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

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

****FORM 10-Q****
| ý     | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                 |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                   |
| ** ** | **For  the quarterly period ended September 26, 2004**                                                                                                                                                                                                                                       |
|       | ** **                                                                                                                                                                                                                                                                                   |
| **or**     |
|       |                                                                                                                                                                                                                                                                                         |
| o          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                |
|       |                                                                                                                                                                                                                                                                                         |
|       | **For  the transition period from                        to                      .** |

**Commissionfile number 333-116310**

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

(Exact name of Registrant as specified in itscharter)

| **Delaware**(State or other jurisdiction of  incorporation or organization)                              | **13-4012902**(I.R.S. Employer  Identification No.) |
|----------------------------------------------------------------------------------------------------------|-----------------------------------------------------|
| ** **                                                                                               | ** **                                          |
| ** **                                                                                               | ** **                                          |
| **4001 Via Oro Avenue, Suite 200  Long Beach, California 07702**(Address of principal executive offices) |

 

Registrant’s telephone number, including areacode:****(310) 513-7500****

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

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes o No ý

Asof November 10, 2004, the registrant had outstanding 258,655 shares of Class ACommon Stock, par value $0.001 per share, and 15,866 shares of Class B CommonStock, par value $0.001 per share.

 

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**Real Mex Restaurants, Inc. andSubsidiariesIndex**

** **
| PART I FINANCIAL INFORMATION |                                                                                        |
|------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                      | Financial Statements                                                                        |   |
|                         | Consolidated Balance  Sheets                                                                |   |
|                         | Consolidated  Statements of Operations                                                      |   |
|                         | Consolidated  Statements of Cash Flows                                                      |   |
|                         | Notes to  Consolidated Financial Statements                                                 |   |
| Item  2.                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item  3.                     | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
| PART II OTHER INFORMATION    |                                                                                        |
| Item 1.                      | Legal Proceedings                                                                           |   |
| 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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**PARTI**FINANCIAL INFORMATION

**Item 1. Financial Statements**

**Real Mex Restaurants, Inc. andSubsidiaries**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                                                                                           | ** ** | **September 26,** | ** ** | **December 28,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                           | ** ** | **2004**          | ** ** | **2003**         | ** ** |
| ** **                                                                                                                                                                                                                                                                           | ** ** | **(unaudited)**   | ** ** | ** **       | ** ** |
| **Assets**                                                                                                                                                                                                                                                                           |       |              |       |             |       |
| Current assets:                                                                                                                                                                                                                                                                      |       |              |       |             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                            |       | $                 | 13,881     |             | $          | 2,605 |   |
| Trade receivables, net                                                                                                                                                                                                                                                               |       | 4,283             |       | 4,278            |       |
| Other receivables                                                                                                                                                                                                                                                                    |       | 235               |       | 537              |       |
| Inventories                                                                                                                                                                                                                                                                          |       | 7,157             |       | 5,558            |       |
| Prepaid expenses and supplies                                                                                                                                                                                                                                                        |       | 3,858             |       | 3,641            |       |
| Total current assets                                                                                                                                                                                                                                                                 |       | 29,414            |       | 16,619           |       |
|                                                                                                                                                                                                                                                                                 |       |              |       |             |       |
| Property and equipment, net                                                                                                                                                                                                                                                          |       | 35,170            |       | 46,620           |       |
| Goodwill, net                                                                                                                                                                                                                                                                        |       | 105,387           |       | 105,387          |       |
| Deferred charges                                                                                                                                                                                                                                                                     |       | 5,285             |       | 2,094            |       |
| Other assets                                                                                                                                                                                                                                                                         |       | 3,728             |       | 2,300            |       |
| Total assets                                                                                                                                                                                                                                                                         |       | $                 | 178,984    |             | $          | 173,020 |   |
|                                                                                                                                                                                                                                                                                 |       |              |       |             |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                                                                        |       |              |       |             |       |
| Current liabilities:                                                                                                                                                                                                                                                                 |       |              |       |             |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                                                                             |       | $                 | 44,043     |             | $          | 38,242 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                    |       | 334               |       | 8,160            |       |
| Total current liabilities                                                                                                                                                                                                                                                            |       | 44,377            |       | 46,402           |       |
|                                                                                                                                                                                                                                                                                 |       |              |       |             |       |
| Long-term debt, less current portion                                                                                                                                                                                                                                                 |       | 106,248           |       | 106,539          |       |
| Other liabilities                                                                                                                                                                                                                                                                    |       | 7,788             |       | 4,218            |       |
| Total liabilities                                                                                                                                                                                                                                                                    |       | 158,413           |       | 157,159          |       |
|                                                                                                                                                                                                                                                                                 |       |              |       |             |       |
| Commitments and contingencies                                                                                                                                                                                                                                                        |       |              |       |             |       |
|                                                                                                                                                                                                                                                                                 |       |              |       |             |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                           |       |              |       |             |       |
| Redeemable Preferred Stock:                                                                                                                                                                                                                                                          |       |              |       |             |       |
| Series A, 12 1/2% Cumulative Compounding Preferred Stock — 15,881 and  15,919 shares issued and outstanding at September 26, 2004 and December 28,  2003 respectively; liquidation preference of $28,774 and $26,419 at September  26, 2004 and December 28, 2003 respectively; |       | 28,774            |       | 26,419           |       |
| Series B, 13.5% Cumulative Compounding Preferred Stock — 10,722 and  10,746 shares issued and outstanding at September 26, 2004 and December 28,  2003 respectively; liquidation preference of $20,308 and $18,520 at September  26, 2004 and December 28, 2003 respectively;   |       | 20,308            |       | 18,520           |       |
| Series C, 15% Cumulative Compounding Preferred Stock — 14,975 shares  issued and outstanding at September 26, 2004 and December 28, 2003  respectively; liquidation preference of $44,900 and $40,416 at September 26,  2004 and December 28, 2003 respectively;                |       | 44,901            |       | 40,416           |       |
| Common Stock, $.001 par value, 2,000,000 shares authorized, 274,522  and 275,103 shares issued and outstanding at September 26, 2004 and December  28, 2003 respectively;                                                                                                            |       | 1                 |       | 1                |       |
| Warrants                                                                                                                                                                                                                                                                             |       | 4,027             |       | 4,027            |       |
| Notes receivable from stockholders                                                                                                                                                                                                                                                   |       | —            |       | (484             | )          |
| Additional paid-in capital                                                                                                                                                                                                                                                           |       | 16,202            |       | 16,255           |       |
| Accumulated deficit                                                                                                                                                                                                                                                                  |       | (93,642           | )          | (89,293          | )          |
| Total Stockholders’ equity                                                                                                                                                                                                                                                      |       | 20,571            |       | 15,861           |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                      |       | $                 | 178,984    |             | $          | 173,020 |   |
|                                                                                                                                                                                                                                                                                      |            |                   |            |                  |            |  |  |  |  |

 

See accompanying notes.

 

3

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**Real Mex Restaurants, Inc. andSubsidiaries**

**Consolidated Statements of Operations (unaudited)**

**(in thousands)**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **September 26,**      | ** ** | **September 28,**     | ** ** | **September 26,** | ** ** | **September 28,** | ** ** |
| ** **                                   | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                    |       |                   |       |                  |       |   |   |   |   |
| Restaurant revenues                          |       | $                      | 78,845     |                  | $          | 77,724 |   | $ | 241,845 |   | $ | 234,440 |   |
| Other revenues                               |       | 3,049                  |       | 1,635                 |       | 7,194 |   | 3,312 |   |
| Total revenues                               |       | 81,894                 |       | 79,359                |       | 249,039 |   | 237,752 |   |
| Costs and expenses:                          |       |                   |       |                  |       |   |   |   |   |
| Cost of sales                                |       | 20,203                 |       | 19,654                |       | 61,324 |   | 58,710 |   |
| Labor                                        |       | 29,662                 |       | 28,827                |       | 90,326 |   | 86,609 |   |
| Direct operating and occupancy expense       |       | 19,798                 |       | 19,313                |       | 58,142 |   | 56,566 |   |
| General and administrative expense           |       | 4,027                  |       | 3,783                 |       | 12,986 |   | 11,321 |   |
| Depreciation                                 |       | 2,747                  |       | 2,533                 |       | 8,755 |   | 9,144 |   |
| Pre-opening costs                            |       | —                 |       | 1                     |       | 125 |   | 1 |   |
| Loss on impairment of property and equipment |       | 128                    |       | —                |       | 136 |   | — |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Operating income                             |       | 5,329                  |       | 5,248                 |       | 17,245 |   | 15,401 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Other income (expense):                      |       |                   |       |                  |       |   |   |   |   |
| Casualty gain                                |       | 450                    |       | 187                   |       | 998 |   | 534 |   |
| Interest expense                             |       | (3,140                 | )          | (3,302                | )          | (9,512 | ) | (9,990 | ) |
| Debt termination costs                       |       | —                 |       | —                |       | (4,677 | ) | — |   |
| Other income (expense), net                  |       | 270                    |       | (550                  | )          | 354 |   | (27 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Total other expense, net                     |       | (2,420                 | )          | (3,665                | )          | (12,837 | ) | (9,483 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Income before income tax provision           |       | 2,909                  |       | 1,583                 |       | 4,408 |   | 5,918 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Income tax provision                         |       | 3                      |       | 53                    |       | 70 |   | 96 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Net income                                   |       | 2,906                  |       | 1,530                 |       | 4,338 |   | 5,822 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Redeemable preferred stock accretion         |       | (3,155                 | )          | (2,876                | )          | (8,687 | ) | (7,674 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Net loss attributable to common stockholders |       | $                      | (249       | )                     | $          | (1,346 | ) | $ | (4,349 | ) | $ | (1,852 | ) |
|                                              |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

4

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** **

**Real Mex Restaurants, Inc.Consolidated Statements of Cash Flows(unaudited)(in thousands)**
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **September 26,**     | ** ** | **September 28,** | ** ** |
| ** **                                                                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Operating activities**                                                           |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 4,338      |   | $ | 5,822 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                  |       |   |   |
| Depreciation                                                                       |       | 8,755                 |       | 9,144 |   |
| Amortization of:                                                                   |       |                  |       |   |   |
| Deferred financing                                                                 |       | 674                   |       | 570 |   |
| Debt discount                                                                      |       | 114                   |       | 334 |   |
| (Gain) loss on disposal of property and equipment                                  |       | (1,344                | )          | 88 |   |
| Debt termination costs                                                             |       | 4,247                 |       | — |   |
| Impairment of property and equipment                                               |       | 136                   |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                  |       |   |   |
| Trade and other receivables                                                        |       | 297                   |       | (654 | ) |
| Inventories                                                                        |       | (1,599                | )          | (668 | ) |
| Prepaid expenses and supplies                                                      |       | (217                  | )          | (1,347 | ) |
| Deferred charges, net                                                              |       | (59                   | )          | — |   |
| Other assets                                                                       |       | (1,428                | )          | (877 | ) |
| Accounts payable and accrued liabilities                                           |       | 6,208                 |       | 617 |   |
| Other liabilities                                                                  |       | (261                  | )          | 30 |   |
| Net cash provided by operating activities                                          |       | 19,861                |       | 13,059 |   |
|                                                                               |       |                  |       |   |   |
| **Investing activities**                                                           |       |                  |       |   |   |
| Additions to property and equipment                                                |       | (5,439                | )          | (5,390 | ) |
| Proceeds from sale of property and property casualty recoveries                    |       | 13,173                |       | 872 |   |
| Net cash provided by (used in) investing activities                                |       | 7,734                 |       | (4,518 | ) |
|                                                                               |       |                  |       |   |   |
| **Financing activities**                                                           |       |                  |       |   |   |
| Borrowings under long-term debt agreements                                         |       | 105,000               |       | 2,450 |   |
| Payments on long-term debt agreements                                              |       | (115,985              | )          | (4,860 | ) |
| Payment of financing costs                                                         |       | (5,706                | )          | — |   |
| Payments received on stockholder loans for stock subscription notes                |       | 462                   |       | 324 |   |
| Purchase of Common Stock                                                           |       | (53                   | )          | (56 | ) |
| Redemption of Series A Redeemable Preferred Stock                                  |       | (35                   | )          | (50 | ) |
| Redemption of Series B Redeemable Preferred Stock                                  |       | (24                   | )          | (34 | ) |
| Redemption of Series C Redeemable Preferred Stock                                  |       | —                |       | (25 | ) |
| Interest receivable decrease (increase) on stockholder loans                       |       | 22                    |       | (42 | ) |
| Net cash used in financing activities                                              |       | (16,319               | )          | (2,293 | ) |
| Net increase in cash and cash equivalents                                          |       | 11,276                |       | 6,248 |   |
|                                                                               |       |                  |       |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 2,605                 |       | 1,201 |   |
| Cash and cash equivalents at end of period                                         |       | $                     | 13,881     |   | $ | 7,449 |   |
|                                                                               |       |                  |       |   |   |
| **Supplemental disclosure of cash flow information**                               |       |                  |       |   |   |
| Interest paid                                                                      |       | $                     | 3,838      |   | $ | 5,494 |   |
| Income taxes paid                                                                  |       | $                     | 70         |   | $ | 96 |   |
|                                                                               |       |                  |       |   |   |
| **Supplemental disclosure of noncash investing and  financing activities**         |       |                  |       |   |   |
| Deferral of gain on sale-leaseback recorded in other liabilities                   |       | $                     | 3,927      |   | — |   |
| In kind accrued interest transferred to debt                                       |       | $                     | 407        |   | $ | 960 |   |

 

See accompanying notes.

 

5

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

**Notesto Consolidated Financial Statements****(unaudited)**

**September26, 2004**

**(inthousands, except for share data)**

 

**1.             Basis of Presentation**

Real Mex Restaurants, Inc.,a Delaware Corporation, formerly known as Acapulco Acquisition Corp. (togetherwith its subsidiaries, the “Company”) was formed on May 15, 1998. EffectiveFebruary 24, 2004, the Board of Directors approved a resolution to change theCompany’s name from Acapulco Acquisition Corp. to Real Mex Restaurants, Inc.

The Company, primarilythrough its major subsidiaries Acapulco Restaurants, Inc. (Acapulco) and ElTorito Restaurants, Inc. (El Torito), operates 124 restaurants, of which 112are located in California and the remainder are located in six other states,primarily under the trade names El Torito Restaurant and Acapulco Mexican RestaurantY Cantina. The Company’s other major subsidiary, Real Mex Foods, Inc., (RealMex) provides internal production, purchasing and distribution services for therestaurant operations. On a limited basis, Real Mex also manufactures specialtyproducts for sale to outside customers.

The accompanyingconsolidated financial statements have been prepared by the Company inaccordance with accounting principles generally accepted in the United Statesand with the instructions to Form 10-Q and Article 10 of Regulation S-X. In theopinion of management, the accompanying unaudited interim financial statementsinclude all adjustments (consisting of normal recurring adjustments), which arenecessary for a fair statement of the Company’s consolidated financialcondition, results of operations and cash flows for the periods presented.However, these results are not necessarily indicative of results for any otherinterim periods or for the full fiscal year. The consolidated balance sheetdata presented herein for December 28, 2003 was derived from the Company’saudited consolidated financial statements for the fiscal year then ended, butdoes not include all disclosures required by accounting principles generallyaccepted in the United States. The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesrequires the Company to make certain estimates and assumptions for thereporting periods covered by the financial statements. These estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses. Actual amounts could differ from these estimates.

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States have been omitted pursuant to the requirements ofthe Securities and Exchange Commission. The Company believes the disclosuresincluded in the accompanying interim consolidated financial statements andfootnotes are adequate to make the information not misleading, but should beread in conjunction with the consolidated financial statements and notesthereto. Refer to Amendment No. 3 to our Registration Statement on Form S-4(File No. 333-116310) as filed with the Securities and Exchange Commission onSeptember 9, 2004 for our 2003 consolidated financial statements and notesthereto.

 

**2.             Long-Term Debt**

 

Long-term debt consists ofthe following:
| ** **                                                               | ** ** | **September 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Senior A term loan due 2005                                              |       | $                       | —     |                   | $          | 19,230 |   |
| Senior B term loan due 2007                                              |       | —                  |       | 32,429                 |       |
| Senior C term loan due 2007                                              |       | —                  |       | 18,339                 |       |
| Subordinated notes due 2008                                              |       | —                  |       | 20,270                 |       |
| Subordinated notes due 2009                                              |       | —                  |       | 21,483                 |       |
| SBA debt                                                                 |       | —                  |       | 246                    |       |
| Insurance notes                                                          |       | —                  |       | 737                    |       |
| Senior secured notes due 2010                                            |       | 105,000                 |       | —                 |       |
| Capitalized lease obligations, collateralized by leasehold  improvements |       | 1,519                   |       | 1,902                  |       |
| Other                                                                    |       | 63                      |       | 63                     |       |
|                                                                     |       |                    |       |                   |       |
|                                                                     |       | 106,582                 |       | 114,699                |       |
| Less current portion                                                     |       | (334                    | )          | (8,160                 | )          |
|                                                                     |       |                    |       |                   |       |
|                                                                     |       | $                       | 106,248    |                   | $          | 106,539 |   |

 

6

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On March 31, 2004, theCompany retired its existing Revolving Credit and Term Loan Agreement asamended and restated on November 30, 2001, and entered into a new Amended andRestated Revolving Credit Agreement (the “Line”) providing for $30,000 ofSenior Secured Credit Facilities with a lead bank acting as Lead Arranger andAdministrative Agent. The Line includes a $15,000 letter of credit facility anda $15,000 revolving credit facility, with a $6,000 sub-limit for letters ofcredit. No amounts were outstanding under the Line as of December 28, 2003 andSeptember 26, 2004.

On October 13, 2004, theCompany entered into a Consent and Waiver agreement (the “Consent”) to theLine. The Consent granted the Company permission to execute and deliver an assetpurchase agreement (the “Agreement” as described under subsequent events) andwaived any restrictions under the Line to the execution of the Agreement. Underthe terms of the Consent, the Company may not borrow under the Line until theearlier of (x) the date the Company terminates the Agreement, or (y) the datethe transactions contemplated by the Agreement are consummated with the consentof the lenders.

On March 31, 2004, theCompany sold $105,000 aggregate principal amount of 10% Senior Secured Notesdue 2010 (the “Notes”). Interest on the Notes is payable semiannually on April1 and October 1 each year, commencing October 1, 2004. The proceeds of theNotes were used to repay a portion of the Senior A, B and C term loans, the SubordinatedDebt and the fees associated with the sale of the Notes and the Line.Concurrent with the retirement of the Subordinated notes and the Senior A, Band C term loans, the company wrote-off the unamortized cost of the associateddeferred debt fees in the amount of $4,677, recorded in Debt Termination Costsin the income statement.  As a result ofthe failure of the Company to consumate an exchange offer of registered notesfor the Notes, on November 5, 2004, the interest rate on the Notes increased by0.25% per annum.  Such increased interestwill continue to accrue (subject to further increase) until the Companycompletes the exchange offer.

The terms of the amended andRestated Credit Agreement and the Notes include specific financial and other covenants,all of which the Company was in compliance with at September 26, 2004.

**3.             Capitalization**

 

**Common Stock**

 

The Company is authorized toissue 1,000,000 shares of par value $0.001 Class A Common Stock and 1,000,000shares of par value $0.001 Class B Common Stock. The terms of the Class BCommon Stock are identical to the Class A Common Stock except that the holdersof Class B Common Stock have no voting rights, except as provided by law. Eachholder of Class B Common Stock has the right to convert any or all shares ofClass B Common Stock into an equal number of shares of Class A Common Stock atany time. There were 258,655 and 259,236 shares issued and outstanding of ClassA Common Stock at September 26, 2004 and December 28, 2003, respectively. Therewere 15,867 shares issued and outstanding of Class B Common Stock at September26, 2004 and December 28, 2003.

**Redeemable Preferred Stock**

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

7

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Series A 12.5% CumulativeCompounding Redeemable Preferred Stock (Series A) and Series B 13.5% CumulativeCompounding Redeemable Preferred Stock (Series B) have a liquidation preferenceof $1 per share, plus accreted dividends associated with each share. Withrespect to dividend rights and rights of liquidation, Series A ranks senior toall classes of Common Stock and Series B. Series B ranks senior to all classesof Common Stock.

Series C 15% CumulativeCompounding Participating Preferred stock (Series C) ranks senior with respectto payment of dividends, liquidation, and redemption to the previously existingseries of preferred stock and common stock of the Company. The Series C has aliquidation preference equal to two times the original issue price of $1 pershare, plus accreted dividends.

The liquidation preferenceon the Series A and Series B accretes at the stated rates, and the liquidationpreference on Series C accretes at the stated rate on the liquidationpreference value; dividends (representing the accreted liquidation preference)are to be paid from legally available funds, when and if declared by the boardof directors. If dividends are not declared, a dividend will continue to accrueand will be paid as dividends only when and if declared, or upon a sale orliquidation of the Company or upon redemption of the Preferred Stock. Accretionof the liquidation preference on the Redeemable Preferred Stock was $8,686 and$10,409 during the nine months ended September 26, 2004 and year ended December28, 2003, respectively, and is reflected as an increase in the preferred stockvalues and an increase in the accumulated deficit.

Net loss attributable tocommon stockholders includes the effect of the accretion of the liquidationpreference on the redeemable preferred stock, which reduces net income andincreases net loss attributable to common stockholders for the relevantperiods.

**StockOption Plans**

The Company’s 1998 and 2000Stock Option Plans (the Plans) have authorized the grant of options to certainemployees, directors and independent contractors for up to 12,000 and 100,000shares, respectively, of the Company’s Common Stock. All options granted underboth Plans have 10-year terms and vest and become fully exercisable on thefourth, fifth or sixth anniversary of the vesting anniversary dates.

The Company has elected tofollow APB Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations in accounting for its employee stock options because,as discussed below, the alternative fair value accounting provided for underSFAS No. 123, “Accounting for Stock Based Compensation,” requires use of optionvaluation models that were not developed for use in valuing employee stockoptions. Under APB Opinion No. 25, if the exercise price of the Company’semployee stock options equals the market price of the underlying stock on the dateof the grant, no compensation expense is recognized. The Company follows therequired disclosures of SFAS No. 148, “Accounting for Stock BasedCompensation—Transition and Disclosure,” which amends SFAS No. 123, “Accountingfor Stock Based Compensation”, which requires more prominent and more frequentdisclosures in financial statements of the effects of stock based compensation.

Options awards granted underthe 1998 Plan and options issued in 2000 through 2002 under the 2000 planprovide for 50% of the options to become exercisable based on “annual vesting”.50% of the award (10% of the award per year) vests during the first five yearsafter the grant date and the remaining 50% vests based on a “cliff vesting”schedule. The 50% portion of the option shares with the cliff vesting featurevest at an accelerated rate of 20% per year (i.e., 10% of the total optionsgranted) provided that the equity of the Company (as defined in the Plans) isgreater than or equal to specified annual targets. On any vesting anniversarydate, the cumulative unvested shares through that date would vest if therequired annual target threshold were met. If, after the fifth anniversarydate, the required annual target threshold is not met, any unvested optionsexpire and terminate. Option awards granted in 2004 under the 2000 Plan, vestat the rate of 20% per year on each vesting anniversary date.

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| ** **                          | ** ** | **1998 Plan**                 | ** ** | **2000 Plan**                           | ** ** |
|-------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding—December 28, 2003  |       | 6,050                         |       | $                                       | 10.00      |   | 42,734 |   | $ | 65.53 |   |
|                                |       |                          |       |                                    |       |   |   |   |   |
| Granted                             |       | —                        |       | —                                  |       | 39,700 |   | $ | 0.01 |   |
| Exercised                           |       | —                        |       | —                                  |       | — |   | — |   |
| Canceled                            |       | (800                          | )          |                                    |       | (2,937 | ) | 92.00 |   |
| Outstanding—September 26, 2004 |       | 5,250                         |       | $                                       | 10.00      |   | 79,497 |   | $ | 31.83 |   |
|                                |       |                          |       |                                    |       |   |   |   |   |
| Exercisable at September 26, 2004   |       | 3,675                         |       | $                                       | 10.00      |   | 18,320 |   | $ | 61.13 |   |
|                                     |            |                               |            |                                         |            |  |  |  |  |  |  |  |  |

 

Pro forma informationregarding net income is required by SFAS No. 148, and has been determined as ifthe Company had accounted for its employee stock options at fair value. Thefair value of the option grant is estimated on the date of grant using theminimum value method. The weighed-average remaining contractual life of the1998 options is four years and the weighted-average fair value of the optionsis $0 per share. The weighted-average remaining contractual life of the 2000options is eight years and the weighted-average fair value of the options is $0per share.

For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period. Under SFAS No. 148, the Company would haveincurred no additional compensation expense for the nine months ended September26, 2004 and September 28, 2003.

**4.             Related Party Transactions**

The Company has a managementagreement with two of its stockholders. The stockholders are to be paid feesequating to .667% and .333%, respectively, of consolidated earnings beforeinterest, income taxes, depreciation and amortization of the Company. Expensesrelating to the agreement of $259 were recorded as general and administrativeexpense in the nine months ended September 26, 2004 and September 28, 2003.

The Company cancelled itsmanagement agreement with Restaurant Associates Corp. to provide services forthe benefit of the Company, including general and strategic management,treasury, tax, financial reporting, benefits administration, insurance,information technology, real estate and legal on March 31, 2004. The serviceswere to be performed by employees of Restaurant Associates Corp., two of whosit on the Board of the Company. Expenses relating to these agreements of $74and $188 were recorded as general and administrative expense for the ninemonths ended September 26, 2004 and September 28, 2003, respectively.

Notes receivable fromstockholders consisted of amounts due from stockholders related to theacquisition of the Company’s Common and Preferred Stock. The notes boreinterest at 8.0%. Principal and unpaid simple interest was due in fourinstallments, commencing June 28, 2001, and ending on June 28, 2004. The noteswere fully repaid on June 28, 2004.

**5.             Employee BenefitPlan**

The Company is the sponsorfor a defined contribution plan (401(k) plan) for the Company’s qualified employees,as defined. Participants may contribute from 1% to 50% of pre-tax compensation,subject to certain limitations. The plan provides for discretionarycontributions by the Company. The Company has recorded contribution expense of$144 and $150 during the nine months ended September 26, 2004 and September 28,2003, respectively.

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**6.             Sale LeasebackTransaction**

On March 31, 2004, theCompany sold and leased back the land and building underlying five of theCompany’s restaurants (three in Missouri and two in California) for total netproceeds of $12,012 (the “Sale Leaseback Transaction”). The Sale-LeasebackTransaction resulted in deferred gain of $3,927 that is being amortized overthe lives of the related leases. In the nine month period ended September 26,2004, the Company recognized $96 of the deferred gain which was recorded inOther income (expense) net.

The leases underlying theSale-Leaseback Transaction have initial 20-year non-cancelable terms andqualify for operating lease treatment. The impact of the Sale-LeasebackTransaction will be an increase in rent expense of approximately $1,025 in 2004or $1,367 on an annual basis. The proceeds of the Sale-Leaseback Transactionwere used to repay a portion of the Senior A, B and C term loans.

**7.             Subsequent Event**

On October 14, 2004, theCompany and its wholly-owned subsidiary, CKR Acquisition Corp. (“Buyer”), enteredinto an asset purchase agreement (the “Agreement”) with Chevys, Inc. (“Chevys”),Chevys Holdings, Inc. and J.W. Childs Equity Partners L.P. (“J.W. Childs”).  Chevys owns and operates approximately 74restaurants, the majority of which are located in California. Subject to theterms and conditions of the Agreement, Buyer agreed to purchase substantiallyall of the assets and assume certain liabilities of Chevys, including certainrestaurant and franchise systems, pursuant to a plan of reorganization under theBankruptcy Code.  Pursuant to the Agreement,the cash purchase price is $77.9 million. In addition, J.W. Childs will receive securities representing 11.5% of theCompany’s equity and debt securities, subject to additional limitations.

The closing of the purchaseand sale of the business is subject to certain conditions, including, without limitation,(i) bankruptcy court approval of the plan of reorganization, (ii) the transferto Buyer of a sufficient number of Chevys’ liquor licenses (or the right to usesuch licenses) such that at closing there would not be a material adverseeffect on the business, (iii) the expiration of the waiting period under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) theexecution of a joinder to the Company’s securities holders agreement by J.W.Childs, and (v) the absence of any events or changes which would reasonably beexpected to have a material adverse effect on the business.

The Company currently expectsto finance the transaction using one or more of the following sources: debtfinancing, additional equity contributions from its existing shareholders, cashon hand or proceeds from the sale of certain assets.

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

*You should read the followingdiscussion together with our consolidated financial statements and relatednotes thereto included elsewhere in this filing.  The following discussion and analysis of ourfinancial condition and results of operations contains forward lookingstatements within the meaning of the federal securities laws.  See “Forward-Looking Statements” below.*

**Overview**

Real Mex Restaurants, Inc.(referred to hereafter as “we” and “our”) is one of the largest full service,casual dining Mexican restaurant chain operators in the United States in termsof number of restaurants. We currently operate 124 restaurants, of which 112are located in California, with additional restaurants in Arizona, Indiana,Illinois, Missouri, Oregon and Washington. Our three major subsidiaries are ElTorito Restaurants, Inc., (“El Torito”) which we acquired in June 2000,Acapulco Restaurants, Inc., (“Acapulco”) and a purchasing, distribution, andmanufacturing subsidiary, Real Mex Foods, Inc.

Our two primary restaurantconcepts, El Torito and Acapulco, offer high quality Mexican food, a wideselection of alcoholic beverages and excellent guest service.  In addition to the El Torito, El Torito Grilland Acapulco concepts, we operate 12 additional restaurant locations, most ofwhich are also full service Mexican formats, under the following brands: LasBrisas; Casa Gallardo; El Paso Cantina; GuadalaHarry’s; Hola Amigos; Who Song& Larry’s; and Keystone Grill.

Cost of sales is comprisedprimarily of food and alcoholic beverage expenses. The components of cost ofsales are variable and increase with sales volume. In addition, the componentsof cost of sales are subject to increase or decrease based on fluctuations incommodity costs and depend in part on the success of controls we have in placeto manage cost of sales in our restaurants. The cost, availability and qualityof the ingredients we use to prepare our food and beverages are subject to arange of factors including, but not limited to, seasonality, politicalconditions, weather conditions, and ingredient shortages.

Labor cost includes directhourly and management wages, operations management bonus expense, vacation pay,payroll taxes and workers’ compensation insurance and health insuranceexpenses.

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

General and administrativeexpense includes all corporate and administrative functions that support ouroperations. Expenses within this category include executive management,supervisory and staff salaries, bonus and related employee benefits, travel andrelocation costs, information systems, training, corporate rent andprofessional and other consulting fees. Depreciation principally includes depreciation of capital expendituresfor restaurants. Pre-opening costs are expensed as incurred and include costsassociated with the opening of a new restaurant or the conversion of anexisting restaurant to a different concept.

On March 31, 2004, wecompleted the Sale-Leaseback Transaction, which resulted in net proceeds ofapproximately $12.0 million. The gain on the Sale-Leaseback Transaction ofapproximately $3.9 million has been deferred and is being amortized over thelives of the related leases. The leases entered into in connection with theSale-Leaseback Transaction have 20 year terms and are expected to qualify foroperating lease treatment. The proceeds of the Sale-Leaseback Transaction wereused to repay then outstanding indebtedness. We expect that the Sale-LeasebackTransaction, apart from any other factors influencing rent expense, will resultin approximately $1.03 million in increased rent expense in 2004 (or $1.4million annualized for 2004), to be partially offset by approximately $0.2million in deferred gain amortization in 2004.

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On March 31, 2004, we sold$105,000,000 of our 10% Senior Secured Notes due 2010.  The proceeds of the sale of the Notes wereused to pay then outstanding indebtedness.

On October 14, 2004, we andour wholly-owned subsidiary, CKR Acquisition Corp. (“Buyer”) entered into anasset purchase agreement (the “Agreement”) with Chevys, Inc. (“Chevys”), ChevysHoldings, Inc., and J.W. Childs Equity Partners L.P.  “J.W. Childs” Chevys owns and operatesapproximately 74 restaurants, the majority of which are located inCalifornia.  Subject to the terms andconditions of the Agreement, Buyer agreed to purchase substantially all of theassets and assume certain liabilities of Chevys, including certain restaurantand franchise systems, pursuant to a plan of reorganization under chapter 11 ofthe Bankruptcy Code.  Pursuant to theAgreement, the cash purchase price is $77.9 million.  In addition, J.W. Childs will receivesecurities representing 11.5% of our equity and debt securities.

In the event certainadministrative and exit costs exceed certain levels, J.W. Childs will receive1% less equity for every $1.0 million of such excess costs and the cashpurchase price will be increased by $1.0 million.  Pursuant to the Agreement, Buyer will assumeordinary course post-petition current liabilities of Chevys, approximately $6.7million of letters of credit and approximately $0.9 million of other debt.

We currently expect tofinance the transaction using one or more of the following sources: debtfinancing, additional equity contributions from our existing shareholders,cash on hand or proceeds from the sale of certain assets.  There can be no assurance that we will beable to raise the necessary financing. The Buyer’s obligations are not subject to a financing contingency.

Pursuant to the Agreement,Buyer has made an initial deposit of $0.5 million and will make an additionaldeposit of $0.5 million upon delivery of agreements by certain creditors of Chevysto support the plan of reorganization. If the Agreement is terminated because of a material breach by Buyer, Chevysmay retain the deposit as liquidated damages, and the deposit will be theexclusive remedy of Chevys against us and Buyer.  The closing of the purchase and sale of thebusiness is subject to certain conditions, including, without limitation, (i)bankruptcy court approval of the plan of reorganization, (ii) the transfer toBuyer of a sufficient number of Chevys’ liquor licenses (or the right to usesuch licenses) such that at closing there would not be a material adverseeffect on the business, (iii) the expiration at the waiting period under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended, (iv) the execution of a joinderto our security holders agreement by J.W. Childs and (v) the absence of anyevents or changes which would reasonably be expected to have a material adverseeffect on the business.

Our fiscal year consists of52 or 53 weeks and ends on the last Sunday in December of each year. The ninemonths ended September 26, 2004 and September 28, 2003 consist of thirty-nineweeks. When calculating same store sales, we include a restaurant that has beenopen for more than 12 months and for the entirety of each comparable period.

**Critical AccountingPolicies**

The preparation of our financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, we evaluate ourestimates, including those related to goodwill, income taxes, impairment oflong-lived assets and self-insurance reserves. We base our estimates onhistorical experience and on various other assumptions and factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Based on ourongoing review, we plan to make adjustments to our judgments and estimateswhere facts and circumstances dictate. Actual results could differ from ourestimates.  Refer to Amendment No. 3 toour Registration Statement on Form S-4 (File No. 333-116310) as filed with theSecurities and Exchange Commission on September 9, 2004 for discussion of ourcritical accounting policies and estimates.

We believe the followingcritical accounting policies are important to the portrayal of our financialcondition and results and require our management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.

**Property and Equipment**

Property and equipment isrecorded at cost. Property and equipment is depreciated over the assets’estimated useful lives using the straight-line method. Leasehold improvementsare amortized using the straight-line method over the estimated useful life ofthe asset or the term of the related lease, whichever is shorter. The estimateduseful lives for furniture, fixtures and equipment range from three to tenyears. The lives for buildings and leasehold improvements are the shorter of 20years or the term of the related operating lease.

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**Long-Lived AssetImpairments**

We assess the impairment oflong-lived assets, including restaurant sites and other assets, when events orchanges in circumstances indicate that the carrying value of the assets or theasset group may not be recoverable. The asset impairment review assesses thefair value of the assets based on the future cash flows the assets are expectedto generate. An impairment loss is recognized when estimated undiscountedfuture cash flows expected to result from the use of the asset plus netproceeds expected from the disposition of the asset (if any) are less than therelated asset’s carrying amount. Impairment losses are measured as the amount bywhich the carrying amounts of the assets exceed their fair values. The netproceeds expected from the disposition of the asset are determined byindependent quotes or expected sales prices developed by internal specialists.Estimates of future cash flows and expected sales prices are judgments based onour experience and knowledge of local operations. These estimates can besignificantly impacted by future changes in real estate market conditions, theeconomic environment, capital spending decisions and inflation.

For properties to be closedthat are under long-term lease agreements, the present value of any remainingliability under the lease, discounted using risk-free rates and net of expectedsublease rentals that could be reasonably obtained for the property, isrecognized as a liability and expensed. The value of any equipment andleasehold improvements related to a closed store is reduced to reflect netrecoverable values. Internal specialists estimate the subtenant income, futurecash flows and asset recovery values based on their historical experience andknowledge of (1) the market in which the store to be closed is located, (2) theresults of its previous efforts to dispose of similar assets and (3) thecurrent economic conditions. The actual cost of disposition for these leasesand related assets is affected by specific real estate markets, the economicenvironment and inflation.

**Valuation of Goodwill**

Goodwill is tested annuallyfor impairment, and is tested for impairment more frequently if events andcircumstances indicate that the asset might be impaired. Management of theCompany performs its annual impairment test during the last quarter of itsfiscal year. An impairment loss is recognized to the extent that the carryingamount exceeds the asset’s fair value. We consider the reporting unit level tobe the company level, as the components (e.g., brands) within the Company havesimilar economic characteristics, including production processes, types orclasses of customers and distribution methods. This determination is made atthe reporting unit level and consists of two steps. First, management of theCompany determines the fair value of a reporting unit and compares it to itscarrying amount. Second, if the carrying amount of a reporting unit exceeds itsfair value, an impairment loss is recognized for any excess of the carryingamount of the reporting unit’s goodwill over the implied fair value of thegoodwill. The implied fair value of goodwill is determined by allocating thefair value of the reporting unit in a manner similar to a purchase priceallocation, in accordance with Statement of Financial Accounting Standards No.141, “Business Combinations”. The residual fair value after this allocation isthe implied fair value of the reporting unit goodwill.

Factors that could changethe result of our goodwill impairment test include, but are not limited to,different assumptions used to forecast future revenues, expenses, capitalexpenditures and working capital requirements used in our cash flow models. Inaddition, selection of a risk-adjusted discount rate on the estimatedundiscounted cash flows is susceptible to future changes in market conditions,and when 

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unfavorable, can adverselyaffect our original estimates of fair values. A variance in the discount ratecould have a significant impact on the valuation of the goodwill for purposesof the impairment test. We cannot predict the occurrence of certain futureevents that might adversely affect the reported value of goodwill. Such eventsinclude, but are not limited to, strategic decisions made in response toeconomic environment on our customer base, or a material negative change inrelationships with our customers. We are not aware of any significant events orchanges that would affect the recoverability of those amounts as of September26, 2004.

**Self-Insurance**

Our business is primarilyself-insured for workers’ compensation and general liability costs. We recordour self-insurance liability, determined actuarially, based on claims filed andan estimate of claims incurred but not yet reported. Any actuarial projectionof ultimate losses is subject to a high degree of variability. Sources of thisvariability are numerous and include, but are not limited to, future economicconditions, court decisions and legislative actions. Our workers’ compensationfuture funding estimates anticipate no change in the benefit structure.Statutory changes could have a significant impact on future claim costs.

Our workers’ compensationliabilities are from claims occurring in various states. Individual stateworkers’ compensation regulations have received a tremendous amount ofattention from state politicians, insurers, employers and providers, as well asthe public in general. Recent years have seen an escalation in the number oflegislative reforms, judicial rulings and social phenomena affecting ourbusiness. The changes in a state’s political and economic environment increasethe variability in the unpaid claim liabilities.

**Income Taxes**

We utilize the liabilitymethod of accounting for income taxes as set forth in SFAS No. 109, “Accountingfor Income Taxes.” Under the liability method, deferred taxes are determinedbased on the difference between the financial statement and the tax basis ofassets and liabilities using enacted tax rates in effect in the years in whichthe differences are expected to reverse. Recognition of deferred tax assets islimited to amounts considered by management to be more likely than not ofrealization in future periods.

**Revenue Recognition**

Revenues from operations arerecognized when sales occur.

**Results of Operations**

Our operating results forthe three and nine months ended September 26, 2004 and September 28, 2003 areexpressed as a percentage of total revenues below:
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **September 26, 2004** | ** ** | **September 28, 2003** | ** ** | **September 26, 2004** | ** ** | **September 28, 2003** | ** ** |
| Total revenues                         |       | 100.0                  | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                          |       | 24.7                   |       | 24.8                   |       | 24.6 |   | 24.7 |   |
| Labor                                  |       | 36.2                   |       | 36.3                   |       | 36.3 |   | 36.4 |   |
| Direct operating and occupancy expense |       | 24.2                   |       | 24.3                   |       | 23.3 |   | 23.8 |   |
| Total operating costs                  |       | 85.1                   |       | 85.4                   |       | 84.2 |   | 84.9 |   |
| General and administrative expense     |       | 4.9                    |       | 4.8                    |       | 5.2 |   | 4.8 |   |
| Depreciation                           |       | 3.4                    |       | 3.2                    |       | 3.5 |   | 3.8 |   |
| Amortization                           |       | —                 |       | —                 |       | — |   | — |   |
| Operating income                       |       | 6.5                    |       | 6.6                    |       | 6.9 |   | 6.5 |   |
| Interest expense                       |       | 3.8                    |       | 4.2                    |       | 3.8 |   | 4.2 |   |
| Debt termination costs                 |       | —                 |       | —                 |       | 1.9 |   | — |   |
| Total other expense, net               |       | 3.0                    |       | 4.6                    |       | 5.2 |   | 4.0 |   |
| Income before income taxes             |       | 3.6                    |       | 2.0                    |       | 1.8 |   | 2.5 |   |
| Net income                             |       | 3.5                    |       | 1.9                    |       | 1.7 |   | 2.4 |   |

 

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**Three months ended September 26, 2004 comparedto the three months ended September 28, 2003**

*Total Revenues*.  Total revenues increased by $2.5 million, or3.2%, to $81.9 million in the third quarter of 2004 from $79.4 million in thethird quarter of 2003 due to a $1.1 million increase in restaurant revenues anda $1.4 million increase in other revenues. The increase in restaurant revenues was the result of comparable storesales increases of 4.8% in the quarter, partially offset by restaurantclosures.  The increase in comparablestore sales was driven by increases in pricing in the El Torito and Acapulco restaurantsof 1.5%, increases in customer counts of 1.4% in the El Torito restaurants anddecreased discounting in the Acapulco restaurants.  The $1.4 million increase in other revenueswas primarily due to an increase in sales to outside customers by ourdistribution facility.

*Cost of Sales*.  Total cost of sales of $20.2 million in thethird quarter of 2004 increased $0.5 million or 2.8% as compared to the thirdquarter of 2003 primarily due to higher costs associated with the increase insales to outside customers by our distribution facility combined with commoditycost increases primarily in cheese, other dairy products and fresh fish.  As a percentage of total revenues, cost ofsales decreased to 24.7% for the third quarter of 2004 from 24.8% for the thirdquarter of 2003.

*Labor*.  Labor costs of $29.7 million in the thirdquarter of 2004 increased by $0.8 million or 2.9% as compared to the thirdquarter of 2003. The increase in labor cost dollars was primarily due to higherworkers’ compensation insurance expense of $1.2 million, partially offset bylower hourly and management labor dollars. Payroll and benefits remain subjectto inflation and government regulation, especially wage rates currently at ornear the minimum wage, and expenses for health insurance and workers’compensation insurance.  As a percent oftotal revenues, labor costs decreased to 36.2% for the third quarter of 2004from 36.3% for the third quarter of 2003 primarily due to lower hourly laborexpense as a percent of sales.

*Direct Operating and OccupancyExpense*.  Direct operating and occupancyexpense of $19.8 million in the third quarter of 2004 increased by $0.5 millionor 2.5% as compared to the third quarter of 2003. This variance was primarilydue to an increase in general liability insurance expense of $0.5 millioncombined with higher occupancy expenses of $0.2 million resulting from baserent increases associated with lease renewals and the Sale-LeasebackTransaction, partially offset by lower utilities expense of $0.2 million.  Direct operating and occupancy expense as apercentage of sales decreased to 24.2% in the third quarter of 2004 from 24.3%in the third quarter of 2003.

*General and AdministrativeExpense*.  General and administrativeexpense of $4.0 million in the third quarter of 2004 was fairly consistent inboth total dollars and as a percent of sales with the third quarter of 2003.

*Depreciation*.  Depreciation expense of $2.7 million in thethird quarter of 2004 increased $0.2 million or 8.4% as compared to the thirdquarter of 2003.

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As a percentage of totalrevenues, depreciation increased to 3.4% for the third quarter of 2004 from3.2% for the third quarter of 2003.

*Interest Expense*.  Interest expense of $3.1 million in the thirdquarter of 2004 decreased $0.2 million or 4.9% as compared to the third quarterof 2003 due to a reduction in debt levels. The Company’s total outstanding debtwas $12.0 million lower as of September 26, 2004 as compared to September 28,2003.  As a percentage of total revenues,interest expense decreased to 3.8% for the third quarter of 2004 from 4.2% forthe third quarter of 2003.

**Nine months ended September 26, 2004 compared tothe nine months ended September 28, 2003**

*Total Revenues*.  Total revenues increased by $11.3 million, or4.7%, to $249.0 million through the first nine months of 2004 from $237.8million in the first nine months of 2003 due to a $7.4 million increase inrestaurant sales and a $3.9 million increase in other revenues.  The increase in restaurant sales was theresult of comparable store sales increases of 6.0% in the first nine months ofthe year, partially offset by restaurant closures.  The increase in comparable store sales wasdriven by increases in pricing in the Acapulco and El Torito restaurants of1.5%, increases in customer counts of 1.8% in the El Torito restaurant anddecreased discounting in the Acapulco restaurant.  The $3.9 million increase in other revenueswas primarily due to an increase in sales to outside customers by our distributionfacility.

*Cost of Sales*.  Total cost of sales of $61.3 million in thefirst nine months of 2004 increased $2.6 million or 4.5% as compared to thefirst nine months of 2003 primarily due to higher costs associated with theincrease in sales to outside customers by our distribution facility combinedwith commodity cost increases primarily in cheese, other dairy products andfresh fish.  As a percentage of totalrevenues, cost of sales decreased to 24.6% for the first nine months of 2004from 24.7% for the first nine months of 2003.

*Labor*.  Labor costs of $90.3 million in the firstnine months of 2004 increased by $3.7 million or 4.3% as compared to the firstnine months of 2003. The increase in labor cost dollars was due to an increasein hourly labor of $0.8 million, associated with the increase in restaurantrevenues, combined with higher benefits expense, primarily higher workers’compensation insurance expense of $2.1 million and higher state unemploymenttaxes of $0.6 million. Payroll and benefits remain subject to inflation andgovernment regulation, especially wage rates currently at or near the minimumwage, and expenses for health insurance and workers’ compensationinsurance.  As a percent of totalrevenues, labor costs decreased to 36.3% for the first nine months of 2004 from36.4% for the first nine months of 2003.

*Direct Operating and OccupancyExpense*.  Direct operating and occupancyexpense of $58.1 million in the first nine months of 2004 increased by $1.6million or 2.8% as compared to the first nine months of 2003. This variance wasprimarily due to increases in occupancy expenses resulting from base rentincreases associated with lease renewals and the Sale-LeasebackTransaction.  Direct operating andoccupancy expense as a percentage of sales decreased to 23.3% for the firstnine months of 2004 from 23.8% for the first nine months of 2003.

*General and AdministrativeExpense*.  General and administrativeexpense of $13.0 million in the first nine months of 2004 increased $1.7million or 14.7% as compared to the first nine months of 2003, primarily due tohigher bonus expense. As a percentage of total revenues, general andadministrative expenses increased to 5.2% for the first nine months of 2004from 4.8% for the first nine months of 2003.

*Depreciation*.  Depreciation expense of $8.8 million in thefirst nine months of 2004 decreased $0.4 million or 4.3% as compared to thefirst nine months of 2003, primarily due to decreased depreciation expense

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associated with restaurantclosures.  As a percentage of totalrevenues, depreciation decreased to 3.5% for the first nine months of 2004 from3.8% for the first nine months of 2003.

*Interest Expense*.  Interest expense of $9.5 million in the firstnine months of 2004 decreased $0.5 million or 4.8% as compared to the firstnine months of 2003 primarily due to a reduction in debt levels. The Company’stotal outstanding debt was $12.0 million lower as of September 26, 2004 ascompared to September 28, 2003.  As apercentage of total revenues, interest expense decreased to 3.8% for the firstnine months of 2004 from 4.2% for the first nine months of 2003.

**Liquidity and Capital Resources**

Our principal liquidityrequirements are to service our debt and meet our capital expenditure andworking capital needs.  Our indebtednessat September 26, 2004 was $106.6 million, and we had $11.9 million of revolvingcredit availability under our Revolving Credit Facility.  Our ability to make principal and interestpayments and to fund planned capital expenditures will depend on our ability togenerate cash in the future, which, to a certain extent, is subject to generaleconomic, financial, competitive, legislative, regulatory and other factorsthat are beyond our control.  Based onour current level of operations, we believe our cash flow from operations,available cash and available borrowings under our $15.0 million RevolvingCredit Facility and $15.0 million Letters of Credit Facility (collectively, the“Senior Credit Facility”) will be adequate to meet our liquidity needs for theforeseeable 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 borrowingswill 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. We may need to refinance all or a portion of our indebtednesson or before maturity. We cannot assure you that we will be able to refinanceany of our indebtedness on commercially reasonable terms or at all.

**Working Capital and Cash Flows**

We presently have, in thepast have had, and in the future are likely to have, negative working capitalbalances. The working capital deficit principally is the result of accountspayable and accrued liabilities being in excess of current asset levels. Thelargest components of our accrued liabilities include reserves for ourself-insured workers’ compensation and general liability insurance, accruedpayroll and related employee benefits costs, and gift certificate liabilities.We do not have significant receivables and we receive trade credit based uponnegotiated terms in purchasing food and supplies. Funds available from cashsales not needed immediately to pay for food and supplies or to financereceivables or inventories typically have been used for capital expendituresand/or debt service payments under our existing indebtedness.

*Operating Activities*.  We had net cash provided by operatingactivities of $19.9 million for the nine months ended September 26, 2004compared with net cash provided by operating activities of $13.1 million forthe nine months ended September 28, 2003. The increase in cash provided byoperating activities was primarily attributable to an increase in accountspayable and other accrued liabilities resulting from higher accrued interest balancesdue to a change in the timing of interest payments for the related debt.

*Investing Activities*.  We had net cash provided by investingactivities of $7.7 million for the nine months ended September 26, 2004compared with net cash used in investing activities of $4.5 million for thenine months ended September 28, 2003. The increase in cash provided byinvesting activities was primarily the result of the proceeds from theSale-Leaseback Transaction.  We expect tomake capital expenditures totaling approximately $10.4 million in 2004,including approximately $5.7 million in maintenance capital expenditures,approximately $2.5 million to build two new El Torito restaurants,approximately $0.2 million for restaurant conversions and approximately $2.0million for the continuation of our refreshening program. As of September 26,2004, we made capital expenditures totalling approximately $5.4 million, themajority of which consisted of maintenance capital expenditures. In 

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addition, we expectpre-opening expenses associated with new units and conversions to be $0.6million in 2004.  These and other similarcosts may be higher in the future due to inflation and other factors. We expectto fund such new restaurants, conversions and refreshenings from cash flow fromoperations, available cash, available borrowings under our Senior CreditFacility, landlord contributions (if favorable terms are available) and tradefinancing received from trade suppliers.

*Financing Activities*.  We had net cash used in financing activitiesof $16.3 million for the nine months ended September 26, 2004 compared with netcash used in financing activities of $2.3 million for the nine months endedSeptember 28, 2003. The increase in cash used in financing activities wasprimarily attributable to the retirement of long term debt of $115.9 millionand the payment of financing costs of $5.4 million.

**Debt and Other Obligations**

At March 28, 2004, our priorsenior credit facility (the “Prior Credit Facility”) consisted of term loanswith a $70.2 million outstanding balance, and a $24.0 million revolver, whichhad a $17.0 million sub-limit for letters of credit. In addition, at March 28,2004 we had outstanding $44.4 million of subordinated notes under asubordinated loan agreement (“Subordinated Notes”). On March 31, 2004, theCompany sold $105,000 aggregate principal amount of 10% Senior Secured Notesdue 2010. Interest on the Notes is payable semiannually on April 1 and October1 each year, commencing October 1, 2004. At the closing of the sale of theNotes, we used the proceeds from the sale of the Notes and the Sale-LeasebackTransaction to repay our term loans then outstanding under the Prior CreditFacility and Subordinated Notes in full, and entered into the Senior CreditFacility. The Senior Credit Facility is comprised of a $15.0 million RevolvingCredit Facility and a $15.0 million Letters of Credit Facility. At the closingof the sale of the old notes, we utilized the Letters of Credit Facility in itsentirety and utilized an additional $2.0 million from the Revolving CreditFacility to secure approximately $17.0 million in outstanding letters ofcredit, which serve as collateral for our various self-insured workers’compensation and other insurance programs.

In connection with theretirement of our term loans then outstanding under our Prior Credit Facilityand Subordinated Notes, we took a charge of $4.7 million consisting of a noncash charge of $2.4 million for the write-off of discount associated with theSubordinated Notes, a non cash charge of $1.9 million for the write-off ofdeferred financing costs associated with indebtedness outstanding under thePrior Credit Facility and a $0.4 million pre-payment premium in connection withthe repayment of the Subordinated Notes. In addition, we terminated an interest rate swap agreement related toour Prior Credit Facility at a cash cost of $0.2 million.

As of September 26, 2004, wehad capitalized lease obligations, collateralized with leasehold improvements,in an aggregate amount of $1.5 million and with a weighted average interestrate of 10.0%. Principal and interest payments on the capital lease obligationsare due monthly and range from $1,100 to $7,500 per month. The capital leaseobligations mature between 2004 and 2027.

As a result of the failureto consumate an exchange offer of registered notes for the Notes, on November5, 2004, the interest rate on the Notes increased by 0.25% per annum.  Such increased interest will continue toaccrue (subject to further increase) until the Company completes the exchangeoffer.

**Inflation**

Over the past five years,inflation has not significantly affected our operations.  However, the impact of inflation on labor,food and occupancy costs could, in the future, significantly affect ouroperations.  We pay many of our employeeshourly rates related to the federal or applicable state minimum wage.  Our workers’ compensation and healthinsurance costs have been and are subject to continued inflationarypressures.  Costs for construction,taxes, repairs, maintenance and insurance all impact our occupancy costs.  Many of our leases require us to pay taxes,maintenance, repairs, insurance and utilities, all of which may be subject toinflationary increases.  We believe thatour current practice of maintaining operating margins through a combination of periodicmenu price increases, cost controls, careful evaluation of property andequipment needs, and efficient purchasing practices is our most effective toolfor dealing with inflation.

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**Forward Looking Statements**

This report includes “forwardlooking statements.”  Forward lookingstatements are those that do not relate solely to historical fact. Theyinclude, but are not limited to, any statement that may predict, forecast,indicate or imply future results, performance, achievements or events. They maycontain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,”“plan,” “will,” “should,” “may,” or “could” or words or phrases of similarmeaning. They may relate to, among other things: our liquidity and capitalresources; legal proceedings and regulatory matters involving our Company;food-borne illness incidents; increases in the cost of ingredients; ourdependence upon frequent deliveries of food and other supplies; ourvulnerability to changes in consumer preferences and economic conditions; ourability to compete successfully with other casual dining restaurants; ourability to expand; and anticipated growth in the restaurant industry and ourmarkets.

These forward lookingstatements reflect our current views with respect to future events and arebased on assumptions and subject to risks and uncertainties, including, but notlimited to, economic, competitive, governmental and technological factorsoutside of our control, that may cause actual results to differ materially fromtrends, plans or expectations set forth in the forward looking statements.These risks and uncertainties may include these risks and uncertainties andthis described in Amendment No. 3 to our Registration Statement on Form S-4(File No. 333-116310) as filed with the Securities and Exchange Commission onSeptember 9, 2004.   Given these risksand uncertainties, we urge you to read this prospectus completely and with theunderstanding that actual future results may be materially different from whatwe plan or expect. Also, these forward looking statements present our estimatesand assumptions only as of the date of this report. Except for our ongoingobligation to disclose material information as required by federal securitieslaws, we do not intend to update you concerning any future revisions to anyforward looking statements to reflect events or circumstances occurring afterthe date of this report.

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

The inherent risk in marketrisk sensitive instruments and positions primarily relates to potential lossesarising from adverse changes in foreign exchange rates and interest rates.

We consider the U.S. dollarto be the functional currency for all of our entities. All of our net sales andour expenses in fiscal years 2001, 2002 and 2003 were denominated in U.S.dollars. Therefore, foreign currency fluctuations did not materially impact ourfinancial results in those periods.

We are subject to marketrisk from exposure to changes in interest rates based on our financingactivities. This exposure relates to borrowings under the Senior CreditFacility that are payable at floating rates of interest. Except for letters ofcredit secured by the Senior Credit Facility, we currently do not have anyborrowings under our Senior Credit Facility. As a result, all of our debtcurrently carries fixed interest rates and we will, therefore, not be impactedby changes in interest rates until after we borrow under our Senior CreditFacility.

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

**Item 4.    Controls and Procedures**

As of the end of the periodcovered by this report, we conducted an evaluation, under the supervision andwith the participation of the principal executive officer (“CEO”) and principalfinancial officer (“CFO”), of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the CEO and CFOconcluded that our disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There was no change in our internalcontrol over financial reporting during our most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**PART IIOTHER INFORMATION**

**Item 1.    LegalProceedings**

The Company is periodicallya defendant in cases involving personal injury and other matters which arise inthe normal course of business. While any pending or threatened litigation hasan element of uncertainty, the Company believes that the outcome of theselawsuits or claims, individually or combined, will not materially adverselyaffect the consolidated financial position, results of operations or cash flowsof the Company.

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

Not applicable.

**Item 3.    DefaultsUpon Senior Securities**

Not applicable.

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**Item 4.    Submissionof Matters to a Vote of Security Holders**

Not applicable.

**Item 5.    OtherInformation**

Not applicable.

**Item6.    Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                          |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Asset Purchase Agreement,  dated as of October 13, 2004, by and among Real Mex Restaurants, Inc., CKR  Acquisition Corp., Chevys, Inc. and its subsidiaries, Chevys Holdings, Inc.  and J.W. Childs Equity Partners L.P. |
| 31.1            |       | Certification pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of  the Chief Executive Officer.                                                                                      |
| 31.2            |       | Certification pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of  the Chief Financial Officer.                                                                                      |
| 32.1            |       | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.                                                                |
| 32.2            |       | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.                                                                |

 

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**SIGNATURE**

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                     | REAL MEX RESTAURANTS, INC. |
|--------------------------|----------------------------|
|                     |                       |   |
|                     |                       |   |
| Dated: November 10, 2004 | By:                        | /s/ Frederick F. Wolfe |
|                     |                       | Frederick F. Wolfe |
|                     |                       | President & Chief  Executive Officer  (principal executive officer) |
|                     |                       |   |
|                     |                       |   |
| Dated: November 10, 2004 | By:                        | /s/ Steven Tanner |
|                     |                       | Steven Tanner |
|                     |                       | Chief Financial Officer  (principal financial and accounting officer) |
|                     |                       |   |

 

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