****UNITED STATESSECURITIES AND EXCHANGE COMMISSION****

****Washington, D.C. 20549****

****FORM 10-Q****
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                      |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                  |
| ** ** | **For the quarterly period ended  September 24, 2006**                                                                                                                                                                                                                                      |
|       | ** **                                                                                                                                                                                                                                                                                  |
| **Or**     |
|       |                                                                                                                                                                                                                                                                                        |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                     |
|       |                                                                                                                                                                                                                                                                                        |
|       | **For the transition period from                        to                      .** |

 

**Commission file number 333-116310**

****REAL MEXRESTAURANTS, INC.****

(Exact name of Registrantas specified in its charter)
| **Delaware**                                                     | ** ** | **13-4012902**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |

 

**5660 Katella Avenue, Suite 100Cypress, CA 90630**(Address of principal executive offices)

Registrant’s telephonenumber, including area code:**(562)-346-1200**

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer.

(See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act). (Check one):
| Large Accelerated  Filer o  | Accelerated Filer o | Non-Accelerated  Filer ý |
|---------------------------------------|--------------------------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  ý No

As of November 7, 2006, the registrant had outstanding 1,000 shares of CommonStock, par value $0.001 per share.

 

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**Real Mex Restaurants, Inc. and SubsidiariesIndex**
| PART I FINANCIAL  INFORMATION |                                                                                                     |
|------------------------------------|----------------------------------------------------------------------------------------------------------|
|                               |                                                                                                     |   |
| Item 1.                            | Financial  Statements                                                                                    |   |
|                               | Consolidated  Balance Sheets                                                                             |   |
|                               | Consolidated  Statements of Operations                                                                   |   |
|                               | Consolidated  Statements of Cash Flows                                                                   |   |
|                               | Notes  to Consolidated Financial Statements                                                              |   |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              |   |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                              |   |
| Item 4.                            | Controls  and Procedures                                                                                 |   |
|                               |                                                                                                     |   |
| PART II  OTHER INFORMATION    |                                                                                                     |
|                               |                                                                                                     |   |
| Item 1.                            | Legal  Proceedings                                                                                       |   |
| Item 1A.                           | Risk Factors                                                                                             |   |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                             |   |
| Item 3.                            | Defaults  Upon Senior Securities                                                                         |   |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders                                                     |   |
| Item 5.01.                         | Changes  in Control of Registrant                                                                        |   |
| Item 5.02.                         | Departure  of Directors or Principal Officers; Election of Directors; Appointment of  Principal Officers |   |
|                               | Exhibits                                                                                                 |   |
| SIGNATURE                          |                                                                                                     |   |

 

2

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**FORWARD-LOOKING STATEMENTS**

*This report includes “forwardlooking statements” within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”). Forward looking statements are those that do not relate solely tohistorical fact. They include, but are not limited to, any statement thatmay predict, forecast, indicate or imply future results, performance,achievements or events. They may contain words such as “believe,” “anticipate,”“expect,” “estimate,” “intend,” “project,” “plan,” “will,” “should,” “may,” or “could”or words or phrases of similar meaning. They may relate to, among otherthings: our liquidity and capital resources; legal proceedings and regulatorymatters involving our Company; food-borne illness incidents; increases in thecost of ingredients; our dependence upon frequent deliveries of food and othersupplies; our vulnerability to changes in consumer preferences and economicconditions; our ability to compete successfully with other casual diningrestaurants; our ability to expand; and anticipated growth in the restaurantindustry and our markets.*

*These forward looking statementsreflect our current views with respect to future events and are based onassumptions and subject to risks and uncertainties,including, but not limited to, economic, competitive, governmental andtechnological factors outside of our control, that may cause actualresults to differ materially from trends, plans or expectations set forth inthe forward looking statements. These risks and uncertainties may includethese risks and uncertainties and the risks and uncertainties described elsewherein this report and in Item 1A “Risk Factors” of our annual report onForm 10-K filed with the SEC on February 21, 2006. Given these risksand uncertainties, we urge you to read this report completely and with theunderstanding that actual future results may be materially different fromwhat we plan or expect. All of the forward-looking statements made in thisForm 10-Q are qualified by these cautionary statements and we cannotassure you that the actual results or developments anticipated by our Companywill be realized or, even if substantially realized, that they will have theexpected consequences to or effects on our Company or our business oroperations. In addition, these forward-looking statements present our estimatesand assumptions only as of the date of this report. Except for our ongoingobligation to disclose material information as required by federal securitieslaws, we do not intend to update you concerning any future revisions to anyforward looking statements to reflect events or circumstances occurring afterthe date of this report.*

*Unless otherwise provided in thisreport, references to “we”, “us” and “our Company” refer to Real MexRestaurants, Inc. and its consolidated subsidiaries.*

3

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**PART IFINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**Real Mex Restaurants, Inc. andSubsidiariesConsolidated Balance Sheets(in thousands, except for share data)**
| ** **                                                                                                                                                                                                        | ** ** | **Successor**          | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **September 24,** | ** ** | **December 25,** | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                   |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                      | 8,748      |                  | $          | 14,871 |   |
| Trade  receivables, net                                                                                                                                                                                           |       | 8,409                  |       | 8,265                 |       |
| Other  receivables                                                                                                                                                                                                |       | 2,568                  |       | 2,289                 |       |
| Related party  receivables                                                                                                                                                                                        |       | 495                    |       | —                |       |
| Inventories                                                                                                                                                                                                       |       | 10,166                 |       | 9,977                 |       |
| Prepaid expenses  and supplies                                                                                                                                                                                    |       | 7,546                  |       | 5,268                 |       |
| Deferred tax  asset                                                                                                                                                                                               |       | 7,687                  |       | 3,454                 |       |
| Total current assets                                                                                                                                                                                              |       | 45,619                 |       | 44,124                |       |
|                                                                                                                                                                                                              |       |                   |       |                  |       |
| Property and equipment,  net                                                                                                                                                                                      |       | 83,102                 |       | 82,592                |       |
| Goodwill, net                                                                                                                                                                                                     |       | 295,859                |       | 157,267               |       |
| Deferred charges                                                                                                                                                                                                  |       | 5,232                  |       | 6,354                 |       |
| Deferred tax asset                                                                                                                                                                                                |       | 10,972                 |       | 14,097                |       |
| Other assets                                                                                                                                                                                                      |       | 4,797                  |       | 6,455                 |       |
| Total assets                                                                                                                                                                                                      |       | $                      | 445,581    |                  | $          | 310,889 |   |
|                                                                                                                                                                                                              |       |                   |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                                              |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                  |       | $                      | 15,989     |                  | $          | 26,227 |   |
| Accrued  self-insurance reserves                                                                                                                                                                                  |       | 17,230                 |       | 15,916                |       |
| Accrued  compensation and benefits                                                                                                                                                                                |       | 15,112                 |       | 11,845                |       |
| Other accrued  liabilities                                                                                                                                                                                        |       | 20,481                 |       | 12,272                |       |
| Related party  payables                                                                                                                                                                                           |       | —                 |       | 228                   |       |
| Current portion  of long-term debt                                                                                                                                                                                |       | 121                    |       | 117                   |       |
| Current portion  of capital lease obligations                                                                                                                                                                     |       | 219                    |       | 210                   |       |
| Total current  liabilities                                                                                                                                                                                        |       | 69,152                 |       | 66,815                |       |
|                                                                                                                                                                                                              |       |                   |       |                  |       |
| Long-term debt, less  current portion                                                                                                                                                                             |       | 180,672                |       | 180,717               |       |
| Capital lease  obligations, less current portion                                                                                                                                                                  |       | 822                    |       | 987                   |       |
| Other liabilities                                                                                                                                                                                                 |       | 13,452                 |       | 11,786                |       |
| Total liabilities                                                                                                                                                                                                 |       | 264,098                |       | 260,305               |       |
|                                                                                                                                                                                                              |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                                              |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                        |       |                   |       |                  |       |
| Redeemable  Preferred Stock:                                                                                                                                                                                      |       |                   |       |                  |       |
| Series A, 12 1/2% Cumulative Compounding  Preferred Stock—18,242 shares issued and outstanding at December 25, 2005;  liquidation preference of $35,646 at December 25, 2005;                                |       | —                 |       | 35,646                |       |
| Series B, 13.5%  Cumulative Compounding Preferred Stock—12,323 shares issued and outstanding  at December 25, 2005; liquidation preference of $25,365 at December 25, 2005;                                  |       | —                 |       | 25,365                |       |
| Series C, 15%  Cumulative Compounding Preferred Stock—17,478 shares issued and outstanding  at December 25, 2005; liquidation preference of $58,080 at December 25, 2005  respectively;                      |       | —                 |       | 58,080                |       |
| Common Stock,  $.001 par value, 1,000 shares authorized, issued and outstanding as of  September 24, 2006; 2,000,000 shares authorized and 316,290 shares  issued and outstanding at December 25, 2005; |       | —                 |       | —                |       |
| Warrants                                                                                                                                                                                                          |       | —                 |       | 4,027                 |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 191,560                |       | 16,203                |       |
| Accumulated  deficit                                                                                                                                                                                              |       | (10,077                | )          | (88,737               | )          |
| Total stockholders’  equity                                                                                                                                                                                  |       | 181,483                |       | 50,584                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                   |       | $                      | 445,581    |                  | $          | 310,889 |   |

 

See accompanyingnotes.

4

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**Real Mex Restaurants, Inc. and Subsidiaries****Consolidated Statements of Operations (unaudited)****(in thousands)**
| ** **                                                     | ** ** | **Quarter**            | ** ** | **Year-to-date**    | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **Successor**          | ** ** | **Predecessor**     | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                                     | ** ** | **August 21,**    | ** ** | **June 26,**   | ** ** | **June 27,** | ** ** | **August 21,** | ** ** | **December 26,** | ** ** | **December 27,** | ** ** |
| ** **                                                     | ** ** | **2006 to**       | ** ** | **2006 to**    | ** ** | **2005 to** | ** ** | **2006 to** | ** ** | **2005 to** | ** ** | **2004 to** | ** ** |
| ** **                                                     | ** ** | **September 24,** | ** ** | **August 20,** | ** ** | **September 25,** | ** ** | **September 24,** | ** ** | **August 20,** | ** ** | **September 25,** | ** ** |
| ** **                                                     | ** ** | **2006**               | ** ** | **2006**            | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                      |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Restaurant  revenues                                           |       | $                      | 48,207     |                | $          | 83,232 |   | $ | 131,275 |   | $ | 48,207 |   | $ | 351,591 |   | $ | 389,229 |   |
| Other revenues                                                 |       | 2,804                  |       | 4,451               |       | 5,204 |   | 2,804 |   | 18,358 |   | 14,218 |   |
| Royalty and franchise  fees                                    |       | 304                    |       | 595                 |       | 1,110 |   | 304 |   | 2,603 |   | 2,791 |   |
| Total revenues                                                 |       | 51,315                 |       | 88,278              |       | 137,589 |   | 51,315 |   | 372,552 |   | 406,238 |   |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Costs and expenses:                                            |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                  |       | 13,473                 |       | 22,495              |       | 35,367 |   | 13,473 |   | 94,873 |   | 103,584 |   |
| Labor                                                          |       | 18,031                 |       | 28,730              |       | 47,103 |   | 18,031 |   | 125,748 |   | 141,691 |   |
| Direct operating  and occupancy expense                        |       | 12,103                 |       | 21,498              |       | 34,755 |   | 12,103 |   | 86,937 |   | 98,182 |   |
| General and  administrative expense                            |       | 2,911                  |       | 4,635               |       | 6,850 |   | 2,911 |   | 18,893 |   | 20,321 |   |
| Depreciation and  amortization                                 |       | 1,899                  |       | 2,875               |       | 4,237 |   | 1,899 |   | 12,230 |   | 14,207 |   |
| Legal settlement  costs                                        |       | 8                      |       | 1,422               |       | 35 |   | 8 |   | 4,180 |   | 748 |   |
| Merger costs                                                   |       | 157                    |       | 9,434               |       | — |   | 157 |   | 9,434 |   | — |   |
| Pre-opening  costs                                             |       | 116                    |       | 467                 |       | 67 |   | 116 |   | 910 |   | 397 |   |
| Impairment of  property and equipment                          |       | —                 |       | 1,197               |       | — |   | — |   | 1,197 |   | 216 |   |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Operating income (loss)                                        |       | 2,617                  |       | (4,475              | )          | 9,175 |   | 2,617 |   | 18,150 |   | 26,892 |   |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Other income (expense):                                        |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Interest expense                                               |       | (2,918                 | )          | (3,910              | )          | (5,768 | ) | (2,918 | ) | (16,005 | ) | (17,069 | ) |
| Other income  (expense), net                                   |       | 245                    |       | 288                 |       | (110 | ) | 245 |   | 642 |   | (37 | ) |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Total other  expense, net                                      |       | (2,673                 | )          | (3,622              | )          | (5,878 | ) | (2,673 | ) | (15,363 | ) | (17,106 | ) |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| (Loss) income before  income tax provision (benefit)           |       | (56                    | )          | (8,097              | )          | 3,297 |   | (56 | ) | 2,787 |   | 9,786 |   |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Income tax provision  (benefit)                                |       | 21                     |       | (3,175              | )          | 29 |   | 21 |   | 1,307 |   | 31 |   |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Net (loss) income  before redeemable preferred stock accretion |       | (77                    | )          | (4,922              | )          | 3,268 |   | (77 | ) | 1,480 |   | 9,755 |   |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Redeemable preferred  stock accretion                          |       | —                 |       | (2,330              | )          | (3,860 | ) | — |   | (10,126 | ) | (10,685 | ) |
|                                                           |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Net loss attributable to common stockholders                   |       | $                      | (77        | )                   | $          | (7,252 | ) | $ | (592 | ) | $ | (77 | ) | $ | (8,646 | ) | $ | (930 | ) |

 

See accompanyingnotes.

5

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**Real MexRestaurants, Inc.Consolidated Statements of Cash Flows (unaudited)(in thousands)**
| ** **                                                                                           | ** ** | **Successor**                         | ** ** | **Predecessor**                         | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                           | ** ** | **August 21, 2006 to** | ** ** | **December 26, 2005 to** | ** ** | **December 27, 2004 to** | ** ** |
| ** **                                                                                           | ** ** | **September 24, 2006**      | ** ** | **August 20, 2006**           | ** ** | **September 25, 2005** | ** ** |
| **Operating activities**                                                                             | ** ** | ** **                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net (loss) income                                                                                    |       | $                                     | (77        | )                                       | $          | 1,480 |   | $ | 9,755 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |                                  |       |                                    |       |   |   |
| Depreciation                                                                                         |       | 1,899                                 |       | 12,230                                  |       | 14,207 |   |
| Amortization of  deferred financing costs                                                            |       | 147                                   |       | 1,179                                   |       | 1,255 |   |
| (Gain) loss on  disposal of property and equipment                                                   |       | (14                                   | )          | (18                                     | )          | 166 |   |
| Impairment of  property and equipment                                                                |       | —                                |       | 1,197                                   |       | 216 |   |
| Tax benefit from  employee stock option exercise                                                     |       | —                                |       | 1,799                                   |       | — |   |
| Deferred tax  asset                                                                                  |       | —                                |       | (1,108                                  | )          | — |   |
| Changes in  operating assets and liabilities:                                                        |       |                                  |       |                                    |       |   |   |
| Trade and other  receivables                                                                         |       | 153                                   |       | (1,071                                  | )          | (2,261 | ) |
| Inventories                                                                                          |       | (154                                  | )          | (35                                     | )          | (3,948 | ) |
| Prepaid expenses  and supplies                                                                       |       | (753                                  | )          | (1,525                                  | )          | (586 | ) |
| Deferred  charges, net                                                                               |       | —                                |       | (301                                    | )          | (17 | ) |
| Other assets                                                                                         |       | (202                                  | )          | 912                                     |       | 600 |   |
| Accounts payable  and accrued liabilities                                                            |       | (9,080                                | )          | 11,400                                  |       | 5,039 |   |
| Other  liabilities                                                                                   |       | 329                                   |       | 1,484                                   |       | 1,189 |   |
| Net cash (used in)  provided by operating activities                                                 |       | (7,752                                | )          | 27,623                                  |       | 25,615 |   |
|                                                                                                 |       |                                  |       |                                    |       |   |   |
| **Investing activities**                                                                             | ** ** | ** **                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Additions to property  and equipment                                                                 |       | (2,637                                | )          | (13,050                                 | )          | (12,518 | ) |
| Chevys Acquisition, net  of cash acquired of $3,913                                                  |       | —                                |       | —                                  |       | (76,011 | ) |
| Net proceeds from  disposal of property                                                              |       | —                                |       | —                                  |       | 692 |   |
| Net cash used in  investing activities                                                               |       | (2,637                                | )          | (13,050                                 | )          | (87,837 | ) |
|                                                                                                 |       |                                  |       |                                    |       |   |   |
| **Financing activities**                                                                             | ** ** | ** **                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Borrowings under  long-term debt agreements                                                          |       | —                                |       | —                                  |       | 75,000 |   |
| Payments on long-term  debt agreements and capital lease obligations                                 |       | (23                                   | )          | (174                                    | )          | (226 | ) |
| Payment of financing  costs                                                                          |       | (110                                  | )          | —                                  |       | (3,047 | ) |
| Dividend paid                                                                                        |       | (10,000                               | )          | —                                  |       | — |   |
| Net cash (used in)  provided by financing activities                                                 |       | (10,133                               | )          | (174                                    | )          | 71,727 |   |
| Net (decrease) increase  in cash and cash equivalents                                                |       | (20,522                               | )          | 14,399                                  |       | 9,505 |   |
|                                                                                                 |       |                                  |       |                                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                                    |       | 29,270                                |       | 14,871                                  |       | 10,690 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                     | 8,748      |                                    | $          | 29,270 |   | $ | 20,195 |   |
|                                                                                                 |       |                                  |       |                                    |       |   |   |
| **Supplemental disclosure of cash  flow information**                                                | ** ** | ** **                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Interest paid                                                                                        |       | $                                     | 3,409      |                                    | $          | 11,405 |   | $ | 12,828 |   |
| Income taxes paid                                                                                    |       | $                                     | 21         |                                    | $          | 44 |   | $ | 322 |   |
|                                                                                                 |       |                                  |       |                                    |       |   |   |
| **Supplemental disclosure of  noncash investing and financing activities**                           | ** ** | ** **                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Preferred and common stock issued as consideration for the Chevys  Acquisition                       |       | $                                     | —     |                                    | $          | 5,682 |   | $ | 7,349 |   |

 

See accompanyingnotes.

6

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**Real Mex Restaurants, Inc. and SubsidiariesNotes to Consolidated Financial Statements (unaudited)September 24, 2006(in thousands, except for share data)**

**1.****                                      Basisof Presentation**

Real Mex Restaurants,Inc. (the surviving corporation resulting from a merger on August 21, 2006 withRM Integrated, Inc. (see Merger Agreement)), a Delaware corporation, was formedon May 15, 1998.

The Company prior to the Merger is referred to as the “Predecessor”and after the Merger is referred to as the “Successor”.

The Company, primarilythrough its major subsidiaries El Torito Restaurants, Inc. (El Torito),Chevys Restaurants, LLC (Chevys) and Acapulco Restaurants, Inc.(Acapulco), currently operates 196 restaurants, of which 161 are located inCalifornia and the remainder are located in 12 other states, primarily underthe trade names El Torito Restaurant, Chevys Fresh Mex and Acapulco MexicanRestaurant Y Cantina. The Company’s other major subsidiary, Real MexFoods, Inc., (Real Mex) provides internal production, and purchasing anddistribution services for the restaurant operations and also manufacturesspecialty products for sale to outside customers.

The accompanyingunaudited consolidated financial statements include the accounts of Real MexRestaurants, Inc. and its wholly owned subsidiaries. Our consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.

Certain information andfootnote disclosures normally included in consolidated financial statements inaccordance with U.S. generally accepted accounting principles have been omittedpursuant to requirements of the Securities and Exchange Commission (SEC). Adescription of our accounting policies and other financial information isincluded in our audited consolidated financial statements as filed with the SECin our annual report on Form 10-K for the year ended December 25,2005. We believe that the disclosures included in our accompanying interimconsolidated financial statements and footnotes are adequate to make theinformation not misleading, but should be read in conjunction with ourconsolidated financial statements and notes thereto included in the AnnualReport on Form 10-K. The accompanying consolidated balance sheet as ofDecember 25, 2005 has been derived from our audited financial statements

**2.****                                      SettlementAgreement**

On August 17,2006, Real Mex and its subsidiary CKR Acquisition Corp. (“CKR”) entered into aMutual Settlement Agreement and Release (“Settlement Agreement”) with J.W.Childs Equity Partners, L.P. (“JW Childs Partners”) and its affiliate JWCChevys Co-Invest, LLC (“JWC,” and together with JW Childs Partners, “JW Childs”).  Under the Settlement Agreement, the partiesagreed to resolve certain disputes regarding (i) the number of Real Mex equitysecurities issuable to JW Childs under an asset purchase agreement (“AssetPurchase Agreement”) in connection with the Company’s acquisition of the businessof Chevys, Inc. on January 11, 2005 and (ii) certain indemnification claimsmade by Real Mex and CKR against JW Childs (“Indemnification Claims”) pursuantto an indemnification agreement (“Indemnification Agreement”) entered intobetween Real Mex, CKR and JW Childs Partners in connection with the AssetPurchase Agreement.  Under the SettlementAgreement, on August 17, 2006, Real Mex issued to JW Childs an aggregate of1,896.574 shares of its Series A 12.5% Cumulative Compounding Preferred Stock,par value $0.001 per share, 1,432.894 shares of its Series B 13.5% CumulativeCompounding Preferred Stock, par value $0.001 per share and 1,176.648 shares ofits newly-created Series D 15% Cumulative Compounding Preferred Stock, parvalue $0.001 per share, and each party released any and all of their respectiveclaims arising from, relating to, or pertaining to the Indemnification Claims,the Indemnification Agreement and the Asset Purchase Agreement, subject tocertain exceptions.  Additionally, JWChilds agreed to vote all of its securities in favor of the Merger (asdescribed below).

The foregoingdescription of the Settlement Agreement is qualified in its entirety byreference to the Settlement Agreement filed with the Securities and ExchangeCommission as Exhibit 10.2 to Form 8-K (File No. 333-116310) on August 17, 2006and incorporated by reference herewith.

**3.****                                      MergerAgreement**

On August 17,2006, the Company entered into an Agreement and Plan of Merger (“MergerAgreement”) with RM Restaurant Holding Corp. (“RM Restaurant Holding”) and itssubsidiary, RM Integrated, Inc. (“RM Integrated”, and together with RMRestaurant Holding, “Buyer”).  Themajority of the stock of RM Restaurant Holding is owned by Sun Cantinas LLC (“SunLLC”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).  On August 18, 2006, the stockholders of theCompany entitled to vote thereon (including the holders of a majority of theCompany’s Series C Preferred Stock, par value $0.001 per share) approved theMerger

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Agreement.  On August 21, 2006 (the “Effective Time”),the closing of the Merger Agreement occurred, and RM Integrated merged with andinto Real Mex (the “Merger”), with Real Mex continuing as the survivingcorporation and the 100% owned subsidiary of RM Restaurant Holding.  The net purchase price of Real Mex was $191.6million, consisting of  $359.0 million incash, plus net cash acquired of $29.3 million, plus a $1.0 million workingcapital adjustment and plus direct acquisition costs of $4.7 million, lessindebtedness assumed of $181.9 million and seller costs of  $9.6 million. Pursuant to the MergerAgreement, $11.0 million of the Merger Consideration is being held inescrow and the purchase price is subject to adjustment post-closing based onthe amount of net working capital of the Company immediately prior to theclosing and certain other adjustments. As a result of the Merger and in accordance with the terms of the MergerAgreement, (i) all of the outstanding capital stock of Real Mex was convertedinto the right to receive a portion of the purchase price, and all Real Mexoptions, warrants and shares of restricted stock were cancelled and convertedinto the right to receive a portion of the purchase price, less the exerciseprices or unpaid purchase prices therefore, as applicable, and (ii) the Companybecame a wholly-owned subsidiary of RM Restaurant Holding.  Prior to the Merger, Bruckmann, Rosser,Sherrill & Co., Inc. (“BRS”), together with its affiliates, was acontrolling shareholder of Real Mex.  Asdescribed in the Merger Agreement, the Amended and Restated ManagementAgreement dated June 28, 2000 by and among the Company, certain of itssubsidiaries, BRS, and FS Private Investments, L.L.C. was terminated inconnection with the Merger.

The foregoingdescription of the Merger Agreement is qualified in its entirety by referenceto the Merger Agreement filed with the Securities and Exchange Commission asExhibit 10.1 to Form 8-K (File No. 333-116310) on August 17, 2006 andincorporated by reference herewith.

The following tablepresents the preliminary allocation of the purchase price, includingprofessional fees and other related transaction costs, to the assets acquiredand liabilities assumed based on their estimated fair values:

| Cash and cash equivalents                 |   | 29,270  |    |
|-------------------------------------------|--------|---------|---------|
| Trade accounts  receivable                |   | 8,780   |    |
| Inventories                               |   | 10,012  |    |
| Other current  assets                     |   | 9,638   |    |
| Property and  equipment                   |   | 82,365  |    |
| Deferred tax  asset                       |   | 18,659  |    |
| Other assets                              |   | 9,861   |    |
| Goodwill and  other intangible assets     |   | 295,859 |    |
| Total assets acquired                     |   | 464,444 |    |
|                                      |   |    |    |
| Accounts payable  and accrued liabilities |   | 77,888  |    |
| Long-term debt                            |   | 181,857 |    |
| Other  liabilities                        |   | 13,139  |    |
| Total liabilities assumed                 |   | 272,884 |    |
| Net assets acquired                       |   | $       | 191,560 |   |
|                                           |        |         |         |  |

 

The Merger was accountedfor under the purchase method of accounting and, accordingly, the purchaseprice has been allocated to the assets acquired and the liabilities assumedbased on the estimated fair market value at the date of the merger. The Companyattributes the goodwill associated with the merger to the historical financialperformance and the anticipated future performance of the Company’s operations.The Company is in the process of obtaining a valuation of property andequipment and other intangible assets; accordingly, the purchase priceallocation required by SFAS No. 141 has not yet been finalized. Theallocation of the purchase price is based on preliminary data and could changewhen the valuations are completed.

**4.****                                      ChevysAcquisition**

On January 11, 2005,the Company, through its subsidiary Chevys Restaurants LLC, purchasedsubstantially all of the assets of Chevys, Inc. and certain of itssubsidiaries (the Sellers) out of the Sellers’ Chapter 11 bankruptcyproceeding, including 69 Chevys Fresh Mex® restaurants and five Fuzio UniversalPasta® restaurants (the “Chevys Acquisition”). In addition, the Company assumedfranchise agreements for 37 franchised Chevys Fresh Mex restaurants and fivefranchised Fuzio Universal Pasta restaurants. The purchase price consisted ofapproximately $76.0 million in cash and the assumption of approximately $10.0million in net negative working capital, approximately $6.3 million of lettersof credit and approximately $0.8 million under a mortgage. In addition, theCompany issued to J.W. Childs Equity Partners L.P. and its affiliate, JWCChevys Co-Invest, LLC, in their capacity as unsecured creditors of the Sellers,shares of the Company’s equity securities at closing on January 11, 2005, andadditional securities on August 27, 2006 under the Settlement Agreement. TheCompany financed the transaction with $75.0 million in unsecured debtfinancing, the proceeds of which were used to fund a portion of the purchaseprice and a portion of the approximately $4.2 million of fees and expensesrelated to the transaction.

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The following tablepresents the preliminary allocation of the acquisition costs, includingprofessional fees and other related transaction costs, to the assets acquiredand liabilities assumed based on their estimated fair values:

| Cash and cash equivalents                 |   | $       | 3,913  |   |
|-------------------------------------------|--------|---------|--------|--------|
| Trade accounts  receivable                |   | 2,643   |   |
| Inventories                               |   | 1,382   |   |
| Other current  assets                     |   | 1,178   |   |
| Property and  equipment                   |   | 42,312  |   |
| Deferred tax  asset                       |   | 4,260   |   |
| Other assets                              |   | 3,386   |   |
| Goodwill                                  |   | 58,455  |   |
| Total assets acquired                     |   | 117,529 |   |
|                                      |   |    |   |
| Accounts payable  and accrued liabilities |   | 19,163  |   |
| Other  liabilities                        |   | 2,416   |   |
| Total liabilities assumed                 |   | 21,579  |   |
| Net assets acquired                       |   | $       | 95,950 |   |

 

These transactions wereaccounted for under the purchase method of accounting and, accordingly, thepurchase price has been allocated to the assets acquired and the liabilitiesassumed based on the estimated fair market value at the date of theacquisition.

The primary reason forthe Chevys Acquisition was to add a complementary growth concept in thefull-service Mexican segment of the restaurant industry. The Company attributesthe goodwill associated with the Chevys Acquisition to the historical financialperformance and the anticipated future performance of Chevys. The Company iscurrently determining the amount, if any, of any additional tax benefits thatmay have been acquired in the Chevys Acquisition. Any change in the amountof the tax benefits will impact the overall purchase price only.

Thefollowing pro forma consolidated results of operations have been prepared as ifthe Chevys Acquisition had occurred on December 27, 2004 (the first day offiscal year 2005):
| ** **                                              | ** ** | **Successor**                | ** ** | **Predecessor**                                                | ** ** | **Successor**                       | ** ** | **Predecessor**              | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **August 21,**          | ** ** | ** **                                                     | ** ** | ** **                          | ** ** | **August 21,**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **2006 to**             | ** ** | ** **                                                     | ** ** | **June 27, 2005 to** | ** ** | **2006 to**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **September 24,  2006** | ** ** | **June 26, 2006 to  August 20, 2006** | ** ** | **September 25,  2005**        | ** ** | **September 24,  2006** | ** ** | **December 26, 2005 to  August 20, 2006** | ** ** | **December 27, 2004 to  September 25, 2005** | ** ** |
| ** **                                              | ** ** | ** **                   | ** ** | ** **                                                     | ** ** | ** **                          | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  revenues                                         |       | $                            | 51,315     |                                                           | $          | 88,278                              |       | $                            | 137,589    |   | $ | 51,315 |   | $ | 372,552 |   | $ | 414,944 |   |
| Net income before  redeemable preferred stock accretion |       | (77                          | )          | (4,922                                                         | )          | 3,268                               |       | (77                          | )          | 1,480 |   | 10,099 |   |
|                                                         |            |                              |            |                                                                |            |                                     |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

**5.****                                      Long-TermDebt**

Long-term debt consists of the following:

|                                   | ** ** | **Successor**                | ** ** | **Predecessor**             | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **September 24,  2006** | ** ** | **December 25,  2005** | ** ** |
| Senior secured  notes due 2010    |       | $                            | 105,000    |                        | $          | 105,000 |   |
| Senior Unsecured  Credit Facility |       | 75,000                       |       | 75,000                      |       |
| Mortgage                          |       | 730                          |       | 771                         |       |
| Other                             |       | 63                           |       | 63                          |       |
|                              |       | 180,793                      |       | 180,834                     |       |
|                              |       |                         |       |                        |       |
| Less current  portion             |       | (121                         | )          | (117                        | )          |
|                              |       |                         |       |                        |       |
|                              |       | $                            | 180,672    |                        | $          | 180,717 |   |

 

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**TheOld Senior Secured Revolving Credit Facility and the New Senior SecuredRevolving Credit Facilities**

On March 31, 2004, the Company retired the then existing revolvingcredit and term loan agreement and entered into a new amended and restatedrevolving credit agreement (the “Old Senior Secured Revolving Credit Facility”)providing for $30,000 of senior secured credit facilities with a lead bankacting as Lead Arranger and Administrative Agent. The Old Senior SecuredRevolving Credit Facility included a $15,000 letter of credit facility and a$15,000 revolving credit facility that could be used for letters of credit. Noamounts were outstanding under the Old Senior Secured Revolving Credit Facilityas of September 24, 2006.

On October 5, 2006, theCompany entered into an amended and restated revolving credit facility,pursuant to which its existing $15,000 revolving credit facility and $15,000letter of credit facility, was increased to a $15,000 revolving credit facility(the “New Senior Secured Revolving Credit Facility”) and a $25,000 letter ofcredit facility (the “New Senior Secured Letter of Credit Facility”, togetherwith the New Senior Secured Revolving Credit Facility, the “New Senior SecuredRevolving Credit Facilities”) maturing on October 5, 2008, pursuant to whichthe Lenders agree to make loans and issue letters of credit to the Company andits subsidiaries, all of the proceeds of which are to be used for workingcapital purposes. Bank of Montreal will act as administrative agent with respectto the New Senior Secured Revolving Credit Facilities.

Obligations under the NewSenior Secured Revolving Credit Facilities are guaranteed by all of the Company’ssubsidiaries as well as by Sun Capital Partners IV, LP, which indirectly owns amajority beneficial interest in the Company. If Sun Capital Partners IV, LP makes any payments on its guarantee itwill have the right to reimbursement from the Company for such payments.Interest on the New Senior Secured Revolving Credit Facilities accrues, at thegreater of (i) the Bank of Montreal’s prime commercial rate and (ii) the ratewhich is 0.5% in excess of the federal funds rate.  The New Senior Secured Revolving CreditFacilities are secured by, among other things, first priority pledges of all ofthe equity interests of the Company’s direct and indirect subsidiaries, andfirst priority security interests (subject to customary exceptions) insubstantially all of the current and future property and assets of the Companyand its direct and indirect subsidiaries, with certain limited exceptions.   The lien on the collateral securing the NewSenior Secured Revolving Credit Facilities is senior to the lien on thecollateral securing the Notes and the guarantees of the Notes. In connectionwith the Company’s entrance into the New Senior Secured Revolving CreditFacilities, on October 5, 2006, the Company borrowed $5,500 under the NewSenior Secured Revolving Credit Facility, the proceeds of which were used topay down certain term loans outstanding under the Old Senior Unsecured CreditFacility described below.

The foregoing descriptionof the New Senior Secured Revolving Credit Facilities is qualified in itsentirety by reference to the Fourth Amendment to Credit Agreement and Amendmentto Loan Documents which is dated as of October 5, 2006, (filed with theSecurities and Exchange Commission as Exhibit 10.2 to Form 8-K (File No.333-116310) on October 5, 2005), the Amended and Restated Revolving CreditAgreement, dated as of March 31, 2004, (filed with the Securities and ExchangeCommission as Exhibit 10.1 to the Company’s Registration Statement on Form S-4(File No. 333-116310) on June 9, 2004), the Second Amendment and Consent, datedas of January 11, 2005, (filed with the Securities and Exchange Commission as Exhibit10.3 to Form 8-K (File No. 333-116310) on January 18, 2005) and the ThirdAmendment, dated as of January 6, 2006, (filed with the Securities and ExchangeCommission as Exhibit 10.23 to Form 10-K (File No. 333-116310) on February 22,2006), each of which is incorporated herein by reference.

**Old and New Senior Unsecured Credit Facilities**

On January 11, 2005,the Company entered into a $75,000 senior unsecured credit facility (the “OldSenior Unsecured Credit Facility”), consisting of a single term loan maturingon December 31, 2008, all of the proceeds of which were used to finance aportion of the cash consideration for the Chevys Acquisition and pay relatedfees and expenses. Obligations under the Old Senior Unsecured Credit Facilitywere guaranteed by the Company’s subsidiaries. No security interests weregranted by the Company or its subsidiaries in connection with the Old SeniorUnsecured Credit Facility. Interest on the term loan outstanding under the OldSenior Unsecured Credit Facility accrued, at the Company’s option, at either(i) the greater of prime or the rate which is 0.5% in excess of thefederal funds rate, plus 8.5% or (ii) a reserve adjusted Eurodollar rate,plus 9.5%. As of September 24, 2006, the interest rate on the Old Senior UnsecuredCredit Facility’s term loan was 14.92%.

On October 5, 2006, theCompany entered into an amended and restated senior unsecured credit facility,pursuant to which the Old Senior Unsecured Credit Facility was decreased to a$65,000 senior unsecured credit facility (the “ New Senior Unsecured CreditFacility”), consisting of a single term loan maturing on October 5, 2010.Credit Suisse will act as administrative agent with respect to the New SeniorUnsecured Credit Facility. All of the proceeds of the New Senior UnsecuredCredit Facility were used to repay in full any term loans outstanding under theOld Senior Unsecured Credit Facility and not continued on the restatementdate.  The total amount of term loansrepaid was $10,000.

Obligations under the NewSenior Credit Facility are guaranteed by all of the Company’s subsidiaries. Nosecurity interest is granted by the Company or its subsidiaries in connectionwith the new Senior Unsecured Credit Facility. Interest on the term loanoutstanding under the New Senior Unsecured Credit Facility accrues, at theCompany’s option, at either (i) the greater of the prime 

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rate or the rate which is0.5% in excess of the federal funds rate, plus 4.0% or (ii) a reserve adjustedEurodollar rate, plus 5.0%. As of October 5, 2006, the interest rate on the NewSenior Unsecured Credit Facility’s term loan was 10.42%.

The foregoingdescription of the Amended and Restated Senior Unsecured Credit Facility isqualified in its entirety by reference to the Amended and Restated Credit Agreement(filed with the Securities and Exchange Commission as Exhibit 10.1 to Form 8-K(File No. 333-116310) on October 5, 2006) and is incorporated herein byreference.

**The Notes**

On March 31, 2004,the Company sold $105,000 aggregate principal amount of 10% senior securednotes due 2010 (the “Notes”). Interest on the Notes is payable semiannually onApril 1 and October 1 each year. The proceeds of the Notes were usedto repay in full the then outstanding term loans under the Company’s priorcredit facility and old subordinated notes, and the fees associated with theLine and the sale of the Notes. The Notes included a provision that requiredthe Company to commence an exchange offer to exchange the originally issuednotes for new registered notes by October 27, 2004. The Company suspendedand extended the exchange offer on October 22, 2004 as a result of itsthen pending acquisition of Chevys, Inc. The Company completed theexchange offer for 100% of the Notes on June 7, 2005. In fiscal year 2005,the Company exceeded the capital expenditure limit under the indenturegoverning the Notes and as a result is required to pay interest at a rate of10.25% for the period April 1, 2006 through March 31, 2007, a 0.25%increase in the stated rate. Exceeding this capital expenditure limit does notconstitute a default with respect to the Notes or the indenture.

On September 19,2006, the Company  commenced a change ofcontrol offer (the “Offer”) to purchase any or all of its Notes that remainoutstanding under the Indenture dated March 31, 2004 (the “Indenture”) by andamong the Company, the guarantors thereto and Wells Fargo Bank, NationalAssociation, as trustee. The Offer was made pursuant to Section 4.15 of theIndenture as the Merger described in Section 3 above constituted a “change ofcontrol” under the Indenture. In accordance with the terms of the Indenture,the Company offered to repurchase the Notes at a purchase price in cash equalto 101% of the aggregate principal amount of the Notes or portion of Notes validlytendered for payment thereof, plus accrued and unpaid interest up to, but notincluding, the date of payment, upon the terms and subject to the conditions ofthe Offer.  The Company obtained asecurities purchase commitment, subject to customary conditions, from CreditSuisse Securities (USA) LLC (“Credit Suisse”) pursuant to which Credit Suissewould have purchased any Notes properly tendered pursuant to the Offer. CreditSuisse obtained a securities purchase commitment from a third party, CocinaFunding Corp., L.L.C. (an affiliate of Farallon Capital Management, L.L.C.), toresell the Notes purchased in the Offer to Cocina immediately following theexpiration date. The offer expired on October 19, 2006. No Notes were tenderedpursuant to the offer and as of the expiration date of the Offer, $105 millionaggregate principal amount of Notes remained outstanding.

The terms of the Notesinclude specific financial and other covenants, all of which the Company was incompliance with at September 24, 2006.

**The Mortgage**

On January 11, 2005,the Company assumed an $812 mortgage (the “Mortgage”), secured by the buildingand improvements of one of the restaurants acquired in the Chevys Acquisition.The Mortgage carries a fixed annual interest rate of 9.28% and requires equalmonthly payments of principal and interest through April 1, 2015.

The terms of the OldSenior Secured Revolving Credit Facility and the Old and Senior UnsecuredCredit Facilities included specific financial and other covenants. Theamendment of the agreements eliminated these covenants. The terms of the newagreements include specific financial and other covenants as more fullydescribed elsewhere in this document.

Interestrates for the Notes, the Old Senior Unsecured Credit Facility and the Mortgage areshown in the following table:

|                                       | ** ** | **Successor**                | ** ** | **Predecessor**             | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **September 24,  2006** | ** ** | **December 25,  2005** | ** ** |
| Senior secured  notes due 2010        |       | 10.25                        | %          | 10.00                       | %          |
| Old Senior  Unsecured Credit Facility |       | 14.92                        | %          | 14.17                       | %          |
| Mortgage                              |       | 9.28                         | %          | 9.28                        | %          |

 

**6.****                                      Capitalization**

**Common Stock**

The Company is authorized to issue 1,000 shares of parvalue $0.001 Common Stock; prior to the Merger, the Company was

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authorized to issue 1,000,000 shares of par value$0.001 Class A Common Stock and 1,000,000 shares of par value $0.001 Class BCommon Stock. The terms of the Class B Common Stock were identical to the ClassA Common Stock except that the holders of Class B Common Stock had no votingrights, except as provided by law. Each holder of Class B Common Stock had theright to convert any or all shares of Class B Common Stock into an equal numberof shares of Class A Common Stock at any time. There were 1,000 share of Commonstock issued and outstanding at September 24, 2006, and 300,423 shares issuedand outstanding of Class A Common Stock at December 25, 2005. There were 15,867shares issued and outstanding of Class B Common Stock at December 25, 2005.

**RedeemablePreferred Stock**

Prior to the Merger, theCompany was authorized to issue 100,000 shares of nonvoting $0.001 par valueRedeemable Preferred Stock; following the Merger, the Company is not authorizedto issue any preferred stock. Shares of preferred stock were issuable uponapproval of the board of directors and redeemable at any time at the option ofthe Company. Concurrent with the Merger, all then issued and outstandingpreferred stock was cancelled in exchange for the right to receive a portion ofthe purchase price as more fully described in the Merger Agreement.

Series A 12.5%Cumulative Compounding Redeemable Preferred Stock (Series A) andSeries B 13.5% Cumulative Compounding Redeemable Preferred Stock(Series B) had a liquidation preference of $1 per share, plus accreteddividends associated with each share. With respect to dividend rights andrights of liquidation, Series A ranked senior to all classes of CommonStock and Series B. Series B ranked senior to all classes of CommonStock.

Series C 15%Cumulative Compounding Participating Preferred stock (Series C) rankedsenior with respect to payment of dividends, liquidation, and redemption to thepreviously existing series of preferred stock and common stock of theCompany. The Series C had a liquidation preference equal to two times theoriginal issue price of $1 per share, plus accreted dividends.

The liquidationpreference on the Series A, Series B and Series C accreted atthe stated rates on the liquidation preference value thereof; dividends(representing the accreted liquidation preference) were to be paid from legallyavailable funds, when and if declared by the board of directors. If dividendswere not declared, a dividend would continue to accrue and would be paid asdividends only when and if declared, or upon a sale or liquidation of the Companyor upon redemption of the preferred stock. Accretion of the liquidationpreference on the Redeemable Preferred Stock was $2,330 during the two monthsended August 20, 2006 and $3,860 during the three months ended September 25,2006, and $10,126 during the eight months ended August 20, 2006 and $10,685during the nine months ended September 25, 2005, and is reflected as anincrease in the preferred stock values and an increase in the accumulateddeficit.

The Predecessor’s net(loss) or net income attributable to common stockholders includes the effect ofthe accretion of the liquidation preference on the redeemable preferred stock,which reduced net income and increased net loss attributable to commonstockholders for the relevant periods.

**StockOption Plans**

The Company’s 1998 and2000 Stock Based Incentive Compensation Plans (the Plans) had authorized thegrant of options to certain employees, directors and independent contractorsfor up to 12,000 and 100,000 shares, respectively, of the Company’s CommonStock. All options granted under both Plans had 10-year terms.

Concurrent with theMerger and change in control, all options then outstanding under the Plansfully vested and were converted into the right to receive a portion of thepurchase price as more fully described in the Merger Agreement. Upon conversionof the options, the Plans were terminated.

Prior to fiscal 2006, theCompany accounted for stock-based compensation expense under the recognitionand measurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and related interpretations andadopted the disclosure-only provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”). Under APB 25, no stock-based compensation expense was reflected in netincome for grants of stock options prior to fiscal 2006 because the Companygranted stock options with an exercise price equal to the market value of thestock on the date of grant.

EffectiveDecember 26, 2005, the Company adopted SFAS No. 123(R), “Share-BasedPayment” (“SFAS 123R”), which requires the measurement and recognition ofcompensation cost at fair value for all share-based payments, including stockoptions and restricted stock awards. The Company adopted SFAS 123R using theprospective method, as the Company is considered a nonpublic company forpurposes of FAS 123R. Under this method, the Company records the expenserelated to all stock awards granted on or subsequent to December 26, 2005,based on the grant date “calculated value” estimated in accordance with theprovisions of SFAS 123R. The Company applies the Black-Scholes valuationmodel in determining the calculated value of share-based payments using the volatilityof the Company’s appropriate industry sector index, which is amortized on astraight-line basis over the requisite

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service period. Nooptions were granted in 2006.

**7.****                                      RelatedParty Transactions**

The Company has a Management and Services Agreement(the Management Agreement”) dated August 21, 2006, by and between the Companyand Sun Capital Partners Management IV, LLC (the “Manager”), an affiliate ofSun LLC, the indirect holder of the majority of the capital stock of theCompany. The Manager is paid annual fees equating to the greater of (i)$500,000 or (ii) 1% of the sum of the amounts for such period of EBITDA whichis defined as (A) net income (or loss) after taxes of the Company and itsdirect and indirect subsidiaries on a consolidated basis (“Net Income”),plus (B) interest expense which has been deducted in the determination of NetIncome, plus (C) federal, state and local taxes which have been deducted indetermining Net Income, plus (D) depreciation and amortization expenses whichhave been deducted in determining Net Income, including without limitationamortization of capitalized transaction expenses incurred in connection withthe transactions contemplated by the Merger plus (E) extraordinary losseswhich have been deducted in the determination of Net Income, plus (F)un-capitalized transaction expenses incurred in connection with the Merger,plus (G) all other non-cash charges, minus (H) extraordinary gainswhich have been included in the determination of Net Income.  EBITDA is computed without taking intoconsideration the fees payable under the Management Agreement. The Company paysthe fees in quarterly installments in advance equal to the greater of (i)$125,000 or (ii) 1% of EBITDA for the immediately preceding fiscal quarter.Expenses relating to the Management Agreement of $49 were recorded as generaland administrative expense for the one month period ended September 24, 2006.

In September 2006, the Company made a dividenddistribution of $10.0 million to RM Restaurant Holding which was recorded as areduction to retained earnings. The Company also made other distributions to RMRestaurant Holding in the amount of $0.4 million recorded as a related partyreceivable.

The Company had an Amended and Restated ManagementAgreement dated June 28, 2000 with two of its former stockholders Bruckman,Rosser, Sherrill & Co., L.P. and FS Private Investments, LLC. Thestockholders were paid annual fees equating to .667% and .333%, respectively,of consolidated earnings before interest, income taxes, depreciation andamortization of the Company. As described in the Merger Agreement, the Amendedand Restated Management Agreement dated June 28, 2000  was terminated in connection with the Merger.Expenses relating to the agreement of $108 and $133 were recorded as generaland administrative expense in the two months ended August 20, 2006 and threemonths ended September 25, 2005, respectively, and $436 and $415 for the eightmonths ended August 20, 2006 and nine months ended September 25, 2005, respectively.Additionally, the Company recorded a termination fee of $1,819 in the twomonths and eight months ended August 20, 2006 related to the termination of theAmended and Restated Management Agreement.

On January 19, 2005, the Company paid $833,333 and $166,667to Bruckman, Rosser, Sherrill & Co., L.P. and FS Private Investments, LLC,respectively, for advisory and transactional services provided to the Companyin connection with the Chevys Acquisition.

Effective March 31, 2005, the Company cancelled its managementagreement with Restaurant Associates Corp. to provide services for the benefitof the Company, including general and strategic management, treasury, tax,financial reporting, benefits administration, insurance, informationtechnology, real estate and legal services. Two of the Company’s directors areemployees of Restaurant Associates Corp. Expense relating to this agreement of$74 was recorded as general and administrative expense for the nine monthsended September 25, 2005.

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**Item 2.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

*You should read the followingdiscussion together with our consolidated financial statements and relatednotes thereto included elsewhere in this report. The following discussion andanalysis of our financial condition and results of operations contains forwardlooking statements within the meaning of the federal securities laws. See thediscussion under the heading “Forward-Looking Statements” elsewhere in thisreport.*

**Overview**

We are one of the largestfull service, casual dining Mexican restaurant chain operators in the UnitedStates in terms of number of restaurants. As of September 24, 2006 we operated195 restaurants, of which 161 are located in California, with additional restaurantsin Arizona, Florida, Indiana, Illinois, Maryland, Missouri, Nevada, New Jersey,New York, Oregon, Virginia and Washington. Our four major subsidiaries are ElTorito Restaurants, Inc., which we acquired in June 2000, AcapulcoRestaurants, Inc., Chevys Restaurants, LLC, which we formed in connectionwith the Chevys Acquisition, and a purchasing, distribution, and manufacturingsubsidiary, Real Mex Foods, Inc.

El Torito, El ToritoGrill, Acapulco and Chevys, our primary restaurant concepts, offer high qualityMexican food, a wide selection of alcoholic beverages and excellent guestservice. In addition to the El Torito, El Torito Grill, Acapulco and Chevysconcepts, we operate 15 additional restaurant locations, most of which are alsofull service Mexican formats, under the following brands: Las Brisas; CasaGallardo; El Paso Cantina; GuadalaHarry’s; Who Song & Larry’s;Keystone Grill; and Fuzio Universal Pasta.

On August 17, 2006, theCompany entered into an Agreement and Plan of Merger (“Merger Agreement”) withRM Restaurant Holding Corp. (“RM Restaurant Holding”) and RM Integrated, Inc. (“RMIntegrated”, and together with RM Restaurant Holding, “Buyer”).  The majority of the stock of RM RestaurantHolding is owned by Sun Cantinas LLC (“Sun LLC”), an affiliate of Sun CapitalPartners, Inc. (“Sun Capital”).  OnAugust 18, 2006, the stockholders of the Company entitled to vote thereon(including the holders of a majority of the Company’s Series C Preferred Stock,par value $0.001 per share) approved the Merger Agreement.  On August 21, 2006 (the “Effective Time”),the closing of the Merger Agreement occurred, and RM Integrated merged with andinto Real Mex, with Real Mex continuing as the surviving corporation (the “Merger”).  The net purchase price of Real Mex was $191.6million, consisting of  $359.0 million incash, plus net cash acquired of $29.3 million, plus a $1.0 million workingcapital adjustment and plus direct acquisition costs of $4.7 million, lessindebtedness assumed of $181.9 million and seller expenses of $9.6 million. Pursuantto the Merger Agreement, $11.0 million of the Merger Consideration isbeing held in escrow and the purchase price is subject to adjustmentpost-closing based on the amount of net working capital of the Companyimmediately prior to the closing and certain other adjustments.  As a result of the Merger and in accordancewith the terms of the Merger Agreement, (i) all of the outstanding capitalstock of Real Mex was converted into the right to receive a portion of thepurchase price, and all Real Mex options, warrants and shares of restrictedstock were cancelled and converted into the right to receive a portion of thepurchase price, less the exercise prices or unpaid purchase prices therefore,as applicable, and (ii) the Company became a wholly-owned subsidiary of RMRestaurant Holding.  Prior to the Merger,Bruckmann, Rosser, Sherrill & Co., Inc. (“BRS”), together with itsaffiliates, was a controlling shareholder of Real Mex.  As described in the Merger Agreement, theAmended and Restated Management Agreement dated June 28, 2000 by and among theCompany, certain of its subsidiaries, BRS, and FS Private Investments, L.L.C.was terminated in connection with the Merger.

On January 11, 2005we completed the Chevys Acquisition, acquiring 69 Chevys restaurants and fiveFuzio Universal Pasta restaurants and assuming franchise agreements for 37franchised Chevys restaurants and five franchised Fuzio Universal Pastarestaurants. The purchase price for the Chevys Acquisition was approximately$76.2 million in cash and the assumption of certain liabilities, plus theissuance of Real Mex common and preferred stock to J.W. Childs Equity PartnersL.P. and its affiliate, JWC Chevys Co-Invest, LLC. See “Notes to ConsolidatedFinancial Statements”. Chevys’ results of operations have been included in ourCompany’s consolidated financial statements since the date of the acquisition.

In 2005, we opened onenew El Torito restaurant in Corona, CA and one new El Torito Grill restaurantin Sherman Oaks, CA. In January 2006, we opened two new El Toritorestaurants in Oxnard, CA and Temecula, CA. In August 2006, we opened a newChevys restaurant in San Leandro, CA and a new El Torito restaurant inRiverside, CA. In October 2006 we opened a new El Torito Grill restaurant inRancho Santa Margarita, CA. In November 2006 we opened a new Chevys restaurantin West Nyack, NY. We plan to open one additional restaurant inDecember 2006, an El Torito Grill in Anaheim, CA.

Our restaurant revenuesinclude sales of food and alcoholic and other beverages. Other revenues consistprimarily of sales by Real Mex Foods, Inc. to outside customers ofprocessed and packaged prepared foods and other merchandise items. Royalty andfranchise fees include royalty fees which are based on a contractual percentageof sales in franchised restaurants, franchise fees, which are the fees paid forthe franchising of a particular location. Franchise fees are recognized asrevenue upon the opening of a franchised restaurant.

Cost of sales iscomprised primarily of food and alcoholic beverage expenses. The components ofcost of sales are variable 

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and increase with salesvolume. In addition, the components of cost of sales are subject to increase ordecrease based on fluctuations in commodity costs and depend in part onthe success of controls we have in place to manage cost of sales in ourrestaurants. The cost, availability and quality of the ingredients we use toprepare our food and beverages are subject to a range of factors including, butnot limited to, seasonality, political conditions, weather conditions, and ingredientshortages.

Labor cost includesdirect hourly and management wages, operations management bonus expense,vacation pay, payroll taxes and workers’ compensation insurance and healthinsurance expenses.

Direct operating andoccupancy expense includes operating supplies, repairs and maintenance,advertising expenses, utilities, and other restaurant related operatingexpenses. This expense also includes all occupancy costs such as fixed rent,percentage rent, common area maintenance charges, real estate taxes and otherrelated occupancy costs.

General andadministrative expense includes all corporate and administrative functions thatsupport our operations. Expenses within this category include executivemanagement, supervisory and staff salaries, bonus and related employeebenefits, travel and relocation costs, information systems, training, corporaterent and professional and other consulting fees.

Legal settlement costsinclude amounts paid or accrued to settle various legal actions against thecompany, excluding costs to defend the actions.

Merger costs include alldirect costs related to the Merger that are not eligible for capitalizationincluding legal expenses, investment banker fees, other advisory services,restricted stock compensation and other costs.

Depreciation andamortization principally includes depreciation and amortization of capitalexpenditures for restaurants. Pre-opening costs are expensed as incurred andinclude costs associated with the opening of a new restaurant or the conversionof an existing restaurant to a different concept.

Our fiscal year consistsof 52 or 53 weeks and ends on the last Sunday in December of each year.The three months and nine months ended September 24, 2006 and September 25,2005 consist of 13 and 39 weeks, respectively. When calculating comparablestore sales, we include a restaurant that has been open for more than 18 monthsand for the entirety of each comparable period.

**CriticalAccounting Policies**

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith U.S. generally accepted accounting principles. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates, including those related to property and equipment,impairment of long-lived assets, valuation of goodwill, self-insurancereserves, income taxes and revenue recognition. We base our estimates onhistorical experience and on various other assumptions and factors that arebelieved to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Based on ourongoing review, we plan to adjust our judgments and estimates where facts andcircumstances dictate. Actual results could differ from our estimates.

For further informationregarding the accounting policies that we believe to be critical accountingpolicies that affect our more significant judgments and estimates used inpreparing our consolidated financial statements, see our report onForm 10-K filed for the fiscal year ended December 25, 2005.

**Results of Operations**

The discussion of and the results of operations forthe three months ended September 24, 2006 is based on the combined results forthe Predecessor period from June 26, 2006 through August 20, 2006, and theSuccessor period August 21, 2006 through September 24, 2006.  The discussion of and the results ofoperations for the nine months ended September 24, 2006 is based on thecombined results for the Predecessor period from December 26, 2005 throughAugust 20, 2006, and the Successor period August 21, 2006 through September 24,2006. Because of purchase accounting, certain amounts may not be comparablebetween the three and nine months ended September 24, 2006 and September 25,2005.

Our operating results for the three and nine monthperiods ended September 24, 2006 and September 25, 2005 are expressed as apercentage of total revenues below:
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 24,  2006**     | ** ** | **September 25,  2005**    | ** ** | **September 24,  2006** | ** ** | **September 25,  2005** | ** ** |
| Total revenues                          |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of sales                           |       | 25.8                             |       | 25.7                            |       | 25.6 |   | 25.5 |   |
| Labor                                   |       | 33.5                             |       | 34.2                            |       | 33.9 |   | 34.9 |   |
| Direct operating  and occupancy expense |       | 24.1                             |       | 25.3                            |       | 23.4 |   | 24.2 |   |
| Total operating  costs                  |       | 83.3                             |       | 85.2                            |       | 82.8 |   | 84.5 |   |
| General and  administrative expense     |       | 5.4                              |       | 5.0                             |       | 5.1 |   | 5.0 |   |
| Depreciation and  amortization          |       | 3.4                              |       | 3.1                             |       | 3.3 |   | 3.5 |   |
| Legal settlement  costs                 |       | 1.0                              |       | —                          |       | 1.0 |   | 0.2 |   |
| Merger costs                            |       | 6.9                              |       | —                          |       | 2.3 |   | — |   |
| Operating income                        |       | (1.4                             | )          | 6.7                             |       | 4.9 |   | 6.6 |   |
| Interest expense                        |       | 4.9                              |       | 4.2                             |       | 4.5 |   | 4.2 |   |
| Total other  expense, net               |       | 11.4                             |       | 4.3                             |       | 6.5 |   | 4.2 |   |
| Income before  tax provision            |       | (5.8                             | )          | 2.4                             |       | 0.6 |   | 2.4 |   |
| Net income                              |       | (3.6                             | )          | 2.4                             |       | 0.3 |   | 2.4 |   |

 

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**Three months endedSeptember 24, 2006 compared to the three months ended September 25, 2005**

*Total Revenues*. Total revenues increased by $2.0million, or 1.5%, to $140.0 million in the third quarter of 2006 from $137.6million in the third quarter of 2005 primarily due to a $2.1 million increasein other revenues. Comparable store sales decreased 0.2% in the thirdquarter.  The increase in other revenueswas primarily due to an increase in food manufacturing sales to outsidecustomers by Real Mex Foods, Inc., our distribution and manufacturingsubsidiary.

*Cost of Sales*. Total cost of sales of $36.0 million inthe third quarter of 2006 decreased $0.6 million or 1.7% as compared to thethird quarter of 2005, due to an overall decrease in commodity prices in 2006versus 2005. As a percentage of total revenues, cost of sales increasedslightly to 25.8% for the third quarter of 2006 from 25.7% for the thirdquarter of 2005.

*Labor*. Labor costs of $46.8 million in thethird quarter of 2006 increased by $0.3 million or 0.7% as compared to thethird quarter of 2005, and as a percentage of total revenues, labor costsdecreased to 33.5% for the third quarter of 2006 from 34.2% for the thirdquarter of 2005. The reduction in labor costs an was primarily due to areduction in total hourly employee labor expense achieved as a result of ourcontinued focus on hourly labor controls, scheduling and a reduction inemployee turnover. Payroll and benefits remain subject to inflation andgovernment regulation; especially wage rates currently at or near the minimumwage, and expenses for health insurance and workers’ compensation insurance.

*Direct Operating and OccupancyExpense*. Directoperating and occupancy expense of $33.6 million in the third quarter of 2006decreased by $1.2 million or 3.3% as compared to the third quarter of 2005primarily due to lower advertising expense and other direct expense.  Direct operating and occupancy expense as apercentage of sales decreased to 24.1% in the third quarter of 2006 from 25.3%in the third quarter of 2005.

*General and AdministrativeExpense*. Generaland administrative expense of $7.5 million in the third quarter of 2006increased by $0.7 million or 10.2% as compared to the third quarter of 2005primarily due to higher salary and payroll tax expense combined with higherbonus expense.  General andadministrative expense as a percentage of sales increased to 5.4% in the thirdquarter of 2006 from 5.0% in the third quarter of 2005.

*Legal Settlement Costs.*We incurred legal settlement costs of$1.4 million in the third quarter of 2006 compared to $0.1 million in the thirdquarter of 2005. The increase in costs relates to lawsuits filed against us in2004 and 2005.

*Depreciation and Amortization*. Depreciation and amortization expenseof $4.8 million in the third quarter of 2006 decreased by $0.5 million or 12.7%as compared to the third quarter of 2005. As a percentage of total revenues,depreciation and amortization increased to 3.4% for the third quarter of 2006from 3.1% for the third quarter of 2005.

*Interest Expense*. Interest expense of $6.8 million in thethird quarter of 2006 increased $1.1 million or 18.4% as compared to the thirdquarter of 2005 primarily due to an increase in the interest rate on our SeniorUnsecured Credit Facility (the interest rate in the third quarter of 2005ranged from 12.27% to 12.71%, versus 14.92% during the third quarter of 2006)and a 0.25% increase in the interest rate on the Notes. As a percentage oftotal revenues, interest expense was 4.9% in the third quarter of 2006 versus4.2% in the third quarter of 2005.

*Merger Costs.* Merger costs of $9.6 million in thethird quarter of 2006 include all direct costs related to the Merger that arenot eligible for capitalization including legal expenses, investment bankerfees, other advisory services, restricted stock compensation and other costs.

*IncomeTax Provision.*The income tax provision for the third quarter of 2006 and 2005 was based onestimated annual effective tax rates. A rate of 38.7% was applied to the thirdquarter of 2006. In the third quarter of 2005, a net effective tax rate of

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0.0% was applied as the Company offset income taxexpense by a reversal of the existing valuation allowance. These rates arecomprised of the combined federal and state statutory rates.

**Nine months endedSeptember 24, 2006 compared to the nine months ended September 25, 2005**

*Total Revenues*.  Totalrevenues increased by $17.6 million, or 4.3%, to $423.9 million in the firstnine months of 2006 from $406.2 million in the first nine months of 2005 due toa $10.6 million increase in restaurant revenues, a $6.9 million increase inother revenues and a $0.1 million increase in royalty and franchise fees.  The increase in restaurant revenues was partiallydue to the fact that the nine months ended September 26, 2005 excluded 16 daysof sales in the Chevys restaurants as the Chevys restaurants were acquired onJanuary 11, 2005.  This is combined withcomparable store sales increases of 0.2% in the first nine months of 2006 andnew restaurant openings, partially offset by restaurant closures.  The increase in comparable store sales waspartially driven by price increases in the El Torito restaurants ofapproximately 0.2%, in the Acapulco restaurants of approximately 0.4% and inthe Chevys restaurants of approximately 1.0%. The increase in other revenues was primarily due to an increase in salesto outside customers by Real Mex Foods, Inc., our distribution andmanufacturing subsidiary. The increase in royalty and franchise fees wasprimarily due to the timing of the Chevys acquisition in the prior year.

*Cost of Sales*.  Total cost ofsales of $108.3 million in the first nine months of 2006 increased $4.8 millionor 4.6% as compared to the first nine months of 2005.  This increase was primarily due to theinclusion in our results of operations in 2006 of a full nine months of theChevys restaurants cost of sales versus a partial nine months in 2005, combinedwith higher costs associated with the increase in sales to outside customers byour distribution facility.  As apercentage of total revenues, cost of sales increased to 25.6% for the firstnine months of 2006 from 25.5% for the first nine months of 2005.

*Labor*.  Labor costsof $143.8 million in the first nine months of 2006 increased by $2.1 million or1.5% as compared to the first nine months of 2005 primarily due to the increasein labor cost dollars associated with the inclusion in our results ofoperations of the Chevys restaurants for a full nine months in fiscal 2006versus a partial nine months in fiscal 2005. Payroll and benefits remain subject to inflation and governmentregulation; especially wage rates currently at or near the minimum wage, andexpenses for health insurance and workers’ compensation insurance.  As a percentage of total revenues, laborcosts decreased to 33.9% for the first nine months of 2006 from 34.9% for thefirst nine months of 2005, primarily due to lower hourly labor expense achievedas a result of our continued focus on hourly labor controls, scheduling and reductionsin employee turnover.

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expense of $99.0 million in the firstnine months of 2006 increased by $0.9 million or 0.9% as compared to the firstnine months of 2005. The increase in direct operating and occupancy expense wasprimarily associated with the inclusion in our results of operations of theChevys restaurants for a full nine months in fiscal 2006 versus a partial ninemonths in fiscal 2005. Direct operating and occupancy expense as a percentageof sales decreased to 23.4% in the first nine months of 2006 from 24.2% in thefirst nine months of 2005 primarily due to lower general liability insuranceexpense resulting from a reduction in frequency and severity of claims and a reductionin media advertising expenditures.

*General and Administrative Expense*. General and administrative expense of $21.8 million in the first ninemonths of 2006 increased by $1.5 million or 7.3% primarily due to increasedstaffing associated with the Chevys Acquisition. General and administrativeexpense as a percentage of sales increased to 5.1% in the first nine months of2006 versus 5.0% in the first nine months of 2005.

*Legal Settlement Costs.*We incurred legal settlement costs of$4.2 million in the first nine month of 2006 compared to $0.7 million in thefirst nine months of 2005. The increase in costs relates to lawsuits filedagainst us in 2004 and 2005.

*Depreciation and Amortization*. Depreciation and amortization expense of $14.1 million in the first ninemonths of 2006 decreased $0.08 million or 0.5% as compared to the first ninemonths of 2005. As a percentage of total revenues, depreciation decreased to3.3% for the first nine months of 2006 compared to 3.5% for the first ninemonths of 2005.

*Interest Expense*. Interest expense of $18.9 million in the first nine months of 2006increased $1.9 million or 10.9% as compared to the first nine months of 2005primarily due to an increase in the interest rate on our Senior UnsecuredCredit Facility (the interest rate in 2005 ranged from 11.93% to 13.37%, versus14.17% to 14.92% during 2006), a 0.25% increase in the interest rate on theNotes beginning on April 1, 2006, and the fact that our Senior Unsecured CreditFacility was outstanding for 16 days more in the first nine months of 2006 thanin 2005. As a percentage of total revenues, interest expense increased to 4.5%for the first nine months of 2006 from 4.2% in the first nine months of 2005.

*Merger Costs.* Merger costs of $9.6 million in thefirst nine months of 2006 include all direct costs related to the Merger thatare not eligible for capitalization including legal expenses, investment bankerfees, other advisory services, restricted stock compensation and other costs.

*IncomeTax Provision.*The income tax provision for the first nine months of 2006 and 2005 was basedon estimated annual

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effective tax rates. Arate of 39.0% was applied to the first nine months of 2006. In the first ninemonths of 2005, a net effective tax rate of 0.0% was applied as the Companyoffset income tax expense by a reversal of the existing valuation allowance.These rates are comprised of the combined federal and state statutory rates.

**Liquidity and CapitalResources**

Our principal liquidityrequirements are to service our debt and meet our capital expenditure andworking capital needs.  Our indebtedness,including capital lease obligations, at September 24, 2006 was $181.8 million.As of October 5, 2006, our indebtedness, including capital lease obligations,was $176.3 million, our availability under our New Senior Secured RevolvingCredit Facility was $9.5 million and our availability under our New SeniorSecured Letter of Credit Facility was $0.1 million. Our ability to makeprincipal and interest payments and to fund planned capital expenditures willdepend on our ability to generate cash in the future, which, to a certainextent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control.  Based on our current level of operations, webelieve our cash flow from operations, available cash and available borrowingsunder our New Senior Secured Revolving Credit Facility will be adequate to meetour liquidity needs for the near future. In addition, we may partially fundrestaurant openings through credit received from trade suppliers and landlordcontributions, if favorable terms are available. We cannot assure you, however,that our business will generate sufficient cash flow from operations or thatfuture borrowing will be available to us under our New Senior Secured RevolvingCredit Facility in an amount sufficient to enable us to service ourindebtedness or to fund our other liquidity needs. If we consummate anacquisition, our debt service requirements could increase. We may need torefinance all or a portion of our indebtedness on or before maturity. We cannotassure you that we will be able to refinance any of our indebtedness oncommercially reasonable terms or at all.

**WorkingCapital and Cash Flows**

We presently have, in thepast have had, and in the future are likely to have, negative working capitalbalances. The working capital deficit principally is the result of accountspayable and accrued liabilities being in excess of current asset levels. Thelargest components of our accrued liabilities include reserves for ourself-insured workers’ compensation and general liability insurance, accruedcompensation and related employee benefits costs, sales and property taxes andgift certificate and gift card liabilities. We do not have significantreceivables and we receive trade credit based upon negotiated terms inpurchasing food and supplies. Funds available from cash sales not neededimmediately to pay for food and supplies or to finance receivables or inventoriestypically have been used for capital expenditures and debt service paymentsunder our existing indebtedness.

*Operating Activities*. We had net cash provided by operatingactivities of $19.9 million and $25.6 million for the nine months endedSeptember 24, 2006 and September 25, 2005, respectively. The decrease in cashprovided by operating activities was primarily attributable to a decrease innet income resulting from expenses related to the merger of $9.6 million and anincrease in interest expense of $1.9 million due to higher interest rates onour Senior Unsecured Credit Facility and an increase in income tax expense of$1.3 million. This was partially offset by the absence of cash expendituresincurred in 2005 to generate increased inventory levels in connection with theinitiation of distribution services to the Chevys restaurants by Real MexFoods, Inc. of $3.7 million and an increase in other operating income dueto 17 days of additional sales in our Chevys restaurants and an increase in accruedliabilities related to accruals for legal settlements which were expensed butnot yet paid.

*Investing Activities*. We had net cash used in investingactivities of $15.7 million and $87.8 million for the nine months endedSeptember 24, 2006 and September 25, 2005, respectively. The $72.1 millionreduction in cash used in investing activities was primarily due to the absenceof $76.0 million used for the Chevys Acquisition that was completed onJanuary 11, 2005 partially reduced by an increase in additions to propertyand equipment driven by the increase in the number of new restaurants completedand under construction in 2006. We expect to make capital expenditures totalingapproximately $24.2 million in fiscal 2006, of which approximately $12.4million is expected to be spent on eight new restaurants, $9.6 million formaintenance capital expenditures and $2.2 million for the remodeling andrefurbishment of existing restaurants.

These and other similarcosts may be higher in the future due to inflation and other factors. Weexpect to fund the new restaurants and the other capital expenditures describedabove from cash flow provided by operating activities, available cash,available borrowings under our New Senior Secured Revolving Credit Facility,landlord contributions (if favorable terms are available) and trade financingreceived from trade suppliers.

*Financing Activities*.We had net cash used in financing activities of $10.3 million for the ninemonths ended September 24, 2006 compared with net cash provided by financingactivities of $71.7 million for the nine months ended September 25, 2005.The $82.0 million decrease in cash provided by financing activities wasprimarily due to the January 2005 incurrence of a $75.0 million seniorunsecured credit facility to fund the Chevys Acquisition, partially reduced byfinancing costs of $3.0 million and a dividend distribution of $10.0 million inSeptember 2006 paid to our parent, RM Restaurant Holding.

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**Debtand Other Obligations**

*Generally.* OnJanuary 11, 2005, we entered into a $75.0 million senior unsecured creditfacility consisting of a single term loan maturing on December 31, 2008,all of the proceeds of which were used to finance a portion of the cashconsideration for the Chevys Acquisition and pay related fees and expenses.

On March 31, 2004,we sold $105.0 million aggregate principal amount of our senior secured notes.At the closing of the sale of our senior secured notes, we used the proceedsfrom the sale of these notes and a sale-leaseback transaction to repay in fullterm loans then outstanding under our prior credit facility and subordinatednotes, and entered into a new senior secured credit facility, or our Old SeniorSecured Revolving Credit Facility.

*New and Old Senior SecuredRevolving Credit Facilities*. Our Old Senior Secured RevolvingCredit Facility was initially comprised of a $15.0 million revolving creditfacility which had a $2.0 million sub-limit for letters of credit, which werefer to as our Old Revolving Credit Facility, and a $15.0 million letters ofcredit facility which we refer to as our Old Senior Secured Letters of CreditFacility. On January 11, 2005, concurrent with the closing of the ChevysAcquisition, we amended the Old Senior Secured Revolving Credit Facility to,among other things, modify certain covenants, change the maturity date toJune 30, 2008 (subject to extension to March 31, 2009 provided that theOld Senior Unsecured Credit Facility has been repaid and terminated in full onor prior to June 29, 2008), and increased the sub-limit for letters ofcredit availability under the Old Revolving Credit Facility from $2.0 millionto $15.0 million (subject to an overall limitation of $30.0 million under theOld Senior Secured Revolving Credit Facility). In December of 2005, wefurther amended the Old Revolving Credit Facility to increase the annual limitof permitted capital expenditures to $30.0 million.

On October 5, 2006, theCompany entered into an amended and restated revolving credit facility,pursuant to which its existing $15,000 Old Revolving Credit Facility and$15,000 Old Senior Secured Letter of Credit Facility, was increased to a$15,000 revolving credit facility (the “New Senior Secured Revolving CreditFacility”) and a $25,000 letter of credit facility (the “New Senior SecuredLetter of Credit Facility”, together with the New Senior Secured RevolvingCredit Facility, the “New Senior Secured Revolving Credit Facilities”) maturingon October 5, 2008, pursuant to which the Lenders agree to make loans and issueletters of credit to the Company and its subsidiaries, all of the proceeds ofwhich are to be used for working capital purposes. Bank of Montreal will act asadministrative agent with respect to the New Senior Secured Revolving CreditFacilities.

Under our Old Senior SecuredRevolving Credit Facility, interest accrued based upon a total leverage ratiocalculation. The interest under the Old Senior Secured Revolving CreditFacility accrued, at our option, at either (i) the base rate of interestin effect from time to time, which is the higher of the lender’s prime rate asannounced from time to time or the federal funds rate plus 0.50%, plus thecurrent applicable margin of 1.75% or (ii) a London Inter Bank OfferingRate for deposits as reported by a generally recognized financial reportingservice plus the current applicable margin of 4.0%. Our Old Senior SecuredRevolving Credit Facility was guaranteed by our subsidiaries and secured by,among other things, first priority pledges of all of the equity interests ofour direct and indirect subsidiaries, and first priority security interests(subject to customary exceptions) in substantially all of our current andfuture property and assets, with certain limited exceptions.

The lien on thecollateral securing the Old Senior Secured Revolving Credit Facility was seniorto the lien on the collateral securing our senior secured notes and theguarantees of these notes.

Our Old Senior SecuredRevolving Credit Facility contained various affirmative and negative covenantsand restrictions, which among other things, required us to meet certainfinancial tests (including certain leverage and cash flow ratios), and limitour and our subsidiaries’ ability to incur or guarantee additionalindebtedness, make certain capital expenditures, pay dividends or make otherequity distributions, purchase or redeem capital stock, make certaininvestments, enter into arrangements that restrict dividends from subsidiaries,sell assets, engage in transactions with affiliates and effect a consolidation ormerger. We were required to maintain certain cash flow ratios determined on anannual basis equal to (i) 1.70 to 1.00 for the period January 1, 2006to December 31, 2006, (ii) 1.80 to 1.00 for the periodJanuary 1, 2007 to December 31, 2007, and (iii) 1.90 to 1.00 forthe period January 1, 2008 and thereafter until maturity. Pursuant to theterms of the Old Senior Secured Revolving Credit Facility, cash flow ratio wasdefined as the ratio of (a) Consolidated Cash Flow (as defined therein) to(b) Consolidated Financial Obligations (as defined therein).

Our New Senior CreditFacility is guaranteed by our subsidiaries and secured by, among other things,first priority pledges of all of the equity interests of our direct andindirect subsidiaries, and first priority security interests (subject tocustomary exceptions) in substantially all of our current and future propertyand assets, with certain limited exceptions. The lien on the collateralsecuring the New Senior Credit Facility is senior to the lien on the collateralsecuring our senior secured notes and the guarantees of these notes.Obligations under the New Senior Secured Revolving Credit Facilities are alsoguaranteed by Sun Capital Partners IV, LP, which indirectly owns a majoritybeneficial interest in the Company.  IfSun Capital Partners IV, LP makes any payments on its guarantee it will havethe right to reimbursement from the Company for such payments. Interest on theNew Senior Secured Revolving Credit Facilities accrues, at the greater of (i)the Bank of Montreal’s prime commercial rate and (ii) the rate which is 0.5% inexcess of the federal funds rate. The New Senior Secured Revolving CreditFacilities are secured by, among other things, first priority pledges of all ofthe equity interests of the Company’s direct and indirect subsidiaries, andfirst priority security interests (subject to customary exceptions) insubstantially all of the current and future property and assets of the Companyand its direct and indirect subsidiaries, with certain limited exceptions. Thelien on the collateral securing the New Senior Secured Revolving CreditFacilities is senior to the

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lien on the collateralsecuring the Notes and the guarantees of the Notes. In connection with theCompany’s entrance into the New Senior Secured Revolving Credit Facilities, onOctober 5, 2006 the Company borrowed $5,500 under the New Senior SecuredRevolving Credit Facility, the proceeds of which were used to pay down certainterm loans outstanding under the Old Senior Unsecured Credit Facility describedbelow. As of October 5, 2006, our availability under our New Senior SecuredRevolving Credit Facility was $9.5 million and our availability under our NewSenior Secured Letter of Credit Facility was $0.1 million.

Our New Senior Credit Facilitycontains various affirmative and negative covenants and restrictions, whichamong other things, require us to meet certain financial tests (includingcertain leverage and cash flow ratios), and limit our and our subsidiaries’ability to incur or guarantee additional indebtedness, make certain capitalexpenditures, pay dividends or make other equity distributions, purchase orredeem capital stock, make certain investments, enter into arrangements thatrestrict dividends from subsidiaries, sell assets, engage in transactions withaffiliates and effect a consolidation or merger. We are required to maintaincertain ratios including a cash flow ratio determined on an annual basis equalto (i) 1.70 to 1.00 for the period January 1, 2006 and thereafter. Pursuantto the terms of the New Senior Credit Facility, cash flow ratio is defined asthe ratio of (a) Consolidated Cash Flow (as defined therein) to(b) Consolidated Financial Obligations (as defined therein).

*Old and New Senior UnsecuredCredit Facilities*. On January 11, 2005, the Companyentered into a $75,000 senior unsecured credit facility (the “Old SeniorUnsecured Credit Facility”), consisting of a single term loan maturing onDecember 31, 2008, all of the proceeds of which were used to finance a portionof the cash consideration for the Chevys Acquisition and pay related fees andexpenses. Obligations under the Old Senior Unsecured Credit Facility wereguaranteed by the Company’s subsidiaries. No security interests were granted bythe Company or its subsidiaries in connection with the Old Senior UnsecuredCredit Facility. Interest on the term loan outstanding under the Old SeniorUnsecured Credit Facility accrued, at the Company’s option, at either(i) the greater of prime or the rate which is 0.5% in excess of thefederal funds rate, plus 8.5% or (ii) a reserve adjusted Eurodollar rate,plus 9.5%. As of September 24, 2006, the interest rate on the Old SeniorUnsecured Credit Facility’s term loan was 14.92%.

On October 5, 2006, theCompany entered into an amended and restated senior unsecured credit facility,pursuant to which the Old Senior Unsecured Credit Facility was decreased to a$65,000 senior unsecured credit facility (the “ New Senior Unsecured CreditFacility”), consisting of a single term loan maturing on October 5, 2010.Credit Suisse will act as administrative agent with respect to the New SeniorUnsecured Credit Facility. All of the proceeds of the New Senior UnsecuredCredit Facility were used to repay in full any term loans outstanding under theOld Senior Unsecured Credit Facility and not continued on the restatementdate.  The total amount of term loansrepaid was $10,000.

Our New Senior UnsecuredCredit Facilities contain various affirmative and negative covenants, whichamong other things, require us to meet certain financial tests (includingcertain leverage and interest coverage ratios) and limit our subsidiaries’ability to incur or guarantee additional indebtedness, grant certain liens,make certain restricted payments, make capital expenditures, engage intransactions with affiliates, make certain investments, sell our assets, makeacquisitions, effect a consolidation or merger and amend or modify instrumentsgoverning certain indebtedness (including relating to our senior secured notesand the New Senior Secured Revolving Credit Facilities). We are required tomaintain certain minimum interest coverage ratios ranging from (i) 2.00 to1.00 for the three fiscal quarters ending on or prior to June 30, 2006through December 31, 2006, (ii) 2.15 to 1.00 for the fiscal quartersending on or prior to March 31, 2007 through December 31, 2007, and(iv) 2.30 to 1.00 thereafter until maturity. Pursuant to the terms of theSenior Unsecured Credit Facility, interest coverage ratio is defined as theratio as of the last day of any fiscal quarter of (a) Consolidated EBITDA(as defined therein) for the four-fiscal quarter period then ending to(b) Consolidated Interest Expense (as defined therein) for suchfour-fiscal quarter period.

Obligations under the NewSenior Credit Facility are guaranteed by all of the Company’s subsidiaries. Nosecurity interests were granted by the Company or its subsidiaries inconnection with the New Senior Unsecured Credit Facility. Interest on the termloan outstanding under the New Senior Unsecured Credit Facility accrues, at theCompany’s option, at either (i) the greater of the prime rate or the rate whichis 0.5% in excess of the federal funds rate, plus 4.0% or (ii) a reserveadjusted Eurodollar rate, plus 5.0%. As of November 6, 2006, the interest rateon the New Senior Unsecured Credit Facility’s term loan was 10.42%.

*Senior Secured Notes due 2010*.Interest on our senior secured notes accrues at a stated rate of 10.00% perannum and is payable semiannually on April 1 and October 1 of eachyear. The rate was increased to 10.25% for the period beginning April 1,2006 and ending March 31, 2007, due to our having exceeded a fiscal year2005 capital expenditure threshold under the indenture governing the notes.Exceeding this capital expenditure threshold does not constitute a default withrespect to our senior secured notes or the indenture.

Our senior secured notesare fully and unconditionally guaranteed on a senior secured basis by all ofour present and future domestic subsidiaries which are restricted subsidiariesunder the indenture governing our senior secured notes. Our senior securednotes and related guarantees are secured by substantially all of our and ourdomestic restricted subsidiaries’ tangible and intangible assets, subject tothe prior ranking claims on such assets by the lenders under our Senior CreditFacility. The indenture governing our senior secured notes contains variousaffirmative and negative covenants, subject to a number of important limitationsand exceptions, including but not limited those limiting our ability to incuradditional indebtedness, pay dividends, redeem stock or make otherdistributions, issue stock of our subsidiaries, make certain investments oracquisitions, grant liens on assets, enter into transactions

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with affiliates, merge, consolidate or transfersubstantially all of our assets, and transfer and sell assets. The covenantthat limits our incurrence of indebtedness requires that, after giving effectto any such incurrence of indebtedness and the application of the proceedsthereof, our fixed charge coverage ratio as of the date of such incurrence willbe at least (i) 2.25 to 1.00 in the case of any incurrence on or beforeApril 1, 2006 and (ii) 2.50 to 1.00 in the case of any incurrenceafter April 1, 2006. The indenture defines consolidated fixed chargecoverage ratio as the ratio of Consolidated Cash Flow (as defined therein) toFixed Charges (as defined therein). We were in compliance with all specifiedfinancial and other covenants under the senior secured notes indenture atSeptember 24, 2006.

We can redeem our seniorsecured notes on or after April 1, 2007, except that we may redeem upto 35% of our senior secured notes before April 1, 2007 with the proceedsof one or more public equity offerings. We are required to offer to purchaseour senior secured notes under certain circumstances involving a change ofcontrol, and we also have the right to redeem our senior secured notes prior toApril 1, 2007 in connection with a change in control. Additionally, if weor any of our domestic restricted subsidiaries engage in assets sales, wegenerally must invest the net cash proceeds from such sales in our businesswithin 360 days or prepay the indebtedness obligations under our New SeniorSecured Revolving Credit Facility or certain other secured indebtedness or makean offer to purchase a portion of our senior secured notes.

On September 19, 2006,the Company  commenced a change ofcontrol offer (the “Offer”) to purchase any or all of its Notes that remainoutstanding under the Indenture dated March 31, 2004 (the “Indenture”) by andamong the Company, the guarantors thereto and Wells Fargo Bank, NationalAssociation, as trustee. The Offer was made pursuant to Section 4.15 of theIndenture as the Merger described in Section 3 above constituted a “change ofcontrol” under the Indenture. In accordance with the terms of the Indenture,the Company is offered to repurchase the Notes at a purchase price in cashequal to 101% of the aggregate principal amount of the Notes or portion ofNotes validly tendered for payment thereof, plus accrued and unpaid interest upto, but not including, the date of payment, upon the terms and subject to theconditions of the Offer.  The Companyobtained a securities purchase commitment, subject to customary conditions,from Credit Suisse Securities (USA) LLC (“Credit Suisse”) pursuant to whichCredit Suisse would have purchased any Notes properly tendered pursuant to theOffer. Credit Suisse obtained a securities purchase commitment from a thirdparty, Cocina Funding Corp., L.L.C. (an affiliate of Farallon CapitalManagement, L.L.C.) to resell the Notes purchased in the Offer to Cocinaimmediately following the expiration date. The offer expired on October 19, 2006.No Notes were tendered pursuant to the offer and as of the expiration date ofthe Offer, $105 million aggregate principal amount of Notes remainedoutstanding.

*Mortgage.*Concurrently with the closing of the Chevys Acquisition, we assumed a $0.8million mortgage secured by the building and improvements of one of therestaurants acquired in the transaction. The mortgage carries a fixed annualinterest rate of 9.28% and requires equal monthly payments of principal andinterest through April 2015.

*Capital Leases*.In conjunction with our acquisition of El Torito, we assumed capital leaseobligations, collateralized with leasehold improvements, in an aggregate amountof $9.2 million. The remaining capital lease obligations have aweighted-average interest rate of approximately 10.0%. As of September 24,2006, the principal amount due relating to capital lease obligations was $1.0million. Principal and interest payments on the capital lease obligations aredue monthly and range from $750 to $7,000 per month. The capital leaseobligations mature between 2006 and 2025.

**Inflation**

Over the past five years,inflation has not significantly affected our operations. However, the impact ofinflation on labor, food and occupancy costs could, in the future,significantly affect our operations. We pay many of our employees hourly ratesrelated to the federal or applicable state minimum wage. Our workers’compensation and health insurance costs have been and are subject to continuedinflationary pressures. Costs for construction, taxes, repairs, maintenance andinsurance all impact our occupancy costs. Many of our leases require us to paytaxes, maintenance, repairs, insurance and utilities, all of which may besubject to inflationary increases. We believe that our current practice ofmaintaining operating margins through a combination of periodic menu priceincreases, cost controls, careful evaluation of property and equipment needs,and efficient purchasing practices is our most effective tool for dealing withinflation.

**Recent Developments**

**SettlementAgreement**

On August 17,2006, Real Mex and its subsidiary CKR Acquisition Corp. (“CKR”) entered into aMutual Settlement Agreement and Release (“Settlement Agreement”) with J.W.Childs Equity Partners, L.P. (“JW Childs Partners”) and its affiliate JWCChevys Co-Invest, LLC (“JWC,” and together with JW Childs Partners, “JW Childs”).  Under the Settlement Agreement, the partiesagreed to resolve certain disputes regarding (i) the number of Real Mex equitysecurities issuable to JW Childs under an asset purchase agreement (“AssetPurchase Agreement”) in connection with the Company’s acquisition of thebusiness of Chevys, Inc. on January 11, 2005 and (ii) certain indemnificationclaims made by Real Mex and CKR against JW Childs (“Indemnification Claims”)pursuant to an indemnification agreement (“Indemnification Agreement”) enteredinto between Real Mex, CKR and JW Childs Partners in connection with the AssetPurchase Agreement.  Under the SettlementAgreement, on August 17, 2006, Real Mex issued to JW Childs an aggregate of1,896.574 shares of its Series A 12.5% Cumulative Compounding Preferred Stock,par value $0.001 per

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share, 1,432.894 sharesof its Series B 13.5% Cumulative Compounding Preferred Stock, par value $0.001per share and 1,176.648 shares of its newly-created Series D 15% CumulativeCompounding Preferred Stock, par value $0.001 per share, and each partyreleased any and all of their respective claims arising from, relating to, orpertaining to the Indemnification Claims, the Indemnification Agreement and theAsset Purchase Agreement, subject to certain exceptions.  Additionally, JW Childs agreed to vote all ofits securities in favor of the Merger (as described below).

The foregoingdescription of the Settlement Agreement is qualified in its entirety byreference to the Settlement Agreement filed with the Securities and ExchangeCommission as Exhibit 10.1 to Form 8-K (File No. 333-116310) on August 17, 2006and incorporated by reference herewith.

**MergerAgreement**

On August 17,2006, the Company entered into an Agreement and Plan of Merger (“MergerAgreement”) with RM Restaurant Holding Corp. (“RM Restaurant Holding”) and itssubsidiary, RM Integrated, Inc. (“RM Integrated”, and together with RMRestaurant Holding, “Buyer”).  Themajority of the stock of RM Restaurant Holding is owned by Sun Cantinas LLC (“SunLLC”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).  On August 18, 2006, the stockholders of theCompany entitled to vote thereon (including the holders of a majority of theCompany’s Series C Preferred Stock, par value $0.001 per share) approved theMerger Agreement.  On August 21, 2006(the “Effective Time”), the closing of the Merger Agreement occurred, and RMIntegrated merged with and into Real Mex (the “Merger”), with Real Mexcontinuing as the surviving corporation and 100% owned subsidiary of RMRestaurant Holding.  The net purchaseprice of Real Mex was $191.6 million, consisting of  $359.0 million in cash, plus net cashacquired of $29.3 million, plus a $1.0 million working capital adjustment andplus direct acquisition costs of $4.7 million, less indebtedness assumed of$181.9 million and seller expenses of $9.6 million. Pursuant to the MergerAgreement, $11.0 million of the Merger Consideration is being held inescrow and the purchase price is subject to adjustment post-closing based onthe amount of net working capital of the Company immediately prior to theclosing and certain other adjustments. As a result of the Merger and in accordance with the terms of the MergerAgreement, (i) all of the outstanding capital stock of Real Mex was convertedinto the right to receive a portion of the purchase price, and all Real Mexoptions, warrants and shares of restricted stock were cancelled and convertedinto the right to receive a portion of the purchase price, less the exerciseprices or unpaid purchase prices therefore, as applicable, and (ii) the Companybecame a wholly-owned subsidiary of RM Restaurant Holding.  Prior to the Merger, Bruckmann, Rosser,Sherrill & Co., Inc. (“BRS”), together with its affiliates, was acontrolling shareholder of Real Mex.  Asdescribed in the Merger Agreement, the Amended and Restated ManagementAgreement dated June 28, 2000 by and among the Company, certain of itssubsidiaries, BRS, and FS Private Investments, L.L.C. was terminated inconnection with the Merger.

The foregoingdescription of the Merger Agreement is qualified in its entirety by referenceto the Merger Agreement filed with the Securities and Exchange Commission asExhibit 10.2 to Form 8-K (File No. 333-116310) on August 17, 2006 andincorporated by reference herewith.

**Item 3.   Quantitativeand Qualitative Disclosures About Market Risk**

The inherent risk inmarket risk sensitive instruments and positions primarily relates to potentiallosses arising from adverse changes in foreign exchange rates and interestrates.

We consider the U.S.dollar to be the functional currency for all of our entities. All of our netsales and our expenses in fiscal years 2006 and 2005 were denominated in U.S.dollars. Therefore, foreign currency fluctuations did not materially affect ourfinancial results in those periods.

We are also subject tomarket risk from exposure to changes in interest rates based on our financingactivities. This exposure relates to borrowings under our senior secured andunsecured credit facilities that are payable at floating rates of interest. Asof October 5, 2006, we had borrowings outstanding under our New Senior SecuredRevolving Credit Facility of $5.5 million and we currently have $65.0 millionoutstanding under our New Senior Unsecured Credit Facility. A hypothetical 10%increase in interest rates would result in an annual after tax reduction of$0.7 million in earnings.

Many of the food productspurchased by us are affected by changes in weather, production, availability,seasonality and other factors outside our control. In an effort to control someof this risk, we have entered into certain fixed price purchase agreements withvarying terms of generally no more than year duration. In addition, we believethat almost all of our food and supplies are available from several sources,which helps to control food commodity risks.

**Item 4.   Controlsand Procedures**

As of the end of theperiod covered by this report, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer (“CEO”)and principal financial officer (“CFO”), of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934 (the “Exchange Act”)). Based on this evaluation, the CEO and CFOconcluded that, as of the end of the record period covered by

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this report, ourdisclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms. There was no change in our internal controlover financial reporting during our most recently completed fiscal quarter thathas materially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

**PART IIOTHER INFORMATION**

**Item1. Legal Proceedings**

We are periodically adefendant in cases involving personal injury, labor and employment and othermatters incidental to our business. While any pending or threatened litigationhas an element of uncertainty, we believe that the outcome of these lawsuits orclaims, individually or combined, will not materially adversely affect ourconsolidated financial position, results of operations or cash flows.

**Item1A. Risk Factors**

No material changes fromthe risk factors disclosed in Item 1A of our report on Form 10-K for thefiscal year ended December 25, 2005.

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

The information set forth under the heading “SettlementAgreement” in note 2 to the financial statements of this Form 10Q isincorporated herein by reference.  Theshares of the Company’s Series A Preferred Stock, Series B Preferred Stock andSeries D Preferred Stock issued to JW Childs were not be registered under theSecurities Act of 1933, as amended (the “Securities Act”), in reliance upon theexemption from the registration requirements as provided in Section 4(2) of theSecurities Act.

**Item3. Defaults Upon Senior Securities**

Not applicable.

**Item4. Submission of Matters to a Vote of Security Holders**

Not applicable.

**Item 5.01Changes in Control Of Registrant.**

The informationset forth under the heading “Merger Agreement” in Part I, Item 1 of this Form10-Q is incorporated herein by reference.

**Item 5.02Departure of Directors or Principal Officers; Election of Directors;Appointment of Principal Officers.**

Effective as of August21, 2006, the Board of Directors of the Company following the Merger consistsof the following three individuals: Fredrick F. Wolfe, President and Chief Executive Officer of the Company,Clarence E. Terry, a Managing Director of Sun Capital, and Douglas C. Werking,a Vice President of Sun Capital.

The officers of theCompany following the Merger are the same officers in place immediately priorto the Merger.  In addition, onSeptember25, 2006, Peter J Letendre was appointed to the office of ChiefAccounting Officer of the Company.

**Exhibits**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                           |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                      |
| 3.(i)            |       | Amended and Restated Certificate of Incorporation of  Real Mex Restaurants, Inc. as filed with the Secretary of State of the State  of Delaware on August 21, 2006.                                                                       |
|             |       |                                                                                                                                                                                                                                      |
| 3.(ii)           |       | Bylaws of Real Mex Restaurants, Inc. dated as of  August 21, 2006.                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                      |
| 10.1             |       | Agreement and Plan of Merger, dated August 17, 2006  among Real Mex Restaurants, Inc., RM Restaurant Holding Corp. and RM  Integrated, Inc (Filed with the Securities and Exchange Commission as  Exhibit 10.1 to the Company’s |

 

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|        |   | Report on Form 8-K (File No. 333-116310) on  August 23, 2006 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Mutual Settlement and Release, dated August 17, 2006  among Real Mex Restaurants, Inc., CKR Acquisition Corp., J.W. Childs Equity  Partners, L.P. and JWC Chevys Co-Invest, LLC (Filed with the Securities and  Exchange Commission as Exhibit 10.2 to the Company’s Report on Form 8-K  (File No. 333-116310) on August 23, 2006 and incorporated by  reference herewith) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Amended and Restated Credit Agreement (Filed with  the Securities and Exchange Commission as Exhibit 10.1 to the Company’s  Report on Form 8-K (File No. 333-116310) on October 6, 2006 and  incorporated by reference herewith)                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Fourth Amendment to Credit Agreement and Amendment  to Loan Documents (Filed with the Securities and Exchange Commission as  Exhibit 10.2 to the Company’s Report on Form 8-K (File  No. 333-116310) on October 6, 2006 and incorporated by reference  herewith)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934 of the Chief Executive Officer.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities  Exchange Act of 1934 of the Chief Financial Officer.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1   |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2   |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.                                                                                                                                                                                                                            |

 

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                    | REAL MEX  RESTAURANTS, INC. |
|-------------------------|----------------------------------|
|                    |                             |   |
|                    |                             |   |
| Dated: November 6, 2006 | By:                              | /s/ Frederick F. Wolfe |   |
|                    |                             | Frederick F. Wolfe |
|                    |                             | President &  Chief Executive Officer  (principal executive officer) |
|                    |                             |   |
| Dated: November 6, 2006 | By:                              | /s/ Steven Tanner |   |
|                    |                             | Steven Tanner |
|                    |                             | Chief Financial Officer  (principal financial officer) |
|                    |                             |   |
| Dated: November 6, 2006 | By:                              | /s/ Peter J Letendre |   |
|                    |                             | Peter J Letendre |
|                    |                             | Chief Accounting  Officer  (principal accounting officer) |

 

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