** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

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**FORM 10-K**

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

**x****        ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2006**

**o**** ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FORTHE TRANSITION PERIODFROM               TO               **

**COMMISSIONFILE NUMBER 333-116310**

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**RealMex Restaurants, Inc.**

(Exact name of Registrant as specified in its charter)

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

Registrant’stelephone number, including area code:   **(562)346-1200**

**Securities registered pursuant toSection 12(b) of the Act:   NONE**

**Securitiesregistered pursuant to Section 12(g) of theAct:   NONE**

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.   Yes  o     No  x

Indicate by checkmark if the registrant is not required to file reports to file reports pursuantto Section 13 or Section 15(d) of the Act .  Yes  o    No  x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  x    No  o.

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K.   x.

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

Large AcceleratedFiler  o     AcceleratedFiler  o     Non-AcceleratedFiler  x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes  o    No  x

The aggregatemarket value of the voting and non-voting common equity held by non-affiliatesof the registrant is not applicable as no public market for the voting stock ofthe registrant exists.

As of March 12, 2007, Real Mex Restaurants, Inc. hadoutstanding 1,000 shares of Common Stock, par value $0.001 per share.

DOCUMENTS INCORPORATED BY REFERENCE:

**None**

 

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**FORWARD-LOOKINGSTATEMENTS**

*Thisreport includes “forward looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities 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.*

*Theseforward looking statements reflect our current views with respect to futureevents and are based on assumptions and subject to risks and uncertainties,including, but not limited to, economic, competitive, governmental andtechnological factors outside of our control, that may cause actual results todiffer materially from trends, plans or expectations set forth in the forwardlooking statements. These risks and uncertainties may include these factors andthe risks and uncertainties described in Item 1A “Risk Factors” of this reportand elsewhere in this report.  Giventhese risks and uncertainties, we urge you to read this report completely andwith the understanding that actual future results may be materially differentfrom what we plan or expect.  All of theforward-looking statements made in this Form 10-K are qualified by thesecautionary statements and we cannot assure you that the actual results ordevelopments anticipated by our Company will be realized or, even ifsubstantially realized, that they will have the expected consequences to oreffects on our Company or its business or operations.  In addition, these forward-looking statementspresent our estimates and assumptions only as of the date of this report.Except for any ongoing obligation to disclose material information as requiredby federal securities laws, we do not intend to update you concerning any futurerevisions to any forward looking statements to reflect events or circumstancesoccurring after the date of this report.*

*Unlessotherwise provided in this report, references to “we”, “us”, “Real Mex” and “ourCompany” refer to Real Mex Restaurants, Inc. and our consolidatedsubsidiaries.*

**PART I**

ITEM 1.                  BUSINESS

**Our Company**

We are one of thelargest full service Mexican casual dining restaurant chain operators in theUnited States in terms of number of restaurants.  As of December 31, 2006, we had 195 restaurants,located principally in California.  Ourfour primary restaurant concepts, El Torito®, El Torito Grill®, Chevys FreshMex® and Acapulco Mexican Restaurant®, offer a large variety of traditional,innovative and authentic Mexican dishes and a wide selection of alcoholicbeverages at moderate prices, seven days a week for lunch and dinner, as wellas Sunday brunch.  Our restaurantconcepts feature fresh, high quality and flavorful foods, served in casualatmospheres.  For Fiscal Year 2006, wegenerated revenues of $564.7 million, flat same store sales, a net loss of $3.6million and net cash provided by operating activities of $24.8 million.

**Merger Agreement**

On August 17,2006, the Company entered into an Agreement and Plan of Merger (“MergerAgreement”) with RM Restaurant Holding Corp. (“RM Restaurant Holding”) and itssubsidiary, RM Integrated, Inc. (“RM Integrated”, and together with RMRestaurant Holding, “Buyer”).  Themajority of the stock of RM Restaurant Holding is owned by Sun Cantinas LLC (“SunLLC”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).  On August 18, 2006, the stockholders of theCompany entitled to vote thereon (including the holders of a majority of theCompany’s Series C Preferred Stock, par value $0.001 per share) approved theMerger Agreement.  On August 21, 2006(the “Effective Time”), the closing of the transactions contemplated by theMerger Agreement occurred, and RM Integrated merged with and into Real Mex (the“Merger”), with Real Mex continuing as the surviving corporation and the 100%owned subsidiary of RM Restaurant Holding. The net purchase price of Real Mex was $199.1 million, consistingof  $359.0 million in cash, plus net cashacquired of $35.2 million, plus a $2.8 million working capital adjustment and directacquisition costs of $3.9 million, less indebtedness assumed of $188.2 millionand seller costs of  $7.6 million.Pursuant to the Merger Agreement, $6.0 million of the Merger Considerationis being held in escrow and the purchase price is subject to adjustment basedon certain other adjustments.  As aresult of the Merger and in accordance with the terms of the Merger Agreement,(i) all of the outstanding capital stock of Real Mex was converted into theright to receive a portion of the purchase price, and all Real Mex options,warrants and shares of restricted stock were cancelled and converted into theright to receive a portion of the purchase price, less the exercise prices orunpaid purchase prices therefore, as applicable, and (ii) the Company became awholly-owned subsidiary of RM Restaurant Holding.  Prior to the Merger, Bruckmann, Rosser,Sherrill & Co., Inc. (“BRS”), together with its affiliates, was acontrolling stockholder of Real Mex.  Asdescribed in the Merger Agreement, the Amended and Restated ManagementAgreement dated June 28, 2000 by and among the Company, certain of itssubsidiaries, BRS, and FS Private Investments, L.L.C. was terminated inconnection with the Merger.

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The foregoingdescription of the Merger Agreement is qualified in its entirety by referenceto the Merger Agreement filed with the Securities and Exchange Commission asExhibit 10.1 to Form 8-K (File No. 333-116310) on August 17, 2006 andincorporated by reference herein.

The Merger wasaccounted for under the purchase method of accounting and, accordingly, thepurchase price has been allocated to the assets acquired and the liabilitiesassumed based on their estimated fair market values at the date of the Merger. The Companyattributes the goodwill associated with the Merger to the historical financialperformance and the anticipated future performance of the Company’s operations.

The followingtable presents the preliminary allocation of the acquisition costs, includingprofessional fees and other related transaction costs, to the assets acquiredand liabilities assumed based on their estimated fair values (in thousands):

| Cash and cash equivalents                 |   | $       | 29,270  |   |
|-------------------------------------------|--------|---------|---------|--------|
| Trade and other  accounts receivable      |   | 11,625  |    |
| Inventories                               |   | 10,012  |    |
| Other current assets                      |   | 5,676   |    |
| Property and equipment                    |   | 88,997  |    |
| Deferred tax asset                        |   | 6,197   |    |
| Other assets                              |   | 39,697  |    |
| Goodwill                                  |   | 277,460 |    |
| Total assets  acquired                    |   | 468,933 |    |
|                                      |   |    |    |
| Accounts payable and  accrued liabilities |   | 20,881  |    |
| Long-term debt                            |   | 185,666 |    |
| Other liabilities                         |   | 63,264  |    |
| Total  liabilities assumed                |   | 269,811 |    |
| Net assets acquired                       |   | $       | 199,122 |   |

 

**The allocation of the purchaseprice is a preliminary estimate as the determination of the fair market valuesof the assets acquired and the liabilities assumed has not been finalized.**

**Chevys Acquisition**

OnJanuary 11, 2005, we completed the acquisition of 69 Chevys Fresh Mex®restaurants and five Fuzio Universal Pasta® restaurants and assumed franchiseagreements relating to 37 franchised Chevys Fresh Mex restaurants and fivefranchised Fuzio Universal Pasta restaurants, which we refer to as the ChevysAcquisition.  The purchase price for theChevys Acquisition was approximately $76.2 million in cash and the assumptionof certain liabilities, plus the issuance of Real Mex common and preferredequity securities to J.W. Childs Equity Partners L.P. and its affiliate, JWCChevys Co-Invest, LLC, in their capacity as unsecured creditors of the formerowners of Chevys.

The primary reason for the Chevys Acquisitionwas to add a complementary growth vehicle in the full-service Mexican segmentof the restaurant industry. The Company attributes the goodwill associated withthe Chevys Acquisition to the historical financial performance and theanticipated future performance of Chevys. The Company is currently determiningthe amount, if any, of any additional tax benefits that may have been acquiredin the Chevys Acquisition.

**Our Restaurant Concepts**

*El Toritoand El Torito Grill (40.4% of Fiscal Year 2006 restaurant revenues)*.  Founded in 1954, El Torito has been a pioneerin the full service, casual dining Mexican restaurant segment inCalifornia.  As of December 31, 2006, weoperated 78 El Torito restaurants, including nine El Torito Grill restaurants,and, this concept was the largest full service Mexican casual dining restaurantchain in California, in terms of number of restaurants.  Our El Torito concept is dedicated to fresh,quality ingredients and authentic, made-from-scratch Mexican cuisine, includingsizzling fajitas, hand-made tamales and traditional Mexican combinationplatters.

We featureauthentic regional specialties created by our executive chef, Pepe Lopez.  El Torito restaurants are modeled after atraditional Mexican hacienda. Lunch and dinner entrees range in price from$5.99 to $16.99 with an average dining room check of $13.94 and $15.03 for ElTorito and El Torito Grill, respectively, for Fiscal Year 2006.

El Torito restaurants areprimarily free standing buildings.  Therestaurants average approximately 8,800 square feet with average seating ofapproximately 306 guests.  All but one ofthe El Torito properties is leased.

In the El Toritoconcept, we drive the traditionally slower day-parts of early evening andweekday traffic through Happy Hour offers and specialty theme menus.  During Happy Hour, guests enjoy value pricedappetizers and drinks.  Our Pronto Lunchmenu offers guests value priced, time sensitive entrees.  We stimulate incremental traffic with valuepromotions such as Cadillac Margarita ® Mondays and our longstanding TacoTuesday programs where guests may enjoy grilled chicken or steak tacos in thecantina.

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*Chevys(36.4% of Fiscal Year 2006 restaurant revenues).*  Chevys was founded in Alameda, California in1986.  As of December 31, 2006, weoperated 68 Company-owned restaurants, franchised 34 restaurants and thisconcept was the second largest full service, Mexican casual dining restaurantchain in California in terms of number of restaurants.  Chevys is a comfortable yet high-energyrestaurant concept that offers guests an array of freshly prepared Mexicandishes in an ultra-casual atmosphere.  Weoffer an extensive variety of Mexican dishes, including traditional enchiladas,burritos and tacos, as well as a variety of combination platters. The food menuis complemented by a wide selection of margaritas and an assortment of Mexicanand American beers. Lunch and dinner entrees range in price from $7.49 to$20.49 with an average dining room check of $13.24 for Fiscal Year 2006.

Chevys restaurantsare primarily freestanding and located in high-traffic urban and suburbanareas.  Chevys restaurants generallyaverage approximately 7,800 square feet with average seating for approximately327 guests in the dining room and cantina. All of the Chevys properties are leased. The restaurant design iscantina-style with a vibrant, ultra-casual layout. A signature item of Chevysis its fresh tortilla maker called “El Machino”. El Machino is generallyfeatured in the dining room and helps reinforce the Company’s commitment tofreshness.

*Acapulco(16.1% of Fiscal Year 2006 restaurant revenues).*  The first Acapulco restaurant opened inPasadena, California in 1960.  As ofDecember 31, 2006, we had 35 Acapulco restaurant locations and this concept wasthe third largest full service, Mexican casual dining restaurant chain inCalifornia in terms of number of restaurants. We offer California style Mexican food featuring traditional favoritesas well as seafood specialties such as grilled halibut, shrimp and crabentrees.  We also feature a host ofspecialty drinks, including our signature house margarita made with premiumJose Cuervo Gold Tequila.  Lunch anddinner entrees range in price from $6.75 to $15.99 with an average dining roomcheck of $14.38 for Fiscal Year 2006.

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

Acapulco benefitsfrom long-standing value oriented day-part programs designed to driveincremental traffic during slow periods. Beginning with Sunday brunch, guests can indulge in a champagne brunchwith a variety of fresh soups, chilled salads, a taco bar with handmadetortillas, a made to order taco bar and a variety of traditional Mexicanfavorites.  Weekday value promotionsinclude Happy Hour, Margarita Mondays, Kids Eat Free on Tuesdays and a lunchbuffet, for time sensitive guests.

*OtherRestaurant Concepts (7.1% of Fiscal Year 2006 restaurant revenues).*  As of December 31, 2006, we operated 14additional restaurant locations, most of which are also full service Mexicanformats, under the following brands: Las Brisas; Casa Gallardo; El Paso Cantina;GuadalaHarry’s; Who·Song & Larry’s and Fuzio Universal Pasta.  We acquired most of these restaurants withthe acquisitions of El Torito Restaurants, Inc. and Chevys.

**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 that these freshlyprepared made-from-scratch items underscore our authenticity. We prepare allour recipes with fresh, high quality ingredients, from our salsa to oursizzling fajitas.  El Torito is known fortableside preparations, including our most popular appetizer, our guacamole,which is made to our guests’ specifications at their table.  Our food is complemented by a variety of specialtydrinks, including our house margarita, made with premium Jose Cuervo GoldTequila.

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

*InternalProduction, Purchasing and Distribution Facilities*.  We centralize purchasing and distribution forthe majority of our raw ingredients, fresh products and alcoholic beveragesthrough two facilities located in Buena Park and Union City, California andmanufacture food products through a facility in Santa Fe Springs,California.  The purchasing anddistribution facilities, encompassing approximately 67,000 square feet in BuenaPark and 54,000 square feet in Union City enable us to order and deliver fooditems and ingredients on a timely basis. We are able to leverage our purchasing power and reduce delivery costs,contributing to our restaurant gross margins. Our manufacturing facility, encompassing approximately 32,000 squarefeet, produces certain high volume items for our Acapulco restaurants includingsoups, baked goods and sauce bases, enabling us to maintain food quality andconsistency while reducing costs.  Thisfacility also manufactures specialty products for sales to outside customers,marketed under 

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the Real Mex FoodsTM labelas well as co-packaged under other branded names.  All three facilities have additional capacityto allow for growth in our distribution operations and production for outsidecustomers.

*ProvenManagement Team and Experienced Board of Directors*.  We are led by a management team withextensive experience in all aspects of restaurant operations.  Our management team has an average of morethan 13 years with our Company and more than 24 years of experience in therestaurant industry.  Our Chief ExecutiveOfficer, Fred Wolfe, is a long-time veteran of our Company, having served atotal of 21 years with us.  From 1997 to2001, Mr. Wolfe served as Chief Operating Officer of California Pizza Kitchen, Inc.,or CPK, and together with the other top members of CPK’s management team,successfully engineered CPK’s return to profitability and initial publicoffering.

**Business Strategy**

Our primarybusiness objective is to increase stockholder value through same store salesand store margin improvements, new restaurant openings, expansion of the Chevysfranchise network, growth in outside sales by Real Mex Foods and strategicacquisitions.

*Samestore sales and store margin improvements* .  At our El Torito concept, we intend tocommunicate our commitment to creating fresh, authentic Mexican dishes anddrinks through in-restaurant merchandising, direct mail, newspaper, internetadvertising, sponsorship marketing and public relations.  In 2005, the Acapulco concept shifted thebrand positioning from a discount proposition to a family of local Mexicanneighborhood restaurants delivering generous portions of California-Mexicanfood and drink at a good value.  InFiscal Year 2006, we reduced the frequency of coupons by 17% as compared toFiscal Year 2005 and circulation of coupons by 68.2% as compared to Fiscal Year2005, while increasing same store sales and profitability.  We replaced the discount message with newproduct introductions as limited time offers and communicated these promotionsvis-à-vis direct mail, traffic sponsorships and in-restaurant merchandising. Inthe Chevys concept, we leveraged our equity in “Fresh Mex” and further enhancedthe brand by incorporating fun and flavor into the concept’s positioning.  We introduced five promotions that boastedfresh, fun and flavor and communicated the new offers using radio, outdooradvertising, direct mail and in-restaurant merchandising.

*NewRestaurant Openings*. We plan to open new El Torito, Chevys and El Torito Grill restaurants inand near our existing markets, primarily using internally generated cashflow.  Our new store prototype isapproximately 7,500 square feet with an additional approximately 1,000 squarefoot patio.  Our net cash investment fora typical El Torito restaurant is generally between $1.4 million and $3.2million, including pre-opening costs, depending on the level of landlordallowances.  Our target pre-tax,cash-on-cash return on new restaurants is at least 30%.  To successfully execute this strategy, weintend to leverage the extensive experience our management team has acquiredopening new restaurants for our Company as well as for other restaurantchains.  From December 2004 through 2005,we opened two El Torito restaurants and an El Torito Grill restaurant, all insouthern California.  We also opened sixrestaurants in 2006, three El Torito restaurants, an El Torito Grill restaurantand a Chevys restaurant, all in California and a Chevys restaurant in New York.  In 2006, we also signed leases for two ElTorito Grill restaurants, an El Torito restaurant and a Chevys restaurant, allin California, to be opened in 2007 and 2008. We are currently finalizing a lease for an additional restaurant sitewhich we expect to open in 2007 and we are actively negotiating letters ofintent on a number of other restaurant sites for opening in 2007 andbeyond.  In total, we plan to open eightrestaurants in 2007, one of which is the El Torito Grill restaurant in Anaheim,CA that opened in January 2007.

*Expansion of the Chevys franchise network*. We currently have 11 franchiseesoperating 35 franchised Chevys restaurants in 12 states.  We plan to continue to develop new franchiserelationships and expand existing franchise relationships in order to increaseChevys brand awareness and marketing efficiencies and to increase revenues fromnew store franchise fees along with revenues from ongoing franchiseroyalties.  We plan to franchise thosemarkets that do not fit into our Company restaurant development plans eitherbecause of size or geographic location.

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

*Strategicacquisitions. *We lookfor opportunities to acquire existing Mexican or Southwestern themed restaurantsat attractive prices.  We believe that ifwe can acquire a competitive concept at an attractive price, achieve generaland administrative expense as well as purchasing and distribution synergies,that it can be a cost effective way to grow our business and enhancestockholder value.  We evaluateacquisition opportunities based on their fit with our existing operations.  We also consider our financial and managementresources and capacity to manage the acquisition process, management transitionand ongoing operations.

**Purchasing and Distribution**

We seek to obtainhigh 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 February 2005, opened a distribution facility in Union City,California to service the northern California Chevys restaurants and othernorthern California, Nevada, Oregon and 

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Washington restaurants.Our purchasing and distribution facilities enable us to order and distributefood items timely, enabling delivery of fresh products to our restaurants.  In addition, we obtain our beer from avariety of state regulated distributors who deliver directly to our restaurants.

**Employees**

As of December 31,2006, we had approximately 12,769 employees. Of these employees, approximately 11,491 were employed as restauranthourly team members, 802 as restaurant managers, 266 as distribution andproduction facility employees, and 210 as executive, senior, and general officestaff.  None of our workforce isunionized.

*RestaurantStaffing.*  Restaurantsare assigned between three and five managers - typically, a general manager,one or more assistant managers and one chef. The average restaurant employs approximately 64 team members -approximately 35% of who 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.

*Turnover.*We believe one of our strengths is the relative stability ofour employee staff.  We believe that inFiscal Year 2006, our hourly turnover of 104.8% was slightly better than theindustry average, and our management turnover of 30.2% was also better thanindustry average.  Our restaurantmanagement is heavily tenured, with Regional Directors averaging approximately13 years, General Managers averaging approximately 9 years and Managersaveraging almost 6 years.  Hourlyemployee tenure averages more than 3 years. Other highly skilled positions such as chefs average 14 years with theCompany.

**Competition**

The food serviceindustry is competitive and affected by external changes such as economicconditions, 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 will as aresult face competition from other food service companies, many of which aremore established than us.

**Government Regulation**

Our business,including each of the restaurants we operate, is subject to extensive federal,state and local government regulation, including those relating to, amongothers, public health, 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 are subject to regulation in each state in whichwe operate.  Typically our restaurants’licenses to sell alcoholic beverages must be renewed annually and may besuspended or revoked at any time for 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 FiscalYear 2006, approximately 24.7% of our restaurant revenues were attributable tothe sale of alcoholic beverages, and we believe that our ability to servealcohol is an important factor in attracting customers.  The failure of any of our restaurants totimely obtain and maintain liquor or other licenses, permits or approvalsrequired to serve alcoholic beverages or food could delay or prevent theopening of, or adversely impact the viability of, the restaurant, and we couldlose significant revenue.

Our restaurantsare subject in each state in which we operate to “dram shop” laws, which allowa person to sue us if that person was injured by an intoxicated guest who waswrongfully served alcoholic beverages at one of our restaurants.  A judgment against us under a dram shop lawcould exceed our liability insurance coverage policy limits and could result insubstantial liability for us and have a material adverse effect on our profitability.  Our inability to continue to obtain suchinsurance coverage at reasonable costs also could have a material adverseeffect on us.

Our foodmanufacturing operations are subject to extensive regulation by the UnitedStates Department of Agriculture, or USDA, and other state and localauthorities.  Our facilities and productsare subject to periodic inspection by federal, state and localauthorities.  We believe that we arecurrently in substantial compliance with all material governmental laws and regulationsand maintain all material permits and licenses relating to our operations.  We are required to have a USDA inspector onsite at our manufacturing facility to ensure compliance with USDA regulations.  Nevertheless, we cannot assure you that we arein full compliance with all such laws and regulations or that we will be ableto comply with any future 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.

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We are alsosubject to the U.S.  Bio-Terrorism Act of2002 which, among other things, requires us to provide specific informationabout the food products we ship in the U.S. and to register our manufacturingfacilities with the United States Food & Drug Administration, or FDA.  In addition, we are subject to the NutritionLabeling and Education Act of 1990 and the regulations promulgated there underby the FDA.  This regulatory programprescribes the format and content of certain information required to appear onthe labels of food products.

Additionally, restaurantsand other facilities use electricity and natural gas, which are subject tovarious federal and state regulations concerning the allocation of energy.  Our operating costs have been and willcontinue to be affected by increases in the cost of energy.

**Environmental Matters**

Our operations arealso subject 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 responsible for,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 comprehensive environmentalreview of our properties or operations and we cannot assure that we haveidentified all of the potential environmental liabilities at our properties orthat such liabilities would not have a material adverse effect on our financialcondition.

ITEM 1A.                                           RISKFACTORS

***Ourresults of operations and financial condition can be adversely affected bynumerous risks. You should carefully consider the risk factors detailed belowin conjunction with the other information contained in this report. If any ofthe following risks actually occur, our business, financial condition,operating results, cash flows and/or future prospects could be materiallyadversely affected.***

*Food-borne illness incidentscould reduce our restaurant sales.*

We cannotguarantee that our internal controls and training at our restaurants anddistribution and manufacturing facilities will be fully effective in preventingall food-borne illnesses. Furthermore, our reliance on third party suppliersmakes it difficult to monitor food safety compliance and increases the riskthat food-borne illness would affect multiple locations rather than singlerestaurants. Third party food suppliers and transporters outside of our controlcould cause some food borne illness incidents. New illnesses resistant to ourcurrent precautions may develop in the future, or diseases with long incubationperiods could arise, that could give rise to claims or allegations on aretroactive basis. One or more instances of food-borne illness in one of ourrestaurants could negatively affect our restaurant sales if highly publicized.This risk exists even if it were later determined that the illness was wronglyattributed to one of our restaurants. A number of other restaurant chains haveexperienced incidents related to food borne illnesses that have had a materialadverse impact on their operations, and we cannot assure you that we can avoida similar impact upon the occurrence of a similar incident at our restaurants.In addition, we may be subject to liability claims as a result of food-borneillnesses.

*Increases in the cost ofingredients could materially adversely affect our business, financialcondition, and results of operations and cash flows.*

The cost,availability and quality of the ingredients we use to prepare our food andbeverages are subject to a range of factors, many of which are beyond ourcontrol. Changes in the cost of such ingredients can result from a number offactors, including seasonality, political conditions, weather conditions,shortages of ingredients and other factors. If we fail to anticipate and reactto increasing ingredient costs by adjusting our purchasing practices and menuprice adjustments, our cost of sales may increase and our operating resultscould be adversely affected.

*We depend upon frequentdeliveries of food and other supplies.*

Our ability tomaintain consistent quality menu items depends in part upon our ability toacquire fresh food products and related items, including essential ingredientsused in the Mexican restaurant business such as avocados, from reliable sourcesin accordance with our specifications. Shortages or interruptions in the supplyof fresh food products caused by unanticipated demand, problems in productionor distribution, contamination of food products, an outbreak of food-bornediseases, inclement weather or other conditions could materially adverselyaffect the availability, quality and cost of ingredients, which could adverselyaffect our business, financial condition, results of operations and cash flows.

We have contractswith a large number of suppliers of most food, beverages and other supplies forour restaurants. In addition, we distribute substantially all of the productswe receive from suppliers through our distribution facility. If suppliers donot perform adequately or if any one or more of such entities seeks toterminate its agreement or fails to perform as anticipated, or if there is anydisruption in any of our supply relationships or distribution operations forany reason, it could have a material adverse effect on our business, financialcondition, results of operations and cash flows. Our inability to replace ourdistribution operations and our suppliers in a short period of time onacceptable terms could increase our costs and could cause shortages at ourrestaurants of food 

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and other items that maycause our restaurants to remove certain items from a restaurant’s menu ortemporarily close a restaurant. If we temporarily close a restaurant or removepopular items from a restaurant’s menu, that restaurant may experience asignificant reduction in revenue during the time affected by the shortage orthereafter, as our customers may change their dining habits as a result.

*We are vulnerable to changes inconsumer preferences and economic and other conditions that could harm ourbusiness, financial condition, and results of operations and cash flows*.

Food servicebusinesses are often affected by changes in consumer tastes, national, regionaland local economic conditions, demographic trends, consumer confidence in theeconomy and discretionary spending priorities. Factors such as trafficpatterns, weather conditions, local demographics and the type, number andlocation of competing restaurants may adversely affect the performance ofindividual locations. In addition, inflation and increased food and energycosts may harm the restaurant industry in general and our locations inparticular. Adverse changes in any of these factors could reduce consumertraffic or impose practical limits on pricing, which could harm our business,financial condition, results of operations and cash flows.  We cannot assure you that consumers willcontinue to regard our products favorably or that we will be able to developnew products that appeal to consumer preferences. Any failure to satisfyconsumer preferences could have a materially adverse affect on our business.Our continued success will depend in part on our ability to anticipate,identify and respond to changing consumer preferences and economic conditions.

*Our business is highly sensitiveto events and conditions in the State of California.*

A majority of ourrestaurants are located in California. Because of this geographicconcentration, we are susceptible to local and regional risks, such as energyshortages and related increased costs, increased government regulation, adverseeconomic conditions, adverse weather conditions, earthquakes and other naturaldisasters, any of which could have a material adverse effect on our business,financial condition and results of operations. In light of our currentgeographic concentration, adverse publicity relating to our restaurants couldhave a more pronounced adverse effect on overall sales than might be the caseif our restaurants were more broadly dispersed.

*There is intense competition inthe restaurant industry.*

The restaurantbusiness is intensely competitive with respect to food quality, price valuerelationships, ambiance, service and location, and there are manywell-established competitors with substantially greater financial, marketing,personnel and other resources. In addition, many of our competitors are wellestablished in the markets where we operate. While we believe that ourrestaurants are distinctive in design and operating concept, other companiesmay develop restaurants that operate with similar concepts.

*We intend to open additionalrestaurants, which could have a material adverse effect on our business,financial condition, and results of operations and cash flows.*

We are reviewingadditional sites for potential future restaurants. Historically, there is a “ramp-up”period of approximately four months before we expect a new restaurant toachieve our targeted level of performance. This is due to higher operatingcosts caused by start-up and other temporary inefficiencies such as customeracceptance and unavailability of experienced staff. Our ability to open newrestaurants is dependent upon a number of factors, many of which are beyond ourcontrol, including our ability to:

·                                          findquality locations;

·                                          reachacceptable agreements regarding the lease or purchase of locations;

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

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

·                                          obtain,for an acceptable cost, required permits and regulatory approvals.

We may not be ableto attract enough customers to new restaurants because potential customers maybe unfamiliar with our restaurants or the atmosphere or menu of our restaurantsmight not appeal to them. In addition, as part of our growth strategy, weintend to open new restaurants in our existing markets. Since we typically drawcustomers from a relatively small radius around each of our restaurants, theoperating results and comparable unit sales for existing restaurants that arenear the area in which a new restaurant opens may decline, and the newrestaurant itself may not be successful, due to the close proximity of otherrestaurants and market saturation.

For these same reasons,many markets would not successfully support one of our restaurants. Ourexisting business support systems, management information systems, financialcontrols and other systems and procedures may be inadequate to support ourexpansion, which could require us to incur substantial expenditures that couldmaterially adversely affect our operating results or cash flows.

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

We are, from timeto time, faced with negative publicity relating to food quality, restaurantfacilities, health inspection scores, employee relationships or other mattersat specific restaurants. Adverse publicity may negatively affect us, regardlessof whether the 

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allegations are valid orwhether we are liable. In addition, the negative impact of adverse publicityrelating to one restaurant may extend far beyond the restaurant involved toaffect some or all of our other restaurants. A similar risk exists with respectto totally unrelated food service businesses, if customers mistakenly associatesuch unrelated businesses with our own operations.

*Uninsured losses could occur.*

We havecomprehensive insurance, including general liability and property (includingbusiness interruption) extended coverage. However, there are certain types oflosses that may be uninsurable or that we believe are not economical to fullyinsure, such as earthquakes and other natural disasters. In view of thelocation of many of our existing and planned restaurants in California, ouroperations are particularly susceptible to damage and disruption caused byearthquakes. In the event of an earthquake or other natural disaster affectingour geographic area of operations, we could suffer a loss of the capitalinvested in, as well as anticipated earnings from, the damaged or destroyedproperties.

*Changes in employment laws mayadversely affect our business.*

Various federaland state labor laws govern the relationship with our employees and affectoperating costs. These laws include minimum wage requirements, overtime,unemployment tax rates, workers’ compensation rates and citizenshiprequirements. Significant additional government imposed increases in thefollowing areas could materially affect our business, financial condition,operating results or cash flow:

·                                          minimumwage;

·                                          paidleaves of absence;

·                                          provisionto employees of mandatory health insurance; and

·                                          taxreporting; and

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

*If we face labor shortages orincreased labor costs, our growth and operating results could be adverselyaffected.*

Labor is a primarycomponent in the cost of operating our restaurants. If we face labor shortagesor increased labor costs because of increased competition for employees, higheremployee turnover rates or increases in the federal or applicable state minimumwage or other employee benefits costs (including costs associated with healthinsurance coverage), our operating expenses could increase and our growth couldbe adversely affected. In addition, our success depends in part upon ourability to attract, motivate and retain a sufficient number of well-qualifiedrestaurant operators and management personnel, as well as a sufficient numberof other qualified employees, including guest service and kitchen staff, tokeep pace with our expansion schedule. Qualified individuals needed to fillthese positions are in short supply in some geographic areas. In addition, fullservice casual dining segment restaurant operators have traditionallyexperienced relatively high employee turn over rates. Although we have not yetexperienced any significant problems in recruiting or retaining employees, ourability to recruit and retain such individuals may delay the planned openingsof new restaurants or result in higher employee turnover in existingrestaurants, which could have a material adverse effect on our business,financial condition, results of operations and cash flows.

We have beenaffected by increasing healthcare and workers’ compensation expenses affectingbusiness in most industries including ours. To manage premium increases we haveelected to self-insure. Higher deductibles could result in greater exposure toour operating results and liquidity. If we are exposed to material liabilitiesthat are not insured it could materially adversely affect our financialcondition and results of operations.

*We may be locked into long-termand non-cancelable leases and may be unable to renew leases at the end of theirterms.*

Many of ourcurrent leases are non-cancelable and typically have initial terms of 10 to 20years and one or more renewal terms of three or more years that we may exerciseat our option. Leases that we enter into in the future likely will also be long-termand non-cancelable and have similar renewal options. If we close a restaurant,we may remain committed to perform our obligations under the applicable lease,which would include, among other things, payment of the base rent for thebalance of the lease term. Alternatively, at the end of the lease term and anyrenewal period for a restaurant, we may be unable to renew the lease withoutsubstantial additional cost, if at all. We may close or relocate therestaurant, which could subject us to construction and other costs and risks,and could have a material adverse effect on our business. Additionally, therevenue and profit, if any, generated at a relocated restaurant, may not equalthe revenue and profit generated at the existing restaurant. Furthermore, inthe past, we have been forced to close profitable restaurants due to theinability to renew a lease upon the expiration of its lease term and we expectthis to occur from time to time in the future.

*We face risks associated withgovernment regulations.*

We are subject toextensive government regulation at the federal, state and local governmentlevel. These include, but are not limited to, regulations relating to thepreparation and sale of food and beverages, zoning and building codes, land useand employee, public health, sanitation and safety matters. We are required toobtain and maintain governmental licenses, permits and approvals. 

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Difficulty or failure inobtaining these approvals in the future could result in delaying or cancelingthe opening of new restaurants or could materially adversely affect theoperation of existing restaurants. Local authorities may suspend or denyrenewal of our governmental licenses if they determine that our operations donot meet the standards 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 ourrestaurants’ licenses to sell alcoholic beverages must be renewed annually andmay be suspended or revoked at any time for cause. Alcoholic beverage controlregulations relate to various aspects of daily operations of our restaurants,including the minimum age of patrons and employees, hours of operation,advertising, wholesale purchasing and inventory control, handling and storage.In Fiscal Year 2006, approximately 24.7% of our restaurant revenues wereattributable to the sale of alcoholic beverages, and we believe that ourability to serve alcoholic beverages, such as our signature margarita drinks,is an important factor in attracting customers. The failure of any of ourrestaurants to timely obtain and maintain liquor or other licenses, permits orapprovals required to serve alcoholic beverages or food could delay or preventthe opening of, or adversely impact the viability of, the restaurant and wecould lose significant revenue. Our restaurants are also subject in each statein which we operate to “dram shop” laws, which allow a person to sue us if thatperson was injured by an intoxicated person who was wrongfully served alcoholicbeverages at one of our restaurants. A judgment against us under a dram shoplaw could exceed our liability insurance coverage policy limits and couldresult in substantial liability for us and have a material adverse effect on ourprofitability. Our inability to continue to obtain such insurance coverage atreasonable costs also could have a material adverse effect on us

The federalAmericans with Disabilities Act and similar state laws prohibit discriminationbecause of disability in public accommodations and employment. Mandatedmodifications to our facilities (or related litigation) in the future to makedifferent accommodations for persons with disabilities could result in materialunanticipated expenses.

Our distributionand manufacturing operations are subject to extensive regulation by the FDA,USDA and other state and local authorities. Our processing facilities andproducts are subject to periodic inspection by federal, state and localauthorities. We cannot assure you, however, that we are in full compliance withall currently applicable governmental laws, or that we will be able to complywith any or all future laws and regulations. Failure by us to comply withapplicable laws and regulations could subject us to civil remedies, includingfines, injunctions, recalls or seizures, as well as potential criminalsanctions, which could have a material adverse effect on our business,financial condition or results of operations.

*We may be subject to significantliability should the consumption of any of our specialty products cause injury,illness or death.*

We may be requiredto recall specialty products that we manufacture and co-package at ourmanufacturing facility in the event of contamination, product tampering,mislabeling or damage to our products. We cannot assure you that productliability claims will not be asserted against us or that we will not beobligated to recall our products. A product liability judgment against us or aproduct recall could have a material adverse effect on our business, financialcondition or results of operations.

*The failure to enforce andmaintain our trademarks could materially adversely affect our ability toestablish and maintain brand awareness.*

We have registeredor filed applications to register certain names used by our restaurants and ourfood manufacturing operations as trademarks or service marks with the UnitedStates Patent and Trademark Office and in certain foreign countries, includingthe names Acapulco Mexican Restaurant®, El Torito Grill®, Real Mex FoodsTM,Chevys Fresh Mex® and Fuzio Universal Pasta®. The success of our business strategy depends on our continued ability touse our existing trademarks and service marks in order to increase brandawareness and further develop our branded products. If our efforts to protectour intellectual property are not adequate, or if any third partymisappropriates or infringes our intellectual property, either in print or onthe Internet, the value of our brands may be harmed, which could have amaterial adverse effect on our business, including the failure of our brandsand branded products to achieve and maintain market acceptance.

We cannot assureyou that all of the steps we have taken to protect our intellectual property inthe U.S. and foreign countries will be adequate. In addition, the laws of someforeign countries do not protect intellectual property rights to the sameextent as the laws of the U.S.

*We face risks associated withenvironmental laws.*

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

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

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

In particular,under applicable environmental laws, we may be responsible for remediation ofenvironmental conditions and may be subject to associated liabilities,including liabilities resulting from lawsuits brought by private litigants,relating to our restaurants and the land on which our restaurants are located,regardless of whether we lease or own the restaurants or land in question andregardless of whether such environmental conditions were created by us or by aprior owner or tenant. If we are found liable for the costs of remediation ofcontamination at any of our properties our operating expenses would likely increaseand our operating results would be materially adversely affected.

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*We depend on the services of keyexecutives, whose loss could materially harm our business.*

Some of our seniorexecutives are important to our success because they have been instrumental insetting our strategic direction, operating and marketing our business,identifying, recruiting and training key personnel, identifying expansionopportunities and arranging necessary financing. Losing the services of any ofthese individuals could materially adversely affect our business until asuitable replacement could be found. We believe that they could not easily bereplaced with executives of equal experience and capabilities. We do notmaintain key person life insurance policies on any of our executives. See “Management.”

*Compliance with regulation ofcorporate governance and public disclosure will result in additional expenses.*

Keeping abreastof, and in compliance with, laws, regulations and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002 and new SEC regulations will require a significant amount of managementattention and external resources. We are committed to observing high standardsof corporate governance and public disclosure. Consequently, we intend toinvest all reasonably necessary resources to comply with evolving standards,and this investment will result in increased general and administrativeexpenses and a diversion of management time and attention from revenuegenerating activities to compliance activities.

*We may make acquisitions or enterinto similar transactions*

We may expand bypursuing acquisitions, business combinations and joint ventures. We mayencounter difficulties in integrating the expanded operations, entering intomarkets, or conducting operations where we have no or limited prior experience.Furthermore, we may not realize the benefits we anticipated when we enteredinto these transactions. In addition, the negotiation of potentialacquisitions, business combinations or joint ventures as well as theintegration of an acquired business could require us to incur significant costsand cause diversion of management’s time and resources.

*Our substantial level ofindebtedness could adversely affect our financial condition.*

We havesubstantial indebtedness, including obligations under capital leases andunamortized debt premium, of approximately $183.9 million as of December 31,2006.  Subject to restrictions in theindenture for our senior secured notes and our senior secured and unsecuredcredit facilities, we may incur additional indebtedness.  Our high level of indebtedness could haveimportant consequences to holders of our indebtedness and significant effectson our business, including the following:

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

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

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

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

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

We expect to usecash flow from operations to pay our expenses and amounts due under ouroutstanding indebtedness.  Our ability tomake these payments thus depends on our future performance, which will beaffected by financial, business, economic and other factors, many of which wecannot control.  Our business may notgenerate sufficient cash flow from operations in the future and our anticipatedgrowth in revenue and cash flow may not be realized, either or both of whichcould result in our being unable to repay indebtedness, or to fund otherliquidity 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 our senior secured notes and oursenior secured and unsecured credit facilities, may restrict us from adoptingany of these alternatives.

*The indenture for our seniorsecured notes and our senior secured and unsecured credit facilities imposesignificant operating and financial restrictions, which may prevent us frompursuing certain business opportunities and taking certain actions.*

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

·                                          incuradditional indebtedness;

·                                          repayindebtedness before stated maturity dates;

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

·                                          makeacquisitions or investments;

·                                          createor incur liens;

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

·                                          enterinto certain transactions with affiliates;

·                                          sellstock in our subsidiaries;

·                                          restrictdividends, distributions or other payments from our subsidiaries; and

·                                          otherwiseconduct necessary corporate activities.

In addition, oursenior secured and unsecured credit facilities require us to maintaincompliance with specified financial covenants. These covenants could adversely affect our ability to finance our futureoperations or 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.

*Sun Cantinas LLC, an affiliateof  Sun Capital Partners, Inc., controlsour Company through ownership of 100% of the voting stock of our parent, RMRestaurant Holding Corp,  and theirinterests may conflict with the interests of the holders of our indebtedness.*

As a result oftheir stock ownership of our parent company, Sun Cantinas LLC, or SCLLCindirectly owns 100% of our outstanding voting common stock.  By virtue of their stock ownership and theterms of the securities’ holders agreement, of our parent, SCLLC hassignificant influence over our management and will be able to determine theoutcome of all matters required to be submitted to the stockholders forapproval, including the election of our directors and the approval of mergers,consolidations and the sale of all or substantially all of our assets. Theinterests of SCLLC as equity owner of our Company may differ from the interestsof the holders of our indebtedness, and, as such, SCLLC may take actions thatmay not be in their interests.  Forexample, if we encounter financial difficulties or are unable to pay our debtsas they mature, the interests of our equity owners might conflict with theinterests of the holders of our indebtedness. In addition, our equity ownersmay have an interest in pursuing acquisitions, divestitures, financing, orother transactions that, in their judgment, could enhance their equity investments,although such transactions might involve risks to the holders of ourindebtedness.

*Future changes in financialaccounting standards may cause adverse unexpected operating results and affectour reported results of operations.*

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

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ITEM1B.               UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2.                                                     PROPERTIES

Our corporate headquarters are located in Cypress,California. We occupy this facility under a lease that expires in 2012. As ofDecember 31, 2006, we leased 193 restaurant facilities and owned two. Themajority of our leases are for ten, 15 or 20-year terms, include options toextend the terms, include rent holidays, rent escalation clauses and/orcontingent rent provisions and some of our leases have tenant improvementallowances. Our restaurant leases have terms that expire between 2007 and 2027(excluding renewal options not yet exercised) and have an average remainingterm of approximately 13 years, including options.

**RestaurantLocations**

As of December 31, 2006, we owned, licensed orfranchised 244 restaurants in 16 states and three foreign countries, of which195 are Company operated and 49 operate under franchise or licensearrangements.

Our restaurant locations by concept and state as ofDecember 31, 2006 were as follows:
| ** **                    | ** ** | **Concepts**                | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------------------|------------|------------|------------|
| **State**                     | ** ** | **El Torito (1)** | ** ** | **Chevys** | ** ** | **Acapulco** | ** ** | **Franchised** | ** ** | **Other (2)** | ** ** | **Total** | ** ** |
| California                    |       | 74                          |       | 45         |       | 34 |   | 6 |   | 8 |   | 167 |   |
| Missouri                      |       | 0                           |       | 0          |       | 0 |   | 10 |   | 4 |   | 14 |   |
| Arizona                       |       | 2                           |       | 3          |       | 0 |   | 0 |   | 0 |   | 5 |   |
| Nevada                        |       | 0                           |       | 3          |       | 0 |   | 0 |   | 0 |   | 3 |   |
| Oregon                        |       | 1                           |       | 3          |       | 1 |   | 0 |   | 0 |   | 5 |   |
| Washington                    |       | 0                           |       | 1          |       | 0 |   | 2 |   | 1 |   | 4 |   |
| New  Jersey                   |       | 0                           |       | 2          |       | 0 |   | 3 |   | 0 |   | 5 |   |
| Illinois                      |       | 0                           |       | 1          |       | 0 |   | 4 |   | 1 |   | 6 |   |
| Minnesota                     |       | 0                           |       | 0          |       | 0 |   | 2 |   | 0 |   | 2 |   |
| Florida                       |       | 0                           |       | 3          |       | 0 |   | 1 |   | 0 |   | 4 |   |
| Virginia                      |       | 0                           |       | 3          |       | 0 |   | 1 |   | 0 |   | 4 |   |
| Maryland                      |       | 0                           |       | 2          |       | 0 |   | 2 |   | 0 |   | 4 |   |
| New  York                     |       | 0                           |       | 2          |       | 0 |   | 2 |   | 0 |   | 4 |   |
| Louisiana                     |       | 0                           |       | 0          |       | 0 |   | 3 |   | 0 |   | 3 |   |
| South  Dakota                 |       | 0                           |       | 0          |       | 0 |   | 1 |   | 0 |   | 1 |   |
| Indiana                       |       | 1                           |       | 0          |       | 0 |   | 0 |   | 0 |   | 1 |   |
| Total  domestic               |       | 78                          |       | 68         |       | 35 |   | 37 |   | 14 |   | 232 |   |
| Japan                         |       | 0                           |       | 0          |       | 0 |   | 8 |   | 0 |   | 8 |   |
| United  Arab Emirates         |       | 0                           |       | 0          |       | 0 |   | 2 |   | 0 |   | 2 |   |
| Turkey                        |       | 0                           |       | 0          |       | 0 |   | 2 |   | 0 |   | 2 |   |
| Total including International |       | 78                          |       | 68         |       | 35 |   | 49 |   | 14 |   | 244 |   |

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(1) Includes El Torito Grills which are located inCalifornia and Indiana

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

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Wealso lease an approximately 32,000 square foot dedicated manufacturing facilitylocated in Santa Fe Springs, California, an approximately 67,000 square footwarehouse and distribution facility located in Buena Park, California and anapproximately 54,000 square foot warehouse and distribution facility located inUnion City, California, utilized by our subsidiary, Real Mex Foods, Inc.

Ourowned and certain of our leased real property is pledged to secure indebtednessoutstanding under our senior credit facility and our senior secured notes.

ITEM 3.                                                     LEGAL PROCEEDINGS

We are periodically a defendantin cases involving personal injury and other matters that arise in the normalcourse of business. While any pending or threatened litigation has an elementof uncertainty, we believe that the outcome of these lawsuits or claims,individually or combined, will not materially adversely affect the consolidatedfinancial position, results of operations or cash flows of our Company.

ITEM 4.                                                     SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

During the fourth quarterof Fiscal Year 2006, no matters were submitted to a vote of stockholdersthrough solicitation of proxies or otherwise.

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**PART II**

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

**Market Information**

Thereis currently no established public trading market for our outstanding commonstock.

**Holders**

The number of recordholders of each of our classes of common stock as of March 7, 2007 was asfollows:

CommonStock: 1

**Dividends**

In Fiscal Year 2006, wepaid dividends of $10.0 million on our common stock to our parent, RMRestaurant Holding Corp.  Our ability topay dividends is restricted by certain covenants contained in our secured andunsecured senior credit facilities, as well as certain restrictions containedin our indenture relating to our senior secured notes.

**Securities Authorized For Issuance under EquityCompensation Plans**

For information onsecurities authorized for issuance under equity compensation plans, see “Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters—Equity Compensation Plan Information.”

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ITEM 6.                                                     SELECTEDFINANCIAL 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 the Successor Period from August 21, 2006 to December31, 2006 and the Predecessor Period from December 26, 2005 to August 20, 2006(together defined as, “Fiscal Year 2006 Combined” or “2006”) and thePredecessor fiscal years ended December 2005, 2004, 2003 and 2002. FiscalYear 2006 Combined consists of 53 weeks and all other fiscal years presentedconsist of 52 weeks.  This data presentedbelow should be read in conjunction with, and is qualified in its entirety byreference to, “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, and our consolidated financial statements and the notesthereto appearing elsewhere in this report.
| ** **                                                | ** ** | **Successor**           | ** ** | **Predecessor**           | ** ** | ** **           | ** ** | ** **                               | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|----------------------|------------|------------------------------------------|------------|
| ** **                                                | ** ** | **August**              | ** ** | ** **                | ** ** | ** **           | ** ** | ** **                               | ** ** |
| ** **                                                | ** ** | **21, 2006**       | ** ** | **December**              | ** ** | **Fiscal Year** | ** ** | ** **                               | ** ** |
| ** **                                                | ** ** | **to**                  | ** ** | **26, 2005 to** | ** ** | **2006**             | ** ** | **Predecessor**                          | ** ** |
| ** **                                                | ** ** | **December**            | ** ** | **August 20,**       | ** ** | **Combined**         | ** ** | **Fiscal Year Ended (6)** | ** ** |
| ** **                                                | ** ** | **31, 2006**       | ** ** | **2006**                  | ** ** | **(5)**              | ** ** | **2005(4)**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| **Statement  of Operations Data:**                        | ** ** | ** **              | ** ** | ** **                | ** ** | ** **           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restaurant revenues                                       |       | $                       | 179,630    |                      | $          | 351,591              |       | $                                        | 531,221    |   | $ | 510,013 |   | $ | 314,157 |   | $ | 307,278 |   | $ | 310,094 |   |
| Other revenue                                             |       | 11,094                  |       | 18,358                    |       | 29,452               |       | 20,532                                   |       | 10,787 |   | 4,714 |   | 2,285 |   |
| Total revenues                                            |       | 192,098                 |       | 372,552                   |       | 564,650              |       | 534,296                                  |       | 326,810 |   | 312,138 |   | 312,379 |   |
| Cost of sales                                             |       | 50,359                  |       | 94,873                    |       | 145,232              |       | 137,171                                  |       | 80,839 |   | 77,555 |   | 77,867 |   |
| Labor                                                     |       | 67,729                  |       | 125,748                   |       | 193,477              |       | 186,390                                  |       | 118,888 |   | 116,269 |   | 116,156 |   |
| Direct operating and occupancy expense                    |       | 47,651                  |       | 86,937                    |       | 134,588              |       | 130,603                                  |       | 76,760 |   | 74,938 |   | 74,315 |   |
| Total operating costs                                     |       | 165,739                 |       | 307,558                   |       | 473,297              |       | 454,164                                  |       | 276,487 |   | 268,762 |   | 268,338 |   |
| General and administrative expenses                       |       | 11,414                  |       | 18,893                    |       | 30,307               |       | 28,346                                   |       | 17,725 |   | 15,201 |   | 14,670 |   |
| Depreciation and amortization                             |       | 8,505                   |       | 12,230                    |       | 22,553               |       | 18,498                                   |       | 11,837 |   | 11,732 |   | 11,872 |   |
| Operating income                                          |       | 3,379                   |       | 18,150                    |       | 21,529               |       | 31,433                                   |       | 20,299 |   | 16,209 |   | 15,803 |   |
| Interest expense                                          |       | 10,481                  |       | 16,005                    |       | 26,486               |       | 22,973                                   |       | 12,528 |   | 13,372 |   | 14,354 |   |
| Debt termination costs                                    |       | —                  |       | —                    |       | —               |       | —                                   |       | 4,677 |   | — |   | — |   |
| (Loss) income before income tax provision                 |       | (8,238                  | )          | 2,787                     |       | (5,451               | )          | 8,677                                    |       | 4,546 |   | 3,315 |   | 2,257 |   |
| Net (loss) income                                         |       | (5,047                  | )          | 1,480                     |       | (3,567               | )          | 13,386                                   |       | 13,616 |   | 3,206 |   | 2,535 |   |
| Redeemable preferred stock accretion                      |       | —                  |       | (10,126                   | )          | (10,126              | )          | (14,583                                  | )          | (11,862 |   | (10,409 | ) | (9,267 | ) |
| Net (loss) income attributable to common  stockholders(1) |       | $                       | (5,047     | )                         | $          | (8,646               | )          | $                                        | (13,693    | ) | $ | (1,197 | ) | $ | 1,754 |   | $ | (7,203 | ) | $ | (6,732 | ) |
| **Balance  Sheet Data:**                                  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                 |       |                    |       |                      |       | 2,710                |       | 14,871                                   |       | 10,690 |   | 2,605 |   | 1,201 |   |
| Property and equipment, net                               |       |                    |       |                      |       | 90,802               |       | 82,592                                   |       | 36,589 |   | 46,620 |   | 52,616 |   |
| Total assets                                              |       |                    |       |                      |       | 447,135              |       | 310,889                                  |       | 186,951 |   | 173,020 |   | 175,768 |   |
| Total debt(2)                                             |       |                    |       |                      |       | 183,905              |       | 182,031                                  |       | 106,503 |   | 114,699 |   | 121,607 |   |
| Total stockholders’ equity                           |       |                    |       |                      |       | 184,077              |       | 50,584                                   |       | 29,849 |   | 15,861 |   | 12,542 |   |
| **Other  Financial Data:**                                | ** ** | ** **              | ** ** | ** **                | ** ** | ** **           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                      |       |                    |       |                      |       | $                    | 24,130     |                                     | $          | 23,408 |   | $ | 9,982 |   | $ | 6,962 |   | $ | 5,992 |   |
| Ratio of earnings  to fixed charges(3)               |       |                    |       |                      |       | 0.9 x                |       | 1.2 x                                    |       | 1.2 X |   | 1.2 x |   | 1.1 x |   |

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(1) Netincome (loss) attributable to common stockholders includes the effect of theaccretion of the liquidation preference on the redeemable preferred stock whichreduces or increases net loss attributable to common stockholders for therelevant periods through August 20, 2006.

(2) Totaldebt includes long-term debt, obligations under capital leases and unamortizeddebt premium.

(3) Forpurposes of calculating the ratio of earnings to fixed charges, earningsconsist of net income (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).

(4) Includesthe results of Chevys since January 12, 2005, the date of acquisition.

(5)Includes the combined results of the Successor and Predecessor periods fromDecember 26, 2005 to December 31, 2006 and is comprised of 53 weeks.

(6)Results are for the fiscal years ended December and are each comprised of 52weeks.

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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 andelsewhere in this report.  Unlessotherwise provided below, references to “we”, “us” and “our Company” refer toReal Mex Restaurants, Inc. and our consolidated subsidiaries.  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 31, 2006, we operated195 restaurants, 161 of which are located in California, with additionalrestaurants in Arizona, Florida, Indiana, Illinois, Maryland, Missouri, Nevada,New Jersey, New York, Oregon, Virginia and Washington. Our four majorsubsidiaries are El Torito Restaurants, Inc., which we acquired inJune 2000, Acapulco Restaurants, Inc., Chevys Restaurants LLC, whichwe formed to facilitate the Chevys Acquisition in January 2005 and apurchasing, distribution, and manufacturing subsidiary, Real MexFoods, Inc.

El Torito, El ToritoGrill, Acapulco and Chevys, our primary restaurant concepts, each offer highquality Mexican food, a wide selection of alcoholic beverages and excellentguest service.  In addition to the ElTorito, El Torito Grill, Acapulco and Chevys concepts, we operate 16 additionalrestaurant locations, most of which are also full service Mexican formats,under the following brands: Las Brisas; Casa Gallardo; El Paso Cantina;GuadalaHARRY’S; Who**·**Song &Larry’s; and Fuzio Universal Pasta.

On January 11, 2005,we completed the Chevys Acquisition, acquiring 69 Chevys restaurants and fiveFuzio Universal Pasta restaurants and assumed franchise agreements for 37franchised Chevys restaurants and five franchised Fuzio Universal Pastarestaurants.  The purchase price for theChevys Acquisition included approximately $76.2 million in cash and theassumption of certain liabilities, plus the issuance of Company common andpreferred stock to J.W. Childs Equity Partners L.P. and its affiliate, JWCChevys Co-Invest, LLC.  See “Notes toConsolidated Financial Statements.” Chevys’ results of operations have been included in our Company’sconsolidated financial statements since the date of acquisition.

InDecember 2004, we opened our first new El Torito restaurant in five years,located in Encinitas, California and opened 2 restaurants in 2005: an El Toritoin Corona, California and an El Torito Grill in Sherman Oaks, California. InFiscal Year 2006 Combined we opened six restaurants: three El Toritorestaurants, an El Torito Grill restaurant and a Chevys restaurant, all inCalifornia and a Chevys restaurant in New York.We also have in the past, and may in the future, convert select restaurants tothe El Torito or Chevys brand and divest underperforming restaurants.

Our fiscal year consistsof 52 or 53 weeks and ends on the last Sunday in December of eachyear.  Fiscal Year 2006 Combined iscomprised of 53 weeks and all other fiscal years presented are comprised of 52weeks. When calculating same store sales, we include a restaurant that has beenopen for more than 18 months and for the entirety of each comparableperiod.  As of December 31, 2006, we had185 restaurants that met this criterion.

In Fiscal Year 2006Combined, we generated revenues of $564.7 million.  Our revenues are comprised of restaurantsales, other revenues and royalty and franchise fees.  Restaurant revenues include sales of food andalcoholic and other beverages. Other revenues consist primarily of sales byReal Mex Foods to outside customers of processed and packaged prepared foodsand other merchandise items.

Cost of sales iscomprised primarily of food and alcoholic beverage expenses. The components ofcost of sales are variable and increase with sales volume. In addition, thecomponents of cost of sales are subject to increase or decrease based onfluctuations in commodity costs and depend in part on the success of controlswe have in place to manage cost of sales in our restaurants. The cost,availability and quality of the ingredients we use to prepare our food andbeverages are subject to a range of factors including, but not limited to,seasonality, political conditions, weather conditions, and ingredientshortages.

Labor cost includesdirect hourly and management wages, operations management bonus, vacation pay,payroll taxes, workers’ compensation insurance and health insurance.

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

General andadministrative expense includes all corporate and administrative functions thatsupport our operations. Expenses within this category include executivemanagement, supervisory and staff salaries, bonus and related employeebenefits, travel and relocation costs, information systems, training, corporaterent, professional fees and other consulting fees.

Legal settlement costsinclude amounts paid or accrued to settle various legal actions against theCompany, excluding costs to defend the actions.

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Merger costs include alldirect costs related to the Merger that are not eligible for capitalizationincluding legal expenses, investment banker fees, other advisory services,restricted stock compensation and other costs.

Depreciation principallyincludes depreciation of capital expenditures for restaurants.  Pre-opening costs are expensed as incurredand include costs associated with the opening of a new restaurant or theconversion of an existing restaurant to a different concept.  Goodwill is deemed to have an indefinite lifeand is subject to an annual impairment test. Other intangible assets are amortized over their useful lives inaccordance with Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets”.

Amortization of favorablelease asset and unfavorable lease liability, net, represents the amortizationof the asset in excess of the approximate fair market value and the liabilityin excess of the approximate fair market value of the leases assumed as ofAugust 21, 2006, the date of acquisition of the Company.  The amounts are being amortized over theremaining primary term of the underlying leases.

Our annual operating results are impacted byrestaurant 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 31, 2006, we owned two restaurant locations and leasedthe remaining 193.

We perform ongoinganalyses of restaurant cash flow and in the case of negative cash flow orunderperforming restaurants, we may negotiate early termination of leases,allow leases to expire without renewal or sell restaurants.  In addition, from time to time we may beforced to close a successful restaurant if we are unable to renew the lease onsatisfactory terms, or at all.  From theend of fiscal 2000 to the end of Fiscal Year 2006, we closed 32 restaurants, 23of which were early lease terminations and nine of which we were unable torenew the leases thereon.

We have recorded an income tax benefit of $1.9 millionin 2006 as compared to income tax benefits of $4.7 million in 2005 and $9.0million in 2004.  The benefit in 2006 isrelated to our net loss for the year. The benefits for 2005 and 2004 wererelated to the reduction of our valuation allowance related to our deferred taxassets.  There is no valuation allowanceas of December 31, 2006. The amount of deferred tax assets consideredrealizable is based upon our ability to generate future taxable income,exclusive of reversing temporary differences and carry forwards.  In evaluating future taxable income forvaluation allowance purposes as of December 31, 2006, we considered only incomeexpected to be generated in fiscal years 2007, 2008 and 2009.

Some purchase accounting adjustments for theChevys Acquisition related to the value of tax attributes acquired have notbeen reflected in the deferred tax balances as of December 31, 2006 as thefinal tax returns for the seller, Chevy’s Restaurant, Inc., have not beenfiled. Until the tax returns are filed, we are unable to determine thecarryover basis of assets, liabilities, and net operating loss carry-forwardsat the date of acquisition. Upon completion of the sellers’ final tax returnsfor the periods ending before the Chevys Acquisition, the Company will assessand record the carryover basis of certain temporary differences. We believethat the carryover basis of such deferred tax assets and liabilities, if any,would have a full valuation allowance recorded against the net deferred asset,as, based on the weight of available evidence, we believe it is more likelythan not that a significant portion of the deferred tax assets would not berealized in the near future.

In 2003, two of ourrestaurants were partially destroyed by fire. The combined loss of property, which was covered by our replacement costproperty insurance, resulted in a gain of $1.0 million in Fiscal Year 2004 andis presented as a casualty gain in the December 26, 2004 ConsolidatedStatements of Operations.  The gainincludes business interruption insurance proceeds and a gain on propertyreplacement.

**Results of Operations**

The discussion of and theresults of operations for the year ended December 31, 2006 is based on thecombined results for the Predecessor Period from December 26, 2005 throughAugust 20, 2006, and the Successor Period from August 21, 2006 throughDecember, 2006 (“Fiscal Year 2006 Combined” or “2006”).  Because of purchase accounting adjustments tothe fair market value of long-term assets, and because Fiscal Year 2006Combined contains 53 weeks and Fiscal Year 2005 contains 52 weeks, certainamounts may not be comparable between Fiscal Year 2006 Combined and the fiscalyears ended December 25, 2005 (“Fiscal Year 2005” or “2005”) and December 26,2004 (Fiscal Year 2004” or “2004”).

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Our operating results forFiscal Year 2006 Combined, Fiscal Year 2005 and Fiscal Year 2004 are expressedas a percentage of total revenues below:
| ** **                                           | ** ** | **Fiscal Years Ended(1)**  | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **Fiscal Year  2006  Combined** | ** ** | **Fiscal Year  2005** | ** ** | **Fiscal Year  2004** | ** ** |
|                                                 |       |                                 |       |   |   |   |   |
| Total revenues                                       |       | 100.0                                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                        |       | 25.7                                 |       | 25.7 |   | 24.7 |   |
| Labor                                                |       | 34.3                                 |       | 34.9 |   | 36.4 |   |
| Direct operating  and occupancy expense              |       | 23.8                                 |       | 24.4 |   | 23.5 |   |
| Total operating  costs                               |       | 83.8                                 |       | 85.0 |   | 84.6 |   |
| General and  administrative expense                  |       | 5.4                                  |       | 5.3 |   | 5.4 |   |
| Depreciation and  amortization                       |       | 3.7                                  |       | 3.5 |   | 3.6 |   |
| Legal settlement  costs                              |       | 0.7                                  |       | 0.1 |   | — |   |
| Merger costs                                         |       | 1.7                                  |       | — |   | — |   |
| Operating income                                     |       | 3.8                                  |       | 5.9 |   | 6.2 |   |
| Interest expense                                     |       | 4.7                                  |       | 4.3 |   | 3.8 |   |
| Debt termination  costs                              |       | —                               |       | — |   | 1.4 |   |
| Total other  expense, net                            |       | 4.8                                  |       | 4.3 |   | 4.8 |   |
| (Loss) income  before income tax provision (benefit) |       | (1.0                                 | )          | 1.6 |   | 1.4 |   |
| Net (loss) income                                    |       | (0.6                                 | )          | 2.5 |   | 4.2 |   |

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(1)                                  FiscalYear 2006 Combined is comprised of 53 weeks and Fiscal Years 2005 and 2004 arecomprised of 52 weeks.

**FiscalYear 2006 Combined Compared to Fiscal Year 2005**

*TotalRevenues*. Total revenues increased by $30.4 million, or 5.7%,to $564.7 million in Fiscal Year 2006 Combined from $534.3 million in FiscalYear 2005 due to a $21.2 million increase in restaurant revenues, an $8.9million increase in other revenues and a $0.2 million increase in royalty andfranchise fees. The Fiscal Year 2006 Combined increase in restaurant revenueswas the result of an extra week of operations in 2006 versus 2005, which contributedapproximately $10.2 million in additional sales combined with the fact that dueto the date of the Chevys Acquisition, 2005 restaurant sales do not includesixteen days of Chevys restaurant sales. Comparable store sales, excluding Chevys, were up 2.2%.  Excluding the 53rd week, comparable store sales excluding Chevyswere up approximately 0.4%.  The $10.8million increase in other revenues was primarily due to an increase in sales tooutside customers by our distribution facility. The $0.2 million increase inroyalty and franchise fees was due to a complete year of fees earned fromfranchises acquired in the Chevys Acquisition in 2006 versus a partial year in2005 due to the date of the Chevys Acquisition.

*Costof Sales*. Total cost of sales of $145.2 million in FiscalYear 2006 Combined increased $8.1 million or 5.9% as compared to Fiscal Year2005, primarily due to the inclusion in our results of operations of the Chevysrestaurants’ cost of sales for a complete year in 2006 versus a partial year in2005 and a 53rd week of costs in 2006, combined with highercosts associated with the increase in sales to outside customers by ourdistribution facility and higher commodity costs. As a percentage of totalrevenues, cost of sales was unchanged versus Fiscal Year 2005 at 25.7%.

*Labor*.Labor costs of $193.5 million in Fiscal Year 2006 Combined increased by $7.1million or 3.8% as compared to Fiscal Year 2005. The increase in labor costswas partially due to the full year of Chevys expense in 2006 and a 53rd week of costs in 2006 combined with managementsalary increases averaging 4.0% in 2006. Payroll and benefits, particularly wage rates currently at or near theminimum wage and expenses for health insurance and workers’ compensationinsurance, remain subject to increase as a result of inflation and governmentregulation. As a percent of total revenues, labor costs decreased to 34.3% inFiscal Year 2006 Combined from 34.9% in Fiscal Year 2005 primarily due to lowerhourly labor expense achieved as a result of our continued focus on hourlylabor controls and scheduling combined with lower workers’ compensationinsurance premium and claims expense as a percentage of sales.

*DirectOperating and Occupancy Expense*. Direct operating andoccupancy expense of $134.6 million in Fiscal Year 2006 Combined increased by$4.0 million or 3.1% as compared to Fiscal Year 2005. The increase in directoperating and occupancy expense was partially due to the inclusion in ourresults of operations of the Chevys restaurants’ direct operating and occupancyexpense for a complete year in 2006 versus a partial year in 2005 and a 53rd week of costs in 2006.  Direct operating and occupancy expense as apercentage of sales decreased to 23.8% in Fiscal Year 2006 Combined from 24.4%in Fiscal Year 2005 primarily due to lower general liability insurance expensein Fiscal Year 2006 Combined.

*Generaland Administrative Expense*. General and administrativeexpense of $30.3 million in Fiscal Year 2006 Combined increased by $2.0 millionor 6.9% as compared to Fiscal Year 2005 primarily due to management salaryincreases averaging 4.0% in 2006 combined with higher bonus and employeebenefits expense and a 53rd week of costs in 2006 versus 52 in 2005,.General and administrative expense as a percentage of sales was 5.4% in FiscalYear 2006 Combined as compared to 5.3% in Fiscal Year 2005.

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*LegalSettlement Costs.*We incurred legal settlement costs of $4.2million in Fiscal Year 2006 Combined compared to $0.8 million in Fiscal Year2005. The increase in costs relates to lawsuits filed against us in 2004 and2005.

*Depreciationand amortization*. Depreciation and amortization expense of $20.7million in Fiscal Year 2006 Combined increased $2.3 million or 11.9% ascompared to Fiscal Year 2005.  $1.1million of the increase was due to an increase in fair market value recordedfor  property and equipment, and the resulting increase in depreciationand amortization expense, as the Merger was accounted for under the purchasemethod of accounting and, accordingly, the purchase price was allocated to theassets acquired and the liabilities assumed based on the estimated fair marketvalues at the date of the Merger.  As apercentage of total revenues, depreciation and amortization increased to 3.7%in Fiscal Year 2006 Combined from 3.5% in Fiscal Year 2005.

*InterestExpense*. Interest expense of $26.5 million in Fiscal Year2006 Combined increased $3.5 million or 15.3% as compared to Fiscal Year 2005primarily due to an increase in the interest rate on our Old Senior UnsecuredCredit Facility (the interest rate in 2005 ranged from 11.93% to 13.37%, versus14.17% to 14.92% during 2006), a 0.25% increase in the interest rate on our seniorsecured notes beginning on April 1, 2006, and the fact that our Old SeniorUnsecured Credit Facility was outstanding for 16 days more in Fiscal Year 2006Combined versus Fiscal Year 2005.  As apercentage of total revenues, interest expense increased to 4.7% in Fiscal Year2006 Combined from 4.3% in Fiscal Year 2005.

*Merger Costs.*Merger costs of $9.7 million in Fiscal Year 2006 Combined include all directcosts related to the Merger that are not eligible for capitalization includinglegal expenses, investment banker fees, other advisory services, restrictedstock compensation and other costs.

*IncomeTax Provision.* The income tax provision for Fiscal Year 2006Combined and 2005 was based on estimated annual effective tax rates. A rate of34.6% was applied in Fiscal Year 2006 Combined versus a rate of (54.3)% inFiscal Year 2005.  These rates arecomprised of the combined federal and state statutory rates. The difference inrates results from the reversal of a valuation allowance against net deferredtax assets in 2005.

**FiscalYear 2005 Compared to Fiscal Year 2004**

*TotalRevenues*. Total revenues increased by $207.5 million, or63.5%, to $534.3 million in Fiscal Year 2005 from $326.8 million in Fiscal Year2004 due to a $195.9 million increase in restaurant revenues, a $9.7 millionincrease in other revenues and a $1.9 million increase in royalty and franchisefees. The Fiscal Year 2005 increase in restaurant revenues was the result ofthe inclusion in our results of operations of the Chevys’ restaurant sales of$191.3 million combined with comparable store sales increases of 2.9%. Theincrease in comparable store sales was driven by increases in pricing in ElTorito concept restaurants of approximately 1.2% and in Acapulco conceptrestaurants of approximately 1.9%, increases in customer counts of 2.0% in theEl Torito restaurants and decreased discounting in the Acapulco restaurants.The $2.9 million increase in other revenues was primarily due to an increase insales to outside customers by our distribution facility. The $1.2 millionincrease in royalty and franchise fees was due to fees earned from franchisesacquired in the Chevys Acquisition.

*Costof Sales*. Total cost of sales of $137.2 million in FiscalYear 2005 increased $56.3 million or 69.7% as compared to Fiscal Year 2004,primarily due to the inclusion in our results of operations of the Chevysrestaurants’ cost of sales of $47.9 million combined with higher costsassociated with the increase in sales to outside customers by our distributionfacility and higher commodity costs. As a percentage of total revenues, cost ofsales increased to 25.7% in Fiscal Year 2005 from 24.7% in Fiscal Year 2004primarily due to higher commodity costs, mainly in the poultry, beef and dairymarkets, and an increase in packaging costs.

*Labor*.Labor costs of $186.4 million in Fiscal Year 2005 increased by $67.5 million or56.8% as compared to Fiscal Year 2004. The increase in labor costs associatedwith the inclusion in our results of operations of the Chevys restaurants was$67.8 million. Payroll and benefits, particularly wage rates currently at ornear the minimum wage and expenses for health insurance and workers’compensation insurance, remain subject to inflation and government regulation.As a percent of total revenues, labor costs decreased to 34.9% in Fiscal Year2005 from 36.4% in Fiscal Year 2004 primarily due to lower hourly labor expenseachieved as a result of our continued focus on hourly labor controls andscheduling.

*DirectOperating and Occupancy Expense*. Direct operating andoccupancy expense of $130.6 million in Fiscal Year 2005 increased by $53.8million or 70.1% as compared to Fiscal Year 2004. The increase in directoperating and occupancy expense associated with the inclusion in our results ofoperations of the Chevys restaurants was $54.8 million. Direct operating andoccupancy expense as a percentage of sales increased to 24.4% in Fiscal Year2005 from 23.5% in Fiscal Year 2004 primarily due to higher occupancy expense associatedwith the Chevys restaurants.

*Generaland Administrative Expense*. General and administrativeexpense of $28.3 million in Fiscal Year 2005 increased by $10.6 million or59.9% as compared to Fiscal Year 2004, primarily due to increased staffing associatedwith the Chevys Acquisition. General and administrative expense as a percentageof sales decreased to 5.3% in Fiscal Year 2005 as compared to 5.4% in FiscalYear 2004.

*Depreciationand amortization*. Depreciation and amortization expense of$18.5 million in Fiscal Year 2005 increased $6.7 million or 56.3% as comparedto Fiscal Year 2004. The increase associated with the inclusion in our resultsof operations of the Chevys restaurants was $6.9 million. As a percentage oftotal revenues, depreciation decreased to 3.5% in Fiscal Year 2005 from 3.6% inFiscal Year 2004, primarily due to fully depreciated assets with a 5-year lifeacquired in the El Torito acquisition in June 2000.

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*InterestExpense*. Interest expense of $23.0 million in Fiscal Year2005 increased $10.4 million or 83.4% as compared to Fiscal Year 2004 primarilydue to interest on our $75.0 million Old Senior Unsecured Credit Facility whichwas used to finance a portion of the Chevys Acquisition and an increase ininterest on letters of credit issued as security for contracts assumed inconnection with the Chevys Acquisition. As a percentage of total revenues,interest expense increased to 4.3% in Fiscal Year 2005 from 3.8% in Fiscal Year2004.

*IncomeTax Provision.* The income tax provision for the Fiscal Year2005 and Fiscal Year 2006 was based on estimated annual effective tax rates. Arate of (54.3) % was applied in Fiscal Year 2005 versus a rate of (202.7) % inFiscal Year 2004.  These rates are comprisedof the combined federal and state statutory rates. In both years, a portion ofa previously recorded valuation allowance was reversed as it was deemed morelikely than not that the Company would be able to utilize the benefit of itsdeferred tax assets based on estimated future taxable income for the threesucceeding fiscal years.

**Liquidityand Capital Resources**

Our principalliquidity requirements are to service our debt and meet our capital expenditureand working capital needs. Our indebtedness at December 31, 2006, includingobligations under capital leases and unamortized debt premium, was $183.9million, and we had $7.1 million of revolving credit availability under our$15.0 million Old Senior Secured Revolving Credit Facility. Our ability to makeprincipal and interest payments and to fund planned capital expenditures willdepend on our ability to generate cash in the future, which, to a certainextent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control. Based on our currentlevel of operations, we believe our cash flow from operations, available cashand available borrowings under our New Senior Secured Revolving Credit Facilitywill be adequate to meet our liquidity needs for the near future. In addition,we may partially fund restaurant openings through credit received from tradesuppliers and landlord allowances, if favorable terms are available. We cannotassure you, however, that our business will generate sufficient cash flow fromoperations or that future borrowings will be available to us under our NewSenior Secured

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

**WorkingCapital and Cash Flows**

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

*OperatingActivities*. We had net cash provided by operating activitiesof $24.8 million for Fiscal Year 2006 Combined compared with net cash providedby operating activities of $31.4 million for Fiscal Year 2005. The decrease incash provided by operating activities was primarily attributable to the $9.7million in Merger costs which were partially offset by a $3.1million increasein other cash flows from operations. We had net cash provided by operatingactivities of $31.4 million for Fiscal Year 2005 compared with net cashprovided by operating activities of $21.3 million for Fiscal Year 2004. Theincrease in cash provided by operating activities was primarily attributable tothe cash flow generated from restaurants acquired in the Chevys Acquisition,net of increases in related overhead.

*InvestingActivities*. We had net cash used in investing activities of$24.1 million for Fiscal Year 2006 Combined compared with net cash used ininvesting activities of $98.9 million for Fiscal Year 2005. The decrease incash used by investing activities was primarily the result of the absence ofFiscal Year 2005 costs of the Chevys Acquisition of $76.2 million (net of cashacquired of $3.9 million) reduced by an increase in additions to property andequipment of $0.7 million. We had net cash used in investing activities of$98.9 million for Fiscal Year 2005 compared with net cash provided by investingactivities of $3.2 million for Fiscal Year 2004. The increase in cash used byinvesting activities was primarily the result of the costs of the 2005 ChevysAcquisition of $76.2 million (net of cash acquired of $3.9 million), anincrease in additions to property and equipment of $14.2 million and a decreasein proceeds from the sale of property of $12.5 million, as we had asale-leaseback transaction in 2004 which generated approximately $12.1 millionin net proceeds.

We expect to makecapital expenditures totaling approximately $29.3 million in Fiscal Year 2007.Approximately $3.5 million is expected to be spent on restaurant remodels andrefurbishment and approximately $13.7 million is expected to be used to buildor complete the building of eight new El Torito, El Torito Grill or Chevysrestaurants. We expect pre-opening expenses associated with these newrestaurants to total approximately $1.6 million. We expect Fiscal Year 2007capital expenditures for information technology to be approximately $2.3million, including approximately $1.5 million for restaurant point of sale andback office equipment.. In 2007, we will move the existing manufacturingfacility of Real Mex Foods to a new, larger, location and expect the cost tofinish out and equip the new facility to be approximately $3.3 million. Maintenancecapital expenditures for our restaurants are expected to be approximately $6.5million. These and other similar costs may be higher in the future due toinflation and other factors. We expect to fund the expenditures for newrestaurants and other capital expenditures described above from cash flow fromoperations, available cash, available borrowings under our senior creditfacility, landlord allowances (if favorable terms are available) and tradefinancing received from trade suppliers.

*FinancingActivities*. We had net cash used in financing activities of$12.8 million for Fiscal Year 2006 Combined compared with net cash provided byfinancing activities of $71.7 million in Fiscal Year 2005. The increase in netcash used by financing activities was primarily due to the absence of theissuance of the $75.0 million senior secured note issued in Fiscal Year 2005.In Fiscal Year 2006 Combined, cash was provided by borrowings under our line ofcredit of $8.0 million and cash was used to pay our parent a $10.0 milliondividend, pay financing costs of $0.9 million and repay principal onoutstanding debt of $10.3 million, $10.0 million of which was associated withthe amendment and restatement of the $75.0 million senior unsecured note to a $65.0million senior unsecured note. We had net cash provided by financing activitiesof $71.7 million for Fiscal Year 2005 compared with net cash used in financingactivities of $16.4 million for Fiscal Year 2004. The increase in net cashprovided by financing activities was primarily attributable to the 2005issuance of a $75.0 million senior unsecured note in connection with the ChevysAcquisition which was reduced by $3.0 million in financing costs attributableto the issuance of the note.

**Debt andOther Obligations**

On March 31,2004, we sold $105.0 million aggregate principal amount of our senior securednotes. At the closing of the sale of our senior secured notes, we used theproceeds from the sale of these notes and the sale-leaseback transaction to repayterm loans then outstanding under our prior credit facility of $70.2 millionand subordinated notes of $44.4 million in full, and entered into a new seniorsecured credit facility. In connection with the retirement of our term loansthen outstanding, we took a charge of $4.7 million consisting of deferredfinancing costs and discounts on the retired debt and termination of aninterest rate swap agreement at a cash cost of $0.2 million. As a result of theMerger and under purchase accounting rules we recorded $4.2 million ofunamortized debt premium as additional debt related to our senior secured notesas the fair market value of the debt on the Merger date was greater than itscarrying value.

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*SeniorSecured Revolving Credit Facility*. On March 31, 2004, the Company retired the then existing revolvingcredit and term loan agreement and entered into a new amended and restatedrevolving credit agreement providing for $30.0 million of senior secured creditfacilities with a lead bank acting as Lead Arranger and Administrative Agent.The revolving credit agreement included a $15.0 million letter of creditfacility and a $15.0 million revolving credit facility that could be used forletters of credit.

On October 5, 2006, theCompany entered into an amended and restated revolving credit facility,pursuant to which its existing $15.0 million revolving credit facility and$15.0 million letter of credit facility, was increased to a $15.0 millionrevolving credit facility (the “Old Senior Secured Revolving Credit Facility”)and a $25.0 million letter of credit facility (the “Old Senior Secured Letterof Credit Facility”, together with the Old Senior Secured Revolving CreditFacility, the “Old Senior Secured Revolving Credit Facilities”) maturing onOctober 5, 2008, pursuant to which the Lenders agreed to make loans and issueletters of credit to the Company and its subsidiaries, all of the proceeds ofwhich were to be used for working capital purposes. Bank of Montreal acted asadministrative agent with respect to the old Senior Secured Revolving CreditFacilities.

On January 29,2007, the Company entered into a Second Amended and Restated Credit Agreementpursuant to which the Old Senior Secured Revolving Credit Facilities wererefinanced with a new Agent and Administrative Agent, General Electric CapitalCorporation, and a new $15.0 million revolving credit facility (the “New SeniorSecured Revolving Credit Facility”) and $25.0 letter of credit facility (the “NewSenior Secured Letter of Credit Facility”, together with the New Senior SecuredRevolving Credit Facility, the “New Senior Secured Revolving Credit Facilities”),maturing on January 29, 2009, were put into place, pursuant to which theLenders agree to make loans and issue letters of credit to and on behalf of theCompany and its subsidiaries.

Obligations underthe New Senior Secured Revolving Credit Facilities are guaranteed by all of theCompany’s subsidiaries as well as by RM Restaurant Holding Corp., which whollyowns the Company and has made a first priority pledge of all of its equityinterests in the Company as security for the Obligations.  Interest on theNew Senior Secured Revolving Credit Facilities accrues pursuant to anApplicable Margin as set forth in the Second Amended and Restated Credit Agreement. The New Senior Secured Revolving Credit Facilities are secured by, amongother things, first priority pledges of all of the equity interests of theCompany’s direct and indirect subsidiaries, and first priority securityinterests (subject to customary exceptions) in substantially all of the currentand future property and assets of the Company and its direct and indirectsubsidiaries, with certain limited exceptions.  In connection with theCompany’s entrance into the New Senior Secured Revolving Credit Facilities onJanuary 29, 2007, the Company borrowed $7.4 million under the New SeniorSecured Revolving Credit Facility, the proceeds of which were used to pay downexisting revolving borrowings under the Old Senior Secured Revolving CreditFacility.

Our New SeniorSecured Revolving Credit Facilities contain various affirmative and negativecovenants and restrictions, which among other things, require us to meetcertain financial tests (including certain leverage and cash flow ratios), andlimits our and our subsidiaries’ ability to incur or guarantee additionalindebtedness, make certain capital expenditures, pay dividends or make otherequity distributions, purchase or redeem capital stock, make certaininvestments, enter into arrangements that restrict dividends from subsidiaries,sell assets, engage in transactions with affiliates and effect a consolidationor merger. We are required to maintain a cash flow ratio determined on anannual basis equal to 1.70 to 1.00 until maturity. Pursuant to the termsof the Senior Secured Revolving Credit Facility, cash flow ratio is defined asthe ratio of (a) Consolidated Cash Flow (as defined therein) to(b) Consolidated Financial Obligations (as defined therein).

The Company was incompliance with all specified financial and other covenants under the OldSenior Secured Revolving Credit Facilities at December 31, 2006.

*SeniorUnsecured Credit Facility*. *.*On January 11, 2005, we entered into a $75.0 million senior unsecured creditfacility (the “Old Senior Unsecured Credit Facility”) consisting of a singleterm loan maturing on December 31, 2008, all of the proceeds of which were usedto finance a portion of the cash consideration for the Chevys Acquisition andpay related fees and expenses. On October 5, 2006, the Company entered into anamended and restated senior unsecured credit facility, pursuant to which theOld Senior Unsecured Credit Facility was decreased to a $65.0 million seniorunsecured credit facility (the “ New Senior Unsecured Credit Facility”), consistingof a single term loan maturing on October 5, 2010. All of the proceeds of theNew Senior Unsecured Credit Facility were used to repay in full any term loansoutstanding under the Old Senior Unsecured Credit Facility and not continued onthe restatement date.  The total amountof term loans repaid was $10.0 million. Obligations under the New SeniorUnsecured Credit Facility are guaranteed by all of the Company’s subsidiaries.Interest on the term loan outstanding under the New Senior Unsecured Credit Facilityaccrues, at the Company’s option, at either (i) the greater of the prime rateor the rate which is 0.5% in excess of the federal funds rate, plus 4.0% or(ii) a reserve adjusted Eurodollar rate, plus 5.0%. As of December 31, 2006,the interest rate on the New Senior Unsecured Credit Facility’s term loan was10.35%.

Our New SeniorUnsecured Credit Facility contains various affirmative and negative covenantswhich, among other things, require us to meet certain financial tests(including certain leverage and interest coverage ratios) and limits our andour subsidiaries’ ability to incur or guarantee additional indebtedness, grantcertain liens, make certain restricted payments, make capital expenditures,engage in transactions with affiliates, make certain investments, sell ourassets, make acquisitions, effect a consolidation or merger and amend or modifyinstruments governing certain indebtedness (including relating to our seniorsecured notes and the Senior Secured Revolving Credit Facilities). We arerequired to maintain certain minimum interest coverage ratios ranging from(i) 2.00 to 1.00 for the fiscal quarter ending on or prior to December 31,2006,  (ii) 2.15 to 1.00 for thefiscal quarters ending on or prior to March 31, 2007 through December 31,2007, and (iii) 2.30 to 1.00 thereafter until maturity. Pursuant to theterms of the New Senior 

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Unsecured CreditFacility, the 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. TheCompany was in compliance with all specified financial and other covenantsunder the New Senior Unsecured Credit Facility at December 31, 2006.

*SeniorSecured Notes due 2010*. Interest on our senior secured notesaccrues at a rate of contract rate of 10% per annum. (The current interest rateis 10.25% as in Fiscal Year 2005 the Company exceeded the capital expenditurelimit under the indenture governing the Notes and as a result is required topay interest at a rate of 10.25% for the period April 1, 2006 throughMarch 31, 2007, a 0.25% increase in the stated rate. Exceeding thiscapital expenditure limit does not constitute a default with respect to thenotes or the indenture.) Interest is payable semiannually on April 1 andOctober 1 of each year. Our senior secured notes are fully andunconditionally guaranteed on a senior secured basis by all of our present andfuture domestic subsidiaries which are restricted subsidiaries under theindenture governing our senior secured notes. Our senior secured notes andrelated guarantees are secured by substantially all of our and our domesticrestricted subsidiaries’ tangible and intangible assets, subject to the priorranking claims on such assets by the lenders under our New Senior SecuredRevolving Credit Facilities. The indenture governing our senior secured notescontains various affirmative and negative covenants, subject to a number ofimportant limitations and exceptions, including but not limited those limitingour ability to incur additional indebtedness, make capital expenditures, paydividends, redeem stock or make other distributions, issue stock of oursubsidiaries, make certain investments or acquisitions, grant liens on assets,enter into transactions with affiliates, merge, consolidate or transfersubstantially all of our assets, and transfer and sell assets. The covenant thatlimits our incurrence of indebtedness requires that, after giving effect to anysuch incurrence of indebtedness and the application of the proceeds thereof,our fixed charge coverage ratio as of the date of such incurrence will be atleast 2.50 to 1.00 in the case of any incurrence after April 1, 2006. Theindenture defines consolidated fixed charge coverage ratio as the ratio ofConsolidated Cash Flow (as defined therein) to Fixed Charges (as definedtherein). The Company was in compliance with all specified financial and othercovenants under the senior secured notes indenture at December 31, 2006.

We can redeem oursenior secured notes on or after April 1, 2007, except that we may redeemup to 35% of our senior secured notes before April 1, 2007 with theproceeds of one or more public equity offerings. We are required to offer toredeem our senior secured notes under certain circumstances involving a changeof control. Additionally, if we or any of our domestic restricted subsidiariesengage in assets sales, we generally must either invest the net cash proceedsfrom such sales in our business within 360 days, prepay the indebtednessobligations under our New Senior Secured Revolving Credit Facility or certainother secured indebtedness or make an offer to purchase a portion of our seniorsecured notes.

On June 9,2004, we filed a registration statement with respect to notes havingsubstantially identical terms as our senior secured notes, as part of an offerto exchange registered notes for these notes. We completed the exchange offerfor 100% of our senior secured notes on June 7, 2005.

On September 19,2006, the Company  commenced a change ofcontrol offer (the “Offer”) to purchase any or all of its notes that remainoutstanding under the indenture dated March 31, 2004 (the “Indenture”) by andamong the Company, the guarantors thereto and Wells Fargo Bank, NationalAssociation, as trustee. The Offer was made pursuant to Section 4.15 of theIndenture as the Merger constituted a “change of control” under the Indenture.In accordance with the terms of the Indenture, the Company offered torepurchase the notes at a purchase price in cash equal to 101% of the aggregateprincipal amount of the notes or portion of notes validly tendered for paymentthereof, plus accrued and unpaid interest up to, but not including, the date ofpayment, upon the terms and subject to the conditions of the Offer. The offerexpired on October 19, 2006. No notes were tendered pursuant to the offer andas of the expiration date of the Offer, $105 million aggregate principal amountof notes remained outstanding.

As a result of theMerger and under purchase accounting rules we recorded $4.2 million ofunamortized debt premium as additional debt related to our senior secured notesas the fair market value of the debt on the Merger date was greater than itscarrying value. The premium will be amortized to interest expense over theremaining life of the debt.

*Mortgage.*Concurrently with the closing of the Chevys Acquisition, we assumed a $0.8million 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. As of December 31, 2006, the principal amount dueon the mortgage was $0.7 million.

*CapitalLeases*. In conjunction with our acquisition of El Torito, weassumed capital lease obligations, collateralized with leasehold improvements,in an aggregate amount of $9.2 million. The remaining capital lease obligationshave a weighted-average interest rate of 9.4%. As of December 31, 2006, theprincipal amount due relating to capital lease obligations was $1.0 million.Principal and interest payments on the capital lease obligations are duemonthly and range from $750 to $7,000 per month. The capital lease obligationsmature between 2007 and 2025.

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The followingtables represent our contractual commitments as of December 31, 2006 associatedwith obligations under debt agreements, other obligations discussed above andfrom our operating leases:
| ** **                            | ** ** | **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)        |       | $                              | 179,109    |                            | $          | 8,401              |       | $                  | 192        |                             | $          | 170,166 |   | $ | 350 |   |
| Capital Lease  Obligations            |       | 1,388                          |       | 313                             |       | 561                |       | 159                |       | 355                              |       |
| Operating Lease  Obligations(2)       |       | 253,827                        |       | 39,400                          |       | 71,250             |       | 52,593             |       | 90,584                           |       |
| Purchase  Obligations                 |       | 23,786                         |       | 23,786                          |       | —             |       | —             |       | —                           |       |
|                                  |       |                           |       |                            |       |               |       |               |       |                             |       |
| Total                                 |       | $                              | 458,110    |                            | $          | 71,900             |       | $                  | 72,003     |                             | $          | 222,918 |   | $ | 91,289 |   |

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(1)                                  Includesour senior secured notes, unsecured term loan, Old Senior Secured Revolving CreditFacility and an obligation to a vendor.

(2)                                  Inaddition to the base rent, many of our leases contain percentage rent clauses,which obligate us to pay additional rents based on a percentage of sales, whensales levels exceed a contractually defined base. We recorded such additionalrent expenses of $2,661 in Fiscal Year 2006 Combined, $2,517 in Fiscal Year2005 and $2,218 in Fiscal Year 2004. Operating Lease Obligations do not reflectpotential renewals or replacements of expiring leases.

**Inflation**

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

**CriticalAccounting Policies**

Our Company’saccounting policies are fully described in Note 4 of the Consolidated FinancialStatements. As disclosed in Note 4, the discussion and analysis of ourfinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, we evaluate ourestimates, including those related to property and equipment, impairment oflong-lived assets, valuation of goodwill, self-insurance reserves, income taxesand revenue recognition. We base our estimates on historical experience and on variousother assumptions 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 ongoing review, we plan to adjust ourjudgments and estimates where facts and circumstances dictate. Actual resultscould differ from our estimates.

We believe thefollowing critical accounting policies are important to the portrayal of ourfinancial condition and results and require our management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain.

**Propertyand Equipment**

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

**Long-LivedAsset Impairment**

We assess theimpairment of long-lived assets, including restaurant sites and other assets,when events or changes in circumstances indicate that the carrying value of theassets or the asset group may not be recoverable. The asset impairment reviewassesses the fair value of the assets based on the future cash flows the assetsare expected to generate. An impairment loss is recognized when estimatedundiscounted future cash flows expected to result from the use of the assetplus net proceeds expected from the disposition of the asset (if any) are lessthan the related asset’s carrying amount. Impairment losses are measured as theamount by which the carrying amounts of the assets exceed their fair values.The net proceeds expected from the disposition of the asset are determined byindependent quotes or expected sales prices developed by internal specialists.Estimates of future cash flows and expected sales prices are judgments based onour experience and knowledge of local operations. These estimates can besignificantly affected by future changes in real estate market conditions, theeconomic environment, and capital spending decisions and inflation.

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For properties tobe closed that are under long-term lease agreements, the present value of anyremaining liability under the lease, discounted using risk-free rates and netof expected sublease rentals that could be reasonably obtained for theproperty, is recognized as a liability and expensed. The value of any equipmentand leasehold improvements related to a closed store is reduced to reflect netrecoverable values. Internal specialists estimate the subtenant income, futurecash flows and asset recovery values based on their historical experience andknowledge of (1) the market in which the store to be closed is located,(2) the results of its previous efforts to dispose of similar assets and(3) the current economic conditions. Specific real estate markets, theeconomic environment and inflation affect the actual cost of disposition forthese leases and related assets.

During Fiscal Year2006 Combined, Fiscal Year 2005 and Fiscal Year 2004, our management determinedthat certain identified property and equipment was impaired. Management wrote theproperty down by $1.2 million, $0.6 million and $0.2 million, respectively, toits estimated fair value by increasing accumulated depreciation andamortization and recording a loss on impairment of property and equipment.

**Valuationof Goodwill**

Goodwill is testedannually for impairment, and is tested for impairment more frequently if eventsand circumstances indicate that the asset might be impaired. Managementperforms its annual impairment test during the last quarter of the Company’sfiscal year. An impairment loss is recognized to the extent that the carryingamount exceeds the asset’s fair value. We consider the reporting unit level tobe the Company level, as the components (e.g., brands) within our Company havesimilar economic characteristics, including production processes, types orclasses of customers and distribution methods. This determination is made atthe reporting unit level and consists of two steps. First, our managementdetermines the fair value of a reporting unit and compares it to its carryingamount. Second, if the carrying amount of a reporting unit exceeds its fairvalue, an impairment loss is recognized for any excess of the carrying amountof the reporting unit’s goodwill over the implied fair value of the goodwill.The implied fair value of goodwill is determined by allocating the fair valueof the reporting unit in a manner similar to a purchase price allocation, inaccordance with Statement of Financial Accounting Standards No. 141, “BusinessCombinations”. The residual fair value after this allocation is the impliedfair value of the reporting unit goodwill.

Factors that couldchange the result of our goodwill impairment test include, but are not limitedto, different assumptions used to forecast future revenues, expenses, capitalexpenditures and working capital requirements used in our cash flow models. Inaddition, selection of a risk-adjusted discount rate on the estimatedundiscounted cash flows is susceptible to future changes in market conditions,and when unfavorable, can adversely affect our original estimates of fairvalues. A variance in the discount rate could have a significant impact on thevaluation of the goodwill for purposes of the impairment test. We cannotpredict the occurrence of certain future events that might adversely affect thereported value of goodwill. Such events include, but are not limited to,strategic decisions made in response to the economic environment on ourcustomer base or a material negative change in relationships with ourcustomers. Our annual impairment tests of goodwill were performed as of August21, 2006, in conjunction with the fair market valuation of the assets acquiredin the Merger, and it was determined that the recorded amounts for goodwill arerecoverable and that no impairment existed.

**Self-Insurance**

Our business isprimarily self-insured for workers’ compensation and general liability costs.Our recorded self-insurance liability is determined actuarially based on claimsfiled and an estimate of claims incurred but not yet reported. Any actuarialprojection of ultimate losses is subject to a high degree of variability.Sources of this variability are numerous and include, but are not limited to,future economic conditions, court decisions and legislative actions. Ourworkers’ compensation future funding estimates anticipate no change in thebenefit structure. Statutory changes could have a significant impact on futureclaim costs.

Our workers’compensation liabilities are from claims occurring in various states.Individual state workers’ compensation regulations have received a tremendousamount of attention from state politicians, insurers, employers and providers,as well as the public in general. Recent years have seen an escalation in thenumber of legislative reforms, judicial rulings and social phenomena affectingour business. The changes in a state’s political and economic environmentincrease the variability in the unpaid claim liabilities.

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**IncomeTaxes**

Our Company utilizes the liability method ofaccounting for income taxes as set forth in SFAS No. 109, “Accounting forIncome Taxes.” Under the liability method, deferred taxes are determined basedon the difference between the financial statement and the tax basis of assetsand liabilities using enacted tax rates in effect in the years in which thedifferences are expected to reverse. Recognition of deferred tax assets islimited to amounts considered by management to be more likely than not to berealizable in future periods. We have significant deferred tax assets, whichare subject to periodic recoverability assessments. In accordance with SFASNo. 109, net deferred tax assets are reduced by a valuation allowance if,based on all the available evidence, it is more likely than not that some orall of the deferred tax assets will not be realized. No valuation allowance hasbeen provided for at December 31, 2006. The amount of deferred tax assetsconsidered realizable was based upon our ability to generate future taxableincome, exclusive of reversing temporary differences and carry-forwards. Thetax benefits recorded in Fiscal Years 2005 and 2004 are related to thereduction of our valuation allowance related to our net deferred tax assets.

The purchase accounting adjustments for the ChevysAcquisition have not been fully reflected in the deferred tax balances as ofDecember 31, 2006 as the final tax returns for the seller, Chevy’s Restaurant,Inc., have not been filed. Until the tax returns are filed, we are unable todetermine the carryover basis of assets, liabilities, and net operating losscarry-forwards at the date of acquisition. Upon completion of the sellers’final tax returns for the periods ending before the Chevys Acquisition, theCompany will assess and record the carryover basis of certain temporarydifferences. We believe that the carryover basis of such deferred tax assetsand liabilities, if any, would have a full valuation allowance recorded againstthe net deferred asset, as, based on the weight of available evidence, webelieve it is more likely than not that a significant portion of the deferredtax assets would not be realized in the near future.

 In evaluating future taxable income forvaluation allowance purposes as of December 31, 2006, we concluded that it wasappropriate to consider only income expected to be generated in fiscal years2007, 2008 and 2009. We may be required to adjust the allowance, if, based onestimates of future income, we conclude that a valuation allowance iswarranted. An increase in the valuation allowance would result in a correspondingcharge to income tax expense in the period the allowance is increased.

**RevenueRecognition**

Revenues from the operation of Company-ownedrestaurants are recognized when sales occur. Fees from franchised and licensedrestaurants are included in revenue as earned. Royalty fees are based onfranchised restaurants’ revenues and we record these fees in the period therelated franchised restaurants’ revenues are earned. Real Mex Foods’ revenuesfrom sales to outside customers are recognized upon delivery, when titletransfers to the customer, and are included in other revenues.

**RecentAccounting Pronouncements**

In September 2006,the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans-AnAmendment of FASB Statements No. 87, 88, 106, and 132R” (SFASNo. 158). SFAS No. 158 requires that the funded status of definedbenefit postretirement plans be recognized on the Company’s balance sheet, andchanges in the funded status be reflected in comprehensive income, effectivefiscal years ending after December 15, 2006. SFAS No. 158 alsorequires the measurement date of the plan’s funded status to be the same as theCompany’s fiscal year-end. The adoption of SFAS No. 158 will have no effectupon the Company.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (SFASNo. 157). The purpose of SFAS No. 157 is to define fair value,establish a framework for measuring fair value and enhance disclosures about fairvalue measurements. The measurement and disclosure requirements are effectivefor the Company beginning in the first quarter of Fiscal Year 2008. The Companyis currently evaluating whether SFAS No. 157 will result in a change toits fair value measurements.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109.” Theinterpretation contains a two step approach to recognizing and measuringuncertain tax positions accounted for in accordance with SFAS No. 109. Thefirst step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates it is more likely than not that theposition will be sustained on audit, including resolution of related appeals orlitigation processes, if any. The second step is to measure the tax benefit asthe largest amount which is more than 50% likely of being realized uponultimate settlement. The provisions are effective for the Company beginning inthe first quarter of Fiscal Year 2007. The Company believes the impact of theadoption of this statement will not have a material effect on its consolidatedfinancial statements.

ITEM 7A.                                           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The inherent riskin market risk sensitive instruments and positions primarily relates topotential losses arising from adverse changes in foreign exchange rates andinterest rates.

We consider theU.S. dollar to be the functional currency for all of our entities. All of ournet sales and our expenses in Fiscal Year 2006 Combined, Fiscal Year 2005 andFiscal Year 2004 were denominated in U.S. dollars. Therefore, foreign currencyfluctuations did not materially affect our financial results in those periods.

We are alsosubject to market risk from exposure to changes in interest rates based on ourfinancing activities. This exposure relates to borrowings under our seniorsecured and unsecured credit facilities that are payable at floating rates ofinterest. As of February 19, 2007, we had borrowings of $11.2 millionoutstanding under our New Senior Secured Revolving Credit Facility. As ofFebruary 19, 2007, we have $65.0 million outstanding under our New SeniorUnsecured Credit Facility. A hypothetical 10% fluctuation in interest rates asof February 19, 2007 would have a net after tax impact of $0.4 million on ourearnings in Fiscal Year 2007, in addition to its effect on cash flows.

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

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`ITEM 8.                                                 FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The audited consolidated financial statements are setforth below.

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of DirectorsReal Mex Restaurants, Inc.

We have auditedthe accompanying consolidated balance sheet of Real Mex Restaurants, Inc.and its subsidiaries (collectively, the “Company”) as of December 31, 2006 andthe related consolidated statements of operations, stockholders’ equity, andcash flows for the period August 21, 2006 to December 31, 2006 (the “SuccessorPeriod”) subsequent to the acquisition of the Company by RM Restaurant Holding Corp.,a majority owned subsidiary of Sun Cantinas LLC. We have also audited theconsolidated balance sheet of the Company as of December 25, 2005 and theconsolidated statements of operations, stockholders’ equity, and cash flows forthe periods ended December 26, 2005 through August 20, 2006, and the yearsended December 25, 2005 and December 26, 2004 (the “Predecessor Periods”),prior to the acquisition of the Company by RM Restaurant Holding Corp. Thesefinancial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the financial statements based on our audits.

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

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of the Company atDecember 31, 2006 and December 25, 2005, and the related results of theiroperations and their cash flows for the Successor and Predecessor Periods, inconformity with accounting principles generally accepted in the United States.

As discussed in Note 8 to the consolidated financialstatements, the Company changed its method of accounting for Share BasedPayments in accordance with Statements of Accounting Financial Standards No.123 (revised 2004) on December 26, 2005.
|                          | /s/ Ernst & Young LLP |
|--------------------------|---------------------------|
| Los Angeles,  California |                      |
| March 16, 2007           |                      |

 

27

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**Real Mex Restaurants, Inc.Consolidated Balance Sheets(In Thousands, Except For Share Data)**
| ** **                                                                                                                                                                                                    | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
|                                                                                                                                                                                                          |       |                        |       |                        |       |
| **Assets**                                                                                                                                                                                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                               |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                           | 2,710      |                        | $          | 14,871 |   |
| Trade receivables, net                                                                                                                                                                                        |       | 8,604                       |       | 8,265                       |       |
| Other receivables                                                                                                                                                                                             |       | 1,572                       |       | 2,289                       |       |
| Related party  receivables                                                                                                                                                                                    |       | 3,591                       |       | —                      |       |
| Inventories                                                                                                                                                                                                   |       | 10,565                      |       | 9,977                       |       |
| Prepaid expenses and  other current assets                                                                                                                                                                    |       | 6,037                       |       | 5,268                       |       |
| Current portion of  favorable lease asset, net                                                                                                                                                                |       | 4,910                       |       | —                      |       |
| Deferred tax asset                                                                                                                                                                                            |       | 8,265                       |       | 3,454                       |       |
| Total current assets                                                                                                                                                                                          |       | 46,254                      |       | 44,124                      |       |
|                                                                                                                                                                                                          |       |                        |       |                        |       |
| Property and equipment,  net                                                                                                                                                                                  |       | 90,802                      |       | 82,592                      |       |
| Goodwill, net                                                                                                                                                                                                 |       | 277,461                     |       | 157,267                     |       |
| Deferred charges                                                                                                                                                                                              |       | 3,939                       |       | 6,354                       |       |
| Deferred tax asset                                                                                                                                                                                            |       | 1,149                       |       | 14,097                      |       |
| Favorable lease asset,  long-term portion, net                                                                                                                                                                |       | 19,827                      |       | —                      |       |
| Other assets                                                                                                                                                                                                  |       | 7,703                       |       | 6,455                       |       |
| Total assets                                                                                                                                                                                                  |       | $                           | 447,135    |                        | $          | 310,889 |   |
|                                                                                                                                                                                                          |       |                        |       |                        |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                                |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                                                          |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                                                              |       | $                           | 23,354     |                        | $          | 26,227 |   |
| Accrued self-insurance  reserves                                                                                                                                                                              |       | 15,877                      |       | 15,916                      |       |
| Accrued compensation  and benefits                                                                                                                                                                            |       | 15,576                      |       | 11,845                      |       |
| Other accrued  liabilities                                                                                                                                                                                    |       | 18,469                      |       | 12,272                      |       |
| Related party payables                                                                                                                                                                                        |       | —                      |       | 228                         |       |
| Current portion of  long-term debt                                                                                                                                                                            |       | 9,573                       |       | 117                         |       |
| Current portion of capital  lease obligations                                                                                                                                                                 |       | 224                         |       | 210                         |       |
| Total current  liabilities                                                                                                                                                                                    |       | 83,073                      |       | 66,815                      |       |
|                                                                                                                                                                                                          |       |                        |       |                        |       |
| Long-term debt, less  current portion                                                                                                                                                                         |       | 173,345                     |       | 180,717                     |       |
| Capital lease  obligations, less current portion                                                                                                                                                              |       | 763                         |       | 987                         |       |
| Other liabilities                                                                                                                                                                                             |       | 5,877                       |       | 11,786                      |       |
| Total liabilities                                                                                                                                                                                             |       | 263,058                     |       | 260,305                     |       |
|                                                                                                                                                                                                          |       |                        |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                                |       | —                      |       | —                      |       |
|                                                                                                                                                                                                          |       |                        |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                    |       |                        |       |                        |       |
| Redeemable  Cumulative Compounding Preferred Stock:                                                                                                                                                           |       |                        |       |                        |       |
| Series A,  12 1/2% — 18,240 shares issued and outstanding at December 25, 2005;  liquidation preference of $35,646 at December 25, 2005;                                                            |       | —                      |       | 35,646                      |       |
| Series B,  13.5% — 12,323 shares issued and outstanding at December 25, 2005;  liquidation preference of $25,365 at December 25, 2005;                                                              |       | —                      |       | 25,365                      |       |
| Series C,  15% — 17,478 shares issued and outstanding at December 25, 2005; liquidation  preference of $58,080 at December 25, 2005;                                                                |       | —                      |       | 58,080                      |       |
| Common stock,  $.001 par value, 1,000 shares authorized, issued and outstanding at  December 31, 2006; 2,000,000 shares authorized and 316,290 shares issued  and outstanding at December 25, 2005; |       | —                      |       | —                      |       |
| Warrants                                                                                                                                                                                                      |       | —                      |       | 4,027                       |       |
| Additional  paid-in capital                                                                                                                                                                                   |       | 199,124                     |       | 16,203                      |       |
| Accumulated  deficit                                                                                                                                                                                          |       | (15,047                     | )          | (88,737                     | )          |
| Total stockholders’  equity                                                                                                                                                                              |       | 184,077                     |       | 50,584                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                               |       | $                           | 447,135    |                        | $          | 310,889 |   |

 

*See notes to consolidated financial statements.*

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**Real Mex Restaurants, Inc.**

**Consolidated Statements of Operations**
| ** **                                                                  | ** ** | **Successor**           | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **August 21,**     | ** ** | **December 26,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **2006 to**        | ** ** | **2005 to**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **December 31,**   | ** ** | **August 20,**   | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
| ** **                                                                  | ** ** | **2006**                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **(In Thousands)** | ** ** |
| Revenues:                                                                   |       |                    |       |                  |       |   |   |   |   |
| Restaurant  revenues                                                        |       | $                       | 179,630    |                  | $          | 351,591 |   | $ | 510,013 |   | $ | 314,157 |   |
| Other revenues                                                              |       | 11,094                  |       | 18,358                |       | 20,532 |   | 10,787 |   |
| Franchise  revenues                                                         |       | 1,374                   |       | 2,603                 |       | 3,751 |   | 1,866 |   |
| Total revenues                                                              |       | 192,098                 |       | 372,552               |       | 534,296 |   | 326,810 |   |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Costs and  expenses:                                                        |       |                    |       |                  |       |   |   |   |   |
| Cost of sales                                                               |       | 50,359                  |       | 94,873                |       | 137,171 |   | 80,839 |   |
| Labor                                                                       |       | 67,729                  |       | 125,748               |       | 186,390 |   | 118,888 |   |
| Direct operating  and occupancy expense                                     |       | 47,651                  |       | 86,937                |       | 130,603 |   | 76,760 |   |
| General and  administrative expense                                         |       | 11,414                  |       | 18,893                |       | 28,346 |   | 17,725 |   |
| Depreciation and  amortization                                              |       | 8,505                   |       | 12,230                |       | 18,498 |   | 11,837 |   |
| Amortization of  favorable lease asset and unfavorable lease liability, net |       | 1,818                   |       | —                |       | — |   | — |   |
| Legal settlement  costs                                                     |       | 19                      |       | 4,180                 |       | 763 |   | — |   |
| Merger costs                                                                |       | 307                     |       | 9,434                 |       | — |   | — |   |
| Pre-opening  costs                                                          |       | 917                     |       | 910                   |       | 524 |   | 295 |   |
| Loss on  impairment of property and equipment                               |       | —                  |       | 1,197                 |       | 568 |   | 167 |   |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Operating income                                                            |       | 3,379                   |       | 18,150                |       | 31,433 |   | 20,299 |   |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Other income  (expense):                                                    |       |                    |       |                  |       |   |   |   |   |
| Interest expense                                                            |       | (10,481                 | )          | (16,005               | )          | (22,973 | ) | (12,528 | ) |
| Casualty gain                                                               |       | —                  |       | —                |       | — |   | 997 |   |
| Debt termination  costs                                                     |       | —                  |       | —                |       | — |   | (4,677 | ) |
| Other (expense)  income, net                                                |       | (1,136                  | )          | 642                   |       | 217 |   | 455 |   |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Total other  expense, net                                                   |       | (11,617                 | )          | (15,363               | )          | (22,756 | ) | (15,753 | ) |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| (Loss) income  before income tax provision                                  |       | (8,238                  | )          | 2,787                 |       | 8,677 |   | 4,546 |   |
|                                                                        |       | —                  |       |                  |       |   |   |   |   |
| Income tax  (benefit) provision                                             |       | (3,191                  | )          | 1,307                 |       | (4,709 | ) | (9,070 | ) |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Net (loss) income  before redeemable preferred stock accretion              |       | (5,047                  | )          | 1,480                 |       | 13,386 |   | 13,616 |   |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Redeemable  preferred stock accretion                                       |       | —                  |       | (10,126               | )          | (14,583 | ) | (11,862 | ) |
|                                                                        |       |                    |       |                  |       |   |   |   |   |
| Net (loss) income  attributable to common stockholders                      |       | $                       | (5,047     | )                     | $          | (8,646 | ) | $ | (1,197 | ) | $ | 1,754 |   |

 

*See notes to consolidated financial statements.*

 

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**Real Mex Restaurants, Inc.Consolidated Statements of Stockholders’ Equity  (in thousands, except for share data)**
| ** **                                              | ** ** | **Predecessor**               | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **Series A  Redeemable** | ** ** | **Series B  Redeemable** | ** ** | **Series C  and  Series D  Redeemable** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Notes  Receivable** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Preferred**                 | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **From** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Stock**                     | ** ** | **Stock** | ** ** | **Stock** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Stockholders** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 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 | ) |
| Repurchase  of common stock                             |       | —                        |       | — |   | — |   | (580 | ) | — |   | — |   | — |   | (53 | ) | — |   | (53 | ) |
| Interest  receivable increase on stockholder notes      |       | —                        |       | — |   | — |   | — |   | — |   | — |   | 22 |   | — |   | — |   | 22 |   |
| Payment  from stockholders on notes receivable          |       | —                        |       | — |   | — |   | — |   | — |   | — |   | 462 |   | — |   | — |   | 462 |   |
| Accretion  on redeemable preferred stock                |       | 3,260                         |       | 2,474 |   | 6,128 |   | — |   | — |   | — |   | — |   | — |   | (11,862 | ) | — |   |
| Net  Income                                             |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 13,616 |   | 13,616 |   |
| Balance at December 26,  2004                           |       | 29,644                        |       | 20,970 |   | 46,544 |   | 274,523 |   | 1 |   | 4,027 |   | — |   | 16,202 |   | (87,539 | ) | 29,849 |   |
| Redemption  of Series A Redeemable Preferred Stock |       | 2064                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 2,064 |   |
| Redemption  of Series B Redeemable Preferred Stock |       | —                        |       | 1,393 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 1,393 |   |
| Issuance  of Series C Redeemable Preferred Stock   |       | —                        |       | — |   | 3,892 |   | — |   | — |   | — |   | — |   | — |   | — |   | 3,892 |   |
| Issuance  of common stock                               |       | —                        |       | — |   | — |   | 41,767 |   | (1 | ) | — |   | — |   | 1 |   | — |   |   |   |
| Accretion  on redeemable preferred stock                |       | 3,938                         |       | 3,002 |   | 7,644 |   | — |   | — |   | — |   | — |   | — |   | (14,584 | ) | — |   |
| Net  income                                             |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 13,386 |   | 13,386 |   |
| Balance at December 25,  2005                           |       | 35,646                        |       | 25,365 |   | 58,080 |   | 316,290 |   | — |   | 4,027 |   | — |   | 16,203 |   | (88,737 | ) | 50,584 |   |
| Issuance  of Series A Redeemable Preferred Stock   |       | 1,897                         |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 1,897 |   |
| Issuance  of Series B Redeemable Preferred Stock   |       | —                        |       | 1,433 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 1,433 |   |
| Issuance  of Series D Redeemable Preferred Stock   |       | —                        |       | — |   | 2,352 |   | — |   | — |   | — |   | — |   | — |   | — |   | 2,352 |   |
| Tax  benefit from employee stock option exercise        |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | 1,800 |   | — |   | 1,800 |   |
| Accretion  on redeemable preferred stock                |       | 2,861                         |       | 2,177 |   | 5,089 |   | — |   | — |   | — |   | — |   | — |   | (10,127 | ) | — |   |
| Net  income                                             |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 1,480 |   | 1,480 |   |
| Balance at August 20, 2006                              |       | $                             | 40,404     |   | $ | 28,975 |   | $ | 65,521 |   | 316,290 |   | $ | — |   | $ | 4,027 |   | $ | — |   | $ | 18,003 |   | $ | (97,384 | ) | $ | 59,546 |   |

 

** **
| ** **                                              | ** ** | **Successor**                 | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **Series A  Redeemable** | ** ** | **Series B  Redeemable** | ** ** | **Series C  Redeemable** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Notes  Receivable** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Preferred**                 | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **From** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Stock**                     | ** ** | **Stock** | ** ** | **Stock** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Stockholders** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Initial capitalization  of the Company, August 21, 2006 |       | $                             | —     |   | $ | — |   | $ | — |   | 1,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 199,124 |   | $ | — |   | $ | 199,124 |   |
| Dividend  distribution to parent                        |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (10,000 | ) | (10,000 | ) |
| Net  loss                                               |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (5,047 | ) | (5,047 | ) |
| Balance at December 31, 2006                            |       | $                             | —     |   | $ | — |   | $ | — |   | 1,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 199,124 |   | $ | (15,047 | ) | $ | 184,077 |   |

 

*See notes to consolidated financial statements.*

30

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**Real Mex Restaurants, Inc.Consolidated Statements of Cash Flows**
| ** **                                                                                           | ** ** | **Successor**                         | ** ** | **Predecessor**                     | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                           | ** ** | **August 21, 2006 to** | ** ** | **December 26, 2005  to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **December 31, 2006**       | ** ** | **August 20, 2006**       | ** ** | **December 25, 2005** | ** ** | **December 26, 2004** | ** ** |
| **Operating  activities**                                                                            | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss)  income                                                                                   |       | $                                     | (5,047     | )                                   | $          | 1,480 |   | $ | 13,386 |   | $ | 13,616 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |                                  |       |                                |       |   |   |   |   |
| Depreciation and amortization                                                                        |       | 8,505                                 |       | 12,230                              |       | 18,498 |   | 11,837 |   |
| Amortization of:                                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Favorable lease asset and unfavorable lease  liability, net                                          |       | 1,818                                 |       | —                              |       | — |   | — |   |
| Deferred financing                                                                                   |       | 2,286                                 |       | 1,179                               |       | 1,712 |   | 929 |   |
| Debt discount                                                                                        |       | —                                |       | —                              |       | — |   | 114 |   |
| Loss (gain) on disposal of property and equipment                                                    |       | 706                                   |       | (19                                 | )          | (204 | ) | (384 | ) |
| Impairment of property and equipment                                                                 |       | —                                |       | 1,197                               |       | 568 |   | 167 |   |
| Tax benefit from employee stock option exercise                                                      |       | —                                |       | 1,800                               |       | — |   | — |   |
| Debt termination costs                                                                               |       | —                                |       | —                              |       | — |   | 4,247 |   |
| Casualty gain                                                                                        |       | —                                |       | —                              |       | — |   | (997 | ) |
| Deferred tax asset                                                                                   |       | (3,218                                | )          | (1,108                              | )          | (4,812 | ) | (9140 | ) |
| Changes in operating assets and liabilities:                                                         |       |                                  |       |                                |       |   |   |   |   |
| Trade and other receivables                                                                          |       | 1,449                                 |       | (1,071                              | )          | (2,473 | ) | 346 |   |
| Inventories                                                                                          |       | (553                                  | )          | (35                                 | )          | (1,979 | ) | (1058 | ) |
| Prepaid expenses and supplies                                                                        |       | (328                                  | )          | (1,525                              | )          | (336 | ) | (113 | ) |
| Related party receivable                                                                             |       | (3,591                                | )          | —                              |       | — |   | — |   |
| Deferred charges, net                                                                                |       | (80                                   | )          | (301                                | )          | (25 | ) | (48 | ) |
| Other assets                                                                                         |       | (107                                  | )          | 912                                 |       | 196 |   | (3003 | ) |
| Accounts payable and accrued liabilities                                                             |       | (5,303                                | )          | 11,400                              |       | 5,403 |   | 4,670 |   |
| Other liabilities                                                                                    |       | 629                                   |       | 1,484                               |       | 1,472 |   | 96 |   |
| Net cash (used  in) provided by operating activities                                                 |       | (2,834                                | )          | 27,623                              |       | 31,406 |   | 21,279 |   |
|                                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| **Investing  activities**                                                                            | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  property and equipment                                                                 |       | (11,080                               | )          | (13,050                             | )          | (23,408 | ) | (9,982 | ) |
| Chevys  Acquisition, net of cash acquired of $3,913                                                  |       | —                                |       | —                              |       | (76,165 | ) | — |   |
| Net proceeds  from disposal of property                                                              |       | —                                |       | —                              |       | 683 |   | 13,170 |   |
|                                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net cash(used  in) provided by investing activities                                                  |       | (11,080                               | )          | (13,050                             | )          | (98,890 | ) | 3,188 |   |
|                                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| **Financing  activities**                                                                            | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net borrowing  under line of credit                                                                  |       | 7,950                                 |       | —                              |       | — |   | — |   |
| Borrowings under  long-term debt agreements                                                          |       | 437                                   |       | —                              |       | 75,000 |   | 105,000 |   |
| Payments of  long-term debt and capital leases                                                       |       | (10,148                               | )          | (174                                | )          | (288 | ) | (116,064 | ) |
| Repurchase of  common stock                                                                          |       | —                                |       | —                              |       | — |   | (53 | ) |
| Redemption of  Series A Redeemable Preferred Stock                                                   |       | —                                |       | —                              |       | — |   | (35 | ) |
| Redemption of  Series B Redeemable Preferred Stock                                                   |       | —                                |       | —                              |       | — |   | (24 | ) |
| Payment of  financing costs                                                                          |       | (885                                  | )          | —                              |       | (3,047 | ) | (5,690 | ) |
| Payments  received on stockholder loans for stock subscription notes                                 |       | —                                |       | —                              |       | — |   | 462 |   |
| Interest  receivable decrease on stockholder loans                                                   |       | —                                |       | —                              |       | — |   | 22 |   |
| Distribution to  stockholder                                                                         |       | (10,000                               | )          | —                              |       | — |   | — |   |
| Net cash (used  in) provided by financing activities                                                 |       | (12,646                               | )          | (174                                | )          | 71,665 |   | (16,382 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                |       | (26,560                               | )          | 14,399                              |       | 4,181 |   | 8,085 |   |
|                                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                                    |       | 29,270                                |       | 14,871                              |       | 10,690 |   | 2,605 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                     | 2,710      |                                | $          | 29,270 |   | $ | 14,871 |   | $ | 10,690 |   |
|                                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| **Supplemental  disclosure of cash flow information**                                                | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                                        |       | $                                     | 11,225     |                                | $          | 11,405 |   | $ | 20,999 |   | $ | 9,639 |   |
| Income taxes  paid                                                                                   |       | $                                     | 17         |                                | $          | 44 |   | $ | 323 |   | $ | 70 |   |
|                                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| **Supplemental  disclosure of noncash investing and financing activities**                           | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred and  common stock issued as consideration for the Chevys Acquisition                       |       | $                                     | —     |                                | $          | 5,682 |   | $ | 7,349 |   | $ | — |   |
| Deferral of gain  on sale-leaseback recorded in other liabilities                                    |       | $                                     | —     |                                | $          | — |   | $ | — |   | $ | 3,927 |   |
| In-kind interest  transferred to debt                                                                |       | $                                     | —     |                                | $          | — |   | $ | — |   | $ | 407 |   |

 

*See notes to consolidated financial statements.*

 

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**Real MexRestaurants, Inc.**

**Notes toConsolidated Financial Statements**

**December31, 2006**

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

**1. Description of Business**

Real MexRestaurants, Inc., (together with its subsidiaries, the “Company”) (successorin merger with RM Integrated, Inc. and a wholly owned subsidiary of RMRestaurant Holding Corp.) is a Delaware corporation and was formed onMay 15, 1998, to acquire the stock of Acapulco Restaurants, Inc.(Acapulco). Effective February 24, 2004, the Company changed its name fromAcapulco Acquisition Corp. to Real Mex Restaurants, Inc.

The Company isengaged in the business of owning and operating restaurants, primarily underthe names El Torito®, Acapulco Mexican Restaurant Y Cantina® and Chevys FreshMex®. At December 31, 2006, the Company, primarily through its majorsubsidiaries (El Torito Restaurants, Inc., Chevys Restaurants LLC and AcapulcoRestaurants, Inc.), owned and operated 195 restaurants, of which 161 were inCalifornia and the remainder in 12 other states. The Company’s other majorsubsidiary, Real Mex Foods, Inc. (RMF), provides internal production,purchasing and distribution services for the restaurant operations andmanufactures specialty products for sales to outside customers.

**Basis of Presentation**

The Company prior to August 21, 2006 is referred to as the “Predecessor”and after August 20, 2006 is referred to as the “Successor”.

The Company’sfiscal year consists of 52 or 53 weeks ending on the last Sunday in Decemberwhich in 2006 was December 31, 2006, in 2005 was December 25, 2005 and in 2004was December 26, 2004. The accompanying consolidated balance sheets present theCompany’s financial position as of December 31, 2006 and December 25, 2005. Theaccompanying consolidated statements of operations, stockholders’ equity andcash flows present the 19 week Successor Period from August 21, 2006 toDecember 31, 2006, the 34 week Predecessor Period from December 25, 2005 toAugust 20, 2006 and the 52 week Predecessor Periods ended December 25, 2005 andDecember 26, 2004.

**2.Acquisition of the Company**

On August 17,2006, the Company entered into an Agreement and Plan of Merger (“MergerAgreement”) with RM Restaurant Holding Corp. (“RM Restaurant Holding”) and itssubsidiary, RM Integrated, Inc. (“RM Integrated”, and together with RMRestaurant Holding, “Buyer”).  Themajority of the stock of RM Restaurant Holding is owned by Sun Cantinas LLC (“SunLLC”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).  On August 18, 2006, the stockholders of theCompany entitled to vote thereon approved the Merger Agreement.  On August 21, 2006 (the “Effective Time”),the closing of the Merger Agreement occurred, and RM Integrated merged with andinto Real Mex Restaurants, Inc. (the “Merger”), with Real Mex Restaurants, Inc.continuing as the surviving corporation and the 100% owned subsidiary of RMRestaurant Holding.

The net purchaseprice was $199.1 million, consisting of $359.0 million in cash, plus net cashacquired of $35.2 million, plus a $2.8 million working capital adjustment anddirect acquisition costs of $3.9 million, less indebtedness assumed of $188.2million and seller costs of $7.6 million. Pursuant to the Merger Agreement,$6.0 million of the Merger consideration is being held in escrow and thepurchase price is subject to adjustment based on certain otheradjustments.  As a result of the Mergerand in accordance with the terms of the Merger Agreement, (i) all of theoutstanding capital stock of the Company was converted into the right toreceive a portion of the purchase price, and all Company options, warrants andshares of restricted stock were cancelled and converted into the right toreceive a portion of the purchase price, less the exercise prices or unpaidpurchase prices therefore, as applicable, and (ii) the Company became awholly-owned subsidiary of RM Restaurant Holding.  Prior to the Merger, Bruckmann, Rosser,Sherrill & Co., Inc. (“BRS”), together with its affiliates, was acontrolling stockholder of the Company. As described in the Merger Agreement, the Amended and RestatedManagement Agreement dated June 28, 2000 by and among the Company, certain ofits subsidiaries, BRS, and FS Private Investments, L.L.C. was terminated inconnection with the Merger.

32

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The following tablepresents the preliminary allocation of the purchase price, includingprofessional fees and other related transaction costs, to the assets acquiredand liabilities assumed based on their estimated fair values:

| Cash and cash equivalents                 |   | $       | 29,270  |   |
|-------------------------------------------|--------|---------|---------|--------|
| Trade and other  accounts receivable      |   | 11,625  |    |
| Inventories                               |   | 10,012  |    |
| Other current  assets                     |   | 5,676   |    |
| Property and  equipment                   |   | 88,997  |    |
| Deferred tax  asset                       |   | 6,196   |    |
| Other assets                              |   | 39,697  |    |
| Goodwill                                  |   | 277,460 |    |
| Total assets acquired                     |   | 468,933 |    |
|                                      |   |    |    |
| Accounts payable  and accrued liabilities |   | 20,881  |    |
| Long-term debt                            |   | 185,666 |    |
| Other  liabilities                        |   | 63,264  |    |
| Total liabilities assumed                 |   | 269,811 |    |
| Net assets acquired                       |   | $       | 199,122 |   |

 

The Merger was accountedfor under the purchase method of accounting and, accordingly, the purchaseprice has been allocated to the assets acquired and the liabilities assumedbased on the estimated fair market value at the date of the merger. The allocation ofthe purchase price is a preliminary estimate as the determination of the fairmarket values of the assets acquired and the liabilities assumed has not beenfinalized. The Company attributes the goodwill associated with the Merger tothe historical financial performance and the anticipated future performance ofthe Company’s operations.

**3.Chevys Acquisition**

On January 11,2005, the Company, through its subsidiary Chevys Restaurants LLC, purchasedsubstantially all of the assets of Chevys, Inc. and certain of its subsidiaries(the Sellers) out of the Sellers’ Chapter 11 bankruptcy proceeding, including69 Chevys Fresh Mex® restaurants and five Fuzio Universal Pasta® restaurants(the “Chevys Acquisition”). In addition, the Company assumed franchiseagreements for 37 franchised Chevys Fresh Mex restaurants and five franchisedFuzio Universal Pasta restaurants. The purchase price consisted ofapproximately $76.2 million in cash and the assumption of approximately $10.0million in net negative working capital, approximately $6.3 million of lettersof credit and approximately $0.8 million under a mortgage. In addition, theCompany issued to J.W. Childs Equity Partners L.P. and its affiliate, JWCChevys Co-Invest, LLC, in their capacity as unsecured creditors of the Sellers,shares of the Company’s equity securities. The Company financed the transactionwith $75.0 million in unsecured debt financing, the proceeds of which were usedto fund a portion of the purchase price and a portion of the approximately $4.2million of fees and expenses related to the transaction.

The followingtable presents the preliminary allocation of the purchase price includingprofessional fees and other related transaction costs, to the assets acquiredand liabilities assumed based on their estimated fair values:

| Cash and cash equivalents                 |   | $       | 3,913  |   |
|-------------------------------------------|--------|---------|--------|--------|
| Trade accounts  receivable                |   | 2,641   |   |
| Inventories                               |   | 1,382   |   |
| Other current  assets                     |   | 1,178   |   |
| Property and  equipment                   |   | 42,312  |   |
| Deferred tax  asset                       |   | 4,364   |   |
| Other assets                              |   | 3,386   |   |
| Goodwill                                  |   | 58,350  |   |
| Total assets acquired                     |   | 117,526 |   |
|                                      |   |    |   |
| Accounts payable  and accrued liabilities |   | 19,162  |   |
| Other  liabilities                        |   | 2,416   |   |
| Total liabilities assumed                 |   | 21,578  |   |
| Net assets acquired                       |   | $       | 95,948 |   |

 

These transactionswere accounted for under the purchase method of accounting and, accordingly,the purchase price has been allocated to the assets acquired and theliabilities assumed based on the estimated fair market value at the date of theacquisition. Thefair market value was determined by an independent valuation company. TheCompany is currently determining the amount, if any, of any additional taxbenefits that may have been acquired in the Chevys Acquisition.  Any change will impact the overall purchaseprice only.

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The primary reasonfor the Chevys Acquisition was to add a complementary growth vehicle in thefull-service Mexican segment of the restaurant industry. The Company attributesthe goodwill associated with the Chevys Acquisition to the historical financialperformance and the anticipated future performance of Chevys.

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

|                                                         | ** ** | **Predecessor (unaudited)**                                           | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **December 27, 2004 to   December 25, 2005** | ** ** |
| Total revenues                                          |       | $                                                                          | 542,318    |   |
| Net income  before redeemable preferred stock accretion |       | 13,092                                                                     |       |
|                                                         |            |                                                                            |            |  |

 

The pro formainformation is presented for informational purposes only and is not necessarilyindicative of the results of operations that actually would have been achievedhad the Chevys Acquisition been consummated as of that time, nor is it intendedto be a projection of future results.

**4. Summary of Accounting Policies**

**Principles of Consolidation**

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

**Use of Estimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.

**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**

Receivablesconsist primarily of amounts due from credit card companies, outside customersof RMF and franchisees. Receivables from credit card companies are generallysettled in the week following the transaction date. Receivables from RMF’soutside customers are generally collected within 30 days of the date of thesale and receivables from franchisees are generally collected within 21 daysfollowing the close of the royalty period. Receivables are stated net of anallowance for doubtful accounts of $295 and $284 at December 31, 2006 andDecember 25, 2005, respectively.

**Inventories**

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

**Supplies and Expendable Equipment**

The initialpurchase of supplies and expendable equipment, when a restaurant is firstopened, such as china, glass and silverware, is capitalized and depreciatedover a period of 5 years. Replacements of supplies and expendable equipment areexpensed.

**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 thestraight-line basis over the shorter of the estimated useful lives of theassets or the non-cancelable term of their underlying leases.

Depreciation andamortization expense includes the amortization of assets held under capitalleases.

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**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 appropriaterate of return. This approach represents a quantification of the futuredividend paying capacity of the business being appraised. Second, if thecarrying amount of a reporting unit exceeds its fair value, an impairment lossis recognized for any excess of the carrying amount of the reporting unit’sgoodwill over the implied fair value of that goodwill. The implied fair valueof goodwill is determined by allocating the fair value of the reporting unit ina manner similar to a purchase price allocation, in accordance with SFASNo. 141, “Business Combinations.” The residual fair value after thisallocation is the implied fair value of the reporting unit goodwill.

The Companyperformed an initial annual assessment of impairment of goodwill by applyingfair-value based tests as of and on Merger date and has determined that noimpairment existed as of December 31, 2006.

**Accounting for the Impairment ofLong-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 Successor Period from August 21, 2006 through December 31, 2006management recorded no impairment. During the Predecessor Period from December26, 2006 to August 20, 2006, and the Predecessor years ended December 25, 2005and December 26, 2004, management of the Company determined that certainidentified property and equipment was impaired and recorded an impairmentcharge of $1,197, $568 and $167, respectively, reducing the carrying value ofsuch assets to the estimated fair value. Fair value was based on management’sestimate of future cash flows to be generated by the property and equipmentdetermined to be impaired.

**Liquor Licenses**

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

**Favorable Lease Asset and UnfavorableLease Liability**

Favorable leaseasset represents the asset in excess of the approximate fair market value ofthe leases assumed as of August 21, 2006, the date of acquisition of theCompany. The amount is being amortized over the remaining primary term of theunderlying leases.

Unfavorable leaseliability represents the liability in excess of the approximate fair marketvalue of the leases assumed as of August 21, 2006, the date of acquisition of theCompany. The amount is being amortized over the remaining primary term of theunderlying leases. Unfavorable lease liabilities are recorded in other accruedexpenses (short-term portion) and other liabilities (long-term portion).

The followingtable shows the estimated amortization expense for the years after December 31,2006:
| ** **                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
|                         |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Favorable lease  asset       |       | $        | 5,053      |     | $          | 4,195    |       | $        | 3,332      |     | $          | 2,500          |       | $ | 1,832 |   | $ | 5,784 |   |
| Unfavorable  lease liability |       | (688     | )          | (674     | )          | (556     | )          | (449     | )          | (312     | )          | (522           | )          |
|                         |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Net amortization  expense    |       | $        | 4,365      |     | $          | 3,521    |       | $        | 2,776      |     | $          | 2,051          |       | $ | 1,520 |   | $ | 5,262 |   |

 

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**Deferred Charges**

Deferred chargesat December 31, 2006 consists of deferred financing costs of $2,894 related tothe sale of $105,000 aggregate principal amount of 10% Senior Secured Notes due2010, $534 related to the $65,000 Senior Unsecured Credit Facility maturing onDecember 31, 2008, $287 related to the $40,000 Senior Secured Revolving CreditFacilities and $224 of charges related to site selection and the acquisition ofleases. Amounts capitalized related to financing costs are amortized over thelives of the respective long-term borrowings using the effective-interestmethod and are included in interest expense in the accompanying consolidatedstatements of operations. Amounts capitalized related to leases are amortizedover the primary term of their respective leases and are included in occupancyexpense in the accompanying statements of operations. The following table showsthe estimated amortization expense for the years after December 31, 2006:
| ** **                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
|                                                   |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Financing, site  selection and lease acquisition costs |       | $        | 1,246      |     | $          | 1,205    |       | $        | 1,076      |     | $          | 339            |       | $ | 10 |   | $ | 63 |   |
|                                                        |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |

 

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

**Self Insurance**

The Company is self-insured for most workers’compensation and general liability losses (collectively “casualty losses”). TheCompany maintains stop-loss coverage with third party insurers to limit itstotal exposure. The recorded liability associated with these programs is basedon an estimate of the ultimate costs to be incurred to settle known claims andclaims incurred but not reported as of the balance sheet date. The estimatedliability is not discounted and is based on a number of assumptions andfactors, including historical trends, actuarial assumptions and economicconditions.

**Gift Certificates and Gift Cards**

The Companyrecords deferred revenue, included in accounts payable, for gift certificatesand gift cards outstanding until they are redeemed.

**Segment Information**

The Companyoperates 195 restaurants through its three 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 195 operating restaurants into a singlereporting segment called restaurant operations.

**Promotion and Advertising Expense**

The cost ofpromotion and advertising is expensed as incurred. The Company incurred $4,497,$6,713, $10,665 and $5,728 in promotion and advertising expense during the 19week Successor Period from August 21, 2006 to December 31, 2006, the 34 weekPredecessor Period December 26, 2005 to August 20, 2006 and Predecessor yearsended December 25, 2005 and December 26, 2004, respectively.

**Operating Leases**

The Companyaccounts for operating leases on the straight-line basis in accordance withSFAS No. 13, “Accounting for Operating Leases.” The Company leasesrestaurant and office facilities that have terms with expirations in 2007through 2027. Most of the restaurant facilities have renewal clausesexercisable at the option of the Company with rent escalation clausesstipulating specific rent increases, some of which are based upon the ConsumerPrice Index. Certain of these leases require the payment of contingent rentalsbased on a percentage of gross revenues. At December 31, 2006 and December 25,2005, deferred rent equaled $586 and $3,948, respectively, which is included inother long-term liabilities.

36

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**Concentrationof Credit Risk**

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

**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. Theestimated fair value of the Senior Secured Notes due 2010 (as defined in Note7) at December 31, 2006, based on quoted market prices, was $110,775.Management estimates that the carrying values of its other financialinstruments approximate their fair values since their realization orsatisfaction is expected to occur in the short term.

As a result of theMerger and under purchase accounting rules we recorded $4.2 million ofunamortized debt premium as additional debt related to our senior secured notesas the fair market value of the debt on the Merger date was greater than itscarrying value. The premium will be amortized to interest expense over theremaining life of the debt.

**Recent Accounting Pronouncements**

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedSFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans-An Amendment of FASB Statements No. 87, 88, 106, and132R” (SFAS No. 158). SFAS No. 158 requires that the funded status ofdefined benefit postretirement plans be recognized on the Company’s balancesheet, and changes in the funded status be reflected in comprehensive income,effective fiscal years ending after December 15, 2006. SFAS No. 158also requires the measurement date of the plan’s funded status to be the sameas the Company’s fiscal year-end. The adoption of SFAS No. 158 will have noeffect upon the Company.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (SFAS No. 157). The purpose of SFAS No. 157 is todefine fair value, establish a framework for measuring fair value and enhancedisclosures about fair value measurements. The measurement and disclosurerequirements are effective for the Company beginning in the first quarter offiscal year 2008. The Company is currently evaluating whether SFAS No. 157will result in a change to its fair value measurements.

In June 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109.” Theinterpretation contains a two step approach to recognizing and measuringuncertain tax positions accounted for in accordance with SFAS No. 109. Thefirst step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates it is more likely than not that theposition will be sustained on audit, including resolution of related appeals orlitigation processes, if any. The second step is to measure the tax benefit asthe largest amount which is more than 50% likely of being realized uponultimate settlement. The provisions are effective for the Company beginning inthe first quarter of fiscal year 2007. The Company believes the impact of theadoption of this statement will not have a material effect on its consolidatedfinancial statements.

**5. Property and Equipment**

Property andequipment consists of the following:
| ** **                                      | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Land and land  improvements                     |       | $                           | 4,560      |                        | $          | 1,855 |   |
| Buildings and  improvements                     |       | 1,762                       |       | 4,364                       |       |
| Furniture,  fixtures and equipment              |       | 39,176                      |       | 68,438                      |       |
| Leasehold  improvements and leasehold rights    |       | 64,430                      |       | 90,936                      |       |
|                                            |       | 109,928                     |       | 165,593                     |       |
| Less accumulated  depreciation and amortization |       | (19,126                     | )          | (83,001                     | )          |
|                                            |       | $                           | 90,802     |                        | $          | 82,592 |   |

 

 

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**6. Accounts Payable and Other AccruedLiabilities**

Accounts payableconsist of the following:
| ** **                        | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Trade accounts payable            |       | $                           | 19,750     |                        | $          | 22,759 |   |
| Gift cards and gift  certificates |       | 3,604                       |       | 3,468                       |       |
|                              |       | $                           | 23,354     |                        | $          | 26,227 |   |

 

Other accruedliabilities consist of the following:
| ** **                   | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Rent and occupancy  expenses |       | $                           | 1,572      |                        | $          | 1,444 |   |
| Sales taxes                  |       | 4,919                       |       | 4,088                       |       |
| Accrued interest             |       | 3,331                       |       | 2,939                       |       |
| Related party payables       |       | —                      |       | 228                         |       |
| Other                        |       | 8,647                       |       | 3,801                       |       |
|                         |       | $                           | 18,469     |                        | $          | 12,500 |   |

 

**7. Long-Term Debt**

Long-term debtconsists of the following:

|                                                | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Senior Secured  Notes due 2010                 |       | $                           | 105,000    |                        | $          | 105,000 |   |
| Senior Secured  Notes unamortized debt premium |       | 3,809                       |       | —                      |       |
| Senior Secured  Revolving Credit Facility      |       | 7,950                       |       | —                      |       |
| Senior Unsecured  Credit Facility              |       | 65,000                      |       | 75,000                      |       |
| Mortgage                                       |       | 711                         |       | 771                         |       |
| Other                                          |       | 448                         |       | 63                          |       |
|                                           |       | 182,918                     |       | 180,834                     |       |
|                                           |       |                        |       |                        |       |
| Less current  portion                          |       | (9,573                      | )          | (117                        | )          |
|                                           |       |                        |       |                        |       |
|                                           |       | $                           | 173,345    |                        | $          | 180,717 |   |

 

*SeniorSecured Notes due 2010*. On March 31, 2004, we sold$105.0 million aggregate principal amount of our senior secured notes (the “Notes”).At the closing of the sale of our senior secured notes, we used the proceedsfrom the sale of these notes and the sale-leaseback transaction to repay termloans then outstanding under our prior credit facility of $70.2 million andsubordinated notes of $44.4 million in full, and entered into a new seniorsecured credit facility. In connection with the retirement of our term loansthen outstanding, we took a charge of $4.7 million consisting of deferredfinancing costs and discounts on the retired debt and termination of an interestrate swap agreement at a cash cost of $0.2 million.

Interest on the notesaccrues at a rate of contract rate of 10% per annum. (The current interest rateis 10.25% as, in fiscal year 2005, the Company exceeded the capital expenditurelimit under the indenture governing the notes and as a result is required topay interest at a rate of 10.25% for the period April 1, 2006 throughMarch 31, 2007, a 0.25% increase in the stated rate. Exceeding thiscapital expenditure limit did not constitute a default with respect to the notesor the indenture.) Interest is payable semiannually on April 1 andOctober 1 of each year. Our notes are fully and unconditionally guaranteedon a senior secured basis by all of our present and future domesticsubsidiaries which are restricted subsidiaries under the indenture governingour notes. Our notes and related guarantees are secured by substantially all ofour and our domestic restricted subsidiaries’ tangible and intangible assets,subject to the prior ranking claims on such assets by the lenders under our NewSenior Secured Revolving Credit Facilities. The indenture governing our notescontains various affirmative and negative covenants, subject to a number ofimportant limitations and exceptions, including but not limited those limitingour ability to incur additional indebtedness, make capital expenditures, paydividends, redeem stock or make other distributions, issue stock of oursubsidiaries, make certain investments or acquisitions, grant liens on assets,enter into 

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transactions withaffiliates, merge, consolidate or transfer substantially all of our assets, andtransfer and sell assets. The covenant that limits our incurrence ofindebtedness requires that, after giving effect to any such incurrence ofindebtedness and the application of the proceeds thereof, our fixed chargecoverage ratio as of the date of such incurrence will be at least 2.50 to 1.00in the case of any incurrence after April 1, 2006. The indenture definesconsolidated fixed charge coverage ratio as the ratio of Consolidated Cash Flow(as defined therein) to Fixed Charges (as defined therein). The Company was incompliance with all specified financial and other covenants under the notesindenture at December 31, 2006.

We can redeem our noteson or after April 1, 2007, except that we may redeem up to 35% of our notesbefore April 1, 2007 with the proceeds of one or more public equityofferings. We are required to redeem our notes under certain circumstancesinvolving 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 New Senior Secured Revolving CreditFacility or certain other secured indebtedness or make an offer to purchase aportion of our notes.

On June 9,2004, we filed a registration statement with respect to notes havingsubstantially identical terms as our notes, as part of an offer to exchangeregistered notes for these notes. We completed the exchange offer for 100% ofour Notes on June 7, 2005.

On September 19,2006, the Company  commenced a change ofcontrol offer (the “Offer”) to purchase any or all of its notes that remain outstandingunder the Indenture dated March 31, 2004 (the “Indenture”) by and among theCompany, the guarantors thereto and Wells Fargo Bank, National Association, astrustee. The Offer was made pursuant to Section 4.15 of the Indenture as theMerger described in Section 3 above constituted a “change of control” under theIndenture. In accordance with the terms of the Indenture, the Company offeredto repurchase the notes at a purchase price in cash equal to 101% of theaggregate principal amount of the notes or portion of notes validly tenderedfor payment thereof, plus accrued and unpaid interest up to, but not including,the date of payment, upon the terms and subject to the conditions of theOffer.  The offer expired on October 19, 2006.No notes were tendered pursuant to the Offer and as of the expiration date ofthe Offer, $105 million aggregate principal amount of notes remainedoutstanding.

As a result of theMerger and under purchase accounting rules we recorded $4.2 million ofunamortized debt premium as additional debt related to our senior secured notesas the fair market value of the debt on the Merger date was greater than itscarrying value. The premium will be amortized to interest expense over theremaining life of the debt.

*SeniorSecured Revolving Credit Facility*. OnMarch 31, 2004, the Company retired the then existing revolving credit andterm loan agreement and entered into a new amended and restated revolvingcredit agreement providing for $30.0 million of senior secured credit facilitieswith a lead bank acting as Lead Arranger and Administrative Agent. Therevolving credit agreement included a $15.0 million letter of credit facilityand a $15.0 million revolving credit facility that could be used for letters ofcredit.

On October 5, 2006, theCompany entered into an amended and restated revolving credit facility,pursuant to which its existing $15.0 million revolving credit facility and$15.0 million letter of credit facility, was increased to a $15.0 millionrevolving credit facility (the “Old Senior Secured Revolving Credit Facility”)and a $25.0 million letter of credit facility (the “Old Senior Secured Letterof Credit Facility”, together with the Old Senior Secured Revolving CreditFacility, the “Old Senior Secured Revolving Credit Facilities”) maturing onOctober 5, 2008, pursuant to which the Lenders agreed to make loans and issueletters of credit to the Company and its subsidiaries, all of the proceeds ofwhich were to be used for working capital purposes. Bank of Montreal acted asadministrative agent with respect to the old Senior Secured Revolving CreditFacilities.

On January 29,2007, the Company entered into a Second Amended and Restated Credit Agreementpursuant to which the Old Senior Secured Revolving Credit Facilities wererefinanced with a new agent and administrative agent, General Electric CapitalCorporation, and a new $15.0 million revolving credit facility (the “New SeniorSecured Revolving Credit Facility”) and $25.0 letter of credit facility (the “NewSenior Secured Letter of Credit Facility”, together with the New Senior SecuredRevolving Credit Facility, the “New Senior Secured Revolving Credit Facilities”),maturing on January 29, 2009, were put into place, pursuant to which the lendersagree to make loans and issue letters of credit to and on behalf of the Companyand its subsidiaries.

Obligations underthe New Senior Secured Revolving Credit Facilities are guaranteed by all of theCompany’s subsidiaries as well as by RM Restaurant Holding Corp., which whollyowns the Company and has made a first priority pledge of all of its equityinterests in the Company as security for the Obligations.  Interest on theNew Senior Secured Revolving Credit Facilities accrues pursuant to anApplicable Margin as set forth in the Second Amended and Restated CreditAgreement.  The New Senior Secured Revolving Credit Facilities are securedby, among other things, first priority pledges of all of the equity interests inthe Company’s direct and indirect subsidiaries, and first priority securityinterests (subject to customary exceptions) in substantially all of the currentand future property and assets of the Company and its direct and indirectsubsidiaries, with certain limited exceptions. In connection with the Company’sentrance into the New Senior Secured Revolving Credit Facilities on January 29,2007, the Company borrowed $7.4 million under the New Senior Secured RevolvingCredit Facility, the proceeds of which were used to pay down existing revolvingborrowings under the Old Senior Secured Revolving Credit Facility.

The Senior SecuredRevolving Credit Facilities contains various affirmative and negative covenantsand restrictions, which among other things, requires the Company to meetcertain financial tests (including certain leverage and cash flow ratios), andlimits the Company and the Company’s 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. The Company is required to maintain a cash flow ratiodetermined on an annual basis equal to 1.70 to 1.00 until maturity.Pursuant to the 

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terms of the New SeniorSecured Revolving Credit Facility, cash flow ratio is defined as the ratio of(a) Consolidated Cash Flow (as defined therein) to (b) ConsolidatedFinancial Obligations (as defined therein).

The Company was incompliance with all specified financial and other covenants under the OldSenior Secured Revolving Credit Facilities at December 31, 2006.

*SeniorUnsecured Credit Facility*. On January 11, 2005, the Companyentered into a $75.0 million senior unsecured credit facility (the “Old SeniorUnsecured Credit Facility”) consisting of a single term loan maturing onDecember 31, 2008, all of the proceeds of which were used to finance a portionof the cash consideration for the Chevys Acquisition and pay related fees andexpenses. On October 5, 2006, the Company entered into an amended and restatedsenior unsecured credit facility, pursuant to which the Old Senior UnsecuredCredit Facility was decreased to a $65.0 million senior unsecured creditfacility (the “New Senior Unsecured Credit Facility”), consisting of a singleterm loan maturing on October 5, 2010. All of the proceeds of the New SeniorUnsecured Credit Facility were used to repay in full any term loans outstandingunder the Old Senior Unsecured Credit Facility and not continued on therestatement date.  The total amount ofterm loans repaid was $10.0 million. Obligations under the New Senior UnsecuredCredit Facility are guaranteed by all of the Company’s subsidiaries. Intereston the term loan outstanding under the New Senior Unsecured Credit Facilityaccrues, at the Company’s option, at either (i) the greater of the prime rateor the rate which is 0.5% in excess of the federal funds rate, plus 4.0% or(ii) a reserve adjusted Eurodollar rate, plus 5.0%. As of December 31, 2006,the interest rate on the New Senior Unsecured Credit Facility’s term loan was10.35%.

The New SeniorUnsecured Credit Facility contains various affirmative and negative covenantswhich, among other things, require the Company to meet certain financial tests(including certain leverage and interest coverage ratios) and limits its andits subsidiaries’ ability to incur or guarantee additional indebtedness, grantcertain liens, make certain restricted payments, make capital expenditures,engage in transactions with affiliates, make certain investments, sell assets,make acquisitions, effect a consolidation or merger and amend or modifyinstruments governing certain indebtedness (including relating to our seniorsecured notes and the New Senior Secured Revolving Credit Facilities). TheCompany is required to maintain certain minimum interest coverage ratiosranging from (i) 2.00 to 1.00 for the fiscal quarter ending on or prior toDecember 31, 2006, (ii) 2.15 to 1.00 for the fiscal quarters ending on orprior to March 31, 2007 through December 31, 2007, and(iii) 2.30 to 1.00 thereafter until maturity. Pursuant to the terms of theNew Senior Unsecured Credit Facility, interest coverage ratio is defined as theratio as of the last day of any fiscal quarter of (a) Consolidated EBITDA(as defined therein) for the four-fiscal quarter period then ending to(b) Consolidated Interest Expense (as defined therein) for suchfour-fiscal quarter period. The Company was in compliance with all specifiedfinancial and other covenants under the New Senior Unsecured Credit Facility atDecember 31, 2006.

*Mortgage.*Concurrently with the closing of the Chevys Acquisition, we assumed a $0.8million 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. As of December 31, 2006, the principal amount dueon the mortgage was $0.7 million.

Interest rates forthe Company’s long-term debt are shown in the following table:

|                                             | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Senior Secured Notes  due 2010              |       | 10.25                       | %          | 10.00                       | %          |
| Senior Secured  Revolving Credit Facilities |       | 8.25                        | %          | —                      |       |
| Senior Unsecured Credit  Facility           |       | 10.35                       | %          | 14.17                       | %          |
| Mortgage                                    |       | 9.28                        | %          | 9.28                        | %          |

 

In conjunctionwith the issuance of subordinated notes, the Company issued warrants topurchase 43,773 shares of its Common Stock at an exercise price of $0.01 pershare. The warrants were exercisable during the 10-year period following thedate of issuance. The value of the warrants of $4,027 was recorded asadditional paid-in capital and reduced the carrying value of the subordinatednotes. On August 21, 2006, as a result of the Merger and in accordance with theterms of the Merger Agreement, all outstanding warrants were exercised andconverted into the right to receive a portion of the Merger consideration.

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The maturity oflong-term debt for the fiscal years succeeding December 31, 2006, is asfollows:

|            | ** ** | **Principal** | ** ** | **Unamortized  Debt  Premium** | ** ** | **Total** | ** ** |
|------------|------------|---------------|------------|--------------------------------|------------|-----------|------------|
| 2007       |       | $             | 8,401      |                           | $          | 1,172     |       | $ | 9,573 |   |
| 2008       |       | 120           |       | 1,172                          |       | 1,292     |       |
| 2009       |       | 72            |       | 1,172                          |       | 1,244     |       |
| 2010       |       | 170,079       |       | 293                            |       | 170,372   |       |
| 2011       |       | 87            |       |                           |       | 87        |       |
| Thereafter |       | 350           |       |                           |       | 350       |       |
|       |       | $             | 179,109    |                           | $          | 3,809     |       | $ | 182,918 |   |

 

**8. Capitalization**

**Common Stock-Successor**

The Company isauthorized to issue 1,000 shares of common stock. At December 31, 2006, therewere 1,000 shares of common stock issued and outstanding.

**Common Stock-Predecessor**

The Company wasauthorized 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 were identical to Class A Common Stock exceptthat the holders of Class B Common Stock had no voting rights, except asprovided by law. Each holder of Class B Common Stock had the right to convertany or all shares of Class B Common Stock into an equal number of shares ofClass A Common Stock at any time. At December 25, 2005, there were 300,423shares issued and outstanding of Class A Common Stock and 15,867 sharesissued and outstanding of Class B Common Stock. On August 21, 2006, as aresult of the Merger and in accordance with the terms of the Merger Agreement,all of the issued and outstanding common stock was converted into the right toreceive a portion of the Merger consideration.

**Redeemable PreferredStock-Predecessor**

The Company wasauthorized to issue 100,000 shares of Preferred Stock. Shares were issued uponapproval of the board of directors and all outstanding shares of PreferredStock were redeemable at any time at the option of the Company, subject torestrictions under certain debt covenants.

Series A 12.5% Cumulative Compounding RedeemablePreferred Stock (Series A) and Series B 13.5% Cumulative CompoundingRedeemable Preferred Stock (Series B) had a liquidation preference of $1per share and accumulated dividends associated with each share. With respect todividend rights and rights of liquidation, Series A ranked senior to allclasses of Common Stock and Series B. Series B ranked senior to allclasses of Common Stock.

Series C 15%Cumulative Compounding Participating Preferred stock (Series C) ranked seniorwith respect to payment of dividends, liquidation, and redemption to all otherseries of preferred stock and common stock of the Company. The Series Chad 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 was recorded at liquidation value at the date of issuance. Holdersof Series C were entitled to receive, in addition to the liquidationpreference, an amount equal to 40% of any amounts that would otherwise beavailable to the holders of Common Stock in the event of a liquidation or saleof the Company.

Series D 15%Cumulative Compounding Participating Preferred stock (Series D) ranked seniorwith respect to payment of dividends, liquidation, and redemption to all otherseries of preferred stock, except Series C, to which it ranked equally, andcommon stock of the Company. The Series D had a liquidation preferenceequal to the original issue price plus accreted dividends.

The liquidationpreference on the Series A, Series B, Series C and Series D accretedat the stated rates on the liquidation preference value thereof; dividends(representing accreted liquidation preference) were to be paid from legallyavailable funds, when and if declared by the board of directors. Dividendsaccrued and were payable only when and if declared, or upon a sale orliquidation of the Company or upon redemption of the applicable series ofpreferred stock. Accretion of the liquidation preference on the redeemablepreferred stock is reflected as an increase in the preferred stock values andan increase in the accumulated deficit. Accretion of the liquidation preferenceon the Redeemable Preferred Stock was $10,126, $14,583 and $11,862 during the Predecessor Periods of 34 weeksended August 20, 2006 and years ended December 25, 2005 and December 26, 2004,respectively, and is reflected in the consolidated statements of stockholders’equity as an increase in the preferred stock values and an increase in theaccumulated deficit.

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

On August 16,2006, as partial consideration for the Chevys Acquisition, the Company issued1,897 of Series A, 1,433 shares of Series B and 1,946 shares of Series Dredeemable preferred stock to J.W. Childs Equity Partners L.P. and itsaffiliate, JWC Chevys 

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Co-Invest, LLC, in theircapacity as unsecured creditors of the Sellers. In fiscal year 2005, as partialconsideration for the Chevys Acquisition, the Company issued 2,064 of Series A,1,393 shares of Series B and 3,892 shares of Series C redeemable preferredstock to J.W. Childs Equity Partners L.P. and its affiliate, JWC ChevysCo-Invest, LLC, in their capacity as unsecured creditors of the Sellers. Therewere no preferred shares issued in fiscal year 2004.

On August 21,2006, as a result of the Merger and in accordance with the terms of the MergerAgreement, all issued and outstanding preferred stock was converted into theright to receive a portion of the Merger consideration.

**Stock Option Plans**

As a result of theMerger and in accordance with the terms of the Merger Agreement all of theCompany’s issued vested and unvested stock options were cancelled and convertedinto the right to receive a portion of the purchase price, less the exerciseprices, as applicable. Concurrently with the Merger, the Company’s 1998 and2000 Stock Option Plans were terminated. The Company does not currently have astock option plan.

The Company’s 1998and 2000 Stock Option Plans (the Plans) had 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 had 10-year terms. Under the 2000 Stock-BasedIncentive Compensation Plan, the Company granted a stock option for 3,671shares in 2001, 50% of whose vesting was conditional on a change in control.

The 2000Stock-Based Incentive Compensation Plan, for option grants prior to 2004,provided for 50% of the options to become exercisable based on “annual vesting,”with 10% of the grant vesting per year during the first five years after thegrant date, and the remaining 50% to become exercisable based on a “cliffvesting” schedule. Additionally, for option grants made in 2004 and 2005, thePlan provided for 20% of the option grants to become exercisable each year onthe anniversary date of the grants.

A summary of thestatus of the Company’s two stock option plans’ activity and relatedinformation is presented below:
| ** **                                 | ** ** | **Predecessor**                    | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **1998 Plan**                 | ** ** | **2000 Plan** | ** ** |
| ** **                                 | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Stock  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                       |       |                               |       |   |   |   |   |   |   |
| Outstanding —  December 28, 2003 |       | 6,050                              |       | $ | 10.00 |   | 42,734 |   | $ | 65.53 |   |
| Granted                                    |       | —                             |       | — |   | 39,700 |   | 0.01 |   |
| Exercised                                  |       | —                             |       | — |   | — |   | — |   |
| Canceled                                   |       | (800                               | )          | 10.00 |   | (1,101 | ) | 92.00 |   |
| Outstanding — December  26, 2004      |       | 5,250                              |       | 10.00 |   | 81,333 |   | 33.19 |   |
| Granted                                    |       | 682                                |       | 10.00 |   | 4,839 |   | 30.52 |   |
| Exercised                                  |       | —                             |       | — |   | 407 |   | 0.01 |   |
| Canceled                                   |       | —                             |       | — |   | (13,215 | ) | 92.00 |   |
| Outstanding — December  25, 2005      |       | 5,932                              |       | 10.00 |   | 72,550 |   | 22.49 |   |
| Granted                                    |       | —                             |       | — |   | — |   | — |   |
| Exercised                                  |       | —                             |       | — |   | — |   | — |   |
| Canceled                                   |       | —                             |       | — |   | — |   | — |   |
| Outstanding — August  20, 2006        |       | 5,932                              |       | 10.00 |   | 72,550 |   | 22.49 |   |
| Granted                                    |       | —                             |       | — |   | — |   | — |   |
| Exercised — August 20,  2006          |       | 5,932                              |       | 10.00 |   | 55,596 |   | 1.29 |   |
| Canceled                                   |       | —                             |       | — |   | 16,594 |   | 92.00 |   |
| Outstanding — December  31, 2006      |       | —                             |       | $ | — |   | — |   | $ | — |   |
|                                       |       |                               |       |   |   |   |   |   |   |
| Exercisable at December 31, 2006           |       | —                             |       | $ | — |   | — |   | $ | — |   |

 

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In accordance withSFAS No. 148, Accounting for Stock-Based Compensation- Transition andDisclosure, the Company accounted for the stock-based compensation plans usingthe intrinsic value-based measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. Nostock-based employee compensation cost is reflected in net income, as alloptions granted under the Plans had an exercise price equal to the market valueas of the underlying common stock on the date of grant. If the Company hadelected to recognize compensation cost based on the fair value of the optionsgranted at the grant rate as prescribed by SFAS No. 148, net income would havebeen reduced by compensation of $26for the Predecessor year ended December 25, 2005. There would have been no proforma effects to net income for the Successor Period from August 21, 2006 toDecember 31, 2006 or the Predecessor Period December 26, 2005 to August 20,2006 or the Predecessor year December 26, 2004.

The fair value of these options was estimated at thedate of grant using a Black-Scholes option-pricing model with the followingassumption for the Predecessor’s 34 weeks ended August 20, 2006 and thePredecessor fiscal years ended 2005 and 2004:

|                                              | ** ** | **Predecessor **         | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                   | ** ** | **August 20, 2006** | ** ** | **2005**        | ** ** | **2004**        | ** ** |
|                                         |       |                          |       |            |       |            |       |
| Risk free  interest rate                     |       | 3.87                          | %          | 3.87            | %          | 3.96            | %          |
| Weighted-average  remaining contractual life |       | 6.35                          |       | 7.02            |       | 7.97            |       |
| Weighted-average  fair value                 |       | 5.83                          |       | 5.83            |       | 0.00            |       |
| Dividend yield                               |       | —                        | %          | —          | %          | —          | %          |
| Expected volatility                          |       | 0.00                          | %          | 0.00            | %          | 0.00            | %          |

 

**9. Income Taxes**

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

|                                | ** ** | **Successor**           | ** ** | **Predecessor**     | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                     | ** ** | **December   31,** | ** ** | **August 20,** | ** ** | **December   25,** | ** ** | **December   26,** | ** ** |
| ** **                     | ** ** | **2006**                | ** ** | **2006**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                       | * *   | * *                | * *   | * *            | * *   | * * | * * | * * | * * |
| Federal                        |       | $                       | —     |                | $          | 1,570 |   | $ | — |   | $ | — | ** ** |
| State                          |       | 61                      |       | 344                 |       | 14 |   | 70 |   |
|                           |       | 61                      |       | 1,914               |       | 14 |   | 70 |   |
| Deferred:                      |       |                    |       |                |       |   |   |   |   |
| Federal                        |       | (2,729                  | )          | (367                | )          | 2,188 |   | 2,113 |   |
| State                          |       | (523                    | )          | (240                | )          | 1,137 |   | 35 |   |
|                           |       | (3,252                  | )          | (607                | )          | 3,325 |   | 2,148 |   |
|                           |       | (3,191                  | )          | 1,307               |       | 3,339 |   | 2,218 |   |
| Change in  valuation allowance |       | —                  |       | **—**          | ** ** | (8,048 | ) | (11,288 | ) |
|                           |       | $                       | (3,191     | )                   | $          | 1,307 |   | $ | (4,709 | ) | $ | (9,070 | ) |

 

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. Significant components of the Company’sdeferred tax assets and liabilities are as follows:

|                                              | ** ** | **Successor **         | ** ** | **Predecessor **       | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Deferred tax assets:                         | * *   | * *                    | * *   | * *                    | * *   |
| Federal net  operating loss carry-forwards   |       | $                           | 4,205      |                        | $          | 1,763 |   |
| State net  operating loss carry-forwards     |       | 580                         |       | 143                         |       |
| Goodwill                                     |       | 5,321                       |       | 6,156                       |       |
| Accrued expenses  not currently deductible   |       | 7,203                       |       | 4,074                       |       |
| Tax credit  carry-forwards                   |       | 592                         |       | 567                         |       |
| Property and  equipment basis difference     |       | 18,186                      |       | 14,150                      |       |
| Deferred rent                                |       | 242                         |       | 1,174                       |       |
| Gift  certificates and other deferred income |       | 843                         |       | 778                         |       |
| Unamortized debt  premium                    |       | 1,737                       |       | —                      |       |
| Deferred  compensation                       |       | 980                         |       | 426                         |       |
| Other                                        |       | 666                         |       | 362                         |       |
| Total deferred tax assets                    |       | $                           | 40,555     |                        | $          | 29,593 |   |

 

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|                                                           | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **December 31,  2006** | ** ** | **December 25,  2005** | ** ** |
| Deferred tax  liabilities:                                |       |                        |       |                        |       |
| Prepaid expenses                                          |       | $                           | (528       | )                           | $          | (872 | ) |
| Goodwill                                                  |       | (13,984                     | )          | (10,178                     | )          |
| Difference  between book and tax basis of revalued assets |       | (14,855                     | )          | —                      |       |
| State taxes                                               |       | (670                        | )          | (992                        | )          |
| Unamortized  landlord allowance                           |       | (1,104                      | )          |                        |       |
| Total deferred tax  liabilities                           |       | (31,141                     | )          | (12,042                     | )          |
|                                                      |       |                        |       |                        |       |
| Net deferred tax asset                                    |       | $                           | 9,414      |                        | $          | 17,551 |   |

 

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

 
| ** **                                     | ** ** | **Successor**     | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **December  31,** | ** ** | **August   20,** | ** ** | **December  25,** | ** ** | **December  26,** | ** ** |
| ** **                                     | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |              |       |                  |       |   |   |   |   |
| Income tax at U.S.  federal statutory tax rate |       | 34.0              | %          | 34.0                  | %          | 34.0 | % | 34.0 | % |
| State income tax, net  of federal benefit      |       | 5.8               |       | 5.7                   |       | 4.7 |   | 5.8 |   |
| Valuation allowance                            |       | —            |       | —                |       | (92.9 | ) | (252.2 | ) |
| Non-deductible Merger  costs                   |       | —            |       | 11.2                  |       | — |   | — |   |
| Other                                          |       | (0.9              | )          | (4.0                  | )          | (0.1 | ) | 9.7 |   |
| Effective tax rate                             |       | 38.7              | %          | 46.9                  | %          | (54.3 | )% | (202.7 | )% |

 

In accordance withSFAS No. 109, “Accounting for Income Taxes,” net deferred tax assets arereduced by a valuation allowance if, based on all the available evidence, it ismore likely than not that some or all of the deferred tax assets will not berealized. The amount of deferred tax assets considered realizable wasdetermined based on future reversals of existing taxable temporary differencesand future taxable income, exclusive of reversing temporary differences andcarry-forwards.

In evaluatingfuture taxable income for valuation allowance purposes at December 31, 2006,the Company concluded that it was appropriate to consider income expected to begenerated in 2007, 2008 and 2009. For the Predecessor years ended December 25,2005 and December 26, 2004, the Company reduced the valuation allowance andrecorded an income tax benefit of $8,048 and $9,140, respectively, inaccordance with SFAS No. 109.

The purchase accounting adjustments for the ChevysAcquisition have not been reflected in their entirety in the deferred taxbalances as of December 31, 2006 as the final tax returns for the seller, Chevy’sRestaurant, Inc., have not been filed. Until the tax returns are filed, we areunable to determine the carryover basis of assets, liabilities, and netoperating loss carry-forwards at the date of acquisition. Upon completion ofthe Sellers’ final tax returns for the periods ending before the ChevysAcquisition, the Company will assess and record the carryover basis of certaintemporary differences. We believe that the carryover basis of such deferred taxassets and liabilities, if any, would have a full valuation allowance recordedagainst the net deferred asset, as, based on the weight of available evidence,we believe it is more likely than not that a significant portion of thedeferred tax assets would not be realized in the near future. Purchaseaccounting adjustments have only been recorded for those deferred tax assetsthat were recognized in the current year.

For tax purposes,the excess of the purchase price over the fair market value of the assetsacquired at the time of the Acapulco and the El Torito acquisitions has beenaccounted for as amortizable goodwill.

At December 31,2006 and December 25, 2005, the Company had a federal net operating losscarry-forward of $12,367 and $5,185, respectively, which will begin to expirein 2021. In addition, at December 31, 2006 and December 25, 2005, the Companyhad a state net operating loss carry-forward of $7,902 and $2,074,respectively, which will begin to expire in 2013.

 

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**10. Commitments and Contingencies**

**Commitments**

The Company leasesrestaurant and office facilities that have terms with expirations in 2007through 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 $269 and $3,183 atDecember 31, 2006 and December 25, 2005, respectively. Accumulated amortizationof the leased leasehold improvements was $30 and $2,779 at December 31, 2006and December 25, 2005, respectively. Amortization of assets under capitalleases is included in depreciation expense.

The minimum annuallease commitment and subtenant income of the Company for the years succeedingDecember 31, 2006 is approximately as follows:

 
| ** **                                             | ** ** | **Capital**     | ** ** | **Minimum**     | ** ** | ** **   | ** ** | **Net**         | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|-----------------|------------|--------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Lease**       | ** ** | **Lease**       | ** ** | **Sublease** | ** ** | **Lease**       | ** ** |
| ** **                                             | ** ** | **Obligations** | ** ** | **Commitments** | ** ** | **Income**   | ** ** | **Commitments** | ** ** |
| 2007                                                   |       | $               | 313        |            | $          | 39,400       |       | $               | (235       | ) | $ | 39,478 |   |
| 2008                                                   |       | 313             |       | 37,492          |       | (196         | )          | 37,609          |       |
| 2009                                                   |       | 248             |       | 33,758          |       | (184         | )          | 33,822          |       |
| 2010                                                   |       | 133             |       | 28,365          |       | (49          | )          | 28,449          |       |
| 2011                                                   |       | 26              |       | 24,228          |       | —       |       | 24,254          |       |
| Thereafter                                             |       | 355             |       | 90,583          |       | —       |       | 90,938          |       |
| Total minimum  lease payments                          |       | 1,388           |       | $               | 253,826    |         | $          | (664            | )          | $ | 254,550 |   |
| Less: Amount  representing interest                    |       | (401            | )          |            |       |         |       |            |       |
| Present value of net  minimum capital lease payments   |       | 987             |       |            |       |         |       |            |       |
| Less: Current  maturities of capital lease obligations |       | (224            | )          |            |       |         |       |            |       |
| Long-term capital lease obligations                    |       | $               | 763        |            |       |         |       |            |       |   |

The Company iscontingently liable for leases on sold or assigned premises for $5,028 as ofDecember 31, 2006.

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:
| ** **                                                                 | ** ** | **Successor**         | ** ** | **Predecessor**     | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                 | ** ** | **December 31,** | ** ** | **August 20,** | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
| ** **                                                                 | ** ** | **2006**              | ** ** | **2006**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Rental expense                                                             |       | $                     | 14,893     |                | $          | 30,003 |   | $ | 42,837 |   | $ | 24,059 |   |
| Percentage rent  expense above minimum rent   (included in rental expense) |       | 907                   |       | 1,755               |       | 2,517 |   | 2,218 |   |
| Net sublease income                                                        |       | 122                   |       | 289                 |       | 530 |   | 813 |   |
|                                                                            |            |                       |            |                     |            |  |  |  |  |  |  |  |  |

 

**Litigation**

The Company isperiodically a defendant in cases involving personal injury, employment-relatedclaims and other matters that arise in the normal course of business. While anypending or threatened litigation has an element of uncertainty, the Companybelieves that the outcome of these lawsuits or claims, individually orcombined, will not materially adversely affect the consolidated financialposition, results of operations or cash flows of the Company.

**Self-Insurance**

The Company is self-insured for most casualty lossesup to certain stop-loss limits. The Company has accounted for its liabilitiesfor these casualty losses and claims, including both reported and incurred butnot reported claims, based on information provided by independent actuaries.Management believes that it has recorded reserves for casualty losses at alevel that has substantially mitigated the potential negative impact of adversedevelopments and/or volatility. Management believes that its calculation ofcasualty loss liabilities would not change materially under differentconditions and/or different methods. However, due to the inherent volatility ofactuarially determined casualty claims, it is reasonably possible that theCompany could experience 

45

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changes in estimated casualty losses, which could bematerial to both quarterly and annual net income. Amounts estimated to beultimately payable with respect to existing claims and an estimate for claimsincurred but not reported under these programs have been accrued and areincluded in the in the accompanying consolidated balance sheets. Estimatedliabilities related to the self-insured casualty losses were $15,877 and$15,916 as of December 31, 2006 and December 25, 2005, respectively.

The Company isalso required to maintain collateral securing future payment under theself-insured retention insurance programs. As of December 31, 2006 and December25, 2005, this collateral consisted of stand-by letters of credit of $21,173and $18,804, respectively.

**11. Related Party Transactions**

**Successor Transactions**

The Company has aManagement Services Agreement (the Management Agreement”) dated August 21,2006, by and between the Company and Sun Capital Partners Management IV, LLC(the “Manager”), an affiliate of Sun Cantinas LLC, the indirect holder of themajority of the capital stock of the Company. The Manager is paid annual feesequal to the greater of (i) $500 or (ii) 1% of the Company’s EBITDA for suchperiod. EBITDA is defined as (A) net income (or loss) after taxes of the Companyand its direct and indirect subsidiaries on a consolidated basis (“NetIncome”), plus (B) interest expense which has been deducted in thedetermination of Net Income, plus (C) federal, state and local taxes which havebeen deducted in determining Net Income, plus (D) depreciation and amortizationexpenses which have been deducted in determining Net Income, including withoutlimitation amortization of capitalized transaction expenses incurred inconnection with the transactions contemplated by the Merger plus(E) extraordinary losses which have been deducted in the determination ofNet Income, plus (F) un-capitalized transaction expenses incurred in connectionwith the Merger, plus (G) all other non-cash charges, minus(H) extraordinary gains which have been included in the determination ofNet Income.  EBITDA is computed withouttaking into consideration the fees payable under the Management Agreement. TheCompany pays the fees in quarterly installments in advance equal to the greaterof (i) $125 or (ii) 1% of EBITDA for the immediately preceding fiscal quarter.Expenses relating to the Management Agreement of $174 were recorded as generaland administrative expense in the Successor Period from August 21, 2006 toDecember 31, 2006. Additionally, the Company prepaid $125 in fees under theagreement for the first quarter of 2007.

In September 2006, theCompany made a dividend distribution of $10,000 to RM Restaurant Holding Corp.,its parent, which was recorded as a reduction to retained earnings. The Companyhas also made subsequent additional distributions to RM Restaurant Holding Corp.in the amount of $3,466 and has recorded the distributions as a related partyreceivable.

**Predecessor Transactions**

The Company had anAmended and Restated Management Agreement dated June 28, 2000 with two of itsformer stockholders Bruckman, Rosser, Sherrill & Co., L.P. and FS PrivateInvestments, LLC. The stockholders were paid annual fees equating to .667% and..333%, respectively, of consolidated earnings before interest, income taxes,depreciation and amortization of the Company. As described in the MergerAgreement, the Amended and Restated Management Agreement dated June 28,2000  was terminated in connection withthe Merger. Expenses relating to the agreement of $436, $510 and $302 wererecorded as general and administrative expense in the periods from December 26,2005 to August 20, 2006 and the fiscal years ended December 25, 2005 andDecember 26, 2004, respectively. Additionally, the Company recorded atermination fee of $1,819 in the period from December 26, 2005 to August 20,2006, related to the termination of the Amended and Restated ManagementAgreement.

On January 19, 2005, the Company paid $834 and $167 toBruckman, Rosser, Sherrill & Co., L.P. and FS Private Investments, LLC,respectively, for advisory and transactional services provided to the Companyin connection with the Chevys Acquisition.

Effective March 31, 2004,the Company cancelled its management agreement with Restaurant Associates Corp.to provide services for the benefit of the Company, including general andstrategic management, treasury, tax, financial reporting, benefitsadministration, insurance, information technology, real estate and legalservices. Two of the Company’s former directors were employees of RestaurantAssociates Corp. Expense relating to this agreement of $74 was recorded asgeneral and administrative expense in the year ended December 25, 2005.

In April 2004, weentered into an oral agreement with RA Patina, pursuant to which oursubsidiary, Real Mex Foods, Inc., provides food distribution services tocertain restaurants owned by RA Patina. From December 26, 2005 to August 20, 2006and for the fiscal year ended December 25, 2005 we received $922 and $985,respectively, for services rendered under this food distribution servicearrangement. Fortunato N. Valenti, one of our former directors, is the ChiefExecutive Officer of RA Patina and Richard Stockinger, also one of our formerdirectors, is the President of RA Patina.

**12. Employee Benefit Plan**

The Company is thesponsor for a defined contribution plan (401(k) plan) for qualified Companyemployees, as defined. Participants may contribute from 1% to 50% of pre-taxcompensation, subject to certain limitations. The plan contains a provisionthat provides that the Company may make discretionary contributions. TheCompany has recorded contribution expense of $93, $159, 

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$263 and $188 during theSuccessor Period from August 21, 2006 to December 31, 2006 and the PredecessorPeriods from December 26, 2005 to August 20, 2006 and years ended December 25,2005 and December 26, 2004, respectively.

**13. Casualty Gain—Predecessor**

In 2003, two ofthe Company’s restaurants were partially destroyed by fire. The loss, coveredby the Company’s replacement cost property insurance, resulted in a loss of $14during the year ended December 25, 2005 and a gain of $997 during the yearended December 26, 2004, and is presented as casualty gain (loss) in theconsolidated statements of operations. The gain includes business interruptioninsurance proceeds and gain on property replacement.

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

The following is asummary of the quarterly results of operations for the years ended December 31,2006 and December 25, 2005:

 
| ** **                        | ** ** | **(1)**                      | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Successor** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **5 weeks** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Predecessor**              | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** | **August 21, 2006** | ** ** | **Successor** | ** ** |
| ** **                        | ** ** | **13 weeks ended** | ** ** | **13 weeks ended** | ** ** | **8 weeks** | ** ** | **to** | ** ** | **14 weeks ended** | ** ** |
| ** **                        | ** ** | **March 26,**           | ** ** | **June 25,** | ** ** | **June 26, 2006 to** | ** ** | **September 24,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2006**                     | ** ** | **2006** | ** ** | **August 20, 2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| Total revenues               |       | $                            | 137,582    |   | $ | 146,692 |   | $ | 88,278 |   | $ | 51,315 |   | $ | 140,783 |   |
| Operating income (loss) |       | $                            | 7,395      |   | $ | 15,230 |   | $ | (4,475 | ) | $ | 2,617 |   | $ | 762 |   |
| Net income (loss)                 |       | $                            | 863        |   | $ | 5,539 |   | $ | (4,922 | ) | $ | (77 | ) | $ | (4,970 | ) |

 
| ** **       | ** ** | **Predecessor**                    | ** ** | **Predecessor**                    | ** ** | **Predecessor **        | ** ** | ** ** | ** ** | **Predecessor**              | ** ** |
|------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------|------------|------------------------------|------------|
| ** **       | ** ** | ** 13 weeks ended** | ** ** | ** 13 weeks ended** | ** ** | **13 weeks ended** | ** ** | ** ** | ** ** | **13 weeks ended** | ** ** |
| ** **       | ** ** | **March 27,**                 | ** ** | **June 26,**                  | ** ** | **September 25,**       | ** ** | ** ** | ** ** | **December 25,**        | ** ** |
| ** **       | ** ** | **2005**                           | ** ** | **2005**                           | ** ** | **2005**                     | ** ** | ** ** | ** ** | **2005**                     | ** ** |
| Total revenues   |       | $                                  | 123,989    |                               | $          | 144,660                      |       | $          | 137,589    |                         |       |   | $ | 128,058 |   |
| Operating income |       | $                                  | 6,666      |                               | $          | 11,051                       |       | $          | 9,175      |                         |       |   | $ | 4,541 |   |
| Net income       |       | $                                  | 1,395      |                               | $          | 5,092                        |       | $          | 3,268      |                         |       |   | $ | 3,631 |   |

----

(1)             Includesthe results of operations of Chevys since January 12, 2005, the date ofacquisition.

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ITEM9.                                                     CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.              CONTROLSAND PROCEDURES

As of the end of our 2006fiscal year, we conducted an evaluation, under the supervision and with theparticipation of the principal executive officer (“CEO”) and principalfinancial officer (“CFO”), of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act.)  Basedon this evaluation, the CEO and CFO concluded that, as of the end of our 2006fiscal year, 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 (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) during our most recently completed fiscal quarter thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

ITEM 9B.               OTHERINFORMATION

None.

**PARTIII**

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

**Directors, Executive Officers andKey Employees**

The following table setsforth certain information regarding our board of directors, executive officersand other key employees of our Company
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                        |
|-----------------------|------------|---------|------------|---------------------------------------------------------------------|
| Frederick F.  Wolfe   |       | 56      |       | President, Chief Executive Officer and Director                     |
| Steven Tanner         |       | 56      |       | Chief Financial Officer                                             |
| Charles Rink          |       | 47      |       | Chief Operating Officer, President Chevys  Restaurants LLC          |
| Carlos Angulo         |       | 45      |       | President, Real Mex Foods, Inc.                                     |
| Roberto (Pepe)  Lopez |       | 51      |       | Executive Chef and Senior Vice President, Research  and Development |
| Clarence E.  Terry    |       | 60      |       | Director+                                                           |
| Douglas C.  Werking   |       | 44      |       | Director*                                                           |

----

*******                   **Memberof our audit committee

+                    Memberof our compensation committee

*FrederickF. Wolfe* has been ourPresident, Chief Executive Officer and Director since May 2001. Before joiningour Company, Mr. Wolfe served as Chief Operating Officer at California PizzaKitchen from 1997 to 2001. From 1982 to 1997, Mr. Wolfe served in a variety ofpositions at Acapulco rising from Assistant Manager to Vice President of Operations.

*StevenTanner*  has been our ChiefFinancial Officer since January 2004. Before joining our Company, Mr. Tannerserved as 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 Burger 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 our ChiefOperating Officer since 2005 and President of Chevys since the acquisition inJanuary 2005. Since joining our Company in 1990, Mr. Rink served as RegionalDirector, Divisional Vice President, Northwest Division, Vice President ofOperations Services and Executive Vice President of El Torito Restaurants. Hisprevious experience includes serving as District Manager for VisionsRestaurants, Inc. between 1988 and 1990 and as District Manager for RestaurantEnterprises Group, Inc. between 1983 and 1988.

*CarlosAngulo*  has been the Presidentof Real Mex Foods, Inc. since January 2005. Mr. Angulo joined us in 2000 asVice President of Real Mex Foods, Inc. Previously, Mr. Angulo worked for Smart& Final for 18 years in a variety of positions from Store Manager to VicePresident of Northern California Distribution. Mr. Angulo received a Bachelorof Science degree from the University of Southern California.

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

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*Clarence E. Terry*has been a Director of our Company since August 2006. Since September 1999, Mr.Terry has served as Managing Director of Sun Capital Partners, a privateinvestment firm, and he has more than 30 years of operating experience. Priorto joining Sun Capital, Mr. Terry served as Vice President at Rain BirdSprinkler Manufacturing, Inc., a manufacturer of irrigation products. Mr. Terryis also a director of Loud Technologies, Inc., SAN Holdings, Inc. and a numberof private companies.

*Douglas C. Werking*hasbeen a Director of our Company since August 2006. Since 2006, Mr. Werking hasserved as a Vice President of Sun Capital Partners, a private investment firmand has over 17 years experience in finance, restructurings, turnarounds, andgeneral management. Prior to joining Sun Capital Partners in 2006, he was aManaging Director with an international turnaround and restructuring consultingfirm, during which time, Mr. Werking served in several interim managementpositions including CFO with Peregrine, Inc., a Detroit-based automotive partsmanufacturer, as Chief Restructuring Officer with Mirant Corporation, a largemerchant energy company, and Treasurer with Air Transport International, aLittle Rock-based air cargo company. He has worked with companies in theautomotive, manufacturing, textile, technology, agricultural, and healthcareindustries. Mr. Werking received his Bachelor of Science and Commerce degreefrom Santa Clara University and MBA from the University of Chicago.

**Audit Committee Financial Expert**

Our Board of Directorsbelieves that its audit committee members are financially literate and are capableof analyzing and evaluating our Company’s financial statements.  Our Board of Directors has determined thatDouglas Werking is an “audit committee financial expert” as defined underItem 401(h) of Regulation S-K. Mr. We are not required by the rules of any stock exchange or securitiesassociation to have an audit committee composed of independent directors.

**Code of Ethics**

On February 7, 2007 theCompany adopted a Code of Ethics that applies to our principal executiveofficer, principal financial officer, chief accounting officer or controller,and all persons performing similar functions. The Code of Ethics is filedherewith.

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ITEM 11.                EXECUTIVECOMPENSATION

**COMPENSATIONDISCUSSION AND ANALYSIS**

**CompensationPhilosophy and Overall Objectives**

Webelieve that the compensation paid to our Chief Executive Officer, our ChiefFinancial Officer and our three other most highly compensated executiveofficers, whom we collectively refer to as our named executive officers (“NamedExecutive Officers”), should be closely aligned with our performance as well asthat of each Named Executive Officer’s individual performance on both a short-and long-term basis, and that such compensation should be sufficient to attractand retain highly qualified leaders who can create significant value for ourorganization. Our compensation programs are designed to provide Named ExecutiveOfficers meaningful incentives for superior performance. Performance isevaluated using both financial and non-financial objectives that we believecontribute to our long-term success. Among these objectives are financialstrength, customer service, operational excellence, employee commitment andregulatory integrity.

**How isCompensation Determined**

Due tothe unique nature of each Named Executive Officer’s duties, our criteria forassessing executive performance and determining compensation in any year isinherently subjective and is not based upon specific formulas or weighting offactors. We use companies in similar industries as benchmarks when initiallyestablishing Named Executive Officers’ compensation. We also review peercompany data when making annual base salary and incentive recommendations.

**Discussionof Specific Compensation Elements**

Thefollowing describes the components of our executive compensation program andthe basis upon which recommendations and determinations were made.

**BaseSalary**

Wedetermine base salaries for all of our Named Executive Officers by reviewingcompany and individual performance, the value each Named Executive Officerbrings to us and general labor market conditions. While base salary provides abase level of compensation intended to be competitive with the external market,the base salary for each Named Executive Officer is determined on a subjectivebasis after consideration of these factors and is not based on targetpercentiles or other formal criteria. The base salaries of Named ExecutiveOfficers are reviewed on an annual basis, and any annual increase is the resultof an evaluation of the Company and of the individual Named Executive Officer’sperformance for the period.  An increaseor decrease in base pay may also result from a promotion or other significantchange in a Named Executive Officer’s responsibilities during the year.

**Annual Bonus Plan**

We maintain an annualbonus plan 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 of the bonus,executives must be employed on the first day of the fiscal year, provided thatunder the plan we may adjust awards based on individual performance factors orspecial circumstances affecting our Company. In addition, pursuant to the annual bonus plan, senior management(including the Named Executive Officers, including our CEO) is entitled toreceive additional annual incentive awards upon our Company’s exceeding the pre-setEBITDA target.  The amount of theadditional bonus pool is calculated based on a percentage of the amount bywhich EBITDA for the plan year exceeds the pre-set EBITDA target, with eacheligible participant’s share being equal to a percentage of the additionalbonus pool.

**RetentionAgreements**

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

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severance plan or similararrangement maintained by our Company.  Achange in control occurred on August 21, 2006. Therefore, under the terms ofthe retention agreements, the agreements will expire on February 20, 2008.

**Employment Agreement**

We entered into anexecutive employment agreement with Mr. Wolfe effective August 21, 2006. Underthe employment agreement, Mr. Wolfe is entitled to a base salary of $473,000per annum, or such greater amount as the Board of Directors shall determine,and customary executive benefits. Contingent upon our meeting certain financialgoals set annually in accordance with our bonus plan, Mr. Wolfe is eligible toreceive a bonus of up to 133.3% of his base salary. If Mr. Wolfe’s employmentis terminated by us without cause or by his resignation for “good reason,” hewould be entitled to any unpaid previously awarded bonus. If such terminationwithout cause or for “good reason” is within the first two years of thecommencement of the executive employment agreement he would be entitled toseverance payments equal in the aggregate to his annual base salary for aperiod of two years following such termination; if the termination occurredafter the two-year period, he would be entitled to severance payments equal inthe aggregate to his annual base salary for a period of one year. Theemployment agreement with Mr. Wolfe expires on August 20, 2011.

The following table setsforth certain information with respect to annual and long-term compensation forservices in all capacities for Fiscal Years 2006, 2005 and 2004 paid to ourNamed Executive Officers who were serving as such as of December 31, 2006:

 
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | ** **    | ** ** | **Change in**     | ** ** | ** **  |       | ** ** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|---------------|------------|---------------|------------|-------------------|------------|-------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Non-**      | ** ** | **Pension Value** | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Equity**    | ** ** | **and**           | ** ** | ** **  |       | ** ** | ** ** |
| ** **                      |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Incentive** | ** ** | **Nonqualified**  | ** ** | **All**     | ** ** | ** ** | ** ** |
| **Name and**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Restricted** | ** ** | ** **    | ** ** | **Plan**      | ** ** | **Deferred**      | ** ** | **Other**   | ** ** | ** ** | ** ** |
| **Principal**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**      | ** ** | **Option**    | ** ** | **Compen-**   | ** ** | **Compensation**  | ** ** | **Compen-** | ** ** | ** ** | ** ** |
| **Position**                    | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Other**  | ** ** | **Awards**     | ** ** | **Awards(2)** | ** ** | **sation(7)** | ** ** | **Earnings(1)**   | ** ** | **sation**  | ** ** | **Total**  | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **($)**    | ** ** | **($)**    | ** ** | ** ** | ** ** | **(#)**        | ** ** | **(#)**       | ** ** | **($)**       | ** ** | **(#)**           | ** ** | **($)**     | ** ** | **($)**    | ** ** |
| Frederick F.     |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Wolfe                    |       | 2006       |       | 484,468    |       | 836,499    |       | *          |       | —         |       | —        |       | —        |       | —            |       | 2,267,988   | (3)        | 3,588,955  |       |
| CEO, President                  |       | 2005       |       | 454,935    |       | 339,293    |       | *          |       | —         |       | —        |       | —        |       | —            |       | —      |       | 794,228    |       |
|   and Director             |       | 2004       |       | 440,793    |       | 75,000     |       | *          |       | —         |       | —        |       | —        |       | —            |       | —      |       | 515,793    |       |
| Steven L.                       |       | 2006       |       | 269,135    |       | 462,676    |       | *          |       | —         |       | —        |       | —        |       | —            |       | 1,290,320   | (3)        | 2,022,131  |       |
|   Tanner(4)                |       | 2005       |       | 254,559    |       | 133,682    |       | *          |       | —         |       | —        |       | —        |       | —            |       | —      |       | 388,241    |       |
|   CFO                      |       | 2004       |       | 210,769    |       | —     |       | *          |       | 735            | (3)        | 4,072         |       | —        |       | —            |       | —      |       | 210,769    |       |
| Charles Rink                    |       | 2006       |       | 297,243    |       | 466,153    |       | *          |       | —         |       | —        |       | —        |       | —            |       | 1,025,183   | (5)        | 1,788,579  |       |
|   COO                      |       | 2005       |       | 293,054    |       | 147,195    |       | *          |       | —         |       | —        |       | —        |       | —            |       | —      |       | 440,249    |       |
|                            |       | 2004       |       | 248,668    |       | 35,000     |       | *          |       | —         |       | 12,215        |       | —        |       | —            |       | —      |       | 283,668    |       |
| Carlos Angulo                   |       | 2006       |       | 233,292    |       | 375,120    |       | *          |       | —         |       | —        |       | —        |       | —            |       | 683,427     | (5)        | 1,291,839  |       |
|   President                |       | 2005       |       | 221,384    |       | 96,418     |       | *          |       | —         |       | —        |       | —        |       | —            |       | —      |       | 317,802    |       |
| Real Mex                        |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Foods, Inc.              |       | 2004       |       | 180,769    |       | 35,000     |       | *          |       | —         |       | 8,143         |       | —        |       | —            |       | —      |       | 215,769    |       |
| Roberto (Pepe)                  |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Lopez                    |       | 2006       |       | 198,162    |       | 142,794    |       | *          |       | —         |       | —        |       | —        |       | —            |       | 256,317     | (5)        | 597,273    |       |
| Executive                       |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Chef and                 |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Senior Vice              |       | 2005       |       | 195,369    |       | 60,413     |       | *          |       | —         |       | —        |       | —        |       | —            |       | —      |       | 255,782    |       |
|   President,               |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Research                 |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   and                      |       |       |       |       |       |       |       |       |       |           |       |          |       |          |       |              |       |        |       |       |       |
|   Development              |       | 2004       |       | 162,308    |       | 25,000     |       | *          |       | —         |       | 3,054         |       | —        |       | —            |       | —      |       | 187,308    |       |

----

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

(1)             TheCompany does not have a pension plan and does not pay above market orpreferential earnings on deferred compensation plans.

(2)             Representsoptions to acquire shares of our Class A Common Stock granted under our Amendedand Restated 2000 Stock-Based Incentive Compensation Plan.

(3)             Amountsfor Mr. Wolfe and Mr. Tanner include restricted stock award payments and theexercise of stock option awards.

(4)             StevenL. Tanner joined our Company as Chief Financial Officer on January 12, 2004.

(5)             Representsthe exercise of stock option awards. No stock-based employee compensation costis reflected in net income, as all options granted under the Plans had anexercise price equal to the market value as of the underlying common stock onthe date of grant.

(6)             Represents295 restricted shares of our Series A 12.5% Cumulative Compounding PreferredStock, 208 restricted shares of our Series B 13.5% Cumulative CompoundingPreferred Stock and 232 restricted shares of our Series C 15% CumulativeCompounding Participating Preferred Stock.

(7)             TheCompany does not have a Non-Equity Incentive Plan.

 

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**Option Grants in Fiscal YearEnded December 31, 2006**

There were nooptions granted by the Company during Fiscal Year 2006 to our Named ExecutiveOfficers.

**Option Exercises and Stock Vested**

In connection withthe Merger, all options and shares of restricted stock fully vested andconverted into the right to receive a portion of the purchase price less theexercise prices or unpaid purchase prices. The following table sets forth each exercise of stock options and each vestingof stock, including restricted stock, for each of the Named Executive Officersduring Fiscal Year 2006:

** **
|                            | ** ** | **Option Awards**                                           | ** ** | **Stock Awards**                               | ** ** |
|----------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Name**                   | ** ** | **Number of   Shares Acquired  on Exercise** | ** ** | **Value   Realized   on   Exercise** | ** ** | **Number of   Shares Acquired  on Vesting** | ** ** | **Value   Realized on   Vesting** | ** ** |
|                       |       | (#)                                                              |       | ($)                                                 |       | (#) |   | ($) |   |
|  Frederick F. Wolfe   |       |                                                             |       |                                                |       |   |   |   |   |
|  CEO, President and   |       |                                                             |       |                                                |       |   |   |   |   |
| Director                   |       | 13,000                                                           |       | 1,026,197                                           |       | 325**(1** | **)** | 1,241,791 |   |
|                       |       |                                                             |       |                                                |       |   |   |   |   |
|  Steven L. Tanner     |       |                                                             |       |                                                |       |   | ** ** |   |   |
|  CFO                  |       | 4,072                                                            |       | 341,755                                             |       | 735**(2** | **)** | 948,565 |   |
|                            |       |                                                             |       |                                                |       |   |   |   |   |
|  Charles Rink         |       |                                                             |       |                                                |       |   |   |   |   |
|  COO                  |       | 12,215                                                           |       | 1,025,183                                           |       | — |   | — |   |
|                       |       |                                                             |       |                                                |       |   |   |   |   |
|  Carlos Angulo        |       |                                                             |       |                                                |       |   |   |   |   |
|  President Real Mex   |       | 8,143                                                            |       | 683,427                                             |       | — |   | — |   |
|                            |       |                                                             |       |                                                |       |   |   |   |   |
|  Roberto (Pepe) Lopez |       |                                                             |       |                                                |       |   |   |   |   |
|  Executive Chef and   |       |                                                             |       |                                                |       |   |   |   |   |
| Senior Vice President,     |       |                                                             |       |                                                |       |   |   |   |   |
| Research and               |       |                                                             |       |                                                |       |   |   |   |   |
| Development                |       | 3,054                                                            |       | 256,317                                             |       | — |   | — |   |

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**(1)****           **Represents325 restricted shares of our Series C 15% Cumulative Compounding ParticipatingPreferred Stock.

**(2)****           **Represents295 restricted shares of our Series A 12.5% Cumulative Compounding PreferredStock, 208 restricted shares of our Series B 13.5% Cumulative CompoundingPreferred Stock and 232 restricted shares of our Series C 15% CumulativeCompounding Participating Preferred Stock.

**Compensation of Directors**

Ourdirectors are entitled to reimbursement of their reasonable out-of-pocket expensesin connection with their travel to and attendance at meetings of the Board ofDirectors or committees thereof.

In February 2005,we agreed to pay, retroactive to the beginning of Fiscal Year 2005, (i) eachnon-employee director (other than the Chairman of our Audit Committee and theChairman of our Board of Directors) an annual fee of $25,000; (ii) the Chairmanof our Audit Committee an annual fee of $35,000; and (iii) the Chairman of ourBoard of Directors an annual fee of $50,000. We further agreed to pay 50.0% of these amounts retroactively to thosenon-employee directors who served on our Board of Directors during Fiscal Year2004. In August 2006, the compensation plan for non-employee directors wasterminated.

**CompensationCommittee Interlocks and Insider Participation**

During the Fiscal Year2006, all compensation decisions were made by the Compensation Committee whichis comprised of Mr. Terry.  None of theCompany’s executive officers currently serve, or in the past have served, as adirector or member of any compensation committee of another entity that has oneor more executive officers serving on the Company’s Board of Directors.

**CompensationCommittee Report**

We have reviewed anddiscussed the Compensation Discussion and Analysis with management. Based onour review and discussions with management, we have recommended to the Board ofDirectors that the Compensation Discussion and Analysis be included in theCompany’s Form 10-K.

Submitted by:

Clarence E. Terry

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ITEM12.                                               SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

**Security Ownership of****Certain Beneficial Ownersand Management**

The following table setsforth information with respect to the beneficial ownership of outstandingcommon stock and preferred stock of Real Mex Restaurants, Inc. as of December31, 2006 by:

·                                          Eachperson (or group of affiliated persons) who is known by us to beneficially own5% or more of Real Mex Restaurants, Inc.’s common and preferred stock;

·                                          Eachof our Named Executive Officers;

·                                          Eachof our Directors; and

·                                          Allof our Directors and executive officers as a group.

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

**Number and Percent of Shares of**

**Stock of**

**Real Mex Restaurants, Inc.**

 

|                                                                | ** ** | **Common Stock(1)** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                     | ** ** | **Shares**               | ** ** | **Percentage** | ** ** |
| ***Greater  than 5% Stockholder***                             |       |                     |       |   |   |
| RM Restaurant  Holding Corp.                                   |       | 1,000                    |       | 100.00 |   |
| ***Named  Executive Officers and Directors***                  |       |                     |       |   |   |
| Frederick F.  Wolfe, Jr.                                       |       | —                   |       | — |   |
| Steven Tanner                                                  |       | —                   |       | — |   |
| Charles Rink                                                   |       | —                   |       | — |   |
| Carlos Angulo                                                  |       | —                   |       | — |   |
| Roberto Lopez                                                  |       | —                   |       | — |   |
| Clarence E.  Terry                                             |       | —                   |       | — |   |
| Douglas C.  Werking                                            |       | —                   |       | — |   |
| All executive officers  and directors as a group   (7 persons) |       | —                   |       | — |   |

 

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ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

**ManagementAgreements**

The Company has aManagement Services Agreement (the Management Agreement”) dated August 21,2006, by and between the Company and Sun Capital Partners Management IV, LLC(the “Manager”), an affiliate of Sun Cantinas LLC, the indirect holder of themajority of the capital stock of the Company. The Manager is paid annual feesequal to the greater of (i) $500,000 or (ii) 1% of the Company’s EBITDA forsuch period. EBITDA is defined as (A) net income (or loss) after taxes of theCompany and its direct and indirect subsidiaries on a consolidated basis (“NetIncome”), plus (B) interest expense which has been deducted in thedetermination of Net Income, plus (C) federal, state and local taxes which havebeen deducted in determining Net Income, plus (D) depreciation and amortizationexpenses which have been deducted in determining Net Income, including withoutlimitation amortization of capitalized transaction expenses incurred inconnection with the transactions contemplated by the Merger plus(E) extraordinary losses which have been deducted in the determination ofNet Income, plus (F) un-capitalized transaction expenses incurred in connectionwith the Merger, plus (G) all other non-cash charges, minus(H) extraordinary gains which have been included in the determination ofNet Income.  EBITDA is computed withouttaking into consideration the fees payable under the Management Agreement. TheCompany pays the fees in quarterly installments in advance equal to the greaterof (i) $125,000 or (ii) 1% of EBITDA for the immediately preceding fiscal quarter.Expenses relating to the Management Agreement of $174,000 were recorded asgeneral and administrative expense for the Successor Period August 21, 2006 toDecember 31, 2006. Additionally, the Company prepaid $125,000 in fees under theagreement for the first quarter of 2007.

The Company had anAmended and Restated Management Agreement dated June 28, 2000 with two of itsformer stockholders Bruckman, Rosser, Sherrill & Co., L.P. and FS PrivateInvestments, LLC. The stockholders were paid annual fees equating to .667% and..333%, respectively, of consolidated earnings before interest, income taxes,depreciation and amortization of the Company. As described in the MergerAgreement, the Amended and Restated Management Agreement dated June 28, 2000  was terminated in connection with the Merger.Expenses relating to the agreement of $0.4 million, $0.5 million and $0.3million were recorded as general and administrative expense in the PredecessorPeriods December 26, 2005 to August 20, 2006 and the fiscal years endedDecember 25, 2005 and December 26, 2004, respectively. Additionally, theCompany recorded a termination fee of $1.8 million in the Predecessor PeriodDecember 26, 2005 to August 20, 2006, related to the termination of the Amendedand Restated Management Agreement.

On January 19, 2005, the Company paid $0.8 million and$0.2 million to Bruckman, Rosser, Sherrill & Co., L.P. and FS PrivateInvestments, LLC, respectively, for advisory and transactional servicesprovided to the Company in connection with the Chevys Acquisition.

Effective March 31, 2004,the Company cancelled its management agreement with Restaurant Associates Corp.to provide services for the benefit of the Company, including general andstrategic management, treasury, tax, financial reporting, benefitsadministration, insurance, information technology, real estate and legalservices. Two of the Company’s former directors were employees of RestaurantAssociates Corp. Expense relating to this agreement of $0.1 million wasrecorded as general and administrative expense in the Predecessor year endedDecember 25, 2005.

**DividendDistribution**

In September 2006, theCompany made a dividend distribution of $10.0 million to RM Restaurant Holdingwhich was recorded as a reduction to retained earnings. The Company has alsomade additional distributions to RM Restaurant Holding in the amount of $3.5million and has recorded the distributions as a related party receivable.

**Transactionswith J.W. Childs**

*Issuanceof Equity Securities to J.W. Childs*.  Pursuant to the terms of the definitive assetpurchase agreement, dated October 14, 2004 (the “Chevys Purchase Agreement”),on January 11, 2005 we issued to J.W. Childs an aggregate of 41,360 shares ofour Class A Common Stock, 2,064 shares of our Series A 12.5% CumulativeCompounding Preferred Stock, 1,393 shares of our Series B 13.5% CumulativeCompounding Preferred Stock, 1,946 shares of our Series C 15% CumulativeCompounding Participating Preferred Stock and options to purchase 3,485 sharesof our Class A Common Stock (which options are fully-vested and exercisable atprices ranging from $5 to $92 per share) as part of the consideration for theChevys Acquisition. On August 16, 2006, as partial consideration for the ChevysAcquisition and pursuant to a Mutual Settlement and Release Agreement, theCompany issued 1,897 of Series A, 1,433 shares of Series B and 1,946 shares ofSeries D redeemable preferred stock to J.W. Childs Equity Partners L.P. and itsaffiliate, JWC Chevys Co-Invest, LLC, in their capacity as unsecured creditorsof the Sellers.

**OtherRelated Party Transactions**

In April 2004, weentered into an oral agreement with RA Patina, pursuant to which oursubsidiary, Real Mex Foods, Inc., provides food distribution services tocertain restaurants owned by RA Patina. In Fiscal Years 2006 and 2005, wereceived 

54

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approximately $1.46million and $1.0 million, respectively, for services rendered under this fooddistribution service arrangement. Fortunato N. Valenti, one of our formerdirectors, is the Chief Executive Officer of RA Patina and Richard Stockinger,also one of our former directors, is the President of RA Patina.

ITEM 14.                PRINCIPAL ACCOUNTANT FEES AND SERVICES

**IndependentAuditors**

Our Audit Committeeappointed Ernst & Young LLP (“E&Y”) as our Company’s independentauditors to conduct the audit of our Company’s books and records for the fiscalyear ending December 31, 2006. E&Y has served as our independent auditorssince our inception in 1998.

**Principal Accounting Fees andServices**

The following table setsforth the aggregate fees billed to the Company by E&Y:

 

|                     | ** ** | **Fiscal Year 2006  Combined** | ** ** | **Fiscal Year  2005** | ** ** |
|---------------------|------------|------------------------------------------|------------|----------------------------|------------|
| Audit Fees          |       | $                                        | 80,000     |                       | $          | 491,800 |   |
| Audit Related  Fees |       | 22,000                                   |       | 20,000                     |       |
| Tax Fees            |       | 105,880                                  |       | 243,700                    |       |
| All Other Fees      |       | 30,300                                   |       | 521,129                    |       |
| Total Fees          |       | $                                        | 238,180    |                       | $          | 1,276,629 |   |

 

**Audit Fees** represent theaggregate fees billed or estimated to be billed to us for professional servicesrendered for the audit of our annual financial statements, review of financialstatements included in our Form 10-Qs and services normally provided by ouraccountants in connection with statutory and regulatory filings or engagements.

**Audit-Related***Fees* represent the aggregate fees billed to us or estimatedto be billed to us for assurance and related services that were reasonablyrelated to the performance of the audit or review of our financial statementsand are not reported under “Audit Fees” above. The nature of services providedconsisted in both years of audits of our 401(k) plans.

**Tax Fees** represent theaggregate fees billed to us or estimated to be billed to us for professionalservices rendered for tax compliance, tax advice and tax planning. In FiscalYear 2006 Combined the services included analysis of the income taxdeductibility of certain Merger expenses and a tax return review. In FiscalYear 2005 the services included an analysis of the tax attributes acquired whenwe acquired Chevys and a tax return review.

**All Other Fees** represent theaggregate fees billed to us or estimated to be billed to us for products orservices provided to us by E&Y, other than the services reported in theabove categories, which consisted principally of fees for the examination ofthe offering circular and registration statement on Form S-4 in connection withthe related exchange offer, fees for services rendered in connection with theChevys Acquisition and fees for services rendered in connection the Merger.

**Policy on Audit CommitteePre-Approval of Audit and Permissible Non-Audit Services of the IndependentAuditor**

The Audit Committee isresponsible for appointing, setting compensation for and overseeing the work ofthe independent auditor. The Audit Committee has established a policy requiringpre-approval of all audit and permissible non-audit services provided by theindependent auditor. The Audit Committee considers whether such services areconsistent with the rules of the SEC on auditor independence as well as whetherthe independent auditor is best positioned to provide the most effective andefficient service, for reasons such as familiarity with our Company’s business,people, culture, accounting systems, risk profile and other factors and inputfrom our management. The Audit Committee may delegate to one or more of itsmembers the pre-approval of audit and permissible non-audit services providedthat those members 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 Fiscal Year 2006Combined, all of the services related to the audit or other fees describedabove were pre- approved by the Audit Committee and none were provided pursuantto any waiver of the pre-approval requirement.

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**PART IV**

ITEM 15.                EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

*(a)*(1)      FINANCIALSTATEMENTS.

The ConsolidatedFinancial Statements are filed as part of this report under Item 8 FinancialStatements and Supplementary Data.

•                    ConsolidatedBalance Sheets - December 31, 2006 and December 25, 2005

•                    ConsolidatedStatements of Operations — Successor Period August 21, 2006 to December 31,2006 and Predecessor Periods December 26, 2005 to August 20, 2006 and FiscalYears Ended December 25, 2005, and December 26, 2004

•                    ConsolidatedStatements of Stockholders’ Equity - Successor Period August 21, 2006 toDecember 31, 2006 and Predecessor Periods December 26, 2005 to August 20, 2006and Fiscal Years Ended December 25, 2005, and December 26, 2004

•                    ConsolidatedStatements of Cash Flows - Successor Period August 21, 2006 to December 31,2006 and Predecessor Periods December 26, 2005 to August 20, 2006 and FiscalYears Ended December 25, 2005, and December 26, 2004

•                    Notes toConsolidated Financial Statements - December 31, 2006 and December 25, 2005

(2)           FINANCIAL STATEMENT SCHEDULE.

The financial statementschedules are not required under the related instructions or are inapplicableand therefore have been omitted.

(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.(i) to the Company’s  Quarterly Report on Form 10-Q (File No. 333-116310) on November 6, 2006 and  incorporated by reference herewith) |   |
|         |       |            |       |   |   |
|         | 3.2        |            |       | Bylaws of Real  Mex Restaurants, Inc. (Filed with the Securities and Exchange Commission as  Exhibit 3.(ii) to the Company’s Quarterly Report on Form 10-Q (File No.  333-116310) on November 6, 2006 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) |   |

 

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|        | 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 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) |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.18       |       |   | 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)                    |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.19       |       |   | 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)                      |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.20       |       |   | 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)                                          |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.21       |       |   | 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)                       |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.22       |       |   | 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)                                           |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.23       |       |   | 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)                                 |       |
|   |       |       |   |                                                                                                                                                                                                                                                                                  |       |
|   | 3.24       |       |   | 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)                                                     |       |

 

57

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|        | 3.25   |   |   | 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)                                                                                                                                           |   |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.26   |   |   | 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)                                                                                                                                                              |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.27   |   |   | 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)                                                                                                                                       |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.28   |   |   | 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)                                                                                                                                                           |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.29   |   |   | Certificate of  Incorporation of CKR Acquisition Corp. (Filed with the Securities and  Exchange Commission as Exhibit 3.31 to the Company’s Annual Report on Form  10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference  herewith)                                                                                                                                        |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.30   |   |   | Bylaws of CKR  Acquisition Corp. (Filed with the Securities and Exchange Commission as  Exhibit 3.32 to the Company’s Annual Report on Form 10-K (File No.  333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                                                                                                               |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.31   |   |   | Articles of  Formation of Chevys Restaurants, LLC (formerly known as Chevys Acquisition  Company LLC). (Filed with the Securities and Exchange Commission as Exhibit  3.33 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on  March 24, 2005 and incorporated by reference herewith)                                                                                         |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 3.32   |   |   | Operating  Agreement of Chevys Restaurants, LLC (formerly known as Chevys Acquisition  Company LLC). (Filed with the Securities and Exchange Commission as Exhibit  3.34 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on  March 24, 2005 and incorporated by reference herewith)                                                                                           |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 4.1    |   |   | Indenture, dated  as of March 31, 2004, among Real Mex Restaurants, Inc., the guarantors named  therein and Wells Fargo Bank, N.A., as trustee. (Filed with the Securities  and Exchange Commission as Exhibit 4.1 to the Company’s Registration  Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated  by reference herewith)                                          |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 4.2    |   |   | First  Supplemental Indenture, dated as of November 29, 2004, among CKR Acquisition  Corp., Real Mex Restaurants, Inc., the guarantors named therein and Wells  Fargo Bank, N.A., as trustee. (Filed with the Securities and Exchange  Commission as Exhibit 4.2 to the Company’s Annual Report on Form 10-K (File  No. 333-116310) on March 24, 2005 and incorporated by reference herewith)   |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 4.3    |   |   | Second  supplemental Indenture, dated as of January 10, 2005, among Chevys  Restaurants, LLC, Real Mex Restaurants, Inc., the guarantors neared therein  and Wells Fargo Bank, N.A., as trustee (Filed with the Security and Exchange  Commission as Exhibit 4.4 to the Company’s Registration Statement on Form S-4  (File No. 333-124670) on May 5, 2005 and incorporated reference herewith) |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.1   |   |   | 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)      |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.2   |   |   | Employment  Agreement dated as of August 21, 2006, by and between Real Mex Restaurants, Inc.  and Frederick Wolfe. (Filed herewith)                                                                                                                                                                                                                                                                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.3   |   |   | Form of  Retention Agreement dated as of February 21, 2006, by and between Real Mex  Restaurants, Inc. and Messrs. Tanner, Rink, Angulo and Wolfe. . (Filed with  the Securities and Exchange Commission as Exhibit 10.20 to the Company’s  Annual Report on Form 10-K (File No. 333-116310) on  February 21, 2006 and incorporated by reference herewith)                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.4   |   |   | Agreement and  Plan of Merger, dated August 17, 2006 among Real Mex Restaurants, Inc., RM  Restaurant Holding Corp. and RM Integrated, Inc (Filed with the Securities  and Exchange Commission as Exhibit 10.1 to the Company’s Report on Form  8-K (File No. 333-116310) on August 23, 2006 and incorporated by  reference herewith)                                            |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.5   |   |   | Amended and  Restated Credit Agreement (Filed with the Securities and Exchange Commission  as Exhibit 10.1 to the Company’s Report on Form 8-K (File  No. 333-116310) on October 6, 2006 and incorporated by reference  herewith)                                                                                                                                                     |   |

 

58

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|        | 10.6   |   |   | Fourth Amendment  to Credit Agreement and Amendment to Loan Documents (Filed with the  Securities and Exchange Commission as Exhibit 10.2 to the Company’s  Report on Form 8-K (File No. 333-116310) on October 6, 2006 and  incorporated by reference herewith) |   |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |   |   |                                                                                                                                                                                                                                                                            |   |
|   | 10.7   |   |   | Amended and  Restated Credit Agreement (Filed with the Securities and Exchange Commission  as Exhibit 10.2 to the Company’s Report on Form 8-K (File  No. 333-116310) on February 2, 2007 and incorporated by reference  herewith)                               |   |
|   |   |   |   |                                                                                                                                                                                                                                                                            |   |
|   | 12.1   |   |   | Computation of  Ratio of Earnings to Fixed Charges. (Filed herewith)                                                                                                                                                                                                            |   |
|   |   |   |   |                                                                                                                                                                                                                                                                            |   |
|   | 14.1   |   |   | Code of Ethics  adopted by the Company on February 7, 2007 (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 he Chief Financial Officer. (Filed herewith)                                                                                                                             |   |
|   |   |   |   |                                                                                                                                                                                                                                                                            |   |
|   | 32.1   |   |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. (Filed herewith)                                                                                                      |   |
|   |   |   |   |                                                                                                                                                                                                                                                                            |   |
|   | 32.2   |   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. (Filed herewith)                                                                                                      |   |

 

59

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SIGNATURES

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                            | REAL MEX RESTAURANTS, INC. |
|----------------------------|----------------------------|
|                       |                       |   |
|                       |                       |   |
|                       | By:                        | /s/ Frederick F. Wolfe |   |
|                       |                       | Frederick F. Wolfe |
| Date:  March  8, 2007 |                       | Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Signature               | ** ** | **Title**                        | ** ** | **Date**       |
|-------------------------|------------|----------------------------------|------------|----------------|
|                    |       |                             |       |           |
|                    |       |                             |       |           |
| /s/ Frederick F.  Wolfe |       |                             |       |           |
| Frederick F.  Wolfe     |       | President and Chief Executive    |       | March 14, 2007 |
|                    |       | Officer and Director             |       |           |
|                    |       | (Principal Executive Officer)    |       |           |
|                    |       |                             |       |           |
|                    |       |                             |       |           |
| /s/ Steven  Tanner      |       |                             |       |           |
| Steven Tanner           |       | Chief Financial Officer          |       | March 14, 2007 |
|                    |       | (Principal Financial Officer and |       |           |
|                    |       | Accounting Officer)              |       |           |
|                    |       |                             |       |           |
|                    |       |                             |       |           |
| /s/ Peter J  Letendre   |       |                             |       |           |
| Peter J Letendre        |       | Chief Accounting Officer         |       | March 14, 2007 |
|                    |       | (Principal Accounting Officer)   |       |           |
|                    |       |                             |       |           |
| /s/ Clarence E.  Terry  |       |                             |       |           |
| Clarence E.  Terry      |       | Director                         |       | March 14, 2007 |
|                    |       |                             |       |           |
|                    |       |                             |       |           |
| /s/ Douglas C.  Werking |       |                             |       |           |
| Douglas C.  Werking     |       | Director                         |       | March 14, 2007 |

 

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**INDEX TOEXHIBITS**

 
| 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.(i) to the Company’s  Quarterly Report on Form 10-Q (File No. 333-116310) on November 6, 2006 and  incorporated by reference herewith) |   |
|         |       |            |       |   |   |
|         | 3.2        |            |       | Bylaws of Real  Mex Restaurants, Inc. (Filed with the Securities and Exchange Commission as  Exhibit 3.(ii) to the Company’s Quarterly Report on Form 10-Q (File No.  333-116310) on November 6, 2006 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) |   |
|         |       |            |       |   |   |

 

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|        | 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 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)                        |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.18   |   |   | 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)                                           |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.19   |   |   | 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)                                             |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.20   |   |   | 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)                                                                 |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.21   |   |   | 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)                                              |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.22   |   |   | 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)                                                                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.23   |   |   | 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)                                                        |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.24   |   |   | 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)                                                                            |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|        | 3.25   |   |   | 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)                                                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.26   |   |   | 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)                                                                      |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.27   |   |   | 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)                                               |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.28   |   |   | 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)                                                                   |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.29   |   |   | Certificate of  Incorporation of CKR Acquisition Corp. (Filed with the Securities and  Exchange Commission as Exhibit 3.31 to the Company’s Annual Report on Form  10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference  herewith)                                                |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.30   |   |   | Bylaws of CKR  Acquisition Corp. (Filed with the Securities and Exchange Commission as  Exhibit 3.32 to the Company’s Annual Report on Form 10-K (File No.  333-116310) on March 24, 2005 and incorporated by reference herewith)                                                                       |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.31   |   |   | Articles of  Formation of Chevys Restaurants, LLC (formerly known as Chevys Acquisition  Company LLC). (Filed with the Securities and Exchange Commission as Exhibit  3.33 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on  March 24, 2005 and incorporated by reference herewith) |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |
|   | 3.32   |   |   | Operating  Agreement of Chevys Restaurants, LLC (formerly known as Chevys Acquisition  Company LLC). (Filed with the Securities and Exchange Commission as Exhibit  3.34 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on  March 24, 2005 and incorporated by reference herewith)   |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                         |   |

 

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|        | 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)                                          |   |
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|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 4.2    |   |   | First  Supplemental Indenture, dated as of November 29, 2004, among CKR Acquisition  Corp., Real Mex Restaurants, Inc., the guarantors named therein and Wells  Fargo Bank, N.A., as trustee. (Filed with the Securities and Exchange  Commission as Exhibit 4.2 to the Company’s Annual Report on Form 10-K (File  No. 333-116310) on March 24, 2005 and incorporated by reference herewith)   |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 4.3    |   |   | Second  supplemental Indenture, dated as of January 10, 2005, among Chevys  Restaurants, LLC, Real Mex Restaurants, Inc., the guarantors neared therein  and Wells Fargo Bank, N.A., as trustee (Filed with the Security and Exchange  Commission as Exhibit 4.4 to the Company’s Registration Statement on Form S-4  (File No. 333-124670) on May 5, 2005 and incorporated reference herewith) |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.1   |   |   | 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)      |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.2   |   |   | Employment  Agreement dated as of August 21, 2006, by and between Real Mex Restaurants,  Inc. and Frederick Wolfe. (Filed herewith)                                                                                                                                                                                                                                                                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.3   |   |   | Form of  Retention Agreement dated as of February 21, 2006, by and between Real Mex  Restaurants, Inc. and Messrs. Tanner, Rink, Angulo and Wolfe. . (Filed with  the Securities and Exchange Commission as Exhibit 10.20 to the Company’s  Annual Report on Form 10-K (File No. 333-116310) on  February 21, 2006 and incorporated by reference herewith)                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.4   |   |   | Agreement and  Plan of Merger, dated August 17, 2006 among Real Mex Restaurants, Inc., RM  Restaurant Holding Corp. and RM Integrated, Inc (Filed with the Securities  and Exchange Commission as Exhibit 10.1 to the Company’s Report on Form  8-K (File No. 333-116310) on August 23, 2006 and incorporated by  reference herewith)                                            |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.5   |   |   | Amended and  Restated Credit Agreement (Filed with the Securities and Exchange Commission  as Exhibit 10.1 to the Company’s Report on Form 8-K (File  No. 333-116310) on October 6, 2006 and incorporated by reference  herewith)                                                                                                                                                     |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|        | 10.6   |   |   | Fourth Amendment  to Credit Agreement and Amendment to Loan Documents (Filed with the  Securities and Exchange Commission as Exhibit 10.2 to the Company’s  Report on Form 8-K (File No. 333-116310) on October 6, 2006 and  incorporated by reference herewith)                                                                                                                      |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 10.7   |   |   | Amended and  Restated Credit Agreement (Filed with the Securities and Exchange Commission  as Exhibit 10.2 to the Company’s Report on Form 8-K (File  No. 333-116310) on February 2, 2007 and incorporated by reference  herewith)                                                                                                                                                    |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 12.1   |   |   | Computation of  Ratio of Earnings to Fixed Charges. (Filed herewith)                                                                                                                                                                                                                                                                                                                                 |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 14.1   |   |   | Code of Ethics  adopted by the Company on February 7, 2007 (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 he Chief Financial Officer. (Filed herewith)                                                                                                                                                                                                                                                  |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 32.1   |   |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. (Filed herewith)                                                                                                                                                                                                                           |   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 32.2   |   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. (Filed herewith)                                                                                                                                                                                                                           |   |

 

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