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

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

 

****FORM 10-Q****

 

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                    |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | **For the quarterly period ended  March 30, 2008**                                                                                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                       |
| **Or**     |
| ** ** |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | **For the transition period  from                      to                      .** |

 

**Commission file number 333-116310**

 

****REAL MEX RESTAURANTS, INC.****

(Exact name of Registrant as specified in its charter)

 

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

 

**5660 Katella Avenue, Suite 100**

**Cypress, CA 90630**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:

**(562)-346-1200**

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                      |   | Accelerated  filer o         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                         |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

o Yes  x No

 

Asof April 27, 2008, the registrant had outstanding 1,000 shares of CommonStock, par value $0.001 per share.

 

 

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**Real MexRestaurants, Inc.**

 

**Index**

 
| PART I FINANCIAL INFORMATION |                                                                                        |
|-----------------------------------|---------------------------------------------------------------------------------------------|
|                              |                                                                                        |
| Item 1.                           | Financial Statements  (Unaudited)                                                           |   |
|                              | 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                         |                                                                                        |

 

2

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**FORWARD-LOOKING STATEMENTS**

 

*Thisreport includes “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”). Forward looking statements are those that donot relate solely to historical fact. They include, but are not limited to, anystatement that may 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 relateto, among other things: our liquidity and capital resources; legal proceedingsand regulatory matters involving our Company; food-borne illness incidents;increases in the cost of ingredients; our dependence upon frequent deliveriesof food and other supplies; our vulnerability to changes in consumerpreferences and economic conditions; our ability to compete successfully withother casual dining restaurants; our ability to expand; and anticipated growthin the restaurant industry and our markets.*

 

*Theseforward looking statements reflect our current views with respect to futureevents and are based on assumptions and subject to ri**s**ks and uncertainties, including, but not limited to, economic,competitive, governmental and technological factors outside of our control,that may cause actual results to differ materially from trends, plans orexpectations set forth in the forward looking statements. These risks anduncertainties may include these factors and the risks and uncertaintiesdescribed elsewhere in this report and in Item 1A “Risk Factors” of our annualreport on Form 10-K filed with the SEC on March 28, 2008. Given theserisks and uncertainties, we urge you to read this report completely and withthe understanding that actual future results may be materially differentfrom what we plan or expect. All of the forward-looking statements made in thisForm 10-Q are qualified by these cautionary statements and we cannotassure you that the actual results or developments anticipated by our Companywill be realized or, even if substantially realized, that they will have theexpected consequences to or effects on our Company or our business oroperations. In addition, these forward-looking statements present our estimatesand assumptions only as of the date of this report. Except for our ongoingobligation to disclose material information as required by federal securities laws,we do not intend to update you concerning any future revisions to any forwardlooking statements to reflect events or circumstances occurring after the dateof this report.*

 

*Unlessotherwise provided in this report, references to “we”, “us”, “our” and “Company”refer to Real Mex Restaurants, Inc. and its consolidated subsidiaries.*

 

3

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**PART IFINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**Real Mex Restaurants, Inc.**

**ConsolidatedBalance Sheets (unaudited)**

**(in thousands, except for share data)**

 
| ** **                                                                                                                         | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                    |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                         |       | $                        | 2,278      |                        | $          | 2,323 |   |
| Trade  receivables, net                                                                                                            |       | 10,332                   |       | 10,160                      |       |
| Other  receivables                                                                                                                 |       | 3,924                    |       | 2,594                       |       |
| Inventories                                                                                                                        |       | 11,928                   |       | 12,049                      |       |
| Deferred  compensation plan assets                                                                                                 |       | 2,475                    |       | 3,115                       |       |
| Prepaid expenses  and other current assets                                                                                         |       | 5,810                    |       | 7,186                       |       |
| Current portion  of favorable lease asset, net                                                                                     |       | 3,345                    |       | 3,454                       |       |
| Total current  assets                                                                                                              |       | 40,092                   |       | 40,881                      |       |
|                                                                                                                               |       |                     |       |                        |       |
| Property and  equipment, net                                                                                                       |       | 97,139                   |       | 96,179                      |       |
| Goodwill, net                                                                                                                      |       | 273,621                  |       | 273,621                     |       |
| Deferred charges                                                                                                                   |       | 2,789                    |       | 3,115                       |       |
| Favorable lease  asset, less current portion, net                                                                                  |       | 10,532                   |       | 11,313                      |       |
| Other assets                                                                                                                       |       | 9,344                    |       | 9,346                       |       |
| Total assets                                                                                                                       |       | $                        | 433,517    |                        | $          | 434,455 |   |
|                                                                                                                               |       |                     |       |                        |       |
| **Liabilities  and stockholder’s equity**                                                                                     | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                              |       |                     |       |                        |       |
| Accounts payable                                                                                                                   |       | $                        | 31,244     |                        | $          | 22,692 |   |
| Accrued  self-insurance reserves                                                                                                   |       | 15,936                   |       | 15,479                      |       |
| Accrued  compensation and benefits                                                                                                 |       | 12,791                   |       | 17,402                      |       |
| Other accrued  liabilities                                                                                                         |       | 16,112                   |       | 14,014                      |       |
| Related party  payables                                                                                                            |       | 4,716                    |       | 2,505                       |       |
| Current portion  of long-term debt                                                                                                 |       | 1,302                    |       | 12,579                      |       |
| Current portion  of capital lease obligations                                                                                      |       | 487                      |       | 433                         |       |
| Total current  liabilities                                                                                                         |       | 82,588                   |       | 85,104                      |       |
|                                                                                                                               |       |                     |       |                        |       |
| Long-term debt,  less current portion                                                                                              |       | 171,746                  |       | 172,057                     |       |
| Capital lease  obligations, less current portion                                                                                   |       | 1,270                    |       | 1,118                       |       |
| Unfavorable  lease liability, less current portion, net                                                                            |       | 4,079                    |       | 4,394                       |       |
| Other  liabilities                                                                                                                 |       | 12,826                   |       | 8,669                       |       |
| Total  liabilities                                                                                                                 |       | 272,509                  |       | 271,342                     |       |
|                                                                                                                               |       |                     |       |                        |       |
| Commitments and  contingencies                                                                                                     |       | —                   |       | —                      |       |
|                                                                                                                               |       |                     |       |                        |       |
| Stockholder’s  equity:                                                                                                        |       |                     |       |                        |       |
| Common stock,  $.001 par value, 1,000 shares authorized, issued and outstanding at  March 30, 2008 and December 30, 2007 |       | —                   |       | —                      |       |
| Additional  paid-in capital                                                                                                        |       | 201,803                  |       | 201,706                     |       |
| Accumulated  deficit                                                                                                               |       | (40,795                  | )          | (38,593                     | )          |
| Total  stockholder’s equity                                                                                                   |       | 161,008                  |       | 163,113                     |       |
| Total  liabilities and stockholder’s equity                                                                                   |       | $                        | 433,517    |                        | $          | 434,455 |   |

 

See notes to consolidated financial statements.

 

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**Real Mex Restaurants, Inc.**

**ConsolidatedStatements of Operations (unaudited)**

**(in thousands)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **March 30,**               | ** ** | **April 1,** | ** ** |
| ** **                                                                  | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | **As  Restated** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | **(Note 4)** | ** ** |
| Revenues:                                                                   |       |                             |       |   |   |
| Restaurant  revenues                                                        |       | $                                | 127,487    |   | $ | 130,295 |   |
| Other revenues                                                              |       | 9,337                            |       | 7,201 |   |
| Franchise  revenues                                                         |       | 753                              |       | 1,015 |   |
| Total revenues                                                              |       | 137,577                          |       | 138,511 |   |
|                                                                        |       |                             |       |   |   |
| Costs and  expenses:                                                        |       |                             |       |   |   |
| Cost of sales                                                               |       | 34,060                           |       | 32,826 |   |
| Labor                                                                       |       | 50,473                           |       | 49,676 |   |
| Direct operating  and occupancy expense                                     |       | 36,542                           |       | 36,249 |   |
| General and  administrative expense                                         |       | 7,843                            |       | 7,997 |   |
| Depreciation and  amortization                                              |       | 5,511                            |       | 5,753 |   |
| Amortization of  favorable lease asset and unfavorable lease liability, net |       | 567                              |       | 27 |   |
| Pre-opening  costs                                                          |       | 338                              |       | 390 |   |
|                                                                        |       |                             |       |   |   |
| Operating income                                                            |       | 2,243                            |       | 5,593 |   |
|                                                                        |       |                             |       |   |   |
| Other income  (expense):                                                    |       |                             |       |   |   |
| Interest expense                                                            |       | (4,617                           | )          | (4,846 | ) |
| Other income  (expense), net                                                |       | 189                              |       | (94 | ) |
|                                                                        |       |                             |       |   |   |
| Total other  expense, net                                                   |       | (4,428                           | )          | (4,940 | ) |
|                                                                        |       |                             |       |   |   |
| (Loss) income  before income tax provision                                  |       | (2,185                           | )          | 653 |   |
|                                                                        |       |                             |       |   |   |
| Income tax  provision                                                       |       | 17                               |       | 273 |   |
|                                                                        |       |                             |       |   |   |
| Net (loss)  income                                                          |       | $                                | (2,202     | ) | $ | 380 |   |

 

See notes to consolidated financial statements.

 

5

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**Real Mex Restaurants, Inc.**

**Consolidated Statements of Cash Flows (unaudited)**

**(in thousands)**

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **March 30,**               | ** ** | **April 1,** | ** ** |
| ** **                                                                                | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | ** **                       | ** ** | **As Restated ** | ** ** |
| ** **                                                                                | ** ** | ** **                       | ** ** | **(Note 4)** | ** ** |
| **Operating  activities**                                                                 |       |                             |       |   |   |
| Net (loss)  income                                                                        |       | $                                | (2,202     | ) | $ | 380 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                            |       | 5,511                            |       | 5,753 |   |
| Amortization of:                                                                          |       |                             |       |   |   |
| Favorable lease  asset and unfavorable lease liability, net                               |       | 567                              |       | 28 |   |
| Debt premium                                                                              |       | (293                             | )          | (293 | ) |
| Deferred  financing costs                                                                 |       | 315                              |       | 558 |   |
| Loss (gain) on  disposal of property and equipment                                        |       | 74                               |       | (51 | ) |
| Stock-based  compensation expense                                                         |       | 97                               |       | 228 |   |
| Deferred tax  asset                                                                       |       | —                           |       | 248 |   |
| Other                                                                                     |       | —                           |       | (159 | ) |
| Changes in  operating assets and liabilities:                                             |       |                             |       |   |   |
| Trade and other  receivables                                                              |       | (1,502                           | )          | (2,197 | ) |
| Inventories                                                                               |       | 121                              |       | (12 | ) |
| Deferred  compensation plan assets                                                        |       | 640                              |       | (217 | ) |
| Prepaid expenses  and other current assets                                                |       | 1,485                            |       | 1,062 |   |
| Related party  receivable                                                                 |       | 2,211                            |       | (71 | ) |
| Deferred  charges, net                                                                    |       | 11                               |       | (177 | ) |
| Other assets                                                                              |       | (107                             | )          | (2 | ) |
| Accounts payable  and accrued liabilities                                                 |       | 6,008                            |       | (1,008 | ) |
| Other  liabilities                                                                        |       | 4,165                            |       | 1,445 |   |
| Net cash  provided by operating activities                                                |       | 17,101                           |       | 5,515 |   |
|                                                                                      |       |                             |       |   |   |
| **Investing  activities**                                                                 |       |                             |       |   |   |
| Additions to  property and equipment                                                      |       | (6,057                           | )          | (5,775 | ) |
| Net cash used in  investing activities                                                    |       | (6,057                           | )          | (5,775 | ) |
|                                                                                      |       |                             |       |   |   |
| **Financing  activities**                                                                 |       |                             |       |   |   |
| Net (repayment)  borrowing under revolving credit facility                                |       | (11,000                          | )          | 750 |   |
| Payments on  long-term debt agreements and capital lease obligations                      |       | (89                              | )          | (142 | ) |
| Payment of  financing costs                                                               |       | —                           |       | (534 | ) |
| Net cash (used  in) provided by financing activities                                      |       | (11,089                          | )          | 74 |   |
| Net decrease in  cash and cash equivalents                                                |       | (45                              | )          | (186 | ) |
|                                                                                      |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 2,323                            |       | 2,710 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                | 2,278      |   | $ | 2,524 |   |
|                                                                                      |       |                             |       |   |   |
| **Supplemental  disclosure of cash flow information**                                     |       |                             |       |   |   |
| Interest paid                                                                             |       | $                                | 2,007      |   | $ | 2,391 |   |
| Income taxes  paid                                                                        |       | $                                | 17         |   | $ | 24 |   |

 

See notes to consolidated financial statements.

 

6

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**Real Mex Restaurants, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(unaudited)**

**March 30, 2008**

**(in thousands, except for share data)**

 

**1.****                                    ****Basis of Presentation**

 

Real MexRestaurants, Inc. (the surviving corporation resulting from a merger on August 21,2006 with RM Integrated, Inc. (the “Merger”)), a Delaware corporation, wasformed on May 15, 1998.

 

Real MexRestaurants, Inc. (the “Company”), primarily through its majorsubsidiaries El Torito Restaurants, Inc. (“El Torito”), Chevys Restaurants,LLC (“Chevys”) and Acapulco Restaurants, Inc. (“Acapulco”), operated 187restaurants as of March 30, 2008, of which 155 were located in Californiaand the remainder were located in 12 other states, primarily under the tradenames El Torito Restaurant®, Chevys Fresh Mex® and Acapulco Mexican RestaurantY Cantina®. Real Mex Restaurants, Inc.’s other major subsidiary, Real MexFoods, Inc., provides internal production, purchasing and distributionservices for the restaurant operations and also manufactures specialty productsfor sale to outside customers.

 

The Company’s fiscal year consists of 52 or 53 weeksending on the last Sunday in December which in 2008 is December 28,2008 and in 2007 was December 30, 2007. The accompanying consolidatedbalance sheets present the Company’s financial position as of March 30,2008 and December 30, 2007. The accompanying consolidated statements ofoperations and cash flows present the 13 week quarters ended March 30,2008 and April 1, 2007.

 

The accompanying unaudited consolidated financialstatements include the accounts of Real Mex Restaurants, Inc. and itswholly-owned subsidiaries. Our consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X.

 

Certain information and footnote disclosures normallyincluded in consolidated financial statements in accordance with accountingprinciples generally accepted in the United States have been omitted pursuantto requirements of the Securities and Exchange Commission (SEC). A descriptionof our accounting policies and other financial information is included in ouraudited consolidated financial statements as filed with the SEC in our annualreport on Form 10-K for the year ended December 30, 2007. We believethat the disclosures included in our accompanying interim consolidatedfinancial statements and footnotes are adequate to make the information notmisleading, but should be read in conjunction with our consolidated financialstatements and notes thereto included in the our annual report on Form 10-K.The accompanying consolidated balance sheet as of December 30, 2007 hasbeen derived from our audited financial statements.

 

Certain prior year amounts have been reclassified toconform to the current year presentation.

 

**2.****                                    ****Long-Term Debt**

 

Long-term debt consistsof the following:

 
| ** **                                     | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior Secured  Notes due 2010                 |       | $                        | 105,000    |                        | $          | 105,000 |   |
| Senior Secured  Notes unamortized debt premium |       | 2,344                    |       | 2,637                       |       |
| Senior Secured  Revolving Credit Facility      |       | —                   |       | 11,000                      |       |
| Senior Unsecured  Credit Facility              |       | 65,000                   |       | 65,000                      |       |
| Mortgage                                       |       | 641                      |       | 656                         |       |
| Other                                          |       | 63                       |       | 343                         |       |
|                                           |       | 173,048                  |       | 184,636                     |       |
| Less current  portion                          |       | (1,302                   | )          | (12,579                     | )          |
|                                           |       | $                        | 171,746    |                        | $          | 172,057 |   |

 

*SeniorSecured Notes due 2010*. Interest on our senior secured registered notes (“senior securednotes”) accrues at a contract rate of 10% per annum. (The interest rate was10.25% through March 31, 2007 as, in fiscal year 2005, we exceeded thecapital expenditure limit under the indenture governing the senior securednotes and as a result were required to pay a 0.25% increase in the stated rate.Exceeding the capital expenditure limit did not constitute a default withrespect to the senior secured notes or indenture.) Interest is payablesemiannually on April 1 and October 1 of each year. Our seniorsecured notes

 

7

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are fully and unconditionally guaranteed on a seniorsecured basis 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 domestic restricted subsidiaries’ tangible and intangible assets,subject to the prior ranking claims on such assets by the lenders under our NewSenior Secured Revolving Credit Facilities. The indenture governing our seniorsecured notes contains various affirmative and negative covenants, subject to anumber of important limitations and exceptions, including but not limited toour ability to incur additional indebtedness, make capital expenditures, paydividends, redeem stock or make other distributions, issue stock of oursubsidiaries, make certain investments or acquisitions, grant liens on assets,enter into transactions with affiliates, merge, consolidate or transfersubstantially all of our assets, and transfer and sell assets. The covenantthat limits our incurrence of indebtedness requires that, after giving effectto any such incurrence of indebtedness and the application of the proceedsthereof, our fixed charge coverage ratio as of the date of such incurrence willbe at least 2.50 to 1.00. The indenture defines consolidated fixed chargecoverage ratio as the ratio of Consolidated Cash Flow (as defined therein) toFixed Charges (as defined therein). The Company was in compliance with allspecified financial and other covenants under the senior secured notesindenture at March 30, 2008.

 

We can redeem our senior securednotes at any time. We are required to offer to redeem our senior secured notesunder certain circumstances involving a change of control. Additionally, if weor any of our domestic restricted subsidiaries engage in assets sales, wegenerally must either invest the net cash proceeds from such sales in ourbusiness within 360 days, prepay the indebtedness obligations under our NewSenior Secured Revolving Credit Facility or certain other secured indebtednessor make an offer to purchase a portion of our senior secured notes.

 

As aresult of the Merger and under purchase accounting rules we recorded $4.2million of unamortized debt premium as additional debt related to our seniorsecured notes as the fair market value of the debt on the Merger date wasgreater than its carrying value. The premium is amortized to interest expenseover the remaining life 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,the Company 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 on October 5,2008, pursuant to which the Lenders agreed to make loans to the Company and itssubsidiaries (all of the proceeds of which were to be used for working capitalpurposes) and issue letters of credit on behalf of the Company and itssubsidiaries.

 

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 behalf of the Company and its subsidiaries.

 

On April 17, 2008,the Company executed an amendment (the “Amendment”) to New Senior SecuredRevolving Credit Facilities. The Amendment modifies certain definitions andmeasures related to covenants for the reporting periods ending March 30,2008 and June 29, 2008, including the Applicable Margin, Leverage Ratio,Adjusted Leverage Ratio and Cash Flow Ratio, as defined in the agreement.

 

Obligations under the NewSenior Secured Revolving Credit Facilities are guaranteed by all of the Company’ssubsidiaries as well as by RM Restaurant Holding Corp., which wholly owns theCompany and has made a first priority pledge of all of its equity interests inthe Company as security for the obligations. Interest on the New Senior SecuredRevolving Credit Facility accrues pursuant to an Applicable Margin as set forthin the Second Amended and Restated Credit Agreement. The New Senior SecuredRevolving Credit Facilities are secured by, among other things, first prioritypledges of all of the equity interests of the Company’s direct and indirectsubsidiaries, and first priority security interests (subject to customaryexceptions) in substantially all of the current and future property and assetsof the Company and its direct and indirect subsidiaries, with certain limitedexceptions. In connection with the Company’s entrance into the New SeniorSecured Revolving Credit Facilities on January 29, 2007, the Companyborrowed $7.4 million under the New Senior Secured

 

8

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Revolving Credit Facility, the proceeds of which wereused to pay the outstanding revolving borrowings under the Old Senior SecuredRevolving Credit Facility. As of March 30, 2008, there were no borrowingsoutstanding under the New Senior Secured Revolving Credit Facility.

 

The Second Amended andRestated Credit Agreement contains various affirmative and negative covenantsand 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. This agreement contains a cross-default provision wherein if we arein default on any other credit facilities, default on this facility isautomatic. The Company was in compliance with all specified financial and othercovenants under the New Senior Secured Revolving Credit Facilities at March 30,2008.

 

*SeniorUnsecured Credit Facility*. In 2005 we entered into a $75.0 million senior unsecured creditfacility (the “Old Senior Unsecured Credit Facility”) consisting of a singleterm loan maturing on December 31, 2008, all of the proceeds of which wereused to finance a portion of the cash consideration of an acquisition and payrelated fees and expenses. On October 5, 2006, the Company entered into anAmended and Restated Senior Unsecured Credit Facility, pursuant to which theOld Senior Unsecured Credit Facility was decreased to a $65.0 million seniorunsecured credit facility (the “ New Senior Unsecured Credit Facility”),consisting of a single term loan maturing on October 5, 2010. All of theproceeds of the New Senior Unsecured Credit Facility were used to repay in fullany term loans outstanding under the Old Senior Unsecured Credit Facility andnot continued on the restatement date. The total amount of term loans repaidwas $10.0 million. Obligations under the New Senior Unsecured Credit Facilityare guaranteed 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 ratewhich is 0.5% in excess of the federal funds rate, plus 4.0% or (ii) areserve adjusted Eurodollar rate, plus 5.0%. As of March 30, 2008, theinterest rate on the New Senior Unsecured Credit Facility term loan was 9.83%.

 

Our New Senior UnsecuredCredit Facility contains various affirmative and negative covenants which,among other things, require us to meet certain financial tests (includingcertain leverage and interest coverage ratios) and limits our and oursubsidiaries’ 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) 2.15to 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 until maturity. Pursuant to theterms of the New Senior Unsecured Credit Facility, the Interest Coverage Ratiois defined as the ratio as of the last day of any fiscal quarter of (a) ConsolidatedEBITDA (as defined therein) for the four-fiscal quarter period then ending to (b) ConsolidatedInterest Expense (as defined therein) for such four-fiscal quarter period. TheCompany was in compliance with all specified financial and other covenantsunder the New Senior Unsecured Credit Facility at March 30, 2008.

 

*Mortgage.* In 2005, concurrent with an acquisition,we assumed a $0.8 million mortgage secured by the building and improvements ofone of the restaurants acquired in the transaction. The mortgage carries afixed annual interest rate of 9.28% and requires equal monthly payments ofprincipal and interest through April 2015. As of March 30, 2008, theprincipal amount outstanding on the mortgage was $0.6 million.

 

Interest rates for theCompany’s long-term debt are shown in the following table:

 
| ** **                                  | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior Secured  Notes due 2010              |       | 10.00                    | %          | 10.00                       | %          |
| Senior Secured  Revolving Credit Facilities |       | 5.36 to 6.00             | %          | 7.02 to 8.00                | %          |
| Senior Unsecured  Credit Facility           |       | 9.83                     | %          | 9.83                        | %          |
| Mortgage                                    |       | 9.28                     | %          | 9.28                        | %          |
| Other                                       |       | —                   |       | 6.45 to 7.75                | %          |

 

9

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**4.****                                    ****Capitalization**

 

**CommonStock**

 

The Company is authorizedto issue 1,000 shares of common stock. At March 30, 2008 and December 30,2007, there were 1,000 shares of common stock authorized, issued andoutstanding.

 

**Stock Option Plans**

 

In December 2006,the Board of Directors of RM Restaurant Holding Corp. (the “Board”), theCompany’s parent, adopted a Non-Qualified Stock Option Plan (the “2006 Plan”).The 2006 Plan reserved 100,000 shares of the Company’s non-voting common stockfor issuance upon exercise of stock options granted under the 2006 Plan. Optionsvest 20% per year according to the schedule specified in each optionagreement. Accelerated vesting of all outstanding options is triggered upon achange of control of the Company. The options have a life of 10 years, and canonly be exercised upon the earliest of the following dates: (i) the 10year anniversary of the effective date; (ii) the date of a change incontrol, as defined in the 2006 Plan; or (iii) date of employmenttermination, subject to certain exclusions.

 

TheCompany accounts for stock-based compensation in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-BasedPayments” (“SFAS 123R”), which requires the Company to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award. That cost is recognized in theconsolidated statement of operations over the period during which an employeeis required to provide service in exchange for the award — the requisiteservice period. No compensation cost is recognized for equity instruments for whichemployees do not render the requisite service. The grant-date fair value ofemployee stock options is estimated using the Black-Scholes option pricingmodel.

 

TheCompany utilizes comparator companies to estimate its price volatility and thesimplified method to calculate option expected time to exercise, under SAB 107.The fair value of stock-based payment awards was estimated using theBlack-Scholes option pricing model with the following assumptions and weightedaverage fair values for the three months ended March 30, 2008:

 
| Weighted average  fair value of grants |   | $     | 39.43  |   |
|----------------------------------------|--------|-------|--------|--------|
| Risk-free  interest rate               |   | 4.52  | %      |
| Expected  volatility                   |   | 42.28 | %      |
| Expected life in  years                |   | 6.15  |   |

 

Thefollowing table summarizes the stock option activity as of and for the threemonths ended March 30, 2008:

 
| ** **                                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Outstanding at  December 30, 2007              |       | 79,850     |       | $                                          | 81.50      |   |
| Granted                                             |       | —     |       | —                                     |       |
| Exercised                                           |       | —     |       | —                                     |       |
| Forfeited/expired                                   |       | (12,850    | )          | 81.50                                      |       |
| Outstanding at  March 30, 2008                 |       | 67,000     |       | $                                          | 81.50      |   |
| Vested and  expected to vest at March 30, 2008 |       | 62,060     |       | $                                          | 81.50      |   |
| Exercisable at  March 30, 2008                 |       | 12,900     |       | $                                          | 81.50      |   |

 

TheCompany recorded $97 of stock-based compensation expense for the three monthsended March 30, 2008, which is included in general and administrativeexpense on the consolidated statements of operations. As of March 30,2008, $1,615 of total unrecognized compensation costs related to non-vestedstock-based awards is expected to be recognized through fiscal year 2012, andthe weighted average remaining vesting period of those awards is approximately1.9 years. At March 30, 2008, the aggregate intrinsic value of exercisableoptions was $0.

 

Theinitial valuation of the stock-based compensation was completed during thethird quarter of 2007. At such time, the Company determined that $628 ofstock-based compensation expense should be recorded in the nine months ended September 30,2007 as the amounts had not been previously recorded. Of the $628, $172 relatedto the quarter ended September 30, 2007 and $456 related to the prior 2007quarters, which the Company believes is not material to the prior quarters. Thefollowing table presents the major subtotals for the Company’s unauditedConsolidated Statements of Operations and the related impact of the restatementadjustments discussed above for the first and second quarter of 2007 (inthousands):

 

10

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| ** **                          | ** ** | **Three months ended April 1, 2007** | ** ** | **Three months ended July 1, 2007** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                          | ** ** | **Previously  Reported**                                      | ** ** | **Effect of  Restatement**                              | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Effect of  Restatement** | ** ** | **Restated** | ** ** |
| General and  administrative expense |       | $                                                             | 7,769      |                                                         | $          | 228 |   | $ | 7,997 |   | $ | 8,057 |   | $ | 228 |   | $ | 8,285 |   |
| Operating income                    |       | 5,821                                                         |       | (228                                                         | )          | 5,593 |   | 8,041 |   | (228 | ) | 7,813 |   |
| Income before  income tax provision |       | 881                                                           |       | (228                                                         | )          | 653 |   | 5,151 |   | (228 | ) | 4,923 |   |
| Income tax  provision               |       | 368                                                           |       | (95                                                          | )          | 273 |   | 2,040 |   | (90 | ) | 1,950 |   |
| Net income                          |       | 513                                                           |       | (133                                                         | )          | 380 |   | 3,111 |   | (138 | ) | 2,973 |   |
|                                     |            |                                                               |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**5.****                                    ****Related Party 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) $500 or (ii) 1% of the Company’s EBITDAfor such period. EBITDA is defined as (A) net income (or loss) after taxesof the Company and its direct and indirect subsidiaries on a consolidated basis(“Net Income”), plus (B) interest expense which has been deductedin the determination of Net Income, plus (C) federal, state and localtaxes which have been deducted in determining Net Income, plus (D) depreciationand amortization expenses which have been deducted in determining Net Income,including without limitation amortization of capitalized transaction expensesincurred in connection with the transactions contemplated by the Mergerplus (E) extraordinary losses which have been deducted in thedetermination of Net Income, plus (F) un-capitalized transaction expensesincurred in connection with the Merger, plus (G) all other non-cashcharges, minus (H) extraordinary gains which have been included in thedetermination 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) $125or (ii) 1% of EBITDA for the immediately preceding fiscal quarter.Expenses relating to the Management Agreement of $125 were recorded as generaland administrative expense during the three months ended March 30, 2008.

 

The Companyperiodically makes distributions to, from and on behalf of RM RestaurantHolding Corp., its parent. During the three months ended March 30, 2008,the Company received an advance from RM Restaurant Holding Corp. totaling $2,000,which was recorded as a related party payable. The Company has a net relatedparty payable of $4,716 and $2,505 at March 30, 2008 and December 30,2007, respectively.

 

**6.****                                    ****Impact of RecentlyIssued Accounting Principles**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “FairValue Measurements” (“SFAS 157”). The purpose of SFAS 157 is to define fairvalue, establish a framework for measuring fair value and enhance disclosuresabout fair value measurements. The Statement applies whenever other statementsrequire or permit assets or liabilities to be measured at fair value. Accordingly,SFAS 157 does not require new fair value measurements. SFAS 157 is effectivefor fiscal years beginning after November 15, 2007. In February 2008the FASB issued FASB Staff Position for SFAS 157 (“FSP FAS 157-2”), whichdelays the effective date of SFAS 157 for non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value in an entity’s financial statements on a recurring basis untilfiscal years beginning after November 15, 2008. We adopted the provisionsof SFAS 157 in the first quarter of 2008, except for those items within scopeof FSP FAS 157-2, which we will adopt in the first quarter of 2009. We did notapply the provisions of SFAS 157 during the first quarter of 2008; however, wewill apply the provisions as necessary (i.e. annual year-end impairment reviewof goodwill and intangible assets). As a result, the adoption of SFAS 157 hadno impact on our consolidated results of operations and financial conditionduring the quarter ended March 30, 2008.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial liabilities - Including an Amendment of FASB Statement No. 115”(“SFAS 159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value. Unrealized gains and losseson items for which the fair value option has been elected will be recognized inearnings at each subsequent reporting date. SFAS 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andwas adopted by us in the first quarter of 2008. As a result, the adoption ofSFAS 159 had no impact on our consolidated results of operations and financialcondition during the quarter ended March 30, 2008.

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS141R provides companies with principles and requirements on how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, liabilities assumed, and any noncontrolling interest in the acquireeas well as the recognition and measurement of goodwill acquired in a businesscombination. SFAS 141R also requires certain disclosures to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. Acquisition costs

 

11

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associatedwith the business combination will generally be expensed as incurred. SFAS 141Ris effective for business combinations occurring in fiscal years beginningafter December 15, 2008, which will require us to adopt these provisionsfor business combinations occurring in fiscal year 2009 and thereafter. Earlyadoption of SFAS 141R is not permitted. The Company does not believe thatthe adoption of SFAS 141R will have an effect on its financial statements;however, the effect is dependent upon whether the company makes any futureacquisitions and the specifics of those acquisitions.

 

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Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations contains forward looking statements within the meaning of thefederal securities laws. See the discussion under the heading “Forward-LookingStatements” elsewhere in this report.*

 

**Overview**

** **

We are one of thelargest full service, casual dining Mexican restaurant chain operators in theUnited States in terms of number of restaurants. As of March 30, 2008, weoperated 187 restaurants, 155 of which are located in California, withadditional restaurants in Arizona, Florida, Indiana, Illinois, Maryland,Missouri, Nevada, New Jersey, New York, Oregon, Virginia and Washington. Our threemajor subsidiaries are El Torito Restaurants, Inc., which we acquired in June 2000,Acapulco Restaurants, Inc., Chevys Restaurants LLC, which we formed tofacilitate the Chevys Acquisition in January 2005 and a purchasing,distribution, and manufacturing subsidiary, Real Mex Foods, Inc.

 

El Torito, ElTorito Grill, Acapulco and Chevys, our primary restaurant concepts, each offerhigh quality Mexican food, a wide selection of alcoholic beverages andexcellent guest service. In addition to the El Torito, El Torito Grill,Acapulco and Chevys concepts, we operate eight additional restaurant locations,most of which are also full service Mexican formats, under the followingbrands: Las Brisas; Casa Gallardo; El Paso Cantina; and Who·Song &Larry’s.

 

In 2007, we openedfour restaurants, including two El Torito restaurants, one El Torito Grillrestaurant and one Chevys restaurant, all in California. We have signed leasesfor 5 openings in 2008, including two Chevys restaurants and an El Toritorestaurant in California, and two El Torito Grill restaurants, located in NewYork and Florida.

 

Our restaurantrevenues include sales of food and alcoholic and other beverages. Otherrevenues consist primarily of sales by Real Mex Foods, Inc. to outsidecustomers of processed and packaged prepared foods and other merchandise items.

 

Cost of sales iscomprised primarily of food and alcoholic beverage expenses. The components ofcost of sales are variable and increase with sales volume. In addition, thecomponents of cost of sales are subject to increase or decrease based onfluctuations in commodity costs and depend in part on the success ofcontrols we have in place to manage cost of sales in our restaurants. The cost,availability and quality of the ingredients we use to prepare our food andbeverages are subject to a range of factors including, but not limited to,seasonality, political conditions, weather conditions, and ingredientshortages.

 

Labor costincludes direct hourly and management wages, operations management bonusexpense, vacation pay, payroll taxes, workers’ compensation insurance andhealth insurance expenses.

 

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

 

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

 

Depreciation andamortization principally includes depreciation of capital expenditures forrestaurants and also includes amortization of favorable lease asset andunfavorable lease liability. Amortization of favorable lease asset andunfavorable lease liability represents the amortization of the asset in excessof the approximate fair market value and the liability in excess of theapproximate fair market value of the leases assumed as of August 21, 2006,the date of the Merger of the Company. The amounts are being amortized over theremaining primary terms of the underlying leases.

 

Pre-opening costsare expensed as incurred and include costs associated with the opening of a newrestaurant or the conversion of an existing restaurant to a different concept.

 

Other incomeincludes gains on the disposal of assets and other miscellaneous income andexpense.

 

Goodwill is deemedto have an indefinite life and is subject to an annual impairment test, or morefrequently if facts and circumstances indicate that an impairment has occurred.Other intangible assets are amortized over their useful lives in accordancewith Statement of Financial Accounting Standards No. 142, “Goodwill andOther Intangible Assets.”

 

Our fiscal yearconsists of 52 or 53 weeks and ends on the last Sunday in December of eachyear. The three months ended March 30, 2008 and April 1, 2007 consistof thirteen 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 March 30, 2008,

 

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we had175 restaurants that met this criterion.

 

**Critical AccountingPolicies**

** **

The discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to property and equipment,impairment of long-lived assets, valuation of goodwill, self-insurancereserves, income taxes and revenue recognition. We base our estimates onhistorical experience and on various other assumptions and factors that are believedto be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Based on our ongoing review,we plan to adjust our judgments and estimates where facts and circumstancesdictate. Actual results could differ from our estimates.

 

For furtherinformation regarding the accounting policies that we believe to be criticalaccounting policies that affect our more significant judgments and estimatesused in preparing our consolidated financial statements, see Note 3 of theConsolidated Financial Statements in our report on Form 10-K filed for thefiscal year ended December 31, 2007.

 

**Results of Operations**

** **

The discussion of andthe results of operations are based on the 13 week periods (“first quarter”)ended March 30, 2008 and April 1, 2007.

 

Our operatingresults for the 13 week periods ended March 30, 2008 and April 1,2007 are expressed as a percentage of total revenues below:

 
| ** **                              | ** ** | **13 Weeks Ended** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **March 30, 2008** | ** ** | **April 1, 2007** | ** ** |
| Total revenues                          |       | 100.0                        | %          | 100.0 | % |
| Cost of sales                           |       | 24.8                         |       | 23.7 |   |
| Labor                                   |       | 36.7                         |       | 35.9 |   |
| Direct operating  and occupancy expense |       | 26.6                         |       | 26.2 |   |
| Total operating  costs                  |       | 88.0                         |       | 85.7 |   |
| General and  administrative expense     |       | 5.7                          |       | 5.8 |   |
| Depreciation                            |       | 4.0                          |       | 4.2 |   |
| Pre-opening  costs                      |       | 0.2                          |       | 0.3 |   |
| Operating income                        |       | 1.6                          |       | 4.0 |   |
| Interest expense                        |       | 3.4                          |       | 3.5 |   |
| (Loss) income  before tax provision     |       | (1.6                         | )          | 0.5 |   |
| Net (loss)  income                      |       | (1.6                         | )          | 0.3 |   |

 

**Thirteenweeks ended March 30, 2008 compared to the thirteen weeks ended April 1,2007**

 

*TotalRevenues*. Totalrevenues decreased by $0.9 million, or 0.7%, to $137.6 million in the firstquarter of 2008 from $138.5 million in the first quarter of 2007 due to a $2.8million decrease in restaurant revenues and a $0.3 million decrease in royaltyand franchise fees, partially offset by a $2.1 million increase in otherrevenues. The decrease in restaurant revenues was partially due to comparablestore sales decreases of 0.2% in the quarter combined with a net five storedecrease in restaurant count in the first quarter 2008 versus the first quarter2007. The increase in other revenues was primarily due to an increase in salesto outside customers by Real Mex Foods, Inc., our distribution andmanufacturing subsidiary.

 

*Cost ofSales*. Total costof sales of $34.1 million in the first quarter of 2008 increased $1.2 millionor 3.8% as compared to the first quarter of 2007. As a percentage of totalrevenues, cost of sales increased to 24.8% for the first quarter of 2008 from23.7% for the first quarter of 2007. This increase was due to higher commoditycosts combined with higher costs associated with the increase in sales tooutside customers by our distribution facility.

 

*Labor*. Labor costs of $50.5 million in thefirst quarter of 2008 increased by $0.8 million or 1.6% as compared to thefirst quarter of 2007. As a percentage of total revenues, labor costs increasedto 36.7% in the first quarter of 2008 from 35.9% in the first quarter of 2007.This increase was primarily due to minimum wage increases which took place in January inthe majority of the states in which we operate combined with higher casualtyand health insurance expenses in the first quarter of

 

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2008. Payrolland benefits remain subject to inflation and government regulation; especiallywage rates currently at or near the minimum wage, and expenses for healthinsurance.

 

*DirectOperating and Occupancy Expense*. Direct operating and occupancy expense of $36.5million in the first quarter of 2008 increased $0.3 million or 0.8% versus thefirst quarter of 2007 primarily due to higher occupancy expense in the firstquarter of 2008. Direct operating and occupancy expense as a percentage ofsales increased to 26.6% in the first quarter of 2008 from 26.2% in the firstquarter of 2007.

 

*Generaland Administrative Expense*. General and administrative expense of $7.8 millionin the first quarter of 2008 decreased by $0.2 million or 1.9% as compared tothe first quarter of 2007 primarily due to a decrease in legal expenses.General and administrative expense as a percentage of sales decreased to 5.7%in the first quarter of 2008 from 5.8% in the first quarter of 2007.

 

*Depreciationand amortization*.Depreciation and amortization expense of $5.5 million in the first quarter of2008 decreased $0.2 million or 4.2% as compared to the first quarter of 2007. Asa percentage of total revenues, depreciation and amortization decreased to 4.0%for the first quarter of 2008 from 4.2% for the first quarter of 2007.

 

*InterestExpense*. Interestexpense of $4.6 million in the first quarter of 2008 decreased $0.2 million or4.7% as compared to the first quarter of 2007 primarily due to a reduction inthe interest rate on our senior unsecured credit facility, with a range of 7.0%to 8.0% at April 1, 2007 versus a range of 5.4% to 6.0%  at March 30, 2008. As a percentage oftotal revenues, interest expense was 3.4% in the first quarter of 2008 and 3.5%in the first quarter of 2007.

 

*Incometax provision.*The income tax provision for the first quarter of 2008 and 2007 was based onestimated annual effective tax rates. A rate of 0.8% was applied to the firstquarter of 2008 versus a rate of 41.8% in the first quarter of 2007. Thedecrease in rate is due to the recording of a full valuation reserve fordeferred tax assets at December 30, 2007, which is also expected during2008. The rates are comprised of the combined federal and state statutoryrates.

 

**Liquidity and CapitalResources**

** **

Our principalliquidity requirements are to service our debt and meet our capital expenditureand working capital needs. Our indebtedness, including capital leaseobligations and excluding unamortized debt premium, at March 30, 2008 was $174.8million, and we had $15.0 million of revolving credit availability under ourrevolving credit facility. Our ability to make principal and interest paymentsand to fund planned capital expenditures will depend on our ability to generatecash in 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 otherliquidity needs. If we consummate an acquisition, our debt service requirementscould increase. Our senior secured notes mature in 2010 and we will needadditional financing to meet this obligation. Our New Senior Secured RevolvingCredit Facility matures in 2009 and we cannot assure you that a new creditfacility will be available to us. Also, we may need to refinance all or aportion of our indebtedness on or before maturity. We cannot assure you that wewill be able to refinance any of our indebtedness on commercially reasonableterms or at all.

 

**Working Capital andCash Flows**

** **

We presently have,in the past have had, and in the future are likely to have, negative workingcapital balances. The working capital deficit principally is the result ofaccounts payable and accrued liabilities being in excess of current assetlevels. The largest components of our accrued liabilities include reserves forour self-insured workers’ compensation and general liability insuranceprograms, accrued compensation and related employee benefits costs, sales andproperty taxes and gift certificate and gift card liabilities. We receive tradecredit based upon negotiated terms in purchasing food and supplies. Fundsavailable from cash sales not needed immediately to pay for food and suppliesor to finance receivables or inventories typically have been used for capitalexpenditures and debt service payments under our existing indebtedness.

 

15

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*OperatingActivities*. Wehad net cash provided by operating activities of $17.1 million for the quarterended March 30, 2008 compared with net cash provided by operatingactivities of $5.5 million for the quarter ended April 1, 2007. The increasein cash provided by operating activities was primarily attributable toincreases in accounts payable, other accrued liabilities and other liabilities.The increase in accounts payable and other accrued liabilities is primarily aresult of timing differences. The increase in other liabilities is primarilydue to increases in deferred income related to vendor rebates and landlordcontributions.

 

*Investing Activities*. We had net cash used in investingactivities, comprised entirely of additions to property and equipment, of $6.1million and $5.8 million for the quarters ended March 30, 2008 and April 1,2007  respectively.

 

We expect to make capitalexpenditures totaling approximately $23.9 million in Fiscal Year 2008.Approximately $1.0 million is expected to be spent on restaurant remodels andrefurbishment and approximately $12.5 million is expected to be used to buildfive new El Torito, El Torito Grill and Chevys restaurants. Pre-openingexpenses associated with these new restaurants are expected to totalapproximately $1.1 million. We expect Fiscal Year 2008 capital expenditures forinformation technology to be approximately $0.7 million, for Real Mex Foodsapproximately $1.2 million and maintenance and other capital expenditures forour restaurants approximately $8.5 million. These and other similar costs may behigher in the future due to inflation and other factors. We expect to fund theexpenditures for new restaurants and other capital expenditures described abovefrom cash flow from operations, available cash, available borrowings under oursenior credit facility, landlord allowances (if favorable terms are available)and trade financing received from trade suppliers.

 

*Financing Activities*. We had net cash used in financingactivities of $11.1 million in the quarter ended March 30, 2008 comparedwith net cash provided by financing activities of $0.1 million in the quarterended April 1, 2007. The increase in cash used in financing activities wasprimarily due to the repayment of all outstanding borrowings under our NewSenior Secured Revolving Credit Facility.

 

**Debt and OtherObligations**

** **

*SeniorSecured Notes due 2010*. Interest on our senior secured registered notes (“senior securednotes”) accrues at a contract rate of 10% per annum. (The interest rate was10.25% through March 31, 2007 as, in fiscal year 2005, we exceeded thecapital expenditure limit under the indenture governing the senior securednotes and as a result were required to pay a 0.25% increase in the stated rate.Exceeding the capital expenditure limit did not constitute a default withrespect to the senior secured notes or indenture.) Interest is payablesemiannually 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 domestic restricted subsidiaries’ tangible and intangible assets,subject to the prior ranking claims on such assets by the lenders under our NewSenior Secured Revolving Credit Facilities. The indenture governing our seniorsecured notes contains various affirmative and negative covenants, subject to anumber of important limitations and exceptions, including but not limited toour ability to incur additional indebtedness, make capital expenditures, paydividends, redeem stock or make other distributions, issue stock of oursubsidiaries, make certain investments or acquisitions, grant liens on assets,enter into transactions with affiliates, merge, consolidate or transfersubstantially all of our assets, and transfer and sell assets. The covenantthat limits our incurrence of indebtedness requires that, after giving effectto any such incurrence of indebtedness and the application of the proceedsthereof, our fixed charge coverage ratio as of the date of such incurrence willbe at least 2.50 to 1.00. The indenture defines consolidated fixed chargecoverage ratio as the ratio of Consolidated Cash Flow (as defined therein) toFixed Charges (as defined therein). The Company was in compliance with allspecified financial and other covenants under the senior secured notes indentureat March 30, 2008.

 

We can redeem our seniorsecured notes at any time. We are required to offer to redeem our seniorsecured notes under certain circumstances involving a change of control.Additionally, if we or any of our domestic restricted subsidiaries engage inassets sales, we generally must either invest the net cash proceeds from suchsales in our business within 360 days, prepay the indebtedness obligationsunder our New Senior Secured Revolving Credit Facility or certain other securedindebtedness or make an offer to purchase a portion of our senior securednotes.

 

As aresult of the Merger and under purchase accounting rules we recorded $4.2million of unamortized debt premium as additional debt related to our seniorsecured notes as the fair market value of the debt on the Merger date wasgreater than its carrying value. The premium is amortized to interest expenseover the remaining life of the debt.

 

*SeniorSecured Revolving Credit Facilities*. In 2004, the Company entered into anamended and restated revolving

 

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credit agreementproviding for $30.0 million of senior secured credit facilities. The revolvingcredit agreement included a $15.0 million letter of credit facility and a $15.0million revolving credit facility that could be used for letters of credit.

 

On October 5, 2006,the Company 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 on October 5,2008, pursuant to which the Lenders agreed to make loans to the Company and itssubsidiaries (all of the proceeds of which were to be used for working capitalpurposes) and issue letters of credit on behalf of the Company and itssubsidiaries.

 

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 behalf of the Company and its subsidiaries.

 

On April 17, 2008,the Company executed an amendment (the “Amendment”) to New Senior SecuredRevolving Credit Facilities. The Amendment modifies certain definitions andmeasures related to covenants for the reporting periods ending March 30,2008 and June 29, 2008, including the Applicable Margin, Leverage Ratio,Adjusted Leverage Ratio and Cash Flow Ratio, as defined in the agreement.

 

Obligations under the NewSenior Secured Revolving Credit Facilities are guaranteed by all of the Company’ssubsidiaries as well as by RM Restaurant Holding Corp., which wholly owns theCompany and has made a first priority pledge of all of its equity interests inthe Company as security for the obligations. Interest on the New Senior SecuredRevolving Credit Facility accrues pursuant to an Applicable Margin as set forthin the Second Amended and Restated Credit Agreement. The New Senior SecuredRevolving Credit Facilities are secured by, among other things, first prioritypledges of all of the equity interests of the Company’s direct and indirectsubsidiaries, and first priority security interests (subject to customaryexceptions) in substantially all of the current and future property and assetsof the Company and its direct and indirect subsidiaries, with certain limitedexceptions. In connection with the Company’s entrance into the New SeniorSecured Revolving Credit Facilities on January 29, 2007, the Company borrowed$7.4 million under the New Senior Secured Revolving Credit Facility, theproceeds of which were used to pay the outstanding revolving borrowings underthe Old Senior Secured Revolving Credit Facility. As of March 30, 2008,there were no borrowings outstanding under the New Senior Secured RevolvingCredit Facility.

 

The Second Amended andRestated Credit Agreement contains various affirmative and negative covenantsand 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. This agreement contains a cross-default provision wherein if we are indefault on any other credit facilities, default on this facility is automatic.The Company was in compliance with all specified financial and other covenantsunder the New Senior Secured Revolving Credit Facilities at March 30,2008.

 

*SeniorUnsecured Credit Facility*. In 2005 we entered into a $75.0 million senior unsecured creditfacility (the “Old Senior Unsecured Credit Facility”) consisting of a singleterm loan maturing on December 31, 2008, all of the proceeds of which wereused to finance a portion of the cash consideration of an acquisition and payrelated fees and expenses. On October 5, 2006, the Company entered into anAmended and Restated Senior Unsecured Credit Facility, pursuant to which theOld Senior Unsecured Credit Facility was decreased to a $65.0 million seniorunsecured credit facility (the “ New Senior Unsecured Credit Facility”),consisting of a single term loan maturing on October 5, 2010. All of theproceeds of the New Senior Unsecured Credit Facility were used to repay in fullany term loans outstanding under the Old Senior Unsecured Credit Facility andnot continued on the restatement date. The total amount of term loans repaidwas $10.0 million. Obligations under the New Senior Unsecured Credit Facilityare guaranteed 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 ratewhich is 0.5% in excess of the federal funds rate, plus 4.0% or (ii) areserve adjusted Eurodollar rate, plus 5.0%. As of March 30, 2008, theinterest rate on the New Senior Unsecured Credit Facility term loan was 9.83%.

 

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Our New Senior UnsecuredCredit Facility contains various affirmative and negative covenants which,among other things, require us to meet certain financial tests (includingcertain leverage and interest coverage ratios) and limits our and oursubsidiaries’ 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) 2.15to 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 until maturity. Pursuant to theterms of the New Senior Unsecured Credit Facility, the Interest Coverage Ratiois defined as the ratio as of the last day of any fiscal quarter of (a) ConsolidatedEBITDA (as defined therein) for the four-fiscal quarter period then ending to (b) ConsolidatedInterest Expense (as defined therein) for such four-fiscal quarter period. TheCompany was in compliance with all specified financial and other covenantsunder the New Senior Unsecured Credit Facility at March 30, 2008.

 

*Mortgage.* In 2005, concurrent with an acquisition,we assumed a $0.8 million mortgage secured by the building and improvements ofone of the restaurants acquired in the transaction. The mortgage carries afixed annual interest rate of 9.28% and requires equal monthly payments ofprincipal and interest through April 2015. As of March 30, 2008, theprincipal amount outstanding on the mortgage was $0.6 million.

 

Interest rates for theCompany’s long-term debt are shown in the following table:

 
| ** **                                  | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior Secured  Notes due 2010              |       | 10.00                    | %          | 10.00                       | %          |
| Senior Secured  Revolving Credit Facilities |       | 5.36 to 6.00             | %          | 7.02 to 8.00                | %          |
| Senior Unsecured  Credit Facility           |       | 9.83                     | %          | 9.83                        | %          |
| Mortgage                                    |       | 9.28                     | %          | 9.28                        | %          |
| Other                                       |       | —                   |       | 6.45 to 7.75                | %          |

 

*CapitalLeases*. TheCompany leases certain leasehold improvements under agreements that areclassified as capital leases. The capital lease obligations have aweighted-average interest rate of 8.8%. As of March 30, 2008, theprincipal amount due relating to capital lease obligations was $1.8 million.Principal and interest payments on the capital lease obligations are duemonthly and range from $2,600 to $11,400 per month. The capital leaseobligations mature between 2009 and 2025.

 

**Inflation**

** **

The impact ofinflation on labor, food and occupancy costs could, in the future,significantly affect our operations. We pay many of our employees hourly ratesrelated to the federal or applicable state minimum wage. Our workers’compensation and health insurance costs have been and are subject to continuedinflationary pressures. Costs for construction, taxes, repairs, maintenance andinsurance all impact our occupancy costs. Many of our leases require us to paytaxes, maintenance, repairs, insurance and utilities, all of which may besubject to inflationary increases. 

 

Management continuallyseeks ways to mitigate the impact of inflation on our business. We believe thatour current 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.**   Quantitative and Qualitative DisclosuresAbout Market Risk

** **

The inherent riskin market risk sensitive instruments and positions primarily relates topotential losses arising from adverse changes in foreign exchange rates andinterest rates.

 

We consider theU.S. dollar to be the functional currency for all of our entities. All of ournet sales and our expenses in fiscal years 2008 and 2007 were denominated inU.S. dollars. Therefore, foreign currency fluctuations did not materially affectour financial results in those periods.

 

We are alsosubject to market risk from exposure to changes in interest rates based on ourfinancing activities. This exposure relates to borrowings under our seniorsecured and unsecured credit facilities that are payable at floating rates ofinterest. As of March 30, 2008, we had $65.0 million outstanding under ourSenior Unsecured Credit Facility. A hypothetical 10% fluctuation in interestrates, as of March 30, 2008, would result in an after tax reduction of $0.4million in earnings on

 

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anannualized basis.

 

Many of the foodproducts purchased by us are affected by changes in weather, production,availability, seasonality and other factors outside our control. In an effortto control some of this risk, we have entered into certain fixed price purchaseagreements with varying terms of generally no more than one year duration. Inaddition, we believe that almost all of our food and supplies are availablefrom several sources, which helps to control food commodity risks.

 

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

 

**DisclosureControls 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 our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”)). Based on thisevaluation, the CEO and CFO concluded that, as of the end of the record periodcovered by this report, our disclosure controls and procedures are effective toprovide reasonable assurance that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There was no change in our internalcontrol over financial reporting during our most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**ChangesIn Internal Controls Over Financial Reporting**

 

There was nochange in our internal control over financial reporting during our mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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** **

**PART IIOTHER INFORMATION**

** **

**Item 1. LegalProceedings**

** **

We areperiodically a defendant in cases involving personal injury, labor andemployment and other matters incidental to our business. While any pending orthreatened litigation has an element of uncertainty, we believe that theoutcome of these lawsuits or claims, individually or combined, will notmaterially adversely affect our consolidated financial position, results ofoperations or cash flows.

 

**Item 1A. Risk Factors**

** **

No materialchanges from the risk factors disclosed in Item 1A of our report on Form 10-Kfor the fiscal year ended December 30, 2007.

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

** **

Not applicable.

 

**Item 3. Defaults UponSenior Securities**

** **

Not applicable.

 

**Item 4. Submission ofMatters to a Vote of Security Holders**

** **

Not applicable.

 

**Item 5. OtherInformation**

** **

Not applicable.

 

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** **

**Item 6.    Exhibits**

 
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                          |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                     |
| 10.1             |       | Amendment No. 2 to  Credit Agreement dated April 17, 2008. (Filed with the Securities and  Exchange Commission as Exhibit 10.1 to the Company’s Current Report on  Form 8-K dated April 23, 2008 and incorporated by reference  herewith.) |
|             |       |                                                                                                                                                                                                                                                                     |
| 31.1*            |       | Certification pursuant  to Rule 13a-14(a) or Rule 15d-14(a) of the Securities  Exchange Act of 1934 of the Chief Executive Officer.                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                     |
| 31.2*            |       | Certification pursuant  to Rule 13a-14(a) or Rule 15d-14(a) of the Securities  Exchange Act of 1934 of the Chief Financial Officer.                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                     |
| 32.1*            |       | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                     |
| 32.2*            |       | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.                                                                                                      |

 

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*Filed herewith

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          | REAL MEX  RESTAURANTS, INC. |
|--------------------------|----------------------------------|
|                     |                             |
|                     |                             |   |
| Dated: May 12, 2008 | By:                              | /s/ Frederick F. Wolfe |
|                     |                             | Frederick F. Wolfe |
|                     |                             | President &  Chief Executive  Officer and Director  (Principal Executive Officer) |
|                     |                             |   |
| Dated: May 12, 2008 | By:                              | /s/ Steven Tanner |
|                     |                             | Steven Tanner |
|                     |                             | Chief Financial Officer  (Principal Financial Officer  and Accounting Officer) |

 

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