POLLO TROPICAL INC, 10-K, 1997-03-28

POLLO TROPICAL INC
10-K, 1997-03-28
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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
/X/ THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
/ / THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
--------------- ----------------

COMMISSION FILE NO. 0-22422
POLLO TROPICAL, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
FLORIDA 65-0100964
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>

7300 NORTH KENDALL DRIVE, 8TH FLOOR, MIAMI, FLORIDA 33156
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 670-7696
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(TITLE OF CLASS)

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

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

The aggregate market value of voting stock held by non-affiliates of the
Company as of March 26, 1997 was approximately $27,632,475 based on the $5.00
closing sale price for the Common Stock on the NASDAQ National Market System
on such date. For purposes of this computation, all executive officers and
directors of the Company have been deemed to be affiliates. Such determination
should not be deemed to be an admission that such directors and officers are,
in fact, affiliates of the Registrant.

The number of shares of Common Stock of the Registrant outstanding as of
March 26, 1997 was 8,133,799.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement relating to the
Registrant's 1997 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this report are incorporated by reference into Part III
of this report.

<PAGE> 2

PART I
FORWARD LOOKING STATEMENTS

The statements contained in this Report that are not purely historical are
forward-looking statement within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, experience and effects described herein and the performance or
achievements of the Company to be materially different from those anticipated,
expressed or implied by the forward-looking statements. In evaluating the
Company's business, the following factors in addition to the other information
set forth herein should be carefully considered: competition; success of the
Company's operating initiatives and growth strategy; labor and ingredient
costs, general economic conditions; franchisees' adherence to development
schedules; advertising and promotional efforts; availability, locations and
terms of sites for restaurant development and the success of the Company's
international franchising strategy. In addition, the Company's strategy to
penetrate and develop international markets involves a number of risks and
challenges and there can be no assurance that these issues will not have a
material adverse effect on the Company. The factors which will influence the
Company's success in each targeted country or market in connection with this
strategy include: the selection of appropriate qualified master franchisees and
area developers; negotiation and execution of definitive franchising and area
development agreements; the political and economic stability of each targeted
market; the customs duties and trade restrictions in each targeted market;
foreign currency exchange rates and foreign exchange regulations; the extent to
which the Company's core products, recipes and menu will need to be modified to
meet local tastes, customs or eating habits; receipt of foreign government
approvals; compliance with foreign government regulations, including the
regulation of the food services industry in each targeted market on a national,
regional and local basis (including health, safety, food handling, labeling and
zoning laws); the ability of the Company to register its trademarks in each
targeted country; the uncertainty of each local market's acceptance of the
Company's products, trade dress or retail format; foreign investment and
approval procedures; restrictions on termination and non-renewal (where
applicable); access to resources and raw materials; dependence on third party
suppliers and local vendors; availability of transportation and communication
channels; labor and employment laws, technology transfer regulations; language
and cultural differences; access to affordable capital and suitable sites for
the development of units; governmental assistance programs; tax laws and
applicable treaties; repatriation and immigration laws; the costs and methods
for dispute resolution in each targeted country; agency laws, and availability
of appropriate media for marketing efforts.

ITEM 1. BUSINESS

GENERAL

Pollo Tropical, Inc. (the "Company" or "Pollo Tropical") owns, operates
and franchises quick-service restaurants featuring grilled fresh chicken,
marinated in a proprietary blend of tropical fruit juices and spices, and
authentic "made from scratch" side dishes. The menu's emphasis on freshness
and quality, and its focus on chicken served hot off the grill, provide a
healthy and flavorful alternative to ordinary quick-service restaurant chains.
The Company's restaurants combine high quality, distinctive taste and an
inviting tropical setting with the convenience and value pricing of
quick-service restaurants. Pollo Tropical opened its first company-owned
restaurant in 1988 in Miami, Florida, and its first international franchised
restaurant in 1995 in Mayaguez, Puerto Rico. As of December 29, 1996, the
Company owned and operated 35 restaurants, 34 of which are located in Florida,
and franchised seven restaurants, six of which are located in Puerto Rico. In
the fourth quarter of the fiscal year ended December 29, 1996 ("Fiscal 1996"),
the Company changed its growth strategy exiting the underperforming markets of
Chicago, New York and Tampa, closing a total of six Company-owned restaurants.
Five domestic franchise restaurants located outside of South Florida were also
closed during Fiscal 1996. The Company plans to open three additional
company-owned restaurants in Florida, and anticipates that five additional
international franchise restaurants will be in operation, by the end of the
Fiscal year ending December 28, 1997 ("Fiscal 1997").

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CONCEPT

Each element of the Company's restaurant concept is designed to achieve a
high level of customer satisfaction and encourage repeat business. The key
elements of the Company's restaurant concept include the following:

Focus on Grilled Chicken. The Company's restaurants feature a menu
focused on grilled chicken served whole, in halves or in quarters, and grilled
boneless chicken breasts, served in a variety of sandwiches, salads and
platters. The Company believes that its focus on grilled chicken capitalizes
on an increasing consumer preference for healthier, lower-fat foods. The
focused menu also facilitates the consistent preparation of fresh, high quality
foods, the execution of efficient customer service and the accurate replication
of the concept in new locations.

Distinctive Food Selection and Preparation. The Company's unique
selection of food items reflects tropical and Caribbean influences and features
grilled fresh chicken marinated in a proprietary blend of tropical fruit juices
and spices. Chicken is grilled in view of customers on large,
custom-fabricated, open-flame grills. The Company recently broadened the
selection by adding "tropical" pork to the menu. Also featured is an array of
distinctive and popular side dishes, including black beans and rice, yucatan
fries and sweet plantains, as well as more traditional fare such as french
fries, corn, as well as tossed and caesar salads. Freshly prepared tropical
desserts, such as flan and tres leches, complete the flavorful menu. The
Company believes that its menu capitalizes on the growing consumer preference
for ethnic foods.

Fresh, High Quality Food. The Company uses fresh whole chickens, top
grade produce and freshly baked breads and desserts, which are delivered
several times a week to each restaurant. The Company's proprietary chicken
marinade, black beans and rice, salads and other dishes are "made from scratch"
daily on-site. The Company maintains stringent quality standards for the
preparation and service of all food items. The Company believes the menu's
emphasis on freshness and quality, as well as its focus on grilled chicken,
appeals to increasingly health-conscious customers who desire a wholesome and
healthy alternative to the fare served at other quick-service restaurants.

Value. The Company's restaurants deliver value by providing generous
portions of wholesome, flavorful food at economical prices. The Company
emphasizes value with menu prices typically well below the prices of comparable
menu items in full service restaurants and frequently less than comparable menu
items offered by other quick-service restaurants. For example, the Company
offers everyday value pricing on two popular combination plates - a quarter
chicken with black beans and rice, typically priced at $2.99, and "the Family
Meal," a whole cut chicken with large portions of black beans and rice designed
to serve three to four persons, typically priced at $8.99.

Customer Convenience. The Company places a premium on quick-service and
customer convenience. The Company's traditional restaurants, which are open
for lunch and dinner seven days a week from 11:00 a.m. to 10:00 p.m. (11:00
p.m. on Friday and Saturday), 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. Prompt, accurate and
courteous service is a priority in each mode of food delivery. In addition,
the menu offers a variety of portion sizes to accommodate a single customer,
family or large group. The Company's restaurants also offer an economical
catering menu, with special prices and portions to serve 25 to 500 persons.

Inviting Decor and Tropical Atmosphere. The Company's restaurants feature
an attractive interior decor and exterior design which is easily replicable in
its multi-unit system. The Company's 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. While each restaurant has a similar appearance, the
restaurants' design is sufficiently flexible to accommodate a variety of
available sites. Restaurants are also designed to conveniently serve a high
volume of customer traffic while retaining an inviting, casual atmosphere.

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GROWTH STRATEGY

Pollo Tropical opened its first restaurant in 1988 in South Florida, grew
to 36 restaurants through the end of Fiscal 1995, and in Fiscal 1996 the
Company built four new restaurants. The Company revised its growth strategy in
Fiscal 1996 to focus its domestic growth on filling in its core markets in
South and Central Florida with Company stores and utilizing franchising to
expand the concept internationally targeting South and Central America and the
Caribbean. The Company feels that this strategy will capitalize on the strong
menu acceptance and visit frequency that Hispanic consumers have shown for the
Pollo Tropical brand. After expanding the concept in Fiscal 1995 and early
1996 to several markets outside of the Company's core Florida base, average
store volumes in these markets were significantly lower than historical
averages. The Company attempted to reverse unfavorable sales trends in the
expansion markets by relaunching the concept with a new logo, new products,
increased advertising and promotional expenditures, and a new exterior look to
the buildings. After extensive market testing and analysis, the Company
concluded that the restaurant locations in the expansion markets were lacking a
sufficient base of Hispanic heavy users who are a critical component in
achieving the high average store volumes the Company experiences in its core
markets. The Company's operations in these restaurant locations were
unprofitable and sales trends did not justify continued investment spending.
The Company closed five restaurants in these expansion markets in November 1996
and a sixth restaurant closed in January 1997. The Company, which opened one
new restaurant in January 1997, currently operates 35 restaurants in South and
Central Florida and anticipates opening two additional restaurants during
Fiscal 1997. In the Orlando market, the Company is utilizing the TropiGrill -
Chicken and More logo. These restaurants feature greater menu variety, which
provides the Company with greater flexibility to appeal to a broader range of
consumers.

FRANCHISE PROGRAM

As part of its refocused growth strategy, the Company utilizes a
multi-unit area development franchise approach as a means of accelerating its
penetration into international markets outside Florida with a relatively
minimal capital commitment. The Company's strategy for its franchise program
is to offer certain market areas to qualified and experienced area developers
in the Caribbean and Central and South American markets who are committed to
the development of multiple units in such areas on an expedited basis.

In December 1995, the Company's first international franchised restaurant
opened in the Caribbean. As of the date of this Report, ten franchised
restaurants are in operation, including eight in Puerto Rico, one in the
Dominican Republic, and one non-traditional restaurant on the Florida
International University campus in Miami. Additionally, the Company has
entered into two area development agreements granting the right to develop
Pollo Tropical restaurants in the Netherland Antilles and Ecuador. The
Company anticipates the opening of approximately five additional franchised
restaurants in the Caribbean and South America during the remainder of Fiscal
1997. During Fiscal 1996, the Company terminated the area development
agreements in Atlanta, Georgia, Ft. Meyers, Florida, and Naples, Florida,
resulting in the closing of five franchised restaurants and terminated the area
development agreement in the New York metropolitan area entered in 1994. The
Company continues to seek to procure new area development agreements in Central
and South America and the Caribbean with qualified franchisees and
anticipates continued growth in franchise revenues. The Company receives
exclusivity fees upon signing area development agreements. Such fees are
recognized as revenue when franchised restaurants open or when such agreements
terminate. Additionally, when franchised restaurants become operational the
Company receives additional fees and continuing royalties based upon sales. As
the Company does not control the timing of franchise openings, terminations by
franchisees, or franchise sales, the recognition of franchise revenues cannot
be accurately predicted and, therefore, may fluctuate significantly on a
quarter to quarter basis. The Company has developed and continues to develop
its corporate infrastructure in order to manage and administer its franchise
program.

The Company's standard franchise agreement has a 15-year term (with two
five-year renewal options) and 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 prior to the
opening of the franchisee's restaurants. The franchisee also pays a continuing
royalty, based upon gross sales. The terms and conditions of the Company's
area development and franchise agreements will vary depending upon a number of
factors, including the experience

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and resources of the franchisee, the size and density of the covered territory,
the number of units to be developed, the schedule for development, capital
requirements, fee and royalty arrangements and other matters. All franchisees
are required to operate their restaurants in compliance with certain methods,
standards and specifications developed by the Company regarding such matters as
menu items, recipes, food preparation, materials, supplies, services, fixtures,
furnishings, decor and signs, although the franchisee has 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 the Company. Before commencing operation
of a restaurant, a franchisee is required to participate in an extensive
training program covering all material aspects of operating the restaurant,
and the Company will provide on-site personnel to assist in the franchisee's
initial restaurant openings.

The Company's growth strategy which incorporates a significant component
of international franchising and requires the penetration and development of
overseas markets involves a number of risks and challenges, and there can be no
assurance that these issues will not have a material adverse effect on the
Company. The factors which will influence the Company's success in each
targeted country or market in connection with this strategy include: the
selection of appropriate qualified master franchisees and area developers; the
political and economic stability of each targeted market; the customs duties
and trade restrictions in each targeted market; foreign currency exchange rates
and foreign exchange regulations; the extent to which the Company's core
products, recipes and menu will need to be modified to meet local tastes,
customs or eating habits; the regulation of the food services industry in each
targeted market on a national, regional and local basis (including health,
safety, food handling, labeling and zoning laws); the ability of the Company to
register its trademarks in each targeted country; the uncertainty of each local
market's acceptance of the Company's products, trade dress or retail format;
foreign investment and approval procedures; restrictions on termination and
non-renewal (where applicable); access to resources and raw materials;
dependence on third party suppliers and local vendors; availability of
transportation and communication channels; labor and employment laws,
technology transfer regulations, language and cultural differences; access to
affordable capital and suitable sites for the development of units;
governmental assistance programs; tax laws and applicable treaties;
repatriation and immigration laws; the costs and methods for dispute resolution
in each targeted country; agency laws, and availability of appropriate media
for marketing efforts.

The area development and franchise agreements are subject to various
conditions and contingencies and there can be no assurance that franchisees
will be successful, that additional area development agreements will be entered
into, that additional planned franchised restaurants will be opened or that
franchisees' development schedules will be achieved. The Company's franchise
program is also subject to various foreign, federal and state regulations. See
"Government Regulation."

UNIT ECONOMICS

The Company believes that the average company-owned Pollo Tropical
restaurant continues to produce strong store level results. For Fiscal 1996,
the 32 restaurants open throughout the year generated average sales of
approximately $1,813,000, operating income of approximately $319,000 and cash
flow of approximately $384,000.

The Company anticipates that average unit sales volumes for its new
company-owned restaurants will be lower than historical averages due, among
other things, to the Company's planned market penetration strategy in core
markets. The cost to construct and equip a 3,200 square foot prototype unit
generally costs between $750,000 and $800,000, excluding real estate and
pre-opening costs.

Pollo Tropical restaurant sales are well balanced by method of service and
by day part. The company-owned restaurants provide customers with sit-down
dining and counter take-out service, and, in all but one location, also provide
the convenience of a drive-thru window. Based on selected Fiscal 1996 weekly
data, sit-down, counter take-out and drive-thru sales contributed 43.0%, 22.6%
and 34.4% of restaurant sales, respectively. Of such sales, lunch, with an
average transaction of $6.93, accounted for 45.3% of restaurant sales, and
dinner, with an average transaction of $8.10, accounted for 54.7% of restaurant
sales. The average drive-thru transaction was $7.40. A transaction is an
order which may serve one or more customers.

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RESTAURANT LOCATIONS AND SITE SELECTION

The following table sets forth certain information regarding the existing
Company-owned restaurants in operation. Except as noted, all sites are
free-standing buildings:

<TABLE>
<CAPTION>
Metropolitan Square Property
Location Area Opened Footage Interest
- -------- -------------- -------------- ------- --------
<S> <C> <C> <C> <C>
1. Douglas Road(1)..... Miami November 1988 2,800 Leased
2. West Kendall(1)..... Miami January 1990 2,250 Leased
3. Dadeland............ Miami June 1990 2,800 Leased
4. Westchester......... Miami July 1991 3,783 Leased
5. Okeechobee Boulevard Palm Beach April 1992 3,500 Leased
6. Cutler Ridge........ Miami May 1992 3,520 Leased
7. N. Miami Beach...... Miami September 1992 4,200 Leased
8. Kendall............. Miami December 1992 4,200 Leased
9. Miami Lakes......... Miami September 1993 4,290 Leased
10. Oakland Park....... Ft. Lauderdale October 1993 4,200 Leased
11. West Hialeah(1).... Miami October 1993 2,800 Leased
12. Miami Springs...... Miami October 1993 3,170 Owned
13. Pembroke Pines..... Ft. Lauderdale November 1993 3,780 Leased
14. North Miami........ Miami December 1993 3,980 Owned
15. Boynton Beach...... Palm Beach January 1994 3,635 Leased
16. Coconut Grove...... Miami February 1994 4,400 Owned
17. Davie.............. Ft. Lauderdale March 1994 3,330 Owned
18. Lake Worth......... Palm Beach March 1994 3,600 Owned
19. Coral Reef......... Miami May 1994 3,627 Leased
20. Homestead.......... Miami June 1994 3,629 Leased
21. Miami Beach........ Miami July 1994 3,876 Leased
22. Altamonte Springs.. Orlando July 1994 3,987 Owned
23. Honey Hill......... Miami August 1994 3,862 Leased
24. S. Orange Blossom.. Orlando August 1994 3,810 Owned
25. Miller Drive....... Miami August 1994 3,862 Owned
26. Pembroke Lakes Mall Ft. Lauderdale August 1994 3,617 Leased
27. Coral Springs...... Ft. Lauderdale September 1994 3,624 Owned
28. Red Road........... Miami December 1994 3,269 Owned
29. Beacon Center...... Miami December 1994 3,862 Owned
30. Sawgrass........... Ft. Lauderdale December 1994 3,600 Owned
31. Curry Ford......... Orlando December 1994 3,248 Leased
32. 17th Street
Causeway......... Ft. Lauderdale April 1996 3,334 Owned
33. Downtown(2)........ Miami May 1996 3,317 Leased
34. Grant Square....... Orlando May 1996 3,078 Leased
35. Coral Gables....... Miami January 1997 2,623 Leased
</TABLE>

(1) Represents locations where the restaurant is an end-cap to a strip
shopping center.
(2) Represents a location where the restaurant is in a street
level storefront in an office building.

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The Company considers the location of each restaurant to be critical to
its long-term success, and management devotes significant effort to the
investigation and evaluation of potential sites. The Company's strategy is to
open its restaurants in high-profile locations with strong customer traffic
during day, evening and weekend hours. The site selection process focuses on
market area demographics, population densities, and traffic volumes as well as
specific site characteristics such as visibility, accessibility, traffic
patterns, drive-thru window availability and adequate parking. The Company
also reviews potential competition and customer activity at other restaurants
operating in the vicinity. As the Company believes that its menu offers a
healthy and distinctive alternative to the fare offered by other restaurants,
it typically seeks to locate a restaurant in an area where other restaurants
are open and operating successfully.

Most of the Company's restaurants are free-standing buildings and three
are end-cap locations in strip shopping centers. The Company's goal is to
locate restaurants on the best possible sites in target markets, and thus, the
Company will also consider either end-cap locations or conversions of existing
buildings. The Company opened one "non-traditional" location in downtown Miami
during Fiscal 1996. The Company opened its first Company-owned restaurant in
1988, seven from 1990 through Fiscal 1992, six in Fiscal 1993, 19 in Fiscal
1994, five in Fiscal 1995, four in Fiscal 1996 and one thus far in Fiscal 1997.
The Company closed two underperforming units in St. Petersburg in October
1995. The Company exited the three markets of Tampa, Chicago, and New York
resulting in the closing of five restaurants in November 1996 and one in
January 1997. The Company plans to have two additional Company-owned
restaurants in operation by the end of Fiscal 1997.

The Company requires approximately nine to 18 months after identifying a
site to (i) lease or purchase the property, (ii) complete the construction,
permitting and zoning process, and (iii) open the restaurant. From the date
construction commences, it typically takes between 90 and 120 days to open a
restaurant. While the Company believes that its future restaurant development
will occur approximately as planned, there can be no assurance that future real
estate, economic and other conditions will not delay or hinder the Company's
expansion plans.

RESTAURANT DESIGN AND LAYOUT

New Company restaurants typically provide seating for 100 customers and
provide drive-thru service. The Company's current prototypical free-standing
restaurant is approximately 3,200 square feet in size however actual size may
vary from location to location depending on the size of the property and volume
expectations at such locations. The Company's restaurants feature an attractive
interior decor and exterior design which is easily replicable in its multi-unit
system. The exterior of each restaurant is designed to convey a tropical theme
and permit easy identification by passing motorists and pedestrians. The
restaurants are typically painted attractive tropical colors and feature a
distinctive entrance tower which provides for clear identification of the Pollo
Tropical or TropiGrill name, as the case may be, as well as increased
visibility at night when the tower is illuminated. The tropical theme is
enhanced by lush landscaping surrounding the restaurant. In order to
facilitate family dining, a fenced outdoor children's playground is included in
those locations where space permits. The interior of the restaurant also
emphasizes the airy, tropical atmosphere through the use of high ceilings,
large windows, light colored woods and decorative tiles. Additional decorative
features such as wrought iron balcony railings, wooden park bench seating and
tropical plants are designed to give the restaurants the feel of a Caribbean
courtyard. The custom-designed cooking area has an exhibition-style layout
which permits customers to view the chicken grilling process and the
cleanliness and freshness of the food preparation.

FOOD PREPARATION AND SERVICE

In preparing its menu items the Company emphasizes quality and freshness.
The Company seeks to use only the highest quality products and ingredients,
including fresh whole chickens, top-quality produce, and freshly ground spices.
The kitchen staff reports to work daily at 8:00 a.m. in order to prepare
fresh black beans, rice, tropical pork, salads and other dishes "from scratch"
for the restaurant opening at 11:00 a.m. Other menu items such as breads and
desserts are prepared pursuant to the Company's recipes by approved bakeries.
The Company forecasts daily sales to minimize cooked food left on hand at the
end of the night. Unsold chicken, if any, is donated to local food banks.

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Freshness is the hallmark of the Company's food preparation. Restaurants
purchase fresh whole chickens which are delivered four to five times per week
and are marinated for 24 hours in a proprietary blend of tropical fruit juices
and spices. Chickens are grilled to a golden brown over open flames in a
multi-step process designed to seal in flavors and prevent overcooking. The
Company estimates the number of chickens required at any particular time during
the day so that chickens can be served hot off the grill within minutes of
cooking.

The Company seeks to insure that orders are filled promptly and accurately
and that chicken and side dishes are served hot. Orders are entered into the
restaurant's computerized point-of-sale system and are printed out at the end
of a dual service line. The dual service line permits separation of counter
and drive-thru service in the kitchen during busy periods and permits the rapid
fulfillment of multiple orders. As a result of the significant drive-thru
volume at many of the Company's restaurants, managers and other specified
restaurant personnel continuously monitor the placement of drive-thru orders
through the use of a headset communications system to further facilitate prompt
order delivery.

CUSTOMER SERVICE

The Company is committed to providing a consistent level of service with
emphasis on prompt, accurate and courteous order fulfillment, designed to
attract repeat customers. Restaurant managers are actively involved in all
aspects of restaurant operations with emphasis on supervising the food
preparation process and insuring prompt and correct order fulfillment at both
the front counter and drive-thru windows. Through the use of a computer
display and communications systems employed in the restaurants, orders are
typically filled within two minutes of being placed. Restaurant management
conducts internal inspections for taste, quality and cleanliness several times
a day, in order to provide a consistent level of quality customer service. The
Company uses a 24-hour 1-800 telephone service to accept customer comments.

MARKETING AND PROMOTION

The Company's marketing strategy is to create brand awareness,
differentiate itself from competitors, and promote repeat business through its
use of local television, cable, radio, direct mail, and print media. The
Company's marketing emphasizes product quality and value in an upbeat, fun
environment. In addition, by consistently providing a positive dining
experience, the Company believes it benefits from significant word-of-mouth
advertising. The Company seeks to cluster restaurants in target markets in
order to maximize the effectiveness of its advertising efforts. The Company
also markets at the store level through special price offerings, coupon
discounts and unique promotional programs. The Company advertises in both
English and Spanish (where appropriate) media throughout the year.

RESTAURANT OPERATIONS AND MANAGEMENT

The Company maintains quality and consistency in its restaurant operations
by carefully training and supervising personnel and establishing exacting
standards relating to food quality, speed, accuracy, friendliness of service,
and cleanliness of the restaurant facility. The Company's restaurants are
staffed to provide the capacity to handle a high volume of business.

Restaurants are generally staffed by one manager, two or three assistant
managers and between 30 and 40 hourly employees. The Company believes that its
managers are crucial to the efficient operation of its restaurants and the
development of customer loyalty. Therefore, the Company requires its managers
to complete an intensive training program during which they are instructed in
all areas of the Company's restaurant operations. Such areas of training
include food preparation, customer service, cost controls, facility
maintenance, communications skills and employee relations. Restaurant managers
are overseen by district managers and by the Company's Vice President of
Operations.

The Company's management strives to improve the efficiency of its new
restaurants by evaluating and adjusting the restaurant's floor plan and
operational procedures. Where appropriate, the Company has implemented

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<PAGE> 9

similar changes in its existing restaurants to improve their operational
efficiencies. The Company believes that by continually improving its
restaurants to take advantage of the best practices in the industry, it will be
able to provide the highest level of service to its customers and maximize the
financial performance of its restaurants.

The Company seeks to attract and retain high quality, knowledgeable
restaurant management and staff. Management endeavors to be responsive to
employee concerns and to promote talented individuals from within. The Company
considers its rate of employee turnover, particularly among restaurant
management, to be favorable in relation to the industry. All restaurant and
district managers participate in a bonus plan in which awards are tied to the
achievement of specified financial and other performance goals.

The Company has established and continues to upgrade a significant
corporate infrastructure in order to support company-owned restaurants and the
franchise program. The Company has reduced several operations positions, as a
result of the decrease in the number of openings of new Company-owned
restaurants in Fiscal 1996 and in Fiscal 1997 and as a result of the closing of
six restaurants in markets outside of South Florida.

MANAGEMENT INFORMATION SYSTEMS; ACCOUNTING AND ADMINISTRATIVE SERVICES

The Company uses an in-store computerized point-of-sale system to control
cash, collect customer and sales statistics, track labor hours and collect
other restaurant data. This information is electronically polled from the
Company's executive office and compiled into a daily report which keeps
management abreast of sales, cash variances and bank deposit data by restaurant
on a next-day basis. Additionally, a running 13-week comparative report is
generated on a weekly basis to monitor sales, customer counts, average check,
food cost, labor cost and hours, promotional coupon redemption and other
information. This report is used both by corporate personnel and district
managers to monitor and review each restaurant for changes in trends from week
to week. The Company is evaluating changes to its management information
systems in order to improve efficiencies, including substantially updating its
system-wide point-of-sale reporting systems.

COMPETITION

The Company's restaurants compete with quick-service food operations, home
meal replacement outlets, and casual sit-down restaurants. Management
believes that the Company's combination of freshly prepared food, distinctive
menu items, tropical ambiance, and fast service help to distinguish its
restaurants from other quick-service food operations. In addition, management
believes its price-value relationship differentiates the Company's restaurants
from more expensive sit-down or casual dining restaurants.

The restaurant industry is extremely competitive with respect to price,
service, restaurant location and food quality. There are many well established
international, national, regional and local competitors in the Company's market
areas, some of which have greater financial and other resources than the
Company. These competitors include international and regional chicken theme
chains, such as Boston Market, KFC and Kenny Rogers Roasters, as well as fast
food chains such as McDonald's, Burger King and Wendy's. Many of the Company's
competitors have been in existence longer than the Company and are better
established in areas where the Company's restaurants are or will be located.
The restaurant business is often affected by changes in consumer tastes,
economic conditions, population, weather, traffic patterns, and availability of
employees. The Company's revenues are primarily derived from the sale of
chicken and, therefore, a change in consumer taste preferences for, or adverse
publicity associated with, chicken could have a negative effect on the
Company's sales and profitability. In addition to other restaurant companies,
Pollo Tropical competes with numerous other businesses for suitable locations
for its restaurants.

PURCHASING

The Company negotiates 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. The Director of
Purchasing negotiates system-wide prices and quantities and coordinates
distribution with the Company's suppliers. Each restaurant's food and supplies
are ordered by its manager from approved suppliers and are shipped directly to
the restaurants. The Company has also obtained improved pricing as its
purchasing volume has increased. The

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<PAGE> 10

Company does not maintain a central product warehouse or commissary. The
Company has not experienced any significant delays in receiving restaurant
supplies and equipment.

The Company's profitability is highly dependent upon food costs,
particularly that of fresh chicken, which represents a large majority of such
costs. The cost of fresh chicken increased during Fiscal 1996 and is expected
to remain at the currently high levels during Fiscal 1997. This cost increase
has had an adverse effect on the Company's profitability and may continue to do
so. Food costs fluctuate from time to time depending on a variety of factors
beyond the control of the Company. The Company has endeavored to control
purchasing and labor costs by working closely with vendors to provide the
Company with cost effective products to meet its specific needs. While
management has also reacted to changes in food costs through selected menu
price adjustments, there can be no assurance that it will be able to do so in
the future.

EMPLOYEES

At December 29, 1996, the Company employed approximately 1,224 persons, of
whom 1,176 were restaurant personnel and 48 were corporate personnel. The
Company considers its employee relations to be excellent. Most employees,
other than restaurant management and corporate personnel, are paid on an hourly
basis.
The Company's employees are not covered by a collective bargaining agreement.
The Company believes that its employee wages are comparable to, and that its
working conditions and turnover rates compare favorably with, those of other
companies in the quick-service restaurant industry.

TRADEMARKS, SERVICE MARKS AND TRADE DRESS

The Company believes its trademarks, service marks and trade dress have
significant value and are important to its marketing efforts. The Company has
registered its principal "Pollo Tropical" and "TropiGrill" logos and designs
with the United States Patent and Trademark Office and has filed for
registration of them in a number of foreign countries. The Company's policy is
to pursue registration of its principal marks and to oppose strenuously any
infringement of its marks or trade dress.

GOVERNMENT REGULATION

Each restaurant is subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, safety, fire
and other departments relating to the development and operation of restaurants,
including regulations relating to environmental, building and zoning
requirements, and the preparation and sale of food. The Company is also
subject to laws governing its relationship with employees, including minimum
wage requirements, overtime, working conditions and immigration requirements.
Difficulties or failures in obtaining the required construction and operating
licenses, permits or approvals could delay or prevent the opening of new
restaurants. A significant number of the Company's food service personnel are
paid at rates related to the federal minimum wage. The minimum wage is set to
increase on October 1, 1997 from $4.85 per hour to $5.15 per hour.
Accordingly, this is expected to increase the Company's labor costs. The
Company believes that it is operating in substantial compliance with applicable
laws and regulations governing its operations.

The Company is subject to Federal Trade Commission ("FTC") regulation and
various state laws which regulate the offer and sale of franchises. Several
state laws also regulate substantive aspects of the franchisor-franchisee
relationship. The FTC requires the Company to furnish to prospective
franchisees a franchise offering circular containing prescribed information. A
number of states in which the Company might consider franchising also regulate
the sale of franchises and require registration of the franchise offering
circular with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time (some of
which are now pending) which would provide for federal registration of the
franchisor-franchisee relationship in certain respects. The state laws often
limit, among other things, the ability of a franchisor to terminate or refuse
to renew a franchise. The Company has developed its franchise program to
comply with all applicable federal and state laws, and intends to continue to
comply with all such laws.

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<PAGE> 11

ITEM 2. PROPERTIES

Pollo Tropical's Company-owned restaurants are situated on 22 leased and
13 Company-owned restaurant sites. In the course of its expansion, the Company
seeks to obtain the best available sites for its restaurants, and leases or
purchases a site depending on available terms. The Company maintains a
flexible posture as to purchasing or leasing properties to best and most
effectively respond to prevailing market conditions.

Real estate leased by the Company is typically leased under "triple net"
leases that require the Company to pay real estate taxes and utilities and
maintain insurance with respect to the premises and, in many cases, to pay
contingent rentals based on sales in excess of specified amounts. Generally,
the leases have initial terms of ten to 20 years with options to renew for
additional periods which range from five to 15 years. All of the Company's
current leases have remaining terms or renewal options extending more than
eleven years beyond March 28, 1997. See "BUSINESS -- Restaurant Locations and
Site Selections".

ITEM 3. LEGAL PROCEEDINGS

The Company is not aware of any litigation which it believes would have a
material adverse effect on the Company or its business and is not aware that
any such litigation is threatened.

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

None.

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<PAGE> 12

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

The Common Stock is traded on the NASDAQ National Market System under the
symbol "POYO." The following table sets forth, for the periods indicated, the
high and low closing sales prices for the Common Stock, as reported on the
NASDAQ National Market System. As of March , 1997, there were approximately
shareholders of record.

<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
-------------- --------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter 10 7 1/8 4 3/8 3 3/8
Second Quarter 9 7 3/4 5 3 3/4
Third Quarter 9 5/8 7 4 1/2 2 7/8
Fourth Quarter 7 1/4 3 1/2 3 3/8 2 1/8
</TABLE>

The Company presently has no plans to pay any dividends on its capital
stock. All earnings will be retained for the foreseeable future to support
operations and to finance the growth and development of the Company's business.
The payment of future cash dividends, if any, will be at the discretion of
the Board of Directors of the Company and will depend upon, among other things,
future earnings, capital requirements, the Company's financial condition, any
applicable restrictions under credit agreements existing from time to time, and
on such other factors as the Board of Directors may consider relevant.

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<PAGE> 13

ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales............................ $11,698 $19,305 $41,114 $55,489 $63,735
Franchise revenues.......................... -- -- 41 555 499
--------- -------- -------- -------- --------
Total revenues.............................. 11,698 19,305 41,155 56,044 64,234
--------- -------- -------- -------- --------
Operating expenses:
Cost of sales............................... 4,297 6,961 14,849 20,065 24,037
Restaurant payroll.......................... 2,852 4,481 9,710 13,661 15,695
Other restaurant operating expenses......... 1,904 3,089 6,195 9,465 12,137
General and administrative.................. 769 1,528 3,702 5,344 5,461
Depreciation and amortization............... 382 635 2,301 3,230 2,871
Restaurant closure expenses................. -- -- -- 1,492 6,324
--------- -------- -------- -------- --------
Total operating expenses..................... 10,204 16,694 36,757 53,257 66,525
--------- -------- -------- -------- --------
Income (loss) from operations................ 1,494 2,611 4,398 2,787 (2,291)
Other income (expenses), net................. 69 30 (9) (889) (903)
--------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charge....................... 1,563 2,641 4,389 1,898 (3,194)
Provision for (benefit from) income taxes or
pro forma adjustment to reflect income
taxes(1)(3) 589 963 1,590 720 (1,214)
--------- -------- -------- -------- --------
Pro forma income (loss) before extraordinary
charge...................................... 974 1,678 2,799 1,178 (1,980)
Extraordinary charge for early extinguishment
of debt, net of income tax benefit of
$37,942 in 1995............................. -- -- -- 63 --
--------- -------- -------- -------- --------
Pro forma net income (loss)(1)(3)............ $ 974 $ 1,678 $ 2,799 $ 1,115 $(1,980)
========= ======== ======== ======== ========
Income (loss) per share:
Pro forma income (loss) before extraordinary
charge...................................... $ 0.14 $ 0.24 $ 0.34 $ 0.15 $ (0.24)
Extraordinary charge......................... -- -- -- (0.01) --
--------- -------- -------- -------- --------
Pro forma net income (loss) per share(2)(3).. $ 0.14 $ 0.24 $ 0.34 $ 0.14 $ (0.24)
========= ======== ======== ======== ========
Pro forma shares outstanding(2)(3)........... 6,813 6,874 8,151 8,089 8,100
========= ======== ======== ======== ========

AS OF
-----------------------------------------------------
DEC. 31, JAN. 2, JAN. 1, DEC. 31, DEC. 29,
1992 1994 1995 1995 1996
---------- -------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital (deficit).................... $ (960) $ 6,979 $(2,685) $(4,407) $(7,381)
Total assets................................. 6,257 28,336 42,255 46,825 48,521
Short-term bank borrowings................... 170 -- -- -- --
Long-term debt, including current maturities. 824 2,500 11,402 12,049 11,375
Total shareholders' equity................... 3,756 21,409 24,619 25,959 24,142
</TABLE>
- ------------
(1) Reflects the effect on historical income statement data, assuming the
Company had been treated as a C corporation rather than as an S
corporation for income tax purposes, and assuming that combined federal
and state effective income tax rates aggregated 37.7% for the periods
prior to the Reorganization.

(2) Gives effect as of the earliest period presented to the Reorganization.
In connection with the Reorganization, which occurred immediately prior to
consummation of the Initial Public Offering, Pollo Tropical's Articles of
Incorporation were amended to provide, among other things, that the
authorized capital stock of Pollo Tropical would consist of (i)
15,000,000 shares of common stock, par value $.01 per share, 6,374,028
shares of which would be outstanding and (ii) 1,000,000 shares of
preferred stock, par value $.01 per share, none of which would be
outstanding. In connection therewith, and in order to effect the

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<PAGE> 14

Reorganization, a stock split of Pollo Tropical's common stock was effected,
based on a pre-established ratio.

(3) During 1993, the Company entered into a Plan of merger with each of the
entities that previously owned the Company's restaurants and a franchise
company whereby each such entity was merged into newly created wholly owned
subsidiaries of Pollo Tropical (the "Reorganization"). The Reorganization
was accounted for at historical cost in a manner similar to pooling-of-
interest accounting as the entities included in the Reorganization were
under common control.

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<PAGE> 15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company pursued an expansion strategy outside of its core markets of
South and Central Florida during Fiscal 1995 which carried through the first
quarter of Fiscal 1996, opening a total of six restaurants in three new markets
(Tampa, Chicago and New York). During Fiscal 1996 the Company implemented
several marketing strategies and other initiatives, including everyday value
pricing on selected menu items, separate advertising campaigns aimed towards its
dual-target audience, a successful new product launch and improved customer
service. These marketing strategies and initiatives reversed a seven quarter
negative same store sales trend, ending the year with three consecutive
quarters of positive same store sales and resulting in a 7.9% increase for the
year in the core markets. In evaluating these results, the Company revised its
growth strategy in Fiscal 1996 to focus its domestic expansion by filling in its
core markets in South and Central Florida with Company stores and utilizing
franchising to expand the concept internationally, targeting South and Central
America and the Caribbean. The Company feels that this strategy will capitalize
on the strong menu acceptance and visit frequency that Hispanic consumers have
shown for the Pollo Tropical brand. After expanding the concept in Fiscal 1995
and early 1996 to several markets outside of the Company's core Florida base,
average store volumes in these markets were significantly lower than historical
averages. The Company attempted to reverse unfavorable sales trends in the
expansion markets by relaunching the concept with a new logo, new products,
increased advertising and promotional expenditures, and a new exterior look to
the buildings. After extensive market testing and analysis, the Company
concluded that the restaurant locations in the expansion markets were lacking a
sufficient base of Hispanic heavy users who are a critical component in
achieving the high average store volumes the Company experiences in its core
markets. The Company's operations in these restaurant locations were
unprofitable and sales trends did not justify continued investment spending. As
a result of this realignment of its growth strategy, the Company closed five of
the restaurants in the new markets in November 1996 and closed a sixth
restaurant in January 1997. The Company recorded a pre-tax charge related to
the closing of these six restaurants of $6.5 million in the quarter ended
December 29, 1996. Also during Fiscal 1996, the Company opened four new
restaurants, three of which were in the core markets of South and Central
Florida, in addition to closing the five restaurants in the expansion markets,
bringing the total Company owned restaurants to 35 as of the end of Fiscal 1996,
from the 36 restaurants open as of Fiscal 1995.

The Company pursued a franchise growth strategy through area development
agreements in both domestic and foreign markets in Fiscal 1994 and Fiscal 1995.
During Fiscal 1996, as a result of the realignment of its growth plans, all of
the domestic franchised restaurants outside of the Company's core markets were
closed. The Company changed its franchise growth strategy by focusing
primarily on new area development agreements with qualified franchisees in
Central and South America and the Caribbean and anticipates continued growth in
franchise revenues. The Company receives exclusivity fees upon signing area
development agreements. Such fees are recognized as revenue when franchised
restaurants open or when such agreements terminate. Additionally, when
franchised restaurants become operational the Company receives continuing
royalties based upon sales. As the Company does not control the timing of
franchise openings and/or terminations by franchisees, the recognition of
franchise revenues, therefore, may fluctuate significantly on a quarter to
quarter basis. The Company has developed and continues to develop its
corporate infrastructure in order to manage and administer its franchise
program.

During most of Fiscal 1996, the Company's restaurant level margins were
adversely affected by higher food costs, the value pricing strategy and
inefficiencies in the expansion markets. The restaurant level margins were
further adversely affected by the introductory pricing of a successful new
product launch in the third quarter. The company has implemented programs
aimed at addressing costs, pricing and efficiency in an effort to improve
restaurant level margins.

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<PAGE> 16

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
selected income statement data as a percentage of restaurant sales, except
general and administrative expense, which is shown as a percentage of total
revenues.

<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Cost of sales...................... 36.1% 36.2% 37.7%
Restaurant payroll................. 23.6 24.6 24.6
Other restaurant operating expenses 15.1 17.1 19.0
General and administrative......... 9.0 9.5 8.5
Depreciation and amortization of
property and equipment............ 2.7 3.5 3.5
Amortization of deferred restaurant
pre-opening costs................. 2.7 2.1 0.9
Other amortization................. 0.2 0.2 0.2
Restaurant closure expenses........ -- 2.7 9.9
Income (loss) from operations...... 10.7 5.0 (3.6)
Other income (expenses)............ * (1.6) (1.4)
Net income (loss).................. 6.8 2.0 (3.1)
*Percentage not meaningful
</TABLE>

- 16 -

<PAGE> 17

YEAR ENDED DECEMBER 29, 1996 (FISCAL 1996) COMPARED TO YEAR ENDED DECEMBER 31,
1995 (FISCAL 1995)

Restaurant Sales. Restaurant sales for Fiscal 1996 increased $8.2 million
(15%) to $63.7 million for Fiscal 1996 from $55.5 million for Fiscal 1995.
This was due to an increased number of restaurants being opened during the year
ended December 29, 1996, as compared to the same period of the prior year and
to a sales increase in restaurants open for both years. During Fiscal 1996, 32
restaurants operated for the full year and eight restaurants operated for only
part of the year, of which 5 were closed during the year as compared to the
prior year when 31 restaurants operated for the full year and 7 restaurants
operated for only part of the year, of which, two were closed during the year.
Same store sales for Fiscal 1996 increased 7.9%.

Franchise Revenues. Franchise revenues for Fiscal 1996 decreased $55,000
to $499,000 for Fiscal 1996 from $554,000 for Fiscal 1995. This revenue
consists of initial franchise fees which are recognized when a restaurant
opens, continuing royalties, fees from operating franchised restaurants and
forfeiture of exclusivity fees when area development agreements are terminated.
During Fiscal 1996, the Company recognized $112,500 for forfeiture of
exclusivity fees as compared to $197,000 for the same period of the prior year.

During the year-ended December 29, 1996, five domestic franchised
restaurants were closed, five franchised restaurants were opened in Puerto
Rico, and one domestic franchised restaurant opened in a non-traditional site
in South Florida. As of the date of this filing, two additional franchised
restaurants have opened in Puerto Rico and the first franchised restaurant has
opened in the Dominican Republic. The Company anticipates the opening of
approximately five additional international franchised restaurants during the
remainder of Fiscal 1997.

Cost of Sales. Cost of sales, which consists of food, beverage, paper and
supply costs, increased 150 basis points to 37.7% for Fiscal 1996 from 36.2%
for the comparable period of the prior year. This increase was due to higher
relative food costs resulting from several factors including the continued
higher market price for chicken, the value pricing strategy implemented in the
first quarter, the successful launch of the new pork product line in the core
market at introductory pricing, and the greater waste experienced in the lower
volume restaurants in the expansion markets. The market price for chicken
averaged 12% higher for Fiscal 1996 as compared to the same period of the prior
year. During the third and fourth quarters of Fiscal 1996, the Company
implemented several cost savings programs as well as selective price increases
on several menu items.

Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, as a percentage of
restaurant sales, remained level at 24.6% for Fiscal 1996 as compared to Fiscal
1995. Higher sales volumes as well as increased controls placed on labor
scheduling at the unit level helped to offset the higher relative payroll costs
in the expansion markets and the impact of the minimum wage increase which was
effective in the quarter ended December 29, 1996. Management further expects
the closing of the six restaurants which had higher restaurant payroll costs as
a percentage of sales to help offset the relative impact of the minimum wage
increases.

General and Administrative Expenses. General and administrative ("G & A")
expenses for Fiscal 1996 decreased 100 basis points to 8.5% from 9.5% for the
same period of the prior year. This decrease is primarily due to the fixed
cost nature of the general and administrative expenses relative to the higher
sales volumes experienced during the year. The Company has reduced the number
of support staff and several operations positions as a result of the decrease
in the number of openings of new Company-owned restaurants in Fiscal 1996 and
Fiscal 1997.

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<PAGE> 18

Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment remained level at 3.5% as a percentage
of restaurants sales for the year-ended December 29, 1996 as compared to the
same period of the prior year.

Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred restaurant pre-opening costs decreased 120 basis points to 0.9% for
Fiscal 1996 from 2.1% for Fiscal 1995. This decrease was the result of fewer
new restaurants being opened during the latest 12 months as compared to the 12
month period ended December 31, 1995.

Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, prepaid loan costs, organization costs and
leasehold acquisition costs. Other amortization as a percentage of restaurant
sales was unchanged at 0.2% for Fiscal 1996 and Fiscal 1995.

Restaurant Closure Expenses. During 1995, the Company accrued estimated
expenses in the amount of $1,565,108 for two restaurants closed in October
1995. The estimated expenses consisted of $1,243,626 in net losses on disposal
of fixed assets and $321,482 in estimated liabilities associated with
termination of leases. The assets related to the Fiscal 1995 closed
restaurants were disposed of during Fiscal 1996 resulting in a gain in the
amount of $174,047. This gain is primarily attributable to the sale of the one
restaurant site and the reversal of an accrual due to a more favorable economic
transaction than originally estimated associated with the subleasing of the
other restaurant site.

In the fourth quarter of Fiscal 1996, the Company accrued estimated
expenses in the amount of $6,498,289 associated with the closing of six
restaurants. The estimated expenses consist of $5,713,142 in net losses on
disposal of fixed assets, $670,237 in estimated liabilities associated with
termination of leases and $114,910 associated with employee termination
benefits. Any difference between these estimated expenses and the actual
amounts of such expenses will be recorded during the period in which such
differences become known.

Other Income (Expenses). The Company incurred interest costs of
$1,035,038 during Fiscal 1996 of which $43,894 was capitalized as construction
costs. Such interest was further offset by $14,599 in interest income.
During Fiscal 1995, the Company incurred interest costs of $991,342, of which
$205,694 was capitalized as construction cost, and generated interest income of
$27,861. Other expenses for Fiscal 1995, included a write-off of approximately
$166,000 of deferred costs associated with the Company's efforts in obtaining
certain private financing.

Extraordinary Charge. During Fiscal 1995, the Company incurred an
extraordinary charge of $62,967, net of income tax benefit of $37,942, related
to the write-off of charges associated with the refinancing of the Company's
debt which occurred during the third quarter of Fiscal 1995.

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<PAGE> 19

YEAR ENDED DECEMBER 31, 1995 (FISCAL 1995) COMPARED TO YEAR ENDED JANUARY 1,
1995 (FISCAL 1994)

Restaurant Sales. Restaurant sales for Fiscal 1995 increased $14.4
million (35.0%) from $41.1 million for Fiscal 1994 to $55.5 million for 1995.
This increase was due entirely to a greater number of restaurants open and
operating during the full year of Fiscal 1995 as compared to 1994 and the
addition of five new restaurants during that year. During Fiscal 1995, 31
restaurants operated for the full year as compared to the prior year when 15
restaurants operated for the full year and 18 restaurants operated for only
part of the year. This increase was slightly offset by a sales decrease in
restaurants open the entire two years.

Franchise Revenues. Franchise revenues for Fiscal 1995 increased $514,000
from $41,000 for Fiscal 1994 to $555,000 for Fiscal 1995. This revenue
consists of initial franchise fees which are recognized when a restaurant
opens, continuing royalties and fees from operating franchised restaurants, and
forfeiture of exclusivity fees when area development agreements are terminated.
During Fiscal 1995, five new franchised restaurants opened, compared to one in
the fourth quarter of Fiscal 1994, and one area development agreement was
terminated.

Cost of Sales. Cost of sales, which consisted of food, beverage and paper
and supply costs, as a percentage of restaurant sales, increased 0.1% from
Fiscal 1994 to Fiscal 1995. This slight change was primarily due to an
increase in the market prices for chicken during Fiscal 1995 as compared to
Fiscal 1994, although such price increases were partially offset by increased
purchasing power and emphasis on cost controls at the unit level.

Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, as a percentage of
restaurant sales, increased 1.0% to 24.6% for Fiscal 1995 from 23.6% for Fiscal
1994. This increase is due in part to an increase in hourly payroll expense,
as well as, lower average sales volumes in the Company's restaurants causing
the fixed components of labor to affect total payroll as a percentage of sales.
The increase was partially offset by a decrease in workers' compensation
insurance expense due to favorable claim experience during the period.

Other Restaurant Operating Expenses. Other restaurant operating expenses
consist of all restaurant operating costs other than payroll expenses and
include occupancy costs, utilities and advertising expenses. These expenses as
a percentage of restaurant sales increased from 15.1% for Fiscal 1994 to 17.1%
for Fiscal 1995. One of the largest components of this change was utility
expense, which increased as a percentage of sales to 4.7% for Fiscal 1995 from
4.0% for Fiscal 1994. This increase was attributable to lower average sales in
the Company's restaurants. The next largest component of this change in other
restaurant expenses as a percentage of restaurant sales was occupancy costs,
which includes rent expense and real and property taxes, which increased to
4.5% for Fiscal 1995 from 3.8% for Fiscal 1994. This increase in occupancy
expense was due to higher real and personal property taxes, lower average sales
volumes in the Company's restaurants and the sale and subsequent leaseback of
two restaurants which occurred during the third quarter of Fiscal 1995. The
third largest component was an increase in the Company's level of advertising
which increased 0.4% from 3.4% to 3.8%. This reflects the Company's increased
level of expenditure of advertising dollars to fund marketing activities in six
different regions of the country.

General and Administrative Expenses. General and administrative ("G & A")
expenses increased to $5.3 million for Fiscal 1995 from $3.7 million for Fiscal
1994 as the result of the continued enlargement of the Company's corporate
staff, systems and other infrastructure as well as additional costs associated
with being a publicly traded Company. G & A expenses as a percentage of
restaurant sales increased from 9.0% for Fiscal 1994 to 9.6% for Fiscal 1995.
The Company has reduced the number of real estate and construction-related
managers, as well as support staff and several operations positions, as a
result of the decrease in the number of openings of new Company-owned
restaurants in Fiscal 1995 and in Fiscal 1996.

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<PAGE> 20

Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment increased by 0.8% for Fiscal 1995 as
compared to Fiscal 1994. The increase was primarily the result of
depreciation of fixed assets associated with the Company's 20 new restaurants
which opened from February 9, 1994 through December 31, 1995. The Company
anticipates that depreciation and amortization of property and equipment as a
percentage of restaurant sales will remain near this higher level during Fiscal
1996, as a result of the new restaurants opened during Fiscal 1994 and Fiscal
1995, along with new restaurants planned for Fiscal 1996.

Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred restaurant pre-opening costs decreased as a percentage of restaurant
sales by 0.6% to 2.1% for Fiscal 1995 from 2.7% for Fiscal 1994. This decrease
was the result of fewer new restaurants being opened during the latest 12
months as compared to the 12 month period ended January 1, 1995. The Company
anticipates that amortization of pre-opening costs as a percentage of
restaurant sales will decline during Fiscal 1996 as compared to Fiscal 1995 as
the result of its plans to open fewer new restaurants during Fiscal 1996 as
compared to Fiscal 1995.

Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, prepaid loan costs, organization costs and
lease acquisition costs. Other amortization as a percentage of restaurant
sales was unchanged at 0.2% for Fiscal 1994 and Fiscal 1995.

Restaurant Closure Expenses. Prior to Fiscal 1995, the Company had not
closed any restaurants and therefore had not previously incurred any restaurant
closure expenses. In the third quarter of Fiscal 1995, the Company accrued
estimated expenses in the amount of $1,565,108 associated with the closing of
two restaurants on October 22, 1995. The estimated expenses consisted of
$1,243,626 in net losses on disposal of fixed assets and $321,482 in estimated
liabilities associated with termination of leases. There was a reversal in the
accrual attributable to the restaurant closings of $73,174 in the fourth
quarter of Fiscal 1995 due to a more favorable economic transaction than
originally estimated, associated with the sub-leasing of a closed restaurant.
The accrual may be adjusted in the future if the actual expense differs from
the estimate. The Company, upon analyzing the current and probable future
performance of each operating restaurant, may determine to close
underperforming restaurants in the future. Such decisions would generate
additional restaurant closure expenses.

Other Income (Expense). The Company incurred interest costs of $991,342
during Fiscal 1995 of which $205,694 was capitalized as construction costs.
Such interest was further offset by $27,861 in interest income. During Fiscal
1994, the Company incurred interest costs of $429,439, of which $309,088 was
capitalized as construction cost, and generated interest income of $88,844.
Other expense for Fiscal 1995, included a write-off of approximately $166,000
of deferred costs associated with the Company's efforts in obtaining certain
private financing.

- 20 -

<PAGE> 21

LIQUIDITY AND CAPITAL RESOURCES

As is customary in the restaurant industry, the Company is able to operate
with a working capital deficit because its restaurant sales are in cash, it
receives trade credit from its vendors and its operations do not require
significant investment in receivables or inventories. Historically, the Company
has used the majority of its available capital for the development of new
restaurants. Consequently, prior to the Initial Public Offering in 1993 and
since the quarter ended April 3, 1994, the Company has operated with working
capital deficits.

During Fiscal 1996, the Company generated $4.6 million in cash flow from
operations and reduced its long-term bank indebtedness $0.7 million. The
Company has also reduced its amount of cash held in order to minimize interest
costs on the outstanding portion of the credit facility. During Fiscal 1996,
the Company opened four new restaurants. Capital expenditures during Fiscal
1996 for these four new restaurants were approximately $2.6 million. In
addition, capital expenditures of approximately $1.9 million were expended for
development of restaurants to be opened in the future and for existing
restaurants.

The Company has a $25 million line of credit facility from a commercial
bank, which provides for advances of up to $25,000,000; however, the lender has
no obligation to make further advances after July 13, 1998. As of year-end
December 29, 1996, there was an additional borrowing capacity under the credit
line of $13.9 million and as of February 28, 1997 the available borrowing
capacity under the line was $16.0 million.

The Company anticipates that the funds available under its existing credit
facility combined with cash flow from operations will be sufficient to fund its
new restaurant openings and other cash needs throughout Fiscal 1997.

- 21 -

<PAGE> 22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

PAGE
----

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants .................. 23

Consolidated Balance Sheets as of
December 31, 1995 and December 29, 1996 ........................... 24

Consolidated Statements of Operations for the Years
Ended January 1, 1995, December 31, 1995
and December 29, 1996 ............................................. 25

Consolidated Statements of Shareholders' Equity
for the Years Ended January 1, 1995, December 31, 1995
and December 29, 1996 .............................................. 26

Consolidated Statements of Cash Flows for the
Years Ended January 1, 1995, December 31, 1995
and December 29, 1996 .............................................. 27

Notes to Consolidated Financial Statements .......................... 29
</TABLE>

- 22 -

<PAGE> 23

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders of
Pollo Tropical, Inc.:

We have audited the accompanying consolidated balance sheets of Pollo
Tropical, Inc. (a Florida corporation) and subsidiaries as of December 31, 1995
and December 29, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pollo Tropical, Inc. and
subsidiaries as of December 31, 1995 and December 29, 1996, and the results of
their operations and their cash flows for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996 in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Miami, Florida,
February 27, 1997.

- 23 -

<PAGE> 24

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<S> <C> <C>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 691,324 $ 94,490
Inventories.......................................... 331,969 314,865
Prepaid expenses..................................... 264,705 294,589
Prepaid income taxes................................. 152,680 354,062
Deferred income taxes............................... -- 1,583,649
Other current assets................................. 451,556 554,689
------------ -------------
Total current assets................................ 1,892,234 3,196,344

PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization of $3,679,826 in 1995
and $5,754,641 in 1996............................... 41,731,694 42,539,997
DEFERRED RESTAURANT PRE-OPENING COSTS, net of
accumulated amortization of $1,749,078 in 1995
and $702,614 in 1996................................. 406,442 99,213
INTANGIBLE ASSETS, net of accumulated amortization
of $50,617 in 1995 and $84,518 in 1996............... 369,899 431,892
LEASEHOLD ACQUISITION COSTS, net of accumulated
amortization of $212,625 in 1995 and $310,600 in 1996 1,519,262 1,423,334
DEPOSITS AND DEFERRED COSTS ON FUTURE
RESTAURANT LOCATIONS................................. 127,340 93,338
OTHER ASSETS.......................................... 777,711 737,345
------------ -------------
Total assets........................................ $46,824,582 $48,521,463
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable..................................... $ 3,526,265 $ 2,673,868
Accrued liabilities.................................. 1,295,899 1,545,805
Current maturities of long-term debt................. 77,352 83,773
Accrued restaurant closure expenses.................. 1,399,516 6,273,830
------------ -------------
Total current liabilities........................... 6,299,032 10,577,276

LONG-TERM DEBT, net of current maturities............. 11,971,648 11,290,952
DEFERRED RENT......................................... 1,192,909 1,361,353
DEFERRED FRANCHISE FEE INCOME......................... 597,500 270,000
DEFERRED INCOME TAXES................................. 804,238 879,830
------------ -------------
Total liabilities................................... 20,865,327 24,379,411
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 10)

SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued or outstanding.............. -- --
Common stock, $.01 par value, 15,000,000 shares
authorized, 8,047,952 shares in 1995 and 8,149,799
shares in 1996 issued and outstanding............... 80,479 81,498
Additional paid-in capital........................... 21,545,990 21,708,161
Retained earnings.................................... 4,332,786 2,352,393
------------ -------------
Total shareholders' equity.......................... 25,959,255 24,142,052
------------ -------------
Total liabilities and shareholders' equity.......... $46,824,582 $48,521,463
============ =============
</TABLE>

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

- 24 -

<PAGE> 25

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
-------------- --------------- ----------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales.......................... $41,113,965 $55,489,397 $63,734,848
Franchise revenues........................ 41,297 554,416 499,304
------------- -------------- ---------------
41,155,262 56,043,813 64,234,152
------------- -------------- ---------------
OPERATING EXPENSES:
Cost of sales............................. 14,848,773 20,064,837 24,037,263
Restaurant payroll........................ 9,710,224 13,660,579 15,695,011
Other restaurant operating expenses....... 6,195,104 9,465,369 12,136,629
General and administrative................ 3,702,275 5,343,849 5,461,375
Depreciation and amortization of property
and equipment............................ 1,109,202 1,961,783 2,202,074
Amortization of deferred restaurant
pre-opening costs........................ 1,104,565 1,159,723 554,744
Other amortization........................ 87,215 108,675 113,783
Restaurant closure expenses............... -- 1,491,934 6,324,242
------------- -------------- ---------------
36,757,358 53,256,749 66,525,121
------------- -------------- ---------------
Income (loss) from operations........... 4,397,904 2,787,064 (2,290,969)
------------- -------------- ---------------
OTHER INCOME (EXPENSES):
Interest expense, net of interest
capitalized of $309,088 in 1994,
$205,694 in 1995 and $43,894 in 1996..... (120,351) (785,648) (991,144)
Interest income........................... 88,844 27,861 14,599
Other, net................................ 22,135 (130,865) 73,843
------------- -------------- ---------------
(9,372) (888,652) (902,702)
------------- -------------- ---------------
Income (loss) before income taxes and
extraordinary charge.................... 4,388,532 1,898,412 (3,193,671)

PROVISION FOR (BENEFIT FROM)
INCOME TAXES.............................. 1,589,775 720,836 (1,213,278)
------------- -------------- ---------------
Income (loss) before extraordinary charge 2,798,757 1,177,576 (1,980,393)

EXTRAORDINARY CHARGE FOR EARLY
EXTINGUISHMENT OF DEBT, net of
income tax benefit of $37,942 in 1995..... -- 62,967 --
------------- -------------- ---------------
Net income (loss)........................ $ 2,798,757 $ 1,114,609 $(1,980,393)
============= ============== ===============
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary charge. $ .34 $ .15 $ (.24)
Extraordinary charge...................... -- (.01) --
------------- -------------- ---------------
Net income (loss) per share............... $ .34 $ .14 $ (.24)
============= ============== ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 8,151,112 8,089,164 8,099,650
============= ============== ===============
</TABLE>

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

- 25 -

<PAGE> 26

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK,
$.01 PAR VALUE
------------------
<S> <C> <C> <C> <C> <C>
TOTAL
NUMBER OF ADDITIONAL RETAINED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS EQUITY
--------- ------ --------------- -------- --------------
BALANCE, January 2, 1994 7,874,028 78,740 $20,910,348 $ 419,420 $21,408,508
Proceeds from exercise of stock
options, including tax benefit
of $390,830 70,962 709 410,699 -- 411,408
Net income for the year -- -- -- 2,798,757 2,798,757
--------- ------- -------------- ----------- --------------
BALANCE, January 1, 1995 7,944,990 79,449 21,321,047 3,218,177 24,618,673
Proceeds from exercise of stock
options, including tax benefit
of $202,078 77,962 780 223,907 -- 224,687
Restricted stock award, net of
deferred compensation of
$112,500 25,000 250 (250) -- --
Amortization of deferred
compensation -- -- 1,286 -- 1,286
Net income for the year -- -- -- 1,114,609 1,114,609
--------- ------- -------------- ----------- -------------
BALANCE, December 31, 1995 8,047,952 80,479 21,545,990 4,332,786 25,959,255
Proceeds from exercise of stock
options, including tax benefit
of $123,038 101,847 1,019 154,455 -- 155,474
Amortization of deferred
compensation -- -- 7,716 -- 7,716
Net loss for the year -- -- -- (1,980,393) (1,980,393)
--------- ------- -------------- ----------- -------------
BALANCE, December 29, 1996 8,149,799 81,498 $21,708,161 $ 2,352,393 $24,142,052
========= ======= ============== =========== ============
</TABLE>

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

- 26 -

<PAGE> 27

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).............................. $ 2,798,757 $ 1,114,609 $(1,980,393)
----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities --
Depreciation and amortization................ 2,300,982 3,230,181 2,870,601
Loss on disposal of property and equipment... -- 63,856 221,239
Restaurant closure expenses.................. -- 1,491,934 6,324,242
Deferred rent................................ 494,085 322,682 168,444
Amortization of deferred compensation........ -- 1,286 7,716
Extraordinary charge, net.................... -- 62,967 --
Changes in operating assets and liabilities --
(Increase) decrease in assets:
Inventories................................ (194,501) 16,116 31,915
Prepaid expenses........................... (76,739) 91,810 (29,884)
Prepaid income taxes....................... -- (152,680) (78,344)
Other current assets....................... (2,222) (390,165) (103,133)
Deferred restaurant pre-opening costs...... (1,436,788) (530,748) (247,516)
Other assets............................... (547,098) (76,546) 40,366
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities... 1,003,994 945,894 (602,491)
Income taxes payable....................... 504,850 126,000 --
Accrued restaurant closure expenses........ -- (92,418) (155,198)
Deferred franchise fee income.............. 538,971 (91,471) (327,500)
Deferred income taxes, net.................. 509,926 92,517 (1,508,057)
----------- ----------- -----------
Total adjustments............................... 3,095,460 5,111,215 6,612,400
----------- ----------- -----------
Net cash provided by operating activities... 5,894,217 6,225,824 4,632,007
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sale of investments............................. 6,400,000 -- --
Capital expenditures............................ (23,400,782) (9,058,937) (4,539,108)
Proceeds from disposition of property
and equipment.................................. -- 2,621,470 --
Payments for intangible assets.................. (212,785) (273,890) (81,896)
Payments for leasehold acquisition costs........ (565,402) (265,772) --
Decrease in deposits and deferred costs
on future restaurant locations................. 534,988 84,252 34,002
----------- ----------- -----------
Net cash used in investing activities........ (17,243,981) (6,892,877) (4,587,002)
----------- ----------- -----------
</TABLE>

(Continued)

- 27 -

<PAGE> 28

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- ------------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Decrease in due to related parties................ $ (11,699) $ -- $ --
Principal payments on long-term debt.............. (125,004) (2,374,996) (77,276)
Net borrowings (repayments) under revolving
credit agreement................................. 9,027,200 3,021,800 (596,999)
Distributions paid to shareholders................ (842,833) --
Proceeds from exercise of stock options........... 20,578 22,609 32,436
------------ ------------------ ------------------
Net cash provided by (used in) financing
activities..................................... 8,068,242 669,413 (641,839)
------------ ------------------ ------------------
Net increase (decrease) in cash and
cash equivalents............................... (3,281,522) 2,360 (596,834)
CASH AND CASH EQUIVALENTS,
beginning of period............................... 3,970,486 688,964 691,324
------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS,
end of period..................................... $ 688,964 $ 691,324 $ 94,490
============ ================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest, net of interest capitalized of $309,088
in 1994, $205,694 in 1995 and
$43,894 in 1996................................. $ 31,507 $ 790,260 $ 973,072
============ ================== ==================
Income taxes..................................... $ 575,000 $ 655,000 $ 280,000
============ ================== ==================
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Tax benefit from stock options recorded to
additional paid-in capital....................... $ 390,830 $ 202,078 $ 123,038
============ ================== ==================
</TABLE>

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

- 28 -

<PAGE> 29

POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996

(1) GENERAL

Pollo Tropical, Inc. ("Pollo Tropical") and subsidiaries (collectively, the
"Company"), as of December 29, 1996, owned and operated 35 "Pollo Tropical"
restaurants located in Florida and New York. As of December 29, 1996, there
were 7 franchised restaurants open in Florida and Puerto Rico.

During October 1993, the Company merged with the entities that previously
owned the Company's restaurants and franchise rights, all of which were
under common control (the "Reorganization"). Immediately following the
Reorganization, the Company completed an Initial Public Offering of
2,012,500 shares of its Common Stock at $13.50 per share.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year-End

The Company utilizes a 52/53 week year-end and ends its year on the Sunday
closest to January 1. All references to 1994 herein relate to January 1,
1995 and the fiscal year ended January 1, 1995, all references to 1995
herein relate to December 31, 1995 and the fiscal year ended December 31,
1995, and all references to 1996 herein relate to December 29, 1996 and the
fiscal year ended December 29,1996.

Basis of Financial Statement Presentation

The accompanying consolidated financial statements include the accounts of
Pollo Tropical, Pollo Operations, Inc. and Pollo Franchise, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
with current year presentation.

Cash Equivalents

All highly liquid instruments with an original maturity of three months or
less when acquired are considered to be cash and cash equivalents.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts payable, accrued
liabilities, accrued restaurant closure expenses and long-term debt
approximates fair value as of December 31, 1995 and December 29, 1996.

Inventories

Inventories, which consist of restaurant food items, related paper supplies
and crew uniforms, are stated at the lower of cost (computed on the
first-in, first-out method) or market.

Property and Equipment

Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the terms of the leases which are
less than the estimated lives of the related improvements. Maintenance and
repairs which do not improve or extend the life of the asset are expensed as
incurred.

The Company capitalizes interest cost as part of the historical cost of
acquiring and constructing restaurant property. Interest capitalization
ceases when the property is placed in service.

Deferred Restaurant Pre-Opening Costs

Direct costs incurred prior to a restaurant opening to the public are
capitalized and amortized over a period of one year beginning on the date
the restaurant commences operations.

- 29 -

<PAGE> 30

Intangible Assets

Intangible assets are amortized using the straight-line method over the
following periods:

<TABLE>
<S> <C>
LIFE IN YEARS
-----------------
Covenant not to compete .. Term of agreement
Organization costs ....... 5
Loan costs ............... Term of loan
Trademark costs .......... 40
</TABLE>
Leasehold Acquisition Costs

Costs incurred to obtain leaseholds are capitalized and amortized over the
initial terms of the related leases.

Deferred Franchise Costs

Deferred franchise costs, which are included in Other assets in the accompanying
consolidated financial statements, are recognized as general and administrative
expenses as franchised restaurants are opened.

Long-Lived Assets

The Company continually evaluates whether events and circumstances have occurred
that may warrant revision of the estimated useful life of its intangible assets
and other long-lived assets or whether the remaining balance of its intangible
assets and other long-lived assets should be evaluated for possible impairment.
The Company uses an estimate of the related undiscounted cash flows over the
remaining life of the intangible assets in measuring their recoverability.

Consolidated Balance Sheet Data

Other current assets consist of the following at December 31, 1995 and
December 29, 1996:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Purchase option.............. $110,000 $ --
Insurance dividend receivable 205,900 215,000
Other........................ 135,656 339,689
-------- --------
$451,556 $554,689
======== ========
</TABLE>

Accrued liabilities consist of the following at December 31, 1995 and
December 29, 1996:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Sales tax................... $ 303,861 $ 313,983
Payroll related............. 412,294 585,436
Other....................... 579,744 646,386
---------- ----------
$1,295,899 $1,545,805
========== ==========
</TABLE>

Franchise Revenues

Franchise revenues consist of franchise fees, which are typically collected upon
execution of an area development and/or franchise agreement, and continuing
royalties, based upon gross sales. Franchise fees are initially recorded as
deferred franchise fee income and are recognized in earnings either when
franchised restaurants are opened, or upon forfeiture of such fees by the
franchisees pursuant to the terms of the franchise development agreements, as
applicable.

Franchise revenues consist of the following:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
Franchise fees...... $40,000 $376,471 $227,500
Continuing royalties 1,297 177,945 271,804
---------- ------------ ------------
$41,297 $554,416 $499,304
========== ============ ============
</TABLE>

- 30 -

<PAGE> 31

Advertising Costs

Advertising costs not directly related to the opening of a new restaurant
are expensed during the period in which the cost is incurred. Advertising
expense was $1,378,444, $2,103,155 and $2,978,255 for Fiscal 1994, Fiscal
1995 and Fiscal 1996, respectively, and are included in Other restaurant
operating expenses in the accompanying Consolidated Statements of
Operations.

Income Taxes

The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under
this method, deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate applicable when the
related asset or liability is expected to be realized or settled. Deferred
income tax expenses or benefits are based on the changes in the asset or
liability from period to period. If available evidence suggests that it is
more likely than not that some portion or all of the deferred tax assets
will not be realized, a valuation allowance is required to reduce the
deferred tax assets to the amount that is more likely than not to be
realized. Future changes in such a valuation allowance would be included in
the provision for deferred income taxes in the period of change.

Net Income (Loss) Per Share

Income per common share has been computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents include all outstanding
options after applying the treasury stock method. Loss per share is
computed by dividing net loss by the weighted average number of shares of
common stock outstanding.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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
most significant estimates with regard to the accompanying consolidated
financial statements relate to accrued restaurant closure expenses, as
discussed in Note 10. Although the Company believes its estimates are
appropriate, changes in assumptions utilized in preparing such estimates
could cause these estimates to change in the near term.

(3) CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following at December 31, 1995 and
December 29, 1996:

<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Cash on hand....................... $ 57,250 $49,900
Cash management fund............... 634,074 44,590
-------- -------
$691,324 $94,490
======== =======
</TABLE>

(4) PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 1995 and
December 29, 1996:

<TABLE>
<CAPTION>
LIFE IN
YEARS 1995 1996
------- ------------ ------------
<S> <C> <C> <C>
Land....................................... -- $11,531,845 $11,657,999
Buildings and leasehold improvements....... 7-31 24,219,869 25,927,959
Furniture, fixtures and equipment.......... 5-15 8,750,143 9,513,141
Signs...................................... 7 817,493 1,103,039
Software................................... 5 92,170 92,500
----------- -----------
45,411,520 48,294,638
Less - Accumulated depreciation and
amortization............................. (3,679,826) (5,754,641)
----------- -----------
$41,731,694 $42,539,997
=========== ===========
</TABLE>

At December 29, 1996, property and equipment includes $6,408,789 of property
and equipment, less accumulated depreciation and amortization of $331,573,
related to closed restaurants (See Note 10).

- 31 -

<PAGE> 32

The Company's office space and the land underlying some of its existing
restaurant locations are leased under operating leases (see Note 10).

(5) INTANGIBLE ASSETS

Intangible assets consist of the following at December 31, 1995 and
December 29, 1996:

<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Covenant not-to-compete...................... $ -- $ 50,000
Organization costs........................... 51,502 51,497
Loan costs................................... 132,132 154,632
Trademark costs.............................. 236,882 260,281
--------- --------
420,516 516,410
Less: Accumulated amortization (50,617) (84,518)
--------- --------
$ 369,899 $ 431,892
========= =========
</TABLE>

(6) DEPOSITS AND DEFERRED COSTS ON FUTURE RESTAURANT LOCATIONS

Deposits and deferred costs on future restaurant locations consist of
amounts deposited with lessors and/or paid to others to secure real property
and develop future restaurant locations. Upon opening of the restaurant,
all such deposits and deferred costs are charged to the appropriate
depreciable and amortizable asset categories.

(7) INDEBTEDNESS

Long-term debt consists of the following at December 31, 1995 and December
29, 1996:

<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Advances under a $25,000,000 revolving credit and term loan
agreement with interest payable monthly at the Company's option,
at prime (8.25% at December 29, 1996) plus .375% or libor rate
(5.664% at December 29, 1996) plus 2.65%. Loan converts to a
term loan on August 31, 1998, at which time principal payments
equal to the loan balance divided by 120 commence, with a
balloon payment due June 30, 2003............................... $11,749,000 $11,152,000
Mortgage note payable with interest at 8%, payable monthly in
equal principal and interest installments from January
1996 through maturity in June 1999, collateralized by a
restaurant location............................................. 300,000 222,725
----------- -----------
12,049,000 11,374,725
Less -- Current maturities of long-term debt.................... (77,352) (83,773)
----------- -----------
$11,971,648 $11,290,952
=========== ===========
</TABLE>

The $25,000,000 revolving credit and term loan (the "Loan") is unsecured;
however, the Company has agreed not to further encumber any of its
presently owned real estate while the Loan is outstanding. The Loan
provides for advances of up to $20,000,000 until June 30, 1996, and
thereafter, up to $25,000,000; however, the lender has no obligation to
make further advances after July 13, 1998. At December 29, 1996, the
available portion of the Loan was $13,848,000.

The terms of the Loan require that the Company remain in compliance with
certain financial and non-financial covenants, including the maintenance of
certain financial ratios. The Company was either in compliance with the
debt covenants or had obtained waivers for events of non-compliance at
December 29, 1996.

In connection with obtaining the Loan, the proceeds from which were used to
repay substantially all the outstanding indebtedness, the Company incurred
costs in the aggregate of $154,632, which are capitalized as intangible
assets in the accompanying consolidated balance sheets, and are being
amortized over the term of the Loan. The unamortized balance of
capitalized costs associated with obtaining indebtedness retired with the
proceeds from the Loan was charged to expense during the quarter ended
October 1, 1995, and is included, net of income tax benefit, in the
accompanying consolidated statement of operations as an extraordinary
charge.

- 32 -

<PAGE> 33

Repayment of future maturities of long-term debt at December 29, 1996 is
as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997 ..................................................... $ 83,773
1998 ..................................................... 462,459
1999 ..................................................... 1,163,426
2000 ..................................................... 1,115,200
2001 ..................................................... 1,115,200
Thereafter ............................................... 7,434,666
-----------
$11,374,724
</TABLE>

During the years ended January 1, 1995 and December 31, 1995, the Company
incurred interest of $71,754 and $45,424, respectively, related to
borrowings from a related party. The loan was fully paid by the Company in
July 1995.

(8) INCOME TAXES

The provision for (benefit from) income taxes consists of the following:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
Federal................................................... $1,376,947 $618,257 $(1,225,018)
State..................................................... 212,828 102,579 11,740
---------- ------------ -----------
Total................................................... $1,589,775 $720,836 $(1,213,278)
========== ============ ===========
Current................................................... $1,079,849 $628,319 $ 294,779
Deferred.................................................. 509,926 92,517 (1,508,057)
---------- ------------ -----------
Total................................................... $1,589,775 $720,836 $ 1,213,278)
========== ============ ===========
</TABLE>

Deferred income taxes arise primarily due to temporary differences in
recognizing certain revenues and expenses for tax purposes, the use of
accelerated depreciation for tax purposes, and the expected use of
alternative minimum tax carry-forwards in future periods. The components
of the current deferred income tax asset and the net non-current deferred
income tax liability at December 31, 1995 and December 29, 1996 are as
follows:

1995 1996
--------------- ------------
<S> <C> <C>
Current deferred tax asset:
Accrued restaurant closure expenses............... $ -- $(1,583,649)
============== ===========
Non-current deferred tax liability, net:
Depreciation and amortization of
property and equipment........................... $1,492,519 2,024,154
Amortization of deferred restaurant
pre-opening costs................................ 145,611 22,283
Deferred franchise fee income, net................ (89,896) 54,947
Deferred rent..................................... (282,294) (341,705)
Alternative minimum tax carry-forwards............ (375,308) (736,747)
Foreign tax credit carry-forward.................. -- (74,577)
Accrued liabilities............................... (101,418) (34,809)
Other, net........................................ 15,024 (33,716)
-------------- -----------
Non-current deferred tax liability, net $ 804,238 $ 879,830
============== ===========
</TABLE>

- 33 -

<PAGE> 34

At December 29, 1996, the Company had available a foreign tax credit
carry-forward which expires in 2001.

The following table reconciles the Federal statutory income tax rate and the
Company's effective income tax rate for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
Provision for income taxes at
Federal statutory rate...... 34.0% 34.0% 34.0%
State taxes, net of Federal
income tax benefit.......... 3.6 3.6 3.6
Tax-exempt interest income... (.5) -- --
Nondeductible expenses....... -- 0.8 0.9
Jobs tax credits............. (.4) -- --
Other, net................... (.5) (.4) (.5)
--------- ----------- -----------
Effective income tax rate... 36.2% 38.0% 38.0%
========= =========== ===========
</TABLE>

The Company's January 2, 1994 federal income tax return is currently being
audited by the Internal Revenue Service. It is not possible to predict the
ultimate outcome of this audit; however, the Company does not believe that
the ultimate resolution of any of these matters will have a material adverse
effect on the accompanying consolidated financial statements.

(9) SHAREHOLDERS' EQUITY

As a result of the Reorganization (Note 1) the Company paid a distribution
to its shareholders of $842,833 for all undistributed S Corporation earnings
from July 1, 1993 through the S Corporation termination date.

Stock Based Compensation Plans

In August 1993, the Company adopted the 1993 Option Plan (as amended to
date, the "1993 Plan"). Under the 1993 Plan, 800,000 shares of common stock
are reserved for issuance upon exercise of options. The Plan is designed to
serve as an incentive for retaining qualified and competent employees.

In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). Under the 1995 Plan, 500,000 shares of common stock are reserved for
issuance upon exercise of options. The Plan is designed to serve as an
incentive for retaining qualified and competent employees.

In June 1995, the Company adopted the 1995 Bonus/Fee Stock Option Plan (the
"1995 Bonus Plan"). Under the 1995 Bonus Plan, 500,000 shares of common
stock are reserved for issuance upon exercise of options. The 1995 Bonus
Plan allows certain eligible employees and directors who receive either a
cash bonus or a director's fee of $2,500 or more to elect to receive stock
options instead of receiving cash to which they are entitled (the "Deferred
Cash"). The per share exercise price of the options granted pursuant to the
1995 Bonus Plan would be equal to 50% of the fair market value of the common
stock on the day the option is granted. The number of shares of common stock
covered by the option would be calculated by doubling the number of shares
that could be purchased at fair market value with the Deferred Cash so that
the "in-the-money" value of the option equals the Deferred Cash. No options
have been granted pursuant to the 1995 Bonus Plan.

In November 1995, the Company adopted the 1995 Directors' Stock Option Plan
(the "1995 Directors' Plan"). Under the 1995 Directors' Plan, 200,000
shares of common stock are reserved for issuance upon exercise of options.
Upon election as a member of the Board, each Director receives an option to
purchase 15,000 shares of common stock, and an additional option to purchase
3,000 shares of common stock is granted on each annual meeting date under
certain conditions. All stock options granted pursuant to the 1995
Directors' Plan become exercisable in 50% increments on each six month
anniversary of the date of grant, so long as the optionee is a Director on
the relevant exercise date.

- 34 -

<PAGE> 35
In November 1995, the Company adopted the 1995 Restricted Stock Award Plan (the
"1995 Restricted Plan"). Under the 1995 Restricted Plan, not less than
100,000 shares of common stock are reserved for award and issuance, generally
at no cost to the employee. In November 1995, the Company awarded 25,000
shares of common stock to its President pursuant to the 1995 Restricted Plan.
These shares vest as to 20% in September 1998, 30% in September 1999 and 50% in
September 2000. The Company recorded deferred compensation of $112,500 on the
date of grant based on the quoted market value of the common stock. Deferred
compensation is being amortized to expense ratably over the restricted period,
and is included in the accompanying consolidated financial statements.

The Company's Board of Directors, or a committee thereof (the "Committee"),
administers and interprets each of the above described plans (collectively, the
"Plans"). The Plans provide for the granting of both "incentive stock options"
(as defined in Section 422 of the Internal Revenue Code) and nonstatutory stock
options or awards. Options are granted under the Plan on such terms and at
such prices as determined by the Committee, except that the per share exercise
price of incentive stock options cannot be less than the fair market value of
the common stock on the date of grant. Generally, the stock options granted
pursuant to the 1993 Plan, the 1995 Plan and the 1995 Bonus Plan vest in
increments of 33% per year over a three year period on the yearly anniversary
of the grant and have a term of ten years from the date of grant.

The following table summarizes stock option activity:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE AVAILABLE FOR
PRICE PER SHARE OUTSTANDING FUTURE GRANTS
---------------- ----------- -------------
<S> <C> <C> <C>
Balance, January 2, 1994.. $ 6.66 737,228 253,035
Granted.................. $13.08 127,500 (127,500)
Exercised................ $ 0.29 (70,962) --
Canceled................. $13.92 (5,700) 5,700
---------- ------------
Balance, January 1, 1995.. $ 8.23 788,066 131,235
Authorized, net.......... -- -- 1,065,000
Granted/converted........ $ 4.66 478,800 (478,800)
Exercised................ $ 0.29 (77,962) --
Canceled................. $12.84 (213,400) 213,400
---------- ------------
Balance, December 31, 1995 $ 6.10 975,504 930,835
Granted.................. $ 4.50 136,900 (136,900)
Exercised................ $ 0.32 (101,847) --
Canceled................. $ 6.09 (98,790) 98,790
---------- ------------
Balance, December 29, 1996 $ 6.51 911,767 892,725
========== ============
</TABLE>

The following table summarizes information about the stock options outstanding
at December 29, 1996:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------- ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.29 - $0.58 36,034 4.98 $ 0.30 36,034 $ 0.30
$2.71 - $4.50 594,763 7.21 $ 4.33 183,576 $ 3.96
$7.50 - $13.50 280,970 6.63 $11.90 257,302 $11.81
------- -------
911,767 476,912
======= =======
</TABLE>

The weighted-average exercise price and weighted-average market price of
114,700 options granted during 1996 for which the exercise price exceeds the
market price of the stock on the grant date is $4.50 and $3.42, respectively.

- 35 -

<PAGE> 36

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements whereby no compensation cost related to stock
options is deducted in determining net income (loss). Had compensation
cost for the Company's stock option plans been determined pursuant to SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's pro forma
net income (loss) and net income (loss) per share would have been different
than the amounts recorded in the accompanying statements of operations.
Using the Black-Scholes option pricing model for all options granted after
January 1, 1995, the Company's pro forma net income (loss), pro forma net
income (loss) per share and pro forma weighted average fair value of
options granted, with related assumptions, are as follows for the years
ended December 31, 1995 and December 29, 1996:

1995 1996
----------------- ------------------
<S> <C> <C>
Pro forma net income (loss)............................. $1,064,705 $(2,127,024)
Pro forma net income (loss) per share................... $ 0.13 $ (0.26)
Pro forma weighted average fair value of options granted $ 2.12 $ 1.54
Risk free interest rates................................ 5.37% - 7.11% 5.31% - 6.46%
Expected lives.......................................... 3-5 Years 3-5 Years
Expected volatility..................................... 59% 59%
</TABLE>

(10) COMMITMENTS AND CONTINGENCIES

Leases

The Company leases land and facilities for office and restaurant locations
under various noncancelable operating lease agreements, one of which is
with a related party. Certain of these lease agreements contain provisions
for rent overrides based on a percentage of gross sales. Additionally, the
Company, in certain instances, is responsible for real estate taxes and
common area maintenance costs. The leases also provide for renewal
options. Future minimum rental commitments, excluding renewal option
periods, under these operating lease agreements at December 29, 1996 are as
follows:

RELATED UNRELATED
FISCAL YEAR PARTIES PARTIES TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C>
1997.............................. $ 102,879 $ 2,097,964 $ 2,200,843
1998.............................. 102,879 2,112,873 2,215,752
1999.............................. 102,879 2,000,331 2,103,210
2000.............................. 111,881 1,851,205 1,963,086
2001.............................. 118,311 1,746,669 1,864,980
Thereafter........................ 948,463 16,318,415 17,266,878
---------- ------------ ------------
$1,487,292 $26,127,457 $27,614,749
========== ============ ============
</TABLE>

Future minimum rental commitments have been reduced by future minimum
sublease rentals of $431,915 due under non-cancelable subleases.

Rent expense was $1,365,138, $1,918,955 and $2,292,827 (net of $94,850 in
sublease rentals) in Fiscal 1994, Fiscal 1995 and Fiscal 1996,
respectively, which included $130,076, $97,288 and $102,879, respectively,
paid to related parties.

Rent expense is recorded in the accompanying consolidated financial
statements on the straight-line basis in accordance with generally accepted
accounting principles. Actual rent is paid in accordance with the lease
terms. The excess of rent expense over actual rent paid in Fiscal 1994,
Fiscal 1995 and Fiscal 1996 was $494,085, $332,950 and $76,655,
respectively.

In July 1995, the Company entered into sale/leaseback transactions with an
unrelated party for two of its owned restaurant sites, which resulted in
net proceeds that approximated the carrying value of the land, buildings
and fixtures sold. The resulting leases are accounted for as operating
leases.

- 36 -

<PAGE> 37

Employment Agreements

In September 1995, the Company entered into an employment agreement with
its President which calls for minimum annual compensation of $250,000
through September 1998.

Franchise Development Agreements

The Company has entered into domestic and international area development
and franchise agreements, one of which is with a related party, granting
the right to develop Pollo Tropical restaurants in certain states, the
Caribbean and Latin America. The Company's standard franchise agreement
has a 15-year term and provides for an initial franchise fee and a
continuing royalty, based upon gross sales. The agreements grant the
franchisee the rights to operate restaurants and use the associated trade
name and trademark within the standards and guidelines established by the
Company.

Guarantee

The Company was contingently liable under a guarantee with respect to a
loan (in the amount of approximately $514,000 at December 29, 1996) made by
a bank to a related party. In November 1993, the related party refinanced
this loan and the Company was released from its guarantee, however, the
loan remains collateralized by all the assets of one of the Company's
operating restaurants.

Accrued Restaurant Closure Expenses

During Fiscal 1995, the Company accrued estimated expenses in the amount of
$1,565,108 for two restaurants closed in October 1995. The estimated
expenses consisted of $1,243,626 in net losses on disposal of fixed assets
and $321,482 in estimated liabilities associated with termination of
leases. The assets related to the Fiscal 1995 closed restaurants were
disposed of during Fiscal 1996 resulting in a gain in the amount of
$174,047. This gain is primarily attributable to the sale of the one
restaurant site and the reversal of an accrual due to a more favorable
economic transaction than originally estimated associated with the
subleasing of the other restaurant site.

Litigation, Claims and Assessments

From time to time, the Company may be engaged in routine litigation and
disputes incidental to its business. The Company does not believe that the
ultimate resolution of any of these matters will have a material adverse
effect on the accompanying consolidated financial statements.

(11) RELATED-PARTY TRANSACTIONS

Included in Other restaurant operating expenses for the year ended January
1, 1995 is $35,500 paid to a related party for accounting services.

Included in capital expenditures for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996 are $175,164, $26,758 and $32,920,
respectively, paid to a related party for architectural services.

Included in Deferred franchise fee income as of December 31, 1995 and
December 29, 1996 is $120,000 received from a related party for initial
franchise fees.

See Notes 7 and 10 for other related-party transactions.

- 37 -

<PAGE> 38

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

- NONE -

- 38 -

<PAGE> 39

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The information required by this Item 10 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

- 39 -

<PAGE> 40

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS:

Reference is made to the index set forth on page 19 of this Annual
Report on Form 10-K.

2. FINANCIAL STATEMENT SCHEDULES:

Financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are not
applicable and therefore have been omitted.

3. EXHIBITS:

<TABLE>
<S> <C>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------

3.1 Registrant's Amended and Restated Articles of Incorporation(2)
3.2 Registrant's Amended and Restated Bylaws(2)
10.1 1993 Stock Option Plan (filed as exhibit 10.1 to the
Registrant's registration statement on Form S-8 (Reg. No.
33-74370) and incorporated herein by reference)(3)
10.2 1995 Directors Stock Option Plan (3)(5)
10.5 Employment Agreement, between the Registrant and Nicholas A.
Castaldo (3)(4)
10.6 Lease Agreement with Verde Properties Limited Company(2)
10.9 Lease Agreement with Norton S. Pallot, Gloria M. Pallot, Howard M.
Katzen, Barbara P. Katzen, S. Ronald Pallot and Gloria C. Pallot(2)
10.10 Advisory Agreement with Miller Advisory Corp.(2)
10.11 Forms of ARM Development Agreement and Franchise Agreement
10.18 $1,000,000 Promissory Note to Food Spot Corporation(2)
10.19 $7,000,000 Line of Credit with NationsBank of Florida, N.A.(4)
10.20 $10,000,000 Line of Credit with NationsBank of Florida, N.A.(4)
10.21 Employment Agreement between the Registrant and Daniel O'Grady
(3)(4)
10.22 1995 Stock Option Plan (3)(5)
10.23 1995 Bonus/Fee Plan (3)(5)
10.24 1995 Restricted Stock Plan (3)(5)
10.25 $25,000,000 Credit Agreement with First Union National Bank of
Florida(4)
10.26 Waiver and Modification to the $25,000,000 Credit Agreement with
First Union National Bank of Florida (1)
22.1 Subsidiaries of the Registrant(2)
23.2 Consent of Arthur Andersen LLP(1)
27.1 Article 5 of Regulation S-X Financial Data Schedule for Year-end 10-K (for SEC use only)
</TABLE>

____________________
(1) Filed herewith
(2) Incorporated by reference to the exhibit with the same number filed
with the Registrant's Registration Statement on Form S-1 (File No.
33-68266)
(3) Executive Compensation Plans and Arrangements
(4) Previously filed
(5) Incorporated by reference to the exhibits with the same number filed
with the Registrant's Registration Statement on Form S-8 (File No.
333-22441)

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

- 40 -

<PAGE> 41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on March 27, 1997.

POLLO TROPICAL, INC.

By:/S/ LARRY J. HARRIS
---------------------------------------
Larry J. Harris
Chairman and Chief Executive Officer

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

<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
------------------------ --------------------------- --------------

/S/ LARRY J. HARRIS Chairman and Chief March 27, 1997
------------------------ Executive Officer
Larry J. Harris (Principal Executive
Officer)

/S/ STUART I. HARRIS Vice Chairman and Secretary March 27, 1997
------------------------
Stuart I. Harris

/S/ NICHOLAS A. CASTALDO President and Director March 27, 1997
------------------------
Nicholas A. Castaldo

/S/ WILLIAM CARL DREW Chief Financial Officer March 27, 1997
------------------------
William Carl Drew

/S/ VIVIAN LOPEZ-BLANCO Controller March 27, 1997
------------------------
Vivian Lopez-Blanco

/S/ RONALD L. MILLER Director March 27, 1997
------------------------
Ronald L. Miller

/S/ CRAIG M. NASH Director March 27, 1997
------------------------
Craig M. Nash

/S/ ALAN VITULI Director March 27, 1997
------------------------
Alan Vituli

/S/ CLAYTON WILHITE Director March 27, 1997
------------------------
Clayton Wilhite

</TABLE>

- 41 -

<PAGE> 1
Exhibit 10.26

FIRST UNION NATIONAL BANK OF FLORIDA
200 South Biscayne Boulevard
Miami, Florida 33131

March 26, 1997

Pollo Operations, Inc.
Pollo Tropical, Inc.
Pollo Franchise, Inc.
7300 North Kendall Drive
Miami, Florida 33156
Attn.: William Carl Drew, Chief
Financial Officer

Re: Revolving Credit and Term Loan Agreement dated as of July 13, 1995
(the "Loan Agreement")

Dear Mr. Drew:

Reference is made to the above-referenced Loan Agreement dated as of
July 13, 1995, among Pollo Operations, Inc., Pollo Tropical, Inc., Pollo
Franchise, Inc. and First Union National Bank of Florida (the "Loan Agreement").
Capitalized terms used but not defined herein shall have the meanings ascribed
to them in Section 1.1 of the Loan Agreement.

You have requested the Bank to agree to certain waivers and
modifications of the Loan Agreement is connection with the Borrower's 1996
audited financial statements to be included in its Annual Report on Form 10-K to
be filed with the Securities and Exchange Commission.

This letter agreement confirms our agreement and understanding, as
follows:

1. DEFINITION OF TANGIBLE NET WORTH. The definition of
"Tangible Net Worth" in Section 1.1 of the Loan Agreement is hereby amended in
its entirety to read as follows:

"Tangible Net Worth" shall mean the net worth of
Borrower, Guarantor and the Subsidiaries determined on a
consolidated basis in accordance with GAAP minus (i) any
write-up of assets subsequent to the date hereof; (ii)
deferred assets other than prepaid insurance and prepaid taxes
(including deferred income taxes, only if classified as a
current asset under GAAP); (iii) patents, copyrights,
trademarks, trade names, noncompete agreements, franchises and
other intangibles; (iv) goodwill or other amounts representing
the excess of the purchase price of assets or stock over the
value assigned thereto on the books of such Person; (v)
unamortized debt discount and expense; (vi) any accounts,
notes or other amounts due from Affiliates; (vii)
capitalization of leasehold acquisition costs, and (viii) any
other amounts categorized as intangibles under GAAP.

<PAGE> 2

Pollo Operations, Inc. et al
March 26, 1997
Page 2

2. TANGIBLE NET WORTH COVENANT. The "Tangible Net Worth"
covenant in paragraph I(c) of Exhibit 5.22 (Other Covenants) of the Loan
Agreement is hereby amended in its entirety to read as follows:

(c) Tangible Net Worth. After December 30, 1996,
maintain a consolidated Tangible Net Worth of not less than
$21,500,000. Further, such Tangible Net Worth as of the close of each
fiscal quarter thereafter shall not be less than the Tangible Net Worth
as of the close of the preceding fiscal quarter plus seventy-five
percent (75%) of the Net Income (but not including any net loss) for
the then ending fiscal quarter.

3. PERMITTED LOSSES COVENANT. Compliance with the
"Permitted Losses" covenant in paragraph 1(e) of Exhibit 5.22 (Other Covenants)
of the Loan Agreement is hereby waived as of December 29, 1996. Notwithstanding
the foregoing, such waiver is effective in this one instance only and is not a
waiver with respect to any date or period subsequent to December 29, 1996.

4. FEE. In consideration of the Lender entering into
this letter, Borrower is paying a fee to the Lender of $10,000.

5. REAFFIRMATION OF GUARANTEES. Each of the undersigned
Guarantors hereby reaffirms its obligations under the Guaranty Agreement
executed by such Guarantor, consents to any and all modifications of the Loan
Agreement occasioned by this letter agreement and agrees that its obligations
under such Guaranty Agreement shall remain in full force and effect after the
date hereof and shall be unaffected by the transactions contemplated by this
letter agreement.

6. NO OTHER MODIFICATIONS. Except as modified
herein, the Loan Agreement and the other Loan Documents referred to therein
shall remain in full force and effect after the date hereof unless and until
modified or amended in accordance with the terms thereof.

If the foregoing correctly states our agreement and
understanding, kindly so indicate by signing and returning the enclosed copy of
this letter agreement in the spaces provided for the signatures of your duly
authorized officers.

Very truly yours,
FIRST UNION NATIONAL BANK OF FLORIDA

By: /s/ Mary A. Morgan
------------------------------
Mary A. Morgan, Vice President
<PAGE> 3

Pollo Operations, Inc. et al
March 26, 1997
Page 3

POLLO OPERATIONS, INC.

By: /s/ Larry J. Harris
------------------------------------
Name: Larry J. Harris
Title: Chairman Of The Board

POLLO TROPICAL, INC.

By: /s/ Larry J. Harris
------------------------------------
Name: Larry J. Harris
Title: Chairman Of The Board

POLLO FRANCHISE, INC.

By: /s/ Larry J. Harris
------------------------------------
Name: Larry J. Harris
Title: Chairman Of The Board

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------

As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statement File No. 33-74370.

ARTHUR ANDERSEN LLP

/s/ Arthur Andersen LLP
- -----------------------
Miami, Florida
March 27, 1997.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS OF POLLO TROPICAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-K
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 94,490
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 314,865
<CURRENT-ASSETS> 3,196,344
<PP&E> 48,294,638
<DEPRECIATION> (5,754,641)
<TOTAL-ASSETS> 48,521,463
<CURRENT-LIABILITIES> 10,577,276
<BONDS> 0
0
0
<COMMON> 81,498
<OTHER-SE> 24,060,554
<TOTAL-LIABILITY-AND-EQUITY> 48,521,463
<SALES> 63,734,848
<TOTAL-REVENUES> 64,234,152
<CGS> 24,037,263
<TOTAL-COSTS> 42,487,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 991,144
<INCOME-PRETAX> (3,193,671)
<INCOME-TAX> (1,213,278)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,980,393)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> 0

</TABLE>