 2004 to $211.8 million at December 31, 2005 including a voluntary prepayment during 2005 of $6.0 million principal amount of our term loan borrowings. As a result of our growth in new units during 2005 and anticipated growth in new units in 2006, we anticipate sale-leaseback proceeds to increase from approximately $5 million in 2005 to in excess of $20 million in 2006.

Company Overview

We are one of the largest restaurant companies in the United States operating three restaurant brands in the quick-casual and quick-service restaurant segments with 540 company owned and operated restaurants in 17 states as of December 31, 2005. We own, operate and franchise two Hispanic restaurant brands, Taco Cabana^® and Pollo Tropical^® operating primarily in Texas and Florida, respectively. We are also the largest Burger King^® franchisee and have operated Burger King restaurants since 1976. We believe that the diversification of our restaurant concepts and geographic dispersion of our restaurants provide us with balance and stability.

Hispanic Brands

We acquired Pollo Tropical, Inc. in July 1998 and acquired Taco Cabana, Inc. in December 2000. Our Hispanic Brands combine the convenience of quick-service restaurants with the menu variety, use of fresh ingredients, upscale decor and food quality of casual dining. As of December 31, 2005, our Hispanic Brands were comprised of 204 company-owned restaurants and 29 franchised restaurants and accounted for 49.1% of our total revenues for fiscal 2005 and 65.6% of our total segment EBITDA.

Taco Cabana. Taco Cabana restaurants combine fresh, high-quality Tex-Mex and traditional Mexican style food in a festive setting with the convenience and value of quick-service restaurants. Menu items include sizzling fajitas, quesadillas, enchiladas, other Tex-Mex dishes, fresh-made flour tortillas, frozen margaritas and beer. Most menu items are made fresh daily in each of our Taco Cabana restaurants. Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978. As of December 31, 2005, we owned and operated 135 Taco Cabana restaurants located in Texas, Oklahoma and New Mexico and franchised three Taco Cabana restaurants in New Mexico and Georgia. For the year ended December 31, 2005, our company-owned Taco Cabana restaurants generated total revenues of $209.5 million and segment EBITDA of $31.9 million.

Pollo Tropical. Pollo Tropical restaurants combine high quality distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants. Our Pollo Tropical restaurants feature fresh grilled chicken marinated in a proprietary blend of tropical fruit juices and spices and authentic “made from scratch” side dishes. Most menu items are made fresh daily in each of our Pollo Tropical restaurants. Pollo Tropical opened its first company-owned restaurant in 1988 in Miami. As of December 31, 2005, we owned and operated a total of 69 Pollo Tropical restaurants, 59 of which were located in south Florida and ten of which were located in central Florida. We also franchised 26 Pollo Tropical restaurants as of December 31, 2005, 22 of which were located in Puerto Rico, two in Ecuador and two in Florida. Since our acquisition of Pollo Tropical, we have expanded the brand by over 90% by opening 33 new restaurants. For the year ended December 31, 2005, our company-owned Pollo Tropical restaurants generated total revenues of $135.8 million and segment EBITDA of $28.7 million.

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Burger King. Burger King is one of the largest hamburger restaurant chains in the world and we are the largest Burger King franchisee. Burger King restaurants feature the popular flame-broiled WHOPPER^® sandwich as well as hamburgers and other sandwiches, fries, salads, breakfast items and other offerings typically found in quick-service hamburger restaurants. As of December 31, 2005, we operated 336 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. For the year ended December 31, 2005, our Burger King restaurants generated total revenues of $360.1 million and segment EBITDA of $31.8 million.

Liquidity and Capital Resources

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:

• restaurant operations are primarily conducted on a cash basis;

• rapid turnover results in a limited investment in inventories; and

• cash from sales is usually received before related liabilities for food, supplies and payroll become due.

Historically, our cash requirements have arisen from:

• servicing our debt;

• ongoing capital reinvestment in our existing restaurants; and

• financing the opening and equipping of new restaurants.

Interest payments under our debt obligations represent significant liquidity requirements for us. We believe cash generated from our operations and availability under our revolving credit facility will provide sufficient cash availability to cover our working capital needs, capital expenditures (which represent a major investment of cash for us), planned development and debt service requirements for the next twelve months.

December 2004 Refinancing. On December 15, 2004, we completed the private placement of $180.0 million of our 9% Senior Subordinated Notes due 2013, which we refer to as the “senior subordinated notes.” Concurrently, we repaid all outstanding borrowings under our prior senior secured credit facility and amended and restated such senior credit facility with a new syndicate of lenders, which we refer to as the “senior credit facility.” We received $400.0 million in total proceeds that included the issuance of the notes and the term loan B borrowings of $220.0 million under the new senior credit facility. The proceeds were primarily utilized to repay borrowings outstanding under the prior senior credit facility of $74.4 million, to retire all of our 9 ¹/2% senior subordinated notes due 2008 (including redemption premiums) in the amount of $175.9 million, to pay a dividend to Holdings, our sole stockholder, in the amount of $116.8 million (and Holdings concurrently paid a dividend to its stockholders in the aggregate amount of $116.8 million), to pay fees and expenses related to the refinancing of $8.8 million, and to pay a bonus to employees (including management) and a director, who owned options to purchase common stock of Holdings, totaling $20.9 million, which includes $0.6 million of payroll taxes.

Stock-based Compensation Charge. We recorded a pretax compensation charge, including applicable payroll taxes, of $16.4 million in 2005 relative to stock awards issued in the second quarter of 2005. Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings’ common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings’ common stock. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, effective May 3, 2005, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients’ shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Carrols Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Carrols Holdings (at its option) in the event of a termination of employment before the occurrence of certain events.

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Operating activities. Net cash provided by operating activities for the years ended December 31, 2005, 2004 and 2003 was $22.0 million, $59.2 million and $46.3 million, respectively. At December 31, 2005, we had $9.3 million in cash. At December 31, 2004 we had $31.5 million in cash due to the timing of payments associated with the December 2004 refinancing. In the first quarter of 2005, we paid the $20.3 million bonus to employees (including management) and a director and the applicable taxes of $0.6 million, as well as $5.5 million of tax withholdings related to the dividend payment in late December of 2004. These payments reduced net cash provided from operating activities in the aggregate $26.4 million in 2005. Our income tax payments included in operating activities have been historically reduced due to the utilization of net operating loss carryforwards. For tax years after 2005 we have Federal alternative minimum tax credit carryforwards of $2.9 million with no expiration date and Federal employment tax credit carryforwards of $2.5 million that begin to expire in 2021.

Investing activities including capital expenditures and sale-leaseback transactions. Net cash used for investing activities for the years ended December 31, 2005 and 2004 was $33.9 million and $8.5 million, respectively. Net cash provided from investing activities for the year ended December 31, 2003 was $14.6 million. Capital expenditures represent a major investment of cash for us, and, excluding acquisitions, for the years ended December 31, 2005, 2004 and 2003, were $34.6 million, $19.1 million and $30.4 million, respectively. In addition, we purchased four Taco Cabana restaurants from a franchisee for a cash purchase price of $4.2 million in 2005. We sold other properties, primarily non-operating restaurant properties, in 2005, 2004 and 2003 for net proceeds of $0.8 million, $1.2 million and $3.9 million, respectively. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility.

In 2005, we sold four restaurant properties in sale-leaseback transactions for net proceeds of $5.2 million. In 2004, we sold eight restaurant properties in sale-leaseback transactions for net proceeds of $11.0 million and in 2003 we sold 31 restaurant properties in sale-leaseback transactions for net proceeds of $44.2 million. The net proceeds from these sales were used to reduce outstanding debt under our senior credit facility. Purchases of properties to be sold in sale-leaseback transactions were $1.1 million, $1.6 million and $3.1 million in 2005, 2004 and 2003, respectively.

Our capital expenditures primarily include (1) capital restaurant maintenance expenditures, (2) restaurant remodeling and (3) new restaurant development. Capital restaurant maintenance expenditures include capital expenditures for the ongoing reinvestment and enhancement of our restaurants. Remodeling expenditures include capital expenditures for renovating and in some cases rebuilding the interior and exterior of our existing restaurants, including expenditures associated with franchise renewals with respect to our Burger King restaurants. Capital expenditures for new restaurant development are associated with developing new restaurants including the purchase of related real estate.

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The following table sets forth our capital expenditures for the periods presented:

	Taco Cabana		Pollo Tropical		Burger King		Consolidated
	(Dollars in thousands)
Year Ended December 31, 2005:
Restaurant maintenance expenditures (1)	$	3,434	$	2,505	$	2,745	$	8,684
Restaurant remodeling expenditures		—		1,384		2,634		4,018
Acquisition of Taco Cabana restaurants		4,215		—		—		4,215
New restaurant development expenditures		9,143		10,235		1,235		20,613
Other capital expenditures		225		303		791		1,319
Total capital expenditures	$	17,017	$	14,427	$	7,405	$	38,849
Number of new restaurant openings		6		6		1		13
Year Ended December 31, 2004:
Restaurant maintenance expenditures (1)	$	2,496	$	2,094	$	2,913	$	7,503
Restaurant remodeling expenditures		—		—		845		845
New restaurant development expenditures		4,059		4,542		1,053		9,654
Other capital expenditures		89		248		734		1,071
Total capital expenditures	$	6,644	$	6,884	$	5,545	$	19,073
Number of new restaurant openings		5		3		1		9
Year Ended December 31, 2003:
Restaurant maintenance expenditures (1)	$	2,697	$	2,186	$	2,061	$	6,944
Restaurant remodeling expenditures		121		26		3,170		3,317
New restaurant development expenditures		13,687		2,147		2,872		18,706
Other capital expenditures		322		232		850		1,404
Total capital expenditures	$	16,827	$	4,591	$	8,953	$	30,371
Number of new restaurant openings		8		2		2		12

(1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the years ended December 31, 2005, 2004 and 2003, these restaurant repair and maintenance expenses were approximately $18.1 million, $15.7 million and $15.3 million, respectively.

In 2006, we anticipate that total capital expenditures will be approximately $37 million to $44 million. These capital expenditures include approximately $20 million to $25 million for the development of new restaurants and purchase of related real estate applicable to our Taco Cabana and Pollo Tropical restaurant concepts. In 2006 we anticipate opening approximately six to eight new Pollo Tropical restaurants and eight to ten new Taco Cabana restaurants. Capital expenditures in 2006 also include expenditures of approximately $15 million to $17 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures and approximately $2.0 million in other capital expenditures.

Financing activities. Net cash used for financing activities for the year ended December 31, 2005, 2004 and 2003 as $10.2 million, $21.7 million and $61.1 million, respectively. Financing activities in these periods consisted of repayments under our debt arrangements and the sale of restaurants in sale-leaseback transactions accounted for as lease financing obligations with proceeds of $4.5 million and $3.6 million for the years ended December 31, 2004 and 2003, respectively. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility.

In 2005 and 2004 we also made voluntary principal repayments on borrowings under our senior credit facility of $6.0 million and $39.0 million, respectively. In addition, in 2005 we purchased one restaurant property subject to a lease financing obligation for $1.1 million under our right of first refusal included in the subject lease. This purchase is shown as a principal payment in the statement of cash flows as it relates to a previously recorded lease financing obligation.

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Indebtedness. At December 31,2005 we had total debt outstanding of $504.6 million comprised of $180.0 million of notes, borrowings under our term loan B facility of $211.8 million under the senior credit facility, lease financing obligations of $110.9 million and capital lease obligations of $1.9 million.

Senior Credit Facility. Our senior credit facility provides for a revolving credit facility under which we may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a $220.0 million term loan B facility and incremental facilities (as defined in the new senior credit facility), at our option, of up to $100.0 million, subject to the satisfaction of certain conditions. At December 31, 2005 $211.8 million was outstanding under the term loan B facility and no amounts were outstanding under our revolving credit facility. After reserving $11.1 million for letters of credit guaranteed by the facility, $38.9 million was available for borrowings under our revolving credit facility at December 31, 2005.

As a result of the restatement of our financial statements as discussed in Note 2 to our interim financial statements for the third quarter of 2005 contained in our Quarterly Report on Form 10Q, the Company was in default under its senior credit facility by failing to timely furnish its quarterly consolidated financial statements for the third quarter of 2005 to its lenders. On December 6, 2005, the Company obtained a Consent and Waiver from its lenders under the senior credit facility that permitted the Company to extend the time to deliver its consolidated financial statements for the third quarter of 2005 to February 15, 2006.On February 15, 2006, the Company obtained a waiver of such default from its lenders that extended the period of time to deliver its consolidated financial statements for the third quarter of 2005 to June 30, 2006. The waiver also extended the period of time to deliver its annual audited consolidated financial statements for 2005 and its consolidated financial statements for the first fiscal quarter of 2006 to June 30, 2006. While the Company currently anticipates delivering these financial statements by June 30, 2006, its failure to do so would constitute an event of default under the new senior credit facility. If such an event of default occurs under the senior credit facility that is not waived, the lenders could cause all amounts outstanding with respect to the borrowings to be due and payable immediately which in turn would result in cross defaults under the Indenture governing the senior subordinated notes. The Company’s assets and cash flow may not be sufficient to fully repay outstanding debt if accelerated upon an event of default and there can be no assurance that such outstanding debt could be refinanced in such an event on acceptable terms or if at all. See “Item 1A. Risk Factors”.

Senior Subordinated Notes. In connection with the sale of $180 million of 9% senior subordinated notes due 2013, we and certain of our subsidiaries, which we refer to as the “guarantors”, entered into a Registration Rights Agreement dated as of December 15, 2004, with J.P. Morgan Securities Inc., Banc of America Securities LLC, Lehman Brothers Inc., Wachovia Capital Markets, LLC and SunTrust Capital Markets, Inc. In general, the Registration Rights Agreement provided that we and the guarantors agreed to file, and cause to become effective, a registration statement with the Securities Exchange Commission in which we offer the holders of the senior subordinated notes the opportunity to exchange such senior subordinated notes for newly issued notes that have terms which are identical to the senior subordinated notes that are registered under the Securities Act of 1933, as amended, which we refer to as the “exchange offer”.

Pursuant to the Registration Rights Agreement, because we did not complete the exchange offer on or prior to June 13, 2005, the interest rate on our senior subordinated notes was increased by 0.25% per annum for the 90-day period immediately following June 13, 2005 and increased by an additional 0.25% per annum in each of the subsequent 90-day periods immediately following September 11,2005. On December 14, 2005 the exchange offer was completed which eliminated this additional interest expense after such date. This resulted in additional interest expense of $0.4 million during 2005.

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Results of Operations

The following table sets forth, for fiscal years 2003, 2004 and 2005, selected operating results of Carrols as a percentage of total restaurant sales:

	Year Ended December 31,
	2003		2004		2005
Restaurant sales:
Taco Cabana	28.1	%	29.1	%	29.7	%
Pollo Tropical	17.0	%	17.8	%	19.3	%
Burger King	54.9	%	53.1	%	51.0	%
Total restaurant sales	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of sales	28.2	%	29.1	%	29.0	%
Restaurant wages and related expenses	30.2	%	29.7	%	29.0	%
Restaurant rent expense	4.8	%	5.0	%	4.9	%
Other restaurant operating expenses	14.0	%	13.3	%	14.6	%
Advertising expense	4.2	%	3.5	%	3.6	%
General and administrative	5.8	%	6.3	%	8.3	%
Income from restaurant operations	5.9	%	7.3	%	5.7	%

Fiscal 2005 Compared to Fiscal 2004

In 2005, we opened six new Taco Cabana restaurants, six new Pollo Tropical restaurants and one new Burger King restaurant. We also acquired four Taco Cabana restaurants from a former franchisee, closed thirteen Burger King restaurants and one Taco Cabana restaurant. Fiscal 2005 included 52 weeks compared to 53 weeks in fiscal 2004.

Restaurant Sales. Total restaurant sales in 2005 increased by $9.1 million, to $705.4 million due to comparable sales increases at all three of our restaurant concepts and the net addition of three restaurants. The extra week in fiscal 2004 contributed consolidated sales of $13.0 million in 2004 attributable to our three restaurant concepts as follows: Taco Cabana—$3.8 million; Pollo Tropical—$2.3 million; and Burger King—$6.9 million. The changes in comparable restaurant sales noted below are calculated using only those restaurants open since the beginning of the earliest period being compared (12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants).

Taco Cabana restaurant sales increased $7.0 million, excluding the impact of the extra week in 2004 of $3.8 million to $209.5 million in 2005 due primarily to the net addition of nine restaurants since the beginning of 2004 and the acquisition of four restaurants from a franchisee in the third quarter of 2005. These thirteen restaurants contributed $8.6 million of additional sales in 2005. To a lesser extent, sales also increased from a 1.2% sales increase at our comparable Taco Cabana restaurants resulting from an increase in the average sales transaction compared to 2004.

Pollo Tropical restaurant sales increased $11.8 million, excluding the effect of the extra week in 2004 of $2.3 million, to $135.8 million in 2005 due in part to a 4.7% sales increase at our comparable Pollo Tropical restaurants. This increase was from an increase in the average sales transaction due in part to menu price increases of approximately 4% near the end of the second quarter of 2005. The addition of nine restaurants since the beginning of 2004 contributed $7.9 million of additional sales in 2005.

During October of 2005 our Pollo Tropical restaurants were negatively impacted by hurricanes Katrina and Wilma, and our Taco Cabana restaurants in the Houston market were negatively impacted by hurricane Rita. Although the restaurants collectively suffered only minimal property damage, our estimate of lost revenues from restaurants temporarily closed were, in the aggregate, approximately $1.8 million. Consequently, comparable restaurant sales decreased 3.3% at Pollo Tropical and increased .9% at Taco Cabana during the fourth quarter of 2005 compared to the fourth quarter of 2004.

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Burger King restaurant sales were $360.1 million in 2005, and excluding the effect of the extra week in 2004 of $6.9 million, decreased $2.8 million due primarily to the closing of thirteen underperforming Burger King restaurants during the year. Comparable restaurant sales at our Burger King restaurants increased 1.0% in 2005 over 2004 from an increase in the average sales transaction due to menu price increases.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased slightly to 29.0% in 2005 from 29.1% in 2004. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 28.8% in 2005 from 29.8% in 2004 due to improvements in restaurant-level food controls (0.8% of Taco Cabana sales) and higher rebates (0.2% of Taco Cabana sales). The effect of menu price increases in early 2005 substantially offset increases in commodity costs. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased 1.9% to 33.3% in 2005 from 31.4% in 2004 due to significant increases in chicken commodity costs (1.5% of Pollo Tropical sales) and increases in other commodity costs (0.6% of Pollo Tropical sales) partially offset by menu price increases in 2005. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 27.5% in 2005 from 27.9% in 2004 due to the effect of menu price increases in 2005 (1.0% of Burger King sales) offset in part by an increase in beef commodity prices (0.2% of Burger King sales), higher promotional sales discounts (0.2% of Burger King sales) and lower rebates (0.1% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.0% in 2005 from 29.7% in 2004. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.1% in 2005 from 28.5% in 2004 due primarily to the effect of menu price increases in 2005. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased 1.5% to 23.8% in 2005 from 25.3% in 2004 due primarily to the effect on fixed labor costs of higher comparable restaurant sales volumes (0.5% of Pollo Tropical sales), the effect of menu price increases in 2005 (0.5% of Pollo Tropical sales) and lower medical insurance costs (0.3% of Pollo Tropical sales). Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.5% in 2005 from 31.8% in 2004 due to lower medical insurance costs (0.2% of Burger King sales) and lower restaurant level bonuses (0.1% of Burger King sales).

Restaurant rent expense, as a percentage of total restaurant sales, decreased to 4.9% in 2005 from 5.0% in 2004 due primarily to the effect of comparable restaurant sales increases on fixed rental costs.

Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.6% in 2005 from 13.3% in 2004. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 14.6% in 2005 from 13.2% in 2004 due primarily to higher utility costs from higher natural gas prices and increased electricity usage (0.7% of Taco Cabana sales) and higher maintenance costs associated with initiatives to enhance the appearance of our Taco Cabana restaurants (0.5% of Taco Cabana sales). Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.4% in 2005 from 10.9% in 2004 due primarily to higher utility costs resulting from higher natural gas and electricity prices (0.4% of Pollo Tropical sales), higher general liability claim costs (0.2% of Pollo Tropical sales) and increased fees due to increased levels of credit card sales (0.2% of Pollo Tropical sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 15.4% in 2005 from 14.3% in 2004 due higher utility costs due to higher natural gas rates and for summer months also electricity usage (0.5% of Burger King sales), and fees associated with the acceptance of credit cards (0.2% of Burger King sales) and higher repair and maintenance expense to enhance the appearance of our Burger King restaurants (0.3% of Burger King sales).

Advertising expense, as a percentage of total restaurant sales, increased slightly to 3.6% in 2005 from 3.5% in 2004. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased slightly to 4.2% in 2005 from 4.1% in 2004. Taco Cabana advertising expenditures in 2006 are anticipated to be comparable to 2005, as a percentage of Taco Cabana sales. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, increased to 1.9% in 2005 from 1.6% in 2004 due to higher television and radio advertising expenditures in 2005. Advertising expenditures for our Pollo Tropical restaurants in 2006 are

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anticipated to be 1.3% to 1.7% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, were 3.9% in both 2005 and 2004.

General and administrative expenses, including stock-based compensation expense, as a percentage of total restaurant sales, increased to 8.3% in 2005 from 6.3% in 2004. Stock-based compensation expense was $16.4 million and $1.8 million in 2005 and 2004, respectively, or as a percentage of total restaurant sales, 2.3% and 0.3%, respectively. Stock-based compensation expense in 2005 was substantially from the issuance of stock in exchange for stock options in the second quarter of 2005. General and administrative expenses increased in total $15.0 million due primarily to the $14.6 million increase in stock-based compensation expense. General and administrative expenses further increased $0.4 million in 2005 compared to 2004 due primarily to increased legal and professional fees, including audit fees, of $1.8 million, higher administrative salaries of $0.6 million, and higher Company 401(k) contributions of $0.3 million, substantially offset by lower administrative bonus expense of $2.3 million.

Segment EBITDA. Segment EBITDA is a measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt. Our fiscal year 2004 included 53 weeks. The effect of the additional week in 2004 increased segment EBITDA in 2004 by $1.4 million for our Taco Cabana restaurants, $0.9 million for our Pollo Tropical restaurants and $2.1 million for our Burger King restaurants. Excluding the impact of the extra week in 2004, Segment EBITDA for our Taco Cabana restaurant segment increased to $31.9 million in 2005 from $30.1 million in 2004, Segment EBITDA for our Pollo Tropical restaurant segment increased to $28.7 million in 2005 from $27.9 million in 2004 and Segment EBITDA for our Burger King restaurant segment decreased from $36.6 million in 2004 to $31.8 million in 2005.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $33.1 million in 2005 from $38.5 million in 2004 due primarily to lower depreciation of restaurant equipment related to our Burger King restaurants of $2.3 million, lower depreciation due to the closure of Burger King restaurants since the beginning of 2004 of $0.7 million, lower depreciation of corporate information systems of $0.7 million, lower leasehold improvement amortization depreciation for our Taco Cabana restaurants of $1.4 million and lower depreciation due to the sale/leaseback of properties in the second half of 2004.

Impairment losses were $1.5 million in 2005 and were comprised of $0.3 million related to Burger King franchise rights and $1.1 million related to property and equipment of certain underperforming Burger King restaurants and planned future closures of Burger King restaurants and $0.1 million related to property and equipment of certain underperforming Taco Cabana restaurants. Impairment losses were $1.5 million in 2004 and were comprised of $0.3 million related to Burger King franchise rights and $1.2 million related to property and equipment of certain underperforming Burger King restaurants and planned future closures of Burger King restaurants.

Interest Expense. Interest expense increased $7.6 million to $43.0 million in 2005 from $35.4 million in 2004 due primarily to higher average outstanding debt balances resulting from the December 2004 refinancing and higher effective interest rates on our floating rate borrowings under our senior credit facility. However, the weighted average interest rate on our long-term debt, excluding lease financing obligations, for the year ended December 31, 2005 decreased to 7.3% from 7.8% in 2004. This decrease was due to increased borrowings under our senior credit facility in 2005 (as a result of the December 2004 refinancing), which are at a lower rate than our borrowings under our senior subordinated notes, and which also comprised a higher percentage of our total outstanding long-term debt in 2005 compared to 2004.

Provision (Benefit) for Income Taxes. Although we had a pretax loss of $1.6 million in 2005 we have a tax provision of $2.8 million for the year ended December 31, 2005 due to the non-deductible portion of stock-based compensation expense related to stock awards in the second quarter of 2005. The Federal tax provision for 2005 includes $3.3 million for the non-deductible portion of stock-based compensation expense and $0.5 million of income tax expense associated with Ohio state tax legislation enacted in the second quarter of 2005.

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During the fourth quarter of 2005, we established a valuation allowance of $ 1.1 million against net deferred tax assets due to state net operating loss carryforwards where realization of related deferred tax asset amounts was not likely. The estimation of future taxable income for federal and state purposes and the Company’s resulting ability to realize deferred tax assets pertaining to state net operating loss carryforwards and tax credit carryforwards can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to material future changes.

Net Income (Loss). As a result of the foregoing, we incurred a net loss of $4.3 million in 2005 compared to a net loss of $8.1 million in 2004.

Fiscal 2004 Compared to Fiscal 2003

In 2004, we opened five new Taco Cabana restaurants, three new Pollo Tropical restaurants and one new Burger King restaurant and closed four Burger King restaurants. Fiscal 2004 included 53 weeks compared to 52 weeks in fiscal 2003.

On June 22, 2004, Carrols Holdings filed a registration statement on Form S-1 for an offering of Enhanced Yield Securities comprised of common stock and senior subordinated notes. On October 25, 2004, Carrols Holdings withdrew its registration statement on Form S-1 with respect to the aforementioned securities. We recorded the incurred costs related to this offering of $2.3 million in other expense in the third quarter of 2004.

Restaurant Sales. Total restaurant sales for 2004 increased by $52.7 million, or 8.2%, to $696.3 million from $643.6 million in 2003 due to sales increases at all three of our restaurant concepts. The extra week in fiscal 2004 resulted in an increase in total consolidated sales of $13.0 million attributable to our three restaurant concepts as follows: Taco Cabana—$3.8 million; Pollo Tropical—$2.3 million; and Burger King—$6.9 million.

Taco Cabana restaurant sales were $202.5 million in 2004, and excluding the effect of the extra week in 2004 of $3.8 million, increased $17.6 million due in part to a 4.8% sales increase at our comparable Taco Cabana restaurants and the net addition of ten restaurants since the beginning of 2003. Such increase in Taco Cabana’s comparable restaurant sales in 2004 resulted from higher customer traffic, an increase in the average sales transaction compared to 2003 and, to a lesser extent, modest menu price increases of approximately 1% which occurred early in the first quarter of 2004.

Pollo Tropical restaurant sales were $124.0 million in 2004, and excluding the effect of the extra week in 2004 of $2.3 million, increased $12.5 million due primarily to a 10.6% sales increase at our comparable Pollo Tropical restaurants that resulted from an increase in customer traffic, and to a much lesser extent the addition of five restaurants since the beginning of 2003. There were no significant menu price increases affecting 2004 results of our Pollo Tropical restaurants.

Burger King restaurant sales were $369.8 million in 2004, and excluding the effect of the extra week in 2004 of $6.9 million, increased $9.6 million due primarily to an increase in comparable restaurant sales of 2.9% from increases in the average sales transaction at our Burger King restaurants and from sales of new premium sandwiches introduced in 2004. These increases were partially offset by reduced customer traffic, most notably in the first quarter of 2004. Our Burger King restaurants had menu price increases of approximately 1.5% in August 2004.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 29.1% in 2004 from 28.2% in 2003. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.8% in 2004 from 29.6% in 2003 due to higher beef commodity prices in 2004, offset partially by a modest price increase of 1.0% early in the first quarter of 2004 and improvements in restaurant food controls. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased to 31.4% in 2004 from 30.5% in 2003 due to increases in chicken commodity costs (0.6% of Pollo sales) and lower vendor rebates (0.6% of Pollo sales), partially offset by improvements in restaurant food controls. Burger

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King cost of sales, as a percentage of Burger King restaurant sales, increased significantly to 27.9% in 2004 from 26.7% in 2003 due to an increase in beef commodity prices of approximately 13% (0.6% of Burger King sales), increases in other commodity costs including cheese and produce, (0.9% of Burger King sales) and sales of new menu items which have higher selling prices but lower margins as a percentage of their selling prices (0.4% of Burger King sales). These increases were offset in part by the effect of menu price increases (0.5% of Burger King sales) and lower promotional sales discounts (0.2% of Burger King sales) in 2004.

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.7% in 2004 from 30.2% in 2003. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.5% in 2004 from 28.8% in 2003 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and to the price increase in the first quarter of 2004, offset in part by higher medical insurance costs (0.2% of Taco Cabana sales). Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 25.3% in 2004 from 25.7% in 2003 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and restaurant productive labor efficiencies. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.8% in 2004 from 32.3% in 2003 due primarily to the effect on fixed labor costs of higher comparable restaurant sales volumes (0.4% of Burger King sales) and lower restaurant incentive bonuses (0.2% of Burger King sales), offset in part by higher medical insurance costs (0.1% of Burger King sales).

Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.0% in 2004 from 4.8% in 2003 due to sale-leaseback transactions that were completed in 2003 and 2004.

Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 13.3% in 2004 from 14.0% in 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 13.2% in 2004 from 13.6% in 2003 due to the effect on fixed operating costs of higher comparable restaurant sales volumes and lower utility costs. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 10.9% in 2004 from 11.8% in 2003 due to lower general liability insurance costs (0.4% of Pollo Tropical sales), lower utility costs (0.3% of Pollo Tropical sales) and the effect of higher comparable restaurant sales volumes on fixed operating costs. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 14.3% in 2004 from 14.8% in 2003 due primarily to lower repair and maintenance expenses (0.2% of Burger King sales) and lower discretionary restaurant operating expenses (0.3% of Burger King sales).

Advertising expense, as a percentage of total restaurant sales, decreased to 3.5% in 2004 from 4.2% in 2003. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased to 4.1% in 2004 from 4.7% in 2003 due to the timing of promotions in 2004 compared to the prior year. Our Taco Cabana advertising expenditures in 2005 (as a percentage of sales) are anticipated to be comparable to 2004. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 1.6% in 2004 from 3.6% in 2003 due to lower television and radio advertising expenditures. Our Pollo Tropical advertising expenditures in 2005 are anticipated to range from 2.0% to 2.5% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, decreased to 3.9% in 2004 from 4.2% in 2003 due to lower local advertising expenditures in 2004.

General and administrative expenses, as a percentage of total restaurant sales, increased to 6.3% in 2004 from 5.8% in 2003. General and administrative expenses increased $6.2 million to $43.6 million due primarily to increased administrative bonus levels in 2004 of $4.7 million and an increase in stock-based compensation expense of $1.6 million.

Segment EBITDA. Segment EBITDA is a measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt. Segment EBITDA for our Taco Cabana restaurant segment increased to $30.1 million in 2004 from

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$24.2 million in 2003. Segment EBITDA for our Pollo Tropical restaurant segment increased to $27.9 million in 2004 from $22.5 million in 2003. Segment EBITDA for our Burger King restaurant segment decreased to $36.6 million in 2004 from $37.4 million in 2003. Our fiscal year 2004 included 53 weeks. The effect of the additional week in 2004 increased segment EBITDA by $1.4 million for our Taco Cabana restaurants, $0.9 million for our Pollo Tropical restaurants and $2.1 million for our Burger King restaurants.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $38.5 million in 2004 from $40.2 million in 2003 due primarily to lower equipment depreciation at our Burger King restaurants. Impairment losses were $1.5 million in 2004 and were related to certain underperforming Burger King restaurants. Impairment losses were $4.2 million in 2003; $3.5 million of which were related to certain underperforming Taco Cabana restaurants and $0.7 million of which were related to certain underperforming Burger King restaurants.

Bonus to Employees and Director. In conjunction with our December 2004 refinancing, we approved a compensatory bonus payment of approximately $20.3 million to a number of employees (including management) and a director who owned options to purchase common stock on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of options owned by such persons. The bonus payment was made in January 2005 and including applicable payroll taxes totaled $20.9 million.

Interest Expense. Interest expense decreased $2.0 million to $35.4 million in 2004 from $37.3 million in 2003 due primarily to lower average outstanding debt balances in 2004, offset slightly by higher effective interest rates on our floating rate debt. The average effective interest rate on all debt, excluding lease financing obligations, increased to 7.8% in 2004 from 7.2% in 2003. This increase was primarily from our senior subordinated notes comprising a greater percentage of our total outstanding debt, as a result of our principal prepayments on borrowings under our prior senior credit facility.

Provision (Benefit) for Income Taxes. The effective income tax rate for 2004 was 45.4%. This rate is higher than the Federal statutory tax rate of 34% due primarily to state franchise taxes.

Net Income (Loss). As a result of the foregoing, we incurred a net loss of $8.1 million in 2004 compared to net income of $1.3 million in 2003.

Application of Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies” footnote in the notes to our consolidated financial statements. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.

Sales recognition at company-operated restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls, and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes, the evaluation of goodwill and intangible assets for impairment and assessing impairment of long-lived assets and Burger King franchise rights and lease accounting. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.

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Accrued occupancy costs. We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of factors such as the remaining contractual period under our lease obligations, the amount of sublease income we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events and prior estimates could result in adjustments to these accrued costs. At December 31, 2005, we had three non-operating restaurant properties.

Insurance liabilities. We are self-insured for most workers’ compensation, general liability and medical insurance claims. At December 31, 2005, we had $8.2 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

Legal obligations. In the normal course of business, we must make estimates of potential future legal obligations and liabilities, which require the use of management’s judgment. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates and adjustments to income could be required.

Income taxes. We record income tax liabilities utilizing known obligations and estimates of potential obligations. We are required to record a valuation allowance if it is more likely than not that the value of estimated deferred tax assets are different from those recorded. This would include making estimates and judgments on future taxable income, the consideration of feasible tax planning strategies and existing facts and circumstances. When the amount of deferred tax assets to be realized is expected to be different from that recorded, the asset balance and income statement would reflect any change in valuation in the period such determination is made.

Evaluation of Goodwill and Intangible Assets. We must evaluate our recorded indefinite-lived intangible assets for impairment under Statement of Financial Accounting Standards (SFAS) 142 “Goodwill and Other Intangible Assets” on an ongoing basis. We have elected to conduct our annual impairment review of goodwill and other indefinite-lived intangible assets at December 31. Our reviews at December 31, 2005 and 2004 indicated there had been no impairment as of those dates. This annual evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting units including projections regarding future operating results of each restaurant over its remaining lease term and market values. These estimates may differ from actual future events and if these estimates or related projections change in the future, we may be required to record impairment charges for these assets. Goodwill included in our consolidated balance sheet was $124.9 million at December 31, 2005.

Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets with their respective carrying values. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Impairment of Burger King Franchise Rights. We assess the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment by comparing the aggregate undiscounted future cash flows from those acquired restaurants with the respective carrying value of franchise rights for each Burger King acquisition. In determining

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future cash flows, significant estimates are made by us with respect to future operating results of each group of acquired restaurants over their remaining franchise life. If acquired franchise rights are determined to be impaired, the impairment charge is measured by calculating the amount by which the franchise rights carrying amount exceeds its fair value. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Lease Accounting. Judgments made by management for its lease obligations include the lease term including the determination of renewal options that are reasonably assured which can affect the classification of a lease as capital or operating for accounting purposes, the term over which related leasehold improvements for each restaurant are amortized, and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.

We also must evaluate under SFAS No. 98, “Accounting for Leases” (“SFAS 98”), sales of our restaurants which occur in sale-leaseback transactions to determine the proper accounting for the proceeds of such sales either as a sale or a financing. This evaluation requires certain judgments in determining whether or not clauses in the lease or any related agreements constitute continuing involvement under SFAS 98. These judgments must also consider the various interpretations of SFAS 98 since its issuance in 1989. For those sale-leasebacks that are accounted for as financing transactions, we must estimate our incremental borrowing rate, or an alternative rate in cases where the incremental borrowing rate is not appropriate to utilize, for purposes of determining interest expense and the resulting amortization of the lease financing obligation. Changes in the determination of the incremental borrowing rates or other rates utilized in connection with the accounting for lease financing transactions could have a significant effect on the interest expense and underlying balance of the lease financing obligations.

In addition, if a purchase option exists for any properties subject to a lease financing obligation, the purchase option is evaluated for its probability of exercise on an ongoing basis. This evaluation considers many factors including, without limitation, our intentions, the fair value of the underlying properties, our ability to acquire the property, economic circumstances and other available alternatives to us for the continued use of the property. These factors may change and be considered differently in future assessments of probability.

Contractual Obligations

The following table summarizes our contractual obligations and commitments as of December 31, 2005 (in thousands):

	Payments due by period
Contractual Obligations	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More than 5 Years
Long-term debt obligations, including interest (1)	$	580,173	$	33,168	$	65,875	$	260,630	$	220,500
Capital lease obligations, including interest (2)		3,280		559		644		357		1,720
Operating lease obligations (3)		357,869		33,992		60,900		53,182		209,795
Lease financing obligations, including interest (4)		254,971		10,723		22,055		22,727		199,466
Total contractual obligations	$	1,196,293	$	78,442	$	149,474	$	336,896	$	631,481

(1) Our long-term debt obligations include $180 million of notes and $211.8 million of borrowings outstanding under the term loan B facility of our new senior credit facility. Interest payments on our notes of $121,500 for all years presented are included at the coupon rate of 9%. Interest payments included above totaling $66,873 for all years presented on our term loan B facility are variable in nature and have been calculated using an interest rate of 7.0% for each year (See Item 7A. Quantitative and Qualitative Disclosures about Market Risks—Interest Rate Risk).

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(2) Includes interest of $1,384 in total for all years presented.

(3) Represents aggregate minimum lease payments. Many of our leases also require contingent rent in addition to the minimum base rent based on a percentage of sales and require expenses incidental to the use of the property which have been excluded from this table.

(4) Includes interest of $144,073 in total for all years presented.

We have not included obligations under our postretirement medical benefit plans in the contractual obligations table as our postretirement plan is not required to be funded in advance, but is funded as retiree medical claims are paid. Also excluded from the contractual obligations table are payments we may make for workers’ compensation, general liability and employee healthcare claims for which we are self-insured. The majority of our recorded liabilities related to self-insured employee health and insurance plans represent estimated reserves for incurred claims that have yet to be filed or settled.

Long-Term Debt Obligations. Refer to Note 7 of the consolidated financial statements for details of our long-term debt.

Capital Lease and Operating Lease Obligations. Refer to Note 6 of the consolidated financial statements for details of our capital lease and operating lease obligations.

Lease Financing Obligations. Refer to Note 8 of the consolidated financial statements for details of our lease financing obligations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.

Inflation

The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses, and most recently, energy costs. Wages paid in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates. Accordingly, changes in the Federal and state hourly minimum wage rates directly affect our labor costs. The restaurant industry and we typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future.

Effects of New Recent Accounting Developments

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R) which replaces SFAS No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all employee share-based payments, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 “Share-Based Payment.” SAB 107 expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements. SFAS 123R is effective for awards that are granted, modified, or settled in cash for the first annual reporting period beginning after June 15, 2005. We plan to adopt the provision of SFAS 123 using the modified prospective method of adoption. However, as all shares of stock issued in the stock award were fully vested and we will not have any stock options outstanding at

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December 31, 2005, we will not record any stock-based compensation expense related to the adoption of SFAS 123R on January 1, 2006. Compensation cost for any new unvested share-based awards granted after December 31, 2005 will be recorded upon issuance at their fair value over their service period.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (“FIN 47”). FIN 47 clarifies that the term “conditional” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” which refers to a legal obligation to perform an asset retirement activity even if the timing and/or settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 became effective for us in the fourth quarter of 2005. Based on our analysis and evaluation, the adoption of FIN 47 had no effect on our consolidated financial statements.

In October 2005, the FASB issued Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period,” which requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense. This Staff Position is effective for reporting periods beginning after December 15, 2005, and retrospective application is permitted but not required. We have not historically capitalized rent incurred during the construction period. Accordingly, Staff Position FAS 13-1 is not expected to have any impact on our consolidated financial statements.

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” This Issue discussed how entities are to adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. We present our restaurant sales net of sales taxes and therefore Issue 06-3 will not impact the method for recording these sales taxes in our consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Interest Rate Risk

We are exposed to market risk associated with fluctuations in interest rates, primarily limited to our senior credit facility. There were no borrowings outstanding under the revolving credit facility at December 31, 2005 and $211.8 million of borrowings outstanding under the term loan B facility. Revolving loans under our senior credit facility bear interest at a per annum rate, at our option of either:

1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .50% to 1.50% based on the Company’s total leverage ratio (as defined in the senior credit facility); or

2) LIBOR plus a margin ranging from 2.0% to 3.0% based on the Company’s total leverage ratio.

Borrowings under the term loan B facility bear interest at a per annum rate, at the Company’s option, of either:

1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .75% to 1.0% based on the Company’s total leverage ratio; or

2) LIBOR plus a margin ranging from 2.25% to 2.50% based on the Company’s total leverage ratio.

A 1% change in interest rates would have resulted in an increase or decrease in interest expense of approximately $2.4 million for the year ended December 31, 2005.

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Commodity Price Risk

We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Index to Financial Statements attached hereto is set forth in Item 15.

I TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Restatement. As discussed in Note 2 to Amendment No. 1 to our 2004 Annual Report on Form 10-K/A we restated our consolidated financial statements for the 2004, 2003 and 2002 fiscal years. Refer to Note 2 to the consolidated financial statements included in the 2004 10-K/A for a complete discussion of the restatement.

Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. In the evaluation, we considered the restatement of our financial statements as discussed in the 2004 10-K/A. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of January 1, 2006.

Material Weaknesses in Internal Control Over Financial Reporting A material weakness is a control deficiency (within the meaning of PCAOB Auditing Standard No. 2), or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management identified the following material weaknesses in its internal control over financial reporting as of January 1, 2006:

Personnel

In conjunction with filing the 2004 Form 10-K/A, which included the restatements discussed in Note 2 to the consolidated financial statements of that filing, management concluded that the Company did not have

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sufficient personnel with the appropriate knowledge and expertise to identify and resolve certain complex accounting and tax matters. In addition, the Company did not perform the appropriate level of review commensurate with the Company’s financial reporting requirements to ensure the consistent execution of its responsibility in the areas of monitoring of controls, the application of U.S. generally accepted accounting policies and disclosures to support its accounting, tax and reporting functions. This material weakness contributed to certain of the material weaknesses discussed below.

Controls over Applying the Lease Financing Method, SFAS No. 98 and Lease Accounting Policies

(a) Controls over the application of the financing method required under SFAS No. 98, with respect to the depreciation of assets subject to lease financing obligations and the selection of the appropriate interest rate to apply to such financing obligations, were ineffective resulting in the failure to identify misstatements in property and equipment, lease financing obligations, deferred income-sale/leaseback transactions, depreciation expense, interest expense and rent expense.

(b) Controls to identify leases that contained provisions which constitute forms of continuing involvement requiring real estate transactions to be accounted for as financing transactions rather than as sale/leaseback transactions were ineffective. This resulted in the Company’s failure to identify misstatements in property and equipment, lease financing obligations, deferred income-sale/leaseback transactions, depreciation expense, interest expense and rent expense.

(c) Controls over the selection and application of lease accounting policies were not effective in determining lease terms for leasehold amortization periods and recording acquisitions of leases with non-level or above-market rentals which failed to identify misstatements in property and equipment, goodwill, deferred lease liability, depreciation expense, amortization expense and rent expense.

Controls Related to Acquired Intangibles and Deferred Taxes in Conjunction with Acquisitions

(a) Controls over the application of SFAS No. 142 “Accounting for Goodwill and Other Intangible Assets” (“SFAS 142”) were not effective in the evaluation of the amortization lives of franchise rights and the recording of deferred income tax liabilities related to franchise rights at the acquisition date resulting in misstatements of franchise rights, deferred income tax liabilities, income tax expense, and amortization expense.

(b) Controls related to the preparation, periodic analysis and recording of deferred taxes resulting from differences in financial reporting and tax bases of acquired assets and liabilities were not effective resulting in misstatements of deferred income tax assets and liabilities, goodwill and goodwill amortization expense as well as the related footnotes.

Controls Over Certain Financial Statement Disclosures

(a) Controls over the preparation of the guarantor footnote disclosures were not effective resulting in the improper allocation of corporate general and administrative and income tax expenses from the “parent company only” to the “guarantor subsidiaries” in accordance with generally accepted accounting principles.

(b) Controls over the preparation of the statements of cash flows were not effective resulting in (i) the improper classification of the proceeds from qualifying sale leaseback transactions as financing cash flows versus investing cash flows and (ii) the improper recording of the amount of capital expenditures and changes in accounts payable which did not exclude non-cash expenditures. These weaknesses resulted in the misstatements of the amount of net cash provided from (used for) operating activities, investing activities, financing activities and the amount of cash capital expenditures and in the changes in accounts payable.

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Controls Over Stock Option Accounting

Controls over the application of variable accounting for stock option agreements that contained several dividend provisions were not effective which failed to identify a misstatement in stock-based compensation expense.

The control deficiencies described above resulted in the restatement of the Company’s consolidated financial statements for 2004, 2003 and 2002, and the unaudited quarterly financial information for 2004 and 2003, as well as audit adjustments to the 2004 consolidated financial statements. Additionally, each of these control deficiencies could result in the material misstatement of the aforementioned accounts that would result in material misstatements to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined at January 1, 2006 that each of these control deficiencies constituted material weaknesses.

Changes in Internal Control over Financial Reporting No change occurred in our internal control over financial reporting during the fourth quarter of 2005 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Remediation of Material Weaknesses. Through the date of the filing of this Form 10-K, we have remediated the following material weaknesses: item (c) under Controls over Applying the Lease Financing Method, SFAS No. 98 and Lease Accounting Policies; item (a) under Controls Related to Acquired Intangibles and Deferred Taxes in Conjunction with Acquisitions; item (a) under Controls Over Certain Financial Statement Disclosures; and Controls Over Stock Option Accounting, as described above and have taken the following steps to improve our internal controls.

(a) We have made improvements with respect to the controls over leasing transactions in the application of lease accounting policies in determining lease terms, the assignment of appropriate lives for leasehold improvements and intangible assets related to leases, and recording the acquisitions of leases with non-level rents and, in that regard we have: (i) performed staff training and enhanced our management review over our procedures in determining the definition of lease term and the assignment of appropriate depreciable lives to leasehold improvements and intangible assets related to leases in accordance with U.S. generally accepted accounting principles, and; (ii) enhanced documentation procedures to ensure appropriate accounting for straight-line rent expense for any acquired businesses;

(b) We implemented procedures to appropriately apply variable accounting with regards to certain stock options. In addition, all stock options were cancelled and terminated during the quarter ended July 3, 2005;

(c) We improved our controls over the application of SFAS 142 in evaluating the amortization lives of franchise rights. We will continue to review any factors that would alter the remaining lives of our franchise rights as circumstances change;

(d) We developed procedures to ensure that corporate general and administrative expenses and income tax expenses are properly allocated between the “parent company only” and “guarantor subsidiaries”; and

(e) We have hired two senior-level finance professionals to augment the Company’s controls and procedures pertaining to financial reporting.

In addition, we plan to take the following steps to remediate the material weaknesses at January 1, 2006 identified as a result of our evaluation:

(a) establish procedures to properly depreciate assets subject to lease financing obligations and select the appropriate interest rate to apply under financing method required by SFAS No. 98;

(b) implement a more formalized review process including the involvement of both legal and accounting personnel to identify forms of continuing involvement in sale/leaseback transactions;

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(c) further formalize, document and enhance the procedures and analysis around the reconciliation of deferred tax balances to the underlying financial reporting and tax bases; and

(d) hire additional accounting personnel with the appropriate expertise.

ITEM 9B. OTHER INFORMATION

None

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information about our current directors, executive officers and other named officers.

Name	Age	Position
Alan Vituli	64	Chairman of the Board and Chief Executive Officer
Daniel T. Accordino	55	President, Chief Operating Officer and Director
Paul R. Flanders	49	Vice President, Chief Financial Officer, and Treasurer
Joseph A. Zirkman	46	Vice President, General Counsel and Secretary
Timothy J. LaLonde	49	Vice President, Controller
Michael A. Biviano	49	Executive Vice President—Taco Cabana
James E. Tunnessen	51	Executive Vice President—Pollo Tropical
Lewis S. Shaye	51	Chief Concept Officer
Benjamin D. Chereskin†	47	Director
Brian F. Gleason*†	39	Director
Robin P. Selati*	40	Director
Olaseni Adeyemi Sonuga	51	Director
Clayton E. Wilhite*†	51	Director

* Current member of audit committee

† Current member of compensation committee

Alan Vituli has been Chairman of the Board since 1986 and Chief Executive Officer since March 1992. Mr Vituli is also Chairman of the Board of Directors and Chief Executive Officer of Carrols Holdings. Between 1983 and 1985, Mr. Vituli was employed by Smith Barney, Harris Upham & Co., Inc. as a Senior Vice President responsible for real estate transactions. From 1966 until joining Smith Barney, Mr. Vituli was associated with the accounting firm of Coopers & Lybrand, first as an employee and for the last 10 years as a partner. Among the positions held by Mr. Vituli at Coopers & Lybrand was National Director of Mergers and Acquisitions. Before joining Coopers & Lybrand, Mr. Vituli was employed in a family-owned restaurant business. From 1993 through our acquisition of Pollo Tropical in 1998, Mr. Vituli served on the board of directors of Pollo Tropical. Mr. Vituli also serves on the board of directors of Ruth’s Chris Steak House, Inc.

Daniel T. Accordino has been President, Chief Operating Officer and a Director since February 1993. Before that, Mr. Accordino served as Executive Vice President—Operations from December 1986 and as Senior Vice President of Carrols from April 1984. From 1979 to April 1984, he was Vice President of Carrols responsible for restaurant operations, having previously served as our Assistant Director of Restaurant Operations. Mr. Accordino has been an employee of ours since 1972.

Paul R. Flanders has been Vice President, Chief Financial Officer, and Treasurer since April 1997. Before joining us, he was Vice President—Corporate Controller of Fay’s Incorporated, a retailing chain, from 1989 to 1997, and Vice President—Corporate Controller for Computer Consoles, Inc., a computer systems manufacturer, from 1982 to 1989. Mr. Flanders was also associated with the accounting firm of Touche Ross & Co. from 1977 to 1982.

Joseph A. Zirkman has been Vice President and General Counsel since January 1993. He was appointed Secretary in February 1993. Before joining us, Mr. Zirkman was an associate with the New York City law firm of Baer Marks & Upham beginning in 1986.

Timothy J. LaLonde has been Vice President, Controller since July 1997. Before joining us, he was a controller at Fay’s Incorporated, a retailing chain, from 1992 to 1997. Prior to that, he was a Senior Audit Manager with the accounting firm of Deloitte & Touche LLP, where he was employed since 1978.

Michael A. Biviano has been Executive Vice President of Taco Cabana since January 2002. Prior to that, he was Vice President—Regional Director of Operations for our Burger King restaurants since 1989, having served as a district supervisor since 1983. Mr. Biviano has been an employee of ours since 1973.

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James E. Tunnessen has been Executive Vice President of Pollo Tropical since August 2003. Prior to that he was Vice President—Regional Director of Operations for our Burger King restaurants since 1989, having served as a district supervisor from 1979. Mr. Tunnessen has been an employee of ours since 1972.

Lewis S. Shaye has been Chief Concept Officer since January 2005. Prior to joining Carrols Corporation he was Senior Vice President of Brand and Product Development for Papa Gino’s Holding Corporation (PGH), which owned, operated and franchised the Papa Gino’s Pizza and D’Angelo Grilled Sandwich brands. Mr. Shaye joined PGH in 1992 as Vice President of Operations and was promoted to Senior Vice President of Brand and Product Development in September 1995. Prior to joining PGH in 1992, Mr. Shaye was Senior District Manager at Marriott Corporation where his responsibilities included operational accountability for premier Marriott contract foodservice locations.

Benjamin D. Chereskin has served as a Director since March 1997. Mr. Chereskin is a Managing Director of Madison Dearborn Partners, LLC (“Madison Dearborn”), a private equity firm, and co-founded the firm in 1993. Before that, Mr. Chereskin was with First Chicago Venture Capital for nine years. Mr. Chereskin also serves on the board of directors of Tuesday Morning Corporation and Cinemark, Inc.

Brian F. Gleason has served as a Director since October 2003. Mr. Gleason is a Managing Director and Executive Vice President of Phoenix Management Services, Inc., a national corporate revitalization advisory firm. Mr. Gleason has been affiliated with Phoenix Management Services since 1996 and serves on its board of directors. Prior to that, Mr. Gleason worked in Corporate Finance for Reliance Insurance Company since 1991. Mr. Gleason also serves on the board of directors of Thompson Products, Inc; and International Intimates, Inc. Mr. Gleason is serving on the Board of Directors as a designee of BIB Holdings. See “Certain Relationships and Related Transactions.”

Robin P. Selati has served as a Director since March 1997. Mr. Selati is a Managing Director of Madison Dearborn and joined the firm in 1993. Before 1993, Mr. Selati was associated with Alex Brown & Sons Incorporated in the consumer/retail investment banking group. Mr. Selati also serves on the board of directors of Tuesday Morning Corporation; Cinemark, Inc.; Ruth’s Chris Steak House, Inc.; and Pierre Foods, Inc.

Olaseni Adeyemi Sonuga has served as a Director since March 2004. Mr. Sonuga is the General Manager of Bahrain International Bank E.C., a Bahraini publicly quoted international investment bank that he joined in 2002 as Chief Financial Officer. The stockholders and creditors of Bahrain International Bank entered into an agreement in May of 2004, the Asset Realization Protocol, under which the Bank has been given time to liquidate its assets to meet its liabilities. Between 1999 and 2002, Mr. Sonuga served as Advisor to the Chairman of Oman Aviation Services Company SAOG, an Omani listed company that owns Oman Air and also provides airport services at all Omani airports. Prior to this, he was a Vice President at Taib Bank since 1997, a Bahraini listed company. In the period 1992 to 1997, he was the Business Services Manager of the National Drilling Company of Abu Dhabi, UAE. He began his career as a Chartered Accountant in the UK in 1979 when he joined the London office of Touche Ross. Mr. Sonuga is a Director on the board of several companies both in the USA and internationally, including Thompson Products, Inc., International Intimates, Inc. and Springfield Service Corp in the USA, BIB Holdings (Bermuda) Ltd., Crown Dilmun Holdings (CI) Ltd. and Ascot Dilmun Holdings, Ltd, internationally.

Clayton E. Wilhite has served as a Director since July 1997. Since January 1998, Mr. Wilhite has been with CFI Group Worldwide LLC, and has been Managing Partner of its North American Group from May 1998 to December 2004 and Managing Partner of CFI Worldwide LLC since January 2005. Mr. Wilhite has served since September 1998 on the board of directors of CFI Group Worldwide LLC, an international management consulting firm specializing in measuring customer satisfaction. Between 1996 and 1998, he was the Chairman of Thurloe Holdings, L.L.C. From August 1996 through our acquisition of Pollo Tropical, Mr. Wilhite served on the board of directors of Pollo Tropical, Inc. Before 1996, Mr. Wilhite was with the advertising firm of D’Arcy Masius Benton & Bowles, Inc. having served as its Vice Chairman from 1995 to 1996, as President of DMB&B/North America from 1988 to 1995, and as Chairman and Managing Director of DMB&B/St. Louis from 1985 to 1988.

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All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. Our executive officers are chosen by the Board and serve at its discretion. All of our directors also serve as directors of Carrols Holdings.

Audit Committee Financial Expert

Our audit committee is comprised of Robin P. Selati, Clayton E. Wilhite and Brian F. Gleason. The Board of Directors has determined that we have at least one audit committee financial expert, Robin P. Selati, who serves as Chairman of the audit committee. Mr. Selati is serving on the Board of Directors as a designee of Madison Dearborn Capital Partners, L.P. and Madison Dearborn Capital Partners II, L.P., principal stockholders of Carrols Holdings, in accordance with Carrols Holdings’ stockholders agreement. Consequently Mr. Selati is not deemed to be an “independent” director as such term is used in the federal securities laws. Because our securities are not listed on any national securities exchange or Nasdaq, we are not required to have independent members of our Board of Directors or any committee thereof, including our audit committee.

Code of Ethics

We have adopted a Code of Ethics that applies to our chief executive officer, chief operating officer, chief financial officer, general counsel, controller and other principal financial accounting and executive employees. Our Code of Ethics is posted on our website at http://www.carrols.com. All amendments and waivers to the Code of Ethics will be disclosed through the website.

ITEM 11. EXECUTIVE COMPENSATION

The following tables set forth certain information for the fiscal years ended December 31, 2005, 2004 and 2003 for our Chief Executive Officer and our next five most highly compensated executive officers who served as executive officers of the Company during the year ended December 31, 2005 and whose annual compensation exceeded $100,000. Stock awards and option data refers to the common stock and options of Carrols Holdings.

SUMMARY COMPENSATION TABLE

	Annual Compensation					Long-Term Compensation		Other Compensation(4)
Name and Principal Position	Year	Salary		Bonus(1)		Stock Award($)(2)	Securities Underlying Options (#)(3)
Alan Vituli     Chairman of the Board and Chief Executive Officer	2005 2004 2003	$	600,000 561,000 550,008	$	379,367 9,251,531 —	6,880,313 —   —	—   —   —	$	—   —   17,000
Daniel T. Accordino     President, Chief Operating Officer and Director	2005 2004 2003	$	460,008 428,400 420,000	$	290,853 4,837,852 —	3,536,804 —   —	—   —   —	$	—   —   7,125
Michael A. Biviano     Executive Vice President,     Taco Cabana	2005 2004 2003	$	259,708 244,800 234,231	$	172,701 716,933 —	391,079 —   —	—   783 1,044	$	—   —   —
Lewis S. Shaye     Vice President, Chief Concept Officer	2005 2004 2003	$	281,923 —   —	$	120,390 —   —	123,000 —   —	—   —   —	$	—   —   —
Paul R. Flanders     Vice President, Chief Financial Officer and Treasurer	2005 2004 2003	$	223,008 214,200 210,000	$	94,171 698,011 —	401,288 —   —	—   500 500	$	—   —   —
Joseph A. Zirkman     Vice President, General Counsel and Secretary	2005 2004 2003	$	223,008 214,200 210,000	$	94,171 656,586 —	368,385 —   —	—   500 500	$	—   —   —

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(1) We provide bonus compensation to our executive officers based on an individual’s achievement of certain specified objectives and our achievement of specified increases in stockholder value. In January 2005, we also made a compensatory bonus distribution of approximately $20.3 million to employee option holders (including our executive officers and a director), in conjunction with the December 2004 refinancing on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of options owned by such persons. Bonuses earned in 2004 (and paid in 2005) by Mr. Vituli, Mr. Accordino, Mr. Biviano, Mr. Flanders and Mr. Zirkman, included $8,662,481, $4,452,922, $492,377, $505,231 and $463,806, respectively, for amounts earned in conjunction with this special bonus distribution.

(2) Represents the estimated value of shares of Carrols Holdings common stock issued to the named individuals. On May 3, 2005, Carrols Holdings issued 260,600 shares of its common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings stock, and at the same time issued an additional 5,440 shares of stock in separate awards. The number of shares awarded to Mr. Vituli, Mr. Accordino, Mr. Biviano, Mr. Shaye, Mr. Flanders and Mr. Zirkman, were 111,875, 57,509, 6,359, 2,000, 6,525 and 5,990, respectively. With the exception of Mr. Shaye, each of the named officers had an identical number of stock options cancelled in exchange for the award of stock. The fair market value of a share of our common stock on the date of these awards was estimated to be $61.50. See “Description of Plans – 2005 Stock Awards”.

(3) Reflects stock option grants for shares of Carrols Holdings common stock in 2003 and 2004. These awards were cancelled in 2005 pursuant to (2) above.

(4) Represents the premiums paid by us prior to July 2003 for split-dollar life insurance policies whereby Mr. Vituli and Mr. Accordino have designated beneficiaries.

Compensation Committee Interlocks and Insider Participation

During the last fiscal year, no executive officer of ours served as a director of or member of a compensation committee of any entity for which any of the persons serving on our Board of Directors or on the Compensation Committee of the Board of Directors is an executive officer. The Compensation Committee is comprised of Messrs. Chereskin, Wilhite and Gleason.

Board of Directors

Directors’ Compensation. Directors who are our employees do not receive any additional compensation for serving as directors. Directors who are not our employees receive a fee of $15,000 per annum, and Mr. Wilhite also receives an additional fee of $500 for each special board or committee meeting attended by him. All directors are reimbursed for all reasonable expenses they incur while acting as directors, including as members of any committee of the Board of Directors. In addition, in January 2005, Mr. Wilhite received a cash payment of $309,720 as part of the $20.3 million distribution made to employees and Mr. Wilhite in conjunction with the December 2004 refinancing. Such payment was made on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of the options he owned. See “Item 1. Business – December 2004 Refinancing”.

Liability Limitation. As permitted under the Delaware General Corporation Law, our Restated Certificate of Incorporation provides that a director will not be personally liable to us or our stockholders for monetary damages for breach of a fiduciary duty owed to our stockholders or us. By its terms and in accordance with the laws of the State of Delaware, however, this provision does not eliminate or limit the liability of any of our directors:

• for any breach of the director’s duty of loyalty to us or our stockholders;

• for an act or omission not in good faith or involving intentional misconduct or a knowing violation of law;

• for any transaction from which the director derived an improper personal benefit; or

• for an improper declaration of dividends or purchase or redemption of our securities.

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Indemnification. Our Restated Certificate of Incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law.

Agreements with Named Executive Officers

Vituli Employment Agreement. Effective as of May 3, 2005, Carrols entered into an extension of an employment agreement with Alan Vituli which extended the term of an employment agreement dated January 1, 1995, as amended April 3, 1996, as further amended and restated on March 27, 1997, as further amended and extended on April 1, 2002 and as further extended on November 11, 2004, between Carrols and Mr. Vituli upon the same terms and conditions as previously set forth in the employment agreement. Pursuant to the employment agreement, which will expire on December 31, 2006, Mr. Vituli will continue to serve as Chairman of the Board of Directors and Chief Executive Officer of Carrols. The employment agreement is subject to automatic renewals for successive one-year terms unless either Mr. Vituli or we elect not to renew by giving written notice to the other at least 90 days before a scheduled expiration date. The employment agreement provides that Mr. Vituli receive a base salary, which was $600,000 when the agreement was extended on May 3, 2005, and provides that such amount be increased annually by at least $25,000 on each January 1. Pursuant to the employment agreement, Mr. Vituli participates in Carrols’ Executive Bonus Plan and any of our stock option plans applicable to executive employees. The employment agreement also requires us to provide (or reimburse the insurance cost of) medical coverage for Mr. Vituli and his spouse for their respective lives and to maintain the premium payments on a split-dollar life insurance policy on the life of Mr. Vituli providing a death benefit of $1.5 million payable to an irrevocable trust designated by Mr. Vituli. The Company no longer provides for premium payments on this policy. The employment agreement also provides that if Mr. Vituli’s employment is terminated without cause (as defined in the employment agreement) within six months following a change of control (as defined in the employment agreement), Mr. Vituli will receive a cash lump sum equal to his salary during the previous 12 months. The employment agreement also provides that if Mr. Vituli’s employment is terminated by Carrols without cause (other than following a change in control as described above) or Mr. Vituli resigns with good reason (as defined in the employment agreement), Mr. Vituli will receive a cash payment in an amount equal to 2.99 times his average salary plus average annual bonus for the prior five years. The employment agreement includes non-competition and non-solicitation provisions effective during the term of the employment agreement and for two years following its termination.

Accordino Employment Agreement. Effective as May 3, 2005, Carrols entered into an extension of an employment agreement with Daniel T. Accordino which extended the term of an employment agreement dated January 1, 1995, as amended April 3, 1996, as further amended and restated on March 27, 1997, as further amended and extended on April 1, 2002 and as further extended on November 11, 2004, between Carrols and Mr. Accordino upon the same terms and conditions as previously set forth in the employment agreement. Pursuant to the employment agreement, which will expire on December 31, 2006, Mr. Accordino will continue to serve as President and Chief Operating Officer of Carrols. The employment agreement is subject to automatic renewals for successive one-year terms unless either Mr. Accordino or we elect not to renew by giving written notice to the other at least 90 days before a scheduled expiration date. The employment agreement provides that Mr. Accordino receive a base salary, which was $460,000 when the agreement was extended, and provides that such amount be increased annually by at least $20,000 on each January 1. Pursuant to the employment agreement, Mr. Accordino participates in Carrols’ Executive Bonus Plan and any of our stock option plans applicable to executive employees. The employment agreement also requires us to provide (or reimburse the insurance cost of) medical coverage for Mr. Accordino and his spouse for their respective lives and to maintain the premium payments on a split-dollar life insurance policy on the life of Mr. Accordino providing a death benefit of $1.0 million payable to an irrevocable trust designated by Mr. Accordino. The Company no longer provides for premium payments on this policy. The employment agreement also provides that if Mr. Accordino’s employment is terminated without cause (as defined in the employment agreement) within six months following a change of control (as defined in the employment agreement), Mr. Accordino will receive a cash lump sum equal to his salary during the previous 12 months. The employment agreement also provides that if Mr. Accordino’s employment is terminated by Carrols without cause (other than following a change in control as described above) or Mr. Accordino resigns with good reason (as defined in the employment agreement),

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Mr. Accordino will receive a cash payment in an amount equal to 2.99 times his average salary plus average annual bonus for the prior five years. The employment agreement includes non-competition and non-solicitation provisions effective during the term of the employment agreement and for two years following its termination.

Change of Control Agreement. On December 27, 2002, we entered into a change of control agreement with each of Mr. Flanders, Mr. Zirkman, and four of our other officers. Each change of control agreement provides that if within one year following a change of control (as defined in the change of control agreement) of either Carrols Holdings or Carrols, an employee’s employment is terminated by us without cause (as defined in the change of control agreement) or by the employee for good reason (as defined in the change of control agreement), then such employee will be entitled to receive (a) a lump sum payment in the amount equal to one year’s salary at the then current rate, (b) a prorated bonus payment through the date of termination and in accordance with the Executive Bonus Plan then in effect and (c) continued coverage under our welfare and benefits plans for such employee and his dependents for a period of up to one year or sooner if such benefits are provided to the employee by a new employer. The payments and benefits due under each change of control agreement cannot be reduced by any compensation earned by the employee or any benefits provided to the employee as a result of employment by another employer or otherwise. The payments are also not subject to any set-off, counterclaim, recoupment, defense or other right that we may have against the employee.

2005 Stock Awards

Effective May 3, 2005, Carrols Holdings issued an aggregate of 260,600 shares of Carrols Holdings common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Carrols Holdings’ common stock. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, effective May 3, 2005, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients’ shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Carrols Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Carrols Holdings (at its option) in the event of a termination of employment before the occurrence of certain events.

Description of Plans

Employee Retirement Plan. We offer salaried employees the option to participate in the Carrols Corporation Retirement Savings Plan (“the Retirement Plan”). Under the Retirement Plan, our contributions begin to vest after one year and fully vest after five years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. We may elect to contribute on an annual basis to the Retirement Plan. Our contributions are equal to 50% of the employee’s contribution to a maximum contribution of $520 annually for any plan year that we participate in an employee match. The Retirement Plan includes a pre-tax savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post-tax savings option. Participating employees may contribute up to 18% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. The employee’s contributions may be withdrawn at any time, subject to restrictions on future contributions. Our matching contributions may be withdrawn by the employee under certain conditions of financial necessity or hardship as defined in the Retirement Plan. Our contributions to the Retirement totaled $403,000 and $432,000 for the years ended December 31, 2005 and 2003, respectively. For the 2004 plan year, we did not make any matching contributions.

Deferred Compensation Plan. We have a Deferred Compensation Plan which permits employees not eligible to participate in the Carrols Corporation Retirement Savings Plan because they have been excluded as “highly compensated” employees (as so defined in the Retirement Plan), to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds.

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Bonus Plans. We have cash bonus plans designed to promote and reward excellent performance by providing employees with incentive compensation. Key senior management executives of each operating division can be eligible for bonuses equal to varying percentages of their respective annual salaries determined by our performance as well as the division’s performance.

Long-Term Incentive Plans. Carrols Holdings historically maintained several long-term incentive plans. As indicated above (See “2005 Stock Awards”) all outstanding stock options were cancelled and terminated effective May 3, 2005 in exchange for the issuance of an identical number of shares of common stock. At the same time, all stock option plans were terminated. The terminated plans included: (i) the Carrols Holdings Corporation 1996 Long-Term Incentive Plan; (ii)the Carrols Holdings Corporation 1998 Directors’ Stock Option Plan; (iii) the Carrols Holdings Corporation 1998 Pollo Tropical Long-Term Incentive Plan; and, (iv) the Carrols Holdings Corporation 2001 Taco Cabana Long-Term Incentive Plan.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the number and percentage of shares of voting common stock of Carrols and of Carrols Holdings beneficially owned, as of May 31, 2006, by (i) each person who is known by us to own beneficially more than 5% of our common stock; (ii) each member of our current board of directors; (iii) each of our named executive officers; and (iv) all members of our board of directors and our executive officers as a group.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated.

	Shares Beneficially Owned
	Number	Percentage
Stockholder of Carrols Corporation:
Carrols Holdings Corporation	10	100	%
Stockholders of Carrols Holdings Corporation: (1)(2)
BIB Holdings (Bermuda) Ltd. (3)	566,667	40.2	%
Madison Dearborn (4)	566,667	40.2	%
Alan Vituli (5)	121,702	8.7	%
Daniel T. Accordino	58,369	4.1	%
Paul R. Flanders	6,525	*
Joseph A. Zirkman	6,113	*
Timothy J. LaLonde	2,022	*
Michael A. Biviano	6,359	*
James E. Tunnessen	4,544	*
Lewis S. Shaye	2,000	*
Benjamin D. Chereskin (6)	566,667	40.2	%
Brian F. Gleason	—	—
Robin P. Selati (6)	566,667	40.2	%
Olaseni Adeyemi Sonuga	—	—
Clayton E. Wilhite	4,000	*
Directors and executive officers as a group (13 persons)	211,634	15.0	%

* Less than 1%

(1) The percentage of outstanding shares is based on 1,407,424 shares of common stock outstanding as of May 31, 2006. The number of shares of common stock shown in the table includes shares that were issued on May 3, 2005 to executive officers and a director in exchange for the cancellation and termination of all of their existing stock options. The number of shares issued to each person was identical to the number of stock options held (except for Mr. Shaye who held no options) and were as follows: 111,875 shares for Mr. Vituli; 57,509 shares for Mr. Accordino; 6,525 shares for Mr. Flanders; 5,990 shares for Mr. Zirkman; 2,022 shares for Mr. LaLonde; 6,359 shares for Mr. Biviano; 4,544 shares for Mr. Tunnessen; 2,000 shares for Mr. Shaye and 4,000 shares for Mr. Wilhite. See “Executive Compensation – 2005 Stock Awards”.

(2) The address of BIB Holdings (Bermuda) Ltd is c/o Dilmun Investments, Inc., 84 West Park Place, Stamford, CT 06901. The address of Madison Dearborn, each of the Madison Dearborn entities, Mr. Chereskin and Mr. Selati is Three First National Plaza, Suite 3800, Chicago, IL 60602. The address of the other directors and executive officers listed is c/o Carrols Corporation, 968 James Street, Syracuse, NY 13203.

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(3) These 566,667 shares of common stock were previously owned by Atlantic Restaurants, Inc., which was formed to effect the acquisition of Carrols in 1996. Atlantic Restaurants, which was a wholly-owned subsidiary of BIB Holdings, was merged into BIB Holdings on February 10, 1999. BIB Holdings is a wholly-owned subsidiary of Bahrain International Bank. The stockholders and creditors of Bahrain International Bank agreed in May 2004 to an asset realization protocol under which Bahrain International Bank’s assets will be liquidated.

(4) Consists of 283,333 shares held by Madison Dearborn Capital Partners, L.P. (“MDCP”) and 283,334 shares held by Madison Dearborn Capital Partners II, L. P. (“MDCPII”). The shares held by MDCP and MDCPII may be deemed to be beneficially owned by entities affiliated with Madison Dearborn, including Madison Dearborn Partners, L.P. (“MDP”), the general partner of MDCP, Madison Dearborn Partners II, L.P. (“MDPII”), the general partner of MDCPII, and Madison Dearborn Partners, Inc., the general partner of MDP and MDPII.

(5) All shares are held by the Vituli Family Trust and deemed to be beneficially owned by Mr. Vituli.

(6) All of such shares are held by affiliates of Madison Dearborn as reported in footnote (4) above. Mr. Chereskin and Mr. Selati are each Managing Directors of Madison Dearborn, and therefore they each may be deemed to share voting and investment power over the shares owned by these entities, and therefore to beneficially own such shares. Both Mr. Chereskin and Mr. Selati disclaim beneficial ownership of all such shares.

Equity Compensation Plan Information

All outstanding stock option awards were cancelled and terminated effective May 3, 2005 in exchange for the issuance of an identical number of shares of common stock. See “2005 Stock Awards”. At the same time, all stock option plans were terminated. The terminated plans included: (i) the Carrols Holdings Corporation 1996 Long-Term Incentive Plan; (ii)the Carrols Holdings Corporation 1998 Directors’ Stock Option Plan; (iii) the Carrols Holdings Corporation 1998 Pollo Tropical Long-Term Incentive Plan; and, (iv) the Carrols Holdings Corporation 2001 Taco Cabana Long-Term Incentive Plan. We have 3,560 shares of Holdings’ common stock reserved for future issuance.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Stockholders Agreement. On March 27, 1997, in connection with the investment by MDCP and MDCPII, all holders of Carrols Holdings’ common stock entered into a Stockholders Agreement. In general, the agreement (as amended in October 2003) provides that all holders of Carrols Holdings’ common stock will vote their common stock in order to cause the following individuals to be elected to the Board of Directors of Carrols Holdings and each of its subsidiaries (including us):

(a) three representatives designated collectively by MDCP and MDCPII, provided that the third designee shall not be entitled to remain on the Board of Directors unless BIB Holdings has three designees serving on the Board of Directors at such time (so long as BIB Holdings is entitled to three Board designees at such time) subject to adjustment if the percentage holdings of MDCP and MDCPII collectively, decreases below a certain threshold;

(b) three representatives designated by BIB Holdings, provided that the third designee shall not be entitled to remain on the Board of Directors unless Madison Dearborn has three designees serving on the Board of Directors at such time (so long as Madison Dearborn is entitled to three Board designees at such time), subject to adjustment if the percentage holdings of BIB Holdings decreases below a certain threshold; and

(c) two representatives designated by Mr. Vituli as long as Mr. Vituli is our Chief Executive Officer.

Currently, Messrs. Chereskin and Selati are serving on the Board of Directors as designees of Madison Dearborn, Messrs. Gleason, Sonuga and Wilhite are serving on the Board of Directors as designees of BIB Holdings and Messrs. Vituli and Accordino are serving on the Board of Directors as designees of Mr. Vituli.

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Pursuant to the stockholders agreement as currently in effect, Madison Dearborn has the right, at any time, to either cause a third designee to be elected to the Board of Directors or cause the removal of a third BIB Holdings designee from the Board of Directors.

In addition, the agreement provides for certain limitations on the ability of holders of Carrols Holdings’ common stock to sell, transfer, assign, pledge or otherwise dispose of their common stock. The agreement contains covenants requiring us to obtain the prior consent of MDCP, MDCPII and, in certain circumstances, BIB Holdings before taking certain actions including the redemption, purchase or other acquisition of Carrols Holdings’ capital stock, changing the capital budget approved by Carrols Holdings’ Board of Directors for that year or the entry into the ownership, active management or operation of any business other than Burger King franchise restaurants.

Registration Rights Agreement. On March 27, 1997, in connection with the investment by MDCP and MDCPII, those entities, BIB Holdings, Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman entered into a registration agreement with Carrols Holdings. The registration agreement provides for demand and piggyback registration rights with respect to Carrols Holdings’ common stock. MDCP, MDCPII or BIB Holdings may demand registration under the Securities Act of all or any portion of their shares of Carrols Holdings’ common stock or options for shares of Carrols Holdings’ common stock (the “Registrable Securities”), provided that:

(1) in the case of the first demand registration, MDCP, MDCPII and BIB Holdings must consent to a demand registration unless Carrols Holdings has completed a registered public offering of the Carrols Holdings’ common stock; and

(2) all demand registrations on Form S-1 must be underwritten.

MDCP and MDCPII, collectively, and BIB Holdings are each entitled to request:

(1) three demand registrations on Form S-1 in which Carrols Holdings will pay all registration expenses, provided that the offering value of the Registrable Securities is at least $15 million; and

(2) an unlimited number of demand registrations on Form S-3 in which Carrols Holdings will pay all registration expenses, provided that the offering value of the Registrable Securities is at least $5 million with an underwritten offering equal to at least $10 million.

Whenever Carrols Holdings proposes to register any of its securities (other than pursuant to a demand registration) and the registration form may be used for the registration of Registrable Securities, Carrols Holdings shall give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and shall include in such registration all Registrable Securities to which Carrols Holdings has received written requests for inclusion in such registration within 20 days after receipt of Carrols Holdings’ notice. Carrols Holdings shall pay the registration expenses of the holders of Registrable Securities in all such piggyback registrations. The Registration Agreement contains typical “cut back” provisions in connection with both demand registrations and piggyback registrations. Carrols Holdings will provide the holders of the Registrable Securities with typical indemnification in the event of certain misstatements or omissions made in connection with both demand registrations and piggyback registrations.

68

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

On September 27, 2005, the Company engaged Deloitte & Touche LLP as its Independent Registered Public Accounting Firm. In the discussions that follow, figures related to the 2005 fiscal year reflect the billings of Deloitte & Touche LLP and the figures related to the 2004 fiscal year reflect billings of PricewaterhouseCoopers LLP.

The following table summarizes the aggregate fees billed to us by our principal independent registered public accounting firms, Deloitte & Touche LLP in 2005 and PricewaterhouseCoopers LLP in 2004:

	Year Ended December 31,
	2004		2005
	(In thousands)
Audit Fees (a)	$	2,000	$	950
Audit-Related Fees (b)		507		—
Total Audit and Audit Related Fees		2,507	$	950
Tax Fees (c)		114		65
All Other Fees (d)		—		—
Total	$	2,621	$	1,015

(a) Audit fees include services related to the audit of the Company’s annual consolidated financial statements and review of the interim quarterly consolidated financial statements.

(b) Audit-related fees for 2004 were substantially in connection with our refinancing transactions during 2004 and $5,000 for employee benefit plan audits.

(c) Fees for tax services billed in 2004 and 2005 consisted of $10,000 and $20,000 for tax compliance, respectively, and $104,000 and 45,000 respectively, for tax planning and advice, which included an earnings and profits study in 2004.

	Year Ended December 31
	2004		2005
Percentage of Tax Planning and Advice Fees and All Other Fees to Audit Fees, Audit-Related Fees and Tax Compliance Fees	4.1	%	4.6	%

In considering the nature of the services provided by the independent registered public accountants, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and Company management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the Securities and Exchange Commission in connection with the Sarbanes-Oxley Act of 2002.

Pre-Approval Policy

The services performed by the independent auditor in 2004 were pre-approved in accordance with the pre-approval procedures adopted by the Audit Committee. All requests for audit, audit-related, tax, and other services must be submitted to the Audit Committee for specific pre-approval and cannot commence until such pre-approval has been granted.

69

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements

	Page
CARROLS CORPORATION AND SUBSIDIARIES
Reports of Independent Registered Public Accounting Firms	F-1, F-2
Financial Statements:
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Changes in Stockholder’s Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7 to F-37

(a) (2) Financial Statement Schedules

Schedule	Description	Page
II	Valuation and Qualifying Accounts	F-38

Schedules other than those listed are omitted for the reason that they are not required, not applicable, or the required information is shown in the financial statements or notes thereto.

Separate financial statements of the Company are not filed for the reasons that (1) consolidated statements of the Company and its consolidated subsidiaries are filed and (2) the Company is primarily an operating Company and all subsidiaries included in the consolidated financial statements filed are wholly-owned.

(a) (3) Exhibits

EXHIBIT INDEX

Exhibit Number	Description
3.1	Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.(3)(a) to Carrols Corporation’s 1987 Annual Report on Form 10-K)
3.2	Restated By-laws (incorporated by reference to Exhibit 3.(3)(b) to Carrols Corporation’s 1986 Annual Report on Form 10-K)
3.3	Certificate of Amendment to the Restated Certificate of Incorporation of Carrols Holdings Corporation (incorporated by reference to Exhibit 3.3 to Carrols Corporation’s September 30, 2001 Quarterly Report on Form 10-Q)
3.4	Certificate of Amendment to the Restated Certificate of Incorporation of Carrols Holdings Corporation (incorporated by reference to Exhibit 3.1 to Carrols Corporation’s Form 8-K filed on November 1, 2004)
3.5	Certificate of Amendment to the Restated Certificate of Incorporation of Carrols Holdings Corporation (incorporated by reference to Exhibit 3.2 to Carrols Corporation’s Form 8-K filed on November 1, 2004)
4.1	Form of Stockholders Agreement by and among Carrols Holdings Corporation, Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Atlantic Restaurants, Inc., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.23 to Carrols Corporation’s 1996 Annual Report on Form 10-K)

70

Exhibit Number	Description
4.2	First Amendment, dated as of October 14, 2003, to Carrols Holdings Corporation Stockholders Agreement (incorporated by reference to Exhibit 4.6 to Carrols Corporation’s 2004 Annual Report on Form 10-K)
4.3	Form of Registration Agreement by and among Carrols Holdings Corporation, Atlantic Restaurants, Inc., Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.24 to Carrols Corporation’s 1996 Annual Report on Form 10-K)
4.4	Registration Rights Agreement dated as of December 15, 2004, by and among Carrols Corporations, the Guarantors named therein, J.P. Morgan Securities Inc., Banc of America Securities LLC, Lehman Brothers Inc., Wachovia Capital Markets, LLC and SunTrust Capital Markets, Inc. (incorporated by reference to Exhibit 10.1 to Carrols Corporation’s Form 8-K filed on December 21, 2004)
10.1	Carrols Corporation 1996 Long Term Incentive Plan (incorporated by reference to Exhibit 10.20 to Carrols Corporation 1996 Annual Report on Form 10-K) (1)
10.2	Stock Option Agreement dated as of December 30, 1996 by and between Carrols Corporation and Alan Vituli (incorporated by reference to Exhibit 10.21 to Carrols Corporation 1996 Annual Report on Form 10-K) (1)
10.3	Stock Option Agreement dated as of December 30, 1996 by and between Carrols Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.22 to Carrols Corporation 1996 Annual Report on Form 10-K) (1)
10.4	Form of Second Amended and Restated Employment Agreement dated March 27, 1997 by and between Carrols Corporation and Alan Vituli (incorporated by reference to Exhibit 10.25 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.5	Form of Second Amended and Restated Employment Agreement dated March 27, 1997 by and between Carrols Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.26 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.6	Form of Carrols Holdings Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.27 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.7	Form of Stock Option Agreement by and between Carrols Holdings Corporation and Alan Vituli (incorporated by reference to Exhibit 10.28 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.8	Form of Stock Option Agreement by and between Carrols Holdings Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.29 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.9	Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and Alan Vituli (incorporated by reference to Exhibit 10.30 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.10	Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.31 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)
10.11	Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and Joseph A. Zirkman (incorporated by reference to Exhibit 10.32 to Carrols Corporation’s 1996 Annual Report on Form 10-K) (1)

71

Exhibit Number	Description
10.12	Carrols Holdings Corporation 1998 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.29 to Carrols Corporation Form S-4 filed on February 2, 1999) (1)
10.13	Carrols Holdings Corporation 1998 Pollo Tropical Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Carrols Corporation’s September 30, 1999 Quarterly Report on Form 10-Q) (1)
10.14	Carrols Corporation Retirement Savings Plan dated April 1, 1999 (incorporated by reference to Exhibit 10.29 to Carrols Corporation’s 1999 Annual Report on Form 10-K) (1)
10.15	Carrols Holdings Corporation 2001 Taco Cabana Long-Term Incentive Plan (incorporated by reference to Exhibit 10.25 to Carrols Corporation’s 2002 Annual Report on Form 10-K) (1)
10.16	Carrols Corporation and Subsidiaries Deferred Compensation Plan dated January 1, 2002 (incorporated by reference to Exhibit 10.26 to Carrols Corporation’s March 31, 2002 Quarterly Report on Form 10-Q) (1)
10.17	Extension of Employment Agreement dated March 27, 2002 by and between Carrols Corporation and Alan Vituli (incorporated by reference to Exhibit 10.27 to Carrols Corporation’s June 30, 2002 Quarterly Report on Form 10-Q) (1)
10.18	Extension of Employment Agreement dated March 27, 2002 by and between Carrols Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.28 to Carrols Corporation’s June 30, 2002 Quarterly Report on Form 10-Q) (1)
10.19	Carrols Corporation Retirement Savings Plan July 1, 2002 Restatement (incorporated by reference to Exhibit 10.29 to Carrols Corporation’s September 29, 2002 Quarterly Report on Form 10-Q) (1)
10.20	Addendum incorporating EGTRRA Compliance Amendment to Carrols Corporation Retirement Savings Plan dated September 12, 2002 (incorporated by reference to Exhibit 10.30 to Carrols Corporation’s September 29, 2002 Quarterly Report on Form 10-Q) (1)
10.21	Carrols Corporation Change of Control Agreement dated December 27, 2002 (incorporated by reference to Exhibit 10.31 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)
10.22	Extension of Stock Option Awards dated March 1, 2002 by and between Carrols Holdings Corporation and Alan Vituli (incorporated by reference to Exhibit 10.32 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)
10.23	Extension of Stock Option Awards dated March 1, 2002 by and between Carrols Holdings Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.33 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)
10.24	Extension of Stock Option Awards dated March 1, 2002 by and between Carrols Holdings Corporation and Paul Flanders (incorporated by reference to Exhibit 10.34 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)
10.25	Extension of Stock Option Awards dated March 1, 2002 by and between Carrols Holdings Corporation and Joseph Zirkman (incorporated by reference to Exhibit 10.35 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)
10.26	Extension of Stock Option Awards dated March 1, 2002 by and between Carrols Holdings Corporation and Timothy LaLonde (incorporated by reference to Exhibit 10.36 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)
10.27	Extension of Stock Option Awards dated March 1, 2002 by and between Carrols Holdings Corporation and Michael Biviano (incorporated by reference to Exhibit 10.37 to Carrols Corporation’s 2003 Annual Report on Form 10-K) (1)

72

Exhibit Number	Description
10.28	First Amendment, dated as of January 1, 2004, to Carrols Corporation Retirement Savings Plan (incorporated by reference to Exhibit 10.35 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.29	Carrols Holdings Corporation First Amended and Restated 1998 Pollo Tropical Long-Term Incentive Plan (incorporated by reference to Exhibit 10.37 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.30	Extension of Employment Agreement dated November 11, 2004 by and between Carrols Corporation and Alan Vituli (incorporated by reference to exhibit 10.30 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.31	Extension of Employment Agreement dated as of May 3, 2005 by and between Carrols Corporation and Alan Vituli (incorporated by reference to exhibit 10.31 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.32	Extension of Employment Agreement dated November 11, 2004 by and between Carrols Corporation and Daniel T. Accordino (incorporated by reference to exhibit 10.32 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.33	Extension of Employment Agreement dated as of May 3, 2005 by and between Carrols Corporation and Daniel T. Accordino (incorporated by reference to exhibit 10.33 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.34	Amendment to Carrols Holdings Corporation 1998 Pollo Tropical Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Carrols Corporation’s Form 8-K filed on November 1, 2004) (1)
10.35	Amendment to Carrols Holdings Corporation 2001 Taco Cabana Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to Carrols Corporation’s Form 8-K filed on November 1, 2004) (1)
10.36	Loan Agreement dated as of December 15, 2004, by and among Carrols Corporation, JPMorgan Chase Bank N.A., Bank of America N.A., Wachovia Bank, National Association, Manufacturers and Traders Trust Company, Suntrust Bank and other lenders now or hereafter partied hereto (incorporated by reference to Exhibit 10.3 to Carrols Corporation’s Form 8-K filed on December 21, 2004)
10.37	Indenture dated as of December 15, 2004, by and among Carrols Corporation and the Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2 to Carrols Corporation’s Form 8-K filed on December 21, 2004)
10.38	Form of Stock Award Agreement of Carrols Holdings Corporation dated as of May 3, 2005 (incorporated by reference to exhibit 10.38 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.39	Form of Exchange Agreement dated as of May 3, 2005 by and between Carrols Holdings Corporation and Vituli Family Trust (incorporated by reference to exhibit 10.39 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.40	Form of Stock Award Agreement dated as of May 3, 2005 by and between Carrols Holdings Corporation and Daniel T. Accordino (incorporated by reference to exhibit 10.40 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)

73

Exhibit Number	Description
10.41	Form of Stock Award Agreement dated as of May 3, 2005 by and between Carrols Holdings Corporation and Clayton E. Wilhite (incorporated by reference to exhibit 10.41 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.42	Form of Stock Award Agreement dated as of May 3, 2005 by and between Carrols Holdings Corporation and Paul Flanders (incorporated by reference to exhibit 10.42 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.43	Form of Stock Award Agreement dated as of May 3, 2005 by and between Carrols Holdings Corporation and Joseph Zirkman (incorporated by reference to exhibit 10.43 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
10.44	Form of Stock Award Agreement dated as of May 3, 2005 by and between Carrols Holdings Corporation and Michael Biviano (incorporated by reference to exhibit 10.44 to Carrols Corporation’s 2004 Annual Report on Form 10-K) (1)
21.1	List of Subsidiaries (incorporated by reference to exhibit 21.1 to Carrols Corporation’s 2004 Annual Report on Form 10-K)
31.1	Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
31.2	Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
32.1	Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
32.2	Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)

(1) Management contract or compensatory plan or arrangement identified pursuant to this report.

(2) Filed herewith.

74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

Carrols Corporation

Syracuse, New York

We have audited the accompanying consolidated balance sheet of Carrols Corporation and subsidiaries (the “Company”) as of January 1, 2006, and the related consolidated statements of operations, changes in stockholder’s equity (deficit), and cash flows for the year then ended. Our audit also included the 2005 financial statement schedule listed in the Index at Item 15 (a)(2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Carrols Corporation and subsidiaries at January 1, 2006, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2005 financial statement schedule, when considered in relation to the basic 2005 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche

Rochester, New York

June 30, 2006

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder

of Carrols Corporation:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Carrols Corporation and its subsidiaries at December 31, 2004 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements included in the 2004 Form 10K/A (not separately presented herein), the consolidated financial statements as of December 31, 2004 and for the years ended December 31, 2004 and 2003 have been restated.

/s/ PricewaterhouseCoopers LLP

Syracuse, New York

July 27, 2005, except for the current restatement section of Note 2 to the consolidated financial statements included in the 2004 Form 10K/A (not separately presented herein) as to which the date is June 29, 2006

F-2

CA RROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

(in thousands of dollars except share and per share amounts)

	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	9,331		$	31,466
Trade and other receivables, net of reserves of $0 and $81, respectively		3,017			2,578
Inventories		5,333			4,831
Prepaid rent		4,476			3,589
Prepaid expenses and other current assets		4,635			4,358
Refundable income taxes		593			3,326
Deferred income taxes (Note 10)		4,867			6,242
Total current assets		32,252			56,390
Property and equipment, net (Note 2)		217,506			213,489
Franchise rights, net (Note 3)		86,490			90,056
Goodwill (Note 3)		124,934			122,241
Intangible assets, net (Note 3)		1,465			—
Franchise agreements, at cost less accumulated amortization of $5,208 and $4,954, respectively		5,869			6,480
Deferred income taxes (Note 10)		13,279			12,940
Other assets		15,150			14,650
Total assets	$	496,945		$	516,246
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Current portion of long-term debt (Note 7)	$	2,588		$	2,611
Accounts payable		19,022			17,581
Accrued interest		7,615			956
Accrued payroll, related taxes and benefits		15,703			24,940
Accrued bonus to employees and director (Note 11)		—			20,860
Other liabilities		12,765			13,957
Total current liabilities		57,693			80,905
Long-term debt, net of current portion (Note 7)		391,108			398,614
Lease financing obligations (Note 8)		110,898			111,715
Deferred income—sale-leaseback of real estate (Note 6)		10,660			8,585
Accrued postretirement benefits (Note 16)		4,068			3,504
Other liabilities (Note 5)		26,029			28,452
Total liabilities		600,456			631,775
Commitments and contingencies (Notes 6 and 14)
Stockholder’s deficit (Notes 11 and 12):
Common stock, par value $1; authorized 1,000 shares, issued and outstanding – 10 shares		—			—
Additional paid-in capital		(75,948	)		(92,309	)
Accumulated deficit		(27,563	)		(23,220	)
Total stockholder’s deficit		(103,511	)		(115,529	)
Total liabilities and stockholder’s deficit	$	496,945		$	516,246

The accompanying notes are an integral part of these consolidated financial statements.

F-3

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars)

	2005			2004			2003
Revenues:
Restaurant sales	$	705,422		$	696,343		$	643,579
Franchise royalty revenues and fees		1,488			1,536			1,406
Total revenues		706,910			697,879			644,985
Costs and expenses:
Cost of sales		204,620			202,624			181,182
Restaurant wages and related expenses		204,611			206,732			194,315
Restaurant rent expense		34,668			34,606			31,089
Other restaurant operating expenses		102,921			92,891			89,880
Advertising expense		25,523			24,711			27,351
General and administrative (including stock-based compensation expense of $16,432, $1,818, and $253, respectively)		58,614			43,578			37,376
Depreciation and amortization		33,096			38,521			40,228
Impairment losses (Note 4)		1,468			1,544			4,151
Bonus to employees and director (Note 11)		—			20,860			—
Other expense (Note 9)		—			2,320			—
Total operating expenses		665,521			668,387			605,572
Income from operations		41,389			29,492			39,413
Interest expense		42,972			35,383			37,334
Loss on extinguishment of debt (Note 7)		—			8,913			—
Income (loss) before income taxes		(1,583	)		(14,804	)		2,079
Provision (benefit) for income taxes (Note 10)		2,760			(6,720	)		741
Net income (loss)	$	(4,343	)	$	(8,084	)	$	1,338

The accompanying notes are an integral part of these consolidated financial statements.

F-4

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY (DEFICIT)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars)

	Common Stock		Additional Paid-In Capital			Accumulated Deficit			Total Stockholder’s Equity (Deficit)
Balance at January 1, 2003	$	—	$	24,485		$	(16,474	)	$	8,011
Net income		—		—			1,338			1,338
Balance at December 31, 2003		—		24,485			(15,136	)		9,349
Net loss		—		—			(8,084	)		(8,084	)
Dividends declared (Note 11)		—		(116,794	)		—			(116,794	)
Balance at December 31, 2004		—		(92,309	)		(23,220	)		(115,529	)
Net loss		—		—			(4,343	)		(4,343	)
Equity contributions from parent (Note 12)		—		16,361			—			16,361
Balance at December 31, 2005	$	—	$	(75,948	)	$	(27,563	)	$	(103,511	)

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars)

	2005			2004			2003
Cash flows provided from operating activities:
Net income (loss)	$	(4,343	)	$	(8,084	)	$	1,338
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Gain on disposal of property and equipment		(620	)		(176	)		(386	)
Stock-based compensation		16,310			1,818			253
Depreciation and amortization		33,096			38,521			40,228
Amortization of deferred financing costs		1,529			1,527			1,540
Amortization of unearned purchase discounts		(2,156	)		(2,154	)		(2,146	)
Amortization of deferred gains from sale-leaseback transactions		(481	)		(458	)		(180	)
Impairment losses		1,468			1,544			4,151
Loss on extinguishment of debt		—			8,913			—
Accretion of interest on lease financing obligations		344			406			443
Deferred income taxes		1,036			(6,466	)		(1,156	)
Changes in operating assets and liabilities:
Income taxes		2,435			(4,162	)		2,089
Accounts payable		1,140			(2,427	)		1,258
Accrued payroll, related taxes and benefits		(9,186	)		9,666			(3,585	)
Accrued bonus to employees and director		(20,860	)		20,860			—
Other liabilities – current		(931	)		1,762			381
Accrued interest		6,659			(593	)		134
Other liabilities – long-term		(603	)		(428	)		475
Other		(2,829	)		(858	)		1,512
Net cash provided from operating activities		22,008			59,211			46,349
Cash flows provided from (used for) investing activities:
Capital expenditures:
New restaurant development		(20,613	)		(9,654	)		(18,706	)
Restaurant remodeling		(4,018	)		(845	)		(3,317	)
Other restaurant capital expenditures		(8,684	)		(7,503	)		(6,944	)
Corporate and restaurant information systems		(1,319	)		(1,071	)		(1,404	)
Acquisition of Taco Cabana restaurants		(4,215	)		—			—
Total capital expenditures		(38,849	)		(19,073	)		(30,371	)
Properties purchased for sale-leaseback		(1,091	)		(1,574	)		(3,149	)
Proceeds from sale-leaseback transactions		5,237			10,984			44,180
Proceeds from dispositions of property and equipment		795			1,174			3,921
Net cash provided from (used for) investing activities		(33,908	)		(8,489	)		14,581
Cash flows used for financing activities:
Payments on revolving credit facility, net		—			(600	)		(52,200	)
Scheduled principal payments on term loans		(2,200	)		(10,125	)		(11,000	)
Principal pre-payments on term loans		(6,000	)		—			—
Proceeds from issuance of debt		—			400,000			—
Tender and redemption of 9  1/2% senior subordinated notes		—			(175,756	)		—
Repayment of borrowings under previous credit facility		—			(113,375	)		—
Financing costs associated with issuance of debt and lease financing obligations		(542	)		(9,013	)		(186	)
Proceeds from lease financing obligations		—			4,500			3,625
Dividends paid		—			(116,794	)		—
Settlement of lease financing obligation		(1,074	)		—			—
Payments on other notes payable		—			(117	)		(847	)
Principal payments on capital leases		(419	)		(390	)		(446	)
Net cash used for financing activities		(10,235	)		(21,670	)		(61,054	)
Net increase (decrease) in cash and cash equivalents		(22,135	)		29,052			(124	)
Cash and cash equivalents, beginning of year		31,466			2,414			2,538
Cash and cash equivalents, end of year	$	9,331		$	31,466		$	2,414
Supplemental disclosures:
Interest paid on long-term debt	$	23,763		$	23,368		$	25,231
Interest paid on lease financing obligations	$	10,677		$	10,626		$	9,991
Income taxes paid (refunded), net	$	(824	)	$	3,905		$	(195	)
Increase (decrease) for accruals for capital expenditures	$	301		$	1,153		$	(127	)
Capital lease obligations acquired and incurred	$	1,090		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-6

CARROLS C ORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

1. Summary of Significant Accounting Policies

Basis of Consolidation. The consolidated financial statements include the accounts of Carrols Corporation and its subsidiaries (the “Company”). All intercompany transactions have been eliminated in consolidation. The Company is a wholly-owned subsidiary of Carrols Holdings Corporation (“Holdings”).

Business Description. At December 31, 2005, the Company operated, as franchisee, 336 quick-service restaurants under the trade name “Burger King” in thirteen Northeastern, Midwestern and Southeastern states. At December 31, 2005, the Company also owned and operated 69 Pollo Tropical restaurants located in Florida and franchised a total of 26 Pollo Tropical restaurants in Puerto Rico, Ecuador and Florida. At December 31, 2005, the Company owned and operated 135 Taco Cabana restaurants located primarily in Texas and franchised three restaurants in New Mexico and Georgia.

Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation of goodwill, impairment of long-lived assets and impairment of Burger King franchise rights. Actual results could differ from those estimates.

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to fiscal years ended December 28, 2003, January 2, 2005 and January 1, 2006 will be referred to as fiscal years ended December 31, 2003, 2004 and 2005, respectively. The fiscal years ended December 31, 2005 and 2003 each contained 52 weeks. The fiscal year ended December 31, 2004 contained 53 weeks.

Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At December 31, 2005 and 2004 the Company had $2.0 million and $28.0 million, respectively, invested in money market funds.

Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are primarily comprised of food and paper.

Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment are recorded at cost. Repair and maintenance activities are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:

Owned buildings	5 to 30 years
Equipment	3 to 15 years
Computer hardware and software	3 to 7 years
Assets subject to capital leases	Shorter of useful life or lease term

Leasehold improvements are being depreciated over the shorter of their useful lives or the underlying lease term. In circumstances where an economic penalty, as defined under Statement of Financial Accounting Standards No. 13, “Accounting for Leases”, (“SFAS 13”) would be presumed by not exercising one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term. For significant leasehold improvements made during the latter part of the lease term, the Company

F-7

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

amortizes those improvements over the shorter of their useful life or an extended lease term. The extended lease term would consider the exercise of renewal options if the value of the improvements would cause a penalty to be incurred without the renewal of the option. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a 20-year period.

Burger King Franchise Rights. For its Burger King restaurant acquisitions prior to January 1, 2002, the Company has generally allocated to franchise rights, an intangible asset, the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets acquired. The Company made an assessment of remaining life of its intangible assets as part of its implementation of SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”). As of January 1, 2002, amounts allocated to franchise rights for each acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty year renewal period. The average remaining life of all franchise rights at January 1, 2002 was approximately 31 years.

Burger King Franchise Agreements. Fees for initial franchises and renewals are amortized using the straight-line method over the term of the agreement, which is generally twenty years.

Goodwill. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with SFAS 142, goodwill is not subject to amortization but is tested at least annually for impairment. The Company performs its impairment evaluation annually at December 31.

Long-Lived Assets. The Company assesses the recoverability of property and equipment, franchise rights and intangible assets by determining whether the carrying value of these assets, over their respective remaining lives, can be recovered through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate the carrying amounts of these assets may not be fully recoverable.

Deferred Financing Costs. Financing costs, that are included in other assets and were incurred in obtaining long-term debt and lease financing obligations, are capitalized and amortized over the life of the related obligation as interest expense using the effective interest method.

Leases. Leases are accounted for in accordance with SFAS 13 and other related authoritative guidance. Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including any option period included in the determination of the lease term. Contingent rentals are generally based upon a percentage of sales or a percentage of sales in excess of stipulated amounts and are generally not considered minimum rent payments but are recognized as rent expense when incurred.

Lease Financing Obligations. Lease financing obligations pertain to real estate transactions required by SFAS No. 98 “Accounting for Leases” to be accounted for under the financing method. The assets (land and building) subject to these obligations remain on the consolidated balance sheet at their historical costs and such assets (excluding land) continue to be depreciated over their remaining useful lives, the proceeds received by the Company from these transactions are recorded as lease financing obligations and the lease payments are applied as payments of principal and interest. The selection of the interest rate on lease financing obligations is evaluated based on the Company’s incremental borrowing rate adjusted to the rate required to prevent recognition of a non-cash loss or negative amortization of the obligation through the end of the primary lease term. In addition, if a purchase option exists for any properties subject to a lease financing obligation, the purchase option is evaluated for its probability of exercise on an ongoing basis. This evaluation considers many factors including,

F-8

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

without limitation, our intentions, the fair value of the underlying properties, our ability to acquire the property, economic circumstances and other available alternatives to us for the continued use of the property. At December 31, 2005 and 2004 no purchase options were considered probable of exercise by the Company.

Revenue Recognition. Revenues from Company owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues associated with Pollo Tropical and Taco Cabana restaurants are based on a percent of gross sales and are recorded as income when earned.

Income Taxes. The Company provides for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when these differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is more likely than not. The Company also records a reserve for uncertain tax positions when it is probable and estimable. The Company and its subsidiaries file a consolidated federal income tax return with Holdings.

Advertising Costs. All advertising costs are expensed as incurred.

Cost of Sales. The Company includes the cost of food, beverage and paper, less purchase discounts, in cost of sales.

Self Insurance. The Company is generally self-insured for workers compensation, general liability and medical insurance. The Company maintains stop loss coverage for both individual and aggregate claim amounts. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims based on Company experience and certain actuarial methods used to measure such estimates. The Company does not discount any of its self-insurance obligations.

Fair Value of Financial Instruments. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

• Current Assets and Liabilities. The carrying value of cash and cash equivalents and accrued liabilities approximates fair value because of the short maturity of those instruments.

• Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at December 31, 2005 and 2004 were approximately $174.6 million and $186.3 million, respectively.

• Revolving and Term Loan Facilities. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value. The recorded amounts, as of December 31, 2005 and 2004, approximated fair value.

Stock-Based Compensation. Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings common stock. During the second quarter of 2005 Holdings issued an additional 5,440 shares of Holdings common stock in separate awards. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. The Company recorded a pre-tax compensation charge, including applicable payroll taxes, of $16.4 million in the second quarter of 2005 due to these stock awards. See Note 12 for a complete discussion of the stock award.

F-9

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) permits entities to recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB 25”) and provide pro forma net income disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 has been applied. The Company did not elect to change to the fair value-based-method of accounting for stock-based compensation and has continued to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123 in fiscal 2005, 2004 and 2003. Certain provisions of the Company’s option plans caused the Company to account for stock options using a variable accounting treatment. Under variable accounting, compensation expense must be remeasured each balance sheet date based on the difference between the current market price of the Company’s stock and the option’s exercise price. An accrual for compensation expense is determined based on the proportionate vested amount of each option as prescribed by Financial Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” Each period, adjustments to the accrual are recognized in the income statement. Stock-based compensation expense for the Company’s options was $75 in 2005, $1,818 in 2004 and $253 in 2003.

The following table presents the Company’s pro forma net income (loss) had compensation cost been determined based upon the fair value of the stock options at the grant date consistent with the fair-value based method of SFAS 123:

	Year Ended December 31,
	2005			2004			2003
Net income (loss)—as reported	$	(4,343	)	$	(8,084	)	$	1,338
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects (1)(2)		13,188			13,279			152
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (2)		(12,011	)		(5,656	)		(257	)
Pro forma net income (loss)	$	(3,166	)	$	(461	)	$	1,233

(1) The amount of stock-based compensation expense included in reported net income (loss) includes certain stock options requiring variable accounting (see Note 12) and for the year ended December 31, 2005, includes $13.1 million of expense related to stock awards granted in the second quarter of 2005, net of tax. This expense, net of tax, has also been included in the determination of compensation expense determined under the fair-value based method for the year ended December 31, 2005.

(2) For the year ended December 31, 2004, the equity value of the Company was reduced as a result of the December 2004 refinancing (See Note 7) in which a non-recurring dividend of $116.8 million was paid to Holdings. In conjunction with this, the Company also approved a compensatory bonus payment of approximately $20.3 million to a number of employees (including management) and a director who owned stock options, on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of the options owned by such persons. The Company did not modify its outstanding stock options to reflect the reduction in equity value. Therefore for the year ended December 31, 2004, this reduction has been offset against the $20.3 million bonus payment recorded for the determination of compensation expense under SFAS 123. The $20.3 million bonus payment, net of tax, has also been included in stock-based employee compensation expense included in reported net loss for the year ended December 31, 2004 in the above table.

F-10

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

The Company did not grant any options in 2005. The fair value of each option grant in 2004 and 2003 was estimated using the minimum value option-pricing model with the following weighted-average assumptions:

	2004		2003
Risk-free interest rate	3.38	%	3.17	%
Annual dividend yield	0	%	0	%
Expected life	5 years		5 years

Earnings Per Share Presentation. The guidance of SFAS No. 128, “Earnings Per Share,” requires presentation of earnings per share by all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange (domestic of foreign) or in the over-the-counter market. The Company’s common stock is not publicly traded and therefore, earnings per share amounts are not presented.

Recent Accounting Developments.

In December 2004, the Financial Accounting Standards Board (“FASB’) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB No. 25. SFAS 123R requires the measurement of all employee share-based payments, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 “Share-Based Payments” (“SAB 107”) which expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements. SFAS 123R is effective for awards that are granted, modified, or settled in cash for the first annual reporting period beginning after June 15, 2005. The Company plans to adopt the provisions of SFAS 123R using the modified prospective method of adoption at January 1, 2006. However, as all shares of stock issued in the stock award in the second quarter of 2005 were fully vested (see Note 12) and the Company does not have any stock options outstanding at December 31, 2005, the Company will not record any stock-based compensation expense related to SFAS 123R upon adoption on January 1, 2006. Compensation cost for any share-based awards granted after December 31, 2005 will be recorded upon issuance at their fair value over their service period.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (“FIN 47”). FIN 47 clarifies that the term “conditional” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” which refers to a legal obligation to perform an asset retirement activity even if the timing and/or settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 is effective for periods no later than fiscal years ending after December 15, 2005. The Company performed an evaluation and determined that the adoption of FIN 47 had no effect on the Company’s 2005 consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors

F-11

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

made in fiscal years beginning after December 15, 2005. The Company will apply this literature in the event of changes in accounting principle and error corrections for periods beginning on January 1, 2006.

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” This Issue discussed how entities are to adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. The Company presents restaurant sales net of sales taxes and therefore Issue 06-3 will not impact the method for recording these sales taxes in our consolidated financial statements.

2. Property and Equipment

Property and equipment at December 31 consisted of the following:

	2005			2004
Land	$	61,112		$	54,682
Owned buildings		76,502			73,937
Leasehold improvements		129,015			126,148
Equipment		183,670			178,994
Assets subject to capital leases		8,106			12,299
		458,405			446,060
Less accumulated depreciation and amortization		(240,899	)		(232,571	)
	$	217,506		$	213,489

Assets subject to capital leases pertain to buildings leased for certain restaurant locations and had accumulated amortization at December 31, 2005 and 2004 of $6,872 and $11,864, respectively. At December 31, 2005 and 2004, land of $45,077 and $45,551, respectively, and owned buildings of $56,580 and $57,186, respectively, were subject to lease financing obligations accounted for under the financing method (See Note 8). Accumulated depreciation pertaining to owned buildings subject to lease financing obligations at December 31, 2005 and 2004 was $24,416 and $21,877, respectively.

Depreciation expense for all property and equipment for the years ended December 31, 2005, 2004 and 2003 was $29,110, $34,462 and $36,024, respectively.

F-12

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

3. Goodwill, Franchise Rights and Intangible Assets

Goodwill. In accordance with SFAS No. 142, the Company reviews goodwill for impairment annually, or more frequently when events and circumstances indicate that the carrying amounts may be impaired. The Company performs its annual impairment assessment as of December 31 and has determined its reporting units to be at the operating segment level: its Burger King restaurants, operating as a franchisee; Pollo Tropical and Taco Cabana at the brand level. No impairment losses have been recognized as a result of these tests since January 1, 2002. The Company recorded $2.7 million of goodwill associated with the acquisition of four Taco Cabana restaurants in July of 2005. Changes in goodwill for the year ended December 31, 2005 and 2004 are summarized below:

	Taco Cabana		Pollo Tropical		Burger King		Total
Goodwill, January 1, 2005	$	64,484	$	56,307	$	1,450	$	122,241
Goodwill acquired in 2005		2,693		—		—		2,693
Goodwill, December 31, 2005	$	67,177	$	56,307	$	1,450	$	124,934

Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty-year renewal period. Following is a summary of the Company’s franchise rights as of the respective balance sheet dates:

	December 31, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Franchise rights	$	139,139	$	52,649	$	139,527	$	49,471

Amortization expense related to Burger King franchise rights for the years ended December 31, 2005, 2004 and 2003 was $3,215, $3,233 and $3,233, respectively. Estimated annual amortization is $3,215 for each of the years ending 2006 through 2010.

Intangible Assets. In July 2005, the Company completed the acquisition of four Taco Cabana restaurants from a franchisee for a cash purchase price of approximately $4.2 million. Under Emerging Issues Task Force Issue No. 04 -1 “Accounting for Preexisting Relationships between the Parties to a Business Combination (“EITF 04-1”), certain reacquired rights, including the right to the acquirer’s trade name, are required to be recognized as intangible assets apart from goodwill. The Company has allocated $1.6 million of the purchase price to this intangible asset and determined its weighted average life to be approximately seven years, based on the remaining terms of the acquired franchise agreements. The Company recorded amortization expense relating to the intangible asset of approximately $145 for the year ended December 31, 2005 and expects the annual expense for each of the next five years ending 2006 through 2010 to be $289, $289, $211, $133 and $125, respectively.

	December 31, 2005
	Gross Carrying Amount		Accumulated Amortization
Intangible assets	$	1,610	$	145

F-13

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

4. Impairment of Long-Lived Assets

The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of the assets, an estimate of undiscounted future cash flows produced by each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value.

The Company assesses the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. The Company recorded impairment charges related to its Burger King franchise rights of $316 and $283 for the years ended December 31, 2005 and 2004, respectively. No impairment charges were recorded related to the Company’s Burger King franchise rights for the year ended December 31, 2003.

The Company recorded impairment losses on long-lived assets, including Burger King franchise rights, for its segments as follows:

	2005		2004		2003
Burger King	$	1,373	$	1,544	$	706
Taco Cabana		95		—		3,445
	$	1,468	$	1,544	$	4,151

5. Other Liabilities, Long-Term

Other liabilities, long-term, at December 31, consisted of the following:

	2005		2004
Unearned purchase discounts	$	6,686	$	8,611
Accrued occupancy costs		10,674		11,400
Accrued workers’ compensation costs		4,615		4,821
Other		4,054		3,620
	$	26,029	$	28,452

Unearned purchase discounts are amortized as a reduction of cost of sales either over the life of the supplier contract or the estimated purchase commitment period. In 2000, Burger King Corporation arranged for the Coca-Cola Company and Dr. Pepper/Seven-Up, Inc. to provide funding to franchisees in connection with certain initiatives to upgrade restaurants. The Company received approximately $19.8 million in 2000 and $1.6 million in 2001 under this arrangement with these suppliers. The total amount of these purchase discounts amortized for each of the years ended December 31, 2005, 2004 and 2003 was $2.2 million.

Accrued occupancy costs include obligations pertaining to closed restaurant locations, contingent rent, accruals to expense operating lease rental payments on a straight-line basis over the lease term, and acquired leases with above market rentals.

F-14

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

In 2001, management made the decision to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At December 31, 2005 and 2004, the Company had $1.1 million and $0.6 million in lease liability reserves, respectively, and $0 and $0.1 million, respectively, in other exit cost reserves related to these restaurants that are included in accrued occupancy costs. The following table presents the activity in the exit cost reserve included in accrued occupancy costs:

	2005			2004			2003
Beginning Balance	$	756		$	847		$	700
Additions		467			—			347
Payments		(140	)		(91	)		(200	)
Ending Balance	$	1,083		$	756		$	847

In 2005, lease liability reserves were increased due a change in circumstances affecting the Company’s estimates of future sub-lease revenue for one restaurant property.

6. Leases

The Company utilizes land and buildings in operation under various lease agreements. We do not consider any of these individual leases material to the Company’s operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in some cases rent escalations. Certain leases require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy costs including payment of property taxes, insurance and utilities.

In the years ended December 31, 2005, 2004 and 2003, the Company sold four, eight and thirty-one restaurant properties in sale-leaseback transactions for net proceeds of $5,237, $10,984 and $44,180, respectively. Deferred gains of $2,556, $2,391 and $5,399 for the years ended December 31, 2005, 2004 and 2003, respectively, have been recorded as a result of these sale-leaseback transactions and are being amortized over the lives of the related leases. These related leases have been classified as operating leases and generally contain a twenty-year initial term with renewal options. The amortization of deferred gains related to these sale-leaseback transactions was $481, $458 and $180 for the years ended December 31, 2005, 2004 and 2003, respectively.

Minimum rent commitments under capital and non-cancelable operating leases at December 31, 2005 were as follows:

Years Ending	Capital			Operating
2006	$	559		$	33,992
2007		410			31,819
2008		234			29,081
2009		199			27,630
2010		158			25,552
Thereafter		1,720			209,795
Total minimum lease payments		3,280		$	357,869
Less amount representing interest		(1,384	)
Total obligations under capital leases		1,896
Less current portion		(388	)
Long-term obligations under capital leases	$	1,508

F-15

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

Total rent expense on operating leases, including percentage rent on both operating and capital leases, for the past three fiscal years was as follows:

	2005		2004		2003
Minimum rent on real property	$	32,416	$	32,509	$	29,100
Additional rent based on a percentage of sales		2,252		2,097		1,989
Restaurant rent expense		34,668		34,606		31,089
Administrative rent		822		783		782
Equipment rent		739		526		373
	$	36,229	$	35,915	$	32,244

7. Long-Term Debt

Long-term debt at December 31 consisted of the following:

	2005			2004
Collateralized:
Senior Credit Facility -Term loan B facility	$	211,800		$	220,000
Unsecured:
9% Senior Subordinated Notes		180,000			180,000
Capital leases		1,896			1,225
		393,696			401,225
Less current portion		(2,588	)		(2,611	)
	$	391,108		$	398,614

December 2004 Refinancing

On December 15, 2004, the Company completed the private placement of $180.0 million of 9% Senior Subordinated Notes due 2013. Concurrently, the Company repaid all outstanding borrowings under its prior senior secured credit facility and amended and restated that credit facility with a new syndicate of lenders. The Company received $400.0 million in total proceeds that included the issuance of the 9% senior subordinated notes and $220.0 million principal amount of term loan B borrowings under the senior credit facility. Those proceeds were primarily utilized to repay borrowings outstanding under the prior senior credit facility of $74.4 million, to retire all unsecured 9 ¹/2% senior subordinated notes due 2008 outstanding in the amount, including redemption premiums, of $175.9 million, to pay a dividend to Holdings (which Holdings in turn paid to its stockholders) in the amount of $116.8 million, to pay fees and expenses related to the refinancing of $8.8 million, and to pay a bonus to employees and a director totaling $20.9 million including payroll taxes of $0.6 million. See discussion of these payments in Note 11. The Company also recorded an $8.9 million loss on early extinguishment of debt from the write-off of previously deferred financing costs and premiums in conjunction with the retirement of the 9 ¹/2% senior subordinated notes.

Senior Secured Credit Facility:

On December 15, 2004, the Company entered into a new senior secured credit facility with a syndicate of lenders. The senior secured credit facility provides for a revolving credit facility under which the Company may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a term loan B facility of $220.0 million and incremental borrowing facilities, at the Company’s option, of up to $100.0 million, subject to the satisfaction of certain conditions.

F-16

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

There were no borrowings outstanding on the revolving credit facility at December 31, 2005 or 2004. After reserving $11.1 million for letters of credit guaranteed by the facility, $38.9 million was available for borrowings under the revolving credit facility at December 31, 2005.

Borrowings under the revolving credit facility bear interest at a per annum rate, at the Company’s option, of either:

1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .50% to 1.50% based on the Company’s total leverage ratio (as defined in the senior credit facility); or

2) LIBOR plus a margin ranging from 2.0% to 3.0% based on the Company’s total leverage ratio.

Borrowings under the term loan B bear interest at a per annum rate, at the Company’s option, of either:

1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .75% to 1.0% based on the Company’s total leverage ratio; or

2) LIBOR plus a margin ranging from 2.25% to 2.50% based on the Company’s total leverage ratio.

The revolving credit facility expires on December 31, 2009 and the term loan B facility matures on December 31, 2010.

Amounts under the term loan B facility are repayable as follows:

1) twenty quarterly installments of $0.55 million beginning on the last day of the first fiscal quarter in 2005; and

2) four quarterly installments of $52.25 million beginning with last day of the first fiscal quarter in 2010. The fourth and final installment of $46.25 million is due and payable on the term loan B maturity date.

Under the senior credit facility, the Company is also required to make mandatory prepayments of principal on term loan B facility borrowings (a) annually in an initial amount equal to 50% of Excess Cash Flow (as defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by us therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt.

In general, the Company’s obligations under the senior credit facility are guaranteed by Holdings and all of the Company’s material subsidiaries and are collateralized by all of the Company’s and its subsidiaries assets, a pledge of the Company’s common stock and the stock of each of the Company’s subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting the Company and its subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). At December 31, 2005, the Company was in compliance with these covenants in its senior credit facility.

As a result of the restatement of the Company’s financial statements as previously reported in the Company’s 2004 Form 10-K/A, the Company was in default under its senior credit facility by failing to timely furnish its interim consolidated financial statements for the third quarter of 2005 to its lenders. On December 6, 2005, the Company obtained a Consent and Waiver from its lenders under the senior credit facility that permitted

F-17

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

the Company to extend the time to deliver its consolidated financial statements for the third quarter of 2005 to February 15, 2006. On February 15, 2006, the Company obtained a Consent and Waiver from its lenders under the senior credit facility that permitted the Company to extend the time period to deliver its consolidated financial statements for the third quarter of 2005 to June 30, 2006. This waiver also permitted the Company to extend the time period to deliver its annual audited consolidated financial statements for 2005 and its consolidated financial statements for the first fiscal quarter of 2006 to June 30, 2006. While the Company currently anticipates delivering these financial statements by June 30, 2006, its failure to do so would constitute an event of default under the new senior credit facility. If such an event of default occurs under the senior credit facility that is not waived, the lenders could cause all amounts outstanding with respect to the borrowings to be due and payable immediately which in turn would result in cross defaults under the Indenture governing the 9% senior subordinated notes. The Company’s assets and cash flow may not be sufficient to fully repay outstanding debt if accelerated upon an event of default and there can be no assurance that such outstanding debt could be refinanced in such an event on acceptable terms or if at all.

Senior Subordinated Notes:

On December 15, 2004, the Company issued $180.0 million of 9% Senior Subordinated Notes due 2013. The senior subordinated notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 (commencing July 15, 2005) and mature on January 15, 2013. The notes are redeemable at the option of the Company in whole or in part on or after January 15, 2009 at a price of 104.5% of the principal amount if redeemed before January 15, 2010, 102.25% of the principal amount if redeemed after January 15, 2010 but before January 15, 2011 and at 100% of the principal amount after January 15, 2011.

In connection with the terms of the senior subordinated notes, because we did not complete an exchange offer of the senior subordinated notes for identical senior subordinated notes registered under the Securities Act of 1933 on or prior to June 13, 2005, the interest rate on the Company’s 9% Senior Subordinated Notes was increased by 0.25% per annum for the 90-day period immediately following June 13, 2005 and was increased by an additional 0.25% per annum in each of the subsequent 90-day periods immediately following September 11, 2005. On December 14, 2005, the exchange offer was completed which eliminated this additional interest expense after such date. This resulted in additional interest expense of $356 during 2005.

Restrictive covenants under the 9% senior subordinated notes include limitations with respect to the Company’s ability to incur additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Except for the Company’s obligation to timely furnish and file its Form 10-Q for the third quarter of 2005, the Company was in compliance at December 31, 2005 with the restrictive covenants in the indenture governing the senior subordinated notes. The Company subsequently has furnished and filed the Form 10-Q for the third quarter of 2005.

At December 31, 2005, principal payments required on all long-term debt are as follows:

2006	$	2,588
2007		2,477
2008		2,324
2009		2,300
2010		203,069
Thereafter		180,938
	$	393,696

F-18

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

The weighted average interest rate on all debt, excluding lease financing obligations, for the years ended December 31, 2005, 2004 and 2003 was 7.3%, 7.8% and 7.2%, respectively. Interest expense on the Company’s long-term debt was as $31,728, $24,122 and $26,689 for the years ended December 31, 2005, 2004 and 2003, respectively.

8. Lease Financing Obligations

The Company entered into sale-leaseback transactions in various years involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result have been classified as financing transactions under SFAS No. 98, “Accounting For Leases”. Under the financing method, the assets remain on the consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

These leases generally provide for an initial term of twenty years plus renewal options. The rent payable under such leases includes a minimum rent provision and in some cases, includes rent based on a percentage of sales provision. These leases also require payment of property taxes, insurance and utilities.

Purchase options related to certain properties sold in real estate transactions accounted for under the financing method are held by an entity wholly-owned by the nephew of the Chairman and Chief Executive Officer of the Company and such entity is deemed a related party.

At December 31, 2005, payments required on lease financing obligations are as follows:

2006	$	10,723
2007		10,840
2008		11,215
2009		11,308
2010		11,419
Thereafter, through 2023		199,466
Total minimum lease payments		254,971
Less: Interest implicit in obligations		(144,073	)
Total lease financing obligations	$	110,898

The interest rates on lease financing obligations range from 8.5% to 12.4%. Imputed interest expense on lease financing obligations totaled $11,244, $11,261 and $10,645 for the years ended December 31, 2005, 2004 and 2003, respectively.

9. Other Expense

During 2004, the Company’s parent company, Holdings, filed a registration statement on Form S-1 to register an initial public offering of Enhanced Yield Securities (EYSs) comprised of common stock and senior subordinated notes. On October 25, 2004 Holdings withdrew and terminated its registration of such securities. The Company expensed the costs incurred for this offering of $2.3 million in 2004.

F-19

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

10. Income Taxes

The income tax provision (benefit) was comprised of the following for the years ended December 31:

	2005			2004			2003
Current:
Federal	$	1,426		$	(1,250	)	$	1,404
Foreign		295			306			279
State		3			690			214
		1,724			(254	)		1,897
Deferred (prepaid):
Federal		661			(3,981	)		(1,306	)
State		(744	)		(2,485	)		150
		(83	)		(6,466	)		(1,156	)
Valuation allowance		1,119			—			—
	$	2,760		$	(6,720	)	$	741

The components of deferred income tax assets and liabilities at December 31, are as follows:

	2005			2004
Current deferred tax assets:
Accounts receivable and other reserves	$	124		$	181
Accrued vacation benefits		2,084			1,913
Other accruals		2,659			3,573
Net federal operating loss carryforwards		—			575
Current deferred tax assets		4,867			6,242
Long term deferred tax assets/(liabilities):
Deferred income on sale-leaseback of certain real estate		5,784			5,258
Lease financing obligations		10,317			8,873
Postretirement benefit expenses		1,609			1,386
Property and equipment depreciation		387			(775	)
Net state operating loss carryforwards		2,331			1,870
Amortization of other intangible assets, net		2,294			2,995
Amortization of franchise rights		(22,542	)		(22,129	)
Occupancy costs		4,128			4,366
Tax credit carryforwards		5,786			6,213
Unearned purchase discounts		3,489			4,258
Other		815			625
Long-term net deferred tax assets		14,398			12,940
Less: Valuation allowance		(1,119	)		—
Total long-term deferred tax assets		13,279			12,940
Carrying value of net deferred tax assets	$	18,146		$	19,182

The Company’s state net operating loss carryforwards expire in varying amounts beginning in 2006 through 2025. In addition, the Company has available Federal alternative minimum tax credit carryforwards of $2.9 million with no expiration date and Federal employment tax credit carryforwards of $2.5 million that begin to expire in 2021.

F-20

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

The Company establishes a valuation allowance to reduce the carrying amount of deferred tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company evaluates whether its deferred tax assets are probable of realization on a quarterly basis. In performing this analysis, the Company considers all available evidence, both positive and negative, including historical operating results, the estimated timing of future reversals of existing taxable temporary differences and estimated future taxable income exclusive of reversing temporary differences and carryforwards. As of December 31, 2005, the Company has a valuation allowance of $1,119 against net deferred tax assets due to state net operating loss carryforwards where realization of related deferred tax asset amounts was not more likely than not. The estimation of future taxable income for federal and state purposes and the Company’s resulting ability to realize deferred tax assets pertaining to state net operating loss carryforwards and tax credit carryforwards can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to material future changes that could be material.

A reconciliation of the statutory federal income tax provision (benefit) to the effective tax provision for the years ended December 31 is as follows:

	2005			2004			2003
Statutory federal income tax provision	$	(538	)	$	(5,036	)	$	707
State income taxes, net of federal benefit		(500	)		(1,366	)		271
Stock based compensation expense		3,302			—			—
Change in valuation allowance		1,119			—			—
Non-deductible expenses		56			5			101
Foreign taxes		295			306			279
Employment tax credits		(552	)		(287	)		(354	)
Foreign tax credits		(295	)		(306	)		—
Miscellaneous		(127	)		(36	)		(263	)
	$	2,760		$	(6,720	)	$	741

11. Dividend and Bonus Payments

On December 22, 2004, the Board of Directors of the Company approved the payment of a cash dividend of $116.8 million to Holdings from the net proceeds of the December 2004 refinancing. The cash dividend was paid on December 28, 2004 and concurrently distributed by Holdings in a dividend to the stockholders of Holdings.

In conjunction with the December 2004 refinancing, the Company also approved a compensatory bonus payment of approximately $20.3 million to a number of employees (including management) and a director who owned stock options based on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of the options owned by such persons. The bonus payment was made in January 2005, and including applicable payroll taxes of $0.6 million, totaled $20.9 million.

12. Stockholder’s Equity

The Company. The Company, which is 100% owned by Holdings, has 1,000 shares of common stock authorized of which 10 shares are issued and outstanding. Dividends on the Company’s common stock are restricted to amounts permitted by the senior secured credit facility and the indenture governing the 9% senior subordinated notes.

F-21

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

Holdings. Holdings’ Restated Certificate of Incorporation authorizes 7,000,000 shares of common stock and 100,000 shares of Preferred Stock, par value $0.01. Of the 7,000,000 common shares authorized, 1,410,109 shares of Holdings’ common stock and no shares of preferred stock were issued and outstanding at December 31, 2005.

Stock Awards. Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings’ common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings’ common stock. As a consequence of the exchange, all outstanding stock options were cancelled and terminated, and the option plans (described below) were subsequently terminated. The Board of Directors of Holdings also authorized and reserved the issuance of 9,000 shares of Holdings’ common stock under stock award agreements to employees of which 5,440 shares were issued in the second quarter of 2005. The Company has 3,560 shares of Holdings’ common stock reserved for future issuance.

All shares were issued pursuant to stock award agreements, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients’ shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Holdings (at its option) in the event of a termination of employment before the occurrence of certain events. The fair market value of a share of Holdings’ common stock on the date of these awards was estimated to be $61.50. The Company recorded a compensation charge of $16.4 million in 2005 relative to these stock awards.

Prior to October 27, 2004, Holdings’ authorized common stock consisted of three series comprised of 3,000,000 shares of Carrols Stock, par value $0.01 per share, 2,000,000 shares of Pollo Tropical Stock, par value $0.01 per share, and 2,000,000 shares of Taco Cabana Stock, par value $0.01 per share. The Pollo Tropical and Taco Cabana classes of Holdings’ stock were considered tracking stocks, a class of stock which tracked the separate performance of Pollo Tropical and Taco Cabana, respectively. On October 27, 2004, Holdings eliminated this tracking stock by combining all of its authorized series of common stock into one series of common stock. Holdings’ Pollo Tropical class of common stock and Holdings’ Taco Cabana class of common stock were each converted into the series of common stock known as Carrols Stock, which at the time of the combination, was renamed and is now referred to as common stock.

Prior to October 27, 2004, no shares of Holdings’ Pollo Tropical or Taco Cabana classes of common stock were outstanding. However, as a result of the combination, each outstanding option to purchase a share of Holdings’ Pollo Tropical class of common stock pursuant to the 1998 Pollo Tropical Long-Term Incentive Plan was converted on October 27, 2004 into an option to purchase 0.4144 shares of Holdings’ common stock. Similarly, each outstanding option to purchase a share of Holdings’ Taco Cabana class of common stock pursuant to the 2001 Taco Cabana Long-Term Incentive Plan was converted on October 27, 2004 into an option to purchase 0.0522 shares of Holdings’ common stock.

Stock Options. In 1996, Holdings adopted a stock option plan entitled the 1996 Long-Term Incentive Plan (“1996 Plan”) and reserved and authorized a total of 106,250 shares of Holdings’ common stock for grant thereunder. The number of shares reserved and authorized under this plan was increased to 111,250 in 2001 and to 189,325 in 2002. Options under this plan generally vested over a four-year period. In 1998, Holdings adopted the 1998 Directors’ Stock Option Plan (“1998 Directors’ Plan”) authorizing the grant of up to 10,000 options to non-employee directors. Options under this plan were exercisable over four years. Also, options for 32,427 shares of Holdings common stock not covered under any plan (“Non Plan Options”) were granted in 1997 at a

F-22

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

price of $101.76 with vesting over a five-year period. On February 26, 2002, the Compensation Committee of Holdings extended the expiration date for the Non Plan Options and the 1996 Plan options granted prior to March 1, 2002 to February 29, 2012 for all executive officers and certain other officers of the Company.

Holdings also adopted the 1998 Pollo Tropical Long-Term Incentive Plan (“1998 Pollo Plan”) authorizing to grant up to 41,440 shares of Holdings’ common stock (100,000 shares of Holdings’ Pollo Tropical class of common stock prior to the conversion). Holdings also adopted the 2001 Taco Cabana Long-Term Incentive Plan (“2001 Taco Plan”) authorizing to grant up to 26,100 shares of Holdings’ common stock (500,000 shares of Holdings’ Taco Cabana class of common stock prior to the conversion). Options under both of these plans generally vested over a five-year period.

A summary of all option activity under Holdings’ stock option plans for the years ended December 31, 2005, 2004 and 2003 was as follows:

	NonPlan Options			1996 Plan			Directors Plan			Pollo Plan			Taco Plan
Outstanding at January 1, 2003		32,427			180,103			3,000			84,075			306,000
Granted		—			5,250			500			6,900			104,500
Canceled		—			(1,705	)		—			(200	)		(71,500	)
Outstanding at December 31, 2003		32,427			183,648			3,500			90,775			339,000
Granted		—			3,100			500			8,725			85,500
Canceled		—			(649	)		—			(750	)		(15,724	)
Redeemed		—			(502	)		—			(22,470	)		—
Merger of tracking stock to common stock		—			—			—			(56,777	)		(387,967	)
Outstanding at December 31, 2004		32,427			185,597			4,000			19,503			20,809
Canceled		(32,427	)		(185,597	)		(4,000	)		(19,503	)		(20,809	)
Outstanding at December 31, 2005		—			—			—			—			—
	NonPlan Options			1996 Plan			Directors Plan			Pollo Plan			Taco Plan
Grant Prices (in whole dollars):
2003		—		$	124.00		$	124.00		$	164.00		$	14.25
2004		—			127.00			127.00			183.00			14.50
Weighted Average Option Price (in whole dollars):
At December 31, 2003	$	101.76		$	110.00		$	117.14		$	106.29		$	12.59
At December 31, 2004		101.76			110.22			118.38			153.40			156.46
Options Exercisable:
At December 31, 2003		32,427			175,426			2,750			77,480			141,200
At December 31, 2004		32,427			179,185			3,250			13,432			11,029

13. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King operating as a franchisee, Pollo Tropical and Taco Cabana, both Company owned concepts. The Company’s Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a regional quick-casual restaurant chain featuring grilled marinated chicken and authentic “made from scratch” side dishes. Pollo Tropical’s core markets are located in south and

F-23

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

central Florida. Taco Cabana is a regional quick-casual restaurant chain featuring Mexican style food, including, flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s core markets are primarily located in Texas.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The following table includes Segment EBITDA which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt.

The “Other” column includes corporate related items not allocated to reportable segments. Other identifiable assets consist primarily of cash, certain other assets, corporate property and equipment, goodwill and deferred income taxes.

	Taco Cabana		Pollo Tropical		Burger King Restaurants		Other		Consolidated
Year Ended December 31, 2005:
Revenues	$	209,831	$	136,983	$	360,096	$	—	$	706,910
Cost of sales		60,368		45,185		99,067		—		204,620
Restaurant wages and related expenses		58,932		32,275		113,404		—		204,611
Depreciation and amortization		7,951		4,881		18,988		1,276		33,096
Segment EBITDA		31,927		28,691		31,767
Identifiable assets		70,883		59,761		182,902		183,399		496,945
Capital expenditures		16,792		14,124		6,614		1,319		38,849
Year Ended December 31, 2004:
Revenues	$	202,941	$	125,101	$	369,837	$	—	$	697,879
Cost of sales		60,435		38,986		103,203		—		202,624
Restaurant wages and related expenses		57,702		31,380		117,650		—		206,732
Depreciation and amortization		9,884		4,460		22,078		2,099		38,521
Segment EBITDA		30,082		27,891		36,582
Identifiable assets		63,655		50,177		198,015		204,399		516,246
Capital expenditures		6,555		6,636		4,811		1,071		19,073
Year Ended December 31, 2003:
Revenues	$	181,481	$	110,194	$	353,310	$	—	$	644,985
Cost of sales		53,562		33,260		94,360		—		181,182
Restaurant wages and related expenses		52,214		28,105		113,996		—		194,315
Depreciation and amortization		8,707		4,451		24,236		2,834		40,228
Segment EBITDA		24,206		22,489		37,350
Identifiable assets		72,763		46,650		220,025		159,616		499,054
Capital expenditures		16,505		4,359		8,103		1,404		30,371

F-24

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

A reconciliation of segment EBITDA to consolidated net income (loss) is as follows:

	Year Ended December 31,
	2005			2004			2003
Segment EBITDA:
Taco Cabana	$	31,927		$	30,082		$	24,206
Pollo Tropical		28,691			27,891			22,489
Burger King		31,767			36,582			37,350
Subtotal	$	92,385			94,555			84,045
Less:
Depreciation and amortization		33,096			38,521			40,228
Impairment losses		1,468			1,544			4,151
Interest expense		42,972			35,383			37,334
Provision (benefit) for income taxes		2,760			(6,720	)		741
Bonus to employees and director		—			20,860			—
Stock-based compensation expense		16,432			1,818			253
Loss on extinguishment of debt		—			8,913			—
Other expense		—			2,320			—
Net income (loss)	$	(4,343	)	$	(8,084	)	$	1,338

14. Commitments and Contingencies

On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that the Company violated certain minimum wage laws under the federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. The Company has since filed a Motion for Summary Judgment as to the existing Plaintiffs that the Court has under consideration. The Plaintiffs have indicated they will re-file a Motion to certify and for National Discovery and the Company will oppose such Motion. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Consequently, it is not possible to predict what adverse impact, if any, this case could have on the Company’s consolidated financial condition or results of operations and cash flows. The Company intends to continue to contest this case vigorously.

The Company is a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material adverse effect on its consolidated financial condition or results of operations and cash flows.

15. Retirement Plans

The Company offers its salaried employees the option to participate in the Carrols Corporation Retirement Savings Plan (“the Retirement Plan”). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post tax savings option. The Company may elect to contribute to

F-25

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

the Retirement Plan on an annual basis. The Company’s contributions are equal to 50% of the employee’s contribution to a maximum Company contribution of $520 annually for any plan year that the Company participates in an employee match. Under the Retirement Plan the Company’s contributions begin to vest after one year and fully vest after five years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. Participating employees may contribute up to 18% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. Contributions to the Retirement Plan were $403 and $432 for the years ended December 31, 2005 and 2003, respectively. For the 2004 plan year, the Company did not make any matching contributions.

The Company also has a Deferred Compensation Plan which permits employees not eligible to participate in the Carrols Corporation Plan because they have been excluded as “highly compensated” employees (as so defined in the Plan), to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds. At December 31, 2005 there was a total of $870 deferred under this plan, including accrued interest.

16. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. A December 31 measurement date is used for the postretirement benefits. The following is the plan status and accumulated postretirement benefit obligation (APBO) at December 31, 2005 and 2004:

	2005			2004
Change in benefit obligation:
Benefit obligation at beginning of year	$	4,943		$	4,310
Service cost		395			381
Interest cost		280			251
Plan participant’s contributions		8			1
Actuarial loss		598			107
Benefits paid		(149	)		(107	)
Benefit obligation at end of year		6,075			4,943
Change in plan assets:
Fair value of plan assets at beginning of year		—			—
Employer contributions		141			106
Plan participant’s contributions		8			1
Benefits paid		(149	)		(107	)
Fair value of plan assets at end of year		—			—
Funded status		6,075			4,943
Unrecognized prior service cost		73			103
Unrecognized net actuarial net loss		(2,080	)		(1,542	)
Accrued benefit cost	$	4,068		$	3,504
Weighted average assumptions:
Discount rate used to determine benefit obligations		5.55	%		5.75	%
Discount rate used to determine net periodic benefit cost		5.75	%		6.15	%

F-26

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

The discount rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical and life insurance benefits. The Company has typically used the corporate AA/Aa bond rate for this assumption.

Assumed health care cost trend rates at December 31:

	2005		2004		2003
Medical benefits cost trend rate assumed for the following year	8.00	%	8.25	%	8.50	%
Prescription drug benefit cost trend rate assumed for the following year	11.00	%	12.00	%	12.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	5.00	%	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2012		2012		2010

During 2006, the Company expects to contribute approximately $91 to its postretirement benefit plan. The benefits expected to be paid in each year from 2006 through 2010 are $102, $110, $118, $136 and $158, respectively, and for the years 2011-2015 the aggregate amount of $1,318.

	2005			2004			2003
Components of net periodic post retirement benefit cost:
Service cost	$	395		$	381		$	287
Interest cost		280			251			232
Amortization of gains and losses		61			46			37
Amortization of unrecognized prior service cost		(30	)		(30	)		(30	)
Net periodic postretirement benefit cost	$	706		$	648		$	526

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the health care cost trend rates would have the following effects:

	1% Increase		1% Decrease
Effect on total of service and interest cost components	$	170	$	(135	)
Effect on postretirement benefit obligation		1,267		(1,017	)

17. Guarantor Financial Statements

The Company’s obligation under the $180.0 million 9% senior subordinated notes are, and the $170.0 million 9 ¹/2% senior subordinated notes of the Company were, jointly and severally guaranteed in full on an unsecured senior subordinated basis by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”), all of which are directly or indirectly wholly-owned by the Company. These subsidiaries are:

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols Realty Holdings

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

F-27

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

The following supplemental financial information sets forth on a condensed consolidating basis, consolidating balance sheets, statements of operations and statements of cash flows for the Parent Company only, Guarantor Subsidiaries and for the Company as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003.

For certain of the Company’s sale-leaseback transactions, the Parent Company has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with Emerging Issues Task Force Issue No. 90-14, “Unsecured Guarantee by Parent of Subsidiary’s Lease Payments in a Sale-Leaseback Transaction”, the Company has included in the following Guarantor Financial Statements amounts pertaining to these leases as if they were accounted for as financing transactions of the Guarantor subsidiaries. These adjustments are eliminated in consolidation.

For purposes of the guarantor financial statements, the Company and its subsidiaries determine the applicable tax provision for each entity generally using the separate return method. Under this method, current and deferred taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its tax obligation or refund, including the effects of the alternative minimum tax, would be the same as those followed in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating an entity’s ability to realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision (benefit) for the Parent Company Only and the Guarantor Subsidiaries, as calculated on the separate return method, and the consolidated income tax provision (benefit) are eliminated in consolidation.

The Company provides some administrative support to its subsidiaries related to executive management, information systems and certain accounting, legal and other administrative functions. For purposes of the guarantor financial statements, the Company allocates such corporate costs on a specific identification basis, where applicable, or based on revenues or the number of restaurants for each subsidiary. Management believes that these allocations are reasonable based on the nature of costs incurred.

During 2003, the Parent Company entered into an intercompany agreement, retroactive to January 1, 2002, to charge interest to the Guarantor Subsidiaries. The retroactive interest recorded in 2003 was $11,277. The Company has corrected the 2003 provision (benefit) for income taxes between the Parent Company only and the Guarantor Subsidiaries’ financial statements to reflect the tax consequences of the retroactive interest charge in the year recorded for financial reporting purposes. The amount of this adjustment was a tax benefit of $3,834 included in the Guarantor Subsidiaries’ 2003 statement of operations.

F-28

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2005

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	7,493		$	1,838		$	—		$	9,331
Trade and other receivables, net		608			2,409			—			3,017
Inventories		3,767			1,566			—			5,333
Prepaid rent		2,600			1,876			—			4,476
Prepaid expenses and other current assets		1,292			3,343			—			4,635
Refundable income taxes		593			—			—			593
Deferred income taxes		3,081			2,225			(439	)		4,867
Total current assets		19,434			13,257			(439	)		32,252
Property and equipment, net		85,999			155,078			(23,571	)		217,506
Franchise rights, net		86,490			—			—			86,490
Goodwill		1,450			123,484			—			124,934
Intangible assets, net		—			1,465			—			1,465
Franchise agreements, net		5,869			—			—			5,869
Intercompany receivable (payable)		159,161			(159,735	)		574			—
Investment in subsidiaries		21,478			—			(21,478	)		—
Deferred income taxes		5,611			7,668			—			13,279
Other assets		10,231			5,968			(1,049	)		15,150
Total assets	$	395,723		$	147,185		$	(45,963	)	$	496,945
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	2,340		$	248		$	—		$	2,588
Accounts payable		7,327			11,695			—			19,022
Accrued interest		7,615			—			—			7,615
Accrued payroll, related taxes and benefits		8,940			6,763			—			15,703
Other liabilities		7,933			4,832			—			12,765
Total current liabilities		34,155			23,538			—			57,693
Long-term debt, net of current portion		389,892			1,216			—			391,108
Lease financing obligations		48,817			90,613			(28,532	)		110,898
Deferred income—sale-leaseback of real estate		5,664			2,327			2,669			10,660
Accrued postretirement benefits		4,068			—			—			4,068
Other liabilities		16,638			9,222			169			26,029
Total liabilities		499,234			126,916			(25,694	)		600,456
Commitments and contingencies
Stockholder’s equity (deficit)		(103,511	)		20,269			(20,269	)		(103,511	)
Total liabilities and stockholder’s equity (deficit)	$	395,723		$	147,185		$	(45,963	)	$	496,945

F-29

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2004

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	29,195		$	2,271		$	—		$	31,466
Trade and other receivables, net		336			2,242			—			2,578
Inventories		3,376			1,455			—			4,831
Prepaid rent		1,866			1,723			—			3,589
Prepaid expenses and other current assets		1,085			3,273			—			4,358
Refundable income taxes		3,326			—			—			3,326
Deferred income taxes		3,618			2,624			—			6,242
Total current assets		42,802			13,588			—			56,390
Property and equipment, net		97,006			140,532			(24,049	)		213,489
Franchise rights, net		90,056			—			—			90,056
Goodwill		1,450			120,791			—			122,241
Franchise agreements, net		6,480			—			—			6,480
Intercompany receivable (payable)		148,424			(149,005	)		581			—
Investment in subsidiaries		14,100			—			(14,100	)		—
Deferred income taxes		3,198			9,930			(188	)		12,940
Other assets		10,442			5,380			(1,172	)		14,650
Total assets	$	413,958		$	141,216		$	(38,928	)	$	516,246
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	2,343		$	268		$	—		$	2,611
Accounts payable		7,875			9,706			—			17,581
Accrued interest		956			—			—			956
Accrued payroll, related taxes and benefits		16,142			8,798			—			24,940
Accrued bonus to employees and director		20,860			—			—			20,860
Other liabilities		8,586			5,371			—			13,957
Total current liabilities		56,762			24,143			—			80,905
Long-term debt, net of current portion		398,233			381			—			398,614
Lease financing obligations		48,892			91,313			(28,490	)		111,715
Deferred income—sale-leaseback of real estate		4,086			1,676			2,823			8,585
Accrued postretirement benefits		3,504			—			—			3,504
Other liabilities		18,010			10,340			102			28,452
Total liabilities		529,487			127,853			(25,565	)		631,775
Commitments and contingencies
Stockholder’s equity (deficit)		(115,529	)		13,363			(13,363	)		(115,529	)
Total liabilities and stockholder’s equity (deficit)	$	413,958		$	141,216		$	(38,928	)	$	516,246

F-30

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2005

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries		Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	360,096		$	345,326	$	—		$	705,422
Franchise royalty revenues and fees		—			1,488		—			1,488
Total revenues		360,096			346,814		—			706,910
Cost and expenses:
Cost of sales		99,067			105,553		—			204,620
Restaurant wages and related expenses		113,404			91,207		—			204,611
Restaurant rent expense		21,200			11,126		2,342			34,668
Other restaurant operating expenses		55,599			47,322		—			102,921
Advertising expense		14,206			11,317		—			25,523
General and administrative (including stock-based compensation expense of $16,432)		33,184			25,430		—			58,614
Depreciation and amortization		19,649			13,926		(479	)		33,096
Impairment losses		1,373			95		—			1,468
Total operating expenses		357,682			305,976		1,863			665,521
Income from operations		2,414			40,838		(1,863	)		41,389
Interest expense		36,220			9,346		(2,594	)		42,972
Intercompany interest allocations		(18,225	)		18,225		—			—
Income (loss) before income taxes		(15,581	)		13,267		731			(1,583	)
Provision (benefit) for income taxes		(3,860	)		6,361		259			2,760
Equity income from subsidiaries		7,378			—		(7,378	)		—
Net income (loss)	$	(4,343	)	$	6,906	$	(6,906	)	$	(4,343	)

F-31

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2004

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries		Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	369,837		$	326,506	$	—		$	696,343
Franchise royalty revenues and fees		—			1,536		—			1,536
Total revenues		369,837			328,042		—			697,879
Cost and expenses:
Cost of sales		103,203			99,421		—			202,624
Restaurant wages and related expenses		117,650			89,082		—			206,732
Restaurant rent expense		21,809			10,455		2,342			34,606
Other restaurant operating expenses		52,712			40,179		—			92,891
Advertising expense		14,489			10,222		—			24,711
General and administrative (including stock-based compensation expense of $1,818)		21,033			22,545		—			43,578
Depreciation and amortization		23,186			15,810		(475	)		38,521
Impairment losses		1,544			—		—			1,544
Bonus to employees and director		14,817			6,043		—			20,860
Other expense		2,320			—		—			2,320
Total operating expenses		372,763			293,757		1,867			668,387
Income (loss) from operations		(2,926	)		34,285		(1,867	)		29,492
Interest expense		28,615			9,370		(2,602	)		35,383
Loss on extinguishment of debt		8,913			—		—			8,913
Intercompany interest allocations		(18,225	)		18,225		—			—
Income (loss) before income taxes		(22,229	)		6,690		735			(14,804	)
Provision (benefit) for income taxes		(8,857	)		2,253		(116	)		(6,720	)
Equity income from subsidiaries		5,288			—		(5,288	)		—
Net income (loss)	$	(8,084	)	$	4,437	$	(4,437	)	$	(8,084	)

F-32

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2003

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	353,310		$	290,269		$	—		$	643,579
Franchise royalty revenues and fees		—			1,406			—			1,406
Total revenues		353,310			291,675			—			644,985
Costs and expenses:
Cost of sales		94,360			86,822			—			181,182
Restaurant wages and related expenses		113,996			80,319			—			194,315
Restaurant rent expense		20,353			9,419			1,317			31,089
Other restaurant operating expenses		52,302			37,578			—			89,880
Advertising expense		14,923			12,428			—			27,351
General and administrative (including stock-based compensation expense of $253)		18,588			17,984			804			37,376
Depreciation and amortization		26,010			14,472			(254	)		40,228
Impairment losses		706			3,445			—			4,151
Total operating expenses		341,238			262,467			1,867			605,572
Income from operations		12,072			29,208			(1,867	)		39,413
Interest expense		30,742			8,062			(1,470	)		37,334
Intercompany interest allocations		(29,502	)		29,502			—			—
Income (loss) before income taxes		10,832			(8,356	)		(397	)		2,079
Provision for income taxes		17			937			(213	)		741
Equity loss from subsidiaries		(9,477	)		—			9,477			—
Net income (loss)	$	1,338		$	(9,293	)	$	9,293		$	1,338

F-33

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2005

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from (used for) operating activities:
Net income (loss)	$	(4,343	)	$	6,906		$	(6,906	)	$	(4,343	)
Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities:
Gain on disposal of property and equipment		(35	)		(585	)		—			(620	)
Stock based compensation expense		10,883			5,427			—			16,310
Depreciation and amortization		19,649			13,926			(479	)		33,096
Amortization of deferred financing costs		1,395			257			(123	)		1,529
Amortization of unearned purchase discounts		(2,156	)		—			—			(2,156	)
Amortization of deferred gains from sale-leaseback transactions		(213	)		(115	)		(153	)		(481	)
Impairment losses		1,373			95			—			1,468
Accretion of interest on lease financing obligations.		(75	)		461			(42	)		344
Deferred income taxes		(1,876	)		2,660			252			1,036
Changes in payroll and related accounts		(27,996	)		(2,050	)		—			(30,046	)
Changes in other operating assets and liabilities		(5,388	)		3,808			7,451			5,871
Net cash provided from (used for) operating activities		(8,782	)		30,790			—			22,008
Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(1,234	)		(19,379	)		—			(20,613	)
Restaurant remodeling		(2,634	)		(1,384	)		—			(4,018	)
Other restaurant capital expenditures		(2,745	)		(5,939	)		—			(8,684	)
Corporate and restaurant information systems		(791	)		(528	)		—			(1,319	)
Acquisition of restaurants		—			(4,215	)		—			(4,215	)
Net capital expenditures		(7,404	)		(31,445	)		—			(38,849	)
Purchased properties for sale-leaseback		(275	)		(816	)		—			(1,091	)
Proceeds from sale-leaseback transactions		3,519			1,718			—			5,237
Proceeds from dispositions of property and equipment		126			669			—			795
Net cash used for investing activities		(4,034	)		(29,874	)		—			(33,908	)
Cash flows used for financing activities:
Scheduled principal payments on term loans		(2,200	)		—			—			(2,200	)
Principal pre-payments on term loans		(6,000	)		—			—			(6,000	)
Financing costs associated with issuance of debt		(542	)		—			—			(542	)
Settlement of lease financing obligation		—			(1,074	)		—			(1,074	)
Principal payments on capital leases		(144	)		(275	)		—			(419	)
Net cash used for financing activities		(8,886	)		(1,349	)		—			(10,235	)
Net decrease in cash and cash equivalents		(21,702	)		(433	)		—			(22,135	)
Cash and cash equivalents, beginning of year		29,195			2,271			—			31,466
Cash and cash equivalents, end of year	$	7,493		$	1,838		$	—		$	9,331

F-34

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2004

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from operating activities:
Net income (loss)	$	(8,084	)	$	4,437		$	(4,437	)	$	(8,084	)
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
(Gain)/loss on disposal of property and equipment		(288	)		112			—			(176	)
Stock-based compensation expense		35			1,783			—			1,818
Depreciation and amortization		23,186			15,810			(475	)		38,521
Amortization of deferred financing costs		1,396			265			(134	)		1,527
Amortization of unearned purchase discounts		(2,154	)		—			—			(2,154	)
Amortization of deferred gains from sale-leaseback transactions		(205	)		(100	)		(153	)		(458	)
Impairment losses		1,544			—			—			1,544
Accretion of interest lease financing obligations		(33	)		478			(39	)		406
Loss on extinguishment of debt		8,913			—			—			8,913
Deferred income taxes		(7,898	)		1,259			173			(6,466	)
Changes in other operating assets and liabilities		36,954			(18,199	)		5,065			23,820
Net cash provided from operating activities		53,366			5,845			—			59,211
Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(1,053	)		(8,601	)		—			(9,654	)
Restaurant remodeling		(845	)		—			—			(845	)
Other restaurant expenditures		(2,913	)		(4,590	)		—			(7,503	)
Corporate and restaurant information systems		(734	)		(337	)		—			(1,071	)
Total capital expenditures		(5,545	)		(13,528	)		—			(19,073	)
Properties purchased for sale-leaseback transactions		(1,574	)		—			—			(1,574	)
Proceeds from sale-leaseback transactions		6,263			4,721			—			10,984
Proceeds from dispositions of property and equipment		488			686			—			1,174
Net cash used for investing activities		(368	)		(8,121	)		—			(8,489	)
Cash flows provided from (used for) financing activities:
Payments on revolving credit facility, net		(600	)		—			—			(600	)
Scheduled principal payments on term loans		(10,125	)		—			—			(10,125	)
Proceeds from issuance of debt		400,000			—			—			400,000
Tender and redemption of 9 1/2% senior subordinated notes		(175,756	)		—			—			(175,756	)
Repayment of borrowings under previous credit facility		(113,375	)		—			—			(113,375	)
Financing costs associated with issuance of debt and lease financing obligations		(8,853	)		(160	)		—			(9,013	)
Proceeds from lease financing obligations		1,250			3,250			—			4,500
Dividends paid		(116,794	)		—			—			(116,794	)
Payments on other notes payable		(117	)		—			—			(117	)
Principal payments on capital leases		(141	)		(249	)		—			(390	)
Net cash provided from (used for) financing activities		(24,511	)		2,841			—			(21,670	)
Net increase in cash and cash equivalents		28,487			565			—			29,052
Cash and cash equivalents, beginning of year		708			1,706			—			2,414
Cash and cash equivalents, end of year	$	29,195		$	2,271		$	—		$	31,466

F-35

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2003

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from (used for) operating activities:
Net income (loss)	$	1,338		$	(9,293	)	$	9,293		$	1,338
Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities:
(Gain)/loss on disposal of property and equipment		(837	)		451			—			(386	)
Stock-based compensation expense		—			253			—			253
Depreciation and amortization		26,010			14,472			(254	)		40,228
Amortization of deferred financing costs		1,414			205			(79	)		1,540
Amortization of unearned purchase discounts		(2,146	)		—			—			(2,146	)
Amortization of deferred gains from sale-leaseback transactions		(63	)		(27	)		(90	)		(180	)
Impairment losses		706			3,445			—			4,151
Accretion of interest on lease financing obligations		35			429			(21	)		443
Deferred income taxes		(2,625	)		1,454			15			(1,156	)
Changes in other operating assets and liabilities		37,194			(26,066	)		(8,864	)		2,264
Net cash provided from (used for) operating activities		61,026			(14,677	)		—			46,349
Cash flows provided from (used for) investing activities:
Capital expenditures:
New restaurant development		(2,873	)		(15,833	)		—			(18,706	)
Restaurant remodeling		(3,170	)		(147	)		—			(3,317	)
Other restaurant expenditures		(2,061	)		(4,883	)		—			(6,944	)
Corporate and restaurant information systems		(850	)		(554	)		—			(1,404	)
Total capital expenditures		(8,954	)		(21,417	)		—			(30,371	)
Properties purchased for sale-leaseback		—			(3,149	)		—			(3,149	)
Proceeds from sale-leaseback transactions		7,433			14,976			21,771			44,180
Proceeds from dispositions of property and equipment		1,251			2,670			—			3,921
Net cash provided from (used for) investing activities		(270	)		(6,920	)		21,771			14,581
Cash flows provided from (used for) financing activities:
Payments on revolving credit facility, net		(52,200	)		—			—			(52,200	)
Scheduled principal payments on term loans		(11,000	)		—			—			(11,000	)
Financing costs associated with lease financing obligations		(186	)		(1,159	)		1,159			(186	)
Proceeds from lease financing obligations, net		3,625			22,930			(22,930	)		3,625
Payments on other notes payable		(847	)		—			—			(847	)
Principal payments on capital leases		(155	)		(291	)		—			(446	)
Net cash provided from (used for) financing activities		(60,763	)		21,480			(21,771	)		(61,054	)
Net decrease in cash and cash equivalents		(7	)		(117	)		—			(124	)
Cash and cash equivalents, beginning of year		715			1,823			—			2,538
Cash and cash equivalents, end of year	$	708		$	1,706		$	—		$	2,414

F-36

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except share amounts)

Note 18. Selected Quarterly Financial Data (Unaudited)

	Quarter Ended
2005			June 30(1)						September 30		December 31
	March 31		As Previously Reported			As Restated
Total revenues	$	169,516	$	181,800		$	181,800		$	181,286	$	174,308
Gross profit (2)		30,824		34,986			35,134			36,514		31,587
Net income (loss)		873		(11,147	)		(11,354	)(3)		5,262		876

	Quarter Ended
2004	March 31			June 30		September 30		December 31
Total revenues	$	156,900		$	177,923	$	178,162	$	184,894
Gross profit (2)		29,288			35,549		34,732		36,746
Net income (loss)		(217	)		2,632		1,615		(12,114	)(4)

(1) As reported in Amendment No. 1 to the Company’s 2004 Annual Report on Form 10-K/A, restatements that affect the net income in the second quarter of 2005 are to: (i) correct our accounting for the depreciation of assets and recording of interest expense associated with sale-leaseback transactions accounted for under the financing method and; (ii) record twelve real estate transactions as financing transactions as required under SFAS No. 98 rather than as sale-leaseback transactions as previously reported.

(2) Gross profit is defined as total revenues less cost of sales, restaurant wages and related expenses, restaurant rent expense, other restaurant operating expenses and advertising expenses.

(3) In the second quarter of 2005, the Company recorded stock-based compensation expense of $16.4 million in connection with stock awards issued in the second quarter of 2005 (See Note 12).

(4) In the fourth quarter of 2004, the Company recorded a $20.9 million non-recurring bonus payment including taxes (See Note 11) and incurred an $8.9 million loss on early extinguishment of debt associated with the December 2004 refinancing (See Note 7).

F-37

CARROLS CORPORATION AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2005, 2004 and 2003

(in thousands of dollars)

Column A	Column B		Col. C						Col. D			Col. E
Description	Balance at Beginning of Period		Charged to Costs and Expenses			Charged to other accounts			Deductions			Balance at End of Period
Year ended December 31, 2005:
Reserve for doubtful trade accounts receivable	$	81		—			—		$	(81	)(a)	$	—
Reserve for note receivable		1,159		—			—			(65	)(c)		1,094
Deferred income tax valuation allowance		—		1,119	(d)		—			—			1,119
Year ended December 31, 2004:
Reserve for doubtful trade accounts receivable	$	94	$	—		$	—		$	(13	)(a)	$	81
Reserve for note receivable		1,184		—			—			(25	)(c)		1,159
Year ended December 31, 2003:
Reserve for doubtful trade accounts receivable	$	128	$	—		$	—		$	(34	)(a)	$	94
Reserve for note receivable		—		—			1,200	(b)		(16	)(c)		1,184

(a) Represents write-offs of accounts.

(b) Represents the establishment of a reserve for the total amount of a note receivable at the date of its issuance.

(c) Represents payments received on this fully reserved note.

(d) Represents the establishment of a valuation allowance on certain deferred tax assets.

F-38

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 30th day of June 2006.

CARROLS CORPORATION
By:	/s/    ALAN VITULI
	Alan Vituli, Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    ALAN VITULI         Alan Vituli	Director, Chairman of the Board and Chief Executive Officer	June 30, 2006
/s/    DANIEL T. ACCORDINO         Daniel T. Accordino	President, Chief Operating Officer and Director	June 30, 2006
/s/    PAUL R. FLANDERS         Paul R. Flanders	Vice President – Chief Financial Officer and Treasurer	June 30, 2006
/s/    TIMOTHY J. LALONDE         Timothy J. LaLonde	Vice President – Controller	June 30, 2006
/s/    BENJAMIN D. CHERESKIN         Benjamin D. Chereskin	Director	June 30, 2006
/s/    ROBIN P. SELATI         Robin P. Selati	Director	June 30, 2006
/s/    CLAYTON E. WILHITE         Clayton E. Wilhite	Director	June 30, 2006
/s/    BRIAN F. GLEASON         Brian F. Gleason	Director	June 30, 2006
/s/    OLASENI ADEYEMI SONUGA         Olaseni Adeyemi Sonuga	Director	June 30, 2006

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Alan Vituli, certify that:

1. I have reviewed this annual report on Form 10-K of Carrols Corporation for the year ended December 31, 2005;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 30, 2006 /s/ ALAN VITULI              Alan Vituli Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Paul R. Flanders, certify that:

1. I have reviewed this annual report on Form 10-K of Carrols Corporation for the year ended December 31, 2005;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

c) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 30, 2006 /s/ PAUL R. FLANDERS             Paul R. Flanders Vice President – Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATE PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Alan Vituli, Chief Executive Officer of Carrols Corporation (the “Company”), hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Company’s Annual Report on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ALAN VITULI

Alan Vituli

Chairman of the Board and Chief Executive Officer

June 30, 2006

EX-32.2

Exhibit 32.2

CERTIFICATE PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Paul R. Flanders, Chief Financial Officer of Carrols Corporation (the “Company”), hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Company’s Annual Report on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ PAUL R. FLANDERS

Paul R. Flanders

Vice-President Chief Financial Officer and Treasurer

June 30, 2006