Edgar Filing: MEXICAN RESTAURANTS INC

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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
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COMMISSION FILE NUMBER: 0-28234

MEXICAN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)

TEXAS 76-0493269
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)

1135 EDGEBROOK, HOUSTON, TEXAS 77034-1899
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: 713/943-7574

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(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
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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 Common Stock held by non-affiliates of the
registrant, based on the sale trade price of the Common Stock as reported by the
Nasdaq National Market on March 15, 2002 was $5,089,227. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant. Number of shares outstanding of each of the
registrant's classes of common stock, as of March 20, 2002: 3,504,105 shares of
common stock, par value $.01.

DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive proxy statement in connection with the Annual Meeting
of Shareholders to be held May 29, 2002, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
report.

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PART 1

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K under "Item 1. Business", "Item 3.
Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other facts which may cause the actual results,
performance or achievements of Mexican Restaurants, Inc. and its subsidiaries
(the "Company"), its area developers, franchisees and restaurants to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions;
competition; success of operating initiatives; development and operating costs;
area developers' adherence to development schedules; advertising and promotional
efforts; brand awareness; adverse publicity; acceptance of new product
offerings; availability, locations and terms of sites for store development;
changes in business strategy or development plans; quality of management;
availability, terms and development of capital; business abilities and judgment
of personnel; availability of qualified personnel; food, labor and employee
benefit costs; changes in, or the failure to comply with government regulations;
regional weather conditions; construction schedules; and other factors
referenced in the Form 10-K. The use in this Form 10-K of such words as
"believes", "anticipates", "expects", "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. The success of the Company is dependent on the
efforts of the Company, its employees, its area developers, and franchisees and
the manner in which they operate and develop stores in light of various factors,
including those set forth above.

ITEM 1. BUSINESS

GENERAL

Mexican Restaurants, Inc. (formerly Casa Ole Restaurants, Inc.) (the
"Company") was incorporated under the laws of the State of Texas in February
1996, and had its initial public offering in April 1996. The Company operates as
a holding company and conducts substantially all of its operations through its
subsidiaries. All references to the Company include the Company and its
subsidiaries, unless otherwise stated.

The Company operates and franchises Mexican-theme restaurants featuring
various elements associated with the casual dining experience, under the names
Casa Ole, Monterey's Tex-Mex Cafe, Monterey's Little Mexico, Tortuga Coastal
Cantina and La Senorita. The Casa Ole, Monterey, Tortuga and La Senorita
concepts have been in business for 30, 47, 8 and 23 years, respectively. Today
the Company operates 50 restaurants, franchises 33 restaurants and licenses one
restaurant in various communities across Texas, Louisiana, Oklahoma and
Michigan. The Company previously operated three restaurants in Idaho but closed
those restaurants on December 30, 2001. The Idaho restaurant leased premises
have subsequently been subleased. The Casa Ole', Monterey and La Senorita
restaurants are designed to appeal to a broad range of customers, and are
located primarily in small and medium-sized communities and middle-income areas
of larger markets. The Tortuga Coastal Cantina restaurants also appeal to a
broad range of customers and are primarily located in Houston suburban markets.
The restaurants offer fresh, quality food, affordable prices, friendly service
and comfortable surroundings. Menus feature a variety of traditional Mexican and
Tex-Mex selections; complemented by the Company's own original Mexican-based
recipes designed to have broad appeal. The Company believes that the established
success of the Company in existing markets, its focus on middle-income
customers, and the skills of its management team provide significant
opportunities to realize the value inherent in the Mexican restaurant market and
increase revenues in existing markets. The Company, however, has no plans in
fiscal year 2002 to open new restaurants.

STRATEGY AND CONCEPT

The Company's objective is to be perceived as a value leader in the
Mexican segment of the full-service casual dining marketplace. To accomplish
this objective, the Company has developed strategies designed to achieve and
maintain high levels of customer loyalty, frequent patronage and profitability.
The key strategic elements are:

o Offering consistent, high-quality, original recipe Mexican
menu items that reflect both national and local taste
preferences;

o Pricing menu offerings at levels below many family and
casual-dining restaurant concepts;

o Selecting, training and motivating its employees to enhance
customer dining experiences and the friendly casual atmosphere
of its restaurants;

o Providing customers with the friendly, attentive service
typically associated with more expensive casual-dining
experiences; and

o Reinforcing the perceived value of the dining experience with
a comfortable and inviting Mexican decor.

MENU. The Company's restaurants offer high-quality products with a
distinctive, yet mild taste profile with mainstream appeal. Fresh ingredients
are a critical recipe component, and the majority of menu items are prepared
daily in the kitchen of each restaurant from original recipes.

The menus feature a wide variety of entrees including enchiladas,
combination platters, burritos, fajitas, coastal seafood and other house
specialties. The menu also includes soup, salads, appetizers and desserts. From
time to time the Company also introduces new dishes designed to keep the menus
fresh. Alcoholic beverages are served as a complement to meals and represent a
range of less than 5% of sales at its more family oriented locations, and up to
20% in its more casual dining locations. At Company-owned restaurants the dinner
menu entrees presently range in price from $4.99 to $15.95, with most items
priced between $5.95 and $9.95. Lunch prices at most Company-owned restaurants
presently range from $4.99 to $8.95.

ATMOSPHERE AND LAYOUT. The Company emphasizes an attractive interior
and exterior design for each of its restaurants. The typical restaurant has an
inviting and interesting Mexican exterior. The interior decor is comfortable
Mexican in appearance to reinforce the perceived value of the dining experience.
Stucco, tile floors, carpets, plants and a variety of paint colors are integral
features of each restaurant's decor. These decor features are incorporated in a
floor plan designed to provide a comfortable atmosphere. The Company's
restaurant designs are sufficiently flexible to accommodate a variety of
available sites and development opportunities, such as malls, end-caps of strip
shopping centers and free standing buildings, including conversions. The
restaurant facility is also designed to serve a high volume of customers in a
relatively limited period of time. The Company's restaurants typically range in
size from approximately 4,000 to 5,600 square feet, with an average of
approximately 4,500 square feet and a seating capacity of approximately 180.

GROWTH STRATEGY

The Company believes that the unit economics of the various restaurant
concepts of the Company, as well as their value orientation and focus on middle
income customers, provide significant opportunities for growth. The Company's
long-standing strategy to capitalize on these growth opportunities has been
comprised of two key elements:

IMPROVE SAME RESTAURANT SALES AND PROFITS. The Company's first growth
opportunity is to improve the sales and controllable income of existing
restaurants. This is accomplished through an emphasis on restaurant operations,
coupled with marketing, purchasing and other organizational efficiencies (see
"Restaurant Operations" below). During fiscal year 2002, the Company expects to
focus solely on improving operational results and paying down debt.

INCREASED PENETRATION OF EXISTING MARKETS. The Company's second growth
opportunity is to increase the number of restaurants in existing Designated
Market Areas ("DMAs") and expand into contiguous new markets. The DMA concept is
a mapping tool developed by the A.C. Nielsen Co. that measures the size of a
particular market by reference to communities included within a common
television market. The Company's objective in increasing the density of
Company-owned restaurants within existing markets is to improve operating
efficiencies in such markets and to realize improved overhead absorption. In
addition, the Company believes that increasing the density of restaurants in
both Company-owned and franchised markets will assist it in achieving effective
media penetration while maintaining or reducing advertising costs as a
percentage of revenues in the relevant markets. The Company believes that
careful and prudent site selection within existing markets will avoid
cannibalization of the sales base of existing restaurants.

In implementing its new unit expansion strategy, the Company may use a
combination of franchised and Company-owned restaurants. The number of such
restaurants developed in any period will vary. The Company believes that a mix
of franchised and Company-owned restaurants would enable it to realize
accelerated expansion opportunities, while maintaining majority or sole
ownership of a significant number of restaurants. Generally the Company does not
anticipate opening franchised and Company-owned restaurants within the same
market. In seeking franchisees, the Company will continue to primarily target
experienced multi-unit restaurant operators with knowledge of a particular
geographic market and financial resources sufficient to execute the Company's
development strategy.

In adding to its Company-owned restaurants, the Company anticipates it
will continue to selectively acquire existing franchised restaurants. During
fiscal 2001, the Company acquired a franchise restaurant in Bellmead, Texas.
During fiscal 1999, the Company acquired a franchise restaurant in San Marcos,
Texas and converted that restaurant into a Tortuga Coastal Cantina. The Company
does not currently anticipate building any new restaurants or acquiring existing
franchised restaurants in fiscal year 2002.

SITE SELECTION

Senior management of the Company devotes significant time and resources
to analyzing prospective sites for the Company's restaurants. Senior management
has also created and utilizes a site selection committee, which reviews and
approves each site to be developed. In addition, the Company conducts customer
surveys to precisely define the demographic profile of the customer base of each
of the Company's restaurant concepts. The Company's site selection criteria
focus on:

1) matching the customer profile of the respective restaurant concept
to the profile of the population of the target local market;

2) easy site accessibility, adequate parking, and prominent visibility
of each site under consideration;

3) the site's strategic location within the marketplace;

4) the site's proximity to the major concentration of shopping centers
within the market;

5) the site's proximity to a large employment base to support the
lunch segment; and

6) the impact of competition from other restaurants in the market.

The Company believes that a sufficient number of suitable sites are
available for Company and franchise development in existing markets. Based on
its current planning and market information, the Company does not plan to open
additional restaurants in fiscal year 2002, but believes that its franchisees
may open one additional restaurant. The anticipated total investment for a 4,200
to 5,600 square foot restaurant, including land, building, equipment, signage,
site work, furniture, fixtures and decor ranges between $1.4 and $2.1 million
(including capitalized lease value). Additionally, training and other
pre-opening costs are anticipated to approximate $50,000 per location. The cost
of developing and operating a Company restaurant can vary based upon
fluctuations in land acquisition and site improvement costs, construction costs
in various markets, the size of the particular restaurant and other factors.
Although the Company anticipates that development costs associated with
near-term restaurants will range between $1.4 and $2.1 million, there can be no
assurance of this. Where possible, the Company uses build to suit, lease
conversion or sale and leaseback transactions to limit its cash investment to
approximately $500,000 per location.

RESTAURANT OPERATIONS

MANAGEMENT AND EMPLOYEES. The management staff of each restaurant is
responsible for managing the restaurant's operations. Each Company-owned
restaurant operates with a general manager, one or more assistant managers and a
kitchen manager or a chef. Including managers, restaurants have an average of 50
full-time and part-time employees. The Company historically has spent
considerable effort developing its employees, allowing it to promote from
within. As an additional incentive to its restaurant management personnel, the
Company has a bonus plan in which restaurant managers can receive monthly
bonuses based on a percentage of their restaurants' controllable profits.

The Company's regional supervisors, who report directly to the
Company's Directors of Operation, offer support to the store managers. Each
supervisor is eligible for a monthly bonus based on a percentage of controllable
profits of the stores under their control.

As of December 30, 2001, the Company employed 2,191 people, of whom
2,150 were restaurant personnel at the Company-owned restaurants and 41 were
corporate personnel. The Company considers its employee relations to be good.
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.

TRAINING AND QUALITY CONTROL. The Company requires its hourly employees
to participate in a formal training program carried out at the individual
restaurants, with the on-the-job training program varying from three days to two
weeks based upon the applicable position. Managers of both Company-owned and
franchised restaurants are trained at one of the Company's specified training
stores by that store's general manager and are then certified upon completion of
a four to six week program that encompasses all aspects of restaurant operations
as well as personnel management and policy and procedures, with special emphasis
on quality control and customer relations. To evaluate ongoing employee service
and provide rewards to employees, the Company employs a "mystery shopper"
program which consists of two anonymous visits per month per restaurant. The
Company's franchise agreement requires each franchised restaurant to employ a
general manager who has completed the Company's training program at one of the
Company's specified training stores. Compliance with the Company's operational
standards is monitored for both Company-owned and franchised restaurants by
random, on-site visits by corporate management, regular inspections by regional
supervisors, the ongoing direction of a corporate quality control manager and
the mystery shopper program.

MARKETING AND ADVERTISING. The Company believes that when media
penetration is achieved in a particular market, investments in radio and
television advertising can generate significant increases in revenues in a
cost-effective manner. During fiscal 2001, the Company spent approximately 4.0%
of restaurant revenues on various forms of advertising. Besides radio and
television, the Company makes use of in-store promotions, involvement in
community activities, and customer word-of-mouth to maintain their performance.

PURCHASING. The Company strives to obtain consistent quality products
at competitive prices from reliable sources. The Company works with its
distributors and other purveyors to ensure the integrity, quality, price and
availability of the various raw ingredients. The Company researches and tests
various products in an effort to maintain quality and to be responsive to
changing customer tastes. The Company operates a centralized purchasing system
that is utilized by all of the Company-owned restaurants and is available to the
Company's franchisees. Under the Company's franchise agreement, if a franchisee
wishes to purchase from a supplier other than a currently approved supplier, it
must first submit the products and supplier to the Company for approval.
Regardless of the purchase source, all purchases must comply with the Company's
product specifications. The Company's ability to maintain consistent product
quality throughout its operations depends upon acquiring specified food products
and supplies from reliable sources. Management believes that all essential food
and beverage products are available from other qualified sources at competitive
prices.

FRANCHISING

The Company currently has 15 franchisees operating a total of 33
restaurants and one licensee operating one restaurant. No new franchise
restaurants were opened, one Casa Ole' franchise restaurant was acquired by the
Company, one La Senorita franchise location was closed and one Monterey's Little
Mexico was licensed during fiscal year 2001. It is expected that one additional
franchise La Senorita will close in fiscal 2002. Franchising allows the Company
to expand the number of stores and penetrate markets more quickly and with less
capital than developing Company-owned stores. Franchisees are selected on the
basis of various factors, including business background, experience and
financial resources. In seeking new franchisees, the Company targets experienced
multi-unit restaurant operators with knowledge of a particular geographic market
and financial resources sufficient to execute the Company's development
schedule. Under the current franchise agreement, franchisees are required to
operate their stores in compliance with the Company's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. In addition,
franchisees are required to purchase, directly from the Company or its
authorized agent, spice packages for use in the preparation of certain menu
items, and must purchase certain other items from approved suppliers unless
written consent is received from the Company.

FRANCHISE AGREEMENTS. The Company enters into a franchise agreement
with each franchisee which grants the franchisee the right to develop a single
store within a specific territory at a site approved by the Company. The
franchisee then has limited exclusive rights within the territory. Under the
Company's current standard franchise agreement, the franchisee is required to
pay a franchise fee of $25,000 per restaurant. The current standard franchise
agreement provides for an initial term of 15 years (with a limited renewal
option) and payment of a royalty of 3% to 5% of gross sales. The termination
dates of the Company's franchise agreements with its existing franchisees
currently range from 2002 to 2015.

Franchise agreements are not assignable without the prior written
consent of the Company. Also, the Company retains rights of first refusal with
respect to any proposed sales by the franchisee. Franchisees are not permitted
to compete with the Company during the term of the franchise agreement and for a
limited time, and in a limited area, after the term of the franchise agreement.
The enforceability and permitted scope of such noncompetition provisions varies
from state to state. The Company has the right to terminate any franchise
agreement for certain specific reasons, including a franchisee's failure to make
payments when due or failure to adhere to the Company's policies and standards.
Many state franchise laws, however, limit the ability of a franchisor to
terminate or refuse to renew a franchise. See "Item 1. Business--Government
Regulation."

Prior forms of the Company's franchise agreements may contain terms
that vary from those described above, including with respect to the payment or
nonpayment of advertising fees and royalties, the term of the agreement, and
assignability, noncompetition and termination provisions.

FRANCHISEE TRAINING AND SUPPORT. Under the current franchise agreement,
each franchisee (or if the franchisee is a corporation, a manager designated by
the franchisee) is required to personally participate in the operation of the
franchise. Before opening the franchisee's business to the public, the Company
provides training at its approved training facility for each franchisee's
general manager, assistant manager and kitchen manager or chef. The Company
recommends that the franchisee, if the franchisee is other than the general
manager, or if a corporation, its chief operating officer, attend such training.
The Company also provides a training team to assist the franchisee in opening
its restaurant. The team, supervised by the Director of Training, will assist
and advise the franchisee and/or its manager in all phases of the opening
operation for a seven to fourteen day period. The formal training program
required of hourly employees and management, along with continued oversight by
the Company's quality control manager, is designed to promote consistency of
operations.

AREA DEVELOPERS. The area development agreement is an extension of the
standard franchise agreement. The area development agreement provides area
developers with the right to execute more than one franchise agreement in
accordance with a fixed development schedule. Restaurants established under
these agreements must be located in a specific territory in which the area
developer will have limited exclusive rights. Area developers pay an initial
development fee generally equal to the total initial franchise fee for the first
franchise agreement to be executed pursuant to the development schedule plus 10%
of the initial franchise fee for each additional franchise agreement to be
executed pursuant to the development schedule. Generally the initial development
fee is not refundable, but will be applied in the proportions described above to
the initial franchise fee payable for each franchise agreement executed pursuant
to the development schedule. New area developers will pay monthly royalties for
all restaurants established under such franchise agreements on a declining scale
generally ranging from 5% of gross sales for the initial restaurant to 3% of
gross sales for the fourth restaurant and thereafter as additional restaurants
are developed. Area development agreements are not assignable without the prior
written consent of the Company. The Company will retain rights of first refusal
with respect to proposed sales of restaurants by the area developers. Area
developers are not permitted to compete with the Company. If an area developer
fails to meet its development schedule obligations, the Company can, among other
things, terminate the area development agreement or modify the territory in the
agreement. The Company is not currently seeking new area developers. The Company
currently has three area developers operating a total of on ten, four, and three
restaurants, respectively.

COMPETITION

The restaurant industry is intensely competitive. Competition is based
upon a number of factors, including concept, price, location, quality and
service. The Company competes against a broad range of other family dining
concepts, including those focusing on various other types of ethnic food, as
well as local restaurants in its various markets. The Company also competes
against other quick service and casual dining concepts within the Mexican and
Tex-Mex food segment. Many of the Company's competitors are well established and
have substantially greater financial and other resources than the

Company. Some of the Company's competitors may be better established in markets
where the Company's restaurants are or may be located. Also, the Company
competes with franchisors of other restaurants and various other concepts for
franchisees.

The success of a particular restaurant concept is also affected by many
other factors, including national, regional or local economic and real estate
conditions, changes in consumer tastes and eating habits, demographic trends,
weather, traffic patterns, and the type, number and location of competing
restaurants. In addition, factors such as inflation, increased food, labor and
benefit costs, and the availability of experienced management and hourly
employees may adversely affect the restaurant industry in general and the
Company's restaurants in particular.

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.
These include regulations pertaining to the environmental, building and zoning
requirements in the preparation and sale of food. The Company is also subject to
laws governing the service of alcohol and 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 a specific new restaurant. The Company believes that it is
operating in substantial compliance with applicable laws and regulations that
govern its operations.

Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county or
municipal authorities, for a license or permit to sell alcoholic beverages on
the premises and to provide service for extended hours. Typically licenses must
be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the
Company's restaurants, including minimum age of patrons drinking alcoholic
beverages and of employees serving alcoholic beverages, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The Company is also subject to "dramshop"
statutes which generally provide a person injured by an intoxicated person with
the right to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. The Company carries liquor
liability coverage as part of its existing comprehensive general liability
insurance. Additionally, within thirty days of employment by the Company, each
Texas employee of the Company who serves alcoholic beverages is required to
attend an alcoholic seller training program that has been approved by the Texas
Alcoholic Beverage Commission and endorsed by the Texas Restaurant Association
and which endeavors to educate the server to detect and prevent overservice of
the Company's customers. This program endeavors to educate the server to detect
and prevent over-service, or underage- service, of alcoholic beverages to the
Company's customers.

In connection with the sale of franchises, the Company is subject to
the United States Federal Trade Commission rules and regulations and state laws
that regulate the offer and sale of franchises and business opportunities. The
Company is also subject to laws that regulate certain aspects of such
relationships. The Company has had no claims with respect to its programs and,
based on the nature of any potential compliance issues identified, does not
believe that compliance issues associated with its historic franchising programs
will have a material adverse effect on its results of operations or financial
condition. The Company believes that it is operating in substantial compliance
with applicable laws and regulations that govern franchising programs.

The Company is subject to various local, state and federal laws
regulating the discharge of pollutants into the environment. The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations. The Company conducts
environmental audits of each proposed restaurant site in order to determine
whether there is any evidence of contamination prior to purchasing or entering
into a lease with respect to such site. To date the Company's operations have
not been materially adversely affected by the cost of compliance with applicable
environmental laws.

TRADEMARKS, SERVICE MARKS AND TRADE DRESS

The Company believes its trademark, service marks and trade dress have
significant value and are important to its marketing efforts. It has registered
the trademarks for "Casa Ole", "Casa Ole Mexican Restaurant", "Monterey's
Tex-Mex Cafe", "Monterey's Little Mexico", "Tortuga Cantina" and "La Senorita"
with the U.S. Patent Office.

ITEM 2. PROPERTIES

In fiscal year 2001, the Company's executive offices were located in
approximately 7,200 square feet of office space in Houston, Texas. The offices
are currently leased by the Company from CO Properties No. 3, a Texas
partnership owned by Larry N. Forehand and Michael D. Domec, under a gross lease
(where the landlord pays utilities and property taxes) expiring in December
2004, with rental payments of $7,863 per month. Beginning January 1, 2002, the
Company increased its office space to 10,015 square feet to accommodate its new
accounting department. Rental payments will increase to $10,215 per month in
fiscal year 2002. See "Notes to Consolidated Financial Statements--Related Party
Transactions." The Company believes that its properties are suitable and
adequate for its operations.

The Company owns the land and buildings on three restaurant locations,
and the building and improvements on two restaurant locations situated on ground
leases with the balance of locations on leased sites. One of the owned
restaurants was closed in a prior year, and was sold under an installment
contract in fiscal 2002. Two of the owned restaurants were closed in previous
years and have been leased in prior years to either franchisees or to third
parties. Since the end of the fiscal year the Company has subleased four closed
restaurants to other local operators. The Company also owns a pad site in
Phoenix, Arizona that is under negotiation for sale. Real estate leased for
Company-owned restaurants is typically leased under triple net leases that
require the Company to pay real estate taxes and utilities, to maintain
insurance with respect to the premises and in certain cases to pay contingent
rent based on sales in excess of specified amounts. Generally the non-mall
locations for the Company-owned restaurants have initial terms of 10 to 20 years
with renewal options.

RESTAURANT LOCATIONS

At December 30, 2001, the Company had 50 Company-operated restaurants,
33 franchise restaurants and one license restaurant. As of such date, the
Company operated and franchised Casa Ole restaurants in the States of Texas and
Louisiana; operated Monterey's Tex-Mex Cafe restaurants in the State of Oklahoma
and operated and franchised Monterey's Little Mexico restaurants in the States
of Texas; operated Tortuga Coastal Cantina restaurants in the State of Texas;
and also operated and franchised La Senorita restaurants in the State of
Michigan. The Company's portfolio of restaurants is summarized below:

CASA OLE
Company-operated 17 Leased
Franchise-operated 30
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CONCEPT TOTAL 47
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MONTEREY'S TEX-MEX CAFE
Company-operated 4 Leased
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CONCEPT TOTAL 4
===

MONTEREY'S LITTLE MEXICO
Company-operated 14 Leased
License-operated 1
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CONCEPT TOTAL 15
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TORTUGA COASTAL CANTINA
Company-operated 10 Leased
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CONCEPT TOTAL 10
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LA SENORITA
Company-operated 5 Leased
Franchise-operated 3
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CONCEPT TOTAL 8
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SYSTEM TOTAL 84
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ITEM 3. LEGAL PROCEEDINGS

Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" above for additional
factors relating to such statements.

From time to time the Company is party to certain legal proceedings
incidental to and arising in the ordinary course of business. Although the
amount of any liability that could arise with respect to these proceedings
cannot be predicted accurately, in the opinion of the Company, any liability
that might result from existing claims will not have a material adverse effect
on the Company or its business. Nevertheless, a future lawsuit or claim could
result in a material adverse effect on the Company or its business.

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

No matter was submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 30, 2001.

PART II

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

The Company's Common Stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol "CASA." The following table sets forth
the range of quarterly high and low closing sale prices of the Company's Common
Stock on the Nasdaq National Market during each of the Company's fiscal quarters
since January 4, 1999.

HIGH LOW
---- -----

FISCAL YEAR 1999:
First Quarter (through April 4, 1999)...................... 4.50 3.44
Second Quarter (ended July 4, 1999)........................ 4.56 3.25
Third Quarter (ended October 3, 1999)...................... 4.94 3.75
Fourth Quarter (ended January 2, 2000)..................... 4.44 3.25

FISCAL YEAR 2000:
First Quarter (ended April 2, 2000)........................ 3.81 3.19
Second Quarter (ended July 2, 2000)........................ 4.00 2.81
Third Quarter (ended October 1, 2000)...................... 3.87 2.37
Fourth Quarter (ended December 31, 2000)................... 2.87 1.75

FISCAL YEAR 2001:
First Quarter (ended April 1, 2001)........................ 3.19 2.25
Second Quarter (ended July 1, 2001)........................ 3.04 2.50
Third Quarter (ended September 30, 2001)................... 3.82 2.66
Fourth Quarter (ended December 30, 2001)................... 3.04 2.10

FISCAL YEAR 2002:
First Quarter (as of March 14, 2002)....................... 3.80 3.05

As of March 14, 2002, the Company estimates that there were
approximately 800 beneficial owners of the Company's Common Stock, represented
by approximately 66 holders of record.

Since its 1996 initial public offering, the Company has not paid cash
dividends on its Common Stock. The Company intends to retain earnings of the
Company to support operations and to finance expansion and does not intend to
pay cash dividends on the Common Stock for the foreseeable future. The payment
of cash dividends in the future will be at the discretion of the Board of
Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's current credit
agreement prohibits the payment of any cash dividends.

ITEM 6. SELECTED FINANCIAL DATA

Balance sheet data as of December 28, 1997, January 3, 1999, January 2,
2000, December 31, 2000, and December 30, 2001 and income statement data for the
fiscal years then ended have been derived from consolidated financial statements
audited by KPMG LLP, independent public accountants. The selected financial data
set forth below should be read in conjunction with and are qualified by
reference to the Consolidated Financial Statements and the Notes thereto
included in Item 8. hereof and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7. hereof.

FISCAL YEARS
------------

1997 1998(1) 1999 2000 2001
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)

INCOME STATEMENT DATA:
Revenues:
Restaurant sales .......................... $ 34,301 $ 47,000 $ 55,997 $ 61,834 $ 61,852
Franchise fees, royalties and other ....... 1,029 1,120 1,469 1,362 1,393
-------- -------- -------- -------- --------

Total revenues ............. 35,330 48,120 57,466 63,196 63,245
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales ............................. 8,954 12,899 15,774 17,402 17,107
Restaurant operating expenses ............. 19,231 25,611 31,448 35,796 36,013
General and administrative ................ 3,632 4,429 5,191 5,548 5,457
Depreciation and amortization ............. 1,245 1,654 2,003 2,227 2,408
Restaurant closure costs .................. 432 -- 1,493 -- 972
-------- -------- -------- -------- --------

Total costs and expenses ... 33,494 44,593 55,909 60,973 61,958
-------- -------- -------- -------- --------

Infrequently occurring income
items, net ................................ -- -- 437 -- --
-------- -------- -------- -------- --------

Operating income ............................ 1,836 3,527 1,994 2,223 1,287
Other income (expense) ...................... (171) (385) (534) (885) (302)
-------- -------- -------- -------- --------

Income before income tax expense ............ $ 1,665 $ 3,142 $ 1,460 $ 1,338 $ 985
======== ======== ======== ======== ========

Extraordinary item .......................... $ -- $ 40 $ -- $ -- $ --
======== ======== ======== ======== ========

Net income .................................. $ 1,015 $ 1,973 $ 833 $ 867 $ 849
======== ======== ======== ======== ========

Net income per share (diluted) .............. $ 0.28 $ 0.55 $ 0.23 $ 0.24 $ 0.24
======== ======== ======== ======== ========

FISCAL YEARS
------------

1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(Dollars in thousands)

BALANCE SHEET DATA:
Working capital (deficit) ................... $ (2,023) $ (1,047) $ (1,484) $ (1,920) $ (3,154)
Total assets ................................ $ 26,508 $ 23,421 $ 31,043 $ 31,509 $ 30,067
Long-term debt, less
current portion .......................... $ 10,107 $ 2,870 $ 8,963 $ 8,300 $ 5,573
Total stockholders' equity .................. $ 11,735 $ 13,559 $ 14,392 $ 14,889 $ 15,717

----------

(1) The fiscal year 1998 consisted of 53 weeks. All other fiscal years presented
consisted of 52 weeks.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" above for additional factors relating
to such statements. The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Report.

GENERAL

The Company was organized under the laws of the State of Texas on
February 16, 1996. Pursuant to the reorganization of the Company in preparation
for the initial public offering, the shareholders of the prior corporations
contributed to the Company all outstanding shares of capital stock of each
corporation, and the Company issued to such shareholders in exchange therefor an
aggregate of 2,732,705 shares of its Common Stock. The exchange transaction was
completed April 24, 1996, and, as a result, the corporations became wholly-owned
subsidiaries of the Company, and each shareholder of the Company received a
number of shares of Common Stock in the Company.

The Company's primary source of revenues is the sale of food and
beverages at Company-owned restaurants. The Company also derives revenues from
franchise fees, royalties and other franchise-related activities. Franchise fee
revenue from an individual franchise sale is recognized when all services
relating to the sale have been performed and the restaurant has commenced
operation. Initial franchise fees relating to area franchise sales are
recognized ratably in proportion to services that are required to be performed
pursuant to the area franchise or development agreements and proportionately as
the restaurants within the area are opened.

FISCAL YEAR

The Company has a 52/53 week fiscal year ending on a Sunday nearest
December 31. References in this Report to fiscal 1999, 2000 and 2001 relate to
the periods ended January 2, 2000, December 31, 2000 and December 30, 2001
respectively. Fiscal years 1999, 2000 and 2001 presented herein consisted of 52
weeks. Fiscal year 1998 consisted of 53 weeks.

RESULTS OF OPERATIONS

FISCAL 2001 COMPARED TO FISCAL 2000

REVENUES. Fiscal year 2001 revenues increased 0.01% to $63.2 million.
Restaurant sales increased $17,846 to $61.9 million. Fiscal year 2001 consisted
of 2,728 restaurant weeks compared to 2,849 restaurant weeks in the prior year.
Fiscal year 2000 sales included three under performing restaurants that were
closed at the end of that fiscal year, and one restaurant that was sold in the
middle of that fiscal year. During fiscal year 2001, one restaurant was
temporarily closed for six weeks due to flood damage, one new restaurant was
acquired from a franchisee, and three under performing restaurants were closed
on December 30, 2001. Total system same-restaurant sales were up 2.7%.
Company-owned same restaurant sales were up 2.2% and franchise-owned
same-restaurant sales were up 3.5%. Company-owned average weekly sales increased
4.5% in fiscal year 2001.

Franchise fees, royalties and other increased 2.3% or $31,248 to $1.4
million. The increase was due to the increase in franchise same-restaurant
sales. The increase in franchise same restaurant sales was offset by the
bankruptcy of two franchisees during the second quarter of fiscal year 2001 and
the loss of corresponding royalty income.

COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, decreased as a percent of restaurant sales to
27.7% compared with 28.1% in fiscal 2000. The decrease was due, in part, to menu
price increases, and due to menu design changes that removed low selling, high
food cost items. Higher cheese prices offset some of this improvement.

Labor and other related expenses decreased as a percentage of
restaurant sales 70 basis points to 32.9% compared with 33.6% in fiscal 2000.
The decrease was primarily due to hourly and manager labor efficiency as a
result of increasing same restaurant sales. The improvement was also due to last
year's closure of under performing restaurants. Worker's compensation insurance
premiums increased 56.0% during fiscal year 2001, offsetting some of these
improvements.

Restaurant operating expenses, which primarily includes rent, property
taxes, utilities, repair and maintenance, liquor taxes, property insurance,
general liability insurance and advertising, increased as a percentage of
restaurant sales to 25.4% in fiscal year 2001 as compared with 24.3% in fiscal
year 2000. The increase was primarily due to higher utility, insurance and
advertising costs.

General and administrative expenses decreased as a percentage of total
sales from 8.8% of total sales in fiscal year 2000 to 8.6% in fiscal year 2001.
The decrease was primarily due to a decrease in corporate staffing that was
offset by higher legal expenses relating to a parking easement lawsuit that was
successfully concluded and severance expenses relating to the corporate staff
decreases.

Depreciation and amortization increased by 14.0% to $2.4 million. The
increase was primarily due to the addition of two new restaurants in October
2000 and June 2001, four remodels during 2000 and six remodels during 2001, as
well as other fixed asset additions during fiscal year 2001. The closed
restaurants mentioned above had relatively low book values of fixed assets so
their closure did not significantly reduce depreciation.

No new restaurants were opened during 2001. The franchise restaurant
acquired during fiscal year 2001 was an existing, operating restaurant that
required no pre-opening costs.

During the fourth quarter of fiscal year 2001, the Company expensed
$971,885 related to restaurant closure and asset impairment costs. These costs
were due to the closure and sublease of three restaurants in Boise, Idaho and
due to the impairment of the carrying value of previously closed restaurants
that were sold or subleased just after the end of fiscal year 2001. There were
no impairments recorded in fiscal year 2000.

OTHER INCOME (EXPENSE). Interest expense decreased by $172,416 due to
declining debt and declining interest rates during fiscal year 2001. Total debt
as of December 30, 2001 was $6.6 million compared with $8.3 million as of
December 31, 2000, a decrease of $1.7 million. The decrease was also due to a
$285,779 gain primarily due to the sale of one restaurant. The restaurant, which
in 1998 had been sold and leased back from Franchise Finance of America ("FFCA),
was purchased back from FFCA and then sold to a third party. The restaurant was
purchased with insurance proceeds after it was destroyed by fire. The gain was
primarily the realization of a deferred gain from the 1998 sale-lease back
transaction.

INCOME TAX EXPENSE. The Company's effective tax rate for fiscal year
2001 was 13.8% compared with 35.0% in fiscal year 2000. The lower rate is due to
the effect of higher tax credits and favorable tax treatment on the closure of
the Boise, Idaho restaurants.

FISCAL 2000 COMPARED TO FISCAL 1999

REVENUES. Fiscal 2000 revenues increased 10.0% to $63.2 million.
Restaurant sales increased 10.4% to $61.8 million. La Senorita Restaurants,
which was acquired on April 30, 1999, contributed $2.2 million of the $5.7
million increase in restaurant sales. One new restaurant was opened, one
restaurant was reopened, and three restaurants were closed during the year.
Total system same-store sales (including La Senorita) were up 2.7%.
Company-owned same store sales were up 3.2% and franchise-owned same-store sales
were up 2.1%. Due to new store development of higher volume Tortuga Coastal
Cantina and La Senorita restaurants, company-owned average weekly sales
increased 6.1%.

Franchise fees, royalties and other decreased 7.3% or $107,000 to $1.4
million. The decrease was due to other miscellaneous revenues decreasing as the
Company stopped selling certain merchandise items in the RESTAURANTS.

COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, decreased slightly as a percent of sales to
28.1% compared with 28.2% in fiscal 1999. The decrease was due to efforts with
suppliers to generate costs savings coupled with a decrease in cheese prices.
These were offset by significant increases in the cost of beef, guacamole and
tequila. Moderate price increases during the year also helped to keep costs down
as a percent of sales.

Labor and other related expenses increased 10 basis points to 33.6%
compared with 33.5% in fiscal 1999. The increase was primarily due to higher
labor costs associated with new store development, as well as the tight labor
markets. Also, workers' compensation and health insurance expenses increased on
a comparable basis. Offsetting these increases were labor efficiencies within
the restaurants that were opened during fiscal 1999.

Restaurant operating expenses increased to 24.3% of restaurant sales
compared with 22.6% in fiscal 1999. The increase was due to a combination of
higher utility costs, increased repairs and maintenance, increased property
taxes and rent. Utility costs increased due to the higher energy costs. Older
facilities contributed to the increased repairs. The addition of the Tortuga
Coastal Cantina and La Senorita restaurants and their related capital additions
resulted in an increase in rental expense and property taxes.

General and administrative expenses decreased from 9.0% of total sales
in fiscal year 1999 to 8.8% in fiscal year 2000. The decrease was primarily due
to the absorption of general and administrative expenses over a larger revenue
base. Fiscal year 1999 also included $62,000 in write-offs of site development
costs.

Depreciation and amortization increased by 23.6% to $2.1 million. This
increase is primarily due to the La Senorita acquisition in May 1999 and capital
additions during 1999 as five new restaurants were opened and nine restaurants
were remodeled resulting in a full year's depreciation during fiscal year 2000.
Also during the year, two additional restaurants were opened and four were
remodeled.

Pre-opening costs decreased by 60.8% as the number of stores opened
decreased from 6 to 2.

During fiscal year 1999, the Company expensed $1.5 million related to
restaurant closure and asset impairment costs. There were no impairments
recorded in fiscal year 2000.

Infrequently occurring (income) and expense in 1999 consisted of two
items that increased operating income in the aggregate by $437,684. There were
no such items in fiscal year 2000.

OTHER INCOME (EXPENSE). Interest expense increased by $373,861 due to a
higher average debt balance and higher interest rates. The Company borrowed $4.2
million to finance the La Senorita acquisition in May 1999 and also borrowed to
finance investments in new stores throughout 1999, increasing debt from
$2,870,000 to $8,963,320 during the year. Debt was decreased by $663,320 during
2000, but the average balance remained higher than in 1999. Interest rates have
increased by 2% over the beginning of 1999, further contributing to the
increased expense.

Other income and expense items decreased from a net expense of $42,426
to a net expense of $19,242.

INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 2000
was 35.0% compared with 42.9% in fiscal 1999. The lower rate is due to the
effect of higher tax credits on lower income before taxes.

LIQUIDITY AND CAPITAL RESOURCES

The Company met fiscal 2001 capital requirements with cash generated by
operations. In fiscal 2001, the Company's operations generated approximately
$3.2 million in cash, as compared with $3.5 million in fiscal 2000 and $3.6
million in fiscal 1999. As of December 30, 2001, the Company had a working
capital deficit of approximately $3.2 million, compared with a working capital
deficit of approximately $1.9 million at December 31, 2000. The increase in
fiscal year 2001 working capital deficit is primarily due to the
reclassification of $1.0 million of long-term debt to short-term debt. A working
capital deficit is common in the restaurant industry, since restaurant companies
do not typically require a significant investment in either accounts receivable
or inventory.

The Company's principal capital requirements are the funding of new
restaurant development or acquisitions and remodeling of older units. During
fiscal 2001, capital expenditures on property, plant and equipment were
approximately $1.8 million as compared to approximately $2.8 million for fiscal
2000. Capital expenditures included the remodeling of six restaurants. The
Company also exchanged a franchise note receivable for an existing, operating
restaurant. Additionally, the Company had cash outlays for necessary replacement
of equipment and leasehold improvements in various older units. There are no new
restaurants planned for fiscal year 2002. The Company does plan to modestly
remodel five restaurants in fiscal year 2002. The estimated capital needed for
fiscal year 2002 for general corporate purposes, including remodeling, is
approximately $1.6 million.

On June 29, 2001, the Company re-financed $7.8 million of its debt with
Fleet National Bank. The new credit facility is for $10.0 million. The credit
facility consists of a $5.0 million term note that requires quarterly principal
payments of $250,000 and matures on June 29, 2006. The credit facility also
includes a $5.0 million revolving line of credit that matures on June 29, 2004.
The interest rate is either the prime rate or LIBOR plus a stipulated
percentage. Accordingly, the Company is impacted by changes in the prime rate
and LIBOR. The Company is subject to a non-use fee of 0.5% on the unused portion
of the revolver from the date of the credit agreement. As of December 30, 2001,
the Company had $6.6 million outstanding on the credit facility and is in full
compliance with all debt covenants except the maximum capital expenditures
covenant, which the Company exceeded by $95,000. The Company obtained a waiver
for the fourth quarter non-compliance and expects to be in compliance with the
covenant in all quarters of fiscal year 2002. Over the last several years, the
Company's debt was incurred to acquire Monterey's Acquisition Corp, which was
acquired on July 1997, La Senorita Restaurants, which was acquired on April 30,
1999, to develop new restaurants, to remodel existing restaurants, as well as to
accommodate other working capital needs. The Company anticipates that it will
use excess cash flow during fiscal year 2002 to pay down debt approximately $2.0
million. The Company's Board of Directors is considering a stock repurchase
program. Such a program would be established in a manner permitted under the
current bank financing agreement. However, there is no assurance that any shares
will actually be repurchased during fiscal year 2002.

The Company's management believes that with its operating cash flow and
the Company's revolving line of credit with Fleet National Bank, funds will be
sufficient to meet operating requirements and to finance routine capital
expenditures and remodels through the end of the 2002 fiscal year. Unless the
Company violates an important debt covenant, the Company's credit facility with
Fleet National Bank is not subject to triggering events that would cause the
credit facility to become due sooner than the maturity dates described in the
previous paragraph.

RISK FACTORS

The Company cautions readers that its business is subject to a number
of risks, any of which could cause the actual results of the Company to differ
materially from those indicated by forward-looking statements made from time to
time in releases, including this Form 10-K, and oral statements. Certain risk
factors have been presented throughout this document, including, among others,
expansion strategy; site selection; attracting and retaining franchisees,
managers and other employees; availability of food products; competition and
government regulation. Certain other risks to which the Company is subject
include:

SEASONALITY. The Company's sales and earnings fluctuate seasonally.
Historically the Company's highest sales and earnings have occurred in the
second and third calendar quarters, which the Company believes is typical of the
restaurant industry and consumer spending patterns in general with respect to
the third quarter and is due to increased holiday traffic at the Company's mall
restaurants for the fourth quarter. In addition, quarterly results have been
and, in the future are likely to be, substantially affected by the timing of new
restaurant openings. Because of the seasonality of the Company's business and
the impact of new restaurant openings, results for any calendar quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.

IMPACT OF INFLATION & MARKET RISKS. The Company believes that inflation
has impacted net income during fiscal year 2002. Substantial increases in
utility expenses and insurance premiums had a marked impact on the Company's
operating results to the extent such increases could not be passed along to
customers. There can be no assurance that the Company will not experience the
same inflationary impact in the future. If operating expenses increase,
management intends to attempt to recover increased costs by increasing prices to
the extent deemed advisable considering competitive conditions. The Company does
not have or participate in transactions involving derivative, financial and
commodity instruments.

ACCELERATING GROWTH STRATEGY. The Company's ability to expand by adding
Company-owned and franchised restaurants will depend on a number of factors,
including the availability of suitable locations, the ability to hire, train and
retain an adequate number of experienced management and hourly employees, the
availability of acceptable lease terms and adequate financing, timely
construction of restaurants, the ability to obtain various government permits
and licenses and other factors, some of which are beyond the control of the
Company and its franchisees. The opening of additional franchised restaurants
will depend, in part, upon the ability of existing and future franchisees to
obtain financing or investment capital adequate to meet their market development
obligations. Based on the Company's experience in attempting to grow outside its
existing markets, the Company has found there can be limited consumer acceptance
and that the cost of such efforts can have a materially adverse impact on the
Company's financial results.

SMALL RESTAURANT BASE AND GEOGRAPHIC CONCENTRATION. The results
achieved to date by the Company's relatively small restaurant base may not be
indicative of the results of a larger number of restaurants in a more
geographically dispersed area. Because of the Company's relatively small
restaurant base, an unsuccessful new restaurant could have a more significant
effect on the Company's results of operations than would be the case in a
company owning more restaurants. Additionally, given the Company's present
geographic concentration (all Company-owned units are currently in Texas,
Oklahoma and Michigan), results of operations may be adversely affected by
economic or other conditions in the region and adverse publicity relating to the
Company's restaurants could have a more pronounced adverse effect on the
Company's overall sales than might be the case if the Company's restaurants were
more broadly dispersed.

CONTROL OF THE COMPANY BY MANAGEMENT AND DIRECTORS. Approximately 56.8%
of the Common Stock and rights to acquire Common Stock of the Company are
beneficially owned or held by Larry N. Forehand, David Nierenberg, Michael D.
Domec and Louis P. Neeb, directors and/or executive officers of the Company.

SHARES ELIGIBLE FOR FUTURE SALE AND STOCK PRICE. Sales of substantial
amounts of shares in the public market could adversely affect the market price
of the Common Stock. The Company has granted limited registration rights to
holders of warrants granted by the Company and Larry N. Forehand to Louis P.
Neeb, Tex-Mex Partners, L.C. and a former officer of the Company to register the
880,766 underlying shares of Common Stock covered by such warrants in connection
with registrations otherwise undertaken by the Company. In any event, the market
price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors.

COMPETITION. The restaurant industry is intensely competitive. The
Company competes against other family dining concepts, as well as quick service
and casual dining concepts, for customers, employees, and franchisees. See "Item
1. Business--Competition."

CONTRACTUAL OBLIGATIONS AND COMMITMENTS. The Company leases restaurant
operating space and equipment under non-cancelable operating leases that expire
at various dates through April 30, 2019. The restaurant operating space base
agreements typically provide for a minimum lease rent plus common area
maintenance, insurance, and real estate taxes, plus additional percentage rent
based upon revenues of the restaurant (generally 2% to 7%) and may be renewed
for periods ranging from five to twenty-five years.

On June 25, 1998, the Company completed a sale-leaseback transaction
involving the sale and leaseback of land, building and improvements of 13
company-owned restaurants. The properties were sold for $11.5 million and
resulted in a gain of approximately $3.5 million that was deferred and is
amortized over the terms of the leases, which are 15 years each. The leases are
classified as operating leases in accordance with SFAS No. 13 "Accounting for
Leases". The 13 leases have a total future minimum lease obligation of
approximately $13,932,038.

Future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year as of December 30,
2001 are approximately:

2002........................................... 4,007,792
2003........................................... 3,749,068
2004........................................... 3,402,971
2005........................................... 3,081,155
2006........................................... 3,053,816
Thereafter..................................... 21,091,266
------------
$ 38,386,068
============

Long-term debt consists of the following at December 31, 2000 and
December 30, 2001:

FISCAL YEARS
2000 2001
------------ ------------

Revolving Line of Credit ................................. 8,300,000 2,072,729
------------ ------------

Term Note ........................................... -- 4,500,000
------------ ------------
Long-term debt .................................... 8,300,000 6,572,729
Less current installments due in 2002 ............. -- (1,000,000)
------------ ------------
Long-term debt, excluding current installments .... $ 8,300,000 $ 5,572,729
============ ============

Maturities on long-term debt are as follows:
2002.......................................... 1,000,000
2003.......................................... 1,000,000
2004.......................................... 3,072,729
2005.......................................... 1,000,000
2006.......................................... 500,000
----------
$6,572,729
==========

RELATED PARTIES. Bay Area Management, Inc., owned entirely by the
brother of a Company shareholder and director, provided accounting and
administrative services on a fee basis, to all of the Company-owned Casa Ole
restaurants and some franchise entities. The Company paid a termination fee of
$82,000 and cancelled the contract during 1999. Total amounts paid to Bay Area
Management, Inc. in fiscal 1999 was $216,369.

The Company leases its executive offices from a company owned by two
shareholders of Mexican Restaurants, Inc. Net lease expense related to these
facilities in fiscal 1999, 2000 and 2001 was $60,000, $89,592 and $94,416,
respectively.

In May 1998 the Board of Directors of the Company adopted a program to
assist executives and five key employees of the Company in their purchasing of
shares of the Company. The program provides for the Company to assist the
executives and key employees in obtaining third party loans to finance such
purchases. It also provides for annual cash bonuses to such executives to
provide for payment of interest expense and principal amounts to amortize these
loans in not more than five years. The bonus payments are based on attainment of
earnings per share targets established by the Company's Board of Directors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have or participate in transactions involving
derivative, financial and commodity instruments. The Company's long-term debt
bears interest at floating market rates. Based on amounts outstanding at year-
end, a 1% change in interest rates would change interest expense by
approximately $66,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1 of this report.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

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

(a) Documents filed as part of Report.

1. Financial Statements:

The Financial Statements are listed in the index to
Consolidated Financial Statements on page F-1 of this Report.

2. Exhibits:

+/-2.1 Stock Purchase Agreement with Purchase of Designated
Assets, dated as of January 12, 1999, by and among
the Company, La Senorita Restaurants Acquisition
Corp., a Delaware corporation and wholly owned
subsidiary of the Company, La Senorita Traverse City,
Inc., Kleinrichert Bros., Inc., La Senorita Mt.
Pleasant, Inc., KMANCO, Inc., La Senorita Lansing,
Inc., Kenneth Kleinrichert, Donald Kleinrichert,
Joseph Kleinrichert, The Joseph Kleinrichert Trust
and Steve Arnot.

*3.1 Articles of Incorporation of the Company (as
amended).

++3.2 Bylaws of the Company.

++4.1 Specimen of Certificate of Common Stock of the
Company.

++4.2 Articles of Incorporation of the Company (see 3.1
above).

++4.3 Bylaws of the Company (see 3.2 above).

++10.1 Employment Agreement by and between the Company and
Louis P. Neeb dated February 28, 1996.

++10.2 Employment Agreement by and between the Company and
Patrick A. Morris dated February 28, 1996.

++10.3 Employment Agreement by and between the Company and
Stacy M. Riffe dated February 28, 1996.

++10.4 Indemnity Agreement by and between the Company and
Louis P. Neeb dated as of April 10, 1996.

++10.5 Indemnity Agreement by and between the Company and
Larry N. Forehand dated as of April 10, 1996.

++10.6 Indemnity Agreement by and between the Company and
John C. Textor dated as of April 10, 1996.

++10.7 Indemnity Agreement by and between the Company and
Patrick A. Morris dated as of April 10, 1996.

++10.8 Indemnity Agreement by and between the Company and
Michael D. Domec dated as of April 10, 1996.

++10.9 Indemnity Agreement by and between the Company and
Stacy M. Riffe dated as of April 10, 1996.

++10.10 Indemnity Agreement by and between the Company and
J.J. Fitzsimmons dated as of April 10, 1996.

++10.11 Indemnity Agreement by and between the Company and
Richard E. Rivera dated as of April 10, 1996.

++10.12 Corrected Warrant Agreement by and between the
Company and Louis P. Neeb dated as of February 26,
1996.

++10.13 Corrected Warrant Agreement by and between the
Company and Tex-Mex Partners, L.C. dated as of
February 26, 1996.

++10.14 Form of the Company's Multi-Unit Development
Agreement.

++10.15 Form of the Company's Franchise Agreement.

+++10.16 1996 Long Term Incentive Plan.

+++10.17 Stock Option Plan for Non-Employee Directors.

++10.18 Lease Agreement, dated July 15, 1977, between
Weingarten Realty, Inc. and Fiesta Restaurants, Inc.,
for property located at 1020 Federal Road, Houston,
Texas (Casa Ole No. 4).

++10.19 Lease Agreement, dated July 12, 1978, between W & W
Investments, a Texas partnership, and Fiesta
Restaurants, Inc., for property located at 2727 John
Ben Shepperd Pkwy, Odessa, Texas (Casa Ole No. 8).

++10.20 Lease Agreement, dated August 11, 1986, between
Hartford-Lubbock Limited Partnership, a Texas limited
partnership, and Casa Ole No. 10, Inc., for property
located at 4413 South Loop 289, Lubbock, Texas (Casa
Ole No. 10).

++10.21 Lease Agreement, dated July 29, 1983, between Phil R.
Kensinger, Trustee, and Quality Mexican Restaurants,
Inc., for property located at 12203 Murphy Rd.,
Stafford, Texas (Casa Ole No. 13).

++10.22 Lease Agreement, dated July 17, 1987, between Leroy
Melcher and Fiesta Restaurants, Inc., for property
located at 3121 Palmer Hwy, Texas City, Texas (Casa
Ole No. 14).

++10.23 Lease Agreement, dated February 17, 1981, between
Eldred Doty, wife Joyce C. Doty and Fiesta
Restaurants, Inc., for property located at 3121
Palmer Hwy, Texas City, Texas (Casa Ole No. 14).

++10.24 Lease Agreement, dated May 16, 1983, between CBL
Management, Inc., a Tennessee corporation, and Fiesta
Restaurants, Inc., d/b/a Casa Ole, for property
located at Post Oak Mall #3026, College Station,
Texas (Casa Ole No. 22).

++10.25 Lease Agreement, dated June 5, 1985, between David Z.
Mafrige Interests and Fiesta Restaurants, Inc., for
property located at 12350 Gulf Freeway, Houston,
Texas (Casa Ole No. 28).

++10.26 Lease Agreement, dated March 13, 1985, between
Plantation Village Plaza Joint Venture and Fiesta
Restaurants, Inc., for property located at 415 This
Way, Lake Jackson, Texas (Casa Ole No. 29).

++10.27 Lease Agreement, dated August 6, 1985, between Dalsan
Properties--Waco II, Service Life and Casualty
Insurance Co. and Casa Ole No 34, Inc., for property
located at 414 N. Valley Mills Dr., Waco, Texas (Casa
Ole No. 34).

++10.28 Lease Agreement, dated May 6, 1976, between Federated
Store Realty, Inc., Prudential Insurance Company of
America and Fiesta Restaurants, Inc., for property
located at 263 Greenspoint Mall, Houston, Texas (Casa
Ole No. 35).

++10.29 Lease Agreement, dated May 30, 1989, between Temple
Mall Company, a Texas General Partnership, and Casa
Ole Franchise Services, Inc., for property located at
3049 S. 31st Street, Temple, Texas (Casa Ole No. 37).

++10.30 Lease Agreement, dated May 3, 1995, between CO
Properties No. 3, a Texas general partnership, and
Casa Ole Franchise Services, Inc., for property
located at 1135 Edgebrook, Houston, Texas.

++10.31 Corrected Warrant Agreement by and between Larry N.
Forehand and Louis P. Neeb dated as of February 26,
1996.

++10.32 Corrected Warrant Agreement by and between Larry N.
Forehand and Tex-Mex Partners, L.C. dated as of
February 26, 1996.

++10.33 Corrected Warrant Agreement by and between Larry N.
Forehand and Patrick A. Morris dated as of February
26, 1996.

++10.34 Corrected Warrant Agreement by and between Larry N.
Forehand and Stacy M. Riffe dated as of February 26,
1996.

++10.35 Indemnification letter agreement by Larry N. Forehand
dated April 10, 1996.

+10.36 1996 Manager's Stock Option Plan (incorporated by
reference to Exhibit 99.2 of the Company's Form S-8
Registration Statement Under the Securities Act of
1933, dated February 24, 1997, filed by the Company
with the Securities and Exchange Commission).

**10.37 Lease Agreement, dated June 21, 1996, between Sam
Jack McGlasson and Casa Ole Restaurants, Inc., for
property located at 725 North Loop 340, Bellmead,
Texas (Casa Ole No. 51).

**10.38 Amended Lease Agreement, dated November 7,1996,
between The Prudential Insurance Company of America,
by and through its Agent, Terranomics Retail
Services, Inc. and Casa Ole Restaurants, Inc., for
property located at 263 Greenspoint Mall, Houston,
Texas (Casa Ole No. 35).

**10.39 Assignment of Lease and Consent to Assign, dated
October 11, 1996, between Roy M. Smith and W.M. Bevly
d/b/a Padre Staples Mall (landlord) and Pepe, Inc.
d/b/a Casa Ole Restaurant and Cantina
(tenant/assignor) and Jack Goodwin (guarantor) and
Casa Ole No. 29, Inc., for property located at 1184
Padre Staples Mall, Corpus Christi, Texas (Casa Ole
No. 36).

**10.40 Option Contract and Agreement dated January 11, 1997,
between Casa Ole of Beaumont, Inc., a Texas
corporation, and Casa Ole Restaurants, Inc.

**10.41 $750,000 Promissory Note, dated December 30, 1996,
between Casa Ole No. 29, Inc. and Rainbolt, Inc. for
the purchase of Victoria, Texas restaurant (Casa Ole
No. 15).

10.42 Credit Agreement Between Casa Ole Restaurants, Inc.,
as the Borrower, and NationsBank of Texas, N.A., as
the Bank, for $10,000,000, dated July 10, 1996
(incorporated by reference to Exhibit 10.1 of the
Company's Form 10-Q Quarterly Report Under the
Securities Exchange Act of 1934, dated August 22,
1996, filed by the Company with the Securities and
Exchange Commission).

**10.43 Amendment No. 1, dated January 13, 1997, to the
Credit Agreement Between Casa Ole Restaurants, Inc.,
as the Borrower, and NationsBank of Texas, N.A., as
the Bank, for $10,000,000, dated July 10, 1996.

**10.44 Employment Agreement by and between the Company and
Curt Glowacki dated May 15, 1997.

**10.45 Employment Agreement by and between the Company and
Andrew J. Dennard dated May 20, 1997.

+10.46 Form of Executive Officer Stock Purchase Letters.

++21.1 List of subsidiaries of the Company (incorporated by
reference to Exhibit 22.1 of the Company's Form S-1
Registration Statement Under the Securities Act of
1933, dated April 24,1996, filed by the Company with
the Securities and Exchange Commission).

*23.1 Consent of KPMG LLP.

*24.1 Power of Attorney (included on the signature page to
this Form 10-K).

-----------

* Filed herewith.
** Incorporated by reference to corresponding Exhibit number of the Company's
(then known as Casa Ole Restaurants, Inc.) Form 10-K Annual Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934, dated March
24, 1997, filed by the Company with the Securities and Exchange Commission.

+/- Incorporated by reference to corresponding Exhibit 2.1 of the Company's
(then known as Casa Ole Restaurants, Inc.) Form 8-K filed by the Company on
May 14, 1999 with the Securities and Exchange Commission.
* Incorporated by reference to corresponding Exhibit number of the Company's
Form 8-K filed by the Company on May 25, 1999 with the Securities and
Exchange Commission.
++ Incorporated by reference to corresponding Exhibit number of the Company's
(then known as Casa Ole Restaurants, Inc.) FormS-1 Registration Statement
Under the Securities Act of 1933, dated April 24, 1996, filed by the Company
with the Securities and Exchange Commission (Registration number 333-1678).
+ Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K

There were two reports on Form 8-K during the last quarter of the period
covered by this report. On October 3, 2001, the Company reported that it was
continuing to evaluate interest expressed by several parties with regard to
a potential acquisition of all or a part of the Company. On November 7,
2001, the Company announced that its board of directors accepted the
recommendation of its financial advisors to reject as inadequate all
indications of interest received by the Company.

MEXICAN RESTAURANTS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Auditors................................................................. F-2

Consolidated Balance Sheets as of December 31, 2000 and December 30, 2001...................... F-3

Consolidated Statements of Income for each of the years in the three fiscal-year
period ended December 30, 2001............................................................... F-4

Consolidated Statements of Stockholders' Equity for each of the years in
the three fiscal-year period ended December 30, 2001......................................... F-5

Consolidated Statements of Cash Flows for each of the years in the three
fiscal-year period ended December 30, 2001................................................... F-6

Notes to Consolidated Financial Statements..................................................... F-7

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Mexican Restaurants, Inc.:

We have audited the accompanying consolidated balance sheets of Mexican
Restaurants, Inc. and subsidiaries (the Company) as of December 31, 2000 and
December 30, 2001, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mexican
Restaurants, Inc. and subsidiaries as of December 31, 2000 and December 30,
2001, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.

KPMG LLP

Houston, Texas
March 15, 2002

F-2

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2000 AND DECEMBER 30, 2001

FISCAL YEARS

2000 2001
------------ ------------

ASSETS

Current assets:
Cash and cash equivalents ........................................... $ 636,334 $ 311,423
Royalties receivable ................................................ 66,798 113,329
Other receivables ................................................... 611,603 554,211
Inventory ........................................................... 718,629 654,237
Taxes receivable .................................................... 257,080 333,038
Prepaid expenses and other current assets ........................... 529,830 682,058
------------ ------------
Total current assets ......................................... 2,820,274 2,648,296
------------ ------------

Property, plant and equipment ......................................... 25,550,871 25,500,483
Less accumulated depreciation ....................................... (7,339,223) (8,749,475)
------------ ------------
Net property, plant and equipment ............................ 18,211,648 16,751,008
Deferred tax assets ................................................... 1,167,661 1,145,360
Property held for resale .............................................. 1,100,000 1,399,672
Other assets .......................................................... 8,209,243 8,122,278
------------ ------------

$ 31,508,826 $ 30,066,614
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current installments of long-term debt ................................ $ -- $ 1,000,000
Accounts payable ...................................................... 2,953,649 1,947,973
Accrued sales and liquor taxes ........................................ 452,617 464,495
Accrued payroll and taxes ............................................. 1,006,457 1,123,083
Accrued expenses ...................................................... 327,390 1,266,786
------------ ------------

Total current liabilities .................................... 4,740,113 5,802,337
------------ ------------

Long-term debt ........................................................ 8,300,000 5,572,729
Other liabilities ..................................................... 537,219 580,696
Deferred gain ......................................................... 3,042,832 2,393,639

Stockholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, none issued .......................... -- --
Capital stock, $0.01 par value, 20,000,000 shares
authorized, 4,732,705 shares issued ............................... 47,327 47,327
Additional paid-in capital .......................................... 20,121,076 20,121,076
Retained earnings ................................................... 6,025,121 6,873,797
Deferred Compensation ............................................... (171,519) (130,215)
Treasury stock, cost of 1,200,400 common shares in 2000 and
1,219,200 common shares in 2001 ................................... (11,133,343) (11,194,772)
------------ ------------
Total stockholders' equity ................................... 14,888,662 15,717,213
------------ ------------

$ 31,508,826 $ 30,066,614
============ ============

See accompanying notes to consolidated financial statements.

F-3

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE FISCAL YEARS ENDED JANUARY 2, 2000,
DECEMBER 31, 2000 AND DECEMBER 30, 2001

FISCAL YEARS

1999 2000 2001
------------ ------------ ------------

Revenues:
Restaurant sales ....................................... $ 55,997,170 $ 61,833,623 $ 61,851,469
Franchise fees, royalties and other .................... 1,468,596 1,393,157 1,361,909
------------ ------------ ------------
57,465,766 63,195,532 63,244,626

Costs and expenses:
Cost of sales .......................................... 15,773,922 17,401,417 17,107,319
Labor .................................................. 18,785,669 20,768,127 20,327,514
Restaurant operating expenses .......................... 12,662,395 15,028,247 15,685,679
General and administrative ............................. 5,191,043 5,547,784 5,457,232
Depreciation and amortization .......................... 1,708,965 2,111,839 2,408,121
Pre-opening costs ...................................... 293,931 115,331 254
Asset impairments and restaurant closure costs ......... 1,493,449 -- 971,885
------------ ------------ ------------
55,909,374 60,972,745 61,958,004

Infrequently occurring income items, net ................. 437,684 -- --
------------ ------------ ------------

Operating income ................................ 1,994,076 2,222,787 1,286,622
------------ ------------ ------------

Other income (expense):
Interest income ........................................ 21,304 18,141 51,182
Interest expense ....................................... (491,494) (865,355) (692,939)
Other, net ............................................. (63,730) (37,383) 339,338
------------ ------------ ------------
(533,920) (884,597) (302,419)
------------ ------------ ------------
Income before income tax expense ......................... 1,460,156 1,338,190 984,203
Income tax expense ....................................... 627,032 471,000 135,527
------------ ------------ ------------

Net income ...................................... $ 833,124 $ 867,190 $ 848,676
============ ============ ============

Basic income per share ................................... $ .23 $ .24 $ .24
============ ============ ============

Diluted income per share ................................. $ .23 $ .24 $ .24
============ ============ ============

Weighted average number of shares (basic and diluted) .... 3,603,712 3,580,380 3,527,291
============ ============ ============

See accompanying notes to consolidated financial statements.

F-4

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE FISCAL YEARS ENDED
JANUARY 3, 1999, JANUARY 2, 2000
AND DECEMBER 31, 2000

ADDITIONAL TOTAL
CAPITAL PAID-IN RETAINED TREASURY DEFERRED STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK COMPENSATION EQUITY
--------- ------------ ------------ ------------ ------------ -------------

Balances at January 3, 1999 $ 47,327 $ 20,537,076 $ 4,324,807 $(11,350,000) -- $ 13,559,210

Net income -- -- 833,124 -- -- 833,124
--------- ------------ ------------ ------------ ------------ -------------

Balances at January 2, 2000 $ 47,327 $ 20,537,076 $ 5,157,931 $(11,350,000) -- $ 14,392,334

Net income -- -- 867,190 -- -- 867,190

Issuance of Restricted Stock -- (416,000) -- 622,500 (206,500) --

Repurchase of shares -- -- -- (405,843) -- (405,843)

Amortization of Deferred Compensation -- -- -- -- 34,981 34,981
--------- ------------ ------------ ------------ ------------ -------------

Balances at December 31, 2000 $ 47,327 $ 20,121,076 $ 6,025,121 $(11,133,343) $ (171,519) $ 14,888,662

Net income -- -- 848,676 -- -- 848,676

Repurchase of shares -- -- -- (61,429) -- (61,429)

Amortization of Deferred Compensation -- -- -- -- 41,304 41,304
--------- ------------ ------------ ------------ ------------ -------------

Balances at December 30, 2001 $ 47,327 $ 20,121,076 $ 6,873,797 $(11,194,772) $ (130,215) $ 15,717,213
========= ============ ============ ============ ============ =============

See accompanying notes to consolidated financial statements.

F-5

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE FISCAL YEARS ENDED JANUARY 2, 2000,
DECEMBER 31, 2000, AND DECEMBER 30, 2001

FISCAL YEARS

1999 2000 2001
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 833,124 $ 867,190 $ 848,676
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .......................................... 1,708,965 2,111,839 2,408,121
Deferred gain amortization ............................................. (253,234) (243,518) (226,437)
Asset impairments and restaurant closure costs ......................... 1,493,449 -- 971,885
Gain on sale of fixed assets ........................................... (457,243) 19,537 (285,779)
Deferred compensation expense .......................................... -- 34,981 41,304
Deferred income taxes .................................................. (452,272) 223,212 22,301
Changes in assets and liabilities, net of effects of acquisitions:
Royalties receivable ................................................... 28,051 (24,138) (46,531)
Other receivables ...................................................... (168,133) (163,135) (99,455)
Taxes receivable/payable ............................................... 426,845 (136,653) (75,958)
Inventory .............................................................. (241,935) (17,434) 64,392
Prepaids and other current assets ...................................... (152,282) (30,985) (222,246)
Other assets ........................................................... (93,056) (5,696) (224,088)
Accounts payable ....................................................... 967,709 531,146 (1,005,676)
Accrued expenses and other liabilities ................................. (156,303) 146,331 1,067,900
Deferred franchise fees and other long-term liabilities ................ 137,707 205,404 (38,563)
------------ ------------ ------------
Total adjustments ................................................ 2,788,268 2,650,891 2,351,170
------------ ------------ ------------
Net cash provided by operating activities ........................ 3,621,392 3,518,081 3,199,846
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of acquisition, net of cash acquired .................. (4,132,945) -- --
Purchase of property, plant and equipment .................................. (7,297,411) (2,840,040) (1,844,795)
Proceeds from sale of property, plant and equipment ........................ 1,996,732 283,521 108,738
------------ ------------ ------------
Net cash provided by (used in) investing activities ........................ (9,433,624) (2,556,519) (1,736,057)
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings under line of credit agreement .............................. 6,093,320 (663,320) (1,727,271)
Purchase of treasury stock ................................................. -- (405,843) (61,429)
------------ ------------ ------------
Net cash provided by (used in) financing activities .............. 6,093,320 (1,069,163) (1,788,700)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ................. 281,088 (107,601) (324,911)
Cash and cash equivalents at beginning of year ............................. 462,847 743,935 636,334
------------ ------------ ------------

Cash and cash equivalents at end of year ................................... $ 743,935 $ 636,334 $ 311,423
============ ============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest .............................................................. $ 493,845 $ 832,528 $ 671,749
Income taxes .......................................................... 807,882 388,608 280,154
Non-cash financing activities:
Sale of property for notes receivable ................................. -- -- 244,109
Purchase of property for notes receivable ............................. -- -- 207,800
Issuance of restricted stock .......................................... -- 206,500 --

See accompanying notes to consolidated financial statements.

F-6

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, DECEMBER 31, 2000 AND DECEMBER 30, 2001

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Business

On February 16, 1996, Mexican Restaurants, Inc. (formerly Casa Ole
Restaurants, Inc.) was incorporated in the State of Texas, and on April 24,
1996, its initial public offering of 2,000,000 shares of Common Stock became
effective. Mexican Restaurants, Inc. is the holding company for Casa Ole
Franchise Services, Inc. and several subsidiary restaurant operating
corporations (collectively the "Company"). Casa Ole Franchise Services, Inc. was
incorporated in 1977, and derives its revenues from the collection of franchise
fees under a series of protected location franchise agreements and from the sale
of restaurant accessories to the franchisees of those protected location
franchise agreements. The restaurants feature moderately priced Mexican and
Tex-Mex food served in a casual atmosphere. The first Casa Ole restaurant was
opened in 1973.

On July 2, 1997, the Company purchased 100% of the outstanding stock of
Monterey's Acquisition Corp. ("MAC"). The Company purchased the shares of common
stock for $4.0 million, paid off outstanding debt and accrued interest totaling
$7.1 million and funded various other agreed upon items approximating $500,000.
Approximately $4.8 million of goodwill was recorded as a result of this
purchase. At the time of the acquisition, MAC owned and operated 26 restaurants
in Texas and Oklahoma under the names "Monterey's Tex-Mex Cafe," "Monterey's
Little Mexico" and "Tortuga Coastal Cantina."

On April 30, 1999, the Company purchased 100% of the outstanding stock
of La Senorita Restaurants, a Mexican restaurant chain operated in the State of
Michigan. The Company purchased the shares of common stock of La Senorita for
$4.0 million. The transaction was funded with the Company's revolving line of
credit with Bank of America. La Senorita operated five company-owned
restaurants, and has three franchise restaurants. One of the franchise
restaurants is owned by a partnership in which the parent company has a 17.5%
limited interest.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of Mexican
Restaurants, Inc. and its wholly owned subsidiaries, after elimination of all
significant inter-company transactions. The Company owns and operates various
Mexican restaurant concepts principally in Texas, Oklahoma, Michigan and Idaho.
The three Idaho restaurants were closed on December 30, 2001. The Company also
franchises the Casa Ole concept principally in Texas and Louisiana and the La
Senorita concept principally in the State of Michigan.

The Company maintains its accounting records on a 52/53 week fiscal
year ending on the Sunday nearest December 31. Fiscal years 1999, 2000 and 2001
consisted of 52 weeks.

(d) Cash Equivalents

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.

(e) Inventory

Inventory, which is comprised of food and beverages, is stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method. Miscellaneous restaurant supplies are included in inventory and valued
on a specific identification basis.

(f) Pre-opening Costs

Pre-opening costs primarily consists of hiring and training employees
associated with the opening of a new restaurant and are expensed upon the
opening of the restaurant.

F-7

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(g) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation on
equipment and on buildings and improvements is calculated on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized straight-line over the shorter of the lease term plus options or
estimated useful life of the assets.

Buildings and improvements............................... 20-40 years
Vehicles................................................. 5 years
Equipment................................................ 3-15 years
Leasehold improvements................................... 3-20 years

Significant expenditures that add materially to the utility or useful
lives of property, plant and equipment are capitalized. All other maintenance
and repair costs are charged to current operations. The cost and related
accumulated depreciation of assets replaced, retired or otherwise disposed of
are eliminated from the property accounts and any gain or loss is reflected as
other income and expense. Recoverability of assets to be held and used is
measured by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount the carrying
value exceeds the fair value of the asset. In the fourth quarter of fiscal year
2001, the Company recorded asset impairment and restaurant closure costs of
$971,885. These costs related to the closure of three restaurants located in
Boise, Idaho and to the impairment of the carrying value of previously closed
restaurants due to their sale or sublease. There was an impairment cost of
$1,493,449 in fiscal year 1999 and no such impairment cost in fiscal year 2000.
Property held for resale is separately aggregated in the consolidated balance
sheet and is recorded at the estimated fair market value ($1,100,000 and
$1,399,672 or fiscal years 2000 and 2001, repectively). Fiscal year 2001 also
included a gain on sale of $285,779 primarily due to a restaurant sold. Fiscal
year 1999 also included a gain on sale of $519,685 on a restaurant sold.

(h) Other Assets

At December 30, 2001, other assets included $7.6 million of goodwill,
net of amortization primarily resulting from the MAC and La Senorita
acquisitions. Goodwill is being amortized over 40 years for MAC and 15 years for
La Senorita. Accumulated amortization was $1,216,757 and $874,000 for fiscal
years 2001 and 2000, respectively. The Company assesses the recoverability of
intangible assets by determining whether amortization of the asset balance over
its remaining life can be recovered through undiscounted operating cash flows of
the acquired operation. The Company believes that no impairment of goodwill
exists.

In July 2001, the FASB issued Statement on Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets," (SFAS 142) which will
be effective for our Company as of the beginning of fiscal 2002. SFAS 142
requires goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires the fair value of goodwill and other
intangible assets with indefinite lives be tested for impairment upon adoption
of this statement, annually and upon the occurrence of certain events, and be
written down to fair value if considered impaired. Our management estimates the
adoption of SFAS 142 will result in the elimination of annual amortization
expense related to goodwill in the amount of approximately $329,468. Our
management has begun the preliminary process of evaluating goodwill as required
by SFAS 142. Although preliminary indications are that no impairment of goodwill
exists, further evaluation will be conducted over the next two quarters of
fiscal year 2002. Therefore, management's preliminary evaluation that no
impairment of goodwill exists is subject to change.

(i) Income Taxes

Income taxes are provided based on the asset and liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes.

(j) Franchise Fees

Franchise fee revenue from an individual franchise sale is recognized
when all services relating to the sale have been performed and the restaurant
has commenced operation. Initial franchise fees relating to area franchise sales
are recognized ratably in proportion to services that are required to be
performed pursuant to the area franchise or development agreements and
proportionately as the restaurants within the area are opened.

(k) Stock Options

F-8

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(l) Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities 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.

(m) Reclassification

Certain reclassifications have been made to the 1999 amounts to conform
to the 2000 and 2001 presentations.

(n) Recent Accounting Pronouncements

In August, 2001, the FASB issued Statement on Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," (SFAS 144) which will be effective for our Company as of the beginning
of fiscal 2002. SFAS 144 requires that long-lived assets to be disposed of by
sale be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS 144 broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The impact, if any, of SFAS 144, on our
financial position or results of operations has not yet been determined.

(2) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 2000 and December 30,
2001 were as follows:

FISCAL YEARS
2000 2001
------------ ------------

Land......................................... $ 637,412 $ 129,591
Buildings and improvements................... 1,250,124 1,159,115
Vehicles..................................... 36,880 54,989
Equipment and smallwares..................... 14,046,786 13,752,123
Leasehold improvements....................... 9,480,865 10,404,665
Construction in progress..................... 98,804 --
------------ ------------
Total............................... $ 25,550,871 $ 25,500,483
============ ============

F-9

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(3) LONG-TERM DEBT

Long-term debt consists of the following at December 31, 2000 and
December 30, 2001:

FISCAL YEARS
2000 2001
----------- -----------

Revolving Line of Credit ................................ 8,300,000 2,072,729

Term Note .......................................... -- 4,500,000
----------- -----------
Long-term debt ................................... 8,300,000 6,572,729
Less current installments due in 2002 ............ -- (1,000,000)
----------- -----------
Long-term debt, excluding current installments ... $ 8,300,000 $ 5,572,729
=========== ===========

Maturities on long-term debt are as follows:
2002....................................... 1,000,000
2003....................................... 1,000,000
2004....................................... 3,072,729
2005....................................... 1,000,000
2006....................................... 500,000
-----------
$ 6,572,729
===========

(4) INCOME TAXES

The provision for income tax expense (benefit) is summarized as follows
for fiscal years 1999, 2000 and 2001:

1999 2000 2001
------------ ------------ ------------

Current:
Federal ...................... $ 1,004,217 $ 220,388 $ 117,925
State and local .............. 75,087 27,400 (4,699)
Deferred ........................ (452,272) 223,212 22,301
------------ ------------ ------------
$ 627,032 $ 471,000 $ 135,527
============ ============ ============

The actual income tax expense differs from expected income tax expense
calculated by applying the U.S. federal corporate tax rate to income before
income tax expense as follows:

1999 2000 2001
---------- ---------- ----------

Expected tax expense......................... $ 496,453 $ 454,984 $ 334,629
State tax expense, net....................... 49,557 48,180 28,213
Non-deductible amortization.................. 38,181 83,497 30,609
Tax credits.................................. (28,992) (129,690) (215,656)
Other........................................ 71,833 14,029 (42,268)
---------- ---------- ----------
$ 627,032 $ 471,000 $ 135,527
========== ========== ==========

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2000 and
December 30, 2001 are as follows:

F-10

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, DECEMBER 30,
2000 2001
------------ ------------

Deferred tax assets:
Sale-leaseback................................. $ 1,124,935 $ 835,474
Tax credit carryforwards and AMT credit........ 152,293 519,780
Asset impairments.............................. 646,990 327,042
Accrued expenses............................... 25,884 173,441
Other.......................................... 41,754 34,710
------------ ------------
$ 1,991,856 $ 1,890,447
------------ ------------
Deferred tax liabilities:.........................
Depreciation differences.......................... $ (824,195) $ (745,087)
------------ ------------

Net deferred taxes................................ $ 1,167,661 $ 1,145,360
============ ============

At December 31, 2000 and December 30, 2001, the Company determined that
it was more likely than not that the deferred tax assets would be realized based
on current projections of taxable income.

(5) COMMON STOCK, OPTIONS AND WARRANTS

(a) 1996 Long Term Incentive Plan

The Board of Directors and shareholders of the Company have approved
the Mexican Restaurants, Inc. 1996 Long Term Incentive Plan (the "Incentive
Plan"). The Incentive Plan, as amended, authorizes the granting of up to 500,000
shares of Common Stock in the form of incentive stock options and non-qualified
stock options to key executives and other key employees of the Company,
including officers of the Company and its subsidiaries. The purpose of the
Incentive Plan is to attract and retain key employees, to motivate key employees
to achieve long-range goals and to further align the interests of key employees
with those of the other shareholders of the Company. Options granted under the
Incentive Plan will vest and become exercisable at the rate of 10% on the first
anniversary of the date of grant, 15% on the second anniversary of the date of
grant, and 25% on each of the third through fifth anniversaries of the date of
grant.

(b) Stock Option Plan for Non-Employee Directors

The Company has adopted the Mexican Restaurants, Inc. Stock Option Plan
for Non-Employee Directors (the "Directors Plan") for its outside directors and
has reserved 100,000 shares of Common Stock for issuance thereunder. The
Directors Plan provides that each outside director will automatically be granted
an option to purchase 10,000 shares of Common Stock at the time of becoming a
director. These options will be exercisable in 20% increments and will vest
equally over the five-year period from the date of grant. Such options are
priced at the fair market value at the time an individual is elected as a
director. Each outside director receives options to purchase 1,500 shares of
Common Stock quarterly, plus additional options for attendance at committee
meetings, exercisable at the fair market value of the Common Stock at the close
of business on the date immediately preceding the date of grant. Such annual
options will vest at the conclusion of one year, so long as the individual
remains a director of the Company. All stock options granted pursuant to the
Directors Plan will be nonqualified stock options and will remain exercisable
until the earlier of ten years from the date of grant or six months after the
optionee ceases to be a director of the Company.

The Company has adopted the 1996 Manager's Stock Option Plan (the
"Manager's Plan") specifically for its store-level managers. The Manager's Plan
authorizes the granting of up to 200,000 shares of Common Stock in the form of
non-qualified stock options to store-level managers of the Company. The purpose
of the Manager's Plan is to attract, retain and motivate restaurant managers to
achieve long-range goals and to further align the interests of those employees
with those of the other shareholders of the Company. Options granted under the
Manager's Plan will generally vest and become exercisable at the rate of 10% on
the first anniversary of the date of grant, 15% on the second anniversary of the
date of grant, and 25% on each of the third through fifth anniversaries of the
date of grant.

F-11

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(d) Warrants

In conjunction with the initial public offering, the Company entered
into warrant agreements with Louis P. Neeb and Tex-Mex, a limited liability
company in which a member of the Board of Directors prior to February 14, 2000
is a principal, pursuant to which Mr. Neeb and Tex-Mex acquired warrants to
purchase shares of Common Stock at the initial public offering ($11.00 per
share) price less the amount paid for the warrant ($.10 per share) for an
aggregate amount of Common Stock equal to ten percent (10%) of the shares of
Common Stock of the Company outstanding upon consummation of the initial public
offering, such shares to be allocated 5%, or 179,885 shares, to Mr. Neeb and 5%,
or 179,885 shares, to Tex-Mex. The Company's warrants to Mr. Neeb became
exercisable on the second anniversary of the initial public offering, and the
Company's warrants to Tex-Mex became exercisable on the first anniversary of the
initial public offering.

In late fiscal 1998 the Company exchanged a note valued in the amount
of $148,534 (principal and accrued interest) for 98,301 warrants to purchase
Common Stock previously held by a former officer of the Company. The warrants,
which were granted by Larry N. Forehand with an exercise price of $10.90 per
share, became exercisable in April 1998. Upon an exercise by Mr. Neeb or Tex-Mex
of the warrants granted to them by the Company, the Company plans to exercise
these newly acquired warrants simultaneously and use the warrant shares acquired
from Mr. Forehand to satisfy its obligations under its warrant agreements with
Mr. Neeb and Tex-Mex.

(e) Stock Transactions

During 1999 and 2000 the Company authorized the granting of 64,000
shares of restricted stock to key executives. The awards were valued at an
average of $3.50 per share and will vest in 20% increments over a five year
period from the date of the grant. Compensation expense of $34,981 and $41,304
was recognized in fiscal years 2000 and 2001, respectively.

During fiscal year 2001, the Company repurchased 18,800 shares from two
former employees for $61,429. During fiscal year 2000, the Company repurchased
120,000 shares of common stock for $375,000 in a private transaction, and
repurchased 9,400 shares from a former executive and current franchise holder
for $30,843.

(f) Option and Warrant Summary

Weighted Average
Shares Exercise Price
---------- ----------------

Balance at January 3, 1999................ 864,270 $ 9.28
Granted............................... 122,500 $ 4.18
Exercised............................. -- --
Canceled.............................. (80,675) $ 7.96
---------- ----------

Balance at January 2, 2000................ 906,095 $ 8.71
Granted............................... 82,800 $ 3.23
Exercised............................. -- --
Canceled.............................. (84,950) $ 7.96
---------- ----------
903,945 $ 8.29
Balance at December 30, 2001..............
Granted............................... 252,025 $ 2.79
Exercised............................. --
Canceled.............................. (115,000) $ 5.97
---------- ----------
1,040,970 $ 7.06

The options (681,200) and warrants (359,770) outstanding at December
30, 2001 had exercise prices ranging between $1.75 to $11.00, of which 184,500
of the options had exercise prices ranging from $8.63 to $11.00, and 359,770 of
the warrants had a exercise price of $10.90. As of December 30, 2001, 671,483
options and warrants were exercisable at an average price of $9.07.

F-12

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(g) SFAS No. 123. "Accounting for Stock-Based Compensation"

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and has accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, no compensation cost has been recognized
for stock options or warrants. Had compensation cost for the Company's
outstanding stock options and warrants been determined based on the fair value
at the grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below for fiscal years 1999, 2000 and 2001:

1999 2000 2001
-------- -------- --------

Net income - as reported............................................ $833,124 $867,190 $848,676
Pro forma net income - pro forma for SFAS No. 123................... 670,960 756,549 786,884
Net income per share - as reported.................................. 0.23 0.24 0.24
Pro forma net income per share - pro forma for SFAS No. 123......... 0.19 0.21 0.22

The weighted average fair value of the options and warrants granted
during 1999, 2000 and 2001 is estimated at $2.16, $2.29 and $1.40 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: volatility of 52% for 1999, 85% for 2000 and 54%
for 2001, risk-free interest rate of 5.8% for 1999, 6.2% for 2000 and 4.6% for
2001, an expected life of 5 years for options and 4 years for warrants and 0%
dividend yield.

(h) Income Per Share

Basic income per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted income per share
reflects dilution from all contingently issuable shares, including options and
warrants. For fiscal years 1999, 2000 and 2001, the effect of dilutive stock
options increase the weighted average shares outstanding by approximately 6,007,
1,054 and 6,607 shares respectively, which does not affect the determination of
diluted income per share. Approximately 860,000, 899,000 and 835,570 options and
warrants were considered antidilutive for 1999, 2000 and 2001 respectively.

(6) LEASES

The Company leases restaurant operating space and equipment under
non-cancelable operating leases which expire at various dates through April 30,
2019.

The restaurant operating space base agreements typically provide for a
minimum lease rent plus common area maintenance, insurance, and real estate
taxes, plus additional percentage rent based upon revenues of the restaurant
(generally 2% to 7%) and may be renewed for periods ranging from five to
twenty-five years.

Future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year as of December 30,
2001 are approximately:

2002..................................... 4,007,792
2003..................................... 3,749,068
2004..................................... 3,402,971
2005..................................... 3,081,155
2006..................................... 3,053,816
Thereafter............................... 21,091,266
------------
$ 38,386,068
============

Rent expense for restaurant operating space and equipment amounted to
approximately $3,933,000, $4,385,000 and $4,848,538 for the fiscal years 1999,
2000 and 2001, respectively.

F-13

MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(7) 401(k) PLAN

Beginning in fiscal year 1998, the Company established a defined
contribution 401(k) plan that covers substantially all full-time employees
meeting certain age and service requirements. Participating employees may elect
to defer a percentage of their qualifying compensation as voluntary employee
contributions. The Company may contribute additional amounts at the discretion
of management. The Company did not make any contributions to the plan in 1999.
The company contributed $21,000 and $14,559 in 2000 and 2001, respectively.

(8) RELATED PARTY TRANSACTIONS

Bay Area Management, Inc., owned entirely by the brother of a Company
shareholder and director, provided accounting and administrative services on a
fee basis, to all of the Company-owned Casa Ole restaurants and some franchise
entities. The Company paid a termination fee of $82,000 and cancelled the
contract during 1999. Total amounts paid to Bay Area Management, Inc. in fiscal
1999 was $216,369.

(9) CONTINGENCIES

The Company has litigation, claims and assessments that arise in the
normal course of business. Management believes that the Company's financial
position or results of operations will not be materially affected by such
matters.

(10) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The unaudited quarterly results for the fiscal year ended December 30,
2001 were as follows (in thousands, except per share data):

FISCAL YEAR 2001 QUARTER ENDED
DECEMBER 30 SEPTEMBER 30 JULY 1 APRIL 1
----------- ------------ ------ -------

Revenues.................................... $15,053 16,528 15,885 15,778
Operating income (loss)..................... $(643) $608 $559 $763
Net income (loss)........................... $(285) $367 $382 $385
Earnings (loss) per common share............ $(0.08) $0.10 $0.11 $0.11
Earnings (loss) per common share-diluted ... $(0.08) $0.10 $0.11 $0.11

FISCAL YEAR 2000 QUARTER ENDED
DECEMBER 31 OCTOBER 1 JULY 2 APRIL 2
----------- --------- -------- -------

Revenues.................................... $15,105 $16,128 $ 16,070 $15,893
Operating income (loss)..................... $(38) $699 $772 $790
Net income (loss)........................... $(219) $313 $390 $383
Earnings (loss) per common share............ $(0.07) $0.09 $0.11 $0.11
Earnings (loss) per common share-diluted ... $(0.07) $0.09 $0.11 $0.11

F-14

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.

MEXICAN RESTAURANTS, INC.

By: /s/ Louis P. Neeb
-------------------------------------
Louis P. Neeb,
Chairman of the Board of Directors

POWER OF ATTORNEY

KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Louis P. Neeb, Curt Glowacki
and Andrew Dennard, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K under
the Securities Exchange Act of 1934, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Louis P. Neeb Chairman of the Board of
--------------------------- Directors March 22, 2002
Louis P. Neeb

/s/ Larry N. Forehand Founder and Vice Chairman of the
--------------------------- Board of Directors March 22, 2002
Larry N. Forehand

/s/ Curt Glowacki President and
--------------------------- Chief Executive Officer March 22, 2002
Curt Glowacki (Principal Executive Officer)

/s/ Andrew J. Dennard Vice President and
--------------------------- Chief Financial Officer
Andrew J. Dennard (Principal Financial and Accounting Officer) March 22, 2002

/s/ David Nierenberg Director March 22, 2002
---------------------------
David Nierenberg

/s/ Michael D. Domec Director March 22, 2002
---------------------------
Michael D. Domec

/s/ J. J. Fitzsimmons Director March 22, 2002
---------------------------
J. J. Fitzsimmons

/s/ Richard E. Rivera Director March 22, 2002
---------------------------
Richard E. Rivera

/s/ J. Stuart Sargent Director March 22, 2002
---------------------------
J. Stuart Sargent

F-15

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
-------- -----------