Company Overview
We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical® and Taco Cabana®. Our Pollo Tropical restaurants offer a wide selection of tropical and Caribbean inspired food, while our Taco Cabana restaurants offer a wide selection of fresh Tex-Mex and traditional Mexican food. Our differentiated brands are positioned within the fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the menu variety, use of fresh ingredients, food quality, decor and service more typical of casual dining restaurants. As of July 1, 2012, our company-owned restaurants included 89 Pollo Tropical restaurants and 158 Taco Cabana restaurants.
We franchise our Pollo Tropical restaurants and as of July 1, 2012, we had 35 franchised Pollo Tropical restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad, the Bahamas, Venezuela, Costa Rica, Panama and on college campuses in Florida. We also have agreements for the future development of franchised Pollo Tropical restaurants in Tobago, Aruba, Curacao, Bonaire,

Guatemala and India. While we are currently not actively franchising our Taco Cabana restaurants, we had five Taco Cabana franchised restaurants as of July 1, 2012, located in Texas, New Mexico and Georgia.
The following is an overview of the key financial measures discussed in our results of operations:
• Restaurant sales consist of food and beverage sales, net of discounts, at our company-owned and operated restaurants. Restaurant sales are influenced by menu price increases, new restaurant openings, closures of restaurants and changes in comparable restaurant sales. Restaurants are included in comparable restaurant sales after they have been open for 18 months. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year.

• Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods up to one year.

• Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers' compensation insurance and state unemployment insurance.

• Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of gains on sale-leaseback transactions.

• Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, real estate taxes and credit card fees.

• Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities.

• General and administrative expenses are comprised primarily of
(1) salaries and expenses associated with the development and support of our brands and the management oversight of the operation of our restaurants; (2) legal, auditing and other professional fees and stock-based compensation expense; and (3) subsequent to the Spin-off, costs incurred under a transition services agreement with Carrols for administrative support services.

• Adjusted Segment EBITDA, which is the measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other income and expense and gains and losses on the extinguishment of debt. Adjusted Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted Segment EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions.

• Depreciation and amortization expense primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants and the depreciation of assets under lease financing obligations.

• Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.

• Interest expense subsequent to August 5, 2011 consists of interest expense associated with our $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 ("the Notes"), borrowings under our senior secured credit facility, the amortization of deferred financing costs, imputed interest expense on leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations and any gains and losses from the settlement of lease financing obligations. Prior to August 5, 2011, interest expense included an allocation of interest expense due to Carrols, based on amounts due to Carrols in each respective period and imputed interest expense on leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations and any gains and losses from the settlement of lease financing obligations.

Recent and Future Events Affecting our Results of Operations

Spin-off of Fiesta Restaurant Group, Inc. On April 16, 2012, the board of directors of Carrols approved the Spin-off of Fiesta. On May 7, 2012, Carrols completed the Spin-off of Fiesta in the form of a pro rata dividend of all of our issued and outstanding common stock to Carrols' stockholders whereby each holder of Carrols' common stock of record on April 26, 2012 received one share of our common stock for every one share of Carrols common stock held.
We filed with the Securities and Exchange Commission (the "SEC") a Form 10 registration statement, File No. 001-35373, as amended (the "Registration Statement"), which included as an exhibit thereto an information statement which describes the Spin-off. This Registration Statement, which registered the Company's common stock under the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.
In connection with the Spin-off, on April 24, 2012, Carrols and Carrols Corp. entered into several agreements with us that govern the transition and Carrols' post Spin-off relationship with us, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement.
We incurred costs of $1.0 million in the second quarter of 2012 related to the Transition Services Agreement which became effective on May 7, 2012. We currently anticipate incurring approximately $4.4 million of costs under the Transition Services Agreement for all of 2012. Lease Financing Obligations
For certain of our sale-leaseback transactions, Carrols Corp. has guaranteed the lease payments on an unsecured basis or is the primary lessee on the leases associated with certain of our sale-leaseback transactions. Prior to the Spin-off, ASC 840-40 "Sale-Leaseback Transactions" required us to classify these leases as lease financing transactions because the guarantee from a related party constituted continuing involvement and caused the sale to not qualify for sale-leaseback accounting. Under the financing method, the assets remain on our consolidated balance sheet and continue to be depreciated and the net proceeds received by us from these transactions are recorded as a lease financing liability. Payments under these leases were applied as payments of imputed interest and deemed principal on the underlying financing obligations rather than as rent expense.
Such leases qualified for sale-leaseback accounting upon the Spin-off due to the cure or elimination of certain provisions that previously precluded sale-leaseback accounting (and the treatment of such leases as operating leases) in our consolidated financial statements. This was primarily due to guarantees from Carrols Corp. prior to the Spin-off which were considered guarantees from a related party. As a result of the qualification for sale-leaseback accounting during the second quarter of 2012 due to the Spin-off, we removed the associated lease financing obligations, property and equipment, and deferred financing costs from our balance sheet, and recognized deferred gains on sale-leaseback transactions related to the qualification of $32.1 million that will be amortized as a reduction of rent expense over the individual remaining lease terms. This resulted in a decrease in lease financing obligations of $114.2 million, a decrease in assets under lease financing obligations of $80.4 million, and a decrease of $1.6 million in deferred financing fees. Additionally in the second quarter of 2012, we exercised purchase options associated with the leases for five restaurant properties previously accounted for as lease financing obligations and purchased these properties from the lessor. As a result, we reduced our lease financing obligations by $6.0 million during the second quarter of 2012.
As a result of the qualification of these leases discussed above and purchase of the five properties mentioned above, restaurant rent expense was $1.1 million higher, depreciation expense was $0.3 million lower and interest expense was $1.6 million lower in the second quarter of 2012 compared to the second quarter of 2011. For all of 2012 as compared to 2011, the qualification of these leases and purchase will cause restaurant rent expense to be $4.7 million higher, depreciation and amortization expense to be $1.4 million lower and interest expense to be $7.1 million lower.

Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant and the cost of any necessary future capital improvements. We may elect to close restaurants based on such evaluation.
In the first quarter of 2012, we closed our five Pollo Tropical restaurants in New Jersey and one underperforming Taco Cabana restaurant. Two of the five Pollo Tropical restaurant location's assets were previously impaired as of January 1, 2012 and have a base lease term ending in 2012. We also closed two underperforming Pollo Tropical restaurants and one underperforming Taco Cabana restaurant in 2011. We currently do not anticipate closing any additional Pollo Tropical and Taco Cabana restaurants in 2012.

We do not believe that the future impact on our consolidated results of operations from such restaurant closures will be material, although there can be no assurance in this regard. Our determination of whether to close restaurants in the future is subject to further evaluation and may change. Refinancing of Outstanding Indebtedness
On August 5, 2011, we entered into independent financing arrangements, the proceeds from which were used to distribute funds to Carrols to enable Carrols to repay its existing indebtedness, as well as to pay all related fees and expenses. In the first quarter of 2012 Carrols transferred to us $2.5 million of excess cash proceeds from the financings.
On August 5, 2011 we sold $200.0 million of Notes and entered into a $25 million senior secured revolving credit facility which was undrawn at closing. Effective with the issuance of the Notes, amounts due to Carrols at August 5, 2011 were repaid and we have since been independently funding our operations, including payment to Carrols for our pro-rata share for executive management and administrative support provided by Carrols to us prior to the Spin-off and for costs incurred subsequent to the Spin-off under the Transition Services Agreement discussed above.
In connection with the sale of $200.0 million of the Notes, we and certain of our subsidiaries entered into a registration rights agreement dated as of August 5, 2011, with Wells Fargo Securities, LLC and Jefferies & Company, Inc. In general, the registration rights agreement provides that we and certain of our subsidiaries agreed to file, and cause to become effective, a registration statement with the SEC in which we offer the holders of the Fiesta Notes the opportunity to exchange such notes for newly issued notes that have terms which are identical to the Fiesta Notes that are registered under the Securities Act of 1933, as amended (the "Securities Act"), which we refer to as the "exchange notes". We initially filed a registration statement on Form S-4 for the exchange notes with the SEC on April 30, 2012 which was declared effective by the SEC on June 25, 2012. We consummated the exchange of all the $200.0 million of the Notes for exchange notes on July 30, 2012.
Executive Summary-Consolidated Operating Performance for the Three Months Ended July 1, 2012

Total revenues increased 6.3% in the second quarter of 2012 to $128.8 million from $121.2 million in the second quarter of 2011. Restaurant sales in the second quarter of 2012 increased 6.2% to $128.2 million from $120.7 million in the second quarter of 2011, primarily due to comparable restaurant sales growth at both Pollo Tropical and Taco Cabana. Franchise revenues in the second quarter of 2012 increased to $0.6 million from $0.5 million in the second quarter of 2011.

Restaurant operating margins, as a percentage of restaurant sales, improved in the second quarter of 2012 compared to the second quarter of 2011, and were favorably impacted by lower cost of sales, restaurant wages, and other operating expenses, partially offset by higher rent expense due to the qualification for sale treatment of the sale-leaseback transactions discussed above.

General and administrative expenses increased $1.5 million to $10.5 million in the second quarter of 2012 from $9.1 million in the second quarter of 2011 due to the hiring of certain Fiesta management team members as well as legal and other costs incurred in connection with the Spin-off.

Depreciation and amortization decreased $0.6 million to $4.4 million in the second quarter of 2012 from $4.9 million in the second quarter of 2011, primarily due to the elimination of depreciation expense of $0.3 million as a result of the qualification for sale treatment of sale-leaseback transactions, as discussed above.

Income from operations increased $2.6 million, or 25.6%, to $12.9 million in the second quarter of 2012 from $10.2 million in the second quarter of 2011.

Interest expense increased $1.5 million to $6.3 million in the second quarter of 2012 from $4.8 million in the second quarter 2011, due primarily to our refinancing activities in the third quarter of 2011 partially offset by the elimination of interest expense of $1.6 million as a result of the qualification for sale treatment of sale-leaseback transactions and the prospective treatment of these payments as rent, as discussed above.
Our 2012 estimated effective income tax rate used in the second quarter of 2012, excluding discrete tax items, increased to 42.7% from 37.3% used in the second quarter of 2011 due primarily to the elimination of Work Opportunity Tax Credits in 2012. If these credits were to be reenacted for 2012 our effective tax rate would be adjusted in the period of reenactment.

Net income increased $0.3 million to $3.9 million in the second quarter of 2012, or $0.17 per diluted share, compared to net income of $3.6 million, or $0.16 per diluted share, in the second quarter of 2011.

Table of Contents

Results of Operations

Three Months Ended July 1, 2012 Compared to Three Months Ended July 3, 2011
The following table sets forth, for the three months ended July 1, 2012 and July
3, 2011, selected consolidated operating results as a percentage of consolidated
restaurant sales:

                                      July 1, 2012    July 3, 2011
Restaurant sales:
Pollo Tropical                              44.2 %          43.2 %
Taco Cabana                                 55.8 %          56.8 %
Consolidated restaurant sales              100.0 %         100.0 %
Costs and expenses:
Cost of sales                               32.2 %          32.9 %
Restaurant wages and related expenses       26.6 %          27.1 %
Restaurant rent expense                      4.2 %           3.5 %
Other restaurant operating expenses         12.7 %          13.0 %
Advertising expense                          3.1 %           3.1 %
General and administrative                   8.2 %           7.5 %

Since the beginning of the second quarter of 2011 through the end of the second quarter of 2012, we have opened five new Pollo Tropical restaurants and four new Taco Cabana restaurants. During the same period we closed six Pollo Tropical restaurants and two Taco Cabana restaurants.
Total revenues increased 6.3% to $128.8 million in the second quarter of 2012 from $121.2 million in the second quarter of 2011. Pollo Tropical restaurant sales in the second quarter of 2012 increased 8.5% to $56.6 million due primarily to an increase in comparable restaurant sales of 7.8%, resulting from a 6.9% increase in guest traffic and a 0.8% increase in average check, compared to the second quarter of 2011. In addition, five restaurants opened since the beginning of the second quarter of 2011 contributed $0.6 million in additional restaurant sales in the second quarter of 2012, net of the impact of closed restaurants in the same period. The effect of menu price increases taken at our Pollo Tropical restaurants in the last twelve months was approximately 2.9%. Taco Cabana restaurant sales in the second quarter of 2012 increased 4.4% to $71.6 million due primarily to an increase in comparable restaurant sales of 4.5% in the second quarter of 2012 resulting from a 3.8% increase in average check and a 0.6% increase in guest traffic. The effect of menu price increases taken in the last twelve months at our Taco Cabana restaurants was approximately 3.7%.
Franchise revenues increased to $0.6 million in the second quarter of 2012 from $0.5 million in the second quarter of 2011.
Pollo Tropical Operating Costs and Expenses (percentages stated as a percentage of Pollo Tropical restaurant sales). Pollo Tropical cost of sales decreased to 33.1% in the second quarter of 2012 from 33.3% in the second quarter of 2011 due primarily to the effect of menu price increases taken in the last twelve months and a favorable sales mix partially offset by higher commodity prices (0.4%). Pollo Tropical restaurant wages and related expenses decreased to 23.3% in the second quarter of 2012 from 23.6% in the second quarter of 2011 due primarily to the effect of higher sales volumes on fixed labor costs. Pollo Tropical other restaurant operating expenses decreased to 12.0% in second quarter of 2012 from 12.6% in the second quarter of 2011 due to lower utility costs (0.5%) and the effect of higher sales volumes on fixed operating costs, partially offset by higher restaurant pre-opening expenses in 2012. Pollo Tropical advertising expense decreased to 1.8% in the second quarter of 2012 from 1.9% in the second quarter of 2011.
Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales). Taco Cabana cost of sales decreased to 31.5% in the second quarter of 2012 from 32.5% in the second quarter of 2011 due primarily to the effect of menu price increases taken in the last twelve months. Taco Cabana restaurant wages and related expenses decreased to 29.2% in the second quarter of 2012, from 29.8% in the second quarter of 2011 due primarily to the effect of higher sales volumes on fixed labor costs and lower workers' compensation claim costs (0.3%). Taco Cabana other restaurant operating expenses decreased to 13.2% in the second quarter of 2012 from 13.4% in the second quarter of 2011 due primarily to lower utility costs (0.4%) partially offset by higher repair and maintenance expenses (0.3%). Taco Cabana advertising expense increased to 4.2% in the second quarter of 2012 from 4.0% in the second quarter of 2011 due to the timing of promotions.

Consolidated Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, increased to 4.2% in the second quarter of 2012 from 3.5% in the second quarter of 2011 due primarily to the qualification for sale treatment of the sale-leaseback transactions discussed above which increased rent expense in the second quarter by $1.1 million.

Consolidated General and Administrative Expenses. General and administrative expenses increased to $10.5 million in the second quarter of 2012 from $9.1 million in the second quarter of 2011 and, as a percentage of total restaurant sales, increased to 8.2% compared to 7.5% in the second quarter of 2011, due to the hiring of certain Fiesta executive management and administrative staff as well as legal and other costs incurred in connection with the Spin-off. General and administrative costs also included an increase in administrative bonus accruals, primarily due to the addition of executive management, of $0.4 million.

Adjusted Segment EBITDA. Due to the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $10.5 million in the second quarter of 2012 from $9.5 million in the second quarter of 2011. Adjusted Segment EBITDA for our Pollo Tropical restaurants was negatively impacted by an increase in rent expense of $0.4 million in the second quarter of 2012 compared to the second quarter of 2011 due to the qualification for sale treatment of sale-leaseback transactions, as discussed above. Adjusted Segment EBITDA for our Taco Cabana restaurants decreased to $6.9 million in the second quarter of 2012 from $7.0 million in the second quarter of 2011. Adjusted Segment EBITDA for our Taco Cabana restaurants was negatively impacted by an increase in rent expense of $0.7 million in the second quarter 2012 compared to the second quarter of 2011 due to the qualification for sale treatment of sale-leaseback transactions, as discussed above. General and administrative expenses for each segment includes general and administrative expenses related directly to the segment as well as allocated expenses associated with administrative support for executive management and other administrative functions.

Depreciation and Amortization. Depreciation and amortization expense decreased to $4.4 million in the second quarter of 2012 from $4.9 million in the second quarter of 2011 due primarily to the qualification for sale treatment of the sale-leaseback transactions discussed above which decreased depreciation expense in the second quarter of 2012 by $0.3 million.
Impairment and Other Lease Charges. Impairment and other lease charges were negligible in the second quarter of 2012 and were $0.8 million in the second quarter of 2011.

Interest Expense. Interest expense increased $1.5 million to $6.3 million in the second quarter of 2012 from $4.8 million in the second quarter 2011 due primarily to our refinancing activities in the third quarter of 2011 partially offset by the elimination of interest expense of $1.6 million in the second quarter of 2012 as a result of the qualification for sale treatment of sale-leaseback transactions and the prospective treatment of payments under the related real property leases as rent, as discussed above.
Provision for Income Taxes. The provision for income taxes for the second quarter of 2012 was derived using an estimated effective annual income tax rate . . .