** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**

** **

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

** **

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

 

**For thefiscal year ended December 30, 2007**

 

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

 

**FOR THE TRANSITION PERIODFROM               TO**

** **

**COMMISSION FILE NUMBER 333-116310**

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**                                     Real Mex Restaurants, Inc.**

(Exact name of Registrant as specified in its charter)

 
| **DELAWARE**                                                                                      | ** ** | **13-4012902**                         |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction of   incorporation or organization)                                 |       | (I.R.S. Employer   Identification No.) |
|                                                                                              |       |                                   |
| **5660  Katella Avenue, Suite 100, Cypress, CA**                                             | ** ** | **90630**                              |
| (Address of principal  executive offices)                                                         |       | (Zip Code)                             |
|                                                                                              |       |                                   |
| Registrant’s telephone  number, including area code:   **(562)  346-1200**    |
|                                                                                              |       |                                   |
| **Securities  registered pursuant to Section 12(b) of the  Act:   NONE** |
| ** **                                                                                        | ** ** | ** **                             |
| **Securities  registered pursuant to Section 12(g) of the  Act:   NONE** |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes  o     No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yes  o    No  x

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one)

 

LargeAccelerated Filer  o     AcceleratedFiler  o     Non-AcceleratedFiler  x     SmallerReporting Company o

 

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

 

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

 

As of March 24,2008, Real Mex Restaurants, Inc. had outstanding 1,000 shares of CommonStock, 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 of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”). Forward looking statements are those that do not relate solely tohistorical fact. They include, but are not limited to, any statement that maypredict, forecast, indicate or imply future results, performance, achievementsor events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “plan,” “will,” “should,” “may,” or “could” or words orphrases of similar meaning. They may relate to, among other things: ourliquidity 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 anyfuture revisions to any forward looking statements to reflect events orcircumstances occurring after the date of this report.*

 

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

 

**PART I**

 

ITEM 1.                  BUSINESS

 

**Our Company**

 

We are one of the largestfull service Mexican casual dining restaurant chain operators in the UnitedStates in terms of number of restaurants. As of December 30, 2007, we had 188 restaurants, locatedprincipally in California.  Our fourprimary restaurant concepts, El Torito®, El Torito Grill®, Chevys Fresh Mex®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 2007, wegenerated revenues of $565.2 million, an increase in same store sales of 1.3%,a net loss of $23.5 million and net cash provided by operating activities of$25.4 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”). The majority of the stock of RM RestaurantHolding is owned by Sun Cantinas LLC (“Sun LLC”), an affiliate of Sun CapitalPartners, Inc. (“Sun Capital”). On August 18, 2006, the stockholders ofthe Company entitled to vote thereon (including the holders of a majority ofthe Company’s Series C Preferred Stock, par value $0.001 per share)approved the Merger Agreement. On August 21, 2006 (the “Effective Time”),the closing of the transactions contemplated by the Merger Agreement occurred,and RM Integrated merged with and into Real Mex Restaurants, Inc., withReal Mex Restaurants, Inc. continuing as the surviving corporation and the100% owned subsidiary of RM Restaurant Holding. The net purchase price of RealMex Restaurants, Inc. was $200.9 million, consisting of $359.0 million incash, plus net cash acquired of $35.2 million, plus $4.6 million in workingcapital and other adjustments plus direct acquisition costs of $3.9 million,less indebtedness assumed of $188.2 million and seller costs of $9.3 million.Pursuant to the 

 

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Merger Agreement,$6.0 million of the Merger Consideration was held in escrow. Indebtednessassumed included accrued interest and the purchase price is subject to adjustmentbased on certain other adjustments. As a result of the Merger and in accordancewith the terms of the Merger Agreement, (i) all of the outstanding capitalstock of Real Mex Restaurants, Inc. was converted into the right toreceive a portion of the purchase price, and all Real Mex Restaurants, Inc.stock options, warrants and shares of restricted stock were cancelled andconverted into the right to receive a portion of the purchase price, less theexercise prices or unpaid purchase prices therefore, as applicable, and (ii) theCompany became a wholly-owned subsidiary of RM Restaurant Holding. Prior to theMerger, Bruckmann, Rosser, Sherrill & Co., Inc. (“BRS”), togetherwith its affiliates, was a controlling stockholder of Real Mex Restaurants, Inc.As described 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.

 

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

 

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 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.

 

Thefollowing table presents the 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                     |   | 5,615   |    |
| Property  and equipment                   |   | 88,997  |    |
| Deferred  tax asset                       |   | 6,196   |    |
| Other  assets                             |   | 35,281  |    |
| Goodwill                                  |   | 288,138 |    |
| Total  assets acquired                    |   | 475,134 |    |
|                                      |   |    |    |
| Accounts  payable and accrued liabilities |   | 20,881  |    |
| Long-term  debt                           |   | 186,057 |    |
| Other  liabilities                        |   | 67,329  |    |
| Total  liabilities assumed                |   | 274,267 |    |
| Net  assets acquired                      |   | $       | 200,867 |   |

 

**Chevys Acquisition**

 

On January 11, 2005,we completed the acquisition of 69 Chevys Fresh Mex® restaurants and five FuzioUniversal Pasta® restaurants and assumed franchise agreements relating to 37franchised Chevys Fresh Mex restaurants and five franchised Fuzio UniversalPasta restaurants, which we refer to as the Chevys Acquisition.  The purchase price for the Chevys Acquisitionwas approximately $76.2 million in cash and the assumption of certainliabilities, plus the issuance of Real Mex common and preferred equitysecurities to J.W. Childs Equity Partners L.P. and its affiliate, JWC ChevysCo-Invest, LLC, in their capacity as unsecured creditors of the former ownersof Chevys.

 

The primary reason for the Chevys Acquisition was to add acomplementary growth vehicle in the full-service Mexican segment of therestaurant industry. The Company attributes the goodwill associated with theChevys Acquisition to the historical financial performance and the anticipatedfuture performance of Chevys. The Company is currently determining the amount,if any, of any additional tax benefits that may have been acquired in theChevys Acquisition.

 

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**Our Restaurant Concepts**

 

*El Toritoand El Torito Grill (42.3% of Fiscal Year 2007 restaurant revenues)*. Founded in 1954, El Torito has been a pioneer in the full service,casual dining Mexican restaurant segment in California.  As of December 30, 2007, we operated 79El Torito restaurants, including 10 El Torito Grill restaurants, and, thisconcept was the largest full service Mexican casual dining restaurant chain inCalifornia, in terms of number of restaurants. Our El Torito concept is dedicated to fresh, quality ingredients andauthentic, made-from-scratch Mexican cuisine, including sizzling fajitas,hand-made tamales and traditional Mexican combination platters.

 

We feature authenticregional 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$6.99 to $17.99 with an average dining room check of $14.85 and $15.90 for ElTorito and El Torito Grill, respectively, for Fiscal Year 2007.

 

El Torito restaurants are primarily free standingbuildings.  The restaurants averageapproximately 8,800 square feet with average seating of approximately 306guests.  All of the El Torito propertiesare leased.

 

In the El Torito concept,we drive the traditionally slower day-parts of early evening and weekdaytraffic 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.

 

*Chevys(36.6% of Fiscal Year 2007 restaurant revenues).*  Chevys wasfounded in Alameda, California in 1986. As of December 30, 2007, we operated 68 Company-owned restaurants,franchised 29 restaurants and this concept was the second largest full service,Mexican casual dining restaurant chain in California in terms of number ofrestaurants.  Chevys is a comfortable yethigh-energy restaurant concept that offers guests an array of freshly preparedMexican dishes in an ultra-casual atmosphere. We offer an extensive variety of Mexican dishes, including traditionalenchiladas, burritos and tacos, as well as a variety of combination platters.The food menu is complemented by a wide selection of margaritas and anassortment of Mexican and American beers. Lunch and dinner entrees range inprice from $8.99 to $16.99 with an average dining room check of $13.58 forFiscal Year 2007.

 

Chevys restaurants areprimarily 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(15.4% of Fiscal Year 2007 restaurant revenues).*  The firstAcapulco restaurant opened in Pasadena, California in 1960.  As of December 30, 2007, we had 32Acapulco restaurant locations and this concept was the third largest fullservice, Mexican casual dining restaurant chain in California in terms ofnumber of restaurants.  We offerCalifornia style Mexican food featuring traditional favorites as well asseafood specialties such as grilled halibut, shrimp and crab entrees.  We also feature a host of specialty drinks,including our signature house margarita made with premium Jose Cuervo Gold Tequila.  Lunch and dinner entrees range in price from$7.49 to $17.49 with an average dining room check of $14.51 for Fiscal Year2007.

 

Acapulco restaurants areprimarily freestanding and located in high-traffic urban and suburbanareas.  Acapulco restaurants generallyaverage approximately 8,500 square feet with average seating for approximately240 guests.  Many locations haveattractive outdoor patios.  All but oneof the properties are leased.  Acapulcocurrently uses three models for restaurant decor: Hacienda, Aztec andResort.  The three styles, which aresimilar to one another, have allowed our Company to match design and capitalexpenditures with each location’s physical plant and the site’s customerdemographics.  A consistent appearance isachieved through similar exterior signage and the use of Mexican furnishingsand vibrant primary color schemes in interior design throughout all Acapulcorestaurants.

 

Acapulco benefits fromlong-standing value oriented day-part programs designed to drive incrementaltraffic during slow periods.  Beginningwith Sunday brunch, guests can indulge in a champagne brunch with a variety offresh soups, chilled salads, a taco bar with handmade tortillas, a made toorder taco bar and a variety of traditional Mexican favorites.  Weekday value promotions include Happy Hour,Margarita Mondays, Kids Eat Free on Tuesdays and a lunch buffet, for timesensitive guests.

 

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*OtherRestaurant Concepts (5.7% of Fiscal Year 2007 restaurant revenues).* As of December 30, 2007, we operated 9 additional restaurantlocations, all of which are also full service Mexican formats, under thefollowing brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHarry’sand Who·Song & Larry’s.  We acquiredmost of these restaurants with the acquisitions of El Torito Restaurants, Inc.

 

**Business Strengths**

 

*Fresh, Authentic, Mexican Food.* Our food and beverage offerings range from guest favorites such assizzling fajitas, hand-made tamales and traditional Mexican combinationplatters to authentic regional specialties created by our executive chef.  Our executive chef makes regular visits tosmall villages throughout many regions of Mexico to identify new flavors and recipes,and introduces distinct dishes to our restaurant guests.  We believe that these freshly preparedmade-from-scratch items underscore our authenticity. We prepare all our recipeswith fresh, high quality ingredients, from our salsa to our sizzling fajitas.  El Torito is known for tablesidepreparations, including our most popular appetizer, our guacamole, which ismade to our guests’ specifications at their table.  Our food is complemented by a variety ofspecialty drinks, including our house margarita, made with premium Jose CuervoGold Tequila.

 

*Service*. We train our servers to follow a service program designed to achievefast and consistent service while also promoting a casual and festiveatmosphere.  Our service program outlinesprocedures, such as the server’s first approach to the guest, productrecommendations throughout the visit, timing and manner of food delivery, plateclearing, payment processing, and bidding the guest farewell.  Throughout the day, managers are responsiblefor generating energy and enthusiasm throughout their restaurants bycirculating 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 for the majority of our rawingredients, fresh products and alcoholic beverages through two facilitieslocated in Buena Park and Union City, California and manufacture food productsthrough a facility in Vernon, California. The purchasing and distribution facilities, encompassing approximately67,000 square feet in Buena Park and 54,000 square feet in Union City enable usto order and deliver food items and ingredients on a timely basis.  We are able to leverage our purchasing power andreduce delivery costs, contributing to our restaurant gross margins.  Our manufacturing facility, encompassingapproximately 101,000 square feet, produces certain high volume items for ourAcapulco restaurants including soups, baked goods and sauce bases, enabling usto maintain food quality and consistency while reducing costs.  This facility also manufactures specialtyproducts for sales to outside customers, marketed under the Real Mex FoodsTMlabel as well as co-packaged under other branded names.  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 with extensive experience in all aspectsof restaurant operations.  Our managementteam has an average of more than 15 years with our Company.  Our Chief Executive Officer, Fred Wolfe, is along-time veteran of our Company, having served a total of 22 years withus.  From 1997 to 2001, Mr. Wolfeserved as Chief Operating Officer of California Pizza Kitchen, Inc., orCPK, 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 primary businessobjective is to increase stockholder value through same store sales and storemargin improvements, new restaurant openings, expansion of the Chevys franchisenetwork, growth in outside sales by Real Mex Foods and strategic acquisitions.

 

*Samestore sales and store margin improvements*.  At our ElTorito concept, we intend to communicate our commitment to creating fresh,authentic Mexican dishes and drinks through in-restaurant merchandising, directmail, newspaper, internet advertising, sponsorship marketing and publicrelations.  We sought to improve salesand margins through new product introductions and signature specials duringfive promotional events.  Our Acapulcoconcept built upon the positioning of a family of local Mexican neighborhoodrestaurants delivering generous portions of California-Mexican food and drinkat a good value.  In Fiscal Year 2007, wesustained the same number of direct mail drops and coupons as in Fiscal Year2006. We introduced Co-Op direct mail programs boasting increased circulationand reduced advertising expenses over prior Fiscal Year while increasing samestore sales and profitability.  Welaunched five promotions featuring  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 through in-restaurantmerchandising and direct mail with coupon incentives.

 

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*NewRestaurant Openings*.  We plan to open new El Torito, Chevys and ElTorito Grill restaurants in and near our existing markets, primarily usinginternally generated cash flow.  Our newstore prototype is approximately 7,500 square feet with an additional approximately1,000 square foot patio.  Our net cashinvestment for a typical El Torito restaurant is generally between $1.4 millionand $3.2 million, including pre-opening costs, depending on the level oflandlord allowances.  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 restaurant chains.  From December 2004 through 2005, weopened 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 2007, we opened four restaurants,  two El Torito restaurants, one El ToritoGrill restaurant and one Chevys restaurant, all in California.  We have signed leases for 5 openings in 2008,including two Chevys restaurants and an El Torito restaurant in California, andtwo El Torito Grill restaurants, located in New York and Florida. We areactively negotiating letters of intent on a number of other restaurant sitesfor opening in 2009 and beyond.

 

*Expansionof the Chevys franchise network*.  We currentlyhave 10 franchisees operating 29 franchised Chevys restaurants in 12states.  We plan to continue to developnew franchise relationships and expand existing franchise relationships inorder to increase Chevys brand awareness and marketing efficiencies and toincrease revenues from new store franchise fees along with revenues fromongoing franchise royalties.  We plan tofranchise those markets that do not fit into our Company restaurant developmentplans either because of size or geographic location.

 

*Growth inoutside sales by Real Mex Foods*.  Wemanufacture bulk food packages and individually wrapped retail products underthe Real Mex FoodsTM label, as well as co-package these products under otherbranded company names. We plan to expand this area of our business as wecontinue to develop a core group of standard products for retail salesincluding premium quality burritos, enchiladas and tamales.  We currently sell directly to, or package forfast food and casual restaurants, amusement parks, club stores, and foodservice, retail, vending and institutional customers.  We plan to continue expanding this businessto include other products and to market these products to additional customersin these and other business segments.

 

*Strategicacquisitions. *We look for opportunities to acquireexisting Mexican or Southwestern themed restaurants at attractive prices.  We believe that if we can acquire acompetitive concept at an attractive price, achieve general and administrativeexpense as well as purchasing and distribution synergies, that it can be a costeffective way to grow our business and enhance stockholder value.  We evaluate acquisition opportunities basedon their fit with our existing operations. We also consider our financial and management resources and capacity tomanage the acquisition process, management transition and ongoing operations.

 

**Purchasing and Distribution**

 

We seek to obtain highquality ingredients, products and supplies from a variety of reliable sourcesat competitive prices.  We centralizepurchasing of most of our food ingredients, products and supplies, and in February 2005,opened a distribution facility in Union City, California to service thenorthern California Chevys restaurants and other northern California, Nevada,Oregon and Washington restaurants. Our purchasing and distribution facilitiesenable us to order and distribute food items timely, enabling delivery of freshproducts to our restaurants.  Inaddition, we obtain our beer from a variety of state regulated distributors whodeliver directly to our restaurants. In January 2008 we opened a newmanufacturing plant in Vernon, California, in order to expand capacity tofacilitate continued growth in our food manufacturing business and sales toexternal accounts.

 

**Employees**

 

As of December 30,2007, we had 12,701 employees.  Of theseemployees, 11,336 were employed as restaurant hourly team members, 854 asrestaurant managers, 316 as distribution and production facility employees, and195 as executive, senior, and general office staff.  None of our workforce is unionized.

 

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

 

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*Turnover.*We believe one ofour strengths is the relative stability of our employee staff.  We believethat in Fiscal Year 2007, our hourly turnover of 97.2% and our managementturnover of 26.8% were better than industry average.  Our restaurant management is heavilytenured, with Regional Directors averaging approximately 17 years, GeneralManagers averaging approximately 10 years and Managers averaging over 5years.  Hourly employee tenure averagesalmost 4 years.  Other highly skilledpositions such as chefs average 14 years with the Company.

 

**Competition**

 

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

 

**Government Regulation**

 

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

 

Our restaurants’ sales ofalcoholic beverages are subject to regulation in each state in which weoperate.  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 and employees,hours of operation, advertising, wholesale purchasing and inventory control,handling and storage.  In Fiscal Year2007, approximately 24.6% of our restaurant revenues were attributable to thesale of alcoholic beverages, and we believe that our ability to serve alcoholis an important factor in attracting customers. The failure of any of our restaurants to timely obtain and maintainliquor or other licenses, permits or approvals required to serve alcoholicbeverages or food could delay or prevent the opening of, or adversely impact theviability of, the restaurant, and we could lose significant revenue.

 

Our restaurants aresubject in each state in which we operate to “dram shop” laws, which allow aperson to sue us if that person was injured by an intoxicated 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 food manufacturingoperations are subject to extensive regulation by the United States Departmentof Agriculture, or USDA, and other state and local authorities.  Our facilities and products are subject toperiodic inspection by federal, state and local authorities.  We believe that we are currently insubstantial compliance with all material governmental laws and regulations andmaintain 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.

 

We are also subject tothe U.S.  Bio-Terrorism Act of 2002which, among other things, requires us to provide specific information aboutthe food products we ship in the U.S. and to register our manufacturingfacilities with the United States Food & Drug Administration, orFDA.  In addition, we are subject to theNutrition Labeling and Education Act of 1990 and the regulations promulgatedthere under by the FDA.  This regulatoryprogram prescribes the format and content of certain information required toappear on the labels of food products.

 

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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 will continueto be affected by increases in the cost of energy.

 

**Environmental Matters**

 

Our operations are alsosubject to federal, state and local laws and regulations relating toenvironmental protection, including regulation of discharges into the air andwater.  Under various federal, state andlocal laws, an owner or operator of real estate may be liable for the costs ofremoval or remediation of certain hazardous or toxic substances on or in suchproperty.  Such liability may be imposedwithout regard to whether the owner or operator knew of, or was responsiblefor, the presence of such hazardous or toxic substances.  Although we are not aware of any materialenvironmental conditions that require remediation by us under federal, state orlocal law at our properties, we have not conducted a comprehensiveenvironmental review of our properties or operations and we cannot assure thatwe have identified all of the potential environmental liabilities at ourproperties or that such liabilities would not have a material adverse effect onour financial condition.

 

ITEM 1A.              RISK FACTORS

 

***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 cannot guarantee thatour internal controls and training at our restaurants and distribution andmanufacturing facilities will be fully effective in preventing all food-borneillnesses. Furthermore, our reliance on third party suppliers makes itdifficult to monitor food safety compliance and increases the risk thatfood-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 andquality of the ingredients we use to prepare our food and beverages are subjectto a range of factors, many of which are beyond our control. Changes in thecost of such ingredients can result from a number of factors, includingseasonality, political conditions, weather conditions, shortages of ingredientsand other factors. If we fail to anticipate and react to increasing ingredientcosts by adjusting our purchasing practices and menu price adjustments, ourcost of sales may increase and our operating results could be adverselyaffected.

 

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

 

Our ability to maintainconsistent quality menu items depends in part upon our ability to acquire freshfood products and related items, including essential ingredients used in theMexican restaurant business such as avocados, from reliable sources inaccordance with our specifications. Shortages or interruptions in the supply offresh food products caused by unanticipated demand, problems in production or distribution,contamination of food products, an outbreak of food-borne diseases, inclementweather or other conditions could materially adversely affect the availability,quality and cost of ingredients, which could adversely affect our business,financial condition, results of operations and cash flows.

 

7

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We have contracts with alarge number of suppliers of most food, beverages and other supplies for ourrestaurants. In addition, we distribute substantially all of the products wereceive from suppliers through our distribution facility. If suppliers do notperform adequately or if any one or more of such entities seeks to terminateits agreement or fails to perform as anticipated, or if there is any disruptionin any of our supply relationships or distribution operations for any reason,it could have a material adverse effect on our business, financial condition,results of operations and cash flows. Our inability to replace our distributionoperations and our suppliers in a short period of time on acceptable termscould increase our costs and could cause shortages at our restaurants of foodand other items that may cause our restaurants to remove certain items from arestaurant’s menu or temporarily close a restaurant. If we temporarily close arestaurant or remove popular items from a restaurant’s menu, that restaurantmay experience a significant reduction in revenue during the time affected bythe shortage or thereafter, as our customers may change their dining habits asa 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 service businessesare often affected by changes in consumer tastes, national, regional and localeconomic conditions, demographic trends, consumer confidence in the economy anddiscretionary spending priorities. Factors such as traffic patterns, weatherconditions, local demographics and the type, number and location of competingrestaurants may adversely affect the performance of individual locations. Inaddition, inflation and increased food and energy costs may harm the restaurantindustry in general and our locations in particular. Adverse changes in any ofthese factors could reduce consumer traffic or impose practical limits onpricing, which could harm our business, financial condition, results ofoperations and cash flows.  We cannotassure you that consumers will continue to regard our products favorably orthat we will be able to develop new products that appeal to consumerpreferences. Any failure to satisfy consumer preferences could have amaterially adverse affect on our business. Our continued success will depend inpart on our ability to anticipate, identify and respond to changing consumerpreferences 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 restaurant businessis 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:

 

·                                          find quality locations;

 

·                                          reach acceptable agreements regarding thelease or purchase of locations;

 

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

 

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

                                                and

 

·                                          obtain, for an acceptable cost, requiredpermits and regulatory approvals.

 

8

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We may not be able toattract enough customers to new restaurants because potential customers may beunfamiliar 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 time totime, 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 allegations are valid or whether we are liable. In addition, thenegative impact of adverse publicity relating to one restaurant may extend farbeyond the restaurant involved to affect some or all of our other restaurants.A similar risk exists with respect to totally unrelated food servicebusinesses, if customers mistakenly associate such unrelated businesses withour own operations.

 

*Uninsured losses could occur.*

 

We have comprehensiveinsurance, including general liability and property (including businessinterruption) extended coverage. However, there are certain types of lossesthat may be uninsurable or that we believe are not economical to fully insure,such as earthquakes and other natural disasters. In view of the location ofmany of our existing and planned restaurants in California, our operations areparticularly susceptible to damage and disruption caused by earthquakes. In theevent of an earthquake or other natural disaster affecting our geographic areaof operations, we could suffer a loss of the capital invested in, as well asanticipated earnings from, the damaged or destroyed properties.

 

*Changes in employment laws mayadversely affect our business.*

 

Various federal and statelabor laws govern the relationship with our employees and affect operatingcosts. These laws include minimum wage requirements, overtime, unemployment taxrates, workers’ compensation rates and citizenship requirements. Significantadditional government imposed increases in the following areas could materiallyaffect our business, financial condition, operating results or cash flow:

 

·                                          minimum wage;

 

·                                          paid leaves of absence;

 

·                                          provision to employees of mandatoryhealth insurance; and

 

·                                          tax reporting; and

 

·                                          revisions in the tax payment requirementsfor 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 

 

9

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personnel, as well as asufficient number of other qualified employees, including guest service andkitchen staff, to keep pace with our expansion schedule. Qualified individualsneeded to fill these positions are in short supply in some geographic areas. Inaddition, full service casual dining segment restaurant operators havetraditionally experienced relatively high employee turn over rates. Although wehave not yet experienced any significant problems in recruiting or retainingemployees, our ability to recruit and retain such individuals may delay theplanned openings of new restaurants or result in higher employee turnover inexisting restaurants, which could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.

 

We have been affected byincreasing healthcare and workers’ compensation expenses affecting business inmost industries including ours. To manage premium increases we have elected toself-insure. Higher deductibles could result in greater exposure to ouroperating results and liquidity. If we are exposed to material liabilities thatare not insured it could materially adversely affect our financial conditionand 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 our currentleases are non-cancelable and typically have initial terms of 10 to 20 yearsand one or more renewal terms of three or more years that we may exercise atour option. Leases that we enter into in the future likely will also belong-term and non-cancelable and have similar renewal options. If we close arestaurant, we may remain committed to perform our obligations under theapplicable lease, which would include, among other things, payment of the baserent for the balance of the lease term. Alternatively, at the end of the leaseterm and any renewal period for a restaurant, we may be unable to renew thelease without substantial additional cost, if at all. We may close or relocatethe restaurant, which could subject us to construction and other costs andrisks, and could have a material adverse effect on our business. Additionally,the revenue and profit, if any, generated at a relocated restaurant, may notequal the revenue and profit generated at the existing restaurant. Furthermore,in the 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.

 

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 our restaurants’licenses to sell alcoholic beverages must be renewed annually and may besuspended 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 2007, approximately 24.6% 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 onour profitability. Our inability to continue to obtain such insurance coverageat reasonable costs also could have a material adverse effect on us

 

The federal Americanswith Disabilities Act and similar state laws prohibit discrimination because ofdisability in public accommodations and employment. Mandated modifications toour facilities (or related litigation) in the future to make differentaccommodations for persons with disabilities could result in materialunanticipated expenses.

 

Our distribution andmanufacturing operations are subject to extensive regulation by the FDA, USDAand other state and local authorities. Our processing facilities and productsare subject to periodic inspection by federal, state and local 

 

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authorities. We cannotassure you, however, that we are in full compliance with all currentlyapplicable governmental laws, or that we will be able to comply with any or allfuture laws and regulations. Failure by us to comply with applicable laws andregulations could subject us to civil remedies, including fines, injunctions,recalls or seizures, as well as potential criminal sanctions, which could havea material adverse effect on our business, financial condition or results ofoperations.

 

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

 

We may be required torecall 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 registered orfiled 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 andChevys Fresh Mex®.  The success of ourbusiness strategy depends on our continued ability to use our existing trademarksand service marks in order to increase brand awareness and further develop ourbranded products. If our efforts to protect our intellectual property are notadequate, or if any third party misappropriates or infringes our intellectualproperty, either in print or on the Internet, the value of our brands may beharmed, which could have a material adverse effect on our business, includingthe failure of our brands and branded products to achieve and maintain marketacceptance.

 

We cannot assure you thatall of the steps we have taken to protect our intellectual property in the U.S.and foreign countries will be adequate. In addition, the laws of some foreigncountries do not protect intellectual property rights to the same extent as thelaws of the U.S.

 

*We face risks associated withenvironmental laws.*

 

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

 

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

 

·                                          impose liability for the costs ofcleaning up, and damage resulting from, sites of past spills, disposals orother releases of hazardous materials.

 

In particular, underapplicable environmental laws, we may be responsible for remediation ofenvironmental conditions and may be subject to associated liabilities, includingliabilities resulting from lawsuits brought by private litigants, relating toour restaurants and the land on which our restaurants are located, regardlessof whether we lease or own the restaurants or land in question and regardlessof whether such environmental conditions were created by us or by a prior owneror tenant. If we are found liable for the costs of remediation of contaminationat any of our properties our operating expenses would likely increase and ouroperating results would be materially adversely affected.

 

*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.*

 

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Keeping abreast of, andin compliance with, laws, regulations and standards relating to corporategovernance and public disclosure, including the Sarbanes-Oxley Act of 2002 andnew SEC regulations will require a significant amount of management attentionand external resources. We are committed to observing high standards ofcorporate governance and public disclosure. Consequently, we intend to investall reasonably necessary resources to comply with evolving standards, and thisinvestment will result in increased general and administrative expenses and adiversion of management time and attention from revenue generating activitiesto compliance activities.

 

*We may make acquisitions or enterinto similar transactions*

 

We may expand by pursuingacquisitions, business combinations and joint ventures. We may encounterdifficulties in integrating the expanded operations, entering into markets, orconducting 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 potential acquisitions,business combinations or joint ventures as well as the integration of anacquired business could require us to incur significant costs and causediversion of management’s time and resources.

 

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

 

We have substantialindebtedness, including obligations under capital leases and unamortized debtpremium, of approximately $186.2 million as of December 30, 2007.  Subject to restrictions in the indenture forour senior secured notes and our senior secured and unsecured creditfacilities, 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:

 

·                                          our ability to obtain additionalfinancing for working capital, capital expenditures, acquisitions or generalcorporate purposes may be impaired;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                                          incur additional indebtedness;

 

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·                                          repay indebtedness before stated maturitydates;

 

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

 

·                                          make acquisitions or investments;

 

·                                          create or incur liens;

 

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

 

·                                          enter into certain transactions withaffiliates;

 

·                                          sell stock in our subsidiaries;

 

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

 

·                                          otherwise conduct necessary corporateactivities.

 

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

 

*We have a material amount ofgoodwill which, if it becomes impaired, would result in a reduction in our netincome.*

 

Goodwill is the amount bywhich the cost of an acquisition accounted for using the purchase methodexceeds the fair value of the net assets we acquire. Current accountingstandards require that goodwill be periodically evaluated for impairment basedon the fair value of the reporting unit. The downturn in the economy hasresulted in an unfavorable impact on current operations and growth projections.  As a result, a goodwill impairment loss ofapproximately $10.0 million was recognized during fiscal year 2007. Afterrecording this impairment loss approximately $273.6 million, or 63.0%, of ourtotal assets represented goodwill at December 30, 2007. Any furtherdeclines in our assessment of the fair value the Company could result in afurther write-down of our goodwill and a reduction in our net income.

 

*Sun Cantinas LLC, an affiliate ofSun Capital Partners, Inc., controls our Company through ownership of 100%of the voting stock of our parent, RM Restaurant Holding Corp, and theirinterests may conflict with the interests of the holders of our indebtedness.*

 

As a result of theirstock ownership of our parent company, Sun Cantinas LLC, or SCLLC indirectlyowns 100% of our outstanding voting common stock.  By virtue of their stock ownership and theterms of the stockholders’ agreement, of our parent, SCLLC has significantinfluence over our management and will be able to determine the outcome of allmatters required to be submitted to the stockholders for approval, includingthe election of our directors and the approval of mergers, consolidations andthe sale of all or substantially all of our assets. The interests of SCLLC asequity owner of our Company may differ from the interests of the holders of ourindebtedness, and, as such, SCLLC may take actions that may not be in theirinterests.  For example, if we encounterfinancial difficulties or are unable to pay our debts as they mature, theinterests of our equity owners might conflict with the interests of the holdersof our indebtedness. In addition, our equity owners may have an interest inpursuing acquisitions, divestitures, financing, or other transactions that, intheir judgment, could enhance their equity investments, although suchtransactions might involve risks to the holders of our indebtedness.

 

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

 

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

 

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ITEM 1B.               UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2.                                                     PROPERTIES

 

Ourcorporate headquarters are located in Cypress, California. We occupy thisfacility under a lease that expires in 2012. As of December 30, 2007, weleased 187 restaurant facilities and owned one. The majority of our leases arefor 10, 15 or 20-year terms, include options to extend the terms, include rentholidays, rent escalation clauses and/or contingent rent provisions and some ofour leases have tenant improvement allowances. Our restaurant leases have termsthat expire between 2008 and 2027 (excluding renewal options not yet exercised)and have an average remaining term of approximately 14 years, includingoptions.

 

**RestaurantLocations**

 

As of December 30,2007, we owned, licensed or franchised 229 restaurants in 16 states and threeforeign countries, of which 188 are Company operated and 41 operate underfranchise or license arrangements.

 

Ourrestaurant locations by concept and state as of December 30, 2007 were asfollows:

 
| ** **                    | ** ** | **Concepts**          | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------------|------------|------------|------------|
| **State**                     | ** ** | **El Torito(1)** | ** ** | **Chevys** | ** ** | **Acapulco** | ** ** | **Franchised** | ** ** | **Other(2)** | ** ** | **Total** | ** ** |
| California                    |       | 75                    |       | 47         |       | 31 |   | 1 |   | 3 |   | 157 |   |
| Missouri                      |       | —                |       | —     |       | — |   | 9 |   | 4 |   | 13 |   |
| Illinois                      |       | —                |       | 1          |       | — |   | 4 |   | 1 |   | 6 |   |
| Arizona                       |       | 2                     |       | 3          |       | — |   | — |   | — |   | 5 |   |
| New Jersey                    |       | —                |       | 2          |       | — |   | 3 |   | — |   | 5 |   |
| Oregon                        |       | 1                     |       | 3          |       | 1 |   | — |   | — |   | 5 |   |
| Maryland                      |       | —                |       | 2          |       | — |   | 2 |   | — |   | 4 |   |
| New York                      |       | —                |       | 2          |       | — |   | 2 |   | — |   | 4 |   |
| Virginia                      |       | —                |       | 3          |       | — |   | 1 |   | — |   | 4 |   |
| Washington                    |       | —                |       | 1          |       | — |   | 2 |   | 1 |   | 4 |   |
| Florida                       |       | —                |       | 2          |       | — |   | 1 |   | — |   | 3 |   |
| Louisiana                     |       | —                |       | —     |       | — |   | 2 |   | — |   | 2 |   |
| Nevada                        |       | —                |       | 2          |       | — |   | — |   | — |   | 2 |   |
| Indiana                       |       | 1                     |       | —     |       | — |   | — |   | — |   | 1 |   |
| Minnesota                     |       | —                |       | —     |       | — |   | 1 |   | — |   | 1 |   |
| South Dakota                  |       | —                |       | —     |       | — |   | 1 |   | — |   | 1 |   |
| Total domestic                |       | 79                    |       | 68         |       | 32 |   | 29 |   | 9 |   | 217 |   |
| Japan                         |       | —                |       | —     |       | — |   | 8 |   | — |   | 8 |   |
| United Arab Emirates          |       | —                |       | —     |       | — |   | 1 |   | — |   | 1 |   |
| Turkey                        |       | —                |       | —     |       | — |   | 3 |   | — |   | 3 |   |
| Total including International |       | 79                    |       | 68         |       | 32 |   | 41 |   | 9 |   | 229 |   |

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(1) IncludesEl Torito Grills which are located in California and Indiana

 

(2) Includes GuadalaHarry’s, Las Brisas, Who·Song&Larry’s, El Paso Cantina andCasa Gallardo

 

We also lease anapproximately 101,000 square foot dedicated manufacturing facility located inVernon, California, an approximately 67,000 square foot warehouse anddistribution facility located in Buena Park, California and an approximately54,000 square foot warehouse and distribution facility located in Union City,California, utilized by our subsidiary, Real Mex Foods, Inc.

 

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

 

 

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ITEM 3.                                                     LEGAL PROCEEDINGS

 

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

 

ITEM 4.                                                     SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

During the fourth quarter of Fiscal Year 2007, nomatters were submitted to a vote of stockholders through solicitation ofproxies or otherwise.

 

**PART II**

 

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

 

**Market Information**

** **

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

 

**Holders**

** **

The number of record holders of each of our classes ofcommon stock as of March 24, 2008 was as follows:

 

CommonStock: 1

 

**Dividends**

** **

No dividends were paid during Fiscal Year 2007. InFiscal Year 2006, we paid dividends of $10.0 million on our common stock to ourparent, RM Restaurant Holding Corp. Our ability to pay dividends is restrictedby certain covenants contained in our secured and unsecured senior creditfacilities, as well as certain restrictions contained in our indenture relatingto our senior secured notes.

 

**SecuritiesAuthorized For Issuance under Equity Compensation 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.”

 

**Recent Sales ofUnregistered Securities and Repurchases of Equity Securities**

** **

We have not sold anyunregistered equity securities in Fiscal Year 2007 nor have we repurchased anyequity securities in the fourth quarter of 2007.

 

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ITEM 6.                                                     SELECTED FINANCIAL DATA

 

Thefollowing table sets forth selected historical consolidated financial and otherdata of our Company.  The selectedhistorical consolidated financial data has been derived from our Company’saudited consolidated financial statements for the Successor Fiscal Year 2007and Successor Period from August 21, 2006 to December 31, 2006 andthe Predecessor Period from December 26, 2005 to August 20, 2006(together defined as, “Fiscal Year 2006 Combined” or “2006”) and the Predecessorfiscal years ended December 2005, 2004, 2003 and 2002. Fiscal Year 2006Combined consists of 53 weeks and all other fiscal years presented consist of52 weeks.  This data presented belowshould 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**           | ** ** | **Successor**         | ** ** | **Predecessor**           | ** ** | ** **   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|---------------------------|------------|--------------|------------|------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **Fiscal**              | ** ** | **August**            | ** ** | **December**              | ** ** | ** **   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Year**                | ** ** | **21, 2006  to** | ** ** | **26, 2005 to** | ** ** | ** **   | ** ** | **Predecessor**                    | ** ** |
| ** **                                                | ** ** | **Ended**               | ** ** | **December**          | ** ** | **August 20,**       | ** ** | **Combined** | ** ** | **Fiscal Year Ended(6)** | ** ** |
| ** **                                                | ** ** | **2007(6)**             | ** ** | **31, 2006**     | ** ** | **2006**                  | ** ** | **2006(5)**  | ** ** | **2005(4)**                        | ** ** | **2004**   | ** ** | **2003**   | ** ** |
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| **Statement of Operations Data:**                         | ** ** | ** **              | ** ** | ** **            | ** ** | ** **                | ** ** | ** **   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restaurant  revenues                                      |       | $                       | 523,352    |                  | $          | 179,630                   |       | $            | 351,591    |                               | $          | 531,221    |       | $          | 510,013    |   | $ | 314,157 |   | $ | 307,278 |   |
| Other revenue                                             |       | 38,164                  |       | 11,094                |       | 18,358                    |       | 29,452       |       | 20,532                             |       | 10,787     |       | 4,714      |       |
| Total revenues                                            |       | 565,191                 |       | 192,098               |       | 372,552                   |       | 564,650      |       | 534,296                            |       | 326,810    |       | 312,138    |       |
| Cost of sales                                             |       | 140,824                 |       | 46,883                |       | 87,388                    |       | 134,271      |       | 127,126                            |       | 80,839     |       | 77,555     |       |
| Labor                                                     |       | 199,843                 |       | 67,729                |       | 125,748                   |       | 193,477      |       | 186,390                            |       | 118,888    |       | 116,269    |       |
| Direct operating  and occupancy expense                   |       | 148,088                 |       | 51,127                |       | 94,422                    |       | 145,549      |       | 140,648                            |       | 76,760     |       | 74,938     |       |
| Total operating  costs                                    |       | 488,755                 |       | 165,739               |       | 307,558                   |       | 473,297      |       | 454,164                            |       | 276,487    |       | 268,762    |       |
| General and  administrative expenses                      |       | 31,718                  |       | 11,414                |       | 18,893                    |       | 30,307       |       | 28,346                             |       | 17,725     |       | 15,201     |       |
| Depreciation and  amortization                            |       | 22,254                  |       | 8,505                 |       | 12,230                    |       | 20,735       |       | 18,498                             |       | 11,837     |       | 11,732     |       |
| Goodwill  impairment                                      |       | 10,000                  |       | —                |       | —                    |       | —       |       | —                             |       | —     |       | —     |       |
| Operating income                                          |       | 6,854                   |       | 3,379                 |       | 18,150                    |       | 21,529       |       | 31,433                             |       | 20,299     |       | 16,209     |       |
| Interest expense                                          |       | 19,326                  |       | 10,481                |       | 16,005                    |       | 26,486       |       | 22,973                             |       | 12,528     |       | 13,372     |       |
| Debt termination  costs                                   |       | —                  |       | —                |       | —                    |       | —       |       | —                             |       | 4,677      |       | —     |       |
| (Loss) income  before income tax provision                |       | (10,802                 | )          | (8,238                | )          | 2,787                     |       | (5,451       | )          | 8,677                              |       | 4,546      |       | 3,315      |       |
| Net (loss)  income                                        |       | (23,546                 | )          | (5,047                | )          | 1,480                     |       | (3,567       | )          | 13,386                             |       | 13,616     |       | 3,206      |       |
| Redeemable  preferred stock accretion                     |       | —                  |       | —                |       | (10,126                   | )          | (10,126      | )          | (14,583                            | )          | (11,862    | )          | (10,409    | )          |
| Net (loss)  income attributable to common stockholders(1) |       | $                       | (23,546    | )                     | $          | (5,047                    | )          | $            | (8,646     | )                                  | $          | (13,693    | )          | $          | (1,197     | ) | $ | 1,754 |   | $ | (7,203 | ) |
| **Balance Sheet Data:**                                   | ** ** | ** **              | ** ** | ** **            | ** ** | ** **                | ** ** | ** **   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                |       | 2,323                   |       |                  |       |                      |       | 2,710        |       | 14,871                             |       | 10,690     |       | 2,605      |       |
| Property and  equipment, net                              |       | 96,179                  |       |                  |       |                      |       | 90,802       |       | 82,592                             |       | 36,589     |       | 46,620     |       |
| Total assets                                              |       | 434,455                 |       |                  |       |                      |       | 447,135      |       | 310,889                            |       | 186,951    |       | 173,020    |       |
| Total debt(2)                                             |       | 186,187                 |       |                  |       |                      |       | 183,905      |       | 182,031                            |       | 106,503    |       | 114,699    |       |
| Total  stockholders’ equity                          |       | 163,113                 |       |                  |       |                      |       | 184,077      |       | 50,584                             |       | 29,849     |       | 15,861     |       |
| **Other Financial Data:**                                 | ** ** | ** **              | ** ** | ** **            | ** ** | ** **                | ** ** | ** **   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                     |       | $                       | 34,404     |                  |       |                      |       |         | $          | 23,545                             |       | $          | 23,408     |       | $          | 9,982 |   | $ | 6,962 |   |
| Ratio of  earnings to fixed charges(3)               |       | —                  |       |                  |       |                      |       | —       |       | 1.2 x                              |       | 1.2 x      |       | 1.2 x      |       |

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(1) Net income(loss) attributable to common stockholders includes the effect of the accretionof the liquidation preference on the redeemable preferred stock which reducesor increases net loss attributable to common stockholders for the relevantperiods through August 20, 2006.

 

(2) Total debtincludes long-term debt, obligations under capital leases and unamortized debtpremium.

 

(3) For purposes ofcalculating the ratio of earnings to fixed charges, earnings consist of netincome before income taxes plus fixed charges. Fixed charges consist of interest expense on all indebtedness, plusone-third of rental expense (the portion deemed representative of the interestfactor). For periods with a net loss before income taxes, this calculation isnot performed since the ratio is not meaningful.

 

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

 

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

 

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

 

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

 

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

 

**Overview**

** **

We are one of the largest full service, casual diningMexican restaurant chain operators in the United States in terms of number ofrestaurants. As of December 30, 2007, we operated 188 restaurants, 156 ofwhich are located in California, with additional restaurants in Arizona,Florida, Indiana, Illinois, Maryland, Missouri, Nevada, New Jersey, New York,Oregon, Virginia and Washington. Our three major subsidiaries are El ToritoRestaurants, Inc., which we acquired in June 2000, AcapulcoRestaurants, Inc., Chevys Restaurants LLC, which we formed to facilitatethe Chevys Acquisition in January 2005 and a purchasing, distribution, andmanufacturing subsidiary, Real Mex Foods, Inc.

 

El Torito, El Torito Grill, Acapulco and Chevys, ourprimary restaurant concepts, each offer high quality Mexican food, a wideselection of alcoholic beverages and excellent guest service.  In addition to the El Torito, El ToritoGrill, Acapulco and Chevys concepts, we operate 9 additional restaurantlocations, most of which are also full service Mexican formats, under thefollowing brands: Las Brisas; Casa Gallardo; El Paso Cantina; GuadalaHARRY’S;and Who**·**Song & Larry’s.

 

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

 

In May 2007, theCompany sold four Company-owned Fuzio restaurants to a franchisee, entered intoa management agreement with the franchisee on a fifth Company-owned Fuziorestaurant and sold the Fuzio trademark, trade name and Fuzio franchise rightsto the franchisee. The selling price of $4.9 million in cash included $0.7million in prepaid management fees associated with the management agreement.Concurrent with the sale, the Company purchased three franchised Chevysrestaurants from the franchisee for $3.1 million in cash. See “Notes toConsolidated Financial Statements.”

 

In December 2004,we opened our first new El Torito restaurant in five years, located inEncinitas, California and opened 2 restaurants in 2005: an El Torito in Corona,California and an El Torito Grill in Sherman Oaks, California. In Fiscal Year2006 Combined we opened sixrestaurants: three El Torito restaurants, an El Torito Grill restaurant and aChevys restaurant, all in California, and a Chevys restaurant in New York.  In Fiscal Year2007, we opened four restaurants: two El Torito restaurants, an ElTorito Grill restaurant and a Chevys restaurant, all in California. We also have in the past, and may in the future,convert select restaurants to the El Torito or Chevys brand and divestunderperforming restaurants.

 

Our fiscal year consists of 52 or 53 weeks and ends onthe last Sunday in December of each year. Fiscal Year 2006 Combined is comprised of 53 weeks and all other fiscalyears presented are comprised of 52 weeks. When calculating same store sales,we include a restaurant that has been open for more than 18 months and for theentirety of each comparable period.  Asof December 30, 2007, we had 173 restaurants that met this criterion.

 

In Fiscal Year 2007, we generated revenues of $565.2million.  Our revenues are comprised ofrestaurant sales, other revenues and royalty and franchise fees.  Restaurant revenues include sales of food andalcoholic and other beverages. Other revenues consist primarily of sales byReal Mex Foods to outside customers of processed and packaged prepared foodsand other merchandise items.

 

Cost of sales is comprised primarily of food andalcoholic beverage expenses. The components of cost of sales are variable andincrease with sales volume. In addition, the components of cost of sales aresubject to increase or decrease based 

 

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on fluctuations in commodity costs and depend in parton the success of controls we have in place to manage cost of sales in ourrestaurants. The cost, availability and quality of the ingredients we use toprepare our food and beverages are subject to a range of factors including, butnot limited to, seasonality, political conditions, weather conditions, andingredient shortages.

 

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

 

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

 

General and administrative expense includes allcorporate and administrative functions that support our operations. Expenseswithin this category include executive management, supervisory and staffsalaries, bonus and related employee benefits, travel and relocation costs,information systems, training, corporate rent, professional fees and otherconsulting fees.

 

Legal settlement costs include amounts paid or accruedto settle various legal actions against the Company, excluding costs to defendthe actions.

 

Merger costs include all direct costs related to theMerger that are not eligible for capitalization including legal expenses,investment banker fees, other advisory services, restricted stock compensationand other costs.

 

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

 

Goodwill impairment reflects the impairment lossesrelated to the difference between the fair value and recorded value forgoodwill as identified in our annual impairment test. The fair value wasdetermined using discounted cash flow projections based upon managementforecasts. We recorded a goodwill impairment charge of $10.0 million in fiscal2007 as a result of the impact of the downturn in the economy on currentoperations and growth projections.

 

Amortization of favorable lease asset and unfavorablelease liability, net, represents the amortization of the asset in excess of theapproximate fair market value and the liability in excess of the approximatefair market value of the leases assumed as of August 21, 2006, the date ofacquisition of the Company.  The amountsare being amortized over the remaining primary term of the underlying leases.

 

Our annual operating resultsare impacted by restaurant closures to the extent we close locations.  Due to our long operating history, restaurantclosures are generally the result of lease expirations.  Many of our leases are non-cancelable andhave initial terms of 10 to 20 years with one or more renewal terms of three ormore years that we may exercise at our option. As of December 30, 2007, we owned one restaurant location andleased the remaining 187.

 

We perform ongoing analyses of restaurant cash flowand in the case of negative cash flow or underperforming restaurants, we maynegotiate early termination of leases, allow leases to expire without renewalor sell restaurants.  In addition, fromtime to time we may be forced to close a successful restaurant if we are unableto renew the lease on satisfactory terms, or at all.  From the end of Fiscal 2000 to the end ofFiscal Year 2007, we closed 41 restaurants, 27 of which were early leaseterminations and 14 of which we were unable to renew the leases thereon.

 

Wehave recorded income tax expense of $12.7 million in 2007 as compared to incometax benefits of $1.9 million in 2006 and $4.7 million in 2005.  The expense in 2007 is primarily related tothe deferred tax valuation allowance of $13.3 million recorded in 2007. Theamount of deferred tax assets considered realizable is based upon our abilityto generate future taxable income, exclusive of reversing temporary differencesand carry forwards.  In evaluating futuretaxable income for valuation allowance purposes as of December 30, 2007,we considered only income expected to be generated in fiscal years 2008, 2009and 2010. As a result of this analyis, we recorded a full valuation allowanceagainst our net deferred tax asset balance. The benefit recorded in 2006 wasdue to our net loss for the year, and in 2005 it was related to the reductionof our valuation allowance related to our deferred tax assets.

 

Some purchase accountingadjustments for the Chevys Acquisition related to the value of tax attributesacquired have not been reflected in the deferred tax balances as of December 30,2007 as the final tax returns for the seller, Chevy’s 

 

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Restaurant, Inc.,have not been filed. Until the tax returns are filed, we are unable to determinethe 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.

 

**Results of Operations**

** **

Thediscussion of and the results of operations for the year ended December 30,2007 is based on the results for the 52 week Successor period from January 1,2007 to December 30, 2007 (“Fiscal Year 2007” or “2007”). The discussionof and the results of operations for the 53 weeks ended December 31, 2006is based on the combined results of the Predecessor period from December 26,2005 through August 20, 2006 and the Successor period from August 21,2006 to December 31, 2006 (“Fiscal Year 2006 Combined” or “2006”). Becauseof purchase accounting adjustments to the fair market value of long-term assetsand long-term liabilities, and because Fiscal Year 2007 and fiscal year ended December 25,2005 (“Fiscal Year 2005” or “2005”) contained 52 weeks  and Fiscal Year 2006 Combined contained 53weeks, certain amounts may not be comparable between Fiscal Year 2007, FiscalYear 2006 and Fiscal Year 2005.

 

Our operating results for Fiscal Year 2007, FiscalYear 2006 Combined and Fiscal Year 2005 are expressed as a percentage of totalrevenues below:

 
| ** **                                | ** ** | **Fiscal Years Ended(1)** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **Fiscal  Year 2007**               | ** ** | **Fiscal Year  2006  Combined** | ** ** | **Fiscal Year  2005** | ** ** |
| Total revenues                            |       | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Cost of sales                             |       | 24.9                                |       | 23.8 |   | 23.8 |   |
| Labor                                     |       | 35.4                                |       | 34.3 |   | 34.9 |   |
| Direct operating and occupancy expense    |       | 26.2                                |       | 25.8 |   | 26.3 |   |
| Total operating costs                     |       | 86.5                                |       | 83.8 |   | 85.0 |   |
| General and administrative expense        |       | 5.6                                 |       | 5.4 |   | 5.3 |   |
| Depreciation and amortization             |       | 3.9                                 |       | 3.7 |   | 3.5 |   |
| Legal settlement costs                    |       | 0.1                                 |       | 0.7 |   | 0.1 |   |
| Merger costs                              |       | —                              |       | 1.7 |   | — |   |
| Operating income                          |       | 1.2                                 |       | 3.8 |   | 5.9 |   |
| Interest expense                          |       | 3.4                                 |       | 4.7 |   | 4.3 |   |
| Total other expense, net                  |       | 3.1                                 |       | 4.8 |   | 4.3 |   |
| (Loss) income before income tax provision |       | (1.9                                | )          | (1.0 | ) | 1.6 |   |
| Net (loss) income                         |       | (4.2                                | )          | (0.6 | ) | 2.5 |   |

----

(1)                                  FiscalYear 2007 is comprised of 52 weeks, Fiscal Year 2006 Combined is comprised of53 weeks, and Fiscal Year 2005 is comprised of 52 weeks.

 

**Fiscal Year 2007 Compared toFiscal Year 2006 Combined**

 

*Total Revenues*. Total revenues increased by $0.5 million, or 0.1%,to $565.2 million in Fiscal Year 2007 from $564.7 million in Fiscal YearCombined 2006 due to an $8.7 million increase in other revenues, partiallyoffset by a $7.8 million decrease in restaurant revenues. The $8.7 millionincrease in other revenues to $38.2 million in Fiscal Year 2007 was primarilydue to an increase in sales to existing outside customers and the addition ofnew outside customers by Real Mex Foods, Inc., our distribution andmanufacturing subsidiary.  The $7.8million decrease in restaurant revenues to $523.4 million in Fiscal Year 2007was primarily due to one less week of operations in Fiscal Year 2007.  Comparable store sales increased 1.3% inFiscal Year 2007 when comparing 52 comparable weeks sales results with FiscalYear 2006 Combined.

 

*Cost of Sales*. Total cost of sales of $140.8 million in Fiscal Year2007 increased $6.6 million or 4.9% as compared to Fiscal Year 2006 Combined.As a percentage of total revenues, cost of sales increased to 24.9% in FiscalYear 2007 from 23.8% in Fiscal Year 2006 Combined primarily due to highercommodity costs, specifically beef, cheese, dairy and oils,  in Fiscal Year 2007.

 

*Labor*. Labor costs of $199.8 million in Fiscal Year 2007increased by $6.4 million or 3.3% as compared to Fiscal 

 

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Year 2006 Combined. As a percentage of total revenues,labor costs increased to 35.4% in Fiscal Year 2007 from 34.3% in Fiscal Year2006 Combined.  This increase wasprimarily due to minimum wage increases which took place in January in themajority of the states in which we operate combined with annual managementsalary increases.  Payroll and benefitsremain subject to inflation and government regulation, especially wage ratesthat are currently at or near the minimum wage, and expenses for healthinsurance.

 

*Direct Operating and Occupancy Expense*. Direct operating and occupancy expenseof $148.1 million in Fiscal Year 2007 increased by $2.5 million or 1.7% ascompared to Fiscal Year 2006 Combined. Direct operating and occupancy expense as a percentage of salesincreased to 26.2% in Fiscal Year 2007 from 25.8% in Fiscal Year 2006 Combinedprimarily due to an increase in expenditures for advertising and promotion andincreases in property taxes, common area maintenance expense and rent expensein Fiscal Year 2007.

 

*General and Administrative Expense*. General and administrative expense of$31.7 million in Fiscal Year 2007 increased by $1.4 million or 4.7% as comparedto Fiscal Year 2006 Combined primarily due to higher salaried labor expensecombined with higher insurance expense and stock-based compensation expenserelated to options issued during 2007. General and Administrative expense as apercentage of sales increased to 5.6% in Fiscal Year 2007 from 5.4% in FiscalYear 2006 Combined.

 

*Depreciation and Amortization*. Depreciation and amortization expenseof $22.2 million in Fiscal Year 2007 increased $1.5 million or 7.3% as comparedto Fiscal Year 2006 Combined.  As apercentage of total revenues, depreciation and amortization increased to 3.9%in Fiscal Year 2007 from 3.7% in Fiscal Year 2006 Combined. The increase inexpense as a percent of sales is due to the increase in the depreciable basisof furniture, fixtures and equipment to fair market value and net favorablelease asset and unfavorable lease liability amortization required underpurchase accounting rules due to the Merger on August 21, 2006 anddepreciation on the assets of new restaurants.

 

*Legal Settlement Costs.*Legal settlement costs of $0.4 million inFiscal Year 2007 decreased by $3.8 million or 90.4% in Fiscal Year 2007 ascompared to Fiscal Year 2006 Combined. Legal settlement costs in Fiscal Year2006 Combined related to lawsuits filed against the Company in 2004 and 2006.

 

*Merger Costs.*No merger costs were incurred during Fiscal Year 2007.Merger costs of $9.7 million in Fiscal Year 2006 Combined related to all directcosts associated with the Merger that were not eligible for capitalizationincluding legal expenses, investment banker fees, other advisory services,restricted stock compensation and other costs.

 

*Goodwill Impairment.*A non-cash goodwill impairment charge of$10.0 million was recorded in fiscal 2007 to reflect the impairment lossesrelated to the difference between the fair value and recorded value forgoodwill. The fair value was determined based upon a combination of twovaluation techniques, including an income approach, which utilizes discountedfuture cash flow projections based upon management forecasts, and a marketapproach, which is based upon pricing multiples at which similar companies havebeen sold. No goodwill or trademark impairment was recognized by the Companyduing Fiscal Year 2006 Combined.

 

*Interest Expense*. Interest expense of $19.3 million in Fiscal Year2007 decreased $7.2 million or 27.0% as compared to Fiscal Year 2006 Combinedprimarily due to a $10.0 million reduction in our senior unsecured creditfacility and a reduction in the weighted average interest rate on our seniorunsecured credit facility from 13.61% in Fiscal Year 2006 Combined to 10.36% inFiscal Year 2007.  As a percentage oftotal revenues, interest expense was 3.4% in Fiscal Year 2007 as compared to4.7% in Fiscal Year 2006 Combined.

 

*Incometax provision.*The income tax provision for Fiscal Year 2007 and 2006 was based on estimatedannual effective tax rates. A rate of 118.0% was applied to Fiscal Year 2007versus a rate of 34.6% in Fiscal Year 2006 Combined. The rates are comprised ofthe combined federal and state statutory rates. The difference in ratesprimarily results from the valuation allowance of $13.3 million recorded in2007.

 

**Fiscal Year 2006 Combined Compared toFiscal Year 2005**

 

*TotalRevenues*. Totalrevenues increased by $30.4 million, or 5.7%, to $564.7 million in Fiscal Year2006 Combined from $534.3 million in Fiscal Year 2005 due to a $21.2 millionincrease in restaurant revenues, an $8.9 million increase in other revenues anda $0.2 million increase in royalty and franchise fees. The Fiscal Year 2006Combined increase in restaurant revenues was the result of an extra week ofoperations in 2006 versus 2005, which contributed approximately $10.2 millionin additional sales combined with the fact that due to the date of the ChevysAcquisition, 2005 restaurant sales do not include sixteen days of Chevysrestaurant sales.  Comparable storesales, excluding Chevys, were up 2.2%. Excluding 

 

20

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the 53rd week, comparable store salesexcluding Chevys were up approximately 0.4%. The $10.8 million increase in other revenues was primarily due to anincrease in sales to outside customers by our distribution facility. The $0.2 millionincrease in royalty and franchise fees was due to a complete year of feesearned from franchises acquired in the Chevys Acquisition in 2006 versus apartial year in 2005 due to the date of the Chevys Acquisition.

 

*Cost ofSales*. Total costof sales of $134.3 million in Fiscal Year 2006 Combined increased $7.1 millionor 5.6% as compared to Fiscal Year 2005, primarily due to the inclusion in ourresults of operations of the Chevys restaurants’ cost of sales for a completeyear in 2006 versus a partial year in 2005 and a 53rd week of costsin 2006, combined with higher costs associated with the increase in sales tooutside customers by our distribution facility and higher commodity costs. As apercentage of total revenues, cost of sales was 23.8% in Fiscal Year 2006Combined and Fiscal Year 2005.

 

*Labor*. Labor costs of $193.5 million in FiscalYear 2006 Combined increased by $7.1 million or 3.8% as compared to Fiscal Year2005. The increase in labor costs was partially due to the full year of Chevysexpense in 2006 and a 53rd week of costs in 2006 combined withmanagement salary increases averaging 4.0% in 2006.  Payroll and benefits, particularly wage ratescurrently at or near the minimum wage and expenses for health insurance andworkers’ compensation insurance, remain subject to increase as a result ofinflation and government regulation. As a percent of total revenues, laborcosts decreased to 34.3% in Fiscal Year 2006 Combined from 34.9% in Fiscal Year2005 primarily due to lower hourly labor expense achieved as a result of ourcontinued focus on hourly labor controls and scheduling combined with lowerworkers’ compensation insurance premium and claims expense as a percentage ofsales.

 

*DirectOperating and Occupancy Expense*. Direct operating and occupancy expense of $145.5million in Fiscal Year 2006 Combined increased by $4.9 million or 3.5% ascompared to Fiscal Year 2005. The increase in direct operating and occupancyexpense was partially due to the inclusion in our results of operations of theChevys restaurants’ direct operating and occupancy expense for a complete yearin 2006 versus a partial year in 2005 and a 53rd week of costs in2006.  Direct operating and occupancyexpense as a percentage of sales decreased to 25.8% in Fiscal Year 2006 Combinedfrom 26.3% in Fiscal Year 2005 primarily due to lower general liabilityinsurance expense in Fiscal Year 2006 Combined.

 

*Generaland Administrative Expense*. General and administrative expense of $30.3 millionin Fiscal Year 2006 Combined increased by $2.0 million or 6.9% as compared toFiscal Year 2005 primarily due to management salary increases averaging 4.0% in2006 combined with higher bonus and employee benefits expense and a 53rdweek of costs in 2006 versus 52 in 2005,. General and administrative expense asa percentage of sales was 5.4% in Fiscal Year 2006 Combined as compared to 5.3%in Fiscal Year 2005.

 

*Legal Settlement Costs.*We incurred legal settlement costs of$4.2 million 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 $20.7 million in Fiscal Year 2006Combined increased $2.3 million or 11.9% as compared to Fiscal Year 2005.  $1.1 million of the increase was due to anincrease in fair market value recorded for property and equipment, and theresulting increase in depreciation and amortization expense, as the Merger wasaccounted for under the purchase method of accounting and, accordingly, thepurchase price was allocated to the assets acquired and the liabilities assumedbased on the estimated fair market values at the date of the Merger.  As a percentage of total revenues, depreciationand amortization increased to 3.7% in Fiscal Year 2006 Combined from 3.5% inFiscal Year 2005.

 

*InterestExpense*. Interestexpense of $26.5 million in Fiscal Year 2006 Combined increased $3.5 million or15.3% as compared to Fiscal Year 2005 primarily due to an increase in theinterest rate on our Old Senior Unsecured Credit Facility (the interest rate in2005 ranged from 11.93% to 13.37%, versus 14.17% to 14.92% during 2006), a0.25% increase in the interest rate on our senior secured notes beginning on April 1,2006, and the fact that our Old Senior Unsecured Credit Facility wasoutstanding for 16 days more in Fiscal Year 2006 Combined versus Fiscal Year2005.  As a percentage of total revenues,interest expense increased to 4.7% in Fiscal Year 2006 Combined from 4.3% inFiscal Year 2005.

 

*Merger Costs.* Merger costs of $9.7 million in Fiscal Year 2006Combined include all direct costs related to the Merger that are not eligiblefor capitalization including legal expenses, investment banker fees, otheradvisory services, restricted stock compensation and other costs.

 

*Income Tax Provision.* The income tax provision for Fiscal Year2006 Combined and 2005 was based on estimated annual effective tax rates. Arate of 34.6% was applied in Fiscal Year 2006 Combined versus a rate of (54.3)%in Fiscal 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.

 

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**Liquidity and Capital Resources**

 

Our principal liquidityrequirements are to service our debt and meet our capital expenditure andworking capital needs. Our indebtedness at December 30, 2007, includingobligations under capital leases and unamortized debt premium, was $186.2million, and we had $4.0 million of revolving credit availability under our$15.0 million New Senior Secured Revolving Credit Facility. Our ability to makeprincipal and interest payments and to fund planned capital expenditures will dependon our ability to generate cash in the future, which, to a certain extent, issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond our control. Based on our current level ofoperations, we believe our cash flow from operations, available cash andavailable 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 Revolving Credit Facility in an amount sufficient to enable usto service our indebtedness or to fund our other liquidity needs. If weconsummate an acquisition, our debt service requirements could increase. Asdiscussed below, our senior secured notes mature in 2010 and we will needadditional financing to meet this obligation. Also, we may need to refinanceall or a portion of our indebtedness on or before maturity. We cannot assureyou that we will be able to refinance any of our indebtedness on commerciallyreasonable terms or at all.

 

**Working Capital and Cash Flows**

 

We presently have, in thepast have had, and in the future are likely to have, negative working capitalbalances. The working capital deficit principally is the result of accountspayable and accrued liabilities being 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*. Wehad net cash provided by operating activities of $25.4 million for Fiscal Year2007 compared with $27.0 million for Fiscal Year 2006 Combined. The decrease incash provided by operating activities was primarily attributable to an increasein inventory and accounts receivable of Real Mex Foods, as a result of the increasein sales to outside customers.

 

*InvestingActivities*. Wehad net cash used in investing activities of $28.4 million for Fiscal Year 2007compared with $26.4 million for Fiscal Year 2006 Combined.  The increase in cash used in investingactivities was primarily the result of an increase in additions to property andequipment of $8.0 million, partially offset by the sale of all remaining Fuziounits, including the rights to the Fuzio trademark, of $6.0 million.

 

We expect to make capitalexpenditures totaling approximately $23.9 million in Fiscal Year 2008.Approximately $1.0 million is expected to be spent on restaurant remodels andrefurbishment and approximately $12.5 million is expected to be used to buildfive new El Torito, El Torito Grill and Chevys restaurants. Pre-openingexpenses associated with these new restaurants are expected to totalapproximately $1.1 million. We expect Fiscal Year 2008 capital expenditures forinformation technology to be approximately $0.7 million, for Real Mex Foods approximately$1.2 million and maintenance and other capital expenditures for our restaurantsapproximately $8.5 million. These and other similar costs may be higher in thefuture due to inflation and other factors. We expect to fund the expendituresfor new restaurants and other capital expenditures described above from cashflow from operations, available cash, available borrowings under our seniorcredit facility, landlord allowances (if favorable terms are available) andtrade financing received from trade suppliers.

 

*Financing Activities*. We had net cash provided by financingactivities of $2.6 million for Fiscal Year 2007 compared with net cash used infinancing activities of $12.8 million in Fiscal Year 2006 Combined. The netincrease in cash provided by financing activities in 2007 was primarily due tothe $10.0 million in dividends paid to our parent during Fiscal Year 2006Combined. In addition, we repaid less principal on outstanding debt by $8.9million, $10.0 million of which was associated with the amendment andrestatement of the $75.0 million senior unsecured note to a $65.0 millionsenior unsecured note. These changes were partially offset by a decrease in thenet borrowings under our revolving credit facility of $4.9 million.

 

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**Debt and Other Obligations**

 

*Senior Secured Notes due 2010*. Our senior secured registered notes (“senior secured notes”) mature on April 1,2010. We will need additional financing in order to meet our obligation to paythe senior secured notes at maturity. Interest on our senior secured notesaccrues at a contract rate of 10% per annum. (The interest rate was 10.25%through March 31, 2007 as, in fiscal year 2005, we exceeded the capitalexpenditure limit under the indenture governing the senior secured notes and asa result were required to pay a 0.25% increase in the stated rate. Exceedingthe capital expenditure limit did not constitute a default with respect to thesenior secured notes or indenture.) Interest is payable semiannually on April 1and October 1 of each year. Our senior secured notes are fully andunconditionally guaranteed on a senior secured basis by all of our present andfuture domestic subsidiaries which are restricted subsidiaries under theindenture governing our senior secured notes. Our senior secured notes andrelated guarantees are secured by substantially all of our and our domesticrestricted subsidiaries’ tangible and intangible assets, subject to the priorranking claims on such assets by the lenders under our 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 to our abilityto incur additional indebtedness, make capital expenditures, pay dividends,redeem stock or make other distributions, issue stock of our subsidiaries, makecertain investments or acquisitions, grant liens on assets, enter intotransactions with affiliates, merge, consolidate or transfer substantially allof our assets, and transfer and sell assets. The covenant that limits ourincurrence of indebtedness requires that, after giving effect to any suchincurrence of indebtedness and the application of the proceeds thereof, ourfixed charge coverage ratio as of the date of such incurrence will be at least2.50 to 1.00 in the case of any incurrence after September 30, 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 30, 2007.

 

We can redeem our seniorsecured notes at any time after April 1, 2007. 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 September 19,2006, the Company commenced a change of control offer (the “Offer”) to purchaseany or all of its notes that remained outstanding under the indenture dated March 31,2004 by and among the Company, the guarantors thereto and Wells Fargo Bank,National Association, as trustee. The Offer was made pursuant to Section 4.15of the indenture as the Merger 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 the Offer.The Offer expired on October 19, 2006. No notes were tendered pursuant tothe Offer and as of the expiration date of the Offer, $105.0 million aggregateprincipal amount of notes remained outstanding.

 

As aresult of the Merger and under purchase accounting rules we recorded $4.2million of unamortized debt premium as additional debt related to our seniorsecured notes as the fair market value of the debt on the Merger date wasgreater than its carrying value. The premium is amortized to interest expenseover the remaining life of the debt.

 

*SeniorSecured Revolving Credit Facilities*. In 2004, the Company entered into anamended and restated revolving credit agreement providing for $30.0 million ofsenior secured credit facilities. The revolving credit agreement included a$15.0 million letter of credit facility and a $15.0 million revolving creditfacility that could be used for letters of credit.

 

On October 5, 2006,the Company entered into a new amended and restated revolving credit facility,pursuant to which the 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 on October 5,2008, pursuant to which the Lenders agreed to make loans to the Company and itssubsidiaries (all of the proceeds of which were to be used for working capitalpurposes) and issue letters of credit on behalf of the Company and its subsidiaries.

 

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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 million letter of credit facility(the “New Senior Secured Letter of Credit Facility”, together with the NewSenior Secured Revolving Credit Facility, the “New Senior Secured RevolvingCredit Facilities”), maturing on January 29, 2009, were put into place,pursuant to which the lenders agree to make loans and issue letters of creditto and on behalf of the Company and its subsidiaries.

 

Obligations under the New Senior Secured RevolvingCredit Facilities are guaranteed by all of the Company’s subsidiaries as wellas by RM Restaurant Holding, which wholly owns the Company and has made a firstpriority pledge of all of its equity interests in the Company as security forthe obligations. Interest on the New Senior Secured Revolving Credit Facilityaccrues pursuant to an Applicable Margin as set forth in the Second Amended andRestated Credit Agreement. The New Senior Secured Revolving Credit Facilitiesare secured by, among other things, first priority pledges of all of the equityinterests of the Company’s direct and indirect subsidiaries, and first prioritysecurity interests (subject to customary exceptions) in substantially all ofthe current and future property and assets of the Company and its direct andindirect subsidiaries, with certain limited exceptions. In connection with theCompany’s entrance 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 the outstandingrevolving borrowings under the Old Senior Secured Revolving Credit Facility. Asof December 30, 2007, there was $11.0 million outstanding under the NewSenior Secured Revolving Credit Facility.

 

The Second Amended andRestated Credit Agreement contains various affirmative and negative covenantsand restrictions, which among other things, require us to meet certainfinancial tests (including certain leverage and cash flow ratios), and limitsour 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. Under the terms of the Second Amended and Restated Credit Agreementwe are required to maintain a cash flow ratio determined on an annual basisequal to 1.70 to 1.00 until maturity, except for the fiscal quarters endedSeptember 30, 2007 and December 30, 2007, when compliance with theCash Flow Ratio is not to be tested. The Company and its lender determined thatthe definition of this covenant had been drafted improperly and therefore thelender waived compliance until the first quarter of 2008. Pursuant to the termsof the Second Amended and Restated Credit Agreement, the Cash Flow Ratio isdefined as the ratio of (a) Consolidated Cash Flow (as defined therein) to(b) Consolidated Financial Obligations (as defined therein). Thisagreement contains a cross-default provision wherein if we are in default onany other credit facilities, default on this facility is automatic. The Companywas in compliance with all specified financial and other covenants under theNew Senior Secured Revolving Credit Facilities at December 30, 2007.

 

*SeniorUnsecured Credit Facility*. In 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 wereused to finance a portion of the cash consideration of an acquisition and payrelated 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”),consisting of a single term loan maturing on October 5, 2010. All of theproceeds of the New Senior Unsecured Credit Facility were used to repay in fullany term loans outstanding under the Old Senior Unsecured Credit Facility andnot continued on the restatement date. The total amount of term loans repaidwas $10.0 million. Obligations under the New Senior Unsecured Credit Facilityare guaranteed by all of the Company’s subsidiaries. Interest on the term loanoutstanding under the New Senior Unsecured Credit Facility accrues, at theCompany’s option, at either (i) the greater of the prime rate or the ratewhich is 0.5% in excess of the federal funds rate, plus 4.0% or (ii) areserve adjusted Eurodollar rate, plus 5.0%. As of December 30, 2007, theinterest rate on the New Senior Unsecured Credit Facility term loan was 9.83%.

 

Our New Senior UnsecuredCredit Facility contains various affirmative and negative covenants which,among other things, require us to meet certain financial tests (includingcertain leverage and interest coverage ratios) and limits our and oursubsidiaries’ 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 New Senior Secured Revolving Credit Facilities). We arerequired to maintain certain minimum interest coverage ratios ranging from (i) 2.15to 1.00 for the fiscal quarters ending on or after March 31, 2007 through December 31,2007 and (ii) 2.30 to 1.00 thereafter until maturity. Pursuant to theterms of the New Senior Unsecured Credit Facility, the Interest Coverage Ratiois defined as the ratio as of the last day of any fiscal quarter of (a) ConsolidatedEBITDA (as defined therein) for the four-fiscal quarter period then ending to (b) ConsolidatedInterest Expense (as defined 

 

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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 30, 2007.

 

*Mortgage.* In 2005, concurrent with an acquisition,we assumed a $0.8 million mortgage secured by the building and improvements ofone of the restaurants acquired in the transaction. The mortgage carries afixed annual interest rate of 9.28% and requires equal monthly payments ofprincipal and interest through April 2015. As of December 30, 2007,the principal amount outstanding on the mortgage was $0.7 million.

 

*Capital Leases*. In conjunction with our acquisition ofEl Torito, we assumed capital lease obligations, collateralized with leaseholdimprovements, in an aggregate amount of $9.2 million. In addition, we haveentered into additional capital leases for equipment of $0.9 million duringFiscal Year 2007. The remaining capital lease obligations have aweighted-average interest rate of  9.0%.As of December 30, 2007, the principal amount due relating to capitallease obligations was $1.6 million. Principal and interest payments on thecapital lease obligations are due monthly and range from $2,600 to $11,400 permonth. The capital lease obligations mature between 2009 and 2025.

 

The following tablesrepresent our contractual commitments as of December 30, 2007 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)        |       | $                              | 182,000    |                            | $          | 11,408             |       | $                  | 170,151    |                             | $          | 182 |   | $ | 259 |   |
| Capital Lease Obligations            |       | 1,987                          |       | 555                             |       | 822                |       | 280                |       | 330                              |       |
| Operating Lease Obligations(2)       |       | 261,725                        |       | 41,551                          |       | 70,537             |       | 53,210             |       | 96,427                           |       |
| Purchase Obligations                 |       | 62,849                         |       | 43,522                          |       | 5,522              |       | 5,522              |       | 8,283                            |       |
|                                 |       |                           |       |                            |       |               |       |               |       |                             |       |
| Total                                |       | $                              | 508,561    |                            | $          | 97,036             |       | $                  | 247,032    |                             | $          | 59,194 |   | $ | 105,229 |   |

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(1)                                  Includes our senior secured notes,unsecured term loan, New Senior Secured Revolving Credit Facility and anobligation to a vendor.

 

(2)                                  In addition to the base rent, many of ourleases contain percentage rent clauses, which obligate us to pay additionalrents based on a percentage of sales, when sales levels exceed a contractuallydefined base. We recorded such additional rent expenses of $ 2,164 in FiscalYear 2007, $2,661 in Fiscal Year 2006 Combined and $2,517 in Fiscal Year 2005.Operating Lease Obligations do not reflect potential renewals or replacementsof expiring leases.

 

**Inflation**

 

Over the past five years,inflation has not significantly affected our operations. However, the impact ofinflation on labor, food and occupancy costs could, in the future,significantly affect our operations. We pay many of our employees hourly ratesrelated to the federal or applicable state minimum wage. Our workers’compensation and health insurance costs have been and are subject to continuedinflationary pressures. Costs for construction, taxes, repairs, maintenance andinsurance all 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.

 

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**Critical Accounting Policies**

 

Our Company’s accounting policies are fully describedin Note 4 of the Consolidated Financial Statements. As disclosed in Note 4, thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anongoing basis, we evaluate our estimates, including those related to propertyand equipment, impairment of long-lived assets, valuation of goodwill,self-insurance reserves, income taxes and revenue recognition. We base ourestimates on historical experience and on various other assumptions and factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Based on ourongoing review, we plan to adjust our judgments and estimates where facts andcircumstances dictate. Actual results could differ from our estimates.

 

We believe the followingcritical accounting policies are important to the portrayal of our financialcondition and results and require our management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.

 

**Property and Equipment**

 

Property and equipment isrecorded at cost and depreciated over its estimated useful life using thestraight-line method for financial reporting purposes. The lives for furniture,fixtures and equipment range from three to 10 years. The life for buildings is theshorter of 20 years or the term of the related operating lease. Costs ofleasehold rights and improvements and assets held under capital leases areamortized on the straight-line basis over the shorter of the estimated usefullives of the assets or the non-cancelable term of their underlying leases. Thecosts of repairs and maintenance are expensed when incurred, while expendituresfor refurbishments and improvements that extend the useful life of an asset arecapitalized.

 

**Long-Lived Asset Impairment**

 

We assess the impairmentof long-lived assets, including restaurant sites and other assets, when eventsor changes in circumstances indicate that the carrying value of the assets orthe asset group may not be recoverable. The asset impairment review assessesthe fair value of the assets based on the future cash flows the assets areexpected 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.

 

For properties to beclosed 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) theresults of its previous efforts to dispose of similar assets and (3) thecurrent economic conditions. Specific real estate markets, the economicenvironment and inflation affect the actual cost of disposition for theseleases and related assets.

 

During Fiscal Year 2007,Fiscal Year 2006 Combined and Fiscal Year 2005, our management determined thatcertain identified property and equipment was impaired. Management wrote theproperty down by $1.4, $1.2 million and $0.6 million, respectively, to itsestimated fair value by increasing accumulated depreciation and amortizationand recording a loss on impairment of property and equipment.

 

**Valuation of 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 

 

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Company have similar economic characteristics,including production processes, types or classes of customers and distributionmethods. This determination is made at the reporting unit level and consists oftwo steps. First, our management determines the fair value of a reporting unitand compares it to its carrying amount. The fair value is determined based upona combination of two valuation techniques, including an income approach, whichutilizes discounted future cash flow projections based upon management forecasts,and a market approach, which is based upon pricing multiplesat which similarcompanies have been sold. Second, if the carrying amount of a reporting unitexceeds its fair value, an impairment loss is recognized for any excess of thecarrying amount of the reporting unit’s goodwill over the implied fair value ofthe goodwill. The implied fair value of goodwill is determined by allocatingthe fair value of the reporting unit in a manner similar to a purchase priceallocation, in accordance with Statement of Financial Accounting Standards No. 141,“Business Combinations”. The residual fair value after this allocation is theimplied fair value of the reporting unit goodwill.

 

Factors that could changethe result of our goodwill impairment test include, but are not limited to,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 estimated undiscountedcash flows is susceptible to future changes in market conditions, and whenunfavorable, can adversely affect our original estimates of fair values. Avariance in the discount rate could have a significant impact on the valuationof the goodwill for purposes of the impairment test. We cannot predict theoccurrence of certain future events that might adversely affect the reportedvalue of goodwill. Such events include, but are not limited to, strategicdecisions made in response to the economic environment on our customer base ora material negative change in relationships with our customers.

 

Our annual impairmenttests of goodwill was performed as of November 25, 2007.  Management forecasts were revised due to therecent impact of the downturn in the economy on current operations and growthprojections. As a result, the Company identified impairment of approximately$10.0 million. We have recorded a non-cash charge of $10.0 million for thewrite-down of the goodwill related to the Merger as of December 30, 2007.

 

**Self-Insurance**

 

Our business is primarilyself-insured for workers’ compensation and general liability costs. Ourrecorded 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’ compensationliabilities are from claims occurring in various states. Individual stateworkers’ compensation regulations have received a tremendous amount ofattention from state politicians, insurers, employers and providers, as well asthe public in general. Recent years have seen an escalation in the number oflegislative reforms, judicial rulings and social phenomena affecting ourbusiness. The changes in a state’s political and economic environment increasethe variability in the unpaid claim liabilities.

 

**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 

 

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recoverability assessments. In accordance with SFAS No. 109,net deferred tax assets are reduced by a valuation allowance if, based on allthe available evidence, it is more likely than not that some or all of thedeferred tax assets will not be realized. We recorded a valuation allowance of$13.3 million at December 30, 2007. The amount of deferred tax assetsconsidered realizable was based upon our ability to generate future taxableincome, exclusive of reversing temporary differences and carry-forwards. Inevaluating future taxable income for valuation allowance purposes as of December 30,2007, we concluded that it was appropriate to consider only income expected tobe generated in fiscal years 2008, 2009 and 2010. The tax benefit recorded inFiscal Years 2005 was related to the reduction of our valuation allowancerelated to our net deferred tax assets.

 

The purchase accounting adjustments for the ChevysAcquisition have not been fully reflected in the deferred tax balances as of December 30,2007 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.

 

**Revenue Recognition**

 

Revenues from theoperation of Company-owned restaurants are recognized when sales occur. Feesfrom franchised and licensed restaurants are included in revenue as earned.Royalty fees are based on franchised restaurants’ revenues and we record thesefees in the period the related franchised restaurants’ revenues are earned.Real Mex Foods’ revenues from sales to outside customers are recognized upondelivery, when title transfers to the customer, and are included in otherrevenues. Sales tax collected from customers and remitted to governmentalauthorities is presented on a net basis (excluded from revenue) in ourfinancial statements.

 

**Recent Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157).The purpose of SFAS No. 157 is to define fair value, establish a frameworkfor measuring fair value and enhance disclosures about fair value measurements.The Statement applies whenever other statements require or permit assets orliabilities to be measured at fair value. The measurement and disclosure requirements are effective for the Companybeginning in the first quarter of Fiscal Year 2008. The Company does not expectthe impact of this Statement to have a material effect on our consolidatedfinancial statements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial liabilities - Including an Amendment of FASB Statement No. 115”(SFAS No. 159). SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value. Unrealizedgains and losses on items for which the fair value option has been elected willbe recognized in earnings at each subsequent reporting date. SFAS No. 159is effective for financial statements issued for fiscal years beginning after November 15,2007, which is the year beginning December 31, 2007 for the Company. TheCompany is evaluating the impact that the adoption of SFAS No. 159 willhave on its consolidated results of operations and financial condition.

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (SFAS No. 141R).SFAS No. 141R provides companies with principles and requirements on howan acquirer recognizes and measures in its financial statements theidentifiable assets acquired, liabilities assumed, and any noncontrollinginterest in the acquiree as well as the recognition and measurement of goodwillacquired in a business combination. SFAS No. 141R also requires certaindisclosures to enable users of the financial statements to evaluate the natureand financial effects of the business combination. Acquisition costs associatedwith the business combination will generally be expensed as incurred. SFAS No. 141Ris effective for business combinations occurring in fiscal years beginningafter December 15, 2008, which will require us to adopt these provisionsfor business combinations occurring in fiscal year 2009 and thereafter. Earlyadoption of SFAS No. 141R is not permitted. The Company does not believethat the adoption of SFAS No. 141R will have an effect on its financialstatements; however, the effect is dependent upon whether the company makes anyfuture acquisitions and the specifics of those acquisitions.

 

ITEM 7A.                                           QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

The inherent risk inmarket risk sensitive instruments and positions primarily relates to potentiallosses arising from adverse changes in foreign exchange rates and interestrates.

 

We consider the U.S.dollar to be the functional currency for all of our entities. All of our netsales and our expenses in Fiscal Year 2007, Fiscal Year 2006 Combined and FiscalYear 2005 were denominated in U.S. dollars. Therefore, foreign currencyfluctuations did not materially affect our financial results in those periods.

 

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We are also subject tomarket risk from exposure to changes in interest rates based on our financingactivities. This exposure relates to borrowings under our senior secured andunsecured credit facilities that are payable at floating rates of interest. Asof February 24, 2008, we had borrowings of $11.0 million outstanding underour New Senior Secured Revolving Credit Facility. As of February 24, 2008,we have $65.0 million outstanding under our New Senior Unsecured CreditFacility. A hypothetical 10% fluctuation in interest rates as of February 24,2008 would have a net after tax impact of $0.4 million on our earnings inFiscal 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, webelieve that almost all of our food and supplies are available from severalsources, which helps to control food commodity risks.

 

29

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ITEM8.                                                     FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA

 

The audited consolidated financial statements are setforth below.

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Board of Directors and StockholdersReal Mex Restaurants, Inc.

 

We have audited the accompanying consolidated balance sheet of Real MexRestaurants, Inc. (a Delaware corporation) as of December 30, 2007, and therelated statements of operations, stockholders’ equity, and cash flows for theyear ended December 30, 2007.  Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Real MexRestaurants, Inc. as of December 30, 2007, and the results of its operationsand its cash flows for the year ended December 30, 2007 in conformity withaccounting principles generally accepted in the United States of America.

 

/s/ Grant Thornton LLP

 

Irvine, CaliforniaMarch 24, 2008

30

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of DirectorsReal Mex Restaurants, Inc.

 

We have audited theaccompanying consolidated balance sheet of Real Mex Restaurants, Inc. andits 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 HoldingCorp., a majority owned subsidiary of Sun Cantinas LLC. We have also auditedthe consolidated statements of operations, stockholders’ equity, and cash flowsfor the periods ended December 26, 2005 through August 20, 2006 andthe year ended December 25, 2005 (the “Predecessor Periods”), prior to theacquisition of the Company by RM Restaurant Holding Corp. These financialstatements and the financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of the Company at December 31,2006, and the related results of their operations and their cash flows for theSuccessor and Predecessor Periods, in conformity with accounting principlesgenerally accepted in the United States.

 

As discussed inNote 8 to the consolidated financial statements, the Company changed its methodof accounting for Share Based Payments in accordance with Statements ofAccounting Financial Standards No. 123 (revised 2004) on December 26,2005.

 
|                    | /s/ Ernst & Young LLP |
|-------------------------|--------------------------------|
| Los Angeles, California |                           |
| March 16, 2007     |                           |

 

 

31

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

 
| ** **                                                                                                          | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                     |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                           |       | $                           | 2,323      |                        | $          | 2,710 |   |
| Trade receivables, net                                                                                              |       | 10,160                      |       | 8,604                       |       |
| Other receivables                                                                                                   |       | 2,594                       |       | 1,572                       |       |
| Related party receivables                                                                                           |       | —                      |       | 3,591                       |       |
| Inventories                                                                                                         |       | 12,049                      |       | 10,565                      |       |
| Deferred compensation plan assets                                                                                   |       | 3,115                       |       | 2,370                       |       |
| Prepaid expenses and other current assets                                                                           |       | 7,186                       |       | 7,404                       |       |
| Current portion of favorable lease asset, net                                                                       |       | 3,454                       |       | 4,910                       |       |
| Deferred tax asset                                                                                                  |       | —                      |       | 8,265                       |       |
| Total current assets                                                                                                |       | 40,881                      |       | 49,991                      |       |
|                                                                                                                |       |                        |       |                        |       |
| Property and equipment, net                                                                                         |       | 96,179                      |       | 90,802                      |       |
| Goodwill, net                                                                                                       |       | 273,621                     |       | 277,461                     |       |
| Deferred charges                                                                                                    |       | 3,115                       |       | 3,939                       |       |
| Deferred tax asset                                                                                                  |       | —                      |       | 1,149                       |       |
| Favorable lease asset, less current portion, net                                                                    |       | 11,313                      |       | 19,827                      |       |
| Other assets                                                                                                        |       | 9,346                       |       | 7,703                       |       |
| Total assets                                                                                                        |       | $                           | 434,455    |                        | $          | 450,872 |   |
|                                                                                                                |       |                        |       |                        |       |
| **Liabilities and stockholders’ equity**                                                                       | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                |       |                        |       |                        |       |
| Accounts payable                                                                                                    |       | $                           | 22,692     |                        | $          | 27,091 |   |
| Accrued self-insurance reserves                                                                                     |       | 15,479                      |       | 15,877                      |       |
| Accrued compensation and benefits                                                                                   |       | 17,402                      |       | 15,576                      |       |
| Other accrued liabilities                                                                                           |       | 14,014                      |       | 18,469                      |       |
| Related party payables                                                                                              |       | 2,505                       |       | —                      |       |
| Current portion of long-term debt                                                                                   |       | 12,579                      |       | 9,573                       |       |
| Current portion of capital lease obligations                                                                        |       | 433                         |       | 224                         |       |
| Total current liabilities                                                                                           |       | 85,104                      |       | 86,810                      |       |
|                                                                                                                |       |                        |       |                        |       |
| Long-term debt, less current portion                                                                                |       | 172,057                     |       | 173,345                     |       |
| Capital lease obligations, less current portion                                                                     |       | 1,118                       |       | 763                         |       |
| Unfavorable lease liability, less current portion,  net                                                             |       | 4,394                       |       | 2,514                       |       |
| Other liabilities                                                                                                   |       | 8,669                       |       | 3,363                       |       |
| Total liabilities                                                                                                   |       | 271,342                     |       | 266,795                     |       |
| .                                                                                                                   |       |                        |       |                        |       |
| Commitments and contingencies                                                                                       |       | —                      |       | —                      |       |
|                                                                                                                |       |                        |       |                        |       |
| Stockholders’ equity:                                                                                          |       |                        |       |                        |       |
| Common stock,  $.001 par value, 1,000 shares authorized, issued and outstanding at  December 31, 2007 and 2006 |       | —                      |       | —                      |       |
| Additional  paid-in capital                                                                                         |       | 201,706                     |       | 199,124                     |       |
| Accumulated  deficit                                                                                                |       | (38,593                     | )          | (15,047                     | )          |
| Total stockholders’ equity                                                                                     |       | 163,113                     |       | 184,077                     |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                           | 434,455    |                        | $          | 450,872 |   |

 

*Seenotes to consolidated financial statements.*

 

32

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**RealMex Restaurants, Inc.**

**ConsolidatedStatements of Operations**

**(InThousands)**

** **

| ** **                                                     | ** ** | **Successor**         | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | ** **            | ** ** | **August 21,**   | ** ** | **December 26,** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **            | ** ** | **2006 to**      | ** ** | **2005 to**      | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **August 20,**   | ** ** | **December 25,** | ** ** |
| ** **                                                     | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Revenues:                                                      |       |                  |       |                  |       |                  |       |   |   |
| Restaurant  revenues                                           |       | $                     | 523,352    |                  | $          | 179,630               |       | $ | 351,591 |   | $ | 510,013 |   |
| Other revenues                                                 |       | 38,164                |       | 11,094                |       | 18,358                |       | 20,532 |   |
| Franchise  revenues                                            |       | 3,675                 |       | 1,374                 |       | 2,603                 |       | 3,751 |   |
| Total revenues                                                 |       | 565,191               |       | 192,098               |       | 372,552               |       | 534,296 |   |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Costs and  expenses:                                           |       |                  |       |                  |       |                  |       |   |   |
| Cost of sales                                                  |       | 140,824               |       | 46,883                |       | 87,388                |       | 127,126 |   |
| Labor                                                          |       | 199,843               |       | 67,729                |       | 125,748               |       | 186,390 |   |
| Direct operating  and occupancy expense                        |       | 148,088               |       | 51,127                |       | 94,422                |       | 140,648 |   |
| General and  administrative expense                            |       | 31,718                |       | 11,414                |       | 18,893                |       | 28,346 |   |
| Depreciation and  amortization                                 |       | 23,961                |       | 10,323                |       | 12,230                |       | 18,498 |   |
| Legal settlement  costs                                        |       | 402                   |       | 19                    |       | 4,180                 |       | 763 |   |
| Merger costs                                                   |       | —                |       | 307                   |       | 9,434                 |       | — |   |
| Pre-opening  costs                                             |       | 2,139                 |       | 917                   |       | 910                   |       | 524 |   |
| Goodwill impairment                                            |       | 10,000                |       | —                |       | —                |       | — |   |
| Impairment of property and equipment                           |       | 1,362                 |       | —                |       | 1,197                 |       | 568 |   |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Operating income                                               |       | 6,854                 |       | 3,379                 |       | 18,150                |       | 31,433 |   |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Other income  (expense):                                       |       |                  |       |                  |       |                  |       |   |   |
| Interest expense                                               |       | (19,326               | )          | (10,481               | )          | (16,005               | )          | (22,973 | ) |
| Other income  (expense), net                                   |       | 1,670                 |       | (1,136                | )          | 642                   |       | 217 |   |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Total other  expense, net                                      |       | (17,656               | )          | (11,617               | )          | (15,363               | )          | (22,756 | ) |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| (Loss) income  before income tax provision                     |       | (10,802               | )          | (8,238                | )          | 2,787                 |       | 8,677 |   |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Income tax  (benefit) provision                                |       | 12,744                |       | (3,191                | )          | 1,307                 |       | (4,709 | ) |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Net (loss)  income before redeemable preferred stock accretion |       | (23,546               | )          | (5,047                | )          | 1,480                 |       | 13,386 |   |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Redeemable preferred  stock accretion                          |       | —                |       | —                |       | (10,126               | )          | (14,583 | ) |
|                                                           |       |                  |       |                  |       |                  |       |   |   |
| Net (loss) income  attributable to common stockholders         |       | $                     | (23,546    | )                     | $          | (5,047                | )          | $ | (8,646 | ) | $ | (1,197 | ) |
|                                                                |            |                       |            |                       |            |                       |            |  |  |  |  |  |  |  |

 

*Seenotes to consolidated financial statements.*

 

33

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**RealMex 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** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Preferred**                 | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Stock**                     | ** ** | **Stock** | ** ** | **Stock** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| 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** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Preferred**                 | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Stock**                     | ** ** | **Stock** | ** ** | **Stock** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **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 |   |
| Contribution from  parent                                    |       | —                        |       | — |   | — |   | — |   | — |   | — |   | 1,743 |   | — |   | 1,743 |   |
| Stock-based  compensation                                    |       | —                        |       | — |   | — |   | — |   | — |   | — |   | 839 |   | — |   | 839 |   |
| Net loss                                                     |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | (23,546 | ) | (23,546 | ) |
| Balance at December 30, 2007                            |       | $                             | —     |   | $ | — |   | $ | — |   | 1,000 |   | $ | — |   | $ | — |   | $ | 201,706 |   | $ | (38,593 | ) | $ | 163,113 |   |

 

*Seenotes to consolidated financial statements.*

 

34

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**RealMex Restaurants, Inc.Consolidated Statements of Cash Flows**

**(InThousands)**

 
| ** **                                                                                           | ** ** | **Successor**                   | ** ** | **Predecessor**                       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                           | ** ** | ** **                      | ** ** | ** **                            | ** ** | **December 26, 2005** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | ** **                      | ** ** | **August 21, 2006 to** | ** ** | **to** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **December 30, 2007** | ** ** | **December 31, 2006**       | ** ** | **August 20, 2006** | ** ** | **December 25, 2005** | ** ** |
| **Operating  activities**                                                                            | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss)  income                                                                                   |       | $                               | (23,546    | )                                     | $          | (5,047 | ) | $ | 1,480 |   | $ | 13,386 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities: |       |                            |       |                                  |       |   |   |   |   |
| Depreciation                                                                                         |       | 22,254                          |       | 8,505                                 |       | 12,230 |   | 18,498 |   |
| Amortization of:                                                                                     |       |                            |       |                                  |       |   |   |   |   |
| Favorable lease  asset and unfavorable lease liability, net                                          |       | 1,707                           |       | 1,818                                 |       | — |   | — |   |
| Deferred  financing costs                                                                            |       | 1,828                           |       | 2,286                                 |       | 1,179 |   | 1,712 |   |
| Debt premium                                                                                         |       | (1,563                          | )          | —                                |       | — |   | — |   |
| Goodwill  impairment                                                                                 |       | 10,000                          |       | —                                |       | — |   | — |   |
| Loss (gain) on  disposal of property and equipment                                                   |       | (877                            | )          | 706                                   |       | (19 | ) | (204 | ) |
| Impairment of  property and equipment                                                                |       | 1,362                           |       | —                                |       | 1,197 |   | 568 |   |
| Stock-based  compensation expense                                                                    |       | 839                             |       | —                                |       | 1,800 |   | — |   |
| Deferred tax  asset                                                                                  |       | 12,731                          |       | (3,218                                | )          | (1,108 | ) | (4,812 | ) |
| Other                                                                                                |       | 231                             |       | —                                |       | — |   | — |   |
| Changes in  operating assets and liabilities:                                                        |       |                            |       |                                  |       |   |   |   |   |
| Trade and other  receivables                                                                         |       | (2,578                          | )          | 1,449                                 |       | (1,071 | ) | (2,473 | ) |
| Inventories                                                                                          |       | (1,484                          | )          | (553                                  | )          | (35 | ) | (1,979 | ) |
| Deferred  compensation plan assets                                                                   |       | (745                            | )          | (755                                  | )          | (573 | ) | (610 | ) |
| Prepaid expenses  and other current assets                                                           |       | 544                             |       | (3,310                                | )          | (952 | ) | 274 |   |
| Related party  receivable/payable                                                                    |       | 6,096                           |       | (3,591                                | )          | — |   | — |   |
| Deferred  charges, net                                                                               |       | (148                            | )          | (80                                   | )          | (301 | ) | (25 | ) |
| Other assets                                                                                         |       | 73                              |       | (107                                  | )          | 912 |   | 196 |   |
| Accounts payable  and accrued liabilities                                                            |       | (6,519                          | )          | (2,151                                | )          | 14,235 |   | 5,403 |   |
| Other  liabilities                                                                                   |       | 5,225                           |       | 629                                   |       | 1,484 |   | 1,472 |   |
| Net cash  provided by (used in) operating activities                                                 |       | 25,430                          |       | (3,419                                | )          | 30,458 |   | 31,406 |   |
|                                                                                                 |       |                            |       |                                  |       |   |   |   |   |
| **Investing  activities**                                                                            | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of  property and equipment                                                                 |       | (34,404                         | )          | (10,495                               | )          | (15,885 | ) | (23,408 | ) |
| Chevys  Acquisition, net of cash acquired of $3,913                                                  |       | —                          |       | —                                |       | — |   | (76,165 | ) |
| Sale of Fuzio  trademark                                                                             |       | 1,200                           |       | —                                |       | — |   | — |   |
| Net proceeds  from disposal of property and equipment                                                |       | 4,789                           |       | —                                |       | — |   | 683 |   |
|                                                                                                 |       |                            |       |                                  |       |   |   |   |   |
| Net cash used in  investing activities                                                               |       | (28,415                         | )          | (10,495                               | )          | (15,885 | ) | (98,890 | ) |
|                                                                                                 |       |                            |       |                                  |       |   |   |   |   |
| **Financing  activities**                                                                            | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net borrowing  under revolving credit facility                                                       |       | 3,050                           |       | 7,950                                 |       | — |   | — |   |
| Borrowings under  long-term debt agreements                                                          |       | 981                             |       | 437                                   |       | — |   | 75,000 |   |
| Payments on  long-term debt agreements and capital lease obligations                                 |       | (577                            | )          | (10,148                               | )          | (174 | ) | (288 | ) |
| Payment of  financing costs                                                                          |       | (856                            | )          | (885                                  | )          | — |   | (3,047 | ) |
| Dividend paid                                                                                        |       | —                          |       | (10,000                               | )          | — |   | — |   |
| Net cash  provided by (used in) financing activities                                                 |       | 2,598                           |       | (12,646                               | )          | (174 | ) | 71,665 |   |
| Net (decrease)  increase in cash and cash equivalents                                                |       | (387                            | )          | (26,560                               | )          | 14,399 |   | 4,181 |   |
|                                                                                                 |       |                            |       |                                  |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                                    |       | 2,710                           |       | 29,270                                |       | 14,871 |   | 10,690 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                               | 2,323      |                                  | $          | 2,710 |   | $ | 29,270 |   | $ | 14,871 |   |
|                                                                                                 |       |                            |       |                                  |       |   |   |   |   |
| **Supplemental  disclosure of cash flow information**                                                | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                                        |       | $                               | 19,722     |                                  | $          | 11,225 |   | $ | 11,405 |   | $ | 20,999 |   |
| Income taxes  paid                                                                                   |       | $                               | 38         |                                  | $          | 17 |   | $ | 44 |   | $ | 323 |   |
|                                                                                                 |       |                            |       |                                  |       |   |   |   |   |
| **Supplemental  disclosure of noncash investing and financing activities**                           | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred and  common stock issued as consideration for the Chevys Acquisition                       |       | $                               | —     |                                  | $          | — |   | $ | 5,682 |   | $ | 7,349 |   |

 

*Seenotes to consolidated financial statements.*

 

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**RealMex Restaurants, Inc.**

**Notesto Consolidated Financial Statements**

**December 30,2007**

**(InThousands, Except For Share Data)**

 

**1. Description of Business**

 

Real Mex Restaurants, Inc.,(together with its subsidiaries, the “Company”) (the surviving corporationresulting from a merger on August 21, 2006 with RM Integrated, Inc.(the “Merger”)) is a Delaware corporation and was formed on May 15, 1998,to acquire the stock of Acapulco Restaurants, Inc. (Acapulco). Effective February 24,2004, the Company changed its name from Acapulco Acquisition Corp. to Real MexRestaurants, Inc.

 

The Company is engaged inthe business of owning and operating restaurants, primarily under the names ElTorito®, Acapulco Mexican Restaurant Y Cantina® and Chevys Fresh Mex®. At December 30,2007, the Company, primarily through its major subsidiaries (El ToritoRestaurants, Inc., Chevys Restaurants LLC and Acapulco Restaurants, Inc.),owned and operated 188 restaurants, of which 156 were in California and theremainder in 12 other states. The Company’s other major subsidiary, Real MexFoods, Inc. (RMF), provides internal production, purchasing anddistribution services for the restaurant operations and manufactures specialtyproducts for sales to outside customers.

 

**Basis of Presentation**

 

TheCompany prior to August 21, 2006 is referred to as the “Predecessor” andafter August 20, 2006 is referred to as the “Successor”.

 

The Company’s fiscal yearconsists of 52 or 53 weeks ending on the last Sunday in December which in2007 was December 30, 2007, in 2006 was December 31, 2006 and in 2005was December 25, 2005. The accompanying consolidated balance sheetspresent the Company’s financial position as of December 30, 2007 and December 31,2006. The accompanying consolidated statements of operations, stockholders’equity and cash flows present the 52 week Successor Period ended December 30,2007, 19 week Successor Period from August 21, 2006 to December 31,2006, the 34 week Predecessor Period from December 25, 2005 to August 20,2006 and the 52 week Predecessor Period ended December 25, 2005.

 

**2. 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”). The majority of the stock of RM RestaurantHolding is owned by Sun Cantinas LLC (“Sun LLC”), an affiliate of Sun CapitalPartners, Inc. (“Sun Capital”). On August 18, 2006, the stockholdersof the Company entitled to vote thereon (including the holders of a majority ofthe Company’s Series C Preferred Stock, par value $0.001 per share)approved the Merger Agreement. On August 21, 2006 (the “Effective Time”),the closing of the transactions contemplated by the Merger Agreement occurred,and RM Integrated merged with and into Real Mex Restaurants, Inc., withReal Mex Restaurants, Inc. continuing as the surviving corporation and the100% owned subsidiary of RM Restaurant Holding. The net purchase price of RealMex Restaurants, Inc. was $200.9 million, consisting of $359.0 million incash, plus net cash acquired of $35.2 million, plus $4.6 million in workingcapital and other adjustments plus direct acquisition costs of $3.9 million,less indebtedness assumed of $188.2 million and seller costs of $9.3 million.Pursuant to the Merger Agreement, $6.0 million of the Merger Considerationwas held in escrow. Indebtedness assumed included accrued interest and thepurchase price is subject to adjustment based on certain other adjustments. Asa result of the Merger and in accordance with the terms of the MergerAgreement, (i) all of the outstanding capital stock of Real MexRestaurants, Inc. was converted into the right to receive a portion of thepurchase price, and all Real Mex Restaurants, Inc. stock options, warrantsand shares 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 withits affiliates, was a controlling stockholder of Real Mex Restaurants, Inc.As described 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.

 

TheMerger was accounted for under the purchase method of accounting and,accordingly, the purchase price has 

 

36

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been allocated to theassets acquired and the liabilities assumed based on their estimated fairmarket values at the date of the Merger. The Company attributes the goodwillassociated with the Merger to the historical financial performance and theanticipated future performance of the Company’s operations.

 

Thefollowing table presents the 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                     |   | 5,615   |    |
| Property and equipment                   |   | 88,997  |    |
| Deferred tax asset                       |   | 6,196   |    |
| Other assets                             |   | 35,281  |    |
| Goodwill                                 |   | 288,138 |    |
| Total assets  acquired                   |   | 475,134 |    |
|                                     |   |    |    |
| Accounts payable and accrued liabilities |   | 20,881  |    |
| Long-term debt                           |   | 186,057 |    |
| Other liabilities                        |   | 67,329  |    |
| Total  liabilities assumed               |   | 274,267 |    |
| Net assets acquired                      |   | $       | 200,867 |   |

 

**3. 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 generally accepted accountingprinciples in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

**Reclassification**

 

Certain reclassificationshave been made to prior year amounts to conform to current year presentation.

 

In 2005 and 2006 certaincosts related to supplies were included in cost of sales. Beginning in 2007,these costs were reclassified to direct operating and occupancy expense. Thisresulted in a decrease to cost of sales and an increase to direct operating andoccupancy expense of $3,476, $7,485 and $10,045 for the 19 week SuccessorPeriod from August 21, 2006 to December 31, 2006, the 34 weekPredecessor Period December 26, 2005 to August 20, 2006 andPredecessor Year Ended December 25, 2005, respectively.

 

As of December 30,2007, prepaid rent was recorded in prepaid expenses and other current assets.In 2006, such rent was recorded as a reduction to accounts payable. As aresult, a reclassification adjustment of $3,737 was recorded to increaseaccounts payable and prepaid expenses, in order to conform to 2007presentation.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalentsconsist of cash balances in bank accounts and investments with a maturity ofthree months or less at the time of purchase.

 

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**Receivables**

 

Receivables consistprimarily of amounts due from credit card companies, outside customers of RMFand franchisees. Receivables from credit card companies are generally settledin the week following the transaction date. Receivables from RMF’s outsidecustomers are generally collected within 30 days of the date of the sale andreceivables from franchisees are generally collected within 21 days followingthe close of the royalty period. Receivables are stated net of an allowance fordoubtful accounts of $320 and $295 at December 30, 2007 and December 31,2006, respectively.

 

**Inventories**

 

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

 

**Suppliesand Expendable Equipment**

 

The initial purchase of supplies and expendableequipment, when a restaurant is first opened, such as china, glass andsilverware, is capitalized and depreciated over a period of 5 years.Replacements of supplies and expendable equipment are expensed.

 

**Pre-Opening Costs**

 

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

 

**Property and Equipment**

 

Property and equipment isrecorded at cost and depreciated over its estimated useful life using thestraight-line method for financial reporting purposes. The lives for furniture,fixtures and equipment range from three to 10 years. The life for buildings isthe shorter of 20 years or the term of the related operating lease. Costs ofleasehold rights and improvements and assets held under capital leases areamortized on the straight-line basis over the shorter of the estimated usefullives of the assets or the non-cancelable term of their underlying leases. Thecosts of repairs and maintenance are expensed when incurred, while expendituresfor refurbishments and improvements that extend the useful life of an asset arecapitalized.

 

Depreciation expenseincludes the amortization of assets held under capital leases.

 

**Goodwill**

 

The Company accounts forgoodwill under Statement of Financial Accounting Standards (SFAS) No. 142.Goodwill is tested annually for impairment, and is tested for impairment morefrequently if events and circumstances indicate that the asset might beimpaired. The Company performs its annual impairment test during the lastquarter of its fiscal year. An impairment loss is recognized to the extent thatthe carrying amount exceeds the asset’s fair value. The Company considers thereporting unit level to be the Company-level, as the components (e.g., brands)within the Company have similar economic characteristics, including productionprocesses, types or classes of customers and distribution methods. Thisdetermination is made at the reporting unit level and consists of two steps.First, the Company determines the fair value of a reporting unit and comparesit to its carrying amount. The Company calculates the fair value of a reportingunit using a combination of two techniques, including an income approach and amarket approach. Under the income approach, the fair market value of thereporting unit is estimated based upon discounting the future availabledebt-free net cash flows to present value at an appropriate rate of return.This approach represents a quantification of the future dividend payingcapacity of the business being appraised. Under the market approach, pricingmultiples are determined based upon analyzing the prices of reasonably comparablecompanies that trade in the public market and/or transactions involving similarcompanies that have been bought or sold. Second, if the carrying amount of areporting unit exceeds its fair value, an impairment loss is recognized for anyexcess of the carrying amount of the reporting unit’s goodwill over the impliedfair value of that goodwill. The implied fair value of goodwill is determinedby allocating the fair value of the reporting unit in a manner similar to apurchase price allocation, in accordance with SFAS No. 141, “BusinessCombinations.” The residual fair value after this allocation is the impliedfair value of the reporting unit goodwill.

 

Our annual impairmenttest of goodwill was performed as of November 25, 2007.  Management forecasts were revised due to therecent impact of the downturn in the economy on current operations and growthprojections. As a result, the Company identified impairment of approximately$10.0 million. We have recorded a non-cash charge of $10.0 million for thewrite-down of the goodwill related to the Merger as of December 30, 2007.

 

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**Accounting for the Impairment ofLong-Lived Assets**

 

Long-lived assets aretested for impairment in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which addresses financialaccounting and reporting for the impairment or disposal of long-lived assets.During the Successor Period ended December 30, 2007 management recordedimpairment of $1,361 and from August 21, 2006 through December 31,2006 management recorded no impairment. During the Predecessor Period from December 26,2006 to August 20, 2006, and the Predecessor year ended December 25,2005, management of the Company determined that certain identified property andequipment was impaired and recorded an impairment charge of $1,197 and $568,respectively, reducing the carrying value of such assets to the estimated fairvalue. Fair value was based on management’s estimate of future cash flows to begenerated by the property and equipment determined to be impaired.

 

**Liquor Licenses**

 

Transferable liquorlicenses, which have a market value, are carried at the lower of aggregateacquisition cost or market and are not amortized.

 

**FavorableLease Asset and Unfavorable Lease Liability**

 

Favorable lease asset represents the asset in excessof the approximate fair market value of the leases assumed as of August 21,2006, the date of acquisition of the Company. The amount is being amortizedover the remaining primary term of the underlying 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 acquisitionof the Company. The amount is being amortized over the remaining primary termof the underlying leases. The current portion of unfavorable lease liabilitiesis recorded in other accrued liabilities.

 

The following table showsthe estimated amortization expense for the years after December 30, 2007:

 
| ** **                  | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
|                        |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Favorable lease asset       |       | $        | 3,454      |     | $          | 2,846    |       | $        | 2,041      |     | $          | 1,470          |       | $ | 1,156 |   | $ | 3,800 |   |
| Unfavorable lease liability |       | (1,287   | )          | (1,217   | )          | (894     | )          | (680     | )          | (577     | )          | (1,100         | )          |
|                        |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Net amortization expense    |       | $        | 2,167      |     | $          | 1,629    |       | $        | 1,147      |     | $          | 790            |       | $ | 579 |   | $ | 2,700 |   |

 

**Deferred Charges**

 

Deferred charges at December 30,2007 consists of deferred financing costs of $2,004 related to the sale of$105,000 aggregate principal amount of 10% Senior Secured Notes due 2010, $391related to the $65,000 Senior Unsecured Credit Facility maturing on December 31,2008, $649 related to the Senior Secured Revolving Credit Facilities and $72 ofcharges related to site selection of leases. Amounts capitalized related tofinancing costs are amortized over the lives of the respective long-termborrowings using the effective-interest method and are included in interestexpense in the accompanying consolidated statements of operations. Amountscapitalized related to leases are amortized over the primary term of theirrespective leases and are included in occupancy expense in the accompanyingstatements of operations. The following table shows the estimated amortizationexpense for the years after December 30, 2007:

 
| ** **                                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Financing, site selection and lease acquisition  costs |       | $        | 1,303      |     | $          | 1,296    |       | $ | 516 |   |
|                                                        |            |          |            |          |            |          |            |  |  |  |

 

**Income Taxes**

 

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes” (SFAS No. 109). In accordance with SFAS No. 109, income taxesare accounted for using the liability method.

 

The Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48), effective January 1, 2007.  Under FIN 48, the Company is required todetermine whether it is more likely than not that a tax position will besustained upon examination based on the technical merits of the position.  A tax position

 

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that meets the more likely than not recognitionthreshold is measured to determine the amount of benefit to recognize in thefinancial statements. The adoption of FIN 48 did not have a material effect onthe financial statements.  The Companyhas concluded that there are no significant uncertain tax positions requiringrecognition in the financial statements.

 

The Company’s policy is to recognize interest andpenalties expense, if any, related to unrecognized tax benefits as a componentof income tax expense.  As of December 30,2007, the Company has not recorded any interest and penalty expense. TheCompany’s determination on its analysis of uncertain tax positions are relatedto tax years that remain subject to examination by the relevant taxauthorities.  These include the 2004through 2006 tax years for federal purposes and the 2003 through 2006 tax yearsfor California purposes.

 

**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. Sales tax collected fromcustomers and remitted to governmental authorities is presented on a net basis(excluded from revenue) in our financial statements.

 

**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 Company records deferred revenue, included inaccounts payable, for gift certificates and gift cards outstanding until theyare redeemed.

 

**Segment Information**

 

The Company operates 188 restaurants through its threerestaurant operating subsidiaries, providing similar products to similarcustomers. These restaurants possess similar economic characteristics resultingin similar long-term expected financial characteristics. Operating segments arecomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision-maker indeciding how to allocate resources and in assessing performance. Based upon itsmethods of internal reporting and management structure, management believesthat the Company meets the criteria for aggregating its 188 operatingrestaurants into a single reporting segment called restaurant operations.

 

**Promotion and Advertising Expense**

 

The cost of promotion and advertising is expensed asincurred. The Company incurred $10,855, $4,497, $6,713 and $10,665 in promotionand advertising expense during the Successor Year Ended December 30, 2007,the 19 week Successor Period from August 21, 2006 to December 31,2006, the 34 week Predecessor Period December 26, 2005 to August 20,2006 and Predecessor Year Ended December 25, 2005 respectively.

 

**Operating Leases**

 

The Company accounts for operating leases on thestraight-line basis in accordance with SFAS No. 13, “Accounting forOperating Leases.” The Company leases restaurant and office facilities thathave terms with expirations in 2007 through 2027. Most of the restaurantfacilities have renewal clauses exercisable at the option of the Company withrent escalation clauses stipulating specific rent increases, some of which arebased upon the Consumer Price Index. Certain of these leases require thepayment of contingent rentals based on a percentage of gross revenues. At December 30,2007 and December 31, 2006, deferred rent equaled $2,958 and $586,respectively, which is included in other long-term liabilities.

 

 

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**Concentration of Credit Risk**

 

Financial instruments that potentially subject theCompany to concentrations of credit risk consist primarily of cash and cashequivalents. The Company places its cash and cash equivalents with high qualityfinancial institutions. At times, balances in the Company’s cash accounts mayexceed the Federal Deposit Insurance Corporation (FDIC) limit. Most of theCompany’s restaurants are located in California. Consequently, the Company maybe susceptible to adverse trends and economic conditions in California.

 

**Fair Value of Financial Instruments**

 

The Company’s financial instruments are primarilycomprised of cash and cash equivalents, receivables, accounts payable, accruedliabilities and long-term debt. The estimated fair value of the Senior SecuredNotes due 2010 (as defined in Note 6) at December 30, 2007, based onquoted market prices, was $100,800. Management estimates that the carryingvalues of its other financial instruments approximate their fair values sincetheir realization or satisfaction is expected to occur in the short term.

 

As a result of the Merger and under purchaseaccounting rules the Company recorded $4.2 million of unamortizeddebt premium as additional debt related to our senior secured notes as the fairmarket value of the debt on the Merger date was greater than its carryingvalue. The premium is amortized to interest expense over the remaining life ofthe debt.

 

**Recent Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157).The purpose of SFAS No. 157 is to define fair value, establish a frameworkfor measuring fair value and enhance disclosures about fair value measurements.The Statement applies whenever other statements require or permit assets orliabilities to be measured at fair value. The measurement and disclosure requirements are effective for theCompany beginning in the first quarter of Fiscal Year 2008. The Company doesnot expect the impact of this Statement to have a material effect on ourconsolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial liabilities - Including an Amendment of FASB Statement No. 115”(SFAS No. 159). SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value. Unrealizedgains and losses on items for which the fair value option has been elected willbe recognized in earnings at each subsequent reporting date. SFAS No. 159is effective for financial statements issued for fiscal years beginning after November 15,2007, which is the year beginning December 31, 2007 for the Company. TheCompany is evaluating the impact that the adoption of SFAS No. 159 willhave on its consolidated results of operations and financial condition.

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (SFAS No. 141R).SFAS No. 141R provides companies with principles and requirements on howan acquirer recognizes and measures in its financial statements theidentifiable assets acquired, liabilities assumed, and any noncontrollinginterest in the acquiree as well as the recognition and measurement of goodwillacquired in a business combination. SFAS No. 141R also requires certaindisclosures to enable users of the financial statements to evaluate the natureand financial effects of the business combination. Acquisition costs associatedwith the business combination will generally be expensed as incurred. SFAS No. 141Ris effective for business combinations occurring in fiscal years beginningafter December 15, 2008, which will require us to adopt these provisionsfor business combinations occurring in fiscal year 2009 and thereafter. Earlyadoption of SFAS No. 141R is not permitted. The Company does not believethat the adoption of SFAS No. 141R will have an effect on its financialstatements; however, the effect is dependent upon whether the company makes anyfuture acquisitions and the specifics of those acquisitions.

 

**4. Property and Equipment**

 

Property and equipment consists of the following:

 
| ** **                                     | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land and land improvements                     |       | $                           | 2,079      |                        | $          | 4,560 |   |
| Buildings and improvements                     |       | 1,201                       |       | 1,762                       |       |
| Furniture, fixtures and equipment              |       | 51,240                      |       | 37,710                      |       |
| Leasehold improvements and leasehold rights    |       | 73,207                      |       | 65,059                      |       |
|                                           |       | 127,727                     |       | 109,091                     |       |
| Less accumulated depreciation and amortization |       | (31,548                     | )          | (18,289                     | )          |
|                                           |       | $                           | 96,179     |                        | $          | 90,802 |   |

 

 

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**5. Accounts Payable and Other AccruedLiabilities**

 

Accounts payable consist of the following:

 
| ** **                       | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Trade accounts payable           |       | $                           | 19,445     |                        | $          | 23,487 |   |
| Gift cards and gift certificates |       | 3,247                       |       | 3,604                       |       |
|                             |       | $                           | 22,692     |                        | $          | 27,091 |   |

 

Other accrued liabilities consist of the following:

 
| ** **                  | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Rent and occupancy expenses |       | $                           | 1,345      |                        | $          | 1,572 |   |
| Sales taxes                 |       | 4,378                       |       | 4,919                       |       |
| Accrued interest            |       | 2,937                       |       | 3,331                       |       |
| Other                       |       | 5,354                       |       | 8,647                       |       |
|                        |       | $                           | 14,014     |                        | $          | 18,469 |   |

 

**6. Long-Term Debt**

 

Long-term debt consists of the following:

 
| ** **                                    | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior Secured Notes due 2010                 |       | $                           | 105,000    |                        | $          | 105,000 |   |
| Senior Secured Notes unamortized debt premium |       | 2,637                       |       | 3,809                       |       |
| Senior Secured Revolving Credit Facility      |       | 11,000                      |       | 7,950                       |       |
| Senior Unsecured Credit Facility              |       | 65,000                      |       | 65,000                      |       |
| Mortgage                                      |       | 656                         |       | 711                         |       |
| Other                                         |       | 343                         |       | 448                         |       |
|                                          |       | 184,636                     |       | 182,918                     |       |
| Less current portion                          |       | (12,579                     | )          | (9,573                      | )          |
|                                          |       | $                           | 172,057    |                        | $          | 173,345 |   |

 

*Senior Secured Notes due 2010*. Interest on our senior securedregistered notes (“senior secured notes”) accrues at a contract rate of 10% perannum. (The interest rate was 10.25% through March 31, 2007 as, in fiscalyear 2005, we exceeded the capital expenditure limit under the indenturegoverning the senior secured notes and as a result were required to pay a 0.25%increase in the stated rate. Exceeding the capital expenditure limit did notconstitute a default with respect to the senior secured notes or indenture.)Interest is payable semiannually on April 1 and October 1 of eachyear. Our senior secured notes are fully and unconditionally guaranteed on asenior secured basis by all of our present and future domestic subsidiarieswhich are restricted subsidiaries under the indenture governing our seniorsecured notes. Our senior secured notes and related guarantees are secured bysubstantially all of our domestic restricted subsidiaries’ tangible andintangible assets, subject to the prior ranking claims on such assets by thelenders under our New Senior Secured Revolving Credit Facilities. The indenturegoverning our senior secured notes contains various affirmative and negativecovenants, subject to a number of important limitations and exceptions,including but not limited to our ability to incur additional indebtedness, makecapital expenditures, pay dividends, redeem stock or make other distributions,issue stock of our subsidiaries, make certain investments or acquisitions,grant liens on assets, enter into transactions with affiliates, merge,consolidate or transfer substantially all of our assets, and transfer and sellassets. The covenant that limits our incurrence of indebtedness requires that,after giving effect to any such incurrence of indebtedness and the applicationof the proceeds thereof, our fixed charge coverage ratio as of the date of suchincurrence will be at least 2.50 to 1.00 in the case of any incurrence after September 30,2006. The indenture defines consolidated fixed charge coverage ratio as theratio of Consolidated Cash Flow (as defined 

 

 

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therein) to Fixed Charges (as defined therein). TheCompany was in compliance with all specified financial and other covenantsunder the senior secured notes indenture at December 30, 2007.

 

We can redeem our senior secured notes at any timeafter April 1, 2007. We are required to offer to redeem our senior securednotes under certain circumstances involving a change of control. Additionally,if we or any of our domestic restricted subsidiaries engage in assets sales, wegenerally must either invest the net cash proceeds from such sales in ourbusiness within 360 days, prepay the indebtedness obligations under our NewSenior Secured Revolving Credit Facility or certain other secured indebtednessor make an offer to purchase a portion of our senior secured notes.

 

On September 19,2006, the Company commenced a change of control offer (the “Offer”) to purchaseany or all of its notes that remained outstanding under the indenture dated March 31,2004 by and among the Company, the guarantors thereto and Wells Fargo Bank,National Association, as trustee. The Offer was made pursuant to Section 4.15of the indenture as the Merger 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 the Offer.The Offer expired on October 19, 2006. No notes were tendered pursuant tothe Offer and as of the expiration date of the Offer, $105.0 million aggregateprincipal amount of notes remained outstanding.

 

As a result of the Mergerand 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 is amortized to interest expense over the remaininglife of the debt.

 

*Senior Secured Revolving CreditFacilities*. In 2004, theCompany entered into an amended and restated revolving credit agreementproviding for $30.0 million of senior secured credit facilities. The revolvingcredit agreement included a $15.0 million letter of credit facility and a $15.0million revolving credit facility that could be used for letters of credit.

 

On October 5, 2006, the Company entered into anew amended and restated revolving credit facility, pursuant to which theexisting $15.0 million revolving credit facility and $15.0 million letter ofcredit facility, was increased to a $15.0 million revolving credit facility(the “Old Senior Secured Revolving Credit Facility”) and a $25.0 million letterof credit facility (the “Old Senior Secured Letter of Credit Facility”,together with the Old Senior Secured Revolving Credit Facility, the “Old SeniorSecured Revolving Credit Facilities”) maturing on October 5, 2008,pursuant to which the Lenders agreed to make loans to the Company and itssubsidiaries (all of the proceeds of which were to be used for working capitalpurposes) and issue letters of credit on behalf of the Company and itssubsidiaries.

 

On January 29, 2007, the Company entered into aSecond Amended and Restated Credit Agreement pursuant to which the Old SeniorSecured Revolving Credit Facilities were refinanced with a new agent andadministrative agent, General Electric Capital Corporation, and a new $15.0million revolving credit facility (the “New Senior Secured Revolving CreditFacility”) and $25.0 million letter of credit facility (the “New Senior SecuredLetter of Credit Facility”, together with the New Senior Secured RevolvingCredit 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 under the New Senior Secured RevolvingCredit Facilities are guaranteed by all of the Company’s subsidiaries as wellas by RM Restaurant Holding, which wholly owns the Company and has made a firstpriority pledge of all of its equity interests in the Company as security forthe obligations. Interest on the New Senior Secured Revolving Credit Facilityaccrues pursuant to an Applicable Margin as set forth in the Second Amended andRestated Credit Agreement. The New Senior Secured Revolving Credit Facilitiesare secured by, among other things, first priority pledges of all of the equityinterests of the Company’s direct and indirect subsidiaries, and first prioritysecurity interests (subject to customary exceptions) in substantially all ofthe current and future property and assets of the Company and its direct andindirect subsidiaries, with certain limited exceptions. In connection with theCompany’s entrance 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 the outstandingrevolving borrowings under the Old Senior Secured Revolving Credit Facility. Asof December 30, 2007, there was $11.0 million outstanding under the NewSenior Secured Revolving Credit Facility.

 

The Second Amended and Restated Credit Agreementcontains various affirmative and negative covenants and restrictions, whichamong other things, require us to meet certain financial tests (includingcertain leverage and cash flow ratios), and limits our and our subsidiaries’ability to incur or guarantee additional indebtedness, make certain capital 

 

 

43

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expenditures, pay dividends or make other equitydistributions, purchase or redeem capital stock, make certain investments,enter into arrangements that restrict dividends from subsidiaries, sell assets,engage in transactions with affiliates and effect a consolidation or merger.Under the terms of the Second Amended and Restated Credit Agreement we arerequired to maintain a cash flow ratio determined on an annual basis equalto 1.70 to 1.00 until maturity, except for the fiscal quarters ended September 30,2007 and December 30, 2007, when compliance with the Cash Flow Ratio is notto be tested. The Company and its lender determined that the definition of thiscovenant had been drafted improperly and therefore the lender waived complianceuntil the first quarter of 2008. Pursuant to the terms of the Second Amendedand Restated Credit Agreement, the Cash Flow Ratio is defined as the ratio of (a) ConsolidatedCash Flow (as defined therein) to (b) Consolidated Financial Obligations(as defined therein). This agreement contains a cross-default provision whereinif we are in default on any other credit facilities, default on this facilityis automatic. The Company was in compliance with all specified financial andother covenants under the New Senior Secured Revolving Credit Facilities at December 30,2007.

 

*Senior Unsecured Credit Facility*. In 2005 we entered into a $75.0 millionsenior unsecured credit facility (the “Old Senior Unsecured Credit Facility”)consisting of a single term loan maturing on December 31, 2008, all of theproceeds of which were used to finance a portion of the cash consideration ofan acquisition and pay related fees and expenses. On October 5, 2006, theCompany entered into an Amended and Restated Senior Unsecured Credit Facility,pursuant to which the Old Senior Unsecured Credit Facility was decreased to a$65.0 million senior unsecured credit facility (the “ New Senior UnsecuredCredit Facility”), consisting of a single term loan maturing on October 5,2010. All of the proceeds of the New Senior Unsecured Credit Facility were usedto repay in full any term loans outstanding under the Old Senior UnsecuredCredit Facility and not continued on the restatement 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 primerate or 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 30,2007, the interest rate on the New Senior Unsecured Credit Facility term loanwas 9.83%.

 

Our New Senior Unsecured Credit Facility containsvarious affirmative and negative covenants which, among other things, requireus to meet certain financial tests (including certain leverage and interestcoverage ratios) and limits our and our subsidiaries’ ability to incur orguarantee additional indebtedness, grant certain liens, make certain restrictedpayments, make capital expenditures, engage in transactions with affiliates,make certain investments, sell our assets, make acquisitions, effect aconsolidation or merger and amend or modify instruments governing certainindebtedness (including relating to our senior secured notes and the New SeniorSecured Revolving Credit Facilities). We are required to maintain certainminimum interest coverage ratios ranging from (i) 2.15 to 1.00 for thefiscal quarters ending on or after March 31, 2007 through December 31,2007 and (ii) 2.30 to 1.00 thereafter until maturity. Pursuant to theterms of the New Senior Unsecured Credit Facility, the Interest Coverage Ratiois defined as the ratio as of the last day of any fiscal quarter of (a) ConsolidatedEBITDA (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 30, 2007.

 

*Mortgage.* In 2005, concurrent with an acquisition,we assumed a $0.8 million mortgage secured by the building and improvements ofone of the restaurants acquired in the transaction. The mortgage carries afixed annual interest rate of 9.28% and requires equal monthly payments ofprincipal and interest through April 2015. As of December 30, 2007,the principal amount outstanding on the mortgage was $0.7 million.

 

Interest rates for the Company’s long-term debt areshown in the following table:

 
| ** **                                 | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior Secured Notes due 2010              |       | 10.00                       | %          | 10.25                       | %          |
| Senior Secured Revolving Credit Facilities |       | 7.02 to 8.00                | %          | 8.25                        | %          |
| Senior Unsecured Credit Facility           |       | 9.83                        | %          | 10.35                       | %          |
| Mortgage                                   |       | 9.28                        | %          | 9.28                        | %          |
| Other                                      |       | 6.45 to 7.75                | %          | 7.75                        | %          |

 

The maturity of long-term debt for the fiscal yearssucceeding December 30, 2007, is as follows:

 

 

44

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| ** ** | ** ** | **Principal** | ** ** | **Unamortized  Debt  Premium** | ** ** | **Total** | ** ** |
|------------|------------|---------------|------------|--------------------------------|------------|-----------|------------|
| 2008       |       | $             | 11,408     |                           | $          | 1,172     |       | $ | 12,580 |   |
| 2009       |       | 72            |       | 1,172                          |       | 1,244     |       |
| 2010       |       | 170,079       |       | 293                            |       | 170,372   |       |
| 2011       |       | 87            |       | —                         |       | 87        |       |
| 2012       |       | 95            |       | —                         |       | 95        |       |
| Thereafter |       | 259           |       | —                         |       | 259       |       |
|       |       | $             | 182,000    |                           | $          | 2,637     |       | $ | 184,637 |   |

 

**7. Capitalization**

 

**Common Stock-Successor**

 

The Company is authorized to issue 1,000 shares ofcommon stock. At December 30, 2007 and December 31, 2006 there were1,000 shares of common stock issued and outstanding.

 

**Redeemable PreferredStock-Predecessor**

 

Prior to the Merger, the Company was authorized toissue 100,000 shares of Preferred Stock. Shares were issued upon approval ofthe board of directors and all outstanding shares of Preferred Stock wereredeemable at any time at the option of the Company, subject to restrictionsunder 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 equalto $1 per share plus accreted dividends. With respect to dividend rights andrights of liquidation, Series A ranked senior to all classes of CommonStock and Series B. Series B ranked senior to all classes of CommonStock.

 

Series C 15% Cumulative Compounding ParticipatingPreferred stock (Series C) ranked senior with respect to payment of dividends,liquidation, and redemption to all other series of preferred stock andcommon stock of the Company. The Series C had a liquidation preferenceequal to two times the original issue price of $1 per share, plus accreteddividends. As a result of the liquidation preference, Series C wasrecorded at liquidation value at the date of issuance. Holders of Series Cwere entitled to receive, in addition to the liquidation preference, an amountequal to 40% of any amounts that would otherwise be available to the holders ofCommon Stock in the event of a liquidation or sale of the Company.

 

The liquidation preference on the Series A, Series Band Series C accreted at the stated rates on the liquidation preferencevalue thereof; dividends (representing accreted liquidation preference) were tobe paid from legally available funds, when and if declared by the board ofdirectors. Dividends 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 was reflected as an increase in the preferred stock values andan increase in the accumulated deficit. Accretion of the liquidation preferenceon the Redeemable Preferred Stock during the two month and eight monthPredecessor periods ended August 20, 2006 was $2.3 million and $10.1million, respectively. In the Predecessor periods, net loss attributable tocommon stockholders includes the effect of the accretion of the liquidationpreference on the redeemable preferred stock which reduced net incomeattributable to common stockholders for the period.

 

On August 21, 2006, as a result of the Merger andin accordance with the terms of the Merger Agreement, all issued andoutstanding preferred stock was converted into the right to receive a portionof the Merger consideration.

 

**Stock Option Plans**

 

As a result of the Merger and in accordance with theterms of the Merger Agreement all of the Company’s then outstanding vested andunvested stock options were cancelled and converted into the right to receive aportion of the purchase price, less the exercise prices thereon, as applicable.Concurrent with the Merger, the Company’s 1998 and 2000 Stock Option Plans wereterminated.

 

In December 2006,the Board of Directors of RM Restaurant Holding (the “Board”), the Company’sparent, adopted a Non-Qualified Stock Option Plan (the “2006 Plan”). The 2006Plan reserved 100,000 shares of the Company’s non-voting common stock forissuance upon exercise of stock options granted under the 2006 Plan. In January 2007,the Board issued

 

 

45

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stock options to certainmembers of management. These options vest 20% per year beginning August 16,2007, with full vesting on August 16, 2011. Accelerated vesting of alloutstanding options is triggered upon a change of control of the Company. Theoptions have a life of 10 years, and can only be exercised upon the earliest ofthe following dates: (i) the 10 year anniversary of the effective date; (ii) thedate of a change in control, as defined in the 2006 Plan; or (iii) date ofemployment termination, subject to certain exclusions.

 

The Company accounts forstock-based compensation in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 123 (Revised), “Share-Based Payment” (“SFAS 123R”),which requires the Company to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award. That cost is recognized in the consolidated statement ofoperations over the period during which an employee is required to provideservice in exchange for the award — the requisite service period. Nocompensation cost is recognized for equity instruments for which employees donot render the requisite service. The grant-date fair value of employee stockoptions is estimated using the Black-Scholes option pricing model.

 

The Company utilizescomparator companies to estimate its price volatility and the simplified methodto calculate option expected time to exercise, under SAB 107. The fair value ofstock-based payment awards was estimated using the Black-Scholes option pricingmodel with the following assumptions and weighted average fair values for theyear ended December 30, 2007:

 

| Weighted average fair  value of grants |   | $     | 39.43  |   |
|----------------------------------------|--------|-------|--------|--------|
| Risk-free interest rate                |   | 4.52  | %      |
| Expected volatility                    |   | 42.28 | %      |
| Expected life in years                 |   | 6.15  |   |

 

The following tablesummarizes the stock option activity as of and for the year ended December 30,2007:

 

| ** **                                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Outstanding at  December 31, 2006                 |       | —     |       | —                                     |       |
| Granted                                                |       | 80,750     |       | $                                          | 81.50      |   |
| Exercised                                              |       | —     |       | —                                     |       |
| Forfeited/expired                                      |       | (900       | )          |                                       | 81.50      |   |
| Outstanding at  December 30, 2007                 |       | 79,850     |       | $                                          | 81.50      |   |
| Vested and expected to  vest at December 30, 2007 |       | 73,240     |       | $                                          | 81.50      |   |
| Exercisable at  December 30, 2007                 |       | 15,550     |       | $                                          | 81.50      |   |

 

The Company recorded $839of stock-based compensation expense for the year ended December 30, 2007,which is included in general and administrative expense on the consolidatedstatements of operations. The initial valuation of the stock-based compensationwas completed during the third quarter of 2007. At such time, the Company determined that $628 of stock-basedcompensation expense should be recorded in the nine months ended September 30,2007 as the amounts had not been previously recorded.  Of the $628, $172 relates to the quarterended September 30, 2007 and $456 relates to the prior 2007 quarters,which the Company believes is not material to the current or prior quarters.The following table presents the major subtotals for the Company’s unauditedConsolidated Statements of Operations and the related impact of the restatementadjustments discussed above for the first and second quarter of 2007 (inthousands):

 

 
| ** **                         | ** ** | **Three months ended April 1, 2007** | ** ** | **Three months ended July 1, 2007** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                         | ** ** | **Previously  Reported**                                 | ** ** | **Effect of  Restatement**                              | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Effect of  Restatement** | ** ** | **Restated** | ** ** |
| General and administrative expense |       | $   7,681                                 |       | $   228                                       |       | $   7,909 |   | $   8,057 |   | $   228 |   | $   8,285 |   |
| Operating income                   |       | 5,821                                                    |       | (228                                                         | )          | 5,593 |   | 8,041 |   | (228 | ) | 7,813 |   |
| Income before income tax provision |       | 881                                                      |       | (228                                                         | )          | 653 |   | 5,151 |   | (228 | ) | 4,923 |   |
| Income tax provision               |       | 368                                                      |       | (95                                                          | )          | 273 |   | 2,040 |   | (90 | ) | 1,950 |   |
| Net income                         |       | 513                                                      |       | (133                                                         | )          | 380 |   | 3,111 |   | (138 | ) | 2,973 |   |

 

As of December 30,2007, $2,049 of total unrecognized compensation costs related to non-vestedstock-based awards is expected to be recognized through fiscal year 2011, andthe weighted average remaining vesting period of those awards is approximately2.2 years.

 

 

46

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At December 30,2007, the aggregate intrinsic value of exercisable options was $0.

 

**8. Income Taxes**

 

Significant components of the income tax provision(benefit) consist of the following:

 
| ** **                     | ** ** | **Successor**     | ** ** | **Successor**     | ** ** | **Predecessor**     | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------|------------|---------------------|------------|
| ** **                     | ** ** | **December  30,** | ** ** | **December  31,** | ** ** | **August 20,** | ** ** | **December  25,** | ** ** |
| ** **                     | ** ** | **2007**          | ** ** | **2006**          | ** ** | **2006**            | ** ** | **2005** | ** ** |
| Current:                       |       |              |       |              |       |                |       |   |   |
| Federal                        |       | $                 | —     |              | $          | —              |       | $ | 1,570 |   | $ | — |   |
| State                          |       | 58                |       | 61                |       | 344                 |       | 14 |   |
|                           |       | 58                |       | 61                |       | 1,914               |       | 14 |   |
| Deferred:                      |       |              |       |              |       |                |       |   |   |
| Federal                        |       | (465              | )          | (2,729            | )          | (367                | )          | 2,188 |   |
| State                          |       | (129              | )          | (523              | )          | (240                | )          | 1,137 |   |
|                           |       | (594              | )          | (3,252            | )          | (607                | )          | 3,325 |   |
|                           |       | (536              | )          | (3,191            | )          | 1,307               |       | 3,339 |   |
| Change in valuation  allowance |       | 13,282            |       | —            | ** ** | **—**          |       | (8,048 | ) |
|                           |       | $                 | 12,744     |              | $          | (3,191              | )          | $ | 1,307 |   | $ | (4,709 | ) |

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying value of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.Significant components of the Company’s deferred tax assets and liabilities areas follows:

 
| ** **                                   | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax assets:                         |       |                        |       |                        |       |
| Federal net  operating loss carry-forwards   |       | $                           | 9,481      |                        | $          | 4,205 |   |
| State net  operating loss carry-forwards     |       | 1,805                       |       | 580                         |       |
| Goodwill                                     |       | 4,398                       |       | 5,321                       |       |
| Accrued expenses  not currently deductible   |       | 3,394                       |       | 7,203                       |       |
| Tax credit  carry-forwards                   |       | 592                         |       | 592                         |       |
| Property and  equipment basis difference     |       | 17,455                      |       | 18,186                      |       |
| Deferred rent                                |       | 1,006                       |       | 242                         |       |
| Gift  certificates and other deferred income |       | 692                         |       | 843                         |       |
| Unamortized debt  premium                    |       | 1,729                       |       | 1,737                       |       |
| Deferred  compensation                       |       | 1,640                       |       | 980                         |       |
| Other                                        |       | 784                         |       | 666                         |       |
| Total deferred tax assets                    |       | $                           | 42,976     |                        | $          | 40,555 |   |

 

 

47

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| ** **                                                | ** ** | **December 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax liabilities:                                 |       |                        |       |                        |       |
| Prepaid expenses                                          |       | $                           | (504       | )                           | $          | (528 | ) |
| Goodwill                                                  |       | (17,170                     | )          | (13,984                     | )          |
| Difference  between book and tax basis of revalued assets |       | (10,279                     | )          | (14,855                     | )          |
| State taxes                                               |       | (631                        | )          | (670                        | )          |
| Unamortized  landlord allowance                           |       | (1,110                      | )          | (1,104                      | )          |
| Total deferred tax liabilities                            |       | (29,694                     | )          | (31,141                     | )          |
|                                                      |       |                        |       |                        |       |
| Valuation allowance                                       |       | (13,282                     | )          | —                      |       |
|                                                      |       |                        |       |                        |       |
| Net deferred tax asset                                    |       | $                           | —     |                        | $          | 9,414 |   |

 

Approximately $3.3 million of the change in deferredtax assets during 2007 was recorded as a reduction to goodwill, as it wasrelated to the Merger.

 

The reconciliation of income tax at the U.S. federalstatutory tax rates to income tax expense is as follows:

 
| ** **                                    | ** ** | **Successor**     | ** ** | **Successor**     | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **December  30,** | ** ** | **December  31,** | ** ** | **August   20,** | ** ** | **December  25,** | ** ** |
| ** **                                    | ** ** | **2007**          | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                          |       |              |       |              |       |                  |       |   |   |
| Income tax at U.S. federal statutory tax rate |       | 34.0              | %          | 34.0              | %          | 34.0                  | %          | 34.0 | % |
| State income tax, net of federal benefit      |       | 4.7               |       | 5.8               |       | 5.7                   |       | 4.7 |   |
| Valuation allowance                           |       | (123.0            | )          | —            |       | —                |       | (92.9 | ) |
| Non-deductible Merger costs                   |       | —            |       | —            |       | 11.2                  |       | — |   |
| Permanent true-ups                            |       | (33.3             | )          | —            |       | —                |       | — |   |
| Other                                         |       | (0.4              | )          | (0.9              | )          | (4.0                  | )          | (0.1 | ) |
| Effective tax rate                            |       | (118.0            | )%         | 38.7              | %          | 46.9                  | %          | (54.3 | )% |

 

In accordance with SFAS No. 109, “Accounting forIncome Taxes,” 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. The amount of deferred taxassets considered realizable was determined based on future reversals ofexisting taxable temporary differences and future taxable income, exclusive ofreversing temporary differences and carry-forwards.

 

In evaluating future taxable income for valuationallowance purposes at December 30, 2007, the Company concluded that it wasappropriate to consider income expected to be generated in 2008, 2009 and 2010.For the Successor year ended December 30, 2007, the Company recorded avaluation allowance and income tax expense of $13,282, in accordance with SFAS No. 109.For the Predecessor year ended December 25, 2005, the Company reduced thevaluation allowance and recorded an income tax benefit of $8,048.

 

The purchase accounting adjustments for the ChevysAcquisition have not been reflected in their entirety in the deferred taxbalances as of December 30, 2007 as the final tax returns for the seller,Chevy’s Restaurant, Inc., have not been filed. Until the tax returns arefiled, we are unable to determine the carryover basis of assets, liabilities,and net operating loss carry-forwards at the date of acquisition. Uponcompletion of the Sellers’ final tax returns for the periods ending before theChevys Acquisition, the Company will assess and record the carryover basis ofcertain temporary differences. We believe that the carryover basis of suchdeferred tax assets and liabilities, if any, would have a full valuationallowance recorded against the net deferred asset, as, based on the weight ofavailable evidence, we believe it is more likely than not that a significantportion of the deferred tax assets would not be realized in the near future.Purchase accounting adjustments have only been recorded for those deferred taxassets that were recognized in the current year.

 

For tax purposes, the excess of the purchase priceover the fair market value of the assets acquired at the time of the Acapulcoand the El Torito acquisitions has been accounted for as amortizable goodwill.

 

At December 30, 2007 and December 31, 2006,the Company had a federal net operating loss carry-forward of $27,886 and$12,367, respectively, which will begin to expire in 2021. In addition, at December 30,2007 and December 31, 

 

 

48

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2006, the Company had a state net operating losscarry-forward of $20,414 and $7,902, respectively, which will begin to expirein 2013. The utilization of the net operating loss carry-forward is subject tolimitations under the Internal Revenue Code Section 382 and similar stateprovisions.

 

**9. Commitments and Contingencies**

 

**Commitments**

 

The Company leases restaurant and office facilitiesthat have terms with expirations in 2008 through 2027. Most of the restaurantfacilities have renewal clauses exercisable at the option of the Company withrent escalation clauses stipulating specific rent increases, some of which arebased upon the Consumer Price Index. Certain of these leases require thepayment of contingent rentals based on a percentage of gross revenues, asdefined. Additionally, the Company leases several properties that are not beingoperated by the Company. Several of those properties are subleased.

 

The Company leases certain leasehold improvements andequipment under agreements that are classified as capital leases. The cost ofassets under capital leases is included in the balance sheets as property andequipment and was $1,644 and $609 at December 30, 2007 and December 31,2006, respectively. Accumulated amortization of these assets was $199 and $30at December 30, 2007 and December 31, 2006, respectively.Amortization of assets under capital leases is included in depreciationexpense.

 

The minimum annual lease commitment and subtenantincome of the Company for the years succeeding December 30, 2007 isapproximately as follows:

 
| ** **                                             | ** ** | **Capital**     | ** ** | **Minimum**     | ** ** | ** **   | ** ** | **Net**         | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|-----------------|------------|--------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Lease**       | ** ** | **Lease**       | ** ** | **Sublease** | ** ** | **Lease**       | ** ** |
| ** **                                             | ** ** | **Obligations** | ** ** | **Commitments** | ** ** | **Income**   | ** ** | **Commitments** | ** ** |
| 2008                                                   |       | $               | 555        |            | $          | 41,551       |       | $               | (779       | ) | $ | 41,327 |   |
| 2009                                                   |       | 479             |       | 37,832          |       | (793         | )          | 37,518          |       |
| 2010                                                   |       | 343             |       | 32,705          |       | (610         | )          | 32,438          |       |
| 2011                                                   |       | 177             |       | 28,509          |       | (481         | )          | 28,205          |       |
| 2012                                                   |       | 103             |       | 24,701          |       | (406         | )          | 24,398          |       |
| Thereafter                                             |       | 330             |       | 96,427          |       | (1,004       | )          | 95,753          |       |
|                                                   |       |            |       |            |       |         |       |            |       |
| Total minimum lease payments                           |       | 1,987           |       | $               | 261,725    |         | $          | (4,073          | )          | $ | 259,639 |   |
| Less: Amount representing interest                     |       | (436            | )          |            |       |         |       |            |       |
| Present value of net minimum capital lease payments    |       | 1,551           |       |            |       |         |       |            |       |
| Less: Current maturities of capital lease  obligations |       | (433            | )          |            |       |         |       |            |       |
| Long-term capital lease obligations                    |       | $               | 1,118      |            |       |         |       |            |       |   |

 

The Company is contingently liable for leases on soldor assigned premises for $2,729 as of December 30, 2007.

 

Some of the above leases provide for additionalrentals based on a percentage of revenues. The following table summarizes therental expense, percentage rent expense above minimum rent and net subleaseincome:

 
| ** **                                                                | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **August 20,** | ** ** | **December 25,** | ** ** |
| ** **                                                                | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Rental expense                                                            |       | $                     | 45,369     |                  | $          | 14,893 |   | $ | 30,003 |   | $ | 42,837 |   |
| Percentage rent  expense above minimum rent  (included in rental expense) |       | 2,164                 |       | 907                   |       | 1,755 |   | 2,517 |   |
| Net sublease  income                                                      |       | 227                   |       | 122                   |       | 289 |   | 530 |   |
|                                                                           |            |                       |            |                       |            |  |  |  |  |  |  |  |  |

 

In December 2007, the Company entered into anagreement with a certain vendor to purchase an annual minimum of $2.8 millionworth of product each year through 2015. If the purchase obligation is not met each year, the shortfall is rolledinto the end of the contract and the contract is extended.  The contract is based upon expiration date orvolume, which ever occurs last.

 

 

49

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**Litigation**

 

The Company is periodically a defendant in cases involvingpersonal injury, employment-related claims and other matters that arise in thenormal course of business. While any pending or threatened litigation has anelement of uncertainty, the Company believes that the outcome of these lawsuitsor claims, individually or combined, will not materially adversely affect theconsolidated financial position, results of operations or cash flows of theCompany.

 

**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 different conditionsand/or different methods. However, due to the inherent volatility ofactuarially determined casualty claims, it is reasonably possible that theCompany could experience 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 $15,479 and$15,877 as of December 30, 2007 and December 31, 2006, respectively.

 

The Company is also required to maintain collateralsecuring future payment under the self-insured retention insurance programs. Asof December 30, 2007 and December 31, 2006, this collateral consistedof stand-by letters of credit of $18,674 and $21,173, respectively.

 

**10. 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 EBITDAfor such period. EBITDA is defined as (A) net income (or loss) after taxesof the Company and its direct and indirect subsidiaries on a consolidated basis(“Net Income”), plus (B) interest expense which has been deductedin the determination of Net Income, plus (C) federal, state and localtaxes which have been deducted in determining Net Income, plus (D) depreciationand amortization expenses which have been deducted in determining Net Income,including without limitation amortization of capitalized transaction expensesincurred in connection with the transactions contemplated by the Merger plus (E) extraordinarylosses which have been deducted in the determination of Net Income, plus (F) un-capitalizedtransaction expenses incurred in connection with the Merger, plus (G) allother non-cash charges, minus (H) extraordinary gains which have beenincluded in the determination of Net Income. EBITDA is computed without taking into consideration the fees payableunder the Management Agreement. The Company pays the fees in quarterlyinstallments in advance equal to the greater of (i) $125 or (ii) 1%of EBITDA for the immediately preceding fiscal quarter. Expenses relating tothe Management Agreement of $500 and $174 were recorded as general andadministrative expense in Successor Year Ended December 30, 2007 andSuccessor Period from August 21, 2006 to December 31, 2006.respectively. Additionally, the Company prepaid $125 in fees under theagreement for the first quarter of 2008 and 2007.

 

In September 2006,the Company made a dividend distribution of $10,000 to RM Restaurant Holding,its parent, which was recorded as a reduction to retained earnings. A contributionof $1,743 was received from RM Restaurant Holding during 2007 related to adistribution to former stockholders of proceeds from the sale of landsubsequent to the acquisition date, as specified in the Merger Agreement, andwas recorded as additional paid in capital. The Company has also madesubsequent additional distributions to and on behalf of RM Restaurant HoldingCorp. in the amount of $5,399 and has recorded the distributions as a relatedparty receivable. During 2007, the Company received advances from RM RestaurantHolding totaling $8,036, which were recorded as a related party payable. TheCompany has a net related party payable of $2,505 at December 30, 2007 anda net related party receivable of $3,591 at December 31, 2006.

 

**Predecessor Transactions**

 

The Company had anAmended and Restated Management Agreement dated June 28, 2000 with two ofits former stockholders Bruckman, Rosser, Sherrill & Co., L.P. and FSPrivate Investments, LLC. The stockholders were paid annual fees equating to..667% and .333%, respectively, of consolidated earnings before interest, incometaxes, depreciation and amortization of the Company. As described in the MergerAgreement, the Amended and Restated Management Agreement

 

 

50

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dated June 28,2000  was terminated in connection withthe Merger. Expenses relating to the agreement of $436 and $510 were recordedas general and administrative expense in the periods from December 26,2005 to August 20, 2006 and the fiscal year ended December 25, 2005,respectively. Additionally, the Company recorded a termination fee of $1,819 inthe period from December 26, 2005 to August 20, 2006, related to thetermination of the Amended and Restated Management Agreement.

 

**11. Employee Benefit Plan**

 

The Company is the sponsor for a defined contributionplan (401(k) plan) for qualified Company employees, as defined.Participants may contribute from 1% to 50% of pre-tax compensation, subject tocertain limitations. The plan contains a provision that provides that theCompany may make discretionary contributions. The Company has recordedcontribution expense of $255, $93, $159, and $263 during the Successor Periodfor year ended December 30, 2007 and from Successor Period from August 21,2006 to December 31, 2006 and the Predecessor Periods from December 26,2005 to August 20, 2006 and year ended December 25, 2005respectively.

 

**12.****Other Events**

 

In May 2007, the Company sold four Company-ownedFuzio restaurants to a franchisee, entered into a management agreement with thefranchisee on a fifth Company-owned Fuzio restaurant and sold the Fuziotrademark, trade name and Fuzio franchise rights to the franchisee (the “FuzioTransaction”). The selling price of $4,850 in cash included $714 in prepaidmanagement fees associated with the management agreement. The management feeswill be amortized over seven years beginning in May 2007. Concurrent withthe sale, the Company purchased three franchised Chevys restaurants from thefranchisee for $3,124 in cash.

 

The Company recorded a gain of $1,467 on the disposalof the assets of the Fuzio Transaction. The gain is included in other income onthe consolidated statements of operations and has been recorded net ofassociated expenses and remaining net book value of the assets transferred.

 

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

 

The following is a summary of the quarterly results ofoperations for the years ended December 30, 2007 and December 31,2006:

 
| ** **                        | ** ** | **Successor**                | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(Restated)**               | ** ** | **(Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **13 weeks ended** | ** ** | **13 weeks ended** | ** ** | **13 weeks ended** | ** ** | **13 weeks ended** | ** ** |
| ** **                        | ** ** | **April 1, 2007(2)**    | ** ** | **July 1, 2007(2)** | ** ** | **September 30, 2007** | ** ** | **December 30, 2007** | ** ** |
| Total revenues               |       | $                            | 138,511    |   | $ | 149,575 |   | $ | 142,510 |   | $ | 134,595 |   |
| Operating income (loss) |       | $                            | 5,593      |   | $ | 7,813 |   | $ | 4,070 |   | $ | (10,622 | ) |
| Net income (loss)                 |       | $                            | 380        |   | $ | 2,973 |   | $ | (591 | ) | $ | (26,679 | )(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 | ) |

 

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(1)  Includesgoodwill impairment charge of $10.0 million and a deferred tax valuationallowance of $13.3 million.

 

(2)  Duringthe third quarter of 2007, the Company determined that $0.6 million of stock-basedcompensation expense should be recorded in the nine months ended September 30,2007, of which $0.5 million relates to the prior 2007 quarters. See Note 7 fordetails related to this restatement.

 

 

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

 

As previously reported inour current Report on Form 8-K filed on September 25, 2007, on September 20,2007, the Audit Committee recommended and the Board of Directors of Real MexRestaurants, Inc. (the “Company”) approved the dismissal of Ernst &Young LLP (“E&Y”), Los Angeles, CA as the Company’s independent registeredpublic accounting firm effective September 21, 2007. At the same meeting,the Audit Committee recommended and the Board of Directors of the Companyapproved the engagement of Grant Thornton LLP (“Grant”), Irvine, CA to replaceE&Y as its independent registered public accounting firm to report on theCompany’s financial statements for the fiscal year ended December 30,2007, including performing the required quarterly reviews.

 

The reports of E&Y onthe Company’s financial statements for the period from August 21, 2006 to December 31,2006, subsequent to the acquisition of the Company by RM Restaurant HoldingCorp., the period from December 26, 2005 through August 20, 2006 andthe year ended December 25, 2005, prior to the acquisition of the Companyby RM Restaurant Holding Corp., did not contain an adverse opinion ordisclaimer of opinion and were not qualified or modified as to uncertainty,audit scope or accounting principles.

 

  During the two most recent fiscal yearsand any subsequent interim period prior to E&Y’s dismissal, there were nodisagreements with E&Y on any matters of accounting principles orpractices, financial statement disclosure, or auditing scope or procedurewhich, if not resolved to the satisfaction of E&Y, would have caused themto make reference to the matter in its report. There were no reportable events(as defined in Item 304(a)(1)(v) of Regulation S-K) that occurred withinthe Company’s two most recent fiscal years and any subsequent interim periodpreceding Ernst & Young LLP’s dismissal.

 

Noconsultations occurred between the Company and Grant during the two most recentfiscal years and any subsequent interim period prior to Grant’s appointmentregarding either (i) the application of accounting principles to aspecific completed or contemplated transaction, or the type of audit opinionthat might be rendered on the Company’s financial statements or (ii) anymatter that was the subject of a disagreement as defined in Item 304(a)(1)(iv) ofRegulation S-K or a reportable event described in Item 304(a)(1)(v) ofRegulation S-K.

 

ITEM 9A.              CONTROLS AND PROCEDURES

 

**Disclosure Controls and Procedures**

 

As of the end of our 2007 fiscal year, we conductedan evaluation, under the supervision and with the participation of theprincipal executive officer (“CEO”) and principal financial officer (“CFO”), ofthe effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act.) Based on this evaluation, the CEO and CFO concluded that, as of the endof our 2007 fiscal year, our disclosure controls and procedures are effectiveprovide reasonable assurance that information required to be disclosed by us inreports that 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.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act). Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an assessment of the effectiveness of our internal control overfinancial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission.  Based on thisassessment, management determined that our internal control over financialreporting is effective as of the end of our 2007 fiscal year.

 

This annual report does not include an attestationreport of the Company’s registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

**Changes in Internal Control OverFinancial Reporting**

 

There was no change in our internal control overfinancial reporting during our most recently completed fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

ITEM 9B.               OTHER INFORMATION

 

None.

 

 

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**PART III**

 

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

**Directors, Executive Officers andKey Employees**

 

The following table setsforth certain information regarding the current board of directors, executiveofficers and other key employees of our Company:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                              |
|----------------------|------------|---------|------------|---------------------------------------------------------------------------|
| Frederick F. Wolfe   |       | 57      |       | President, Chief Executive Officer and Director                           |
| Steven Tanner        |       | 57      |       | Chief Financial Officer                                                   |
| Carlos Angulo        |       | 46      |       | President, Real Mex Foods, Inc.                                      |
| Roberto (Pepe) Lopez |       | 52      |       | Executive Chef and Senior Vice President, Research  and Development       |
| Raymond Garcia       |       | 53      |       | Senior Vice President of Operations — El  Torito & Acapulco |
| Nicholas Mayer       |       | 45      |       | Senior Vice President of Operations — Chevys                         |
| Steven K. Wallace    |       | 52      |       | Senior Vice President of Human Resources                                  |
| Clarence E. Terry    |       | 61      |       | Director+                                                                 |
| Michael E. Alger     |       | 51      |       | Director*                                                                 |

 

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

 

+                    Memberof our compensation committee

 

*FrederickF. Wolfe* has been our President, Chief Executive Officer andDirector since May 2001. Before joining our Company, Mr. Wolfe servedas Chief Operating Officer at California Pizza Kitchen from 1997 to 2001. From1982 to 1997, Mr. Wolfe served in a variety of positions at Acapulco risingfrom Assistant Manager to Vice President of Operations.

 

*StevenTanner*  has been our Chief Financial Officer since January 2004.Before joining our Company, Mr. Tanner served as Chief Financial Officerat Sweet Factory during 2003, Executive Vice President and Chief FinancialOfficer for Pick Up Stix from 1997 to 2002 and Chief Financial Officer forIn-N-Out Burger from 1991 to 1996. Mr. Tanner is a Certified PublicAccountant and earned his bachelor’s degree in Accounting from the BrighamYoung University.

 

*CarlosAngulo*  has been the President of Real Mex Foods, Inc.since January 2005. Mr. Angulo joined us in 2000 as Vice President ofReal 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 aBachelor of Science degree from the University of Southern California.

 

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

 

*Raymond Garcia*has been our Senior Vice President of Operationsfor El Torito and Acapulco since June 2005. Previously, Mr. Garciaserved from 1991 to present in a variety of positions at Acapulco rising fromAssistant Manager to Vice President of Operations. Before joining Acapulco, Mr. Garciaheld positions of General Manager and Regional Manager at El Torito.

 

*Nicholas Mayer*has been our Senior Vice President of Operationsfor Chevys since January 2007.  Hewas previously our Vice President of Franchise Operations upon acquisition ofChevys in January 2005, and held that same position for the Chevyspredecessor company since January 2000. Mr. Mayer joined the Chevys predecessor company in May 1993 asa General Manager, and was promoted to positions of Regional Director ofOperations in 1995 and Director of Franchise Operations in  1997.

 

*Steven K. Wallace*has been our Senior VicePresident of Human Resources since 2003. Mr. Wallace joined is in thesummer of 2001 as Vice President of Human Resources. Previously, Mr. Wallaceworked with El Torito’s predecessor 

 

 

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companyfor 11 years, plus he obtained operations experience with Marriott Hotels andStouffer Restaurants. Mr. Wallace obtained a business degree from SantaClara University and earned his Masters Degree in Human Resources at ChapmanUniversity. He also holds the Senior Professional in Human Resources (SPHR)certification from the Society for Human Resources Management.

 

*Clarence E. Terry* has been a Director of our Company sinceAugust 2006. Since September 1999, Mr. Terry has served asManaging Director of Sun Capital Partners, a private investment firm, and hehas more than 30 years of operating experience. Prior to joining Sun Capital, Mr. Terryserved as Vice President at Rain Bird Sprinkler Manufacturing, Inc., amanufacturer of irrigation products. Mr. Terry is also a director of LoudTechnologies, Inc., SAN Holdings, Inc. and a number of privatecompanies.

 

*MichaelE. Alger*has beena Director of our Company since February 2008. Since September 2007, Mr. Algerhas served as a Vice President of Operations for Sun Capital Advisors where heoversees a number of LBO fund portfolio companies. From April 2000 until September 2007,Mr. Alger served as the Executive Vice President and Chief FinancialOfficer of Indalex, Inc  and wasresponsible for Finance, IT, and procurement. Prior to joining Indalex, Mr. Alger had numerous senior financialpositions throughout his career. Mr. Alger received his Bachelor ofScience degree in accounting from the University of Illinois and his Masters ofManagement from the JL Kellogg Graduate School at Northwestern University. Mr. Algeris also a director of CPG Finance, Inc., Indalex Holdings Finance, Inc.,Specialty Motors Operations, Inc., and Performance Fibers Holdings, Inc.

 

**Audit Committee Financial Expert**

 

Our Board of Directorshas determined that Michael Alger is an “audit committee financial expert” asdefined under Item 407(d)(5)(ii) of Regulation S-K.  We are not required by the rules of anystock exchange or securities association to have an audit committee composed ofindependent directors and Mr. Alger would not be considered “independent”as such term is defined in Rule 10A-3 of the Exchange Act.

 

**Code of Ethics**

 

On February 7, 2007the Company adopted a Code of Ethics that applies to our principal executiveofficer, principal financial officer, principal accounting officer orcontroller, and all persons performing similar functions.

 

ITEM 11.                EXECUTIVE COMPENSATION

 

**COMPENSATION DISCUSSION ANDANALYSIS**

 

**Compensation Philosophy andOverall Objectives**

 

We believe that thecompensation paid to our Chief Executive Officer, our Chief Financial Officerand our three other most highly compensated executive officers, whom wecollectively refer to as our named executive officers (“Named ExecutiveOfficers”), should be closely aligned with our performance as well as that ofeach Named Executive Officer’s individual performance on both a short- andlong-term basis, and that such compensation should be sufficient to attract andretain 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 believe contributeto our long-term success. Among these objectives are financial strength,customer service, operational excellence, employee commitment and regulatoryintegrity.

 

**How is Compensation Determined**

 

Due to the unique natureof each Named Executive Officer’s duties, our criteria for assessing executiveperformance and determining compensation in any year is inherently subjectiveand is not based upon specific formulas or weighting of factors. We usecompanies in similar industries as benchmarks when initially establishing NamedExecutive Officers’ compensation. We also review peer company data when makingannual base salary and incentive recommendations.

 

**Discussion of SpecificCompensation Elements**

 

The following describesthe components of our executive compensation program and the basis upon whichrecommendations and determinations were made.

 

 

54

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**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 senior management(including the Named Executive Officers, but excluding our CEO who has aseparate 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 thepre-set EBITDA target.  The amount of theadditional bonus pool is calculated based on a percentage of the amount bywhich EBITDA for the plan year exceeds the pre-set EBITDA target, with eacheligible participant’s share being equal to a percentage of the additionalbonus pool.

 

**Stock Option Plan**

 

Wehave a Non-Qualified Stock Option Plan (the “2006 Plan”) which was adopted byour Board of Directors in December 2006. 100,000 shares of non-votingcommon stock are reserved for issuance upon exercise of stock options grantedunder the 2006 Plan. In January 2007, the Board of Directors issued stock optionsto certain members of management. These options vest 20% per year beginning August 16,2007, with full vesting on August 16, 2011. Accelerated vesting of alloutstanding options is triggered upon a change of control of the Company. Theoptions have a life of 10 years, and can only be exercised upon the earliest ofthe following dates: (i) the 10 year anniversary of the effective date; (ii) thedate of a change in control, as defined in the 2006 Plan; or (iii) date ofemployment termination, subject to certain exclusions.

 

**Employment Agreements**

 

We entered into anexecutive employment agreement with Mr. Wolfe effective August 21,2006, as amended and restated. Under the employment agreement, Mr. Wolfeis entitled to a base salary of $473,000 per annum, or such greater amount asthe Board of Directors shall determine, and customary executive benefits.Contingent upon our meeting certain financial goals set annually in accordancewith our bonus plan, Mr. Wolfe is eligible to receive a bonus of up to 662/3% of his base salary. If Mr. Wolfe’s employment is terminated by uswithout cause or by his resignation for “good reason,” he would be entitled toany unpaid previously awarded bonus. If such termination without cause or for “goodreason” is within the first two years of the commencement of the executiveemployment agreement he would be entitled to severance payments equal in theaggregate to his annual base salary for a period of two years following suchtermination; if the termination occurred after the two-year period, he would beentitled to severance payments equal in the aggregate to his annual base salaryfor a period of one year. The employment agreement with Mr. Wolfe expireson August 20, 2011.

 

We entered into anexecutive employment agreement with Mr. Tanner effective January 1,2008. Under the employment agreement, Mr. Tanner is entitled to a basesalary of $296,587 per annum, or such greater amount as the Board of Directorsshall determine, and customary executive benefits. Contingent upon our meetingcertain financial goals set annually in accordance with our bonus plan, Mr. Tanneris eligible to receive a bonus of up to 50% of his base salary. If Mr. Tanner’semployment is terminated by us without cause or by his resignation for “goodreason,” he would be entitled to any unpaid previously awarded bonus and hewould be entitled to severance payments equal in the aggregate to his annualbase salary for a period of one year. The employment agreement with Mr. Tannerexpires on December 31, 2012.

 

55

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**Compensation Committee Interlocksand Insider Participation**

 

During the Fiscal Year2007, all compensation decisions were made by the Compensation Committee whichis composed of Mr. Terry.  None ofthe Company’s executive officers currently serve, or in the past have served,as a director or member of any compensation committee of another entity thathas one or more executive officers serving on the Company’s Board of Directors.

 

**Compensation Committee Report**

 

We have reviewed and discussed the CompensationDiscussion and Analysis with management. Based on our review and discussionswith management, we have recommended to the Board of Directors that theCompensation Discussion and Analysis be included in the Company’s Form 10-K.

 

Submitted by:

 

ClarenceE. Terry

 

**Summary Compensation Table**

 

Thefollowing table sets forth certain information with respect to annual andlong-term compensation for services in all capacities for Fiscal Years 2007,2006 and 2005 paid to our Named Executive Officers who were serving as such asof December 30, 2007:
| ** **                                                                               | ** **           | ** ** | ** **              | ** ** | ** **             | ** ** | ** ** | ** ** | ** **             | ** **                       | ** **             | ** **           | ** **             | ** **                                        | ** **             | ** **                                                                           | ** **             | ** **                   | ** **                      | ** ** | ** ** |
|------------------------------------------------------------------------------------------|----------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|------------------------|----------------------------------|------------------------|----------------------|------------------------|---------------------------------------------------|------------------------|--------------------------------------------------------------------------------------|------------------------|------------------------------|---------------------------------|------------|------------|
| **Name and   Principal Position**                                                        | ** **           | **Year**   | ** **              | **Salary** | ** **             | **Bonus**  | ** ** | **Other**  | ** **             | **Restricted    Stock   Awards** | ** **             | **Option Awards(2)** | ** **             | **Non-  Equity Incentive  Plan Compen-sation(5)** | ** **             | **Change  in   Pension Value and   Nonqualified  Deferred Compensation Earnings(1)** | ** **             | **All   Other Compensation** | ** **                      | **Total**  | ** ** |
| ** **                                                                               | ** **           | ** ** | ** **              | **($)**    | ** **             | **($)**    | ** ** | ** ** | ** **             | **(#)**                          | ** **             | **(#)**              | ** **             | **($)**                                           | ** **             | **(#)**                                                                              | ** **             | **($)**                      | ** **                      | **($)**    | ** ** |
| Frederick F.  Wolfe  CEO, President and Director                                         |                 | 2007       | ** **              | 490,974    | ** **             | 110,000    | ** ** | *          | ** **             | —                           | ** **             | 322,345              | ** **             | —                                            |                   | —                                                                               |                   | 45,394                       | (3)                             | 968,713    |       |
|                                                                                     | 2006                 | ** ** | 484,468                 | ** ** | 836,499                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | 2,267,988              | (3)                          | 3,588,955                       |       |
|                                                                                     | 2005                 | ** ** | 454,935                 | ** ** | 339,293                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | —                 |                         | 794,228                         |       |
| Steven L. Tanner  CFO                                                                    |                 | 2007       | ** **              | 283,841    | ** **             | 40,000     | ** ** | *          | ** **             | —                           | ** **             | 118,193              | ** **             | —                                            |                   | —                                                                               |                   | 19,433                       | (3)                             | 461,467    |       |
|                                                                                     | 2006                 | ** ** | 269,135                 | ** ** | 462,676                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | 1,290,320              | (3)                          | 2,022,131                       |       |
|                                                                                     |                 | 2005       | ** **              | 254,559    | ** **             | 133,682    | ** ** | *          | ** **             | —                           | ** **             | —               | ** **             | —                                            |                   | —                                                                               |                   | —                       |                            | 388,241    |       |
| Charles Rink  COO(6)                                                                     |                 | 2007       | ** **              | 365,211    | ** **             | 40,000     | ** ** | *          | ** **             | —                           | ** **             | 118,193              | ** **             | —                                            |                   | —                                                                               |                   | 30,421                       | (4)                             | 553,825    |       |
|                                                                                     | 2006                 | ** ** | 297,243                 | ** ** | 466,153                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | 1,025,183              | (4)                          | 1,788,579                       |       |
|                                                                                     | 2005                 | ** ** | 293,054                 | ** ** | 147,195                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | —                 |                         | 440,249                         |       |
| Carlos Angulo  President   Real Mex  Foods, Inc.                                    |                 | 2007       | ** **              | 244,600    | ** **             | 40,000     | ** ** | *          | ** **             | —                           | ** **             | 118,193              | ** **             | —                                            |                   | —                                                                               |                   | 20,281                       | (4)                             | 423,074    |       |
|                                                                                     | 2006                 | ** ** | 233,292                 | ** ** | 375,120                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | 683,427                | (4)                          | 1,291,839                       |       |
|                                                                                     | 2005

          | ** ** | 221,384

          | ** ** | 96,418

          | ** ** | *          | ** ** | —

          | ** **                       | —

          | ** **           | —

          |  

                                     | —

          |                                                                                 | —

          |                         | 317,802

                  |       |
| Roberto (Pepe) Lopez  Executive Chef and Senior Vice President, Research and Development |                 | 2007       | ** **              | 209,309    | ** **             | 25,000     | ** ** | *          | ** **             | —                           | ** **             | 21,490               | ** **             | —                                            |                   | —                                                                               |                   | 7,606                        | (4)                             | 263,405    |       |
|                                                                                     | 2006                 | ** ** | 198,162                 | ** ** | 142,794                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | 256,317                | (4)                          | 597,273                         |       |
|                                                                                     | 2005

 

  | ** ** | 195,369

 

  | ** ** | 60,413

 

  | ** ** | *          | ** ** | —

 

  | ** **                       | —

 

  | ** **           | —

 

  |                                              | —

 

  |                                                                                 | —

 

  |                         | 255,782                         |       |
| Raymond Garcia  Senior Vice President, Operations -   El Torito & Acapulco           |                 | 2007       | ** **              | 201,963    | ** **             | 28,000     | ** ** | *          | ** **             | —                           | ** **             | 29,548               | ** **             | —                                            |                   | —                                                                               |                   | 8,478                        | (4)                             | 267,989    |       |
|                                                                                     | 2006                 | ** ** | 190,745                 | ** ** | 140,813                | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | 282,195                |                         | 613,753                         |       |
|                                                                                     | 2005                 | ** ** | 166,500                 | ** ** | 48,413                 | ** ** | *          | ** ** | —                 | ** **                       | —                 | ** **           | —                 |                                              | —                 |                                                                                 | —                 |                         | 214,913

 

 

  |       |

 

56

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----

*                    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)             Representscompensation expense recorded related to options to acquire shares of RMRestaurant Holding, parent of the Company. These amounts do not reflect theamount of compensation actually received by the named executive office duringthe fiscal year.  For a description ofthe assumptions used in calculating the fair value of the equity awards underSFAS No. 123 (R), see our financial statements “Notes to Consolidated FinancialStatements”.

 

(3)             Amountsfor Mr. Wolfe and Mr. Tanner include restricted stock award paymentsand the exercise of stock option awards related to the Merger.

 

(4)             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 related to the Merger.

 

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

 

(6)             CharlesRink resigned from his position as an executive officer of the Company in October 2007.

 

**Option Grants in Fiscal YearEnded December 30, 2007**

 
| **Name**             | ** ** | **Grant  Date** | ** ** | **No. of   Options** | ** ** | **Exercise Price  per Share** | ** ** | **Expiration  Date** | ** ** | **Grant Date  Fair Value  of Option(1)** | ** ** |
|----------------------|------------|-----------------|------------|---------------------------|------------|-------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| Fredrick F. Wolfe    |       | 1/24/07         |       | 30,000                    |       | 81.50                         |       | 8/16/2016            |       | 322,345                                  |       |
| Steven L. Tanner     |       | 1/24/07         |       | 11,000                    |       | 81.50                         |       | 8/16/2016            |       | 118,193                                  |       |
| Charles Rink         |       | 1/24/07         |       | 11,000                    |       | 81.50                         |       | 8/16/2016            |       | 118,193                                  |       |
| Carlos Angulo        |       | 1/24/07         |       | 11,000                    |       | 81.50                         |       | 8/16/2016            |       | 118,183                                  |       |
| Roberto (Pepe) Lopez |       | 1/24/07         |       | 2,000                     |       | 81.50                         |       | 8/16/2016            |       | 21,490                                   |       |
| Raymond Garcia       |       | 1/24/07         |       | 2,750                     |       | 81.50                         |       | 8/16/2016            |       | 29,548                                   |       |

----

(1)          Represents compensation expense recorded related tooptions to acquire shares of RM Restaurant Holding, parent of the Company.These amounts do not reflect the amount of compensation actually received bythe named executive office during the fiscal year.  For a description of the assumptions used incalculating the fair value of the equity awards under SFAS No. 123 (R),see our financial statements “Notes to Consolidated Financial Statements”.

 

57

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**Outstanding Equity Awards at YearEnd**

 

The following tableprovides information regarding outstanding stock options held by the NamedExecutive Officers at December 30, 2007.

** **
| ** **           | ** ** | **Option/Warrant Awards**                                                | ** ** | **Stock Awards**                                                           | ** ** |
|----------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Name**             | ** ** | **Number  of Securities Underlying Unexercised Options (#) Exercisable** | ** ** | **Number  of Securities Underlying Unexercised Options (#) Unexercisable** | ** ** | **Equity  Incentive Plan Awards Number of Securities Underlying Unexercised Unearned  Options (#)** | ** ** | **Option  Exercise Price** | ** ** | **Option  Expiration Date** | ** ** | **Number  of Shares or Units of Stock That Have Not Vested (#)** | ** ** | **Market  Value of Shares or Unit That Have Not Vested** | ** ** | **Equity  Incentive Plan Awards: Number of Unearned Shares Units or Other Rights That  Have Not Vested (#)** | ** ** | **Equity  Incentive Plan Awards: Market or Payout Value of Unearned Shares Units or  Other Rights That Have Not Vested** | ** ** |
| Fredrick F. Wolfe    |       | 6,000                                                                    |       | 24,000                                                                     |       | — |   | 81.50 |   | 8/16/2016 |   | — |   | — |   | — |   | — |   |
| Steven L. Tanner     |       | 2,200                                                                    |       | 8,800                                                                      |       | — |   | 81.50 |   | 8/16/2016 |   | — |   | — |   | — |   | — |   |
| Charles Rink         |       | 2,200                                                                    |       | 8,800                                                                      |       | — |   | 81.50 |   | 8/16/2016 |   | — |   | — |   | — |   | — |   |
| Carlos Angulo        |       | 2,200                                                                    |       | 8,800                                                                      |       | — |   | 81.50 |   | 8/16/2016 |   | — |   | — |   | — |   | — |   |
| Roberto (Pepe) Lopez |       | 400                                                                      |       | 1,600                                                                      |       | — |   | 81.50 |   | 8/16/2016 |   | — |   | — |   | — |   | — |   |
| Ray Garcia           |       | 550                                                                      |       | 2,200                                                                      |       | — |   | 81.50 |   | 8/16/2016 |   | — |   | — |   | — |   | — |   |

 

**PotentialPayments Upon Termination or Change in Control**

 

We have arrangements with certain of the NamedExecutive Officers that may provide them with compensation followingtermination of employment. These arrangements are discussed above under“Employment Agreements”. 

 

**Compensation of Directors**

 

None of ourdirectors are compensated for serving as a director of the Company. Ourdirectors are entitled to reimbursement of their reasonable out-of-pocketexpenses in connection with their travel to and attendance at meetings of theBoard of Directors or committees thereof.

 

 

ITEM 12.                                               SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED  STOCKHOLDER MATTERS

 

**Equity Compensation Plan Information**

 

As of December 30, 2007,our parent’s common stock authorized for issuance under its Non-Qualified StockOption Plan included 100,000 shares of non-voting common stock, of which 79,850options to purchase such shares have been issued, with a weighted averageexercise price of $81.50 per share.

 

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

 

The following table sets forth information withrespect to the beneficial ownership of outstanding common stock and preferred stockof Real Mex Restaurants, Inc. as of March 25, 2008 by:

 

·                                          Each person (or group of affiliatedpersons) who is known by us to beneficially own 5% or more of Real MexRestaurants, Inc.’s common and preferred stock;

 

·                                          Each of our Named Executive Officers;

 

58

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·                                          Each of our Directors; and

 

·                                          All of our Directors and executiveofficers 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.

 

**Numberand Percent of Shares of**

**Stock of**

**Real MexRestaurants, Inc.**

 
| ** **                                                    | ** **   | **Common Stock** | ** **   |
|---------------------------------------------------------------|--------------|-----------------------|--------------|
| ** **                                                    | ** **   | **Shares**            | ** **   | **Percentage** | ** ** |
| ***Greater than 5% Stockholder***                             | *** *** | *** ***          | *** *** | *** *** | *** *** |
| RM Restaurant Holding Corp.(1)                                |         | 1,000                 |         | 100.00 |   |
| ***Named Executive Officers and  Directors***                 | *** *** | *** ***          | *** *** | *** *** | *** *** |
| Frederick F. Wolfe                                            |         | —                |         | — |   |
| Steven Tanner                                                 |         | —                |         | — |   |
| Charles Rink                                                  |         | —                |         | — |   |
| Carlos Angulo                                                 |         | —                |         | — |   |
| Roberto Lopez                                                 |         | —                |         | — |   |
| Raymond Garcia                                                |         | —                |         | — |   |
| Clarence E. Terry                                             |         | —                |         | — |   |
| Michael E. Alger                                              |         | —                |         | — |   |
| All executive  officers and directors as a group  (8 persons) |         | —                |         | — |   |

----

(1) RM Restaurant HoldingCorp. is located at 5660 Katella Avenue, Cypress, California 90630.

 

ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE

 

**ManagementAgreements**

 

The Company has a Management Services Agreement (theManagement Agreement”) dated August 21, 2006, by and between the Companyand Sun Capital Partners Management IV, LLC (the “Manager”), an affiliate ofSun Cantinas LLC, the indirect holder of the majority of the capital stock ofthe Company. The Manager is paid annual fees equal to the greater of (i) $500,000or (ii) 1% of the Company’s EBITDA for such period. EBITDA is defined as (A) netincome (or loss) after taxes of the Company and its direct and indirectsubsidiaries on a consolidated basis (“Net Income”), plus (B) interestexpense which has been deducted in the determination of Net Income, plus (C) federal,state and local taxes which have been deducted in determining Net Income, plus (D) depreciationand amortization expenses which have been deducted in determining Net Income,including without limitation amortization of capitalized transaction expensesincurred in connection with the transactions contemplated by the Merger plus (E) extraordinarylosses which have been deducted in the determination of Net Income, plus (F) un-capitalizedtransaction expenses incurred in connection with the Merger, plus (G) allother non-cash charges, minus (H) extraordinary gains which have beenincluded in the determination of Net Income. EBITDA is computed without taking into consideration the fees payableunder the Management Agreement. The Company pays the fees in quarterlyinstallments in advance equal to the greater of (i) $125,000 or (ii) 1%of EBITDA for the immediately preceding fiscal quarter. Expenses relating tothe Management Agreement of $500,000 and $174,000 were recorded as general andadministrative expense for the Successor Year Ended December 30, 2007 andSuccessor Period August 21, 2006 to December 31, 2006, respectively.Additionally, the Company prepaid $125,000 in fees under the agreement for thefirst quarter of 2008.

 

**OtherRelated Party Transactions**

 

InSeptember 2006, the Company made a dividend distribution of $10.0 million to RMRestaurant Holding, its parent, which was recorded as a reduction to retainedearnings. A contribution of $1.7 million was received from RM RestaurantHolding during 2007 related to a distribution to former stockholders ofproceeds from the sale of land subsequent to the acquisition date, as specifiedin the Merger Agreement, and was recorded as additional paid in capital. TheCompany has also made subsequent additional distributions to and on behalf ofRM Restaurant Holding Corp. in the amount of $5.4 million and has recorded thedistributions as a related party receivable. During 2007, the Company receivedadvances from RM Restaurant Holding totaling $8.0 million, which were recordedas a related party payable. The Company has a net related party payable of $2.5million at December 30, 2007 and a net related party receivable of $3.6 millionat December 31, 2006.

 

In April 2004, weentered into an agreement with RA Patina, pursuant to which our subsidiary,Real Mex Foods, Inc., provides food distribution services to certainrestaurants owned by RA Patina. In Fiscal Years 2007 and 2006, we receivedapproximately $1.42 million and $1.46 million, respectively, for servicesrendered under this food distribution service arrangement. Fortunato N.Valenti, one of our former directors, is the Chief Executive Officer of RAPatina and Richard Stockinger, also one of our former directors, is thePresident of RA Patina.

 

59

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**Director Independence**

 

We are not listed on anynational securities exchange and therefore are not subject to any listingstandards for director independence. Because our directors are affiliated with the majority stockholder ofour parent company, they are not considered independent.

 

ITEM 14.                PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

**Principal Accounting Fees andServices**

 

Ernst & YoungLLP (“E&Y”) was dismissed as our auditor effective September 21, 2007and, on September 20, 2007, our Audit Committee recommended and the Boardof Directors approved the engagement of Grant Thornton LLP (“Grant”) as ourindependent auditors to conduct the audit of our books and records for thefiscal year ending December 30, 2007, including required quarterlyreviews. The total fees billed by Grant during 2007 were $312,000 and the totalfees billed by E&Y during 2007 were $421,050. The following table shows theaggregate fees for professional services rendered during the last two fiscalyears:

 

| ** **         | ** ** | ** **           | ** ** | **Fiscal Year** | ** ** |
|--------------------|------------|----------------------|------------|-----------------|------------|
| ** **         | ** ** | **Fiscal Year** | ** ** | **2006**        | ** ** |
| ** **         | ** ** | **2007**             | ** ** | **Combined**    | ** ** |
| Audit Fees         |       | $                    | 372,000    |            | $          | 80,000 |   |
| Audit Related Fees |       | 26,000               |       | 22,000          |       |
| Tax Fees           |       | 116,900              |       | 105,880         |       |
| All Other Fees     |       | 218,150              |       | 30,300          |       |
| Total Fees         |       | $                    | 733,050    |            | $          | 238,180 |   |

 

**AuditFees**represent the aggregate fees billed or estimated to be billed to us forprofessional services rendered for the audit of our annual financialstatements, review of financial statements included in our Form 10-Qs andservices normally provided by our accountants in connection with statutory andregulatory filings or engagements.

 

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

 

**TaxFees**represent the aggregate fees billed to us or estimated to be billed to us forprofessional services rendered for tax compliance, tax advice and tax planning.In addition, the services included analysis of the income tax deductibility ofcertain Merger expenses and a tax return review.

 

**AllOther Fees**represent the aggregate fees billed to us or estimated to be billed to us forproducts or services provided to us, other than the services reported in theabove categories, including 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 aswhether the independent auditor is best positioned to provide the mosteffective and efficient service, for reasons such as familiarity with ourCompany’s business, people, culture, accounting systems, risk profile and otherfactors and input from our management. The Audit Committee may delegate to oneor more of its members the pre-approval of audit and permissible non-auditservices provided that those members report any pre-approvals to the fullcommittee.  Pursuant to this authority,the Audit Committee has delegated to its Chair the authority to address anyrequests for pre-approval of services between Audit Committee meetings providedthat the amount of fees for any particular services requested does not exceed$10,000, and the Chair must report any pre-approval decisions to the AuditCommittee at its next scheduled meeting. The policy prohibits the AuditCommittee from delegating to management the Audit Committee’s responsibility topre-approve permitted services of the independent auditor. During Fiscal Year2007 all of the services related to the audit or other fees described abovewere pre- approved by the Audit Committee and none were provided pursuant toany waiver of the pre-approval requirement.

 

 

60

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**PART IV**

 

ITEM 15.                EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

*(a)*(1)      FINANCIALSTATEMENTS.

 

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

 
| · |   | Consolidated Balance  Sheets — December 30, 2007 and December 31, 2006                                                                                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                       |
| · |   | Consolidated Statements  of Operations — Successor Fiscal Year Ended December 30, 2007 and  Successor Period August 21, 2006 to December 31, 2006 and  Predecessor Periods December 26, 2005 to August 20, 2006 and Fiscal  Year Ended December 25, 2005                |
|   |   |                                                                                                                                                                                                                                                                                                       |
| · |   | Consolidated Statements  of Stockholders’ Equity — Successor Fiscal Year Ended December 30, 2007  and Successor Period August 21, 2006 to December 31, 2006 and  Predecessor Periods December 26, 2005 to August 20, 2006 and Fiscal  Year Ended December 25, 2005 |
|   |   |                                                                                                                                                                                                                                                                                                       |
| · |   | Consolidated Statements  of Cash Flows - Successor Fiscal Year Ended December 30, 2007 and  Successor Period August 21, 2006 to December 31, 2006 and  Predecessor Periods December 26, 2005 to August 20, 2006 and Fiscal  Year Ended December 25, 2005                     |
|   |   |                                                                                                                                                                                                                                                                                                       |
| · |   | Notes to Consolidated  Financial Statements — December 30, 2007 and December 31, 2006                                                                                                                                                                                                       |

 

(2)           FINANCIAL STATEMENT SCHEDULE.

 

The financial statement schedules are not required underthe related instructions or are inapplicable and therefore have been omitted.

 

(3)           EXHIBITS

 

 

61

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| **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)                                         |

 

 

62

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| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                                                     |
|             |       |                                                                                                                                                                                                                                                                                                           |
| 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)                                                 |

 

 

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| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 Securities 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             |       | Amended and Restated Executive Employment Agreement,  dated February 28, 2008 by and between Real Mex                                                                                                                                                                                                                                                                                                                            |
|             |       | Restaurants, Inc. and Frederick Wolfe. (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 March 5, 2008 and incorporated by reference                                                                                                                                                                                                                                                                                                            |
|             |       | herewith)                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3             |       | Executive Employment Agreement, dated  February 28, 2008 by and between Real Mex Restaurants, Inc. and                                                                                                                                                                                                                                                                                                                      |
|             |       | Steven Tanner. (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  March 5, 2008 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)                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

 

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| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                           |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 with the Securities and Exchange Commission as  Exhibit 14.1 to the Company’s Annual Report on Form 10-K on  March 20, 2007 and incorporated by reference 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)                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                      |

 

 

65

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SIGNATURES

 

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

 
|                      | REAL MEX RESTAURANTS, INC. |
|---------------------------|----------------------------|
|                      |                       |   |
|                      |                       |   |
|                      | By:                        | /s/ Frederick F. Wolfe |
|                      |                       | Frederick F. Wolfe |
| Date: March 26, 2008 |                       | Chief Executive Officer |

 

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

 
| **Signature**          | ** ** | **Title**                        | ** ** | **Date**            |
|------------------------|------------|----------------------------------|------------|---------------------|
|                   |       |                             |       |                |
|                   |       |                             |       |                |
| /s/ Frederick F. Wolfe |       |                             |       |                |
| Frederick F. Wolfe     |       | President and Chief Executive    |       | March 26, 2008 |
|                   |       | Officer and Director             |       |                |
|                   |       | (Principal Executive Officer)    |       |                |
|                   |       |                             |       |                |
|                   |       |                             |       |                |
| /s/ Steven Tanner      |       |                             |       |                |
| Steven Tanner          |       | Chief Financial Officer          |       | March 26, 2008 |
|                   |       | (Principal Financial Officer and |       |                |
|                   |       | Accounting Officer)              |       |                |
|                   |       |                             |       |                |
|                   |       |                             |       |                |
| /s/ Clarence E. Terry  |       |                             |       |                |
| Clarence E. Terry      |       | Director                         |       | March 26, 2008 |
|                   |       |                             |       |                |
|                   |       |                             |       |                |
| /s/ Michael E. Alger   |       |                             |       |                |
| Michael E. Alger       |       | Director                         |       | March 26, 2008 |

 

 

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