****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 March 26,  2006**                                                                                                                                                                                                                                     |
|       | ** **                                                                                                                                                                                                                                                                                  |
| **Or**     |
|       |                                                                                                                                                                                                                                                                                        |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                                        |
|       | **For the transition period from                        to                      .** |

 

**Commission file number333-116310**

 

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

(Exact name of Registrant asspecified in its charter)

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

 

**5660Katella Avenue, Suite 100**

**Cypress,CA 90630**

(Address of principal executiveoffices)

 

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

 

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

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer ( or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act). (Check one):

 

Large Accelerated Filer o                               Accelerated Filer o                                           Non-Accelerated Filer ý

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  ýNo

 

As of May 8, 2006, the registrant had outstanding300,423.16 shares of Class A Common Stock, par value $0.001 per share, and15,866.82 shares of Class B Common Stock, par value $0.001 per share.

 

 

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**Real MexRestaurants, Inc. and SubsidiariesIndex**

 
| PART I  FINANCIAL INFORMATION |                                                                                        |
|------------------------------------|---------------------------------------------------------------------------------------------|
|                               |                                                                                        |
| Item 1.                            | Financial Statements                                                                        |   |
|                               | Consolidated  Balance Sheets                                                                |   |
|                               | Consolidated  Statements of Operations                                                      |   |
|                               | Consolidated  Statements of Cash Flows                                                      |   |
|                               | Notes  to Consolidated Financial Statements                                                 |   |
| Item  2.                           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
| Item  3.                           | Quantitative and Qualitative Disclosures About Market Risk                                  |   |
| Item 4.                            | Controls and Procedures                                                                     |   |
|                               |                                                                                        |
| PART II  OTHER INFORMATION    |                                                                                        |
|                               |                                                                                        |
| Item 1.                            | Legal Proceedings                                                                           |   |
| Item 1A.                           | Risk Factors                                                                                |   |
| Item  2.                           | Unregistered Sales of Equity  Securities and Use of Proceeds                                |   |
| Item  3.                           | Defaults Upon Senior  Securities                                                            |   |
| Item  4.                           | Submission of Matters to a  Vote of Security Holders                                        |   |
| Item 5.                            | Other Information                                                                           |   |
| Item 6.                            | Exhibits                                                                                    |   |
| SIGNATURE                          |                                                                                        |

 

2

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**FORWARD-LOOKING STATEMENTS**

** **

*This report includes “forward looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 (the “Exchange Act”). 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 may containwords 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 looking statements reflect ourcurrent views with respect to future events and are based on assumptions andsubject to risks and uncertainties, including, butnot limited to, economic, competitive, governmental and technological factorsoutside of our control, that may cause actual results to differ materiallyfrom trends, plans or expectations set forth in the forward looking statements.These risks and uncertainties may include these risks and uncertaintiesand the risks and uncertainties described elsewhere in this report and in Item1A “Risk Factors” of our annual report on Form 10-K filed with the SEC on February 21,2006. Given these risks and uncertainties, we urge you to read this reportcompletely and with the understanding that actual future results may bematerially different from what we plan or expect. All of the forward-lookingstatements made in this Form 10-Q are qualified by these cautionarystatements and we cannot assure you that the actual results or developmentsanticipated by our Company will be realized or, even if substantially realized,that they will have the expected consequences to or effects on our Company orits business or operations. In addition, these forward-looking statementspresent our estimates and assumptions only as of the date of this report.Except for our ongoing obligation to disclose material information as requiredby federal securities laws, we do not intend to update you concerning anyfuture revisions to any forward looking statements to reflect events orcircumstances occurring after the date of this report.*

 

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

 

3

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

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

**ConsolidatedBalance Sheets**

**(in thousands, except for sharedata)**

 
| ** **                                                                                                                                                                                                                                                                    | ** ** | **March 26,** | ** ** | **December 25,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                                                                    | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Current  assets:                                                                                                                                                                                                                                                              |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                                                                                                                                                    |       | $                  | 20,911     |                  | $          | 14,871 |   |
| Trade  receivables, net                                                                                                                                                                                                                                                       |       | 9,170              |       | 8,265                 |       |
| Other  receivables                                                                                                                                                                                                                                                            |       | 3,148              |       | 2,289                 |       |
| Inventories                                                                                                                                                                                                                                                                   |       | 10,084             |       | 9,977                 |       |
| Prepaid  expenses and supplies                                                                                                                                                                                                                                                |       | 4,285              |       | 5,268                 |       |
| Deferred tax  asset                                                                                                                                                                                                                                                           |       | 3,454              |       | 3,454                 |       |
| Total  current assets                                                                                                                                                                                                                                                         |       | 51,052             |       | 44,124                |       |
|                                                                                                                                                                                                                                                                          |       |               |       |                  |       |
| Property and  equipment, net                                                                                                                                                                                                                                                  |       | 81,295             |       | 82,592                |       |
| Goodwill,  net                                                                                                                                                                                                                                                                |       | 157,267            |       | 157,267               |       |
| Deferred  charges                                                                                                                                                                                                                                                             |       | 5,912              |       | 6,354                 |       |
| Deferred tax  asset                                                                                                                                                                                                                                                           |       | 13,744             |       | 14,097                |       |
| Other assets                                                                                                                                                                                                                                                                  |       | 6,708              |       | 6,455                 |       |
| Total assets                                                                                                                                                                                                                                                                  |       | $                  | 315,978    |                  | $          | 310,889 |   |
|                                                                                                                                                                                                                                                                          |       |               |       |                  |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                                                                                |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                                                         |       |               |       |                  |       |
| Accounts  payable                                                                                                                                                                                                                                                             |       | $                  | 20,179     |                  | $          | 26,227 |   |
| Accrued  self-insurance reserves                                                                                                                                                                                                                                              |       | 16,671             |       | 15,916                |       |
| Accrued compensation  and benefits                                                                                                                                                                                                                                            |       | 15,123             |       | 11,845                |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                    |       | 17,804             |       | 12,272                |       |
| Related  party payables                                                                                                                                                                                                                                                       |       | 124                |       | 228                   |       |
| Current  portion of long-term debt                                                                                                                                                                                                                                            |       | 118                |       | 117                   |       |
| Current  portion of capital lease obligations                                                                                                                                                                                                                                 |       | 213                |       | 210                   |       |
| Total  current liabilities                                                                                                                                                                                                                                                    |       | 70,232             |       | 66,815                |       |
|                                                                                                                                                                                                                                                                          |       |               |       |                  |       |
| Long-term  debt, less current portion                                                                                                                                                                                                                                         |       | 180,702            |       | 180,717               |       |
| Capital  lease obligations, less current portion                                                                                                                                                                                                                              |       | 934                |       | 987                   |       |
| Other  liabilities                                                                                                                                                                                                                                                            |       | 12,663             |       | 11,786                |       |
| Total  liabilities                                                                                                                                                                                                                                                            |       | 264,531            |       | 260,305               |       |
|                                                                                                                                                                                                                                                                          |       |               |       |                  |       |
| Commitments  and contingencies                                                                                                                                                                                                                                                |       |               |       |                  |       |
|                                                                                                                                                                                                                                                                          |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Redeemable  Preferred Stock:                                                                                                                                                                                                                                                  |       |               |       |                  |       |
| Series A,  12.5% Cumulative Compounding Preferred Stock—18,239.983 shares issued and  outstanding at March 26, 2006 and December 25, 2005; liquidation  preference of $36,697 and $35,646 at March 26, 2006 and December 25,  2005 respectively |       | 36,697             |       | 35,646                |       |
| Series B,  13.5% Cumulative Compounding Preferred Stock—12,323.311shares issued and  outstanding at March 26, 2006 and December 25, 2005; liquidation  preference of $26,164 and $25,365 at March 26, 2006 and December 25,  2005 respectively; |       | 26,164             |       | 25,365                |       |
| Series C,  15% Cumulative Compounding Preferred Stock—17,477.904 shares issued and  outstanding at March 26, 2006 and December 25, 2005; liquidation  preference of $60,129 and $58,080 at March 26, 2006 and December 25,  2005 respectively;  |       | 60,129             |       | 58,080                |       |
| Common  Stock, $.001 par value, 2,000,000 shares authorized, 316,289.98 shares issued  and outstanding at March 26, 2006 and December 25, 2005;                                                                                                                     |       | —             |       | —                |       |
| Warrants                                                                                                                                                                                                                                                                      |       | 4,027              |       | 4,027                 |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                   |       | 16,203             |       | 16,203                |       |
| Accumulated  deficit                                                                                                                                                                                                                                                          |       | (91,773            | )          | (88,737               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                              |       | 51,447             |       | 50,584                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                              |       | $                  | 315,978    |                  | $          | 310,889 |   |

 

See accompanying notes.

 

4

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

**ConsolidatedStatements of Operations (unaudited)**

**(in thousands)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **March 26,**     | ** ** | **March 27,** | ** ** |
| ** **                                    | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Revenues:                                     |       |                   |       |   |   |
| Restaurant  revenues                          |       | $                      | 129,798    |   | $ | 119,438 |   |
| Other  revenues                               |       | 6,840                  |       | 3,870 |   |
| Franchise  revenues                           |       | 944                    |       | 681 |   |
| Total  revenues                               |       | 137,582                |       | 123,989 |   |
| Costs and  expenses:                          |       |                   |       |   |   |
| Cost of  sales                                |       | 35,406                 |       | 31,035 |   |
| Labor                                         |       | 47,807                 |       | 44,592 |   |
| Direct  operating and occupancy expense       |       | 33,309                 |       | 29,205 |   |
| General and  administrative expense           |       | 6,846                  |       | 7,240 |   |
| Depreciation  and amortization                |       | 4,524                  |       | 4,514 |   |
| Legal  settlement costs                       |       | 2,022                  |       | 350 |   |
| Pre-opening  costs                            |       | 273                    |       | 171 |   |
| Impairment  of property and equipment         |       | —                 |       | 216 |   |
|                                          |       |                   |       |   |   |
| Operating  income                             |       | 7,395                  |       | 6,666 |   |
|                                          |       |                   |       |   |   |
| Other income  (expense):                      |       |                   |       |   |   |
| Interest  expense                             |       | (6,012                 | )          | (5,394 | ) |
| Other  income, net                            |       | 51                     |       | 125 |   |
|                                          |       |                   |       |   |   |
| Total other  expense, net                     |       | (5,961                 | )          | (5,269 | ) |
|                                          |       |                   |       |   |   |
| Income  before income tax provision           |       | 1,434                  |       | 1,397 |   |
|                                          |       |                   |       |   |   |
| Income tax  provision                         |       | 571                    |       | 2 |   |
|                                          |       |                   |       |   |   |
| Net income                                    |       | 863                    |       | 1,395 |   |
|                                          |       |                   |       |   |   |
| Redeemable  preferred stock accretion         |       | (3,899                 | )          | (3,391 | ) |
|                                          |       |                   |       |   |   |
| Net loss  attributable to common stockholders |       | $                      | (3,036     | ) | $ | (1,996 | ) |

 

See accompanying notes.

 

5

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**Real MexRestaurants, Inc.**

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

**(inthousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 26,**     | ** ** | **March 27,** | ** ** |
| ** **                                                                         | ** ** | **2006**               | ** ** | **2005** | ** ** |
| **Operating  activities**                                                          |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 863        |   | $ | 1,395 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     |       | 4,524                  |       | 4,514 |   |
| Amortization  of deferred financing costs                                          |       | 442                    |       | 400 |   |
| (Gain) loss  on disposal of property and equipment                                 |       | 5                      |       | (39 | ) |
| Deferred tax  asset                                                                |       | 353                    |       | — |   |
| Impairment  of property and equipment                                              |       | —                 |       | 216 |   |
| Changes in  operating assets and liabilities:                                      |       |                   |       |   |   |
| Trade and  other receivables                                                       |       | (1,764                 | )          | (1,656 | ) |
| Inventories                                                                        |       | (107                   | )          | (2,397 | ) |
| Prepaid  expenses and supplies                                                     |       | 983                    |       | 1,092 |   |
| Deferred  charges, net                                                             |       | (6                     | )          | (1 | ) |
| Other assets                                                                       |       | (253                   | )     | 483 |   |
| Accounts  payable and accrued liabilities                                          |       | 3,413                  |       | 2,118 |   |
| Other  liabilities                                                                 |       | 926                    |       | 528 |   |
| Net cash  provided by operating activities                                         |       | 9,379                  |       | 6,653 |   |
|                                                                               |       |                   |       |   |   |
| **Investing  activities**                                                          |       |                   |       |   |   |
| Additions to  property and equipment                                               |       | (3,275                 | )          | (3,468 | ) |
| Chevys  Acquisition, net of cash acquired of $3,913                                |       | —                 |       | (74,830 | ) |
| Proceeds  from sale of property                                                    |       | —                 |       | 5 |   |
| Net cash  used in investing activities                                             |       | (3,275                 | )          | (78,293 | ) |
|                                                                               |       |                   |       |   |   |
| **Financing  activities**                                                          |       |                   |       |   |   |
| Borrowings  under long-term debt agreements                                        |       | —                 |       | 75,000 |   |
| Payments on  long-term debt agreements and capital lease obligations               |       | (64                    | )          | (76 | ) |
| Payment of  financing costs                                                        |       | —                 |       | (2,616 | ) |
| Net cash  provided by (used in) financing activities                               |       | (64                    | )          | 72,308 |   |
| Net increase  in cash and cash equivalents                                         |       | 6,040                  |       | 668 |   |
|                                                                               |       |                   |       |   |   |
| Cash and  cash equivalents at beginning of period                                  |       | 14,871                 |       | 10,690 |   |
| Cash and  cash equivalents at end of period                                        |       | $                      | 20,911     |   | $ | 11,358 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental  disclosure of cash flow information**                              |       |                   |       |   |   |
| Interest  paid                                                                     |       | $                      | 2,919      |   | $ | 1,728 |   |
| Income taxes  paid                                                                 |       | $                      | 2          |   | $ | 2 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental  disclosure of noncash investing and financing activities**         |       |                   |       |   |   |
| Preferred  and common stock issued as consideration for the Chevys Acquisition     |       | $                      | —     |   | $ | 7,349 |   |

 

See accompanying notes.

 

6

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**Real MexRestaurants, Inc. and Subsidiaries**

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

**March 26,2006**

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

 

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

 

Real Mex Restaurants, Inc.,a Delaware Corporation (together with its subsidiaries, the “Company”), wasformed on May 15, 1998.

 

The Company, primarilythrough its major subsidiaries El Torito Restaurants, Inc. (El Torito),Chevys Restaurants, LLC (Chevys) and Acapulco Restaurants, Inc.(Acapulco), currently operates 195 restaurants, of which 161 are located inCalifornia and the remainder are located in 12 other states, primarily underthe trade names El Torito Restaurant, Chevys Fresh Mex and Acapulco MexicanRestaurant Y Cantina. The Company’s other major subsidiary, Real Mex Foods, Inc.,(Real Mex) provides internal production, purchasing and distribution servicesfor the restaurant operations and also manufactures specialty products for saleto outside customers.

 

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

 

Certain information and footnote disclosures normallyincluded in consolidated financial statements in accordance with U.S. generallyaccepted accounting principles have been omitted pursuant to requirements ofthe Securities and Exchange Commission (SEC). A description of our accountingpolicies and other financial information is included in our auditedconsolidated financial statements as filed with the SEC on Form 10-K forthe year ended December 25, 2005. We believe that the disclosures includedin our accompanying interim financial statements and footnotes are adequate tomake the information not misleading, but should be read in conjunction with ourconsolidated financial statements and notes thereto included in the AnnualReport on Form 10-K. The accompanying consolidated balance sheet as of December 25,2005 has been derived from our audited financial statements

 

**2.****                                      ChevysAcquisition**

 

On January 11, 2005, the Company, through its subsidiary ChevysRestaurants LLC, purchased substantially all of the assets of Chevys, Inc.and certain of its subsidiaries (the Sellers) out of the Sellers’ Chapter 11bankruptcy proceeding, including 69 Chevys Fresh Mex® restaurants and fiveFuzio Universal Pasta® restaurants (the “Chevys Acquisition”). In addition, theCompany assumed franchise agreements for 37 franchised Chevys Fresh Mexrestaurants and five franchised Fuzio Universal Pasta restaurants. The purchaseprice consisted of approximately $76.2 million in cash and the assumption ofapproximately $5.1 million in net negative working capital, approximately $6.3million of letters of credit and approximately $0.8 million under a mortgage.In addition, the Company issued to J.W. Childs Equity Partners L.P. and itsaffiliate, JWC Chevys Co-Invest, LLC, in their capacity as unsecured creditorsof the Sellers, shares of the Company’s equity securities. The Company financedthe transaction with $75.0 million in unsecured debt financing, the proceeds ofwhich were used to fund a portion of the purchase price and a portion of theapproximately $4.2 million of fees and expenses related to the transaction.

 

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The following table presents the preliminary allocation of theacquisition costs, including professional fees and other related transactioncosts, to the assets acquired and liabilities assumed based on their estimatedfair values:

 

| Cash and  cash equivalents                |   | $       | 3,913  |   |
|-------------------------------------------|--------|---------|--------|--------|
| Trade  accounts receivable                |   | 2,641   |   |
| Inventories                               |   | 1,382   |   |
| Other  current assets                     |   | 1,178   |   |
| Property and  equipment                   |   | 42,312  |   |
| Deferred tax  asset                       |   | 3,599   |   |
| Other assets                              |   | 3,386   |   |
| Goodwill                                  |   | 51,880  |   |
| Total assets  acquired                    |   | 110,291 |   |
|                                      |   |    |   |
| Accounts  payable and accrued liabilities |   | 17,609  |   |
| Other  liabilities                        |   | 2,416   |   |
| Total  liabilities assumed                |   | 20,025  |   |
| Net assets  acquired                      |   | $       | 90,266 |   |

 

These transactions were accounted for under the purchase method ofaccounting and, accordingly, the purchase price has been allocated to theassets acquired and the liabilities assumed based on the estimated fair marketvalue at the date of the acquisition.

 

The primary reason for the Chevys Acquisition was to add acomplementary growth concept in the full-service Mexican segment of therestaurant industry. The Company attributes the goodwill associated with theChevys Acquisition to the historical financial performance and the anticipatedfuture performance of Chevys. The Company is currently determining the amount,if any, of any additional tax benefits that may have been acquired in theChevys Acquisition and is negotiating the final purchase price based upon theterms of the contract. Any change will impact the overall purchase price only.

 

The following pro forma consolidated resultsof operations have been prepared as if the Chevys Acquisition had occurred on December 27,2004 (the first day of fiscal year 2005):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 26,**               | ** ** | **March 27,** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Total  revenues                                         |       | $                                | 137,582    |   | $ | 132,695 |   |
| Net income before  redeemable preferred stock accretion |       | 863                              |       | 1,739 |   |
|                                                         |            |                                  |            |  |  |  |  |

 

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

 

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

 

Long-term debt consists ofthe following:

 

| ** **                        | ** ** | **March 26,  2006** | ** ** | **December 25,  2005** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior  secured notes due 2010    |       | $                        | 105,000    |                        | $          | 105,000 |   |
| Senior  Unsecured Credit Facility |       | 75,000                   |       | 75,000                      |       |
| Mortgage                          |       | 757                      |       | 771                         |       |
| Other                             |       | 63                       |       | 63                          |       |
|                              |       | 180,820                  |       | 180,834                     |       |
|                              |       |                     |       |                        |       |
| Less current  portion             |       | (118                     | )          | (117                        | )          |
|                              |       |                     |       |                        |       |
|                              |       | $                        | 180,702    |                        | $          | 180,717 |   |

 

On January 11, 2005, the Company entered into a $75,000 seniorunsecured credit facility (the “Senior Unsecured Credit Facility”), consistingof a single term loan maturing on December 31, 2008, all of the proceedsof which were used to finance a portion of the cash consideration for theChevys Acquisition and pay related fees and expenses. Obligations under theSenior Unsecured Credit Facility are guaranteed by the Company’s subsidiaries.Interest on the term loan outstanding under the Senior Unsecured CreditFacility accrues, at the Company’s option, at either (i) the greater ofprime or the rate which is 0.5% in excess of the federal funds rate, plus 8.5%or (ii) a reserve adjusted Eurodollar rate, plus 9.5%.As of March 26,2006, the interest rate on the Senior Unsecured Credit Facility’s term loan was14.17%.

 

8

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

 

On March 31, 2004,the Company retired the then existing Revolving Credit and Term Loan Agreementand entered into a new Amended and Restated Revolving Credit Agreement (the “Line”)providing for $30,000 of Senior Secured Credit Facilities with a lead bankacting as Lead Arranger and Administrative Agent. The Line includes a $15,000letter of credit facility and a $15,000 revolving credit facility that can beused for letters of credit. No amounts were outstanding under the Line as of March 26,2006.

 

On March 31, 2004, the Company sold $105,000 aggregate principalamount of 10% Senior Secured Notes due 2010 (the “Notes”). Interest on theNotes is payable semiannually on April 1 and October 1 each year. Theproceeds of the Notes were used to repay in full the then outstanding termloans under the Company’s prior credit facility and old subordinated notes, andthe fees associated with the Line and the sale of the Notes. The Notes includeda provision that required the Company to commence an exchange offer to exchangethe originally issued notes for new registered notes by October 27, 2004.The Company suspended and extended the exchange offer on October 22, 2004as a result of its then pending acquisition of Chevys, Inc. The Companycompleted the exchange offer for 100% of the Notes on June 7, 2005. Infiscal year 2005, the Company exceeded the capital expenditure limit under the indenturegoverning the Notes and as a result will be required to pay interest at a rateof 10.25% for the period April 1, 2006 through March 31, 2007, a0.25% increase in the stated rate. Exceeding this capital expenditure limitdoes not constitute a default with respect to the notes or the indenture.

 

The terms of the Line, theNotes and the Senior Unsecured Credit Facility include specific financial andother covenants, all of which the Company was in compliance with at March 26,2006.

 

Interest rates for the Line, the Notes and the Senior Unsecured CreditFacility are shown the following table:

 

| ** **                        | ** ** | **March 26,  2006** | ** ** | **December 25,  2005** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior  secured notes due 2010    |       | 10.00                    | %          | 10.00                       | %          |
| Senior  Unsecured Credit Facility |       | 14.17                    | %          | 14.17                       | %          |
| Mortgage                          |       | 9.28                     | %          | 9.28                        | %          |

 

**4.****                                      Capitalization**

 

**Common Stock**

 

The Company is authorized toissue 1,000,000 shares of par value $0.001 Class A Common Stock and1,000,000 shares of par value $0.001 Class B Common Stock. The terms ofthe Class B Common Stock are identical to the Class A Common Stockexcept that the holders of Class B Common Stock have no voting rights,except as provided by law. Each holder of Class B Common Stock has theright to convert any or all shares of Class B Common Stock into an equalnumber of shares of Class A Common Stock at any time. There were 300,423.16shares issued and outstanding of Class A Common Stock at March 26,2006 and December 25, 2005. There were 15,866.82 shares issued andoutstanding of Class B Common Stock at March 26, 2006 and December 25,2005.

 

**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.

 

Series A 12.5%Cumulative Compounding Redeemable Preferred Stock (Series A) and Series B13.5% Cumulative Compounding Redeemable Preferred Stock (Series B) have aliquidation preference of $1 per share, plus accreted dividends associated witheach share. With respect to dividend rights and rights of liquidation, Series Aranks senior to all classes of Common Stock and Series B. Series Branks senior to all classes of Common Stock.

 

Series C 15% CumulativeCompounding Participating Preferred stock (Series C) ranks senior withrespect to payment of dividends, liquidation, and redemption to the previouslyexisting series of preferred stock and common stock of the Company. The Series Chas a liquidation preference equal to two times the original issue price of $1per share, plus accreted dividends.

 

The liquidation preferenceon the Series A, Series B and Series C accretes at the statedrates on the liquidation preference value thereof; dividends (representing theaccreted liquidation preference) are to be paid from legally available funds,when and if declared by the board of directors. If dividends are not declared,a dividend will continue to accrue and will be paid as dividends only when andif declared, or upon a sale or liquidation of the Company or upon redemption ofthe Preferred Stock. Accretion of the liquidation preference on the RedeemablePreferred Stock was $3,898 and $3,391 during the three months ended March 26,2006 and March 27, 2005, respectively, and is reflected as an increase inthe preferred stock values and an increase in the accumulated deficit.

 

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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.

 

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**Stock Option Plans**

 

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

 

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

 

Prior to fiscal 2006, the Company accounted for stock-basedcompensation expense under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”), and related interpretations and adopted thedisclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB25, no stock-based compensation expense was reflected in net income for grantsof stock options prior to fiscal 2006 because the Company grants stock optionswith an exercise price equal to the market value of the stock on the date ofgrant.

 

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

 

A summary of the status of the Company’s twostock option plans as of March 26, 2006, and December 25, 2005, andchanges during the current year, is presented below:

 
| ** **                               | ** ** | **1998 Plan**                 | ** ** | **2000 Plan**                      | ** ** |
|------------------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding—December 25,  2005 |       | 5,932                              |       | $                                       | 10.00      |   | 72,550 |   | $ | 22.49 |   |
|                                     |       |                               |       |                                    |       |   |   |   |   |
| Granted                                  |       | —                             |       | —                                  |       | — |   | $ | — |   |
| Exercised                                |       | —                             |       | —                                  |       | — |   | — |   |
| Canceled                                 |       | —                             |       | —                                  |       | (367 | ) | 92.00 |   |
| Outstanding—March 26,  2006    |       | 5,932                              |       | $                                       | 10.00      |   | 72,183 |   | $ | 22.13 |   |
|                                     |       |                               |       |                                    |       |   |   |   |   |
| Exercisable  at March 26, 2006      |       | 5,932                              |       | $                                       | 10.00      |   | 36,959 |   | $ | 38.65 |   |

 

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

 

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

 

The Company has a managementagreement with two of its stockholders. The stockholders are paid fees equatingto .667% and .333%, respectively, of consolidated earnings before interest,income taxes, depreciation and amortization of the Company. Expenses relatingto the agreement of $124 and $117 were recorded as general and administrativeexpense in the three months ended March 26, 2006 and March 27, 2005,respectively.

 

On January 19,2005, the Company paid $833 and $166 to Bruckman, Rosser, Sherrill &Co., L.P. and FS Private Investments, LLP, respectively, for advisory andtransactional services provided to the Company pursuant to the management agreementin connection with the Chevys Acquisition.

 

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

** **

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

 

**Overview**

** **

We are one of the largestfull service, casual dining Mexican restaurant chain operators in the UnitedStates in terms of number of restaurants. As of March 26, 2006 we operated195 restaurants, of which 161 are located in California, with additionalrestaurants in Arizona, Florida, Indiana, Illinois, Maryland, Missouri, Nevada,New Jersey, New York, Oregon, Virginia and Washington. Our four majorsubsidiaries are El Torito Restaurants, Inc., which we acquired in June 2000,Acapulco Restaurants, Inc., Chevys Restaurants, LLC, which we formed inconnection with the Chevys Acquisition, and a purchasing, distribution, andmanufacturing subsidiary, Real Mex Foods, Inc.

 

El Torito, El Torito Grill, Acapulcoand Chevys, our primary restaurant concepts, offer high quality Mexican food, awide selection of alcoholic beverages and excellent guest service. In additionto the El Torito, El Torito Grill, Acapulco and Chevys concepts, we operate 16additional restaurant locations, most of which are also full service Mexicanformats, under the following brands: Las Brisas; Casa Gallardo; El PasoCantina; GuadalaHarry’s; Who Song & Larry’s; Keystone Grill; and FuzioUniversal Pasta.

 

On January 11, 2005 wecompleted the Chevys Acquisition, acquiring 69 Chevys restaurants and five FuzioUniversal Pasta restaurants and assuming franchise agreements for 37 franchisedChevys restaurants and five franchised Fuzio Universal Pasta restaurants. Thepurchase price for the Chevys Acquisition was approximately $76.2 million incash and the assumption of certain liabilities, plus the issuance of Real Mexcommon and preferred stock to J.W. Childs Equity Partners L.P. and itsaffiliate, JWC Chevys Co-Invest, LLC. See “Notes to Consolidated FinancialStatements”. Chevys’ results of operations have been included in our Company’sconsolidated financial statements since the date of the acquisition.

 

In 2005, we opened one newEl Torito restaurant in Corona, CA and a new El Torito Grill restaurant inSherman Oaks, CA. In January 2006, we opened two new El Torito restaurantsin Oxnard, CA and Temecula, CA. We plan to open six additional restaurants in2006.

 

Our restaurant revenuesinclude sales of food and alcoholic and other beverages. Other revenuesconsists primarily of sales by Real Mex Foods, Inc. to outside customersof processed and packaged prepared foods and other merchandise items.

 

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 inplace to manage cost of sales in our restaurants. The cost, availability andquality of the ingredients we use to prepare our food and beverages are subjectto a range 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 andamortization principally includes depreciation and amortization of capitalexpenditures for restaurants. Pre-opening costs are expensed as incurred andinclude costs associated with the opening of a new restaurant or the conversionof an existing restaurant to a different concept.

 

Our fiscal year consists of52 or 53 weeks and ends on the last Sunday in December of each year. Thethree months ended March 26, 2006 and March 27, 2005 consist ofthirteen weeks. When calculating comparable store sales, we include arestaurant that has been open for more than 18 months and for the entirety ofeach comparable period.

 

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**Critical AccountingPolicies**

** **

The discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with U.S. generally accepted accounting principles.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anongoing basis, we evaluate our estimates, including those related to propertyand equipment, impairment of long-lived assets, valuation of goodwill,self-insurance reserves, income taxes and revenue recognition. We base ourestimates on historical experience and on various other assumptions and factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Basedon our ongoing review, we plan to adjust our judgments and estimates wherefacts and circumstances dictate. Actual results could differ from ourestimates.

 

For further informationregarding the accounting policies that we believe to be critical accounting policiesthat affect our more significant judgments and estimates used in preparing ourconsolidated financial statements, see our report on Form 10-K filed forthe fiscal year ended December 25, 2005.

 

**Results of Operations**

** **

Our operating results forthe three months ended March 26, 2006 and March 27, 2005 areexpressed as a percentage of total revenues below:

 

| ** **                              | ** ** | **Three Months Ended**  | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **March 26, 2006** | ** ** | **March 27, 2005** | ** ** |
| Total  revenues                         |       | 100.0                   | %          | 100.0 | % |
| Cost of  sales                          |       | 25.7                    |       | 25.0 |   |
| Labor                                   |       | 34.8                    |       | 36.0 |   |
| Direct  operating and occupancy expense |       | 24.2                    |       | 23.5 |   |
| Total  operating costs                  |       | 84.7                    |       | 84.5 |   |
| General and  administrative expense     |       | 5.0                     |       | 5.8 |   |
| Depreciation  and amortization          |       | 3.3                     |       | 3.6 |   |
| Legal  settlement costs                 |       | 1.5                     |       | 0.3 |   |
| Pre-opening  costs                      |       | 0.2                     |       | 0.1 |   |
| Operating  income                       |       | 5.4                     |       | 5.4 |   |
| Interest  expense                       |       | 4.4                     |       | 4.4 |   |
| Total other  expense, net               |       | 4.3                     |       | 4.2 |   |
| Income  before tax provision            |       | 1.0                     |       | 1.1 |   |
| Net income                              |       | 0.6                     |       | 1.1 |   |

 

**Three months ended March 26, 2006compared to the three months ended March 27, 2005**

 

*Total Revenues*. Totalrevenues increased by $13.6 million, or 11.0%, to $137.6 million in the firstquarter of 2006 from $124.0 million in the first quarter of 2005 due to a $10.4million increase in restaurant revenues, a $3.0 million increase in otherrevenues and a $0.3 million increase in royalty and franchise fees. Theincrease in restaurant revenues was partially due to the fact that the threemonths ended March 27, 2005 excluded 16 days of sales in the Chevysrestaurants as the Chevys restaurants were acquired on January 11, 2005. Thisis combined with comparable store sales increases of 0.6% in the quarter andnew restaurant openings, partially offset by restaurant closures. The increasein comparable store sales was partially driven by price increases in the ElTorito restaurants of approximately 0.2%, in the Acapulco restaurants ofapproximately 0.4% and in the Chevys restaurants of approximately 1.0%. Theincrease in other revenues was primarily due to an increase in sales to outsidecustomers by Real Mex, our distribution and manufacturing subsidiary. Theincrease in royalty and franchise fees was primarily due to the timing of theChevys acquisition in the prior year.

 

*Cost of Sales*. Total cost of sales of $35.4 million in the firstquarter of 2006 increased $4.4 million or 14.1% as compared to the firstquarter of 2005. This increase was primarily due to the inclusion in ourresults of operations in 2006 of a full quarter of the Chevys restaurants costof sales versus a partial quarter in 2005, combined with     higher costs associated with the increase in sales tooutside customers by our distribution facility. As a percentage of totalrevenues, cost of sales increased to 25.7% for the first quarter of 2006 from25.0% for the first quarter of 2005.

 

*Labor*. Labor costsof $47.8 million in the first quarter of 2006 increased by $3.2 million or 7.2%as compared to the first quarter of 2005, primarily due to the increase inlabor cost dollars associated with the inclusion in our results of operationsof the Chevys restaurants for a full quarter in fiscal 2006 versus a partialquarter in fiscal 2005. Payroll and benefits remain subject to inflation andgovernment regulation, especially wage rates currently at or near the minimumwage, and expenses for health insurance

 

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and workers’ compensationinsurance. As a percentage of total revenues, labor costs decreased to 34.8%for the first quarter of 2006 from 36.0% for the first quarter of 2005,primarily due to lower hourly labor expense achieved as a result of ourcontinued focus on hourly labor controls, scheduling and reductions in turnover.

 

*Direct Operating and OccupancyExpense*. Direct operating and occupancy expense of $33.3 million in the firstquarter of 2006 increased by $4.1 million or 14.1% as compared to the firstquarter of 2005. The increase in direct operating and occupancy expense wasprimarily associated with the inclusion in our results of operations of theChevys restaurants for a full quarter in fiscal 2006 versus a partial quarterin fiscal 2005. Direct operating and occupancy expense as a percentage of salesincreased to 24.2% in the first quarter of 2006 from 23.5% in the first quarterof 2005.

 

*General and AdministrativeExpense*. General and administrative expense of $6.8 million in the firstquarter of 2006 decreased by $0.4 million or 5.4% as compared to the firstquarter of 2005 primarily due to reduced expenditure levels for legal andconsulting expenses and reductions in bonus accruals. General andadministrative expense as a percentage of sales decreased to 5.0% in the firstquarter of 2006 from 5.8% in the first quarter of 2005.

 

*Legal Settlement Costs.*We incurredlegal settlement costs of $2.0 million in the first quarter of 2006 compared to$0.4 million in the first quarter of 2005. The increase in costs relates tolawsuits filed against us in 2004 and 2005.

 

*Depreciation and amortization*. Depreciationand amortization expense was $4.5 million in both the first quarter of 2006 andthe first quarter of 2005. As a percentage of total revenues, depreciation andamortization decreased to 3.3% for the first quarter of 2006 from 3.6% for thefirst quarter of 2005.

 

*Interest Expense*. Interestexpense of $6.0 million in the first quarter of 2006 increased $0.6 million or11.5% as compared to the first quarter of 2005 primarily due to a 16 day increasein the number of days our $75.0 million senior unsecured credit facility wasoutstanding (the debt was incurred on January 11, 2005) and an increase inthe interest rate associated with this debt (the interest rate in the firstquarter of 2005 ranged from 11.93% to 12.27%, versus 14.17% during the firstquarter of 2006). As a percentage of total revenues, interest expense was 4.4%in both the first quarter of 2006 and the first quarter of 2005.

 

*Income tax provision.* The income tax provision for the firstquarter of 2006 and 2005 was based on estimated annual effective tax rates. Arate of 39.0% was applied to the first quarter of 2006. In the first quarter of2005, a net effective tax rate of 0.0% was applied as the Company offset incometaxes by a reversal of the existing valuation allowance. These rates arecomprised of the combined federal and state statutory rates.

 

**Liquidity and CapitalResources**

** **

Our principal liquidityrequirements are to service our debt and meet our capital expenditure andworking capital needs. Our indebtedness, including capital lease obligations,at March 26, 2006 was $182.0 million, and we had $9.5 million of revolvingcredit availability under our revolving credit facility. Our ability to makeprincipal and interest payments and to fund planned capital expenditures willdepend on our ability to generate cash in the future, which, to a certainextent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control. Based on our currentlevel of operations, we believe our cash flow from operations, available cashand available borrowings under our revolving credit facility will be adequateto meet our liquidity needs for the near future. In addition, we may partiallyfund restaurant openings through credit received from trade suppliers andlandlord contributions, if favorable terms are available. We cannot assure you,however, that our business will generate sufficient cash flow from operationsor that future borrowing will be available to us under our revolving creditfacility in an amount sufficient to enable us to service our indebtedness or tofund our other liquidity needs. If we consummate an acquisition, our debtservice requirements could increase. We may need to refinance all or aportion of our indebtedness on or before maturity. We cannot assure you that wewill be able to refinance any of our indebtedness on commercially reasonableterms or at all.

 

**Working Capital andCash Flows**

** **

We presently have, in 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, accrued compensationand related employee benefits costs, sales and property taxes and giftcertificate and gift card liabilities. We do not have significant receivablesand we receive trade credit based upon negotiated terms in purchasing food andsupplies. Funds available from cash sales not needed immediately to pay forfood and supplies or to finance receivables or inventories typically have beenused for capital expenditures and debt service payments under our existingindebtedness.

 

*Operating Activities*. We had netcash provided by operating activities of $9.4 million for the three monthsended March 26, 2006 compared with net cash provided by operatingactivities of $6.7 million for the three months ended March 27, 2005. Theincrease in cash provided by operating activities was primarily attributable tothe absence of cash expenditures incurred in 2005 to

 

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generate increased inventorylevels in connection with the initiation of distribution services to the Chevysrestaurants by Real Mex Foods, Inc.

 

*Investing Activities*. We had netcash used in investing activities of $3.3 million and $78.3 million for thethree months ended March 26, 2006 and March 27, 2005, respectively.The $75.0 million reduction in cash used in investing activities was primarilydue to the $74.8 million Chevys Acquisition that was completed on January 11,2005. Additions to property and equipment were $3.3 million for the threemonths ended March 26, 2006 versus $3.5 million for the three months endedMarch 27, 2005. We expect to make capital expenditures totalingapproximately $24.2 million in fiscal 2006, of which approximately $12.4million is expected to be spent on eight new restaurants, $9.6 million formaintenance capital expenditures and $2.2 million for the remodel andrefurbishment of existing restaurants.

 

These andother similar costs may be higher in the future due to inflation and otherfactors. We expect to fund the new restaurants and the other capitalexpenditures described above from cash flow from operations, available cash,available borrowings under our Senior Credit Facility, landlord contributions(if favorable terms are available) and trade financing received from tradesuppliers.

 

*FinancingActivities*. We had net cash used in financingactivities of $0.1 million for the three months ended March 26, 2006compared with net cash provided by financing activities of $72.3 million forthe three months ended March 27, 2005. The decrease in cash provided byfinancing activities was primarily due to the issuance of $75.0 million innotes under a senior unsecured credit facility to fund the Chevys Acquisitionin January 2005 reduced by the related financing costs of $2.6 million.

 

**Debt and OtherObligations**

 

*Generally.* On January 11, 2005, weentered into a $75.0 million senior unsecured credit facility consisting of asingle term loan maturing on December 31, 2008, all of the proceeds ofwhich were used to finance a portion of the cash consideration for the ChevysAcquisition and pay related fees and expenses.

 

On March 31, 2004, we sold $105.0 million aggregate principalamount of our senior secured notes. At the closing of the sale of our seniorsecured notes, we used the proceeds from the sale of these notes and asale-leaseback transaction to repay in full term loans then outstanding underour prior credit facility of $70.2 million and subordinated notes of $44.4million, and entered into a new senior secured credit facility, or our SeniorCredit Facility.

 

*Senior Credit Facility*. Our Senior CreditFacility was initially comprised of a $15.0 million revolving credit facilitywhich had a $2.0 million sub-limit for letters of credit, which we refer to asour Revolving Credit Facility, and a $15.0 million letters of credit facilitywhich we refer to as our Letters of Credit Facility. At the closing of the saleof our senior secured 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. On January 11, 2005, concurrentwith the closing of the Chevys Acquisition, we amended the Senior CreditFacility to, among other things, modify certain covenants, change the maturitydate to June 30, 2008 (subject to extension to March 31, 2009provided that the Senior Unsecured Credit Facility has been repaid andterminated in full on or prior to June 29, 2008), and increased thesub-limit for letters of credit availability under the Revolving CreditFacility from $2.0 million to $15.0 million (subject to an overall limitationof $30.0 million under the Senior Credit Facility). In December of 2005,we further amended the Revolving Credit Facility to increase the annual limitof permitted capital expenditures to $30.0 million.

 

Under our Senior Credit Facility, interest accrues based upon a totalleverage ratio calculation. The interest under the Senior Credit Facilityaccrues, at our option, at either (i) the base rate of interest in effectfrom time to time, which is the higher of the lender’s prime rate as announcedfrom time to time or the federal funds rate plus 0.50%, plus the currentapplicable margin of 1.75% or (ii) a London Inter Bank Offering Rate fordeposits as reported by a generally recognized financial reporting service plusthe current applicable margin of 4.0%. Our Senior Credit Facility is guaranteedby our subsidiaries and secured by, among other things, first priority pledgesof all of the equity interests of our direct and indirect subsidiaries, andfirst priority security interests (subject to customary exceptions) insubstantially all of our current and future property and assets, with certainlimited exceptions. The lien on the collateral securing the Senior CreditFacility is senior to the lien on the collateral securing our senior securednotes and the guarantees of these notes.

 

Our Senior Credit Facility contains various affirmative and negativecovenants and restrictions, which among other things, requires us to meetcertain financial tests (including certain leverage and cash flow ratios), andlimits our and our subsidiaries’ ability to incur or guarantee additionalindebtedness, make certain capital expenditures, pay dividends or make otherequity distributions, purchase or redeem capital stock, make certaininvestments, enter into arrangements that restrict dividends from subsidiaries,sell assets, engage in transactions with affiliates and effect a consolidationor merger. We are required to maintain certain cash flow ratios determined onan annual basis equal to (i) 1.40 to 1.00 for the period December 31,2004 to December 31, 2005, (ii) 1.70 to 1.00 for the period January 1,2006 to December 31, 2006, (iii) 1.80 to 1.00 for the period January 1,2007 to December 31, 2007, and (iv) 1.90 to 1.00 for the period January 1,2008 and thereafter until maturity. Pursuant to the terms of the Senior CreditFacility, cash flow ratio is defined as the ratio of (a) Consolidated CashFlow (as defined therein) to (b) Consolidated Financial Obligations (asdefined

 

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therein). Wewere in compliance with all specified financial and other covenants under theSenior Credit Facility at March 26, 2006.

 

*Senior Unsecured Credit Facility*. Concurrentlywith the closing of the Chevys Acquisition, we entered into a $75.0 millionSenior Unsecured Credit Facility, consisting of a single term loan maturing on December 31,2008, all of the proceeds of which were used to finance a portion of the cashconsideration for the Chevys Acquisition and pay related fees and expenses. Ourobligations under the senior unsecured credit facility are guaranteed by oursubsidiaries. Interest on the term loan outstanding under the senior unsecured creditfacility accrues, at our option, at either (i) the greater of prime andthe rate which is 0.5% in excess of the federal funds rate, plus 8.5% or (ii) areserve adjusted Eurodollar rate, plus 9.5%. As of May 5, 2006, theinterest rate on the term loan was 14.17%.

 

Our senior unsecured credit facility contains various affirmative andnegative covenants, which among other things, requires us to meet certainfinancial tests (including certain leverage and interest coverage ratios) andlimits our and our subsidiaries’ ability to incur or guarantee additionalindebtedness, grant certain liens, make certain restricted payments, makecapital expenditures, engage in transactions with affiliates, make certaininvestments, sell our assets, make acquisitions, effect a consolidation ormerger and amend or modify instruments governing certain indebtedness(including relating to our senior secured notes and the Senior CreditFacility). We are required to maintain certain minimum interest coverage ratiosranging from (i) 1.85 to 1.00 for the four fiscal quarters ending on orprior to September 30, 2005 through March 31, 2006, (ii) 2.00 to1.00 for the four fiscal quarters ending on or prior to June 30, 2006through December 31, 2006, (iii) 2.15 to 1.00 for the fiscal quartersending on or prior to March 31, 2007 through December 31, 2007, and (iv) 2.30to 1.00 thereafter until maturity. Pursuant to the terms of the SeniorUnsecured Credit Facility, interest coverage ratio is defined as the ratio asof the last day of any fiscal quarter of (a) Consolidated EBITDA (asdefined therein) for the four-fiscal quarter period then ending to (b) ConsolidatedInterest Expense (as defined therein) for such four-fiscal quarter period. We werein compliance with all specified financial and other covenants under the SeniorUnsecured Credit Facility at March 26, 2006.

 

*Senior Secured Notes due 2010*. Interest on oursenior secured notes accrues at a rate of 10% per annum and is payable semiannuallyon April 1 and October 1 of each year. The stated rate was increasedto 10.25% for the period beginning April 1, 2006 and ending March 31,2007, due to our having exceeded a capital expenditure threshold under theindenture governing the notes for fiscal year 2005. Exceeding this capitalexpenditure threshold does not constitute a default with respect to our seniorsecured notes or the indenture.

 

Our senior secured notes are fully and unconditionally guaranteed on asenior secured basis by all of our present and future domestic subsidiarieswhich are restricted subsidiaries under the indenture governing our seniorsecured notes. Our senior secured notes and related guarantees are secured bysubstantially all of our and our domestic restricted subsidiaries’ tangible andintangible assets, subject to the prior ranking claims on such assets by thelenders under our Senior Credit Facility. The indenture governing our seniorsecured notes contains various affirmative and negative covenants, subject to anumber of important limitations and exceptions, including but not limited thoselimiting our ability to incur additional indebtedness, make capitalexpenditures, pay dividends, redeem stock or make other distributions, issuestock of our subsidiaries, make certain investments or acquisitions, grantliens on assets, enter into transactions with affiliates, merge, consolidate ortransfer substantially all of our assets, and transfer and sell assets. Thecovenant that limits our incurrence of indebtedness requires that, after givingeffect to any such incurrence of indebtedness and the application of theproceeds thereof, our fixed charge coverage ratio as of the date of suchincurrence will be at least (i) 2.25 to 1.00 in the case of any incurrenceon or before April 1, 2006 and (ii) 2.50 to 1.00 in the case of anyincurrence after April 1, 2006. The indenture defines consolidated fixedcharge coverage ratio as the ratio of Consolidated Cash Flow (as definedtherein) to Fixed Charges (as defined therein). We were in compliance with allspecified financial and other covenants under the senior secured notesindenture at March 26, 2006.

 

We can redeem our senior secured notes on or after April 1, 2007,except that we may redeem up to 35% of our senior secured notes before April 1,2007 with the proceeds of one or more public equity offerings. We are requiredto redeem our senior secured notes under certain circumstances involving achange of control, and we also have the right to redeem our senior securednotes prior to April 1, 2007 in connection with a change in control.Additionally, if we or any of our domestic restricted subsidiaries engage inassets sales, we generally must invest the net cash proceeds from such sales inour business within 360 days or prepay the indebtedness obligations under ourRevolving Credit Facility or certain other secured indebtedness or make anoffer to purchase a portion of our senior secured notes.

 

On June 9, 2004, we filed a registration statement with respect tonotes having substantially identical terms as our senior secured notes, as part ofan offer to exchange registered notes for these notes. We completed theexchange offer for 100% of our senior secured notes on June 7, 2005.

 

*Mortgage.* Concurrently with the closing of theChevys Acquisition, we assumed a $0.8 million mortgage secured by the buildingand improvements of one of the restaurants acquired in the transaction. Themortgage carries a fixed annual interest rate of 9.28% and requires equalmonthly payments of principal and interest through April 2015.

 

*Capital Leases*. In conjunction with ouracquisition of El Torito, we assumed capital lease obligations, collateralizedwith leasehold improvements, in an aggregate amount of $9.2 million. Theremaining capital lease obligations have a weighted-average interest rate of9.4%. As of March 26, 2006, the principal amount due relating to capitallease obligations was $1.1 million. Principal and interest payments on thecapital lease obligations are due monthly and range from $750 to $7,000 permonth. The capital lease

 

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obligationsmature between 2006 and 2025.

 

**Inflation**

** **

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

 

**Recent Development**

** **

**We have appointed financial advisors to assist our Companyin exploring and evaluating strategic alternatives. We can give no assurancesthat we will pursue any strategic alternatives.**

** **

**Item 3.**          Quantitative and Qualitative DisclosuresAbout 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 2006 and 2005 were denominated in U.S. dollars.Therefore, foreign currency fluctuations did not materially affect ourfinancial results in those periods.

 

We are also subject tomarket risk from exposure to changes in interest rates based on our financingactivities. This exposure relates to borrowings under our senior secured andunsecured credit facilities that are payable at floating rates of interest. Wecurrently do not have any borrowings outstanding under our Revolving CreditFacility. We currently have $75.0 million outstanding under our SeniorUnsecured Credit Facility. A hypothetical 10% fluctuation in interest rates, asof May 1, 2006, would result in an after tax reduction of $0.7 million inearnings in fiscal 2006.

 

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

 

**Item 4.****         ****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 CFO concluded that, as of the end of therecord period covered by this report, our disclosure controls and proceduresare effective to provide reasonable assurance that information required to bedisclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms. There was no changein our internal control over financial reporting during our most recentlycompleted fiscal quarter that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART IIOTHER INFORMATION**

** **

**Item 1. Legal Proceedings**

** **

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

 

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**Item1A. Risk Factors**

** **

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

 

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

** **

Not applicable.

 

**Item 3. Defaults UponSenior Securities**

** **

Not applicable.

 

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

** **

Not applicable.

 

**Item 5. Other Information**

** **

Not applicable.

 

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**Item6.**           Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.20                |       | Form of Retention Agreement dated as of February 21, 2006,  by and between Real Mex Restaurants, Inc. and Messrs. Tanner, Rink,  Angulo and Wolfe. (Filed with the Securities and Exchange Commission as Exhibit 10.20  to the Company’s Annual Report on Form 10-K (File No. 333-116310)  on February 21, 2006 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.23                |       | Third Amendment, dated as of January 6, 2006, among Real Mex  Restaurants, Inc., Acapulco Restaurants, Inc., El Torito  Restaurants, Inc., El Torito Franchising Company, Acapulco Restaurants  of Encinitas, Inc., TARV, Inc. Acapulco Restaurant of Ventura, Inc.,  Acapulco Restaurant of Westwood, Inc., Acapulco Mark Corp., Murray  Pacific, ALA Design, Inc., Real Mex Foods, Inc., Acapulco  Restaurant of Downey, Inc., Acapulco Restaurant of Moreno Valley, Inc.,  El Paso Cantina, Inc., CKR Acquisition Corp., Chevys Restaurants, LLC,  Fleet National Bank and Union Bank of California, N.A. (Filed with the  Securities and Exchange Commission as Exhibit 10.23 to the Company’s  Annual Report on Form 10-K (File No. 333-116310) on February 21,  2006 and incorporated by reference herewith) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1                 |       | Certification pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief  Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2                 |       | Certification pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief  Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1                 |       | Certification pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of  the Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.2                 |       | Certification pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of  the Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                      | REAL MEX RESTAURANTS, INC. |
|---------------------------|---------------------------------|
|                      |                            |   |
|                      |                            |   |
| Dated: May 08,  2006 | By:                             | /s/ Frederick F. Wolfe |
|                      |                            | Frederick F. Wolfe |
|                      |                            | President & Chief Executive  Officer  (principal executive officer) |
|                      |                            |   |
|                      |                            |   |
| Dated: May 08,  2006 | By:                             | /s/ Steven Tanner |
|                      |                            | Steven Tanner |
|                      |                            | Chief Financial Officer  (principal financial and accounting officer) |

 

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