**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**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 26, 2004** |
|                                                 |       |                                                                                                                                                                                                                      |
| **o**                                                | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                  |
|                                                 |       |                                                                                                                                                                                                                      |
|                                                 |       | **FOR THE  TRANSITION PERIOD FROM               TO               ** |

 

**COMMISSION FILE NUMBER 333-116310**

 

----

 

**Real Mex Restaurants, Inc.**

(Exact name of Registrant as specified in its charter)

 
| **DELAWARE**                                                                                     | ** ** | **13-4012902**                        |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                  |       | (I.R.S. Employer  Identification No.) |
|                                                                                             |       |                                  |
| **4001 Via Oro Avenue, Suite 200, Long Beach,  CA**                                         | ** ** | **90810**                             |
| (Address of principal executive offices)                                                         |       | (Zip Code)                            |
|                                                                                             |       |                                  |
| Registrant’s telephone number, including area  code:   **(310) 513-7500**    |
| **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 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

 

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 March 18,2005, Real Mex Restaurants, Inc. had outstanding 300,016 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 BYREFERENCE:

**None**

 

** **

----

** **

**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 mayinclude these risks and uncertainties and the risks and uncertainties describedin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Risk Factors” contained in Item 7 of 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. Also,these forward looking statements present our estimates and assumptions only asof the date of this report. Except for our ongoing obligation to disclosematerial information as required by federal securities laws, we do not intendto update you concerning any future revisions to any forward looking statementsto reflect events or circumstances occurring after the date of this report.*

 

**PART I**

** **

# **ITEM 1.**                  BUSINESS

# ** **

**Our Company**

** **

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 26,2004, we had 125 restaurants, located principally in California.  Our two primary restaurant concepts, ElTorito and Acapulco, offer a large variety of traditional, innovative andauthentic Mexican dishes and a wide selection of alcoholic beverages atmoderate prices, seven days a week for lunch and dinner, as well as Sundaybrunch.  Both restaurant concepts featurefresh, high quality and flavorful foods, served in casual atmospheres.  For fiscal 2004, we generated revenues of$325.0 million and same store sales increases of 5.5%.  Additionally, for fiscal 2004 we generatednet income of $13.6 million and cash flow from operations of $20.5 million.

 

**Our RestaurantConcepts**

** **

*El Torito (59.5% of fiscal 2004 restaurantrevenues)*.  Founded in 1954, El Torito has been a pioneerin the full service, casual dining Mexican restaurant segment in California interms of number of restaurants.  As of December 26,2004, El Torito operated 74 restaurants, including six premium El Torito Grillrestaurants, and was the largest full service, casual dining Mexican restaurantchain in California.  El

 

----

 

Torito is dedicated to fresh, quality ingredients andauthentic, made-from-scratch Mexican cuisine, including sizzling fajitas,hand-made tamales and traditional Mexican combination platters.  We feature authentic regional specialtiescreated by our executive chef, Pepe Lopez. El Torito restaurants are modeled after a traditional Mexican hacienda.  The readers of the Orange County Register, aleading Los Angeles-area newspaper, have voted El Torito as the “Best MexicanRestaurant” four years in a row and featuring the “Best Sunday Brunch” elevenyears in a row.  Lunch and dinner entreesrange in price from $6.79 to $16.99 with an average check of $18.87 for fiscal2004.

 

El Torito restaurants are primarily free standingbuildings.  The restaurants averageapproximately 8,500 square feet with average seating of approximately 250 inthe dining area and 75 people in the cantina. All but one of the El Torito properties are leased.

 

El Torito drives the traditionally slower dayparts ofearly evening and weekday traffic through Happy Hour offers and specialty thememenus.  During Happy Hour, guests enjoyvalue priced appetizers and drinks.  OurPronto Lunch menu offers guests value priced, time sensitive entrees.  El Torito stimulates incremental traffic withvalue promotions such as Cadillac Margarita Mondays and our long standing TacoTuesday programs where guests may enjoy grilled chicken or steak tacos in thecantina.

 

*Acapulco (28.7% of fiscal 2004 restaurantrevenues).*  The first Acapulco restaurant opened inPasadena, California in 1960.  As of December 26,2004, Acapulco had 39 restaurant locations and was the third largest fullservice, casual dining Mexican restaurant chain in California in terms ofnumber of restaurants.  Acapulco offersCalifornia style Mexican food featuring traditional favorites as well asseafood specialties such as grilled halibut, shrimp and crab entrees.  Acapulco also features a host of specialtydrinks, including our signature house margarita made with premium Jose CuervoGold Tequila.  Lunch and dinner entreesrange in price from $6.99 to $15.99 with an average check of $17.11 for fiscal2004.

 

Acapulco restaurants are primarily freestanding andlocated in high-traffic urban and suburban areas.  Acapulco restaurants generally range in sizefrom approximately 7,500 to 8,600 square feet with average seating ofapproximately 200 in the dining area and 75 people in the cantina.  Many locations have attractive outdoorpatios.  All but one of the restaurantbuildings are leased.  Acapulco currentlyutilizes three models for restaurant decor: Hacienda, Aztec and Resort.  The three styles, which are similar to oneanother, have allowed our Company to match design and capital expenditures witheach location’s physical plant and the site’s customer demographics.  A consistent appearance is achieved throughsimilar exterior signage and the use of Mexican furnishings and vibrant primarycolor schemes in interior design throughout all Acapulco units.

 

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 (11.8% of fiscal 2004restaurant revenues).*  As of December 26, 2004,we operated 12 additional restaurant locations, most of which are also fullservice Mexican formats, under the following brands: Las Brisas; Casa Gallardo;El Paso Cantina; GuadalaHarry’s; Who Song & Larry’s; Hola Amigos andKeystone Grill.  We acquired most ofthese restaurants in connection with the acquisition of El Torito Restaurants, Inc.

 

2

----

 

On January 11, 2005, we completed the acquisitionof 69 Chevys Fresh Mex® restaurants and five Fuzio Universal Pasta®restaurants, and assumed franchise agreements relating to 37 franchised ChevysFresh Mex restaurants and five franchised Fuzio Universal Pasta restaurants(the “Chevys Acquisition”).  The purchaseprice for the Chevys Acquisition was approximately $77.9 million in cash andthe assumption of certain liabilities, plus the issuance of Real Mex securitiesto J.W. Childs (as defined herein).  See “RecentDevelopments” herein.  Unless otherwiseprovided in this report, references to “we”, “us” and “our Company” refer toReal Mex Restaurants, Inc. and our consolidated subsidiaries withoutgiving effect to the Chevys Acquisition, and the financial data and otherinformation contained in this report does not include historical financialinformation of the Chevys Fresh Mex and Fuzio Universal Pasta business (“Chevys”).

 

**Industry Overview**

** **

The National Restaurant Association estimates that therestaurant industry generated sales of $440.1 billion in 2004, its 13thconsecutive year of real sales growth, and predicts that changes in lifestylesand demographics, as well as consumer eating patterns, will continue to providelong-term industry growth.  TheAssociation expects the restaurant industry to grow at an average annual rate(including new restaurants) of approximately 4.6% through 2010.  In addition, the Association expects that by2010, 53% of the funds spent on food will be spent away from home, which is anincrease over the 46% spent in 2003.

 

According to the Association 2003 Consumer Survey, 91%of adults indicated they enjoy going to restaurants.  Moreover, 75% of adults agreed that going outto a restaurant with family or friends gives them an opportunity to socializeand is a better way to make use of their leisure time than cooking and cleaningup.

 

Most of our restaurants are located inCalifornia.  The California RestaurantAssociation estimates that the restaurant industry in California generatedsales of $46.4 billion in 2004, a 5.2% increase versus 2003.  The National Restaurant Association projects2005 California restaurant sales of $51.5 billion in 2005 and projects thatCalifornia will be the state posting the highest restaurant sales volume in2005.

 

**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 restaurantguests.  We believe these freshlyprepared, made-from-scratch items underscore our authenticity.  We prepare all our recipes with fresh, highquality ingredients, from our salsa to our sizzling fajitas.  El Torito is known for tablesidepreparations, including our most popular appetizer, our guacamole, which ismade 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 ourservers to follow a service program designed to achieve fast and consistentservice while also promoting a casual and festive atmosphere.  Our service program outlines procedures, suchas the server’s first approach to the guest, product recommendations throughoutthe visit, timing and manner of food delivery, plate clearing, paymentprocessing, and bidding the guest farewell. Throughout the day, managers are responsible for generating energy andenthusiasm throughout their restaurants by circulating and visiting with guestsat their tables.  Our primary goal is toensure that every guest leaves fully satisfied, thereby promoting repeatvisits.

 

3

----

 

*Commitment to Operational Excellence*. In 2004, we achieved increases in several key attributes of the guest’sdining experience at El Torito including taste, appearance, price/value,quality, cooked to order, portion size, temperature, and overall satisfaction,as measured by an El Torito guest satisfaction survey conducted in July 2004.  We did not achieve the same improvement incustomer satisfaction at Acapulco, which we believe is primarily due to thechange in our marketing strategy for Acapulco from one of discounting, to afood, service and brand platform.  Weintend to continue to improve these key attributes by building upon thefoundation of improved employee training programs and refined menu developmentand execution.

 

*Internal Production, Purchasing and DistributionFacilities*.  We centralize purchasing and distribution forthe majority of our raw ingredients, fresh products and alcoholic beverages,and manufacture food products through two facilities located in SouthernCalifornia.  The purchasing and distributionfacility, encompassing approximately 67,000 square feet, enables us to orderand 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 restaurants including soups, baked goods and sauce bases,enabling us to maintain food quality and consistency while reducing costs.  This facility also manufactures specialtyproducts for sales to outside customers, marketed under the Real Mex FoodsTMlabel as well as co-packaged under other branded names.  Both of these facilities have additionalcapacity to allow for growth in our distribution operations and production foroutside customers.

 

*Proven Management Team and Experienced Board of Directors*. We are led by a management team with extensive experience in all aspectsof restaurant operations.  Our managementteam has an average of more than 20 years of experience in the restaurantindustry.  Our Chief Executive Officer,Fred Wolfe, is a long-time veteran of our Company, having served a total of 19years with us.  From 1997 to 2001, Mr. Wolfe served as Chief Operating Officer of California Pizza Kitchen, Inc.(“CPK”) and, together 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 businessobjective is to increase same store sales and total revenues through brandpositioning, new menu and product innovation, and new restaurant openings.

 

*Effectively Communicate Our Brand Positioning*. At El Torito, we intend to continue to promote our authentic regionalspecials through in-restaurant and local advertising.  At Acapulco, we have historically utilized ahigh level of discounting to drive guest traffic.  In fiscal 2004, we reduced the frequency ofcoupons by 17% as compared to fiscal 2003 and circulation of coupons by 68.2%as compared to fiscal 2003, while increasing same store sales andprofitability.  We intend to continue toreduce our coupon discount strategy and emphasize product quality and service.

 

*Continued Commitment to Product Development andMenu Innovation*.  With the introduction of the El Torito “RealMex” menu in December 2002, we upgraded the quality and freshness ofmultiple menu ingredients.  In 2003, weintroduced a rotating menu of authentic regional specialties and upgraded ourhouse margarita with premium Jose Cuervo Gold Tequila.  In 2004, we introduced five new regionalChefs Specials menus highlighting the regions of Puebla, Veracruz, Oaxaca,Sinaloa and Mexico City.  We plan tocontinue regularly updating our menus to improve the taste, quality andfreshness of items and to continue to meet our customers’ expectations.  In April 2004, we introduced a new menuwith enhanced recipes and higher quality ingredients in our Acapulco conceptrestaurants.  In addition to

 

4

----

 

improving quality, we also streamlined this menu andexperienced an average decrease in preparation time of over 30%, whichtranslated into quicker table turns and higher sales.

 

*Open New Restaurants*.  To leverageour strong brand recognition and take advantage of our attractive uniteconomics, we plan to open new El Torito or El Torito Grill restaurants in andnear our existing markets, primarily using internally generated cash flow.  Our new store prototype is expected to beapproximately 7,500 square feet with an additional approximately 1,200 squarefoot patio.  Our El Torito restaurantsthat are similar in format averaged revenues of $2.8 million fiscal 2004.  Our net cash investment for a typical ElTorito restaurant is generally between $1.4 million and $2.0 million, includingpre-opening costs, depending on the level of landlord contributions.  Our target pre-tax, cash-on-cash return onnew restaurants is in excess of 30%.  Tosuccessfully execute this strategy, we intend to leverage the extensiveexperience our management team has acquired opening new restaurants for ourCompany as well as other restaurant chains. In 2004, we signed leases for three additional new El Torito restaurantsin California, of which one was opened in 2004 and the other two are scheduledto open in 2005.  In December 2004we opened our first new El Torito restaurant in five years, located inEncinitas, California.  Additionally, in February 2005,we signed a lease for an El Torito restaurant location which is expected toopen in 2006.

 

*Introduce New Products Through New Channels*. We manufacture bulk food packages and individually wrapped retail productsunder the Real Mex FoodsTM label, as well as co-package these products underother branded company names.  In 2003, wedeveloped the brand Real Mex FoodsTM to market our manufactured products tooutside customers.  We plan to expandthis area of our business as we continue to develop a core group of standardproducts for retail sales including premium quality burritos, enchiladas andtamales.  We currently sell direct to orpackage for fast food and casual restaurants, amusement parks, club stores, andfood service, retail, vending and institutional customers.  We plan to continue expanding this businessto include other products and to market these products to additional customersin these and other business segments.

 

**Purchasing andDistribution**

** **

We seek to obtain thehighest quality ingredients, products and supplies from a variety of reliablesources at competitive prices.  Wecentralize purchasing of most of our food ingredients, products and supplies,and in December 2003, we moved the purchasing and distributing of theseitems to our new purchasing and distribution facility.  Our purchasing and distribution facilityenables us to order and distribute food items on a timely basis, enablingdelivery of fresh products to our restaurants. In addition, we obtain our beer from a variety of state regulateddistributors who deliver directly to our restaurants.

 

**Employees**

** **

As of December 26,2004, we had approximately 7,680 employees. Of these employees, approximately 6,710 were employed as restauranthourly team members, 665 as restaurant managers, 135 as distribution andproduction facility employees, and 170 as executive, senior, and general officestaff.  None of our workforce isunionized.

 

*Restaurant Staffing.*  Restaurantsare assigned between three and five managers - typically, a general manager,one or more assistant managers and one chef. The average restaurant employs approximately 55 team members -approximately 35% of whom are in kitchen positions and 65% in guest servicepositions.  The actual number of teammembers in each restaurant varies depending on sales volume, physical plantdesign, and unique operational needs.

 

5

----

 

*Turnover.*  We believe oneof our strengths is the relative stability of our employee staff.  We believe that in fiscal 2004 our hourlyturnover of 75.6% was better than the industry average, and our managementturnover of 27.3% was comparable to the industry average.  Our restaurant management is heavily tenured,with Regional Directors averaging approximately 15 years, General Managersaveraging approximately 11 years and Managers averaging more than 7 years.  Hourly employee tenure averages more than 4years.  Other highly skilled positionssuch as chefs average 14 years with the Company.

 

**Competition**

** **

The food service industry iscompetitive and affected by external changes such as economic conditions,disposable income, consumer tastes, and changing population anddemographics.  Competitive factorsinclude: food quality, variety and price; customer service; location; thenumber and proximity of competitors; decor; and public reputation.  We consider our principal competitors to befamily dining venues and casual dining operations.  Like other food service operations, we followchanges in both consumer preferences for food and habits in patronizing eatingestablishments.  We intend to continue toexpand into the specialty food market by selling directly to or co-packagingfor restaurants, food service companies and other customers and facecompetition from other food service companies, many of which are moreestablished than us.

 

**GovernmentRegulation**

** **

Our business, including eachof the restaurants we operate, is subject to extensive federal, state and localgovernment regulation, including those relating to, among others, publichealth, sanitation and safety, zoning and fire codes.  A failure to comply with one or moreregulations could result in the imposition of sanctions, including the closingof facilities for an indeterminate period of time, or third party litigation,any of which could have a material adverse effect on our Company and itsresults of operations.  We are alsosubject to laws and regulations governing our relationships with employees,including the Fair Labor Standards Act, the Immigration Reform and Control Act,minimum wage requirements, overtime, reporting of tip income, work and safetyconditions and other regulations governing employment.  Because a significant number of our employeesare paid at rates tied to the federal and California state minimum wage, anincrease in the minimum wage would increase our labor costs.  An increase in the minimum wage rate oremployee benefits costs could have a material adverse effect on our results ofoperations.

 

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 2004,approximately 28% 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 person 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.

 

6

----

 

Our food manufacturing operations are subject toextensive regulation by the United States Department of Agriculture (“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, there can be no assurance that we are in full compliancewith all such laws and regulations or that we will be able to comply with anyfuture laws 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 ourmanufacturing facilities with the United States Food & DrugAdministration (“FDA”).  In addition, weare subject to the Nutrition Labeling and Education Act of 1990 and theregulations promulgated there under by the FDA. This regulatory program prescribes the format and content of certaininformation required to appear on the labels of food products.

 

Additionally, restaurants and other facilities utilizeelectricity 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 alsosubject to federal, state and local laws and regulations relating toenvironmental protection, including regulation of discharges into the air andwater.  Under various federal, state andlocal laws, an owner or operator of real estate may be liable for the costs ofremoval or remediation of certain hazardous or toxic substances on or in suchproperty.  Such liability may be imposedwithout regard to whether the owner or operator knew of, or was responsiblefor, the presence of such hazardous or toxic substances.  Although we are not aware of any materialenvironmental conditions that require remediation by us under federal, state orlocal law at our properties, we have not conducted a comprehensiveenvironmental review of our properties or operations and no assurance can begiven that we have identified all of the potential environmental liabilities atour properties or that such liabilities would not have a material adverseeffect on our financial condition.

 

**Recent Developments**

 

On January 11, 2005, wecompleted the acquisition of substantially all of the assets of Chevys, Inc.and certain of its subsidiaries (the “Sellers”) out of the Sellers’ Chapter 11bankruptcy proceeding, including 69 Chevys Fresh Mex® restaurants and fiveFuzio Universal Pasta® restaurants.  Inaddition, we assumed franchise agreements for 37 franchised Chevys Fresh Mexrestaurants and five franchised Fuzio Universal Pasta restaurants.  The purchase price for the Chevys Acquisitionwas approximately $77.9 million in cash and the assumption of certainliabilities, including ordinary course post-petition current liabilities of theSellers, approximately $6.3 million of letters of credit and approximately $0.8million of other indebtedness.  The cashportion of the purchase price was financed with $75.0 million of borrowingsunder a new senior unsecured term loan credit facility and cash on hand.  In addition, as part of the consideration forthe Chevys Acquisition, we issued to J.W. Childs Equity Partners L.P. and itsaffiliate, JWC Chevys Co-Invest, LLC (collectively, “J.W. Childs”), in theircapacity as unsecured creditors of the Sellers, an aggregate of 41,360 sharesof our Class A Common Stock, 2,064 shares of our Series A 12.5%Cumulative Compounding Preferred Stock, 1,393 shares of our Series B 13.5%

 

7

----

 

Cumulative CompoundingPreferred Stock, 1,946 shares of our Series C 15% Cumulative CompoundingParticipating Preferred Stock and options to purchase 3,485 shares of our Class ACommon Stock.

 

Chevys Fresh Mex is a full service casual diningMexican restaurant concept which offers a large variety of fresh Mexican dishesand a wide selection of margaritas and originated the Fresh Mex® concept in Mexican cooking.  In terms of number of restaurants, ChevysFresh Mex is the second largest full service casual dining Mexican restaurantchain in California and one of the largest in the United States.  Fuzio Universal Pasta is a full servicecasual dining restaurant concept featuring noodle-based international pasta andfull bars promoting specialty martinis. The Chevys Fresh Mex restaurants are located primarily in California andin 16 other states and the Fuzio Universal Pasta restaurants are located inCalifornia and two other states. According to the Sellers, for fiscal 2004, Chevys generated revenues of$212.9 million.  Chevys Fresh Mexrestaurants accounted for 96.0% of the total fiscal 2004 restaurant revenue ofChevys and Fuzio Universal Pasta restaurants accounted for 4.0% of fiscal 2004restaurant revenue of Chevys.  Duringfiscal 2004, 98.4% of revenue from Chevys Fresh Mex restaurants was derivedfrom company-owned restaurants while the remaining 1.6% was derived from royaltiesfrom franchised restaurants.  Duringfiscal 2004, 97.8% of revenue from Fuzio Universal Pasta restaurants wasderived from company-owned restaurants while the remaining 2.2% was derivedfrom royalties from franchised restaurants.

 

As a result of the Chevys Acquisition, we employedapproximately 5,000 former Chevys employees. As of January 12, 2005, approximately 4,570 of these employees wereemployed as restaurant hourly team members, 400 as restaurant managers, and 30as executive, senior and general office staff. In addition to the leased Chevys Fresh Mex and Fuzio Universal Pastarestaurant properties, we also assumed the lease for Chevys’ property locatedin Emeryville, California, which had been used as Chevys’ corporateheadquarters prior to the Chevys Acquisition.

 

ITEM 2.                  PROPERTIES

 

As of December 26,2004, we owned two of our restaurant locations and leased the remaining123.  We believe that we have reasonablypriced and stable lease agreements.  Ourleases have terms that expire between 2005 and 2027 (excluding renewal optionsnot yet exercised) and have an average remaining term of approximately 12years, including options.  All of ourrestaurants are Company operated.

 

Our restaurant locations by concept and state as of December 26,2004, are as follows:

 

| **Restaurant Concept**       | ** ** | **Restaurants** | ** ** |
|------------------------------|------------|-----------------|------------|
|                         |       |            |       |
| El Torito:                   |       |            |       |
| California                   |       | 71              |       |
| Oregon                       |       | 1               |       |
| Arizona                      |       | 2               |       |
| Total El Torito              |       | 74              |       |
| Acapulco:                    |       |            |       |
| California                   |       | 38              |       |
| Oregon                       |       | 1               |       |
| Total Acapulco               |       | 39              |       |
|                         |       |            |       |
| Other Restaurant Concepts(1) |       | 12              |       |
|                         |       |            |       |
| Total Restaurants            |       | 125             |       |

 

8

----

 

----

(1)           Our other restaurant concepts are locatedin five states including California, Missouri, Illinois, Indiana andWashington.

 

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

 

Our corporateheadquarters are located in Long Beach, California in an approximately 32,000square foot leased facility.

 

Our owned and certain ofour leased real property is pledged to secure indebtedness outstanding underour senior credit facility and our Senior Secured Notes due 2010.

 

ITEM 3.                  LEGAL PROCEEDINGS

 

We are periodically adefendant in cases involving personal injury and other matters which arise inthe normal course of business. While any pending or threatened litigation hasan element of uncertainty, we believe that the outcome of these lawsuits orclaims, individually or combined, will not materially adversely affect theconsolidated financial position, results of operations or cash flows of ourCompany.

 

ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

During the fourth quarter offiscal 2004, no matters were submitted to a vote of stockholders throughsolicitation of proxies or otherwise.

 

**PART II**

** **

ITEM 5.                  MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED 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 ofrecord holders of each of our classes of common stock as of March 18, 2005was as follows:

 

Class ACommon Stock: 50

Class BCommon Stock: 1

 

**Dividends**

** **

In fiscal 2004, we did notpay any dividends on our common stock. Our ability to pay dividends is restricted by certain covenantscontained in our secured and unsecured senior credit facilities, as well ascertain restrictions contained in our indenture relating to our Senior SecuredNotes due 2010.

 

9

----

 

ITEM 6.                  SELECTED FINANCIAL DATA

 

The following table sets forth selected historicalconsolidated financial and other data of our Company.  The selected historical consolidatedfinancial data has been derived from our Company’s audited consolidatedfinancial statements for each of the fiscal years ended December 2004,2003, 2002, 2001 and 2000, and the fiscal year ended October 2000.  On October 30, 2000, we elected tochange the date of our fiscal year-end to the last Sunday in December.  As a result of the change in our fiscal year,our consolidated financial statements include the three month period from October 2,2000 through December 31, 2000. The twelve month periods ended October 1,2000 and December 30, 2001 each 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. 

 
| ** **                                                | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Three months**       | ** ** | **Fiscal Year**       | ** ** |
|-----------------------------------------------------------|------------|---------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **Fiscal Year Ended**     | ** ** | **ended**  | ** ** | **ended**  | ** ** |
| ** **                                                | ** ** | **2004**                  | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **Dec. 31, 2000** | ** ** | **Oct. 1, 2000** | ** ** |
| ** **                                                | ** ** | **($ in thousands)** | ** ** |
| **Statement of Operations Data:**                         | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **            | ** ** |
| Restaurant revenues                                       |       | $                         | 314,157    |       | $          | 307,278    |       | $          | 310,094    |                   | $          | 322,857               |       | $ | 79,746 |   | $ | 161,107 |   |
| Other revenue                                             |       | 10,787                    |       | 4,714      |       | 2,285      |       | 2,149      |       | 370                    |       | 1,433                 |       |
| Total revenues                                            |       | 324,944                   |       | 311,992    |       | 312,379    |       | 325,006    |       | 80,116                 |       | 162,540               |       |
| Cost of sales                                             |       | 80,839                    |       | 77,555     |       | 77,867     |       | 82,188     |       | 21,923                 |       | 43,516                |       |
| Labor                                                     |       | 118,888                   |       | 116,269    |       | 116,156    |       | 120,378    |       | 29,853                 |       | 54,357                |       |
| Direct operating and occupancy expense                    |       | 76,760                    |       | 74,938     |       | 74,315     |       | 80,789     |       | 18,896                 |       | 34,886                |       |
| Total operating costs                                     |       | 276,487                   |       | 268,762    |       | 268,338    |       | 283,355    |       | 70,672                 |       | 132,759               |       |
| General and administrative expenses                       |       | 17,725                    |       | 15,201     |       | 14,670     |       | 16,688     |       | 3,837                  |       | 15,779                |       |
| Depreciation                                              |       | 11,837                    |       | 11,732     |       | 11,872     |       | 13,220     |       | 3,285                  |       | 5,959                 |       |
| Amortization                                              |       | —                    |       | —     |       | —     |       | 8,000      |       | 1,865                  |       | 1,964                 |       |
| Operating income                                          |       | 18,433                    |       | 16,063     |       | 15,803     |       | 1,675      |       | 457                    |       | 5,751                 |       |
| Interest expense                                          |       | 12,528                    |       | 13,372     |       | 14,354     |       | 16,922     |       | 4,285                  |       | 7,735                 |       |
| Debt termination costs                                    |       | 4,677                     |       | —     |       | —     |       | —     |       | —                 |       | —                |       |
| Income (loss) before income taxes                         |       | 4,546                     |       | 3,315      |       | 2,257      |       | (13,822    | )          | (3,203                 | )          | (2,246                | )          |
| Net income (loss)                                         |       | 13,616                    |       | 3,206      |       | 2,535      |       | (14,060    | )          | (3,208                 | )          | (2,533                | )          |
| Redeemable preferred stock accretion                      |       | (11,862                   | )          | (10,409    | )          | (9,267     | )          | (19,685    | )          | (875                   | )          | (1,877                | )          |
| Net income (loss) attributable to common  stockholders(1) |       | $                         | 1,754      |       | $          | (7,203     | )          | $          | (6,732     | )                      | $          | (33,745               | )          | $ | (4,083 | ) | $ | (4,410 | ) |
| **Balance Sheet Data:**                                   |       |                      |       |       |       |       |       |       |       |                   |       |                  |       |
| Cash and cash equivalents                                 |       | 10,690                    |       | 2,605      |       | 1,201      |       | 614        |       | 3,476                  |       | 4,318                 |       |
| Property and equipment, net                               |       | 35,848                    |       | 46,620     |       | 52,616     |       | 59,834     |       | 68,514                 |       | 69,599                |       |
| Total assets                                              |       | 186,951                   |       | 173,020    |       | 175,768    |       | 184,108    |       | 206,201                |       | 206,775               |       |
| Total debt(2)                                             |       | 106,503                   |       | 114,699    |       | 121,607    |       | 126,440    |       | 140,447                |       | 138,665               |       |
| Total shareholders’ equity                           |       | 29,849                    |       | 15,861     |       | 12,542     |       | 9,753      |       | 8,529                  |       | 11,763                |       |
| **Other Financial Data:**                                 |       |                      |       |       |       |       |       |       |       |                   |       |                  |       |
| Capital expenditures                                      |       | $                         | 9,241      |       | $          | 6,962      |       | $          | 5,992      |                   | $          | 7,589                 |       | $ | 2,468 |   | $ | 6,002 |   |
| Ratio of earnings to fixed charges(3)                |       | 1.2                       | x          | 1.2        | x          | 1.1        | x          | 0.4        | x          | 0.4                    | x          | 0.8                   | x          |

 

----

(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 fiscal year ended 2001, the three month period ended December 31,2000 and the fiscal year ended October 1 2000, our earnings wereinsufficient to cover fixed charges by $14,060, $3,203 and $2,246, respectively(in thousands).

 

10

----

 

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

 

*The following Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking statements as a result of certain factors, includingthose set forth under the heading “Forward-Looking Statements” above and elsewherein this report. **Unless otherwise provided below,references to “we”, “us” and “our Company” refer to Real Mex Restaurants, Inc.and our consolidated subsidiaries without giving effect to the ChevysAcquisition, and the financial data and other information discussed below doesnot include historical financial information of Chevys.**  The following discussion should be read inconjunction with our consolidated financial statements and related notesthereto included elsewhere in this report.*

 

**Overview**

** **

We are one of the largestfull service, casual dining Mexican restaurant chain operators in the UnitedStates in terms of number of restaurants. As of December 26, 2004, we operated 125 restaurants, of which 113were located in California, with additional restaurants in Arizona, Indiana,Illinois, Missouri, Oregon and Washington. As of December 26, 2004, our three major subsidiaries were ElTorito Restaurants, Inc., which we acquired in June 2000, AcapulcoRestaurants, Inc., and a purchasing, distribution, and manufacturingsubsidiary, Real Mex Foods, Inc.

 

Our two primary restaurant concepts, El Torito andAcapulco, offer high quality Mexican food, a wide selection of alcoholicbeverages and excellent guest service. Founded in 1954, El Torito has been a pioneer in the full service,casual dining Mexican restaurant segment in California.  As of December 26, 2004, El Toritooperated 74 restaurants, including six premium El Torito Grill restaurants, andwas the largest full service casual dining Mexican restaurant chain inCalifornia in terms of number of restaurants. The first Acapulco restaurant opened in Pasadena, California in1960.  As of December 26, 2004,Acapulco had 39 locations and was the third largest full service, casual diningMexican restaurant chain in California in terms of number of restaurants.

 

In addition to the El Torito, El Torito Grill andAcapulco concepts, as of December 26, 2004, we operated 12 additionalrestaurant locations, most of which are also full service Mexican formats, underthe following brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHarry’s;Hola Amigos; Who Song & Larry’s; and Keystone Grill.  We acquired most of these restaurants inconnection with the acquisition of El Torito Restaurants, Inc.

 

On January 11, 2005, we completed the ChevysAcquisition, acquiring 69 Chevys Fresh Mex restaurants and five Fuzio UniversalPasta restaurants and assuming franchise agreements for 37 franchised ChevysFresh Mex restaurants and five franchised Fuzio Universal Pasta restaurants.  The purchase price for the Chevys Acquisitionwas approximately $77.9 million in cash and the assumption of certainliabilities, plus the issuance of Real Mex securities to J.W. Childs.  See “Business—Recent Developments” herein.

 

In December 2004, we opened our first new ElTorito restaurant in five years, located in Encinitas, California.  In 2005, we plan to open four new El Toritorestaurants.  The cash investment foreach of these new restaurants is expected to average approximately $1.4 million.  Pre-opening expenses for each of these newrestaurants is expected to average approximately $150,000 per restaurant.  We also have in the past, and may in thefuture, convert select restaurants to the El Torito brand and divestunderperforming restaurants.

 

11

----

 

We believe that a continued focus on increasing samestore sales, superior operational execution and the management of restaurantexpenses are the key components in our future profit growth.

 

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 12 months and for the entirety of each comparableperiod.  As of December 26, 2004, wehad 124 restaurants which met this criteria.

 

In fiscal 2004 we generated revenues of $325.0million.  Our revenues are comprised ofrestaurant revenues and other revenues which include outside food sales,admission charges and vending commissions. Our restaurant revenues for fiscal 2004 of $314.2 million are comprisedalmost entirely of food and beverage sales with food sales and beverage salescomprising approximately 72.3% and 27.7%, respectively, of total restaurantrevenues.

 

Cost of sales is comprised primarily of food andalcoholic beverage expenses.  Thecomponents of cost of sales are variable and increase with sales volume.  In addition, the components of cost of salesare subject to increases or decreases based on fluctuations in commodity costsand depend in part on the success of controls we have in place to manage costof sales in our restaurants.  The cost,availability and quality of the ingredients we use to prepare our food and beveragesare subject to a range of factors including, but not limited to, seasonality,political conditions, weather conditions, and ingredient shortages.  We have entered into contracts for a largepercentage of our products in order to limit our exposure to commodity costincreases for shrimp, cheese, tortillas, produce, beans, rice, and cannedtomatoes.  In addition, we havenegotiated reduced pricing on tequila through 2005, which accounts for themajority of our alcoholic beverage costs, and fixed pricing on wine, andbelieve that these contracts will offset any potential negative impact due toexpected increases in beer pricing. Historically, we have been able to renew our contracts on comparableterms to avoid any material impact on our cost structure.

 

In order to improve cost control at the restaurantlevel, we perform a rigorous, restaurant by restaurant review of our keycosts.  The review consists of a bestpractices analysis of food and liquor cost by region.  Underperforming restaurants are identifiedand new cost targets are established. Under this program, Regional Directors and Quality Assurance Chefs arethen assigned to these restaurants to determine the causes of the costvariances.  Management is trained andheld accountable for managing costs at the newly established target levels.

 

Labor cost includes direct hourly and managementwages, operations management bonus expense, vacation pay, payroll taxes,workers’ compensation insurance and health insurance expenses.  Although our fixed premium insurance costshave increased in recent years in response to terrorism and other factors,these increases have been mitigated by in-restaurant safety programs, improvedmanagement of claims and increases in the deductibles under our workers’compensation and general liability policies from $0.3 million per claim to $0.5million per claim.  The increase in theinsurance deductible levels or any significant increase in the aggregate amountof claims could potentially adversely affect our results of operations in thefuture.

 

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

 

General and administrative expense includes allcorporate and administrative functions that support our operations.  Expenses within this category includeexecutive management, supervisory and

 

12

----

 

staff salaries, bonus and related employee benefits,travel and relocation costs, information systems, training, corporate rent andprofessional 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 existing restaurantto a different concept.  Goodwill isdeemed to have an indefinite life and is subject to an annual impairmenttest.  Other intangible assets areamortized over their useful lives.  In September 2001,the Financial and Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets”, effective for fiscal years beginning after December 15,2001.  Under this Statement, goodwilldeemed to have an indefinite life is no longer amortized but is subject to anannual impairment test in accordance with the Statement.  Other intangible assets continue to beamortized over their useful lives.  Weadopted SFAS No. 142 on December 31, 2001.  In accordance with SFAS No. 142, wediscontinued amortization of goodwill and other intangibles with an indefinite life.

 

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 26, 2004, we owned two restaurant locations andleased the remaining 123.

 

We have recorded an incometax benefit of $9.1 million as of December 26, 2004 as compared to taxexpense of $0.1 million as of December 28, 2003.  The current year benefit is related mostly tothe reduction of our valuation allowance related to our deferred tax assets of$17.2 million and $19.3 million in December 26, 2004 and December 28,2003, respectively.  A valuationallowance of $8.0 million and $19.3 million has been provided on deferred taxassets at December 26, 2004 and December 28, 2003, respectively. Theamount of deferred tax assets considered realizable was based upon our abilityto generate future taxable income, exclusive of reversing temporary differencesand carryforwards.  In evaluating futuretaxable income for valuation allowance purposes as of December 26, 2004,we concluded that it was appropriate to consider only income expected to begenerated in fiscal 2005, 2006 and 2007. We believe that anticipating incomefor our Company beyond 2007 involves substantial risk and a reliable forecastof such income was not possible for purposes of supporting the valuation of theremaining deferred tax assets.  Theincome tax provisions recorded for fiscal 2003 and fiscal 2002 represent thestate taxes paid in those periods.  Thetax benefit recorded in fiscal 2002 was due to a carry back allowed under theJob Creation and Worker Assistance Act of 2002.

 

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.  From the end offiscal 2001 to the end of fiscal 2004, our restaurant count declined from 140to 125 restaurants primarily due to restaurant closures as a result of thisstrategy.  In addition, from time to timewe may be forced to close a successful restaurant if we are unable to renew thelease on satisfactory terms, or at all.

 

In 2003, two of our restaurants were partiallydestroyed by fire.  The loss, covered byour replacement cost property insurance, resulted in gains of $0.6 million and$1.0 million in fiscal 2003 and 2004, respectively, which are presented ascasualty gains in the December 28, 2003 and December 26, 2004 incomestatements.  The gains include businessinterruption proceeds and gains on property replacement.

 

13

----

 

On March 31, 2004, we sold and concurrentlyleased back the land and buildings underlying five of our restaurants (three inMissouri and two in California) for total net proceeds of approximately $12.1million (the “Sale-Leaseback Transaction”).

 

On March 31, 2004, we sold $105.0 million of our10% Senior Secured Notes due 2010 (the “Notes”).  The proceeds of the sales of the Notes wereused to pay then outstanding indebtedness.

 

**Results ofOperations**

** **

Our operating results forfiscal years ended 2004, 2003 and 2002 are expressed as a percentage of totalrevenues below:

 

| ** **                                | ** ** | **Fiscal Years Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                      |       |                   |       |   |   |   |   |
| Total revenues                            |       | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                             |       | 24.9                   |       | 24.9 |   | 24.9 |   |
| Labor                                     |       | 36.6                   |       | 37.3 |   | 37.2 |   |
| Direct operating and occupancy expense    |       | 23.6                   |       | 24.0 |   | 23.8 |   |
| Total operating costs                     |       | 85.1                   |       | 86.1 |   | 85.9 |   |
| General and administrative expense        |       | 5.5                    |       | 4.9 |   | 4.7 |   |
| Depreciation                              |       | 3.6                    |       | 3.8 |   | 3.8 |   |
| Operating income                          |       | 5.7                    |       | 5.1 |   | 5.1 |   |
| Interest expense                          |       | 3.9                    |       | 4.3 |   | 4.6 |   |
| Debt termination costs                    |       | 1.4                    |       | — |   | — |   |
| Total other expense, net                  |       | 4.3                    |       | 4.1 |   | 4.3 |   |
| Income (loss) before income tax provision |       | 1.4                    |       | 1.1 |   | 0.7 |   |
| Net income (loss)                         |       | 4.2                    |       | 1.0 |   | 0.8 |   |

** **

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

** **

**Total Revenues**.  Total revenues increased by $13.0 million, or4.2%, to $324.9 million in fiscal 2004 from $312.0 million in fiscal 2003 dueto a $6.9 million increase in restaurant sales and a $6.1 million increase inother revenues.  The increase inrestaurant sales was the result of comparable store sales increases of 5.5% infiscal 2004, partially offset by restaurant closures.  The increase in comparable store sales wasdriven by pricing increases in the Acapulco and El Torito concepts of 1.5%,increases in customer counts of 1.2% in the El Torito concept and decreaseddiscounting in the Acapulco concept.  The$6.0 million increase in other revenues was primarily due to an increase insales to outside customers by our distribution 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 apercentage of total revenues, cost of sales of 24.9% was flat versus fiscal2003.

 

**Labor**. Labor costs of $118.9 million in fiscal 2004 increased by $2.6 millionor 2.3% as compared to fiscal 2003.  Theincrease in labor cost dollars was due to an increase in hourly labor of $0.4million, associated with the increase in restaurant revenues, combined withhigher benefits expense, primarily higher workers’ compensation insuranceexpense of $1.3 million and higher payroll taxes of $0.8 million.  Payroll and benefits remain subject toinflation and government regulation, especially wage rates currently at or nearthe minimum wage, and expenses for health insurance and workers’

 

14

----

 

compensation insurance.  As a percent of total revenues, labor costsdecreased to 36.6% in fiscal 2004 from 37.3% in fiscal 2003.  The decrease in labor costs, as a percent oftotal revenue, was primarily attributable to lower hourly labor expense as apercent of sales.  Hourly labor cost hasimproved due to continued hourly labor cost controls in our restaurantsincluding improvements in labor productivity and the completion of theimplementation of a program designed to assist management with laborforecasting and scheduling.

 

**Direct Operatingand Occupancy Expense**.  Directoperating and occupancy expense of $76.8 million in fiscal 2004 increased by$1.8 million or 2.4% as compared to fiscal 2003.  This variance was primarily due to increasesin occupancy expenses resulting from base rent increases associated with leaserenewals and the Sale-Leaseback Transaction. Direct operating and occupancy expense as a percentage of salesdecreased to 23.6% in fiscal 2004 from 24.0% in fiscal 2003.

 

**General andAdministrative Expense**.  General andadministrative expense of $17.7 million in fiscal 2004 increased $2.5 millionor 16.6% as compared to fiscal 2003, primarily due to higher bonusexpense.  As a percentage of totalrevenues, general and administrative expenses increased to 5.5% in fiscal 2004from 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% infiscal 2004 from 3.8% in fiscal 2003.

 

**Interest Expense**. Interest expense of $12.5 million in fiscal 2004 decreased $0.8 million or6.3% as compared to fiscal 2003 primarily due to a reduction in debt levels andlower average interest rates associated with the refinancing of our outstandingsubordinated notes and the term loans outstanding under our prior creditfacility.  Our Company’s total debtbalance was $8.2 million lower at the end of fiscal 2004 as compared to at theend of fiscal 2003.  As a percentage oftotal revenues, interest expense decreased to 3.9% in fiscal 2004 from 4.3% infiscal 2003.

 

**Debt TerminationCosts**.  On March 31, 2004, we sold $105.0million aggregate principal amount of 10% Senior Secured Notes due 2010.  Concurrent with the sale of the Notes, weretired outstanding subordinated notes and the term loans outstanding under ourprior credit facility and wrote-off the unamortized cost of the associateddeferred debt fees in the amount of $4.2 million and paid approximately $0.4million in debt termination costs in cash. The total of approximately $4.7 million was recorded in Debt TerminationCosts in our Consolidated Statement of Operations for the fiscal year ended December 26,2004.

 

**Fiscal Year Ended December 28,2003 Compared to Fiscal Year Ended December 29, 2002**

** **

**Total Revenues**.  Total revenues of $312.0 million in fiscal2003 decreased $0.4 million or 0.1% compared to fiscal 2002.  This decrease was due to restaurant closures,three in 2002 and four in 2003 (not including two additional restaurants whichclosed on the last day of fiscal 2003), partially offset by same store salesincreases of $4.1 million or 1.4% in 2003, with the strongest increases at ElTorito, and $2.4 million in sales increases to outside customers from ourdistribution facility.

 

**Cost of Sales**. Total cost of sales of $77.6 million in fiscal 2003 decreased $0.3million or 0.4% as compared to the prior year. We were able to maintain product costs through successful contractnegotiation and economies of scale realized through increasing the centralizedpurchasing of our products for El Torito and Acapulco at our distributionfacility.  In addition, increased rawmaterials purchases resulting from the increase in sales to outside customershave further enhanced our purchasing power. As a percentage of total revenues, cost of sales was flat versus theprior year at 24.9%.

 

15

----

 

**Labor**. Labor costs of $116.3 million in fiscal 2003 increased by $0.1 millionor 0.1% as compared to the prior year. As a percent of total revenues, labor costs were 37.3% in fiscal 2003 ascompared to 37.2% in 2002.  In 2003,labor costs at Acapulco were realigned in order to be consistent with ElTorito.  The net result of this changewas a decrease in salary labor and an offsetting increase in maintenance laborexpense, which is included in direct operating and occupancy expenses.  Hourly labor cost has also improved due tocontinued hourly labor cost controls in our restaurants including improvedlabor productivity reporting versus targets and the completion of the implementationof a program designed to assist in labor forecasting and scheduling.  Improvements in hourly and salary laborexpense were offset by higher workers’ compensation expense.  Payroll and benefits remain subject toinflation and government regulation, especially wage rates currently at or nearthe minimum wage, and expenses for health insurance and workers’ compensationinsurance.

 

**Direct Operatingand Occupancy Expense**.  Directoperating and occupancy expense was $74.9 million in fiscal 2003, which was$0.6 million or 0.8% higher than in fiscal 2002.  This variance was primarily due to highermaintenance and cleaning expense of $0.8 million primarily related to therealignment of hourly labor in Acapulco, combined with higher utilities expenseof $0.3 million and partially offset by lower advertising expense of $0.6million.  As a percentage of totalrevenues, direct operating and occupancy expense was 24.0% in fiscal 2003 ascompared to 23.8% in fiscal 2002.

 

**General andAdministrative Expense**.  General andadministrative expense of $15.2 million was $0.5 million or 3.6% higher thanthe prior year primarily due to higher salary/payroll tax expense andrecruitment fees in fiscal 2003.  Generaland administrative expenses as a percentage of total revenues increased to 4.9%in fiscal 2003 as compared to 4.7% in the prior year.

 

**Depreciation**. Depreciation decreased $0.1 million or 1.2% in fiscal 2003 as comparedto fiscal year end 2002.  The decreasewas primarily due to decreased depreciation expense associated with restaurantclosures in both fiscal years.  As apercentage of total revenues, depreciation was 3.8% in both fiscal 2003 and2002.

 

**Interest Expense**. Interest expense decreased $1.0 million or 6.8% in fiscal 2003 ascompared to fiscal 2002 due to a combination of a reduction in debt levels anddecreases in interest rates.  We reduceddebt levels by $11.2 million in fiscal 2003 and interest rates on its seniorcredit facility declined from a weighted average level of 7.3% in fiscal 2002to 6.6% in fiscal 2003.  As a percentageof total revenues, interest expense was 4.3% in fiscal 2003 as compared to 4.6%in fiscal 2002.

 

**Liquidity andCapital Resources**

** **

Our principal liquidityrequirements are to service our debt and meet our capital expenditure andworking capital needs.  Our indebtednessat December 26, 2004, including obligations under capital leases, was$106.5 million, and we had $10.7 million of revolving credit availability underour Revolving Credit Facility (as defined below).  On January 11, 2005, after giving effectto the Chevys Acquisition, our indebtedness including capital lease obligationswas $182.3 million, and we had $3.2 million of revolving credit availabilityunder our Revolving Credit Facility.  Ourability to 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 on our current level of operations, webelieve our cash flow from operations, available cash and available borrowingsunder our Revolving Credit Facility will be adequate to meet our liquidityneeds for the foreseeable future.  In addition,we may partially fund restaurant openings through credit received from tradesuppliers and landlord contributions, if favorable terms are available.  We cannot assure you, however, that ourbusiness will generate sufficient cash flow from operations or that futureborrowings will be available to us under our

 

16

----

 

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

 

On March 31, 2004, we completed theSale-Leaseback Transaction which resulted in net proceeds of approximately$12.1 million.  The gain on theSale-Leaseback Transaction of approximately $3.9 million was deferred and isbeing amortized over the lives of the related leases.  The leases entered into in connection withthe Sale-Leaseback Transaction have 20 year terms and qualify for operatinglease treatment.  The proceeds of theSale-Leaseback Transaction were used to repay then outstandingindebtedness.  For fiscal 2004, theSale-Leaseback Transaction resulted in increased rent expense of $1.06 millionand the recognition of $0.1 million of the deferred gain.

 

**Working Capitaland Cash Flows**

** **

We presently have, in thepast have had, and in the future are likely to have, negative working capitalbalances.  The working capital deficitprincipally is the result of accounts payable and accrued liabilities being inexcess of current asset levels.  The largestcomponents of our accrued liabilities include reserves for our self-insuredworkers’ compensation and general liability insurance, accrued payroll andrelated employee benefits costs, and gift certificate liabilities.  We do not have significant receivables and wereceive trade credit based upon negotiated terms in purchasing food andsupplies.  Funds available from cashsales not needed immediately to pay for food and supplies or to financereceivables or inventories typically have been used for capital expendituresand/or debt service payments under our existing indebtedness.

 

**OperatingActivities**.  We had net cash provided by operatingactivities of $20.5 million for the twelve months ended December 26, 2004compared with net cash provided by operating activities of $16.1 million forthe twelve months ended December 28, 2003. The increase in cash provided by operating activities was primarilyattributable to improved operating results combined with non cash debttermination cost of $4.2 million and net changes in operating assets and liabilities.  We had net cash provided by operatingactivities of $16.1 million for the twelve months ended December 28, 2003,compared with net cash provided by operating activities of $13.2 million in2002.

 

**InvestingActivities**.  We had net cash provided by investingactivities of $3.9 million for the twelve months ended December 26, 2004compared with net cash used in investing activities of $6.1 million for thetwelve months ended December 28, 2003. The increase in cash provided by investing activities was primarily theresult of the Sale-Leaseback Transaction, which generated approximately $12.1million in net proceeds.  We had net cashused in investing activities of $6.1 million for the twelve months ended December 28,2003 compared with net cash used in investing activities of $6.0 million forthe twelve months ended December 29, 2002. The increase in net cash used in investing activities was primarily theresult of an increase in additions to property and equipment due to thereplacement cost of property destroyed by fire in 2003.  Cash used in investment activities in January 2005in connection with the Chevys Acquisition was $75.5 million (on a net cashbasis at closing).  We expect to makecapital expenditures totaling approximately $20.1 million in fiscal 2005, ofwhich $12.5 million is expected to be spent on our restaurants other thanChevys Fresh Mex and Fuzio Universal Pasta restaurants and $7.6 million isexpected to be spent on our Chevys Fresh Mex and Fuzio Universal Pastarestaurants.  The $12.5 million incapital expenditures expected to be spent on our restaurants other than ChevysFresh Mex and Fuzio Universal Pasta restaurants includes approximately $6.2million in maintenance capital expenditures and approximately $6.3 million tobuild four new El Torito or El Torito Grill restaurants.  In addition, we expect pre-opening expensesassociated with these new El Torito units to be $0.7 million in

 

17

----

 

fiscal 2005. The $7.6 million in capital expenditures expected to be spent on ourChevys Fresh Mex and Fuzio Universal Pasta restaurants includes approximately$2.0 million related to upgrades to the Chevys POS system and $5.6 million formaintenance capital expenditures.  Theseand other similar costs may be higher in the future due to inflation and otherfactors.  We expect to fund the new ElTorito restaurants and the other capital expenditures described above from cashflow from operations, available cash, available borrowings under our SeniorCredit Facility, landlord contributions (if favorable terms are available) andtrade financing received from trade suppliers.

 

**FinancingActivities**.  We had net cash used in financing activitiesof $16.4 million for the twelve months ended December 26, 2004 comparedwith net cash used in financing activities of $8.6 million for the twelvemonths ended December 28, 2003.  Theincrease in net cash used in financing activities was primarily attributable tothe retirement of long term indebtedness of $115.9 million and the payment offinancing costs of $5.4 million attributable to the Notes, offset by theproceeds of the offering of the Notes. We had net cash used in financing activities of $8.6 million for thetwelve months ended December 28, 2003 compared with net cash used infinancing activities of $6.6 million for the twelve months ended December 29,2002.  The increase in cash used infinancing activities was primarily attributable to increased debt payments infiscal 2003 as the proceeds from the sale of the land and building of an ownedproperty were used to retire indebtedness outstanding under our senior creditfacility.  Cash used in financingactivities in January 2005 in connection with the Chevys Acquisition was$75.5 million (on a net cash basis at closing), of which $75.0 million was borrowedunder our new Senior Unsecured Credit Facility (as defined below) and $0.5million was funded by cash-on-hand.

 

**Debt and OtherObligations**

** **

**Generally**.  On March 31, 2004, we sold $105.0million aggregate principal amount of Notes. At the closing of the sale of the Notes, we used the proceeds from thesale of the Notes and the Sale-Leaseback Transaction to repay term loans thenoutstanding under our prior credit facility of $70.2 million and subordinatednotes of $44.4 million in full, and entered into a new senior secured creditfacility (the “Senior Credit Facility”). In connection with the retirement of our term loans then outstanding, wetook a charge of $4.7 million consisting of deferred financing costs anddiscounts on the retired debt and termination of an interest rate swapagreement at a cash cost of $0.2 million.

 

**Senior CreditFacility**.  Our Senior Credit Facility was initiallycomprised of a $15.0 million revolving credit facility, which had a $2.0million sub-limit for letters of credit (the “Revolving Credit Facility”) and a$15.0 million letters of credit facility (the “Letters of Credit Facility”).  At the closing of the sale of the Notes, weutilized the Letters of Credit Facility in its entirety and utilized anadditional $2.0 million from the Revolving Credit Facility to secureapproximately $17.0 million in outstanding letters of credit, which serve ascollateral for our various self-insured workers’ compensation and otherinsurance programs.  On January 11,2005, concurrent with the closing of the Chevys Acquisition, we amended theSenior Credit Facility to, among other things, modify certain covenants, changethe maturity date to June 30, 2008 (subject to extension to March 31,2009 provided that the Senior Unsecured Credit Facility (as defined below) hasbeen repaid and terminated in full on or prior to June 29, 2008), andincreased the sub-limit for letters of credit availability under the RevolvingCredit Facility from $2.0 million to $15.0 million (subject to an overalllimitation of $30.0 million availability under the Senior CreditFacility).  At the closing of the ChevysAcquisition, we utilized an additional $6.4 million from the Revolving CreditFacility to secure assumed letters of credit which serve as collateral for Chevys’workers’ compensation insurance programs and to guarantee performance undercertain of Chevys’ operating leases.

 

18

----

 

Under our Senior Credit Facility, interest accruesbased upon a total leverage ratio calculation. The interest under the SeniorCredit Facility accrues, at our option, at either (i) the base rate ofinterest in effect from time to time, which is the higher of the lender’s primerate as announced from time to time or the federal funds rate plus 0.50%, plusthe current applicable margin of 1.75% or (ii) a London Inter BankOffering Rate for deposits as reported by a generally recognized financialreporting service plus the current applicable margin of 4.0%. Our Senior CreditFacility is guaranteed by our subsidiaries and secured by, among other things,perfected first priority pledges of all of the equity interests of our directand indirect subsidiaries, and perfected first priority security interests(subject to customary exceptions) in substantially all of our current andfuture property and assets, with certain limited exceptions. The lien on thecollateral securing the Senior Credit Facility is senior to the lien on thecollateral securing the Notes and the guarantees of the Notes.

 

Our Senior Credit Facility contains variousaffirmative and negative covenants and restrictions, which among other things,requires us to meet certain financial tests (including certain leverage andcash flow ratios), and limits our and our subsidiaries’ ability to incur orguarantee additional indebtedness, make certain capital expenditures, paydividends or make other equity distributions, purchase or redeem capital stock,make certain investments, enter into arrangements that restrict dividends fromsubsidiaries, sell assets, engage in transactions with affiliates and effect aconsolidation or merger.  We are requiredto maintain certain cash flow ratios determined on an annual basis equal to (i) 1.40to 1.00 for the period December 31, 2004 to December 31, 2005, (ii) 1.70to 1.00 for the period January 1, 2006 to December 31, 2006, (iii) 1.80to 1.00 for the period January 1, 2007 to December 31, 2007, and (iv) 1.90to 1.00 for the period January 1, 2008 and thereafter until maturity.  Pursuant to the terms of the Senior CreditFacility, cash flow ratio is defined as the ratio of (a) Consolidated CashFlow (as defined therein) to (b) Consolidated Financial Obligations (asdefined therein).

 

**Senior UnsecuredCredit Facility**.  Concurrently with the closing of the ChevysAcquisition, we entered into a $75.0 million senior unsecured credit facility(the “Senior Unsecured Credit Facility”), consisting of a single term loanmaturing 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.  Ourobligations under the Senior Unsecured Credit Facility are guaranteed by oursubsidiaries.  Interest on the term loanoutstanding under the Senior Unsecured Credit Facility accrues, at our option,at either (i) the greater of prime and the rate which is 0.5% in excess ofthe federal funds rate, plus 8.5% or (ii) a reserve adjusted Eurodollarrate, plus 9.5%.  As of March 18,2005, the interest rate on the term loan was 12.27%.

 

Our Senior Unsecured Credit Facility contains variousaffirmative and negative covenants, which among other things, requires us tomeet certain financial tests (including certain leverage and interest coverageratios) and limits our and our subsidiaries’ ability to incur or guaranteeadditional indebtedness, grant certain liens, make certain restricted payments,make capital expenditures, engage in transactions with affiliates, make certaininvestments, sell our assets, make acquisitions, effect a consolidation ormerger and amend or modify instruments governing certain indebtedness(including relating to the Notes and the Senior Credit Facility).  We are required to maintain certain minimuminterest coverage ratios ranging from (i) 1.75 to 1.00 for the four fiscalquarters ending on or prior to June 30, 2005, (ii) 1.85 to 1.00 forthe four fiscal quarters ending on or prior to September 30, 2005 through March 31,2006, (iii) 2.00 to 1.00 for the four fiscal quarters ending on or priorto June 30, 2006 through December 31, 2006, (iv) 2.15 to 1.00for the fiscal quarters ending on or prior to March 31, 2007 through December 31,2007, and (v) 2.30 to 1.00 thereafter until maturity.  Pursuant to the terms of the Senior UnsecuredCredit Facility, interest coverage ratio is defined as the ratio as of the lastday of any fiscal quarter of (a) Consolidated EBITDA (as defined therein)for the four-fiscal quarter period then ending to (b) ConsolidatedInterest Expense (as defined therein) for such four-fiscal quarter period.

 

19

----

 

**Senior SecuredNotes due 2010**.  Interest on the Notes accrues at a rate of10% per annum and is payable semiannually on April 1 and October 1 ofeach year, commencing October 1, 2004. The Notes are fully and unconditionally guaranteed on a senior securedbasis by all of our present and future domestic subsidiaries which arerestricted subsidiaries under the indenture governing the Notes.  The Notes and related guarantees are securedby substantially all of our and our domestic restricted subsidiaries’ tangibleand intangible assets, subject to the prior ranking claims on such assets bythe lenders under our Senior Credit Facility. The indenture governing the 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 transactionswith affiliates, merge, consolidate or transfer substantially all of ourassets, and transfer and sell assets. The covenant that limits our incurrence of indebtedness requires that,after giving effect to any such incurrence of indebtedness and the applicationof the proceeds thereof, our fixed charge coverage ratio as of the date of suchincurrence will be at least (i) 2.25 to 1.00 in the case of any incurrenceon or before April 1, 2006 and (ii) 2.50 to 1.00 in the case of anyincurrence after April 1, 2006.  Theindenture defines consolidated fixed charge coverage ratio as the ratio ofConsolidated Cash Flow (as defined therein) to Fixed Charges (as definedtherein).

 

We can redeem the Notes on or after April 1,2007, except that we may redeem up to 35% of the Notes prior to April 1,2007 with the proceeds of one or more public equity offerings.  We are required to redeem the Notes undercertain circumstances involving a change of control.  Additionally, if we or any of our domesticrestricted subsidiaries engage in assets sales, we generally must either investthe net cash proceeds from such sales in our business within 360 days, prepaythe indebtedness obligations under our Revolving Credit Facility or certainother secured indebtedness or make an offer to purchase a portion of the Notes.

 

On June 9, 2004, wefiled a registration statement with respect to notes having substantiallyidentical terms as the Notes, as part of an offer to exchange registered notesfor the Notes (the “Exchange Offer”).  Wetemporarily suspended and extended the Exchange Offer on October 27, 2004in connection with the pending acquisition of Chevys.  As a result of the suspension of the ExchangeOffer, pursuant to the terms of a registration rights agreement entered intowith the initial purchasers of the Notes, we began paying additional intereston the Notes on November 5, 2004 at the rate of 0.25% per annum, whichrate increased by an additional 0.25% per annum on February 24, 2005.  Such additional interest will continue toaccrue (subject to further increase) until we complete the Exchange Offer.

 

*Mortgage.*  Concurrentlywith the closing of the Chevys Acquisition, we assumed a $0.8 million mortgage(the “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 connection with our acquisition of El Torito, we assumed capitalizedlease obligations, collateralized with leasehold improvements, in an aggregateamount of $9.2 million.  The capitalizedlease obligations have a weighted average interest rate of 10.0%.  As of December 26, 2004, the principalamount due relating to capitalized lease obligations was $1.4 million.  Principal and interest payments on thecapital lease obligations are due monthly and range from $1,100 to $7,500 permonth.  The capital lease obligationsmature between 2005 and 2027.

 

The following tablesrepresent our contractual commitments as of December 26, 2004 associatedwith obligations pursuant to our operating leases, debt and other obligationsdiscussed above and from

 

20

----

 

our restaurant operatingleases, on an actual basis, and on a pro-forma basis after giving effect to theChevys Acquisition****and relatedborrowings under our Senior Unsecured Credit Facility:

 
| ** **                              | ** ** | **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)           |       | $                         | 105,063    |                  | $          | 63            |       | $             | —     |                   | $          | — |   | $ | 105,000 |   |
| Capital Lease Obligations               |       | 1,440                     |       | 242                   |       | 434           |       | 455           |       | 309                    |       |
| Operating Lease Obligations(2)          |       | 149,325                   |       | 21,258                |       | 36,695        |       | 28,541        |       | 62,831                 |       |
| Purchase Obligations                    |       | 7,133                     |       | 2,378                 |       | 4,755         |       | —        |       | —                 |       |
|                                    |       |                      |       |                  |       |          |       |          |       |                   |       |
| Total                                   |       | $                         | 262,961    |                  | $          | 23,941        |       | $             | 41,884     |                   | $          | 28,996 |   | $ | 168,140 |   |
|                                    |       |                      |       |                  |       |          |       |          |       |                   |       |
| **Contractual Obligations - Pro-forma** |       |                      |       |                  |       |          |       |          |       |                   |       |
| Long Term Debt Obligations(3)           |       | $                         | 180,879    |                  | $          | 109           |       | $             | 114        |                   | $          | 75,138 |   | $ | 105,518 |   |
| Capital Lease Obligations               |       | 1,440                     |       | 242                   |       | 434           |       | 455           |       | 309                    |       |
| Operating Lease Obligations(2)          |       | 271,410                   |       | 37,854                |       | 68,486        |       | 56,344        |       | 108,726                |       |
| Purchase Obligations                    |       | 23,891                    |       | 4,772                 |       | 9,543         |       | 4,788         |       | 4,788                  |       |
|                                    |       |                      |       |                  |       |          |       |          |       |                   |       |
| Total                                   |       | $                         | 477,620    |                  | $          | 42,977        |       | $             | 78,577     |                   | $          | 136,725 |   | $ | 219,341 |   |

 

----

(1)           Includes the Notes and obligations to avendor.

 

(2)           In addition to the base rent, many of ourleases contain percentage rent clauses, which obligate us to pay additionalrents based on a percentage of sales, when sales levels exceed a contractuallydefined base.  We recorded suchadditional rent expenses of $2,150 in 2002, $2,144 in 2003 and $2,218 in2004.  Operating Lease Obligations do notreflect potential renewals or replacements of expiring leases.

 

(3)           Includes the Notes, amounts outstandingunder the Senior Unsecured Credit Facility, the Mortgage and obligations to avendor.

 

**Inflation**

** **

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

 

**CriticalAccounting Policies**

** **

Our Company’s accountingpolicies are fully described in Note 2 of the Consolidated FinancialStatements.  As disclosed in Note 2, thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance

 

21

----

 

with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities.  On an ongoing basis, weevaluate 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 on historical experience and on various otherassumptions and factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Based on our ongoingreview, we plan to make adjustments to our judgments and estimates where factsand circumstances dictate.  Actualresults could differ from our estimates.

 

We believe the following critical accounting policiesare important to the portrayal of our financial condition and results andrequire our management’s most difficult, subjective or complex judgments, oftenas a result of the need to make estimates about the effect of matters that areinherently uncertain.

 

**Property andEquipment**

** **

Property and equipment isrecorded at cost.  Property and equipmentis depreciated over the assets’ estimated useful lives using the straight-linemethod.  Leasehold improvements areamortized using the straight-line method over the estimated useful life of theasset or the term of the related lease whichever is shorter.  The estimated useful lives for furniture,fixtures and equipment range from three to ten years.  The lives for buildings and leaseholdimprovements are the shorter of 20 years or the term (excluding renewaloptions) of the related operating lease.

 

**Long-Lived AssetImpairments**

** **

We assess the impairment oflong-lived assets, including restaurant sites and other assets, when events orchanges in circumstances indicate that the carrying value of the assets or theasset group may not be recoverable.  Theasset impairment review assesses the fair value of the assets based on thefuture cash flows the 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 measured as the amount by which the carryingamounts of the assets exceed their fair values. The net proceeds expected from the disposition of the asset aredetermined by independent quotes or expected sales prices developed by internalspecialists.  Estimates of future cashflows and expected sales prices are judgments based on our experience andknowledge of local operations.  Theseestimates can be significantly impacted by future changes in real estate marketconditions, the economic environment, capital spending decisions and inflation.

 

For properties to be closed that are under long-termlease agreements, the present value of any remaining liability under the lease,discounted using risk-free rates and net of expected sublease rentals thatcould be reasonably obtained for the property, is recognized as a liability andexpensed.  The value of any equipment andleasehold improvements related to a closed store is reduced to reflect netrecoverable values.  Internal specialistsestimate the subtenant income, future cash flows and asset recovery valuesbased on their historical experience and knowledge of (1) the market inwhich the store to be closed is located, (2) the results of its previousefforts to dispose of similar assets and (3) the current economicconditions.  The actual cost ofdisposition for these leases and related assets is affected by specific realestate markets, the economic environment and inflation.

 

22

----

 

During the years ended December 26, 2004, December 28,2003, and December 29, 2002, our management determined that certainidentified property and equipment was impaired and wrote it down by $0.2million, $0.2 million and $1.4 million, respectively, to its estimated fairvalue by increasing accumulated depreciation and amortization and recording aloss on impairment of property and equipment.

 

**Valuation ofGoodwill**

** **

Goodwill is tested annuallyfor impairment, and is tested for impairment more frequently if events andcircumstances indicate that the asset might be impaired.  Management of the Company performs its annualimpairment test during the last quarter of its fiscal year.  An impairment loss is recognized to theextent that the carrying amount exceeds the asset’s fair value.  We consider the reporting unit level to bethe company level, as the components (e.g., brands) within the Company havesimilar economic characteristics, including production processes, types orclasses of customers and distribution methods. This determination is made at the reporting unit level and consists oftwo steps.  First, management of theCompany determines the fair value of a reporting unit and compares it to itscarrying amount.  Second, if the carryingamount of a reporting unit exceeds its fair value, an impairment loss isrecognized for any excess of the carrying amount of the reporting unit’sgoodwill over the implied fair value of the goodwill.  The implied fair value of goodwill isdetermined by allocating the fair value of the reporting unit in a mannersimilar to a purchase price allocation, in accordance with Statement ofFinancial Accounting Standards No. 141, “Business Combinations”.  The residual fair value after this allocationis the implied fair value of the reporting unit goodwill.

 

Factors that could change the result of our goodwillimpairment test include, but are not limited to, different assumptions used toforecast future revenues, expenses, capital expenditures and working capitalrequirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimatedundiscounted cash flows is susceptible to future changes in market conditions,and when unfavorable, can adversely affect our original estimates of fairvalues.  A variance in the discount ratecould have a significant impact on the valuation of the goodwill for purposesof the impairment test.  We cannotpredict the occurrence of certain future events that might adversely affect thereported value of goodwill.  Such eventsinclude, but are not limited to, strategic decisions made in response toeconomic environment on our customer base, or a material negative change inrelationships with our customers.  Ourannual impairment tests of goodwill were performed as of December 26, 2004and it was determined that the recorded amounts for goodwill are recoverableand that no impairment existed.

 

**Self-Insurance**

** **

Our business is primarilyself-insured for workers’ compensation and general liability costs.  We record our self-insurance liability,determined actuarially, based on claims filed and an estimate of claimsincurred but not yet reported.  Anyactuarial projection of ultimate losses is subject to a high degree ofvariability.  Sources of this variabilityare numerous and include, but are not limited to, future economic conditions,court decisions and legislative actions. Our workers’ compensation future funding estimates anticipate no changein the benefit structure.  Statutorychanges could have a significant impact on future claim costs.

 

Our workers’ compensation liabilities are from claimsoccurring 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 haveseen an escalation in the number of legislative reforms, judicial rulings andsocial phenomena affecting our business. The changes in a state’s political and economic environment increase thevariability in the unpaid claim liabilities.

 

23

----

 

**Income Taxes**

** **

Our Company utilizes theliability method of accounting for income taxes as set forth in SFAS No. 109,“Accounting for Income Taxes.” Under the liability method, deferred taxes aredetermined based on the difference between the financial statement and the taxbasis of assets and liabilities using enacted tax rates in effect in the yearsin which the differences are expected to reverse.  Recognition of deferred tax assets is limitedto amounts considered by management to be more likely than not to be realizablein 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. Avaluation allowance of $8.0 million and $19.3 million has been provided ondeferred tax assets at December 26, 2004 and December 28, 2003,respectively. The amount of deferred tax assets considered realizable was basedupon our ability to generate future taxable income, exclusive of reversingtemporary differences and carryforwards. The income tax provisions recorded forfiscal 2002 and 2003 represent the state taxes paid in those periods.  Due to the net operating loss for federalpurposes, there was no federal tax provision in fiscal 2002, 2003 and2004.  The tax benefit recorded in fiscal2002 was due to a carry back allowed under the Job Creation and WorkerAssistance Act of 2002. In evaluating future taxable income for valuationallowance purposes as of December 26, 2004, we concluded that it wasappropriate to consider only income expected to be generated in fiscal 2005,2006 and 2007. We believe that anticipating income for our Company beyond 2007involves substantial risk and a reliable forecast of such income was not possibleand, as a result, such income cannot be relied upon to support deferred taxassets under the “more likely than not” realization requirement in SFAS No. 109.We may be required to adjust the allowance, if, based on estimates of futureincome, we conclude that all or a portion of the valuation allowance is nolonger warranted. A reduction in the valuation allowance would result in acorresponding credit to income tax expense in the period the allowance isreduced.

 

**RevenueRecognition**

** **

Revenues from operations arerecognized when sales occur.

 

**Recent AccountingPronouncements**

** **

In December 2004, FASBissued SFAS No. 123 (Revised), “Share-Based Payment,” which is a revisionof SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(Revised) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123(Revised) requires companies to record compensation expense for share-basedpayments to employees, including grants of employee stock options, at fairvalue. SFAS No. 123 (Revised) is effective for most public companies atthe beginning of the first interim or annual period beginning after June 15,2005. We believe that the implementation of the provisions of SFAS No. 123(Revised) will have an impact consistent with our disclosure included underSFAS No. 148 included in Note 8 of the notes to our consolidated financialstatements included elsewhere in this report.

 

In December 2004, theFASB issued SFAS No. 151, “Inventory Costs,” which amends ARB 43, Chapter4, to clarify that abnormal amounts of idle facility expenses, freight,handling costs and wasted materials (spoilage) should be recognized ascurrent-period charges. In addition, SFAS No. 151 requires that allocationof fixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. The provisions of SFAS No. 151 areeffective for inventory costs incurred

 

24

----

 

during fiscal yearsbeginning after June 15, 2005. We will adopt this statement effective January 1,2006, and do not expect it to have a material impact on our financial positionor results of operations.

 

**Risk Factors**

** **

*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. Some food borne illness incidentscould be caused by third party food suppliers and transporters outside of ourcontrol. New illnesses resistant to our current precautions may develop in thefuture, or diseases with long incubation periods could arise, that could giverise to claims or allegations on a retroactive basis. One or more instances offood-borne illness in one of our restaurants could negatively affect ourrestaurant sales if highly publicized. This risk exists even if it were laterdetermined that the illness was wrongly attributed to one of our restaurants. Anumber of other restaurant chains have experienced incidents related to foodborne illnesses that have had a material adverse impact on their operations,and we cannot assure you that we can avoid a similar impact upon the occurrenceof a similar incident at our restaurants.

 

*Increasesin the cost of ingredients could materially adversely affect our business,financial condition, 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 key ingredients used in the Mexican restaurant business suchas 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

 

25

----

 

experience a significant reduction in revenue duringthe time affected by the shortage or thereafter, as our customers may changetheir dining habits as a result.

 

*Weare vulnerable to changes in consumer preferences and economic and otherconditions that could harm our business, financial condition, 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. There can be no assurance that consumers will continue to regardour products favorably or that we will be able to develop new products that appealto consumer preferences, which could have a materially adverse affect on ourbusiness. Our continued success will depend in part on our ability toanticipate, identify and respond to changing consumer preferences and economicconditions.

 

*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 of operations.In light of our current geographic concentration, adverse publicity relating toour restaurants could have a more pronounced adverse effect on overall salesthan might be the case if our restaurants were more broadly dispersed.

 

*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, results of operations and cashflows.*

* *

We are reviewing additional sites for potential futurerestaurants. Historically, there is a “ramp-up” period of time before we expecta new restaurant to achieve our targeted level of performance. This is due tohigher operating costs caused by start-up and other temporary inefficienciessuch as customer acceptance and unavailability of experienced staff. Ourability to open new restaurants is dependent upon a number of factors, many ofwhich are beyond our control, including our ability to:

 

•              find quality locations;

 

•              reach acceptable agreements regarding thelease or purchase of locations;

 

•              raise or have available an adequateamount of money for construction and opening costs;

 

26

----

 

•              timely hire, train and retain the skilledmanagement and other employees necessary to meet staffing needs; and

 

•              obtain, for an acceptable cost, requiredpermits 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 to one of ourrestaurants could reduce sales at some or all of our other restaurants.*

 

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.Adverse publicity may negatively affect us, regardless of whether theallegations are valid or whether we are liable. In addition, the negativeimpact of adverse publicity relating to one restaurant may extend far beyondthe restaurant involved to affect some or all of our other restaurants. Asimilar risk exists with respect to totally unrelated food service businesses,if customers mistakenly associate such unrelated businesses with our ownoperations.

 

*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 othernatural disasters. 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:

 

•              minimum wages;

 

•              paid leaves of absence;

 

•              tax reporting; and

 

27

----

 

•              revisions in the tax payment requirementsfor 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 impacting 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 at theexisting 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

 

28

----

 

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 2004, 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 on the basis 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 whichwe 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®, El Torito®,Real Mex FoodsTM, Chevys Fresh Mex® and Fuzio Universal Pasta®.  The success of our business strategy dependson our continued ability to use our existing trademarks and service marks inorder to increase brand awareness and further develop our branded products. Ifour efforts to protect our intellectual

 

29

----

 

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.

 

There can be no assurance that all of the steps wehave taken to protect our intellectual property in the U.S. and foreigncountries will be adequate. In addition, the laws of some foreign countries donot protect intellectual property rights to the same extent as the laws of theU.S.

 

*Weface risks associated with environmental laws.*

* *

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

 

•              govern activities or operations that mayhave adverse environmental effects, such as discharges to air and water, aswell as handling and disposal practices for solid and hazardous wastes; and

 

•              impose liability for the costs ofcleaning up, and damage resulting from, sites of past spills, disposals orother 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 related SECregulations will require a significant amount of management attention andexternal resources. We are committed to observing high standards of corporategovernance and public disclosure. As a result, we intend to invest allreasonably necessary resources to comply with evolving standards, and thisinvestment will result in increased general and administrative expenses and adiversion of management time and attention from revenue generating activitiesto compliance activities.

 

30

----

 

*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 or entering into markets or conducting operations wherewe have no or limited prior experience. Furthermore, we may not realize thebenefits we anticipated when we entered into these transactions. In addition,the negotiation of potential acquisitions, business combinations or jointventures as well as the integration of an acquired business could require us toincur significant costs and cause diversion of management’s time and resources.

 

*The integration of Chevys mayresult in substantial costs, delays and other problems.*

 

Ourfuture performance will depend heavily on our ability to integrate Chevys.  To integrate a newly acquired business suchas Chevys, we must integrate restaurant resources and extend our financial andmanagement controls and operating, administrative and information systems in atimely manner and on satisfactory terms and conditions.  We may not be able to successfully integrateChevys or realize projected cost savings and synergies in connection with theChevys Acquisition on the timetable contemplated or at all.

 

Furthermore,the costs of the Chevys Acquisition could significantly impact our short-termoperating results. These costs could include:

 

•              restructuringcharges associated with the Chevys Acquisition; and

 

•              non-recurringacquisition costs including accounting and legal fees, investment banking fees,recognition of transaction-related obligations and various otheracquisition-related costs.

 

Theintegration of Chevys will require the expenditure of substantial managerial,operating, financial and other resources and may also lead to a diversion ofmanagement’s attention from our ongoing business concerns.

 

***Our substantial level of indebtedness could adverselyaffect our financial condition.***

*** ***

Wehave substantial indebtedness.  Aftergiving pro forma effect to the Chevys Acquisition, as of December 26,2004, we would have had approximately $182.3 million of indebtedness.  Subject to restrictions in the indenture forthe Notes and our senior secured and unsecured credit facilities, we may incuradditional indebtedness.  Our high levelof indebtedness could have important consequences to holders of ourindebtedness and significant effects on our business, including the following:

 

•              our ability to obtain additionalfinancing for working capital, capital expenditures, acquisitions or general corporatepurposes may be impaired;

 

•              we must use a substantial portion of ourcash flow from operations to pay interest on our indebtedness, which willreduce the funds available to use for operations and other purposes;

 

•              our high level of indebtedness couldplace us at a competitive disadvantage compared to those of our competitorsthat may have proportionately less debt;

 

•              our flexibility in planning for, orreacting to, changes in our business and the industry in which we operate maybe limited; and

 

31

----

 

•              our high level of indebtedness makes usmore vulnerable to economic downturns and adverse developments in our business.

 

Weexpect to use cash flow from operations to pay our expenses and amounts due underour outstanding indebtedness.  Ourability to make these payments thus depends on our future performance, whichwill be affected by financial, business, economic and other factors, many ofwhich we cannot control.  Our businessmay not generate sufficient cash flow from operations in the future and ouranticipated growth in revenue and cash flow may not be realized, either or bothof which could result in our being unable to repay indebtedness, or to fundother liquidity needs.  If we do not haveenough money, we may be required to refinance all or part of our then-existingdebt, sell assets or borrow more money. We cannot make any assurances that we will be able to accomplish any ofthese alternatives on terms acceptable to us, or at all.  In addition, the terms of existing or futuredebt agreements, including the indenture for the Notes and our senior securedand unsecured credit facilities, may restrict us from adopting any of thesealternatives.

 

***The indenture for the Notes and our senior secured andunsecured credit facilities impose significant operating and financialrestrictions, which may prevent us from pursuing certain business opportunitiesand taking certain actions.***

*** ***

Ourcurrent debt agreements impose, and future debt agreements may impose,significant operating and financial restrictions on us.  These restrictions will limit or prohibit,among other things, our ability to:

 

•              incur additional indebtedness;

 

•              repay indebtedness prior to statedmaturities;

 

•              pay dividends on, redeem or repurchaseour stock or make other distributions;

 

•              make acquisitions or investments;

 

•              create or incur liens;

 

•              transfer or sell certain assets or mergeor consolidate with or into other companies;

 

•              enter into certain transactions withaffiliates;

 

•              sell stock in our subsidiaries;

 

•              restrict dividends, distributions orother payments from our subsidiaries; and

 

•              otherwise conduct necessary corporateactivities.

 

Inaddition, our senior secured and unsecured credit facilities require us tomaintain compliance with specified 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.

 

32

----

 

*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 65.8% of our outstanding capitalstock. By virtue of their stock ownership and the terms of the securitiesholders agreement, these entities have significant influence over ourmanagement and will be able to determine the outcome of all matters required tobe submitted to the stockholders for approval, including the election of ourdirectors and the approval of mergers, consolidations and the sale of all orsubstantially all of our assets. The interests of BRS and JCP as equity ownersof our Company may differ from the interests of the holders of ourindebtedness, and, as such, BRS and JCP may take actions which may not be inthe interests of the holders of our indebtedness. For example, if we encounterfinancial difficulties or are unable to pay our debts as they mature, theinterests 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, financings or other transactions that, intheir judgment, could enhance their equity investments, even though suchtransactions might involve risks to the holders of our indebtedness.

 

ITEM 7A.              QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

The inherent risk in market risk sensitive instrumentsand positions primarily relates to potential losses arising from adversechanges in foreign exchange rates and interest rates.

 

We consider the U.S. dollar to be the functionalcurrency for all of our entities. All of our net sales and our expenses infiscal years 2002, 2003 and 2004 were denominated in U.S. dollars. Therefore,foreign currency fluctuations did not materially impact our financial resultsin those periods.

 

We are also subject tomarket risk from exposure to changes in interest rates based on our financingactivities. This exposure relates to borrowings under our senior secured andunsecured credit facilities that are payable at floating rates of interest. Wecurrently do not have any borrowings outstanding under our Revolving CreditFacility. We currently have $75.0 million outstanding under our SeniorUnsecured Credit Facility. A hypothetical 10% fluctuation in interest rates, asof January 11, 2005, would have a net after tax impact of $0.9 million onearnings in fiscal 2005.

 

Many of the food products purchased by us are affectedby changes in weather, production, availability, seasonality and other factorsoutside our control. In an effort to control some of this risk, we have enteredinto certain fixed price purchase agreements with varying terms of generally nomore than a year duration. In addition, we believe that almost all of our foodand supplies are available from several sources, which helps to control foodcommodity risks.

 

33

----

 

ITEM 8.                  FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA

 

                Theaudited consolidated financial statements are set forth below.

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

TheBoard of Directors

RealMex Restaurants, Inc.

 

We have audited the accompanying consolidated balancesheets of Real Mex Restaurants, Inc. and its subsidiaries (the Company) asof December 26, 2004 and December 28, 2003, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three fiscal years in the period ended December 26, 2004.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Real Mex Restaurants, Inc. and its subsidiaries at December 26,2004 and December 28, 2003, and the results of their operations and theircash flows for each of the three fiscal years in the period ended December 26,2004, in conformity with accounting principles generally accepted in the UnitedStates.

 

 

/s/ Ernst & Young LLP

LosAngeles, California

March 4,2005

 

34

----

 

**Real Mex Restaurants, Inc.**

** **

**Consolidated Balance Sheets**

** **

**(In Thousands, Except For ShareData)**

 
| ** **                                                                                                                                                                                                                                                                                                    | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| **Assets**                                                                                                                                                                                                                                                                                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                               |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                     |       | $                           | 10,690     |                        | $          | 2,605 |   |
| Trade receivables, net                                                                                                                                                                                                                                                                                        |       | 4,312                       |       | 3,460                       |       |
| Other receivables                                                                                                                                                                                                                                                                                             |       | 157                         |       | 1,355                       |       |
| Inventories                                                                                                                                                                                                                                                                                                   |       | 6,616                       |       | 5,558                       |       |
| Prepaid expenses and supplies                                                                                                                                                                                                                                                                                 |       | 3,754                       |       | 3,641                       |       |
| Deferred tax asset                                                                                                                                                                                                                                                                                            |       | 1,371                       |       | —                      |       |
| Total current assets                                                                                                                                                                                                                                                                                          |       | 26,900                      |       | 16,619                      |       |
|                                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| Property and equipment, net                                                                                                                                                                                                                                                                                   |       | 35,848                      |       | 46,620                      |       |
| Goodwill, net                                                                                                                                                                                                                                                                                                 |       | 105,387                     |       | 105,387                     |       |
| Deferred charges                                                                                                                                                                                                                                                                                              |       | 5,003                       |       | 2,094                       |       |
| Deferred tax asset                                                                                                                                                                                                                                                                                            |       | 7,769                       |       | —                      |       |
| Other assets                                                                                                                                                                                                                                                                                                  |       | 6,044                       |       | 2,300                       |       |
| Total assets                                                                                                                                                                                                                                                                                                  |       | $                           | 186,951    |                        | $          | 173,020 |   |
|                                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                                                                                                 |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                                                                                                      |       | $                           | 42,505     |                        | $          | 38,242 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                             |       | 63                          |       | 7,690                       |       |
| Current portion of capital lease obligations                                                                                                                                                                                                                                                                  |       | 242                         |       | 470                         |       |
| Total current liabilities                                                                                                                                                                                                                                                                                     |       | 42,810                      |       | 46,402                      |       |
|                                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| Long-term debt, less current portion                                                                                                                                                                                                                                                                          |       | 105,000                     |       | 105,107                     |       |
| Capital lease obligations, less current portion                                                                                                                                                                                                                                                               |       | 1,198                       |       | 1,432                       |       |
| Other liabilities                                                                                                                                                                                                                                                                                             |       | 8,094                       |       | 4,218                       |       |
| Total liabilities                                                                                                                                                                                                                                                                                             |       | 157,102                     |       | 157,159                     |       |
|                                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                 |       |                        |       |                        |       |
|                                                                                                                                                                                                                                                                                                          |       |                        |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                    |       |                        |       |                        |       |
| Redeemable Preferred Stock:                                                                                                                                                                                                                                                                                   |       |                        |       |                        |       |
| Series A, 12 1/2% Cumulative Compounding  Preferred Stock – 15,881 and 15,919 shares issued and outstanding at December 26,  2004 and December 28, 2003, respectively; liquidation preference of  $29,644 and $26,419 at December 26, 2004 and December 28, 2003,  respectively |       | 29,644                      |       | 26,419                      |       |
| Series B, 13.5% Cumulative Compounding  Preferred Stock – 10,722 and 10,746 shares issued and outstanding at December 26,  2004 and December 28, 2003, respectively; liquidation preference of $20,970  and $18,520 at December 26, 2004 and December 28, 2003,  respectively   |       | 20,970                      |       | 18,520                      |       |
| Series C, 15% Cumulative Compounding Preferred  Stock – 14,975 shares issued and outstanding at December 26, 2004 and December 28,  2003, respectively; liquidation preference of $46,544 and $40,416 at December 26,  2004 and December 28, 2003, respectively                 |       | 46,544                      |       | 40,416                      |       |
| Common Stock, $.001 par value, 2,000,000 shares  authorized, 274,523 and 275,103 shares issued and outstanding at December 26,  2004 and December 28, 2003, respectively                                                                                                                            |       | 1                           |       | 1                           |       |
| Warrants                                                                                                                                                                                                                                                                                                      |       | 4,027                       |       | 4,027                       |       |
| Notes receivable from stockholders                                                                                                                                                                                                                                                                            |       | —                      |       | (484                        | )          |
| Additional paid-in capital                                                                                                                                                                                                                                                                                    |       | 16,202                      |       | 16,255                      |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                           |       | (87,539                     | )          | (89,293                     | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                               |       | 29,849                      |       | 15,861                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                               |       | $                           | 186,951    |                        | $          | 173,020 |   |

 

*See accompanying notes.*

 

35

----

 

**Real Mex Restaurants, Inc.**

** **

**Consolidated Statements ofOperations**

** **
| ** **                                            | ** ** | **Years Ended**             | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** | **December 29,  2002** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**          | ** ** |
| Revenues:                                             |       |                        |       |   |   |   |   |
| Restaurant revenues                                   |       | $                           | 314,157    |   | $ | 307,278 |   | $ | 310,094 |   |
| Other revenues                                        |       | 10,787                      |       | 4,714 |   | 2,285 |   |
|                                                  |       |                        |       |   |   |   |   |
| Total revenues                                        |       | 324,944                     |       | 311,992 |   | 312,379 |   |
|                                                  |       |                        |       |   |   |   |   |
| Costs and expenses:                                   |       |                        |       |   |   |   |   |
| Cost of sales                                         |       | 80,839                      |       | 77,555 |   | 77,867 |   |
| Labor                                                 |       | 118,888                     |       | 116,269 |   | 116,156 |   |
| Direct operating and occupancy expenses               |       | 76,760                      |       | 74,938 |   | 74,315 |   |
| General and administrative expenses                   |       | 17,725                      |       | 15,201 |   | 14,670 |   |
| Depreciation                                          |       | 11,837                      |       | 11,732 |   | 11,872 |   |
| Pre-opening costs                                     |       | 295                         |       | 1 |   | 292 |   |
| Loss on impairment of property and equipment          |       | 167                         |       | 233 |   | 1,404 |   |
|                                                  |       |                        |       |   |   |   |   |
| Operating income                                      |       | 18,433                      |       | 16,063 |   | 15,803 |   |
|                                                  |       |                        |       |   |   |   |   |
| Other income (expense):                               |       |                        |       |   |   |   |   |
| Casualty gain                                         |       | 997                         |       | 639 |   | — |   |
| Interest expense                                      |       | (12,528                     | )          | (13,372 | ) | (14,354 | ) |
| Debt termination costs                                |       | (4,677                      | )          | — |   | — |   |
| Other income (expense), net                           |       | 2,321                       |       | (15 | ) | 808 |   |
|                                                  |       |                        |       |   |   |   |   |
| Total other income (expense), net                     |       | (13,887                     | )          | (12,748 | ) | (13,546 | ) |
| Income before income tax (benefit) provision          |       | 4,546                       |       | 3,315 |   | 2,257 |   |
| Income tax (benefit) provision                        |       | (9,070                      | )          | 109 |   | (278 | ) |
|                                                  |       |                        |       |   |   |   |   |
| Net income                                            |       | 13,616                      |       | 3,206 |   | 2,535 |   |
| Redeemable preferred stock accretion                  |       | (11,862                     | )          | (10,409 | ) | (9,267 | ) |
|                                                  |       |                        |       |   |   |   |   |
| Net (loss) income attributable to common stockholders |       | $                           | 1,754      |   | $ | (7,203 | ) | $ | (6,732 | ) |

 

*See accompanying notes.*

 

36

----

 

**Real Mex Restaurants, Inc.Consolidated Statements of Stockholders’ Equity**For the years ended December 26, 2004, December 28,2003 and December 29, 2002(in thousands, except for share data)****

** **
| ** **                                              | ** ** | **Series A  Redeemable  Preferred  Stock** | ** ** | **Series B  Redeemable  Preferred  Stock** | ** ** | **Series C  Redeemable  Preferred  Stock** | ** ** | **Common Stock** | ** ** | **Warrants** | ** ** | **Notes  Receivable  from  Stockholders** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------|------------|-------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                              | ** ** | ** **                                      | ** ** | ** **                                      | **Shares** | ** **                                      | **Amount** | ** **       | ** ** | ** **   | ** ** | ** **                                | ** ** |
| Balance at December 30, 2001                       |       | $                                               | 20,990     |                                            | $          | 14,451                                          |       | $                | 30,382     |         | 276,282    |                                      | $          | 1                                |       | $                        | 4,027      |      | $          | (1,067 | ) | $ | 16,327 |   | $ | (75,358 | ) | $ | 9,753 |   |
| Redemption of Series A Redeemable Preferred  Stock |       | (21                                             | )          | —                                          |       | —                                          |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | —    |       | (21 | ) |
| Redemption of Series B Redeemable Preferred  Stock |       | —                                          |       | (14                                             | )          | —                                          |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | —    |       | (14 | ) |
| Repurchase of Common Stock                              |       | —                                          |       | —                                          |       | —                                          |       | (356             | )          | —       |       | —                                    |       | —                           |       | (15                      | )          | —    |       | (15 | ) |
| Interest receivable increase on stockholder notes       |       | —                                          |       | —                                          |       | —                                          |       | —           |       | —       |       | —                                    |       | (57                              | )          | —                   |       | —    |       | (57 | ) |
| Payment from stockholders on notes receivable           |       | —                                          |       | —                                          |       | —                                          |       | —           |       | —       |       | —                                    |       | 361                              |       | —                   |       | —    |       | 361 |   |
| Accretion on redeemable preferred stock                 |       | 2,594                                           |       | 1,936                                           |       | 4,737                                           |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | (9,267    | )          | — |   |
| Net income                                              |       | —                                          |       | —                                          |       | —                                          |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | 2,535     |       | 2,535 |   |
| 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                             | )          | 16,255                   |       | (89,293   | )          | 15,861 |   |
| Redemption of Series A Redeemable Preferred  Stock |       | (35                                             | )          | —                                          |       | —                                          |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | —    |       | (35 | ) |
| Redemption of Series B Redeemable Preferred  Stock |       | —                                          |       | (24                                             | )          | —                                          |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | —    |       | (24 | ) |
| Redemption of Series C Redeemable Preferred  Stock |       | —                                          |       | —                                          |       | —                                          |       | —           |       | —       |       | —                                    |       | —                           |       | —                   |       | —    |       | — |   |
| Repurchase of Common Stock                              |       | —                                          |       | —                                          |       | —                                          |       | (580             | )          | —       |       | —                                    |       | —                           |       | (53                      | )          | —    |       | (53 | ) |
| Interest receivable decrease 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 |   |

 

*See accompanying notes.*

 

37

----

 

**Real Mex Restaurants, Inc.**

 

**Consolidated Statements ofCash Flows**

 
| ** **                                                                         | ** ** | **Years Ended**             | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** | **December 29,  2002** | ** ** |
| ** **                                                                         | ** ** | **(In Thousands)**          | ** ** |
|                                                                               |       |                        |       |   |   |   |   |
| **Operating activities**                                                           |       |                        |       |   |   |   |   |
| Net income                                                                         |       | $                           | 13,616     |   | $ | 3,206 |   | $ | 2,535 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                        |       |   |   |   |   |
| Depreciation                                                                       |       | 11,837                      |       | 11,732 |   | 11,872 |   |
| Amortization of:                                                                   |       |                        |       |   |   |   |   |
| Deferred financing                                                                 |       | 929                         |       | 760 |   | 741 |   |
| Debt discount                                                                      |       | 114                         |       | 446 |   | 446 |   |
| (Gain) loss on disposal of property and equipment                                  |       | (384                        | )          | 135 |   | (66 | ) |
| Deferred tax asset                                                                 |       | (9,140                      | )          | — |   | — |   |
| Debt termination costs                                                             |       | 4,247                       |       | — |   | — |   |
| Casualty gain                                                                      |       | (997                        | )          | (639 | ) | — |   |
| Impairment of property and equipment                                               |       | 167                         |       | 233 |   | 1,404 |   |
| Changes in operating assets and liabilities:                                       |       |                        |       |   |   |   |   |
| Trade and other receivables                                                        |       | 346                         |       | 166 |   | 104 |   |
| Inventories                                                                        |       | (1,058                      | )          | (871 | ) | (704 | ) |
| Prepaid expenses and supplies                                                      |       | (113                        | )          | (540 | ) | 1,630 |   |
| Other assets                                                                       |       | (3,744                      | )          | (720 | ) | 18 |   |
| Deferred charges                                                                   |       | (48                         | )          | — |   | 40 |   |
| Accounts payable and accrued liabilities                                           |       | 4,670                       |       | 2,076 |   | (4,228 | ) |
| Income taxes                                                                       |       | —                      |       | — |   | (50 | ) |
| Other liabilities                                                                  |       | 96                          |       | 124 |   | (568 | ) |
| Net cash provided by operating activities                                          |       | 20,538                      |       | 16,108 |   | 13,174 |   |
|                                                                               |       |                        |       |   |   |   |   |
| **Investing activities**                                                           |       |                        |       |   |   |   |   |
| Additions to property and equipment                                                |       | (9,241                      | )          | (6,962 | ) | (5,992 | ) |
| Proceeds from sale of property and equipment                                       |       | 13,170                      |       | 857 |   | — |   |
| Net cash (used in) provided by investing activities                                |       | 3,929                       |       | (6,105 | ) | (5,992 | ) |
|                                                                               |       |                        |       |   |   |   |   |
| **Financing activities**                                                           |       |                        |       |   |   |   |   |
| Borrowings under long-term debt agreements                                         |       | 105,000                     |       | 2,449 |   | 2,633 |   |
| Payments on long-term debt agreements                                              |       | (116,064                    | )          | (11,161 | ) | (9,362 | ) |
| Payments received on stockholder loans for stock  subscription notes               |       | 462                         |       | 324 |   | 361 |   |
| Repurchase of Common Stock                                                         |       | (53                         | )          | (57 | ) | (15 | ) |
| Redemption of Series A Redeemable Preferred  Stock                            |       | (35                         | )          | (50 | ) | (21 | ) |
| Redemption of Series B Redeemable Preferred  Stock                            |       | (24                         | )          | (34 | ) | (14 | ) |
| Redemption of Series C Redeemable Preferred  Stock                            |       | —                      |       | (25 | ) | — |   |
| Payment of financing costs                                                         |       | (5,690                      | )          | — |   | (120 | ) |
| Interest receivable (increase) decrease on  stockholder loans                      |       | 22                          |       | (45 | ) | (57 | ) |
| Net cash used in financing activities                                              |       | (16,382                     | )          | (8,599 | ) | (6,595 | ) |
| Net increase in cash and cash equivalents                                          |       | 8,085                       |       | 1,404 |   | 587 |   |
|                                                                               |       |                        |       |   |   |   |   |
| Cash and cash equivalents at beginning of year                                     |       | 2,605                       |       | 1,201 |   | 614 |   |
| Cash and cash equivalents at end of year                                           |       | $                           | 10,690     |   | $ | 2,605 |   | $ | 1,201 |   |
|                                                                               |       |                        |       |   |   |   |   |
| **Supplemental  disclosure of cash flow information**                              |       |                        |       |   |   |   |   |
| Interest paid                                                                      |       | $                           | 9,369      |   | $ | 10,711 |   | $ | 9,362 |   |
| Income taxes  (refunded) paid                                                      |       | $                           | 70         |   | $ | 111 |   | $ | (227 | ) |
|                                                                               |       |                        |       |   |   |   |   |
| **Supplemental  disclosure of non-cash investing and financing activities**        |       |                        |       |   |   |   |   |
| Deferral of gain  on sale-leaseback recorded in other liabilities                  |       | $                           | 3,927      |   | — |   | — |   |
| In-kind accrued  interest transferred to debt                                      |       | $                           | 407        |   | $ | 1,358 |   | $ | 1,450 |   |

 

*See accompanying notes.*

 

38

----

 

**Real Mex Restaurants, Inc.**

** **

**Notes to Consolidated FinancialStatements**

** **

**December 26, 2004**

** **

**(Dollars in thousands, exceptshare amounts)**

 

**1.  Organization**

** **

**Basis of Presentation**

** **

Real MexRestaurants, Inc., a Delaware Corporation (together with its subsidiaries, the “Company”),was formed on May 15, 1998, to acquire the stock of Acapulco Restaurants,Inc. (Acapulco) from Restaurant Associates Corp. (Restaurant Associates).Effective February 24, 2004, the Company changed its name from AcapulcoAcquisition Corp. to Real Mex Restaurants, Inc.

 

On June 28,2000, the Company acquired all of the outstanding stock of El ToritoRestaurants, Inc. (El Torito), a then 95-unit chain of full service Mexicanrestaurants located primarily in California, from Prandium, Inc. The El Toritoacquisition was accounted for in accordance with the purchase method ofaccounting.

 

**Nature of Business**

** **

The Company isengaged in the business of owning and operating restaurants, primarily underthe names Acapulco Mexican Restaurant Y Cantina and El Torito. At December 26,2004, the Company, primarily through its major subsidiaries (Acapulco and ElTorito), owned and operated 125 restaurants, of which 113 were in Californiaand the remainder in six other states. The Company’s other major subsidiary,Real Mex Foods, Inc. (RMF), provides internal production, purchasing anddistribution services for the restaurant operations and manufactures specialtyproducts for sales to outside customers.

 

**2.  Summary ofAccounting Policies**

** **

**Principles of Consolidation**

** **

The accompanyingconsolidated financial statements include the accounts and results ofoperations of the Company. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Fiscal Year End**

** **

The Company’s fiscalyear consists of 52 or 53 weeks ending on the last Sunday in December. Theyears ended December 26, 2004, December 28, 2003 and December 29, 2002each consist of 52 weeks.

 

**Use of Estimates**

** **

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

39

----

 

**Cash and Cash Equivalents**

 

Cash and cashequivalents consist of cash balances in bank accounts and investments with amaturity of three months or less at the time of purchase.

 

**Receivables**

** **

Receivables consistprimarily of amounts due from credit card companies and are generally settledin the week following the transaction date. Receivables are stated net of anallowance for doubtful accounts of $87, $86 and $199 at December 26, 2004,December 28, 2003 and December 29, 2002, respectively.

 

**Inventories**

** **

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

 

**Supplies**

** **

The initialpurchase of expendable equipment, when a restaurant is first opened, such aschina, glass and silverware, is set up as permanent supplies and is notamortized. Replacements of permanent supplies are expensed.

 

**Pre-Opening Costs**

** **

Pre-opening costsincurred 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**

** **

Property andequipment is depreciated over its estimated useful life using the straight-linemethod for financial reporting purposes. Costs of leasehold rights andimprovements 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.

 

40

----

 

**Goodwill**

** **

The Companyaccounts 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 appropriate rateof return. This approach represents a quantification of the future dividendpaying capacity of the business being appraised. Second, if the carrying amountof a reporting unit exceeds its fair value, an impairment loss is recognizedfor any excess of the carrying amount of the reporting unit’s goodwill over theimplied fair value of that goodwill. The implied fair value of goodwill isdetermined by allocating the fair value of the reporting unit in a mannersimilar to a purchase price allocation, in accordance with SFAS No. 141, “BusinessCombinations.”  The residual fair valueafter this allocation is the implied fair value of the reporting unit goodwill.

 

The Companyperformed an annual assessment of impairment of goodwill by applying fair-valuebased tests and has determined that no impairment existed as ofNovember 21, 2004.

 

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

** **

Long-lived assetsare tested for impairment in accordance with SFAS No. 144, “Accounting for theImpairment 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 26, 2004, December 28, 2003 andDecember 29, 2002, management of the Company determined that certain identifiedproperty and equipment was impaired and recorded an impairment charge of $167,$233 and $1,404, respectively, reducing the carrying value of such assets tothe estimated fair value. Fair value was based on management’s estimate offuture cash flows to be generated by the property and equipment determined tobe impaired.

 

**Liquor Licenses**

** **

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

 

41

----

 

**Deferred Charges**

 

Deferred chargesconsist of deferred financing costs. Deferred charges at December 26, 2004,consist of deferred financing costs of $4,410 related to the sale of $105,000aggregate principal, amount of 10% Senior Secured Notes due 2010 and $593related to the $30,000 Amended and Restated Revolving Credit Agreement. Amountscapitalized related to financing costs are amortized over the lives of therespective long-term borrowings using the effective-interest method and areincluded in interest expense in the accompanying consolidated statements ofoperations. The following table shows amortization expense for the five yearsafter December 26, 2004:

 
| ** **      | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
|            |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Financing costs |       | $        | 977        |     | $          | 977      |       | $        | 977        |     | $          | 977            |       | $ | 865 |   | $ | 230 |   |
|                 |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |

 

**Income Taxes**

 

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes.” In accordance with SFAS No. 109, income taxes are accounted forusing the liability method.

 

**Revenue Recognition**

 

Revenues from theoperation of restaurants are recognized when sales occur. Real Mex Foodsrevenues from sales to third parties are recognized upon delivery, when titletransfers to the customer and are included in other revenues.

 

**Gift Certificates and Gift Cards**

 

The Companyrecords deferred revenue, included in accounts payable, for gift certificatesand gift cards outstanding until redeemed. At December 26, 2004 and December28, 2003, deferred revenue attributable to gift certificates and gift cards was$3,246 and $3,153, respectively.

 

**Segment Information**

 

The Companyoperates 125 restaurants through its two restaurant operating subsidiaries,providing similar products to similar customers. These restaurants possesssimilar economic characteristics resulting in similar long-term expectedfinancial characteristics. Operating segments are components of an enterpriseabout which separate financial information is available that is evaluatedregularly by the chief operating decision-maker in deciding how to allocateresources and in assessing performance. Based upon its methods of internalreporting and management structure, management believes that the Company meetsthe criteria for aggregating its 125 operations into a single reporting segmentcalled restaurant operations.

 

42

----

 

**Promotion and Advertising Expense**

 

The cost ofpromotion and advertising is expensed as incurred. The Company incurred $5,728,$5,655 and $6,494 in promotion and advertising expense during the years endedDecember 26, 2004, December 28, 2003 and December 29, 2002, respectively.

 

**Operating Leases**

 

The Companyaccounts for operating leases on a straight-line basis in accordance with SFASNo. 13, “Accounting for Operating Leases.” The Company leases restaurantand office facilities that have terms with expirations in 2005 through 2027.Most of the restaurant facilities have renewal clauses exercisable at theoption of the Company with rent escalation clauses stipulating specific rentincreases, some of which are based upon the Consumer Price Index. Certain ofthese leases require the payment of contingent rentals based on a percentage ofgross revenues, as defined. At December 26, 2004 and December 28, 2003,deferred rent amounted to $2,862 and $2,557, respectively, which is included inlong-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.  Mostof the Company’s restaurants are located in California. As a result, theCompany may be susceptible to adverse trends and economic conditions inCalifornia.

 

**Fair Value of Financial Instruments**

 

The Company’sfinancial instruments are primarily comprised of cash and cash equivalents,receivables, accounts payable, accrued liabilities and long-term debt.  The estimated fair value of the Notes (asdefined in Note 5) at December 26, 2004, based on quoted market prices, was $109,200.  Management estimates that the carrying valuesof its other financial instruments approximate their fair values since theirrealization or satisfaction is expected to occur in the short term.

 

**Reclassification**

** **

Certain prior yearamounts have been reclassified to conform to the current year presentation.

 

43

----

 

**Recent Accounting Pronouncements**

** **

In December 2004,the Financial Accounting Standards Board (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 Principles Board(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and itsrelated implementation guidance. SFAS No. 123 (Revised) requires companies to recordcompensation expense for share-based payments to employees, including grants ofemployee stock options, at fair value. SFAS No. 123 (Revised) is effective formost public companies at the beginning of the first interim or annual periodbeginning after June 15, 2005. The Company believes that the implementation ofthe provisions of SFAS No. 123 (Revised) will have an impact consistent withour disclosure included under SFAS No. 148 included in Note 8 of the notes toconsolidated financial statements.

 

In December 2004,the FASB issued SFAS No. 151, “Inventory Costs,” which amends ARB 43, Chapter4, to clarify that abnormal amounts of idle facility expenses, freight,handling costs and wasted materials (spoilage) should be recognized ascurrent-period charges. In addition, SFAS No. 151 requires that allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. The provisions of SFAS No. 151 areeffective for inventory costs incurred during fiscal years beginning after June15, 2005. The Company will adopt this statement effective January 1, 2006, anddoes not expect it to have a material impact on the Company’s financialposition or results of operations.

 

**3.  Property andEquipment**

 

Property andequipment consists of the following:

 
| ** **                                      | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                            |       |                   |       |                   |       |
| Land                                            |       | $                      | 2,105      |                   | $          | 6,396 |   |
| Buildings and  improvements                     |       | 4,984                  |       | 9,258                  |       |
| Furniture,  fixtures and equipment              |       | 52,073                 |       | 49,994                 |       |
| Leasehold rights  and leasehold improvements    |       | 38,218                 |       | 34,978                 |       |
|                                            |       | 97,380                 |       | 100,626                |       |
| Less accumulated  depreciation and amortization |       | (61,532                | )          | (54,006                | )          |
|                                            |       | $                      | 35,848     |                   | $          | 46,620 |   |

 

44

----

 

**4.  AccountsPayable and Accrued Liabilities**

 

Accounts payableand accrued liabilities consist of the following:

 
| ** **                       | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| Trade accounts  payable          |       | $                      | 12,050     |                   | $          | 11,306 |   |
| Accrued  self-insurance reserves |       | 13,143                 |       | 12,994                 |       |
| Payroll and  related liabilities |       | 8,861                  |       | 7,300                  |       |
| Rent and occupancy  expenses     |       | 1,003                  |       | 997                    |       |
| Sales taxes                      |       | 2,530                  |       | 2,482                  |       |
| Accrued interest                 |       | 2,680                  |       | 506                    |       |
| Related party  payables          |       | 147                    |       | 1,065                  |       |
| Other                            |       | 2,091                  |       | 1,592                  |       |
|                             |       | $                      | 42,505     |                   | $          | 38,242 |   |

** **

**5.  Long-TermDebt**

 

Long-term debtconsists of the following:

 
| ** **                     | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| Senior A term  loan due 2005   |       | $                      | —     |                   | $          | 19,230 |   |
| Senior B term  loan due 2007   |       | —                 |       | 32,429                 |       |
| Senior C term  loan due 2007   |       | —                 |       | 18,339                 |       |
| Subordinated  notes due 2008   |       | —                 |       | 20,270                 |       |
| Subordinated  notes due 2009   |       | —                 |       | 21,483                 |       |
| Senior secured  notes due 2010 |       | 105,000                |       | —                 |       |
| SBA debt                       |       | —                 |       | 246                    |       |
| Insurance notes                |       | —                 |       | 737                    |       |
| Other                          |       | 63                     |       | 63                     |       |
|                           |       | 105,063                |       | 112,797                |       |
| Less current  portion          |       | (63                    | )          | (7,690                 | )          |
|                           |       | $                      | 105,000    |                   | $          | 105,107 |   |

 

45

----

 

On March 31, 2004,the Company sold $105,000 aggregate principal amount of 10% Senior SecuredNotes due 2010 (the Notes). Interest on the Notes is payable semiannually onApril 1 and October 1 each year and commenced October 1, 2004. The proceeds ofthe Notes were used to repay the Senior A, B and C term loans, the SubordinatedDebt and the fees associated with the sale of the Notes. Concurrent with theretirement of the Subordinated notes and the Senior A, B and C term loans, theCompany wrote off the unamortized cost of the associated deferred debt fees inthe amount of $4,247 and paid $430 in termination costs which are included indebt termination costs in the consolidated statements of operations. The termsof the Notes include financial and other covenants, all of which the Companywas in compliance with at December 26, 2004. The Notes include a provision thatrequired the Company to commence an exchange offer to exchange the originallyissued notes for new registered notes by October 27, 2004. The Company suspendedand extended the exchange offer on October 22, 2004 as a result of its thenpending acquisition of Chevys, Inc. as more fully described in Note 13. As a result ofthe suspension of the exchange offer and under the terms of the Notes, the interest rate onthe Notes was increased to 10.25% on November 5, 2004, andincreased to 10.50% on February 24, 2005.

 

The Company had aRevolving Credit and Term Loan Agreement, as amended on November 30, 2001, witha banking syndicate providing for a $24,000 revolving Line of credit (theLine), a $38,000 Senior A term loan, a $34,500 Senior B term loan, and a$17,500 Senior C term loan (collectively, Senior Debt). The Line had a $17,000sub-limit for stand-by letters of credit as of December 28, 2003. Noamounts were outstanding under the Line as of December 28, 2003.

 

On March 31, 2004,the Company retired the existing Revolving Credit and Term Loan Agreement asamended on November 30, 2001, and entered into a new Amended and RestatedRevolving Credit Agreement (the New Line) providing for $30,000 of SeniorSecured Credit Facilities with a lead bank acting as Lead Arranger andAdministrative Agent. The New Line includes a $15,000 letter of credit facilityand a $15,000 revolving credit facility, with a $6,000 sub-limit for letters ofcredit. No amounts were outstanding under the New Line as of December 26,2004. The terms of the Amended and Restated Credit Agreement include financialand other covenants, all of which the Company was in compliance with atDecember 26, 2004.

 

46

----

 

Interest rates forthe New Line, the Notes, the Line and the Senior Debt are shown in thefollowing table:

 

| ** **                     | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| New Line                       |       | 7.25                   | %          | —                 |       |
| Line                           |       | —                 |       | 6.00                   | %          |
| Senior secured  notes due 2010 |       | 10.25                  | %          | —                 |       |
| Senior A term  loan due 2005   |       | —                 |       | 4.94                   | %          |
| Senior B term  loan due 2007   |       | —                 |       | 5.44                   | %          |
| Senior C term  loan due 2007   |       | —                 |       | 10.44                  | %          |

 

On June 28, 2000,a separate loan agreement was entered into which provided for two SubordinatedNotes; one for $23,000 and one for $20,000 (collectively, Subordinated Notes).In connection with the issuance of the Subordinated Notes, the Company issuedwarrants to purchase 43,773 shares of its Common Stock at an exercise price of$0.01 per share. The warrants are exercisable during the 10-year periodfollowing the date of issuance. The value of the warrants of $4,027 wasrecorded as additional paid-in capital and reduced the carrying value of theSubordinated Notes. The discount on the notes is being amortized to interestexpense over the term of the Subordinated Notes using the effective-interestmethod and is included in interest expense on the accompanying consolidatedstatements of operations. This debt was repaid on March 31, 2004.  In conjunction with the retirement of therelated debt, these costs were written off and are included as debt terminationcosts in other income (expense) in the consolidated statements of operations.Management, based on estimates of future cash flows and other assumptions,determined the original value of the Company’s warrants. Amortization expenseof the discounts amounted to approximately $114 for the year endedDecember 26, 2004 and $446 for each of the years ended December 28,2003 and December 29, 2002.

 

47

----

 

Effective October1, 2002, in order to convert a portion of its outstanding debt to a fixed rate,the Company entered into an interest rate swap agreement with a financialinstitution initially covering $17,525 of its long-term debt, with a notionalamount 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 with theretirement of the Senior Debt on March 31, 2004, with a termination cost of$430, which is included in debt termination costs in the consolidatedstatements of operations.

 

The maturity oflong-term debt for the fiscal years succeeding December 26, 2004, is asfollows:

 
| 2005                  |   | $       | 63      |   |
|-----------------------|--------|---------|---------|--------|
| 2006                  |   | —  |    |
| 2007                  |   | —  |    |
| 2008                  |   | —  |    |
| 2009                  |   | —  |    |
| Thereafter            |   | 105,000 |    |
|                  |   | 105,063 |    |
| Less current  portion |   | (63     | )       |
|                  |   | $       | 105,000 |   |

 

**6. Capitalization**

** **

**Common Stock**

** **

The Company isauthorized to issue 1,000,000 shares of par value $0.001 Class A CommonStock and 1,000,000 shares of par value $0.001 Class B Common Stock. Theterms of Class B Common Stock are identical to Class A Common Stock except thatthe holders of Class B Common Stock have no voting rights, except as providedby law. Each holder of Class B Common Stock has the right to convert any or allshares of Class B Common Stock into an equal number of shares of Class A CommonStock at any time. At December 26, 2004 and December 28, 2003, therewere 258,656 and 259,236 shares, respectively, issued and outstanding ofClass A Common Stock and at December 26, 2004 and December 28, 2003,there were 15,867 shares issued and outstanding of Class B Common Stock.

 

**Redeemable Preferred Stock**

** **

The Company isauthorized to issue 100,000 shares of nonvoting $0.001 par value RedeemablePreferred Stock. Shares are issued upon approval of the board of directors andare redeemable at any time at the option of the Company.

 

48

----

 

Series A 12.5% Cumulative Compounding RedeemablePreferred Stock (Series A) and Series B 13.5% Cumulative CompoundingRedeemable Preferred Stock (Series B) have a liquidation preference of $1per share plus accumulated dividends associated with each share. With respectto dividend rights and rights of liquidation, Series A ranks senior to allclasses of Common Stock and Series B. Series B ranks senior to all classesof Common Stock.

 

Series C 15%Cumulative Compounding Participating Preferred stock (Series C) ranks seniorwith respect to payment of dividends, liquidation, and redemption to all otherseries of preferred stock and common stock of the Company. The Series Chas a liquidation preference equal to two times the original issue price of $1per share, plus accreted dividends. As a result of the liquidation preference,the Series C has been recorded at liquidation value at the date of issuance.Holders of Series C are entitled to receive, in addition to theliquidation preference, an amount equal to 40% of any amounts that wouldotherwise be available to the holders of Common Stock in the event of aliquidation or sale of the Company.

 

The liquidationpreference on the Series A, Series B and Series C accretes at thestated rates on the liquidation preference value; dividends (representingaccreted liquidation preference) are to be paid from legally available funds,when and if declared by the board of directors. If dividends are not declared,a dividend will continue to accrue and will be paid as dividends only when andif declared, or upon a sale or liquidation of the Company or upon redemption ofthe Preferred Stock. Accretion of the liquidation preference on the RedeemablePreferred Stock was $11,861 and $10,409, during the years endedDecember 26, 2004 and December 28, 2003, respectively, and is reflected inthe consolidated statements of stockholders’ equity as an increase in thepreferred stock values and an increase in the accumulated deficit.

 

Net income (loss)attributable to common stockholders includes the effect of the accretion of theliquidation preference on the redeemable preferred stock which reduces netincome or increases net loss attributable to common stockholders for therelevant periods.

 

No shares ofRedeemable Preferred Stock were issued during the years ended December 26, 2004and December 28, 2003.

 

49

----

 

**Stock Option Plans**

** **

The Company’s 1998and 2000 Stock Option Plans (the Plans) have authorized the grant of options tocertain employees, directors and independent contractors for up to 12,000 and100,000 shares, respectively, of the Company’s Common Stock. All optionsgranted under both Plans have 10-year terms.

 

The Company haselected to follow APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting for its employee stockoptions because, as discussed below, the alternative fair value accountingprovided for under SFAS No. 123, “Accounting for Stock-Based Compensation,”requires use of option valuation models that were not developed for use invaluing employee stock options. Under APB Opinion No. 25, if the exerciseprice of the Company’s employee stock options equals the market price of theunderlying stock on the date of the grant, no compensation expense isrecognized. In December 2002, the Company adopted SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure,” which amends SFAS No.123, “Accounting for Stock-Based Compensation.” SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require moreprominent and more frequent disclosures in financial statements of the effectsof stock-based compensation.

 

For option grantsprior to 2004, the Plans provide for 50% of the options to become exercisablebased on “annual vesting,” with 10% of the grant vesting per year during thefirst five years after the grant date, and the remaining 50% to becomeexercisable based on a “cliff vesting” schedule. The 50% portion of the optionshares with the cliff vesting feature will 1) vest at an accelerated rate of20% per year (i.e., 10% of the total options granted), provided that the equityof the Company (as defined in the Plans) is greater than or equal to thespecified annual targets, 2) on any vesting anniversary date, the cumulativeunvested shares through that date would vest if the required threshold is met,and 3) if after the fifth anniversary date the required threshold is not met,unvested options shall expire and terminate. For options grants in 2004, thePlan provides for 20% of the option grants to become exercisable each year onthe anniversary date of the grants.

 

50

----

 

A summary of theCompany’s stock option activity and related information is as follows:

 

| ** **                                 | ** ** | **1998 Plan**                 | ** ** | **2000 Plan**                           | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                       |       |                          |       |                                    |       |   |   |   |   |
| Outstanding –  December 30, 2001 |       | 7,600                         |       | $                                       | 10.00      |   | 33,404 |   | $ | 92.00 |   |
|                                       |       |                          |       |                                    |       |   |   |   |   |   |   |
| Granted                                    |       | —                        | ** ** | **—**                              |       | 13,000 |   | 5.00 |   |
| Exercised                                  |       | —                        |       | —                                  |       | — |   | — |   |
| Canceled                                   |       | (750                          | )          | 10.00                                   |       | (2,569 | ) | 92.00 |   |
| 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                                   |       | (2,937 | ) | 92.00 |   |
| Outstanding –  December 26, 2004      |       | 5,250                         |       | $                                       | 10.00      |   | 79,497 |   | $ | 31.83 |   |
|                                       |       |                          |       |                                    |       |   |   |   |   |
| Exercisable at  December 26, 2004          |       | 5,250                         |       | $                                       | 10.00      |   | 18,320 |   | $ | 61.13 |   |

 

Pro formainformation regarding net income is required by SFAS No. 123, and has beendetermined as if the Company had accounted for its employee stock options atfair value. The fair value of the option grant is estimated on the date ofgrant using the minimum-value method. The weighted-average remainingcontractual life of the 1998 options is four years and the weighted-averagefair value of the options is $0 per share. The weighted-average remainingcontractual life of the 2000 options is eight years and the weighted-average fairvalue of the options is $0 per share.

 

For purposes ofpro forma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting period. Under SFAS No. 148, the Company wouldhave incurred no additional compensation expense for the years endedDecember 26, 2004, December 28, 2003 and December 29, 2002.

 

51

----

 

**7. Income Taxes**

 

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

 
| ** **                     | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** | **December 29,  2002** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Current:                       | * *   | * *               | * *   | * *               | * *   | * *               | * *   |
| Federal                        | ** ** | **$**                  | **—** | ** **             | **$**      | **—**             |       | $ | (334 | ) |
| State                          |       | 70                     |       | 109                    |       | 56                     |       |
|                           |       | 70                     |       | 109                    |       | (278                   | )          |
| Deferred:                      |       |                   |       |                   |       |                   |       |
| Federal                        |       | 2,113                  |       | 4,129                  |       | (2,230                 | )          |
| State                          |       | 35                     |       | 376                    |       | (245                   | )          |
|                           |       | 2,148                  |       | 4,505                  |       | (2,475                 | )          |
|                           |       | 2,218                  |       | 4,614                  |       | (2,753                 | )          |
| Change in  valuation allowance |       | (11,288                | )          | (4,505                 | )          | 2,475                  |       |
|                           |       | $                      | (9,071     | )                      | $          | 109                    |       | $ | (278 | ) |

 

Deferred incometaxes reflect the net tax effects of temporary differences between the carryingvalue of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. A valuation allowance has beenestablished against a portion of the net deferred tax assets. Significantcomponents of the Company’s deferred tax assets and liabilities are as follows:

 

| ** **                                   | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Deferred tax  assets:                        | * *   | * *               | * *   | * *               | * *   |
| Federal net  operating loss carryforwards    |       | $                      | 2,286      |                   | $          | 2,870 |   |
| State net  operating loss carryforwards      |       | 231                    |       | —                 |       |
| Goodwill                                     |       | 7,383                  |       | 8,304                  |       |
| Accrued expenses  not currently deductible   |       | 4,140                  |       | 3,410                  |       |
| Interest not yet  deductible                 |       | —                 |       | 693                    |       |
| Tax credit  carryforward                     |       | 411                    |       | 411                    |       |
| Property and  equipment basis difference     |       | 10,664                 |       | 8,941                  |       |
| Deferred rent                                |       | 750                    |       | 598                    |       |
| Gift  certificates and other deferred income |       | 720                    |       | 679                    |       |
| Other                                        |       | 338                    |       | 485                    |       |
| Total deferred  tax assets                   |       | $                      | 26,923     |                   | $          | 26,391 |   |

 

52

----

 

| ** **                      | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Deferred tax  liabilities:      |       |                   |       |                        |       |
| Prepaid expenses                |       | $                      | (890       | )                           | $          | (852 | ) |
| Goodwill                        |       | (7,685                 | )          | (4,734                      | )          |
| State taxes                     |       | (1,160                 | )          | (1,195                      | )          |
| Other                           |       | —                 |       | (274                        | )          |
| Total deferred  tax liabilities |       | (9,735                 | )          | (7,055                      | )          |
| Net deferred tax  assets        |       | 17,188                 |       | 19,336                      |       |
|                            |       |                   |       |                        |       |
| Less valuation  allowance       |       | (8,048                 | )          | (19,336                     | )          |
|                            |       | $                      | 9,140      |                        | $          | — |   |

 

The reconciliationof income tax at the U.S. federal statutory tax rates to income tax expense isas follows:

 

| ** **                                     | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** | **December 29,  2002** | ** ** |
|------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                                           |       |                   |       |                   |       |                   |       |
| Income tax at  U.S. federal statutory tax rate |       | 34.0                   | %          | 34.0                   | %          | 34.0                   | %          |
| State income tax                               |       | 5.8                    |       | 2.2                    |       | 1.6                    |       |
| Valuation  allowance                           |       | (252.2                 | )          | (40.1                  | )          | 94.2                   |       |
| Other                                          |       | 9.7                    |       | 7.2                    |       | (127.3                 | )          |
| AMT federal                                    |       | —                 |       | —                 |       | (14.8                  | )          |
| Effective tax  rate                            |       | (202.7                 | )%         | 3.3                    | %          | (12.3                  | )%         |

 

In accordance withSFAS No. 109, “Accounting forIncome Taxes,” net deferred tax assets are reduced by a valuationallowance if, based on all the available evidence, it is more likely than notthat some or all of the deferred tax assets will not be realized. A valuationallowance of $8,048 and $19,336 has been provided on deferred tax assets atDecember 26, 2004 and December 28, 2003, respectively. The amount ofdeferred tax assets considered realizable was determined based on futurereversals of existing taxable temporary differences and future taxable income,exclusive of reversing temporary differences and carryforwards.

 

53

----

 

In evaluatingfuture taxable income for valuation allowance purposes at December 26,2004, the Company concluded that it was appropriate to consider only incomeexpected to be generated in 2005, 2006 and 2007. Anticipating income for theCompany beyond 2007 involves substantial risk and a reliable forecast of suchincome was not possible and, as a result, the Company believed such incomecould not be relied upon to support deferred tax assets under the more likelythan not realization requirement in SFAS No. 109. The Company may berequired to adjust the allowance, if, based on estimates of future income, theCompany concludes that all or a portion of the valuation allowance is no longerwarranted. A reduction in the valuation allowance would result in acorresponding credit to income tax expense in the period the allowance isreduced.  For the year ended December 26,2004, the Company reduced the valuation allowance and recorded an income taxbenefit of $9,140 in accordance with SFAS No. 109.

 

For tax purposes,the excess of the purchase price at the time of the Acapulco and the El Toritoacquisitions has been accounted for as amortizable goodwill.

 

At December 26,2004 and December 28, 2003, the Company had a federal net operating losscarryforward of $6,723 and $7,176, respectively, which will begin to expire in2014. In addition, at December 26, 2004 and December 28, 2003, the Company hada state net operating loss carryforward of $3,850 and $4,251, respectively,which will begin to expire in 2010.

 

**8. Commitments and Contingencies**

** **

**Commitments**

** **

The Company leasesrestaurant and office facilities that have terms with expirations in 2005through 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, as defined. Additionally, the Companyleases several properties that are not being operated by the Company. Severalof those properties are subleased.

 

The Company leasescertain leasehold improvements under agreements that are classified as capitalleases. The cost of leasehold improvements under capital leases is included inthe balance sheets as property and equipment and was $3,183 and $3,315 atDecember 26, 2004 and December 28, 2003, respectively. Accumulatedamortization of the leased leasehold

 

54

----

 

improvementswas $2,590 and $2,368 at December 26, 2004 and December 28, 2003, respectively.Amortization of assets under capital leases is included in depreciationexpense.

 

The minimum annuallease commitment and subtenant income of the Company for the years succeedingDecember 26, 2004 is approximately as follows:

 
| ** **                                            | ** ** | **Capital  Lease  Obligations** | ** ** | **Minimum  Lease  Commitments** | ** ** | **Sublease  Income** | ** ** | **Net  Lease  Commitments** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------|------------|-----------------------------|------------|
|                                                  |       |                            |       |                            |       |                 |       |                        |       |
| 2005                                                  |       | $                               | 374        |                            | $          | 20,132               |       | $                           | (473       | ) | $ | 20,033 |   |
| 2006                                                  |       | 320                             |       | 17,696                          |       | (365                 | )          | 17,651                      |       |
| 2007                                                  |       | 313                             |       | 15,640                          |       | (177                 | )          | 15,776                      |       |
| 2008                                                  |       | 313                             |       | 13,827                          |       | (166                 | )          | 13,974                      |       |
| 2009                                                  |       | 248                             |       | 11,353                          |       | (166                 | )          | 11,435                      |       |
| Thereafter                                            |       | 515                             |       | 51,522                          |       | (201                 | )          | 51,836                      |       |
|                                                  |       |                            |       |                            |       |                 |       |                        |       |
| Total minimum lease payments                          |       | 2,083                           |       | $                               | 130,170    |                 | $          | (1,548                      | )          | $ | 130,705 |   |
| Less: Amount representing interest                    |       | (643                            | )          |                            |       |                 |       |                        |       |
| Present value of net minimum capital lease payments   |       | 1,440                           |       |                            |       |                 |       |                        |       |
| Less: Current maturities of capital lease obligations |       | (242                            | )          |                            |       |                 |       |                        |       |
| Long-term capital lease obligations                   |       | $                               | 1,198      |                            |       |                 |       |                        |       |   |

 

The Company iscontingently liable for leases on sold or assigned premises for $6,111 as ofDecember 26, 2004.

 

55

----

 

Some of the aboveleases provide for additional rentals based on a percentage of revenues. Thefollowing table summarizes the rental expense, percentage rent expense aboveminimum rent and net sublease income:

 
| ** **                                                               | ** ** | **December 26,  2004** | ** ** | **December 28,  2003** | ** ** | **December 29,  2002** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Rental expense                                                           |       | $                      | 23,285     |                   | $          | 21,632                 |       | $ | 21,633 |   |
| Percentage rent  expense above minimum rent (included in rental expense) |       | 2,218                  |       | 2,144                  |       | 2,150                  |       |
| Net sublease  income                                                     |       | 813                    |       | 951                    |       | 1,181                  |       |
|                                                                          |            |                        |            |                        |            |                        |            |  |  |  |

 

**Litigation**

 

The Company isperiodically a defendant in cases involving personal injury and other mattersthat arise in the normal course of business. While any pending or threatenedlitigation has an element of uncertainty, the Company believes that the outcomeof these lawsuits or claims, individually or combined, will not materiallyaffect the consolidated financial position, results of operations or cash flowsof the Company.

 

**Self-Insurance**

 

Upon theacquisition of El Torito, the Company assumed the liabilities relating to ElTorito’s self-insured retention insurance programs (general liability and workers’compensation) for years dating back to 1987. The Company continued theseself-insured programs following the acquisition of El Torito. In May 2001, theCompany also added Acapulco to the programs, resulting in all general liabilityand workers’ compensation claims being self-insured from May 2001 forward.Amounts estimated to be ultimately payable with respect to existing claimsunder these programs have been accrued and are included in accounts payable andaccrued liabilities in the accompanying consolidated balance sheets. Estimatedliabilities related to the self-insured claims were $13,143 and $12,994 as ofDecember 26, 2004 and December 28, 2003, respectively.

 

56

----

 

The Company isalso required to maintain collateral securing future payment under theself-insured retention insurance programs. As of December 26, 2004 andDecember 28, 2003, this collateral consisted of $18,804 and $14,163 ofstand-by letters of credit, respectively, and surety bonds of $0 and $2,950 atDecember 26, 2004 and December 28, 2003, respectively.

 

**9.  RelatedParty Transactions**

** **

Subsequent toJuly 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 $302, $308and $294 have been expensed in the years ended December 26, 2004,December 28, 2003 and December 29, 2002, respectively, and areincluded in general and administrative expense in the accompanying consolidatedstatements of operations.

 

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 andlegal. The management agreement called for the payment of $800 to RestaurantAssociates in the first year and $1,000 per year thereafter. The agreement wasamended effective October 1, 2001, reducing the annual compensationpayment to $250 per year. These services were performed by employees ofRestaurant Associates, two of whom sit on the Board of the Company. Theagreement was cancelled on March 31, 2004. Expenses relating to theseagreements of $74, $250 and $250 were recorded as general and administrativeexpense for the years ended December 26, 2004, December 28, 2003 andDecember 29, 2002, respectively.

 

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

 

57

----

 

**10. Employee Benefit Plan**

 

TheCompany is the sponsor for a defined contribution plan (401(k) plan) forcertain of the Company’s qualified employees, as defined. Participants maycontribute from 1% to 15% of pre-tax compensation, subject to certain limitations.The plan provides for certain discretionary contributions by the Company. TheCompany has recorded contribution expense of $188, $195 and $216 during theyears ended December 26, 2004, December 28, 2003 andDecember 29, 2002, respectively.

 

**11. 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 ingains of $997 and $639 during the years ended December 26, 2004 andDecember 28, 2003, respectively, and is presented as casualty gain in theconsolidated statements of operations. The gains include business interruptionproceeds and gain on property replacement.

 

**12. 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 26, 2004, the Company recognized $147 ofthe deferred gain which was recorded in 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 Senior A, Band C term loans.

 

58

----

 

**13. Subsequent Events (Unaudited)**

 

OnJanuary 11, 2005, the Company purchased substantially all of the assets ofChevys, Inc. and certain of its subsidiaries (the Sellers) out of the Sellers’Chapter 11 bankruptcy proceeding, including 69 Chevys Fresh Mex® restaurantsand five Fuzio Universal Pasta® restaurants. In addition, the Company assumed franchise agreements for 37 franchisedChevys Fresh Mex restaurants and five franchised Fuzio Universal Pastarestaurants.  The purchase priceconsisted of approximately $75.5 million in cash and the assumption ofapproximately $4.6 million in net negative working capital, approximately $6.3million of letters of credit and approximately $0.8 million under amortgage.  In addition, the Companyissued to J.W. Childs Equity Partners L.P. and its affiliate, JWC ChevysCo-Invest, LLC, in their capacity as unsecured creditors of the Sellers, sharesof the Company’s equity securities.  TheCompany financed the transaction with $75.0 million in unsecured debtfinancing, the proceeds of which were used to fund a portion of the purchaseprice and a portion of the approximately $5.0 million of fees and expensesrelated to the transaction.

 

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

 

Thefollowing is a summary of the quarterly results of operations for the yearsended December 26, 2004 and December 28, 2003:

 
| ** **        | ** ** | **Quarter Ended**   | ** ** |
|-------------------|------------|---------------------|------------|
| ** **        | ** ** | **March 28,  2004** | ** ** | **June 29,  2004** | ** ** | **September 26,  2004** | ** ** | **December 26,  2004** | ** ** |
|              |       |                |       |   |   |   |   |   |   |
| Total revenues    |       | $                   | 79,791     |   | $ | 87,354 |   | $ | 81,894 |   | $ | 75,905 |   |
| Cost of sales     |       | $                   | 19,613     |   | $ | 21,508 |   | $ | 20,203 |   | $ | 19,515 |   |
| Net income        |       | $                   | 1,009      |   | $ | 422 |   | $ | 2,906 |   | $ | 139 |   |
|              |       |                |       |   |   |   |   |   |   |
| ** **        | ** ** | **March 30,  2003** | ** ** | **June 29,  2003** | ** ** | **September 28,  2003** | ** ** | **December 28,  2003** | ** ** |
|              |       |                |       |   |   |   |   |   |   |
| Total revenues    |       | $                   | 75,370     |   | $ | 83,023 |   | $ | 79,359 |   | $ | 74,240 |   |
| Cost of sales     |       | $                   | 18,684     |   | $ | 20,372 |   | $ | 19,653 |   | $ | 18,846 |   |
| Net (loss) income |       | $                   | (93        | ) | $ | 4,385 |   | $ | 1,530 |   | $ | (2,616 | ) |

 

59

----

 

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

 

None.

 

# **ITEM 9.**                  CONTROLS AND PROCEDURES

 

As ofthe end of our 2004 fiscal year, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer (“CEO”)and principal financial officer (“CFO”), of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act.)  Based on this evaluation, the CEO and CFOconcluded that our disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There was no change in our internalcontrol over financial reporting during our most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART III**

 

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

 

**Directors, Executive Officers and Key Employees**

 

Thefollowing table sets forth certain information regarding our board ofdirectors, executive officers and other key employees of our Company. 

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                   |
|----------------------|------------|---------|------------|----------------------------------------------------------------|
| Frederick F. Wolfe   |       | 54      |       | President, Chief Executive  Officer and Director               |
| Steven Tanner        |       | 54      |       | Chief Financial Officer                                        |
| Charles Rink         |       | 45      |       | Chief Operating Officer                                        |
| Carlos Angulo        |       | 45      |       | Senior Vice  President/Managing Director, Real Mex Foods, Inc. |
| Roberto (Pepe) Lopez |       | 49      |       | Executive Chef and Vice  President, Research and Development   |
| Fortunato N. Valenti |       | 56      |       | Chairman of the Board,  Director                               |
| Richard Stockinger   |       | 45      |       | Director*+                                                     |
| Harold O. Rosser     |       | 55      |       | Director+                                                      |
| Brian P. Friedman    |       | 49      |       | Director*+                                                     |
| J. Rice Edmonds      |       | 33      |       | Director*                                                      |
| Michael J. Hislop    |       | 49      |       | Director                                                       |
| Jeffrey J. Teschke   |       | 33      |       | Director                                                       |

 

----

*****Member of our audit committee

+ Member of our compensation committee

 

*FrederickF. Wolfe* has beenour President, Chief Executive Officer and Director since May 2001. Previously,Mr. Wolfe served as Chief Operating Officer at CPK from 1997 to 2001. From 1982to 1997, Mr. Wolfe served in a variety of positions within our Company risingfrom Assistant Manager to Vice President of Operations. Mr. Wolfe received a bachelor’sdegree in Political Science from Miami University.

 

60

----

 

*StevenTanner* has beenour Chief Financial Officer since January 2004. Previously, Mr. Tanner servedas Chief Financial Officer at Sweet Factory during 2003, Executive VicePresident and Chief Financial Officer for Pick Up Stix, from 1997 to 2002, andChief Financial Officer for In-N-Out Burgers from 1991 to 1996. Mr. Tanner is aCertified Public Accountant and earned his bachelor’s degree in Accounting fromthe Brigham Young University.

 

*CharlesRink* has been ourChief Operating Officer since 2002. Previously, Mr. Rink served as a theExecutive Vice President of El Torito Restaurants since 1996. Mr. Rink joinedus as a Regional Manager in 1990. Since then he has served as Regional Manager,Divisional Vice President, Northwest Division and Vice President of OperationsServices. His previous experience includes serving as District Manager forVisions Restaurants, Inc. between 1988 and 1990, and as District Manager forRestaurant Enterprises Group, Inc. between 1983 and 1988.

 

*CarlosAngulo* has beenthe Managing Director & Senior Vice President, Real Mex Foods, Inc. sinceMarch 2003. Mr. Angulo joined us in 2000 as Vice President of Real Mex Foods.Prior to joining us, Mr. Angulo worked for Smart and Final for 18 years in avariety of positions from Store Manager to Manager of Southern CaliforniaDistribution. Mr. Angulo received a Bachelor of Science degree from theUniversity of Southern California.

 

*Roberto(Pepe) Lopez* hasbeen our Executive Chef since 1992. In addition, in 1994 Mr. Lopez was promotedto Vice President, Research and Development and in 2004, he was promoted toSenior Vice President, Research and Development. Previously, Mr. Lopez servedas Director of Product Development. His prior experience includes serving asExecutive Chef at Cano’s and Las Brisas, and as Manager and then Director ofProduct Development at El Torito. Between 1988 and 1992, he was Director ofProduct Development for Visions Restaurants, Inc.

 

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

 

*RichardStockinger* hasbeen a Director of our Company since November 2000. Since October 2003, Mr.Stockinger has been the President of RA Patina Restaurants, LLC, an independentoperating company of Restaurants Associates. From 1992 to 2003, Mr. Stockingerserved as Vice President and Chief Financial Officer of Restaurant Associates.Prior to joining Restaurant Associates as Corporate Controller in 1985, Mr.Stockinger was an Audit Supervisor at Touche Ross. Mr. Stockinger received adegree from Seton 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., H&E Equipment Services, L.L.C., O’SullivanIndustries, Inc., Il Fornaio, M&S and Remington Arms Company, Inc.

 

*Brian P.Friedman* has beena Director 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., Iowa Telecommunications, Inc.,Pacific Basin Limited and various private companies in which JCP or itsaffiliates have an interest.

 

61

----

 

*J. RiceEdmonds* has beena Director of our Company since November 2000. Mr. Edmonds is also a principalof BRS. Previously, he worked in the high yield finance group of Bankers Trust.Mr. Edmonds holds a B.S. from the University of Virginia McIntire School ofCommerce and an M.B.A. from The Wharton School of the University ofPennsylvania. Mr. Edmonds also serves on the boards of directors of H&EEquipment Services, L.L.C., Il Fornaio, M&S, Copeland Enterprises, Inc.,Town Sports International, Inc. and The Sheridan Group, Inc.

 

*MichaelJ. Hislop* hasbeen a Director of our Company since September 2001. Since 1995,Mr. Hislop has been the President and Chief Executive Officer of IlFornaio. Mr. Hislop received a degree in Hotel and Restaurant Management fromthe University of Massachusetts.  Mr.Hislop also serves on the board of directors of Il Fornaio.

 

*JeffreyJ. Teschke* hasbeen a Director of our Company since January 2005.  Mr. Teschke is also a Vice President of J.W.Childs Associates, L.P.  Prior to joiningJ.W. Childs Associates, L.P. in June 1998, Mr. Teschke was an Associate withQuad-C, Inc., a private equity firm based in Charlottesville, VA from 1996 to1998, and a Financial Analyst at Merrill Lynch & Co. from 1994 to1996.  Mr. Teschke holds a B.A. from theUniversity of Rochester and an M.B.A. from the Harvard Business School.  Mr. Teschke also serves on the boards ofdirectors of Fitness Quest, Inc. and Sunny Delight Beverages Co.

 

**Audit Committee Financial Expert**

 

OurBoard of Directors believes that its audit committee members are financiallyliterate and are capable of analyzing and evaluating our Company’s financialstatements.  Our Board of Directors hasdetermined that Richard Stockinger is an “audit committee financial expert” asdefined under Item 401(h) of Regulation S-K.  Mr. Stockinger is not “independent” as definedin the listing standards of the New York Stock Exchange.

 

**Code of Ethics**

 

As ofthe date of this Form 10-K, we have not adopted a code of ethics that appliesto our principal executive officer, principal financial officer, principalaccounting officer or controller, or persons performing similar functions.  We are currently in the process of developinga code of ethics for the above mentioned officers and employees of our Company.

 

62

----

 

ITEM11.                EXECUTIVE COMPENSATION

 

Thefollowing table sets forth certain information with respect to annual andlong-term compensation for services in all capacities for fiscal years 2004,2003 and 2002 paid to our Chief Executive Officer and the other four mosthighly compensated executive officers who were serving as such as of December26, 2004 (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             | ** ** | 2004                    |       | 431,935    |       | 75,000         |       | *              |       | —                         |       | —         |       | 8,858 |   |
| President, Chief  Executive     | ** ** | 2003                    |       | 363,653    |       | 150,000        |       | *              |       | —                         |       | —         |       | 7,320 |   |
| Officer and  Director           |       | 2002                    |       | 329,243    |       | 80,000         |       | *              |       | 325                            | (4)        | 13,000         |       | 7,320 |   |
|                            |       |                    |       |       |       |           |       |           |       |                           |       |           |       |   |   |
| Steven L.  Tanner(5)            |       | 2004                    |       | 210,769    |       | —         |       | *              |       | 735                            | (6)        | 4,072          |       | — |   |
| Chief Financial  Officer        |       | 2003                    |       | —     |       | —         |       | *              |       | —                         |       | —         |       | — |   |
|                            |       | 2002                    |       | —     |       | —         |       | *              |       | —                         |       | —         |       | — |   |
|                            |       |                    |       |       |       |           |       |           |       |                           |       |           |       |   |   |
| Charles Rink                    |       | 2004                    |       | 248,668    |       | 35,000         |       | *              |       | —                         |       | 12,215         |       | — |   |
| Chief Operating  Officer        |       | 2003                    |       | 237,288    |       | 60,100         |       | *              |       | —                         |       | —         |       | 87,646 |   |
|                            |       | 2002                    |       | 205,974    |       | 19,000         |       | *              |       | —                         |       | —         |       | — |   |
|                            |       |                    |       |       |       |           |       |           |       |                           |       |           |       |   |   |
| Carlos Angulo                   |       | 2004                    |       | 180,769    |       | 35,000         |       | *              |       | —                         |       | 8,143          |       | — |   |
| Senior Vice  President,         |       | 2003                    |       | 159,423    |       | 40,800         |       | *              |       | —                         |       | —         |       | — |   |
| Real Mex Foods,  Inc.           |       | 2002                    |       | 142,115    |       | 18,000         |       | *              |       | —                         |       | —         |       | — |   |
|                            |       |                    |       |       |       |           |       |           |       |                           |       |           |       |   |   |
| Roberto (Pepe)  Lopez           |       | 2004                    |       | 162,308    |       | 25,000         |       | *              |       | —                         |       | 3,054          |       | — |   |
| Executive Chef  and Senior Vice |       | 2003                    |       | 157,307    |       | 40,066         |       | *              |       | —                         |       | —         |       | 29,210 |   |
| President,  Research and        |       | 2002                    |       | 135,767    |       | 18,000         |       | *              |       | —                         |       | —         |       | — |   |
| Development                     |       |                    |       |       |       |           |       |           |       |                           |       |           |       |   |   |

 

----

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

 

(1)           We have not granted any stock appreciationrights or long-term incentive plan awards.

 

(2)           Represents options to acquire shares ofour Class A Common Stock granted pursuant to our Amended and Restated 2000Stock-Based Incentive Compensation Plan.

 

(3)           Amounts for Mr. Wolfe consist of lifeinsurance premiums which we paid on his behalf. Amounts for Mr. Rink and Mr. Lopez consist of amounts distributed upondiscontinuation of the El Torito deferred compensation plan.

 

(4)           Represents 325 restricted shares of ourSeries C 15% Cumulative Compounding Participating Preferred Stock.

 

(5)           Steven L. Tanner joined our Company asChief Financial Officer on January 12, 2004.

 

(6)           Represents 295 restricted shares of ourSeries A 12.5% Cumulative Compounding Preferred Stock, 208 restricted shares ofour Series B 13.5% Cumulative Compounding Preferred Stock and 232 restrictedshares of our Series C 15% Cumulative Compounding Participating PreferredStock.

 

63

----

 

**Option Grants in Fiscal Year Ended December 26,2004**

 

Thefollowing table sets forth information regarding the stock options grantedduring the fiscal year 2004 to our Named Executive Officers:

 
| **Name**              | ** ** | **Number of  Shares  Underlying  Options  Granted****(1)** | ** ** | **Percent of  Total Options  Granted to  Employees in  Fiscal 2004** | ** ** | **Exercise  Price  ($/share)** | ** ** | **Expiration  Date** | ** ** | **Grant Date  Present  Value(2)** | ** ** |
|-----------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|-----------------------------------|------------|
|                  |       |                                                       |       |                                                                 |       |                           |       |                 |       |                              |       |
| Steven Tanner         |       | 4,072                                                      |       | 10.18                                                                | %          | $                              | 0.01       |                 | 07/01/14   |                              | $          | — |   |
| Charles Rink          |       | 12,215                                                     |       | 30.78                                                                | %          | 0.01                           |       | 07/01/14             |       | —                            |       |
| Carlos Angulo         |       | 8,143                                                      |       | 20.51                                                                | %          | 0.01                           |       | 07/01/14             |       | —                            |       |
| Roberto (Pepe)  Lopez |       | 3,054                                                      |       | 7.69                                                                 | %          | 0.01                           |       | 07/01/14             |       | —                            |       |
|                       |            |                                                            |            |                                                                      |            |                                |            |                      |            |                                   |            |  |  |

 

----

## (1)Options vest over a five-year period. Each option expires upon the earlier to occur of (i) the tenthanniversary of the date on which the options were granted, (ii) five years afterthe date of consummation by our Company of an initial public offering and (iii)in the event that the option holder ceases to be a full-time employee of ourCompany, up to two months following any such termination of employment, uponthe terms set forth in the option agreement.

##  

## (2)The potential value of the options at December 26, 2004 is based on the fairmarket value of the shares of common stock underlying the options at that date,less the exercise price of the options. We believe that our common stock had a fair market value of $0 per shareat December 26, 2004.

##  

**Aggregate Option Exercises and Fiscal Year-EndOption Value**

 

Thefollowing table sets forth information regarding the 2004 fiscal year-endoption 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(1)** | ** ** |
|-----------------------|------------|-----------------------------------|-----------------|---------------------|-------------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Exercisable**       | ** ** | **Unexercisable**                 | **Exercisable** | ** **          | **Unexercisable** |
|                  |       |                              |            |                |              |                                                                         |       |                                                                  |       |   |   |   |   |
| Frederick F.  Wolfe   |       | —                            |            | $                   | —            |                                                                         | 8,336      |                                                                  | 6,500      |   | — |   | — |   |
| Steven Tanner         |       | —                            |            | —              |              | —                                                                       |       | 4,072                                                                 |       | — |   | — |   |
| Charles Rink          |       | —                            |            | —              |              | 587                                                                          |       | 13,096                                                                |       | — |   | — |   |
| Carlos Angulo         |       | —                            |            | —              |              | —                                                                       |       | 8,143                                                                 |       | — |   | — |   |
| Roberto (Pepe)  Lopez |       | —                            |            | —              |              | 294                                                                          |       | 3,494                                                                 |       | — |   | — |   |
|                       |            |                                   |                 |                     |                   |                                                                              |            |                                                                       |            |  |  |  |  |  |

 

----

(1) As of December 26,2004, there were no outstanding in-the-money options.

 

**Annual Bonus Plan**

 

We maintain an annual bonusplan that provides for annual incentive awards to be made to our seniormanagement (including the Named Executive Officers, but excluding our CEO whohas a separate bonus program under his employment agreement) upon our Company’sattainment of pre-set annual EBITDA targets (as defined in the annual bonusplan).  The amount of the annual award toeach executive is based upon a percentage of the executive’s base salary.  Awards are normally paid in cash in a lumpsum following the completion of our Company’s audit for each plan year.  To be eligible for a full share

 

64

----

 

of the bonus, executives must be employed on the first day of thefiscal year, provided that under the plan we may adjust awards based onindividual performance factors or special circumstances affecting ourCompany.  In addition, pursuant to theannual bonus plan, senior management (including the Named Executive Officers,including our CEO) are entitled to receive additional annual incentive awardsupon our Company’s exceeding the pre-set EBITDA target.  The amount of the additional bonus pool iscalculated based on a percentage of the amount by which EBITDA for the planyear exceeds the pre-set EBITDA target, with each eligible participant’s sharebeing equal to a percentage of the additional bonus pool.

 

**Compensation of Directors**

 

Ourdirectors are entitled to reimbursement of their reasonable out-of-pocketexpenses in connection with their travel to and attendance at meetings of theBoard of Directors or committees thereof. In February 2005, we agreed to pay (i) each non-employee director (otherthan the Chairman of our Audit Committee and the Chairman of our Board ofDirectors) an annual fee of $25,000; (ii) the Chairman of our Audit Committeean annual fee of $35,000; and (iii) the Chairman of our Board of Directors anannual fee of $50,000.  We further agreedto pay 50.0% of these amounts retroactively to those non-employee directors whoserved on our Board of Directors during fiscal 2004.

 

**Employment Agreements**

 

Weentered into an employment agreement with Frederick F. Wolfe, our President andChief Executive Officer, effective May 14, 2001 which expired on May 14, 2004.Under the old employment agreement, Mr. Wolfe received a base salary of$300,000 per annum, annual bonuses and customary executive benefits. Under theold employment agreement, Mr. Wolfe was also granted options to purchase 3,671shares of our common stock and invested $150,000 in our preferred and commonstock.

 

Weentered into a new employment agreement with Mr. Wolfe effective August 2,2004. Under the new employment agreement, Mr. Wolfe is entitled to a basesalary of $400,000 per annum or such greater amount as the Board of Directorsshall determine and customary executive benefits. Contingent upon our meetingcertain financial goals set annually in accordance with our bonus plan, Mr.Wolfe is eligible to receive a bonus of up to 66 2/3% of his base salary. IfMr. Wolfe’s employment is terminated by us without cause or by his resignationfor “good reason,” he would be entitled to any previously awarded but unpaidbonus and severance payments equal in the aggregate to his annual base salaryfor a period of one year following such termination. The new employmentagreement with Mr. Wolfe expires on August 2, 2007.

 

65

----

 

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

 

**Security Ownership of****Certain Beneficial Ownersand 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 March 18, 2005 by:

 

**•**              Each person (or group of affiliated persons) who isknown by us to beneficially own 5% or more of Real Mex Restaurants, Inc.’scommon and preferred stock;

 

**•**              Each of the Named Executive Officers;

 

**•**              Each of our Directors; and

 

**•**              All of our Directors and Named Executive Officers as agroup.

 

To ourknowledge, each of the holders of shares listed below has sole voting andinvestment power as to the shares owned unless otherwise noted. Beneficial ownership ofthe securities listed in the table has been determined in accordance with theapplicable rules and regulations 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            |       | 25.90                   |       | 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            |       | 16.17                   |       | 3,064.77 |   | 16.80 |   | 2,043.18 |   | 16.59 |   | 2,741.80 |   | 15.69 |   |
| Funds affiliated  with Jefferies Capital Partners(4)              |       | 68,027.87            |       | 21.54                   |       | 4,103.12 |   | 22.5 |   | 2,768.30 |   | 22.46 |   | 3,572.75 |   | 20.44 |   |
| J.W. Childs  Partners, L.P. and affiliated fund (5)          |       | 44,845.50            |       | 14.04                   |       | 2,063.67 |   | 11.31 |   | 1,393.26 |   | 11.31 |   | 1,945.90 |   | 11.13 |   |
| Canterbury  Mezzanine Capital, L.P.(6)                            |       | 47,992.85            |       | 14.27                   |       | 1,000.00 |   | 5.48 |   | 680.00 |   | 5.52 |   | 2,034.76 |   | 11.64 |   |
| Blackstone  Mezzanine Partners, L.P.(7)                           |       | 23,413.00            |       | 6.90                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
| ***Named  Executive Officers and Directors***                     |       |                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Frederick F.  Wolfe, Jr.(8)                                       |       | 9,512.24             |       | 2.93                    |       | 71.05 |   | * |   | 48.09 |   | * |   | 375.00 |   | 2.15 |   |
| Steven Tanner                                                     |       | —               |       | —                  |       | 295.00 |   | 1.62 |   | 208.00 |   | 1.69 |   | 232.00 |   | 1.33 |   |
| Charles Rink(9)                                                   |       | 780.62               |       | *                       |       | 11.72 |   | * |   | 7.97 |   | * |   | — |   | — |   |
| Carlos Angulo                                                     |       | —               |       | —                  |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Roberto Lopez(10)                                                 |       | 294.00               |       | *                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Fortunato N.  Valenti(11)                                         |       | 12,762.86            |       | 3.95                    |       | 340.89 |   | 1.87 |   | 230.01 |   | 1.87 |   | 675.38 |   | 3.86 |   |
| Richard  Stockinger(12)                                           |       | 5,861.21             |       | 1.84                    |       | 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) |       | 29,506.23            |       | 8.82                    |       | 940.92 |   | 5.16 |   | 643.88 |   | 5.22 |   | 1,457.95 |   | 8.34 |   |

 

----

* Less than 1%

 

66

----

 

(1) Consists of shares ofClass A Common Stock. In addition, for purposes of calculating thepercentage beneficial ownership of common stock we have included outstandingshares of Class B Common Stock, all of which are owned by a singlestockholder. The terms of Class B Common Stock are identical toClass A Common Stock, except that the holders of Class B Common Stockhave no voting rights, except as provided by law. Each holder of Class BCommon Stock has the right to convert any or all shares of Class B CommonStock into an equal number of shares of Class A Common Stock at any time.

 

(2) The Preferred Stockconsists of shares of Series A 12.5% Cumulative Compounding PreferredStock, Series B 13.5% Cumulative Compounding Preferred Stock andSeries C 15.0% Cumulative Compounding Participating Preferred Stock.

 

(3) Bruckmann, Rosser,Sherrill & Co., L.P. (“BRS I”) and Bruckmann, Rosser,Sherrill & Co., L.P. (“BRS II” and, together with BRS I, the “BRSFunds”) are private equity investment funds managed by Bruckmann, Rosser,Sherrill & Co., LLC. (“BRSE”). BRSE is the general partner of the BRSFunds and by virtue of such status may be deemed to be the beneficial owner ofthe shares owned by the BRS Funds. BRSE has the power to direct the BRS Fundsas to the voting and disposition of shares held by the BRS Funds. No singleperson controls the voting and dispositive power of BRSE with respect to theshares owned by the BRS Funds. Bruce C. Bruckmann, Harold O. Rosser, Stephen C.Sherrill, Paul D. Kaminski and Thomas J. Baldwin are the managers of BRSE, andnone of them individually has the power to direct or veto the voting or dispositionof shares owned by the BRS Funds. BRSE expressly disclaims beneficial ownershipof the shares owned by the BRS Funds. Each of Messrs. Bruckmann, Rosser,Sherrill, Kaminski and Baldwin expressly disclaims beneficial ownership of theshares owned by the BRS Funds. The address of BRS is 126 East 56th Street, NewYork, New York 10022.

 

(4) Consists of(a) an aggregate of 9,207.12 shares of preferred stock and 59,970.35shares of common stock held by Furman Selz Investors II L.P., (b) anaggregate of 789.11 shares of preferred stock and 5,139.88 shares of commonstock held by FS Employee Investors LLC and (c) an aggregate of 447.94shares of preferred stock and 2,917.64 shares of common stock held by FSParallel Fund L.P. Furman Selz Investors II L.P., FS Employee Investors LLC andFS Parallel Fund L.P. are private equity investment funds managed by JefferiesCapital Partners and its affiliates. JCP has granted Harold O. Rosser andStephen 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) anaggregate of 5,032.20 shares of preferred stock and 38,523.09 shares of commonstock held by J.W. Childs Equity Partners, L.P. and (b) an aggregate of 370.64shares of preferred stock and 2,837.33 shares of common stock held by JWCChevys Co-Invest, LLC.  The generalpartner of J.W. Childs Equity Partners, L.P. is J.W. Childs Advisors, L.P., ADelaware limited partnership.  The general partner of J.W. ChildsAdvisors, L.P. is J.W. Childs Associates, L.P., a Delaware limited partnership. The general partner of J.W. Childs Associates, L.P. is J.W. ChildsAssociates, Inc., a Delaware corporation.  J.W. Childs Associates, Inc. isthe managing member of JWC Chevys Co-Invest, LLC.  J.W. Childs Advisors,L.P., J.W. Childs Associates, L.P. and J.W. Childs Associates, Inc. may be deemedto beneficially own the shares of preferred stock and common stock held by J.W.Childs Equity Partners, L.P. and JWC Chevys Co-Invest, LLC.  The address of J.W. Childs Partners, L.P. andJWC 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 preferred stock and 23,027.38shares of common stock held by Canterbury Mezzanine Capital, L.P., (b) anaggregate of 280.00 shares of preferred stock and 4,605.47 shares of commonstock held by Canterbury Detroit Partners, L.P. and (c) an aggregate of2,034.76 shares of preferred stock and warrants to purchase 20,360.00 shares ofcommon stock held by Canterbury Mezzanine Capital II, L.P. that are currentlyexercisable with an exercise price of $0.01 per share and an expiration date ofJune 28, 2010. The address of Canterbury Mezzanine Capital II, L.P. is 600Fifth Avenue, 23rd Floor, New York, NY 10020.

 

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

 

67

----

 

(8) Includes options toacquire 8,336 shares of common stock that are currently exercisable.

 

(9) Includes options toacquire 587 shares of common stock that are currently exercisable.

 

(10) Includes options toacquire 294 shares of common stock that are currently exercisable.

 

(11) Includes options toacquire 7,111 shares of common stock that are currently exercisable.

 

(12) Includes options toacquire 2,470 shares of common stock that are currently exercisable.

 

(13) Brian P. Friedman isa managing member of JCP, but disclaims beneficial ownership of shares owned byJCP and its affiliates, except to the extent of his pecuniary interest therein.

 

(14) As a Vice-Presidentof J.W. Childs Associates, Inc., Mr. Teschke may be deemed to beneficially ownthe shares of preferred stock and common stock owned by J.W. Childs Associates,Inc., J.W. Childs Associates, L.P., J.W. Childs Advisors, L.P., J.W. ChildsEquity Partners, L.P. and JWC Chevys Co-Invest, LLC.  Mr. Teschkedisclaims beneficial ownership of such shares.

 

(15) Includes options toacquire an aggregate of 15,369 shares of common stock that are currentlyexercisable.

 

**EquityCompensation Plan Information**

**As ofDecember 26, 2004**

 
| **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)     |       | 84,747                                                                                                    |       | $                                                                                      | 30.48      |                                                                                                                                                      | 20,503     |   |
| Equity  compensation plans not approved by security holders(2) |       | —                                                                                                    |       | —                                                                                 |       | —                                                                                                                                                    |       |
| Total                                                          |       | 84,747                                                                                                    |       |                                                                                   |       | 20,503                                                                                                                                                    |       |
|                                                                |            |                                                                                                           |            |                                                                                        |            |                                                                                                                                                           |            |  |

 

----

(1)           Includes (i) theAmended and Restated 2000 Stock-Based Incentive Compensation Plan and (ii) the1998 Stock-Based Incentive Compensation Plan.

 

(2)           Not Applicable.

 

ITEM 13.                CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

**Securities Holders Agreement and RegistrationRights Agreement**

 

*SecuritiesHolders 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

 

68

----

 

determine,and that so long as JCP and affiliated entities and individuals continue to ownat least 50% of the common stock held by them on June 28, 2000, JCP will havethe right to designate one of our directors, and that so long as BRS andaffiliated entities and individuals continue to own at least 50% of the commonstock held by them on June 28, 2000, BRS will have the right to designate allof our other directors. BRS and JCP also each have the right to remove any orall of our directors designated by them upon written notice. Additionally,pursuant to a separate agreement, JCP granted Harold O. Rosser and Stephen C.Sherrill, individuals affiliated with BRS, an irrevocable proxy to vote allshares of common stock held by JCP in accordance with Messrs. Rosser andSherrill’s instructions.

 

Thesecurities holders agreement contains provisions that restrict the ability ofour directors and our officers from transferring shares of our common stock orpreferred stock held by them except in compliance with the terms of thesecurities holders agreement. If our board of directors and holders of amajority of our common stock approve the sale of our Company, each stockholderhas agreed to sell its common stock and preferred stock on the terms andconditions approved by our board of directors and the holders of a majority ofthe common stock then outstanding. The securities holders agreement containsprovisions that may restrict BRS, JCP and their respective affiliated entitiesand 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.

 

*RegistrationRights Agreement. *On June 28, 2000, we entered into aregistration rights agreement with the stockholders party to the securityholders agreement pursuant to which we have granted certain registration rightswith respect to shares of our common stock held by them. Under the registrationrights agreement, we have granted to BRS, JCP, Canterbury, Blackstone andentities and individuals affiliated with BRS, JCP, Canterbury and Blackstone todemand registration rights following an initial public offering of our commonstock with respect to the shares of our common stock held by them. In addition,all of the stockholders party to the registration rights agreement have “piggy-back”registration rights to participate in certain registrations of common stockinitiated by us.

 

**Management Agreements**

 

OnJune 28, 2000, we entered into an Amended and Restated Management Agreementwith BRS and JCP, pursuant to which BRS and JCP provide business andorganizational strategy, financial and investment management and merchant andinvestment banking services. In exchange for these services, BRS and JCPreceived an initial fee, and subject to certain exceptions, are entitled toreceive a management fee equal to 1% of our annual Consolidated EBITDA (asdefined in the management agreement) plus actual out-of-pocket expenses. Themanagement fee is allocated 66 2/3% to BRS and 33 1/3% to JCP. In addition, BRSand JCP may negotiate with us to provide additional services in connection withany transaction in which we may be, or may consider becoming involved. Themanagement agreement includes customary indemnification provisions and expireson June 28, 2010.

 

OnJanuary 19, 2005, we paid $833,333 and $166,667 to BRS and JCP, respectively,for advisory and transactional services provided to our Company pursuant to theAmended and Restated Management Agreement in connection with the ChevysAcquisition.

 

OnJuly 20, 2000 we entered into a Management Agreement with Restaurant Associatespursuant to which Restaurant Associates provided certain operational managementservices to us, subject to the direction and supervision of our Board. Underthe terms of this agreement, as amended, in exchange for these services,Restaurant Associates was entitled to receive a management fee of $250,000 peryear until termination of the agreement. This agreement expired on March 31,2004. Mr. Valenti is the President and Chief Executive Officer of RestaurantAssociates. Additionally, Mr. Stockinger is the President of

 

69

----

 

RAPatina Restaurants, LLC (“RA Patina”), an affiliate of Restaurant Associates,and the former Vice President and Chief Financial Officer of RestaurantAssociates.

 

**Loans to Directors**

 

Pursuantto secured promissory notes, each dated June 28, 2000 (the “Director Notes”),we loaned Fortunato N. Valenti and Richard Stockinger $654,509 and $467,717,respectively, to purchase shares of our common stock and preferred stock (the “Shares”).Pursuant to the terms of the Director Notes, the Shares secured all amountsowed under the Director Notes. The Director Notes bore interest at an annualrate of 8%. As of February 22, 2004, there was $172,199 outstanding under Mr.Valenti’s Note and $200,251 outstanding under Mr. Stockinger’s Director Notes.During fiscal year 2003, the largest amount due under Mr. Valenti’s DirectorNote was $350,996, and the largest aggregate amount due under Mr. Stockinger’swas $303,045. The Director Notes were repaid in full on June 28, 2004.

 

**Transactionswith J.W. Childs**

 

*Issuance of Equity Securities to J.W. Childs*.  Pursuantto the terms of the definitive asset purchase agreement, dated October 14, 2004(the “Chevys Purchase Agreement”), on January 11, 2005 we issued to J.W. Childsan aggregate of 41,360 shares of our Class A Common Stock, 2,064 shares of ourSeries A 12.5% Cumulative Compounding Preferred Stock, 1,393 shares of ourSeries B 13.5% Cumulative Compounding Preferred Stock, 1,946 shares of ourSeries C 15% Cumulative Compounding Participating Preferred Stock and optionsto purchase 3,485 shares of our Class A Common Stock (which options arefully-vested and exercisable at prices ranging from $5 to $92 per share) aspart of the consideration for the Chevys Acquisition.

 

*Indemnification Agreement.*** **On October 14, 2004, in connection with theChevys Purchase Agreement, we entered into an indemnification agreement (“IndemnificationAgreement”) with J.W. Childs and our wholly-owned subsidiary, CKR AcquisitionCorp.  Pursuant to the IndemnificationAgreement, effective upon closing of the Chevys Acquisition, J.W. Childs agreedto indemnify 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 PurchaseAgreement).  Pursuant to theIndemnification Agreement, J.W. Childs will not be liable for damages unless(i) we 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.

 

*Joinder Agreement. *On January 11, 2005, we entered into ajoinder agreement (the “Joinder Agreement”) with J.W. Childs and BRS inconnection with the issuance of our equity securities to J.W. Childs.  Pursuant to the Joinder Agreement, J.W.Childs (i) became bound by and entitled to receive the benefits of certain provisionsof our securities holders agreement, (ii) became subject to certain transferrestrictions with respect to our equity securities owned by J.W. Childs, (iii)was granted certain preemptive rights with respect to future issuances ofcertain 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.

 

70

----

 

**Other Relationships**

 

InApril 2004, we entered into an oral agreement with RA Patina, pursuant to whichour subsidiary, Real Mex Foods, Inc., provides food distribution services tocertain restaurants owned by RA Patina. In fiscal 2004, we received approximately $478,000 for services renderedunder this food distribution service arrangement.  Fortunato N. Valenti, one of our directors,is the Chief Executive Officer of RA Patina and Richard Stockinger, also one ofour directors, is the President of RA Patina.

 

BrianP. Friedman, one of our directors, is the chairman of the executive committeeof Jefferies & Company, Inc., one of the initial purchasers of the Notes.

 

ITEM 14.                PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

**IndependentAuditors**

 

The Audit Committee appointed Ernst & Young LLP(“E&Y”) as the Company’s independent auditors to conduct the audit of theCompany’s books and records for the fiscal year ending December 26, 2004.E&Y has served as the Company’s independent auditors since the Company’sinception in 1998.

 

71

----

 

**Principal Accounting Fees and Services**

 

Thefollowing table sets forth the aggregate fees billed to the Company by E&Y:

 
| ** **          | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|---------------------|------------|-----------------|------------|-----------------|------------|
| Audit Fees          |       | $               | 239,000    |            | $          | 160,490 |   |
| Audit Related  Fees |       | 20,070          |       | 18,732          |       |
| Tax Fees            |       | 11,150          |       | 11,150          |       |
| All Other Fees      |       | 477,570         |       | 6,217           |       |
| Total Fees          |       | $               | 747,790    |            | $          | 196,589 |   |

 

**Audit Fees** represent the aggregate fees billed orestimated to be billed to us for professional services rendered for the auditof our annual financial statements, review of financial statements included inour Form 10-Qs and services normally provided by our accountants in connectionwith statutory and regulatory filings or engagements.

 

**Audit-Related***Fees* representthe aggregate fees billed to us or estimated to be billed to us for assuranceand related services that were reasonably related to the performance of theaudit or review of our financial statements and are not reported under “AuditFees” above. The nature of services provided consisted in both years of auditsof our 401(k) plans.

 

**Tax Fees** represent the aggregate fees billed tous or estimated to be billed to us for professional services rendered for taxcompliance, tax advice and tax planning. The nature of services providedconsisted in both years of tax return review.

 

**All Other Fees** represent the aggregate fees billed tous or estimated 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 the Notesand Exchange Offer and fees for services rendered in connection with the ChevysAcquisition.

 

**Policy on Audit Committee Pre-Approval of Auditand Permissible Non-Audit Services of the Independent Auditor**

** **

TheAudit Committee is responsible for appointing, setting compensation for andoverseeing the work of the independent auditor. The Audit Committee hasestablished a policy requiring its pre-approval of all audit and permissiblenon-audit services provided by the independent auditor. The Audit Committeeconsiders whether such services are consistent with the rules of the SEC onauditor independence as well as whether the independent auditor is bestpositioned to provide the most effective and efficient service, for reasonssuch as familiarity with the Company’s business, people, culture, accountingsystems, risk profile and other factors and input from the Company’smanagement. 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 AuditCommittee has 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

 

72

----

 

fiscal2004, all of the services related to the audit or other fees described abovewere pre- approved by the Audit Committee and none were provided pursuant toany waiver of the pre-approval requirement.

 

**PART IV**

 

ITEM 15.                EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

##### (1)           FINANCIAL STATEMENTS.

#####  

The Consolidated Financial Statements and relatedNotes thereto as set forth under Item 8 of this Report on Form 10-K areincorporated herein by reference.

 

(2)           FINANCIAL STATEMENT SCHEDULE.

 

The financial statement schedules have not been filedbecause they are not applicable or the required information is shown in thefinancial statements or the notes thereto.

 

(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 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)                   |

 

73

----

 
|   |   |                                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                      |

 

74

----

 
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 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 herewith)                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 3.32   |   | Bylaws of CKR  Acquisition Corp. (Filed herewith)                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 3.33   |   | Articles of Formation  of Chevys Restaurants, LLC (formerly known as Chevys Acquisition Company  LLC). (Filed herewith)                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 3.34   |   | Operating Agreement of  Chevys Restaurants, LLC(formerly known as Chevys Acquisition Company LLC).  (Filed 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) |

 

75

----

 
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3    |   | 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 (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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

76

----

 
|   |   | 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)                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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  herewith.)                                                                                                                                                                                                                                                                                                                                                                   |

 

77

----

 
|   |   |                                                                                                                                                                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 herewith.) |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.19  |   | Restricted Stock  Agreement, dated as of October 31, 2004, by and between Real Mex Restaurants,  Inc. and Steven Tanner. (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)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Certification pursuant  to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of  the Chief Financial Officer. (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)                                                                                                             |

 

78

----

 

SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | REAL MEX  RESTAURANTS, INC. |
|--------|-----------------------------|
|   |                        |
|   | By:                         | /s/ Frederick F.  Wolfe |   |
|   |                        | Frederick F. Wolfe |   |
| Date:  | March 23, 2005              |   | 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    |       |     | March 23, 2005 |
|                     |       | Officer  and Director             |       |     |   |
|                     |       | (Principal  Executive Officer)    |       |     |   |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Steven Tanner        |       |                              |       |     |   |
| Steven Tanner            |       | Chief  Financial Officer          |       |     | March 23, 2005 |
|                     |       | (Principal  Financial Officer and |       |     |   |
|                     |       | Accounting  Officer)              |       |     |   |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Fortunato N. Valenti |       |                              |       |     |   |
| Fortunato N. Valenti     |       | Director                          |       |     | March 23, 2005 |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Richard Stockinger   |       |                              |       |     |   |
| Richard Stockinger       |       | Director                          |       |     | March 23, 2005 |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Harold O. Rosser     |       |                              |       |     |   |
| Harold O. Rosser         |       | Director                          |       |     | March 23, 2005 |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Brian P. Friedman    |       |                              |       |     |   |
| Brian P. Friedman        |       | Director                          |       |     | March 23, 2005 |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ J. Rice Edmonds      |       |                              |       |     |   |
| J. Rice Edmonds          |       | Director                          |       |     | March 23, 2005 |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Michael J. Hislop    |       |                              |       |     |   |
| Michael J. Hislop        |       | Director                          |       |     | March 23, 2005 |
|                     |       |                              |       |     |   |
|                     |       |                              |       |     |   |
| /s/ Jeffrey J. Teschke   |       |                              |       |     |   |
| Jeffrey J. Teschke       |       | Director                          |       |     | March 23, 2005 |

 

----

 

**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)                                |

 

----

 
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                            |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.32   |   | Bylaws of CKR  Acquisition Corp. (Filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.33   |   | Articles of Formation  of Chevys Restaurants, LLC (formerly known as Chevys Acquisition Company  LLC). (Filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.34   |   | Operating Agreement of  Chevys Restaurants, LLC(formerly known as Chevys Acquisition Company LLC). (Filed  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 herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3    |   | 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 (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)                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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  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 herewith.)                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.19  |   | Restricted Stock  Agreement, dated as of October 31, 2004, by and between Real Mex Restaurants,  Inc. and Steven Tanner. (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)                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification pursuant  to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

----

 
|   |   | the Chief Financial  Officer. (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) |

 

----