**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

** **

**                         For the quarterlyperiod ended July 1, 2007**

** **

**Or**

** **

**o**                                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

** **

**                         For the transition period from                    to                    .**

** **

**Commission file number333-116310**

** **

**REAL MEX RESTAURANTS, INC.**

(Exact name of Registrantas specified in its charter)

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

 

**5660 Katella Avenue,Suite 100Cypress, CA 90630**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:

**(562)-346-1200**

** **

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and(2) has been subject to such filing requirements for the past 90 days.Yes x No o

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

(See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):
| Large Accelerated  Filer o | Accelerated  Filer o | Non-Accelerated  Filer x |
|---------------------------------|---------------------------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). o Yes  x No

As of August 8, 2007, the registrant had outstanding1,000 shares of Common Stock, par value $0.001 per share.

 

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**Real MexRestaurants, 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 onMarch 20, 2007. Given these risks and uncertainties, we urge you to read thisreport completely and with the understanding that actual future resultsmay be materially different from what we plan or expect. All of theforward-looking statements made in this Form 10-Q are qualified by thesecautionary 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”, “our” and “Company” refer to Real MexRestaurants, Inc. and its consolidated subsidiaries.*

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**PART IFINANCIAL INFORMATION**

**Item 1. Financial Statements**

**Real Mex Restaurants, Inc.****Consolidated BalanceSheets****(in thousands, except forshare data)**
| ** **                                                                                                                  | ** ** | **July 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                  | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                             |       |                   |       |                        |       |
| Cash and cash equivalents                                                                                                   |       | $                      | 2,491      |                        | $          | 2,710 |   |
| Trade  receivables, net                                                                                                     |       | 10,185                 |       | 8,604                       |       |
| Other  receivables                                                                                                          |       | 3,305                  |       | 1,572                       |       |
| Related party  receivables                                                                                                  |       | 5,374                  |       | 3,591                       |       |
| Inventories                                                                                                                 |       | 12,103                 |       | 10,565                      |       |
| Prepaid expenses  and other current assets                                                                                  |       | 7,216                  |       | 6,037                       |       |
| Current portion  of favorable lease asset, net                                                                              |       | 3,665                  |       | 4,910                       |       |
| Deferred tax  asset                                                                                                         |       | 6,210                  |       | 8,265                       |       |
| Total current assets                                                                                                        |       | 50,549                 |       | 46,254                      |       |
|                                                                                                                        |       |                   |       |                        |       |
| Property and equipment,  net                                                                                                |       | 93,793                 |       | 90,802                      |       |
| Goodwill                                                                                                                    |       | 286,938                |       | 277,461                     |       |
| Deferred charges, net                                                                                                       |       | 3,767                  |       | 3,939                       |       |
| Deferred tax asset                                                                                                          |       | 863                    |       | 1,149                       |       |
| Favorable lease asset,  less current portion, net                                                                           |       | 12,998                 |       | 17,753                      |       |
| Other assets                                                                                                                |       | 9,445                  |       | 9,777                       |       |
| Total assets                                                                                                                |       | $                      | 458,353    |                        | $          | 447,135 |   |
|                                                                                                                        |       |                   |       |                        |       |
| **Liabilities and stockholders’  equity**                                                                              | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                        |       |                   |       |                        |       |
| Accounts payable                                                                                                            |       | $                      | 26,244     |                        | $          | 23,354 |   |
| Accrued  self-insurance reserves                                                                                            |       | 15,605                 |       | 15,877                      |       |
| Accrued  compensation and benefits                                                                                          |       | 16,244                 |       | 15,576                      |       |
| Other accrued  liabilities                                                                                                  |       | 16,942                 |       | 18,469                      |       |
| Current portion  of long-term debt                                                                                          |       | 9,545                  |       | 9,573                       |       |
| Current portion  of capital lease obligations                                                                               |       | 235                    |       | 224                         |       |
| Total current  liabilities                                                                                                  |       | 84,815                 |       | 83,073                      |       |
|                                                                                                                        |       |                   |       |                        |       |
| Long-term debt, less  current portion                                                                                       |       | 172,672                |       | 173,345                     |       |
| Capital lease  obligations, less current portion                                                                            |       | 643                    |       | 763                         |       |
| Unfavorable lease  asset, less current portion, net                                                                         |       | 5,129                  |       | 2,514                       |       |
| Other liabilities                                                                                                           |       | 5,650                  |       | 3,363                       |       |
| Total liabilities                                                                                                           |       | 268,909                |       | 263,058                     |       |
|                                                                                                                        |       |                   |       |                        |       |
| Commitments and  contingencies                                                                                              |       |                   |       |                        |       |
|                                                                                                                        |       |                   |       |                        |       |
| Stockholders’ equity:                                                                                                  |       |                   |       |                        |       |
| Common stock,  $.001 par value, 1,000 shares authorized, issued and outstanding at July 1,  2007 and December 31, 2006 |       | —                 |       | —                      |       |
| Additional  paid-in capital                                                                                                 |       | 200,867                |       | 199,124                     |       |
| Accumulated  deficit                                                                                                        |       | (11,423                | )          | (15,047                     | )          |
| Total stockholders’  equity                                                                                            |       | 189,444                |       | 184,077                     |       |
| Total liabilities and stockholders’ equity                                                                             |       | $                      | 458,353    |                        | $          | 447,135 |   |

 

See notes to consolidated financial statements.

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**Real MexRestaurants, Inc.****Consolidated Statements ofOperations (unaudited)****(in thousands)**
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **Successor**                    | ** ** | **Predecessor**                | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                             | ** ** | **July 1,  2007**           | ** ** | **June 25,  2006**        | ** ** | **July 1,  2007** | ** ** | **June 25,  2006** | ** ** |
| Revenues:                                              |       |                             |       |                           |       |   |   |   |   |
| Restaurant revenues                                    |       | $                                | 139,882    |                           | $          | 138,561 |   | $ | 270,177 |   | $ | 268,359 |   |
| Other revenues                                         |       | 8,675                            |       | 7,067                          |       | 15,876 |   | 13,907 |   |
| Royalty and franchise fees                             |       | 1,018                            |       | 1,064                          |       | 2,033 |   | 2,008 |   |
| Total revenues                                         |       | 149,575                          |       | 146,692                        |       | 288,086 |   | 284,274 |   |
| Costs and  expenses:                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of sales                                          |       | 36,296                           |       | 34,156                         |       | 69,122 |   | 66,694 |   |
| Labor                                                  |       | 52,230                           |       | 49,211                         |       | 101,906 |   | 97,018 |   |
| Direct operating and occupancy expense                 |       | 38,191                           |       | 34,945                         |       | 74,364 |   | 71,122 |   |
| General and administrative expense                     |       | 8,057                            |       | 7,412                          |       | 15,738 |   | 14,258 |   |
| Depreciation and amortization                          |       | 6,138                            |       | 4,831                          |       | 11,916 |   | 9,355 |   |
| Legal settlement costs                                 |       | 156                              |       | 736                            |       | 322 |   | 2,758 |   |
| Pre-opening costs                                      |       | 466                              |       | 170                            |       | 856 |   | 443 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Operating income                                       |       | 8,041                            |       | 15,230                         |       | 13,862 |   | 22,625 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                               |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                       |       | (4,842                           | )          | (6,083                         | )          | (9,688 | ) | (12,095 | ) |
| Other income, net                                      |       | 1,952                            |       | 303                            |       | 1,858 |   | 354 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Total other expense, net                               |       | (2,890                           | )          | (5,780                         | )          | (7,830 | ) | (11,741 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income before  income tax provision                    |       | 5,151                            |       | 9,450                          |       | 6,032 |   | 10,884 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income tax  provision                                  |       | 2,040                            |       | 3,911                          |       | 2,408 |   | 4,482 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income                                             |       | 3,111                            |       | 5,539                          |       | 3,624 |   | 6,402 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Redeemable  preferred stock accretion                  |       | —                           |       | (3,898                         | )          | — |   | (7,796 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)  attributable to common stockholders |       | $                                | 3,111      |                           | $          | 1,641 |   | $ | 3,624 |   | $ | (1,394 | ) |

 

See notes to consolidated financial statements.

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**Real MexRestaurants, Inc.****Consolidated Statements of Cash Flows (unaudited)****(in thousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **Successor**                  | ** ** | **Predecessor** | ** ** |
| ** **                                                                         | ** ** | **July 1,  2007**         | ** ** | **June 25,  2006** | ** ** |
| **Operating  activities**                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 3,624      |   | $ | 6,402 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation                                                                       |       | 11,455                         |       | 9,355 |   |
| Amortization of:                                                                   |       |                           |       |   |   |
| Favorable lease asset and unfavorable lease  liability, net                        |       | 461                            |       | — |   |
| Debt premium                                                                       |       | (977                           | )          | — |   |
| Deferred financing costs                                                           |       | 874                            |       | 884 |   |
| Gain on disposal of property and equipment                                         |       | (681                           | )          | (19 | ) |
| Deferred tax asset                                                                 |       | 2,341                          |       | 2,582 |   |
| Other                                                                              |       | 232                            |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Trade and other receivables                                                        |       | (3,314                         | )          | (132 | ) |
| Inventories                                                                        |       | (1,538                         | )          | (188 | ) |
| Prepaid expenses and other current assets                                          |       | (1,064                         | )          | (1,069 | ) |
| Related party receivable                                                           |       | (1,783                         | )          | — |   |
| Deferred charges, net                                                              |       | (168                           | )          | (11 | ) |
| Other assets                                                                       |       | 185                            |       | 479 |   |
| Accounts payable and accrued liabilities                                           |       | 609                            |       | 1,091 |   |
| Other liabilities                                                                  |       | 2,291                          |       | 1,050 |   |
| Net cash  provided by operating activities                                         |       | 12,547                         |       | 20,424 |   |
|                                                                               |       |                           |       |   |   |
| **Investing  activities**                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Additions to  property and equipment                                               |       | (17,890                        | )          | (12,258 | ) |
| Sale of Fuzio  trademark                                                           |       | 1,200                          |       | — |   |
| Net proceeds  from disposal of property and equipment                              |       | 4,682                          |       | — |   |
| Chevys  Acquisition (acquired in 2005)                                             |       | —                         |       | (1,553 | ) |
| Net cash used in  investing activities                                             |       | (12,008                        | )          | (13,811 | ) |
|                                                                               |       |                           |       |   |   |
| **Financing  activities**                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net repayment  under revolving credit facility                                     |       | (800                           | )          | — |   |
| Borrowings under  long-term debt agreements                                        |       | 981                            |       | — |   |
| Payments on  long-term debt agreements and capital lease obligations               |       | (405                           | )          | (130 | ) |
| Payment of  financing costs                                                        |       | (534                           | )          | — |   |
| Net cash used in  financing activities                                             |       | (758                           | )          | (130 | ) |
| Net (decrease)  increase in cash and cash equivalents                              |       | (219                           | )          | 6,483 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 2,710                          |       | 14,871 |   |
| Cash and cash  equivalents at end of period                                        |       | $                              | 2,491      |   | $ | 21,354 |   |
|                                                                               |       |                           |       |   |   |
| **Supplemental  disclosure of cash flow information**                              | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest paid                                                                      |       | $                              | 10,092     |   | $ | 11,154 |   |
| Income taxes paid                                                                  |       | $                              | 133        |   | $ | 42 |   |

 

See notes to consolidated financial statements.

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**Real MexRestaurants, Inc. and Subsidiaries****Notes to Consolidated Financial Statements(unaudited)****July 1, 2007****(in thousands, except for share data)**

**1.             Basis of Presentation**

Real MexRestaurants, Inc. (the surviving corporation resulting from a merger on August21, 2006 with RM Integrated, Inc. (the “Merger”)), a Delaware corporation, wasformed on May 15, 1998.

After the Merger theCompany is referred to as the “Successor” and before the Merger the Company isreferred to as the “Predecessor”.

Real Mex Restaurants,Inc., primarily through its major subsidiaries El Torito Restaurants, Inc.(El Torito), Chevys Restaurants, LLC (Chevys) and AcapulcoRestaurants, Inc. (Acapulco), operated 190 restaurants as of July 1, 2007,of which 157 were located in California and the remainder were located in 12other states, primarily under the trade names El Torito Restaurant®, ChevysFresh Mex® and Acapulco Mexican Restaurant Y Cantina®. Real Mex Restaurants,Inc.’s other major subsidiary, Real Mex Foods, Inc., provides internalproduction, purchasing and distribution services for the restaurant operationsand also manufactures 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 accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.

Certain information andfootnote disclosures normally included in consolidated financial statements inaccordance with U.S. generally accepted accounting principles have been omittedpursuant to requirements of the Securities and Exchange Commission (SEC). Adescription of our accounting policies and other financial information isincluded in our audited consolidated financial statements as filed with the SECin our annual report on Form 10-K for the year ended December 31,2006. We believe that the disclosures included in our accompanying interimconsolidated financial statements and footnotes are adequate to make theinformation not misleading, but should be read in conjunction with ourconsolidated financial statements and notes thereto included in the our annualreport on Form 10-K. The accompanying consolidated balance sheet as ofDecember 31, 2006 has been derived from our audited financial statements.

**2.             Merger Agreement**

On August 17,2006, the Company entered into an Agreement and Plan of Merger (“MergerAgreement”) with RM Restaurant Holding Corp. (“RM Restaurant Holding”) and itssubsidiary, RM Integrated, Inc. (“RM Integrated”, and together with RMRestaurant Holding, “Buyer”).  Themajority of the stock of RM Restaurant Holding is owned by Sun Cantinas LLC (“SunLLC”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).  On August 18, 2006, the stockholders of theCompany entitled to vote thereon (including the holders of a majority of theCompany’s Series C Preferred Stock, par value $0.001 per share) approved theMerger Agreement.  On August 21, 2006(the “Effective Time”), the closing of the transactions contemplated by theMerger Agreement occurred, and RM Integrated merged with and into Real Mex Restaurants,Inc., with Real Mex Restaurants, Inc. continuing as the surviving corporationand the 100% owned subsidiary of RM Restaurant Holding.  The net purchase price of Real MexRestaurants, Inc. was $199.1 million, consisting of $359.0 million in cash, plusnet cash acquired of $35.2 million, plus $4.5 million in working capital andother adjustments plus direct acquisition costs of $3.9 million, lessindebtedness assumed of $188.2 million and seller costs of $7.6 million.Pursuant to the Merger Agreement, $6.0 million of the Merger Considerationis being held in escrow. Indebtedness assumed included accrued interest and thepurchase price is subject to adjustment based on certain otheradjustments.  As a result of the Mergerand in accordance with the terms of the Merger Agreement, (i) all of theoutstanding capital stock of Real Mex Restaurants, Inc. was converted into theright to receive a portion of the purchase price, and all Real Mex Restaurants,Inc. stock options, warrants and shares of restricted stock were cancelled andconverted into the right to receive a portion of the purchase price, less theexercise prices or unpaid purchase prices therefore, as applicable, and (ii)the Company became a wholly-owned subsidiary of RM Restaurant Holding.  Prior to the Merger, Bruckmann, Rosser,Sherrill & Co., Inc. (“BRS”), together with its affiliates, was acontrolling stockholder of Real Mex Restaurants, Inc.  As described in the Merger Agreement, theAmended and Restated Management Agreement dated June 28, 2000 by and among theCompany, certain of its subsidiaries, BRS, and FS Private Investments, L.L.C.was terminated in connection with the Merger.

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The foregoingdescription of the Merger Agreement is qualified in its entirety by referenceto the Merger Agreement filed with the Securities and Exchange Commission asExhibit 10.1 to Form 8-K (File No. 333-116310) on August 23, 2006 andincorporated by reference herein.

The Merger wasaccounted for under the purchase method of accounting and, accordingly, the purchaseprice has been allocated to the assets acquired and the liabilities assumedbased on their estimated fair market values at the date of the Merger. The Company attributes the goodwill associated with the Merger to thehistorical financial performance and the anticipated future performance of theCompany’s operations.

Thefollowing table presents the allocation of the acquisition costs, includingprofessional fees and other related transaction costs, to the assets acquiredand liabilities assumed based on their estimated fair values (in thousands):

| Cash and cash equivalents                 |   | $       | 29,270  |   |
|-------------------------------------------|--------|---------|---------|--------|
| Trade and other  accounts receivable      |   | 11,625  |    |
| Inventories                               |   | 10,012  |    |
| Other current  assets                     |   | 5,615   |    |
| Property and  equipment                   |   | 88,997  |    |
| Deferred tax  asset                       |   | 6,196   |    |
| Other assets                              |   | 35,281  |    |
| Goodwill                                  |   | 288,138 |    |
| Total assets acquired                     |   | 475,134 |    |
|                                      |   |    |    |
| Accounts payable  and accrued liabilities |   | 20,881  |    |
| Long-term debt                            |   | 186,057 |    |
| Other  liabilities                        |   | 67,329  |    |
| Total liabilities assumed                 |   | 274,267 |    |
| Net assets acquired                       |   | $       | 200,867 |   |

 

**3.             Long-Term Debt**

Long-term debt consists of the following:

 

|                                                | ** ** | **July 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Senior Secured  Notes due 2010                 |       | $                      | 105,000    |                        | $          | 105,000 |   |
| Senior Secured  Notes unamortized debt premium |       | 3,223                  |       | 3,809                       |       |
| Senior Secured  Revolving Credit Facility      |       | 7,150                  |       | 7,950                       |       |
| Senior Unsecured  Credit Facility              |       | 65,000                 |       | 65,000                      |       |
| Mortgage                                       |       | 687                    |       | 711                         |       |
| Other                                          |       | 1,157                  |       | 448                         |       |
|                                           |       | 182,217                |       | 182,918                     |       |
|                                           |       |                   |       |                        |       |
| Less current  portion                          |       | (9,545                 | )          | (9,573                      | )          |
|                                           |       |                   |       |                        |       |
|                                           |       | $                      | 172,672    |                        | $          | 173,345 |   |

 

*SeniorSecured Notes due 2010*. Interest on our senior securedregistered notes (“senior secured notes”) accrues at a contract rate of 10% perannum. (The interest rate was 10.25% through March 31, 2007 as, in fiscal year2005, we exceeded the capital expenditure limit under the indenture governingthe senior secured notes and as a result were required to pay a 0.25% increasein the stated rate. Exceeding the capital expenditure limit did not constitutea default with respect to the senior secured notes or indenture.) Interest ispayable semiannually on April 1 and October 1 of each year. Our seniorsecured notes are fully and unconditionally guaranteed on a senior securedbasis by all of our present and future domestic subsidiaries which arerestricted subsidiaries under the indenture governing our senior secured notes.Our senior secured notes and related guarantees are secured by substantiallyall of our and our domestic restricted subsidiaries’ tangible and intangibleassets, subject to the prior ranking claims on such assets by the lenders underour New Senior Secured Revolving Credit Facilities. The indenture governing oursenior secured notes contains various affirmative and negative covenants,subject to a number of important limitations and exceptions, including but notlimited those limiting our ability to incur additional indebtedness, makecapital expenditures, pay dividends, redeem stock or make other distributions,issue stock of our subsidiaries, make

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certain investments or acquisitions, grant liens onassets, 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 2.50 to 1.00 in the case of any incurrence after July 1, 2006. Theindenture defines consolidated fixed charge coverage ratio as the ratio ofConsolidated Cash Flow (as defined therein) to Fixed Charges (as definedtherein). The Company was in compliance with all specified financial and othercovenants under the senior secured notes indenture at July 1, 2007.

We can redeem oursenior secured notes at any time after April 1, 2007. We are required to offerto redeem our senior secured notes under certain circumstances involving achange of control. Additionally, if we or any of our domestic restrictedsubsidiaries engage in assets sales, we generally must either invest the netcash proceeds from such sales in our business within 360 days, prepay theindebtedness obligations under our New Senior Secured Revolving Credit Facilityor certain other secured indebtedness or make an offer to purchase a portion ofour senior secured notes.

On September 19,2006, the Company commenced a change of control offer (the “Offer”) to purchaseany or all of its notes that remained outstanding under the indenture datedMarch 31, 2004 by and among the Company, the guarantors thereto and Wells FargoBank, National Association, as trustee. The Offer was made pursuant to Section4.15 of the indenture as the Merger constituted a “change of control” under theindenture. In accordance with the terms of the indenture, the Company offeredto repurchase the notes at a purchase price in cash equal to 101% of theaggregate principal amount of the notes or portion of notes validly tenderedfor payment thereof, plus accrued and unpaid interest up to, but not including,the date of payment, upon the terms and subject to the conditions of the Offer.The Offer expired on October 19, 2006. No notes were tendered pursuant to theOffer and as of the expiration date of the Offer, $105.0 million aggregate principalamount of notes remained outstanding.

As a result of theMerger and under purchase accounting rules we recorded $4.2 million ofunamortized debt premium as additional debt related to our senior secured notesas the fair market value of the debt on the Merger date was greater than itscarrying value. The premium is amortized to interest expense over the remaininglife of the debt.

*SeniorSecured Revolving Credit Facilities*. In 2004, the Company entered into anamended and restated revolving credit agreement providing for $30.0 million ofsenior secured credit facilities. The revolving credit agreement included a$15.0 million letter of credit facility and a $15.0 million revolving creditfacility that could be used for letters of credit.

On October 5, 2006, theCompany entered into a new amended and restated revolving credit facility,pursuant to which the existing $15.0 million revolving credit facility and$15.0 million letter of credit facility, was increased to a $15.0 millionrevolving credit facility (the “Old Senior Secured Revolving Credit Facility”)and a $25.0 million letter of credit facility (the “Old Senior Secured Letterof Credit Facility”, together with the Old Senior Secured Revolving CreditFacility, the “Old Senior Secured Revolving Credit Facilities”) maturing onOctober 5, 2008, pursuant to which the Lenders agreed to make loans to theCompany and its subsidiaries (all of the proceeds of which were to be used forworking capital purposes) and issue letters of credit on behalf of the Companyand its subsidiaries.

On January 29,2007, the Company entered into a Second Amended and Restated Credit Agreementpursuant to which the Old Senior Secured Revolving Credit Facilities wererefinanced with a new agent and administrative agent, General Electric CapitalCorporation, and a new $15.0 million revolving credit facility (the “New SeniorSecured Revolving Credit Facility”) and $25.0 million letter of credit facility(the “New Senior Secured Letter of Credit Facility”, together with the New SeniorSecured Revolving Credit Facility, the “New Senior Secured Revolving CreditFacilities”), maturing on January 29, 2009, were put into place, pursuant towhich the lenders agree to make loans and issue letters of credit to and onbehalf of the Company and its subsidiaries.

Obligations underthe New Senior Secured Revolving Credit Facilities are guaranteed by all of theCompany’s subsidiaries as well as by RM Restaurant Holding, which wholly ownsthe Company and has made a first priority pledge of all of its equity interestsin the Company as security for the obligations.  Interest on the NewSenior Secured Revolving Credit Facility accrues pursuant to an ApplicableMargin as set forth in the Second Amended and Restated Credit Agreement. The New Senior Secured Revolving Credit Facilities are secured by, amongother things, first priority pledges of all of the equity interests of theCompany’s direct and indirect subsidiaries, and first priority securityinterests (subject to customary exceptions) in substantially all of the currentand future property and assets of the Company and its direct and indirectsubsidiaries, with certain limited exceptions.  In connection with theCompany’s entrance into the New Senior Secured Revolving Credit Facilities onJanuary 29, 2007, the Company borrowed $7.4 million under the New SeniorSecured Revolving Credit Facility, the proceeds of which were used to pay theoutstanding revolving borrowings under the Old

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Senior Secured Revolving Credit Facility. As of July1, 2007, there was $7.2 million outstanding under the New Senior SecuredRevolving Credit Facility.

The Second Amendedand Restated Credit Agreement contains various affirmative and negativecovenants and restrictions, which among other things, require us to meet certainfinancial tests (including certain leverage and cash flow ratios), and limitsour and our subsidiaries’ ability to incur or guarantee additionalindebtedness, make certain capital expenditures, pay dividends or make otherequity distributions, purchase or redeem capital stock, make certaininvestments, enter into arrangements that restrict dividends from subsidiaries,sell assets, engage in transactions with affiliates and effect a consolidationor merger. Under the terms of the Second Amended and Restated Credit Agreementwe are required to maintain a cash flow ratio determined on an annual basisequal to 1.70 to 1.00 until maturity. Pursuant to the terms of the SecondAmended and Restated Credit Agreement, the Cash Flow Ratio is defined as theratio of (a) Consolidated Cash Flow (as defined therein) to(b) Consolidated Financial Obligations (as defined therein).

As of July 1,2007, under the terms of the Second Amended and Restated Credit Agreement, theCash Flow Ratio covenant was not met, and the lender has waived suchnoncompliance. The Cash Flow Ratio covenant was not met due to non-cashpurchase price adjustments made to the balances of deferred tax assets, prepaidexpenses and the current portion of favorable lease assets related to theMerger of the Company in August 2006.  If the non-cash purchase priceadjustments are ignored, the Company would have been in compliance with theCash Flow Ratio covenant. The Company was in compliance with all otherspecified financial and other covenants under the New Senior Secured RevolvingCredit Facilities at July 1, 2007.

*SeniorUnsecured Credit Facility*. In 2005 we entered into a $75.0million senior unsecured credit facility (the “Old Senior Unsecured CreditFacility”) consisting of a single term loan maturing on December 31, 2008, allof the proceeds of which were used to finance a portion of the cashconsideration of an acquisition and pay related fees and expenses. On October 5,2006, the Company entered into an Amended and Restated Senior Unsecured CreditFacility, pursuant to which the Old Senior Unsecured Credit Facility wasdecreased to a $65.0 million senior unsecured credit facility (the “ New SeniorUnsecured Credit Facility”), consisting of a single term loan maturing onOctober 5, 2010. All of the proceeds of the New Senior Unsecured CreditFacility were used to repay in full any term loans outstanding under the OldSenior Unsecured Credit Facility and not continued on the restatementdate.  The total amount of term loansrepaid was $10.0 million. Obligations under the New Senior Unsecured CreditFacility are guaranteed by all of the Company’s subsidiaries. Interest on theterm loan outstanding under the New Senior Unsecured Credit Facility accrues,at the Company’s option, at either (i) the greater of the prime rate or therate which is 0.5% in excess of the federal funds rate, plus 4.0% or (ii) areserve adjusted Eurodollar rate, plus 5.0%. As of July 1, 2007, the interestrate on the New Senior Unsecured Credit Facility term loan was 10.41%.

Our New SeniorUnsecured Credit Facility contains various affirmative and negative covenantswhich, among other things, require 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,engage in transactions with affiliates, make certain investments, sell ourassets, make acquisitions, effect a consolidation or merger and amend or modifyinstruments governing certain indebtedness (including relating to our seniorsecured notes and the New Senior Secured Revolving Credit Facilities). We arerequired to maintain certain minimum interest coverage ratios ranging from(i) 2.15 to 1.00 for the fiscal quarters ending on or after March 31,2007 through December 31, 2007 and (ii) 2.30 to 1.00 thereafter untilmaturity. Pursuant to the terms of the New Senior Unsecured Credit Facility,the 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. The Companywas in compliance with all specified financial and other covenants under theNew Senior Unsecured Credit Facility at July 1, 2007.

*Mortgage.*In 2005, concurrent with an acquisition, we assumed a $0.8 million mortgagesecured by the building and improvements of one of the restaurants acquired inthe transaction. The mortgage carries a fixed annual interest rate of 9.28% andrequires equal monthly payments of principal and interest through April 2015.As of July 1, 2007, the principal amount due on the mortgage was $0.7 million.

Interest rates for the Company’s long-term debt areshown the following table:

|                                           | ** ** | **July 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Senior secured  notes due 2010            |       | 10.00                  | %          | 10.25                       | %          |
| Senior Secured  Revolving Credit Facility |       | 7.57 to 9.00           | %          | 8.25                        | %          |
| Senior Unsecured  Credit Facility         |       | 10.41                  | %          | 10.35                       | %          |
| Mortgage                                  |       | 9.28                   | %          | 9.28                        | %          |
| Other                                     |       | 6.45 to 7.75           | %          | 7.75                        | %          |

 

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**4.             Capitalization**

**CommonStock**

The Company isauthorized to issue 1,000 shares of common stock. At July 1, 2007 and December31, 2006, there were 1,000 shares of common stock authorized, issued andoutstanding.

**Redeemable PreferredStock-Predecessor**

Prior to theMerger, the Company was authorized to issue 100,000 shares of Preferred Stock.Shares were issued upon approval of the board of directors and all outstandingshares of Preferred Stock were redeemable at any time at the option of theCompany, subject to restrictions under certain debt covenants.

Series A 12.5% Cumulative Compounding RedeemablePreferred Stock (Series A) and Series B 13.5% Cumulative CompoundingRedeemable Preferred Stock (Series B) had a liquidation preference equalto $1 per share plus accreted dividends. With respect to dividend rights andrights of liquidation, Series A ranked senior to all classes of CommonStock and Series B. Series B ranked senior to all classes of Common Stock.

Series C 15%Cumulative Compounding Participating Preferred stock (Series C) ranked seniorwith respect to payment of dividends, liquidation, and redemption to all otherseries of preferred stock and common stock of the Company. The Series Chad a liquidation preference equal to two times the original issue price of $1per share, plus accreted dividends. As a result of the liquidation preference,Series C was recorded at liquidation value at the date of issuance. Holders ofSeries C were entitled to receive, in addition to the liquidationpreference, an amount equal to 40% of any amounts that would otherwise beavailable to the holders of Common Stock in the event of a liquidation or saleof the Company.

The liquidationpreference on the Series A, Series B and Series C accreted at thestated rates on the liquidation preference value thereof; dividends(representing accreted liquidation preference) were to be paid from legallyavailable funds, when and if declared by the board of directors. Dividends werepayable only when and if declared, or upon a sale or liquidation of the Companyor upon redemption of the applicable series of preferred stock. Accretion ofthe liquidation preference on the redeemable preferred stock was reflected asan increase in the preferred stock values and an increase in the accumulateddeficit. Accretion of the liquidation preference on the Redeemable PreferredStock during the three month and six month Predecessor periods ended June 25,2006 was $3.9 million and $7.8 million, respectively. In the Predecessorperiods, net loss attributable to common stockholders includes the effect ofthe accretion of the liquidation preference on the redeemable preferred stockwhich reduced net income attributable to common stockholders for the period.

On August 21,2006, as a result of the Merger and in accordance with the terms of the Merger Agreement,all issued and outstanding preferred stock was converted into the right toreceive a portion of the Merger consideration.

**Stock Option Plans**

As a result of theMerger and in accordance with the terms of the Merger Agreement all of theCompany’s outstanding vested and unvested stock options were cancelled andconverted into the right to receive a portion of the purchase price, less theexercise prices thereon, as applicable. Concurrently with the Merger, theCompany’s 1998 and 2000 Stock Option Plans were terminated. The Company doesnot currently have a stock option plan.

In accordance with SFAS No. 148, Accounting forStock-Based Compensation-Transition and Disclosure, the Company accounted forthe stock-based compensation plans using the intrinsic value-based measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related interpretations. No stock-based employee compensationcost is reflected in net income in the periods ended June 25, 2006, as alloptions granted under the Plans had an exercise price equal to the market valueof the underlying common stock on the date of grant. If the Company had electedto recognize compensation cost based on the fair value of the options grantedat the grant rate as prescribed by SFAS No. 148, there would have been no proforma effects to net income in the Successor period from January 1, 2007 toJuly 1, 2007 or the Predecessor period from December 26, 2005 to June 25, 2006.

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**5.             Related Party Transactions**

**Successor Transactions**

The Company has aManagement Services Agreement (the Management Agreement”) dated August 21,2006, by and between the Company and Sun Capital Partners Management IV, LLC(the “Manager”), an affiliate of Sun Cantinas LLC, the indirect holder of themajority of the capital stock of the Company. The Manager is paid annual feesequal to the greater of (i) $0.5 million or (ii) 1% of the Company’s EBITDA forsuch period. EBITDA is defined as (A) net income (or loss) after taxes of theCompany and its direct and indirect subsidiaries on a consolidated basis (“NetIncome”), plus (B) interest expense which has been deducted in thedetermination of Net Income, plus (C) federal, state and local taxes which havebeen deducted in determining Net Income, plus (D) depreciation and amortizationexpenses which have been deducted in determining Net Income, including withoutlimitation amortization of capitalized transaction expenses incurred inconnection with the transactions contemplated by the Merger plus (E) extraordinarylosses which have been deducted in the determination of Net Income, plus (F)un-capitalized transaction expenses incurred in connection with the Merger,plus (G) all other non-cash charges, minus (H) extraordinary gainswhich have been included in the determination of Net Income.  EBITDA is computed without taking intoconsideration the fees payable under the Management Agreement. The Company paysthe fees in quarterly installments in advance equal to the greater of (i) $0.1million or (ii) 1% of EBITDA for the immediately preceding fiscal quarter.Expenses relating to the Management Agreement of $0.2 million in the threemonth period ended July 1, 2007 and $0.3 million in the six month period endedJuly 1, 2007, were recorded as general and administrative expense.Additionally, the Company prepaid $0.1 million in fees under the agreement forthe third quarter of 2007.

In September 2006, the Company made a dividenddistribution of $10.0 million to RM Restaurant Holding, its parent, which wasrecorded as a reduction to retained earnings. The Company has also madesubsequent additional distributions to and on behalf of RM Restaurant Holdingaggregating $5.3 million and has recorded the distributions as a related partyreceivable.

**Predecessor Transactions**

The Company had anAmended and Restated Management Agreement dated June 28, 2000 with two of itsformer stockholders Bruckman, Rosser, Sherrill & Co., L.P. and FS PrivateInvestments, LLC. The stockholders were paid annual fees equating to .667% and..333%, respectively, of consolidated earnings before interest, income taxes,depreciation and amortization of the Company. As described in the MergerAgreement, the Amended and Restated Management Agreement dated June 28, 2000was terminated in connection with the Merger. Expenses relating to theagreement of $0.2 million in the three months ended June 25, 2006 and $0.3million in the six months ended June 25, 2006 were recorded as general andadministrative expense.

**6.             Impact of Recently Issued Accounting Principles**

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FINNo. 48”) *Accounting for Uncertaintyin Income Taxes: an interpretation of FASB Statement No. 109.*Thisinterpretation clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with Statement ofFinancial Accounting Standards (“SFAS”)No. 109, *Accounting*far *Income Taxes.*FIN No. 48 prescribes a recognitionthreshold and measurement principles for financial statement disclosure of taxpositions taken or expected to be taken on a tax return. The Company adoptedthe provision of this interpretation effective January 1, 2007. The adoption ofFIN No. 48 did not have a material impact on the Company’s consolidatedfinancial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements.*ThisStandard defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, which is the year beginningDecember 31, 2007 for the Company. The adoption of SFAS No. 157 is not expectedto have a material impact on the Company’s financial position, results ofoperations or cash flows.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial liabilities - Including an Amendmentof FASB Statement No. 115.*SFASNo. 159 permits entities to choose to measure many financial instruments andcertain other items at fair value. Unrealized gains and losses on items forwhich the fair value option has been elected will be recognized in earnings ateach subsequent reporting date. SFAS No. 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, which isthe year beginning December 31,

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2007for the Company. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on its consolidated results of operations and financialcondition.

**7.             Other Events**

In May 2007, the Company sold four Company-owned Fuziorestaurants to a franchisee, entered into a management agreement with the franchiseeon a fifth Company-owned Fuzio restaurant and sold the Fuzio trademark, tradename and Fuzio franchise rights to the franchisee (the “Fuzio Transaction”).The selling price of $4.9 million in cash included $0.7 million in prepaidmanagement fees associated with the management agreement. The management feeswill be amortized over seven years. Concurrent with the sale, the Companypurchased three franchised Chevys restaurants from the franchisee for $3.1million in cash.

The Company recorded a gain of $1.5 million on thedisposal of the assets of the Fuzio Transaction. The gain is included in otherincome on the consolidated statements of operations and has been recorded netof associated expenses and remaining net book value of the assets transferred.

 

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**Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations**

*The following discussion and analysis of ourfinancial condition and results of operations contains forward-lookingstatements within the meaning of the federal securities laws. See thediscussion under the heading “Forward-Looking Statements” elsewhere in thisreport.*

**Overview**

We are one of the largest full service, casual dining Mexicanrestaurant chain operators in the United States in terms of number of restaurants.As of July 1, 2007 we operated 190 restaurants, of which 157 were located inCalifornia, with additional restaurants in Arizona, Florida, Indiana, Illinois,Maryland, Missouri, Nevada, New Jersey, New York, Oregon, Virginia andWashington. Our four major subsidiaries are El Torito Restaurants, Inc.,Acapulco Restaurants, Inc., Chevys Restaurants, LLC and a purchasing,distribution, and manufacturing subsidiary, 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 nine additional restaurantlocations, all of which are also full service Mexican formats, under thefollowing brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHarry’s;and Who Song & Larry’s.

In2007 we have opened three restaurants: an El Torito Grill restaurant inAnaheim, CA and El Torito restaurants in Rancho Cucamonga, CA and Santa Ana, CA.In 2006 we opened sixrestaurants: three El Torito restaurants, an El Torito Grill restaurant and aChevys restaurant, all in California and a Chevys restaurant in New York. We also have in the past, and may in the future,convert select restaurants to the El Torito or Chevys brand and divestunderperforming restaurants.

Our restaurant revenues include sales of food and alcoholic and otherbeverages. Other revenues consist primarily of sales by Real MexFoods, Inc. to outside customers of processed and packaged prepared foodsand other merchandise items.

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, 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 ofcapital expenditures for restaurants and also includes amortization offavorable lease asset and unfavorable lease liability, net.

Amortization of favorable lease asset and unfavorable lease liability,net, represents the amortization of the asset in excess of the approximate fairmarket value and the liability in excess of the approximate fair market valueof the leases assumed as of August 21, 2006, the date of the Merger of theCompany.  The amounts are being amortizedover the remaining primary terms of the underlying leases.

Legal settlement costs include amounts paid or accrued to settlevarious legal actions against the Company, excluding costs to defend theactions.

Pre-opening costs are expensed as incurred and include costs associatedwith the opening of a new restaurant or the conversion of an existingrestaurant to a different concept.

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Other income includes gains on the disposal of assets and othermiscellaneous income and expense.

Goodwill is deemed to have an indefinite life and is subject to anannual impairment test.  Other intangibleassets are amortized over their useful lives in accordance with Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets”

Our fiscal year consists of 52 or 53 weeks and ends on the last Sundayin December of each year. The three months ended July 1, 2007 and June 25,2006 consist of thirteen weeks. The six months ended July 1, 2007 and June 25,2006 consist of 26 weeks. When calculating comparable store sales, we include arestaurant that has been open for more than 18 months and for the entirety ofeach comparable period. As of July 1, 2007, we had 177 restaurants that metthis criterion.

**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 accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anongoing basis, we evaluate our estimates, including those related to propertyand equipment, impairment of long-lived assets, valuation of goodwill,self-insurance reserves, income taxes and revenue recognition. We base ourestimates on historical experience and on various other assumptions and factorsthat are believed to be reasonable under the circumstances, the results ofwhich form 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 Note 4 of the Consolidated Financial Statements in our reporton Form 10-K filed for the fiscal year ended December 31, 2006.

**Results of Operations**

The discussion of and the results of operations forthe 13 weeks (“second quarter” or “three months”) ended July 1, 2007 and June25, 2006 is and are based on the results for the 13 week Successor period fromApril 2, 2007 to July 1, 2007 and the 13 week Predecessor period from March 27,2006 to June 25, 2006.  The discussion ofand the results of operations for the 26 weeks (“six months”) ended July 1,2007 and June 25, 2006 is and are based on the results for the 26 weekSuccessor period from January 1, 2007 to July 1, 2007 and the 26 weekPredecessor period from December 26, 2005 to June 25, 2006. Because of purchaseaccounting adjustments to the fair market value of long-term assets andlong-term liabilities, certain amounts may not be comparable between the threeand six month periods ended July 1, 2007 and June 25, 2006.

Our operating results for the three and six monthsended July 1, 2007 and June 25, 2006 are expressed as a percentage of totalrevenues below:
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **Successor**                    | ** ** | **Predecessor**                | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                              | ** ** | **July 1, 2007**       | ** ** | **June 25, 2006**    | ** ** | **July 1, 2007** | ** ** | **June 25, 2006** | ** ** |
| Total revenues                          |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                           |       | 24.3                             |       | 23.3                           |       | 24.0 |   | 23.5 |   |
| Labor                                   |       | 34.9                             |       | 33.5                           |       | 35.4 |   | 34.1 |   |
| Direct operating  and occupancy expense |       | 25.5                             |       | 23.8                           |       | 25.8 |   | 25.0 |   |
| Total operating  costs                  |       | 84.7                             |       | 80.7                           |       | 85.2 |   | 82.6 |   |
| General and  administrative expense     |       | 5.4                              |       | 5.1                            |       | 5.5 |   | 5.0 |   |
| Depreciation and  amortization          |       | 4.1                              |       | 3.3                            |       | 4.1 |   | 3.3 |   |
| Legal settlement  costs                 |       | 0.1                              |       | 0.5                            |       | 0.1 |   | 1.0 |   |
| Pre-opening  costs                      |       | 0.3                              |       | 0.1                            |       | 0.3 |   | 0.2 |   |
| Operating income                        |       | 5.4                              |       | 10.4                           |       | 4.8 |   | 8.0 |   |
| Interest expense                        |       | 3.2                              |       | 4.1                            |       | 3.4 |   | 4.3 |   |
| Total other  expense, net               |       | 1.9                              |       | 3.9                            |       | 2.7 |   | 4.1 |   |
| Income before  tax provision            |       | 3.4                              |       | 6.4                            |       | 2.1 |   | 3.8 |   |
| Net income                              |       | 2.1                              |       | 3.8                            |       | 1.3 |   | 2.3 |   |

 

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**Threemonths ended July 1, 2007 compared to the three months ended June 25, 2006**

*Total Revenues*. Total revenues increased by $2.9 million, or 2.0%,to $149.6 million in the second quarter of 2007 from $146.7 million in thesecond quarter of 2006 due to a $1.3 million increase in restaurant revenuesand a $1.6 million increase in other revenues. The increase in restaurantrevenues was due to comparable store sales increases of 1.3% in the quarter andsales from new restaurant openings partially reduced by restaurant closures.The increase in comparable store sales was primarily driven by a 1.6% averagemenu price increase in all brands that was implemented in January 2007.  The increase in other revenues was primarilydue to an increase in sales to existing outside customers and the addition ofnew outside customers by Real Mex Foods, Inc., our distribution andmanufacturing subsidiary.

*Cost of Sales*. Total cost of sales of $36.3 million in the secondquarter of 2007 increased $2.1 million or 6.3% as compared to the secondquarter of 2006. As a percentage of total revenues, cost of sales increased to24.3% in the second quarter of 2007 from 23.3% in the second quarter of 2006.The increase was primarily due to higher beef, chicken and produce commoditycosts in our restaurants.

*Labor*. Labor costs of $52.2 million in the second quarterof 2007 increased by $3.0 million or 6.1% as compared to the second quarter of2006. As a percentage of total revenues, labor costs increased to 34.9% in thesecond quarter of 2007 from 33.5% in the second quarter of 2006.  This increase was primarily due to minimumwage increases which took place in January in the majority of the states inwhich we operate combined with annual management salary increases.  Payroll and benefits remain subject toinflation and government regulation; especially wage rates that are currentlyat or near the minimum wage, and expenses for health insurance.

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expenseof $38.2 million in the second quarter of 2007 increased by $3.2 million or9.3% as compared to the second quarter of 2006. Direct operating and occupancy expense as a percentage of salesincreased to 25.5% in the second quarter of 2007 from 23.8% in the secondquarter of 2006 primarily due to an increase in expenditures for advertisingand promotion and an increase in rent expense resulting from lease renewals andrent for new restaurants.

*General and Administrative Expense*. General and administrative expense of$8.1 million in the second quarter of 2007 increased by $0.6 million or 8.7% ascompared to the second quarter of 2006 primarily due to increased expendituresfor legal expenses related to employee class action litigation and an increasein salaries due to merit increases in the fourth quarter of 2006. General andadministrative expense as a percentage of sales increased to 5.4% in the secondquarter of 2007 from 5.1% in the second quarter of 2006.

*Depreciation and amortization*. Depreciation and amortization expenseof $6.1 million in the second quarter of 2007 increased $1.3 million or 27.0%as compared to the second quarter of 2006. As a percentage of total revenues, depreciation and amortizationincreased to 4.1% in the second quarter of 2007 from 3.3% in the second quarterof 2006. The increase in expense is due to the increase in the depreciablebasis of furniture, fixtures and equipment to fair market value and netfavorable lease asset and unfavorable lease liability amortization requiredunder purchase accounting rules due to the Merger on August 21, 2006 anddepreciation on the assets of new restaurants.

*Legal Settlement Costs.*Legal settlement costs of $0.2 million inthe second quarter of 2007 decreased by $0.6 million or 78.8% in the secondquarter of 2007 as compared to the second quarter of 2006. The legal settlementexpense in the second quarter of 2006 related to lawsuits filed against us in2004 and 2006.

*Interest Expense*. Interest expense of $4.8 million in the secondquarter of 2007 decreased $1.2 million or 20.4% as compared to the secondquarter of 2006 primarily due to a $10.0 million reduction in our seniorunsecured credit facility and a reduction in the weighted average interest rateon our senior unsecured credit facility from 14.26% in the second quarter of2006 to 10.36% in the second quarter of 2007. As a percentage of total revenues, interest expense was 3.2% in thesecond quarter of 2007 and 4.1% in the second quarter of 2006.

*Other Income*. Other income of $2.0 million in the second quarterof 2007 increased by $1.7 million as compared to the second quarter of 2006.The increase in other income was primarily the result of a $1.5 million gain onthe sale of the assets, net of associated expenses, of four Company-owned Fuziorestaurants to a franchisee and the sale of the Fuzio trademark, trade name andFuzio franchise rights to the franchisee.

*Incometax provision.*The income tax provision for the second quarter of 2007 and 2006 was based onestimated annual effective tax rates. A rate of 39.6% was applied to the secondquarter of 2007 versus a rate of 41.4% in the second quarter of 2006. The ratesare comprised of the combined federal and state statutory rates.

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**Six months ended July1, 2007 compared to the six months ended June 25, 2006**

*Total Revenues*. Total revenues increased by $3.8 million, or 1.3%,to $288.1 million in the first six months of 2007 from $284.3 million in thefirst six months of 2006 due to a $1.8 million increase in restaurant revenues,a $2.0 million increase in other revenues. The increase in restaurant revenueswas primarily due to comparable store sales increases of 0.8% and sales fromnew restaurant openings which were partially offset by restaurant closures. Theincrease in comparable store sales was primarily driven by a 1.6% average menuprice increase in all brands that was implemented in January 2007.  The increase in other revenues was primarilydue to an increase in sales to outside customers and the addition of newoutside customers by Real Mex Foods, Inc., our distribution and manufacturingsubsidiary.

*Cost of Sales*. Total cost of sales of $69.1 million in the firstsix months of 2007 increased $2.4 million or 3.6% as compared to the first sixmonths of 2006. As a percentage of total revenues, cost of sales increased to24.0% in the first six months of 2007 from 23.5% in the first six months of2006. This increase was due to higher beef, chicken and produce commodity costsin our restaurants.

*Labor*. Labor costs of $101.9 million in the first sixmonths of 2007 increased by $4.9 million or 5.0% as compared to the first sixmonths of 2006. As a percentage of total revenues, labor costs increased to35.4% in the first six months of 2007 from 34.1% in the first six months of2006.  This increase was primarily due tominimum wage increases which took place in January in the majority of thestates in which we operate combined with annual management salary increases.  Payroll and benefits remain subject toinflation and government regulation; especially wage rates that are currentlyat or near the minimum wage, and expenses for health insurance.

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expenseof $74.4 million in the first six months of 2007 increased by $3.2 million or4.6% as compared to the first six months of 2006. Direct operating andoccupancy expense as a percentage of sales increased to 25.8% in the first sixmonths of 2007 from 25.0% in the first six months of 2006 primarily due to anincrease in expenditures for advertising and promotion and an increase in rentexpense resulting from lease renewals and rent for new restaurants.

*General and Administrative Expense*. General and administrative expense of$15.7 million in the first six months of 2007 increased by $1.5 million or10.4% as compared to the first six months of 2006 primarily due to increasedexpenditures for legal expenses related to employee class action litigation andan increase in salaries due to merit increases in the fourth quarter of 2006.General and administrative expense as a percentage of sales increased to 5.5%in the first six months of 2007 from 5.0% in the first six months of 2006.

*Depreciation and amortization*. Depreciation and amortization expenseof $11.9 million in the first six months of 2007 increased $2.5 million or27.4% as compared to the first six months of 2006.  As a percentage of total revenues,depreciation and amortization increased to 4.1% in the first six months of 2007from 3.3% in the first six months of 2006. The increase in expense is due tothe increase in the depreciable basis of furniture, fixtures and equipment tofair market value and net favorable lease asset and unfavorable lease liabilityamortization required under purchase accounting rules due to the Merger onAugust 21, 2006 and depreciation on the assets of new restaurants.

*Legal Settlement Costs.*Legal settlement costs of $0.3 million inthe first six months of 2007 decreased by $2.4 million or 88.3% in the firstsix months of 2007 as compared to the first six months of 2006. The legalsettlement expense in the first six months of 2006 related to lawsuits filedagainst us in 2004 and 2006.

*Other Income*. Other income, net, of $1.9 million in the first sixmonth of 2007 increased by $1.5 million as compared to the first six month of2006. The increase in other income was primarily the result of a $1.5 milliongain on the sale of the assets, net of associated expenses, of fourCompany-owned Fuzio restaurants to a franchisee and the sale of the Fuziotrademark, trade name and Fuzio franchise rights to the franchisee.

*Interest Expense*. Interest expense of $9.7 million in the first sixmonths of 2007 decreased $2.4 million or 19.9% as compared to the first sixmonths of 2006 primarily due to a $10.0 million reduction in our seniorunsecured credit facility and a reduction in the weighted average interest rateon our senior unsecured credit facility from 14.21% in the first six months of2006 to 10.36% in the first six months of 2007. As a percentage of total revenues, interest expense was 3.4% in thefirst six months of 2007 and 4.3% in the first six months of 2006.

*Incometax provision.*The income tax provision for the first six months of 2007 and 2006 was based onestimated annual effective tax rates. A rate of 39.9% was applied to the firstsix months of 2007 versus a rate of 41.2% in the first six months of 2006. Therates 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 July 1, 2007 was $183.0 million, and we had $7.9million of

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revolving credit availability under our revolvingcredit facility. Our ability to make principal and interest payments and tofund planned capital expenditures will depend on our ability to generate cashin the future, which, to a certain extent, is subject to general economic,financial, competitive, legislative, regulatory and other factors that arebeyond our control. Based on our current level of operations, we believe ourcash flow from operations, available cash and available borrowings under ourrevolving credit facility will be adequate to meet our liquidity needs for thenear future. In addition, we may partially fund restaurant openingsthrough credit received from trade suppliers and landlord contributions, iffavorable terms are available. We cannot assure you, however, that our businesswill generate sufficient cash flow from operations or that future borrowingwill be available to us under our revolving credit facility in an amountsufficient to enable us to service our indebtedness or to fund our other liquidityneeds. If we consummate an acquisition, our debt service requirements couldincrease. We may need to refinance all or a portion of our indebtedness onor before maturity. We cannot assure you that we will be able to refinance anyof our indebtedness on commercially 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$12.5 million and $20.4 million in the six months ended July 1, 2007 and June25, 2006, respectively. The decrease in cash provided by operating activitieswas primarily attributable to an increase in receivables for landlord tenantallowances of $0.9 million, an increase in receivables for workers’ comp claimsin excess of the plan deductible of $0.3 million, an increase in receivablesfrom outside customers of Real Mex Foods of $1.1 million due to the addition ofnew customers, an increase in receivables due to the timing of receipts ofcertain recurring rebates and other items of $1.0 million,  an increase of $0.5 million in furniture andequipment inventories purchased for the future remodel of existing restaurants,an increase in inventories used to supply the new outside customers of Real MexFoods of $1.4 million and an increase in advance to our parent company of $1.8million.

*Investing Activities*. We had net cash used in investing activities of$12.0 million and $13.8 million in the six months ended July 1, 2007 and June25, 2006, respectively. The $1.8 million reduction in cash used in investingactivities was primarily due to an increase in capital expenditures of $5.6million, primarily resulting from a $3.0 million acquisition of three Chevysstores from a franchisee and $1.4 million in expenditures for the partial costof finishing out and equipping a new, larger manufacturing facility of Real MexFoods, Inc. The increase in expenditures was offset by $5.8 million in proceedsprimarily from the sale of five Fuzio restaurants and the Fuzio trademark to afranchisee and an unrelated sale of Company owned land. In addition, theCompany used $1.6 million in 2006 related to an acquisition that occurred in2005.

We expect to makecapital expenditures totaling approximately $25.8 million in fiscal year 2007.Approximately $3.5 million is expected to be spent on restaurant remodels andrefurbishment and approximately $10.2 million is expected to be used topurchase, build or complete the building of up to five new El Torito, El ToritoGrill or Chevys restaurants. We expect pre-opening expenses associated with thenew restaurants to total approximately $1.2 million. We expect fiscal year 2007capital expenditures for information technology to be approximately $2.3million, including approximately $1.5 million for restaurant point of sale andback office equipment. In 2007, we will move the existing manufacturingfacility of Real Mex Foods, Inc. to a new, larger, location and expect the costto finish out and equip the new facility to be approximately $3.3 million.Maintenance capital expenditures for our restaurants are expected to beapproximately $6.5 million. These and other similar costs may be higher in thefuture due to inflation and other factors. We expect to fund the expendituresfor new restaurants and other capital expenditures from cash flow fromoperations, available cash, available borrowings under our senior securedrevolving credit facility, landlord allowances (if favorable terms are available)and trade financing received from trade suppliers.

*FinancingActivities*. We had net cash used in financing activities of$0.8 million in the six months ended July 1, 2007 compared with net cash usedin financing activities of $0.1 million in the six months ended June 25, 2006.The increase in cash used in financing activities was primarily due to thepayment of financing costs associated with the Second Amended and RestatedCredit Agreement.

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**Debt and Other Obligations**

*SeniorSecured Notes due 2010*. Interest on our senior securedregistered notes (“senior secured notes”) accrues at a contract rate of 10% perannum. (The interest rate was 10.25% through March 31, 2007 as, in fiscal year2005, we exceeded the capital expenditure limit under the indenture governingthe senior secured notes and as a result were required to pay a 0.25% increasein the stated rate. Exceeding the capital expenditure limit did not constitutea default with respect to the senior secured notes or indenture.) Interest ispayable semiannually on April 1 and October 1 of each year. Our seniorsecured notes are fully and unconditionally guaranteed on a senior securedbasis by all of our present and future domestic subsidiaries which arerestricted subsidiaries under the indenture governing our senior secured notes.Our senior secured notes and related guarantees are secured by substantiallyall of our and our domestic restricted subsidiaries’ tangible and intangibleassets, subject to the prior ranking claims on such assets by the lenders underour New Senior Secured Revolving Credit Facilities. The indenture governing oursenior secured notes contains various affirmative and negative covenants,subject to a number of important limitations and exceptions, including but notlimited those limiting our ability to incur additional indebtedness, makecapital expenditures, pay dividends, redeem stock or make other distributions,issue stock of our subsidiaries, make certain investments or acquisitions,grant liens on assets, enter into transactions with affiliates, merge,consolidate or transfer substantially all of our assets, and transfer and sellassets. The covenant that limits our incurrence of indebtedness requires that,after giving effect to any such incurrence of indebtedness and the applicationof the proceeds thereof, our fixed charge coverage ratio as of the date of suchincurrence will be at least 2.50 to 1.00 in the case of any incurrence afterJuly 1, 2006. The indenture defines consolidated fixed charge coverage ratio asthe ratio of Consolidated Cash Flow (as defined therein) to Fixed Charges (asdefined therein). The Company was in compliance with all specified financialand other covenants under the senior secured notes indenture at July 1, 2007.

We can redeem oursenior secured notes at any time after April 1, 2007. We are required to offerto redeem our senior secured notes under certain circumstances involving achange of control. Additionally, if we or any of our domestic restrictedsubsidiaries engage in assets sales, we generally must either invest the netcash proceeds from such sales in our business within 360 days, prepay theindebtedness obligations under our New Senior Secured Revolving Credit Facilityor certain other secured indebtedness or make an offer to purchase a portion ofour senior secured notes.

On September 19,2006, the Company commenced a change of control offer (the “Offer”) to purchaseany or all of its notes that remained outstanding under the indenture datedMarch 31, 2004 by and among the Company, the guarantors thereto and Wells FargoBank, National Association, as trustee. The Offer was made pursuant to Section4.15 of the indenture as the Merger constituted a “change of control” under theindenture. In accordance with the terms of the indenture, the Company offeredto repurchase the notes at a purchase price in cash equal to 101% of theaggregate principal amount of the notes or portion of notes validly tenderedfor payment thereof, plus accrued and unpaid interest up to, but not including,the date of payment, upon the terms and subject to the conditions of the Offer.The Offer expired on October 19, 2006. No notes were tendered pursuant to theOffer and as of the expiration date of the Offer, $105.0 million aggregateprincipal amount of notes remained outstanding.

As a result of theMerger and under purchase accounting rules we recorded $4.2 million ofunamortized debt premium as additional debt related to our senior secured notesas the fair market value of the debt on the Merger date was greater than itscarrying value. The premium is amortized to interest expense over the remaininglife of the debt.

*SeniorSecured Revolving Credit Facilities*. In 2004, the Company entered into anamended and restated revolving credit agreement providing for $30.0 million ofsenior secured credit facilities. The revolving credit agreement included a$15.0 million letter of credit facility and a $15.0 million revolving creditfacility that could be used for letters of credit.

On October 5, 2006, theCompany entered into a new amended and restated revolving credit facility,pursuant to which the existing $15.0 million revolving credit facility and$15.0 million letter of credit facility, was increased to a $15.0 millionrevolving credit facility (the “Old Senior Secured Revolving Credit Facility”)and a $25.0 million letter of credit facility (the “Old Senior Secured Letterof Credit Facility”, together with the Old Senior Secured Revolving CreditFacility, the “Old Senior Secured Revolving Credit Facilities”) maturing onOctober 5, 2008, pursuant to which the Lenders agreed to make loans to theCompany and its subsidiaries (all of the proceeds of which were to be used forworking capital purposes) and issue letters of credit on behalf of the Companyand its subsidiaries.

On January 29,2007, the Company entered into a Second Amended and Restated Credit Agreementpursuant to which the Old Senior Secured Revolving Credit Facilities wererefinanced with a new agent and administrative agent, General Electric CapitalCorporation, and a new $15.0 million revolving credit facility (the “New SeniorSecured Revolving Credit Facility”) and $25.0 million letter of credit facility(the “New Senior Secured Letter of Credit Facility”, together with the NewSenior Secured Revolving Credit Facility, the “New Senior Secured RevolvingCredit Facilities”), maturing on January 29, 2009, were put into place,pursuant to which the lenders agree to make loans and issue letters of creditto and on

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behalf of the Company and its subsidiaries.

Obligations underthe New Senior Secured Revolving Credit Facilities are guaranteed by all of theCompany’s subsidiaries as well as by RM Restaurant Holding, which wholly ownsthe Company and has made a first priority pledge of all of its equity interestsin the Company as security for the obligations.  Interest on the NewSenior Secured Revolving Credit Facility accrues pursuant to an ApplicableMargin as set forth in the Second Amended and Restated Credit Agreement. The New Senior Secured Revolving Credit Facilities are secured by, amongother things, first priority pledges of all of the equity interests of theCompany’s direct and indirect subsidiaries, and first priority securityinterests (subject to customary exceptions) in substantially all of the currentand future property and assets of the Company and its direct and indirectsubsidiaries, with certain limited exceptions.  In connection with theCompany’s entrance into the New Senior Secured Revolving Credit Facilities onJanuary 29, 2007, the Company borrowed $7.4 million under the New SeniorSecured Revolving Credit Facility, the proceeds of which were used to pay theoutstanding revolving borrowings under the Old Senior Secured Revolving CreditFacility. As of July 1, 2007, there was $7.2 million outstanding under the NewSenior Secured Revolving Credit Facility.

The Second Amendedand Restated Credit Agreement contains various affirmative and negativecovenants and restrictions, which among other things, require us to meetcertain financial tests (including certain leverage and cash flow ratios), andlimits our and our subsidiaries’ ability to incur or guarantee additionalindebtedness, make certain capital expenditures, pay dividends or make otherequity distributions, purchase or redeem capital stock, make certaininvestments, enter into arrangements that restrict dividends from subsidiaries,sell assets, engage in transactions with affiliates and effect a consolidationor merger. Under the terms of the Second Amended and Restated Credit Agreementwe are required to maintain a cash flow ratio determined on an annual basisequal to 1.70 to 1.00 until maturity. Pursuant to the terms of the SecondAmended and Restated Credit Agreement, the Cash Flow Ratio is defined as theratio of (a) Consolidated Cash Flow (as defined therein) to(b) Consolidated Financial Obligations (as defined therein).

As of July 1,2007, under the terms of the Second Amended and Restated Credit Agreement, theCash Flow Ratio covenant was not met, and the lender has waived suchnoncompliance. The Cash Flow Ratio covenant was not met due to non-cashpurchase price adjustments made to the balances of deferred tax assets, prepaidexpenses and the current portion of favorable lease assets related to theMerger of the Company in August 2006.  If the non-cash purchase priceadjustments are ignored, the Company would have been in compliance with theCash Flow Ratio covenant. The Company was in compliance with all otherspecified financial and other covenants under the New Senior Secured RevolvingCredit Facilities at July 1, 2007.

*SeniorUnsecured Credit Facility*. In 2005 we entered into a $75.0million senior unsecured credit facility (the “Old Senior Unsecured CreditFacility”) consisting of a single term loan maturing on December 31, 2008, allof the proceeds of which were used to finance a portion of the cashconsideration of an acquisition and pay related fees and expenses. On October5, 2006, the Company entered into an Amended and Restated Senior UnsecuredCredit Facility, pursuant to which the Old Senior Unsecured Credit Facility wasdecreased to a $65.0 million senior unsecured credit facility (the “ New SeniorUnsecured Credit Facility”), consisting of a single term loan maturing onOctober 5, 2010. All of the proceeds of the New Senior Unsecured CreditFacility were used to repay in full any term loans outstanding under the OldSenior Unsecured Credit Facility and not continued on the restatement date.  The total amount of term loans repaid was$10.0 million. Obligations under the New Senior Unsecured Credit Facility areguaranteed by all of the Company’s subsidiaries. Interest on the term loanoutstanding under the New Senior Unsecured Credit Facility accrues, at theCompany’s option, at either (i) the greater of the prime rate or the rate whichis 0.5% in excess of the federal funds rate, plus 4.0% or (ii) a reserveadjusted Eurodollar rate, plus 5.0%. As of July 1, 2007, the interest rate onthe New Senior Unsecured Credit Facility term loan was 10.41%.

Our New SeniorUnsecured Credit Facility contains various affirmative and negative covenantswhich, among other things, require 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,engage in transactions with affiliates, make certain investments, sell ourassets, make acquisitions, effect a consolidation or merger and amend or modifyinstruments governing certain indebtedness (including relating to our seniorsecured notes and the New Senior Secured Revolving Credit Facilities). We arerequired to maintain certain minimum interest coverage ratios ranging from(i) 2.15 to 1.00 for the fiscal quarters ending on or after March 31,2007 through December 31, 2007 and (ii) 2.30 to 1.00 thereafter untilmaturity. Pursuant to the terms of the New Senior Unsecured Credit Facility,the 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 Interest Expense(as defined therein) for such four-fiscal quarter period. The Company was incompliance with all specified financial and other covenants under the NewSenior Unsecured Credit Facility at July 1, 2007.

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*Mortgage.*In 2005, concurrent with an acquisition, we assumed a $0.8 million mortgagesecured by the building and improvements of one of the restaurants acquired inthe transaction. The mortgage carries a fixed annual interest rate of 9.28% andrequires equal monthly payments of principal and interest through April 2015.As of July 1, 2007, the principal amount due on the mortgage was $0.7 million.

*CapitalLeases*. The Company leases certain leasehold improvementsunder agreements that are classified as capital leases. The capital leaseobligations have a weighted-average interest rate of 10.0%. As of July 1, 2007,the principal amount due relating to capital lease obligations was $0.9million. Principal and interest payments on the capital lease obligations aredue monthly and range from $2,200 to $7,000 per month. The capital leaseobligations mature between 2009 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,and increases in the minimum wage increase our expenses and reduce our netincome. Our workers’ compensation and health insurance costs have been and aresubject to continued inflationary pressures. Costs for construction, taxes,repairs, maintenance and insurance all impact our occupancy costs. Many of ourleases require us to pay taxes, maintenance, repairs, insurance and utilities,all of which 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.

**Item 3.   Quantitativeand Qualitative Disclosures About Market 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 2007 and2006 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 borrowings underour senior secured and unsecured credit facilities that are payable at floatingrates of interest. As of July 1, 2007, we had $65.0 million outstanding underour Senior Unsecured Credit Facility and $7.2 million outstanding under our NewSenior Secured Revolving Credit Facility. A hypothetical 10% fluctuation ininterest rates, as of July 1, 2007, would result in an after tax reduction of$0.4 million in earnings on an annualized basis.

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 ofthe period covered by this report, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer (“CEO”)and principal financial officer (“CFO”), of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934 (the “Exchange Act”)). Based on this evaluation, the CEO and CFOconcluded that, as of the end of the record period covered by this report, ourdisclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms. There was no change in our internal controlover financial reporting during our most recently completed fiscal quarter thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**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 notmaterially adversely affect our consolidated financial position, results ofoperations or cash flows.

**Item1A. 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 31, 2006.

**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.

**Item5. 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 08,  2007 |   | By:                             | /s/ Frederick F. Wolfe                                                       |   |
|                    |   |                            | Frederick F. Wolfe                                                           |   |
|                    |   |                            | President & Chief Executive Officer   (principal executive officer) |   |
|                    |   |                            |                                                                         |   |
| Dated: August 08,  2007 |   | By:                             | /s/ Steven Tanner                                                            |   |
|                    |   |                            | Steven Tanner                                                                |   |
|                    |   |                            | Chief Financial Officer   (principal financial officer)                      |   |
|                         |        |                                 |                                                                              |  |  |  |  |

 

 

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