POLLO TROPICAL INC, 10-K, 1998-03-27

POLLO TROPICAL INC
10-K, 1998-03-27
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997

[ ] 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)

FLORIDA 65-0100964
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

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 Registrant as of March 13, 1998 was approximately $75,773,000 based on the
$9.25 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 Registrant 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 13, 1998 was 8,191,687.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement relating to the
Registrant's 1998 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.

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PART I

FORWARD LOOKING STATEMENTS

The statements contained in this Report that are not purely historical
are forward-looking statements 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, the effect of expansion efforts on existing
locations, 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
Puerto Rico. As of December 28, 1997, the Company owned and operated 36
restaurants, all of which are located in Florida, and franchised 16 restaurants,
ten of which are located in Puerto Rico, two in the Dominican Republic, two in
Ecuador, one in the Netherlands Antilles and one in Miami, Florida. The Company
plans to open four to five additional company-owned restaurants in Florida, and
anticipates that eight additional international franchised restaurants will be
in operation by the end of the fiscal year ended December 27, 1998 ("Fiscal
1998").

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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. In 1996, the Company broadened the selection by adding
"island" pork to the menu. In 1997, a line of "TropiChops" including a pork and
a chicken breast version was added 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 specialty items - 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 and
grew to 36 Company-owned restaurants through the end of the fiscal year ended
December 28, 1997. After extensive market testing and analysis, the Company
concluded that the success of the restaurants was in large part due to the 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
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. The Company opened two new
restaurants in Fiscal 1997, currently operates 36 restaurants in South and
Central Florida and anticipates opening four to five additional restaurants
during Fiscal 1998. The Company feels that this controlled growth strategy can
more effectively utilize its more efficient infrastructure. This controlled
growth strategy has proven to be successful in Fiscal 1997 with substantial
gains in both same-store sales and operating margins. In the Orlando market, the
Company is utilizing the TropiGrill - Chicken and More(R) logo. These
restaurants feature greater menu variety, and 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 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, 18 franchised
restaurants are in operation, including ten in Puerto Rico, three in the
Dominican Republic, three in Ecuador, one in the Netherlands Antilles and one
non-traditional restaurant on the Florida International University campus in
Miami. The Company anticipates the opening of approximately six additional
franchised restaurants in the Caribbean and South America during the remainder
of Fiscal 1998. 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
may receive 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 may receive 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 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.

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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 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 regulations imposed on franchising activities
in foreign jurisdictions. 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 1997, the
34 restaurants open throughout the entire year generated average sales of
approximately $1,858,000, operating income of approximately $395,000 and cash
flow of approximately $452,000.

The Company anticipates that average unit sales volumes for its new
company-owned restaurants may 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 an approximately 3,200 square foot
prototype unit generally costs between $750,000 and $800,000, excluding land
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 1997 weekly
data, sit-down, counter take-out and drive-thru sales contributed 41.2%, 23.2%
and 35.6% of restaurant sales, respectively. Of such sales, lunch, with an
average transaction of $6.89, accounted for 45.8% of restaurant sales, and
dinner, with an average transaction of $7.99, accounted for 54.2% of restaurant
sales. The average drive-thru transaction was $7.44. 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> <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
36. Hialeah............................. Miami August 1997 4,000 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.

All of the Company's restaurants are free-standing buildings except for
three end-cap locations in strip shopping centers and one street-level
storefront in an office building. 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 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 two 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 open
four to five additional Company-owned restaurants in Florida by the end of
Fiscal 1998.

The Company requires approximately nine to 18 months after identifying
a site to (i) enter into a lease or purchase agreement for 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 80 to 100
customers and provide drive-thru service. The Company's current prototypical
free-standing restaurant ranges between 2,800 and 3,200 square feet in size.
Actual size will 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 may be
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 high 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, chicken, 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 generally donated to local food banks.

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<PAGE> 8

Freshness is the hallmark of the Company's food preparation.
Restaurants purchase fresh whole chickens which are delivered 3 to 4 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 PUBLIC RELATIONS

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 and public relations 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.

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 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.

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<PAGE> 9

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 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.

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

-9-
<PAGE> 10

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 stabilized during Fiscal 1997 and is expected
to trend lower in Fiscal 1998. Such a cost decrease may have a positive effect
on the Company's profitability. 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.
The Company has also negotiated a price cap on its main chicken product through
September of 1998.

EMPLOYEES

At December 28, 1997, the Company employed approximately 1,192 persons,
of whom 1,142 were restaurant personnel and 50 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 and trade dress have significant
value and are important to its marketing efforts. The Company has registered its
principal trademarks for "Pollo Tropical" and "TropiGrill" in the United States
and presently has applications pending or registrations granted in various
foreign countries in which it conducts or may conduct business through its
franchise system. In certain foreign countries, the Company is involved in
trademark opposition proceedings to defend its rights to register its
trademarks. The Company's policy is to pursue registration of its principal
trademarks and to oppose strenuously any infringement of its trademarks 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 increased
September 1, 1997 from $4.85 per hour to $5.15 per hour. This is expected to
increase the Company's labor cost during Fiscal 1998 and beyond. The Company
believes that it is operating in substantial compliance with applicable laws and
regulations governing its operations.

The Company is subject to franchise and related regulations in certain
foreign jurisdictions where it offers and sells franchises. These regulations
include obligations to provide disclosure about the Company, the franchise
agreements, and the franchise system. They also include obligations to register
certain franchise documents in the foreign jurisdictions, and obligations
concerning the substantive relationship between the parties to the agreements.
The Company has developed its franchise program to comply with all applicable
laws, and intends to continue to comply with all such laws.

-10-
<PAGE> 11

RECENT DEVELOPMENTS

In March 1998, the Company's Board of Directors received a proposal
from Larry J. Harris, the co-founder, Chairman and Chief Executive Officer of
the Company, for the merger of the Company pursuant to which the public
shareholders of the Company would receive $10.00 per share in cash.

The Board of Directors has established a special committee to evaluate
and consider the offer and has authorized the committee to engage financial and
legal advisors. The proposed merger is subject, among other things, to (i) the
execution of a definitive merger agreement containing customary terms, (ii)
approval of the transaction by the special committee, the board of directors and
the Company's shareholders, (iii) the receipt of satisfactory financing for the
transaction, and (iv) compliance with all applicable regulatory and governmental
requirements. Accordingly, there can be no assurance that the proposed merger
will be consummated.

-11-
<PAGE> 12

ITEM 2. PROPERTIES

Pollo Tropical's Company-owned restaurants are situated on 23 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 25 years. All of the Company's
current leases have remaining terms or renewal options extending more than
ten years beyond March 27, 1998. See "BUSINESS -- Restaurant Locations and
Site Selection".

ITEM 3. LEGAL PROCEEDINGS

On March 16, 1998, purported shareholders of the Company instituted
suit against the Company, its principal officers and all of its directors,
alleging a breach of fiduciary duties and seeking damages as well as injunctive
and other relief in response to the Company's announcement that it had received
a proposal from Larry J. Harris, the co-founder and Chief Executive Officer of
the Company, for the merger of the Company, pursuant to which the public
shareholders of the Company would receive $10.00 per share in cash. The
plaintiff is seeking certification as the representative of a class of all of
the Company's shareholders other than the defendants, the Company's principal
shareholders, and all persons related thereto. The Company believes that the
lawsuit has no basis, and intends to vigorously defend the action. Although the
ultimate outcome of the lawsuit cannot be predicted, the Company does not
believe the outcome of the lawsuit will have a material adverse effect on the
financial position, results of operation or cash flows of the Company. See
"BUSINESS - Recent Developments".

Other than as described above, the Company is not aware of any other
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.

-12-
<PAGE> 13

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 13, 1998, there were approximately
287 shareholders of record.

FISCAL 1996 FISCAL 1997
HIGH LOW HIGH LOW
---- --- ---- ---

First Quarter 4 3/8 3 3/8 5 1/4 2 1/8
Second Quarter 5 3 3/4 7 1/4 4 1/2
Third Quarter 4 1/2 2 7/8 7 3/8 4 3/4
Fourth Quarter 3 3/8 2 1/8 9 1/4 6 1/8

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.

-13-
<PAGE> 14

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

FISCAL YEAR
-----------
1993 (1) 1994 1995 1996 1997
-------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales .......................... $ 19,305 $ 41,114 $ 55,489 $ 63,735 $ 65,118
Franchise revenues ........................ -- 41 555 499 812
-------- -------- -------- -------- --------
Total revenues ............................ 19,305 41,155 56,044 64,234 65,930
-------- -------- -------- -------- --------
Operating expenses:
Cost of sales ............................. 6,961 14,849 20,065 24,037 22,533
Restaurant payroll ........................ 4,481 9,710 13,661 15,695 15,178
Other restaurant operating expenses ....... 3,089 6,195 9,465 12,137 11,414
General and administrative ................ 1,528 3,702 5,178 5,371 5,538
Depreciation and amortization ............. 635 2,301 3,396 2,961 2,355
Restaurant closure expenses ............... -- -- 1,492 6,324 --
-------- -------- -------- -------- --------
Total operating expenses .................... 16,694 36,757 53,257 66,525 57,018
-------- -------- -------- -------- --------
Income (loss) from operations ............... 2,611 4,398 2,787 (2,291) 8,912
Other income (expenses), net ................ 30 (9) (889) (903) (458)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charge ...................... 2,641 4,389 1,898 (3,194) 8,454
Provision for (benefit from) income taxes (3) 963 1,590 720 (1,214) 3,212
-------- -------- -------- -------- --------
Income (loss) before extraordinary charge ... 1,678 2,799 1,178 (1,980) 5,242

Extraordinary charge for early extinguishment
of debt, net of income tax benefit of
$38 in 1995 ............................... -- -- 63 -- --
-------- -------- -------- -------- --------
Net income (loss)(3) ........................ $ 1,678 $ 2,799 $ 1,115 $ (1,980) $ 5,242
======== ======== ======== ======== ========
Net income (loss) per share: (2) (3) (4)
Basic ................................... $ .25 $ .35 $ 0.14 $ (0.24) $ 0.64
======== ======== ======== ======== ========
Diluted ................................. $ .24 $ .34 $ 0.14 $ (0.24) $ 0.63
======== ======== ======== ======== ========

</TABLE>

<TABLE>
<CAPTION>
AS OF
-----
JAN. 2, JAN. 1, DEC. 31, DEC. 29, DEC. 28,
1994 1995 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................... $ 6,979 $ (2,685) $ (4,407) $ (7,381) $ (4,906)
Total assets.................................... 28,336 42,255 46,825 48,501 40,354
Long-term debt, including current maturities.... 2,500 11,402 12,049 11,375 1,214
Total shareholders' equity...................... 21,409 24,619 25,959 24,142 29,731
</TABLE>
- ---------------
(1) 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.

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

-14-

<PAGE> 15

(3) A proforma adjustment of $761 is included in the provision for income taxes
for Fiscal 1993 which 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 Fiscal
1993 period prior to the Reorganization, which occurred in October 1993.

(4) Amounts prior to Fiscal 1997 have been restated to conform with Statement of
Financial Accounting Standards No. 128, "Earnings per share".

-15-

<PAGE> 16
Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company's financial results have shown significant improvement in
Fiscal 1997 as a result of the Company's focused strategy. In Fiscal 1996, the
Company revised its growth strategy to focus on its domestic expansion by
filling in its core markets in South and Central Florida with Company
restaurants and utilizing franchising to expand the concept internationally,
targeting South and Central America and the Caribbean. As a result of this
revised strategy, the Company closed five unprofitable expansion market
restaurants in the fourth quarter of 1996, and one in the first quarter of 1997.
During Fiscal 1997, the Company opened two new restaurants in the core market of
South Florida, bringing the total Company owned restaurants to 36 as of the end
of Fiscal 1997, from the 35 restaurants open as of the end of Fiscal 1996.
Restaurant sales increased approximately two percent as a result of positive
same store sales, but was somewhat offset by the Company operating fewer
restaurants through most of 1997 as compared with 1996. The Company plans to
open four to five additional Company owned restaurants in Fiscal 1998. The
Company's continued emphasis on marketing, operational, and cost control
initiatives produced improved store level margins in 1997.

During Fiscal 1997, a total of 9 new franchises opened during the year,
and the Company anticipates that franchisees will open approximately eight new
units during 1998, two of which have already opened. This expansion occurred in
three new international markets: the Dominican Republic, Netherlands Antilles
and Ecuador, as well as continued expansion in the Puerto Rico market. 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.

-16-

<PAGE> 17

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
-----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Cost of sales.................................... 36.2% 37.7% 34.6%
Restaurant payroll............................... 24.6 24.6 23.3
Other restaurant operating expenses.............. 17.1 19.0 17.5
General and administrative....................... 9.2 8.4 8.4
Depreciation and amortization of
property and equipment........................ 3.5 3.5 3.1
Amortization of deferred restaurant
pre-opening costs............................. 2.1 0.9 0.2
Other amortization............................... 0.5 0.3 0.3
Restaurant closure expenses...................... 2.7 9.9 --
Income (loss) from operations.................... 5.0 (3.6) 13.7
Other income (expenses).......................... (1.6) (1.4) (0.7)
Net income (loss)................................ 2.0 (3.1) 8.1
</TABLE>

-17-
<PAGE> 18

YEAR ENDED DECEMBER 28, 1997 (FISCAL 1997) COMPARED TO YEAR ENDED
DECEMBER 29, 1996 (FISCAL 1996)

RESTAURANT SALES. Restaurant sales increased $1.4 million (2%) to $65.1
million for Fiscal 1997 from $63.7 million for Fiscal 1996. This was primarily
due to a sales increase in restaurants open for both years. This increase was
offset by effect of the five restaurants closed in November 1996 and the one
restaurant closed in January 1997. During Fiscal 1997, 34 restaurants operated
for the full year and three restaurants operated for only part of the year, of
which one was closed during the year as compared to the prior year when 32
restaurants operated for the full year and eight restaurants operated for only
part of the year, of which, five were closed in November 1996. Same store sales
for Fiscal 1997 increased 4.2%.

FRANCHISE REVENUES. Franchise revenues increased $313,000 to $812,000
for Fiscal 1997 from $499,000 for Fiscal 1996. 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. This increase
is primarily due to an increase in the number of restaurants opened and
operating during Fiscal 1997. During Fiscal 1997, seven restaurants operated for
the full year and nine opened during the year as compared to the prior year when
one restaurant operated for the full year and six were opened during the year
and five domestic franchised restaurants were closed. During Fiscal 1997, the
Company recognized $25,000 for forfeiture of exclusivity fees, as the area
development agreement with Carrols Corporation was terminated. The Chairman of
Carrols Corporation also serves as an outside director of Pollo Tropical, Inc.
During Fiscal 1996, $112,500 was recognized for forfeitures of exclusivity fees.
No area development agreements were entered into during Fiscal 1997.

As of the fiscal year ended December 28, 1997, 16 franchised
restaurants were in operation, as compared to 7 franchised restaurants as of the
fiscal year ended December 29, 1996. Of the nine franchised restaurants opened
during Fiscal 1997, four were opened in Puerto Rico, two in the Dominican
Republic, two in Ecuador and one in the Netherlands Antilles. The Company
anticipates the opening of approximately six additional international franchised
restaurants during the remainder of Fiscal 1998. As of the date of this filing,
two additional franchised restaurants opened, one in Ecuador and one in the
Dominican Republic. The Company expects the average unit sales volumes in
international markets to be significantly lower than the average unit sales
volumes of company owned restaurants in its core markets.

COST OF SALES. Cost of sales, which consists of food, beverage, paper
and supply costs, decreased 310 basis points, as a percentage of restaurant
sales, to 34.6% for Fiscal 1997 from 37.7% for Fiscal 1996. This decrease was
due to a variety of factors including favorable new contract prices on certain
food and paper items and distribution services, improved operating efficiencies
and controls, a sales mix change driven by the introduction of a new product
with relative lower food costs, the closing of six stores which had higher food
cost relative to their low sales volumes, and the effect of other initiatives
implemented during the previous twelve-month period. The Company anticipates
that the market price for chicken may trend lower in Fiscal 1998, and as such
may decrease food costs relative to sales.

RESTAURANT PAYROLL. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers
compensation insurance and group health insurance decreased 130 basis points, as
a percentage of restaurant sales, to 23.3% for Fiscal 1997 as compared to 24.6%
for Fiscal 1996. This decrease was primarily due to the Company's strategy of
concentrating growth in its core markets of South and Central Florida which have
lower payroll expenses relative to their sales. In addition, higher average
sales volumes for Fiscal 1997 and increased controls placed on labor scheduling
at the unit level further reduced payroll expense, as a percentage of restaurant
sales, as compared to Fiscal 1996. These factors were slightly offset by the
increases in the minimum wage which went into effect September 1, 1996 and 1997.
During the next year the Company expects that the higher minimum wage will have
a slightly adverse effect on restaurant payroll expense, as a percentage of
restaurant sales, when compared to the previous year.

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
decreased 150 basis points, as a percentage of restaurant sales, to 17.5% for
Fiscal 1997 from 19.0% for Fiscal 1996. The largest component of this change was
occupancy and utilities costs which decreased 90 basis points, as a percentage
of restaurant sales, to 8.6% for Fiscal 1997 from 9.5% during Fiscal 1996. This
decrease was due to the Company's strategy of concentrating growth in its core
markets of South and Central Florida which have lower occupancy and utilities
costs relative to their sales.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G &
A") expenses remained level at 8.4%, as a percentage of total revenues, for the
year ended December 28, 1997, as compared to the same period of the prior year.

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<PAGE> 19

DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT. Depreciation
and amortization of property and equipment decreased 40 basis points, as a
percentage of restaurant sales, to 3.1% for Fiscal 1997 from 3.5% for Fiscal
1996. This decrease was primarily due to the Company's strategy of concentrating
growth in its core markets of South and Central Florida which have lower
depreciation costs relative to their sales volumes. This decrease was partially
offset by the two new restaurants opened during Fiscal 1997.

AMORTIZATION OF DEFERRED RESTAURANT PRE-OPENING COSTS. Amortization of
deferred restaurant pre-opening costs decreased 70 basis points, as a percentage
of restaurant sales, to 0.2% for Fiscal 1997 from 0.9% for Fiscal 1996. This
decrease was the result of fewer new restaurants being opened during the 12
months ended December 28, 1997, as compared to the 12 month period ended
December 29, 1996.

RESTAURANT CLOSURE EXPENSE. In the fourth quarter of Fiscal 1996, the
Company accrued estimated expenses in the amount of $6.5 million associated with
the closing of six restaurants. The estimated expenses consist of $5.7 million
in net losses on disposal of property and equipment, $670,237 in estimated
liabilities associated with termination of leases and $114,910 associated with
employee termination benefits.

During Fiscal 1997, the Company disposed of four of the six restaurants
for which it had established a reserve in Fiscal 1996. Three of the restaurants
were sold and one was subleased. As part of the sale of one of the restaurants,
the Company received a note receivable in the amount of $880,000. Subsequent to
December 28, 1997, the mortgagee defaulted on the note. During Fiscal 1998, the
Company intends to foreclose on the property, which was held as collateral under
the mortgage and proceed with its sale in order to satisfy the mortgage. During
Fiscal 1997, the Company incurred $3.5 million in net losses on disposal of
fixed assets, $583,436 in expenses associated with termination of leases and
$108,299 associated with employee termination benefits which were applied to the
closure reserve established in Fiscal 1996. The remaining closure reserve in
management's estimate represents amounts expected to be incurred, net of amounts
realized upon the disposition of the remaining two restaurants. 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. Actual
results that substantially differ from management's estimate could be material
to the Company's financial statements.

OTHER INCOME (EXPENSES). The Company incurred interest costs of
$549,126 during Fiscal 1997 of which $4,022 was capitalized as construction
costs. Such interest was further offset by $54,955 in interest income, $46,117
of which was interest income on the note receivable for the sale of a
restaurant. During Fiscal 1996, the Company incurred interest costs of
$1,035,038, of which $43,894 was capitalized as construction cost, and generated
interest income of $14,599. This decrease in interest costs was primarily the
result of the lower average balance of debt outstanding under the revolving line
of credit during Fiscal 1997, as compared to Fiscal 1996.

-19-

<PAGE> 20

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 five were closed during the year as compared to
the prior year when 31 restaurants operated for the full year and seven
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.

COST OF SALES. Cost of sales, which consists of food, beverage, paper
and supply costs, increased 150 basis points, as a percentage of restaurant
sales, 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.

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
increased 190 basis points, as a percentage of restaurant sales, to 19.0% for
Fiscal 1996 from 17.1% for the same period of the prior year. The largest
component of this change was advertising expense which increased 90 basis points
to 4.7% from 3.8% during the same period of the prior year. This increase was
due to the new marketing strategies and initiatives as well as expenditures in
supporting the expansion markets. The increase in operating expenses was also a
result of an increase in occupancy costs of 30 basis points to 4.7% from 4.4%
for the same period of the prior year. This increase was primarily due to the
full year effect for the two restaurants that were part of sale-leaseback
transactions in September 1995.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G &
A") expenses for Fiscal 1996 decreased 80 basis points to 8.4% from 9.2% 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.

DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT. Depreciation
and amortization of property and equipment remained level, as a percentage of
restaurant sales, at 3.5% 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, as a
percentage of restaurant sales, 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.

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<PAGE> 21

OTHER AMORTIZATION. Other amortization consists of amortization of
intangibles such as trademarks, organization costs, leasehold acquisition costs
and deferred franchise expenses. Other amortization decreased slightly 20 basis
points, as a percentage of restaurant sales, to 0.3% for Fiscal 1996 from 0.5%
for Fiscal 1995. This decrease was primarily due to the higher cost associated
with franchised restaurants opened during Fiscal 1995 as compared to Fiscal
1996.

RESTAURANT CLOSURE EXPENSES. During 1995, the Company accrued estimated
expenses in the amount of $1.6 million for two restaurants closed in October
1995. The estimated expenses consisted of $1.2 million 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 $6.5 million associated with the closing of six
restaurants. The estimated expenses consist of $5.7 million 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 (EXPENSE). The Company incurred interest costs of $1
million 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 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.

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.

-21-
<PAGE> 22

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 1997, the Company generated $11.7 million in cash flow
from operations and reduced its long-term bank indebtedness $10.2 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 1997, the
Company opened two new restaurants. Capital expenditures during Fiscal 1997 for
these two new restaurants were approximately $1.1 million. In addition, capital
expenditures of approximately $330,000 were expended for development of
restaurants to be opened in the future and for existing restaurants. During
Fiscal 1997, the Company entered into three purchase agreements for future
restaurant sites with an aggregate purchase price of $1.7 million. The
anticipated closing dates for the purchase agreements will be during Fiscal
1998.

The Company has a line of credit facility from a commercial bank, which
provides for advances of up to 25 million; however, the lender has no obligation
to make further advances after July 13, 1998. As of year end December 28, 1997,
there was an additional borrowing capacity under the credit line of $23.8
million and as of February 26, 1998 the available borrowing capacity under the
line was $24.8 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 1998.

OTHER MATTERS

The Company is currently working to resolve the potential impact of the
year 2000 on its information processing systems. The year 2000 issue relates to
the ability of the systems to properly distinguish between the years 1900 and
2000. Based on preliminary information, the cost of addressing potential
problems is not anticipated to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods. The
Company plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.

-22-

<PAGE> 23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

PAGE
<S> <C>
Report of Independent Certified Public Accountants..........................24

Consolidated Balance Sheets as of
December 29, 1996 and December 28, 1997.................................25

Consolidated Statements of Operations for the Year
Ended December 31, 1995, December 29, 1996
and December 28, 1997...................................................26

Consolidated Statements of Shareholders' Equity
for the Year Ended December 31, 1995, December 29, 1996
and December 28, 1997....................................................27

Consolidated Statements of Cash Flows for the
Year Ended December 31, 1995, December 29, 1996
and December 28, 1997....................................................28

Notes to Consolidated Financial Statements..................................30
</TABLE>

-23-
<PAGE> 24

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 29, 1996
and December 28, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997. 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 29, 1996 and December 28, 1997, and the results
of their operations and their cash flows for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997 in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Miami, Florida,
February 18, 1998 (except with respect to the matters discussed In Note 13,
as to which the date is March 16, 1998).

-24-
<PAGE> 25

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 94,490 $ 292,455
Inventories ......................................... 271,996 280,595
Prepaid expenses .................................... 316,559 244,753
Prepaid income taxes ................................ 354,062 --
Deferred income taxes ............................... 1,583,649 419,743
Other current assets ................................ 554,689 279,384
----------- -----------
Total current assets .............................. 3,175,445 1,516,930

PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization ....................... 42,539,997 35,405,159
DEFERRED RESTAURANT PRE-OPENING COSTS, net of
accumulated amortization of $702,614 in 1996
and $45,603 in 1997 ................................. 99,213 24,730
INTANGIBLE ASSETS, net of accumulated amortization ...... 431,892 467,923
LEASEHOLD ACQUISITION COSTS, net of accumulated
amortization of $310,600 in 1996 and $387,537 in 1997 1,423,334 1,079,925
NOTE RECEIVABLE, net of current portion ................. -- 840,032
DEPOSITS AND DEFERRED COSTS ON FUTURE
RESTAURANT LOCATIONS ................................ 93,338 250,727
OTHER ASSETS ............................................ 737,345 768,675
----------- -----------
Total assets ...................................... $48,500,564 $40,354,101
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable .................................... $ 2,673,868 $ 1,553,056
Accrued liabilities ................................. 1,524,906 2,617,624
Current maturities of long-term debt ................ 83,773 126,559
Accrued restaurant closure expenses ................. 6,273,830 2,125,525
----------- -----------
Total current liabilities ......................... 10,556,377 6,422,764

LONG-TERM DEBT, net of current maturities ............... 11,290,952 1,087,393
DEFERRED RENT ........................................... 1,361,353 1,483,978
DEFERRED FRANCHISE FEE INCOME ........................... 270,000 237,500
DEFERRED INCOME TAXES ................................... 879,830 1,391,085
----------- -----------
Total liabilities ................................. 24,358,512 10,622,720
----------- -----------

COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)

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, 8,149,799 shares in 1996 and 8,207,658
shares in 1997 issued and outstanding ............. 81,498 82,076
Additional paid-in capital .......................... 21,708,161 22,054,326
Retained earnings ................................... 2,352,393 7,594,979
----------- -----------
Total shareholders' equity ........................ 24,142,052 29,731,381
----------- -----------
Total liabilities and shareholders' equity ........ $48,500,564 $40,354,101
=========== ===========
</TABLE>

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

-25-

<PAGE> 26

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales .......................... $ 55,489,397 $ 63,734,848 $ 65,118,299
Franchise revenues ........................ 554,416 499,304 811,700
------------ ------------ ------------
56,043,813 64,234,152 65,929,999
------------ ------------ ------------
OPERATING EXPENSES:
Cost of sales ............................. 20,064,837 24,037,263 22,532,898
Restaurant payroll ........................ 13,660,579 15,695,011 15,177,551
Other restaurant operating expenses ....... 9,465,369 12,136,629 11,413,996
General and administrative ................ 5,177,554 5,370,644 5,537,684
Depreciation and amortization of property
and equipment ........................... 1,961,783 2,202,074 2,023,311
Amortization of deferred restaurant
pre-opening costs ....................... 1,159,723 554,744 122,828
Other amortization ........................ 274,970 204,514 209,378
Restaurant closure expenses ............... 1,491,934 6,324,242 --
------------ ------------ ------------
53,256,749 66,525,121 57,017,646
------------ ------------ ------------

Income (loss) from operations ........... 2,787,064 (2,290,969) 8,912,353
------------ ------------ ------------

OTHER INCOME (EXPENSE):
Interest expense, net of capitalization ... (785,648) (991,144) (545,104)
Interest income ........................... 27,861 14,599 54,955
Other, net ................................ (130,865) 73,843 32,481
------------ ------------ ------------
(888,652) (902,702) (457,668)
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary charge .................... 1,898,412 (3,193,671) 8,454,685

PROVISION FOR (BENEFIT FROM)
INCOME TAXES .............................. 720,836 (1,213,278) 3,212,099
------------ ------------ ------------
Income (loss) before extraordinary charge 1,177,576 (1,980,393) 5,242,586

EXTRAORDINARY CHARGE FOR EARLY
EXTINGUISHMENT OF DEBT, net of
income tax benefit of $37,942 ............. 62,967 -- --
------------ ------------ ------------
Net income (loss) ....................... $ 1,114,609 $ (1,980,393) $ 5,242,586
============ ============ ============

NET INCOME (LOSS) PER SHARE:

Basic ..................................... $ .14 $ (.24) $ .64
============ ============ ============
Diluted ................................... $ .14 $ (.24) $ .63
============ ============ ============
</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 SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

COMMON STOCK,
$.01 PAR VALUE
--------------------------- TOTAL
NUMBER OF ADDITIONAL RETAINED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS EQUITY
------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Proceeds from exercise of stock
options, including tax benefit
of $53,107........................ 57,859 578 275,005 -- 275,583
Amortization of deferred
compensation ..................... -- -- 71,160 -- 71,160

Net income for the year .......... -- -- -- 5,242,586 5,242,586
------------ ------------ ------------ ------------ ============
BALANCE, December 28, 1997 ............. 8,207,658 $ 82,076 $ 22,054,326 $ 7,594,979 $ 29,731,381
============ ============ ============ ============ ============

</TABLE>

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

-27-
<PAGE> 28

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

FOR THE YEAR ENDED
--------------------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................................. $ 1,114,609 $(1,980,393) $5,242,586
------------- ------------- -------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities --
Depreciation and amortization................. 3,396,476 2,961,332 2,355,517
Loss on disposal of property and equipment.... 63,856 221,239 87,156
Restaurant closure expenses, net.............. 1,491,934 6,324,242 --
Deferred rent................................. 322,682 168,444 122,625
Amortization of stock based compensation...... 1,286 7,716 71,160
Extraordinary charge, net..................... 62,967 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in assets:
Inventories........................... 16,116 31,915 (8,599)
Prepaid expenses...................... 91,810 (29,884) 71,806
Prepaid income taxes.................. (152,680) (78,344) 421,343
Other current assets.................. (390,165) (103,133) 291,644
Deferred restaurant pre-opening costs. (530,748) (247,516) (48,345)
Other assets.......................... (242,841) (50,365) (144,441)
Increase (decrease) in liabilities:
Accounts payable and accrued
liabilities........................... 945,894 (602,491) (42,267)
Income taxes payable.................. 126,000 -- --
Accrued restaurant closure expenses... (92,418) (155,198) 1,669,612
Deferred franchise fee income......... (91,471) (327,500) (32,500)
Deferred income taxes, net................... 92,517 (1,508,057) 1,675,161
------------- ------------- -------------
Total adjustments......................... 5,111,215 6,612,400 6,489,872
------------- ------------- -------------
Net cash provided by operating activities.... 6,225,824 4,632,007 11,732,458
------------- ------------- -------------

CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.............................. (9,058,937) (4,539,108) (1,397,021)
Proceeds from disposition of property
and equipment................................... 2,621,470 -- --
Payments for intangible assets.................... (273,890) (81,896) (53,596)
Payments for leasehold acquisition costs.......... (265,772) -- --
Payments on note receivable....................... -- -- 11,810
(Increase) decrease in deposits and deferred
costs on future restaurant locations............ 84,252 34,002 (157,389)
------------- ------------- -------------
Net cash used in investing activities.......... (6,892,877) (4,587,002) (1,596,196)
------------- ------------- -------------
</TABLE>

(Continued)

-28-
<PAGE> 29

POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>

FOR THE YEAR ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-term debt $ (2,374,996) $ (77,276) $ (83,773)
Net borrowings (repayments) under revolving
credit agreement .......................... 3,021,800 (596,999) (10,077,000)
Proceeds from exercise of stock options ..... 22,609 32,436 222,476
------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................. 669,413 (641,839) (9,938,297)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ....................... 2,360 (596,834) 197,965
CASH AND CASH EQUIVALENTS,
Beginning of period ......................... 688,964 691,324 94,490
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
End of period ............................... $ 691,324 $ 94,490 $ 292,455
============ ============ ============

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest, net of capitalization of $205,694
in 1995, $43,894 in 1996 and
$4,022 in 1997 .......................... $ 790,260 $ 973,072 $ 483,877
============ ============ ============
Income taxes .............................. $ 655,000 $ 280,000 $ 963,085
============ ============ ============

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Tax benefit from stock options recorded to
additional paid-in capital ................ $ 202,078 $ 123,038 $ 53,107
============ ============ ============
Note received from sale of Company-owned
restaurant .............................. $ -- $ -- $ 880,000
============ ============ ============
</TABLE>

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

-29-
<PAGE> 30

POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997

(1) GENERAL

Pollo Tropical, Inc. ("Pollo Tropical") and subsidiaries (collectively, the
"Company"), as of December 28, 1997, owned and operated 36 "Pollo Tropical"
restaurants located in Florida. As of December 28, 1997, there were 16
franchised restaurants open in Florida, Puerto Rico, the Dominican
Republic, Ecuador and the Netherlands Antilles.

(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 1995 herein relate to December 31,
1995 and the fiscal year ended December 31, 1995, all references to 1996
herein relate to December 29, 1996 and the fiscal year ended December 29,
1996, and all references to 1997 herein relate to December 28, 1997 and the
fiscal year ended December 28,1997.

BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying consolidated financial statements include the accounts of
Pollo Tropical and its wholly owned subsidiaries . All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
with the 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, note receivable, accounts
payable, accrued liabilities and long-term debt approximates fair value as
of December 29, 1996 and December 28, 1997.

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.

-30-
<PAGE> 31

INTANGIBLE ASSETS

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

LIFE IN YEARS
-------------
Covenant not to compete................. Term of agreement
Organization costs...................... 5
Loan costs.............................. Term of loan
Trademark costs......................... 40

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 Balance Sheets, are amortized and included in
Other amortization in the accompanying Consolidated Statements of
Operations, 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 lives of its
intangible and other long-lived assets or whether the remaining balance of
its intangible 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 lives of the intangible and other long-lived
assets in determining whether an impairment has occurred.

CONSOLIDATED BALANCE SHEET DATA

Other current assets consist of the following:

1996 1997
-------- --------
Insurance dividend receivable .......... $215,000 $ 63,000
Rebates ................................ 129,664 97,676
Other .................................. 210,025 118,708
-------- --------
$554,689 $279,384
======== ========

Accrued liabilities consist of the following:

1996 1997
---------- ----------
Sales tax .............................. $ 293,084 $ 198,394
Payroll related ........................ 585,436 1,100,214
Workers compensation ................... -- 449,014
Other .................................. 646,386 870,002
---------- ----------
$1,524,906 $2,617,624
========== ==========

-31-
<PAGE> 32

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:

FOR THE YEAR ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
Franchise fees ............... $376,471 $227,500 $220,000
Continuing royalties ......... 177,945 271,804 591,700
-------- -------- --------
$554,416 $499,304 $811,700
======== ======== ========

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 $2,103,155, $2,978,255 and $2,987,688 for Fiscal 1995, Fiscal
1996 and Fiscal 1997, respectively, and is 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.

-32-
<PAGE> 33

NET INCOME (LOSS) PER SHARE

In Fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). As a result, the
Company's earnings per share have been restated for Fiscal 1995 and Fiscal
1996 to show basic and diluted earnings per share in accordance with SFAS
128. Prior to the adoption of SFAS 128, the Company reported primary
earnings per share, which equaled diluted earnings per share pursuant to
SFAS 128. Following is the reconciliation of the shares used in the
computations for the periods presented.
<TABLE>
<CAPTION>

FOR THE YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
Weighted average shares used in basic computation 7,991,570 8,099,650 8,179,131
Stock options and warrants ........................ 97,594 -- 108,148
--------- --------- ---------
Weighted average shares used in diluted computation 8,089,164 8,099,650 8,287,279
========= ========= =========
</TABLE>

The effect of the extraordinary charge on basic and diluted earnings per
share for Fiscal 1995 is as follows:

Basic:
Income before extraordinary charge............... $ .15
Extraordinary charge............................. (.01)
----------
Net income....................................... $ .14
==========
Diluted:
Income before extraordinary charge............... $ .15
Extraordinary charge............................. (.01)
----------
Net income....................................... $ .14
==========

The net income (loss) amount used as the numerator in calculating basic and
diluted earnings per share equals net income (loss) in the accompanying
Consolidated Statements of Operations.

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 and workers compensation expense, as discussed in Note 11.
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:

1996 1997
-----------------------------
Cash on hand................................ $49,900 $52,450
Cash management fund........................ 44,590 240,005
------- --------
$94,490 $292,455
======= ========

-33-
<PAGE> 34

(4) PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
<TABLE>
<CAPTION>

LIFE IN
YEARS 1996 1997
------------ -------------------------------------------
<S> <C> <C> <C>
Land................................................... -- $11,657,999 $9,257,525
Buildings and leasehold improvements................... 7-31 25,927,959 23,130,989
Furniture, fixtures and equipment...................... 5-15 9,513,141 9,435,115
Signs.................................................. 7 1,103,039 1,036,597
Software............................................... 5 92,500 95,022
----------- -----------
48,294,638 42,955,248
Less - Accumulated depreciation and amortization....... (5,754,641) (7,550,089)
----------- -----------
$42,539,997 $35,405,159
=========== ===========
</TABLE>

At December 28, 1997, property and equipment includes $2,164,448 of
property and equipment, less accumulated depreciation and amortization of
$136,923, related to closed restaurants (See Note 11).

The Company's office space and the land underlying some of its existing
restaurant locations are leased under operating leases (See Note 11).

(5) INTANGIBLE ASSETS

Intangible assets consist of the following:
<TABLE>
<CAPTION>

1996 1997
------------------------------------
<S> <C> <C>
Covenant not to compete................................. $ 50,000 $ 50,000
Organization costs...................................... 51,497 --
Loan costs.............................................. 154,632 154,632
Trademark costs......................................... 260,281 335,100
-------- --------
516,410 539,732
Less: Accumulated amortization.......................... (84,518) (71,809)
-------- ---------
$431,892 $467,923
======== ========
</TABLE>

(6) NOTE RECEIVABLE

In conjunction with the Fiscal 1997 sale of a restaurant site (See Note 11)
the Company recorded a note receivable in the amount of $880,000. The note
bears interest at a rate of 10% per annum based on a 15 year amortization
period. The note is secured by a mortgage on the restaurant site.
Subsequent to December 28, 1997, the mortgagee defaulted on the note.
During Fiscal 1998, the Company intends to foreclose on the note and
proceed with the sale of the restaurant site in order to satisfy the
mortgage. The foreclosure is not expected to have a material effect on the
Company's Fiscal 1998 results of operations.

(7) 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.

-34-
<PAGE> 35

(8) INDEBTEDNESS

Long-term debt consists of the following:
<TABLE>
<CAPTION>

1996 1997
---------------------------------
<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 (8.50% at
December 28, 1997) plus .375% or libor rate (5.969% at December 28,
1997) 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.............. $11,152,000 $1,075,000
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............................................. 222,725 138,952
----------- ----------
11,374,725 1,213,952
Less -- Current maturities of long-term debt...................... (83,773) (126,559)
----------- ----------
$11,290,952 $1,087,393
=========== ==========
</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 lender has
no obligation to make further advances after July 13, 1998. At December 28,
1997, the available portion of the Loan was $23,775,000.

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 in compliance with the debt
covenants at December 28, 1997.

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 Statements of Operations as an extraordinary charge.

Repayment of future maturities of long-term debt at December 28, 1997 is as
follows:

FISCAL YEAR
-----------

1998.................................................. $ 126,559
1999.................................................. 155,726
2000.................................................. 107,500
2001.................................................. 107,500
2002.................................................. 107,500
Thereafter............................................ 609,167
-----------
$ 1,213,952
===========

-35-
<PAGE> 36

(9) INCOME TAXES

The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>

FOR THE YEAR ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
Federal .............. $ 618,257 $(1,225,018) $ 3,035,434
State ................ 102,579 11,740 176,665
----------- ----------- -----------
Total .............. $ 720,836 $(1,213,278) $ 3,212,099
=========== =========== ===========

Current .............. $ 628,319 $ 294,779 $ 1,536,938
Deferred ............. 92,517 (1,508,057) 1,675,161
----------- ----------- -----------
Total .............. $ 720,836 $(1,213,278) $ 3,212,099
=========== =========== ===========
</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 are as follows:
<TABLE>
<CAPTION>

1996 1997
--------------------------
<S> <C> <C>
Current deferred tax asset:
Accrued restaurant closure expenses ........... $(1,583,649) $ (248,846)
Accrued liabilities ........................... -- (170,897)
----------- -----------
Current deferred income tax asset ......... $(1,583,649) $ (419,743)
=========== ===========

Non-current deferred tax liability:
Depreciation and amortization of
property and equipment ..................... $ 2,024,154 $ 2,184,573

Deferred franchise fee income, net ............ 54,947 102,099
Deferred rent ................................. (341,705) (527,085)
Alternative minimum tax carry-forwards ........ (736,747) (162,590)
Foreign tax credit carry-forwards ............. (74,577) (197,569)
Other, net .................................... (46,242) (8,343)
----------- -----------
Non-current deferred income tax liability, net $ 879,830 $ 1,391,085
=========== ===========
</TABLE>

At December 28, 1997, the Company had available foreign tax credit
carry-forwards in the amount of $45,545 which expires in 2001, and
$152,024, which expires in 2002.

-36-
<PAGE> 37

The following table reconciles the Federal statutory income tax rate and
the Company's effective income tax rate as follows:
<TABLE>
<CAPTION>

FOR THE YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<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
Nondeductible expenses .................. 0.8 0.9 1.0
Jobs tax credits ........................ -- -- (.5)
Other, net .............................. (.4) (.5) (.1)
---- ---- ----
Effective income tax rate ............. 38.0% 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.

(10) SHAREHOLDERS' EQUITY

STOCK BASED COMPENSATION PLANS

In September 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. All regular employees
of the Company or any of its subsidiaries, including officers and
directors, are eligible to receive grants of options under the Plan. 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. All regular and former regular
employees and consultants of the Company or any of its subsidiaries,
including officers and directors, are eligible to receive grants of options
under the Plan. 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.

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.
Each existing Director received a grant of an option to purchase 18,000
shares on the effective date of the plan. 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 to each eligible Director on each annual meeting date under certain
conditions. All stock options granted to existing Directors pursuant to the
1995 Directors' Plan become exercisable as follows: 11,000 shares six
months from the date of grant, the next 6,000 shares twelve months from the
date of grant and the remaining 1,000 shares two years after the date of
grant, so long as the optionee is a Director on the relevant exercise date.
The remaining stock options granted pursuant to the 1995 Directors' Plan
become exercisable equally over a three year period on each of the three
one-year anniversaries of the date of grant, so long as the optionee is a
Director on the relevant exercise date.

-37-
<PAGE> 38
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:

WEIGHTED-AVERAGE
EXERCISE AVAILABLE FOR
PRICE PER SHARE OUTSTANDING FUTURE GRANTS
--------------- ----------- -------------
<S> <C> <C> <C>
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
Granted....................................... $5.68 49,454 (49,454)
Exercised..................................... $3.86 (59,192) --
Canceled...................................... $7.19 (118,135) 118,135
----------- ------------

Balance, December 28, 1997....................... $6.36 783,894 961,406
=========== ============
</TABLE>

The following table summarizes information about the stock options
outstanding at December 28, 1997:
<TABLE>
<CAPTION>

OUTSTANDING EXERCISABLE
------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF REMAINING EXERCISE PRICE WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE SHARES EXERCISE PRICE
-------------------- ------------- ------------------------ --------------------- ------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
$0.29 - $0.58 27,034 3.98 $0.30 27,034 $0.30
$2.71 - $6.94 529,690 6.44 $4.42 214,987 $4.02
$8.00 - $13.50 227,170 5.62 $11.62 227,170 $11.62
------- -------
783,894 469,191
======= =======
</TABLE>

The weighted-average exercise price and weighted-average market price of
13,100 options granted during 1997 for which the exercise price exceeds the
market price of the stock on the grant date is $4.50 and $3.02,
respectively.

-38-
<PAGE> 39

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) if the exercise price
of a stock option is equal to quoted market value on the measurement date.
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 diluted net income (loss) per
share would have been different than the amounts recorded in the
accompanying Consolidated 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 diluted net income (loss)
per share and pro forma weighted average fair value of options granted,
with related assumptions, are as follows:
<TABLE>
<CAPTION>

FOR THE YEAR ENDED
----------------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss)...................................... $1,064,705 $(2,127,024) $5,077,850
Pro forma diluted net income (loss) per share.................... $0.13 $(0.26) $0.62
Pro forma weighted average fair value of options granted......... $2.12 $1.54 $2.57
Risk free interest rates......................................... 5.37%-7.11% 5.31%-6.46% 5.31%-6.46%
Expected lives................................................... 3-5 Years 3-5 Years 3-5 Years
Expected volatility.............................................. 59% 59% 59%
</TABLE>

Pro forma net income (loss) reflects only options granted in Fiscal 1995,
1996 and 1997. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income (loss) amounts presented above because compensation cost is
reflected over the options' vesting period ranging from one to three years
and compensation cost for options granted prior to January 1, 1995 is not
considered.

(11) 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 28, 1997 are as follows:
<TABLE>
<CAPTION>

FISCAL YEAR RELATED UNRELATED
----------- PARTIES PARTIES TOTAL
---------- ------------ ------------
<S> <C> <C> <C> <C>
1998...................................... $ 102,879 $ 2,013,167 $ 2,116,046
1999...................................... 102,879 1,986,226 2,089,105
2000...................................... 111,881 1,908,793 2,020,674
2001...................................... 118,311 1,871,445 1,989,756
2002...................................... 118,311 1,725,974 1,844,285
Thereafter................................ 830,150 13,585,382 14,415,532
---------- ----------- -----------
$1,384,411 $23,090,987 $24,475,398
========== =========== ===========
</TABLE>

Future minimum rental commitments have been reduced by future minimum
sublease rentals of $2,605,841 due under non-cancelable subleases.

Rent expense was $1,918,955, $2,292,827 (net of $94,850 in sublease rentals)
and $2,201,655 (net of $159,010 in sublease rentals) in Fiscal 1995, Fiscal
1996 and Fiscal 1997, respectively, which included $97,288, $102,879 and
$102,879, respectively, paid to related parties.

-39-
<PAGE> 40

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 1995,
Fiscal 1996 and Fiscal 1997 was $332,950, $76,655 and $88,047, 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.

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 and which may be extended at the Company's discretion,
through September 2000.

FRANCHISE DEVELOPMENT AGREEMENTS

The Company has entered into international area development and franchise
agreements, granting the right to develop Pollo Tropical restaurants in 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

A loan (with a principal balance of approximately $485,000 at December 28,
1997) made by a bank to a related party is collateralized by all the assets
of one of the Company's operating restaurants.

SELF-INSURED WORKERS COMPENSATION

The Company is self-insured for workers compensation. The Company maintains
stop loss coverage for individual claims in excess of $250,000 and for
claims which exceed $700,000 in the aggregate in any one year. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future
payment of claims.

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.

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.

During Fiscal 1997, the Company disposed of four of the six restaurants for
which it had established a reserve in Fiscal 1996. Three of the restaurants
were sold and one was subleased. As part of the sale of one of the
restaurants, the Company received a note receivable in the amount of
$880,000. Subsequent to December 28, 1997, the mortgagee defaulted on the
note. During Fiscal 1998, the Company intends to foreclose on the property,
which was held as collateral under the mortgage and proceed with its sale in
order to satisfy the mortgage. During Fiscal 1997, the Company incurred
$3,456,570 in net losses on disposal of fixed assets, $583,436 in expenses
associated with termination of leases and $108,299 associated with employee
termination benefits which were applied to the closure reserve established
in Fiscal 1996. The remaining closure reserve in management's estimate
represents amounts expected to be incurred, net of amounts realized upon the
disposition of the remaining two restaurants. 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. Actual results
that substantially differ from management's estimate could be material to
the Company's financial statements.

-40-

<PAGE> 41

PURCHASE AGREEMENTS

During Fiscal 1997, the Company entered into three purchase agreements for
future restaurant sites for an aggregate purchase price in the amount of
$1,740,000. The anticipated closing dates for the purchase agreements will
be during Fiscal 1998.

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.

(12) RELATED-PARTY TRANSACTIONS

Included in Capital expenditures for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997 are $26,758, $32,920 and $13,245,
respectively, paid to a related party for architectural services.

Included in Deferred franchise fee income at December 29, 1996 is $120,000
received from a related party for initial franchise fees. During Fiscal
1997, forfeitures of exclusivity fees of $25,000 were recognized due to the
termination of the area development agreement.

Included in restaurant sales for the years ended December 29, 1996 and
December 28, 1997 are $7,593 and $27,849, respectively, of sales to a
related party.

During Fiscal 1997, the Company entered into an agreement to purchase
certain rights relating to parking, exclusivity and option terms from a
related party in the amount of $150,000. The Company anticipates closing on
the purchase during Fiscal 1998.

(13) SUBSEQUENT EVENTS

On March 16, 1998, purported shareholders of the Company instituted suit
against the Company, its principal officers and all of its directors,
alleging a breach of fiduciary duties and seeking damages as well as
injunctive and other relief in response to the Company's announcement that
it had received a proposal from Larry J. Harris, the co-founder and Chief
Executive Officer of the Company, for the merger of the Company, pursuant to
which the public shareholders of the Company would receive $10.00 per share
in cash. The plaintiff is seeking certification as the representative of a
class of all of the Company's shareholders other than the defendants, the
Company's principal shareholders, and all persons related thereto. The
Company believes that the lawsuit has no basis, and intends to vigorously
defend the action. Although the ultimate outcome of the lawsuit cannot be
predicted, the Company does not believe the outcome of the lawsuit will have
a material adverse effect on the financial position, results of operation or
cash flows of the Company.

-41-
<PAGE> 42

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

NONE

-42-
<PAGE> 43

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.

-43-
<PAGE> 44

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 23 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>
<CAPTION>

EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
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 Registrants'
registration statement on Form S-8 (Reg. No. 33-74370))
10.2 1995 Directors Stock Option Plan (filed as exhibit 4.2 to the
Registrants' registration statement on Form S-8 (Reg. No. 333-22441))
10.5 Employment Agreement, between the Registrant and Nicholas A. Castaldo
(filed as exhibit 10.5 to the Registrants' Form 10-K for the fiscal
year ended December 31, 1995)
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 (filed as
exhibit 10.11 to the Registrants' Form 10-K for the fiscal year ended
December 31, 1995)
10.18 $1,000,000 Promissory Note to Food Spot Corporation(2)
10.19 1995 Stock Option Plan (filed as exhibit 4.1 to the Registrants'
registration statement on Form S-8 (Reg. No. 33-97998))
10.20 1995 Bonus/Fee Stock Option Plan (filed as exhibit 4.2 of the
Registrants' registration statement on Form S-8 (Reg. No. 33-97998))
10.21 1995 Restricted Stock Award Plan (filed as exhibit 4.1 of the
Registrants' registration statement on Form S-8 (Reg. No. 333-22441))
10.22 $25,000,000 Credit Agreement with First Union National Bank of Florida
(filed as exhibit 10.21 to the Registrants' Form 10-Q for the quarterly
period ended July 2, 1995)
10.23 Waiver and Modification to the $25,000,000 Credit Agreement with First
Union National Bank of Florida (filed as exhibit 10.26 to the
Registrants' Form 10-K for the fiscal year ended December 29, 1996)
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)
99.1 Press Release dated March 13, 1998 (1)
99.2 Press Release dated March 19, 1998 (1)

</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)

(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.

-44-
<PAGE> 45

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, 1998.

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>
<CAPTION>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LARRY J. HARRIS Chairman and Chief March 27, 1998
- ----------------------------- Executive Officer
Larry J. Harris (Principal Executive
Officer)

/s/ STUART I. HARRIS Vice Chairman and Secretary March 27, 1998
- ----------------------------
Stuart I. Harris

/s/ NICHOLAS A. CASTALDO President, Chief Operating March 27, 1998
- --------------------------- Officer and Director
Nicholas A. Castaldo

/s/ WILLIAM CARL DREW Executive Vice President March 27, 1998
- ----------------------------- and Chief Financial Officer
William Carl Drew

/s/ VIVIAN LOPEZ-BLANCO Controller March 27, 1998
- -----------------------------
Vivian Lopez-Blanco

/s/ RONALD L. MILLER Director March 27, 1998
- -----------------------------
Ronald L. Miller

/s/ CRAIG M. NASH Director March 27, 1998
- -----------------------------
Craig M. Nash

/s/ ALAN VITULI Director March 27, 1998
- -----------------------------
Alan Vituli

/s/ CLAYTON WILHITE Director March 27, 1998
- -----------------------------
Clayton Wilhite
</TABLE>

-45-

<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 Statements File Numbers 33-74370,
33-97998 (Amendment No. 1) and 333-22441 (Amendment No. 1).

ARTHUR ANDERSEN LLP

Miami, Florida
March 27, 1998.

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 292,455
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 280,595
<CURRENT-ASSETS> 1,516,930
<PP&E> 42,955,248
<DEPRECIATION> 7,550,089
<TOTAL-ASSETS> 40,354,101
<CURRENT-LIABILITIES> 6,422,764
<BONDS> 0
0
0
<COMMON> 82,076
<OTHER-SE> 29,649,305
<TOTAL-LIABILITY-AND-EQUITY> 40,354,101
<SALES> 65,118,299
<TOTAL-REVENUES> 65,929,999
<CGS> 22,532,898
<TOTAL-COSTS> 34,484,748
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 545,104
<INCOME-PRETAX> 8,454,685
<INCOME-TAX> 3,212,099
<INCOME-CONTINUING> 5,242,586
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,242,586
<EPS-PRIMARY> .64
<EPS-DILUTED> .63

</TABLE>

<PAGE> 1
EXHIBIT 99.1

N E W S R E L E A S E
-----------------------

FOR IMMEDIATE RELEASE CONTACT: WILLIAM CARL DREW
CHIEF FINANCIAL OFFICER
(305) 670-7696

POLLO TROPICAL RECEIVES GOING PRIVATE BUYOUT OFFER FROM
MANAGEMENT GROUP LED BY CO-FOUNDER

MIAMI, Fla. (Mar. 13, 1998) - Pollo Tropical, Inc., (Nasdaq/NM:POYO) today
announced that its Board of Directors received a proposal from Larry J. Harris,
the co-founder and Chief Executive Officer of the Company, for the merger of
the Company pursuant to which the public shareholders of the Company would
receive $10.00 per share in cash.

The Company also announced that its Board of Directors has established a
special committee to evaluate and consider the offer and has authorized the
committee to engage financial and legal advisors. The proposed merger is
subject, among other things, to (i) the execution of a definitive merger
agreement containing customary terms, (ii) approval of the transaction by the
special committee, the board of directors and the Company's shareholders, (iii)
the receipt of satisfactory financing for the transaction, and (iv) compliance
with all applicable regulatory and governmental requirements. Accordingly, there
can be no assurance that the proposed merger will be consummated.

The group stated in its proposal that it had engaged Wheat First Union to
advise it with respect to the transaction.

Pollo Tropical, Inc., headquartered in Miami, owns and operates 36, and
franchises 17, 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 served in an inviting tropical
setting.

-END-

<PAGE> 1
EXHIBIT 99.2

N E W S R E L E A S E
-----------------------

FOR IMMEDIATE RELEASE CONTACT: WILLIAM CARL DREW
CHIEF FINANCIAL OFFICER
(305) 670-7696

POLLO TROPICAL RECEIVES LAWSUIT IN RESPONSE TO
GOING PRIVATE BUYOUT OFFER FROM CO-FOUNDER

MIAMI, Fla. (Mar. 19, 1998) - Pollo Tropical, Inc., (Nasdaq/NM:POYO) announced
today that a lawsuit has been instituted by purported shareholders of the
Company alleging a breach of fiduciary duties and seeking damages and other
relief in response to the Company's announcement that it had received a proposal
from Larry J. Harris, the co-founder and Chief Executive Officer of the Company,
for the merger of the Company, pursuant to which the public shareholders of the
Company would receive $10.00 per share in cash.

As previously reported, the Board of Directors of the Company has
established a special committee to evaluate and consider the proposal. The
special committee has not, to date, responded to the going private proposal.

-END-