ITEM 1. BUSINESS

Overview

Who We Are

We are one of the largest restaurant companies in the United States operating 532 restaurants in 16 states as of December 31, 2003. 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 December 31, 2003, we operated 351 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. Our Burger King restaurant sales were $353.3 million in 2003, or 55% of our total revenues. Our Hispanic restaurant brands collectively operate or franchise more than 200 restaurants and comprised 45% of 2003 revenues.

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 December 31, 2003 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 $110.2 million in 2003.

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 December 31, 2003 we operated 121 company owned Taco Cabana restaurants located in Texas and Oklahoma and franchised nine Taco Cabana restaurants. Since the acquisition we have opened 21 new Taco Cabana restaurants and have closed 15 restaurants, including seven restaurants in the Phoenix, Arizona market. Total Taco Cabana revenues were $181.5 million in 2003.

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Due primarily to our acquisition of Taco Cabana in 2000 as well as the construction of new restaurants over the past five years, total revenues for our Hispanic brands have increased from $83.8 million in 1999 to $291.7 million in 2003. During this time frame total Adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization and other income and expense) from our Hispanic brands has increased over 250% from $18.6 million in 1999 to $47.0 million in 2003. See Reconciliation of Non-GAAP Financial Measures on page 32.

We are a Delaware corporation incorporated in 1968.

The Industry

We operate restaurants in the quick-service and quick-casual restaurant industry segments, which include hamburgers, pizza, chicken, various types of sandwiches, Mexican and other ethnic foods. Our Burger King restaurants operate in the hamburger segment of the quick-service restaurant industry. Our Hispanic brands, Taco Cabana and Pollo Tropical, are part of the quick-casual segment, which combines the convenience of quick-service restaurants with the menu variety, use of fresh ingredients and food quality of casual dining.

According to Technomic Information Services (Technomic), the quick-service segment of the restaurant industry had sales of approximately $136.3 billion in 2002. According to Technomic, sales in this segment grew at a compound annual rate of 4.6% between 1997 and 2002 and are projected to increase at a compound annual rate of 4.5% between 2002 and 2007, including an increase of 3.0% in the hamburger segment. We believe that this growth reflects consumers’ desire for a convenient, reasonably priced restaurant experience. In addition, the consumer’s need for meals prepared outside of the home, including takeout, has increased significantly over past historical levels as a result of the greater numbers of working women and single parent families.

Hispanic Brands

Our Hispanic brands will also benefit from additional factors such as the growing baby boomer demand for quick-casual dining and increasing consumer demand for, and acceptance of, variety and ethnic foods. To a lesser extent, we also believe that our Hispanic brands will benefit from the growing U.S. Hispanic population. According to the U.S. Census Bureau, growth of the Hispanic population is projected to outpace overall population growth and increase from 11.8% of the total population in 2000 to 18.2% by 2025.

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Taco Cabana

Our Taco Cabana restaurants feature fresh, premium quality Tex-Mex and traditional Mexican style food. Menu items include flame-grilled beef and chicken fajitas, quesadillas, traditional Mexican and American breakfasts, other Tex-Mex dishes and fresh-made flour tortillas. Many of Taco Cabana’s menu items are “sharing” foods designed for families and large groups. Unlike many of its competitors, most menu items are made fresh daily in each of our Taco Cabana restaurants. Taco Cabana restaurants also offer a variety of beverage choices including margaritas and beer.

Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978 and of the 121 restaurants we operated at December 31, 2003, 115 are located in Texas. For the year ended December 31, 2003, Taco Cabana’s average restaurant sales were approximately $1.52 million.

Our acquisitions of Taco Cabana and Pollo Tropical have allowed us to:

Pollo Tropical

We operate and franchise Pollo Tropical quick-casual restaurants featuring fresh grilled chicken marinated in a proprietary blend of tropical fruit juices and spices and authentic “made from scratch” side dishes. The menu emphasizes freshness and quality with a focus on flavorful chicken served “hot off the grill.” Pollo Tropical restaurants combine high quality, distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants.

Pollo Tropical opened its first company-owned restaurant in 1988 in Miami and its first international franchised restaurant in 1995 in Puerto Rico. At December 31, 2003, we owned and operated a total of 60 restaurants, 51 of which are located in south Florida under the trade name Pollo Tropical and nine under the trade name TropiGrill in central Florida. We also franchised 24 Pollo Tropical restaurants, 19 of which are located in Puerto Rico, four in Ecuador and one in Miami. For the year ended December 31, 2003, Pollo Tropical’s average restaurant sales were approximately $1.84 million, which we believe is among the highest in its industry segment.

Burger King

Burger King Corporation (“BKC”) is the second largest quick-service hamburger restaurant chain in the world. According to BKC, at December 31, 2003 there were approximately 11,300 restaurants in 58 countries worldwide, including approximately 7,800 throughout the United States. Total worldwide restaurant sales for the year ended June 30, 2003 were approximately $11.1 billion, of which approximately $7.9 billion were in the United States. Burger King restaurants are quick-service restaurants of distinctive design that feature flame-broiled hamburgers and serve several widely known, trademarked products, the most popular being the WHOPPER ^® sandwich.

We believe that the primary competitive advantages of Burger King restaurants are:

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Competitive Strengths

We attribute our success in the quick-casual and quick-service restaurant industry segments to the following competitive strengths:

Strong Brand Names - We believe our restaurant concepts are highly recognized brands in their market areas.

Our Hispanic Brands - Pollo Tropical is one of the most highly recognized quick-casual restaurant brands in its core markets of south and central Florida. Taco Cabana is also a highly recognized quick-casual brand in its core Texas markets. Of the 121 Taco Cabana restaurants we currently operate, a total of 115 restaurants are concentrated in five major markets: San Antonio, Houston, Dallas/Fort Worth, Austin and El Paso. We believe that the following factors have led to the success of both of these concepts:

Burger King - Since the formation of BKC in 1954, the Burger King brand has become one of the most recognized brands in the restaurant industry. BKC spends between 4% and 5% of total system sales on advertising per year (approximately $2.3 billion over the past five years) to sustain and increase this high brand awareness. We believe strong brand recognition, coupled with the quality and value of the food and convenience of its restaurants, provide opportunities for growth for the Burger King brand.

Stable and Diversified Cash Flows - We believe that the stability of our operating cash flows is due to the proven success of our restaurant concepts and our consistent focus on restaurant operations. Over the past five years, our restaurant level EBITDA (Adjusted EBITDA before general and administrative expenses) margins for our Burger King restaurants ranged between 15.3% and 17.5% and averaged 16.6%. Over the same period, restaurant level EBITDA margins for our Pollo Tropical restaurants have ranged between 25.3% and 28.3% and averaged 26.8%. For the past three years the restaurant level EBITDA margins for our Taco Cabana restaurants have ranged between 19.3% and 21.2% and averaged 20.2%. Our aggregate cash flow from operations has increased from $39.1 million in 1999 to $48.2 million in 2003. We believe that the stability and diversification of our cash flows provide us with adequate liquidity to meet our cash flow requirements. See Reconciliation of Non-GAAP Financial Measures on page 32.

Diversified Locations and Restaurant Concepts - Our Burger King restaurants are geographically dispersed over 13 states in the Northeast, Southeast and Great Lakes regions. Our acquisitions of Pollo Tropical, with its restaurants in Florida, and Taco Cabana, with its restaurants in Texas and Oklahoma, have further expanded our geographic presence. We believe that multiple concepts operating in diverse geographic areas enable us to capitalize on regions that have rapidly growing populations and to further reduce our dependence on the economic performance of any one particular region or restaurant concept.

Largest Burger King Franchisee - We are the largest Burger King franchisee in the world. We believe that our leadership position, together with our experienced management team, effective management information systems, and an extensive infrastructure enable us to operate more efficiently and better enhance restaurant margins and overall performance levels than most other Burger King franchisees. These strengths also enable us to continue to develop new restaurants and to selectively acquire additional Burger King restaurants.

Experienced Management Team with a Significant Equity Stake - Our senior management team, headed by Chairman and Chief Executive Officer Alan Vituli and President and Chief Operating Officer Daniel T. Accordino, has a long and successful history of developing, acquiring and operating limited-service restaurants for the Company. Our management team owns (on a diluted basis) approximately 16% of Carrols Holdings Corporation (“Carrols Holdings”), which owns 100% of our stock.

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Business Strategy

Our business strategy is to continue to increase revenues and cash flow through the construction of new restaurants, selective acquisitions, improvements in operating efficiencies and enhancements in our marketing and product development activities. Based on our historical performance, we believe that this business strategy represents a low-risk growth plan. Our strategy is based on the following components:

Leverage Strong Brand Names - We realize significant benefits as an owner of the Pollo Tropical and Taco Cabana restaurant concepts and as a Burger King franchisee. These benefits are the result of the following:

Achieve Operating Efficiencies - We maintain a disciplined commitment to increasing the profitability of our existing restaurants. Our large base of restaurants, management structure and management information systems enable us to optimize operating efficiencies for our restaurants. We are able to control restaurant labor and food costs through the use of our sophisticated management information and point-of-sale systems as well as to effectively manage our restaurant operations and ensure consistent application of operating controls. Our size enables us to realize benefits from improved bargaining power for purchasing and cost management initiatives. We believe these factors provide the basis for increased unit and company profitability.

Consistently Provide Superior Customer Satisfaction - Our operations are focused on achieving a high level of customer satisfaction through quick, accurate and high-quality customer service. We have uniform operating standards and restaurant-level objectives in each of our brands for the following areas:

We closely supervise the operation of all of our restaurants to help ensure that standards and policies are followed and that product quality, customer service and cleanliness of the restaurants are maintained at high levels. At each of our brands we also employ external services to visit our restaurants on an unannounced basis to measure and evaluate our execution of these operating policies.

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Open Additional Restaurants - We believe that many of our existing markets will continue to provide opportunities for the development of new restaurants. We look to develop restaurants in markets we believe are underpenetrated and where the demographic characteristics are favorable for the development of new restaurants. Our staff of real estate and construction professionals are responsible for our new restaurant development. Before developing a new restaurant, we conduct an extensive site selection and evaluation process that includes in-depth demographic, market and financial analysis. By selectively increasing the number of restaurants we operate in a particular market, we can increase brand awareness and effectively leverage our restaurant management oversight, corporate infrastructure and local marketing expenditures.

We believe there may be opportunities to expand our Burger King store units selectively as franchisees seek liquidity through the sale of their restaurants. We believe that selective acquisitions of additional Burger King restaurants could result in operating efficiencies from our proven abilities to improve controls over restaurant food costs, efficiently utilize labor, and achieve increased economies of scale by leveraging our infrastructure and control systems.

Overview of Restaurant Concepts

Burger King Restaurants

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

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

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

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Our Burger King restaurants consist of one of several building types with various seating capacities. BKC’s traditional freestanding restaurant contains approximately 2,800 to 3,200 square feet with seating capacity for 90 to 100 customers, has drive-thru service windows, and has adjacent parking areas. At December 31, 2003, 340 of our 351 Burger King restaurants were freestanding.

Pollo Tropical Restaurants

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

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

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

Our Pollo Tropical restaurants typically provide seating for 80 to 100 customers and provide drive-thru service. All of our Pollo Tropical restaurants are freestanding buildings except for four locations contained within strip shopping centers and one street-level storefront location in an office building. Our typical freestanding Pollo Tropical restaurant ranges between 2,800 and 3,200 square feet in size.

Taco Cabana

Taco Cabana restaurants combine generous portions of fresh, premium quality Tex-Mex and traditional Mexican style food with the convenience and value pricing of quick-service restaurants. The restaurants provide interior, semi-enclosed and patio dining areas with a festive Mexican theme. Menu items include flame-grilled beef and chicken fajitas served on sizzling iron skillets, quesadillas, traditional Mexican and American breakfasts, other Tex-Mex dishes and fresh, hot flour tortillas. Most of the menu items offered at each of our Taco Cabana restaurants are prepared at each restaurant from fresh meat and produce ingredients delivered by suppliers to the restaurant, usually three times each week. Taco Cabana is committed to differentiating itself from other quick-casual competitors by utilizing fresh, high quality ingredients as well as preparing most items “from scratch”. In order to simplify operations and provide a more consistent product, Taco Cabana also uses a number of pre-prepared items.

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Taco Cabana restaurants average approximately 3,200 square feet (exclusive of the exterior dining area) and provide seating for approximately 80 customers, with additional outside patio seating for approximately 50 customers. Taco Cabana restaurants are typically distinctive in appearance, conveying a Mexican theme and permitting easy identification by passing motorists. Our Taco Cabana restaurants feature rounded fronts, as well as Southwest accents such as a clay tile roof, heavy wood beams and a trellis that shades the patio area, and the use of bright colors outside and inside, including colored tiles, doors, windows and awnings. Corrugated metal wall panels, aged wood finishes and distressed stainless steel counter tops are featured inside.

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

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

Restaurant Economics

Burger King Restaurants

For the year ended December 31, 2003, our Burger King restaurants generated average sales of approximately $1,003,000 and average restaurant level EBITDA of approximately $161,000. Drive-thru sales contributed 61.8% of all restaurant sales. In all but 14 locations, which are primarily in malls, our Burger King restaurants have a drive-thru window. Percentages of total sales by day part were as follows for the year ended December 31, 2003:

The average sales transaction was $4.47 in 2003.

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

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Pollo Tropical Restaurants

For the year ended December 31, 2003, our Pollo Tropical restaurants generated average sales of approximately $1,838,000 and average restaurant level EBITDA of approximately $464,000. Pollo Tropical restaurant sales are well balanced by method of service and by day part. For 2003, drive-thru sales contributed 42.2% of restaurant sales and take-out sales accounted for 20.8% of total sales. Percentages of total sales by day part are as follows:

The average sales transaction was $8.18 in 2003.

The cost of equipment, seating, signage and other interior costs of a standard new Pollo Tropical restaurant are approximately $350,000 (excluding the cost of the land, building, and site improvements). The cost of land generally ranges from $550,000 to $750,000. The cost of building and site improvements generally ranges from $650,000 to $800,000. We generally lease the real estate associated with our Pollo Tropical restaurants.

Taco Cabana Restaurants

For the year ended December 31, 2003, our Taco Cabana restaurants generated average restaurant sales of $1,523,000 and average restaurant level EBITDA of $293,000. Drive-thru sales contributed 46.6% of all restaurant sales.

The majority of our Taco Cabana restaurants are open 24 hours a day. Sales at the restaurants are balanced by day part. Percentages of total sales by day part are as follows:

The average sales transaction was $6.66 in 2003.

The cost of equipment, seating, signage and other interior costs of a standard new Taco Cabana restaurant total approximately $420,000 (excluding the cost of the land, building and site improvements). The cost of the land generally ranges from $650,000 to $800,000. The cost of building and site improvements generally ranges from $750,000 to $850,000. We generally lease the real estate associated with our Taco Cabana restaurants.

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As of December 31, 2003, we owned and operated 60 Pollo Tropical restaurants, all located in Florida. In addition, of our 24 franchised Pollo Tropical restaurants, 19 are located in Puerto Rico; four are located in Ecuador and one in Miami.

As of December 31, 2003, we owned and operated 121 Taco Cabana restaurants and franchised nine Taco Cabana restaurants located in the following states:

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Operations

Management Structure

We conduct substantially all of our executive management, finance, marketing and operations support functions from our corporate headquarters in Syracuse, New York, our Pollo Tropical headquarters in Miami, Florida and our Taco Cabana headquarters in San Antonio, Texas. Our Burger King operations are overseen by four Regional Directors, three of whom are Vice Presidents, that have an average of 24 years of Burger King restaurant experience. Forty-five district supervisors that have an average of 19 years of restaurant management experience in the Burger King system support the Regional Directors. The management structure for Pollo Tropical consists of an Executive Vice President, who has over 30 years experience in the restaurant industry, and a Vice President of Operations supported by seven district supervisors. The management structure of Taco Cabana consists of an Executive Vice President of Operations, who has over 30 years of restaurant experience, and two Regional Vice Presidents supported by 17 district supervisors.

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

Training

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

Management Information Systems

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

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

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

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

Site Selection

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

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Burger King Franchise Agreements

Each of our Burger King restaurants operates under a separate franchise agreement with Burger King Corporation. Our franchise agreements with BKC require, among other things, that all restaurants comply with specified design criteria and be operated in a prescribed manner, including utilization of the standard Burger King menu. Our franchise agreements with BKC generally provide for an initial term of 20 years and currently have an initial fee of $50,000. BKC may grant a successor franchise agreement (renewal) for an additional 20-year term, provided the restaurant meets the current BKC operating and image standards. The successor BKC franchise agreement fee is currently $50,000. BKC may not cancel or terminate our franchise agreements unless we are in default of the terms of the agreements. We are not in default under our franchise agreements with BKC.

In order to obtain a successor franchise agreement with BKC, a franchisee is typically required to make capital improvements to the restaurant to bring it up to BKC’s current design standards. The required capital improvements will vary widely depending upon the magnitude of the required changes and the degree to which we have made interim changes to the restaurant. We have three franchise agreements expiring in 2004, 24 franchise agreements expiring in 2005 and 17 franchise agreements expiring in 2006.

We believe that we will be able to satisfy BKC’s normal successor franchise agreement policies. Accordingly, we believe that successor franchise agreements with BKC will be granted on a timely basis by BKC at the expiration of our existing franchise agreements with BKC. Historically, BKC has granted all of our requests for successor franchise agreements. We cannot assure you, however, that BKC will continue to grant each of our requests for successor franchise agreements.

In addition to the initial franchise fee, we generally pay to BKC a monthly royalty of 3  ¹ / 2 % of the gross revenues from our Burger King restaurants. We also contribute a minimum of 4% of restaurant sales from our Burger King restaurants to fund BKC’s national and regional advertising. BKC engages in substantial national and regional advertising and promotional activities and other efforts to maintain and enhance the Burger King brand. We supplement BKC’s marketing with local advertising and promotional campaigns. See “Business—Advertising and Promotion.”

Our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, there is no assurance that a franchise given by BKC to a third party will not adversely affect any single Burger King restaurant that we operate.

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

Franchise Fees and Early Successor Program

On July 1, 2000, BKC increased its royalty and franchise fees for most new restaurants. The franchise fee for new restaurants increased from $40,000 to $50,000 for a 20-year agreement and the royalty rate increased from 3  ¹ / 2 % of sales to 4  ¹ / 2 % of sales, after a transitional period. For franchise agreements entered into during the transitional period, the royalty rate is 4% of sales for the first 10 years of the agreement and 4  ¹ / 2 % of sales for the balance of the term.

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For new restaurants, the transitional period was from July 1, 2000 through June 30, 2003. As of July 1, 2003, the royalty rate became 4  ¹ / 2 % of sales for the full term of new restaurant franchise agreements. As of July 1, 2001, existing restaurants that renewed their franchise agreements pay a royalty of 4  ¹ / 2 % of sales for the full term of the renewed agreement. The advertising contribution remained at 4% of sales. The royalty rates for existing franchise agreements are not affected by these changes until the time of renewal.

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

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

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

After evaluating the applicable royalty reductions and the acceleration of the required capital improvements, we elected to renew 48 franchise agreements under BKC’s Early Successor Incentive Programs. Our capital expenditures related to these renewals were substantially completed in 2002. Burger King royalties, as a percentage of restaurant sales, decreased to 3.4% in 2003 and 2002 from 3.5% in 2001 and are anticipated to be 3.4% in 2004 as a result of our renewals under these programs.

Transformation Initiatives

Over the past three years BKC has instituted initiatives to encourage and facilitate franchisees’ investment in certain upgrades to their restaurants. These transformation initiatives include the installation of new signage with the new Burger King logos, a new drive-thru equipment package, and where necessary, expenditures for painting, parking lot maintenance and landscaping. In addition, BKC defined enhancements to the kitchen including a new high-speed toaster, improved product holding units and a new self-loading broiler capable of cooking at different speeds and temperatures facilitating the preparation of a wider variety of menu items. By an amendment to our franchise agreements, we have committed:

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BKC also arranged for the Coca-Cola Company and Dr. Pepper/Seven-Up, Inc. to make funds available to franchisees to be used in connection with the transformation initiatives. By agreeing to make the investments associated with the transformation initiatives, we received $56,000 per restaurant in 2000, or approximately $19.8 million in the aggregate, from the fund established by Coca-Cola and Dr. Pepper. We also received $1.6 million from this fund on a supplemental basis in 2001 pertaining to completing the drive-thru package.

We had completed all of the initiatives above, with the exception of signage and the Phase II kitchen initiatives, by the end of 2002. We are substantially complete with respect to the installation of new signage as of December 31, 2003. Total expenditures related to these activities over the past four years were $12.8 million. Phase II kitchen initiatives (installation of a new broiler) have not yet been mandated by BKC.

Pollo Tropical Franchise Operations

At December 31, 2003 Pollo Tropical had three franchisees operating a total of 24 Pollo Tropical restaurants located in Puerto Rico, Ecuador and Miami. While our existing franchisees may open new restaurants from time to time, we are not actively expanding our franchise operations at the present time.

Our standard franchise agreement under which we franchise Pollo Tropical restaurants to independent restaurant operators has a 15-year term (with one 15-year renewal option). It provides for an initial payment by the franchisee of a portion of all franchise fees upon signing of the area development and franchise agreements, with the remainder due before the opening of the franchisee’s Pollo Tropical restaurants. The franchisee also pays a continuing royalty, based upon a specified percentage of gross sales. The terms and conditions of these franchise agreements will vary depending upon a number of factors, including:

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

Taco Cabana Franchise Operations

As of December 31, 2003, Taco Cabana had five franchisees operating a total of nine Taco Cabana restaurants. Taco Cabana did not enter into any new franchise agreements during 2003 and we are not actively expanding our franchise operations at the present time.

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Advertising and Promotion

The efficiency and quality of advertising and promotional programs can significantly affect quick-service restaurant businesses. We believe that one of the major advantages of being a Burger King franchisee is the value of the extensive regional and national advertising and promotional programs conducted by BKC. In addition to the benefits derived from BKC’s advertising spending, we supplement BKC’s advertising and promotional activities with local advertising and promotions, including the purchase of additional television, radio and print advertising. Our concentration of restaurants in many of our markets permits us to leverage advertising in those markets. We also utilize promotional programs, such as combination value meals and discounted prices, targeted to our customers, in order to create a flexible and directed marketing program.

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

We believe that brand awareness for our Pollo Tropical restaurants is extremely high because of the concentration of our restaurants in the south Florida markets. The market concentration of Pollo Tropical restaurants allows us to maximize the effectiveness of our advertising efforts. Pollo Tropical advertises in both English and Spanish media throughout the year, including television, radio and print advertising. Pollo Tropical also has marketed at the individual restaurant level through unique promotional and public relations programs. Pollo Tropical spent approximately 3.6%, 3.6% and 3.7% of restaurant sales on advertising in 2003, 2002 and 2001, respectively. We anticipate our 2004 Pollo Tropical advertising expenditures to be near a comparable level, as a percentage of restaurant sales.

Taco Cabana utilizes an integrated, multi-level marketing approach that includes periodic chain-wide promotions, direct mail, in-store promotions, local store marketing and other strategies, including the use of radio and television advertising in its major markets. Combination value meals are also utilized as well as limited time offer menu item promotions. As a percentage of restaurant sales, Taco Cabana’s advertising expenditures were approximately 4.7% in 2003, 4.3% in 2002 and 5.1% in 2001. Advertising expenditures, as a percentage of restaurant sales, increased in 2003 from fiscal 2002 levels, as a percentage of restaurant sales, due to additional promotions in certain markets. We anticipate our Taco Cabana advertising expenditures to range from 4.3% to 4.5% of restaurant sales in 2004.

Supplies and Distribution

We are a member of a national purchasing cooperative created for the Burger King system known as Restaurant Services, Inc. Restaurant Services Inc. is a non-profit independent cooperative that acts as the purchasing agent for approved distributors to the Burger King system and serves to negotiate the lowest cost for the system. We use our purchasing power to negotiate directly with certain other vendors, to obtain favorable pricing and terms for supplying our restaurants.

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For our Burger King restaurants, we are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers. We currently utilize four suppliers to supply our Burger King restaurants with the majority of their foodstuffs in various geographical areas. We may purchase non-food items such as kitchen utensils, equipment maintenance tools and other supplies from any suitable source provided that such items meet BKC product uniformity standards. All BKC-approved suppliers are required to purchase foodstuffs and supplies from BKC-approved manufacturers and purveyors. BKC is responsible for monitoring quality control and supervision of these manufacturers and conducts regular visits to observe the preparation of foodstuffs, and to run various tests to ensure that only high quality foodstuffs are sold to BKC-approved suppliers. In addition, BKC coordinates and supervises audits of approved suppliers and distributors to determine continuing product specification compliance and to ensure that manufacturing plant and distribution center standards are met.

For our Pollo Tropical and Taco Cabana restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies to ensure consistent quality and freshness and to obtain competitive prices. Pollo Tropical and Taco Cabana restaurants’ food and supplies are ordered from approved suppliers and are shipped directly to the restaurants. Both brands are responsible for monitoring quality control and supervision of these suppliers and conduct inspections to observe the preparation and quality of products purchased. For our Taco Cabana restaurants, SYGMA Network, Inc. (SYGMA) serves as the primary distributor of food and beverage products and supplies. SYGMA purchases, warehouses and distributes products for these restaurants under a distribution service agreement that expires on December 31, 2005. For our Pollo Tropical restaurants, Henry Lee, a division of Gordon Food Service, serves as the primary distributor of food and paper products under an agreement which expires on March 16, 2007.

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

Quality Assurance

At each of our three concepts we focus our operations on achieving a high level of customer satisfaction with speed, order accuracy and quality of service that is closely monitored. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with our operating policies, and with respect to our Burger King restaurants, BKC’s required operating procedures as well. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct. In order to help maintain compliance with these operating standards and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance with various customer service standards and objectives.

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

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Trademarks

We have registered our principal Taco Cabana logo and design with the United States Patent and Trademark Office on the Principal Register as a service mark for our restaurant services. We also have secured or have applied for state and Federal registrations of several other advertising or promotional marks, including variations of our principal mark, and have applied for registrations in foreign countries of our principal mark and several other marks.

We have registered our principal trademarks for “Pollo Tropical ^® ,” “TropiGrill ^® ” and “TropiChops ^® ” in the United States and presently have applications pending or registrations granted in various foreign countries in which we conduct business or may conduct business through our franchise system. In certain foreign countries, we have been involved in trademark opposition proceedings to defend our rights to register certain trademarks. We intend to protect both Taco Cabana and Pollo Tropical trademarks by appropriate legal action whenever necessary.

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

Government Regulation

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

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

A significant number of our food service personnel are paid at rates related to the Federal minimum wage and, accordingly, increases in the minimum wage have increased wage rates at our restaurants in the past.

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

Taco Cabana is subject to state “dram-shop” laws in the states in which it operates. Dram-shop laws provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We have specific insurance that covers claims arising under dram-shop laws.

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

Competition

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

We believe that:

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

With respect to our Burger King restaurants, which are part of the quick-service hamburger segment, our largest competitors are McDonald’s and Wendy’s. According to publicly available information, as of December 31, 2003, McDonald’s U.S. operations comprised approximately 13,700 restaurants and had U.S. systemwide sales for the year ended December 31, 2003 of approximately $22.1 billion. As of December 31, 2002, Wendy’s U.S. operations comprised 5,549 restaurants and had total U.S. systemwide sales for the year ended December 31, 2002 of $7.0 billion.

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

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

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Employees

At December 31, 2003, we employed approximately 15,900 persons of whom approximately 400 were administrative personnel and 15,500 were restaurant operating personnel. None of our employees are covered by collective bargaining agreements. We believe that our relations with our employees are good.