**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTSPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 
| **ý**                                           | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                        |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |       |                                                                                                                                                                                                                       |
| **For the fiscal year ended December 25, 2005** |
|                                                 |       |                                                                                                                                                                                                                       |
| **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**

 

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**Real Mex Restaurants, Inc.**

(Exact name of Registrant as specified in its charter)

 
| **DELAWARE**                                                     | ** ** | **13-4012902**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or other jurisdiction of   incorporation or organization) |       | (I.R.S. Employer   Identification No.) |
|                                                             |       |                                   |
| **5660 Katella Avenue,  Suite 100, Cypress, CA**            | ** ** | **90630**                              |
| (Address of principal executive offices)                         |       | (Zip Code)                             |

 
| Registrant’s telephone number, including area  code:   **(562) 346-1200**    |
|--------------------------------------------------------------------------------------------------|
| **Securities registered pursuant to Section 12(b) of  the Act:   NONE** |
| **Securities registered pursuant to Section 12(g) of  the Act:   NONE** |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes oNo ý

 

Indicateby check mark if the registrant is not required to file reports to file reportspursuant to Section 13 or Section 15(d) of the Act.  Yes oNo ý

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý.

 

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

 

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

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant is not applicable as no public market for thevoting stock of the registrant exists.

 

As of February 21,2006, Real Mex Restaurants, Inc. had outstanding 300,423 shares of Class ACommon Stock, par value $0.001 per share, and 15,867 shares of Class BCommon Stock, par value $0.001 per share.

 

DOCUMENTS INCORPORATED BY REFERENCE:

**None**

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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 looking statements are those that donot relate solely to historical fact. They include, but are not limited to, anystatement that may predict, forecast, indicate or imply future results,performance, achievements or events. They may contain words such as “believe,” “anticipate,”“expect,” “estimate,” “intend,” “project,” “plan,” “will,” “should,” “may,” or “could”or words or phrases of similar meaning. They may relate to, among other things:our liquidity and capital resources; legal proceedings and regulatory mattersinvolving our Company; food-borne illness incidents; increases in the cost ofingredients; our dependence upon frequent deliveries of food and othersupplies; our vulnerability to changes in consumer preferences and economicconditions; our ability to compete successfully with other casual diningrestaurants; our ability to expand; and anticipated growth in the restaurantindustry and our markets.*

 

*These forward looking statements reflect ourcurrent views with respect to future events and are based on assumptions andsubject to risksand uncertainties, including, but not limited to, economic, competitive,governmental and technological factors outside of our control, that may causeactual results to differ materially from trends, plans or expectations setforth in the forward looking statements. These risks and uncertainties may includethese risks and uncertainties and the risks and uncertainties described in Item1A “Risk Factors” of this report and elsewhere in this report.  Given these risks and uncertainties, we urgeyou to read this report completely and with the understanding that actualfuture results may be materially different from what we plan or expect.  All of the forward-looking statements made inthis Form 10-K are qualified by these cautionary statements and we cannotassure you that the actual results or developments anticipated by our Companywill be realized or, even if substantially realized, that they will have theexpected consequences to or effects on our Company or its business oroperations.  In addition, theseforward-looking statements present our estimates and assumptions only as of thedate of this report. Except for our ongoing obligation to disclose materialinformation as required by federal securities laws, we do not intend to updateyou concerning any future revisions to any forward looking statements to reflectevents or circumstances 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.*

* *

**PART I**

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# **ITEM 1.**                  BUSINESS

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**Our Company**

** **

We are one of the largest full service, Mexican casualdining restaurant chain operator in the United States in terms of number ofrestaurants.  As of December 25,2005, we had 196 restaurants, located principally in California.  Our four primary restaurant concepts, ElTorito, El Torito Grill®, Chevys Fresh Mex® and Acapulco Mexican Restaurant®,offer a large variety of traditional, innovative and authentic Mexican dishesand a wide selection of alcoholic beverages at moderate prices, seven days aweek for lunch and dinner, as well as Sunday brunch.  Our restaurant concepts feature fresh, highquality and flavorful foods, served in casual atmospheres.  For fiscal 2005, we generated revenues of$534.3 million, same store sales increases of 2.9%, net income of $13.4 millionand net cash provided by operating activities of $31.4 million.

 

**Chevys Acquisition**

** **

On January 11, 2005, we completed the acquisitionof 69 Chevys Fresh Mex® restaurants and five Fuzio Universal Pasta® restaurantsand assumed franchise agreements relating to 37 franchised Chevys Fresh Mexrestaurants and five franchised Fuzio Universal Pasta restaurants, which werefer to as the Chevys Acquisition.  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 equity securities to J.W. Childs Equity Partners L.P. andits affiliate, JWC Chevys Co-Invest, LLC, in their capacity as unsecuredcreditors of the former owners of Chevys.

 

Theprimary reason for the Chevys Acquisition was to add a complementary growthvehicle in the full-service Mexican segment of the restaurant industry. TheCompany attributes the goodwill associated with the Chevys Acquisition to thehistorical financial performance and the anticipated future performance ofChevys. The Company is currently determining the amount, if any, of anyadditional tax benefits that may have been acquired in the Chevys Acquisition.  Additionally, the Company is negotiating thefinal purchase price with the seller based upon the terms of the salesagreement.

 

**Our RestaurantConcepts**

** **

*El Torito and El Torito Grill (39% of fiscal 2005restaurant revenues)*. Founded in 1954, El Torito has been a pioneer in the full service,casual dining Mexican restaurant segment in California.  As of December 25, 2005, we operated 76El Torito restaurants, including seven premium El Torito Grill restaurants, andthis concept was the largest full service, Mexican casual dining restaurantchain in California, in terms of number of restaurants.  Our El Torito concept is dedicated to fresh,quality ingredients and authentic, made-from-scratch Mexican cuisine, includingsizzling fajitas, hand-made tamales and traditional Mexican combination platters.

 

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We feature authentic regional specialties created byour executive chef, Pepe Lopez.  ElTorito restaurants are modeled after a traditional Mexican hacienda. Lunch anddinner entrees range in price from $7.99 to $16.99 with an average dining roomcheck of $13.62 and $14.74 for El Torito and El Torito Grill, respectively, forfiscal 2005.

 

El Torito restaurants are primarily free standingbuildings.  The restaurants averageapproximately 8,800 square feet with average seating of approximately 308guests.  All but one of the El Toritoproperties are leased.

 

In the El Torito concept, we drive the traditionallyslower day-parts of early evening and weekday traffic through Happy Hour offersand specialty theme menus.  During HappyHour, guests enjoy value priced appetizers and drinks.  Our Pronto Lunch menu offers guests valuepriced, time sensitive entrees.  Westimulate incremental traffic with value promotions such as Cadillac Margarita® Mondays and our longstanding Taco Tuesday programs where guests may enjoygrilled chicken or steak tacos in the cantina.

 

*Chevys (37% of fiscal 2005 restaurant revenues).*  Chevys was founded in Alameda, California in1986.  As of December 25, 2005, weoperated 68 company-owned restaurants, franchised 33 restaurants and thisconcept was the second largest full service, Mexican casual dining restaurantchain in California in terms of number of restaurants.  Chevys is a comfortable yet high-energyrestaurant concept that offers guests an array of freshly prepared Mexicandishes in an ultra-casual atmosphere.  Weoffer an extensive variety of Mexican dishes, including traditional enchiladas,burritos and tacos, as well as a variety of combination platters. The food menuis complemented by a wide selection of margaritas and an assortment of Mexicanand American beers. Lunch and dinner entrees range in price from $6.99 to$15.99 with an average dining room check of $12.99 for fiscal 2005.

 

Chevys restaurants are primarily freestanding andlocated in high-traffic urban and suburban areas.  Chevys restaurants generally averageapproximately 7,800 square feet with average seating for approximately 232guests in the dining room and another 104 guests in the cantina.  All of the Chevys restaurant buildings areleased. The restaurant design is cantina-style with a vibrant, ultra-casuallayout. A signature item of Chevys is its fresh tortilla maker called “ElMachino” El Machino is generally featured in the dining room and helps reinforcethe Company’s commitment to freshness.

 

*Acapulco (17% of fiscal 2005 restaurant revenues).*  The first Acapulco restaurant opened inPasadena, California in 1960.  As of December 25,2005, we had 36 Acapulco restaurant locations and this concept was the thirdlargest full service, Mexican casual dining restaurant chain in California interms of number of restaurants.  We offerCalifornia style Mexican food featuring traditional favorites as well asseafood specialties such as grilled halibut, shrimp and crab entrees.  We also feature a host of specialty drinks,including our signature house margarita made with premium Jose Cuervo GoldTequila.  Lunch and dinner entrees rangein price from $6.99 to $15.99 with an average dining room check of $14.04 forfiscal 2005.

 

Acapulco restaurants are primarily freestanding andlocated in high-traffic urban and suburban areas.  Acapulco restaurants generally averageapproximately 8,500 square feet with average seating for approximately 240guests.  Many locations have attractiveoutdoor patios.  All but one of therestaurant buildings are leased. Acapulco currently uses three models for restaurant decor: Hacienda,Aztec and Resort.  The three styles,which are similar to one another, have allowed our Company to match design andcapital expenditures with each location’s physical plant and the site’scustomer demographics.  A consistentappearance is achieved through similar exterior signage and the use of Mexicanfurnishings and vibrant primary color schemes in interior design throughout allAcapulco restaurants.

 

Acapulco benefits from long-standing value orientedday-part programs designed to drive incremental traffic during slowperiods.  Beginning with Sunday brunch,guests can indulge in a champagne brunch with a variety of fresh soups, chilledsalads, a taco bar with handmade tortillas, a made to order taco bar and avariety of traditional Mexican favorites. Weekday value promotions include Happy Hour, Margarita Mondays, Kids EatFree on Tuesdays and a lunch buffet, for time sensitive guests.

 

*Other Restaurant Concepts (7% of fiscal 2005restaurant revenues).* As of December 25, 2005, we operated 16 additional restaurantlocations, most of which are also full service Mexican formats, under thefollowing brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHarry’s;Who·Song & Larry’s; Keystone Grill and Fuzio Universal Pasta.  We acquired most of these restaurants withthe acquisitions of El Torito Restaurants, Inc. and Chevys.

 

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**Business Strengths**

** **

*Fresh, Authentic, Mexican Food.*  Our food and beverage offerings range fromguest favorites such as sizzling fajitas, hand-made tamales and traditionalMexican combination platters to authentic regional specialties created by ourexecutive chef.  Our executive chef makesregular visits to small villages throughout many regions of Mexico to identifynew flavors and recipes, and introduces distinct dishes to our restaurant guests.  We believe that these freshly preparedmade-from-scratch items underscore our authenticity. We prepare all our recipeswith fresh, high quality ingredients, from our salsa to our sizzlingfajitas.  El Torito is known fortableside preparations, including our most popular appetizer, our guacamole,which is made to our guests’ specifications at their table.  Our food is complemented by a variety ofspecialty drinks, including our house margarita, made with premium Jose CuervoGold Tequila.

 

*Service*.  We train our servers to follow a service programdesigned to achieve fast and consistent service while also promoting a casualand festive atmosphere.  Our serviceprogram outlines procedures, such as the server’s first approach to the guest,product recommendations throughout the visit, timing and manner of fooddelivery, plate clearing, payment processing, and bidding the guestfarewell.  Throughout the day, managersare responsible for generating energy and enthusiasm throughout theirrestaurants by circulating and visiting with guests at their tables.  Our primary goal is to ensure that everyguest leaves fully satisfied, thereby promoting repeat visits.

 

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*Commitment to Operational Excellence.*In2005, we achieved significant increases in several key attributes of the guest’sexperience at Acapulco including food quality, plate appearance, restaurantatmosphere and menu selection, as measured by guest satisfaction surveysconducted in September 2005.  Theseresults bring the Acapulco concept to parity with El Torito in guestsatisfaction surveys.  We believe thiswas a result of our strategic shift in focus from one of discounting, to afood, service and brand platform. We also introduced our guest measurementprocess to Chevys in August 2005. The data provides us with a foundationto establish goals for improvement in 2006. We also experienced improvement in our mystery shopper scores across allbrands.

 

*Internal Production, Purchasing and DistributionFacilities*.  Wecentralize purchasing and distribution for the majority of our raw ingredients,fresh products and alcoholic beverages through two facilities located in BuenaPark and Union City, California and manufacture food products through afacility in Santa Fe Springs, California. The purchasing and distribution facilities, encompassing approximately67,000 square feet in Buena Park and 54,000 square feet in Union City enable usto order and deliver food items and ingredients on a timely basis.  We have been able to leverage our purchasingpower and reduce delivery costs, thereby contributing to our restaurant grossmargins.  Our manufacturing facility,encompassing approximately 33,000 square feet, produces certain high volumeitems for our Acapulco restaurants including soups, baked goods and saucebases, enabling us to maintain food quality and consistency while reducingcosts.  This facility also manufacturesspecialty products for sales to outside customers, marketed under the Real MexFoodsTM label as well as co-packaged under other branded names.  All three facilities have additional capacityto allow for growth in our distribution operations and production for outsidecustomers.

 

*Proven Management Team and Experienced Board ofDirectors*.  We are ledby a management team with extensive experience in all aspects of restaurantoperations.  Our management team has anaverage of more than 12 years with our Company and more than 23 years ofexperience in the restaurant industry. Our Chief Executive Officer, Fred Wolfe, is a long-time veteran of ourCompany, having served a total of 20 years with us.  From 1997 to 2001, Mr.  Wolfe served asChief Operating Officer of California Pizza Kitchen, Inc., or CPK, andtogether with the other top members of CPK’s management team, successfullyengineered CPK’s return to profitability and initial public offering.  In addition, a majority of our Directors haveextensive management experience in the restaurant or food industry.

 

**Business Strategy**

** **

Our primary business objective is to increase samestore sales and total revenues through brand positioning, new menu and productinnovation, and new restaurant openings.

 

*Effectively Communicate Our BrandPositioning.*  Atour El Torito concept, we intend to continue to promote our authentic Mexicanfood, drink and hospitality through in-restaurant merchandising, localadvertising and public relations.  In2005, the Acapulco concept shifted the brand positioning from a discountproposition to a family of local Mexican neighborhood restaurants deliveringrefreshing Mexican food and drink at a good value.  In fiscal 2005, we reduced the frequency ofcoupons by 17% as compared to fiscal 2004 and circulation of coupons by 68.2%as compared to fiscal 2004, while increasing same store sales andprofitability.  We replaced the discountmessage with new product introductions as limited time offers and communicatedthese promotions vis-à-vis direct mail, traffic sponsorships and in-restaurantmerchandising. In the Chevys concept, we leveraged our equity in “Fresh Mex”and further enhanced the brand by incorporating fun and flavor into the concept’spositioning.  We introduced threepromotions that boasted fresh, fun and flavor and communicated the new offersusing radio, outdoor advertising, direct mail and in-restaurant merchandising. 

 

*Open NewRestaurants*.  We planto open new El Torito, Chevys and El Torito Grill restaurants in and near ourexisting markets, primarily using internally generated cash flow.  Our new store prototype is approximately7,500 square feet with an additional approximately 1,000 square footpatio.  Our net cash investment for atypical El Torito restaurant is generally between $1.4 million and $3.0million, including pre-opening costs, depending on the level of landlordallowances.  Our target pre-tax, cash-on-cashreturn on new restaurants is more than 30%. To successfully execute this strategy, we intend to leverage theextensive experience our management team has acquired opening new restaurantsfor our Company as well as for other restaurant chains.  In 2005, we opened an El Torito restaurant inCorona, California and an El Torito Grill restaurant in Sherman Oaks,California.  We also substantiallycompleted development of new El Torito restaurants in Oxnard and Temecula,California which opened on January 12, 2006 and January 31, 2006,respectively.  In 2005, we also signedleases for a new Chevys restaurant in San Leandro, California, new El Toritorestaurants in Riverside and Rancho Cucamonga, California and a new El ToritoGrill restaurant in Aliso Viejo, California.   We are currently finalizing the negotiation of leases for threeadditional restaurant sites, which we expect to open in 2006.  In total, we plan to open nine restaurants in2006, including the two restaurants opened in January 2006. 

 

*Introduce New Products Through New Channels*.  We manufacture bulk food packages andindividually wrapped retail products under the Real Mex FoodsTM label, as wellas co-package these products under other branded company names. We plan toexpand this area of our business as we continue to develop a core group ofstandard products for retail sales including premium quality burritos,enchiladas and tamales.  We currentlysell direct to or package for fast food and casual restaurants, amusementparks, club stores, and food service, retail, vending and institutionalcustomers.  We plan to continue expandingthis business to include other 

 

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products and to market these products to additional customers in theseand other business segments.

 

**Purchasing and Distribution**

** **

We seek to obtain high quality ingredients, productsand supplies from a variety of reliable sources at competitive prices.  We centralize purchasing of most of our foodingredients, products and supplies, and in February 2005, opened a distributionfacility in Union City, California to service the northern California Chevysrestaurants and other northern California, Nevada, Oregon and Washingtonrestaurants. Our purchasing and distribution facilities enable us to order anddistribute food items timely, enabling delivery of fresh products to ourrestaurants.  In addition, we obtain ourbeer from a variety of state regulated distributors who deliver directly to ourrestaurants.

 

**Employees**

** **

As of December 25, 2005, we had approximately12,853 employees.  Of these employees,approximately 11,582 were employed as restaurant hourly team members, 841 asrestaurant managers, 226 as distribution and production facility employees, and204 as executive, senior, and general office staff.  None of our workforce is unionized.

 

*Restaurant Staffing.*  Restaurants are assigned between three andfive managers - typically, a general manager, one or more assistant managersand one chef.  The average restaurantemploys approximately 64 team members - approximately 35% of who are in kitchenpositions and 65% in guest service positions. The actual number of team members in each restaurant varies depending onsales volume, physical plant design, and unique operational needs.

 

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*Turnover.*  We believe one of our strengths is therelative stability of our employee staff. We believe that in fiscal 2005, our hourly turnover of 97.7% wasslightly better than the industry average, and our management turnover of 34.2%was comparable to the industry average. Our restaurant management is heavily tenured, with Regional Directorsaveraging approximately 14 years, General Managers averaging approximately 9years and Managers averaging more than 8 years. Hourly employee tenure averages more than 3 years.  Other highly skilled positions such as chefsaverage 13 years with the Company.

 

**Competition**

** **

The food service industry is competitive and affectedby external changes such as economic conditions, disposable income, consumertastes, and changing population and demographics.  Competitive factors include: food quality,variety and price; customer service; location; the number and proximity ofcompetitors; decor; and public reputation. We consider our principal competitors to be family dining venues andcasual dining operations.  Like otherfood service operations, we follow changes in both consumer preferences forfood and habits in patronizing eating establishments.  We intend to continue to expand into thespecialty food market by selling directly to or co-packaging for restaurants,food service companies and other customers and will as a result facecompetition from other food service companies, many of which are moreestablished than us.

 

**GovernmentRegulation**

** **

Our business, including each of the restaurants weoperate, is subject to extensive federal, state and local governmentregulation, including those relating to, among others, public health,sanitation and safety, zoning and fire codes. A failure to comply with one or more regulations could result in theimposition of sanctions, including the closing of facilities for anindeterminate period of time, or third party litigation, any of which couldhave a material adverse effect on our Company and its results of operations.  We are also subject to laws and regulationsgoverning our relationships with employees, including the Fair Labor StandardsAct, the Immigration Reform and Control Act, minimum wage requirements,overtime, reporting of tip income, work and safety conditions and otherregulations governing employment. Because a significant number of our employees are paid at rates tied tothe federal and California state minimum wage, an increase in the minimum wagewould increase our labor costs.  Anincrease in the minimum wage rate or employee benefits costs could have amaterial adverse effect on our results of operations.

 

Our restaurants’ sales of alcoholic beverages aresubject to regulation in each state in which we operate.  Typically our restaurants’ licenses to sellalcoholic beverages must be renewed annually and may be suspended or revoked atany time for cause.  Alcoholic beveragecontrol regulations relate to various aspects of daily operations of ourrestaurants, including the minimum age of patrons and employees, hours ofoperation, advertising, wholesale purchasing and inventory control, handlingand storage.  In fiscal 2005,approximately 25% of our restaurant revenues were attributable to the sale ofalcoholic beverages, and we believe that our ability to serve alcohol is animportant factor in attracting customers. The failure of any of our restaurants to timely obtain and maintainliquor or other licenses, permits or approvals required to serve alcoholicbeverages or food could delay or prevent the opening of, or adversely impactthe viability of, the restaurant, and we could lose significant revenue.

 

Our restaurants are subject in each state in which weoperate to “dram shop” laws, which allow a person to sue us if that person wasinjured by an intoxicated guest who was wrongfully served alcoholic beveragesat one of our restaurants.  A judgmentagainst us under a dram shop law could exceed our liability insurance coveragepolicy limits and could result in substantial liability for us and have amaterial adverse effect on our profitability. Our inability to continue to obtain such insurance coverage atreasonable costs also could have a material adverse effect on us.

 

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Our food manufacturing operations are subject toextensive regulation by the United States Department of Agriculture, or USDA,and other state and local authorities. Our facilities and products are subject to periodic inspection byfederal, state and local authorities.  Webelieve that we are currently in substantial compliance with all materialgovernmental laws and regulations and maintain all material permits andlicenses relating to our operations.  Weare required to have a USDA inspector on site at our manufacturing facility toensure compliance with USDA regulations. Nevertheless, we cannot assure you that we are in full compliance withall such laws and regulations or that we will be able to comply with any futurelaws and regulations in a cost-effective manner.  Failure by us to comply with applicable lawsand regulations could subject us to civil remedies, including fines,injunctions, recalls or seizures, as well as potential criminal sanctions, allof which could have a material adverse effect on our business, financialcondition or results of operations.

 

We are also subject to the U.S.  Bio-Terrorism Act of 2002 which, among otherthings, requires us to provide specific information about the food products weship in the U.S. and to register our manufacturing facilities with the UnitedStates Food & Drug Administration, or FDA.  In addition, we are subject to the NutritionLabeling and Education Act of 1990 and the regulations promulgated there underby the FDA.  This regulatory programprescribes the format and content of certain information required to appear onthe labels of food products.

 

Additionally, restaurants and other facilities useelectricity and natural gas, which are subject to various federal and stateregulations concerning the allocation of energy.  Our operating costs have been and willcontinue to be affected by increases in the cost of energy.

 

**EnvironmentalMatters**

** **

Our operations are also subject to federal, state andlocal laws and regulations relating to environmental protection, includingregulation of discharges into the air and water.  Under various federal, state and local laws,an owner or operator of real estate may be liable for the costs of removal orremediation of certain hazardous or toxic substances on or in such property.  Such liability may be imposed without regardto whether the owner or operator knew of, or was responsible for, the presenceof such hazardous or toxic substances. Although we are not aware of any material environmental conditions thatrequire remediation by us under federal, state or local law at our properties,we have not conducted a comprehensive environmental review of our properties oroperations and we cannot assure that we have identified all of the potentialenvironmental liabilities at our properties or that such liabilities would nothave a material adverse effect on our financial condition.

 

**Recent Developments**

 

We have appointedfinancial advisors to assist our Company in exploring and evaluating strategicalternatives.  We can give no assurances that we will pursue any strategicalternatives.

 

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# **ITEM1A.**              RISK FACTORS

# ** **

***Our results of operations and financial condition can be adverselyaffected by numerous risks. You should carefully consider the risk factorsdetailed below in conjunction with the other information contained in thisreport. If any of the following risks actually occur, our business, financialcondition, operating results, cash flows and/or future prospects could bematerially adversely affected.***

 

*Food-borneillness incidents could reduce our restaurant sales.*

* *

We cannot guarantee that our internal controls andtraining at our restaurants and distribution and manufacturing facilities willbe fully effective in preventing all food-borne illnesses. Furthermore, ourreliance on third party suppliers makes it difficult to monitor food safetycompliance and increases the risk that food-borne illness would affect multiplelocations rather than single restaurants. Third party food suppliers andtransporters outside of our control could cause some food borne illnessincidents. New illnesses resistant to our current precautions may develop inthe future, or diseases with long incubation periods could arise, that couldgive rise to claims or allegations on a retroactive basis. One or moreinstances of food-borne illness in one of our restaurants could negativelyaffect our restaurant sales if highly publicized. This risk exists even if itwere later determined that the illness was wrongly attributed to one of ourrestaurants. A number of other restaurant chains have experienced incidentsrelated to food borne illnesses that have had a material adverse impact ontheir operations, and we cannot assure you that we can avoid a similar impactupon the occurrence of a similar incident at our restaurants.

 

*Increasesin the cost of ingredients could materially adversely affect our business,financial condition, and results of operations and cash flows.*

* *

The cost, availability and quality of the ingredientswe use to prepare our food and beverages are subject to a range of factors,many of which are beyond our control. Changes in the cost of such ingredientscan result from a number of factors, including seasonality, politicalconditions, weather conditions, shortages of ingredients and other factors. Ifwe fail to anticipate and react to increasing ingredient costs by adjusting ourpurchasing practices and menu price adjustments, our cost of sales may increaseand our operating results could be adversely affected.

 

*Wedepend upon frequent deliveries of food and other supplies.*

* *

Our ability to maintain consistent quality menu itemsdepends in part upon our ability to acquire fresh food products and relateditems, including essential ingredients used in the Mexican restaurant businesssuch as avocados, from reliable sources in accordance with our specifications.Shortages or interruptions in the supply of fresh food products caused byunanticipated demand, problems in production or distribution, contamination offood products, an outbreak of food-borne diseases, inclement weather or otherconditions could materially adversely affect the availability, quality and costof ingredients, which could adversely affect our business, financial condition,results of operations and cash flows.

 

We have contracts with a large number of suppliers ofmost food, beverages and other supplies for our restaurants. In addition, wedistribute substantially all of the products we receive from suppliers throughour distribution facility. If suppliers do not perform adequately or if any oneor more of such entities seeks to terminate its agreement or fails to performas anticipated, or if there is any disruption in any of our supplyrelationships or distribution operations for any reason, it could have amaterial adverse effect on our business, financial condition, results ofoperations and cash flows. Our inability to replace our distribution operationsand our suppliers in a short period of time on acceptable terms could increaseour costs and could cause shortages at our restaurants of food and other itemsthat may cause our restaurants to remove certain items from a restaurant’s menuor temporarily close a restaurant. If we temporarily close a restaurant orremove popular items from a restaurant’s menu, that restaurant may experience asignificant

 

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reduction in revenue during the time affected by theshortage or thereafter, as our customers may change their dining habits as aresult.

 

*Weare vulnerable to changes in consumer preferences and economic and otherconditions that could harm our business, financial condition, and results ofoperations and cash flows.*

* *

Food service businesses are often affected by changesin consumer tastes, national, regional and local economic conditions,demographic trends, consumer confidence in the economy and discretionaryspending priorities. Factors such as traffic patterns, weather conditions,local demographics and the type, number and location of competing restaurantsmay adversely affect the performance of individual locations. In addition,inflation and increased food and energy costs may harm the restaurant industryin general and our locations in particular. Adverse changes in any of thesefactors could reduce consumer traffic or impose practical limits on pricing,which could harm our business, financial condition, results of operations andcash flows.  We cannot assure you thatconsumers will continue to regard our products favorably or that we will beable to develop new products that appeal to consumer preferences, which couldhave a materially adverse affect on our business. Our continued success willdepend in part on our ability to anticipate, identify and respond to changingconsumer preferences and economic conditions.

 

*Ourbusiness is highly sensitive to events and conditions in the State ofCalifornia.*

* *

A majority of our restaurants are located inCalifornia. Because of this geographic concentration, we are susceptible tolocal and regional risks, such as energy shortages and related increased costs,increased government regulation, adverse economic conditions, adverse weatherconditions, earthquakes and other natural disasters, any of which could have amaterial adverse effect on our business, financial condition and results ofoperations. In light of our current geographic concentration, adverse publicityrelating to our restaurants could have a more pronounced adverse effect onoverall sales than might be the case if our restaurants were more broadlydispersed.

 

*Thereis intense competition in the restaurant industry.*

* *

The restaurant business is intensely competitive withrespect to food quality, price value relationships, ambiance, service andlocation, and there are many well-established competitors with substantiallygreater financial, marketing, personnel and other resources. In addition, manyof our competitors are well established in the markets where we operate. Whilewe believe that our restaurants are distinctive in design and operatingconcept, other companies may develop restaurants that operate with similarconcepts.

 

*Weintend to open additional restaurants, which could have a material adverseeffect on our business, financial condition, and results of operations and cashflows.*

* *

We are reviewing additional sites for potential futurerestaurants. Historically, there is a “ramp-up” period of approximately fourmonths before we expect a new restaurant to achieve our targeted level ofperformance. This is due to higher operating costs caused by start-up and othertemporary inefficiencies such as customer acceptance and unavailability ofexperienced staff. Our ability to open new restaurants is dependent upon anumber of factors, many of which are beyond our control, including our abilityto:

 

•              findquality locations;

 

•              reachacceptable agreements regarding the lease or purchase of locations;

 

•              raiseor have available an adequate amount of money for construction and openingcosts;

 

10

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•              timelyhire, train and retain the skilled management and other employees necessary tomeet staffing needs; and

 

**•**              obtain, for anacceptable cost, required permits and regulatory approvals.

 

We may not be able to attract enough customers to newrestaurants because potential customers may be unfamiliar with our restaurantsor the atmosphere or menu of our restaurants might not appeal to them. Inaddition, as part of our growth strategy, we intend to open new restaurants inour existing markets. Since we typically draw customers from a relatively smallradius around each of our restaurants, the operating results and comparableunit sales for existing restaurants that are near the area in which a newrestaurant opens may decline, and the new restaurant itself may not besuccessful, due to the close proximity of other restaurants and marketsaturation.

 

For these same reasons, many markets would notsuccessfully support one of our restaurants. Our existing business supportsystems, management information systems, financial controls and other systemsand procedures may be inadequate to support our expansion, which could requireus to incur substantial expenditures that could materially adversely affect ouroperating results or cash flows.

 

*Negative publicity relating toone of our restaurants could reduce sales at some or all of our otherrestaurants.*

 

We are, from time to time, faced with negativepublicity relating to food quality, restaurant facilities, health inspectionscores, employee relationships or other matters at specific restaurants. Adversepublicity may negatively affect us, regardless of whether the allegations arevalid or whether we are liable. In addition, the negative impact of adversepublicity relating to one restaurant may extend far beyond the restaurantinvolved to affect some or all of our other restaurants. A similar risk existswith respect to totally unrelated food service businesses, if customersmistakenly associate such unrelated businesses with our own operations.

 

*Uninsuredlosses could occur.*

* *

We have comprehensive insurance, including generalliability and property (including business interruption) extended coverage.However, there are certain types of losses that may be uninsurable or that webelieve are not economical to fully insure, such as earthquakes and other naturaldisasters. In view of the location of many of our existing and plannedrestaurants in California, our operations are particularly susceptible todamage and disruption caused by earthquakes. In the event of an earthquake orother natural disaster affecting our geographic area of operations, we couldsuffer a loss of the capital invested in, as well as anticipated earnings from,the damaged or destroyed properties.

 

*Changesin employment laws may adversely affect our business.*

* *

Various federal and state labor laws govern therelationship with our employees and affect operating costs. These laws includeminimum wage requirements, overtime, unemployment tax rates, workers’compensation rates and citizenship requirements. Significant additionalgovernment imposed increases in the following areas could materially affect ourbusiness, financial condition, operating results or cash flow:

 

•              minimumwages;

 

**•**              paid leaves ofabsence;

 

**•**              tax reporting; and

 

11

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•              revisionsin the tax payment requirements for employees who receive gratuities.

 

*Ifwe face labor shortages or increased labor costs, our growth and operatingresults could be adversely affected.*

* *

Labor is a primary component in the cost of operatingour restaurants. If we face labor shortages or increased labor costs because ofincreased competition for employees, higher employee turnover rates orincreases in the federal or applicable state minimum wage or other employeebenefits costs (including costs associated with health insurance coverage), ouroperating expenses could increase and our growth could be adversely affected.In addition, our success depends in part upon our ability to attract, motivateand retain a sufficient number of well-qualified restaurant operators andmanagement personnel, as well as a sufficient number of other qualifiedemployees, including guest service and kitchen staff, to keep pace with ourexpansion schedule. Qualified individuals needed to fill these positions are inshort supply in some geographic areas. In addition, full service casual diningsegment restaurant operators have traditionally experienced relatively highemployee turn over rates. Although we have not yet experienced any significantproblems in recruiting or retaining employees, our ability to recruit andretain such individuals may delay the planned openings of new restaurants orresult in higher employee turnover in existing restaurants, which could have amaterial adverse effect on our business, financial condition, results ofoperations and cash flows.

 

We have been affected by increasing healthcare andworkers’ compensation expenses affecting business in most industries includingours. To manage premium increases we have elected to self-insure. Higherdeductibles could result in greater exposure to our operating results andliquidity. If we are exposed to material liabilities that are not insured itcould materially adversely affect our financial condition and results ofoperations.

 

*Wemay be locked into long-term and non-cancelable leases and may be unable torenew leases at the end of their terms.*

* *

Many of our current leases are non-cancelable andtypically have initial terms of 10 to 20 years and one or more renewal terms ofthree or more years that we may exercise at our option. Leases that we enterinto in the future likely will also be long-term and non-cancelable and havesimilar renewal options. If we close a restaurant, we may remain committed toperform our obligations under the applicable lease, which would include, amongother things, payment of the base rent for the balance of the lease term.Alternatively, at the end of the lease term and any renewal period for arestaurant, we may be unable to renew the lease without substantial additionalcost, if at all. We may close or relocate the restaurant, which could subjectus to construction and other costs and risks, and could have a material adverseeffect on our business. Additionally, the revenue and profit, if any, generatedat a relocated restaurant, may not equal the revenue and profit generated atthe existing restaurant. Furthermore, in the past, we have been forced to closeprofitable restaurants due to the inability to renew a lease upon theexpiration of its lease term and we expect this to occur from time to time inthe future.

 

*Weface risks associated with government regulations.*

* *

We are subject to extensive government regulation at afederal, state and local government level. These include, but are not limitedto, regulations relating to the preparation and sale of food and beverages,zoning and building codes, land use and employee, public health, sanitation andsafety matters. We are required to obtain and maintain governmental licenses,permits and approvals. Difficulty or failure in obtaining them in the futurecould result in delaying or canceling the opening of new restaurants or couldmaterially adversely affect the operation of existing restaurants. Localauthorities may suspend or deny renewal of our governmental licenses if theydetermine that our operations do not meet the standards

 

12

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for initial grant or renewal. This risk would be evenhigher if there were a major change in the licensing requirements affecting ourtypes of restaurants.

 

Typically our restaurants’ licenses to sell alcoholicbeverages must be renewed annually and may be suspended or revoked at any timefor cause. Alcoholic beverage control regulations relate to various aspects ofdaily operations of our restaurants, including the minimum age of patrons andemployees, hours of operation, advertising, wholesale purchasing and inventorycontrol, handling and storage. In fiscal 2005, approximately 28% of ourrestaurant revenues was attributable to the sale of alcoholic beverages, and webelieve that our ability to serve alcoholic beverages, such as our signaturemargarita drinks, is an important factor in attracting customers. The failureof any of our restaurants to timely obtain and maintain liquor or otherlicenses, permits or approvals required to serve alcoholic beverages or foodcould delay or prevent the opening of, or adversely impact the viability of,the restaurant and we could lose significant revenue. Our restaurants are alsosubject in each state in which we operate to “dram shop” laws, which allow aperson to sue us if that person was injured by an intoxicated person who waswrongfully served alcoholic beverages at one of our restaurants. A judgmentagainst us under a dram shop law could exceed our liability insurance coveragepolicy limits and could result in substantial liability for us and have amaterial adverse effect on our profitability. Our inability to continue toobtain such insurance coverage at reasonable costs also could have a materialadverse effect on us

 

The federal Americans with Disabilities Act andsimilar state laws prohibit discrimination because of disability in publicaccommodations and employment. Mandated modifications to our facilities (orrelated litigation) in the future to make different accommodations for personswith disabilities could result in material unanticipated expenses.

 

Our distribution and manufacturing operations aresubject to extensive regulation by the FDA, USDA and other state and localauthorities. Our processing facilities and products are subject to periodicinspection by federal, state and local authorities. We cannot assure you,however, that we are in full compliance with all currently applicablegovernmental laws, or that we will be able to comply with any or all futurelaws and regulations. Failure by us to comply with applicable laws andregulations could subject us to civil remedies, including fines, injunctions,recalls or seizures, as well as potential criminal sanctions, which could havea material adverse effect on our business, financial condition or results ofoperations.

 

*Wemay be subject to significant liability should the consumption of any of ourspecialty products cause injury, illness or death.*

* *

We may be required to recall specialty products thatwe manufacture and co-package at our manufacturing facility in the event ofcontamination, product tampering, mislabeling or damage to our products. Wecannot assure you that product liability claims will not be asserted against usor that we will not be obligated to recall our products. A product liabilityjudgment against us or a product recall could have a material adverse effect onour business, financial condition or results of operations.

 

*Thefailure to enforce and maintain our trademarks could materially adverselyaffect our ability to establish and maintain brand awareness.*

* *

We have registered or filed applications to registercertain names used by our restaurants and our food manufacturing operations astrademarks or service marks with the United States Patent and Trademark Officeand in certain foreign countries, including the names Acapulco MexicanRestaurant®, El Torito Grill®, Real Mex FoodsTM, Chevys Fresh Mex® and FuzioUniversal Pasta®.  The success of ourbusiness strategy depends on our continued ability to use our existingtrademarks and service marks in order to increase brand awareness and furtherdevelop our branded products. If our efforts to protect our intellectual

 

13

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property are not adequate, or if any third partymisappropriates or infringes on our intellectual property, either in print oron the Internet, the value of our brands may be harmed, which could have amaterial adverse effect on our business, including the failure of our brandsand branded products to achieve and maintain market acceptance.

 

We cannot assure you that all of the steps we have takento protect our intellectual property in the U.S. and foreign countries will beadequate. In addition, the laws of some foreign countries do not protectintellectual property rights to the same extent as the laws of the U.S.

 

*Weface risks associated with environmental laws.*

* *

We are subject to federal, state and local laws,regulations and ordinances that:

 

**•**              governactivities or operations that may have adverse environmental effects, such asdischarges to air and water, as well as handling and disposal practices forsolid and hazardous wastes; and

 

•              imposeliability for the costs of cleaning up, and damage resulting from, sites ofpast spills, disposals or other releases of hazardous materials.

 

In particular, under applicable environmental laws, wemay be responsible for remediation of environmental conditions and may besubject to associated liabilities, including liabilities resulting fromlawsuits brought by private litigants, relating to our restaurants and the landon which our restaurants are located, regardless of whether we lease or own therestaurants or land in question and regardless of whether such environmentalconditions were created by us or by a prior owner or tenant. If we are foundliable for the costs of remediation of contamination at any of our properties,our operating expenses would likely increase and our operating results would bematerially adversely affected.

 

*Wedepend on the services of key executives, the loss of whom could materiallyharm our business.*

* *

Some of our senior executives are important to oursuccess because they have been instrumental in setting our strategic direction,operating and marketing our business, identifying, recruiting and training keypersonnel, identifying expansion opportunities and arranging necessaryfinancing. Losing the services of any of these individuals could materiallyadversely affect our business until a suitable replacement could be found. Webelieve that they could not easily be replaced with executives of equalexperience and capabilities. We do not maintain key person life insurancepolicies on any of our executives. See “Management.”

 

*Compliancewith regulation of corporate governance and public disclosure will result inadditional expenses.*

* *

Keeping abreast of, and in compliance with, laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulationswill require a significant amount of management attention and externalresources. We are committed to observing high standards of corporate governanceand public disclosure. Consequently, we intend to invest all reasonablynecessary resources to comply with evolving standards, and this investment willresult in increased general and administrative expenses and a diversion ofmanagement time and attention from revenue generating activities to complianceactivities.

 

14

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*Wemay make acquisitions or enter into similar transactions*

* *

We may expand by pursuing acquisitions, businesscombinations and joint ventures. We may encounter difficulties in integratingthe expanded operations, entering into markets, or conducting operations wherewe have no or limited prior experience. Furthermore, we may not realize the benefitswe anticipated when we entered into these transactions. In addition, thenegotiation of potential acquisitions, business combinations or joint venturesas well as the integration of an acquired business could require us to incursignificant costs and cause diversion of management’s time and resources.

 

***Oursubstantial level of indebtedness could adversely affect our financialcondition.***

*** ***

We have substantialindebtedness, including obligations under capital leases, of approximately$182.0 million as of December 25, 2005. Subject to restrictions in the indenture for the Notes and our seniorsecured and unsecured credit facilities, we may incur additionalindebtedness.  Our high level ofindebtedness could have important consequences to holders of our indebtednessand significant effects on our business, including the following:

 

•              ourability to obtain additional financing for working capital, capitalexpenditures, acquisitions or general corporate purposes may be impaired;

 

**•**              wemust use a substantial portion of our cash flow from operations to pay intereston our indebtedness, which will reduce the funds available to use foroperations and other purposes;

 

**•**              ourhigh level of indebtedness could place us at a competitive disadvantagecompared to those of our competitors that may have proportionately less debt;

 

**•**              ourflexibility in planning for, or reacting to, changes in our business and theindustry in which we operate may be limited; and

 

15

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**•**              ourhigh level of indebtedness makes us more vulnerable to economic downturns andadverse developments in our business.

 

We expect to use cashflow from operations to pay our expenses and amounts due under our outstandingindebtedness.  Our ability to make thesepayments thus depends on our future performance, which will be affected byfinancial, business, economic and other factors, many of which we cannotcontrol.  Our business may not generatesufficient cash flow from operations in the future and our anticipated growthin revenue and cash flow may not be realized, either or both of which couldresult in our being unable to repay indebtedness, or to fund other liquidityneeds.  If we do not have enough money,we may be required to refinance all or part of our then-existing debt, sellassets or borrow more money.  We cannotmake any assurances that we will be able to accomplish any of thesealternatives on terms acceptable to us, or at all.  In addition, the terms of existing or futuredebt agreements, including the indenture for our senior secured notes and oursenior secured and unsecured credit facilities, may restrict us from adoptingany of these alternatives.

 

***Theindenture for our senior secured notes and our senior secured and unsecuredcredit facilities impose significant operating and financial restrictions,which may prevent us from pursuing certain business opportunities and takingcertain actions.***

*** ***

Our senior secured andunsecured credit facilities and the indenture for our senior secured notesimpose, and future debt agreements may impose, significant operating andfinancial restrictions on us.  Theserestrictions will limit or prohibit, among other things, our ability to:

 

**•**              incuradditional indebtedness;

 

**•**              repayindebtedness before stated maturity dates;

 

**•**              paydividends on, redeem or repurchase our stock or make other distributions;

 

**•**              makeacquisitions or investments;

 

**•**              createor incur liens;

 

**•**              transferor sell certain assets or merge or consolidate with or into other companies;

 

**•**              enterinto certain transactions with affiliates;

 

**•**              sellstock in our subsidiaries;

 

**•**              restrictdividends, distributions or other payments from our subsidiaries; and

 

**•**              otherwiseconduct necessary corporate activities.

 

In addition, our seniorsecured and unsecured credit facilities require us to maintain compliance withspecified financial covenants.  Thesecovenants could adversely affect our ability to finance our future operationsor capital needs and pursue available business opportunities.  A breach of any of these covenants couldresult in a default in respect of the related indebtedness.  If a default occurs, the relevant lenderscould elect to declare the indebtedness, together with accrued interest andother fees, to be immediately due and payable and proceed against anycollateral securing that indebtedness.

 

*Bruckmann,Rosser, Sherril & Co., LLC and Jefferies Capital Partners togethercontrol our Company, and their interests may conflict with the interests of theholders of our indebtedness.*

* *

As a result of their stock ownership, Bruckmann,Rosser, Sherril & Co., LLC, or BRS, and Jefferies Capital Partners, orJCP, together own beneficially approximately 50.2% of our outstanding commonstock and approximately 65% of our outstanding preferred stock.  By virtue of their stock ownership and theterms of the securities holders agreement, these entities have significantinfluence over our management and will be able to determine the outcome of allmatters required to be submitted to the stockholders for approval, including theelection of our directors and the approval of mergers, consolidations and thesale of all or substantially all of our assets. The interests of BRS and JCP asequity owners of our Company may differ from the interests of the holders ofour indebtedness, and, as such, BRS and JCP may take actions that may not be inyour interests.  For example, if weencounter financial difficulties or are unable to pay our debts as they mature,the interests of our equity owners might conflict with the interests of the holdersof our indebtedness. In addition, our equity owners may have an interest inpursuing acquisitions, divestitures, financing, or other transactions that, intheir judgment, could enhance their equity investments, although suchtransactions might involve risks to the holders of our indebtedness.

 

*Future changes in financial accounting standards may cause adverseunexpected operating results and affect our reported results of operations.*

 

16

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A change in accountingstandards can have a significant effect on our reported results and may affectour reporting of transactions before the change is effective. Newpronouncements and varying interpretations of pronouncements have occurred andmay occur in the future. Changes to existing accounting rules or thequestioning of current accounting practices may adversely affect our reportedfinancial results.

 

17

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ITEM 1B.               UNRESOLVEDSTAFF COMMENTS

 

Not Applicable.

 

ITEM 2.                  PROPERTIES

 

Ourcorporate headquarters are located in Cypress, California. We occupy thisfacility under a lease that expires in 2012. As of December 25, 2005, weleased 194 restaurant facilities and owned two. The majority of our leases arefor ten, 15 or 20-year terms, include options to extend the terms, include rentholidays, rent escalation clauses and/or contingent rent provisions and some ofour leases have tenant improvement allowances. Our restaurant leases have termsthat expire between 2006 and 2027 (excluding renewal options not yet exercised)and have an average remaining term of approximately 14 years, includingoptions.

 

**RestaurantLocations**

** **

As of December 25,2005, we owned, licensed or franchised 245 restaurants in 16 states and threeforeign countries, of which 196 are company operated and 49 operate underfranchise or license arrangements.

 

Ourrestaurant locations by concept and state as of December 25, 2005 were asfollows:

 

 
| ** **                    | ** ** | **Concepts**      | ** ** | ** ** | ** ** |
|-------------------------------|------------|-------------------|------------|------------|------------|
| **State**                     | ** ** | **El Torito (1)** | ** ** | **Chevys** | ** ** | **Acapulco** | ** ** | **Franchised** | ** ** | **Other (2)** | ** ** | **Total** | ** ** |
| California                    |       | 73                |       | 45         |       | 35 |   | 7 |   | 8 |   | 168 |   |
| Missouri                      |       | 0                 |       | 0          |       | 0 |   | 10 |   | 4 |   | 14 |   |
| Arizona                       |       | 2                 |       | 3          |       | 0 |   | 0 |   | 0 |   | 5 |   |
| Nevada                        |       | 0                 |       | 3          |       | 0 |   | 0 |   | 0 |   | 3 |   |
| Oregon                        |       | 1                 |       | 3          |       | 1 |   | 0 |   | 1 |   | 6 |   |
| Washington                    |       | 0                 |       | 1          |       | 0 |   | 2 |   | 1 |   | 4 |   |
| New Jersey                    |       | 0                 |       | 2          |       | 0 |   | 3 |   | 0 |   | 5 |   |
| Illinois                      |       | 0                 |       | 2          |       | 0 |   | 3 |   | 1 |   | 6 |   |
| Minnesota                     |       | 0                 |       | 0          |       | 0 |   | 3 |   | 0 |   | 3 |   |
| Florida                       |       | 0                 |       | 3          |       | 0 |   | 1 |   | 0 |   | 4 |   |
| Virginia                      |       | 0                 |       | 3          |       | 0 |   | 1 |   | 0 |   | 4 |   |
| Maryland                      |       | 0                 |       | 2          |       | 0 |   | 2 |   | 0 |   | 4 |   |
| New York                      |       | 0                 |       | 1          |       | 0 |   | 2 |   | 0 |   | 3 |   |
| Louisiana                     |       | 0                 |       | 0          |       | 0 |   | 2 |   | 0 |   | 2 |   |
| South Dakota                  |       | 0                 |       | 0          |       | 0 |   | 1 |   | 0 |   | 1 |   |
| Indiana                       |       | 0                 |       | 0          |       | 0 |   | 0 |   | 1 |   | 1 |   |
| Total domestic                |       | 76                |       | 68         |       | 36 |   | 37 |   | 16 |   | 233 |   |
| Japan                         |       | 0                 |       | 0          |       | 0 |   | 8 |   | 0 |   | 8 |   |
| United Arab Emirates          |       | 0                 |       | 0          |       | 0 |   | 2 |   | 0 |   | 2 |   |
| Turkey                        |       | 0                 |       | 0          |       | 0 |   | 2 |   | 0 |   | 2 |   |
| Total including International |       | 76                |       | 68         |       | 36 |   | 49 |   | 16 |   | 245 |   |
|                               |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |

 

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(1) IncludesEl Torito Grills which are located in California

(2) IncludesFuzio Universal Pasta, GuadalaHarry’s, Las Brisas, Keystone Grill,Who·Song&Larry’s, El Paso Cantina and Casa Gallardo

 

18

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We also lease anapproximately 32,000 square foot dedicated manufacturing facility located inSanta Fe Springs, California, an approximately 67,000 square foot warehouse anddistribution facility located in Buena Park, California and an approximately54,000 square foot warehouse and distribution facility located in Union City,California, for our subsidiary, Real Mex Foods, Inc.

 

Our owned and certain ofour leased real property is pledged to secure indebtedness outstanding underour senior credit facility and our senior secured notes.

 

ITEM 3.                  LEGAL PROCEEDINGS

 

We are periodically a defendant in cases involvingpersonal injury and other matters that arise in the normal course of business.While any pending or threatened litigation has an element of uncertainty, webelieve that the outcome of these lawsuits or claims, individually or combined,will not materially adversely affect the consolidated financial position,results of operations or cash flows of our Company.

 

ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

During the fourth quarter of fiscal 2005, no matterswere submitted to a vote of stockholders through solicitation of proxies orotherwise.

 

**PART II**

** **

ITEM 5.                  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

**Market Information**

** **

There is currently noestablished public trading market for our outstanding common stock.

 

**Holders**

** **

The approximate number of record holders of each ofour classes of common stock as of February 21, 2006 was as follows:

 

Class ACommon Stock: 53

Class BCommon Stock: 1

 

**Dividends**

** **

In fiscal 2005, we did not pay any dividends on ourcommon stock.  Our ability to paydividends is restricted by certain covenants contained in our secured andunsecured senior credit facilities, as well as certain restrictions containedin our indenture relating to our senior secured notes.

 

**SecuritiesAuthorized For Issuance under Equity Compensation Plans**

** **

For information on securities authorized for issuanceunder equity compensation plans, see “Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters—EquityCompensation Plan Information.”

 

19

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ITEM 6.                  SELECTEDFINANCIAL DATA

 

Thefollowing table sets forth selected historical consolidated financial and otherdata of our Company.  The selectedhistorical consolidated financial data has been derived from our Company’saudited consolidated financial statements for each of the fiscal years ended December 2005,2004, 2003, 2002 and 2001. All fiscal years presented consist of 52 weeks.  This data presented below should be read inconjunction with, and is qualified in its entirety by reference to, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, andour consolidated financial statements and the notes thereto appearing elsewherein this report. 

 
| ** **                                                | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2005(4)**           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement  of Operations Data:**                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restaurant  revenues                                      |       | $                     | 510,013    |   | $ | 314,157 |   | $ | 307,278 |   | $ | 310,094 |   | $ | 322,857 |   |
| Other revenue                                             |       | 20,532                |       | 10,787 |   | 4,714 |   | 2,285 |   | 2,149 |   |
| Total revenues                                            |       | 534,296               |       | 326,810 |   | 312,138 |   | 312,379 |   | 325,006 |   |
| Cost of sales                                             |       | 137,171               |       | 80,839 |   | 77,555 |   | 77,867 |   | 82,188 |   |
| Labor                                                     |       | 186,390               |       | 118,888 |   | 116,269 |   | 116,156 |   | 120,378 |   |
| Direct operating  and occupancy expense                   |       | 130,800               |       | 76,760 |   | 74,938 |   | 74,315 |   | 80,789 |   |
| Total operating  costs                                    |       | 454,361               |       | 276,487 |   | 268,762 |   | 268,338 |   | 283,355 |   |
| General and  administrative expenses                      |       | 28,912                |       | 17,725 |   | 15,201 |   | 14,670 |   | 16,688 |   |
| Depreciation                                              |       | 18,498                |       | 11,837 |   | 11,732 |   | 11,872 |   | 13,220 |   |
| Amortization                                              |       |                  |       | — |   | — |   | — |   | 8,000 |   |
| Operating income                                          |       | 31,433                |       | 20,299 |   | 16,209 |   | 15,803 |   | 1,675 |   |
| Interest expense                                          |       | 22,973                |       | 12,528 |   | 13,372 |   | 14,354 |   | 16,922 |   |
| Debt termination  costs                                   |       |                  |       | 4,677 |   | — |   | — |   | — |   |
| Income (loss)  before income taxes                        |       | 8,677                 |       | 4,546 |   | 3,315 |   | 2,257 |   | (13,822 | ) |
| Net income  (loss)                                        |       | 13,386                |       | 13,616 |   | 3,206 |   | 2,535 |   | (14,060 | ) |
| Redeemable  preferred stock accretion                     |       | (14,583               | )          | (11,862 | ) | (10,409 | ) | (9,267 | ) | (19,685 | ) |
| Net (loss)  income attributable to common stockholders(1) |       | $                     | (1,197     | ) | $ | 1,754 |   | $ | (6,732 | ) | $ | (6,732 | ) | $ | (33,745 | ) |
| **Balance  Sheet Data:**                                  |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                |       | 14,871                |       | 10,690 |   | 2,605 |   | 1,201 |   | 614 |   |
| Property and  equipment, net                              |       | 81,240                |       | 36,589 |   | 46,620 |   | 52,616 |   | 59,834 |   |
| Total assets                                              |       | 310,889               |       | 186,951 |   | 173,020 |   | 175,768 |   | 184,108 |   |
| Total debt(2)                                             |       | 182,031               |       | 106,503 |   | 114,699 |   | 121,607 |   | 126,440 |   |
| Total  stockholders’ equity                          |       | 50,584                |       | 29,849 |   | 15,861 |   | 12,542 |   | 9,753 |   |
| **Other  Financial Data:**                                |       |                  |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                     |       | $                     | 23,408     |   | $ | 9,982 |   | $ | 6,962 |   |   | $ | 5,992 |   | $ | 7,589 |   |
| Ratio of  earnings to fixed charges(3)               |       | 1.2                   | x     | 1.2 | x  | 1.2 | x  | 1.1 | x  | 0.4 | x  |
|                                                           |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Net income(loss) attributable to common stockholders includes the effect of the accretionof the liquidation preference on the redeemable preferred stock which reducesor increases net loss attributable to common stockholders for the relevantperiods.

 

(2) Total debtincludes long-term debt plus obligations under capital leases.

 

(3) For purposes ofcalculating the ratio of earnings to fixed charges, earnings consist of netincome (loss) before income taxes plus fixed charges.  Fixed charges consist of interest expense onall indebtedness, plus one-third of rental expense (the portion deemedrepresentative of the interest factor). For the fiscal year ended 2001, our earnings were insufficient to coverfixed charges by $14,060 (in thousands).

 

(4) Includes theresults of Chevys since January 12, 2005, the date of acquisition.

 

20

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ITEM 7.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

*The following Management’s Discussion and Analysisof Financial Condition and Results of Operations contains forward-lookingstatements as a result of certain factors, including those set forth under theheading “Forward-Looking Statements” above and elsewhere in this report.  Unless otherwise provided below, referencesto “we”, “us” and “our Company” refer to Real Mex Restaurants, Inc. andour consolidated subsidiaries.  Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and related notes thereto included elsewhere in thisreport.*

 

**Overview**

** **

We are one of the largest full service, casual diningMexican restaurant chain operators in the United States in terms of number ofrestaurants. As of December 25, 2005, we operated 196 restaurants, 161 ofwhich are located in California, with additional restaurants in Arizona,Florida, Indiana, Illinois, Maryland, Missouri, Nevada, New Jersey, New York,Oregon, Virginia and Washington. Our four major subsidiaries are El ToritoRestaurants, Inc., which we acquired in June 2000, AcapulcoRestaurants, Inc., Chevys Restaurants LLC, which we formed to facilitatethe Chevys Acquisition in January 2005 and a purchasing, distribution, andmanufacturing subsidiary, Real Mex Foods, Inc.

 

El Torito, El Torito Grill, Acapulco and Chevys, ourprimary restaurant concepts, offer high quality Mexican food, a wide selectionof alcoholic beverages and excellent guest service.  In addition to the El Torito, El ToritoGrill, Acapulco and Chevys concepts, we operate 16 additional restaurantlocations, most of which are also full service Mexican formats, under thefollowing brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHARRY’S;Who**·**Song & Larry’s; KeystoneGrill; and Fuzio Universal Pasta.

 

On January 11, 2005, we completed the ChevysAcquisition, acquiring 69 Chevys restaurants and five Fuzio Universal Pastarestaurants and assumed franchise agreements for 37 franchised Chevysrestaurants and five franchised Fuzio Universal Pasta restaurants.  The purchase price for the Chevys Acquisitionincluded approximately $76.2 million in cash and the assumption of certainliabilities, plus the issuance of Company common and preferred stock to J.W.Childs Equity Partners L.P. and its affiliate, JWC Chevys Co-Invest, LLC.  See “Notes to Consolidated FinancialStatements.”  Chevys’ results ofoperations have been included in our Company’s consolidated financialstatements since the date of acquisition.

 

In December 2004,we opened our first new El Torito restaurant in five years, located inEncinitas, California and opened 2 restaurants in 2005: an El Torito in Corona,California and an El Torito Grill in Sherman Oaks, California.  We also have in the past, and may in thefuture, convert select restaurants to the El Torito or Chevys brand and divestunderperforming restaurants.

 

Our fiscal year consists of 52 or 53 weeks and ends onthe last Sunday in December of each year. When calculating same store sales, we include a restaurant that has beenopen for more than 18 months and for the entirety of each comparableperiod.  As of December 25, 2005, wehad 120 restaurants that met this criterion. References to same store sales contained in this report do not includethe sales of Chevys or new restaurants opened this year.

 

In fiscal year 2005, we generated revenues of $534.3million.  Our revenues are comprised ofrestaurant sales, other revenues and royalty and franchise fees.  Restaurant revenues include sales of food andalcoholic and other beverages. Other revenues consist primarily of sales byReal Mex Foods to outside customers of processed and packaged prepared foodsand other merchandise items.

 

Cost of sales is comprised primarily of food andalcoholic beverage expenses. The components of cost of sales are variable andincrease with sales volume. In addition, the components of cost of sales aresubject to increase or decrease based on fluctuations in commodity costs anddepend in part on the success of controls we have in place to manage cost of salesin our restaurants. The cost, availability and quality of the ingredients weuse to prepare our food and beverages are subject to a range of factorsincluding, but not limited to, seasonality, political conditions, weatherconditions, and ingredient shortages.

 

Labor cost includes direct hourly and managementwages, operations management bonus, vacation pay, payroll taxes, workers’compensation insurance and health insurance.

 

Direct operating and occupancy expense includesoperating supplies, repairs and maintenance, advertising expenses, utilities,and other restaurant related operating expenses. This expense also includes alloccupancy costs such as fixed rent, percentage rent, common area maintenancecharges, real estate taxes and other related occupancy costs.

 

General and administrative expense includes allcorporate and administrative functions that support our operations. Expenseswithin this category include executive management, supervisory and staffsalaries, bonus and related employee benefits, travel and 

 

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relocation costs, information systems, training, corporate rent,professional fees and other consulting fees.

 

Depreciation principally includes depreciation ofcapital expenditures for restaurants. Pre-opening costs are expensed as incurred and include costs associatedwith the opening of a new restaurant or the conversion of an existingrestaurant to a different concept. Goodwill is deemed to have an indefinite life and is subject to an annualimpairment test.  Other intangible assetsare amortized over their useful lives in accordance with Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets”.

 

Our annual operating resultsare impacted by restaurant closures to the extent we close locations.  Due to our long operating history, restaurantclosures are generally the result of lease expirations.  Many of our leases are non-cancelable andhave initial terms of 10 to 20 years with one or more renewal terms of three ormore years that we may exercise at our option. As of December 25, 2005, we owned two restaurant locations andleased the remaining 194.

 

We perform ongoing analyses of restaurant cash flowand in the case of negative cash flow or underperforming restaurants, we maynegotiate early termination of leases, allow leases to expire without renewalor sell restaurants.  In addition, fromtime to time we may be forced to close a successful restaurant if we are unableto renew the lease on satisfactory terms, or at all.  From the end of fiscal 2000 to the end offiscal 2005, we closed 25 restaurants, 20 of which were early leaseterminations and five of which were cases in which we were unable to renew theleases thereon.

 

Wehave recorded an income tax benefit of $4.7 million as of December 25,2005 as compared to an income tax benefit of $9.1 million as of December 26,2004.  The benefits are related to thereduction of our valuation allowance related to our deferred tax assets $13.9million and 17.2 million as of December 25, 2005 and December 26,2004, respectively.  There is novaluation allowance as of December 25, 2005. The amount of deferred taxassets considered realizable was based upon our ability to generate futuretaxable income, exclusive of reversing temporary differences and carryforwards.  In evaluating future taxableincome for valuation allowance purposes as of December 25, 2005, weconsidered only income expected to be generated in fiscal 2006, 2007 and 2008.The income tax provision recorded for fiscal 2003 represents the state taxespaid in that period. 

 

Allpurchase accounting adjustments for the Chevys Acquisition related to the valueof tax attributes acquired have not been reflected in the deferred tax balancesas of December 25, 2005 as the final tax returns for the seller, Chevy’sRestaurant, Inc., have not been filed. Until the tax returns are filed, weare unable to determine the carryover basis of assets, liabilities, and netoperating loss carryforwards at the date of acquisition. Upon completion of theSellers’ final tax returns for the periods ending before the ChevysAcquisition, the Company will assess and record the carryover basis of certaintemporary differences. We believe that the carryover basis of such deferred taxassets and liabilities, if any, would have a full valuation allowance recordedagainst the net deferred asset, as, based on the weight of available evidence,we believe it is more likely than not that a significant portion of thedeferred tax assets would not be realized in the near future.

 

In 2003, two of our restaurants were partiallydestroyed by fire.  The combined loss ofproperty, which was covered by our replacement cost property insurance,resulted in gains of $1.0 million and $0.6 million in fiscal years 2004 and2003, respectively, which are presented as casualty gains in the December 26,2004 and December 28, 2003 Consolidated Statements of Operations.  The gains include business interruptioninsurance proceeds and gains on property replacement.

 

**Results ofOperations**

** **

Our operating results for fiscal years ended 2005,2004 and 2003 are expressed as a percentage of total revenues below:

 
| ** **                                   | ** ** | **Fiscal Years Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **2005**               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                         |       |                   |       |   |   |   |   |
| Total revenues                               |       | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                |       | 25.7                   |       | 24.7 |   | 24.7 |   |
| Labor                                        |       | 34.9                   |       | 36.4 |   | 37.2 |   |
| Direct operating and occupancy expense       |       | 24.5                   |       | 23.5 |   | 24.0 |   |
| Total operating costs                        |       | 85.0                   |       | 84.6 |   | 86.1 |   |
| General and administrative expense           |       | 5.4                    |       | 5.4 |   | 4.9 |   |
| Depreciation                                 |       | 3.5                    |       | 3.6 |   | 3.8 |   |
| Operating income                             |       | 5.9                    |       | 6.2 |   | 5.2 |   |
| Interest expense                             |       | 4.3                    |       | 3.8 |   | 4.3 |   |
| Debt termination costs                       |       | —                 |       | 1.4 |   | — |   |
| Total other expense, net                     |       | 4.3                    |       | 4.8 |   | 4.1 |   |
| Income before income tax provision (benefit) |       | 1.6                    |       | 1.4 |   | 1.1 |   |
| Net income                                   |       | 2.6                    |       | 4.2 |   | 1.0 |   |

 

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** **

**Fiscal YearEnded December 25, 2005 Compared to Fiscal Year Ended December 26, 2004**

 

*Total Revenues*. Total revenues increased by $207.5 million, or 63.5%, to $534.3million in fiscal 2005 from $326.8 million in fiscal 2004 due to a $195.9million increase in restaurant revenues, a $9.7 million increase in otherrevenues and a $1.9 million increase in royalty and franchise fees. The fiscal2005 increase in restaurant revenues was the result of the inclusion in ourresults of operations of the Chevys’ restaurant sales of $191.3 millioncombined with comparable store sales increases of 2.9%. The increase incomparable store sales was driven by increases in pricing in El Torito conceptrestaurants of approximately 1.2% and in Acapulco concept restaurants of approximately1.9%, increases in customer counts of 2.0% in the El Torito restaurants anddecreased discounting in the Acapulco restaurants. The $2.9 million increase inother revenues was primarily due to an increase in sales to outside customersby our distribution facility. The $1.2 million increase in royalty andfranchise fees was due to fees earned from franchises acquired in the ChevysAcquisition.

 

*Cost of Sales*. Total cost of sales of $137.2 million in fiscal 2005 increased $56.3million or 69.7% as compared to fiscal 2004, primarily due to the inclusion inour results of operations of the Chevys restaurants’ cost of sales of $47.9million combined with higher costs associated with the increase in sales tooutside customers by our distribution facility and higher commodity costs. As apercentage of total revenues, cost of sales increased to 25.7% in fiscal 2005from 24.7% in fiscal 2004 primarily due to higher commodity costs, mainly inthe poultry, beef and dairy markets, and an increase in packaging costs.

 

*Labor*.Labor costs of $186.4 million in fiscal 2005 increased by $67.5 million or56.8% as compared to fiscal 2004. The increase in labor costs associated withthe inclusion in our results of operations of the Chevys restaurants was $67.8million. Payroll and benefits, particularly wage rates currently at or near theminimum wage and expenses for health insurance and workers’ compensationinsurance, remain subject to inflation and government regulation. As a percentof total revenues, labor costs decreased to 34.9% in fiscal 2005 from 36.4% infiscal 2004 primarily due to lower hourly labor expense achieved as a result ofour continued focus on hourly labor controls and scheduling.

 

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expense of$130.8 million in fiscal 2005 increased by $54.0 million or 70.4% as comparedto fiscal 2004. The increase in direct operating and occupancy expenseassociated with the inclusion in our results of operations of the Chevysrestaurants was $54.8 million. Direct operating and occupancy expense as apercentage of sales increased to 24.5% in fiscal 2005 from 23.5% in fiscal 2004primarily due to higher occupancy expense associated with the Chevysrestaurants.

 

*General and Administrative Expense*. General and administrative expense of $28.9million in fiscal 2005 increased by $11.2 million or 63.1% as compared tofiscal 2004, primarily due to increased staffing associated with the ChevysAcquisition. General and administrative expense as a percentage of sales was5.4% in both fiscal 2005 and fiscal 2004.

 

*Depreciation*. Depreciation expense of $18.5 million in fiscal 2005 increased $6.7million or 56.3% as compared to fiscal 2004. The increase associated with theinclusion in our results of operations of the Chevys restaurants was $6.9million. As a percentage of total revenues, depreciation decreased to 3.5% infiscal 2005 from 3.6% in fiscal 2004, primarily due to fully depreciated assetswith a 5-year life acquired in the El Torito acquisition in June 2000.

 

*Interest Expense*. Interest expense of $23.0 million in fiscal 2005 increased $10.4million or 83.4% as compared to fiscal 2004 primarily due to interest on our$75.0 million senior unsecured credit facility which was used to finance aportion of the Chevys Acquisition and an increase in interest on letters ofcredit issued as security for contracts assumed in connection with the ChevysAcquisition. As a percentage of total revenues, interest expense increased to4.3% in fiscal 2005 from 3.8% in fiscal 2004.

 

**Fiscal YearEnded December 26, 2004 Compared to Fiscal Year Ended December 28,2003**

 

*Total Revenues*. Total revenues increased by $14.7 million, or 4.7%, to $326.8 millionin fiscal 2004 from $312.1 million in fiscal 2003 due to a $6.9 million increasein restaurant sales and a $6.1 million increase in other revenues. The increasein restaurant sales was the result of comparable store sales increases of 5.5%in fiscal 2004 compared to fiscal 2003, partially offset by restaurantclosures. The increase in comparable store sales was driven by pricingincreases in the Acapulco and El Torito concepts of 1.5%, increases in customercounts of 1.2% in the El Torito concept and decreased discounting in theAcapulco concept during such periods. The $6.0 million increase in otherrevenues was primarily due to an increase in sales to outside customers by ourdistribution facility.

 

*Cost of Sales*. Total cost of sales of $80.8 million in fiscal 2004 increased $3.3million or 4.2% as compared to fiscal 2003 primarily due to higher costsassociated with the increase in sales to outside customers from ourdistribution facility combined with commodity cost increases primarily incheese, dairy and fresh fish. As a percentage of total revenues, cost of salesdecreased to 24.7%

 

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in fiscal 2004 from 24.8% in fiscal 2003.

 

*Labor*.Labor costs of $118.9 million in fiscal 2004 increased by $2.6 million or 2.3%as compared to fiscal 2003. The increase in labor cost dollars was due to anincrease in hourly labor of $0.4 million, associated with the increase inrestaurant revenues, combined with higher benefits expense, primarily higherworkers’ compensation insurance expense of $1.3 million and higher payrolltaxes of $0.8 million. Payroll and benefits, particularly wage rates currentlyat or near the minimum wage and expenses for health insurance and workers’compensation insurance, remain subject to inflation and government regulation. Asa percent of total revenues, labor costs decreased to 36.4% in fiscal 2004 from37.2% in fiscal 2003. The decrease in labor costs, as a percent of totalrevenue, was primarily attributable to lower hourly labor expense as a percentof sales. Hourly labor cost improved due to continued hourly labor costcontrols in our restaurants including improvements in labor productivity andthe completion of the implementation of a program designed to assist managementwith labor forecasting and scheduling.

 

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expense of$76.8 million in fiscal 2004 increased by $1.8 million or 2.4% as compared tofiscal 2003. This variance was primarily due to increases in occupancy expensesresulting from base rent increases associated with lease renewals and thesale-leaseback transaction. Direct operating and occupancy expense as apercentage of sales decreased to 23.5% in fiscal 2004 from 24.0% in fiscal2003.

 

*General and Administrative Expense*. General and administrative expense of $17.7million in fiscal 2004 increased $2.5 million or 16.6% as compared to fiscal2003, primarily due to higher bonus expense. As a percentage of total revenues,general and administrative expenses increased to 5.4% in fiscal 2004 from 4.9%in fiscal 2003.

 

*Depreciation*. Depreciation expense of $11.8 million in fiscal 2004 increased $0.1million or 0.9% as compared to fiscal 2003. As a percentage of total revenues,depreciation decreased to 3.6% in fiscal 2004 from 3.8% in fiscal 2003.

 

*Interest Expense*. Interest expense of $12.5 million in fiscal 2004 decreased $0.8million or 6.3% as compared to fiscal 2003 primarily due to a reduction in debtlevels and lower average interest rates associated with the refinancing of ouroutstanding subordinated notes and the term loans outstanding under our priorcredit facility. Our Company’s total debt balance was $8.2 million lower at theend of fiscal 2004 as compared to at the end of fiscal 2003. As a percentage oftotal revenues, interest expense decreased to 3.8% in fiscal 2004 from 4.3% infiscal 2003.

 

*Debt Termination Costs*. On March 31, 2004, we sold $105.0million aggregate principal amount of our 10% senior secured notes due 2010. Concurrentwith the sale of our senior secured notes, we retired outstanding subordinatednotes and the term loans outstanding under our prior credit facility andwrote-off the unamortized cost of the associated deferred debt fees in theamount of $4.2 million and paid approximately $0.4 million in debt terminationcosts in cash. Total debt termination costs of approximately $4.7 million wererecorded in Debt Termination Costs in our Consolidated Statement of Operationsfor the fiscal year ended December 26, 2004.

 

**Liquidityand Capital Resources**

 

Ourprincipal liquidity requirements are to service our debt and meet our capitalexpenditure and working capital needs. On January 11, 2005, we entered into a$75,000 senior unsecured credit facility consisting of a single term loanmaturing on December 31, 2008, all of the proceeds of which were used to financea portion of the cash consideration for the Chevys Acquisition and pay relatedfees and expenses and we also assumed a $0.8 million mortgage secured bycertain assets acquired in the transaction. Our indebtedness at December 25,2005, including obligations under capital leases and the debt associated withthe Chevys Acquisition, was $182.0 million, and we had $9.5 million ofrevolving credit availability under our Revolving Credit Facility. Our abilityto make principal and interest payments and to fund planned capitalexpenditures will depend on our ability to generate cash in the future, which,to a certain extent, is subject to general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control. Based onour current level of operations, we believe our cash flow from operations,available cash and available borrowings under our Revolving Credit Facilitywill be adequate to meet our liquidity needs for the near future. In addition,we may partially fund restaurant openings through credit received from tradesuppliers and landlord allowances, if favorable terms are available. We cannotassure you, however, that our business will generate sufficient cash flow fromoperations or that future borrowings will be available to us under our

 

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Revolving Credit Facility inan amount sufficient to enable us to service our indebtedness or to fund ourother liquidity needs. If we consummate an acquisition, our debt service requirementscould increase. We may need to refinance all or a portion of our indebtednesson or before maturity. We cannot assure you that we will be able to refinanceany of our indebtedness on commercially reasonable terms or at all.

 

**WorkingCapital and Cash Flows**

 

Wepresently have, in the past have had, and in the future are likely to have,negative working capital balances. The working capital deficit principally isthe result of accounts payable and accrued liabilities being more than currentasset levels. The largest components of our accrued liabilities includereserves for our self-insured workers’ compensation and general liabilityinsurance, accrued payroll and related employee benefits costs, and giftcertificate liabilities. We do not have significant receivables and we receivetrade credit based upon negotiated terms in purchasing food and supplies. Fundsavailable from cash sales not needed immediately to pay for food and suppliesor to finance receivables or inventories typically have been used for capitalexpenditures and/or debt service payments under our existing indebtedness.

 

*Operating Activities*. We had net cash provided by operatingactivities of $31.4 million for the year ended December 25, 2005 compared withnet cash provided by operating activities of $21.3 million for the year endedDecember 26, 2004. The increase in cash provided by operating activitieswas primarily attributable to the cash flow generated from restaurants acquiredin the Chevys Acquisition, net of increases in related overhead. We had netcash provided by operating activities of $21.3 million for the year endedDecember 26, 2004, compared with net cash provided by operating activitiesof $16.1 million for the year ended December 28, 2003. The increase in cashprovided by operating activities in was primarily attributable to improvedoperating results combined with noncash debt termination costs of $4.2 millionand net changes in operating assets and liabilities.

 

*Investing Activities*. We had net cash used in investing activitiesof $98.9 million for the year ended December 25, 2005 compared with net cashprovided by investing activities of $3.2 million for the year endedDecember 26, 2004. The decrease in cash provided by investing activitieswas primarily the result of the costs of the Chevys Acquisition of $76.2million (net of cash acquired of $3.9 million), an increase in additions toproperty and equipment of $14.2 million and a decrease in proceeds from thesale of property of $12.5 million, as we had a sale-leaseback transaction in2004 which generated approximately $12.1 million in net proceeds. We had netcash provided by investing activities of $3.2 million for the year endedDecember 26, 2004, compared with net cash used in investing activities of$6.1 million for the year ended December 28, 2003. The increase in cashprovided by investing activities was primarily the result of the sale-leasebacktransaction, which generated approximately $12.1 million in net proceeds. Weexpect to make capital expenditures totaling approximately $24.2 million infiscal 2006. Approximately $2.2 million is expected to be spent on restaurantremodels and refurbishment and approximately $12.4 million is expected to beused to build or complete the building of nine new El Torito, El Torito Grillor Chevys restaurants. We expect pre-opening expenses associated with these newrestaurants to total approximately $2.4 million. We expect fiscal year 2006capital expenditures for information technology and Real Mex Foods to be $1.5million. Maintenance capital expenditures for our restaurants is expected to beapproximately $8.1 million and includes approximately $1.0 million for newtortilla machines and exterior upgrades in approximately 20 Chevys restaurants.These and other similar costs may be higher in the future due to inflation andother factors. We expect to fund the expenditures for new restaurants and othercapital expenditures described above from cash flow from operations, availablecash, available borrowings under our senior credit facility, landlordallowances (if favorable terms are available) and trade financing received fromtrade suppliers.

 

*Financing Activities*. We had net cash provided by financingactivities of $71.7 million for the year ended December 25, 2005 compared withnet cash used in financing activities of $16.4 million for the year endedDecember 26, 2004. The increase in net cash provided by financingactivities was primarily attributable to the issuance of a $75 million seniorunsecured note in connection with the Chevys Acquisition which was reduced by$3.0 million in financing costs attributable to the issuance of the note. Wehad net cash used in financing activities of $16.4 million for the year endedDecember 26, 2004 compared with net cash used in financing activities of $8.6million for the year ended December 28, 2003. The increase in net cashused in financing activities was primarily attributable to the retirement oflong term indebtedness of $115.9 million and the payment of financing costs of$5.4 million attributable to our senior secured notes, offset by the proceedsof the offering of our senior secured notes.

 

**Debt andOther Obligations**

 

*Generally.* On January 11, 2005, we entered into a $75,000 senior unsecured creditfacility consisting of a single term loan maturing on December 31, 2008, all ofthe proceeds of which were used to finance a portion of the cash considerationfor the Chevys Acquisition and pay related fees and expenses.

 

OnMarch 31, 2004, we sold $105.0 million aggregate principal amount of oursenior secured notes. At the closing of the sale of our senior secured notes,we used the proceeds from the sale of these notes and the sale-leasebacktransaction to repay term loans then outstanding under our prior creditfacility of $70.2 million and subordinated notes of $44.4 million in full, andentered into a new senior secured credit facility, or our Senior CreditFacility. In connection with the retirement of our term loans then

 

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outstanding, we took a charge of $4.7 million consisting of deferredfinancing costs and discounts on the retired debt and termination of aninterest rate swap agreement at a cash cost of $0.2 million.

 

*Senior Credit Facility*. Our Senior Credit Facility was initiallycomprised of a $15.0 million revolving credit facility which had a $2.0 millionsub-limit for letters of credit, which we refer to as our Revolving CreditFacility, and a $15.0 million letters of credit facility which we refer to asour Letters of Credit Facility. At the closing of the sale of our seniorsecured notes, we utilized the Letters of Credit Facility in its entirety andutilized an additional $2.0 million from the Revolving Credit Facility tosecure approximately $17.0 million in outstanding letters of credit, whichserve as collateral for our various self-insured workers’ compensation andother insurance programs. On January 11, 2005, concurrent with the closingof the Chevys Acquisition, we amended the Senior Credit Facility to, amongother things, modify certain covenants, change the maturity date toJune 30, 2008 (subject to extension to March 31, 2009 provided thatthe Senior Unsecured Credit Facility has been repaid and terminated in full onor prior to June 29, 2008), and increased the sub-limit for letters ofcredit availability under the Revolving Credit Facility from $2.0 million to$15.0 million (subject to an overall limitation of $30.0 million under theSenior Credit Facility). In December of 2005, we further amended the RevolvingCredit Facility to increase the annual limit of permitted capital expendituresto $30.0 million.

 

Underour Senior Credit Facility, interest accrues based upon a total leverage ratiocalculation. The interest under the Senior Credit Facility accrues, at ouroption, at either (i) the base rate of interest in effect from time totime, which is the higher of the lender’s prime rate as announced from time totime or the federal funds rate plus 0.50%, plus the current applicable marginof 1.75% or (ii) a London Inter Bank Offering Rate for deposits asreported by a generally recognized financial reporting service plus the currentapplicable margin of 4.0%. Our Senior Credit Facility is guaranteed by oursubsidiaries and secured by, among other things, first priority pledges of allof the equity interests of our direct and indirect subsidiaries, and firstpriority security interests (subject to customary exceptions) in substantiallyall of our current and future property and assets, with certain limitedexceptions. The lien on the collateral securing the Senior Credit Facility issenior to the lien on the collateral securing our senior secured notes and theguarantees of these notes.

 

OurSenior Credit Facility contains various affirmative and negative covenants and restrictions,which among other things, requires us to meet certain financial tests(including certain leverage and cash flow ratios), and limits our and oursubsidiaries’ ability to incur or guarantee additional indebtedness, makecertain capital expenditures, pay dividends or make other equity distributions,purchase or redeem capital stock, make certain investments, enter intoarrangements that restrict dividends from subsidiaries, sell assets, engage intransactions with affiliates and effect a consolidation or merger. We arerequired to maintain certain cash flow ratios determined on an annual basisequal to (i) 1.40 to 1.00 for the period December 31, 2004 toDecember 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 periodJanuary 1, 2007 to December 31, 2007, and (iv) 1.90 to 1.00 forthe period January 1, 2008 and thereafter until maturity. Pursuant to theterms of the Senior Credit Facility, cash flow ratio is defined as the ratio of(a) Consolidated Cash Flow (as defined therein) to (b) ConsolidatedFinancial Obligations (as defined therein). The company was in compliance withall specified financial and other covenants under the Senior Credit Facility atDecember 25, 2005.

 

*Senior Unsecured Credit Facility*. Concurrently with the closing of the ChevysAcquisition, we entered into a $75.0 million Senior Unsecured Credit Facility,consisting of a single term loan maturing on December 31, 2008, all of theproceeds of which were used to finance a portion of the cash consideration forthe Chevys Acquisition and pay related fees and expenses. Our obligations underthe Senior Unsecured Credit Facility are guaranteed by our subsidiaries. Intereston the term loan outstanding under the Senior Unsecured Credit Facilityaccrues, at our option, at either (i) the greater of prime and the ratewhich is 0.5% in excess of the federal funds rate, plus 8.5% or (ii) areserve adjusted Eurodollar rate, plus 9.5%. As of February 21, 2006, theinterest rate on the term loan was 14.17%.

 

OurSenior Unsecured Credit Facility contains various affirmative and negativecovenants, which among other things, requires us to meet certain financialtests (including certain leverage and interest coverage ratios) and limits ourand our subsidiaries’ ability to incur or guarantee additional indebtedness,grant certain liens, make certain restricted payments, make capitalexpenditures, engage in transactions with affiliates, make certain investments,sell our assets, make acquisitions, effect a consolidation or merger and amendor modify instruments governing certain indebtedness (including relating to oursenior secured notes and the Senior Credit Facility). We are required tomaintain certain minimum interest coverage ratios ranging from (i) 1.85 to1.00 for the four fiscal quarters ending on or prior to September 30, 2005through March 31, 2006, (ii) 2.00 to 1.00 for the four fiscalquarters ending on or prior to June 30, 2006 through December 31,2006, (iii) 2.15 to 1.00 for the fiscal quarters ending on or prior toMarch 31, 2007 through December 31, 2007, and (iv) 2.30 to 1.00thereafter until maturity. Pursuant to the terms of the Senior Unsecured CreditFacility, interest coverage ratio is defined as the ratio as of the last day ofany fiscal quarter of (a) Consolidated EBITDA (as defined therein) for thefour-fiscal quarter period then ending to (b) Consolidated InterestExpense (as defined therein) for such four-fiscal quarter period. The companywas in compliance with all specified financial and other covenants under theSenior Unsecured Credit Facility at December 25, 2005.

 

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* *

*Senior Secured Notes due 2010*. Interest on our senior secured notesaccrues at a rate of 10% per annum and is payable semiannually on April 1and October 1 of each year. Our senior secured notes are fully andunconditionally guaranteed on a senior secured basis by all of our present andfuture domestic subsidiaries which are restricted subsidiaries under theindenture governing our senior secured notes. Our senior secured notes andrelated guarantees are secured by substantially all of our and our domesticrestricted subsidiaries’ tangible and intangible assets, subject to the priorranking claims on such assets by the lenders under our Senior Credit Facility. Theindenture governing our senior secured notes contains various affirmative andnegative covenants, subject to a number of important limitations andexceptions, including but not limited those limiting our ability to incuradditional indebtedness, make capital expenditures, pay dividends, redeem stockor make other distributions, issue stock of our subsidiaries, make certaininvestments or acquisitions, grant liens on assets, enter into transactions withaffiliates, merge, consolidate or transfer substantially all of our assets, andtransfer and sell assets. The covenant that limits our incurrence ofindebtedness requires that, after giving effect to any such incurrence ofindebtedness and the application of the proceeds thereof, our fixed chargecoverage ratio as of the date of such incurrence will be at least (i) 2.25to 1.00 in the case of any incurrence on or before April 1, 2006 and(ii) 2.50 to 1.00 in the case of any incurrence after April 1, 2006. Theindenture defines consolidated fixed charge coverage ratio as the ratio ofConsolidated Cash Flow (as defined therein) to Fixed Charges (as definedtherein). The company was in compliance with all specified financial and othercovenants under the Senior Secured Notes indenture at December 25, 2005.

 

Wecan redeem our senior secured notes on or after April 1, 2007, except thatwe may redeem up to 35% of our senior secured notes before April 1, 2007with the proceeds of one or more public equity offerings. We are required toredeem our senior secured notes under certain circumstances involving a changeof control. Additionally, if we or any of our domestic restricted subsidiariesengage in assets sales, we generally must either invest the net cash proceedsfrom such sales in our business within 360 days, prepay the indebtednessobligations under our Revolving Credit Facility or certain other securedindebtedness or make an offer to purchase a portion of our senior securednotes.

 

OnJune 9, 2004, we filed a registration statement with respect to noteshaving substantially identical terms as our senior secured notes, as part of anoffer to exchange registered notes for these notes. We completed the exchangeoffer for 100% of our senior secured notes on June 7, 2005.

 

*Mortgage.* Concurrently with the closing of the Chevys Acquisition, we assumed a$0.8 million mortgage secured by the building and improvements of one of therestaurants acquired in the transaction. The mortgage carries a fixed annualinterest rate of 9.28% and requires equal monthly payments of principal andinterest through April 2015.

 

*Capital Leases*. In conjunction with our acquisition of El Torito, we assumed capitallease obligations, collateralized with leasehold improvements, in an aggregateamount of $9.2 million. The remaining capital lease obligations have aweighted-average interest rate of 9.4%. As of December 25, 2005, the principalamount due relating to capital lease obligations was $1.2 million. Principaland interest payments on the capital lease obligations are due monthly andrange from $750 to $7,000 per month. The capital lease obligations maturebetween 2006 and 2025.

 

Thefollowing tables represent our contractual commitments as of December 25, 2005associated with obligations under debt agreements, other obligations discussedabove and from our restaurant and support center operating leases:

 

27

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| ** **                            | ** ** | **Total**  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years**             | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------|------------|---------------------------|------------|---------------|------------|------------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **            | ** ** | **($ in thousands)** | ** ** | ** **    | ** ** | ** **             | ** ** |
| **Contractual  Obligations - Actual** |       |       |       |                  |       |                      |       |          |       |                   |       |
| Long Term  Debt Obligations(1)        |       | $          | 180,834    |                  | $          | 117                       |       | $             | 75,126     |                   | $          | 105,151 |   | $ | 440 |   |
| Capital  Lease Obligations            |       | 1,709      |       | 320                   |       | 626                       |       | 381           |       | 382                    |       |
| Operating  Lease Obligations(2)       |       | 279,692    |       | 39,533                |       | 73,264                    |       | 57,522        |       | 109,373                |       |
| Purchase  Obligations                 |       | 35,197     |       | 35,197                |       | —                    |       | —        |       | —                 |       |
|                                  |       |       |       |                  |       |                      |       |          |       |                   |       |
| Total                                 |       | $          | 497,432    |                  | $          | 75,167                    |       | $             | 149,016    |                   | $          | 163,054 |   | $ | 110,195 |   |

 

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(1)           Includes our senior secured notes and obligations to a vendor.

 

(2)           In addition to the base rent, many of our leases contain percentagerent clauses, which obligate us to pay additional rents based on a percentageof sales, when sales levels exceed a contractually defined base. We recordedsuch additional rent expenses of $2,517 in 2005, $2,218 in 2004 and $2,144 in2003. Operating Lease Obligations do not reflect potential renewals orreplacements of expiring leases.

 

**Inflation**

 

Overthe past five years, inflation has not significantly affected our operations. However,the impact of inflation on labor, food and occupancy costs could, in thefuture, significantly affect our operations. We pay many of our employeeshourly rates related to the federal or applicable state minimum wage. Ourworkers’ compensation and health insurance costs have been and are subject tocontinued inflationary pressures. Costs for construction, taxes, repairs,maintenance and insurance all affect our occupancy costs. Many of our leasesrequire us to pay taxes, maintenance, repairs, insurance and utilities; all ofwhich may be subject to inflationary increases. We believe that our currentpractice of maintaining operating margins through a combination of periodicmenu price increases, cost controls, careful evaluation of property andequipment needs, and efficient purchasing practices is our most effective toolfor dealing with inflation.

 

**CriticalAccounting Policies**

 

OurCompany’s accounting policies are fully described in Note 2 of the ConsolidatedFinancial Statements. As disclosed in Note 2, the discussion and analysis ofour financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to property and equipment,impairment of long-lived assets, valuation of goodwill, self-insurancereserves, income taxes and revenue recognition. We base our estimates onhistorical experience and on various other assumptions and factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Based on ourongoing review, we plan to adjust our judgments and estimates where facts andcircumstances dictate. Actual results could differ from our estimates.

 

Webelieve the following critical accounting policies are important to theportrayal of our financial condition and results and require our management’smost difficult, subjective or complex judgments, often as a result of the needto make estimates about the effect of matters that are inherently uncertain.

 

**Propertyand Equipment**

 

Propertyand equipment is recorded at cost. Property and equipment is depreciated overthe assets’ estimated useful lives using the straight-line method. Leaseholdimprovements are amortized using the straight-line method over the estimateduseful life of the asset or the term of the related lease whichever is shorter.The estimated useful lives for furniture, fixtures and equipment range fromthree to ten years. The lives for buildings and leasehold improvements are theshorter of 20 years or the term (excluding renewal options) of the relatedoperating lease.

 

**Long-LivedAsset Impairment**

 

Weassess the impairment of long-lived assets, including restaurant sites andother assets, when events or changes in circumstances indicate that thecarrying value of the assets or the asset group may not be recoverable. Theasset impairment review

 

28

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assesses the fair value of the assets based on the future cash flowsthe assets are expected to generate. An impairment loss is recognized whenestimated undiscounted future cash flows expected to result from the use of theasset plus net proceeds expected from the disposition of the asset (if any) areless than the related asset’s carrying amount. Impairment losses are measuredas the amount by which the carrying amounts of the assets exceed their fairvalues. The net proceeds expected from the disposition of the asset aredetermined by independent quotes or expected sales prices developed by internalspecialists. Estimates of future cash flows and expected sales prices are judgmentsbased on our experience and knowledge of local operations. These estimates canbe significantly affected by future changes in real estate market conditions,the economic environment, and capital spending decisions and inflation.

 

Forproperties to be closed that are under long-term lease agreements, the presentvalue of any remaining liability under the lease, discounted using risk-freerates and net of expected sublease rentals that could be reasonably obtainedfor the property, is recognized as a liability and expensed. The value of anyequipment and leasehold improvements related to a closed store is reduced toreflect net recoverable values. Internal specialists estimate the subtenantincome, future cash flows and asset recovery values based on their historicalexperience and knowledge of (1) the market in which the store to be closedis located, (2) the results of its previous efforts to dispose of similarassets and (3) the current economic conditions. Specific real estatemarkets, the economic environment and inflation affect the actual cost ofdisposition for these leases and related assets.

 

Duringthe years ended December 25, 2005, December 26, 2004, andDecember 28, 2003, our management determined that certain identifiedproperty and equipment was impaired. Management wrote the property down by $0.6million, $0.2 million, and $0.2 million, respectively, to its estimated fairvalue by increasing accumulated depreciation and amortization and recording aloss on impairment of property and equipment.

 

**Valuationof Goodwill**

 

Goodwillis tested annually for impairment, and is tested for impairment more frequentlyif events and circumstances indicate that the asset might be impaired. Managementperforms its annual impairment test during the last quarter of its fiscal year.An impairment loss is recognized to the extent that the carrying amount exceedsthe asset’s fair value. We consider the reporting unit level to be the companylevel, as the components (e.g., brands) within our Company have similar economiccharacteristics, including production processes, types or classes of customersand distribution methods. This determination is made at the reporting unitlevel and consists of two steps. First, our management determines the fairvalue of a reporting unit and compares it to its carrying amount. Second, ifthe carrying amount of a reporting unit exceeds its fair value, an impairmentloss is recognized for any excess of the carrying amount of the reportingunit’s goodwill over the implied fair value of the goodwill. The implied fairvalue of goodwill is determined by allocating the fair value of the reportingunit in a manner similar to a purchase price allocation, in accordance withStatement of Financial Accounting Standards No. 141, “Business Combinations”.The residual fair value after this allocation is the implied fair value of thereporting unit goodwill.

 

Factorsthat could change the result of our goodwill impairment test include, but arenot limited to, different assumptions used to forecast future revenues,expenses, capital expenditures and working capital requirements used in ourcash flow models. In addition, selection of a risk-adjusted discount rate onthe estimated undiscounted cash flows is susceptible to future changes inmarket conditions, and when unfavorable, can adversely affect our originalestimates of fair values. A variance in the discount rate could have asignificant impact on the valuation of the goodwill for purposes of theimpairment test. We cannot predict the occurrence of certain future events thatmight adversely affect the reported value of goodwill. Such events include, butare not limited to, strategic decisions made in response to the economicenvironment on our customer base or a material negative change in relationshipswith our customers. Our annual impairment tests of goodwill were performed asof October 22, 2005 and it was determined that the recorded amounts forgoodwill are recoverable and that no impairment existed.

 

**Self-Insurance**

 

Ourbusiness is primarily self-insured for workers’ compensation and generalliability costs. We record our self-insurance liability, determinedactuarially, based on claims filed and an estimate of claims incurred but notyet reported. Any actuarial projection of ultimate losses is subject to a highdegree of variability. Sources of this variability are numerous and include,but are not limited to, future economic conditions, court decisions andlegislative actions. Our workers’ compensation future funding estimatesanticipate no change in the benefit structure. Statutory changes could have asignificant impact on future claim costs.

 

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

 

29

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**IncomeTaxes**

 

Our Companyutilizes the liability method of accounting for income taxes as set forth inSFAS No. 109, “Accounting for Income Taxes.” Under the liability method,deferred taxes are determined based on the difference between the financialstatement and the tax basis of assets and liabilities using enacted tax ratesin effect in the years in which the differences are expected to reverse. Recognitionof deferred tax assets is limited to amounts considered by management to bemore likely than not to be realizable in future periods. We have significantdeferred tax assets, which are subject to periodic recoverability assessments.In accordance with SFAS No. 109, net deferred tax assets are reduced by avaluation allowance if, based on all the available evidence, it is more likelythan not that some or all of the deferred tax assets will not be realized. Novaluation allowance has been provided for at December 25, 2005. The amount ofdeferred tax assets considered realizable was based upon our ability togenerate future taxable income, exclusive of reversing temporary differences andcarryforwards. The tax benefits recorded in fiscal years 2005 and 2004 aremostly related to the reduction of our valuation allowance related to our netdeferred tax assets.

 

The purchase accountingadjustments for the Chevys Acquisition have not been reflected in the deferredtax balances as of December 25, 2005 as the final tax returns for the seller,Chevy's Restaurant, Inc., have not been filed. Until the tax returns are filed,we are unable to determine the carryover basis of assets, liabilities, and netoperating loss carryforwards at the date of acquisition. Upon completion of theSellers’ final tax returns for the periods ending before the ChevysAcquisition, the Company will assess and record the carryover basis of certaintemporary differences. We believe that the carryover basis of such deferred taxassets and liabilities, if any, would have a full valuation allowance recordedagainst the net deferred asset, as, based on the weight of available evidence,we believe it is more likely than not that a significant portion of thedeferred tax assets would not be realized in the near future.

 

 The income tax provision recorded for fiscalyear 2003 represents the state taxes paid in that period. In evaluating futuretaxable income for valuation allowance purposes as of December 25, 2005, weconcluded that it was appropriate to consider only income expected to begenerated in fiscal 2006, 2007 and 2008. We may be required to adjust theallowance, if, based on estimates of future income, we conclude that a valuationallowance is warranted. An increase in the valuation allowance would result ina corresponding credit to income tax expense in the period the allowance isincreased.

 

**RevenueRecognition**

 

Revenues fromthe operation of company-owned restaurants are recognized when sales occur. Allfees from franchised operations are included in revenue as earned. Royalty feesare based on franchised restaurants’ revenues and we record these fees in theperiod the related franchised restaurants’ revenues are earned. Real Mex Foods’revenues from sales to outside customers are recognized upon delivery, whentitle transfers to the customer, and are included in other revenues.

 

**RecentAccounting Pronouncements**

 

InDecember 2004, FASB issued SFAS No. 123 (Revised), “Share-BasedPayment,” which is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation.” SFAS No. 123 (Revised) supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”and its related implementation guidance. SFAS No. 123 (Revised) requirescompanies to record compensation expense for share-based payments to employees,including grants of employee stock options, at fair value. In April 2005, theSEC approved a new rule that delays the effective date of SFAS No. 123R, *Share-Based Payment.* Except for thedeferral of the effective date, the guidance in SFAS No. 123R is unchanged. Underthe SEC’s rule, SFAS No.123R is now effective for our first fiscal yearbeginning on or after June 15, 2005. SFAS No. 123 (Revised) is effectivefor most public companies at the beginning of the first interim or annualperiod beginning after June 15, 2005. We will apply this Statement to allawards granted on or after December 25, 2005 and to awards modified,repurchased, or cancelled after that date. We believe that the implementationof the provisions of SFAS No. 123 (Revised) will have an impact consistentwith our disclosure included under SFAS No. 148 included in Note 8 of thenotes to our consolidated financial statements included elsewhere in thisreport.

 

InDecember 2004, the FASB issued SFAS No. 151, “Inventory Costs,” whichamends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facilityexpenses, freight, handling costs and wasted materials (spoilage) should berecognized as current-period charges. In addition, SFAS No. 151 requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. The provisions ofSFAS No. 151 are effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. We will adopt this statementeffective January 1, 2006, and do not expect it to have a material impacton our financial position or results of operations.

 

InJune 2005, the FASB Emerging Issues Task Force reached a consensus on Issue No.05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF05-6”). The guidance requires that leasehold improvements acquired in abusiness combination or purchased subsequent to the inception of a lease beamortized over the lesser of the useful life of the assets or a term thatincludes renewals that are reasonably assured at the date of the businesscombination or purchase. The guidance is effective for

 

30

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periods beginning after June 29, 2005. The adoption of EITF 05-6 didnot have an impact on our consolidated financial statements.

 

In October2005, the FASB issued Staff Position No. FAS 13-1, “Accounting for Rental Costsduring a Construction Period,” which requires that rental costs associated withoperating leases incurred during a construction period be recognized as rentalexpense. This Staff Position is effective for reporting periods beginning afterDecember 15, 2005. Retroactive application is permitted but not required. Wewill adopt the FASB Staff Position FAS 13-1 on December 26, 2005, at which timerent will no longer be capitalized related to leases with properties underconstruction.

 

ITEM 7A.              QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

Theinherent risk in market risk sensitive instruments and positions primarilyrelates to potential losses arising from adverse changes in foreign exchangerates and interest rates.

 

Weconsider the U.S. dollar to be the functional currency for all of our entities.All of our net sales and our expenses in fiscal years 2005, 2004 and 2003 weredenominated in U.S. dollars. Therefore, foreign currency fluctuations did notmaterially affect our financial results in those periods.

 

Weare also subject to market risk from exposure to changes in interest ratesbased on our financing activities. This exposure relates to borrowings underour senior secured and unsecured credit facilities that are payable at floatingrates of interest. As of February 21, 2006, we do not have any borrowingsoutstanding under our Revolving Credit Facility. As of February 21, 2006, wehave $75.0 million outstanding under our Senior Unsecured Credit Facility. Ahypothetical 10% fluctuation in interest rates as of February 21, 2006 wouldhave a net after tax impact of $0.7 million on our earnings in fiscal 2006, inaddition to its effect on cash flows.

 

Manyof the food products purchased by us are affected by changes in weather,production, availability, seasonality and other factors outside our control. Inan effort to control some of this risk, we have entered into certain fixedprice purchase agreements with varying terms of generally no more than a yearduration. In addition, we believe that almost all of our food and supplies areavailable from several sources, which helps to control food commodity risks.

 

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ITEM 8.                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The audited consolidated financialstatements are set forth below.

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board ofDirectors

Real MexRestaurants, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Real MexRestaurants, Inc. and its subsidiaries (the Company) as of December 25,2005 and December 26, 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the three fiscalyears in the period ended December 25, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Anaudit includes consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of RealMex Restaurants, Inc. and its subsidiaries at December 25, 2005 andDecember 26, 2004, and the results of their operations and their cashflows for each of the three fiscal years in the period ended December 25, 2005,in conformity with accounting principles generally accepted in the UnitedStates.

 
|                     |   | /s/ Ernst  & Young LLP |   |
|--------------------------|--------|----------------------------|--------|
| Los Angeles,  California |
| February 17,  2006       |

 

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**Real Mex Restaurants, Inc.Consolidated Balance Sheets(In Thousands, Except For Share Data)**

** **
| ** **                                                                                                                                                                                                                                                                                          | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| **Assets**                                                                                                                                                                                                                                                                                          | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                     |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                           |       | $                           | 14,871     |                        | $          | 10,690 |   |
| Trade receivables, net                                                                                                                                                                                                                                                                              |       | 8,265                       |       | 4,312                       |       |
| Other receivables                                                                                                                                                                                                                                                                                   |       | 2,289                       |       | 157                         |       |
| Inventories                                                                                                                                                                                                                                                                                         |       | 9,977                       |       | 6,616                       |       |
| Prepaid expenses and supplies                                                                                                                                                                                                                                                                       |       | 5,268                       |       | 3,754                       |       |
| Deferred tax asset                                                                                                                                                                                                                                                                                  |       | 3,454                       |       | 1,371                       |       |
| Total current assets                                                                                                                                                                                                                                                                                |       | 44,124                      |       | 26,900                      |       |
|                                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| Property and equipment, net                                                                                                                                                                                                                                                                         |       | 82,592                      |       | 36,589                      |       |
| Goodwill, net                                                                                                                                                                                                                                                                                       |       | 157,267                     |       | 105,387                     |       |
| Deferred charges                                                                                                                                                                                                                                                                                    |       | 6,354                       |       | 5,003                       |       |
| Deferred tax asset                                                                                                                                                                                                                                                                                  |       | 14,097                      |       | 7,769                       |       |
| Other assets                                                                                                                                                                                                                                                                                        |       | 6,455                       |       | 5,303                       |       |
| Total assets                                                                                                                                                                                                                                                                                        |       | $                           | 310,889    |                        | $          | 186,951 |   |
|                                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                                                                                       |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                                                                                            |       | $                           | 66,488     |                        | $          | 42,505 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                   |       | 117                         |       | 63                          |       |
| Current portion of capital lease  obligations                                                                                                                                                                                                                                                       |       | 210                         |       | 242                         |       |
| Total current liabilities                                                                                                                                                                                                                                                                           |       | 66,815                      |       | 42,810                      |       |
|                                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| Long-term debt, less current portion                                                                                                                                                                                                                                                                |       | 180,717                     |       | 105,000                     |       |
| Capital lease obligations, less current  portion                                                                                                                                                                                                                                                    |       | 987                         |       | 1,198                       |       |
| Other liabilities                                                                                                                                                                                                                                                                                   |       | 11,786                      |       | 8,094                       |       |
| Total liabilities                                                                                                                                                                                                                                                                                   |       | 260,305                     |       | 157,102                     |       |
|                                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                       |       | —                      |       | —                      |       |
|                                                                                                                                                                                                                                                                                                |       |                        |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| Redeemable Preferred Stock:                                                                                                                                                                                                                                                                         |       |                        |       |                        |       |
| Series A, 12 1/2% Cumulative  Compounding Preferred Stock – 18,240 and 15,881 shares issued and outstanding  at December 25, 2005 and December 26, 2004, respectively; liquidation  preference of $35,646 and $29,644 at December 25, 2005 and December 26,  2004, respectively |       | 35,646                      |       | 29,644                      |       |
| Series B, 13.5% Cumulative Compounding  Preferred Stock – 12,323 and 10,722 shares issued and outstanding at December  25, 2005 and December 26, 2004, respectively; liquidation preference of  $25,365 and $20,970 at December 25, 2005 and December 26, 2004,  respectively   |       | 25,365                      |       | 20,970                      |       |
| Series C, 15% Cumulative Compounding  Preferred Stock – 17,478 and 14,975 shares issued and outstanding at December  25, 2005 and December 26, 2004, respectively; liquidation preference of  $58,080 and $46,544 at December 25, 2005 and December 26, 2004,  respectively     |       | 58,080                      |       | 46,544                      |       |
| Common Stock, $.001 par value, 2,000,000  shares authorized, 316,290 and 274,523 shares issued and outstanding at  December 25, 2005 and December 26, 2004, respectively                                                                                                                       |       | —                      |       | 1                           |       |
| Warrants                                                                                                                                                                                                                                                                                            |       | 4,027                       |       | 4,027                       |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                          |       | 16,203                      |       | 16,202                      |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                 |       | (88,737                     | )          | (87,539                     | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                     |       | 50,584                      |       | 29,849                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                     |       | $                           | 310,889    |                        | $          | 186,951 |   |

 

*See accompanying notes.*

 

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**Real Mex Restaurants, Inc.**

 

**Consolidated Statements of Operations**

 
| ** **                                             | ** ** | **Years Ended**        | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
| ** **                                             | ** ** | **(In Thousands)**     | ** ** |
| Revenues:                                              |       |                   |       |   |   |   |   |
| Restaurant  revenues                                   |       | $                      | 510,013    |   | $ | 314,157 |   | $ | 307,278 |   |
| Other  revenues                                        |       | 20,532                 |       | 10,787 |   | 4,714 |   |
| Franchise  revenues                                    |       | 3,751                  |       | 1,866 |   | 146 |   |
|                                                   |       |                   |       |   |   |   |   |
| Total revenues                                         |       | 534,296                |       | 326,810 |   | 312,138 |   |
|                                                   |       |                   |       |   |   |   |   |
| Costs and  expenses:                                   |       |                   |       |   |   |   |   |
| Cost of  sales                                         |       | 137,171                |       | 80,839 |   | 77,555 |   |
| Labor                                                  |       | 186,390                |       | 118,888 |   | 116,269 |   |
| Direct  operating and occupancy expenses               |       | 130,800                |       | 76,760 |   | 74,938 |   |
| General and  administrative expenses                   |       | 28,912                 |       | 17,725 |   | 15,201 |   |
| Depreciation                                           |       | 18,498                 |       | 11,837 |   | 11,732 |   |
| Pre-opening  costs                                     |       | 524                    |       | 295 |   | 1 |   |
| Loss on  impairment of property and equipment          |       | 568                    |       | 167 |   | 233 |   |
|                                                   |       |                   |       |   |   |   |   |
| Operating  income                                      |       | 31,433                 |       | 20,299 |   | 16,209 |   |
|                                                   |       |                   |       |   |   |   |   |
| Other income  (expense):                               |       |                   |       |   |   |   |   |
| Casualty  (loss) gain                                  |       | —                 |       | 997 |   | 639 |   |
| Interest  expense                                      |       | (22,973                | )          | (12,528 | ) | (13,372 | ) |
| Debt  termination costs                                |       | —                 |       | (4,677 | ) | — |   |
| Other income  (expense), net                           |       | 217                    |       | 455 |   | (161 | ) |
|                                                   |       |                   |       |   |   |   |   |
| Total other  expense, net                              |       | (22,576                | )          | (15,753 | ) | (12,894 | ) |
| Income  before income tax (benefit) provision          |       | 8,677                  |       | 4,546 |   | 3,315 |   |
| Income tax  (benefit) provision                        |       | (4,709                 | )          | (9,070 | ) | 109 |   |
|                                                   |       |                   |       |   |   |   |   |
| Net income                                             |       | 13,386                 |       | 13,616 |   | 3,206 |   |
| Redeemable  preferred stock accretion                  |       | (14,583                | )          | (11,862 | ) | (10,409 | ) |
|                                                   |       |                   |       |   |   |   |   |
| Net (loss)  income attributable to common stockholders |       | $                      | (1,197     | ) | $ | 1,754 |   | $ | (7,203 | ) |

 

*See accompanying notes.*

 

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**Real Mex Restaurants, Inc.Consolidated Statements of Stockholders’ EquityFor the years ended December 25, 2005, December 26, 2004 and December 28,2003(in thousands, except for share data)**

 

 
| ** **                                              | ** ** | **Series A  Redeemable** | ** ** | **Series B  Redeemable** | ** ** | **Series C  Redeemable** | ** ** | ** **        | ** ** | ** ** | ** ** | **Notes  Receivable** | ** ** | **Additional**   | ** ** | ** **      | ** ** | ** **  | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------|------------|------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                                              | ** ** | **Preferred**                 | ** ** | **Preferred**                 | ** ** | **Preferred**                 | ** ** | **Common  Stock** | ** ** | ** ** | ** ** | **From**              | ** ** | **Paid-in**      | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                              | ** ** | **Stock**                     | ** ** | **Stock**                     | ** ** | **Stock**                     | ** ** | **Shares**        | ** ** | **Amount** | ** ** | **Warrants**          | ** ** | **Stockholders** | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 29, 2002                      |       | $                             | 23,563     |                          | $          | 16,373                        |       | $                 | 35,119     |       | 275,926    |                  | $          | 1                |       | $               | 4,027      |        | $          | (763 | ) | $ | 16,312 |   | $ | (82,090 | ) | $ | 12,542 |   |
| Redemption of  Series A Redeemable Preferred Stock |       | (50                           | )          | —                        |       | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | (50 | ) |
| Redemption of  Series B Redeemable Preferred Stock |       | —                        |       | (34                           | )          | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | (34 | ) |
| Redemption of  Series C Redeemable Preferred Stock |       | —                        |       | —                        |       | (25                           | )          | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | (25 | ) |
| Repurchase of  Common Stock                             |       | —                        |       | —                        |       | —                        |       | (823              | )          | —     |       | —                |       |             |       | (57             | )          | —      |       | (57 | ) |
| Interest  receivable increase on stockholder notes      |       | —                        |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | (45              | )          | —          |       | —      |       | (45 | ) |
| Payment from  stockholders on notes receivable          |       | —                        |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | 324              |       | —          |       | —      |       | 324 |   |
| Accretion on  redeemable preferred stock                |       | 2,906                         |       | 2,181                         |       | 5,322                         |       | —            |       | —     |       | —                |       | —           |       | —          |       | (10,409     | )          | — |   |
| Net Income                                              |       | —                        |       | —                        |       |                          |       | —            |       | —     |       | —                |       | —           |       | —          |       | 3,206       |       | 3,206 |   |
| Balance at  December 28, 2003                      |       | 26,419                        |       | 18,520                        |       | 40,416                        |       | 275,103           |       | 1          |       | 4,027                 |       | (484             | )          | 16,225          |       | (89,293     | )          | 15,861 |   |
| Redemption of  Series A Redeemable Preferred Stock |       | (35                           | )          | —                        |       | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | (35 | ) |
| Redemption of  Series B Redeemable Preferred Stock |       | —                        |       | (24                           | )          | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | (24 | ) |
| Repurchase of Common  Stock                             |       | —                        |       | —                        |       | —                        |       | (580              | )          | —     |       | —                |       | —           |       | (53             | )          | —      |       | (53 | ) |
| Interest  receivable increase on stockholder notes      |       | —                        |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | 22               |       | —          |       | —      |       | 22 |   |
| Payment from  stockholders on notes receivable          |       | —                        |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | 462              |       | —          |       | —      |       | 462 |   |
| Accretion on  redeemable preferred stock                |       | 3,260                         |       | 2,474                         |       | 6,128                         |       | —            |       | —     |       | —                |       | —           |       | —          |       | (11,862     | )          | — |   |
| Net income                                              |       | —                        |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | 13,616      |       | 13,616 |   |
| Balance at  December 26, 2004                      |       | 29,644                        |       | 20,970                        |       | 46,544                        |       | 274,523           |       | 1          |       | 4,027                 |       | —           |       | 16,202          |       | (87,539     | )          | 29,849 |   |
| Issuance of  Series A Redeemable Preferred Stock   |       | 2064                          |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | 2,064 |   |
| Issuance of  Series B Redeemable Preferred Stock   |       | —                        |       | 1,393                         |       | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | 1,393 |   |
| Issuance of  Series C Redeemable Preferred Stock   |       | —                        |       | —                        |       | 3,892                         |       | —            |       | —     |       | —                |       | —           |       | —          |       | —      |       | 3,892 |   |
| Issuance of  Common Stock                               |       | —                        |       | —                        |       | —                        |       | 41,767            |       | (1         | )          | —                |       |             |       | 1               |       | —      |       | — |   |
| Accretion on  redeemable preferred stock                |       | 3,938                         |       | 3,002                         |       | 7,644                         |       | —            |       | —     |       | —                |       | —           |       | —          |       | (14,584     | )          | — |   |
| Net income                                              |       | —                        |       | —                        |       | —                        |       | —            |       | —     |       | —                |       | —           |       | —          |       | 13,386      |       | 13,386 |   |
| Balance at  December 25, 2005                           |       | $                             | 35,646     |                          | $          | 25,365                        |       | $                 | 58,080     |       | 316,290    |                  | $          | —           |       | $               | 4,027      |        | $          | — |   | $ | 16,203 |   | $ | (88,737 | ) | $ | 50,584 |   |

 

*See accompanying notes.*

 

35

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**Real Mex Restaurants, Inc.Consolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **Years Ended**        | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
| ** **                                                                         | ** ** | ** **             | ** ** | **(In Thousands)** | ** ** | ** ** | ** ** |
|                                                                               |       |                   |       |   |   |   |   |
| **Operating activities**                                                           |       |                   |       |   |   |   |   |
| Net income                                                                         |       | $                      | 13,386     |   | $ | 13,616 |   | $ | 3,206 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                   |       |   |   |   |   |
| Depreciation                                                                       |       | 18,498                 |       | 11,837 |   | 11,732 |   |
| Amortization of:                                                                   |       |                   |       |   |   |   |   |
| Deferred financing                                                                 |       | 1,712                  |       | 929 |   | 760 |   |
| Debt discount                                                                      |       | —                 |       | 114 |   | 446 |   |
| (Gain) loss on disposal of property and  equipment                                 |       | (204                   | )          | (384 | ) | 135 |   |
| Deferred tax asset                                                                 |       | (4,812                 | )          | (9,140 | ) | — |   |
| Debt termination costs                                                             |       | —                 |       | 4,247 |   | — |   |
| Casualty gain                                                                      |       | —                 |       | (997 | ) | (639 | ) |
| Impairment of property and equipment                                               |       | 568                    |       | 167 |   | 233 |   |
| Changes in operating assets and  liabilities:                                      |       |                   |       |   |   |   |   |
| Trade and other receivables                                                        |       | (2,473                 | )          | 346 |   | 166 |   |
| Inventories                                                                        |       | (1,979                 | )          | (1,058 | ) | (871 | ) |
| Prepaid expenses and supplies                                                      |       | (336                   | )          | (113 | ) | (540 | ) |
| Other assets                                                                       |       | 196                    |       | (3,003 | ) | (720 | ) |
| Deferred charges                                                                   |       | (25                    | )          | (48 | ) | — |   |
| Accounts payable and accrued liabilities                                           |       | 5,403                  |       | 4,670 |   | 2,076 |   |
| Other liabilities                                                                  |       | 1,472                  |       | 96 |   | 124 |   |
| Net cash provided by operating activities                                          |       | 31,406                 |       | 21,279 |   | 16,108 |   |
|                                                                               |       |                   |       |   |   |   |   |
| **Investing activities**                                                           |       |                   |       |   |   |   |   |
| Additions to property and equipment                                                |       | (23,408                | )          | (9,982 | ) | (6,962 | ) |
| Chevys acquisition, net of cash acquired of  $3,913                                |       | (76,165                | )          | — |   | — |   |
| Proceeds from sale of property and  equipment                                      |       | 683                    |       | 13,170 |   | 857 |   |
| Net cash (used in) provided by investing  activities                               |       | (98,890                | )          | 3,929 |   | (6,105 | ) |
|                                                                               |       |                   |       |   |   |   |   |
| **Financing activities**                                                           |       |                   |       |   |   |   |   |
| Borrowings under long-term debt agreements                                         |       | 75,000                 |       | 105,000 |   | 2,449 |   |
| Payments on long-term debt agreements                                              |       | (288                   | )          | (116,064 | ) | (11,161 | ) |
| Payments received on stockholder loans for  stock subscription notes               |       | —                 |       | 462 |   | 324 |   |
| Repurchase of Common Stock                                                         |       | —                 |       | (53 | ) | (57 | ) |
| Redemption of Series A Redeemable  Preferred Stock                            |       | —                 |       | (35 | ) | (50 | ) |
| Redemption of Series B Redeemable  Preferred Stock                            |       | —                 |       | (24 | ) | (34 | ) |
| Redemption of Series C Redeemable  Preferred Stock                            |       | —                 |       | — |   | (25 | ) |
| Payment of financing costs                                                         |       | (3,047                 | )          | (5,690 | ) | — |   |
| Interest receivable (increase) decrease on  stockholder loans                      |       | —                 |       | 22 |   | (45 | ) |
| Net cash provided by (used in) financing  activities                               |       | 71,665                 |       | (16,382 | ) | (8,599 | ) |
| Net increase in cash and cash equivalents                                          |       | 4,181                  |       | 8,085 |   | 1,404 |   |
|                                                                               |       |                   |       |   |   |   |   |
| Cash and cash equivalents at beginning of  year                                    |       | 10,690                 |       | 2,605 |   | 1,201 |   |
| Cash and cash equivalents at end of year                                           |       | $                      | 14,871     |   | $ | 10,690 |   | $ | 2,605 |   |
|                                                                               |       |                   |       |   |   |   |   |
| **Supplemental disclosure of cash flow  information**                              |       |                   |       |   |   |   |   |
| Interest paid                                                                      |       | $                      | 20,999     |   | $ | 9,369 |   | $ | 10,711 |   |
| Income taxes paid                                                                  |       | $                      | 323        |   | $ | 70 |   | $ | 111 |   |
|                                                                               |       |                   |       |   |   |   |   |
| **Supplemental disclosure of non-cash  investing and financing activities**        |       |                   |       |   |   |   |   |
| Deferral of gain on sale-leaseback recorded  in other liabilities                  |       | $                      | —     |   | 3,927 |   | — |   |
| Preferred and common stock issued as  consideration for the Chevys acquisition     |       | $                      | 7,349      |   | — |   | — |   |
| In-kind accrued interest transferred to  debt                                      |       | $                      | —     |   | $ | 407 |   | $ | 1,358 |   |

 

*See accompanying notes.*

 

36

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**RealMex Restaurants, Inc.**

** **

**Notesto Consolidated Financial Statements**

** **

**December25, 2005**

** **

**(Dollarsin thousands, except share amounts)**

** **

**1. Organization**

 

**Basis of Presentation**

** **

Real Mex Restaurants, Inc.,a Delaware corporation (together with its subsidiaries, the “Company”), wasformed on May 15, 1998, to acquire the stock of Acapulco Restaurants, Inc.(Acapulco) from Restaurant Associates Corp. (Restaurant Associates). EffectiveFebruary 24, 2004, the Company changed its name from Acapulco Acquisition Corp.to Real Mex Restaurants, Inc.

 

**Nature of Business**

** **

TheCompany is engaged in the business of owning and operating restaurants,primarily under the names El Torito, Acapulco Mexican Restaurant Y Cantina® andChevys Fresh Mex. At December 25, 2005, the Company, primarily through itsmajor subsidiaries (El Torito Restaurants, Inc., Chevys Restaurants LLC andAcapulco Restaurants, Inc.), owned and operated 196 restaurants, of which 161were in California and the remainder in 12 other states. The Company’s othermajor subsidiary, Real Mex Foods, Inc. (RMF), provides internal production,purchasing and distribution services for the restaurant operations andmanufactures specialty products for sales to outside customers.

 

**2. Acquisition**

** **

OnJanuary 11, 2005, the Company, through its subsidiary Chevys Restaurants LLC,(Chevys), purchased substantially all of the assets of Chevys, Inc. and certainof its subsidiaries (the Sellers) out of the Sellers’ Chapter 11 bankruptcyproceeding, including 69 Chevys Fresh Mex® restaurants and five Fuzio UniversalPasta® restaurants (the “Chevys Acquisition”). In addition, the Company assumedfranchise agreements for 37 franchised Chevys Fresh Mex restaurants and fivefranchised Fuzio Universal Pasta restaurants. The purchase price consisted ofapproximately $76.2 million in cash and the assumption of approximately $5.1million in net negative working capital, approximately $6.3 million of lettersof credit and approximately $0.8 million under a mortgage. In addition, theCompany issued to J.W. Childs Equity Partners L.P. and its affiliate, JWCChevys Co-Invest, LLC, in their capacity as unsecured creditors of the Sellers,shares of the Company’s equity securities. The Company financed the transactionwith $75.0 million in unsecured debt financing, the proceeds of which were usedto fund a portion of the purchase price and a portion of the approximately $4.2million of fees and expenses related to the transaction.

 

Thefollowing table presents the preliminary allocation of the acquisition costs,including professional fees and other related transaction costs, to the assetsacquired and liabilities assumed based on their estimated fair 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 |   |

 

Thesetransactions were accounted for under the purchase method of accounting and,accordingly, the purchase price has been allocated to the assets acquired andthe liabilities assumed based on the estimated fair market value at the date ofthe acquisition.

 

37

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Theprimary reason for the Chevys Acquisition was to add a complementary growthvehicle in the full-service Mexican segment of the restaurant industry. TheCompany attributes the goodwill associated with the Chevys Acquisition to thehistorical financial performance and the anticipated future performance ofChevys. The Company is currently determining the amount, if any, of any additionaltax benefits that may have been acquired in the Chevys Acquisition and is negotiatingthe final purchase price based upon the terms of the contract.  Any change will impact the overall purchaseprice only.

 

The followingunaudited pro forma consolidated results of operations have been prepared as ifthe Chevys Acquisition had occurred on December 29, 2003 (the first day offiscal year 2004):

 

 
| ** **                                              | ** ** | **Fiscal Year Ended (unaudited)** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **December 25,**                            | ** ** | **December 26,** | ** ** |
| ** **                                              | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| Total  revenues                                         |       | $                                                | 542,318    |   | $ | 531,759 |   |
| Net income  before redeemable preferred stock accretion |       | 13,092                                           |       | 7,951 |   |
|                                                         |            |                                                  |            |  |  |  |  |

 

Thepro forma information is presented for informational purposes only and is notnecessarily indicative of the results of operations that actually would havebeen achieved had the Chevys Acquisition been consummated as of that time, noris it intended to be a projection of future results.

 

**3. Summary of Accounting Policies**

** **

**Principles of Consolidation**

** **

Theaccompanying consolidated financial statements include the accounts and resultsof operations of the Company. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Fiscal Year End**

** **

TheCompany’s fiscal year consists of 52 or 53 weeks ending on the last Sunday inDecember. The years ended December 25, 2005, December 26, 2004 andDecember 28, 2003 each consist of 52 weeks.

 

**Use of Estimates**

** **

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.

 

**Cash and Cash Equivalents**

** **

Cashand cash equivalents consist of cash balances in bank accounts and investmentswith a maturity of three months or less at the time of purchase.

 

**Receivables**

** **

Receivablesconsist primarily of amounts due from credit card companies, outside customersof RMF and franchisees. Receivables from credit card companies are generallysettled in the week following the transaction date. Receivables from RMFoutside customers are generally collected within 30 days of the date of thesale and receivables from franchisees are generally collected within 21 daysfollowing the close of royalty period. Receivables are stated net of anallowance for doubtful accounts of $284, $87 and $86 at December 25, 2005,December 26, 2004 and December 28, 2003, respectively.

 

**Inventories**

** **

Inventories,consisting primarily of food and beverages, are carried at the lower of cost(first-in, first-out method) or market.

 

**Supplies**

** **

Theinitial purchase of expendable equipment, when a restaurant is first opened,such as china, glass and silverware, is capitalized and depreciated over aperiod of 5 years. Replacements of permanent supplies are expensed.

 

38

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**Pre-Opening Costs**

** **

Pre-openingcosts incurred with the start-up of a new restaurant, or the conversion of anexisting restaurant to a different concept, are expensed as incurred.

 

**Property and Equipment**

** **

Propertyand equipment is depreciated over its estimated useful life using thestraight-line method for financial reporting purposes. Costs of leaseholdrights and improvements and assets held under capital leases are amortized on astraight-line basis over the shorter of the estimated useful lives of theassets or the non-cancelable term of their underlying leases. Depreciationexpense includes the amortization of assets held under capital leases.

 

**Goodwill**

** **

TheCompany accounts for goodwill under Statement of Financial Accounting Standards(SFAS) No. 142. Goodwill is tested annually for impairment, and is tested forimpairment more frequently if events and circumstances indicate that the assetmight be impaired. The Company performs its annual impairment test during thelast quarter of its fiscal year. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value. The Company considersthe reporting unit level to be the company level, as the components (e.g.,brands) within the Company have similar economic characteristics, includingproduction processes, types or classes of customers and distribution methods.This determination is made at the reporting unit level and consists of twosteps. First, the Company determines the fair value of a reporting unit andcompares it to its carrying amount. The Company calculates the fair value of areporting unit using the discounted cash flow method. Under this method, thefair market value of the reporting unit is estimated based upon discounting thefuture available debt-free net cash flows to present value at an appropriaterate of return. This approach represents a quantification of the futuredividend paying capacity of the business being appraised. Second, if thecarrying amount of a reporting unit exceeds its fair value, an impairment lossis recognized for any excess of the carrying amount of the reporting unit’sgoodwill over the implied fair value of that goodwill. The implied fair valueof goodwill is determined by allocating the fair value of the reporting unit ina manner similar to a purchase price allocation, in accordance with SFASNo. 141, “Business Combinations.” The residual fair value after thisallocation is the implied fair value of the reporting unit goodwill.

 

TheCompany performed an annual assessment of impairment of goodwill by applyingfair-value based tests and has determined that no impairment existed as ofDecember 25, 2005 and December 26, 2004.

 

**Accounting for the Impairment of Long-Lived Assets**

** **

Long-livedassets are tested for impairment in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” which addresses financialaccounting and reporting for the impairment or disposal of long-lived assets.During the years ended December 25, 2005, December 26, 2004 and December28, 2003, management of the Company determined that certain identified propertyand equipment was impaired and recorded an impairment charge of $568, $167 and$233, respectively, reducing the carrying value of such assets to the estimatedfair value. Fair value was based on management’s estimate of future cash flowsto be generated by the property and equipment determined to be impaired.

 

**Liquor Licenses**

** **

Transferableliquor licenses, which have a market value, are carried at the lower ofaggregate acquisition cost or market and are not amortized.

 

**Deferred Charges**

** **

Deferredcharges consist of deferred financing costs and lease acquisition costs.Deferred charges at December 25, 2005, consist of deferred financing costs of$3,785 related to the sale of $105,000 aggregate principal amount of 10% SeniorSecured Notes due 2010, $1,901 related to $75,000 Senior Unsecured CreditFacility maturing on December 31, 2008, $610 related to the $30,000 Amended andRestated Revolving Credit Agreement and $58 of charges related to theacquisition of leases. Amounts capitalized related to financing costs areamortized over the lives of the respective long-term borrowings using theeffective-interest method and are included in interest expense in theaccompanying consolidated statements of operations. Amounts capitalized relatedto leases are amortized over the primary term of their respective leases andare included in occupancy expense in the accompanying statements of operations.The following table shows amortization expense for the five years afterDecember 25, 2005:

 

 
| ** **                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
|                                  |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Financing and lease acquisition costs |       | $        | 1,770      |     | $          | 1,774    |       | $        | 1,651      |     | $          | 896            |       | $ | 227 |   | $ | 36 |   |
|                                       |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |

 

39

----

 

**Income Taxes**

** **

TheCompany accounts for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes.” In accordance with SFAS No. 109, income taxesare accounted for using the liability method.

 

**Revenue Recognition**

** **

Revenues from the operation of company-ownedrestaurants are recognized when sales occur. All fees from franchisedoperations are included in revenue as earned. Royalty fees are based on franchisedrestaurants’ revenues and we record these fees in the period the relatedfranchised restaurants’ revenues are earned. Real Mex Foods’ revenues fromsales to outside customers are recognized upon delivery, when title transfersto the customer, and are included in other revenues.

 

**Self Insurance**

** **

The company is self-insured for most workers'compensation and general liability losses (collectively "casualtylosses"). The company maintains stop-loss coverage with third partyinsurers to limit its total exposure. The recorded liability associated withthese programs is based on an estimate of the ultimate costs to be incurred tosettle known claims and claims incurred but not reported as of the balancesheet date. The estimated liability is not discounted and is based on a numberof assumptions and factors, including historical trends, actuarial assumptionsand economic conditions.

 

**Gift Certificates and Gift Cards**

** **

TheCompany records deferred revenue, included in accounts payable, for giftcertificates and gift cards outstanding until they are redeemed. At December25, 2005 and December 26, 2004, deferred revenue attributable to giftcertificates and gift cards was $3,468 and $3,246, respectively.

 

**Segment Information**

** **

TheCompany operates 196 restaurants through its three restaurant operatingsubsidiaries, providing similar products to similar customers. Theserestaurants possess similar economic characteristics resulting in similarlong-term expected financial characteristics. Operating segments are componentsof an enterprise about which separate financial information is available thatis evaluated regularly by the chief operating decision-maker in deciding how toallocate resources and in assessing performance. Based upon its methods ofinternal reporting and management structure, management believes that theCompany meets the criteria for aggregating its 196 operating restaurants into asingle reporting segment called restaurant operations.

 

**Promotion and Advertising Expense**

** **

Thecost of promotion and advertising is expensed as incurred. The Company incurred$10,665, $5,728, and $5,655 in promotion and advertising expense during theyears ended December 25, 2005, December 26, 2004 and December 28, 2003,respectively.

 

**Operating Leases**

** **

TheCompany accounts for operating leases on a straight-line basis in accordancewith SFAS No. 13, “Accounting for Operating Leases.” The Company leasesrestaurant and office facilities that have terms with expirations in 2006through 2027. Most of the restaurant facilities have renewal clausesexercisable at the option of the Company with rent escalation clausesstipulating specific rent increases, some of which are based upon the ConsumerPrice Index. Certain of these leases require the payment of contingent rentalsbased on a percentage of gross revenues. At December 25, 2005 and December 26,2004, deferred rent amounted to $3,948 and $2,862, respectively, which isincluded in long-term liabilities.

 

**Concentration of Credit Risk**

** **

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of cash and cash equivalents. The Company places itscash and cash equivalents with high quality financial institutions. At times,balances in the Company’s cash accounts may exceed the Federal DepositInsurance Corporation (FDIC) limit. Most of the Company’s restaurants arelocated in California. Consequently, the Company may be susceptible to adversetrends and economic conditions in California.

 

40

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** **

**Fair Value of Financial Instruments**

** **

TheCompany’s financial instruments are primarily comprised of cash and cashequivalents, receivables, accounts payable, accrued liabilities and long-termdebt. The estimated fair value of the Notes (as defined in Note 5) at December25, 2005, based on quoted market prices, was $111,825. Management estimatesthat the carrying values of its other financial instruments approximate theirfair values since their realization or satisfaction is expected to occur in theshort term.

 

**Reclassification**

** **

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

**Recent Accounting Pronouncements**

** **

In April 2005,the Securities and Exchange Commission (“SEC”) approved a new rule that delaysthe effective date of Statement of Financial Accounting Standards (“SFAS”) No.123R, *Share-Based Payment*. Exceptfor the deferral of the effective date, the guidance in SFAS No. 123R isunchanged. Under the SEC’s rule, SFAS No.123R is now effective for the Companyfor our first fiscal year beginning on or after June 15, 2005. The Company willapply this Statement to all awards granted on or after December 26, 2005 and toawards modified, repurchased, or cancelled after that date.

 

InDecember 2004, FASB issued SFAS No. 123 (Revised), “Share-BasedPayment,” which is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation.” SFAS No. 123 (Revised) supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”and its related implementation guidance. SFAS No. 123 (Revised) requirescompanies to record compensation expense for share-based payments to employees,including grants of employee stock options, at fair value. In April 2005, theSEC approved a new rule that delays the effective date of Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, *Share-Based Payment.* Except for the deferral of theeffective date, the guidance in SFAS No. 123R is unchanged. Under the SEC’srule, SFAS No.123R is now effective for the Company for our first fiscal yearbeginning on or after June 15, 2005. SFAS No. 123 (Revised) is effectivefor most public companies at the beginning of the first interim or annualperiod beginning after June 15, 2005. The Company believes that theimplementation of the provisions of SFAS No. 123 (Revised) will have animpact consistent with its disclosure included under SFAS No. 148 includedin Note 8 of the notes to its consolidated financial statements includedelsewhere in this report.

 

InDecember 2004, the FASB issued SFAS No. 151, “Inventory Costs,” whichamends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facilityexpenses, freight, handling costs and wasted materials (spoilage) should berecognized as current-period charges. In addition, SFAS No. 151 requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. The provisions ofSFAS No. 151 are effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. The Company will adopt this statementeffective December 26, 2005, and does not expect it to have a material impacton its financial position or results of operations.

 

InJune 2005, the FASB Emerging Issues Task Force reached a consensus on Issue No.05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF05-6”). The guidance requires that leasehold improvements acquired in abusiness combination or purchased subsequent to the inception of a lease beamortized over the lesser of the useful life of the assets or a term thatincludes renewals that are reasonably assured at the date of the businesscombination or purchase. The guidance is effective for periods beginning afterJune 29, 2005. The adoption of EITF 05-6 did not have an impact on theCompany’s consolidated financial statements.

 

In October2005, the FASB issued Staff Position No. FAS 13-1, “Accounting for Rental Costsduring a Construction Period,” which requires that rental costs associated withoperating leases incurred during a construction period be recognized as rentalexpense. As permitted under current GAAP, the Company currently capitalizesrent incurred during the construction phase. This Staff Position is effectivefor reporting periods beginning after December 15, 2005. Retroactiveapplication is permitted but not required. The Company will adopt the FASBStaff Position FAS 13-1 on December 26, 2005, at which time rent will no longerbe capitalized related to leases with properties under construction.

 

**4. Property and Equipment**

** **

Propertyand equipment consists of the following:

 
| ** **                                      | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                            |       |                   |       |                   |       |
| Land and  land improvements                     |       | $                      | 1,855      |                   | $          | 2,111 |   |
| Buildings  and improvements                     |       | 4,364                  |       | 4,984                  |       |
| Furniture,  fixtures and equipment              |       | 68,438                 |       | 52,072                 |       |
| Leasehold  improvements and leasehold rights    |       | 90,936                 |       | 38,954                 |       |
|                                            |       | 165,593                |       | 98,121                 |       |
| Less  accumulated depreciation and amortization |       | (83,001                | )          | (61,532                | )          |
|                                            |       | $                      | 82,592     |                   | $          | 36,589 |   |

 

41

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**5. Accounts Payable and Accrued Liabilities**

** **

Accountspayable and accrued liabilities consist of the following:

 
| ** **                       | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| Trade  accounts payable          |       | $                      | 22,759     |                   | $          | 9,168 |   |
| Ft cards and  Ft certificates    |       | 3,468                  |       | 3,245                  |       |
| Accrued  self-insurance reserves |       | 15,916                 |       | 13,143                 |       |
| Payroll and  related liabilities |       | 11,845                 |       | 8,799                  |       |
| Rent and  occupancy expenses     |       | 1,444                  |       | 1,003                  |       |
| Sales taxes                      |       | 4,088                  |       | 2,530                  |       |
| Accrued  interest                |       | 2,939                  |       | 2,680                  |       |
| Related  party payables          |       | 228                    |       | 147                    |       |
| Other                            |       | 3,801                  |       | 1,790                  |       |
|                             |       | $                      | 66,488     |                   | $          | 42,505 |   |

 

**6. Long-Term Debt**

Long-termdebt consists of the following:

 
| ** **                        | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| Senior  secured notes due 2010    |       | $                      | 105,000    |                   | $          | 105,000 |   |
| Senior  Unsecured Credit Facility |       | 75,000                 |       | —                 |       |
| Mortgage                          |       | 771                    |       | —                 |       |
| Other                             |       | 63                     |       | 63                     |       |
|                              |       | 180,834                |       | 105,063                |       |
|                              |       |                   |       |                   |       |
| Less current  portion             |       | (117                   | )          | (63                    | )          |
|                              |       |                   |       |                   |       |
|                              |       | $                      | 180,717    |                   | $          | 105,000 |   |

 

OnJanuary 11, 2005, the Company entered into a $75,000 senior unsecured creditfacility (the “Senior Unsecured Credit Facility”), consisting of a single termloan maturing on December 31, 2008, all of the proceeds of which were used tofinance a portion of the cash consideration for the Chevys Acquisition and payrelated fees and expenses. Obligations under the Senior Unsecured CreditFacility are guaranteed by the Company’s subsidiaries. Interest on the termloan outstanding under the Senior Unsecured Credit Facility accrues, at theCompany’s option, at either (i) the greater of prime or the rate which is 0.5% inexcess of the federal funds rate, plus 8.5% or (ii) a reserve adjustedEurodollar rate, plus 9.5%. As of December 25, 2005, the interest rate on theSenior Unsecured Credit Facility’s term loan was 14.17%.

 

OnJanuary 11, 2005, the Company assumed a $0.8 million 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 throughApril 1, 2015.

 

OnMarch 31, 2004, the Company retired the then existing Revolving Credit and TermLoan Agreement and entered into a new Amended and Restated Revolving CreditAgreement (the “Line”) providing for $30,000 of Senior Secured CreditFacilities with a lead bank acting as Lead Arranger and Administrative Agent.The Line includes a $15,000 letter of credit facility and a $15,000 revolvingcredit facility that can be used for letters of credit. No amounts wereoutstanding under the Line as of December 25, 2005 and December 26, 2004.

 

OnMarch 31, 2004, the Company sold $105,000 aggregate principal amount of 10%Senior Secured Notes due 2010 (the “Notes”). Interest on the Notes is payablesemiannually on April 1 and October 1 each year. The proceeds of the Notes wereused to repay in full the then outstanding term loans under the Company’s priorcredit facility and old subordinated notes, and the fees associated with theLine and the sale of the Notes. Concurrent with the retirement of thesubordinated notes and the terms loans

 

42

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outstanding under our prior credit facility, the Company wrote off theunamortized cost of the associated deferred debt fees in the amount of $4,247and paid $430 in termination costs which are included in debt termination costsin the consolidated statements of operations. The Notes included a provisionthat required the Company to commence an exchange offer to exchange theoriginally issued notes for new registered notes by October 27, 2004. TheCompany suspended and extended the exchange offer on October 22, 2004 as aresult of its then pending acquisition of Chevys, Inc. The Company completedthe exchange offer for 100% of the Notes on June 7, 2005.

 

Theterms of the Amended and Restated Credit Agreement, the Notes and the SeniorUnsecured Credit Facility include specified financial and other covenants, allof which the Company was in compliance with at December 25, 2005.

 

Interestrates for the Line, the Notes and the Senior Unsecured Credit Facility areshown the following table:

 
| ** **                        | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| Senior  secured notes due 2010    |       | 10.00                  | %          | 10.25                  | %          |
| Senior  Unsecured Credit Facility |       | 14.17                  | %          | —                 |       |
| Mortgage                          |       | 9.28                   | %          | —                 |       |

 

OnJune 28, 2000, a subordinated note agreement was entered into. In conjunctionwith the issuance of the subordinated notes, the Company issued warrants topurchase 43,773 shares of its Common Stock at an exercise price of $0.01 pershare. The warrants are exercisable during the 10-year period following thedate of issuance. The value of the warrants of $4,027 was recorded asadditional paid-in capital and reduced the carrying value of the subordinatednotes. The discount on the notes was being amortized to interest expense over theterm of the subordinated notes using the effective-interest method and isincluded in interest expense on the accompanying consolidated statements ofoperations. This debt was repaid in full on March 31, 2004. Concurrent with theretirement of the related debt, the unamortized discount was written off and isincluded with debt termination costs in other income (expense) in theconsolidated statements of operations. Management determined the original valueof the Company’s warrants based on estimates of future cash flows and otherassumptions. Amortization expense of the discounts amounted to approximately$114 for the year ended December 26, 2004, and $446 for the year endedDecember 28, 2003.

 

EffectiveOctober 1, 2002, in order to convert a portion of its outstanding debt to afixed rate, the Company entered into an interest rate swap agreement with afinancial institution initially covering $17,525 of its long-term debt, with anotional amount of $14,438 at December 28, 2003. This agreement effectivelyguaranteed that the base interest rate on the Company’s covered outstandinglong-term debt would be 2.42%. This agreement was terminated concurrent withthe retirement of the prior credit facility on March 31, 2004.

 

Thematurity of long-term debt for the fiscal years succeeding December 25, 2005,is as follows:

 

 
| 2006       |   | $       | 117     |   |
|------------|--------|---------|---------|--------|
| 2007       |   | 60      |    |
| 2008       |   | 75,066  |    |
| 2009       |   | 72      |    |
| 2010       |   | 105,079 |    |
| Thereafter |   | 440     |    |
|       |   | $       | 180,834 |   |
|            |        |         |         |        |  |

 

**7. Capitalization**

** **

**Common Stock**

** **

                TheCompany is authorized to issue 1,000,000 shares of par value $0.001Class A Common Stock and 1,000,000 shares of par value $0.001 Class BCommon Stock. The terms of Class B Common Stock are identical to Class A CommonStock except that the holders of Class B Common Stock have no voting rights, exceptas provided by law. Each holder of Class B Common Stock has the right toconvert any or all shares of Class B Common Stock into an equal number ofshares of Class A Common Stock at any time. At December 25, 2005 andDecember 26, 2004, there were 300,423 and 258,656 shares, respectively,issued and outstanding of Class A Common Stock and at December 25, 2005and December 26, 2004, there were 15,867 shares issued and outstanding ofClass B Common Stock.

 

43

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**Redeemable Preferred Stock**

** **

TheCompany is authorized to issue 100,000 shares of Preferred Stock. Shares areissued upon approval of the board of directors and all outstanding shares ofPreferred Stock are redeemable at any time at the option of the Company, subjectto restrictions under certain debt covenants.

 

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 and accumulated dividends associatedwith each share. With respect to dividend rights and rights of liquidation,Series A ranks senior to all classes of Common Stock and Series B.Series B ranks senior to all classes of Common Stock.

 

SeriesC 15% Cumulative Compounding Participating Preferred stock (Series C) rankssenior with respect to payment of dividends, liquidation, and redemption to allother series of preferred stock and common stock of the Company. TheSeries C has a liquidation preference equal to two times the originalissue price of $1 per share, plus accreted dividends. As a result of theliquidation preference, the Series C has been recorded at liquidation value atthe date of issuance. Holders of Series C are entitled to receive, inaddition to the liquidation preference, an amount equal to 40% of any amountsthat would otherwise be available to the holders of Common Stock in the eventof a liquidation or sale of the Company.

 

Theliquidation preference on the Series A, Series B and Series C accretesat the stated rates on the liquidation preference value thereof; dividends(representing accreted liquidation preference) are to be paid from legallyavailable funds, when and if declared by the board of directors. Dividends willaccrue and will be payable only when and if declared, or upon a sale orliquidation of the Company or upon redemption of the applicable series ofpreferred stock. Accretion of the liquidation preference on the redeemablepreferred stock is reflected as an increase in the preferred stock values andan increase in the accumulated deficit. Accretion of the liquidation preferenceon the Redeemable Preferred Stock was $14,583, $11,862 and $10,409 during theyears ended December 25, 2005, December 26, 2004 and December 28, 2003, respectively,and is reflected in the consolidated statements of stockholders’ equity as anincrease in the preferred stock values and an increase in the accumulateddeficit.

 

Netincome (loss) attributable to common stockholders includes the effect of theaccretion of the liquidation preference on the redeemable preferred stock whichreduces net income or increases net loss attributable to common stockholdersfor the relevant periods.

 

Infiscal year 2005, as partial consideration for the Chevys Acquisition, theCompany issued 2,064 of Series A, 1,393 shares of Series B and 3,892 shares ofSeries C redeemable preferred stock to J.W. Childs Equity Partners L.P. and itsaffiliate, JWC Chevys Co-Invest, LLC, in their capacity as unsecured creditorsof the Sellers. There were no preferred shares issued in fiscal year 2004.

 

**Stock Option Plans**

** **

TheCompany’s 1998 and 2000 Stock Option Plans (the Plans) have authorized thegrant of options to certain employees, directors and independent contractorsfor up to 12,000 and 100,000 shares, respectively, of the Company’s CommonStock. All options granted under both Plans have 10-year terms. Under the 2000Stock-Based Incentive Compensation Plan, the Company granted a stock option for3,671 shares in 2001, 50% of whose vesting is conditional on a change incontrol.

 

The2000 Stock-Based Incentive Compensation Plan, for option grants prior 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“cliff vesting” schedule. These options are fully vested. Additionally, foroption grants made in 2004 and 2005, the Plan provides for 20% of the optiongrants to become exercisable each year on the anniversary date of the grants.

 

Asummary of the status of the Company’s two stock option plan activity andrelated information 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 29, 2002 |       | 6,850                         |       | $                                       | 10.00      |   | 43,835 |   | $ | 66.20 |   |
| Granted                                   |       | —                        |       | —                                  |       | — |   | — |   |
| Exercised                                 |       | —                        |       | —                                  |       | — |   | — |   |
| Canceled                                  |       | (800                          | )          | 10.00                                   |       | (1,101 | ) | 92.00 |   |
| Outstanding – December 28, 2003 |       | 6,050                         |       | 10.00                                   |       | 42,734 |   | 65.53 |   |
| Granted                                   |       | —                        |       | —                                  |       | 39,700 |   | 0.01 |   |
| Exercised                                 |       | —                        |       | —                                  |       | — |   | — |   |
| Canceled                                  |       | (800                          | )          | 10.00                                   |       | (1,101 | ) | 92.00 |   |
| Outstanding – December 26, 2004 |       | 5,250                         |       | 10.00                                   |       | 81,333 |   | 33.19 |   |
| Granted                                   |       | 682                           |       | 10.00                                   |       | 4,839 |   | 30.52 |   |
| Exercised                                 |       | —                        |       | —                                  |       | 407 |   | 0.01 |   |
| Canceled                                  |       | —                        |       | —                                  |       | (13,215 | ) | 92.00 |   |
| Outstanding – December 25, 2005      |       | 5,932                         |       | $                                       | 10.00      |   | 72,550 |   | $ | 22.49 |   |
|                                      |       |                          |       |                                    |       |   |   |   |   |
| Exercisable at December 25, 2005          |       | 5,250                         |       | $                                       | 10.00      |   | 34,076 |   | $ | 42.44 |   |

 

44

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Inaccordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the Company continues to account for the stock-based compensation plans using the intrinsic value-based measurement principlesof APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated interpretations. No stock-based employee compensation cost is reflectedin net income, as all options granted under the Plans had an exercise price equalto the market value as of the underlying common stock on the date of grant. Ifthe Company had elected to recognize compensation cost based on the fair valueof the options granted at the grant rate as prescribed by SFAS No. 148, netincome would have been reduced by compensation of **$26** for the year ended December 25, 2005. There would havebeen no pro forma effects to net income for December 26, 2004 and December 28,2003.

 

The fair value of theseoptions was estimated at the date of grant using a Black-Scholes option-pricingmodel with the following assumption for the fiscal years ended 2005, 2004 and2003

 
| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Risk free  interest rate                     |       | 3.87     | %          | 3.96     | %          | 3.96     | %          |
| Weighted-average  remaining contractual life |       | 7.02     |       | 7.97     |       | 6.44     |       |
| Weighted-average  fair value                 |       | 5.83     |       | 0.00     |       | 0.00     |       |
| Dividend  yield                              |       | —   | %          | —   | %          | —   | %          |
| Expected  volatility                         |       | 0.00     | %          | 0.00     | %          | 0.00     | %          |

 

 

**8. Income Taxes**

** **

Significantcomponents of the income tax (benefit) provision consists of the following:

 
| ** **                     | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Current:                       | * *   | * *               | * *   | * *               | * *   | * *               | * *   |
| Federal                        | ** ** | **$**                  | **—** | ** **             | **$**      | **—**             | ** ** | $ | **—** | ** ** |
| State                          |       | 14                     |       | 70                     |       | 109                    |       |
|                           |       | 103                    |       | 70                     |       | 109                    |       |
| Deferred:                      |       |                   |       |                   |       |                   |       |
| Federal                        |       | 2,188                  |       | 2,113                  |       | 4,129                  |       |
| State                          |       | 1,137                  |       | 35                     |       | 376                    |       |
|                           |       | 3,325                  |       | 2,148                  |       | 4,505                  |       |
|                           |       | 3,339                  |       | 2,218                  |       | 4,614                  |       |
| Change in valuation  allowance |       | (8,048                 | )          | (11,288                | )          | (4,505                 | )          |
|                           |       | $                      | (4,709     | )                      | $          | 9,070                  |       | $ | 109 |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying value of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of theCompany’s deferred tax assets and liabilities are as follows:

 
| ** **                                  | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Deferred tax  assets:                       | * *   | * *               | * *   | * *               | * *   |
| Federal net operating loss carryforwards    |       | $                      | 1,763      |                   | $          | 2,286 |   |
| State net operating loss carryforwards      |       | 143                    |       | 231                    |       |
| Goodwill                                    |       | 6,156                  |       | 7,383                  |       |
| Accrued expenses not currently deductible   |       | 4,074                  |       | 4,140                  |       |
| Tax credit carryforwards                    |       | 567                    |       | 411                    |       |
| Property and equipment basis difference     |       | 14,150                 |       | 10,664                 |       |
| Deferred rent                               |       | 1,174                  |       | 750                    |       |
| Gift certificates and other deferred income |       | 778                    |       | 720                    |       |
| Other                                       |       | 788                    |       | 338                    |       |
| Total  deferred tax assets                  |       | $                      | 29,593     |                   | $          | 26,923 |   |

 

45

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| ** **                      | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Deferred tax  liabilities:      |       |                   |       |                        |       |
| Prepaid expenses                |       | $                      | (872       | )                           | $          | (852 | ) |
| Goodwill                        |       | (10,178                | )          | (7,685                      | )          |
| State taxes                     |       | (992                   | )          | (1,160                      | )          |
| Total  deferred tax liabilities |       | (12,042                | )          | (9,735                      | )          |
| Net deferred  tax assets        |       | 17,551                 |       | 17,188                      |       |
|                            |       |                   |       |                        |       |
| Less  valuation allowance       |       | —                 |       | (8,048                      | )          |
|                            |       | $                      | 17,551     |                        | $          | 9,140 |   |

 

Thereconciliation of income tax at the U.S. federal statutory tax rates to incometax expense is as follows:

 
| ** **                                     | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                                           |       |                   |       |                   |       |                   |       |
| Income tax  at U.S. federal statutory tax rate |       | 34.0                   | %          | 34.0                   | %          | 34.0                   | %          |
| State income  tax, net of federal benefit      |       | 4.7                    |       | 5.8                    |       | 2.2                    |       |
| Valuation  allowance                           |       | (92.9                  | )          | (252.2                 | )          | (40.1                  | )          |
| Other                                          |       | (0.1                   | )          | 9.7                    |       | 7.2                    |       |
| Effective  tax rate                            |       | (54.3                  | )%         | (202.7                 | )%         | 3.3                    | %          |

 

Inaccordance with SFAS No. 109, “Accounting for Income Taxes,” net deferredtax assets are reduced by a valuation allowance if, based on all the availableevidence, it is more likely than not that some or all of the deferred taxassets will not be realized. The amount of deferred tax assets considered realizablewas determined based on future reversals of existing taxable temporarydifferences and future taxable income, exclusive of reversing temporarydifferences and carryforwards.

 

Inevaluating future taxable income for valuation allowance purposes at December25, 2005, the Company concluded that it was appropriate to consider incomeexpected to be generated in 2006, 2007 and 2008. For the years ended December25, 2005 and December 26,2004, the Company reduced the valuation allowance andrecorded an income tax benefit of $8,048 and $9,140, respectively, inaccordance with SFAS No. 109.

 

The purchase accountingadjustments for the Chevys Acquisition have not been reflected in the deferredtax balances as of December 25, 2005 in their entirety as the final tax returnsfor the seller, Chevy's Restaurant, Inc., have not been filed. Until the taxreturns are filed, we are unable to determine the carryover basis of assets,liabilities, and net operating loss carryforwards at the date of acquisition.Upon completion of the Sellers’ final tax returns for the periods ending beforethe Chevys Acquisition, the Company will assess and record the carryover basisof certain temporary differences. We believe that the carryover basis of suchdeferred tax assets and liabilities, if any, would have a full valuationallowance recorded against the net deferred asset, as, based on the weight ofavailable evidence, we believe it is more likely than not that a significantportion of the deferred tax assets would not be realized in the near future.Purchase accounting adjustments have only been recorded for those deferred taxassets that were recognized in the current year.

 

Fortax purposes, the excess of the purchase price over the fair market value ofthe assets acquired at the time of the Acapulco and the El Torito acquisitionshas been accounted for as amortizable goodwill.

 

AtDecember 25, 2005 and December 26, 2004, the Company had a federal netoperating loss carryforward of $5,185 and $6,723, respectively, which willbegin to expire in 2016. In addition, at December 25, 2005 and December 26,2004, the Company had a state net operating loss carryforward of $2,074 and$3,850, respectively, which will begin to expire in 2012.

 

46

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**9. Commitments and Contingencies**

** **

**Commitments**

** **

TheCompany leases restaurant and office facilities that have terms withexpirations in 2006 through 2027. Most of the restaurant facilities haverenewal clauses exercisable at the option of the Company with rent escalationclauses stipulating specific rent increases, some of which are based upon theConsumer Price Index. Certain of these leases require the payment of contingentrentals based on a percentage of gross revenues, as defined. Additionally, theCompany leases several properties that are not being operated by the Company.Several of those properties are subleased.

 

TheCompany leases certain leasehold improvements under agreements that areclassified as capital leases. The cost of leasehold improvements under capitalleases is included in the balance sheets as property and equipment and was$3,183 at each of December 25, 2005 and December 26, 2004. Accumulatedamortization of the leased leasehold improvements was $2,779 and $2,590 atDecember 25, 2005 and December 26, 2004, respectively. Amortization of assetsunder capital leases is included in depreciation expense.

 

Theminimum annual lease commitment and subtenant income of the Company for theyears succeeding December 25, 2005 is approximately as follows:

 
| ** **                                             | ** ** | **Capital  Lease  Obligations** | ** ** | **Minimum  Lease  Commitments** | ** ** | **Sublease  Income** | ** ** | **Net  Lease  Commitments** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------|------------|-----------------------------|------------|
|                                                   |       |                            |       |                            |       |                 |       |                        |       |
| 2006                                                   |       | $                               | 320        |                            | $          | 39533                |       | $                           | (427       | ) | $ | 39,426 |   |
| 2007                                                   |       | 313                             |       | 37740                           |       | (207                 | )          | 37,846                      |       |
| 2008                                                   |       | 313                             |       | 35,524                          |       | (197                 | )          | 35,640                      |       |
| 2009                                                   |       | 248                             |       | 31,506                          |       | (187                 | )          | 31,567                      |       |
| 2010                                                   |       | 133                             |       | 26,016                          |       | (52                  | )          | 26,097                      |       |
| Thereafter                                             |       | 382                             |       | 109,373                         |       | —               |       | 109,755                     |       |
|                                                   |       |                            |       |                            |       |                 |       |                        |       |
| Total minimum lease payments                           |       | 1,709                           |       | $                               | 279,692    |                 | $          | (1,070                      | )          | $ | 280,331 |   |
| Less: Amount representing interest                     |       | (512                            | )          |                            |       |                 |       |                        |       |
| Present value of net minimum capital lease  payments   |       | 1,197                           |       |                            |       |                 |       |                        |       |
| Less: Current maturities of capital lease  obligations |       | (210                            | )          |                            |       |                 |       |                        |       |
| Long-term capital lease obligations                    |       | $                               | 987        |                            |       |                 |       |                        |       |   |

 

TheCompany is contingently liable for leases on sold or assigned premises for$5,612 as of December 25, 2005.

 

Someof the above leases provide for additional rentals based on a percentage ofrevenues. The following table summarizes the rental expense, percentage rentexpense above minimum rent and net sublease income:

 
| ** **                                                               | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Rental  expense                                                          |       | $                      | 42,837     |                   | $          | 24,059                 |       | $ | 22,403 |   |
| Percentage  rent expense above minimum rent (included in rental expense) |       | 2,517                  |       | 2,218                  |       | 2,144                  |       |
| Net sublease  income                                                     |       | 530                    |       | 813                    |       | 951                    |       |
|                                                                          |            |                        |            |                        |            |                        |            |  |  |  |

 

**Litigation**

** **

TheCompany is periodically a defendant in cases involving personal injury andother matters that arise in the normal course of business. While any pending orthreatened litigation has an element of uncertainty, the Company believes thatthe outcome of these lawsuits or claims, individually or combined, will notmaterially adversely affect the consolidated financial position, results ofoperations or cash flows of the Company.

 

**Self-Insurance**

** **

The company isself-insured for most casualty claims up to certain stop-loss limits. Thecompany has accounted for its liabilities for these losses and claims,including both reported and incurred but not reported claims, based oninformation provided by independent actuaries. Management believes that it hasrecorded reserves for casualty claims at a level that has substantiallymitigated the potential negative impact of adverse developments and/orvolatility. Management believes that its calculation of casualty claims

 

47

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liabilities would not change materially underdifferent conditions and/or different methods. However, due to the inherentvolatility of actuarially determined casualty claims, it is reasonably possiblethat the company could experience changes in estimated losses, which could bematerial to both quarterly and annual net income. Amounts estimated to beultimately payable with respect to existing claims and an estimate for claimsincurred but not reported under these programs have been accrued and areincluded in the in the accompanying consolidated balance sheets. Estimatedliabilities related to the self-insured claims were $15,916 and $13,143 as ofDecember 25, 2005 and December 26, 2004, respectively.

 

TheCompany is also required to maintain collateral securing future payment underthe self-insured retention insurance programs. As of December 25, 2005 andDecember 26, 2004, this collateral consisted stand-by letters of credit of$18,195 and $18,804, respectively.

 

**10. Related Party Transactions**

** **

AfterJuly 13, 1998, the Company entered into a management agreement with two ofits stockholders. Effective June 28, 2000, the management agreement wasamended. Under the terms of the amended agreement, the two principalstockholders are to be paid fees equating to .667% and .333%, respectively, ofconsolidated earnings before interest, income taxes, depreciation andamortization of the Company. Charges relating to the agreement of $510, $302and $308 have been expensed in the years ended December 25, 2005,December 26, 2004 and December 28, 2003, respectively, and areincluded in general and administrative expense in the accompanying consolidatedstatements of operations.

 

On January 19,2005, the Company paid $833,333 and $166,667 to BRS and JCP, respectively,recorded in goodwill, for advisory and transactional services provided to ourCompany pursuant to the Amended and Restated Management Agreement in connectionwith the acquisition of Chevys.

 

EffectiveJuly 1, 2000, the Company entered into a management agreement withRestaurant Associates to provide services for the benefit of the Company,including general and strategic management, treasury, tax, financial reporting,benefits administration, insurance, information technology, real estate and legal.The agreement was amended effective October 1, 2001, reducing the annualcompensation payment to $250 per year. Employees of Restaurant Associates, twoof whom sit on the Board of the Company, performed the services. The agreementwas cancelled on March 31, 2004. Expenses relating to these agreements of $74and $250 were recorded as general and administrative expense for the yearsended December 26, 2004 and December 28, 2003, respectively.

 

In April 2004,we entered into an oral agreement with RA Patina, pursuant to which oursubsidiary, Real Mex Foods, Inc., provides food distribution services tocertain restaurants owned by RA Patina. In fiscal year 2005 and 2004, wereceived approximately $985,000 and $478,000, respectively, for servicesrendered under this food distribution service arrangement. Fortunato N.Valenti, one of our directors, is the Chief Executive Officer of RA Patina andRichard Stockinger, also one of our directors, is the President of RA Patina.

 

Notesreceivable from stockholders consisted of amounts due from stockholders relatedto the acquisition of the Company’s Common and Preferred Stock. The notes boreinterest at 8.0%. Principal and unpaid simple interest was due in fourinstallments, commencing June 28, 2001 and ending on June 28, 2004.The notes were repaid in full on June 28, 2004.

 

48

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**11. Employee Benefit Plan**

** **

TheCompany is the sponsor for a defined contribution plan (401(k) plan) forqualified Company employees, as defined. Participants may contribute from 1% to50% of pre-tax compensation, subject to certain limitations. The plan containsa provision that provides that the Company may make discretionarycontributions. The Company has recorded contribution expense of $263, $188, and$195 during the years ended December 25, 2005, December 26, 2004 andDecember 28, 2003, respectively.

 

**12. Casualty Gain**

** **

In2003, two of the Company’s restaurants were partially destroyed by fire. Theloss, covered by the Company’s replacement cost property insurance, resulted ina loss of $14 during the year ended December 25, 2005 and gains of $997 and$639 during the years ended December 26, 2004 and December 28, 2003,respectively, and is presented as casualty gain (loss) in the consolidated statementsof operations. The gains include business interruption insurance proceeds andgain on property replacement.

 

**13. Sale Leaseback Transaction**

** **

OnMarch 31, 2004, the Company sold and leased back the land and buildingunderlying five of the Company’s restaurants for total net proceeds of $12,012(the Sale-Leaseback Transaction). The Sale-Leaseback Transaction resulted in adeferred gain of $3,927 that is being amortized over the lives of the relatedleases. For the year ended December 25, 2005 and December 26, 2004, the Companyrecognized $196 and $147, respectively, of the deferred gain which was recordedin other income (expense) net.

 

Theleases underlying the Sale-Leaseback Transaction have initial 20-yearnon-cancelable terms and qualify for operating lease treatment. The proceeds ofthe Sale-Leaseback Transaction were used to repay a portion of the prior termloans.

 

**14. Quarterly Results of Operations(Unaudited)**

** **

Thefollowing is a summary of the quarterly results of operations for the years endedDecember 25, 2005 and December 26, 2004:

 
| ** **        | ** ** | **Quarter Ended(1)** | ** ** |
|-------------------|------------|----------------------|------------|
| ** **        | ** ** | **March 27,  2005**  | ** ** | **June 28,  2005** | ** ** | **September 25,  2005** | ** ** | **December 25,  2005** | ** ** |
|              |       |                 |       |   |   |   |   |   |   |
| Total  revenues   |       | $                    | 123,989    |   | $ | 144,660 |   | $ | 137,589 |   | $ | 128,058 |   |
| Operating  income |       | $                    | 6,666      |   | $ | 11,051 |   | $ | 9,175 |   | $ | 4,541 |   |
| Net income        |       | $                    | 1,395      |   | $ | 5,092 |   | $ | 3,268 |   | $ | 3,331 |   |

 
| ** **        | ** ** | **March 28,  2004** | ** ** | **June 29,  2004** | ** ** | **September 26,  2004** | ** ** | **December 26,  2004** | ** ** |
|-------------------|------------|---------------------|------------|--------------------|------------|-------------------------|------------|------------------------|------------|
|              |       |                |       |               |       |                    |       |                   |       |
| Total  revenues   |       | $                   | 79,824     |               | $          | 87,411                  |       | $                      | 81,933     |   | $ | 77,642 |   |
| Operating  income |       | $                   | 3,919      |               | $          | 8,087                   |       | $                      | 5,368      |   | $ | 2,925 |   |
| Net income        |       | $                   | 1,009      |               | $          | 422                     |       | $                      | 2,906      |   | $ | 9,279 |   |

 

----

(1)   Includes the results ofoperations of Chevys since January 12, 2005, the date of acquisition.

 

49

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ITEM9.                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.              CONTROLSAND PROCEDURES

 

As of the end of our 2005 fiscal year, we conducted anevaluation, under the supervision and with the participation of the principalexecutive officer (“CEO”) and principal financial officer (“CFO”), of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct.)  Based on this evaluation, the CEOand CFO concluded that, as of the end of our 2005 fiscal year, our disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms. There was no change in our internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during ourmost recently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

ITEM 9B.               OTHERINFORMATION

 

None.

 

**PART III**

 

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

 

**Directors,Executive Officers and Key Employees**

 

The following table sets forth certain informationregarding our board of directors, executive officers and other key employees ofour Company.

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                 |
|-----------------------|------------|---------|------------|--------------------------------------------------------------|
| Frederick F.  Wolfe   |       | 55      |       | President,  Chief Executive Officer and Director             |
| Steven  Tanner        |       | 55      |       | Chief  Financial Officer                                     |
| Charles Rink          |       | 46      |       | Chief  Operating Officer, President Chevys Restaurants LLC   |
| Carlos  Angulo        |       | 44      |       | President,  Real Mex Foods, Inc.                             |
| Roberto  (Pepe) Lopez |       | 50      |       | Executive  Chef and Vice President, Research and Development |
| Fortunato N.  Valenti |       | 57      |       | Chairman of  the Board, Director                             |
| Richard  Stockinger   |       | 47      |       | Director*+                                                   |
| Harold O.  Rosser     |       | 57      |       | Director+                                                    |
| Brian P.  Friedman    |       | 50      |       | Director*+                                                   |
| J. Rice  Edmonds      |       | 34      |       | Director*                                                    |
| Michael J.  Hislop    |       | 50      |       | Director                                                     |
| Jeffrey J.  Teschke   |       | 34      |       | Director                                                     |

 

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*****Member of our audit committee

+ Member of our compensation committee

 

*FrederickF. Wolfe* has beenour President, Chief Executive Officer and Director since May 2001. Beforejoining our Company, Mr. Wolfe served as Chief Operating Officer at CaliforniaPizza Kitchen from 1997 to 2001. From 1982 to 1997, Mr. Wolfe served in avariety of positions at Acapulco Company rising from Assistant Manager to Vice Presidentof Operations. Mr. Wolfe received a bachelor’s degree in Political Science fromMiami University.

 

*StevenTanner*  has beenour Chief Financial Officer since January 2004. Before joining our Company, Mr.Tanner served as Chief Financial Officer at Sweet Factory during 2003,Executive Vice President and Chief Financial Officer for Pick Up Stix, from1997 to 2002 and Chief Financial Officer for In-N-Out Burger from 1991 to 1996.Mr. Tanner is a Certified Public Accountant and earned his bachelor’s degree inAccounting from the Brigham Young University.

 

50

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*CharlesRink*  has been ourChief Operating Officer since 2005 and President of Chevys since theacquisition in January 2005. Since joining our Company in 1990, Mr. Rink servedas Regional Director, Divisional Vice President, Northwest Division, VicePresident of Operations Services and Executive Vice President of El ToritoRestaurants. His previous experience includes serving as District Manager for VisionsRestaurants, Inc. between 1988 and 1990 and as District Manager for RestaurantEnterprises Group, Inc. between 1983 and 1988.

 

*CarlosAngulo*  has beenthe President of Real Mex Foods, Inc. since January 2005. Mr. Angulo joined usin 2000 as Vice President of Real Mex Foods, Inc. Previously, Mr. Angulo workedfor Smart & Final for 18 years in a variety of positions from Store Managerto Vice President of Northern California Distribution. Mr. Angulo received aBachelor of Science degree from the University of Southern California.

 

*Roberto(Pepe) Lopez* has beenour Executive Chef since 1992.  Inaddition, in 1994, Mr. Lopez was promoted to Vice President, Research andDevelopment and in 2004, he was promoted to Senior Vice President, Research andDevelopment.  Previously, Mr. Lopezserved as Director of Product Development. His prior experience includesserving as Executive Chef at Cano’s and Las Brisas, and as Manager at ElTorito. Between 1988 and 1992, he was Director of Product Development forVisions Restaurants, Inc.

 

*Fortunato N. Valenti* has been aDirector of our Company since October 1998. In November 2000, Mr. Valenti waselected as our Chairman of the Board of Directors. Since 1994, Mr. Valenti hasbeen the President and Chief Executive Officer of Restaurant Associates Corp. (“RestaurantAssociates”).  Mr. Valenti also serves onthe boards of directors of Papa Gino’s, Inc., Il Fornaio (American) Corp. (“IlFornaio”) and McCormick & Schmick Restaurant Corporation (“M&S”).

 

*Richard Stockinger* has been aDirector of our Company since November 2000. Since October 2003, Mr. Stockingerhas been the President of RA Patina Restaurants, LLC, an independent operatingcompany of Restaurants Associates. From 1992 to 2003, Mr. Stockinger served asVice President and Chief Financial Officer of Restaurant Associates. Beforejoining Restaurant Associates as Corporate Controller in 1985, Mr. Stockingerwas an Audit Supervisor at Touche Ross. Mr. Stockinger received a degree fromSeton Hall University.

 

*Harold O. Rosser* has been aDirector of our Company since October 1998. Mr. Rosser is also a managingdirector of BRS. Mr. Rosser serves on numerous boards of directors includingthose of Penhall International, Inc., O’Sullivan Industries, Inc., Il Fornaio,M&S and Marshall Retail Group Inc.

 

*Brian P. Friedman* has been aDirector of our Company since October 1998. Mr. Friedman has been a managingmember of JCP and affiliated entities since 1997. Mr. Friedman also serves asChairman of the Executive Committee of Jefferies & Company, Inc. Mr.Friedman also serves as a director of the general partner K-Sea TransportationPartners, L.P., Telex Communications, Inc., Pacific Basin Limited, JefferiesGroup, Inc., and various private companies in which JCP or its affiliates havean interest.

 

*J. Rice Edmonds* has been aDirector of our Company since November 2000. Mr. Edmonds is also a ManagingDirector of BRS, where he has worked since 1996. Previously, he worked in thehigh yield finance group of Bankers Trust. Mr. Edmonds holds a BS from theUniversity of Virginia McIntire School of Commerce and an MBA from the WhartonSchool of the University of Pennsylvania. Mr. Edmonds also serves on the boardsof directors of McCormick & Schmick’s Seafood Restaurants, Inc., TownSports International, Inc., The Sheridan Group, Inc., and several additionalprivate companies.

 

*Michael J. Hislop* has been aDirector of our Company since September 2001. Since 1995, Mr. Hislop hasbeen the President and Chief Executive Officer of Il Fornaio. Mr. Hislopreceived a degree in Hotel and Restaurant Management from the University ofMassachusetts.  Mr. Hislop also serves onthe board of directors of Il Fornaio.

 

*Jeffrey J. Teschke* has been aDirector of our Company since January 2005. Mr. Teschke is also a Vice President of J.W. Childs Associates,L.P.  Before joining J.W. ChildsAssociates, L.P. in June 1998, Mr. Teschke was an Associate with Quad-C, Inc.,a private equity firm based in Charlottesville, VA from 1996 to 1998, and aFinancial Analyst at Merrill Lynch & Co. from 1994 to 1996.  Mr. Teschke holds a BA from the University ofRochester and an MBA from the Harvard Business School.  Mr. Teschke also serves on the boards ofdirectors of Fitness Quest, Inc., Coldmatic Products International, LLC, W/SPackaging Holdings, Inc. and Sunny Delight Beverages Co.

 

**AuditCommittee Financial Expert**

 

Our Board of Directors believes that its auditcommittee members are financially literate and are capable of analyzing andevaluating our Company’s financial statements. Our Board of Directors has determined that Richard Stockinger is an “auditcommittee financial expert” as defined under Item 401(h) ofRegulation S-K.  Mr. Stockinger isnot “independent” as defined in the listing standards of the New York Stock Exchange.

 

51

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**Code ofEthics**

 

As of the date of this Form 10-K, we have not adopteda code of ethics that applies to our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions.

 

52

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ITEM 11.                EXECUTIVECOMPENSATION

 

The following table sets forth certain informationwith respect to annual and long-term compensation for services in allcapacities for fiscal years 2005, 2004 and 2003 paid to our Chief ExecutiveOfficer and the other four most highly compensated executive officers who wereserving as such as of December 25, 2005 (the “Named Executive Officers”):

 
| ** **                          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Long Term  Compensation(1)** | ** ** | ** **     | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------------------|------------|----------------|------------|
| ** **                          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Restricted**                 | ** ** | **Securities** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Annual Compensation** | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Underlying** | ** ** | **All Other**                  | ** ** |
| **Name and Principal Position**     | ** ** | **Year**                | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Other**      | ** ** | **Awards**                     | ** ** | **Options(2)** | ** ** | **Compensation(3)** | ** ** |
| ** **                          | ** ** | ** **              | ** ** | **($)**    | ** ** | **($)**    | ** ** | ** **     | ** ** | **(#)**                        | ** ** | **(#)**        | ** ** | **($)** | ** ** |
| Frederick F.  Wolfe                 |       | 2005                    |       | 447,615    |       | 339,293    |       | *              |       | —                         |       | —         |       | 7,320 |   |
| President, Chief Executive          |       | 2004                    |       | 431,935    |       | 75,000     |       | *              |       | —                         |       | —         |       | 8,858 |   |
| Officer and Director                |       | 2003                    |       | 363,653    |       | 150,000    |       | *              |       | —                         |       | —         |       | 7,320 |   |
|                                |       |                    |       |       |       |       |       |           |       |                           |       |           |       |   |   |
| Steven L.  Tanner(4)                |       | 2005                    |       | 254,559    |       | 133,682    |       | *              |       | —                         |       | —         |       | — |   |
| Chief Financial Officer             |       | 2004                    |       | 210,769    |       | —     |       | *              |       | 735                            | (5)        | 4,072          |       | — |   |
|                                |       | 2003                    |       | —     |       | —     |       | *              |       | —                         |       | —         |       | — |   |
|                                |       |                    |       |       |       |       |       |           |       |                           |       |           |       |   |   |
| Charles Rink                        |       | 2005                    |       | 293,054    |       | 147,195    |       | *              |       | —                         |       | —         |       | — |   |
| Chief Operating Officer             |       | 2004                    |       | 248,668    |       | 35,000     |       | *              |       | —                         |       | 12,215         |       | — |   |
|                                |       | 2003                    |       | 237,288    |       | 60,100     |       | *              |       | —                         |       | —         |       | 87,646 |   |
|                                |       |                    |       |       |       |       |       |           |       |                           |       |           |       |   |   |
| Carlos  Angulo                      |       | 2005                    |       | 221,384    |       | 96,418     |       | *              |       | —                         |       | —         |       | — |   |
| Senior Vice President,              |       | 2004                    |       | 180,769    |       | 35,000     |       | *              |       | —                         |       | 8,143          |       | — |   |
| Real Mex Foods, Inc.                |       | 2003                    |       | 159,423    |       | 40,800     |       | *              |       | —                         |       | —         |       | — |   |
|                                |       |                    |       |       |       |       |       |           |       |                           |       |           |       |   |   |
| Roberto  (Pepe) Lopez               |       | 2005                    |       | 195,369    |       | 60,413     |       | *              |       | —                         |       | —         |       | — |   |
| Executive Chef and Senior Vice      |       | 2004                    |       | 162,308    |       | 25,000     |       | *              |       | —                         |       | 3,054          |       | — |   |
| President, Research and Development |       | 2003                    |       | 157,307    |       | 40,066     |       | *              |       | —                         |       | —         |       | 29,210 |   |

 

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*              Represents less than$50,000 or 10% of the total salary and bonus for the year indicated.

 

(1)           We have not granted anystock appreciation rights or long-term incentive plan awards.

 

(2)           Represents options toacquire shares of our Class A Common Stock granted under our Amended andRestated 2000 Stock-Based Incentive Compensation Plan.

 

(3)           Amounts for Mr. Wolfeconsist of life insurance premiums that we paid on his behalf.  Amounts for Mr. Rink and Mr. Lopez consist ofamounts distributed upon discontinuation of the El Torito deferred compensationplan.

 

(4)           Steven L. Tanner joinedour Company as Chief Financial Officer on January 12, 2004.

 

(5)           Represents 295restricted shares of our Series A 12.5% Cumulative Compounding Preferred Stock,208 restricted shares of our Series B 13.5% Cumulative Compounding PreferredStock and 232 restricted shares of our Series C 15% Cumulative CompoundingParticipating Preferred Stock.

 

**OptionGrants in Fiscal Year Ended December 25, 2005**

 

There were no options grantedduring the fiscal year 2005 to our Named Executive Officers.

 

53

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**AggregatedOption Exercises and Fiscal Year-End Option Value**

 

The following table sets forth information regardingthe 2005 fiscal year-end option values for our Named Executive Officers:

 
| **Name**              | ** ** | **Shares  Acquired  on Exercise** | ** ** | **Value  Realized** | ** ** | **Number of Securities  Underlying Unexercised  Options At Fiscal Year End** | ** ** | **Value of Unexercised  In-the-money Options  At Fiscal Year End** | ** ** |
|-----------------------|------------|-----------------------------------|------------|---------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Exercisable**       | ** ** | **Unexercisable**                 | ** ** | **Exercisable**     | ** ** | **Unexercisable**                                                            | ** ** |
|                  |       |                              |       |                |       |                                                                         |       |                                                               |       |   |   |   |   |
| Frederick F.  Wolfe   |       | —                            |       | $                   | —     |                                                                         | 11,586     |                                                               | 5,086      |   | 955 |   | 330 |   |
| Steven  Tanner        |       | —                            |       | —              |       | 814                                                                          |       | 3,258                                                              |       | 82 |   | 330 |   |
| Charles Rink          |       | —                            |       | —              |       | 3,177                                                                        |       | 9,772                                                              |       | 254 |   | 989 |   |
| Carlos  Angulo        |       | —                            |       | —              |       | 1,629                                                                        |       | 6,514                                                              |       | 165 |   | 659 |   |
| Roberto  (Pepe) Lopez |       | —                            |       | —              |       | 978                                                                          |       | 2,443                                                              |       | 65 |   | 247 |   |
|                       |            |                                   |            |                     |            |                                                                              |            |                                                                    |            |  |  |  |  |  |

 

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(1) As of December 25, 2005, all outstanding options were in the money.

 

**AnnualBonus Plan**

 

We maintain anannual bonus plan that provides for annual incentive awards to be made to oursenior management (including the Named Executive Officers, but excluding ourCEO who has a separate bonus program under his employment agreement) upon ourCompany’s attainment of pre-set annual EBITDA targets (as defined in the annualbonus plan).  The amount of the annualaward to each executive is based upon a percentage of the executive’s basesalary.  Awards are normally paid in cashin a lump sum following the completion of our Company’s audit for each plan year.  To be eligible for a full share of the bonus,executives must be employed on the first day of the fiscal year, provided thatunder the plan we may adjust awards based on individual performance factors orspecial circumstances affecting our Company. In addition, pursuant to the annual bonus plan, senior management(including the Named Executive Officers, including our CEO) are entitled toreceive additional annual incentive awards upon our Company’s exceeding thepre-set EBITDA target.  The amount of theadditional bonus pool is calculated based on a percentage of the amount bywhich EBITDA for the plan year exceeds the pre-set EBITDA target, with eacheligible participant’s share being equal to a percentage of the additionalbonus pool.

 

**Compensationof Directors**

 

Our directors are entitled to reimbursement of theirreasonable out-of-pocket expenses in connection with their travel to andattendance at meetings of the Board of Directors or committees thereof.  In February 2005, we agreed to pay beginningwith fiscal 2005 (i) each non-employee director (other than the Chairman of ourAudit Committee and the Chairman of our Board of Directors) an annual fee of$25,000; (ii) the Chairman of our Audit Committee an annual fee of $35,000; and(iii) the Chairman of our Board of Directors an annual fee of $50,000.  We further agreed to pay 50.0% of theseamounts retroactively to those non-employee directors who served on our Boardof Directors during fiscal 2004.

 

**EmploymentAgreements**

 

We enteredinto an employment agreement with Mr. Wolfe effective August 2, 2004. Under theemployment agreement, Mr. Wolfe is entitled to a base salary of $400,000 perannum or such greater amount as the Board of Directors shall determine andcustomary executive benefits. Contingent upon our meeting certain financialgoals set annually in accordance with our bonus plan, Mr. Wolfe is eligible toreceive a bonus of up to 66 2/3% of his base salary. If Mr. Wolfe’s employmentis terminated by us without cause or by his resignation for “good reason,” hewould be entitled to any previously awarded but unpaid bonus and severancepayments equal in the aggregate to his annual base salary for a period of oneyear following such termination. The new employment agreement with Mr. Wolfeexpires on August 2, 2007.

 

We enteredinto retention agreements effective February 21, 2006, with each of thefollowing executives: Mr. Wolfe, Mr. Tanner, Mr. Rink and Mr. Angulo.  Under each retention agreement if , followinga change of control (as defined in the retention agreement), the executive’semployment is terminated by us without cause or by his resignation for goodreason (as defined in the retention agreement) prior to the end of an 18 monthperiod following the change of control (as defined in the retention agreement),the executive is entitled to payment of accrued and unpaid salary, any annualbonus earned but unpaid with respect to our fiscal year ending prior to thetermination, and, for the duration of the severance period (which is defined asa period of 18 months reduced by the number of full or partial months followingthe change of control ), a waiver of health and life premiums, continuation ofthe executive’s auto allowance and payment 1/12th of annual base salary foreach month of the severance period.  Thepayments and benefits provided for in the retention agreements will be offsetby any severance benefits due under any employment agreement, severance plan orsimilar arrangement maintained by our Company.

 

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ITEM12.                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

**SecurityOwnership of****CertainBeneficial Owners and Management**

 

The following table sets forth information withrespect to the beneficial ownership of outstanding common stock and preferredstock of Real Mex Restaurants, Inc. as of December 25, 2005 by:

 

**•**              Each person (orgroup of affiliated persons) who is known by us to beneficially own 5% or moreof Real Mex Restaurants, Inc.’s common and preferred stock;

 

**•**              Each of our NamedExecutive Officers;

 

**•**              Each of ourDirectors; and

 

**•**              All of our Directorsand executive officers as a group.

 

To our knowledge, each of the holders of shares listedbelow has sole voting and investment power as to the sharesowned unless otherwise noted. Beneficial ownership of the securities listed inthe table has been determined in accordance with the applicable rules andregulations promulgated under the Exchange Act.

 

**Number and Percent of Shares of**

**Stock of**

**Real Mex Restaurants, Inc.**

 
| ** **                                                        | ** ** | **Common  Stock(1)** | ** ** | **Preferred  Stock(2)** | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                                        | ** ** | **Shares**           | ** ** | **Percentage**          | ** ** | **Series A** | ** ** | **Percentage** | ** ** | **Series B** | ** ** | **Percentage** | ** ** | **Series C** | ** ** | **Percentage** | ** ** |
| ***Greater than 5% Stockholder***                                 |       |                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Bruckmann, Rosser, Sherrill & Co. II, L.P.(3)                 |       | 81,800.51            |       | 20.45                   |       | 4,951.08 |   | 27.14 |   | 3,366.74 |   | 27.32 |   | 4,384.31 |   | 25.08 |   |
| Bruckmann, Rosser, Sherrill & Co., L.P.(3)                    |       | 51,079.50            |       | 12.77                   |       | 3,064.77 |   | 16.80 |   | 2,043.18 |   | 16.58 |   | 2,741.80 |   | 15.69 |   |
| Funds affiliated with Jefferies Capital Partners(4)               |       | 68,027.87            |       | 17.00                   |       | 4,103.12 |   | 22.50 |   | 2,768.30 |   | 22.46 |   | 3,572.75 |   | 20.44 |   |
| J.W. Childs Partners, L.P. and affiliated fund(5)                 |       | 44,845.50            |       | 11.21                   |       | 2,063.67 |   | 11.31 |   | 1,393.26 |   | 11.31 |   | 1,945.90 |   | 11.13 |   |
| Canterbury Mezzanine Capital, L.P.(6)                             |       | 47,992.85            |       | 12.00                   |       | 1,000.00 |   | 5.48 |   | 680.00 |   | 5.52 |   | 2,034.76 |   | 11.64 |   |
| Blackstone Mezzanine Partners, L.P. (7)                           |       | 23,413.00            |       | 5.85                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
| ***Named Executive Officers and  Directors***                     |       |                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Frederick F. Wolfe, Jr.(8)                                        |       | 11,585               |       | 3.19                    |       | 71.05 |   | * |   | 48.09 |   | * |   | 375.00 |   | 2.15 |   |
| Steven Tanner(16)                                                 |       | 814.40               |       | *                       |       | 295.00 |   | 1.62 |   | 208.00 |   | 1.69 |   | 232.00 |   | 1.33 |   |
| Charles Rink(9)                                                   |       | 3,370.62             |       | *                       |       | 11.72 |   | * |   | 7.97 |   | * |   | — |   | — |   |
| Carlos Angulo(17)                                                 |       | 1,628.00             |       | *                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Roberto Lopez(10)                                                 |       | 977.80               |       | *                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Fortunato N. Valenti(11)                                          |       | 12,094.86            |       | 3.02                    |       | 340.89 |   | 1.87 |   | 230.01 |   | 1.87 |   | 675.38 |   | 3.86 |   |
| Richard Stockinger(12)                                            |       | 6,228.21             |       | 1.56                    |       | 204.54 |   | 1.12 |   | 138.00 |   | 11.20 |   | 150.00 |   | * |   |
| Harold O. Rosser                                                  |       | 213.50               |       | *                       |       | 12.81 |   | * |   | 8.54 |   | * |   | 11.19 |   | * |   |
| Brian P. Friedman(13)                                             |       | —               |       | —                  |       | — |   | — |   | — |   | — |   | — |   | — |   |
| J. Rice Edmonds                                                   |       | 81.80                |       | *                       |       | 4.91 |   | * |   | 3.27 |   | * |   | 4.38 |   | * |   |
| Michael J. Hislop                                                 |       | —               |       | —                  |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Jeffrey J. Teschke(14)                                            |       | —               |       | —                  |       | — |   | — |   | — |   | — |   | — |   | — |   |
| All executive  officers and directors as a group (12 persons)(15) |       | 38,171.53            |       | 9.54                    |       | 940.92 |   | 5.16 |   | 643.88 |   | 5.22 |   | 1,447.95 |   | 8.28 |   |

 

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* Less than 1%

 

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(1) Consists of shares of Class A Common Stock. In addition, forpurposes of calculating the percentage beneficial ownership of common stock wehave included outstanding shares of Class B Common Stock, all of which areowned by a single stockholder. The terms of Class B Common Stock are identicalto Class A Common Stock, except that the holders of Class B CommonStock have no voting rights, except as provided by law. Each holder ofClass B Common Stock has the right to convert any or all shares ofClass B Common Stock into an equal number of shares of Class A CommonStock at any time.

 

(2) The Preferred Stock consists of shares of Series A 12.5%Cumulative Compounding Preferred Stock, Series B 13.5% CumulativeCompounding Preferred Stock and Series C 15.0% Cumulative CompoundingParticipating Preferred Stock.

 

(3) Bruckmann, Rosser, Sherrill & Co., L.P. (“BRS I”) andBruckmann, Rosser, Sherrill & Co., L.P. (“BRS II” and, together withBRS I, the “BRS Funds”) are private equity investment funds managed byBruckmann, Rosser, Sherrill & Co., LLC. (“BRSE”). BRSE is the generalpartner of the BRS Funds and by virtue of such status may be deemed to be thebeneficial owner of the shares owned by the BRS Funds. BRSE has the power todirect the BRS Funds as to the voting and disposition of shares held by the BRSFunds. No single person controls the voting and dispositive power of BRSE withrespect to the shares owned by the BRS Funds. Bruce C. Bruckmann, Harold O.Rosser, Stephen C. Sherrill, Paul D. Kaminski and Thomas J. Baldwin are themanagers of BRSE, and none of them individually has the power to direct or vetothe voting or disposition of shares owned by the BRS Funds. BRSE expresslydisclaims beneficial ownership of the shares owned by the BRS Funds. Each ofMessrs. Bruckmann, Rosser, Sherrill, Kaminski and Baldwin expresslydisclaims beneficial ownership of the shares owned by the BRS Funds. Theaddress of BRS is 126 East 56th Street, New York, New York 10022.

 

(4) Consists of (a) an aggregate of 9,207.12 shares of preferredstock and 59,970.35 shares of common stock held by Furman Selz Investors IIL.P., (b) an aggregate of 789.11 shares of preferred stock and 5,139.88shares of common stock held by FS Employee Investors LLC and (c) anaggregate of 447.94 shares of preferred stock and 2,917.64 shares of commonstock held by FS Parallel Fund L.P. Furman Selz Investors II L.P., FS Employee Investors LLC and FS ParallelFund L.P. are private equity investment funds managed by Jefferies CapitalPartners and its affiliates. JCP has granted Harold O. Rosser and Stephen C.Sherrill an irrevocable proxy to vote all shares of Common Stock andSeries C Preferred Stock held by JCP in accordance withMessrs. Rosser and Sherrill’s instructions. The address of JefferiesCapital Partners is 520 Madison Avenue, 12th Floor, New York, New York 10022.

 

(5) Consists of (a) an aggregate of 5,032.20 shares of preferred stockand 38,523.09 shares of common stock held by J.W. Childs Equity Partners, L.P.and (b) an aggregate of 370.64 shares of preferred stock and 2,837.33 shares ofcommon stock held by JWC Chevys Co-Invest, LLC. The general partner of J.W. Childs Equity Partners, L.P. is J.W. ChildsAdvisors, L.P., A Delaware limited partnership.  The general partner ofJ.W. Childs Advisors, L.P. is J.W. Childs Associates, L.P., a Delaware limitedpartnership.  The general partner of J.W. Childs Associates, L.P. is J.W.Childs Associates, Inc., a Delaware corporation.  J.W. Childs Associates,Inc. is the managing member of JWC Chevys Co-Invest, LLC.  J.W. ChildsAdvisors, L.P., J.W. Childs Associates, L.P. and J.W. Childs Associates, Inc.may be deemed to beneficially own the shares of preferred stock and commonstock held by J.W. Childs Equity Partners, L.P. and JWC Chevys Co-Invest,LLC.  The address of J.W. Childs Partners,L.P. and JWC Chevys Co-Invest, LLC is 111 Huntington Avenue, Suite 2900,Boston, MA  02199.

 

(6) Consists of (a) an aggregate of 1,400.00 shares of preferredstock and 23,027.38 shares of common stock held by Canterbury MezzanineCapital, L.P., (b) an aggregate of 280.00 shares of preferred stock and4,605.47 shares of common stock held by Canterbury Detroit Partners, L.P. and(c) an aggregate of 2,034.76 shares of preferred stock and warrants topurchase 20,360.00 shares of common stock held by Canterbury Mezzanine CapitalII, L.P. that are currently exercisable with an exercise price of $0.01 pershare and an expiration date of June 28, 2010. The address of CanterburyMezzanine Capital II, L.P. is 600 Fifth Avenue, 23rd Floor, New York, NY 10020.

 

(7) Consists of (a) warrants to purchase 21,072.00 shares ofcommon stock held by Blackstone Mezzanine Partners L.P. and (b) warrantsto purchase 2,341.00 shares of common stock held by Blackstone MezzanineHoldings L.P. that are currently exercisable, with an exercise price of $0.01per share and an expiration date of June 28, 2010. The address ofBlackstone Mezzanine Partners L.P. is The Blackstone Group, 345 Park Avenue,31st Floor, New York, NY 10154.

 

56

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(8) Includes options to acquire 11,585 shares of common stock that arecurrently exercisable.

 

(9) Includes options to acquire 3,177 shares of common stock that arecurrently exercisable.

 

(10) Includes options to acquire 977.80 shares of common stock that arecurrently exercisable.

 

(11) Includes options to acquire 8,139 shares of common stock that arecurrently exercisable.

 

(12) Includes options to acquire 2,837 shares of common stock that arecurrently exercisable.

 

(13) Brian P. Friedman is a managing member of JCP, but disclaimsbeneficial ownership of shares owned by JCP and its affiliates, except to theextent of his pecuniary interest therein.

 

(14) As a Vice-President of J.W. Childs Associates, Inc., Mr. Teschkemay be deemed to beneficially own the shares of preferred stock and commonstock owned by J.W. Childs Associates, Inc., J.W. Childs Associates, L.P., J.W.Childs Advisors, L.P., J.W. Childs Equity Partners, L.P. and JWC ChevysCo-Invest, LLC.  Mr. Teschke disclaims beneficial ownership of such shares.

 

(15) Includes options to acquire an aggregate of 15,369 shares ofcommon stock that are currently exercisable.

 

(16) Includes options to acquire 814.40 shares of common stock that arecurrently exercisable.

 

(17) Includes options to acquire 1,628 shares of common stock that arecurrently exercisable.

 

**Equity Compensation PlanInformation**

**As of December 25, 2005**

 
| **Plan Category**                                              | ** ** | **(a)  Number of Securities to be  issued upon exercise of  outstanding options,  warranties and rights** | ** ** | **(b)  Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders(1)     |       | 78,482                                                                                                    |       | $                                                                                      | 37.63      |                                                                                                                                                      | 5,039      |   |
| Equity compensation plans not approved by  security holders(2) |       | —                                                                                                    |       | —                                                                                 |       | —                                                                                                                                                    |       |
| Total                                                          |       | 78,482                                                                                                    |       |                                                                                   |       | 5,039                                                                                                                                                     |       |
|                                                                |            |                                                                                                           |            |                                                                                        |            |                                                                                                                                                           |            |  |

 

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(1)           Includes(i) the Amended and Restated 2000 Stock-Based Incentive Compensation Plan and(ii) the 1998 Stock-Based Incentive Compensation Plan.

 

(2)           Notapplicable.

 

ITEM 13.                CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

**SecuritiesHolders Agreement and Registration Rights Agreement**

 

*Securities Holders Agreement*.  On June 28, 2000 we entered into an amendedand restated securities holders agreement with BRS, JCP, BancBoston InvestmentsInc. (“BancBoston”), Canterbury Mezzanine Capital, L.P., Canterbury DetroitPartners, L.P., Canterbury Mezzanine Capital II, L.P. (together with CanterburyMezzanine Capital, L.P. and Canterbury Detroit Partners, L.P., “Canterbury”),Blackstone Mezzanine Partners, L.P. and Blackstone Mezzanine Holdings L.P.(together with Blackstone Mezzanine Partners, L.P., “Blackstone”), certainmembers of our board of directors and executive officers, as well as certain ofour other security holders and investors. The securities holders agreementprovides that our board of directors will consist of six members or such othernumber that BRS will

 

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determine, and that so long as JCP and affiliatedentities and individuals continue to own at least 50% of the common stock heldby them on June 28, 2000, JCP will have the right to designate one of ourdirectors, and that so long as BRS and affiliated entities and individualscontinue to own at least 50% of the common stock held by them on June 28, 2000,BRS will have the right to designate all of our other directors. BRS and JCPalso each have the right to remove any or all of our directors designated by themupon written notice. Additionally, pursuant to a separate agreement, JCPgranted Harold O. Rosser and Stephen C. Sherrill, individuals affiliated withBRS, an irrevocable proxy to vote all shares of common stock held by JCP inaccordance with Messrs. Rosser and Sherrill’s instructions.

 

The securities holders agreement contains provisionsthat restrict the ability of our directors and our officers from transferringshares of our common stock or preferred stock held by them except in compliancewith the terms of the securities holders agreement. If our board of directorsand holders of a majority of our common stock approve the sale of our Company,each stockholder has agreed to sell its common stock and preferred stock on theterms and conditions approved by our board of directors and the holders of amajority of the common stock then outstanding. The securities holders agreementcontains provisions that may restrict BRS, JCP and their respective affiliatedentities and individuals from participating in certain transactions involving asignificant transfer of our securities, unless all other stockholders partiesto the securities holders agreement are offered “tag along rights,” as definedin the securities holders agreement.

 

*Registration Rights Agreement.  *On June 28, 2000, we enteredinto a registration rights agreement with the stockholders party to thesecurity holders agreement pursuant to which we have granted certainregistration rights with respect to shares of our common stock held by them.Under the registration rights agreement, we have granted to BRS, JCP,Canterbury, Blackstone and entities and individuals affiliated with BRS, JCP,Canterbury and Blackstone two demand registration rights following an initialpublic offering of our common stock with respect to the shares of our commonstock held by them. In addition, all of the stockholders that are a party tothe registration rights agreement have “piggy-back” registration rights toparticipate in certain registrations of common stock initiated by us.

 

**ManagementAgreements**

 

On June 28, 2000, we entered into an Amended andRestated Management Agreement with BRS and JCP, pursuant to which BRS and JCPprovide business and organizational strategy, financial and investmentmanagement and merchant and investment banking services. In exchange for theseservices, BRS and JCP received an initial fee, and subject to certainexceptions, are entitled to receive a management fee equal to 1% of our annualConsolidated EBITDA (as defined in the management agreement) plus actualout-of-pocket expenses. The management fee is allocated 66 2/3% to BRS and 331/3% to JCP. In addition, BRS and JCP may negotiate with us to provideadditional services in connection with any transaction in which we may be, ormay consider becoming involved. The management agreement includes customaryindemnification provisions and expires on June 28, 2010.

 

On January 19, 2005, we paid $833,333 and $166,667 to BRS and JCP,respectively, for advisory and transactional services provided to our Companypursuant to the Amended and Restated Management Agreement in connection withthe Chevys Acquisition.

 

On July 20, 2000, we entered into a ManagementAgreement with Restaurant Associates pursuant to which Restaurant Associatesprovided certain operational management services to us, subject to thedirection and supervision of our Board. Under the terms of this agreement, asamended, in exchange for these services, Restaurant Associates was entitled toreceive a management fee of $250,000 per year until termination of theagreement. This agreement expired on March 31, 2004. Mr. Valenti is thePresident and Chief Executive Officer of Restaurant Associates. Additionally,Mr. Stockinger is the President of RA Patina Restaurants, LLC (“RA Patina”), anaffiliate of Restaurant Associates, and the former Vice President and ChiefFinancial Officer of Restaurant Associates.

 

**Transactions with J.W. Childs**

 

*Issuance of Equity Securities to J.W. Childs*.  Pursuant to the terms of the definitive assetpurchase agreement, dated October 14, 2004 (the “Chevys Purchase Agreement”),on January 11, 2005 we issued to J.W. Childs an aggregate of 41,360 shares ofour Class A Common Stock, 2,064 shares of our Series A 12.5% CumulativeCompounding Preferred Stock, 1,393 shares of our Series B 13.5% CumulativeCompounding Preferred Stock, 1,946 shares of our Series C 15% CumulativeCompounding Participating Preferred Stock and options to purchase 3,485 sharesof our Class A Common Stock (which options are fully-vested and exercisable atprices ranging from $5 to $92 per share) as part of the consideration for theChevys Acquisition.

 

*Indemnification Agreement.*** **On October 14, 2004,in connection with the Chevys Purchase Agreement, we entered into anindemnification agreement (“Indemnification Agreement”) with J.W. Childs andour wholly owned subsidiary, CKR Acquisition Corp.  Pursuant to the Indemnification Agreement,effective upon closing of the Chevys Acquisition, J.W. Childs agreed toindemnify us and our affiliates against damages related to (i) anymisrepresentation or breach of warranty, covenant or representation made by theSellers in the Chevys Purchase Agreement or (ii) any Excluded Assets orExcluded Liabilities (as such terms are defined in the Chevys Purchase Agreement).  Pursuant to the Indemnification Agreement,J.W. Childs will not be liable for damages unless (i) we

 

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make a written claim for damages prior to January 11, 2006, (ii) thedamages with respect to any particular claim exceed $10,000 and (iii) theaggregate of all damages exceeds $600,000, subject to an overall cap on damageclaims of $6.0 million. On January 10, 2006, we made a written claim fordamages of at least $971,871 in excess of the $600,000 deductible.  Additional damage amounts may be asserteddepending on the outcome of certain pending items.

 

*Joinder Agreement. *On January 11, 2005,we entered into a joinder agreement (the “Joinder Agreement”) with J.W. Childsand BRS in connection with the issuance of our equity securities to J.W.Childs.  Pursuant to the JoinderAgreement, J.W. Childs (i) became bound by and entitled to receive the benefitsof certain provisions of our securities holders agreement, (ii) became subjectto certain transfer restrictions with respect to our equity securities owned byJ.W. Childs, (iii) was granted certain preemptive rights with respect to futureissuance of certain of our securities, and (iv) became entitled to designate arepresentative to our board of directors. In accordance with the terms of theJoinder Agreement, effective January 11, 2005, we increased the size of ourboard of directors to eight directors and Jeffrey J. Teschke was elected as therepresentative of J.W. Childs.  Mr.Teschke is also a Vice-President of J.W. Childs Associates, Inc.  J.W. Childs Associates, Inc. is the generalpartner of J.W. Childs Associates, L.P., which is the General Partner of J.W.Childs Advisors, L.P., the General Partner of J.W. Childs Equity Partners, L.P.

 

**Other Relationships**

 

In April 2004, we entered into an oral agreement withRA Patina, pursuant to which our subsidiary, Real Mex Foods, Inc., providesfood distribution services to certain restaurants owned by RA Patina.  In fiscal year 2005 and 2004, we receivedapproximately $985,000 and $478,000, respectively, for services rendered underthis food distribution service arrangement. Fortunato N. Valenti, one of our directors, is the Chief ExecutiveOfficer of RA Patina and Richard Stockinger, also one of our directors, is thePresident of RA Patina.

 

ITEM 14.                PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

**Independent Auditors**

 

Our Audit Committee appointed Ernst & Young LLP (“E&Y”)as our Company’s independent auditors to conduct the audit of our Company’sbooks and records for the fiscal year ending December 25, 2005. E&Y hasserved as our independent auditors since our inception in 1998.

 

**PrincipalAccounting Fees and Services**

 

The following table sets forth the aggregate feesbilled to the Company by E&Y:

 
| ** **          | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|---------------------|------------|-----------------|------------|-----------------|------------|
| Audit Fees          |       | $               | 491,800    |            | $          | 222,190 |   |
| Audit  Related Fees |       | 20,000          |       | 20,070          |       |
| Tax Fees            |       | 243,700         |       | 11,150          |       |
| All Other  Fees     |       | 521,129         |       | 292,570         |       |
| Total Fees          |       | $               | 1,276,629  |            | $          | 545,980 |   |

 

**AuditFees** represent the aggregate fees billed or estimated tobe billed to us for professional services rendered for the audit of our annualfinancial statements, review of financial statements included in our Form 10-Qsand services normally provided by our accountants in connection with statutoryand regulatory filings or engagements.

 

**Audit-Related***Fees* represent the aggregate fees billedto us or estimated to be billed to us for assurance and related services thatwere reasonably related to the performance of the audit or review of ourfinancial statements and are not reported under “Audit Fees” above. The natureof services provided consisted in both years of audits of our 401(k) plans.

 

**TaxFees** represent the aggregate fees billed to us orestimated to be billed to us for professional services rendered for tax compliance,tax advice and tax planning. In fiscal year 2005 the services included ananalysis of the tax attributes acquired when we acquired Chevys and a taxreturn review and in fiscal year 2004 consisted of a tax return review.

 

**AllOther Fees** represent the aggregate fees billed to us orestimated to be billed to us for products or services provided to us byE&Y, other than the services reported in the above categories, whichconsisted principally of fees for the examination of the offering circular andregistration statement on Form S-4 in connection with the offering of oursenior secured notes and the related exchange offer and fees for servicesrendered in connection with the Chevys Acquisition.

 

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**Policy onAudit Committee Pre-Approval of Audit and Permissible Non-Audit Services of theIndependent Auditor**

 

The Audit Committee is responsible for appointing,setting compensation for and overseeing the work of the independent auditor.The Audit Committee has established a policy requiring its pre-approval of allaudit and permissible non-audit services provided by the independent auditor.The Audit Committee considers whether such services are consistent with therules of the SEC on auditor independence as well as whether the independentauditor is best positioned to provide the most effective and efficient service,for reasons such as familiarity with our Company’s business, people, culture,accounting systems, risk profile and other factors and input from ourmanagement. The Audit Committee may delegate to one or more of its members thepre-approval of audit and permissible non-audit services provided that thosemembers report any pre-approvals to the full committee.  Pursuant to this authority, the Audit Committeehas delegated to its Chair the authority to address any requests forpre-approval of services between Audit Committee meetings provided that theamount of fees for any particular services requested does not exceed $10,000,and the Chair must report any pre-approval decisions to the Audit Committee atits next scheduled meeting. The policy prohibits the Audit Committee fromdelegating to management the Audit Committee’s responsibility to pre-approvepermitted services of the independent auditor. During fiscal 2005, all of theservices related to the audit or other fees described above were pre- approvedby the Audit Committee and none were provided pursuant to any waiver of thepre-approval requirement.

 

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**PART IV**

 

ITEM 15.                EXHIBITS AND FINANCIAL STATEMENTSCHEDULES.

 

*(a)*(1)      FINANCIALSTATEMENTS.

 

The Consolidated Financial Statements are filed aspart of this report under Item 8 Financial Statements and Supplementary Data.

 

•      ConsolidatedBalance Sheets - December 25, 2005 and December 26, 2004

 

•      ConsolidatedStatements of Operations - Fiscal Years Ended December 25, 2005, December 26,2004, and December 28, 2003

 

•      ConsolidatedStatements of Stockholders’ Equity - Fiscal Years Ended December 25, 2005,December 26, 2004, and December 28, 2003

 

•      ConsolidatedStatements of Cash Flows - Fiscal Years Ended December 25, 2005, December 26,2004, and December 28, 2003

 

•      Notes toConsolidated Financial Statements - December 25, 2005 and December 26, 2004

 

(2)           FINANCIAL STATEMENT SCHEDULE.

 

The financial statement schedules are not requiredunder the related instructions or are inapplicable and therefore have beenomitted.

 

(3)           EXHIBITS

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                             |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| 3.1              |       | Amended and Restated Certificate of Incorporation of Real Mex  Restaurants, Inc. (Filed with the Securities and Exchange Commission as  Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith) |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.2              |       | Bylaws of Real Mex Restaurants, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.2 to the Company’s Registration Statement on  Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                            |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.3              |       | Certificate of Incorporation of Acapulco Restaurants, Inc. (Filed  with the Securities and Exchange Commission as Exhibit 3.3 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                      |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.4              |       | Bylaws of Acapulco Restaurants, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.4 to the Company’s Registration Statement on  Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                            |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.5              |       | Certificate of Incorporation of El Torito Restaurants, Inc. (Filed  with the Securities and Exchange Commission as Exhibit 3.25 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                    |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.6              |       | Bylaws of El Torito Restaurants, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.6 to the Company’s Registration Statement on  Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                           |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.7              |       | Certificate of Incorporation of El Torito Franchising Company (Filed  with the Securities and Exchange Commission as Exhibit 3.7 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                   |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.8              |       | Bylaws of El Torito Franchising Company (Filed with the Securities  and Exchange Commission as Exhibit 3.8 to                                                                                                                                                                               |

 

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|       |       | Amendment No. 1 to the Company’s Registration Statement on Form S-4  (File No. 333-116310) on August 11, 2004 and incorporated by reference  herewith)                                                                                                                          |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.9        |       | Articles of Incorporation of Acapulco Restaurant of Ventura, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.9 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)        |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.10       |       | Bylaws of Acapulco Restaurant of Ventura, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.10 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                          |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.11       |       | Articles of Incorporation of Acapulco Restaurant of Westwood, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.11 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)      |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.12       |       | Bylaws of Acapulco Restaurant of Westwood, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.12 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                           |
| 3.13       |       | Articles of Incorporation of Acapulco Restaurant of Downey, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.13 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)        |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.14       |       | Bylaws of Acapulco Restaurant of Downey, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.14 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                           |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.15       |       | Articles of Incorporation of Murray Pacific (Filed with the  Securities and Exchange Commission as Exhibit 3.15 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                             |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.16       |       | Bylaws of Murray Pacific (Filed with the Securities and Exchange  Commission as Exhibit 3.16 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.17       |       | Articles of Incorporation of Acapulco Restaurants of Encinitas, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.17 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)    |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.18       |       | Bylaws of Acapulco Restaurants of Encinitas, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.18 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                       |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.19       |       | Articles of Incorporation of Acapulco Restaurant of Moreno Valley,  Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.19 to  the Company’s Registration Statement on Form S-4 (File No. 333-116310) on  June 9, 2004 and incorporated by reference herewith) |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.20       |       | Bylaws of Acapulco Restaurant of Moreno Valley, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.20 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                    |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.21       |       | Articles of Incorporation of El Paso Cantina, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.21 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                      |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.22       |       | Bylaws of El Paso Cantina, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.22 to the Company’s Registration Statement  on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by  reference herewith)                                         |
|       |       |                                                                                                                                                                                                                                                                                 |
| 3.23       |       | Articles of Incorporation of Real Mex Foods, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.23 to the Company’s Registration  Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated  by reference herewith)                       |

 

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| 3.24   |   | Bylaws of Real Mex Foods, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.24 to the Company’s Registration Statement  on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by  reference herewith)          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                 |
| 3.25   |   | Articles of Incorporation of TARV, Inc. (Filed with the Securities  and Exchange Commission as Exhibit 3.25 to the Company’s Registration  Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated  by reference herewith) |

 

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| 3.26   |   | Bylaws of TARV, Inc. (Filed with the Securities and Exchange Commission  as Exhibit 3.26 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.27   |   | Articles of Incorporation of ALA Design, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.27 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.28   |   | Bylaws of ALA Design, Inc. (Filed with the Securities and Exchange  Commission as Exhibit 3.28 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.29   |   | Articles of Incorporation of Acapulco Mark Corp. (Filed with the  Securities and Exchange Commission as Exhibit 3.29 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.30   |   | Bylaws of Acapulco Mark Corp. (Filed with the Securities and Exchange  Commission as Exhibit 3.30 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.31   |   | Certificate of Incorporation of CKR Acquisition Corp. (Filed with the  Securities and Exchange Commission as Exhibit 3.31 to the Company’s Annual  Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated  by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.32   |   | Bylaws of CKR Acquisition Corp. (Filed with the Securities and  Exchange Commission as Exhibit 3.32 to the Company’s Annual Report on Form  10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.33   |   | Articles of Formation of Chevys Restaurants, LLC (formerly known as  Chevys Acquisition Company LLC). (Filed with the Securities and Exchange  Commission as Exhibit 3.33 to the Company’s Annual Report on Form 10-K (File  No. 333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.34   |   | Operating Agreement of Chevys Restaurants, LLC (formerly known as  Chevys Acquisition Company LLC). (Filed with the Securities and Exchange  Commission as Exhibit 3.34 to the Company’s Annual Report on Form 10-K (File  No. 333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Indenture, dated as of March 31, 2004, among Real Mex Restaurants,  Inc., the guarantors named therein and Wells Fargo Bank, N.A., as trustee.  (Filed with the Securities and Exchange Commission as Exhibit 4.1 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | First Supplemental Indenture, dated as of November 29, 2004, among  CKR Acquisition Corp., Real Mex Restaurants, Inc., the guarantors named  therein and Wells Fargo Bank, N.A., as trustee. (Filed with the Securities  and Exchange Commission as Exhibit 4.2 to the Company’s Annual Report on Form  10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3    |   | Second supplemental Indenture, dated as of January 10, 2005, among  Chevys Restaurants, LLC, Real Mex Restaurants, Inc., the guarantors neared  therein and Wells Fargo Bank, N.A., as trustee (Filed with the Security and  Exchange Commission as Exhibit 4.4 to the Company’s Registration Statement on  Form S-4 (File No. 333-124670) on May 5, 2005 and incorporated reference  herewith)                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Registration Rights Agreement, dated as of March 31, 2004, by and  among Real Mex Restaurants, Inc., the guarantors named therein, Jefferies  & Company, Inc. and Deutsche Bank Securities Inc. (Filed with the  Securities and Exchange Commission as Exhibit 4.3 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1   |   | Amended and Restated Revolving Credit Agreement, dated as of  March 31, 2004, by and among Real Mex Restaurants, Inc., Acapulco  Restaurants, Inc., El Torito Franchising Company, El Torito  Restaurants, Inc., 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., as Borrowers, Fleet National Bank and the other financial  institutions listed therein, as Lenders, and Fleet National Bank, as agent  and administrative agent with |

 

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|   |   | Fleet Securities, Inc. as arranger. (Filed with the Securities  and Exchange Commission as Exhibit 10.1 to the Company’s Registration  Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated  by reference herewith)                                                                                                                                                                                                                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   |   | Intercreditor Agreement, dated as of March 31, 2004, by and between  Wells Fargo Bank, N.A., as collateral agent and as trustee, and Fleet  National Bank, as administrative agent. (Filed with the Securities and  Exchange Commission as Exhibit 10.2 to the Company’s Registration Statement  on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by  reference herewith)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   |   | Amended and Restated Securities Holders Agreement, dated as of  June 28, 2000, among Real Mex Restaurants, Inc., Bruckmann, Rosser,  Sherrill & Co., L.P., Furman Selz Investors II, L.P. and other  investors as named therein (including Registration Rights Agreement, attached  as Exhibit C, Filed with the Securities and Exchange Commission as  Exhibit 10.2 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith)                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4   |   | Amendments No. 1 to Amended and Restated Securities Holders  Agreement, dated as of November 28, 2001, among Real Mex Restaurants, Inc.,  Bruckmann, Rosser, Sherrill & Co., L.P., Furman Selz Investors II, L.P.  and other investors as named therein. (Filed with the Securities and Exchange  Commission as Exhibit 10.4 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5   |   | Amendment No. 2 to Amended and Restated Securities Holders Agreement,  dated as of September 23, 2003, among Real Mex Restaurants, Inc., Bruckmann,  Rosser, Sherrill & Co., L.P., Furman Selz Investors II, L.P. and other  investors as named therein. (Filed with the Securities and Exchange  Commission as Exhibit 10.5 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6   |   | Shareholder Voting Agreement, dated as of July 13, 1998, among  Furman Selz Investors II, L.P. and other investors listed therein, as  shareholders, and Harold O. Rosser and Stephen C. Sherrill, as  proxyholders. (Filed with the Securities and Exchange Commission as Exhibit  10.6 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith)                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | Shareholder Voting Agreement, dated as of November 29, 2001,  among Furman Selz Investors II, L.P. and other investors listed therein,  as shareholders, and Harold O. Rosser and Stephen C. Sherrill, as  proxyholders. (Filed with the Securities and Exchange Commission as Exhibit  10.7 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith)                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | Restricted Stock Agreement, dated as of September 23, 2002, by and  between Real Mex Restaurants, Inc. and Frederick Wolfe. (Filed with the  Securities and Exchange Commission as Exhibit 10.8 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9   |   | Amended and Restated Real Mex Restaurants, Inc. 2000 Stock-Based  Incentive Compensation Plan. (Filed with the Securities and Exchange  Commission as Exhibit 10.9 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10  |   | Real Mex Restaurants, Inc. 1998 Stock-Based Incentive Compensation  Plan. (Filed with the Securities and Exchange Commission as Exhibit 10.10 to  Amendment No. 1 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11  |   | Amended and Restated Management Agreement, dated as of June 28,  2000, among Bruckmann, Rosser, Sherrill & Co., Inc., FS Private  Investments, L.L.C., as the service providers, and Real Mex Restaurants,  Inc., Acapulco Restaurants Inc., El Torito Restaurants, Inc., and El Torito  Franchising Company, as the Company. (Filed with the Securities and Exchange  Commission as Exhibit 10.11 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.12  |   | Warrant Agreement, dated as of June 27, 2000, by and between  Real Mex Restaurants, Inc. and Blackstone Mezzanine Holdings, L.P. (Filed  with the Securities and Exchange Commission as Exhibit 10.12 to Amendment No.  1 to the Company’s Registration Statement on Form S-4 (File No. 333-116310)  on August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13  |   | Warrant Agreement, dated as of June 27, 2000, by and between Real Mex  Restaurants, Inc. and Blackstone Mezzanine Partners L.P. (Filed with the  Securities and Exchange Commission as Exhibit 10.13 to Amendment No. 1 to the                                                                                                                                                                                                                                                                                                                  |

 

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|   |   | Company’s Registration Statement on Form S-4 (File No. 333-116310) on  August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.14  |   | Warrant Agreement, dated as of June 28, 2000, by and between  Real Mex Restaurants, Inc. and Canterbury Mezzanine Capital II L.P.  (Filed with the Securities and Exchange Commission as Exhibit 10.14 to  Amendment No. 1 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15  |   | Employment Agreement dated as of August 2, 2004, by and between Real  Mex Restaurants, Inc. and Frederick Wolfe. (Filed with the Securities and  Exchange Commission as Exhibit 10.15 to Amendment No. 1 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on August 11, 2004  and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.16  |   | Asset Purchase Agreement, dated as of October 13, 2004, by and among  Real Mex Restaurants, Inc., CKR Acquisition Corp., Chevys, Inc. and its  subsidiaries, Chevys Holdings, Inc. and J.W. Childs Equity Partners L.P.  (Filed with the Securities and Exchange Commission as Exhibit 10.1 to Current  Report on Form 10-Q on November 10, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.17  |   | Indemnification Agreement, dated as of October 13, 2004, by and among  Real Mex Restaurants, Inc., CKR Acquisition Corp. and J.W. Childs Equity  Partners, L.P. (Filed with the Securities and Exchange Commission as Exhibit  10.17 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on  March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.18  |   | Joinder Agreement, dated as of January 11, 2005, by and among Real  Mex Restaurants, Inc., J.W. Childs Equity Partners, L.P., JWC Chevys  Co-Invest, LLC, Bruckmann, Rosser, Sherrill & Co., L.P. and  Bruckmann, Rosser, Sherrill & Co., II L.P. (Filed with the  Securities and Exchange Commission as Exhibit 10.1 to  Form 8-K on January 18, 2005 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.19  |   | Restricted Stock Agreement, dated as of October 31, 2004, by and  between Real Mex Restaurants, Inc. and Steven Tanner. (Filed with the  Securities and Exchange Commission as Exhibit 10.19 to the Company’s Annual  Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated  by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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 herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.21  |   | Term Loan Credit Agreement dated as of January 11, 2005, among Real  Mex Restaurants, Inc., Deutsche Bank Securities, Inc. and Credit Suisse First  Boston. (Filed with the Securities and Exchange Commission as Exhibit 10.2 to  Form 8-K (File No. 333-116310) on January 18, 2005 and incorporated by  reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.22  |   | Second Amendment and Consent, dated as of January 11, 2005, 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 10.3 to Form 8-K (File No. 333-116310) on January 18, 2005 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 herewith)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 12.1   |   | Computation of Ratio of Earnings to Fixed Charges. (Filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 21.1   |   | Subsidiaries of the Company and the Additional Registrants. (Filed  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. (Filed  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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| 31.2   |   | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934 of he Chief Financial Officer. (Filed  herewith)                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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. (Filed herewith) |
|   |   |                                                                                                                                                                       |
| 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) |

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | REAL MEX  RESTAURANTS, INC. |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   | By:                         |   | /s/ Frederick F.  Wolfe |   |
|   |                        | Frederick F.  Wolfe |
| Date:  | February 21, 2006           |   | Chief Executive Officer |
|        |                             |  |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature** | ** **               | **Title** | ** **                       | **Date** |
|---------------|--------------------------|-----------|----------------------------------|----------|
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Frederick F. Wolfe   |      |                             |     |   |
|          | Frederick F. Wolfe       |      | President and Chief Executive    |     | February 21, 2006 |
|          |                     |      | Officer and Director             |     |   |
|          |                     |      | (Principal Executive Officer)    |     |   |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Steven Tanner        |      |                             |     |   |
|          | Steven Tanner            |      | Chief Financial Officer          |     | February 21, 2006 |
|          |                     |      | (Principal Financial Officer and |     |   |
|          |                     |      | Accounting Officer)              |     |   |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Fortunato N. Valenti |      |                             |     |   |
|          | Fortunato N. Valenti     |      | Director                         |     | February 21, 2006 |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Richard Stockinger   |      |                             |     |   |
|          | Richard Stockinger       |      | Director                         |     | February 21, 2006 |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Harold O. Rosser     |      |                             |     |   |
|          | Harold O. Rosser         |      | Director                         |     | February 21, 2006 |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Brian P. Friedman    |      |                             |     |   |
|          | Brian P. Friedman        |      | Director                         |     | February 21, 2006 |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ J. Rice Edmonds      |      |                             |     |   |
|          | J. Rice Edmonds          |      | Director                         |     | February 21, 2006 |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Michael J. Hislop    |      |                             |     |   |
|          | Michael J. Hislop        |      | Director                         |     | February 21, 2006 |
|          |                     |      |                             |     |   |
|          |                     |      |                             |     |   |
|          | /s/ Jeffrey J. Teschke   |      |                             |     |   |
|          | Jeffrey J. Teschke       |      | Director                         |     | February 21, 2006 |

 

68

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**INDEX TO EXHIBITS**

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                             |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| 3.1              |       | Amended and Restated Certificate of Incorporation of Real Mex  Restaurants, Inc. (Filed with the Securities and Exchange Commission as  Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith) |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.2              |       | Bylaws of Real Mex Restaurants, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.2 to the Company’s Registration Statement on  Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                            |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.3              |       | Certificate of Incorporation of Acapulco Restaurants, Inc. (Filed  with the Securities and Exchange Commission as Exhibit 3.3 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                      |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.4              |       | Bylaws of Acapulco Restaurants, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.4 to the Company’s Registration Statement on  Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                            |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.5              |       | Certificate of Incorporation of El Torito Restaurants, Inc. (Filed  with the Securities and Exchange Commission as Exhibit 3.25 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                    |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.6              |       | Bylaws of El Torito Restaurants, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.6 to the Company’s Registration Statement on  Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                           |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.7              |       | Certificate of Incorporation of El Torito Franchising Company (Filed  with the Securities and Exchange Commission as Exhibit 3.7 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                   |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.8              |       | Bylaws of El Torito Franchising Company (Filed with the Securities  and Exchange Commission as Exhibit 3.8 to Amendment No. 1 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on August 11, 2004  and incorporated by reference herewith)                   |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.9              |       | Articles of Incorporation of Acapulco Restaurant of Ventura, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.9 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)               |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.10             |       | Bylaws of Acapulco Restaurant of Ventura, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.10 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                 |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.11             |       | Articles of Incorporation of Acapulco Restaurant of Westwood, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.11 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)             |
|             |       |                                                                                                                                                                                                                                                                                        |
| 3.12             |       | Bylaws of Acapulco Restaurant of Westwood, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.12 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                |

 

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| 3.13   |   | Articles of Incorporation of Acapulco Restaurant of Downey, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.13 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.14   |   | Bylaws of Acapulco Restaurant of Downey, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.14 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                           |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.15   |   | Articles of Incorporation of Murray Pacific (Filed with the  Securities and Exchange Commission as Exhibit 3.15 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.16   |   | Bylaws of Murray Pacific (Filed with the Securities and Exchange  Commission as Exhibit 3.16 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.17   |   | Articles of Incorporation of Acapulco Restaurants of Encinitas, Inc.  (Filed with the Securities and Exchange Commission as Exhibit 3.17 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.18   |   | Bylaws of Acapulco Restaurants of Encinitas, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.18 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                       |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.19   |   | Articles of Incorporation of Acapulco Restaurant of Moreno Valley,  Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.19 to  the Company’s Registration Statement on Form S-4 (File No. 333-116310) on  June 9, 2004 and incorporated by reference herewith) |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.20   |   | Bylaws of Acapulco Restaurant of Moreno Valley, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.20 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.21   |   | Articles of Incorporation of El Paso Cantina, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.21 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                      |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.22   |   | Bylaws of El Paso Cantina, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.22 to the Company’s Registration Statement  on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by  reference herewith)                                         |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.23   |   | Articles of Incorporation of Real Mex Foods, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.23 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                       |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.24   |   | Bylaws of Real Mex Foods, Inc. (Filed with the Securities and  Exchange Commission as Exhibit 3.24 to the Company’s Registration Statement  on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by  reference herewith)                                          |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.25   |   | Articles of Incorporation of TARV, Inc. (Filed with the Securities  and Exchange Commission as Exhibit 3.25 to the Company’s Registration  Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated  by reference herewith)                                 |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.26   |   | Bylaws of TARV, Inc. (Filed with the Securities and Exchange  Commission as Exhibit 3.26 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.27   |   | Articles of Incorporation of ALA Design, Inc. (Filed with the  Securities and Exchange Commission as Exhibit 3.27 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                           |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.28   |   | Bylaws of ALA Design, Inc. (Filed with the Securities and Exchange  Commission as Exhibit 3.28 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                              |

 

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| 3.29   |   | Articles of Incorporation of Acapulco Mark Corp. (Filed with the  Securities and Exchange Commission as Exhibit 3.29 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.30   |   | Bylaws of Acapulco Mark Corp. (Filed with the Securities and Exchange  Commission as Exhibit 3.30 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.31   |   | Certificate of Incorporation of CKR Acquisition Corp. (Filed with the  Securities and Exchange Commission as Exhibit 3.31 to the Company’s Annual  Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated  by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.32   |   | Bylaws of CKR Acquisition Corp. (Filed with the Securities and  Exchange Commission as Exhibit 3.32 to the Company’s Annual Report on Form  10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.33   |   | Articles of Formation of Chevys Restaurants, LLC (formerly known as  Chevys Acquisition Company LLC). (Filed with the Securities and Exchange  Commission as Exhibit 3.33 to the Company’s Annual Report on Form 10-K (File  No. 333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.34   |   | Operating Agreement of Chevys Restaurants, LLC (formerly known as  Chevys Acquisition Company LLC). (Filed with the Securities and Exchange  Commission as Exhibit 3.34 to the Company’s Annual Report on Form 10-K (File  No. 333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1    |   | Indenture, dated as of March 31, 2004, among Real Mex Restaurants,  Inc., the guarantors named therein and Wells Fargo Bank, N.A., as trustee.  (Filed with the Securities and Exchange Commission as Exhibit 4.1 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2    |   | First Supplemental Indenture, dated as of November 29, 2004, among  CKR Acquisition Corp., Real Mex Restaurants, Inc., the guarantors named  therein and Wells Fargo Bank, N.A., as trustee. (Filed with the Securities  and Exchange Commission as Exhibit 4.2 to the Company’s Annual Report on Form  10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3    |   | Second supplemental Indenture, dated as of January 10, 2005, among  Chevys Restaurants, LLC, Real Mex Restaurants, Inc., the guarantors named  therein and Wells Fargo Bank, N.A., as trustee (Filed with the Security and  Exchange Commission as Exhibit 4.4 to the Company’s Registration Statement on  Form S-4 (File No. 333-124670) on May 5, 2005 and incorporated reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4    |   | Registration Rights Agreement, dated as of March 31, 2004, by and  among Real Mex Restaurants, Inc., the guarantors named therein, Jefferies  & Company, Inc. and Deutsche Bank Securities Inc. (Filed with the  Securities and Exchange Commission as Exhibit 4.3 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1   |   | Amended and Restated Revolving Credit Agreement, dated as of  March 31, 2004, by and among Real Mex Restaurants, Inc., Acapulco  Restaurants, Inc., El Torito Franchising Company, El Torito  Restaurants, Inc., 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., as Borrowers, Fleet National Bank and the other financial  institutions listed therein, as Lenders, and Fleet National Bank, as agent  and administrative agent with Fleet Securities, Inc. as arranger. (Filed  with the Securities and Exchange Commission as Exhibit 10.1 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   |   | Intercreditor Agreement, dated as of March 31, 2004, by and between  Wells Fargo Bank, N.A., as collateral agent and as trustee, and Fleet  National Bank, as administrative agent. (Filed with the Securities and  Exchange Commission as Exhibit 10.2 to the Company’s Registration Statement  on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by  reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   |   | Amended and Restated Securities Holders Agreement, dated as of  June 28, 2000, among Real Mex Restaurants, Inc., Bruckmann, Rosser,  Sherrill & Co., L.P., Furman Selz Investors II, L.P. and other  investors as named therein                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|   |   | (including Registration Rights Agreement, attached as Exhibit C,  Filed with the Securities and Exchange Commission as Exhibit 10.2 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9,  2004 and incorporated by reference herewith)                                                                                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4   |   | Amendments No. 1 to Amended and Restated Securities Holders  Agreement, dated as of November 28, 2001, among Real Mex Restaurants, Inc.,  Bruckmann, Rosser, Sherrill & Co., L.P., Furman Selz Investors II, L.P.  and other investors as named therein. (Filed with the Securities and Exchange  Commission as Exhibit 10.4 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5   |   | Amendment No. 2 to Amended and Restated Securities Holders Agreement,  dated as of September 23, 2003, among Real Mex Restaurants, Inc., Bruckmann,  Rosser, Sherrill & Co., L.P., Furman Selz Investors II, L.P. and other  investors as named therein. (Filed with the Securities and Exchange  Commission as Exhibit 10.5 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6   |   | Shareholder Voting Agreement, dated as of July 13, 1998, among  Furman Selz Investors II, L.P. and other investors listed therein, as  shareholders, and Harold O. Rosser and Stephen C. Sherrill, as  proxyholders. (Filed with the Securities and Exchange Commission as Exhibit  10.6 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on June 9, 2004 and incorporated by reference herewith)                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | Shareholder Voting Agreement, dated as of November 29, 2001,  among Furman Selz Investors II, L.P. and other investors listed therein,  as shareholders, and Harold O. Rosser and Stephen C. Sherrill, as  proxyholders. (Filed with the Securities and Exchange Commission as Exhibit  10.7 to the Company’s Registration Statement on Form S-4 (File No. 333-116310)  on June 9, 2004 and incorporated by reference herewith)                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | Restricted Stock Agreement, dated as of September 23, 2002, by and  between Real Mex Restaurants, Inc. and Frederick Wolfe. (Filed with the  Securities and Exchange Commission as Exhibit 10.8 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and  incorporated by reference herewith)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9   |   | Amended and Restated Real Mex Restaurants, Inc. 2000 Stock-Based  Incentive Compensation Plan. (Filed with the Securities and Exchange  Commission as Exhibit 10.9 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10  |   | Real Mex Restaurants, Inc. 1998 Stock-Based Incentive Compensation  Plan. (Filed with the Securities and Exchange Commission as Exhibit 10.10 to  Amendment No. 1 to the Company’s Registration Statement on Form S-4 (File No.  333-116310) on August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11  |   | Amended and Restated Management Agreement, dated as of June 28,  2000, among Bruckmann, Rosser, Sherrill & Co., Inc., FS Private  Investments, L.L.C., as the service providers, and Real Mex Restaurants,  Inc., Acapulco Restaurants Inc., El Torito Restaurants, Inc., and El Torito  Franchising Company, as the Company. (Filed with the Securities and Exchange  Commission as Exhibit 10.11 to the Company’s Registration Statement on Form  S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference  herewith) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.12  |   | Warrant Agreement, dated as of June 27, 2000, by and between  Real Mex Restaurants, Inc. and Blackstone Mezzanine Holdings, L.P. (Filed  with the Securities and Exchange Commission as Exhibit 10.12 to Amendment No.  1 to the Company’s Registration Statement on Form S-4 (File No. 333-116310)  on August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13  |   | Warrant Agreement, dated as of June 27, 2000, by and between Real Mex  Restaurants, Inc. and Blackstone Mezzanine Partners L.P. (Filed with the  Securities and Exchange Commission as Exhibit 10.13 to Amendment No. 1 to the  Company’s Registration Statement on Form S-4 (File No. 333-116310) on August  11, 2004 and incorporated by reference herewith)                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14  |   | Warrant Agreement, dated as of June 28, 2000, by and between Real  Mex Restaurants, Inc. and Canterbury Mezzanine Capital II L.P. (Filed  with the Securities and Exchange Commission as Exhibit 10.14 to Amendment No.  1 to the Company’s Registration Statement on Form S-4 (File No. 333-116310)  on August 11, 2004 and incorporated by reference herewith)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.15  |   | Employment Agreement dated as of August 2, 2004, by and between Real  Mex Restaurants, Inc. and Frederick Wolfe. (Filed with the Securities and  Exchange Commission as Exhibit 10.15 to Amendment No. 1 to the Company’s  Registration Statement on Form S-4 (File No. 333-116310) on August 11, 2004  and incorporated by reference herewith)                                                                                                                                                                                                 |

 

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| 10.16  |   | Asset Purchase Agreement, dated as of October 13, 2004, by and among  Real Mex Restaurants, Inc., CKR Acquisition Corp., Chevys, Inc. and its  subsidiaries, Chevys Holdings, Inc. and J.W. Childs Equity Partners L.P.  (Filed with the Securities and Exchange Commission as Exhibit 10.1 to Current  Report on Form 10-Q on November 10, 2004 and incorporated by reference  herewith)                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.17  |   | Indemnification Agreement, dated as of October 13, 2004, by and among  Real Mex Restaurants, Inc., CKR Acquisition Corp. and J.W. Childs Equity  Partners, L.P. (Filed with the Securities and Exchange Commission as Exhibit  10.17 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on  March 24, 2005 and incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.18  |   | Joinder Agreement, dated as of January 11, 2005, by and among Real  Mex Restaurants, Inc., J.W. Childs Equity Partners, L.P., JWC Chevys  Co-Invest, LLC, Bruckmann, Rosser, Sherrill & Co., L.P. and  Bruckmann, Rosser, Sherrill & Co., II L.P. (Filed with the  Securities and Exchange Commission as Exhibit 10.1 to  Form 8-K on January 18, 2005 and  incorporated by reference herewith)                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.19  |   | Restricted Stock Agreement, dated as of October 31, 2004, by and  between Real Mex Restaurants, Inc. and Steven Tanner. (Filed with the  Securities and Exchange Commission as Exhibit 10.19 to the Company’s Annual  Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated  by reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
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| 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 herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| 10.21  |   | Term Loan Credit Agreement dated as of January 11, 2005, among Real  Mex Restaurants, Inc., Deutsche Bank Securities, Inc. and Credit Suisse First  Boston. (Filed with the Securities and Exchange Commission as Exhibit 10.2 to  Form 8-K (File No. 333-116310) on January 18, 2005 and incorporated by  reference herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| 10.22  |   | Second Amendment and Consent, dated as of January 11, 2005, 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 10.3 to Form 8-K (File No. 333-116310) on January 18, 2005 and  incorporated by reference herewith) |
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| 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 herewith)                                                                                                                                                                 |
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| 12.1   |   | Computation of Ratio of Earnings to Fixed Charges. (Filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| 21.1   |   | Subsidiaries of the Company and the Additional Registrants. (Filed  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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| 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. (Filed  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| 31.2   |   | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934 of he Chief Financial Officer. (Filed  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| 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. (Filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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