##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



---

FORM 10-Q



---



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended October 2, 2005

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 Number)
|968 James Street Syracuse, New York                            |  | 13203                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

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



---

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 ̈No  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 of the registrants common stock (par value $1 per share) outstanding as of June 23, 2006 is 10.



---



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2005



|        |  |                                                                                                                          |  |     
|------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                                                          |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                                                    |  |     
|        |  |                                                                                                                         
|Item 1  |  | Consolidated Financial Statements (Unaudited):                                                                           |  |     
|        |  |                                                                                                                         
|        |  | Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004                                               |  | 3   
|        |  |                                                                                                                         
|        |  | Consolidated Statements of Operations for the three months ended September 30, 2005 and September 30, 2004 (as restated) |  | 4   
|        |  |                                                                                                                         
|        |  | Consolidated Statements of Operations for the nine months ended September 30, 2005 and September 30, 2004 (as restated)  |  | 5   
|        |  |                                                                                                                         
|        |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and September 30, 2004 (as restated)  |  | 6   
|        |  |                                                                                                                         
|        |  | Notes to Consolidated Financial Statements                                                                               |  | 7   
|        |  |                                                                                                                         
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 28  
|        |  |                                                                                                                         
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                               |  | 43  
|        |  |                                                                                                                         
|Item 4  |  | Controls and Procedures                                                                                                  |  | 43  
|        |  |                                                                                                                         
|PART II |  | OTHER INFORMATION                                                                                                        |  |     
|        |  |                                                                                                                         
|Item 1  |  | Legal Proceedings                                                                                                        |  | 45  
|        |  |                                                                                                                         
|Item 6  |  | Exhibits                                                                                                                 |  | 46  



---

##### Table of Contents

PART IFINANCIAL INFORMATION

ITEM 1INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



|                                                                                                      |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                      |  | September 30,2005 |          |   | December 31,2004 |  
|ASSETS                                                                                                |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                       |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                             |  | $                 | 5,298    |   |                  | $ | 31,466   |  
|Trade and other receivables, net of reserves of $22 and $81, respectively                             |  |                   | 3,324    |   |                  |   | 2,578    |  
|Inventories                                                                                           |  |                   | 5,014    |   |                  |   | 4,831    |  
|Prepaid rent                                                                                          |  |                   | 3,657    |   |                  |   | 3,589    |  
|Prepaid expenses and other current assets                                                             |  |                   | 4,889    |   |                  |   | 4,358    |  
|Refundable income taxes                                                                               |  |                   |         |   |                  |   | 3,326    |  
|Deferred income taxes                                                                                 |  |                   | 6,170    |   |                  |   | 6,242    |  
|                                                                                                      |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                  |  |                   | 28,352   |   |                  |   | 56,390   |  
|Property and equipment, net (Note 3)                                                                  |  |                   | 216,232  |   |                  |   | 213,489  |  
|Franchise rights, at cost less accumulated amortization of $51,835 and $49,471, respectively (Note 4) |  |                   | 87,304   |   |                  |   | 90,056   |  
|Goodwill (Note 4)                                                                                     |  |                   | 124,940  |   |                  |   | 122,241  |  
|Intangible assets, at cost less accumulated amortization of $73 (Note 4)                              |  |                   | 1,538    |   |                  |   |         |  
|Franchise agreements, at cost less accumulated amortization of $5,150 and $4,954, respectively        |  |                   | 6,018    |   |                  |   | 6,480    |  
|Deferred income taxes                                                                                 |  |                   | 13,887   |   |                  |   | 12,940   |  
|Other assets                                                                                          |  |                   | 14,886   |   |                  |   | 14,650   |  
|                                                                                                      |  |                   |          |   |                  |   |          |  
|Total assets                                                                                          |  | $                 | 493,157  |   |                  | $ | 516,246  |  
|                                                                                                      |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                 |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                  |  |                   |          |   |                  |   |          |  
|Current portion of long-term debt                                                                     |  | $                 | 2,585    |   |                  | $ | 2,611    |  
|Accounts payable                                                                                      |  |                   | 18,003   |   |                  |   | 17,581   |  
|Accrued interest                                                                                      |  |                   | 3,511    |   |                  |   | 956      |  
|Accrued payroll, related taxes and benefits                                                           |  |                   | 14,383   |   |                  |   | 24,940   |  
|Accrued bonus to employees and director                                                               |  |                   |         |   |                  |   | 20,860   |  
|Accrued income taxes payable                                                                          |  |                   | 1,958    |   |                  |   |         |  
|Other liabilities                                                                                     |  |                   | 15,277   |   |                  |   | 13,957   |  
|                                                                                                      |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                             |  |                   | 55,717   |   |                  |   | 80,905   |  
|Long-term debt, net of current portion                                                                |  |                   | 391,666  |   |                  |   | 398,614  |  
|Lease financing obligations                                                                           |  |                   | 110,810  |   |                  |   | 111,715  |  
|Deferred incomesale-leaseback of real estate                                                         |  |                   | 8,674    |   |                  |   | 8,585    |  
|Accrued postretirement benefits                                                                       |  |                   | 3,925    |   |                  |   | 3,504    |  
|Other liabilities (Note 8)                                                                            |  |                   | 26,752   |   |                  |   | 28,452   |  
|                                                                                                      |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                     |  |                   | 597,544  |   |                  |   | 631,775  |  
|                                                                                                      |  |                  
|Commitments and contingencies (Note 11)                                                               |  |                   |          |   |                  |   |          |  
|                                                                                                      |  |                  
|Stockholders deficit:                                                                                |  |                   |          |   |                  |   |          |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding10 shares                 |  |                   |         |   |                  |   |         |  
|Additional paid-in capital                                                                            |  |                   | (75,948  | ) |                  |   | (92,309  | )
|Accumulated deficit                                                                                   |  |                   | (28,439  | ) |                  |   | (23,220  | )
|                                                                                                      |  |                   |          |   |                  |   |          |  
|Total stockholders deficit                                                                           |  |                   | (104,387 | ) |                  |   | (115,529 | )
|                                                                                                      |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders deficit                                                           |  | $                 | 493,157  |   |                  | $ | 516,246  |  
|                                                                                                      |  |                   |          |   |                  |   |          |  

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



3



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands)

(Unaudited)



|                                                                                        |  |      |         |                        |   |        
|--------------------------------------------------------------------------------------- |  | ---- | ------- | ---------------------- | - | -------
|                                                                                        |  | 2005 |         | Restated (Note 2) 2004
|Revenues:                                                                               |  |      |         |                        |   |        
|Restaurant sales                                                                        |  | $    | 180,911 |                        | $ | 177,796
|Franchise royalty revenues and fees                                                     |  |      | 375     |                        |   | 366    
|                                                                                        |  |      |         |                        |   |        
|Total revenues                                                                          |  |      | 181,286 |                        |   | 178,162
|                                                                                        |  |      |         |                        |   |        
|Costs and expenses:                                                                     |  |      |         |                        |   |        
|Cost of sales                                                                           |  |      | 52,068  |                        |   | 51,853 
|Restaurant wages and related expenses                                                   |  |      | 51,618  |                        |   | 52,245 
|Restaurant rent expense                                                                 |  |      | 8,054   |                        |   | 8,741  
|Other restaurant operating expenses                                                     |  |      | 26,662  |                        |   | 24,405 
|Advertising expense                                                                     |  |      | 6,243   |                        |   | 6,186  
|General and administrative (including stock-based compensation expense of $614 in 2004) |  |      | 9,848   |                        |   | 11,117 
|Depreciation and amortization                                                           |  |      | 8,202   |                        |   | 9,641  
|Impairment losses (Note 3)                                                              |  |      | 574     |                        |   | 60     
|Other expense (Note 6)                                                                  |  |      |        |                        |   | 2,352  
|                                                                                        |  |      |         |                        |   |        
|Total operating expenses                                                                |  |      | 163,269 |                        |   | 166,600
|                                                                                        |  |      |         |                        |   |        
|Income from operations                                                                  |  |      | 18,017  |                        |   | 11,562 
|Interest expense                                                                        |  |      | 10,916  |                        |   | 8,587  
|                                                                                        |  |      |         |                        |   |        
|Income before income taxes                                                              |  |      | 7,101   |                        |   | 2,975  
|Provision for income taxes (Note7)                                                      |  |      | 1,839   |                        |   | 1,360  
|                                                                                        |  |      |         |                        |   |        
|Net income                                                                              |  | $    | 5,262   |                        | $ | 1,615  
|                                                                                        |  |      |         |                        |   |        

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



4



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands)

(Unaudited)



|                                                                                                            |  |      |         |   |                        |   |        
|----------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---------------------- | - | -------
|                                                                                                            |  | 2005 |         |   | Restated (Note 2) 2004
|Revenues:                                                                                                   |  |      |         |   |                        |   |        
|Restaurant sales                                                                                            |  | $    | 531,442 |   |                        | $ | 511,863
|Franchise royalty revenues and fees                                                                         |  |      | 1,160   |   |                        |   | 1,122  
|                                                                                                            |  |      |         |   |                        |   |        
|Total revenues                                                                                              |  |      | 532,602 |   |                        |   | 512,985
|                                                                                                            |  |      |         |   |                        |   |        
|Costs and expenses:                                                                                         |  |      |         |   |                        |   |        
|Cost of sales                                                                                               |  |      | 154,424 |   |                        |   | 147,854
|Restaurant wages and related expenses                                                                       |  |      | 153,740 |   |                        |   | 151,767
|Restaurant rent expense                                                                                     |  |      | 25,818  |   |                        |   | 25,582 
|Other restaurant operating expenses                                                                         |  |      | 75,976  |   |                        |   | 69,154 
|Advertising expense                                                                                         |  |      | 19,791  |   |                        |   | 19,059 
|General and administrative (including stock-based compensation expense of $16,432 and $2,238, respectively) |  |      | 47,832  |   |                        |   | 32,987 
|Depreciation and amortization                                                                               |  |      | 24,929  |   |                        |   | 29,864 
|Impairment losses (Note 3)                                                                                  |  |      | 1,427   |   |                        |   | 629    
|Other expense (Note 6)                                                                                      |  |      |        |   |                        |   | 2,352  
|                                                                                                            |  |      |         |   |                        |   |        
|Total operating expenses                                                                                    |  |      | 503,937 |   |                        |   | 479,248
|                                                                                                            |  |      |         |   |                        |   |        
|Income from operations                                                                                      |  |      | 28,665  |   |                        |   | 33,737 
|Interest expense                                                                                            |  |      | 31,830  |   |                        |   | 26,312 
|                                                                                                            |  |      |         |   |                        |   |        
|Income (loss) before income taxes                                                                           |  |      | (3,165  | ) |                        |   | 7,425  
|Provision for income taxes (Note 7)                                                                         |  |      | 2,054   |   |                        |   | 3,395  
|                                                                                                            |  |      |         |   |                        |   |        
|Net income (loss)                                                                                           |  | $    | (5,219  | ) |                        | $ | 4,030  
|                                                                                                            |  |      |         |   |                        |   |        

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



5



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands)

(Unaudited)



|                                                                                           |  |      |         |   |                        |   |         |  
|------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---------------------- | - | ------- | -
|                                                                                           |  | 2005 |         |   | Restated (Note 2) 2004 |  
|Cash flows provided from operating activities:                                             |  |      |         |   |                        |   |         |  
|Net income (loss)                                                                          |  | $    | (5,219  | ) |                        | $ | 4,030   |  
|Adjustments to reconcile net income (loss) to net cash provided from operating activities: |  |      |         |   |                        |   |         |  
|Gain on disposal of property and equipment                                                 |  |      | (585    | ) |                        |   | (314    | )
|Stock-based compensation                                                                   |  |      | 16,310  |   |                        |   | 2,238   |  
|Depreciation and amortization                                                              |  |      | 24,929  |   |                        |   | 29,864  |  
|Amortization of deferred financing costs                                                   |  |      | 1,154   |   |                        |   | 1,178   |  
|Amortization of unearned purchase discounts                                                |  |      | (1,616  | ) |                        |   | (1,617  | )
|Amortization of deferred gains from sale-leaseback transactions                            |  |      | (377    | ) |                        |   | (342    | )
|Accretion of interest on lease financing obligations                                       |  |      | 257     |   |                        |   | 320     |  
|Impairment losses                                                                          |  |      | 1,427   |   |                        |   | 629     |  
|Deferred income taxes                                                                      |  |      | (876    | ) |                        |   | 498     |  
|Decrease in accrued bonus to employees and director                                        |  |      | (20,860 | ) |                        |   |        |  
|(Decrease) increase in accrued payroll, related taxes and benefits                         |  |      | (10,506 | ) |                        |   | 7,206   |  
|Changes in other operating assets and liabilities                                          |  |      | 6,585   |   |                        |   | 5,651   |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Net cash provided from operating activities                                                |  |      | 10,623  |   |                        |   | 49,341  |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Cash flows used for investing activities:                                                  |  |      |         |   |                        |   |         |  
|Capital expenditures:                                                                      |  |      |         |   |                        |   |         |  
|New restaurant development                                                                 |  |      | (15,497 | ) |                        |   | (7,269  | )
|Restaurant remodeling                                                                      |  |      | (2,093  | ) |                        |   | (818    | )
|Other restaurant capital expenditures                                                      |  |      | (6,188  | ) |                        |   | (4,151  | )
|Corporate and restaurant information systems                                               |  |      | (985    | ) |                        |   | (724    | )
|Acquisition of Taco Cabana restaurants (Note 4)                                            |  |      | (4,220  | ) |                        |   |        |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Total capital expenditures                                                                 |  |      | (28,983 | ) |                        |   | (12,962 | )
|Properties purchased for sale-leaseback                                                    |  |      | (275    | ) |                        |   | (924    | )
|Proceeds from sale-leaseback transactions                                                  |  |      | 1,137   |   |                        |   | 9,703   |  
|Proceeds from sales of other properties                                                    |  |      | 669     |   |                        |   | 1,174   |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Net cash used for investing activities                                                     |  |      | (27,452 | ) |                        |   | (3,009  | )
|                                                                                           |  |      |         |   |                        |   |         |  
|Cash flows used for financing activities:                                                  |  |      |         |   |                        |   |         |  
|Payments on revolving credit facility, net                                                 |  |      |        |   |                        |   | (500    | )
|Scheduled principal payments on term loans                                                 |  |      | (1,650  | ) |                        |   | (10,125 | )
|Principal pre-payments on term loans                                                       |  |      | (6,000  | ) |                        |   | (39,000 | )
|Settlement of lease financing obligation                                                   |  |      | (1,074  | ) |                        |   |        |  
|Payments on other notes payable                                                            |  |      |        |   |                        |   | (117    | )
|Principal payments on capital leases                                                       |  |      | (311    | ) |                        |   | (294    | )
|Financing costs associated with issuance of debt and lease financing obligations           |  |      | (304    | ) |                        |   | (221    | )
|Proceeds from lease financing obligations                                                  |  |      |        |   |                        |   | 4,500   |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Net cash used for financing activities                                                     |  |      | (9,339  | ) |                        |   | (45,757 | )
|                                                                                           |  |      |         |   |                        |   |         |  
|(Decrease) increase in cash and cash equivalents                                           |  |      | (26,168 | ) |                        |   | 575     |  
|Cash and cash equivalents, beginning of period                                             |  |      | 31,466  |   |                        |   | 2,414   |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Cash and cash equivalents, end of period                                                   |  | $    | 5,298   |   |                        | $ | 2,989   |  
|                                                                                           |  |      |         |   |                        |   |         |  
|Supplemental disclosures:                                                                  |  |      |         |   |                        |   |         |  
|Interest paid on long-term debt                                                            |  | $    | 19,843  |   |                        | $ | 12,945  |  
|Interest paid on lease financing obligations                                               |  | $    | 8,020   |   |                        | $ | 7,948   |  
|Income taxes paid (refunded), net                                                          |  | $    | (2,229  | ) |                        | $ | 3,670   |  
|Increase (decrease) in accruals for capital expenditures                                   |  | $    | (44     | ) |                        | $ | 568     |  
|Capital lease obligations incurred                                                         |  | $    | 987     |   |                        | $ |        |  

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



6



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share amounts)

1.
Basis of Presentation

Basis of Consolidation.The unaudited consolidated financial statements include the accounts of Carrols
Corporation and its subsidiaries (Carrols or 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 September 30, 2005, the Company operated, as franchisee, 338 quick-service restaurants under the
trade name Burger King in thirteen Northeastern, Midwestern and Southeastern states. At September 30, 2005, the Company also owned and operated 66 Pollo Tropical restaurants located in Florida and franchised a total of 25 Pollo
Tropical restaurants in Puerto Rico, Ecuador and Florida. At September 30, 2005, the Company owned and operated 132 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.

Fiscal Year.The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to
the fiscal years ended January 2, 2005 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2004 and 2003, respectively. Similarly, all references herein to the three and nine months ended October 2,
2005 and September 26, 2004 will be referred to as the three and nine months ended September 30, 2005 and September 30, 2004, respectively.

Basis of Presentation.The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2005 and 2004 have been prepared without an audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In
the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended September 30, 2005 and
2004 are not necessarily indicative of the results to be expected for the full year.

These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2004 contained in Amendment No. 1 to the Companys 2004 Annual Report on Form 10-K/A. The December 31, 2004 balance
sheet data is derived from those audited financial statements. The Company restated its financial statements including applicable footnotes in Amendment No. 1 to its 2004 Annual Report on Form 10-K/A as of December 31, 2004 and
December 31, 2003 and for the years ended December 31, 2004, 2003 and 2002 as further discussed in Note 2 of the consolidated financial statements contained therein. The consolidated financial statements as of and for the three and nine
months ended September 30, 2004 and all previously reported amounts affected by the restatement that appear elsewhere in these footnotes to the consolidated financial statements have also been restated. See Note 2 to these consolidated
financial statements for a complete discussion of the restatement.

Use of Estimates.The preparation of the 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 and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal
obligations, income taxes, evaluation of goodwill, long-lived assets and Burger King franchise rights for impairment. Actual results could differ from those estimates.

Acquisition of Taco Cabana Restaurants. The Companys consolidated financial statements include the results of operations for four Taco Cabana restaurants acquired from a former franchisee for a cash
purchase price of $4.2 million since their acquisition in July 2005. The assets acquired were recorded at fair value as determined by management based on information available. Certain reacquired rights, including the right to the acquirers
trade name, were recorded as an intangible asset with a fair value of $1.6 million apart from goodwill. The Company has determined the weighted average remaining life of this intangible asset to be approximately seven years, based on the remaining
terms of the acquired franchise agreements.

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 also issued
an additional 5,440 shares of Holdings common stock in separate awards to employees. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, which
provide that such shares



7



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



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 recipients 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 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.

Statement of Financial Accounting Standards 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, as amended, allows entities to continue to apply the provisions of Accounting Principles Board 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 has elected to continue applying the provisions of APB 25 and to provide the pro forma disclosure
provisions of SFAS 123.

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:



|                                                                                                                                     |  |                                 |       |                    |                                |       |      |  |   |                    |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | ------------------ | ------------------------------ | ----- | ---- |  | - | ------------------ | - |  | - | ----- | -
|                                                                                                                                     |  | Three Months EndedSeptember 30, |       |                    | Nine Months EndedSeptember 30, |      
|                                                                                                                                     |  | 2005                            |       | RestatedNote 22004 |                                |       | 2005 |  |   | RestatedNote 22004 |  
|Net income (loss) as reported                                                                                                        |  | $                               | 5,262 |                    | $                              | 1,615 |      |  | $ | (5,219             | ) |  | $ | 4,030 |  
|Add: Stock-based compensation expense included in reported net income (loss), net of related tax effects (1)                         |  |                                 |      |                    |                                | 368   |      |  |   | 13,188             |   |  |   | 1,342 |  
|Deduct: Stock-based compensation expense determined under the fair-value based method for all awards, net of related tax effects
(1) |  |                                 |      |                    |                                | (72   | )    |  |   | (12,011            | ) |  |   | (224  | )
|                                                                                                                                     |  |                                 |       |                    |                                |       |      |  |   |                    |   |  |   |       |  
|Pro forma net income (loss)                                                                                                          |  | $                               | 5,262 |                    | $                              | 1,911 |      |  | $ | (4,042             | ) |  | $ | 5,148 |  
|                                                                                                                                     |  |                                 |       |                    |                                |       |      |  |   |                    |   |  |   |       |  

---

|(1) | The amount of stock-based compensation expense included in reported net income (loss) pertains to certain stock options requiring variable accounting, and for the nine months ended
September 30, 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 nine months ended September 30, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. Restatement of Previously Issued Financial Statements

Current Restatement

Lease Financing Obligations

The Company reviewed its accounting with respect to the depreciation of assets and recording of interest expense associated with lease
financing obligations related to sale-leaseback transactions required to be accounted for under the financing method. Under the financing method, the assets subject to these obligations remain on the consolidated balance sheet at their historical
costs and continue to be depreciated over their useful lives; the proceeds the Company received from the transaction are recorded as a lease financing obligation and the lease payments are applied as payments of principal and interest.

The Company previously considered the land and building as a single asset and depreciated this asset (both land and building) over a depreciable life
that was deemed to be the 20-year primary lease term of the underlying obligation. The Company has concluded that its accounting was in error and that the portion of the asset representing land should not be depreciated and the depreciation of
the building portion of this asset should continue using its original estimated useful life rather than the term of the underlying obligation. The effect of this restatement resulted in a reduction of depreciation expense of $0.5 million and $1.5
million and an increase to net income of $0.3 million and $0.9 million for the three and nine months ended September 30, 2004, respectively.



8



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



Historically, the Company allocated the related lease payments between interest and principal using
an interest rate that would fully amortize the lease financing obligation by the end of the primary lease term. Due to the change in depreciation described above, the assets subject to the lease financing obligations will have a net book value at
the end of the primary lease term, primarily for the land portion. To prevent the recognition of a non-cash loss or negative amortization of the obligation through the end of the primary lease term, it was necessary to reevaluate the selection
of interest rates which included reconsideration of the Companys incremental borrowing rate, and to adjust the rates used to amortize the lease financing obligations so that a lease obligation equal to or greater than the unamortized asset
remained at the end of the primary lease term. The effect of this restatement resulted in an increase in interest expense related to the lease financing obligations for the three and nine months ended September 30, 2004 of $0.7 million and $2.0
million, respectively and a decrease to net income of $0.5 million and $1.5 million, respectively.

These restatements also resulted in an
increase in land and buildings subject to lease financing obligations of $11.4 million and an increase in lease financing obligations of $14.6 million at December 31, 2004.

The Company also reviewed previously reported sale-leaseback transactions and determined twelve additional real estate transactions were required to be
recorded as financing transactions rather than sale/leaseback transactions under SFAS No. 98 Accounting for Leases due to certain forms of continuing involvement. The impact of this restatement is to keep the assets subject to such
leases on the Companys balance sheet and to record the proceeds the Company received from the transactions (including the gains previously deferred) as lease financing obligations. This restatement also affects our operating results by
increasing the depreciation expense for buildings subject to these transactions and re-characterizing the lease payments, previously reported as rent expense for these restaurants, as interest expense and principal repayments on the related
financing obligations. The effect of this restatement (a) for the three and nine months ended September 30, 2004 was to (i) reduce rent expense by $0.3 million and $0.8 million, respectively; (ii) increase depreciation expense by
$0.1 million and $0.3 million, respectively; and (iii) increase interest expense by $0.3 million and $1.0 million, respectively; and (iv) reduce net income by $0.1 million and $0.3 million, respectively; and (b) at December 31, 2004,
to increase the net book value of the assets subject to lease financing obligations by $9.5 million, reduce deferred income-sale-leaseback of real estate by $3.0 million and increase lease financing obligations by $14.7 million.

The net effect of the above current restatements was to decrease net income $0.2 million and $0.4 million for the three and nine months ended September
30, 2004, respectively.

Deferred Taxes

The Company also reviewed deferred taxes recorded for certain long-lived assets and liabilities that were previously acquired in business combinations and the related differences between the income tax bases and the financial reporting
bases of these assets and liabilities and determined that the deferred taxes recorded at the acquisition dates were incorrect. The result of these restatements was to decrease goodwill and deferred tax liabilities by $2.1 million in the aggregate
related to our 2000 acquisition of Taco Cabana and to increase goodwill and deferred tax liabilities by $0.6 million related to our 1998 acquisition of Pollo Tropical. This restatement also cumulatively decreased goodwill amortization expense $0.1
million for periods prior to 2002. The aggregate effect of these adjustments to goodwill was a decrease of $1.4 million at December 31, 2004.

Statements of Cash Flows

The Company has corrected its previously issued financial statements to reflect the proceeds from
qualifying sale-leaseback transactions within investing activities rather than as financing activities as previously reported in the statements of cash flows. For the nine months ended September 30, 2005 and 2004 proceeds from qualifying
sale-leaseback transactions included in the accompanying consolidated financial statements are $1.1 million and $9.7 million, respectively. The Company has also restated its consolidated statements of cash flows for the nine months ended
September 30, 2004 to reflect the impact of changes in accounts payable related to the acquisition of property and equipment as a non-cash item as required under SFAS No. 95.

Previous Restatement

As previously reported in Amendment No. 1 to the Companys Annual
Report on Form 10-K/A for the year ended December 31, 2004, the Company restated its financial statements including applicable footnotes as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002.

Lease and Leasehold Improvement Accounting

The Company reviewed its lease accounting policies following a host of announcements by many restaurant and retail companies that they were revising their accounting practices for leases. The Company historically followed the accounting



9



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



practice of using the initial lease term when determining operating versus capital lease classification and when calculating straight-line rent expense. In
addition, the Company depreciated its buildings on leased land and leasehold improvements over a period that included both the initial lease term plus one or more optional extension periods even if the option renewal was not reasonably assured (or
the useful life of the asset if shorter).

Upon such review, the Company restated its financial statements for the years ended
December 31, 2003 and 2002 and the unaudited quarterly financial information for 2003 and the first three quarters of 2004 to correct errors in its lease accounting. Specifically, the Company revised its lease term for purposes of lease
classification and calculating straight-line rent expense to only include renewal options that are reasonably assured of exercise because an economic penalty, as defined under SFAS No. 13, Accounting for Leases, (SFAS
13) would be incurred in the event of non-renewal. The Company also revised its useful lives of leasehold improvements to the shorter of their economic lives or the lease term as defined in SFAS 13. The primary impact of the restatement was to
accelerate depreciation of buildings on leased land and leasehold improvements made subsequent to the lease inception date. The restatement also reduced the lives of intangible assets related to leases. As a result of this restatement, amortization
expense for leasehold improvements and assets related to leases for the three and nine months ended September 30, 2004 increased by $0.2 million and $0.7 million, respectively.

In conjunction with the review of its lease accounting, the Company also determined that adjustments were necessary for lease liabilities for operating
leases with non-level rents at the time of its acquisitions of Pollo Tropical in 1998 and Taco Cabana in 2000 as well as liabilities related to acquired leases with above-market rentals for Taco Cabana. The Company adjusted its purchase price
allocations for these acquisitions and restated lease liabilities and goodwill as of the acquisition dates. The Company also restated rent expense and interest expense for those previously reported periods subsequent to each acquisition and restated
goodwill amortization through December 31, 2001. As a result of these restatements, rent expense increased $0.1 million in the three and nine months ended September 30, 2004.

Accounting for Franchise Rights

In 2004, the Company also reviewed its accounting policies for the
amortization of franchise rights, intangible assets pertaining to the Companys acquisitions of Burger King restaurants, and determined that it made an error in the assessment of their remaining useful lives at January 1, 2002, as part of
its adoption of SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS 142). Beginning on 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. Previously, the Company amortized the amounts allocated to franchise rights over periods ranging from twenty to forty
years.

In connection with the review of its accounting for franchise rights, the Company also determined that it understated franchise
rights and deferred tax liabilities each by $14.0 million that pertained to an acquisition of 64 Burger King restaurants in 1997.

The
adjustments related to these restatements reduced amortization expense for the three and nine months ended September 30, 2004 by $0.2 million and $0.5 million, respectively.

Stock-based Compensation Expense

In 2004, the Company reevaluated the terms of its option plans and
grants and concluded that provisions of certain options granted under our plans required the Company to account for these options using the variable accounting provisions of APB 25. Previously, the Company had accounted for these options under APB
25 using a fixed accounting treatment whereby compensation expense, if any, was only evaluated at the date of the option grant. The impact of this adjustment was to increase stock-based compensation expense, included in general and administrative
expenses, for the three and nine months ended September 30, 2004 by $0.6 million and $2.2 million, respectively.

Accounting for Guarantor
Financial Statements

The Company has also restated its financial statements to correct the disclosure related to the Company and its
subsidiaries who guarantee certain of the Companys securities for the three and nine months ended September 30, 2004 to reflect the allocation of corporate costs to conform to the current year presentation. See Note 13.



10



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



The following tables sets forth the previously reported amounts and the restated amounts reflected in
the accompanying consolidated financial statements for the three and nine months ended September 30, 2004:



|                                       |  |                       |         |             |   |        
|-------------------------------------- |  | --------------------- | ------- | ----------- | - | -------
|Three months ended September 30, 2004: |  | As PreviouslyReported |         | As Restated
|Consolidated Statements of Operations: |  |                       |         |             |   |        
|Restaurant rent expense                |  | $                     | 8,966   |             | $ | 8,741  
|General and administrative expense     |  |                       | 10,503  |             |   | 11,117 
|Depreciation and amortization          |  |                       | 9,986   |             |   | 9,641  
|Total operating expenses               |  |                       | 166,556 |             |   | 166,600
|Income from operations                 |  |                       | 11,606  |             |   | 11,562 
|Interest expense                       |  |                       | 7,516   |             |   | 8,587  
|Income before income taxes             |  |                       | 4,090   |             |   | 2,975  
|Provision for income taxes             |  |                       | 1,506   |             |   | 1,360  
|Net income                             |  |                       | 2,584   |             |   | 1,615  



|                                       |  |                       |         |             |   |        
|-------------------------------------- |  | --------------------- | ------- | ----------- | - | -------
|Nine months ended September 30, 2004:  |  | As PreviouslyReported |         | As Restated
|Consolidated Statements of Operations: |  |                       |         |             |   |        
|Restaurant rent expense                |  | $                     | 26,253  |             | $ | 25,582 
|General and administrative expense     |  |                       | 30,749  |             |   | 32,987 
|Depreciation and amortization          |  |                       | 30,944  |             |   | 29,864 
|Total operating expenses               |  |                       | 478,761 |             |   | 479,248
|Income from operations                 |  |                       | 34,224  |             |   | 33,737 
|Interest expense                       |  |                       | 23,145  |             |   | 26,312 
|Income before income taxes             |  |                       | 11,079  |             |   | 7,425  
|Provision for income taxes             |  |                       | 4,063   |             |   | 3,395  
|Net income                             |  |                       | 7,016   |             |   | 4,030  



|                                                                |  |                       |         |   |             |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | ----------- | - | ------- | -
|Nine months ended September 30, 2004:                           |  | As PreviouslyReported |         |   | As Restated |  
|Consolidated Statements of Cash Flows:                          |  |                       |         |   |             |   |         |  
|Net income                                                      |  | $                     | 7,016   |   |             | $ | 4,030   |  
|Depreciation and amortization                                   |  |                       | 30,944  |   |             |   | 29,864  |  
|Amortization of deferred financing costs                        |  |                       | 1,095   |   |             |   | 1,178   |  
|Amortization of deferred gains from sale-leaseback transactions |  |                       | (468    | ) |             |   | (342    | )
|Accretion of interest on lease financing obligations            |  |                       |        |   |             |   | 320     |  
|Deferred income taxes                                           |  |                       | 1,431   |   |             |   | 498     |  
|Increase in accrued payroll, related taxes and benefits         |  |                       | 4,968   |   |             |   | 7,206   |  
|Changes in other operating assets and liabilities               |  |                       | 6,803   |   |             |   | 5,651   |  
|Net cash provided from operating activities                     |  |                       | 51,586  |   |             |   | 49,341  |  
|Total capital expenditures                                      |  |                       | (13,529 | ) |             |   | (12,962 | )
|Net cash used for investing activities                          |  |                       | (13,279 | ) |             |   | (3,009  | )
|Principal payments on lease financing obligations               |  |                       | (1,678  | ) |             |   |        |  
|Net cash used for financing activities                          |  |                       | (37,732 | ) |             |   | (45,757 | )

All previously reported amounts affected by the restatements that appear elsewhere in these
footnotes to the consolidated financial statements have also been restated.



11



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



3. 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 its assets, an estimate of undiscounted future cash flows from the related long-lived assets is compared to their respective carrying values. If the carrying value is greater than the undiscounted cash flows the Company then
determines the fair value of the assets. 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.

For the three and nine months ended September 30, 2005 and 2004, the Company recorded impairment losses on long-lived assets, including Burger King
franchise rights, for its segments as follows:



|            |  |                                 |     |                                |   |      |  |      |       |  |   |    
|----------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | ---
|            |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|            |  | 2005                            |     | 2004                           |   | 2005 |  | 2004
|Burger King |  | $                               | 574 |                                | $ | 60   |  | $    | 1,332 |  | $ | 629
|Taco Cabana |  |                                 |    |                                |   |     |  |      | 95    |  |   |   
|            |  |                                 |     |                                |   |      |  |      |       |  |   |    
|            |  | $                               | 574 |                                | $ | 60   |  | $    | 1,427 |  | $ | 629
|            |  |                                 |     |                                |   |      |  |      |       |  |   |    

4. Goodwill, Franchise Rights and Intangible Assets

Goodwill.Goodwill is reviewed 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 does not believe circumstances have changed since the last assessment date which would make it necessary to reassess its values. Changes in goodwill are
summarized below:



|                                    |  |            |        |               |   |            |  |       |       |  |   |        
|----------------------------------- |  | ---------- | ------ | ------------- | - | ---------- |  | ----- | ----- |  | - | -------
|                                    |  | TacoCabana |        | PolloTropical |   | BurgerKing |  | Total
|Carrying amount, beginning of year  |  | $          | 64,484 |               | $ | 56,307     |  | $     | 1,450 |  | $ | 122,241
|Goodwill acquired during the period |  |            | 2,699  |               |   |           |  |       |      |  |   | 2,699  
|                                    |  |            |        |               |   |            |  |       |       |  |   |        
|Goodwill, end of period             |  | $          | 67,183 |               | $ | 56,307     |  | $     | 1,450 |  | $ | 124,940
|                                    |  |            |        |               |   |            |  |       |       |  |   |        

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. The Company assesses the potential impairment of franchise
rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists for any of its assets, an estimate of the aggregate undiscounted future cash flows from the acquired
restaurants is compared to the respective carrying value of franchise rights for each 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 Burger King franchise rights of $0 and $316 for the three and nine months ended September 30, 2005, respectively. There were no impairment charges related to Burger King franchise rights in the three and
nine months ended September 30, 2004.

Amortization expense related to Burger King franchise rights for the three months ended
September 30, 2005 and 2004 was $706 and $808, respectively. Amortization expense related to franchise rights for the nine months ended September 30, 2005 and 2004 was $2,313 and $2,424, respectively.

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 remaining life to be
approximately six years, based on the remaining terms of the acquired franchise agreements. The Company recorded amortization expense relating to this intangible asset of approximately $73 for the three and nine months ended September 30, 2005.



12



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



5. Long-Term Debt

The Companys senior credit facility provides for a revolving credit facility under which it 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 its option, of up to $100.0 million, subject to the satisfaction of certain conditions. At
September 30, 2005, $212.4 million of borrowings were outstanding under the term loan B facility and no amounts were outstanding under the revolving credit facility. After reserving $10.8 million for letters of credit guaranteed by the
facility, $39.2 million was available for borrowings under the revolving credit facility at September 30, 2005. The Company was in compliance with the covenants under its senior credit facility as of September 30, 2005.

On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013. Restrictive covenants under the senior subordinated
notes include limitations with respect to the Companys ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. The Company was in compliance with the restrictive
covenants in the indenture governing the senior subordinated notes at September 30, 2005.

In connection with the terms of the senior
subordinated notes, because the Company had not yet completed an exchange offer on or prior to June 13, 2005, the interest rate on the Companys 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 $188 for the three and nine months ended September 30, 2005.

As a result of the restatement of the Companys financial statements as discussed in Note 3, 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 an additional 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 at all.

6. Public
Offering of Securities

During 2004, the Companys parent company, Carrols Holdings Corporation (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.
In the third quarter of 2004, the Company expensed the costs incurred for this offering of $2.3 million.



13



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



7. Income Taxes

The income tax provision for the three and nine months ended September 30, 2005 and 2004 was comprised of the following:



|         |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |      
|-------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | -----
|         |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30,
|         |  | 2005                            |       |   | 2004                           |   |       | 2005 |  |   | 2004 
|Current  |  | $                               | 2,475 |   |                                | $ | (327  | )    |  | $ | 2,930 |   |  | $ | 2,897
|Deferred |  |                                 | (636  | ) |                                |   | 1,687 |      |  |   | (876  | ) |  |   | 498  
|         |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |      
|         |  | $                               | 1,839 |   |                                | $ | 1,360 |      |  | $ | 2,054 |   |  | $ | 3,395
|         |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |      

The provision for income taxes in the three and nine months ended September 30, 2005 was
derived using an estimated effective annual income tax rate for 2005 of 33.2%, such rate excluding those items where a discrete tax expense has been recorded. The tax provision for the nine months ended September 30, 2005 also includes $3.8
million for the non-deductible portion of stock-based compensation expense related to stock awards in the second quarter of 2005 and $0.5 million of income tax expense associated with Ohio state tax legislation enacted in the second quarter of 2005,
as discussed below. The discrete tax expense for each of these items was recorded in the second quarter.

The provision for income taxes in
the three and nine months ended September 30, 2004 was based on an effective tax rate for 2004 of 45.4%. This rate is higher than the statutory Federal tax rate primarily due to state income taxes and tax credits.

On June 30, 2005, tax legislation in the state of Ohio was enacted that significantly restructured the tax system for most corporate taxpayers.
Included in the legislation is a multi-year phase-out of the state franchise tax and tangible personal property tax. These taxes will be replaced with a Commercial Activity Tax that will be phased-in over a five-year period. The impact of this
legislation was approximately $0.5 million and resulted from the reduction of deferred tax assets associated with the future utilization of Ohio net operating loss carryforwards.

8. Other Liabilities

Other long-term liabilities at September 30, 2005 and December 31,
2004 consisted of the following:



|                                    |  |                    |        |                   |   |       
|----------------------------------- |  | ------------------ | ------ | ----------------- | - | ------
|                                    |  | September 30, 2005 |        | December 31, 2004
|Unearned purchase discounts         |  | $                  | 7,237  |                   | $ | 8,611 
|Accrued occupancy costs             |  |                    | 10,881 |                   |   | 11,400
|Accrued workers compensation costs |  |                    | 4,763  |                   |   | 4,821 
|Other                               |  |                    | 3,871  |                   |   | 3,620 
|                                    |  |                    |        |                   |   |       
|                                    |  | $                  | 26,752 |                   | $ | 28,452
|                                    |  |                    |        |                   |   |       

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 September 30, 2005 and December 31, 2004, the Company had $1.1 million and $0.6 million in lease liability reserves, respectively, and $0.1 million in other
exit cost reserves at December 31, 2004 related to these restaurants that are included in accrued occupancy costs.



14



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



The following table presents the activity in the exit cost reserve:



|                             |  |                                |       |   |      |   |     |  
|---------------------------- |  | ------------------------------ | ----- | - | ---- | - | --- | -
|                             |  | Nine Months EndedSeptember 30, |      
|                             |  | 2005                           |       |   | 2004 |  
|Balance, beginning of period |  | $                              | 756   |   |      | $ | 847 |  
|Additions                    |  |                                | 467   |   |      |   |    |  
|Payments                     |  |                                | (104  | ) |      |   | (62 | )
|                             |  |                                |       |   |      |   |     |  
|Balance, end of period       |  | $                              | 1,119 |   |      | $ | 785 |  
|                             |  |                                |       |   |      |   |     |  

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

9. 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 postretirement benefits.

The following
summarizes the components of net periodic benefit cost for the three and nine months ended September 30, 2005 and 2004:



|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|----------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                                                |  | 2005                            |     |   | 2004                           |   |     | 2005 |  |   | 2004 |  
|Components of net periodic benefit cost:        |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Service cost                                    |  | $                               | 149 |   |                                | $ | 74  |      |  | $ | 296  |   |  | $ | 246 |  
|Interest cost                                   |  |                                 | 90  |   |                                |   | 58  |      |  |   | 205  |   |  |   | 193 |  
|Amortization of gains and losses                |  |                                 | 35  |   |                                |   | 7   |      |  |   | 41   |   |  |   | 38  |  
|Amortization of unrecognized prior service cost |  |                                 | (7  | ) |                                |   | (7  | )    |  |   | (22  | ) |  |   | (22 | )
|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Net periodic postretirement benefit cost        |  | $                               | 267 |   |                                | $ | 132 |      |  | $ | 520  |   |  | $ | 455 |  
|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  

As disclosed in the Companys Amendment No.1 to its 2004 Annual Report on Form 10-K/A, the
Company expected to contribute approximately $99 to its postretirement plan in 2005. During the three and nine months ended September 30, 2005, the Company made contributions of $13 and $99 to its postretirement plan. The Company expects to
make additional contributions of approximately $40 during the fourth quarter of 2005.

10. 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 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 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 measures of segment profit or loss reported to the chief
operating decision maker, who is our President and Chief Operating Officer, for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA, which is the measure of segment profit or loss used by our chief
operating decision maker, is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, other expense and loss on extinguishment of debt.



15



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



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.



|                                             |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|-------------------------------------------- |  | ---------- | ------- | ------------- | - | ---------- |  | ----- | ------- | ------------ | - | ------- |  | - | -------
|Three Months Ended:                          |  | TacoCabana |         | PolloTropical |   | BurgerKing |  | Other |         | Consolidated
|September 30, 2005:                          |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $          | 53,701  |               | $ | 34,907     |  | $     | 92,678  |              | $ |        |  | $ | 181,286
|Cost of sales                                |  |            | 15,483  |               |   | 11,412     |  |       | 25,173  |              |   |        |  |   | 52,068 
|Restaurant wages and related expenses        |  |            | 14,998  |               |   | 8,327      |  |       | 28,293  |              |   |        |  |   | 51,618 
|Depreciation and amortization                |  |            | 2,050   |               |   | 1,340      |  |       | 4,535   |              |   | 277     |  |   | 8,202  
|Segment EBITDA                               |  |            | 8,366   |               |   | 7,534      |  |       | 10,893  |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |            | 8,900   |               |   | 4,336      |  |       | 2,466   |              |   | 282     |  |   | 15,984 
|                                             |  |            |         |               |  
|September 30, 2004 (Restated Note 2):        |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $          | 51,852  |               | $ | 30,287     |  | $     | 96,023  |              | $ |        |  | $ | 178,162
|Cost of sales                                |  |            | 15,440  |               |   | 9,458      |  |       | 26,955  |              |   |        |  |   | 51,853 
|Restaurant wages and related expenses        |  |            | 14,703  |               |   | 7,656      |  |       | 29,886  |              |   |        |  |   | 52,245 
|Depreciation and amortization                |  |            | 2,343   |               |   | 1,230      |  |       | 5,629   |              |   | 439     |  |   | 9,641  
|Segment EBITDA                               |  |            | 7,813   |               |   | 6,271      |  |       | 10,145  |              |   |         |  |   |        
|Capital expenditures                         |  |            | 1,760   |               |   | 2,503      |  |       | 1,195   |              |   | 362     |  |   | 5,820  
|                                             |  |            |         |               |  
|Nine Months Ended:                           |  |            |         |               |   |            |  |       |         |             
|September 30, 2005:                          |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $          | 156,796 |               | $ | 103,954    |  | $     | 271,852 |              | $ |        |  | $ | 532,602
|Cost of sales                                |  |            | 45,516  |               |   | 34,308     |  |       | 74,600  |              |   |        |  |   | 154,424
|Restaurant wages and related expenses        |  |            | 43,997  |               |   | 24,326     |  |       | 85,417  |              |   |        |  |   | 153,740
|Depreciation and amortization                |  |            | 5,995   |               |   | 3,620      |  |       | 14,312  |              |   | 1,002   |  |   | 24,929 
|Segment EBITDA                               |  |            | 23,584  |               |   | 22,374     |  |       | 25,495  |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |            | 13,467  |               |   | 10,293     |  |       | 4,238   |              |   | 985     |  |   | 28,983 
|                                             |  |            |         |               |  
|September 30, 2004 (Restated Note 2):        |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $          | 149,611 |               | $ | 90,925     |  | $     | 272,449 |              | $ |        |  | $ | 512,985
|Cost of sales                                |  |            | 44,661  |               |   | 27,986     |  |       | 75,207  |              |   |        |  |   | 147,854
|Restaurant wages and related expenses        |  |            | 42,550  |               |   | 22,541     |  |       | 86,676  |              |   |        |  |   | 151,767
|Depreciation and amortization                |  |            | 7,775   |               |   | 3,330      |  |       | 17,095  |              |   | 1,664   |  |   | 29,864 
|Segment EBITDA                               |  |            | 20,883  |               |   | 21,015     |  |       | 26,922  |              |   |         |  |   |        
|Capital expenditures                         |  |            | 5,337   |               |   | 3,246      |  |       | 3,655   |              |   | 724     |  |   | 12,962 
|                                             |  |            |         |               |  
|Identifiable Assets:                         |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|At September 30, 2005                        |  | $          | 69,986  |               | $ | 56,878     |  | $     | 186,250 |              | $ | 180,043 |  | $ | 493,157
|At December 31, 2004                         |  |            | 63,655  |               |   | 50,177     |  |       | 198,015 |              |   | 204,399 |  |   | 516,246



16



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



A reconciliation of our segments EBITDA to consolidated net income (loss) is as follows:



|                                 |  |                                  |        |                                 |   |        |  |   |        |   |  |   |       
|-------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | - | ------ | - |  | - | ------
|                                 |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                 |  | 2005                             |        | 2004                            |   | 2005   |  |   | 2004  
|Segment EBITDA:                  |  |                                  |        |                                 |   |        |  |   |        |   |  |   |       
|Taco Cabana                      |  | $                                | 8,366  |                                 | $ | 7,813  |  | $ | 23,584 |   |  | $ | 20,883
|Pollo Tropical                   |  |                                  | 7,534  |                                 |   | 6,271  |  |   | 22,374 |   |  |   | 21,015
|Burger King                      |  |                                  | 10,893 |                                 |   | 10,145 |  |   | 25,495 |   |  |   | 26,922
|                                 |  |                                  |        |                                 |   |        |  |   |        |   |  |   |       
|Subtotal                         |  |                                  | 26,793 |                                 |   | 24,229 |  |   | 71,453 |   |  |   | 68,820
|Less:                            |  |                                  |        |                                 |   |        |  |   |        |   |  |   |       
|Depreciation and amortization    |  |                                  | 8,202  |                                 |   | 9,641  |  |   | 24,929 |   |  |   | 29,864
|Impairment losses                |  |                                  | 574    |                                 |   | 60     |  |   | 1,427  |   |  |   | 629   
|Interest expense                 |  |                                  | 10,916 |                                 |   | 8,587  |  |   | 31,830 |   |  |   | 26,312
|Provision for income taxes       |  |                                  | 1,839  |                                 |   | 1,360  |  |   | 2,054  |   |  |   | 3,395 
|Stock-based compensation expense |  |                                  |       |                                 |   | 614    |  |   | 16,432 |   |  |   | 2,238 
|Other expense                    |  |                                  |       |                                 |   | 2,352  |  |   |       |   |  |   | 2,352 
|                                 |  |                                  |        |                                 |   |        |  |   |        |   |  |   |       
|Net income (loss)                |  | $                                | 5,262  |                                 | $ | 1,615  |  | $ | (5,219 | ) |  | $ | 4,030 
|                                 |  |                                  |        |                                 |   |        |  |   |        |   |  |   |       

11. 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 consolidated 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. The Company may incur or accrue expenses relating to legal proceedings, however, which may adversely
affect its results of operations in a particular period.

12. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board 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 (SAB) No. 107 Share-Based Payments. 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.
The Company plans to adopt the provision of SFAS 123R using the modified prospective method of adoption on January 1, 2006.



17



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



However, as all shares of stock issued in the stock award discussed in Note 1 were fully vested and the Company will
not have any stock options outstanding at December 31, 2005, the Company will not record any stock-based compensation expense related to the adoption of SFAS 123R on January 1, 2006. Compensation cost for any 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 is effective for periods no later than fiscal years ending after December 15, 2005. The
adoption of FIN 47 had no effect on the Companys 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. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions,
those provisions should be followed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply this literature in the event of future changes in
accounting principle and error corrections for periods beginning on January 1, 2006.

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. The Company has not historically capitalized rent incurred during the construction
period. Accordingly, Staff Position FAS 13-1 is not expected to have any impact on the Companys consolidated financial statements.

13. Guarantor
Financial Statements

The Companys obligations under the $180.0 million 9% senior subordinated notes are, and the $170.0 million
91/2% 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 Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Quanta Advertising Corp.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

TC Lease Holdings III, V and VI, Inc.

T.C. Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

The
following supplemental financial information sets forth on a condensed consolidating basis, balance sheets as of September 30, 2005 and December 31, 2004, and statements of operations and statements of cash flows for the Parent Company
only, Guarantor Subsidiaries and for the Company for the three and nine months ended September 30, 2005 and 2004.



18



---

##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



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 then 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. Under this approach, to the extent that no valuation allowance has been provided in the consolidated financial
statements, there would typically be no need for a valuation allowance in the separate accounts of the individual entities. 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. The Company did not previously allocate these corporate costs to its guarantor subsidiaries for periods ended prior to December 31, 2004.

The Company has restated the guarantor financial statements as of and for the three and nine months ended September 30, 2004 to reflect the allocation of the corporate costs to conform to the current year
presentation. The effect of these restatements resulted in allocations from the Parent Company to the Guarantor Subsidiaries for the three and nine months ended September 30, 2004 of $598 and $1,795 for general and administrative expenses and
$52 and $156 for depreciation expense, respectively. The income tax benefit related to these allocations included in the Guarantor Subsidiaries statement of operations was $122 and $366, respectively, for the three and nine month periods ended
September 30, 2004.



19



---

##### Table of Contents

CONSOLIDATING BALANCE SHEET

September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|---------------------------------------------------- |  | ------------------- | -------- | - | --------------------- | - | -------- | ------------ |  | - | ----------------- | - |  | - | -------- | -
|                                                     |  | Parent Company Only |          |   | GuarantorSubsidiaries |   |          | Eliminations |  |   | ConsolidatedTotal |  
|ASSETS                                               |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current assets:                                      |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Cash and cash equivalents                            |  | $                   | 2,387    |   |                       | $ | 2,911    |              |  | $ |                  |   |  | $ | 5,298    |  
|Trade and other receivables, net                     |  |                     | 989      |   |                       |   | 2,335    |              |  |   |                  |   |  |   | 3,324    |  
|Inventories                                          |  |                     | 3,522    |   |                       |   | 1,492    |              |  |   |                  |   |  |   | 5,014    |  
|Prepaid rent                                         |  |                     | 1,850    |   |                       |   | 1,807    |              |  |   |                  |   |  |   | 3,657    |  
|Prepaid expenses and other current assets            |  |                     | 1,579    |   |                       |   | 3,310    |              |  |   |                  |   |  |   | 4,889    |  
|Refundable income taxes                              |  |                     |         |   |                       |   |         |              |  |   |                  |   |  |   |         |  
|Deferred income taxes                                |  |                     | 3,540    |   |                       |   | 2,630    |              |  |   |                  |   |  |   | 6,170    |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total current assets                                 |  |                     | 13,867   |   |                       |   | 14,485   |              |  |   |                  |   |  |   | 28,352   |  
|                                                     |  |                     |          |  
|Property and equipment, net                          |  |                     | 88,792   |   |                       |   | 151,130  |              |  |   | (23,690           | ) |  |   | 216,232  |  
|Franchise rights, net                                |  |                     | 87,304   |   |                       |   |         |              |  |   |                  |   |  |   | 87,304   |  
|Goodwill                                             |  |                     | 1,450    |   |                       |   | 123,490  |              |  |   |                  |   |  |   | 124,940  |  
|Intangible asset, net                                |  |                     |         |   |                       |   | 1,538    |              |  |   |                  |   |  |   | 1,538    |  
|Franchise agreements, net                            |  |                     | 6,018    |   |                       |   |          |              |  |   |                   |   |  |   | 6,018    |  
|Intercompany receivable (payable)                    |  |                     | 160,821  |   |                       |   | (161,253 | )            |  |   | 432               |   |  |   |         |  
|Investment in subsidiaries                           |  |                     | 19,277   |   |                       |   |         |              |  |   | (19,277           | ) |  |   |         |  
|Deferred income taxes                                |  |                     | 3,274    |   |                       |   | 10,992   |              |  |   | (379              | ) |  |   | 13,887   |  
|Other assets                                         |  |                     | 10,634   |   |                       |   | 5,331    |              |  |   | (1,079            | ) |  |   | 14,886   |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total assets                                         |  | $                   | 391,437  |   |                       | $ | 145,713  |              |  | $ | (43,993           | ) |  | $ | 493,157  |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current liabilities:                                 |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current portion of long-term debt                    |  | $                   | 2,343    |   |                       | $ | 242      |              |  | $ |                  |   |  | $ | 2,585    |  
|Accounts payable                                     |  |                     | 7,214    |   |                       |   | 10,789   |              |  |   |                  |   |  |   | 18,003   |  
|Accrued interest                                     |  |                     | 3,511    |   |                       |   |         |              |  |   |                  |   |  |   | 3,511    |  
|Accrued payroll, related taxes and benefits          |  |                     | 7,381    |   |                       |   | 7,002    |              |  |   |                  |   |  |   | 14,383   |  
|Accrued income taxes payable                         |  |                     | 1,958    |   |                       |   |         |              |  |   |                  |   |  |   | 1,958    |  
|Other liabilities                                    |  |                     | 8,717    |   |                       |   | 6,560    |              |  |   |                  |   |  |   | 15,277   |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total current liabilities                            |  |                     | 31,124   |   |                       |   | 24,593   |              |  |   |                  |   |  |   | 55,717   |  
|                                                     |  |                     |          |  
|Long-term debt, net of current portion               |  |                     | 390,475  |   |                       |   | 1,191    |              |  |   |                  |   |  |   | 391,666  |  
|Lease financing obligations                          |  |                     | 48,836   |   |                       |   | 90,495   |              |  |   | (28,521           | ) |  |   | 110,810  |  
|Deferred incomesale-leaseback of real estate        |  |                     | 4,470    |   |                       |   | 1,496    |              |  |   | 2,708             |   |  |   | 8,674    |  
|Accrued postretirement benefits                      |  |                     | 3,925    |   |                       |   |         |              |  |   |                  |   |  |   | 3,925    |  
|Other liabilities                                    |  |                     | 16,994   |   |                       |   | 9,606    |              |  |   | 152               |   |  |   | 26,752   |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total liabilities                                    |  |                     | 495,824  |   |                       |   | 127,381  |              |  |   | (25,661           | ) |  |   | 597,544  |  
|Commitments and contingencies                        |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Stockholders equity (deficit)                       |  |                     | (104,387 | ) |                       |   | 18,332   |              |  |   | (18,332           | ) |  |   | (104,387 | )
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total liabilities and stockholders equity (deficit) |  | $                   | 391,437  |   |                       | $ | 145,713  |              |  | $ | (43,993           | ) |  | $ | 493,157  |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  



20



---

##### Table of Contents

CONSOLIDATING BALANCE SHEET

December 31, 2004

(In thousands of dollars)

(Unaudited)



|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|---------------------------------------------------- |  | ------------------- | -------- | - | ---------------------- | - | -------- | ------------ |  | - | ------------------ | - |  | - | -------- | -
|                                                     |  | 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  |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  



21



---

##### Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|------------------------------------- |  | ------------------ | ------ | - | --------------------- | - | ------------ |  | - | ----------------- | - |  | - | -------
|                                      |  | Parent CompanyOnly |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | ConsolidatedTotal
|Revenues:                             |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Restaurant sales                      |  | $                  | 92,678 |   |                       | $ | 88,233       |  | $ |                  |   |  | $ | 180,911
|Franchise royalty revenues and fees   |  |                    |       |   |                       |   | 375          |  |   |                  |   |  |   | 375    
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total revenues                        |  |                    | 92,678 |   |                       |   | 88,608       |  |   |                  |   |  |   | 181,286
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Costs and expenses:                   |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Cost of sales                         |  |                    | 25,173 |   |                       |   | 26,895       |  |   |                  |   |  |   | 52,068 
|Restaurant wages and related expenses |  |                    | 28,293 |   |                       |   | 23,325       |  |   |                  |   |  |   | 51,618 
|Restaurant rent expense               |  |                    | 5,118  |   |                       |   | 2,351        |  |   | 585               |   |  |   | 8,054  
|Other restaurant operating expenses   |  |                    | 14,308 |   |                       |   | 12,354       |  |   |                  |   |  |   | 26,662 
|Advertising expense                   |  |                    | 3,496  |   |                       |   | 2,747        |  |   |                  |   |  |   | 6,243  
|General and administrative            |  |                    | 4,933  |   |                       |   | 4,915        |  |   |                  |   |  |   | 9,848  
|Depreciation and amortization         |  |                    | 4,707  |   |                       |   | 3,615        |  |   | (120              | ) |  |   | 8,202  
|Impairment losses                     |  |                    | 574    |   |                       |   |             |  |   |                  |   |  |   | 574    
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total operating expenses              |  |                    | 86,602 |   |                       |   | 76,202       |  |   | 465               |   |  |   | 163,269
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income from operations                |  |                    | 6,076  |   |                       |   | 12,406       |  |   | (465              | ) |  |   | 18,017 
|Interest expense                      |  |                    | 9,212  |   |                       |   | 2,352        |  |   | (648              | ) |  |   | 10,916 
|Intercompany interest allocations     |  |                    | (4,557 | ) |                       |   | 4,557        |  |   |                  |   |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income before income taxes            |  |                    | 1,421  |   |                       |   | 5,497        |  |   | 183               |   |  |   | 7,101  
|Provision for income taxes            |  |                    | 298    |   |                       |   | 1,784        |  |   | (243              | ) |  |   | 1,839  
|Equity income from subsidiaries       |  |                    | 4,139  |   |                       |   |             |  |   | (4,139            | ) |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Net income                            |  | $                  | 5,262  |   |                       | $ | 3,713        |  | $ | (3,713            | ) |  | $ | 5,262  
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        



22



---

##### Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2004 (As Restated)

(In thousands of
dollars)

(Unaudited)



|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|------------------------------------------------------------------------------- |  | ------------------- | ------ | - | --------------------- | - | ------------ |  | - | ------------------ | - |  | - | -------
|                                                                                |  | Parent Company Only |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | Consolidated Total
|Revenues:                                                                       |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Restaurant sales                                                                |  | $                   | 96,023 |   |                       | $ | 81,773       |  | $ |                   |   |  | $ | 177,796
|Franchise royalty revenues and fees                                             |  |                     |       |   |                       |   | 366          |  |   |                   |   |  |   | 366    
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Total revenues                                                                  |  |                     | 96,023 |   |                       |   | 82,139       |  |   |                   |   |  |   | 178,162
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Costs and expenses:                                                             |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Cost of sales                                                                   |  |                     | 26,955 |   |                       |   | 24,898       |  |   |                   |   |  |   | 51,853 
|Restaurant wages and related expenses                                           |  |                     | 29,886 |   |                       |   | 22,359       |  |   |                   |   |  |   | 52,245 
|Restaurant rent expense                                                         |  |                     | 5,519  |   |                       |   | 2,636        |  |   | 586                |   |  |   | 8,741  
|Other restaurant operating expenses                                             |  |                     | 13,708 |   |                       |   | 10,697       |  |   |                   |   |  |   | 24,405 
|Advertising expense                                                             |  |                     | 4,057  |   |                       |   | 2,129        |  |   |                   |   |  |   | 6,186  
|General and administrative (including $614 of stock-based compensation expense) |  |                     | 5,155  |   |                       |   | 5,962        |  |   |                   |   |  |   | 11,117 
|Depreciation and amortization                                                   |  |                     | 5,799  |   |                       |   | 3,960        |  |   | (118               | ) |  |   | 9,641  
|Impairment losses                                                               |  |                     | 60     |   |                       |   |             |  |   |                   |   |  |   | 60     
|Other expense                                                                   |  |                     | 2,352  |   |                       |   |             |  |   |                   |   |  |   | 2,352  
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Total operating expenses                                                        |  |                     | 93,491 |   |                       |   | 72,641       |  |   | 468                |   |  |   | 166,600
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Income from operations                                                          |  |                     | 2,532  |   |                       |   | 9,498        |  |   | (468               | ) |  |   | 11,562 
|Interest expense                                                                |  |                     | 6,895  |   |                       |   | 2,342        |  |   | (650               | ) |  |   | 8,587  
|Intercompany interest allocations                                               |  |                     | (4,557 | ) |                       |   | 4,557        |  |   |                   |   |  |   |       
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Income before income taxes                                                      |  |                     | 194    |   |                       |   | 2,599        |  |   | 182                |   |  |   | 2,975  
|Provision for income taxes                                                      |  |                     | 86     |   |                       |   | 706          |  |   | 568                |   |  |   | 1,360  
|Equity income from subsidiaries                                                 |  |                     | 1,507  |   |                       |   |             |  |   | (1,507             | ) |  |   |       
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        
|Net income                                                                      |  | $                   | 1,615  |   |                       | $ | 1,893        |  | $ | (1,893             | ) |  | $ | 1,615  
|                                                                                |  |                     |        |   |                       |   |              |  |   |                    |   |  |   |        



23



---

##### Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------- | ------- | - | --------------------- | - | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                   |  | Parent Company Only |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | Consolidated Total |  
|Revenues:                                                                          |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Restaurant sales                                                                   |  | $                   | 271,852 |   |                       | $ | 259,590      |  | $ |                   |   |  | $ | 531,442 |  
|Franchise royalty revenues and fees                                                |  |                     |        |   |                       |   | 1,160        |  |   |                   |   |  |   | 1,160   |  
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Total revenues                                                                     |  |                     | 271,852 |   |                       |   | 260,750      |  |   |                   |   |  |   | 532,602 |  
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Costs and expenses:                                                                |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Cost of sales                                                                      |  |                     | 74,600  |   |                       |   | 79,824       |  |   |                   |   |  |   | 154,424 |  
|Restaurant wages and related expenses                                              |  |                     | 85,417  |   |                       |   | 68,323       |  |   |                   |   |  |   | 153,740 |  
|Restaurant rent expense                                                            |  |                     | 15,977  |   |                       |   | 8,085        |  |   | 1,756              |   |  |   | 25,818  |  
|Other restaurant operating expenses                                                |  |                     | 41,339  |   |                       |   | 34,637       |  |   |                   |   |  |   | 75,976  |  
|Advertising expense                                                                |  |                     | 10,864  |   |                       |   | 8,927        |  |   |                   |   |  |   | 19,791  |  
|General and administrative (including $16,432 of stock-based compensation expense) |  |                     | 27,303  |   |                       |   | 20,529       |  |   |                   |   |  |   | 47,832  |  
|Depreciation and amortization                                                      |  |                     | 14,827  |   |                       |   | 10,461       |  |   | (359               | ) |  |   | 24,929  |  
|Impairment losses                                                                  |  |                     | 1,332   |   |                       |   | 95           |  |   |                   |   |  |   | 1,427   |  
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Total operating expenses                                                           |  |                     | 271,659 |   |                       |   | 230,881      |  |   | 1,397              |   |  |   | 503,937 |  
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Income from operations                                                             |  |                     | 193     |   |                       |   | 29,869       |  |   | (1,397             | ) |  |   | 28,665  |  
|Interest expense                                                                   |  |                     | 26,763  |   |                       |   | 7,013        |  |   | (1,946             | ) |  |   | 31,830  |  
|Intercompany interest allocations                                                  |  |                     | (13,669 | ) |                       |   | 13,669       |  |   |                   |   |  |   |        |  
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Income (loss) before income taxes                                                  |  |                     | (12,901 | ) |                       |   | 9,187        |  |   | 549                |   |  |   | (3,165  | )
|Provision (benefit) for income taxes                                               |  |                     | (2,505  | ) |                       |   | 4,218        |  |   | 341                |   |  |   | 2,054   |  
|Equity income from subsidiaries                                                    |  |                     | 5,177   |   |                       |   |             |  |   | (5,177             | ) |  |   |        |  
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  
|Net income (loss)                                                                  |  | $                   | (5,219  | ) |                       | $ | 4,969        |  | $ | (4,969             | ) |  | $ | (5,219  | )
|                                                                                   |  |                     |         |   |                       |   |              |  |   |                    |   |  |   |         |  



24



---

##### Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2004 (As Restated)

(In thousands of
dollars)

(Unaudited)



|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------------ |  | - | ------------------ | - |  | - | -------
|                                                                                  |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | Consolidated Total
|Revenues:                                                                         |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Restaurant sales                                                                  |  | $                  | 272,449 |   |                       | $ | 239,414      |  | $ |                   |   |  | $ | 511,863
|Franchise royalty revenues and fees                                               |  |                    |        |   |                       |   | 1,122        |  |   |                   |   |  |   | 1,122  
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Total revenues                                                                    |  |                    | 272,449 |   |                       |   | 240,536      |  |   |                   |   |  |   | 512,985
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Costs and expenses:                                                               |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Cost of sales                                                                     |  |                    | 75,207  |   |                       |   | 72,647       |  |   |                   |   |  |   | 147,854
|Restaurant wages and related expenses                                             |  |                    | 86,676  |   |                       |   | 65,091       |  |   |                   |   |  |   | 151,767
|Restaurant rent expense                                                           |  |                    | 16,206  |   |                       |   | 7,619        |  |   | 1,757              |   |  |   | 25,582 
|Other restaurant operating expenses                                               |  |                    | 39,414  |   |                       |   | 29,740       |  |   |                   |   |  |   | 69,154 
|Advertising expense                                                               |  |                    | 11,006  |   |                       |   | 8,053        |  |   |                   |   |  |   | 19,059 
|General and administrative (including $2,238 of stock-based compensation expense) |  |                    | 15,224  |   |                       |   | 17,763       |  |   |                   |   |  |   | 32,987 
|Depreciation and amortization                                                     |  |                    | 17,916  |   |                       |   | 12,304       |  |   | (356               | ) |  |   | 29,864 
|Impairment losses                                                                 |  |                    | 629     |   |                       |   |             |  |   |                   |   |  |   | 629    
|Other expense                                                                     |  |                    | 2,352   |   |                       |   |             |  |   |                   |   |  |   | 2,352  
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Total operating expenses                                                          |  |                    | 264,630 |   |                       |   | 213,217      |  |   | 1,401              |   |  |   | 479,248
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Income from operations                                                            |  |                    | 7,819   |   |                       |   | 27,319       |  |   | (1,401             | ) |  |   | 33,737 
|Interest expense                                                                  |  |                    | 21,237  |   |                       |   | 7,027        |  |   | (1,952             | ) |  |   | 26,312 
|Intercompany interest allocations                                                 |  |                    | (13,669 | ) |                       |   | 13,669       |  |   |                   |   |  |   |       
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Income before income taxes                                                        |  |                    | 251     |   |                       |   | 6,623        |  |   | 551                |   |  |   | 7,425  
|Provision for income taxes                                                        |  |                    | 121     |   |                       |   | 2,147        |  |   | 1,127              |   |  |   | 3,395  
|Equity income from subsidiaries                                                   |  |                    | 3,900   |   |                       |   |             |  |   | (3,900             | ) |  |   |       
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        
|Net income                                                                        |  | $                  | 4,030   |   |                       | $ | 4,476        |  | $ | (4,476             | ) |  | $ | 4,030  
|                                                                                  |  |                    |         |   |                       |   |              |  |   |                    |   |  |   |        



25



---

##### Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                      |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | ConsolidatedTotal |  
|Cash flows provided from (used for) operating activities:                                             |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net income (loss)                                                                                     |  | $                  | (5,219  | ) |                       | $ | 4,969   |              |  | $ | (4,969            | ) |  | $ | (5,219  | )
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Gain on disposal of property and equipment                                                            |  |                    |        |   |                       |   | (585    | )            |  |   |                  |   |  |   | (585    | )
|Stock-based compensation expense                                                                      |  |                    | 10,808  |   |                       |   | 5,502   |              |  |   |                  |   |  |   | 16,310  |  
|Depreciation and amortization                                                                         |  |                    | 14,827  |   |                       |   | 10,461  |              |  |   | (359              | ) |  |   | 24,929  |  
|Amortization of deferred financing costs                                                              |  |                    | 1,047   |   |                       |   | 200     |              |  |   | (93               | ) |  |   | 1,154   |  
|Amortization of unearned purchase discounts                                                           |  |                    | (1,616  | ) |                       |   |        |              |  |   |                  |   |  |   | (1,616  | )
|Amortization of deferred gains from sale-leaseback transactions                                       |  |                    | (153    | ) |                       |   | (109    | )            |  |   | (115              | ) |  |   | (377    | )
|Accretion of interest on lease financing obligations                                                  |  |                    | (54     | ) |                       |   | 342     |              |  |   | (31               | ) |  |   | 257     |  
|Impairment losses                                                                                     |  |                    | 1,332   |   |                       |   | 95      |              |  |   |                  |   |  |   | 1,427   |  
|Deferred income taxes                                                                                 |  |                    | 1       |   |                       |   | (1,069  | )            |  |   | 192               |   |  |   | (876    | )
|Decrease in accrued bonus to employees and director                                                   |  |                    | (20,860 | ) |                       |   |        |              |  |   |                  |   |  |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                               |  |                    | (8,710  | ) |                       |   | (1,796  | )            |  |   |                  |   |  |   | (10,506 | )
|Changes in other operating assets and liabilities                                                     |  |                    | (6,160  | ) |                       |   | 7,370   |              |  |   | 5,375             |   |  |   | 6,585   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) operating activities                                                |  |                    | (14,757 | ) |                       |   | 25,380  |              |  |   |                  |   |  |   | 10,623  |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash flows used for investing activities:                                                             |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Capital expenditures:                                                                                 |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|New restaurant development                                                                            |  |                    | (860    | ) |                       |   | (14,637 | )            |  |   |                  |   |  |   | (15,497 | )
|Restaurant remodeling                                                                                 |  |                    | (1,407  | ) |                       |   | (686    | )            |  |   |                  |   |  |   | (2,093  | )
|Other restaurant expenditures                                                                         |  |                    | (1,971  | ) |                       |   | (4,217  | )            |  |   |                  |   |  |   | (6,188  | )
|Corporate and restaurant information systems                                                          |  |                    | (614    | ) |                       |   | (371    | )            |  |   |                  |   |  |   | (985    | )
|Acquisition of Taco Cabana restaurants                                                                |  |                    |        |   |                       |   | (4,220  | )            |  |   |                  |   |  |   | (4,220  | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Total capital expenditures                                                                            |  |                    | (4,852  | ) |                       |   | (24,131 | )            |  |   |                  |   |  |   | (28,983 | )
|Properties purchased for sale-leaseback                                                               |  |                    | (275    | ) |                       |   |        |              |  |   |                  |   |  |   | (275    | )
|Proceeds from sale-leaseback transactions                                                             |  |                    | 1,137   |   |                       |   |        |              |  |   |                  |   |  |   | 1,137   |  
|Proceeds from sales of other properties                                                               |  |                    |        |   |                       |   | 669     |              |  |   |                  |   |  |   | 669     |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash used for investing activities                                                                |  |                    | (3,990  | ) |                       |   | (23,462 | )            |  |   |                  |   |  |   | (27,452 | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash flows used for financing activities:                                                             |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Scheduled principal payments on term loans                                                            |  |                    | (1,650  | ) |                       |   |        |              |  |   |                  |   |  |   | (1,650  | )
|Settlement of lease financing obligation                                                              |  |                    |        |   |                       |   | (1,074  | )            |  |   |                  |   |  |   | (1,074  | )
|Principal payments on capital leases                                                                  |  |                    | (107    | ) |                       |   | (204    | )            |  |   |                  |   |  |   | (311    | )
|Principal pre-payments on term loans                                                                  |  |                    | (6,000  | ) |                       |   |        |              |  |   |                  |   |  |   | (6,000  | )
|Financing costs associated with issuance of debt                                                      |  |                    | (304    | ) |                       |   |        |              |  |   |                  |   |  |   | (304    | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash used for financing activities                                                                |  |                    | (8,061  | ) |                       |   | (1,278  | )            |  |   |                  |   |  |   | (9,339  | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                                      |  |                    | (26,808 | ) |                       |   | 640     |              |  |   |                  |   |  |   | (26,168 | )
|Cash and cash equivalents, beginning of period                                                        |  |                    | 29,195  |   |                       |   | 2,271   |              |  |   |                  |   |  |   | 31,466  |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash and cash equivalents, end of period                                                              |  | $                  | 2,387   |   |                       | $ | 2,911   |              |  | $ |                  |   |  | $ | 5,298   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  



26



---

##### Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2004 (As Restated)

(In thousands of
dollars)

(Unaudited)



|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------------- | - | ------- | ----------- |  | - | ------------------ | - |  | - | ------- | -
|                                                                                    |  | ParentCompanyOnly |         |   | Guarantor Subsidiaries |   |         | Elimination |  |   | Consolidated Total |  
|Cash flows provided from operating activities:                                      |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Net income                                                                          |  | $                 | 4,030   |   |                        | $ | 4,476   |             |  | $ | (4,476             | ) |  | $ | 4,030   |  
|Adjustments to reconcile net income to net cash provided from operating activities: |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Gain on disposal of property and equipment                                          |  |                   | (288    | ) |                        |   | (26     | )           |  |   |                   |   |  |   | (314    | )
|Stock-based compensation expense                                                    |  |                   |        |   |                        |   | 2,238   |             |  |   |                   |   |  |   | 2,238   |  
|Depreciation and amortization                                                       |  |                   | 17,916  |   |                        |   | 12,304  |             |  |   | (356               | ) |  |   | 29,864  |  
|Amortization of deferred financing costs                                            |  |                   | 1,079   |   |                        |   | 201     |             |  |   | (102               | ) |  |   | 1,178   |  
|Amortization of unearned purchase discounts                                         |  |                   | (1,617  | ) |                        |   |        |             |  |   |                   |   |  |   | (1,617  | )
|Amortization of deferred gains from sale-leaseback transactions                     |  |                   | (153    | ) |                        |   | (74     | )           |  |   | (115               | ) |  |   | (342    | )
|Accretion of interest on lease financing obligation                                 |  |                   | (17     | ) |                        |   | 365     |             |  |   | (28                | ) |  |   | 320     |  
|Impairment losses                                                                   |  |                   | 629     |   |                        |   |        |             |  |   |                   |   |  |   | 629     |  
|Deferred income taxes                                                               |  |                   | 1,630   |   |                        |   | (1,262  | )           |  |   | 130                |   |  |   | 498     |  
|Changes in other operating assets and liabilities                                   |  |                   | 25,256  |   |                        |   | (17,346 | )           |  |   | 4,947              |   |  |   | 12,857  |  
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Net cash provided from operating activities                                         |  |                   | 48,465  |   |                        |   | 876     |             |  |   |                   |   |  |   | 49,341  |  
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Cash flows provided from (used for) investing activities:                           |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Capital expenditures:                                                               |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|New restaurant development                                                          |  |                   | (1,018  | ) |                        |   | (6,251  | )           |  |   |                   |   |  |   | (7,269  | )
|Restaurant remodeling                                                               |  |                   | (818    | ) |                        |   |        |             |  |   |                   |   |  |   | (818    | )
|Other restaurant expenditures                                                       |  |                   | (1,819  | ) |                        |   | (2,332  | )           |  |   |                   |   |  |   | (4,151  | )
|Corporate and restaurant information systems                                        |  |                   | (590    | ) |                        |   | (134    | )           |  |   |                   |   |  |   | (724    | )
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Total capital expenditures                                                          |  |                   | (4,245  | ) |                        |   | (8,717  | )           |  |   |                   |   |  |   | (12,962 | )
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Properties purchased for sale-leaseback                                             |  |                   | (924    | ) |                        |   |        |             |  |   |                   |   |  |   | (924    | )
|Proceeds from sale-leaseback transactions                                           |  |                   | 4,982   |   |                        |   | 4,721   |             |  |   |                   |   |  |   | 9,703   |  
|Proceeds from sales of other properties                                             |  |                   | 488     |   |                        |   | 686     |             |  |   |                   |   |  |   | 1,174   |  
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Net cash provided from (used for) investing activities                              |  |                   | 301     |   |                        |   | (3,310  | )           |  |   |                   |   |  |   | (3,009  | )
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                           |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Payments on revolving credit facility, net                                          |  |                   | (500    | ) |                        |   |        |             |  |   |                   |   |  |   | (500    | )
|Scheduled principal payments on term loans                                          |  |                   | (10,125 | ) |                        |   |        |             |  |   |                   |   |  |   | (10,125 | )
|Principal pre-payments on term loans                                                |  |                   | (39,000 | ) |                        |   |        |             |  |   |                   |   |  |   | (39,000 | )
|Payments on other notes payable, net                                                |  |                   | (117    | ) |                        |   |        |             |  |   |                   |   |  |   | (117    | )
|Financing costs associated with issuance of debt and lease financing obligations    |  |                   | (61     | ) |                        |   | (160    | )           |  |   |                    |   |  |   | (221    | )
|Proceeds from lease financing obligations                                           |  |                   | 1,250   |   |                        |   | 3,250   |             |  |   |                    |   |  |   | 4,500   |  
|Principal payments on capital leases                                                |  |                   | (110    | ) |                        |   | (184    | )           |  |   |                   |   |  |   | (294    | )
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Net cash provided from (used for) financing activities                              |  |                   | (48,663 | ) |                        |   | 2,906   |             |  |   |                   |   |  |   | (45,757 | )
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Increase in cash and cash equivalents                                               |  |                   | 103     |   |                        |   | 472     |             |  |   |                   |   |  |   | 575     |  
|Cash and cash equivalents, beginning of period                                      |  |                   | 708     |   |                        |   | 1,706   |             |  |   |                   |   |  |   | 2,414   |  
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  
|Cash and cash equivalents, end of period                                            |  | $                 | 811     |   |                        | $ | 2,178   |             |  | $ |                   |   |  | $ | 2,989   |  
|                                                                                    |  |                   |         |   |                        |   |         |             |  |   |                    |   |  |   |         |  



27



---

##### Table of Contents

ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatements

Current Restatement

Lease Financing Obligations

We reviewed our accounting with respect to the depreciation of assets and recording of interest expense associated with lease financing
obligations related to sale-leaseback transactions required to be accounted for under the financing method. Under the financing method, the assets subject to these obligations remain on the consolidated balance sheet at their historical costs and
continue to be depreciated over their useful lives; the proceeds we received from the transactions are recorded as a lease financing obligation and the lease payments are applied as payments of principal and interest.

We previously considered the land and building as a single asset and depreciated this asset (both land and building) over a depreciable life that was
deemed to be the 20-year primary lease term of the underlying obligation. We have concluded that our prior accounting was in error and that the portion of the asset representing land should not be depreciated and the depreciation of the
building portion of this asset should continue based on its original estimated useful life rather than the term of the underlying obligation. The effect of this restatement resulted in a reduction of depreciation expense of $0.5 million and $1.5
million and an increase to net income of $0.3 million and $0.9 million for the three and nine months ended September 30, 2004, respectively.

Historically, we allocated the related lease payments between interest and principal using an interest rate that would fully amortize the lease financing obligation by the end of the primary lease term. Due to the change in depreciation
described above, the assets subject to the lease financing obligations will have a net book value at the end of the primary lease term, primarily for the land portion. To prevent the recognition of a non-cash loss or negative amortization of
the obligation through the end of the primary lease term, it was necessary to reevaluate the selection of interest rates which included our incremental borrowing rate, and to adjust the rates used to amortize the lease financing obligations so that
a lease obligation equal to or greater than the unamortized asset remained at the end of the primary lease term. The effect of this restatement resulted in an increase in interest expense related to the lease financing obligations for the three and
nine months ended September 30, 2004 of $0.7 million and $2.0 million, respectively and a decrease to net income of $0.5 million and $1.5 million, respectively.

These restatements also resulted in an increase in land and buildings subject to lease financing obligations of $11.4 million and an increase in lease financing obligations of $14.6 million at December 31, 2004.

We have also has reviewed previously reported sale-leaseback transactions and determined twelve additional real estate transactions were
required to be recorded as financing transactions rather than sale/leaseback transactions under SFAS No. 98 Accounting for Leases due to certain forms of continuing involvement. The impact of this restatement is to keep the assets
subject to such leases on our balance sheet and to record the proceeds we received from the transactions (including the gains previously deferred) as lease financing obligations. This restatement also affects our operating results by increasing the
depreciation expense for buildings subject to these transactions and re-characterizing the lease payments, previously reported as rent expense for these restaurants, as interest expense and principal repayments on the related financing obligations.
The effect of this restatement (a) for the three and nine months ended September 30, 2004 was to (i) reduce rent expense by $0.3 million and $0.8 million, respectively; (ii) increase depreciation expense by $0.1 million and $0.3
million, respectively; (iii) increase interest expense by $0.3 million and $1.0 million, respectively; and (iv) reduce net income by $0.1 million and $0.3 million, respectively; and (b) at December 31, 2004, to increase the net book
value of the assets subject to lease financing obligations by $9.5 million, reduce deferred income-sale/leaseback of real estate by $3.0 million and increase lease financing obligations by $14.7 million.

The net effect of the above current restatements was to decrease net income $0.2 million and $0.4 million for the three and nine months ended September
30, 2004, respectively.

Deferred Taxes

We have also reviewed deferred taxes recorded for certain long-lived assets and liabilities that were previously acquired in business combinations and the related differences between the income tax bases and the financial reporting bases of
these assets and liabilities and determined that the deferred taxes recorded at the acquisition dates were incorrect. The result of these restatements was to decrease goodwill and deferred tax liabilities by $2.1 million in the aggregate related to
our 2000 acquisition of Taco Cabana and to increase goodwill and deferred tax liabilities by $0.6 million related to our 1998 acquisition of Pollo Tropical. This restatement also cumulatively decreased goodwill amortization expense $0.1 million for
periods prior to 2002.



28



---

##### Table of Contents

Statement of Cash Flows

The Company has corrected its previously issued financial statements to reflect the proceeds from qualifying sale-leaseback transactions within investing activities rather than as financing activities as previously
reported in the statements of cash flows. For the nine months ended September 30, 2005 and 2004 proceeds from qualifying sale-leaseback transactions included in the accompanying consolidated financial statements are $1.1 million and $9.7
million, respectively. We have also restated our consolidated statements of cash flows for the nine months ended September 30, 2004 to reflect the impact of changes in accounts payable related to the acquisition of property and equipment as a
non-cash item as required under SFAS No. 95.

Previous Restatement

As previously reported in Amendment No. 1 to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2004, we restated
our financial statements including applicable footnotes as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002.

Lease and Leasehold Improvement Accounting

We reviewed our lease accounting policies following a host of announcements by
many restaurant and retail companies that they were revising their accounting practices for leases. We historically followed the accounting practice of using the initial lease term when determining operating versus capital lease classification and
when calculating straight-line rent expense. In addition, we depreciated our buildings on leased land and leasehold improvements over a period that included both the initial lease term plus one or more optional extension periods even if the option
renewal was not reasonably assured (or the useful life of the asset if shorter).

Upon such review, we restated our financial statements
for the years ended December 31, 2003 and 2002 and the unaudited quarterly financial information for 2003 and the first three quarters of 2004 to correct errors in our lease accounting. Specifically, we revised our lease term for purposes of
lease classification and calculating straight-line rent expense to only include renewal options that are reasonably assured of exercise because an economic penalty, as defined under Statement of Financial Accounting Statement No. 13,
Accounting for Leases, (SFAS 13) would be incurred in the event of non-renewal. We also revised our useful lives of leasehold improvements to the shorter of their economic lives or the lease term as defined in SFAS 13. The
primary impact of the restatement was to accelerate depreciation of buildings on leased land and leasehold improvements made subsequent to the lease inception date. The restatement also reduced the lives of intangible assets related to leases. As a
result of this restatement, amortization expense for leasehold improvements and assets related to leases for the three and nine months ended September 30, 2004 increased by $0.2 million and $0.7 million, respectively.

In conjunction with the review of our lease accounting, we also determined that adjustments were necessary for lease liabilities for operating leases
with non-level rents at the time of our acquisitions of Pollo Tropical in 1998 and Taco Cabana in 2000 as well as liabilities related to acquired leases with above-market rentals for Taco Cabana. We adjusted our purchase price allocations for these
acquisitions and restated lease liabilities and goodwill as of the acquisition dates. We also restated rent expense and interest expense for those previously reported periods subsequent to each acquisition and restated goodwill amortization through
December 31, 2001. As a result of these restatements, rent expense increased $0.1 million in the three and nine months ended September 30, 2004.

Accounting for Franchise Rights

In 2004, we reviewed our accounting policies for the amortization of franchise rights,
intangible assets pertaining to our acquisitions of Burger King restaurants, and determined that we made an error in the assessment of their remaining useful lives at January 1, 2002, as part of our adoption of SFAS No. 142, Goodwill
and Other Intangible Assets, (SFAS 142). Beginning on 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. Previously, we amortized the amounts allocated to franchise rights over periods ranging from twenty to forty years.

In connection with the review of our accounting for franchise rights, we also determined that we understated franchise rights and deferred tax
liabilities each by $14.0 million pertaining to an acquisition of 64 Burger King restaurants in 1997.

The adjustments related to these
restatements reduced amortization expense for the three and nine months ended September 30, 2004 by $0.2 million and $0.5 million, respectively.



29



---

##### Table of Contents

Stock-based Compensation Expense

In 2004, we reevaluated the terms of our option plans and grants and concluded that provisions of certain options granted under our plans required us to account for these options using the variable accounting
provisions of Accounting Principles Bulletin No. 25 (APB 25). Previously, we accounted for these options under APB 25 using a fixed accounting treatment whereby compensation expense, if any, was only evaluated at the date of the
option grant. The impact of this adjustment was to increase stock-based compensation expense, included in general and administrative expenses, for the three and nine months ended September 30, 2004 by $0.6 million and $2.2 million,
respectively.

Accounting for Guarantor Financial Statements

We also restated our financial statements to correct the disclosure related to the Company and its subsidiaries who guarantee certain of the Companys securities for the three and nine months ended
September 30, 2004 to reflect the allocation of corporate costs to conform to the current year presentation. See Note 13 to the consolidated financial statements for a complete discussion.

All previously reported amounts that appear in our Managements Discussion and Analysis of Financial Condition and Results of Operations below have
also been restated to report the revised amounts. See Note 2 to our unaudited interim consolidated financial statements for a complete discussion of the restatements.

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 unaudited interim consolidated financial statements, the accompanying financial statement notes
(Notes) appearing elsewhere in this report and Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2004. 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 three and nine months ended
September 30, 2005.

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

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 three and nine months ended September 30, 2005 and 2004, including a review of the material items and known trends and uncertainties.

Application of Critical Accounting Estimates and 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.

Forward Looking Statements  cautionary information about forward-looking statements and a
description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Corporation, a Delaware corporation, as Carrols and, together with its
consolidated subsidiaries, as we, our and us unless otherwise indicated. Any reference to Carrols Holdings or Holdings refers to our sole stockholder and corporate parent, Carrols Holdings
Corporation, a Delaware corporation, unless otherwise indicated.

We use the term Segment EBITDA in our Quarterly Reports on
Form 10-Q because we believe it is a useful financial indicator for measuring segment operating results. Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of
calculation.



30



---

##### Table of Contents

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 January 2, 2005 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2004 and 2003, respectively. Similarly, all references herein to the three and nine months
ended October 2, 2005 and September 26, 2004 will be referred to as the three and nine months ended September 30, 2005 and September 30, 2004, respectively.

Executive Summary

Total revenues for the third quarter of 2005 increased 1.8% to $181.3 million from
$178.2 million in the third quarter of 2004. Revenues from our Hispanic restaurant brands, which include our Taco Cabana and Pollo Tropical restaurant chains, increased 7.9% in the third quarter of 2005 to $88.6 million from $82.1 million in the
third quarter of the prior year. Comparable restaurant sales increased 6.4% for the third quarter of 2005 at Pollo Tropical and decreased 1.9% at Taco Cabana. Segment EBITDA (earnings before interest, income taxes, depreciation and amortization,
impairment losses, stock-based compensation expense, other income and expense and loss on extinguishment of debt) for our Hispanic restaurant brands was $15.9 million in the third quarter of 2005 compared to $14.1 million in the third quarter of the
prior year.

Revenues from our Burger King restaurants decreased to $92.7 million in the third quarter of 2005 from $96.0 million in the
third quarter of 2004. Revenues were lower mostly as a result of closing of thirteen underperforming Burger King restaurants since the end of the third quarter in 2004, including ten Burger King restaurants that were closed in 2005. Comparable
restaurant sales decreased 0.9% in the third quarter of 2005 compared to the third quarter of 2004. Segment EBITDA for the Companys Burger King restaurants increased from $10.1 million in the third quarter of 2004 to $10.9 million in the third
quarter of 2005.

Total revenues for the first nine months of 2005 were $532.6 million and increased 3.8% over total revenues of $513.0
million for the first nine months of 2004. Revenues for our Hispanic restaurant brands increased 8.4% for the nine month period in 2005; sales at our Burger King restaurants decreased 0.2%. Comparable unit sales for the nine month period in 2005
increased 7.5% at Pollo Tropical, 1.3% at Taco Cabana and 1.3% at our Burger King restaurants compared to the nine month period in 2004.

Capital expenditures for the first nine months of 2005 totaled $29.0 million including $15.5 million for the construction of new restaurants, $4.2 million for the acquisition of four franchised Taco Cabana restaurants, $2.1 million for
remodeling, and $7.2 million for maintenance and other capital expenditures.

During 2005 we have lowered our outstanding senior secured
debt. The total principal amount outstanding under our senior credit facility decreased from $220.0 million at December 31, 2004 to $212.4 million at September 30, 2005 including a voluntary principal prepayment of $6.0 million of our term
loan borrowings during the third quarter of 2005.

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 536 company-owned and operated restaurants in 17
states as of September 30, 2005. 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 concepts and geographic dispersion of our restaurants provide us with balance and stability.

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 September 30, 2005, our Hispanic Brands were comprised of 198 company-owned and 28
franchised restaurants and accounted for 48.9% of our total revenues and 64.3% of our total segment EBITDA for the first nine months of 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



31



---

##### Table of Contents

in San Antonio, Texas in 1978. As of September 30, 2005, we owned and operated 132 Taco Cabana restaurants located in Texas, Oklahoma and New Mexico and
franchised three Taco Cabana restaurants in New Mexico and Georgia. For the three and nine months ended September 30, 2005, our company-owned Taco Cabana restaurants generated total revenues of $53.6 million and $156.6 million, respectively,
and segment EBITDA of $8.4 million and $23.6 million, respectively.

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 September 30, 2005, we
owned and operated a total of 66 Pollo Tropical restaurants, 57 of which were located in south Florida and nine of which were located in central Florida. We also franchised 25 Pollo Tropical restaurants as of September 30, 2005, 21 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 80% by opening 30 new restaurants. For the three and nine months ended September 30, 2005, our
company-owned Pollo Tropical restaurants generated total revenues of $34.6 million and $103.0 million, respectively, and segment EBITDA of $7.5 million and $22.4 million, respectively.

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 September 30, 2005, we operated 338 Burger King restaurants located in 13 Northeastern, Midwestern and
Southeastern states. For the three and nine months ended September 30, 2005, our Burger King restaurants generated total revenues of $92.7 million and $271.9 million, respectively, and segment EBITDA of $10.9 million and $25.5 million,
respectively.

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 our senior credit facility. We received $400.0 million in total proceeds that included the issuance of the senior subordinated 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 91/2% 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.

Operating activities. Net cash provided from operating activities for the nine months ended September 30, 2005 and 2004 were $10.6 million
and $49.3 million, respectively. At September 30, 2005, we had $5.3 million in cash. At December



32



---

##### Table of Contents

31, 2004 we had $31.5 million in cash due to (i) the timing of redemption of the senior subordinated notes associated with the December 2004
refinancing; (ii) the payment in the first quarter of 2005 of the $20.3 million bonus to employees (including management) and a director, including applicable payroll taxes of $0.6 million; and (iii) the payment of $5.5 million of tax
withholdings in the first quarter of 2005 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 the first nine months of 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 2004 we have $4.2 million of remaining net operating loss carryforwards for Federal income tax
purposes, Federal alternative minimum tax credit carryforwards of $2.9 million and Federal work opportunity tax credit carryforwards of $3.0 million.

Investing activities including capital expenditures and sale-leaseback transactions. Net cash used for investing activities for the first nine months of 2005 was $27.5 million and was primarily used for capital
expenditures of $24.8 million, excluding acquisitions. In addition, we purchased four Taco Cabana restaurants from a franchisee for a cash purchase price of $4.2 million in the third quarter of 2005 and sold one restaurant property in a
sale-leaseback transaction for net proceeds of $1.1 million. Net cash used for investing activities for the first nine months of 2004 was $3.0 million. During the first nine months of 2004 we entered into sale-leaseback transactions for seven
restaurant properties for net proceeds of $9.7 million. The net proceeds from these sales in 2004 were used to reduce outstanding debt on our senior credit facility. Capital expenditures for the first nine months of 2004 were $13.0 million.

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, which in the past have generally been 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. The following table sets forth our capital expenditures for the periods presented (in thousands):



|                                        |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|--------------------------------------- |  | ---------- | ------ | ------------- | - | ---------- |  | ----- | ----- | ------------ | - | --- |  | - | ------
|                                        |  | TacoCabana |        | PolloTropical |   | BurgerKing |  | Other |       | Consolidated
|Nine months Ended September 30, 2005:   |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|Restaurant maintenance expenditures (1) |  | $          | 2,690  |               | $ | 1,527      |  | $     | 1,971 |              | $ |    |  | $ | 6,188 
|Restaurant remodeling expenditures      |  |            |       |               |   | 686        |  |       | 1,407 |              |   |    |  |   | 2,093 
|New restaurant development expenditures |  |            | 6,557  |               |   | 8,080      |  |       | 860   |              |   |    |  |   | 15,497
|Other capital expenditures              |  |            |       |               |   |           |  |       |      |              |   | 985 |  |   | 985   
|Acquisition of Taco Cabana restaurants  |  |            | 4,220  |               |   |           |  |       |      |              |   |    |  |   | 4,220 
|                                        |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|Total capital expenditures              |  | $          | 13,467 |               | $ | 10,293     |  | $     | 4,238 |              | $ | 985 |  | $ | 28,983
|                                        |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|Number of new restaurant openings       |  |            | 3      |               |   | 3          |  |       | 0     |              |   |     |  |   | 6     
|                                        |  |            |        |               |  
|Nine Months Ended September 30, 2004:   |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|Restaurant maintenance expenditures (1) |  | $          | 1,406  |               | $ | 926        |  | $     | 1,819 |              | $ |    |  | $ | 4,151 
|Restaurant remodeling expenditures      |  |            |       |               |   |           |  |       | 818   |              |   |    |  |   | 818   
|New restaurant development expenditures |  |            | 3,931  |               |   | 2,320      |  |       | 1,018 |              |   |    |  |   | 7,269 
|Other capital expenditures              |  |            |       |               |   |           |  |       |      |              |   | 724 |  |   | 724   
|                                        |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|Total capital expenditures              |  | $          | 5,337  |               | $ | 3,246      |  | $     | 3,655 |              | $ | 724 |  | $ | 12,962
|                                        |  |            |        |               |   |            |  |       |       |              |   |     |  |   |       
|Number of new restaurant openings       |  |            | 4      |               |   | 0          |  |       | 1     |              |   |     |  |   | 5     

---

|1) | Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the nine months ended
September 30, 2005 and 2004, restaurant repair and maintenance expenses were approximately $13.5 million and $11.7 million, respectively.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For 2005, we anticipate total capital expenditures, excluding acquisitions, of approximately $35.0 million. These capital expenditures include approximately $21.0 million for the development of new restaurants and
purchase of related real estate, mostly for our Taco Cabana and Pollo Tropical restaurant concepts. In 2005, we anticipate opening six new Pollo Tropical restaurants (of which three were open at September 30, 2005) and six new Taco Cabana
restaurants (of which three were open at September 30, 2005). Capital expenditures in 2005 will also include expenditures of approximately $12.5 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and
capital maintenance expenditures and approximately $1.5 million in other capital expenditures.



33



---

##### Table of Contents

Financing activities. Net cash used for financing activities for the nine months ended
September 30, 2005 and 2004 was $9.3 million and $45.8 million, respectively. Financing activities in these periods consisted of repayments under our debt arrangements. In the first nine months of 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 the third quarter of 2005, we also 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. In the first nine months of 2004 we also sold three
restaurants for net proceeds of $4.5 million in sale-leaseback transactions accounted for as lease financing obligations. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility.

Indebtedness. At September 30, 2005, we had total debt outstanding of $505.1 million comprised of $180.0 million of unsecured senior
subordinated notes, borrowings under our term loan B facility of $212.4 million under the senior credit facility, lease financing obligations of $110.8 million and capital lease obligations of $1.9 million.

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 September 30, 2005, $212.4 million was outstanding under the term loan B facility and no amounts were outstanding under our revolving credit facility. After reserving $10.8 million for letters of credit
guaranteed by the facility, $39.2 million was available for borrowings under our revolving credit facility at September 30, 2005. We were in compliance with the covenants under our senior credit facility as of September 30, 2005.

In connection with the sale of $180 million of the senior subordinated notes, 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 $188 of additional
interest expense in the three and nine months ended September 30, 2005. On December 14, 2005 the exchange offer became effective and the additional interest stopped accruing.

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, we
were 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, we obtained a Consent and Waiver from our lenders
under the senior credit facility that permitted us to extend the time to deliver our consolidated financial statements for the third quarter of 2005 to February 15, 2006. We obtained an additional waiver of such default from our lenders, and
effective February 15, 2006, extended the period of time to deliver our consolidated financial statements for the third quarter of 2005 to June 30, 2006. The waiver also extended the period of time to deliver our annual audited
consolidated financial statements for 2005 and our consolidated financial statements for the first fiscal quarter of 2006 to June 30, 2006. While we anticipate delivering these financial statements by June 30, 2006, our 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. Our 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 at all.

Contractual Obligations. The Companys contractual obligations are detailed in Amendment No 1 to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2004. As of September 30, 2005, the
Companys contractual obligations have not materially changed from December 31, 2004.



34



---

##### Table of Contents

Results of Operations

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004.

Since
September 30, 2004, we have opened six new Pollo Tropical restaurants, four new Taco Cabana restaurants and acquired four Taco Cabana restaurants from an existing franchisee. During the same period we also closed one Taco Cabana restaurant and
thirteen Burger King restaurants.

The following table sets forth, for the three months ended September 30, 2005 and 2004, selected
operating results as a percentage of restaurant sales:



|                                                                        |  |       |   |  |       |  
|----------------------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                                        |  | 2005  |   |  | 2004  |  
|Restaurant sales:                                                       |  |       |   |  |       |  
|Taco Cabana                                                             |  | 29.7  | % |  | 29.1  | %
|Pollo Tropical                                                          |  | 19.1  | % |  | 16.9  | %
|Burger King                                                             |  | 51.2  | % |  | 54.0  | %
|                                                                        |  |       |   |  |       |  
|                                                                        |  | 100.0 | % |  | 100.0 | %
|Costs and expenses:                                                     |  |       |   |  |       |  
|Cost of sales                                                           |  | 28.8  | % |  | 29.2  | %
|Restaurant wages and related expenses                                   |  | 28.5  | % |  | 29.4  | %
|Restaurant rent expense                                                 |  | 4.5   | % |  | 4.9   | %
|Other restaurant operating expenses                                     |  | 14.7  | % |  | 13.7  | %
|Advertising expense                                                     |  | 3.5   | % |  | 3.5   | %
|General and administrative (including stock-based compensation expense) |  | 5.4   | % |  | 6.3   | %
|Income from restaurant operations                                       |  | 9.8   | % |  | 7.6   | %

Restaurant Sales. Total restaurant sales for the third quarter of 2005 increased $3.1
million, or 1.8%, to $180.9 million from $177.8 million in the third quarter of 2004 due to sales increases at our Hispanic restaurant brands, which were partially offset by a decline in our Burger King restaurant sales.

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 $1.9 million, or 3.7%, to $53.6 million in the third quarter of 2005 due primarily to the net addition of four new restaurants opened since the end of the third quarter of 2004 and the acquisition of four Taco Cabana
restaurants from a franchisee in July 2005. These eight additional restaurants contributed $3.1 million of sales in the third quarter of 2005 which was partially offset by a reduction of 1.9% in sales in the third quarter of 2005 at our comparable
Taco Cabana restaurants.

Pollo Tropical restaurant sales increased $4.6 million, or 15.2%, to $34.6 million in the third quarter of 2005
due to a 6.4% sales increase at our comparable Pollo Tropical restaurants, that resulted from an increase in the average sales transaction and menu price increases of approximately 3% in 2005, and the opening of six Pollo Tropical restaurants since
the end of the third quarter of 2004 which contributed $2.4 million in sales.

Burger King restaurant sales decreased $3.3 million, or
3.5%, to $92.7 million in the third quarter of 2005 due to the closure of thirteen Burger King restaurants since September 30, 2004 and a reduction of 0.9% in sales in the third quarter of 2005 at our comparable Burger King restaurants.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased to 28.8%
in the third quarter of 2005 from 29.2% in the third quarter of 2004. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 28.9% in the third quarter of 2005 from 29.8% in 2004 due primarily to improvements in
restaurant-level food controls (0.7% of Taco Cabana sales) and higher vendor rebates (0.3% of Taco Cabana sales). Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased to 33.0% in the third quarter of 2005 from
31.5% in 2004 due primarily to a 19% increase in whole chicken commodity prices (1.7% of Pollo Tropical sales) and increases in other commodity prices including black beans and paper products (0.6% of Pollo Tropical sales),



35



---

##### Table of Contents

partially offset by the effect of menu price increases on the second quarter of 2005 (1.1% of Pollo Tropical sales). Burger King cost of sales, as a
percentage of Burger King restaurant sales, decreased to 27.2% in the third quarter of 2005 from 28.1% in 2004 due primarily to the effect of menu price increases since the end of the second quarter of 2004 (0.9% of Burger King sales), lower beef
and cheese commodity prices (0.3% of Burger King sales) and higher vendor rebates (0.2% of Burger King sales) partially offset in part by increased promotional discounting (0.7% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 28.5% in the third quarter of 2005 from 29.4% in the third
quarter of 2004. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.0% in the third quarter of 2005 from 28.4% in 2004 due primarily to lower medical insurance costs (0.5% of Taco
Cabana sales). Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 24.1% in the third quarter of 2005 from 25.5% in 2004 due to the effect of menu price increases since the end of
the third quarter of 2004 (0.6% of Pollo Tropical sales), the effect on fixed labor costs of higher comparable restaurant sales volumes (0.4% of Pollo Tropical sales) and lower medical insurance costs (0.5% of Pollo Tropical sales). Burger King
restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 30.5% in the third quarter of 2005 from 31.1% in 2004 due to lower medical insurance costs (0.4% of Burger King sales) and lower workers
compensation costs (0.3% of Burger King sales).

Restaurant rent expense, as a percentage of total restaurant sales, decreased to 4.5% in
the third quarter of 2005 from 4.9% in the third quarter of 2004 due primarily to reductions in contingent rentals related to our Taco Cabana restaurants (0.3% of total restaurant sales) and the effect of sales increases at our Pollo Tropical
restaurants on fixed occupancy costs.

Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.7%
in the third quarter of 2005 from 13.7% in the third quarter of 2004. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased to 14.9% in the third quarter of 2005 from 13.6% in 2004 due primarily
to higher utility costs (1.1% of Taco Cabana sales) as a result of higher natural gas prices and increased electricity usage, and to much lesser extent, higher repair and maintenance expenses associated with initiatives to enhance the appearance of
our Taco Cabana restaurants (0.2% of Taco Cabana sales). Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.7% in the third quarter of 2005 from 12.2% in 2004 due primarily to
higher general liability insurance costs (0.2% of Pollo Tropical sales), higher utility costs (0.2% of Pollo Tropical sales) due to higher natural gas prices and higher 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 the third quarter of 2005 from 14.3% in 2004 due primarily to higher utility costs (0.6% of Burger King sales) resulting
from higher natural gas rates and higher electricity usage due to the warmer weather, higher repair and maintenance expenses (0.3% of Burger King sales) to spruce up existing restaurant locations and fees associated with the acceptance of credit
cards (0.1% of Burger King sales).

Advertising expense, as a percentage of total restaurant sales, was 3.5% in both the third quarter of
2005 and the third quarter of 2004. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 4.4% in the third quarter of 2005 from 3.5% in 2004 due primarily to the timing of promotions that were concentrated
in the third quarter of 2005. Our Taco Cabana advertising expenditures for all of 2005 are anticipated to be comparable to 2004 (approximately 4.2% of Taco Cabana sales). Pollo Tropical advertising expense, as a percentage of Pollo Tropical
restaurant sales, increased slightly to 1.2% in the third quarter of 2005 from 1.0% in 2004. There were no significant television and radio advertising expenditures in either quarter. Our Pollo Tropical advertising expenditures for all of 2005 are
anticipated to be approximately 1.9% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, decreased to 3.8% in the third quarter of 2005 from 4.2% in 2004 due to costs associated with
the Burger King system-wide Spiderman game promotion in the third quarter of 2004.

General and administrative expenses, including
stock-based compensation expense, as a percentage of total restaurant sales, decreased to 5.4% in the third quarter of 2005 from 6.3% in 2004. Stock-based compensation expense was $0 and $0.6 million in the third quarter of 2005 and 2004,
respectively, and as a percentage of total restaurant sales, 0.3% in the third quarter of 2004. General and administrative expenses decreased in total $1.3 million including the $0.6 million decrease in stock-based compensation expense. General and
administrative expenses further decreased $0.7 million in the third quarter of 2005 compared to the third quarter of 2004 due primarily to lower administrative bonus expense of $1.3 million, partially offset by increased legal and professional fees,
including audit fees, of $0.4 million and higher administrative salaries of $0.2 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 restaurant concepts and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization, impairment losses, stock-based compensation expense and other expense. Segment EBITDA is defined as earnings before interest, income taxes,



36



---

##### Table of Contents

depreciation and amortization, impairment losses, stock-based compensation expense, other income and expense and loss on extinguishment of debt. Segment
EBITDA for our Taco Cabana restaurants increased 7.1% to $8.4 million in the third quarter of 2005 from $7.8 million in 2004. Segment EBITDA for our Pollo Tropical restaurants increased 20.1% to $7.5 million in the third quarter of 2005 from $6.3
million in 2004. Segment EBITDA for our Burger King restaurants increased 7.4% to $10.9 million in the third quarter of 2005 from $10.1 million in 2004.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased $1.4 million to $8.2 million in the third quarter of 2005 compared to the third quarter of 2004 due primarily
to lower depreciation of $0.8 million related to equipment at our Burger King restaurants, lower corporate information systems depreciation of $0.2 million, and lower depreciation from the closure of thirteen Burger King restaurants since
September 30, 2004 of $0.2 million. Depreciation was also $0.2 million lower in the third quarter of 2005 due to lower leasehold improvement depreciation related to our Taco Cabana restaurants.

Impairment losses were $0.6 million and $0.1 million in the third quarter of 2005 and 2004, respectively and related in both quarters to property and
equipment of certain underperforming Burger King restaurants and planned future closures of Burger King restaurants.

Interest
Expense. Interest expense increased $2.3 million to $10.9 million in the third quarter of 2005 from $8.6 million in the third quarter of 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 three months ended
September 30, 2005 decreased to 7.4% from 8.0% in the third quarter of 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 the third quarter of 2005 compared to the third quarter of 2004.

Provision for Income Taxes. The provision for income taxes in the third quarter of 2005 was derived using an estimated effective annual income tax
rate for 2005 of 33.2%, excluding any tax expense or benefit recorded discretely in any quarter. The provision for income taxes in the third quarter of 2004 is based on an effective tax rate for 2004 of 45.4%. This rate is higher than the statutory
Federal tax rate primarily due to state income taxes and tax credits.

Net Income.As a result of the foregoing, net income was $5.3
million in the third quarter of 2005 compared to net income of $1.6 million in the third quarter of 2004.

Nine Months Ended September 30, 2005
Compared to Nine Months Ended September 30, 2004.

The following table sets forth, for the nine months ended September 30,
2005 and 2004, selected operating results as a percentage of restaurant sales:



|                                                                        |  |       |   |  |       |  
|----------------------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                                        |  | 2005  |   |  | 2004  |  
|Restaurant sales:                                                       |  |       |   |  |       |  
|Taco Cabana                                                             |  | 29.5  | % |  | 29.2  | %
|Pollo Tropical                                                          |  | 19.4  | % |  | 17.6  | %
|Burger King                                                             |  | 51.1  | % |  | 53.2  | %
|                                                                        |  |       |   |  |       |  
|                                                                        |  | 100.0 | % |  | 100.0 | %
|Costs and expenses:                                                     |  |       |   |  |       |  
|Cost of sales                                                           |  | 29.1  | % |  | 28.9  | %
|Restaurant wages and related expenses                                   |  | 28.9  | % |  | 29.6  | %
|Restaurant rent expense                                                 |  | 4.9   | % |  | 5.0   | %
|Other restaurant operating expenses                                     |  | 14.3  | % |  | 13.5  | %
|Advertising expense                                                     |  | 3.7   | % |  | 3.7   | %
|General and administrative (including stock-based compensation expense) |  | 9.0   | % |  | 6.4   | %
|Income from restaurant operations                                       |  | 5.2   | % |  | 6.8   | %

Restaurant Sales. Total restaurant sales in the first nine months of 2005 increased $19.6
million, or 3.8%, to $531.4 million from $511.9 million in the first nine months of 2004 due to comparable restaurant sales increases at all three of our restaurant brands.



37



---

##### Table of Contents

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 $7.3 million, or 4.9%, to $156.6 million in the first nine months of 2005 due to a 1.3% sales increase at our comparable Taco Cabana restaurants, primarily from an increase in
the average sales transaction, and the net addition of seven new restaurants opened since the beginning of 2004 and the acquisition of four Taco Cabana restaurants from a franchisee in July 2005. These eleven additional restaurants contributed a
total of $5.4 million in sales in the first nine months of 2005.

Pollo Tropical restaurant sales increased $12.9 million, or 14.3%, in the
first nine months of 2005 to $103.0 million due to a 7.5% sales increase at our comparable Pollo Tropical restaurants that resulted from both increases in sales transactions and the average sales transaction, and the opening of six Pollo Tropical
restaurants since the beginning of 2004 which contributed a total of $5.7 million in sales in the first nine months of 2005.

Burger King
restaurant sales decreased by $0.6 million, or 0.2%, to $271.9 million in the first nine months of 2005 due to the closure of thirteen Burger King restaurants since September 30, 2004, which was substantially offset by a 1.3% sales increase at
our comparable Burger King restaurants, primarily from an increase in the average sales transaction.

Operating Costs and Expenses.
Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 29.1% in the first nine months of 2005 from 28.9% in the first nine months of 2004. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant
sales, decreased to 29.1% in the first nine months of 2005 from 29.9% in 2004 due primarily to improvements in restaurant-level food controls (1.0% of Taco Cabana sales) and the effect of menu price increases (0.5% of Taco Cabana sales), partially
offset by higher produce commodity prices in 2005. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased significantly to 33.3% in the first nine months of 2005 from 31.1% in 2004 due primarily to a 19% increase
in whole chicken commodity prices (1.8% of Pollo Tropical sales) and also increases in other commodity prices (0.6% of Pollo Tropical sales), partially offset by the effect of menu price increases in the second quarter of 2005 (0.5% of Pollo
Tropical sales). Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 27.4% in the first nine months of 2005 from 27.6% in 2004 due primarily to menu price increases since the end of the second quarter of 2004
(1.1% of Burger King sales) substantially offset by an increase in beef commodity prices (0.4% of Burger King sales), higher promotional discounts (0.3% of Burger King sales) and lower rebates in 2005 (0.2% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 28.9% in the first nine months of 2005 from 29.6% in the
first nine months of 2004. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.1% in the first nine months of 2005 from 28.5% in 2004 due primarily to the effect of menu price increases
since the end of the third quarter of 2004 (0.5% of Taco Cabana sales). Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 23.6% in the first nine months of 2005 from 25.0% in 2004
due primarily to the effect of menu price increases in the second quarter of 2005 (0.4% of Pollo Tropical sales), the effect on fixed labor costs of higher comparable restaurant sales volumes (0.4% of Pollo Tropical sales), and lower medical
insurance costs (0.6% of Pollo Tropical sales). Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.4% in the first nine months of 2005 from 31.8% in 2004 due to lower insurance costs
for medical (0.2% of Burger King sales) and workers compensation (0.3% of Burger King sales).

Restaurant rent expense, as a
percentage of total restaurant sales, decreased to 4.9% in the first nine months of 2005 from 5.0% in the first nine months of 2004 due to the effect of comparable restaurant sales increases on fixed occupancy costs at all three of our restaurant
concepts and lower contingent rentals based on a percentage of restaurant sales related to our Taco Cabana restaurants (0.1% of total restaurant sales).

Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.3% in the first nine months of 2005 from 13.5% in the first nine months of 2004. Taco Cabana other restaurant operating
expenses, as a percentage of Taco Cabana restaurant sales, increased to 14.4% in the first nine months of 2005 from 13.3% in 2004 due primarily to higher repair and maintenance expenses associated with initiatives to enhance the appearance of our
Taco Cabana restaurants (0.5% of Taco Cabana sales) and higher utility costs (0.5% of Taco Cabana sales) due to higher natural gas prices and increased electricity usage. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo
Tropical restaurant sales, increased to 11.8% in the first nine months of 2005 from 11.0% in 2004 due primarily to higher general liability insurance costs (0.2% of Pollo Tropical sales), higher fees due to increased levels of credit card sales
(0.2% of Pollo Tropical sales) and a gain related to a favorable lease settlement in 2004 (0.1% of Pollo Tropical sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 15.2% in the
first nine months of 2005 from 14.5% in 2004 due primarily to higher repair and maintenance expenses (0.3% of Burger King sales) to



38



---

##### Table of Contents

enhance the appearance of our Burger King restaurant locations, higher utility costs due to higher natural gas rates and electricity usage (0.2% of Burger
King sales) and fees associated with the acceptance of credit cards (0.1% of Burger King sales).

Advertising expense, as a percentage of
total restaurant sales, was 3.7% in both the first nine months of 2005 and first nine months of 2004. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased to 4.3% in the first nine months of 2005 from 4.7% in
2004 due primarily to the timing of promotions. Our Taco Cabana advertising expenditures for all of 2005 are anticipated to be comparable to 2004 (approximately 4.2% of Taco Cabana sales). Pollo Tropical advertising expense, as a percentage of Pollo
Tropical restaurant sales, increased to 2.1% in the first nine months of 2005 from 1.2% in 2004 due to higher television and radio advertising expenditures. There were no significant television and radio advertising expenditures in the first and
third quarters of 2004. Our Pollo Tropical advertising expenditures for all of 2005 are anticipated to be approximately 1.9% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, was
4.0% in the first nine months of 2005 and 2004.

General and administrative expenses, including stock-based compensation expense, as a
percentage of total restaurant sales, increased to 9.0% in the first nine months of 2005 from 6.4% in the first nine months of 2004. Stock-based compensation expense was $16.4 million and $2.2 million in the first nine months of 2005 and 2004,
respectively, or as a percentage of total restaurant sales, 3.1% and 0.4%, respectively. Stock-based compensation expense in the first nine months of 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 $14.8 million primarily from the $14.2 million increase in stock-based compensation expense. General and administrative expenses further increased $0.6 million in the first nine
months of 2005 compared to 2004 due primarily to increased legal and professional fees, including audit fees of $1.4 million and higher administrative salaries of $ 0.6 million, partially offset by lower administrative bonus expense of $ 1.4
million.

Segment EBITDA. Segment EBITDA, as defined, is a measure of segment profit or loss reported to the chief operating
decision maker for purposes of allocating resources to our restaurant concepts and assessing their performance. Segment EBITDA for our Taco Cabana restaurants increased 12.9% to $23.6 million in the first nine months of 2005 from $20.9 million in
2004. Segment EBITDA for our Pollo Tropical restaurants increased 6.5% to $22.4 million in the first nine months of 2005 from $21.0 million in 2004. Segment EBITDA for our Burger King restaurants decreased 5.3% to $25.5 million in the first nine
months of 2005 from $26.9 million in 2004.

Depreciation and Amortization and Impairment LossesDepreciation and amortization
expense decreased to $24.9 million in the first nine months of 2005 from $29.9 million in the first nine months of 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 September 30, 2004 of $0.5 million, lower depreciation of corporate information systems of $0.7 million and lower leasehold improvement amortization depreciation for our Taco
Cabana restaurants of $1.4 million.

Impairment losses were $1.4 million in the first nine months of 2005 and were comprised of $0.2
million related to Burger King franchise rights, $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 in the first nine months of 2004 were $0.6 million and related to property and equipment of certain underperforming Burger King restaurants.

Interest Expense. Interest expense increased $5.5 million to $31.8 million in the first nine months of 2005 from $26.3 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 nine months ended September 30, 2005 decreased to 7.1% from 7.7% in the first nine months of 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 the first nine months
of 2005 compared to 2004.

Provision for Income Taxes. The provision for income taxes in the first nine months of 2005 was derived
using an estimated effective annual income tax rate for 2005 of 33.2%. The tax provision for the nine months ended September 30, 2005 also includes $3.8 million for the non-deductible portion of stock-based compensation expense related to stock
awards in the second quarter of 2005 and $0.5 million of income tax expense associated with Ohio state tax legislation enacted in the second quarter of 2005. The discrete tax expense for each of these items was recorded in the second quarter of
2005.



39



---

##### Table of Contents

The provision for income taxes in the three and nine months ended September 30, 2004 is based on an
effective tax rate for 2004 of 45.4%. This rate is higher than the statutory Federal tax rate primarily due to state income taxes and tax credits.

Net Income (Loss).As a result of the foregoing, we incurred a net loss of $5.2 million in the first nine months of 2005 compared to net income of $4.0 million in the first nine months of 2004.

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.

Application of Critical Accounting Estimates and Policies

Our unaudited interim 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 included in Amendment No. 1 to our Form 10-K/A for the year ended December 31, 2004. 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 valuation of goodwill and intangible assets for impairment, assessing impairment of long-lived
assets and lease accounting matters. 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.

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 September 30, 2005, we had two non-operating
restaurant properties.

Insurance liabilities. We are self-insured for most workers compensation, general liability and
medical insurance claims. At September 30, 2005, we had $9.0 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.



40



---

##### Table of Contents

Evaluation of Goodwill. We must evaluate our recorded goodwill and indefinite-lived intangible
assets for impairment under Statement of Financial Accounting Standards No. 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 review at December 31, 2004 indicated there has been no impairment as of that date. 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.

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 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 other 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. At September 30, 2005 there were no purchase options for properties subject to
lease financing obligations that we deemed were probable of exercise.

Effects of New Accounting Standards

In December 2004, the 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



41



---

##### Table of Contents

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 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 becomes effective for us in the fourth quarter of 2005. The adoption of FIN 47 is not expected to
have an effect on the Companys 2005 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. The Company has not historically capitalized rent incurred during the construction period.
Accordingly, Staff Position FAS 13-1is not expected to have any impact on the Companys consolidated financial statements.

Forward Looking
Statements

This Quarterly Report on Form 10-Q 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 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 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 and in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004:



| |  |  | 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;
| | - |  | -----------------------------------



42



---

##### Table of Contents

| |  |  | 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 and in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Inflation

The
inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses. Wages paid in our restaurants are impacted by changes in the Federal or state minimum
hourly wage rates, and accordingly, changes in those rates directly affect our cost of labor. 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.

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

There were no material changes
from the information presented in Item 7A included in Amendment No. 1 to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2004 with respect to the Companys market risk sensitive instruments.

ITEM 4CONTROLS AND PROCEDURES

Restatement. As discussed in Note 2 to the
accompanying consolidated financial statements, we have restated our consolidated financial statements for the three and nine months ended September 26, 2004.

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 Note 2 to the accompanying consolidated financial statements. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of October 2, 2005.



43



---

##### Table of Contents

Material Weaknesses inInternal 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 October 2, 2005:

Personnel

In conjunction with filing
this Form 10-Q/A, which included the restatements as discussed in Note 2 to the accompanying consolidated financial statements, management concluded that the Company did not have 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.

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
three and nine months ended September 26, 2004. 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 October 2, 2005 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 third
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-Q, 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;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44



---

##### Table of Contents

| | (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 October 2, 2005 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;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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.
| | --- | --------------------------------------------------------------------

PART IIOTHER INFORMATION

Item 1. 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 1A. Risk Factors

Not applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Default Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of
Security Holders

None

Item 5.
Other Information

None



45



---

##### Table of Contents

Item 6. Exhibits

(a) The following exhibits are filed as part of this report.



|            |  |                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                
|31.1        |  | Chief Executive Officers Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|31.2        |  | Chief Financial Officers Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|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.
|            | 
|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.



46



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements 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.



|                    |  |                                                                        
|------------------- |  | -----------------------------------------------------------------------
|                    |  | CARROLS CORPORATION                                                    
|                    | 
|Date: June 30, 2006 |  | /s/ ALAN VITULI                                                        
|                    |  | (Signature)                                                            
|                    |  | Alan Vituli Chairman of the Board and Chief Executive Officer          
|                    | 
|Date: June 30, 2006 |  | /s/ PAUL R. FLANDERS                                                   
|                    |  | (Signature)                                                            
|                    |  | Paul R. Flanders Vice President  Chief Financial Officer and Treasurer



47