**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

 
| **x**      | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                                     |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                  |
| ** ** | **For the quarterly period ended June 25, 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 MEX RESTAURANTS, INC.**

(Exactname of Registrant as specified in its charter)

| **Delaware**                     |   | **13-4012902**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

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

Registrant’stelephone number, including area code:**(562)-346-1200**

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.

(See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act). (Check one):

Large AcceleratedFiler o                            AcceleratedFiler o                              Non-AcceleratedFiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  xNo

As of August 4,2006, the registrant had outstanding 300,423.16 shares of Class A CommonStock, par value $0.001 per share, and 15,866.82 shares of Class B 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.                           | Other  Information |
| Item 6.                            | Exhibits |
| SIGNATURE                          |   |

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**FORWARD-LOOKING STATEMENTS**

*This report includes “forward looking statements”within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).Forward looking statements are those that do not relate solely to historicalfact. 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 statements reflect ourcurrent views with respect to future events and are based on assumptions andsubject to risks and uncertainties, including, butnot limited to, economic, competitive, governmental and technological factorsoutside of our control, that may cause actual results to differ materiallyfrom trends, plans or expectations set forth in the forward looking statements.These risks and uncertainties may include these risks and uncertaintiesand the risks and uncertainties described elsewhere in this report and in Item1A “Risk Factors” of our annual report on Form 10-K filed with the SEC onFebruary 21, 2006. Given these risks and uncertainties, we urge you toread this report completely and with the understanding that actual futureresults may be materially different from what we plan or expect. All ofthe forward-looking statements made in this Form 10-Q are qualified bythese cautionary statements and we cannot assure you that the actual results ordevelopments anticipated by our Company will be realized or, even ifsubstantially realized, that they will have the expected consequences to oreffects on our Company or our business or operations. In addition, theseforward-looking statements present our estimates and assumptions only as of thedate of this report. Except for our ongoing obligation to disclose materialinformation as required by federal securities laws, we do not intend to updateyou concerning any future revisions to any forward looking statements toreflect events or circumstances occurring after the date of this report.*

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

3

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**PART IFINANCIAL INFORMATION**

**Item 1. Financial Statements**

**Real MexRestaurants, Inc. and SubsidiariesConsolidated Balance Sheets(in thousands, except for share data)**
| ** **                                                                                                                                                                                                                                                        | ** ** | **June 25,** | ** ** | **December 25,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                                                        | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                                   |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                        |       | $                 | 21,354     |                  | $          | 14,871 |   |
| Trade  receivables, net                                                                                                                                                                                                                                           |       | 9,223             |       | 8,265                 |       |
| Other  receivables                                                                                                                                                                                                                                                |       | 1,463             |       | 2,289                 |       |
| Inventories                                                                                                                                                                                                                                                       |       | 10,165            |       | 9,977                 |       |
| Prepaid expenses  and supplies                                                                                                                                                                                                                                    |       | 6,337             |       | 5,268                 |       |
| Deferred tax  asset                                                                                                                                                                                                                                               |       | 3,454             |       | 3,454                 |       |
| Total current assets                                                                                                                                                                                                                                              |       | 51,996            |       | 44,124                |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Property and equipment,  net                                                                                                                                                                                                                                      |       | 82,910            |       | 82,592                |       |
| Goodwill, net                                                                                                                                                                                                                                                     |       | 158,820           |       | 157,267               |       |
| Deferred charges                                                                                                                                                                                                                                                  |       | 5,495             |       | 6,354                 |       |
| Deferred tax asset                                                                                                                                                                                                                                                |       | 11,515            |       | 14,097                |       |
| Other assets                                                                                                                                                                                                                                                      |       | 5,950             |       | 6,455                 |       |
| Total assets                                                                                                                                                                                                                                                      |       | $                 | 316,686    |                  | $          | 310,889 |   |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                  |       | $                 | 19,624     |                  | $          | 26,227 |   |
| Accrued  self-insurance reserves                                                                                                                                                                                                                                  |       | 16,873            |       | 15,916                |       |
| Accrued  compensation and benefits                                                                                                                                                                                                                                |       | 11,841            |       | 11,845                |       |
| Other accrued  liabilities                                                                                                                                                                                                                                        |       | 16,395            |       | 12,272                |       |
| Related party  payables                                                                                                                                                                                                                                           |       | 328               |       | 228                   |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                |       | 120               |       | 117                   |       |
| Current portion  of capital lease obligations                                                                                                                                                                                                                     |       | 209               |       | 210                   |       |
| Total current  liabilities                                                                                                                                                                                                                                        |       | 65,390            |       | 66,815                |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Long-term debt, less  current portion                                                                                                                                                                                                                             |       | 180,687           |       | 180,717               |       |
| Capital lease obligations,  less current portion                                                                                                                                                                                                                  |       | 885               |       | 987                   |       |
| Other liabilities                                                                                                                                                                                                                                                 |       | 12,738            |       | 11,786                |       |
| Total liabilities                                                                                                                                                                                                                                                 |       | 259,700           |       | 260,305               |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Redeemable  Preferred Stock:                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Series A,  12.5% Cumulative Compounding Preferred Stock—18,239.983 shares issued and  outstanding at June 25, 2006 and December 25, 2005; liquidation  preference of $37,743 and $35,646 at June 25, 2006 and December 25, 2005  respectively |       | 37,743            |       | 35,646                |       |
| Series B,  13.5% Cumulative Compounding Preferred Stock—12,323.311shares issued and  outstanding at June 25, 2006 and December 25, 2005; liquidation  preference of $26,966 and $25,365 at June 25, 2006 and December 25, 2005  respectively; |       | 26,966            |       | 25,365                |       |
| Series C,  15% Cumulative Compounding Preferred Stock—17,477.904 shares issued and  outstanding at June 25, 2006 and December 25, 2005; liquidation  preference of $62,179 and $58,080 at June 25, 2006 and December 25, 2005  respectively;  |       | 62,179            |       | 58,080                |       |
| Common Stock,  $.001 par value, 2,000,000 shares authorized, 316,289.98 shares issued and  outstanding at June 25, 2006 and December 25, 2005;                                                                                                               |       | —            |       | —                |       |
| Warrants                                                                                                                                                                                                                                                          |       | 4,027             |       | 4,027                 |       |
| Additional  paid-in capital                                                                                                                                                                                                                                       |       | 16,203            |       | 16,203                |       |
| Accumulated  deficit                                                                                                                                                                                                                                              |       | (90,132           | )          | (88,737               | )          |
| Total stockholders’  equity                                                                                                                                                                                                                                  |       | 56,986            |       | 50,584                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                   |       | $                 | 316,686    |                  | $          | 310,889 |   |

 

See accompanying notes.

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**Real MexRestaurants, Inc. and SubsidiariesConsolidated Statements of Operations (unaudited)(in thousands)**
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 25,**                | ** ** | **June 26,**              | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **                                             | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                              |       |                             |       |                           |       |   |   |   |   |
| Restaurant revenues                                    |       | $                                | 138,561    |                           | $          | 138,516 |   | $ | 268,359 |   | $ | 257,954 |   |
| Other revenues                                         |       | 7,067                            |       | 5,144                          |       | 13,907 |   | 9,014 |   |
| Royalty and franchise fees                             |       | 1,064                            |       | 1,000                          |       | 2,008 |   | 1,681 |   |
| Total revenues                                         |       | 146,692                          |       | 144,660                        |       | 284,274 |   | 268,649 |   |
| Costs and  expenses:                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of sales                                          |       | 36,972                           |       | 37,182                         |       | 72,378 |   | 68,217 |   |
| Labor                                                  |       | 49,211                           |       | 49,996                         |       | 97,018 |   | 94,588 |   |
| Direct operating and occupancy expense                 |       | 32,130                           |       | 34,222                         |       | 65,439 |   | 63,427 |   |
| General and administrative expense                     |       | 7,412                            |       | 6,231                          |       | 14,258 |   | 13,471 |   |
| Depreciation and amortization                          |       | 4,831                            |       | 5,456                          |       | 9,355 |   | 9,970 |   |
| Legal settlement costs                                 |       | 736                              |       | 363                            |       | 2,758 |   | 713 |   |
| Pre-opening costs                                      |       | 170                              |       | 159                            |       | 443 |   | 330 |   |
| Loss on impairment of property and equipment           |       | —                           |       | —                         |       | — |   | 216 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Operating income                                       |       | 15,230                           |       | 11,051                         |       | 22,625 |   | 17,717 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                               |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                       |       | (6,083                           | )          | (5,907                         | )          | (12,095 | ) | (11,301 | ) |
| Other income (expense), net                            |       | 303                              |       | (52                            | )          | 354 |   | 73 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Total other expense, net                               |       | (5,780                           | )          | (5,959                         | )          | (11,741 | ) | (11,228 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income before  income tax provision                    |       | 9,450                            |       | 5,092                          |       | 10,884 |   | 6,489 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income tax  provision                                  |       | 3,911                            |       | —                         |       | 4,482 |   | 2 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income                                             |       | 5,539                            |       | 5,092                          |       | 6,402 |   | 6,487 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Redeemable  preferred stock accretion                  |       | (3,898                           | )          | (3,433                         | )          | (7,796 | ) | (6,824 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)  attributable to common stockholders |       | $                                | 1,641      |                           | $          | 1,659 |   | $ | (1,394 | ) | $ | (337 | ) |

 

See accompanying notes.

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**Real MexRestaurants, Inc.Consolidated Statements of Cash Flows (unaudited)(in thousands)**
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **June 25,**                | ** ** | **June 26,** | ** ** |
| ** **                                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Operating  activities**                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 6,402      |   | $ | 6,487 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 9,355                            |       | 9,958 |   |
| Amortization of deferred financing costs                                           |       | 884                              |       | 873 |   |
| Gain on disposal of property and equipment                                         |       | (19                              | )          | (67 | ) |
| Deferred tax asset                                                                 |       | 2,582                            |       | — |   |
| Impairment of property and equipment                                               |       | —                           |       | 216 |   |
| Changes in operating assets and liabilities:                                       |       |                             |       |   |   |
| Trade and other receivables                                                        |       | (132                             | )          | (1,971 | ) |
| Inventories                                                                        |       | (188                             | )          | (4,056 | ) |
| Prepaid expenses and supplies                                                      |       | (1,069                           | )          | (1,177 | ) |
| Deferred charges, net                                                              |       | (11                              | )          | (12 | ) |
| Other assets                                                                       |       | 479                              |       | 449 |   |
| Accounts payable and accrued liabilities                                           |       | (1,427                           | )          | (4,852 | ) |
| Other liabilities                                                                  |       | 1,050                            |       | 550 |   |
| Net cash  provided by operating activities                                         |       | 17,906                           |       | 6,398 |   |
| **Investing  activities**                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Additions to  property and equipment                                               |       | (9,740                           | )          | (7,737 | ) |
| Chevys  Acquisition, net of cash acquired of $3,913                                |       | (1,553                           | )          | (75,225 | ) |
| Proceeds from  sale of property                                                    |       | —                           |       | (10 | ) |
| Net cash used in  investing activities                                             |       | (11,293                          | )          | (82,972 | ) |
| **Financing  activities**                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Borrowings under  long-term debt agreements                                        |       | —                           |       | 75,000 |   |
| Payments on  long-term debt agreements and capital lease obligations               |       | (130                             | )          | (157 | ) |
| Payment of  financing costs                                                        |       | —                           |       | (2,880 | ) |
| Net cash (used  in) provided by financing activities                               |       | (130                             | )          | 71,963 |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | 6,483                            |       | (4,611 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 14,871                           |       | 10,690 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                | 21,354     |   | $ | 6,079 |   |
| **Supplemental  disclosure of cash flow information**                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest paid                                                                      |       | $                                | 11,154     |   | $ | 9,960 |   |
| Income taxes  paid                                                                 |       | $                                | 42         |   | $ | 2 |   |
| **Supplemental  disclosure of noncash investing and financing activities**         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Preferred and common  stock issued as consideration for the Chevys Acquisition     |       | $                                | —     |   | $ | 7,349 |   |

 

See accompanying notes.

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**Real MexRestaurants, Inc. and SubsidiariesNotes to Consolidated Financial Statements (unaudited)June 25, 2006(in thousands, except for share data)**

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

Real Mex Restaurants, Inc., a Delaware Corporation (together withits subsidiaries, the “Company”), was formed on May 15, 1998.

The Company, primarily through its major subsidiaries El ToritoRestaurants, Inc. (El Torito), Chevys Restaurants, LLC (Chevys) andAcapulco Restaurants, Inc. (Acapulco), currently operates 194 restaurants,of which 160 are located in California and the remainder are located in 12other states, primarily under the trade names El Torito Restaurant, ChevysFresh Mex and Acapulco Mexican Restaurant Y Cantina. The Company’s other majorsubsidiary, Real Mex Foods, Inc., (Real Mex) provides internal production,purchasing and distribution services for the restaurant operations and alsomanufactures specialty 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 SECon Form 10-K for the year ended December 25, 2005. We believe thatthe disclosures included in our accompanying interim consolidated financialstatements and footnotes are adequate to make the information not misleading,but should be read in conjunction with our consolidated financial statementsand notes thereto included in the Annual Report on Form 10-K. Theaccompanying consolidated balance sheet as of December 25, 2005 has beenderived from our audited financial statements

**2.****             ChevysAcquisition**

OnJanuary 11, 2005, the Company, through its subsidiary Chevys RestaurantsLLC, purchased substantially all of the assets of Chevys, Inc. and certainof its subsidiaries (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 included thepayment of cash and the issuance of the Company’s equity securities. 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.

The followingtable presents the allocation of the acquisition costs, including professionalfees and other related transaction costs, to the assets acquired andliabilities assumed based on their estimated fair values:

| Cash and cash equivalents                 |   | $       | 3,913  |   |
|-------------------------------------------|--------|---------|--------|--------|
| Trade accounts  receivable                |   | 2,641   |   |
| Inventories                               |   | 1,382   |   |
| Other current  assets                     |   | 1,178   |   |
| Property and  equipment                   |   | 42,312  |   |
| Deferred tax  asset                       |   | 3,599   |   |
| Other assets                              |   | 3,386   |   |
| Goodwill                                  |   | 53,434  |   |
| Total assets acquired                     |   | 111,263 |   |
|                                      |   |    |   |
| Accounts payable  and accrued liabilities |   | 19,163  |   |
| Other  liabilities                        |   | 2,416   |   |
| Total liabilities assumed                 |   | 21,579  |   |
| Net assets acquired                       |   | $       | 90,266 |   |

 

These transactionswere accounted for under the purchase method of accounting and, accordingly,the purchase price has been allocated to the assets acquired and theliabilities assumed based on the estimated fair market value at the date of theacquisition.

The primary reasonfor the Chevys Acquisition was to add a complementary growth concept in thefull-service Mexican

7

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segment of the restaurantindustry. The Company attributes the goodwill associated with the ChevysAcquisition to the historical financial performance and the anticipated futureperformance of Chevys. The Company is currently determining the amount, if any,of any additional tax benefits that may have been acquired in the ChevysAcquisition. Any change in the amount of the tax benefits will impact theoverall purchase price only.

The following pro forma consolidated results ofoperations have been prepared as if the Chevys Acquisition had occurred onDecember 27, 2004 (the first day of fiscal year 2005):
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **June 25,**                | ** ** | **June 26,**              | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Total revenues                                          |       | $                                | 146,692    |                           | $          | 144,660 |   | $ | 284,274 |   | $ | 277,355 |   |
| Net income before  redeemable preferred stock accretion |       | 5,539                            |       | 5,092                          |       | 6,402 |   | 6,831 |   |
|                                                         |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

The pro forma information is presented forinformational purposes only and is not necessarily indicative of the results ofoperations that actually would have been achieved had the Chevys Acquisitionbeen consummated as of that time, nor is it intended to be a projection offuture results.

**3.****             Long-TermDebt**

Long-term debt consists of the following:

|                                   | ** ** | **June 25,  2006** | ** ** | **December 25,  2005** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior Secured  Notes due 2010    |       | $                       | 105,000    |                        | $          | 105,000 |   |
| Senior Unsecured  Credit Facility |       | 75,000                  |       | 75,000                      |       |
| Mortgage                          |       | 744                     |       | 771                         |       |
| Other                             |       | 63                      |       | 63                          |       |
|                              |       | 180,807                 |       | 180,834                     |       |
|                              |       |                    |       |                        |       |
| Less current  portion             |       | (120                    | )          | (117                        | )          |
|                              |       |                    |       |                        |       |
|                              |       | $                       | 180,687    |                        | $          | 180,717 |   |

 

OnJanuary 11, 2005, the Company entered into a $75,000 senior unsecuredcredit facility (the “Senior Unsecured Credit Facility”), consisting of asingle term loan maturing on December 31, 2008, all of the proceeds of whichwere used to finance a portion of the cash consideration for the ChevysAcquisition and pay related fees and expenses. Obligations under the SeniorUnsecured Credit Facility are guaranteed by the Company’s subsidiaries.Interest on the term loan outstanding under the Senior Unsecured CreditFacility accrues, at the Company’s option, at either (i) the greater ofprime or the rate which is 0.5% in excess of the federal funds rate, plus 8.5%or (ii) a reserve adjusted Eurodollar rate, plus 9.5%. As of June 25,2006, the interest rate on the Senior Unsecured Credit Facility’s term loan was14.92%.

OnJanuary 11, 2005, the Company assumed an $812 mortgage (the “Mortgage”),secured by the building and improvements of one of the restaurants acquired inthe Chevys Acquisition. The Mortgage carries a fixed annual interest rate of9.28% and requires equal monthly payments of principal and interest throughApril 1, 2015.

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 “Line”) providing for $30,000 of Senior SecuredCredit Facilities with a lead bank acting as Lead Arranger and AdministrativeAgent. The Line includes a $15,000 letter of credit facility and a $15,000revolving credit facility that can be used for letters of credit. No amountswere outstanding under the Line as of June 25, 2006.

On March 31,2004, the Company sold $105,000 aggregate principal amount of 10% seniorsecured notes due 2010 (the “Notes”). Interest on the Notes is payablesemiannually on April 1 and October 1 each year. The proceeds of theNotes were used to repay in full the then outstanding term loans under theCompany’s prior credit facility and old subordinated notes, and the feesassociated with the Line and the sale of the Notes. The Notes included aprovision that required the Company to commence an exchange offer to exchangethe originally issued notes for new registered notes by October 27, 2004.The Company suspended and extended the exchange offer on October 22, 2004as a result of its then pending acquisition of Chevys, Inc. The Companycompleted the exchange offer for 100% of the Notes on June 7, 2005. Infiscal year 2005, the Company exceeded the capital expenditure limit under theindenture governing the Notes and as a result will be required to pay interestat a rate of 10.25% for the period April 1, 2006 through March 31,2007, a 0.25% increase in the stated rate. Exceeding this capital expenditurelimit does not constitute a default with respect to the Notes or the indenture.

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The terms of theLine, the Notes and the Senior Unsecured Credit Facility include specificfinancial and other covenants, all of which the Company was in compliance withat June 25, 2006.

Interest rates forthe Line, the Notes and the Senior Unsecured Credit Facility are shown thefollowing table:

|                                   | ** ** | **June 25,  2006** | ** ** | **December 25,  2005** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior secured  notes due 2010    |       | 10.25                   | %          | 10.00                       | %          |
| Senior Unsecured  Credit Facility |       | 14.92                   | %          | 14.17                       | %          |
| Mortgage                          |       | 9.28                    | %          | 9.28                        | %          |

 

**4.****             Capitalization**

**CommonStock**

The Company is authorized to issue 1,000,000 shares of par value $0.001Class A Common Stock and 1,000,000 shares of par value $0.001 Class BCommon Stock. The terms of the Class B Common Stock are identical to theClass A Common Stock except that the holders of Class B Common Stockhave no voting rights, except as provided by law. Each holder of Class BCommon Stock has the right to convert any or all shares of Class B CommonStock into an equal number of shares of Class A Common Stock at any time.There were 300,423.16 shares issued and outstanding of Class A CommonStock at June 25, 2006 and December 25, 2005. There were 15,866.82 sharesissued and outstanding of Class B Common Stock at June 25, 2006 andDecember 25, 2005.

**RedeemablePreferred Stock**

The Company is authorized to issue 100,000 shares of nonvoting $0.001par value Redeemable Preferred Stock. Shares are issued upon approval of theboard of directors and are redeemable at any time at the option of the Company.

Series A 12.5% Cumulative Compounding Redeemable Preferred Stock(Series A) and Series B 13.5% Cumulative Compounding RedeemablePreferred Stock (Series B) have a liquidation preference of $1 per share,plus accreted dividends associated with each share. With respect to dividendrights and rights of liquidation, Series A ranks senior to all classes ofCommon Stock and Series B. Series B ranks senior to all classes ofCommon Stock.

Series C 15% Cumulative Compounding Participating Preferred stock(Series C) ranks senior with respect to payment of dividends, liquidation,and redemption to the previously existing series of preferred stock andcommon stock of the Company. The Series C has a liquidation preference equalto two times the original issue price of $1 per share, plus accreted dividends.

The liquidation preference on the Series A, Series B andSeries C accretes at the stated rates on the liquidation preference valuethereof; dividends (representing the accreted liquidation preference) are to bepaid from legally available funds, when and if declared by the board ofdirectors. If dividends are not declared, a dividend will continue to accrueand will be paid as dividends only when and if declared, or upon a sale orliquidation of the Company or upon redemption of the preferred stock. Accretionof the liquidation preference on the Redeemable Preferred Stock was $3,898 and$3,433 during the three months ended June 25, 2006 and June 26, 2005,respectively, and $7,796 and $6,824 during the six months ended June 25, 2006and June 26, 2005, respectively, and is reflected as an increase in thepreferred stock values and an increase in the accumulated deficit.

Net loss attributable to common stockholders includes the effect of theaccretion of the liquidation preference on the redeemable preferred stock,which reduces net income and increases net loss attributable to commonstockholders for the relevant periods.

**StockOption Plans**

The Company’s 1998and 2000 Stock Based Incentive Compensation Plans (the Plans) have authorizedthe grant of options to certain employees, directors and independentcontractors for up to 12,000 and 100,000 shares, respectively, of the Company’sCommon Stock. All options granted under both Plans have 10-year terms. Underthe 2000 Stock-Based Incentive Compensation Plan, the Company granted a stockoption for 3,671 shares in 2001, 50% of whose vesting is conditional on achange in control.

The 2000Stock-Based Incentive Compensation Plan, for option grants prior to 2004,provided for 50% of the options to become exercisable based on “annual vesting,”with 10% of the grant vesting per year during the first five years after thegrant date, and the remaining 50% to become exercisable based on a “cliffvesting” schedule. These options are fully vested. Additionally, for optiongrants made in 2004 and 2005, the Plan provides for 20% of the option grants tobecome exercisable each year on the anniversary date of the grants.

Prior to fiscal2006, the Company accounted for stock-based compensation expense under therecognition and measurement

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principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”), and related interpretations and adopted the disclosure-onlyprovisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB25, no stock-based compensation expense was reflected in net income for grantsof stock options prior to fiscal 2006 because the Company grants stock optionswith an exercise price equal to the market value of the stock on the date ofgrant.

Effective December 26, 2005, the Company adoptedSFAS No. 123(R), “Share-Based Payment” (“SFAS 123R”), which requires themeasurement and recognition of compensation cost at fair value for allshare-based payments, including stock options and restricted stock awards. TheCompany adopted SFAS 123R using the prospective method, as the Company isconsidered a nonpublic company for purposes of FAS 123R. Under this method, theCompany records the expense related to all stock awards granted on orsubsequent to December 26, 2005, based on the grant date “calculated value”estimated in accordance with the provisions of SFAS 123R. The Companyapplies the Black-Scholes valuation model in determining the calculated valueof share-based payments using the volatility of the Company’s appropriateindustry sector index, which is amortized on a straight-line basis over therequisite service period. No options were granted during the three and sixmonth periods ended June 25, 2006.

A summary of the status of the Plans as of June 25,2006, and December 25, 2005, and changes during the current year, ispresented below:

|                                          | ** ** | **1998 Plan**                 | ** ** | **2000 Plan**                      | ** ** |
|------------------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding—December 25,  2005 |       | 5,932                              |       | $                                       | 10.00      |   | 72,550 |   | $ | 22.49 |   |
|                                     |       |                               |       |                                    |       |   |   |   |   |
| Granted                                  |       | —                             |       | —                                  |       | — |   | $ | — |   |
| Exercised                                |       | —                             |       | —                                  |       | — |   | — |   |
| Canceled                                 |       | —                             |       | —                                  |       | (367 | ) | 92.00 |   |
| Outstanding—June  25, 2006          |       | 5,932                              |       | $                                       | 10.00      |   | 72,183 |   | $ | 22.13 |   |
|                                     |       |                               |       |                                    |       |   |   |   |   |
| Exercisable at June 25,  2006            |       | 5,932                              |       | $                                       | 10.00      |   | 36,959 |   | $ | 38.65 |   |

 

The weighted-average remaining contractual life of theemployee stock options granted under the 1998 Stock-Based IncentiveCompensation Plan is three years. The weighted-average remaining contractuallife of the employee stock options granted under the 2000 Stock-Based IncentiveCompensation Plan is seven years.

**5.****             RelatedParty Transactions**

The Company has a management agreement with two of its stockholders.The stockholders are paid fees equating to .667% and .333%, respectively, ofconsolidated earnings before interest, income taxes, depreciation andamortization of the Company. Expenses relating to the agreement of $203 and$166 were recorded as general and administrative expense in the three monthsended June 25, 2006 and June 26, 2005, respectively, and $328 and $283 forthe six months ended June 25, 2006 and June 26, 2005, respectively.

OnJanuary 19, 2005, the Company paid $833 and $166 to Bruckman, Rosser,Sherrill & Co., L.P. and FS Private Investments, LLP, respectively,for advisory and transactional services provided to the Company pursuant to themanagement agreement in connection with the Chevys Acquisition.

**Item2.**    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

*You should read the following discussion togetherwith our consolidated financial statements and related notes thereto*

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*included elsewhere in this report. The followingdiscussion and analysis of our financial condition and results of operationscontains forward looking statements within the meaning of the federalsecurities laws. See the discussion under the heading “Forward-LookingStatements” elsewhere in this report.*

**Overview**

We are one of the largest full service, casual dining Mexicanrestaurant chain operators in the United States in terms of number ofrestaurants. As of June 25, 2006 we operated 194 restaurants, of which 160 arelocated in California, with additional restaurants in Arizona, Florida,Indiana, Illinois, Maryland, Missouri, Nevada, New Jersey, New York, Oregon,Virginia and Washington. Our four major subsidiaries are El ToritoRestaurants, 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 Torito Grill, Acapulco and Chevys, our primary restaurantconcepts, offer high quality Mexican food, a wide selection of alcoholicbeverages and excellent guest service. In addition to the El Torito, El ToritoGrill, Acapulco and Chevys concepts, we operate 15 additional restaurantlocations, most of which are also full service Mexican formats, under thefollowing brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHarry’s;Who Song & Larry’s; Keystone Grill; and Fuzio Universal Pasta.

On January 11, 2005 we completed the Chevys Acquisition, acquiring69 Chevys restaurants and five Fuzio Universal Pasta restaurants and assumingfranchise agreements for 37 franchised Chevys restaurants and five franchisedFuzio Universal Pasta restaurants. The purchase price for the ChevysAcquisition was approximately $76.2 million in cash and the assumption ofcertain liabilities, plus the issuance of Real Mex common and preferred stockto J.W. Childs Equity Partners L.P. and its affiliate, JWC Chevys Co-Invest,LLC. See “Notes to Consolidated Financial Statements”. Chevys’ results ofoperations have been included in our Company’s consolidated financialstatements since the date of the acquisition.

In 2005, we opened one new El Torito restaurant in Corona, CA and onenew El Torito Grill restaurant in Sherman Oaks, CA. In January 2006, weopened two new El Torito restaurants in Oxnard, CA and Temecula, CA. We plan toopen six additional restaurants in 2006, including two restaurants scheduled toopen in August 2006 in San Leandro, CA (Chevys) and Riverside, CA (El Torito).

Our restaurant revenues include sales of food and alcoholic and otherbeverages. Other revenues consists primarily of sales by Real MexFoods, Inc. to outside customers of processed and packaged prepared foodsand other merchandise items. Royalty and franchise fees include royalty feeswhich are based on a contractual percentage of sales in franchised restaurants,franchise fees, which are the fees paid for the franchising of a particularlocation. Franchise fees are recognized as revenue upon the opening of afranchised restaurant.

Cost of sales is comprised primarily of food and alcoholic beverageexpenses. The components of cost of sales are variable 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, andingredient shortages.

Labor cost includes direct hourly and management wages, operationsmanagement bonus expense, vacation pay, payroll taxes and workers’ compensationinsurance and health insurance expenses.

Direct operating and occupancy expense includes operating supplies,repairs and maintenance, advertising expenses, utilities, and other restaurantrelated operating expenses. This expense also includes all occupancy costs suchas fixed rent, percentage rent, common area maintenance charges, real estatetaxes and other related occupancy costs.

General and administrative expense includes all corporate andadministrative functions that support our operations. Expenses within thiscategory include executive management, supervisory and staff salaries, bonusand related employee benefits, travel and relocation costs, informationsystems, training, corporate rent and professional and other consulting fees.

Depreciation and amortization principally includes depreciation andamortization of capital expenditures for restaurants. Pre-opening costs areexpensed as incurred and include costs associated with the opening of a newrestaurant or the conversion of an existing restaurant to a different concept.

Our fiscal year consists of 52 or 53 weeks and ends on the last Sundayin December of each year. The three months and six months ended June 25,2006 and June 27, 2005 consist of 13 and 26 weeks, respectively. Whencalculating comparable store sales, we include a restaurant that has been openfor more than 18 months and for the entirety of each comparable period.

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**Critical Accounting 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 information regarding the accounting policies that webelieve to be critical accounting policies that affect our more significantjudgments and estimates used in preparing our consolidated financialstatements, see our report on Form 10-K filed for the fiscal year endedDecember 25, 2005.

**Impact of Recently Issued Accounting Principles**

In June 2006, the Financial Accounting Standards Board(FASB) issued FASB Interpretation Number 48 (FIN 48), “Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” Theinterpretation contains a two step approach to recognizing and measuringuncertain tax positions accounted for in accordance with SFAS No. 109. Thefirst step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates it is more likely than not that theposition will be sustained on audit, including resolution of related appeals orlitigation processes, if any. The second step is to measure the tax benefit asthe largest amount which is more than 50% likely of being realized uponultimate settlement. The provisions are effective for the company beginning inthe first quarter of 2007. The company is evaluating the impact this statementwill have on its consolidated financial statements. 

**Results of Operations**

Our operating results for the three and six months ended June 25, 2006and June 26, 2005 are expressed as a percentage of total revenues below:
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 25, 2006**      | ** ** | **June 26, 2005**    | ** ** | **June 25, 2006** | ** ** | **June 26, 2005** | ** ** |
| Total revenues                          |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                           |       | 25.2                             |       | 25.7                           |       | 25.5 |   | 25.4 |   |
| Labor                                   |       | 33.5                             |       | 34.6                           |       | 34.1 |   | 35.2 |   |
| Direct operating  and occupancy expense |       | 21.9                             |       | 23.7                           |       | 23.0 |   | 23.6 |   |
| Total operating  costs                  |       | 80.7                             |       | 83.9                           |       | 82.6 |   | 84.2 |   |
| General and  administrative expense     |       | 5.1                              |       | 4.3                            |       | 5.0 |   | 5.0 |   |
| Depreciation and  amortization          |       | 3.3                              |       | 3.8                            |       | 3.3 |   | 3.7 |   |
| Legal settlement  costs                 |       | 0.5                              |       | 0.3                            |       | 1.0 |   | 0.3 |   |
| Pre-opening  costs                      |       | 0.1                              |       | 0.1                            |       | 0.2 |   | 0.1 |   |
| Operating income                        |       | 10.4                             |       | 7.6                            |       | 8.0 |   | 6.6 |   |
| Interest expense                        |       | 4.1                              |       | 4.1                            |       | 4.3 |   | 4.2 |   |
| Total other  expense, net               |       | 3.9                              |       | 4.1                            |       | 4.1 |   | 4.2 |   |
| Income before  tax provision            |       | 6.4                              |       | 3.5                            |       | 3.8 |   | 2.4 |   |
| Net income                              |       | 3.8                              |       | 3.5                            |       | 2.3 |   | 2.4 |   |

 

**Threemonths ended June 25, 2006 compared to the three months ended June 26,2005**

*Total Revenues*. Total revenues increased by $2.0 million, or 1.4%,to $146.7 million in the second quarter of 2006 from $144.7 million in thesecond quarter of 2005 primarily due to a $0.1 million net increase inrestaurant revenues, a $2.0 million increase in other revenues and $0.1 millionincrease in royalty and franchise fees. The net increase in restaurant revenueswas primarily due to comparable store sales increases of $0.3 million or 0.2%,plus sales from new restaurants of $2.7 million reduced by sales fromrestaurant closures of $2.9 million. The increase in other revenues wasprimarily due to an increase in sales to outside customers by Real Mex Foods,Inc., our distribution and manufacturing subsidiary.

*Cost of Sales*. Total cost of sales of $37.0 million in the secondquarter of 2006 decreased $0.2 million or 0.6% as compared to the secondquarter of 2005, due to an overall decrease in commodity prices in 2006 versus2005. As a percentage of total revenues, cost of sales decreased to 25.2% forthe second quarter of 2006 from 25.7% for the second quarter of 2005.

*Labor*. Labor costs of $49.2 million in the second quarterof 2006 decreased by $0.8 million or 1.6% as compared to the second quarter of2005, and as a percentage of total revenues, labor costs decreased to 33.5% forthe second quarter of 2006 from 34.6% for the second quarter of 2005. Thereduction in labor costs an was primarily due to a reduction in total hourlyemployee labor expense achieved as a result of our continued focus on hourlylabor controls, scheduling and a reduction in employee turnover. Payroll andbenefits remain subject to inflation and government regulation; especially wagerates currently at or near the minimum wage, and expenses for health insuranceand workers’ compensation insurance.

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expenseof $32.1 million in the second quarter of 2006 decreased by $2.1 million or6.1% as compared to the second quarter of 2005 primarily due to loweradvertising expense and other direct expense. Direct operating and occupancy expense as a percentage of salesdecreased to 21.9% in the second quarter of 2006 from 23.7% in the secondquarter of 2005.

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*General and Administrative Expense*. General and administrative expense of$7.4 million in the second quarter of 2006 increased by $1.2 million or 19.0%as compared to the second quarter of 2005 primarily due to higher salary andpayroll tax expense combined with higher bonus expense.  General and administrative expense as apercentage of sales increased to 5.1% in the second quarter of 2006 from 4.3%in the second quarter of 2005.

*Depreciation and Amortization*. Depreciation and amortization expenseof $4.8 million in the second quarter of 2006 decreased by $0.6 million or11.5% as compared to the second quarter of 2005. As a percentage of totalrevenues, depreciation and amortization decreased to 3.3% for the secondquarter of 2006 from 3.8% for the second quarter of 2005.

*Legal Settlement Costs.*We incurred legal settlement costs of$0.7 million in the second quarter of 2006 compared to $0.4 million in thesecond quarter of 2005. The increase in costs relates to lawsuits filed againstus in 2004 and 2005.

*Interest Expense*. Interest expense of $6.1 million in the secondquarter of 2006 increased $0.2 million or 3.0% as compared to the secondquarter of 2005 primarily due to a an increase in the interest rate on ourSenior Unsecured Credit Facility (the interest rate in the second quarter of2005 ranged from 12.27% to 12.71%, versus 14.17% to 14.92% during the secondquarter of 2006) and a 0.25% increase in the interest rate on the Notes. As apercentage of total revenues, interest expense was 4.1% in both the secondquarter of 2006 and the second quarter of 2005.

*IncomeTax Provision.* The income tax provision for the secondquarter of 2006 and 2005 was based on estimated annual effective tax rates. Arate of 41.4% was applied to the second quarter of 2006. In the second quarterof 2005, a net effective tax rate of 0.0% was applied as the Company offsetincome tax expense by a reversal of the existing valuation allowance. Theserates are comprised of the combined federal and state statutory rates.

**Six months ended June25, 2006 compared to the six months ended June 26, 2005**

*Total Revenues*. Total revenues increased by $15.6 million, or 5.8%, to $284.3 million inthe first six months of 2006 from $268.6 million in the first six months of2005 due to a $10.4 million increase in restaurant revenues, a $4.9 millionincrease in other revenues and a $0.3 million increase in royalty and franchisefees.  The increase in restaurantrevenues was partially due to the fact that the six months ended June 26, 2005excluded 16 days of sales in the Chevys restaurants as the Chevys restaurantswere acquired on January 11, 2005.  Thisis combined with comparable store sales increases of 0.2% in the first sixmonths of 2006 and new restaurant openings, partially offset by restaurantclosures.  The increase in comparablestore sales was partially driven by price increases in the El Toritorestaurants of approximately 0.2%, in the Acapulco restaurants of approximately0.4% and in the Chevys restaurants of approximately 1.0%.  The increase in other revenues was primarilydue to an increase in sales to outside customers by Real Mex Foods, Inc., ourdistribution and manufacturing subsidiary. The increase in royalty andfranchise fees was primarily due to the timing of the Chevys acquisition in theprior year.

*Cost of Sales*. Total cost of sales of $72.4 million in the first six months of 2006increased $4.2 million or 6.1% as compared to the first six months of2005.  This increase was primarily due tothe inclusion in our results of operations in 2006 of a full six months of theChevys restaurants cost of sales versus a partial six months in 2005, combinedwith higher costs associated with the increase in sales to outside customers byour distribution facility.  As a percentageof total revenues, cost of sales increased to 25.5% for the first six months of2006 from 25.4% for the first six months of 2005.

*Labor*. Labor costs of $97.0 million in the first six months of 2006 increasedby $2.4 million or 2.6% as compared to the first six months of 2005 primarilydue to the increase in labor cost dollars associated with the inclusion in ourresults of operations of the Chevys restaurants for a full six months in fiscal2006 versus a partial six months in fiscal 2005.  Payroll and benefits remain subject toinflation and government regulation; especially wage rates currently at or nearthe minimum wage, and expenses for health insurance and workers’ compensationinsurance.  As a percentage of totalrevenues, labor costs decreased to 34.1% for the first six months of 2006 from35.2% for the first six months of 2005, primarily due to lower hourly laborexpense achieved as a result of our continued focus on hourly labor controls,scheduling and reductions in turnover.

*Direct Operating and OccupancyExpense*.  Direct operating and occupancy expense of$65.4 million in the first six months of 2006 increased by $2.0 million or 3.2%as compared to the first six months of 2005. The increase in direct operatingand occupancy expense was primarily associated with the inclusion in ourresults of operations of the Chevys restaurants for a full six months in fiscal2006 versus a partial six months in fiscal 2005. Direct operating and occupancyexpense as a percentage of sales decreased to 23.0% in the first six months of2006 from 23.6% in the first six months of 2005 primarily due to lower generalliability insurance expense.

*General and AdministrativeExpense*.  General and administrative expense of $14.3million in the first six months of 2006 increased by $0.8 million or 5.8%primarily due to increased staffing associated with the Chevys Acquisition.General and administrative expense as a percentage of sales was 5.0% in boththe first six months of 2006 and in the first six months of 2005.

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*Depreciation and Amortization*. Depreciation and amortization expense of $9.4 million in the first sixmonths of 2006 decreased $0.6 million or 6.2% as compared to the first sixmonths of 2005. As a percentage of total revenues, depreciation decreased to3.3% for the first six months of 2006 compared to 3.7% for the first six monthsof 2005.

*Legal Settlement Costs.*We incurred legal settlement costs of$2.8 million in the first six month of 2006 compared to $0.7 the first sixmonths of 2005. The increase in costs relates to lawsuits filed against us in2004 and 2005.

*Interest Expense*.  Interestexpense of $12.1 million in the first six month of 2006 increased $0.8 millionor 7.0% as compared to the first six months of 2005 primarily due to a anincrease in the interest rate on our Senior Unsecured Credit Facility (theinterest rate in the second quarter of 2005 ranged from 12.27% to 12.71%,versus 14.17% to 14.92% during the second quarter of 2006) a 0.25% increase inthe interest rate on the Notes and the fact that our Senior Unsecured CreditFacility was outstanding for 16 days more in the first six months of 2006 thanin 2005. As a percentage of total revenues, interest expense increased to 4.3%for the first six months of 2006 from 4.2% in the first six months of 2005.

*IncomeTax Provision.* The income tax provision for the first sixmonths of 2006 and 2005 was based on estimated annual effective tax rates. Arate of 41.2% was applied to the first six months of 2006. In the first sixmonths 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 Capital Resources**

Our principal liquidity requirements are to service our debt and meetour capital expenditure and working capital needs. Our indebtedness, includingcapital lease obligations, at June 25, 2006 was $181.9 million, and we had $6.2million of revolving credit availability under our revolving credit facility.Our ability to make principal and interest payments and to fund planned capitalexpenditures will depend on our ability to generate cash in the future, which,to a certain extent, is subject to general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control. Based onour current level of operations, we believe our cash flow from operations,available cash and available borrowings under our revolving credit facilitywill be adequate to meet our liquidity needs for the near future. In addition,we may partially fund restaurant openings through credit received fromtrade suppliers and landlord contributions, if favorable terms are available.We cannot assure you, however, that our business will generate sufficient cashflow from operations or that future borrowing will be available to us under ourrevolving credit 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.

**Working Capital and Cash Flows**

We presently have, in the past have had, and in the future are likelyto have, negative working capital balances. The working capital deficitprincipally is the result of accounts payable and accrued liabilities being inexcess of current asset levels. The largest components of our accruedliabilities include reserves for our self-insured workers’ compensation andgeneral liability insurance, accrued compensation and related employee benefitscosts, sales and property taxes and gift certificate and gift card liabilities.We do not have significant receivables and we receive trade credit based uponnegotiated terms in purchasing food and supplies. Funds available from cashsales not needed immediately to pay for food and supplies or to financereceivables or inventories typically have been used for capital expendituresand debt service payments under our existing indebtedness.

*Operating Activities*. We had net cash provided by operating activities of$17.9 million and $6.4 million for the six months ended June 25, 2006 and June26, 2005, respectively. The increase in cash provided by operating activitieswas primarily attributable to the absence of cash expenditures incurred in 2005to generate increased inventory levels in connection with the initiation ofdistribution services to the Chevys restaurants by Real Mex Foods, Inc.,an increase in net income before deferred income taxes, an increase in accruedliabilities related to accruals for legal settlements and a reduction inaccounts receivable related to the Chevys Acquisition.

*Investing Activities*. We had net cash used in investing activities of$11.3 million and $83.0 million for the six months ended June 25, 2006 andJune 26, 2005, respectively. The $71.7 million reduction in cash used ininvesting activities was primarily due to the absence of $75.2 million used forthe Chevys Acquisition that was completed on January 11, 2005 and anincrease in additions to property and equipment driven by the increase in thenumber of new restaurants completed and under construction in 2006. We expectto make capital expenditures totaling approximately $24.2 million in fiscal2006, of which approximately $12.4 million is expected to be spent on eight newrestaurants, $9.6 million for maintenance capital expenditures and $2.2 millionfor the remodeling and refurbishment of existing restaurants.

These and othersimilar costs may be higher in the future due to inflation and otherfactors. We expect to fund the new restaurants and the other capitalexpenditures described above from cash flow provided by operating activities,available cash, available borrowings under our Senior Credit Facility, landlordcontributions (if favorable terms are available) and trade financing

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receivedfrom trade suppliers.

*FinancingActivities*. We had net cash used in financing activities of$0.1 million for the six months ended June 25, 2006 compared with net cashprovided by financing activities of $72.0 million for the six months endedJune 26, 2005. The 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, reduced by therelated financing costs of $2.6 million.

**Debt and Other Obligations**

*Generally.*On January 11, 2005, we entered into a $75.0 million senior unsecuredcredit facility 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 securednotes. At the closing of the sale of our senior secured notes, we used theproceeds from the sale of these notes and a sale-leaseback transaction to repayin full term loans then outstanding under our prior credit facility andsubordinated notes, and entered into a new senior secured credit facility, orour Senior Credit Facility.

*SeniorCredit Facility*. Our Senior Credit Facility was initiallycomprised of a $15.0 million revolving credit facility which had a $2.0 millionsub-limit for letters of credit, which we refer to as our Revolving CreditFacility, and a $15.0 million letters of credit facility which we refer to asour Letters of Credit Facility. On January 11, 2005, concurrent with theclosing of the Chevys Acquisition, we amended the Senior 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 theSenior Unsecured Credit Facility has been repaid and terminated in full on orprior to June 29, 2008), and increased the sub-limit for letters of creditavailability under the Revolving Credit Facility from $2.0 million to $15.0million (subject to an overall limitation of $30.0 million under the SeniorCredit Facility). In December of 2005, we further amended the RevolvingCredit Facility to increase the annual limit of permitted capital expendituresto $30.0 million.

Under our SeniorCredit Facility, interest accrues based upon a total leverage ratiocalculation. The interest under the Senior Credit Facility accrues, at ouroption, at either (i) the base rate of interest in effect from time totime, which is the higher of the lender’s prime rate as announced from time totime or the federal funds rate plus 0.50%, plus the current applicable marginof 1.75% or (ii) a London Inter Bank Offering Rate for deposits asreported by a generally recognized financial reporting service plus the currentapplicable margin of 4.0%. Our Senior Credit Facility is guaranteed by oursubsidiaries and secured by, among other things, first priority pledges of allof the equity interests of our direct and indirect subsidiaries, and firstpriority security interests (subject to customary exceptions) in substantiallyall of our current and future property and assets, with certain limitedexceptions. The lien on the collateral securing the Senior Credit Facility is seniorto the lien on the collateral securing our senior secured notes and theguarantees of these notes.

Our Senior CreditFacility contains various affirmative and negative covenants and restrictions,which among other things, requires us to meet certain financial tests(including certain leverage and cash flow ratios), and limits our and oursubsidiaries’ ability to incur or guarantee additional indebtedness, makecertain capital expenditures, pay dividends or make other equity distributions,purchase or redeem capital stock, make certain investments, enter intoarrangements that restrict dividends from subsidiaries, sell assets, engage intransactions with affiliates and effect a consolidation or merger. We arerequired to maintain certain cash flow ratios determined on an annual basisequal to (i) 1.70 to 1.00 for the period January 1, 2006 toDecember 31, 2006, (ii) 1.80 to 1.00 for the period January 1,2007 to December 31, 2007, and (iii) 1.90 to 1.00 for the period January 1,2008 and thereafter until maturity. Pursuant to the terms of the Senior CreditFacility, cash flow ratio is defined as the ratio of (a) Consolidated CashFlow (as defined therein) to (b) Consolidated Financial Obligations (asdefined therein). We were in compliance with all specified financial and othercovenants under the Senior Credit Facility at June 25, 2006.

*SeniorUnsecured Credit Facility*. Concurrently with the closing ofthe Chevys Acquisition, 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. Ourobligations under the senior unsecured credit facility are guaranteed by oursubsidiaries. Interest on the term loan outstanding under the senior unsecuredcredit facility accrues, at our option, at either (i) the greater of primeand the rate which is 0.5% in excess of the federal funds rate, plus 8.5% or(ii) a reserve adjusted Eurodollar rate, plus 9.5%. As of August 4,2006, the interest rate on the term loan was 14.92%.

Our seniorunsecured credit facility contains various affirmative and negative covenants,which among other things, requires us to meet certain financial tests(including certain leverage and interest coverage ratios) and limits our andour subsidiaries’ ability to incur or guarantee additional indebtedness, grantcertain liens, make certain restricted payments, make capital expenditures, engagein transactions with affiliates, make certain investments, sell our assets,make acquisitions, effect a consolidation or merger and amend or modifyinstruments governing certain indebtedness (including relating to our seniorsecured notes and the Senior Credit Facility). We

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are required to maintaincertain minimum interest coverage ratios ranging from (i) 1.85 to 1.00 forthe four fiscal quarters ending on or prior to September 30, 2005 throughMarch 31, 2006, (ii) 2.00 to 1.00 for the three fiscal quarters ending onor prior to June 30, 2006 through December 31, 2006, (iii) 2.15to 1.00 for the fiscal quarters ending on or prior to March 31, 2007through December 31, 2007, and (iv) 2.30 to 1.00 thereafter untilmaturity. Pursuant to the terms of the Senior Unsecured Credit Facility,interest coverage ratio is defined as the ratio as of the last day of anyfiscal quarter of (a) Consolidated EBITDA (as defined therein) for thefour-fiscal quarter period then ending to (b) Consolidated InterestExpense (as defined therein) for such four-fiscal quarter period. We were incompliance with all specified financial and other covenants under the SeniorUnsecured Credit Facility at June 25, 2006.

*SeniorSecured Notes due 2010*. Interest on our senior secured notesaccrues at a stated rate of 10.00% per annum and is payable semiannually onApril 1 and October 1 of each year. The rate was increased to 10.25%for the period beginning April 1, 2006 and ending March 31, 2007, dueto our having exceeded a fiscal year 2005 capital expenditure threshold underthe indenture governing the notes. Exceeding this capital expenditure thresholddoes not constitute a default with respect to our senior secured notes or theindenture.

Our senior securednotes are fully and unconditionally guaranteed on a senior secured basis by allof our present and future domestic subsidiaries which are restrictedsubsidiaries under the indenture governing our senior secured notes. Our seniorsecured notes and related guarantees are secured by substantially all of ourand our domestic restricted subsidiaries’ tangible and intangible assets,subject to the prior ranking claims on such assets by the lenders under ourSenior Credit Facility. The indenture governing our senior secured notescontains various affirmative and negative covenants, subject to a number ofimportant limitations and exceptions, including but not limited those limitingour ability to incur additional indebtedness, make capital expenditures, paydividends, redeem stock or make other distributions, issue stock of oursubsidiaries, make certain investments or acquisitions, grant liens on assets,enter into transactions 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 at June25, 2006.

We can redeem oursenior secured notes on or after April 1, 2007, except that wemay redeem up to 35% of our senior secured notes before April 1, 2007with the proceeds of one or more public equity offerings. We are required toredeem our senior secured notes under certain circumstances involving a changeof control, and we also have the right to redeem our senior secured notes priorto April 1, 2007 in connection with a change in control. Additionally, ifwe or 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 RevolvingCredit Facility or certain other secured indebtedness or make an offer topurchase a portion of our senior secured notes.

*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.

*CapitalLeases*. In conjunction with our acquisition of El Torito, weassumed capital lease obligations, collateralized with leasehold improvements,in an aggregate amount of $9.2 million. The remaining capital lease obligationshave a weighted-average interest rate of approximately 10.0%. As of June 25,2006, the principal amount due relating to capital lease obligations was $1.1million. Principal and interest payments on the capital lease obligations are duemonthly and range from $750 to $7,000 per month. The capital lease obligationsmature between 2006 and 2025.

**Inflation**

Over the past five years, inflation has not significantly affected ouroperations. However, the impact of inflation on labor, food and occupancy costscould, in the future, significantly affect our operations. We pay many of ouremployees hourly rates related to the federal or applicable state minimum wage.Our workers’ compensation and health insurance costs have been and are subjectto continued inflationary pressures. Costs for construction, taxes, repairs,maintenance and insurance all impact our occupancy costs. Many of our leasesrequire us to pay taxes, maintenance, repairs, insurance and utilities, all ofwhich may be subject to inflationary increases. We believe that ourcurrent practice of maintaining operating margins through a combination ofperiodic menu price increases, cost controls, careful evaluation of propertyand equipment needs, and efficient purchasing practices is our most effectivetool for dealing with inflation.

**RecentDevelopment**

**We have appointed financialadvisors to assist our Company in exploring and evaluating strategicalternatives. We can give no assurances that we will pursue any strategicalternatives.**

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**Item 3.**   Quantitative and Qualitative Disclosures AboutMarket Risk

The inherent risk in market risk sensitive instruments and positionsprimarily relates to potential losses arising from adverse changes in foreignexchange rates and interest rates.

We consider the U.S. dollar to be the functional currency for all ofour entities. All of our net sales and our expenses in fiscal years 2006 and2005 were denominated in U.S. dollars. Therefore, foreign currency fluctuationsdid not materially affect our financial results in those periods.

We are also subject to market risk from exposure to changes in interestrates based on our financing activities. This exposure relates to borrowingsunder our senior secured and unsecured credit facilities that are payable at floatingrates of interest. We currently do not have any borrowings outstanding underour Revolving Credit Facility. We currently have $75.0 million outstandingunder our Senior Unsecured Credit Facility. A hypothetical 10% increase ininterest rates, as of August 4, 2006, would result in an annual after taxreduction of $0.7 million in earnings.

Many of the food products purchased by us are affected by changes inweather, production, availability, seasonality and other factors outside ourcontrol. In an effort to control some of this risk, we have entered intocertain fixed price purchase agreements with varying terms of generally no morethan year duration. In addition, we believe that almost all of our food andsupplies are available from several sources, which helps to control foodcommodity risks.

**Item 4.****  ****Controls and Procedures**

As of the end of the period covered by this report, we conducted anevaluation, under the supervision and with the participation of the principalexecutive officer (“CEO”) and principal financial officer (“CFO”), of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation,the CEO and CFO concluded that, as of the end of the record period covered bythis report, our disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There was no change in our internalcontrol over financial reporting during our most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**PART IIOTHER INFORMATION**

**Item1. Legal Proceedings**

We are periodically a defendant in cases involving personal injury,labor and employment and other matters incidental to our business. While anypending or threatened litigation has an element of uncertainty, we believe thatthe outcome of these lawsuits or claims, individually or combined, will not materiallyadversely affect our consolidated financial position, results of operations orcash flows.

**Item 1A. Risk Factors**

No material changes from the risk factors disclosed in Item 1A of ourreport on Form 10-K for the fiscal year ended December 25, 2005.

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

Not applicable.

**Item3. Defaults Upon Senior Securities**

Not applicable.

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

Not applicable.

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**Item 5.Other Information**

Not applicable.

**Item6.**    Exhibits
| Exhibit No. | ** ** | **Description**                                                                                                                                                     |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                |
| 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 the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                        | REAL MEX RESTAURANTS, INC. |
|------------------------|---------------------------------|
|                   |                            |
|                   |                            |
| Dated: August 04, 2006 | By:                             | /s/ Frederick F. Wolfe |
|                   |                            | Frederick F. Wolfe |
|                   |                            | President & Chief Executive Officer |
|                   |                            | (principal executive officer) |
|                   |                            |
|                   |                            |
| Dated: August 04, 2006 | By:                             | /s/ Steven Tanner |
|                   |                            | Steven Tanner |
|                   |                            | Chief Financial Officer |
|                   |                            | (principal financial and accounting officer) |

 

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