##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 28, 2008
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to.
 Commission file number 333-116310
 REAL MEX RESTAURANTS, INC.
  Delaware
    
    13-4012902(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5660 Katella Avenue, Suite 100
Cypress, CA 90630
 (562)-346-1200
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
    
    Smaller Reporting Company o
 o þ




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##### 



Real Mex Restaurants, Inc.
 Index
 PART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22SIGNATURE
    
    
    23Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
 This report includes forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act).
Forward looking statements are those that do not relate solely to historical fact. They include,
but are not limited to, any statement that may predict, forecast, indicate or imply future results,
performance, achievements or events. They may contain words such as believe, anticipate,
expect, estimate, intend, project, plan, will, should, may, or could or words or
phrases of similar meaning. They may relate to, among other things: our liquidity and capital
resources; legal proceedings and regulatory matters involving our Company; food-borne illness
incidents; increases in the cost of ingredients; our dependence upon frequent deliveries of food
and other supplies; our vulnerability to changes in consumer preferences and economic conditions;
our ability to compete successfully with other casual dining restaurants; our ability to expand;
and anticipated growth in the restaurant industry and our markets.
 These forward looking statements reflect our current views with respect to future events and
are based on assumptions and subject to risks and uncertainties, including, but not limited to,
economic, competitive, governmental and technological factors outside of our control, that
may cause actual results to differ materially from trends, plans or expectations set forth in the
forward looking statements. These risks and uncertainties may include these factors and the risks
and uncertainties described elsewhere in this report and in Item 1A Risk Factors of our annual
report on Form 10-K filed with the SEC on March 28, 2008. Given these risks and uncertainties, we
urge you to read this report completely and with the understanding that actual future results
may be materially different from what we plan or expect. All of the forward-looking statements made
in this Form 10-Q are qualified by these cautionary statements and we cannot assure you that the
actual results or developments anticipated by our Company will be realized or, even if
substantially realized, that they will have the expected consequences to or effects on our Company
or our business or operations. In addition, these forward-looking statements present our estimates
and assumptions only as of the date of this report. Except for our ongoing obligation to disclose
material information as required by federal securities laws, we do not intend to update you
concerning any future revisions to any forward looking statements to reflect events or
circumstances occurring after the date of this report.
 Unless otherwise provided in this report, references to we, us, our and Company refer
to Real Mex Restaurants, Inc. and its consolidated subsidiaries.
  3




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Real Mex Restaurants, Inc.
 
 Consolidated Balance Sheets (unaudited)
(in thousands, except for share data)
 September 28,
    
    
    December 30,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,052
    
    
    $
    2,323Trade receivables, net
    
    
    9,257
    
    
    
    10,160Other receivables
    
    
    2,817
    
    
    
    2,594Inventories
    
    
    13,239
    
    
    
    12,049Deferred compensation plan assets
    
    
    2,242
    
    
    
    3,144Prepaid expenses and other current assets
    
    
    6,986
    
    
    
    7,186Current portion of favorable lease asset, net
    
    
    3,046
    
    
    
    3,454Total current assets
    
    
    39,639
    
    
    
    40,910Property and equipment, net
    
    
    99,722
    
    
    
    96,179Goodwill, net
    
    
    130,621
    
    
    
    160,621Intangible assets
    
    
    109,000
    
    
    
    113,000Deferred charges
    
    
    2,220
    
    
    
    3,115Favorable lease asset, less current portion, net
    
    
    9,092
    
    
    
    11,313Other assets
    
    
    9,275
    
    
    
    9,346Total assets
    
    $
    399,569
    
    
    $
    434,484Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    30,146
    
    
    $
    22,721Accrued self-insurance reserves
    
    
    16,005
    
    
    
    15,479Accrued compensation and benefits
    
    
    12,007
    
    
    
    17,402Other accrued liabilities
    
    
    16,849
    
    
    
    14,014Related party payables
    
    
    20
    
    
    
    2,505Current portion of long-term debt
    
    
    2,270
    
    
    
    12,579Current portion of capital lease obligations
    
    
    480
    
    
    
    433Total current liabilities
    
    
    77,777
    
    
    
    85,133Long-term debt, less current portion
    
    
    171,124
    
    
    
    172,057Capital lease obligations, less current portion
    
    
    1,038
    
    
    
    1,118Unfavorable lease liability, less current portion, net
    
    
    3,462
    
    
    
    4,394Other liabilities
    
    
    12,772
    
    
    
    8,669Total liabilities
    
    
    266,173
    
    
    
    271,371Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $.001 par value, 1,000 shares
authorized, issued and outstanding at September
28, 2008 and December 30, 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    207,110
    
    
    
    201,706Accumulated deficit
    
    
    (73,714
    )
    
    
    (38,593
    )Total stockholders equity
    
    
    133,396
    
    
    
    163,113Total liabilities and stockholders equity
    
    $
    399,569
    
    
    $
    434,484
   4




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Real Mex Restaurants, Inc.
 
 Consolidated Statements of Operations (unaudited)
(in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Restaurant revenues
    
    $
    126,262
    
    
    $
    130,859
    
    
    $
    394,054
    
    
    $
    401,036Other revenues
    
    
    10,446
    
    
    
    10,799
    
    
    
    31,152
    
    
    
    26,675Royalty and franchise fees
    
    
    753
    
    
    
    852
    
    
    
    2,360
    
    
    
    2,885Total revenues
    
    
    137,461
    
    
    
    142,510
    
    
    
    427,566
    
    
    
    430,596Costs and expenses:Cost of sales
    
    
    34,607
    
    
    
    36,588
    
    
    
    106,339
    
    
    
    105,710Labor
    
    
    49,056
    
    
    
    49,423
    
    
    
    152,801
    
    
    
    151,329Direct operating and occupancy expense
    
    
    37,842
    
    
    
    38,190
    
    
    
    112,955
    
    
    
    112,760General and administrative expense
    
    
    6,923
    
    
    
    7,622
    
    
    
    22,652
    
    
    
    23,873Depreciation and amortization
    
    
    6,119
    
    
    
    6,150
    
    
    
    18,432
    
    
    
    18,068Pre-opening costs
    
    
    983
    
    
    
    524
    
    
    
    2,318
    
    
    
    1,380Goodwill and intangible asset impairment
    
    
    
    
    
    
    
    
    
    
    34,000
    
    
    
    Impairment of property and equipment
    
    
    
    
    
    
    
    
    
    
    1,623
    
    
    
    Operating income (loss)
    
    
    1,931
    
    
    
    4,013
    
    
    
    (23,554
    )
    
    
    17,476Other income (expense):Interest expense
    
    
    (4,249
    )
    
    
    (4,788
    )
    
    
    (13,487
    )
    
    
    (14,476
    )Other income, net
    
    
    1,271
    
    
    
    (178
    )
    
    
    1,970
    
    
    
    1,680Total other expense, net
    
    
    (2,978
    )
    
    
    (4,966
    )
    
    
    (11,517
    )
    
    
    (12,796
    )(Loss) income before income tax provision (benefit)
    
    
    (1,047
    )
    
    
    (953
    )
    
    
    (35,071
    )
    
    
    4,680Income tax provision (benefit)
    
    
    33
    
    
    
    (345
    )
    
    
    50
    
    
    
    1,918Net (loss) income
    
    $
    (1,080
    )
    
    $
    (608
    )
    
    $
    (35,121
    )
    
    $
    2,762
   5




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Real Mex Restaurants, Inc.
 
 Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 Nine Months EndedSeptember 28,
    
    
    September 30,2008
    
    
    2007Operating activitiesNet (loss) income
    
    $
    (35,121
    )
    
    $
    2,762Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,771
    
    
    
    16,940Amortization of:Favorable lease asset and unfavorable lease liability, net
    
    
    1,661
    
    
    
    1,128Debt premium
    
    
    (879
    )
    
    
    (1,270
    )Deferred financing costs
    
    
    966
    
    
    
    1,190Goodwill and intangible asset impairment
    
    
    34,000
    
    
    
    Gain on disposal of property and equipment
    
    
    (403
    )
    
    
    (755
    )Gain on lease termination
    
    
    (600
    )
    
    
    Impairment of property and equipment
    
    
    1,623
    
    
    
    Stock-based compensation expense
    
    
    336
    
    
    
    628Deferred tax asset
    
    
    
    
    
    
    1,896Other
    
    
    
    
    
    
    232Changes in operating assets and liabilities:Trade and other receivables
    
    
    680
    
    
    
    (3,241
    )Inventories
    
    
    (1,190
    )
    
    
    (1,802
    )Deferred compensation plan assets
    
    
    902
    
    
    
    (603
    )Prepaid expenses and other current assets
    
    
    608
    
    
    
    (4,107
    )Related party payable
    
    
    47
    
    
    
    103Deferred charges, net
    
    
    29
    
    
    
    (158
    )Other assets
    
    
    (337
    )
    
    
    168Accounts payable and accrued liabilities
    
    
    4,917
    
    
    
    3,327Other liabilities
    
    
    4,139
    
    
    
    2,600Net cash provided by operating activities
    
    
    28,149
    
    
    
    19,038Investing activitiesPurchases of property and equipment
    
    
    (21,361
    )
    
    
    (26,990
    )Sale of Fuzio trademark
    
    
    
    
    
    
    1,200Net proceeds from lease termination
    
    
    600
    
    
    
    Net proceeds from disposal of property and equipment
    
    
    301
    
    
    
    4,662Net cash used in investing activities
    
    
    (20,460
    )
    
    
    (21,128
    )Financing activitiesNet (repayment)/borrowings under revolving credit facility
    
    
    (10,650
    )
    
    
    1,900Borrowings under long-term debt agreements
    
    
    980
    
    
    
    981Payments on long-term debt agreements and capital lease obligations
    
    
    (726
    )
    
    
    (878
    )Payment of financing costs
    
    
    (100
    )
    
    
    (534
    )Capital contributions
    
    
    2,536
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (7,960
    )
    
    
    1,469Net decrease in cash and cash equivalents
    
    
    (271
    )
    
    
    (621
    )Cash and cash equivalents at beginning of period
    
    
    2,323
    
    
    
    2,710Cash and cash equivalents at end of period
    
    $
    2,052
    
    
    $
    2,089Supplemental disclosure of cash flow informationInterest paid
    
    $
    10,777
    
    
    $
    12,197Income taxes paid
    
    $
    50
    
    
    $
    69
   6




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Real Mex Restaurants, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements (unaudited)
September 28, 2008
(in thousands, except for share data)
 1. Basis of Presentation
  ® ® ®
     2. Impairment of Goodwill and Intangible Assets
   7




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3. Impairment of Long-Lived Assets
  4. Intangible Assets
  September 28,
    
    
    December 30,2008
    
    
    2007Trademarks
    
    $
    97,500
    
    
    $
    101,500Franchise agreements
    
    
    11,500
    
    
    
    11,500$
    109,000
    
    
    $
    113,000
 5. Long-Term Debt
  September 28,
    
    
    December 30,2008
    
    
    2007Senior Secured Notes due 2010
    
    $
    105,000
    
    
    $
    105,000Senior Secured Notes unamortized debt premium
    
    
    1,758
    
    
    
    2,637Senior Secured Revolving Credit Facility
    
    
    350
    
    
    
    11,000Senior Unsecured Credit Facility
    
    
    65,000
    
    
    
    65,000Mortgage
    
    
    608
    
    
    
    656Other
    
    
    678
    
    
    
    343173,394
    
    
    
    184,636Less current portion
    
    
    (2,270
    )
    
    
    (12,579
    )$
    171,124
    
    
    $
    172,057
 Senior Secured Notes due 2010
  8




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Senior Secured Revolving Credit Facilities
      9




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##### Table of Contents



Senior Unsecured Credit Facility
  Mortgage.
  September 28,
    
    
    December 30,2008
    
    
    2007Senior Secured Notes due 2010
    
    
    10.25
    %
    
    
    10.00
    %Senior Secured Revolving Credit Facilities
    
    
    5.22 to 6.25
    %
    
    
    7.02 to 8.00
    %Senior Unsecured Credit Facility
    
    
    7.75
    %
    
    
    9.83
    %Mortgage
    
    
    9.28
    %
    
    
    9.28
    %Other
    
    
    3.98
    %
    
    
    6.45 to 7.75
    %
  10




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6. Capitalization
 Common Stock
  Stock Option Plans
    Weighted average fair value of grants
    
    $
    39.43Risk-free interest rate
    
    
    4.52
    %Expected volatility
    
    
    42.28
    %Expected life in years
    
    
    6.15
  WeightedAverageShares
    
    
    Exercise PriceOutstanding at December 30, 2007
    
    
    79,850
    
    
    $
    81.50Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited/expired
    
    
    (15,950
    )
    
    
    81.50Outstanding at September 28, 2008
    
    
    63,900
    
    
    
    81.50Vested and expected to vest at September 28, 2008
    
    
    60,376
    
    
    
    81.50Exercisable at September 28, 2008
    
    
    25,250
    
    
    
    81.50
   11




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##### Table of Contents



7. Related Party Transactions
   8. Impact of Recently Issued Accounting Principles
    9. Subsequent Event
    12




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Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
contains forward looking statements within the meaning of the federal securities laws. See the
discussion under the heading Forward-Looking Statements elsewhere in this report.
 Overview
              13




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Critical Accounting Policies
   Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    25.2
    
    
    
    25.7
    
    
    
    24.9
    
    
    
    24.5Labor
    
    
    35.7
    
    
    
    34.7
    
    
    
    35.7
    
    
    
    35.1Direct operating and occupancy expense
    
    
    27.5
    
    
    
    26.8
    
    
    
    26.4
    
    
    
    26.2Total operating costs
    
    
    88.4
    
    
    
    87.2
    
    
    
    87.0
    
    
    
    85.9General and administrative expense
    
    
    5.0
    
    
    
    5.3
    
    
    
    5.3
    
    
    
    5.5Depreciation and amortization
    
    
    4.5
    
    
    
    4.3
    
    
    
    4.3
    
    
    
    4.2Pre-opening costs
    
    
    0.7
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.3Operating income (loss)
    
    
    1.4
    
    
    
    2.9
    
    
    
    (5.5
    )
    
    
    4.1Interest expense
    
    
    3.1
    
    
    
    3.4
    
    
    
    3.2
    
    
    
    3.4Total other expense, net
    
    
    2.2
    
    
    
    3.5
    
    
    
    2.7
    
    
    
    3.0(Loss) income before tax provision
    
    
    (0.8
    )
    
    
    (0.6
    )
    
    
    (8.2
    )
    
    
    1.1Net (loss) income
    
    
    (0.8
    )
    
    
    (0.4
    )
    
    
    (8.2
    )
    
    
    0.6
 Three months ended September 28, 2008 compared to the three months ended September 30, 2007
 Total Revenues
  14




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Cost of Sales
 Labor
 Direct Operating and Occupancy Expense
 General and Administrative Expense
 Depreciation and amortization
 Interest Expense
 Income tax provision.
 Nine months ended September 28, 2008 compared to the nine months ended September 30, 2007
 Total Revenues
 Cost of Sales
 Labor
  15




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Direct Operating and Occupancy Expense
 General and Administrative Expense
 Depreciation and amortization
 Goodwill and intangible assets impairment.
 Interest Expense.
 Income tax provision
 Liquidity and Capital Resources
   16




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Working Capital and Cash Flows
  Operating Activities
 Investing Activities
  Financing Activities
 Debt and Other Obligations
 Senior Secured Notes due 2010
  17




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Senior Secured Revolving Credit Facilities
       18




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Senior Unsecured Credit Facility
 Effective
November 13, 2008, concurrent with the Exchange, the Company executed a Limited Waiver, Consent and
Amendment to its Senior Unsecured Credit Facility which provided a change in the interest rate from variable to fixed
and amended the Maximum Leverage Ratio, Minimum Interest Coverage Ratio and Capital Expenditure covenants for the
period ending September 28, 2008 and thereafter.  Mortgage.
  September 28,
    
    
    December 30,2008
    
    
    2007Senior Secured Notes due 2010
    
    
    10.25
    %
    
    
    10.00
    %Senior Secured Revolving Credit Facilities
    
    
    5.22 to 6.25
    %
    
    
    7.02 to 8.00
    %Senior Unsecured Credit Facility
    
    
    7.75
    %
    
    
    9.83
    %Mortgage
    
    
    9.28
    %
    
    
    9.28
    %Other
    
    
    3.98
    %
    
    
    6.45 to 7.75
    %
 Capital Leases
  19




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Inflation
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Changes In Internal Controls Over Financial Reporting
   20




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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
   21




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Item 6. Exhibits
 Exhibit No.
    
    Description10.1*
    

Limited
Waiver, Consent and Amendment No. 3 to Second Amended and Restated Credit Agreement dated November 13, 2008.10.2*
    

Limited
Waiver, Consent and Amendment to Amended and Restated Credit
Agreement dated November 13, 2008.10.3*
    

Termination
Agreement (Management Services Agreement) dated November 13, 2008.31.1*
    
    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.
 *
    
    Filed herewith  22




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SIGNATURE
  REAL MEX RESTAURANTS, INC.Dated: November 13, 2008
    By:
    /s/ Frederick F. WolfeFrederick F. WolfePresident & Chief Executive Officer and Director
(Principal Executive Officer)Dated: November 13, 2008
    By:
    /s/ Steven TannerSteven TannerChief Financial Officer
(Principal Financial Officer and Accounting Officer)  23




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EXHIBIT INDEX
 Exhibit No.
    
    Description10.1*
    

Limited
Waiver, Consent and Amendment No. 3 to Second Amended and
Restated Credit Agreement dated November 13, 2008.10.2*
    

Limited
Waiver, Consent and Amendment to Amended and Restated Credit
Agreement dated November 13, 2008.10.3*
    

Termination
Agreement (Management Services Agreement) dated November 13, 2008.31.1*
    
    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.
 *
    
    Filed herewith  24