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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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|x |  | Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2004



or



| ̈ |  | Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- |  | -----------------------------------------------------------------------------------------



Commission File Number 0-25629



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CARROLS CORPORATION

(Exact name of registrant as specified in its charter)



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  x



The number of shares of the registrants common stock outstanding as of
May 12, 2004 is 10.



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PART I - FINANCIAL INFORMATION



ITEM 1 - FINANCIAL STATEMENTS



CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)



|                                                                                                       |  |                |         |                   |   |        
|------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | ----------------- | - | -------
|                                                                                                       |  | March 31, 2004 |         | December 31, 2003
|                                                                                                       |  | (unaudited)    |         |                  
|ASSETS                                                                                                 |  |                |         |                   |   |        
|Current assets:                                                                                        |  |                |         |                   |   |        
|Cash and cash equivalents                                                                              |  | $              | 3,148   |                   | $ | 2,414  
|Trade and other receivables, net of reserves of $128 at each date                                      |  |                | 1,913   |                   |   | 1,280  
|Inventories                                                                                            |  |                | 4,505   |                   |   | 4,936  
|Prepaid rent                                                                                           |  |                | 2,616   |                   |   | 2,534  
|Prepaid expenses and other current assets                                                              |  |                | 4,277   |                   |   | 4,043  
|Deferred income taxes                                                                                  |  |                | 6,286   |                   |   | 6,286  
|                                                                                                       |  |                |         |                   |   |        
|Total current assets                                                                                   |  |                | 22,745  |                   |   | 21,493 
|                                                                                                       |  |                |         |                   |   |        
|Property and equipment, at cost less accumulated depreciation of $202,607 and $194,652, respectively   |  |                | 224,173 |                   |   | 236,353
|Franchise rights, at cost less accumulated amortization of $51,791 and $50,732, respectively           |  |                | 85,114  |                   |   | 86,148 
|Intangible assets, at cost less accumulated amortization of $10,271 and $10,258, respectively (Note 4) |  |                | 124,831 |                   |   | 124,844
|Deferred income taxes                                                                                  |  |                | 8,857   |                   |   | 8,619  
|Other assets                                                                                           |  |                | 9,290   |                   |   | 9,417  
|                                                                                                       |  |                |         |                   |   |        
|Total assets                                                                                           |  | $              | 475,010 |                   | $ | 486,874
|                                                                                                       |  |                |         |                   |   |        



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



2



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands of dollars)



|                                                                                        |  |                |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                        |  | March 31, 2004 |         |   | December 31, 2003 |  
|                                                                                        |  | (unaudited)    |         |   |                   |  
|LIABILITIES and STOCKHOLDERS EQUITY                                                    |  |                |         |  
|                                                                                        |  |               
|Current liabilities:                                                                    |  |                |         |   |                   |   |         |  
|Accounts payable                                                                        |  | $              | 13,457  |   |                   | $ | 17,230  |  
|Accrued interest                                                                        |  |                | 5,639   |   |                   |   | 1,549   |  
|Accrued payroll, related taxes and benefits                                             |  |                | 12,418  |   |                   |   | 11,545  |  
|Accrued income taxes                                                                    |  |                | 7       |   |                   |   | 836     |  
|Other liabilities                                                                       |  |                | 14,740  |   |                   |   | 14,897  |  
|Current portion of long-term debt                                                       |  |                | 13,901  |   |                   |   | 14,005  |  
|Current portion of financing obligations                                                |  |                | 2,393   |   |                   |   | 2,288   |  
|                                                                                        |  |                |         |   |                   |   |         |  
|Total current liabilities                                                               |  |                | 62,555  |   |                   |   | 62,350  |  
|                                                                                        |  |               
|Long-term debt, net of current portion                                                  |  |                | 268,752 |   |                   |   | 281,827 |  
|Financing obligations, net of current portion                                           |  |                | 81,748  |   |                   |   | 82,397  |  
|Deferred income  sale/leaseback of real estate                                         |  |                | 9,789   |   |                   |   | 8,841   |  
|Accrued postretirement benefits                                                         |  |                | 3,100   |   |                   |   | 2,962   |  
|Other liabilities (Note 6)                                                              |  |                | 27,717  |   |                   |   | 27,527  |  
|                                                                                        |  |                |         |   |                   |   |         |  
|Total liabilities                                                                       |  |                | 453,661 |   |                   |   | 465,904 |  
|                                                                                        |  |               
|Stockholders equity:                                                                   |  |                |         |   |                   |   |         |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding  10 shares |  |                |        |   |                   |   |        |  
|Additional paid-in capital                                                              |  |                | 24,485  |   |                   |   | 24,485  |  
|Accumulated deficit                                                                     |  |                | (3,136  | ) |                   |   | (3,515  | )
|                                                                                        |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                              |  |                | 21,349  |   |                   |   | 20,970  |  
|                                                                                        |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                              |  | $              | 475,010 |   |                   | $ | 486,874 |  
|                                                                                        |  |                |         |   |                   |   |         |  



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



3



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(in thousands of dollars)



|                                              |  |             |         |                        |   |         |  
|--------------------------------------------- |  | ----------- | ------- | ---------------------- | - | ------- | -
|                                              |  | 2004        |         | Restated (Note 2) 2003 |  
|                                              |  | (unaudited) |        
|Revenues:                                     |  |             |         |                        |   |         |  
|Restaurant sales                              |  | $           | 156,545 |                        | $ | 151,902 |  
|Franchise royalty revenues and fees           |  |             | 355     |                        |   | 338     |  
|                                              |  |             |         |                        |   |         |  
|Total revenues                                |  |             | 156,900 |                        |   | 152,240 |  
|Costs and expenses:                           |  |             |         |                        |   |         |  
|Cost of sales                                 |  |             | 43,681  |                        |   | 42,434  |  
|Restaurant wages and related expenses         |  |             | 47,851  |                        |   | 47,044  |  
|Restaurant rent expense                       |  |             | 8,564   |                        |   | 7,818   |  
|Other restaurant operating expenses           |  |             | 21,890  |                        |   | 21,363  |  
|Advertising expense                           |  |             | 5,827   |                        |   | 7,269   |  
|General and administrative                    |  |             | 9,759   |                        |   | 9,274   |  
|Depreciation and amortization                 |  |             | 11,152  |                        |   | 10,885  |  
|                                              |  |             |         |                        |   |         |  
|Total operating expenses                      |  |             | 148,724 |                        |   | 146,087 |  
|                                              |  |             |         |                        |   |         |  
|Income from operations                        |  |             | 8,176   |                        |   | 6,153   |  
|                                              |  |            
|Interest expense                              |  |             | 7,577   |                        |   | 8,356   |  
|                                              |  |             |         |                        |   |         |  
|Income (loss) before income taxes             |  |             | 599     |                        |   | (2,203  | )
|                                              |  |            
|Provision (benefit) for income taxes (Note 5) |  |             | 220     |                        |   | (863    | )
|                                              |  |             |         |                        |   |         |  
|Net income (loss)                             |  | $           | 379     |                        | $ | (1,340  | )
|                                              |  |             |         |                        |   |         |  



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



4



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(in thousands of dollars)



|                                                                                           |  |             |        |   |                        |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------- | ------ | - | ---------------------- | - | ------- | -
|                                                                                           |  | 2004        |        |   | Restated (Note 2) 2003 |  
|                                                                                           |  | (unaudited) |       
|Cash flows provided from operating activities:                                             |  |             |        |   |                        |   |         |  
|Net income (loss)                                                                          |  | $           | 379    |   |                        | $ | (1,340  | )
|Adjustments to reconcile net income (loss) to net cash provided from operating activities: |  |             |        |   |                        |   |         |  
|Depreciation and amortization                                                              |  |             | 11,152 |   |                        |   | 10,885  |  
|Deferred income taxes                                                                      |  |             | (238   | ) |                        |   | (866    | )
|Change in operating assets and liabilities                                                 |  |             | (829   | ) |                        |   | 1,012   |  
|                                                                                           |  |             |        |   |                        |   |         |  
|Net cash provided from operating activities                                                |  |             | 10,464 |   |                        |   | 9,691   |  
|                                                                                           |  |             |        |   |                        |   |         |  
|Cash flows used for investing activities:                                                  |  |             |        |   |                        |   |         |  
|Capital expenditures:                                                                      |  |             |        |   |                        |   |         |  
|New restaurant development                                                                 |  |             | (1,637 | ) |                        |   | (6,774  | )
|Restaurant remodeling                                                                      |  |             | (61    | ) |                        |   | (1,278  | )
|Other restaurant expenditures                                                              |  |             | (1,240 | ) |                        |   | (2,206  | )
|Corporate and restaurant information systems                                               |  |             | (166   | ) |                        |   | (761    | )
|                                                                                           |  |             |        |   |                        |   |         |  
|Total capital expenditures                                                                 |  |             | (3,104 | ) |                        |   | (11,019 | )
|Proceeds from sales of non-operating properties                                            |  |             |       |   |                        |   | 1,964   |  
|                                                                                           |  |             |        |   |                        |   |         |  
|Net cash used for investing activities                                                     |  |             | (3,104 | ) |                        |   | (9,055  | )
|                                                                                           |  |             |        |   |                        |   |         |  
|Cash flows used for financing activities:                                                  |  |             |        |   |                        |   |         |  
|Payments on revolving credit facility, net                                                 |  |             | (600   | ) |                        |   | (4,600  | )
|Principal payments on term loans                                                           |  |             | (3,375 | ) |                        |   |        |  
|Principal pre-payments on term loans                                                       |  |             | (9,000 | ) |                        |   |        |  
|Principal payments on financing obligations                                                |  |             | (544   | ) |                        |   | (487    | )
|Payments on other notes payable                                                            |  |             | (98    | ) |                        |   | (258    | )
|Principal payments on capital leases                                                       |  |             | (106   | ) |                        |   | (121    | )
|Proceeds from sale-leaseback transactions                                                  |  |             | 7,097  |   |                        |   | 4,912   |  
|                                                                                           |  |             |        |   |                        |   |         |  
|Net cash used for financing activities                                                     |  |             | (6,626 | ) |                        |   | (554    | )
|                                                                                           |  |             |        |   |                        |   |         |  
|Increase in cash and cash equivalents                                                      |  |             | 734    |   |                        |   | 82      |  
|Cash and cash equivalents, beginning of period                                             |  |             | 2,414  |   |                        |   | 2,538   |  
|                                                                                           |  |             |        |   |                        |   |         |  
|Cash and cash equivalents, end of period                                                   |  | $           | 3,148  |   |                        | $ | 2,620   |  
|                                                                                           |  |             |        |   |                        |   |         |  



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



5



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of
dollars)



|1. |  | Statement of Management
|-- |  | -----------------------



The accompanying unaudited consolidated financial statements for the three months ended March 31, 2004 and 2003 have been prepared without 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 statements. In the
opinion of management, all normal and recurring adjustments necessary for a fair presentation of such financial statements have been included.



The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full
year.



The preparation of 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
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



The consolidated financial statements include the accounts of Carrols Corporation and its majority owned subsidiaries
(Carrols or the Company). All material intercompany balances, transactions and profits have been eliminated.



These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2003 contained in the Companys 2003 Annual Report on Form 10-K. The December 31, 2003 balance sheet data is derived from those audited financial statements. As further discussed in Note 2 of the consolidated financial statements
for the year ended December 31, 2003, the Company restated its financial statements including applicable footnotes in its 2003 Annual Report on Form 10-K for periods ended prior to December 31, 2003 to report real estate transactions for 86
restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98 Accounting for Leases rather than as sale/leaseback transactions as previously reported. All previously reported amounts affected by the restatement
that appear elsewhere in these footnotes to the consolidated financial statements have also been restated.



Certain amounts for prior periods have been reclassified to conform to the current year presentation.



6



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in thousands of dollars)



|2. |  | Restatement of Previously Issued Financial Statements
|-- |  | -----------------------------------------------------



As previously reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2003, the Company has restated its
financial statements including applicable footnotes for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98 Accounting for
Leases rather than as sale/leaseback transactions as previously reported. The impact of the restatement is to record on the Companys balance sheets the property and equipment of the restaurants subject to these transactions and record
the proceeds from these transactions (including the gains previously deferred), as a form of debt financing. The restatement also impacted our operating results by increasing the depreciation expense for the property and equipment subject to these
transactions and recharacterizing the lease payments previously reported as rent expense for these restaurants as principal repayments and interest expense. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.



The following table sets forth the previously reported
amounts and the restated amounts reflected in the accompanying consolidated financial statements for the three months ended March 31, 2003:



|                                                  |  |                       |         |   |             |   |         |  
|------------------------------------------------- |  | --------------------- | ------- | - | ----------- | - | ------- | -
|                                                  |  | As PreviouslyReported |         |   | As Restated |  
|Consolidated Statement of Operations:             |  |                       |         |   |             |   |         |  
|Restaurant rent expense                           |  | $                     | 10,071  |   |             | $ | 7,818   |  
|Depreciation and amortization                     |  |                       | 9,767   |   |             |   | 10,885  |  
|Total operating expenses                          |  |                       | 147,222 |   |             |   | 146,087 |  
|Income from operations                            |  |                       | 5,018   |   |             |   | 6,153   |  
|Interest expense                                  |  |                       | 6,525   |   |             |   | 8,356   |  
|Loss before income taxes                          |  |                       | (1,507  | ) |             |   | (2,203  | )
|Benefit for income taxes                          |  |                       | (572    | ) |             |   | (863    | )
|Net loss                                          |  |                       | (935    | ) |             |   | (1,340  | )
|                                                  |  |                      
|Consolidated Statement of Cash Flows:             |  |                       |         |   |             |   |         |  
|Net loss                                          |  | $                     | (935    | ) |             | $ | (1,340  | )
|Depreciation and amortization                     |  |                       | 9,767   |   |             |   | 10,885  |  
|Deferred income taxes                             |  |                       | (575    | ) |             |   | (866    | )
|Other changes in operating assets and liabilities |  |                       | 947     |   |             |   | 1,012   |  
|Net cash provided from operating activities       |  |                       | 9,204   |   |             |   | 9,691   |  
|Principal payments on financing obligations       |  |                       |        |   |             |   | (487    | )
|Net cash used for financing activities            |  |                       | (67     | ) |             |   | (554    | )



7



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in thousands of dollars)



|3. |  | Impairment of Long-Lived Assets
|-- |  | -------------------------------



The Company reviews its long-lived assets for impairment at the restaurant level on an ongoing basis. If an indicator of impairment exists for any of its
restaurants, an estimate of undiscounted future cash flows produced by each restaurant is compared to that restaurants carrying value. If an asset is determined to be impaired, an impairment charge is measured by the excess of the carrying
amount of the asset over its fair value. For the three months ended March 31, 2004 and 2003 the Company recorded impairment charges, included in depreciation and amortization, of $261 and $37, respectively, related to its property and equipment for
certain of its Burger King restaurants.



|4. |  | Intangible Assets
|-- |  | -----------------



Intangible assets, net of accumulated amortization, consisted of the following:



|                                                                      |  |                |         |                   |   |        
|--------------------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                                                      |  | March 31, 2004 |         | December 31, 2003
|Goodwill, net of accumulated amortization of $10,053 at both dates    |  | $              | 123,861 |                   | $ | 123,861
|Trademarks, net of accumulated amortization of $36 at both dates      |  |                | 228     |                   |   | 228    
|Other, net of accumulated amortization of $182 and $170, respectively |  |                | 742     |                   |   | 755    
|                                                                      |  |                |         |                   |   |        
|                                                                      |  | $              | 124,831 |                   | $ | 124,844
|                                                                      |  |                |         |                   |   |        



Intangible assets,
net of accumulated amortization, applicable to our business segments consisted of the following:



|               |  |                |         |                   |   |        
|-------------- |  | -------------- | ------- | ----------------- | - | -------
|               |  | March 31, 2004 |         | December 31, 2003
|Burger King    |  | $              | 1,460   |                   | $ | 1,473  
|Pollo Tropical |  |                | 57,382  |                   |   | 57,382 
|Taco Cabana    |  |                | 65,989  |                   |   | 65,989 
|               |  |                |         |                   |   |        
|               |  | $              | 124,831 |                   | $ | 124,844
|               |  |                |         |                   |   |        



8



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in thousands of dollars)



|5. |  | Income Taxes
|-- |  | ------------



The income tax provision (benefit) for the three months ended March 31, 2004 and 2003 was comprised of the following:



|         |  |      |      |   |                           |   |        |  
|-------- |  | ---- | ---- | - | ------------------------- | - | ------ | -
|         |  | 2004 |      |   | 2003 As Restated (Note 2) |  
|Current  |  | $    | 458  |   |                           | $ | (1,147 | )
|Deferred |  |      | (238 | ) |                           |   | 284    |  
|         |  |      |      |   |                           |   |        |  
|         |  | $    | 220  |   |                           | $ | (863   | )
|         |  |      |      |   |                           |   |        |  



The difference
between the expected tax benefit, resulting from application of the federal statutory income tax rate to pretax income, and the reported income tax provision results principally from state taxes and non-deductible amortization of certain franchise
rights.



|6. |  | Other Liabilities
|-- |  | -----------------



Other long-term liabilities at March 31, 2004 and December 31, 2003 consisted of the following:



|                            |  |                |        |                   |   |       
|--------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                            |  | March 31, 2004 |        | December 31, 2003
|Unearned purchase discounts |  | $              | 10,319 |                   | $ | 10,888
|Accrued occupancy costs     |  |                | 8,306  |                   |   | 8,012 
|Other                       |  |                | 9,092  |                   |   | 8,627 
|                            |  |                |        |                   |   |       
|                            |  | $              | 27,717 |                   | $ | 27,527
|                            |  |                |        |                   |   |       



|7. |  | Stock-Based Compensation Disclosures Required by SFAS No. 148
|-- |  | -------------------------------------------------------------



Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation, (SFAS 123) permits entities to
recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of 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 provide the pro forma disclosure provisions of SFAS 123. Had compensation
cost been determined based upon the fair value of the stock options at grant date consistent with the method of SFAS 123, the Companys pro-forma net income (loss) would have been $319 and $(1,412) for the periods ended March 31, 2004 and 2003,
respectively.



9



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in thousands of dollars)



|8. |  | Postretirement Benefits
|-- |  | -----------------------



The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management
salaried employees. In accordance with SFAS 132R, Employers Disclosures about Pensions and Other Postretirement Benefits, the following summarizes the components of net periodic benefit cost for the three months ended March 31, 2004 and
2003.



|                                                |  |      |     |   |      |   |     |  
|----------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                                |  | 2004 |     |   | 2003 |  
|Components of net periodic benefit cost:        |  |      |     |   |      |   |     |  
|Service cost                                    |  | $    | 91  |   |      | $ | 72  |  
|Interest cost                                   |  |      | 67  |   |      |   | 58  |  
|Amortization of gains and losses                |  |      | 15  |   |      |   | 9   |  
|Amortization of unrecognized prior service cost |  |      | (7  | ) |      |   | (8  | )
|                                                |  |      |     |   |      |   |     |  
|Net periodic postretirement benefit cost        |  | $    | 166 |   |      | $ | 131 |  
|                                                |  |      |     |   |      |   |     |  



|9. |  | Business Segment Information
|-- |  | ----------------------------



The Company is engaged in the 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 Tex-Mex 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 Other column includes corporate related items not allocated to reportable segments and for income from operations, principally corporate
depreciation and amortization. Other identifiable assets consist primarily of franchise rights and intangible assets. Non-operating expenses, comprised of interest expense and interest income, are corporate related items and therefore have not been
allocated to the reportable segments.



10



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in thousands of dollars)



|                                             |  |            |         |   |               |   |            |  |       |        |  |              |         |   |  |   |        
|-------------------------------------------- |  | ---------- | ------- | - | ------------- | - | ---------- |  | ----- | ------ |  | ------------ | ------- | - |  | - | -------
|                                             |  | BurgerKing |         |   | PolloTropical |   | TacoCabana |  | Other |        |  | Consolidated
|Three Months Ended:                          |  |            |         |   |               |   |            |  |       |        |  |              |         |   |  |   |        
|                                             |  |            |         |   |              
|March 31, 2004:                              |  |            |         |   |               |   |            |  |       |        |  |              |         |   |  |   |        
|Revenues                                     |  | $          | 81,129  |   |               | $ | 29,624     |  | $     | 46,147 |  | $            |        |   |  | $ | 156,900
|Cost of sales                                |  |            | 21,019  |   |               |   | 9,005      |  |       | 13,657 |  |              |        |   |  |   | 43,681 
|Restaurant wages and related expenses        |  |            | 27,447  |   |               |   | 7,110      |  |       | 13,294 |  |              |        |   |  |   | 47,851 
|Depreciation and amortization                |  |            | 6,393   |   |               |   | 1,148      |  |       | 2,715  |  |              | 896     |   |  |   | 11,152 
|Income (loss) from operations                |  |            | (607    | ) |               |   | 6,101      |  |       | 3,578  |  |              | (896    | ) |  |   | 8,176  
|Capital expenditures, excluding acquisitions |  |            | 725     |   |               |   | 231        |  |       | 1,982  |  |              | 166     |   |  |   | 3,104  
|                                             |  |            |         |   |              
|March 31, 2003 (as restated):                |  |            |         |   |               |   |            |  |       |        |  |              |         |   |  |   |        
|Revenues                                     |  | $          | 83,942  |   |               | $ | 26,732     |  | $     | 41,566 |  | $            |        |   |  | $ | 152,240
|Cost of sales                                |  |            | 22,103  |   |               |   | 8,270      |  |       | 12,061 |  |              |        |   |  |   | 42,434 
|Restaurant wages and related expenses        |  |            | 28,142  |   |               |   | 6,824      |  |       | 12,078 |  |              |        |   |  |   | 47,044 
|Depreciation and amortization                |  |            | 6,282   |   |               |   | 1,331      |  |       | 2,249  |  |              | 1,023   |   |  |   | 10,885 
|Income (loss) from operations                |  |            | (343    | ) |               |   | 4,458      |  |       | 3,061  |  |              | (1,023  | ) |  |   | 6,153  
|Capital expenditures, excluding acquisitions |  |            | 3,245   |   |               |   | 2,774      |  |       | 4,239  |  |              | 761     |   |  |   | 11,019 
|                                             |  |            |         |   |              
|Identifiable Assets:                         |  |            |         |   |               |   |            |  |       |        |  |              |         |   |  |   |        
|At March 31, 2004                            |  | $          | 201,000 |   |               | $ | 42,720     |  | $     | 67,524 |  | $            | 163,766 |   |  | $ | 475,010
|At December 31, 2003                         |  |            | 208,008 |   |               |   | 43,612     |  |       | 72,885 |  |              | 162,369 |   |  |   | 486,874



11



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in thousands of dollars)



|10. |  | Guarantor Financial Statements
|--- |  | ------------------------------



The $170 million senior subordinated notes of the Company are guaranteed by certain of the Companys subsidiaries (Guarantor
Subsidiaries), all of which are wholly-owned by the Company. These subsidiaries are:



Carrols Realty Holdings

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

T.C. Management, Inc.

Taco Cabana Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.



The following supplemental financial information includes consolidating balance sheets, statements of operations and statements of cash flows for the
Parent Company only, Guarantor Subsidiaries and for the Company as of March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003. Debt and goodwill allocated to subsidiaries are presented on an accounting
push-down basis.



For certain of the
Companys sale/leaseback transactions, Carrols Corporation 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 of they were accounted for as financing transactions of the
Guarantor subsidiaries. These adjustments are eliminated in consolidation.



12



---

CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONSOLIDATING BALANCE SHEET

March
31, 2004

(in thousands of dollars)

(unaudited)



|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|--------------------------------------------- |  | ----------------- | ------- | --------------------- | - | -------- | ----------- |  | - | -------------- | - |  | - | -------
|                                              |  | ParentCompanyOnly |         | GuarantorSubsidiaries |   |          | Elimination |  |   | Combined Total
|ASSETS                                        |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Current Assets:                               |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Cash and cash equivalents                     |  | $                 | 853     |                       | $ | 2,295    |             |  | $ |               |   |  | $ | 3,148  
|Trade and other receivables, net              |  |                   | 564     |                       |   | 1,349    |             |  |   |               |   |  |   | 1,913  
|Inventories                                   |  |                   | 3,107   |                       |   | 1,398    |             |  |   |               |   |  |   | 4,505  
|Prepaid rent                                  |  |                   | 1,306   |                       |   | 1,310    |             |  |   |               |   |  |   | 2,616  
|Prepaid expenses and other current assets     |  |                   | 1,398   |                       |   | 2,879    |             |  |   |               |   |  |   | 4,277  
|Deferred income taxes                         |  |                   | 6,286   |                       |   |         |             |  |   |               |   |  |   | 6,286  
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total current assets                          |  |                   | 13,514  |                       |   | 9,231    |             |  |   |               |   |  |   | 22,745 
|Property and equipment, net                   |  |                   | 111,749 |                       |   | 139,288  |             |  |   | (26,864        | ) |  |   | 224,173
|Franchise rights, net                         |  |                   | 85,114  |                       |   |         |             |  |   |               |   |  |   | 85,114 
|Intangible assets, net                        |  |                   | 1,460   |                       |   | 123,371  |             |  |   |               |   |  |   | 124,831
|Intercompany receivable (payable)             |  |                   | 143,306 |                       |   | (143,306 | )           |  |   |               |   |  |   |       
|Investment in subsidiaries                    |  |                   | 16,359  |                       |   |         |             |  |   | (16,359        | ) |  |   |       
|Deferred income taxes                         |  |                   | 8,857   |                       |   |         |             |  |   |               |   |  |   | 8,857  
|Other assets                                  |  |                   | 5,920   |                       |   | 4,798    |             |  |   | (1,428         | ) |  |   | 9,290  
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total assets                                  |  | $                 | 386,279 |                       | $ | 133,382  |             |  | $ | (44,651        | ) |  | $ | 475,010
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY          |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Current Liabilities:                          |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Accounts payable                              |  | $                 | 7,424   |                       | $ | 6,033    |             |  | $ |               |   |  | $ | 13,457 
|Accrued interest                              |  |                   | 5,639   |                       |   |         |             |  |   |               |   |  |   | 5,639  
|Accrued payroll, related taxes and benefits   |  |                   | 7,233   |                       |   | 5,185    |             |  |   |               |   |  |   | 12,418 
|Other liabilities                             |  |                   | 7,433   |                       |   | 7,307    |             |  |   |               |   |  |   | 14,740 
|Accrued income taxes payable                  |  |                   | 7       |                       |   |         |             |  |   |               |   |  |   | 7      
|Current portion of financing obligations      |  |                   | 2,393   |                       |   | 1,931    |             |  |   | (1,931         | ) |  |   | 2,393  
|Current portion of long-term debt             |  |                   | 13,648  |                       |   | 253      |             |  |   |               |   |  |   | 13,901 
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total current liabilities                     |  |                   | 43,777  |                       |   | 20,709   |             |  |   | (1,931         | ) |  |   | 62,555 
|                                              |  |                   |         |                      
|Long-term debt, net of current portion        |  |                   | 268,169 |                       |   | 583      |             |  |   |               |   |  |   | 268,752
|Financing obligations, net of current portion |  |                   | 28,010  |                       |   | 82,901   |             |  |   | (29,163        | ) |  |   | 81,748 
|Deferred income sale/leaseback of real estate |  |                   | 5,465   |                       |   | 1,209    |             |  |   | 3,115          |   |  |   | 9,789  
|Accrued postretirement benefits               |  |                   | 3,100   |                       |   |         |             |  |   |               |   |  |   | 3,100  
|Other liabilities                             |  |                   | 16,409  |                       |   | 11,239   |             |  |   | 69             |   |  |   | 27,717 
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total liabilities                             |  |                   | 364,930 |                       |   | 116,641  |             |  |   | (27,910        | ) |  |   | 453,661
|Stockholders equity                          |  |                   | 21,349  |                       |   | 16,741   |             |  |   | (16,741        | ) |  |   | 21,349 
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total liabilities and stockholders equity    |  | $                 | 386,279 |                       | $ | 133,382  |             |  | $ | (44,651        | ) |  | $ | 475,010
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        



13



---

CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONSOLIDATING BALANCE SHEET

December
31, 2003

(in thousands of dollars)



|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|--------------------------------------------- |  | ----------------- | ------- | --------------------- | - | -------- | ----------- |  | - | -------------- | - |  | - | -------
|                                              |  | ParentCompanyOnly |         | GuarantorSubsidiaries |   |          | Elimination |  |   | Combined Total
|ASSETS                                        |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Current Assets:                               |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Cash and cash equivalents                     |  | $                 | 708     |                       | $ | 1,706    |             |  | $ |               |   |  | $ | 2,414  
|Trade and other receivables, net              |  |                   | 372     |                       |   | 908      |             |  |   |               |   |  |   | 1,280  
|Inventories                                   |  |                   | 3,413   |                       |   | 1,523    |             |  |   |               |   |  |   | 4,936  
|Prepaid rent                                  |  |                   | 1,309   |                       |   | 1,225    |             |  |   |               |   |  |   | 2,534  
|Prepaid expenses and other current assets     |  |                   | 1,150   |                       |   | 2,893    |             |  |   |               |   |  |   | 4,043  
|Deferred income taxes                         |  |                   | 6,286   |                       |   |         |             |  |   |               |   |  |   | 6,286  
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total current assets                          |  |                   | 13,238  |                       |   | 8,255    |             |  |   |               |   |  |   | 21,493 
|Property and equipment, net                   |  |                   | 118,489 |                       |   | 142,060  |             |  |   | (24,196        | ) |  |   | 236,353
|Franchise rights, net                         |  |                   | 86,148  |                       |   |         |             |  |   |               |   |  |   | 86,148 
|Intangible assets, net                        |  |                   | 1,473   |                       |   | 123,371  |             |  |   |               |   |  |   | 124,844
|Intercompany receivable (payable)             |  |                   | 147,675 |                       |   | (147,675 | )           |  |   |               |   |  |   |       
|Investment in subsidiaries                    |  |                   | 14,206  |                       |   |         |             |  |   | (14,206        | ) |  |   |       
|Deferred income taxes                         |  |                   | 8,619   |                       |   |         |             |  |   |               |   |  |   | 8,619  
|Other assets                                  |  |                   | 6,163   |                       |   | 4,601    |             |  |   | (1,347         | ) |  |   | 9,417  
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total assets                                  |  | $                 | 396,011 |                       | $ | 130,612  |             |  | $ | (39,749        | ) |  | $ | 486,874
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY          |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Current Liabilities:                          |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Accounts payable                              |  | $                 | 10,918  |                       | $ | 6,312    |             |  | $ |               |   |  | $ | 17,230 
|Accrued interest                              |  |                   | 1,549   |                       |   |         |             |  |   |               |   |  |   | 1,549  
|Accrued payroll, related taxes and benefits   |  |                   | 6,826   |                       |   | 4,719    |             |  |   |               |   |  |   | 11,545 
|Other liabilities                             |  |                   | 6,757   |                       |   | 8,140    |             |  |   |               |   |  |   | 14,897 
|Accrued income taxes                          |  |                   | 836     |                       |   |         |             |  |   |               |   |  |   | 836    
|Current portion of financing obligations      |  |                   | 1,292   |                       |   | 1,723    |             |  |   | (727           | ) |  |   | 2,288  
|Current portion of long-term debt             |  |                   | 13,758  |                       |   | 247      |             |  |   |               |   |  |   | 14,005 
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total current liabilities                     |  |                   | 41,936  |                       |   | 21,141   |             |  |   | (727           | ) |  |   | 62,350 
|                                              |  |                   |         |                      
|Long-term debt, net of current portion        |  |                   | 281,176 |                       |   | 651      |             |  |   |               |   |  |   | 281,827
|Financing obligations, net of current portion |  |                   | 29,418  |                       |   | 80,290   |             |  |   | (27,311        | ) |  |   | 82,397 
|Deferred income sale/leaseback of real estate |  |                   | 3,673   |                       |   | 2,192    |             |  |   | 2,976          |   |  |   | 8,841  
|Accrued postretirement benefits               |  |                   | 2,962   |                       |   |         |             |  |   |               |   |  |   | 2,962  
|Other liabilities                             |  |                   | 15,876  |                       |   | 11,621   |             |  |   | 30             |   |  |   | 27,527 
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total liabilities                             |  |                   | 375,041 |                       |   | 115,895  |             |  |   | (25,032        | ) |  |   | 465,904
|Stockholders equity                          |  |                   | 20,970  |                       |   | 14,717   |             |  |   | (14,717        | ) |  |   | 20,970 
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        
|Total liabilities and stockholders equity    |  | $                 | 396,011 |                       | $ | 130,612  |             |  | $ | (39,749        | ) |  | $ | 486,874
|                                              |  |                   |         |                       |   |          |             |  |   |                |   |  |   |        



14



---

CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2004

(in thousands of dollars)

(unaudited)



|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|------------------------------------- |  | ----------------- | ------ | - | --------------------- | - | ------------ |  | - | ------------- | - |  | - | -------
|                                      |  | ParentCompanyOnly |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | CombinedTotal
|Revenues:                             |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Restaurant sales                      |  | $                 | 81,129 |   |                       | $ | 75,416       |  | $ |              |   |  | $ | 156,545
|Franchise royalty revenues and fees   |  |                   |       |   |                       |   | 355          |  |   |              |   |  |   | 355    
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Total revenues                        |  |                   | 81,129 |   |                       |   | 75,771       |  |   |              |   |  |   | 156,900
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Costs and expenses:                   |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Cost of sales                         |  |                   | 21,019 |   |                       |   | 22,662       |  |   |              |   |  |   | 43,681 
|Restaurant wages and related expenses |  |                   | 27,447 |   |                       |   | 20,404       |  |   |              |   |  |   | 47,851 
|Restaurant rent expense               |  |                   | 5,408  |   |                       |   | 2,490        |  |   | 666           |   |  |   | 8,564  
|Other restaurant operating expenses   |  |                   | 12,683 |   |                       |   | 9,207        |  |   |              |   |  |   | 21,890 
|Advertising expense                   |  |                   | 3,261  |   |                       |   | 2,566        |  |   |              |   |  |   | 5,827  
|General and administrative            |  |                   | 5,525  |   |                       |   | 4,234        |  |   |              |   |  |   | 9,759  
|Depreciation and amortization         |  |                   | 7,086  |   |                       |   | 4,391        |  |   | (325          | ) |  |   | 11,152 
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Total operating expenses              |  |                   | 82,429 |   |                       |   | 65,954       |  |   | 341           |   |  |   | 148,724
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Income (loss) from operations         |  |                   | (1,300 | ) |                       |   | 9,817        |  |   | (341          | ) |  |   | 8,176  
|Interest expense                      |  |                   | 6,413  |   |                       |   | 1,634        |  |   | (470          | ) |  |   | 7,577  
|Intercompany allocations              |  |                   | (4,556 | ) |                       |   | 4,556        |  |   |              |   |  |   |       
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Income (loss) before income taxes     |  |                   | (3,157 | ) |                       |   | 3,627        |  |   | 129           |   |  |   | 599    
|Provision (benefit) for income taxes  |  |                   | (1,383 | ) |                       |   | 1,603        |  |   |              |   |  |   | 220    
|Equity income from subsidiaries       |  |                   | 2,153  |   |                       |   |             |  |   | (2,153        | ) |  |   |       
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        
|Net income (loss)                     |  | $                 | 379    |   |                       | $ | 2,024        |  | $ | (2,024        | ) |  | $ | 379    
|                                      |  |                   |        |   |                       |   |              |  |   |               |   |  |   |        



15



---

CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2003

(in thousands of dollars)

(unaudited)



|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|------------------------------------- |  | ----------------- | ------ | - | --------------------- | - | ------------ |  | - | -------------------------------- | - |  | - | ------- | -
|                                      |  | ParentCompanyOnly |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | As Restated(Note 2)CombinedTotal |  
|Revenues:                             |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Restaurant sales                      |  | $                 | 83,942 |   |                       | $ | 67,960       |  | $ |                                 |   |  | $ | 151,902 |  
|Franchise royalty revenues and fees   |  |                   |       |   |                       |   | 338          |  |   |                                 |   |  |   | 338     |  
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Total revenues                        |  |                   | 83,942 |   |                       |   | 68,298       |  |   |                                 |   |  |   | 152,240 |  
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Costs and expenses:                   |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Cost of sales                         |  |                   | 22,103 |   |                       |   | 20,331       |  |   |                                 |   |  |   | 42,434  |  
|Restaurant wages and related expenses |  |                   | 28,142 |   |                       |   | 18,902       |  |   |                                 |   |  |   | 47,044  |  
|Restaurant rent expense               |  |                   | 5,456  |   |                       |   | 2,182        |  |   | 180                              |   |  |   | 7,818   |  
|Other restaurant operating expenses   |  |                   | 13,144 |   |                       |   | 8,219        |  |   |                                 |   |  |   | 21,363  |  
|Advertising expense                   |  |                   | 3,899  |   |                       |   | 3,370        |  |   |                                  |   |  |   | 7,269   |  
|General and administrative            |  |                   | 5,569  |   |                       |   | 3,675        |  |   | 30                               |   |  |   | 9,274   |  
|Depreciation and amortization         |  |                   | 7,094  |   |                       |   | 3,867        |  |   | (76                              | ) |  |   | 10,885  |  
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Total operating expenses              |  |                   | 85,407 |   |                       |   | 60,546       |  |   | 134                              |   |  |   | 146,087 |  
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Income (loss) from operations         |  |                   | (1,465 | ) |                       |   | 7,752        |  |   | (134                             | ) |  |   | 6,153   |  
|Interest expense                      |  |                   | 7,151  |   |                       |   | 1,341        |  |   | (136                             | ) |  |   | 8,356   |  
|Intercompany allocations              |  |                   | (1,736 | ) |                       |   | 1,736        |  |   |                                 |   |  |   |        |  
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Income (loss) before income taxes     |  |                   | (6,880 | ) |                       |   | 4,675        |  |   | 2                                |   |  |   | (2,203  | )
|Provision (benefit) for income taxes  |  |                   | (2,689 | ) |                       |   | 1,826        |  |   |                                 |   |  |   | (863    | )
|Equity income from subsidiaries       |  |                   | 2,851  |   |                       |   |             |  |   | (2,851                           | ) |  |   |        |  
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  
|Net income (loss)                     |  | $                 | (1,340 | ) |                       | $ | 2,849        |  | $ | (2,849                           | ) |  | $ | (1,340  | )
|                                      |  |                   |        |   |                       |   |              |  |   |                                  |   |  |   |         |  



16



---

CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2004

(in thousands of dollars)

(unaudited)



|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | ------ | ------------ |  | - | -------------- | - |  | - | ------ | -
|                                                                                         |  | ParentCompanyOnly |         |   | GuarantorSubsidiaries |   |        | Eliminations |  |   | Combined Total |  
|Cash flows provided from operating activities:                                           |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Net income (loss)                                                                        |  | $                 | (1,774  | ) |                       | $ | 2,024  |              |  | $ | 129            |   |  | $ | 379    |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Depreciation and amortization                                                            |  |                   | 7,086   |   |                       |   | 4,391  |              |  |   | (325           | ) |  |   | 11,152 |  
|Deferred income taxes                                                                    |  |                   | (238    | ) |                       |   |       |              |  |   |               |   |  |   | (238   | )
|Changes in operating assets and liabilities                                              |  |                   | 6,914   |   |                       |   | (7,744 | )            |  |   | 1              |   |  |   | (829   | )
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Net cash provided from (used for) operating activities                                   |  |                   | 11,988  |   |                       |   | (1,329 | )            |  |   | (195           | ) |  |   | 10,464 |  
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Cash flow used for investing activities:                                                 |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Capital expenditures:                                                                    |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|New restaurant development                                                               |  |                   | (99     | ) |                       |   | (1,538 | )            |  |   |               |   |  |   | (1,637 | )
|Restaurant remodeling                                                                    |  |                   | (61     | ) |                       |   |       |              |  |   |               |   |  |   | (61    | )
|Other restaurant expenditures                                                            |  |                   | (565    | ) |                       |   | (675   | )            |  |   |               |   |  |   | (1,240 | )
|Corporate and restaurant information systems                                             |  |                   | (121    | ) |                       |   | (45    | )            |  |   |               |   |  |   | (166   | )
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Total capital expenditures                                                               |  |                   | (846    | ) |                       |   | (2,258 | )            |  |   |               |   |  |   | (3,104 | )
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Net cash used for investing activities                                                   |  |                   | (846    | ) |                       |   | (2,258 | )            |  |   |               |   |  |   | (3,104 | )
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Cash flows provided from financing activities:                                           |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Payments from revolving credit facility, net                                             |  |                   | (600    | ) |                       |   |       |              |  |   |               |   |  |   | (600   | )
|Principal payments on term loans                                                         |  |                   | (3,375  | ) |                       |   |       |              |  |   |               |   |  |   | (3,375 | )
|Principal payments on financing obligations                                              |  |                   | (307    | ) |                       |   | (431   | )            |  |   | 194            |   |  |   | (544   | )
|Principal pre-payments on term loans                                                     |  |                   | (9,000  | ) |                       |   |       |              |  |   |               |   |  |   | (9,000 | )
|Payments on other notes payable, net                                                     |  |                   | (98     | ) |                       |   |       |              |  |   |               |   |  |   | (98    | )
|Principal payments on capital leases                                                     |  |                   | (44     | ) |                       |   | (62    | )            |  |   |               |   |  |   | (106   | )
|Proceeds from financing obligations, net                                                 |  |                   |        |   |                       |   | 3,250  |              |  |   | (3,250         | ) |  |   |       |  
|Financing costs associated with financing obligations                                    |  |                   |        |   |                       |   | (99    | )            |  |   | 99             |   |  |   |       |  
|Proceeds from sale/leaseback transactions                                                |  |                   | 2,427   |   |                       |   | 1,518  |              |  |   | 3,152          |   |  |   | 7,097  |  
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Net cash (used for) provided from financing activities                                   |  |                   | (10,997 | ) |                       |   | 4,176  |              |  |   | 195            |   |  |   | (6,626 | )
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Net decrease in cash and cash equivalents                                                |  |                   | 145     |   |                       |   | 589    |              |  |   |               |   |  |   | 734    |  
|Cash and cash equivalents, beginning of year                                             |  |                   | 708     |   |                       |   | 1,706  |              |  |   |               |   |  |   | 2,414  |  
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  
|Cash and cash equivalents, end of period                                                 |  | $                 | 853     |   |                       | $ | 2,295  |              |  | $ |               |   |  | $ | 3,148  |  
|                                                                                         |  |                   |         |   |                       |   |        |              |  |   |                |   |  |   |        |  



17



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CARROLS CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2003

(in thousands of dollars)

(unaudited)



|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------------- | ------ | - | --------------------- | - | ------ | ----------- |  | - | -------------------------------- | - |  | - | ------- | -
|                                                                                           |  | ParentCompanyOnly |        |   | GuarantorSubsidiaries |   |        | Elimination |  |   | As Restated(Note 2)CombinedTotal |  
|Cash flows provided from operating activities:                                             |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Net income (loss)                                                                          |  | $                 | (4,191 | ) |                       | $ | 2,849  |             |  | $ | 2                                |   |  | $ | (1,340  | )
|Adjustments to reconcile net income (loss) to net cash provided from operating activities: |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Loss on disposal of property and equipment                                                 |  |                   |       |   |                       |   | (30    | )           |  |   | 30                               |   |  |   |        |  
|Depreciation and amortization                                                              |  |                   | 7,094  |   |                       |   | 3,867  |             |  |   | (76                              | ) |  |   | 10,885  |  
|Deferred income taxes                                                                      |  |                   | (866   | ) |                       |   |       |             |  |   |                                 |   |  |   | (866    | )
|Changes in operating assets and liabilities                                                |  |                   | 6,102  |   |                       |   | (5,083 | )           |  |   | (7                               | ) |  |   | 1,012   |  
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Net cash provided from operating activities                                                |  |                   | 8,139  |   |                       |   | 1,603  |             |  |   | (51                              | ) |  |   | 9,691   |  
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Cash flow used for investing activities:                                                   |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Capital expenditures:                                                                      |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|New restaurant development                                                                 |  |                   | (1,451 | ) |                       |   | (5,323 | )           |  |   |                                 |   |  |   | (6,774  | )
|Restaurant remodeling                                                                      |  |                   | (1,251 | ) |                       |   | (27    | )           |  |   |                                 |   |  |   | (1,278  | )
|Other restaurant expenditures                                                              |  |                   | (543   | ) |                       |   | (1,663 | )           |  |   |                                 |   |  |   | (2,206  | )
|Corporate and restaurant information systems                                               |  |                   | (618   | ) |                       |   | (143   | )           |  |   |                                 |   |  |   | (761    | )
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Total capital expenditures                                                                 |  |                   | (3,863 | ) |                       |   | (7,156 | )           |  |   |                                 |   |  |   | (11,019 | )
|Proceeds from sales of non-operating properties                                            |  |                   |       |   |                       |   | 1,964  |             |  |   |                                 |   |  |   | 1,964   |  
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Net cash used for investing activities                                                     |  |                   | (3,863 | ) |                       |   | (5,192 | )           |  |   |                                 |   |  |   | (9,055  | )
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                                  |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Proceeds from revolving credit facility, net                                               |  |                   | (4,600 | ) |                       |   |       |             |  |   |                                 |   |  |   | (4,600  | )
|Prinicpal payments on financing obligations                                                |  |                   | (269   | ) |                       |   | (269   | )           |  |   | 51                               |   |  |   | (487    | )
|Financing costs associated with financing obligations                                      |  |                   |       |   |                       |   | (307   | )           |  |   | 307                              |   |  |   |        |  
|Proceeds from financing obligations, net                                                   |  |                   |       |   |                       |   | 4,050  |             |  |   | (4,050                           | ) |  |   |        |  
|Payments on other notes payable                                                            |  |                   | (258   | ) |                       |   |       |             |  |   |                                 |   |  |   | (258    | )
|Principal payments on capital leases                                                       |  |                   | (49    | ) |                       |   | (72    | )           |  |   |                                 |   |  |   | (121    | )
|Proceeds from sale/leaseback transactions                                                  |  |                   | 1,076  |   |                       |   | 93     |             |  |   | 3,743                            |   |  |   | 4,912   |  
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Net cash (used for) provided from financing activities                                     |  |                   | (4,100 | ) |                       |   | 3,495  |             |  |   | 51                               |   |  |   | (554    | )
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                       |  |                   | 176    |   |                       |   | (94    | )           |  |   |                                 |   |  |   | 82      |  
|Cash and cash equivalents, beginning of period                                             |  |                   | 715    |   |                       |   | 1,823  |             |  |   |                                 |   |  |   | 2,538   |  
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  
|Cash and cash equivalents, end of period                                                   |  | $                 | 891    |   |                       | $ | 1,729  |             |  | $ |                                 |   |  | $ | 2,620   |  
|                                                                                           |  |                   |        |   |                       |   |        |             |  |   |                                  |   |  |   |         |  



18



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



Certain statements included in this
Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as,
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. Those statements include statements regarding the intent, belief
or current expectations of the Company and its management team. 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. Such risks and uncertainties include, among other things, competitive conditions, economic and regulatory factors, general economic conditions particularly at the retail level,
fluctuations in commodity prices, availability of restaurant supply and distribution of product, liquidity of major distributors, labor and employee benefit costs, the outcome of pending or yet-to-be instituted legal proceedings, the ability of the
Company to manage its growth and successfully implement its business strategy, environmental conditions and regulations, weather conditions, significant disruptions in service or supply by any of our suppliers, risks associated with the expansion of
our business, general risks associated with the food industry, our inability to integrate any businesses we acquire, our borrowing costs and credit ratings, which may be influenced by credit ratings of our competitors, 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 food industry generally, including recalls if
products became adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations and the possibility that consumer 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, the availability and terms of necessary or desirable financing or refinancing and other risks and uncertainties that are discussed herein and
in our Annual Report on Form 10-K for the year ended December 31, 2003.



We use a 52-53 week fiscal year ending on the Sunday closest to December 31. For convenience, all references herein to the fiscal years ended December 29, 2002 and December 28, 2003 will be referred to as the fiscal
years ended December 31, 2002 and 2003, respectively. Similarly, all references herein to the three months ended March 30, 2003 and March 28, 2004 will be referred to as the three months ended March 31, 2003 and March 31, 2004, respectively. Our
fiscal years ended December 31, 2001, 2002 and 2003 each contained 52 weeks.



Restatement



As previously reported in
our Annual Report on From 10-K for the year ended December 31, 2003 we restated our financial statements including applicable footnotes for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated
during 1991 to 2000 as financing transactions under SFAS No. 98 Accounting for Leases rather than as sale/leaseback transactions as previously reported. The impact of the restatement is to record on the Companys balance



19



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these
transactions (including the gains previously deferred), as a form of debt financing. The restatement also impacted our operating results by increasing the depreciation expense for the property and equipment subject to these transactions and
recharacterizing the lease payments previously reported as rent expense for these restaurants as principal repayments and interest expense. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.



The restatement discussed above was due to lease provisions in certain of our
sale/leaseback transactions, which in our opinion have minimal commercial impact upon the relevant terms of the lease. We may amend these leases in the future to address these provisions and to qualify them for treatment as operating leases as
originally intended. However, no assurances can be made as to when or whether any or all of such leases will be amended.



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 Consolidated Financial Statements for a complete discussion of the restatement.



Overview



We are one of the largest restaurant companies in the U. S. operating 534 restaurants in 16 states as of March 31, 2004. We operate three restaurant
concepts that provide balance in terms of our revenues and diversification with regard to restaurant concept as well as the geographic location of our restaurants. We are the largest Burger King franchisee in the world and have operated Burger King
restaurants since 1976. We also own and operate two regional Hispanic restaurant companies: Taco Cabana and Pollo Tropical. At March 31, 2004 we operated 351 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. Our
Burger King restaurant sales were $81.1 million in the first quarter of 2004, or 51.7% of our total first quarter revenues. Our Hispanic restaurant brands collectively operated or franchised 216 restaurants at March 31, 2004 and comprised 48.3% of
our total revenues in the first quarter of 2004.



In 1998 we
acquired Pollo Tropical Inc., a restaurant chain featuring grilled marinated chicken and authentic made from scratch side dishes, for a cash purchase price of approximately $95 million. Since the acquisition we have expanded this concept
by over 65% by opening 24 new Pollo Tropical restaurants. At March 31, 2004, we operated 60 company owned Pollo Tropical restaurants in Florida and franchised 24 Pollo Tropical restaurants, 19 of which are in Puerto Rico. Total Pollo Tropical
revenues were $29.4 million in the first quarter of 2004.



In
December 2000, we acquired Taco Cabana Inc., a restaurant chain featuring Tex-Mex style food including flame-grilled beef and chicken fajitas, quesadillas, and fresh flour tortillas, for a total purchase price of approximately $155 million. At March
31, 2004 we operated 123 company owned Taco Cabana restaurants located in Texas and Oklahoma and franchised nine Taco Cabana restaurants.



20



---

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



Since the acquisition we have opened 23 new Taco Cabana restaurants and have closed 15 restaurants, including seven
restaurants in the Phoenix, Arizona market. Total Taco Cabana revenues were $46.0 million in the first quarter of 2004.



Significant Accounting Policies



Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make
assumptions and estimates that can have a material impact on our results of operations. 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, other than those discussed below. Estimates and judgments are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes and the valuation of goodwill for impairment. 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.



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, if any 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.



We are self-insured for most workers compensation, general liability
and medical 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, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.



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.



We record income tax liabilities
utilizing known obligations and estimates of potential obligations. We are required to record a valuation allowance if the value of estimated deferred tax assets are different from those recorded. This would include making estimates and judgments on
future taxable



21



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



income, the consideration of feasible tax planning strategies and existing facts and circumstances. When the amount
of deferred tax assets to be realized is different from that recorded, the asset balance and income statement would reflect the change in the period such determination is made.



We must evaluate our recorded intangible assets for impairment under Statement of Financial Accounting Standards (SFAS) 142
Goodwill and Other Intangible Assets on an ongoing basis. We have elected to conduct our annual impairment review of goodwill and other intangible assets at December 31. Our review at December 31, 2003 indicated there has been no
impairment as of that date. This annual evaluation requires us to make estimates and assumptions regarding the fair value of our reporting units. These estimates may differ from actual future events.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51 (FIN 46). FIN 46 is intended to clarify the application of the majority voting interest requirement of
ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties. The controlling financial interest may be achieved through arrangements that do not involve voting interests. A company that holds variable interests in an entity will
need to consolidate the variable interest entity (VIE) if the companys interest in the VIE is such that the company will absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected
residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it
is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 is effective immediately to a VIE created or obtained after
January 31, 2003. FIN 46, as amended, became effective for variable interests in a VIE created before February 1, 2003 at December 31, 2003.



FIN 46 has been subsequently modified, clarified and replaced by the issuance of FIN 46R on December 23, 2003. Relative to FIN 46, FIN 46R (a) essentially
excludes operating businesses from its provisions subject to four conditions; (b) states the provisions of FIN 46R are not required to be applied if a company is unable, subject to making an exhaustive effort, to obtain the necessary information;
(c) includes a new definitions and examples of what variable interests are; (d) clarifies and changes the definition of a variable interest entity; and, (e) clarifies and changes the definition and treatment of de facto agents, as that term is
defined in FIN 46 and FIN 46R. The Company must apply all provisions of FIN 46R by the end of the first quarter of 2005. The Company is currently reviewing the provisions of FIN 46R.



22



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



In December 2003, the FASB issued SFAS 132R, a revision of SFAS 132, Employers Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB Statements 87, 88 and 106. SFAS 132R revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement of recognition
of obligations for those plans. SFAS 132R requires additional separate disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The expanded
disclosures are required on an interim basis and are included in our consolidated financial statements for the three months ended March 31, 2004.



Results of Operations



Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003.



Since March 31, 2003 we have opened one new Burger King restaurant, closed
five Burger King restaurants, opened one new Pollo Tropical restaurant, opened nine new Taco Cabana restaurants and closed three Taco Cabana restaurants.



The following table sets forth, for the three months ended March 31, 2004 and 2003, selected operating results as a percentage of restaurant sales:



|                                                |  |       |   |  |                           |  
|----------------------------------------------- |  | ----- | - |  | ------------------------- | -
|                                                |  | 2004  |   |  | As Restated (Note 2) 2003 |  
|Restaurant sales:                               |  |       |   |  |                           |  
|Burger King                                     |  | 51.8  | % |  | 55.3                      | %
|Pollo Tropical                                  |  | 18.8  | % |  | 17.4                      | %
|Taco Cabana                                     |  | 29.4  | % |  | 27.3                      | %
|                                                |  |       |   |  |                           |  
|                                                |  | 100.0 | % |  | 100.0                     | %
|Costs and expenses:                             |  |       |   |  |                           |  
|Cost of sales                                   |  | 27.9  | % |  | 27.9                      | %
|Restaurant wages and related expenses           |  | 30.6  | % |  | 31.0                      | %
|Restaurant rent expense                         |  | 5.5   | % |  | 5.1                       | %
|Other restaurant expenses including advertising |  | 17.7  | % |  | 18.8                      | %
|General and administrative                      |  | 6.2   | % |  | 6.1                       | %
|Depreciation and amortization                   |  | 7.1   | % |  | 7.2                       | %
|                                                |  |       |   |  |                           |  
|Income from restaurant operations               |  | 5.0   | % |  | 3.8                       | %
|                                                |  |       |   |  |                           |  



23



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



Restaurant Sales - Total restaurant sales for the first quarter of 2004 increased $4.7 million
to $156.9 million from $152.2 million in the first quarter of 2003 due to strong sales performances at our Hispanic brands. Pollo Tropical restaurant sales increased $2.9 million, or 10.9%, in the first quarter of 2004 to $29.4 million due primarily
to a 8.0% sales increase at our comparable Pollo Tropical restaurants and, to a lesser extent, the opening of one Pollo Tropical restaurant during the twelve months ended March 31, 2004. Taco Cabana restaurant sales increased $4.6 million, or 11.0%,
to $46.0 million in the first quarter of 2004 due to a 4.9% increase at our comparable Taco Cabana restaurants and the net addition of six restaurants in operation during the first quarter of 2004. Burger King restaurant sales decreased $2.8
million, or 3.4%, to $81.1 million in the first quarter of 2004 due to a decrease in comparable restaurant sales of 3.2%. This decrease in 2004 was due to reduced customer traffic, primarily in January of 2004, in which comparable restaurant sales
at our Burger King restaurants decreased 10.5%.



Operating
Costs and Expenses - Cost of sales (food and paper costs), as a percentage of total restaurant sales, was 27.9% in both the first quarters of 2004 and 2003. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to
25.9% in the first quarter of 2004 from 26.3% in 2003 due to lower promotional sales discounts and higher rebates in 2004 offset in part by a 14.6% increase in beef commodity prices. Pollo Tropical cost of sales, as a percentage of Pollo Tropical
restaurant sales, decreased to 30.7% in the first quarter of 2004 from 31.2% in 2003 due primarily to improvements in restaurant food controls and reductions in sales of lower margin products, offset in part by higher chicken commodity prices in
2004 and lower rebates. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.7% in the first quarter of 2004 from 29.1% in 2003 due primarily to higher beef commodity prices in 2004, offset partially by a
modest price increase of approximately 1% in the beginning of the first quarter of 2004.



Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 30.6% in the first quarter of 2004 from 31.0% in 2003. Burger King restaurant wages and related expenses, as a percentage
of Burger King restaurant sales, increased to 33.8% in the first quarter of 2004 from 33.5% in 2003 due to the effects of lower sales volumes on fixed labor costs and higher workers compensation and medical insurance costs, partially offset by
restaurant productive labor efficiencies. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 24.2% in the first quarter of 2004 from 25.8% in 2003 due to restaurant
productive labor efficiencies and the effect on fixed labor costs of higher comparable restaurant sales volumes. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.9% in the first
quarter of 2004 from 29.1% in 2003 due to the price increase in the first quarter of 2004 and the effect on fixed labor costs of higher comparable restaurant sales volumes.



24



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



Other restaurant operating expenses (which includes advertising), as a percentage of total restaurant
sales, decreased to 17.7% in the first quarter of 2004 from 18.8% in 2003. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 19.7% in the first quarter of 2004 from 20.3% in 2003 due to
lower local advertising expenditures and lower discretionary restaurant operating expenditures partially offset by higher utility costs. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales,
decreased to 12.6% in the first quarter of 2004 from 14.8% in 2003 due primarily to lower advertising expenditures in 2004. Advertising expense, as a percentage of Pollo Tropical restaurant sales, was 1.6% in the first quarter of 2004 compared to
3.9% in 2003. We anticipate our Pollo Tropical advertising expenses for all of 2004, as a percentage of Pollo Tropical restaurant sales, to range from 2.0% to 2.5% which is lower than historical levels. Taco Cabana other restaurant operating
expenses, as a percentage of Taco Cabana restaurant sales, decreased to 17.6% in the first quarter of 2004 from 18.5% in 2003 due to lower advertising costs related to the timing of promotions compared to the prior year partially offset by higher
utility costs.



Restaurant rent expense, as a percentage of
total restaurant sales, increased to 5.5% in the first quarter of 2004 from 5.1% in 2003 due to sale/leaseback transactions completed in 2003, and to a lesser extent, those completed in 2004.



General and administrative expenses, as a percentage of total restaurant
sales, increased slightly to 6.2% in the first quarter of 2004 from 6.1% in 2003 and increased $0.5 million in total to $9.8 million due primarily to increased administrative bonus levels.



EBITDA - Earnings before interest, income taxes, depreciation and
amortization (EBITDA) increased to $19.3 million in the first quarter of 2004 from $17.0 million in the first quarter of 2003. As a percentage of total revenues, EBITDA margins increased to 12.3% in the first quarter of 2004 from 11.2%
in the first quarter of 2003, as a result of the factors discussed above. See Reconciliation of Non-GAAP Financial Measures on page 26.



Depreciation and Amortization  Depreciation and amortization expense increased to $11.2 million in the first quarter of 2004 from $10.9
million in the first quarter of 2003 due primarily to impairment charges of $0.3 million for certain of our Burger King restaurants.



Interest Expense - Interest expense decreased $0.8 million to $7.6 million in the first quarter of 2004 from $8.4 million in the first quarter of
2003 due primarily to lower average debt balances in 2004, resulting primarily from the use of the net proceeds from our sale/leaseback transactions in 2003 and 2004 to reduce debt under our senior credit facility. The weighted average interest rate
on all debt for the three months ended March 31, 2004 and 2003 was 7.5% and 7.1%, respectively.



Income Taxes - The benefit for income taxes for the first quarter of 2004 was derived using an estimated effective annual income tax rate for 2004
of 36.7%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible amortization of certain franchise rights.



25



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



Net Income (Loss)  As a result of the foregoing, net income in the first quarter of 2004
was $379,000 compared to a net loss of $1,340,000 in the first quarter of 2003.



Reconciliation of Non-GAAP Financial Measures



EBITDA is presented because we believe it is a useful financial indicator for measuring the ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating
results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. A reconciliation of EBITDA to net income (loss) for the three months ended March 31, 2004 and 2003 is as follows:



|                                            |  |      |        |                           |   |        |  
|------------------------------------------- |  | ---- | ------ | ------------------------- | - | ------ | -
|                                            |  | 2004 |        | As Restated (Note 2) 2003 |  
|EBITDA                                      |  | $    | 19,328 |                           | $ | 17,038 |  
|Less: Depreciation and amortization expense |  |      | 11,152 |                           |   | 10,885 |  
|Interest expense                            |  |      | 7,577  |                           |   | 8,356  |  
|Provision (benefit) for income taxes        |  |      | 220    |                           |   | (863   | )
|                                            |  |      |        |                           |   |        |  
|Net income (loss)                           |  | $    | 379    |                           | $ | (1,340 | )
|                                            |  |      |        |                           |   |        |  



Off- Balance Arrangements



We have no off-balance sheet arrangements.



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.
| | - |  | ---------------------------------------------------------------------------------------------------------



Our cash requirements arise primarily from:



| |  |  | the need to finance the opening and equipping of new restaurants;
| | - |  | -----------------------------------------------------------------



| |  |  | ongoing capital reinvestment in our existing restaurants; and
| | - |  | -------------------------------------------------------------



| |  |  | servicing our debt.
| | - |  | -------------------



26



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



Our operations in the first quarter of 2004 generated $10.5 million in cash compared with $9.7
million in the first quarter of 2003.



In the first quarter of
2004, we sold five restaurant properties in sale/leaseback transactions for net proceeds of $7.1 million. In the first quarter of 2003 we sold four restaurant properties in sale/leaseback transactions for net proceeds of $4.9 million and sold two
non-operating properties for $1.9 million. The net proceeds from these sales were used to reduce outstanding debt on our senior credit facility. For all of 2004 we anticipate that our net proceeds from sale/leaseback transactions will range from $10
million to $15 million.



Capital expenditures represent a major
investment of cash for us and were $3.1 million and $11.0 million in the first quarter of 2004 and 2003, respectively. Expenditures for new restaurant development were $1.6 million and $6.8 million in the first quarter of 2004 and 2003,
respectively. Our capital expenditures also include remodeling costs and capital maintenance projects for the ongoing reinvestment and enhancement of our restaurants and totaled $1.5 million and $4.2 million in the first quarter of 2004 and 2003,
respectively.



In 2004, we anticipate total capital
expenditures of approximately $20 million to $22 million. Anticipated 2004 expenditures include approximately $11 million to $12 million for the construction of new restaurants and purchase of related real estate applicable to our three restaurant
concepts. Capital expenditures in 2004 also include expenditures of approximately $9 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures.



At March 31, 2004, we had total long-term debt of $282.7 million comprised of
$170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, borrowings under our senior credit facility of $111.1 million and other debt, primarily capital leases, of $1.5 million. Our senior credit facility provides for a $70 million term
loan A facility, an $80 million term loan B facility and a $50 million revolving credit facility. During the quarter ended March 31, 2004 we made voluntary principal prepayments on our term A and term B debt of $9 million. At March 31, 2004, $111.1
million was outstanding under the term loan A and B facilities and no amounts were outstanding under our revolving credit facility. We elected to reduce our revolving credit facility from $100 million to $50 million on May 5, 2004. As a result of
our election, $39.8 million is available for borrowings under our revolving credit facility, after reserving $10.2 million for letters of credit guaranteed by the facility, subject to meeting certain financial ratio tests required by the senior
credit facility.



As a result of the restatement of our
previously issued financial statements discussed above, we were in default related to certain required financial leverage ratios and other covenants under our senior secured credit facility. We have obtained a waiver from our senior secured lenders
of any prior non-compliance and defaults resulting from the restatement. In addition, our senior secured credit facility has been amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat,
on a prospective basis, the specified leases as if no restatement or recharacterization has occurred. We were in compliance with our Senior Credit Facility, as amended, and the indenture governing our 9.5% Senior Subordinated Notes due 2008 as of
March 31, 2004.



27



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)



Interest payments under our senior subordinated notes and other existing 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, planned
development and debt service requirements for the next twelve months.



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 of the Companys Annual Report on Form 10-K for the year ended December
31, 2003 with respect to the Companys market risk sensitive instruments.



ITEM 4  CONTROLS AND PROCEDURES



Our
senior management is responsible for establishing and maintaining a system of 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
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.



In accordance with Exchange Act
Rules 13a 15 and 15d  15, we carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key



28



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ITEM 4  CONTROLS AND PROCEDURES  (Continued)



members of our management, of the effectiveness of our disclosure controls and procedures as
of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted 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.



No change occurred in our internal controls concerning financial reporting during the first quarter of 2004 that materially affected, or is reasonably likely to materially affect, our internal controls over financial
reporting.



As discussed in our Annual Report on Form 10-K for
the year ended December 31, 2003 we restated our financial statements including applicable footnotes for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing
transactions under SFAS No. 98 Accounting for Leases rather than as sale/leaseback transactions as previously reported. In order to provide reasonable assurance that any future sale/leaseback transactions that may be entered into by us
will be properly accounted for in accordance with generally accepted accounting principles, we have enhanced our internal controls to require an evaluation of applicable lease provisions that could affect, in the context of current interpretive
guidance pertaining to the application of generally accepted accounting principles for sale/leaseback transactions, the classification of such transactions.



29



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PART II - OTHER INFORMATION



Item 1. Legal Proceedings



There were no material legal proceedings commenced by or initiated against the Company during the reported quarter or material developments in any
previously reported litigation.



Item 2. Changes in Securities and Use of
Proceeds and Issuer Purchases of Equity Securities



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



Item 6. Exhibits and Reports on Form 8-K



(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.



30



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(b) Reports on Form 8-K filed during the reported quarter.



|                        |  |            |  |                                                                                 
|----------------------- |  | ---------- |  | --------------------------------------------------------------------------------
|Date Filed or Furnished |  | ItemNumber |  | Description                                                                     
|March 18, 2004          |  | 7 and 12   |  | Announced results of operations for the Companys fourth fiscal quarter of 2003.





31



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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: May 12, 2004 |  | /s/ Alan Vituli                                                        
|                   |  | (Signature)                                                            
|                   |  | Alan Vituli Chairman of the Board and Chief Executive Officer          
|                   | 
|Date: May 12, 2004 |  | /s/ Paul R. Flanders                                                   
|                   |  | (Signature)                                                            
|                   |  | Paul R. Flanders Vice President  Chief Financial Officer and Treasurer





32