<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-4678
PANCHO'S MEXICAN BUFFET, INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 75-1292166
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3500 NOBLE AVENUE, FORT WORTH, TEXAS 76111
(Address of principal executive offices) (Zip Code)
831-0081 817
(Registrant's telephone number) (Area Code)
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ___
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K [ X ].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT ON NOVEMBER 30, 1996, BASED ON THE ACTUAL STOCK PRICE ON SUCH DATE
WAS $6,484,700.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 30,
1996:..................................................................4,397,559
DOCUMENTS INCORPORATED BY REFERENCE
THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 22, 1997, IS INCORPORATED BY REFERENCE IN PART III HEREOF.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
The Company, Pancho's Mexican Buffet, Inc. and subsidiaries, is principally
engaged in the operation and development of the Pancho's Mexican Buffet
restaurant chain serving Mexican food cafeteria style. However, Pancho's is more
than a cafeteria, because it's "all-you-can-eat" at a fixed price. Along the
cafeteria line, servers fill a piping hot platter with a diner's choices from
more than 20 items of freshly prepared Mexican food. Pancho's becomes a
full-service restaurant when a diner is at the table. A waitress or waiter
brings refills, or other food a diner may request from the buffet, at no extra
charge. For more service, a diner simply raises the small flag on the table. The
Company currently operates 65 restaurants located in the states of Texas (48),
Louisiana (6), Arizona (5), Oklahoma (3) and New Mexico (2), and one in
Guadalajara, Mexico.
The Company opened its Guadalajara, Mexico restaurant in October, 1995.
This operation is the result of a joint venture between the Company and one of
its non-employee directors to test the Mexican market for possible expansion. No
other new restaurants were opened in fiscal 1996, and none are currently
planned, as management intends to focus on improving sales and profitability and
reducing debt.
Three new restaurants were opened in fiscal 1995 and nine were opened in
fiscal 1994.
In June 1995, following declining sales and net operating losses in the
first two quarters of 1995, the Company adopted a restructuring plan in an
effort to return to profitability. The plan included closing nine
underperforming restaurants and writing down assets at seven restaurants
operating at lower sales volumes and at the Company's constructed but
then-unopened restaurant in Guadalajara, Mexico. Consistent with ongoing efforts
to improve operating margins, three other restaurants were closed during the
year, and two locations formerly operated as Emiliano's Buffet Mexicano
restaurants were re-opened as Pancho's Mexican Buffets.
Jesse Arrambide, a Company founder, developed and opened the first Pancho's
Mexican Buffet in El Paso, Texas in 1958. The Company was organized under the
laws of the State of Delaware in December 1968 to succeed to the business
operated by predecessor corporations which were merged into the Company on
January 23, 1969. The Company's principal offices are located at 3500 Noble
Avenue, Fort Worth, Texas 76111 (telephone number [817] 831-0081).
BUSINESS DEVELOPMENT
The Company's long-term strategy in the United States (U.S.) is to expand
Pancho's Mexican Buffet within the Company's existing five-state market and
other contiguous states. The Company intends to concentrate on the development
of existing markets to reduce its supervision expense as a percentage of sales
and to improve the Company's competitive position, marketing potential and
profitability. There can be no assurance that the Company will be able to
achieve these objectives. The Company has no plans for franchising in the U.S.;
however, two Pancho's are currently being operated under license agreements.
Depending on the success of the Guadalajara restaurant, the Company will
consider further development in Mexico.
The most important factors in selecting new locations are the demographics
of the immediate market area within a radius of three to four miles and the
occupancy cost of the proposed restaurant. The Company's experience indicates
that it is relatively immaterial whether the location is free-standing or in a
mall or shopping center. Senior management inspects each restaurant site prior
to its acquisition. The Company has developed prototypes of both a free-standing
building design and a shopping center space design to enhance site flexibility.
In its restaurants, the Company maintains distinctive styling and colorful decor
using authentic artifacts in a Mexican motif.
The objective of the Pancho's concept is to combine the serving speed and
economy of cafeteria-style service within an environment typical of table
service restaurants. The customer selects and is served food and beverage items
from the serving line. When the patron is seated a uniformed employee serves
chips, hot sauce,
<PAGE> 3
sopaipillas (Mexican bread), beverage refills and more food on request for the
"all-you-can-eat" patrons. This is a unique variation of the traditional
cafeteria concept, providing full table service after a customer has completed
selection from the service line. During fiscal 1993, the Company added
self-service soup/salad bars and dessert bars to provide greater food variety
and value.
RESTAURANT OPERATIONS
The Company's restaurants serve continuously from 11:00 a.m. to 9:00 p.m.
seven days a week. The restaurants are family-oriented and are designed to match
serving-line service speed (three to three and one half patrons per minute) to
seating capacity for optimum utilization of space and return on investment.
Older Pancho's average approximately 7,300 square feet and seat 180 to 200. New
restaurants, and higher volume restaurants in which seating capacity has
recently been expanded, average approximately 9,000 square feet and seat 240 to
300. A typical new restaurant in a strip shopping center costs about $900,000 to
$1,000,000 to develop, including equipment and leasehold improvements.
Free-standing units cost from $1.5 million to $1.9 million for land, building
and equipment.
In addition to the "all-you-can-eat" buffet, the menu includes
competitively-priced limited-selection plates (the Super Combo value meal),
fajitas, a taco salad, soup/salad bar, and a child's plate. Children five years
of age and under are served any three items free. Senior citizens who belong to
Pancho's Seniors Club are given a 20% discount on their personal purchases.
Beverages are priced separately. All menu items include the soup/salad bar and
dessert bar.
More than 20 items of Mexican food are served, including tamales, refried
beans, Mexican rice, flautas, enchiladas (five kinds), red chili stew, green
chili stew, chili rellenos, chili con queso, three kinds of sauces, tacos,
chalupas, pico de gallo, assorted relishes, chips, hot sauce and sopaipillas.
Beverages are also available. Alcoholic beverages are served in 41 restaurants
and accounted for 0.9% of the Company's sales for the year ended September 30,
1996. Pancho's restaurants offer food to go, which accounted for 9.5% of sales
for the year ended September 30, 1996.
The Company has standard procedures for customer service, sanitation, food
preparation and other operational matters. Each restaurant is under the
direction of a general manager, associate manager and production manager (chef).
Additionally, higher volume units have a first assistant manager who typically
has completed the Company's formal Manager Training Program. The basic
three-manager team participates in an incentive compensation program based upon
sales and profitability of their specific restaurant. Company Area Managers and
Production Supervisors inspect the restaurants regularly and assist the unit
management to assure compliance with quality standards set by the Company. They
also participate in incentive compensation geared to the restaurant group for
which they are responsible. Depending on the size of the restaurant and the time
of the year, each Pancho's will have from 30 to 90 employees.
Special attention is directed to personnel planning for new restaurants.
"Blue Ribbon Teams" which assist in the opening of new restaurants are selected
from existing restaurants on the basis of superior employee performance in all
categories of restaurant operations. This program permits recognition of
employee performance and ensures immediate compliance with Company standards of
service in newly-opened restaurants.
MARKETING AND ADVERTISING
From fiscal 1993 through fiscal 1996, the Company employed a mix of
television, radio and newspaper advertising combined with local store marketing
programs. Same-store sales increases in the fourth quarter of fiscal 1993 and
the first three quarters of fiscal 1994 have since been offset by declining
same-store sales. Management has concluded that television advertising is not
efficient for the Company's size and market, and so plans to focus on local
store marketing.
Local store marketing efforts reach out to each restaurant's specific
neighborhood customers. Restaurant managers are encouraged to participate in
community affairs and, with the assistance of the general office, to cater
school, church and other community events. Pancho's supports local schools with
free meals for honor
2
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roll and perfect attendance students, and sponsors sports leagues for local
children. There is a birthday club for children under twelve which serves the
child free on his or her birthday and also provides a free pinata for the
birthday celebration. A senior citizens program includes registered membership
that entitles the member to a 20% discount.
The Company has engaged the marketing consulting firm of Feltenstein
Partners to assist in conducting market research, developing marketing strategy
and tactics, and implementing marketing programs. The Company's previous market
research is being updated in fiscal 1997. Local store marketing programs
tailored to each restaurant will be implemented during 1997.
PURCHASING AND DISTRIBUTION
The Company owns a warehouse and cold storage facility located at its
headquarters in Fort Worth, Texas. Until September 1994, grocery products and
supplies were distributed to the Company's restaurants from that facility.
In July 1994, the Company entered into an agreement with The SYGMA Network,
Inc. to purchase, warehouse and distribute substantially all the food products
and supplies for the Company's restaurants. This agreement provided immediate
benefits through increased delivery frequency at lower cost and decreased
investment in inventory. SYGMA's nationwide distribution network will also allow
the Company to develop new markets without capital investments to expand an
internal distribution system. The SYGMA Network is a subsidiary of SYSCO
Corporation, one of the nation's largest food service, marketing and
distribution organizations. The SYGMA Network specializes in distribution for
restaurant chains.
The Company believes that its system of central purchasing and distribution
is critical to control of product cost and quality and permits restaurant
managers to concentrate on quality of food preparation and customer service.
Some fresh produce and dairy products are purchased locally.
HUMAN RESOURCES
On September 30, 1996, the Company had about 2,952 employees, of whom 72
were corporate personnel, 2,869 were employed in restaurants and 11 were
employed in maintenance and construction.
The Company considers its employee relations to be good. Most employees,
other than restaurant management and corporate personnel, are paid on an hourly
basis. The Company believes that it provides working conditions and wages that
compare favorably with those of its competition. The Company's employees are not
covered by a collective bargaining agreement.
COMPETITION
All aspects of the restaurant business are highly competitive. Price,
restaurant location, food quality, service and attractiveness of facilities are
important aspects of competition, and the competitive environment is often
affected by factors beyond a particular restaurant's control, including changes
in population, traffic patterns and economic conditions. The Company's
restaurants compete with a wide variety of value-priced and "all-you-can-eat"
restaurants, ranging from national and regional restaurant chains to
locally-owned restaurants. The Company believes that its principal competitive
strengths lie in the value, variety and quality of food products served, in the
distinctive atmosphere and food presentation, and in the strength of the
Pancho's Mexican Buffet name.
ITEM 2. PROPERTIES
The Company owns a combination general office/warehouse building located at
3500 Noble Avenue, Fort Worth, Texas. The headquarters facility consists of
general offices and freezer space of about 194,000 cubic feet and warehouse dry
storage of approximately 31,400 square feet. The Company also owns land (85,500
sq. ft.) and a warehouse building (25,000 sq. ft.) adjoining its present general
office/warehouse property and land (42,600 sq. ft.) located at 3565 McCart
Street, Fort Worth, Texas. The Company plans to sell or lease the McCart Street
property.
3
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The sites of thirteen operating restaurants are owned by the Company.
Fifty-two operating restaurants are occupied pursuant to lease agreements which
have varying expiration dates into the year 2007. At September 30, 1996, the
Company had remaining lease obligations on three closed Pancho's Mexican Buffet
restaurant locations. As of November 30, 1996, one of these locations was
subleased, and the Company is seeking to sublease two other sites, for which the
lease terms expire in 1999 and 2003. Leases typically provide for a minimum
rental based on the cost of improvements provided by the lessor and a maximum
rental based upon the gross sales of the facility. The Company does not deem any
individual restaurant lease to be significant in relation to its overall
operations.
The Company has leased its Fort Worth cold storage facility to a food
manufacturing concern whose chairman and chief executive officer is a
non-employee director of the Company. The remainder of the space formerly
occupied by the Company's internal distribution operation is currently used for
equipment and document storage, and is being held for future office expansion.
In connection with its revolving credit and term loan agreement with a
bank, the bank has a security interest in substantially all of the real property
owned by the Company. Substantially all of the equipment and furniture used in
the operation of the restaurants and the headquarters facility are owned by the
Company.
Information as to restaurant locations is set forth below:
ARIZONA:
Mesa
Phoenix-3
Tucson
LOUISIANA:
Baton Rouge
Bossier City
Chalmette
Lafayette
Metairie
Shreveport
MEXICO:
Guadalajara
NEW MEXICO:
Albuquerque-2
OKLAHOMA:
Oklahoma City-2
Tulsa
TEXAS:
Abilene
Amarillo
Arlington-3
Baytown
Beaumont
Burleson
Carrollton
College Station
Conroe
Corpus Christi*
Dallas-4
Denton
El Paso-2**
Euless
Fort Worth-3
Galveston
Garland
Houston-6
Humble
Irving
Killeen
League City
Lewisville
Longview
Lubbock
McAllen*
Mesquite
North Richland Hills
Pasadena
Plano
Richardson
San Antonio-2
Sherman
South Houston
Texarkana
Tyler
Waco
Windcrest
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* Operated by licensees
** Operated by A&A Foods
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
<PAGE> 6
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
POSITION AND OFFICE PERIOD OF
NAME WITH REGISTRANT PRESENT OFFICE AGE
------------------------------ ------------------------- ---
<S> <C> <C> <C>
Jesse Arrambide, III.......... Chairman of the Board and Since December 9, 1994 44
Chief Operations
Officer -- also Director and
officer of subsidiary
companies
Hollis Taylor................. Director and President and Since August 10, 1979 60
Chief Executive
Officer -- also Director and
officer of subsidiary
companies
Samuel L. Carlson............. Director and Senior Vice Since December 21, 1988 60
President, Administration
and Secretary -- also
Director and officer of
subsidiary companies
Brad Fagan.................... Vice President, Treasurer, Since September 29, 1995 37
Controller and Assistant
Secretary -- also Director
and officer of subsidiary
companies
</TABLE>
Jesse Arrambide, III has been a Director since 1977. He has been Chairman
of the Board of Directors since August 1993, and Chief Operations Officer since
December 1994. He was Vice President, Operations from November 1984 to August
1993.
Hollis Taylor has been a Director since March 1974. He has been President
and Chief Executive Officer since August 1979.
Samuel L. Carlson has been a Director since November 1993. He has been
Senior Vice President, Administration and Secretary since December 1988.
Brad Fagan has been Vice President, Treasurer and Assistant Secretary since
September 1995 and Controller since December 1991. Mr. Fagan, a certified public
accountant, was Controller of Staffing Services, Inc. from July 1989 through
April 1991. He was a corporate audit supervisor for PepsiCo, Inc. from May 1985
through July 1989, and worked for the accounting firm of Arthur Andersen & Co.
from July 1983 to May 1985.
5
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA
The Company's common stock is traded over-the-counter in the National
Association of Securities Dealers, Inc. (NASDAQ) National Market System, under
the symbol "PAMX." On November 30, 1996, the number of record holders was about
630 and the Company estimates that on that date there were an additional 1400
beneficial owners. The following table sets forth the quarterly high and low
closing prices of the common stock, as reported by NASDAQ, for the calendar
quarters indicated.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
------------------------------------------------------------------- ------ ------
<S> <C> <C>
December 31, 1994.................................................. $9.625 $6.375
March 31, 1995..................................................... 7.000 5.250
June 30, 1995...................................................... 5.625 3.875
September 30, 1995................................................. 4.250 3.188
December 31, 1995.................................................. 3.750 2.625
March 31, 1996..................................................... 3.500 2.250
June 30, 1996...................................................... 3.000 1.875
September 30, 1996................................................. 2.563 1.875
</TABLE>
COMMON STOCK DIVIDENDS
The Company has paid cash dividends for the past 17 years. In 1996, cash
dividends were $.03 per share. Future cash dividends will depend on earnings,
financial position, capital requirements and other relevant factors.
6
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for each of the five
fiscal years ended September 30, 1992 through 1996 has been derived from the
more detailed consolidated financial statements and notes thereto of the Company
contained elsewhere in this report or previous reports.
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales.................................... $71,487 $80,893 $86,062 $75,968 $73,106
------- ------- ------- ------- -------
Costs and Expenses:
Food costs............................. 19,681 22,910 23,347 20,956 19,727
Restaurant labor and related
expenses............................ 26,561 30,400 30,806 27,256 25,896
Restaurant operating expenses.......... 16,508 18,376 19,134 16,014 14,576
Depreciation and amortization.......... 3,949 4,512 4,420 3,635 3,354
General and administrative expenses.... 5,067 5,547 5,475 5,203 5,234
Restructuring charges.................. 7,572 (264)
------- ------- ------- ------- -------
Total.......................... 71,766 89,317 82,918 73,064 68,787
------- ------- ------- ------- -------
Operating Income (Loss).................. (279) (8,424) 3,144 2,904 4,319
Interest Expense......................... (540) (590) (34)
Other, Including Interest Income......... 269 309 66 147 73
------- ------- ------- ------- -------
Earnings (Loss) Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle................... (550) (8,705) 3,176 3,051 4,392
Provision (Benefit) for Income Taxes..... (135) (3,343) 1,101 937 1,470
------- ------- ------- ------- -------
Net Earnings (Loss) Before Cumulative
Effect of Change in Accounting
Principle.............................. (415) (5,362) 2,075 2,114 2,922
Cumulative Effect of Change in Accounting
for Income Taxes....................... 722
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Net Earnings (Loss)...................... $ (415) $(5,362) $ 2,075 $ 2,836 $ 2,922
======= ======= ======= ======= =======
Cash Dividends........................... $ 132 $ 462 $ 1,056 $ 1,051 $ 916
======= ======= ======= ======= =======
Per Share Data:
Net earnings (loss) before cumulative
effect of change in accounting
principle........................... $ (.09) $ (1.22) $ .47 $ .48 $ .67
Net earnings (loss).................... (.09) (1.22) .47 .64 .67
Cash dividends......................... .03 .105 .24 .24 .21
At Year End:
Total assets........................... $37,968 $44,387 $49,159 $43,092 $40,987
Long-term debt......................... 3,489 8,705 5,840
Stockholders' equity................... 26,521 26,988 33,155 31,783 30,777
Number of restaurants.................. 65 64 72 66 64
</TABLE>
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated: (i) items in the
consolidated statements of operations as a percentage of sales; (ii) average
restaurant sales; and (iii) the number of restaurants open at the end of each
period.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
YEARS ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Sales............................................................ 100.0% 100.0% 100.0%
------ ------ ------
Costs and Expenses:
Food Costs..................................................... 27.5 28.3 27.1
Restaurant labor and related expenses.......................... 37.2 37.6 35.8
Restaurant operating expenses.................................. 23.1 22.7 22.2
Depreciation and amortization.................................. 5.5 5.6 5.1
General and administrative expenses............................ 7.1 6.8 6.4
Restructuring charges.......................................... 9.4 (0.3)
------ ------ ------
Total.................................................. 100.4 110.4 96.3
------ ------ ------
Operating Income (Loss).......................................... (0.4) (10.4) 3.7
Interest Expense................................................. (0.8) (0.7)
Other, Including Interest Income................................. 0.4 0.3
------ ------ ------
Earnings (Loss) Before Income Taxes.............................. (0.8) (10.8) 3.7
Provision (Benefit) for Income Taxes............................. (0.2) (4.2) 1.3
------ ------ ------
Net Earnings (Loss).............................................. (0.6)% (6.6)% 2.4%
====== ====== ======
Average Sales (In Thousands) for Restaurants Open Throughout the
Period......................................................... $1,106 $1,190 $1,219
Number of Restaurants Open at End of Period...................... 65 64 72
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Sales decreased $9,406,000 in fiscal 1996 due to lower same-store sales and
restaurant closings in fiscal 1995.
Same-store sales were down 7.8% in fiscal 1996 compared with a decrease of
11.5% in 1995. As shown in the chart below, comparable-store sales decreases
continued to be significant, but the rate of decrease was less severe in 1996.
COMPARABLE-STORE SALES BY QUARTER
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
1st Quarter...................................... -12.7% - 9.6% +14.3%
2nd Quarter...................................... - 5.3 -11.3 +15.1
3rd Quarter...................................... - 8.2 -11.8 + 9.2
4th Quarter...................................... - 6.5 -11.7 - 6.2
Fiscal Year................................. - 7.8 -11.5 + 7.6
</TABLE>
Stores open all of fiscal 1996 averaged sales of $1,106,000, a decrease of
7.1% from 1995. Fourth quarter average store sales were down 5.6% in fiscal 1996
versus 1995. This trend continued into fiscal 1997, as October 1996 average unit
sales were down 6.6% compared with October 1995. As with same-store sales, the
average sales comparisons are a significant concern despite less severe rates of
decline.
The Company has engaged the marketing consulting firm of Feltenstein
Partners to assist in conducting market research, developing marketing strategy
and tactics, and implementing marketing programs. Market
8
<PAGE> 10
research will be updated in fiscal 1997, and local store marketing programs
tailored to each restaurant will be implemented. Management plans to evaluate
all elements of pricing, atmosphere, quality and service for opportunities to
bolster sales.
The Company closed nine restaurants under a June 1995 restructuring plan
and closed three others in the ordinary course of business in fiscal 1995. The
closed locations contributed $5,430,000 in sales in fiscal 1995. Each closed
unit had been producing well below company average sales per unit. No other
closings are currently planned, but management will continue to evaluate
operating margins and consider closing other locations based on operating
results and cash flow.
The Guadalajara, Mexico restaurant was opened in October 1995, and three
new restaurants were opened in fiscal 1995. These four new restaurants
contributed $1,615,000 more sales in fiscal 1996 than in 1995. No new
restaurants are planned for fiscal 1997, as the Company plans to focus on
improving same-store sales and operating margins at its existing locations
before adding new locations.
Food costs decreased 0.8% of sales for fiscal 1996 compared to the prior
year. Increased costs for some items were more than offset by ingredient
changes, more efficient usage and effective purchasing. Fourth quarter food
costs increased 0.2% of sales in fiscal 1996 versus fiscal 1995.
Labor and related expenses were down 0.4% of sales in 1996 due to lower
benefits costs. Proactive risk management helped the Company reduce its costs
for the Voluntary Employee Injury Benefit (VEIB) Plan (see Note 7 to the
consolidated financial statements) by 0.3% of sales from fiscal 1995 to fiscal
1996. Based on lower than expected claims costs for prior years, the Company
received a $128,000 refund from its previous health insurance provider, which
contributed to a 0.2% of sales decline in employee health insurance expenses for
fiscal 1996.
Despite disappointing restaurant margins, incentive compensation was up
0.1% of sales for fiscal 1996. The Company increased bonus expense by
introducing additional bonus programs for restaurant service and management
personnel to provide increased incentives for excellent service. In fiscal 1996,
the Company absorbed a 2.1% increase in average hourly wages by reducing
overtime worked and achieving a better sales per hour worked ratio. This
management focus on labor cost controls maintained other labor-related costs
about stable despite the effect of lower sales and general wage inflation.
The fiscal 1996 fourth quarter labor and related expenses were 0.3% of
sales lower than in the fourth quarter of fiscal 1995, reflecting continued
emphasis on labor cost control.
The federal minimum wage increased $0.50 per hour effective October 1,
1996, the first day of the Company's fiscal 1997. The Company plans to offset
the labor cost increase from the higher minimum wage with price increases. An
increasingly tight labor market will also contribute to general wage inflation.
Higher wages will make it difficult for the Company to achieve further
reductions in labor and related costs unless the sales trend improves.
Pancho's prepares a large quantity and variety of fresh food in small
batches throughout the day, and provides buffet-line and table service in each
restaurant. Maintaining a high level of quality service and food preparation
makes it difficult to reduce labor costs in proportion to recent sales declines,
as staffing cannot be reduced below certain levels to maintain Pancho's
standards.
Restaurant operating expenses were up 0.4% in fiscal 1996. The increase was
due mainly to the effect of lower sales on expenses that are fixed or
semi-fixed, such as rent and utilities.
The fourth quarter of fiscal 1996 reflected an increase in restaurant
operating costs of 2.2% of sales compared with the fourth quarter of 1995.
Fourth quarter advertising costs increased 1.2% of sales due to increased
spending on broadcast, newspaper and billboard media. Occupancy costs were up
0.8% of sales versus the prior year quarter due primarily to lower sales
compared with generally fixed costs.
Depreciation and amortization decreased $563,000 in fiscal year 1996, down
0.1% of sales, due to the asset write-downs taken in the June 1995
restructuring. Fourth quarter depreciation expense was up 0.1% of sales in
fiscal 1996 due to lower sales despite being $49,000 lower.
9
<PAGE> 11
General and administrative expenses rose 0.3% of sales for the year and
fourth quarter in fiscal 1996 versus 1995. The percentage increase resulted from
the effect of lower sales despite cost savings from staff reductions and other
cost cutting measures of $480,000 and $40,000 for the year and quarter,
respectively.
No restructuring or asset impairment charges were incurred in fiscal 1996.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for Assets to be
Disposed Of", the Company performed a review of its restaurants and of
long-lived assets held for sale or future use to evaluate the realizability of
the assets' carrying values. Based on current and expected future cash flows,
Management believes that the carrying costs of the Company's long-lived assets
will be realized.
The Company recorded a charge of $7.6 million during the third quarter of
1995 for asset impairments and store closings. The asset impairments primarily
resulted from the closing of 9 restaurants in June 1995, the write-down of asset
values in 7 restaurants that were kept in operation despite low sales, and the
write-down of the Company's restaurant in Guadalajara, Mexico. One of the
impaired locations, in Tulsa, Oklahoma, was subsequently closed, with no
additional impairment charges incurred. The 1995 charge also included asset
impairments on new and used equipment inventory and property held for
disposition, as well as exit and carrying costs for the closed locations.
Of the $948,000 charged under the restructuring for carrying costs and exit
costs related to closed locations, $173,000 remained in restructuring reserves,
included in current liabilities, at September 30, 1996. The Company has
continuing lease obligations and carrying costs through 2003 which are charged
against that reserve on two closed locations which the Company is seeking to
sub-lease. The Company also has sub-leased out one other closed location, but
may be liable for additional lease payments or damages if the sub-lessee is
unable to meet its obligations. The Company expects the reserve to be fully
depleted in fiscal 1997. If the Company is unable to sub-lease the remaining
locations or incurs additional liabilities related to the location it has
already sub-leased, additional expenses may be recognized in fiscal 1997 or
later for carrying or exit costs for closed locations.
The Company realized a net gain on sale of assets of $141,000 in fiscal
1996, and Management believes that long-lived assets carried for sale or future
use are carried at the lower of cost or net realizable value. If conditions
change and future circumstances indicate that long-lived assets are carried at
more than future cash flows or fair market value, then additional asset
impairment charges would be necessary.
In fiscal 1996, interest expense was $50,000 lower than in 1995 due to a
decreasing debt balance, partially offset by slightly higher interest rates and
no capitalization of interest in fiscal 1996. Outstanding debt has decreased
from a quarterly high of $10,310,000 on June 30, 1995 to $3,640,000 on September
30, 1996. As outstanding debt decreased, interest expense steadily declined,
from $191,000 in the fourth quarter of fiscal 1995 to $84,000 in the fourth
quarter of fiscal 1996. Interest expense is expected to continue falling in
fiscal 1997 as debt is reduced.
Due to the factors discussed above, the Company reported net losses of
$415,000 and $5,362,000 for fiscal years 1996 and 1995, respectively. The 1996
loss resulted from lower sales that could not be fully-offset with the benefits
of cost control measures. The Company's future earnings depend largely on
improving sales and maintaining tight cost controls in the highly-competitive
restaurant industry.
SFAS No. 123, "Accounting for Stock-Based Compensation", will be effective
for the Company for the fiscal year beginning October 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share.
10
<PAGE> 12
Provision for Income Taxes
The effective tax rate in fiscal 1996 was a benefit of 24.6% of the total
loss before income taxes, compared to a benefit of 38.4% for fiscal 1995 and a
provision of 34.7% for fiscal 1994. The rate was relatively low for fiscal 1996
due to the net operating loss for the Guadalajara, Mexico restaurant which
opened in fiscal 1996, and for which no tax benefit was recognized. As detailed
in Note 5 to the consolidated financial statements, the effective tax rates
differed from the base federal rate of 34% each year due primarily to the
effects of state income taxes, federal employer tax credits and the results of
foreign operations.
Significant current and deferred income tax benefits were recognized in
1995, resulting primarily from the restructuring charges and operating losses.
Income taxes receivable and deferred tax assets were recorded for these benefits
based on tax loss carry back opportunities and the Company's long history of and
expected future taxable income. No tax benefits were recognized for the write
down of assets in Mexico. The entire income tax receivable balance of $1.2
million at September 30, 1995 was received by March 31, 1996.
Additional current and deferred income tax benefits were recognized for
1996, resulting primarily from operating losses. The income tax receivable of
$186,000 at September 30, 1996 is expected to be received in March 1997.
Net deferred tax assets decreased $186,000, to $3,017,000 from September
30, 1995 to September 30, 1996. The decrease is due mainly to the reversal of
tax-book differences for fixed assets and the realization of tax benefits as
restructuring reserves were actually paid. These decreases were partially offset
by the tax loss, which increased the federal alternative minimum tax
carryforwards and the state net operating loss (NOL) carryforwards. The
valuation allowance was increased to $43,000 from $25,000 based on the
expectation that not all the state NOL carryforwards will be realized before
they expire. Note 5 to the consolidated financial statements identifies the
components of the deferred tax assets and liabilities.
The deferred federal tax assets totaled $2,514,000 at September 30, 1996.
Of that amount $321,000 were employer tax credits which expire in fiscal years
2009 through 2011. No other federal tax assets have expiration dates.
State deferred tax assets were a net $503,000 after subtracting the
valuation allowance at September 30, 1996. State NOL carryforwards which expire
on the fiscal yearend for 2000 or 2001 represent $209,000 of those deferred tax
assets, net of the related valuation allowances. Another $143,000 net deferred
tax assets based on state NOL carryforwards expire in fiscal years 2003 through
2011. No other state deferred tax assets have expiration dates.
The Company believes it will realize substantial benefits from the use of
federal employer tax credits and state NOL carryforwards to reduce future
federal and state income tax liabilities. Full realization of these and other
deferred tax assets is dependent on the Company achieving certain levels of
taxable income in the future. If the Company's results from operations continue
to decline, or fail to timely achieve levels necessary to use the employer tax
credits or the state NOL carryforwards, they could expire before use, resulting
in charges against income. The Company has established a valuation allowance to
offset the amount of deferred tax assets it believes are likely to not be
realized.
Liquidity and Capital Resources
The Company's current ratio was 0.4 to 1 at September 30, 1996 compared to
0.8 to 1 at fiscal yearend 1995. The current ratio decreased mainly because
about $1.2 million received for income taxes receivable plus about $1 million in
cash at September 30, 1995 was applied primarily to reduce long-term debt. Cash
equivalents decreased $1,054,000 during the year to a balance of $145,000 at
yearend as all available cash was applied to reducing outstanding long-term
debt.
The current ratio had increased 0.1 during fiscal 1995. Cash equivalents
decreased $462,000 in fiscal 1995, as capital spending exceeded cash provided by
operating and financing activities.
Operating cash flow increased $1,193,000 to $4,657,000 in fiscal 1996, due
mainly to receipt of the income taxes receivable. The net loss of $415,000
included non-cash charges of $3,949,000 for depreciation
11
<PAGE> 13
and amortization and a $186,000 provision for deferred income taxes. The receipt
of the 1995 income tax receivable led to a net reduction in income taxes
receivable of $1,041,000.
Operating activities provided net cash of $3,464,000 in fiscal 1995. The
1995 loss included a pre-tax, non-cash restructuring charge of $7,572,000 for
restaurant closings and impairments. The 1995 loss also included non-cash income
tax benefits of $3,343,000 included in income taxes receivable and deferred tax
assets. Operating cash flow decreased in fiscal 1995 compared with fiscal 1994
due largely to the decline in profitability. Fiscal 1994 operating cash flow had
benefited from a $1.6 million decrease in inventory due to the outsourcing of
grocery distribution services.
Investing activities used a net of $411,000 in fiscal 1996 as capital
additions to remodel two existing restaurants, install computer point-of-sale
systems in three restaurants and provide ordinary replacements were partially
recouped by $278,000 in proceeds from the sale of fixed assets. The Company
opened its Guadalajara restaurant in October 1995. No other new restaurants were
opened in fiscal 1996 and no new units are planned for fiscal 1997, as
management intends to focus on improving sales and profitability and reducing
debt. Capital expenditures to remodel existing restaurants and install
restaurant computer point-of-sale systems will continue within the constraints
of the line of credit and available operating cash flow.
Investing activities used $6.4 million in fiscal 1995 versus $12.0 million
in 1994. Cash invested in property additions was $7 million and $13 million in
1995 and 1994, respectively. Cash was used to build new restaurants, remodel
existing restaurants, install restaurant computer point-of-sale systems and pay
accrued construction costs from the prior year. Three new Pancho's Mexican
Buffet restaurants, in Pasadena, Baytown and Galveston, Texas, were opened in
1995 and two former Emiliano's Buffet Mexicano restaurants were reopened as
Pancho's Mexican Buffets. Nine new restaurants were opened in 1994.
In 1995, the Company sold a restaurant site in Colorado for $290,000, and
sold a closed restaurant building to the landowner for $175,000 and termination
of the ground lease. In 1994, the Company sold a restaurant site purchased for
expansion in Florida, and a closed restaurant location in Colorado was subleased
and the related leasehold improvements and some equipment were sold for
$200,000.
Financing activities used $5,291,000 in fiscal 1996, mainly for net debt
reduction of $5,226,000 and dividends paid of $132,000. In 1995, financing
activities provided net cash of $2,478,000, based primarily on net long-term
borrowings of $2,865,000 less the payment of cash dividends of $725,000. Net
cash provided by financing activities totaled $5.3 million in 1994. Significant
financing activities included $5.8 million in net long-term borrowings under a
bank credit line and $1.1 million used to pay dividends in 1994.
The Company's revolving credit and term loan agreement (Loan Agreement)
with a bank has reduced the revolving credit line limit from $12 million at
December 31, 1995 to $6,482,750 at September 30, 1996. The Company had
$3,032,750 of credit available under the line at September 30, 1996.
In December 1996, the Loan Agreement was amended to reduce the revolving
credit line to $5.0 million effective December 16, 1996 and extend its
termination date to October 31, 1997. The amendment reduces the credit limit at
the end of each subsequent quarter by $500,000. It further reduces the limit by
75% of the Company's excess cash flow (as defined in the agreement) for each
fiscal quarter on the last day of the first month after each quarter end. Cash
capital expenditures are limited by the amendment to $500,000 each of the first
three quarters and a total of $1,900,000 in fiscal 1997. Cash dividend payments
are limited to $150,000 per fiscal year.
The Loan Agreement includes various financial covenants. Due to the net
losses incurred by the Company in September 1996 and the quarter ended December
31, 1995, and in each of the first three quarters of fiscal 1995, the Company
violated certain of those covenants. The bank has subsequently granted permanent
waivers for each of those past covenant violations. However, to obtain the
waivers, the Company agreed to collateralize the loan with substantially all of
its real property.
Management is taking steps to ensure that the Company will be able to
comply with all of the Loan Agreement covenants in the future. However, if the
bank refused to waive a future covenant violation, the bank would be required
under the Loan Agreement to give the Company 15 days written notice of the
12
<PAGE> 14
violation, after which time the Company would be in default. At the bank's
option, it could then declare the loan principal and all accrued interest
current and payable and/or refuse to make additional advances on the credit
line. The Company could then be forced to seek alternative sources of financing.
The Company plans to finance its fiscal 1997 operations and capital
additions primarily with cash flow from operations and the line of credit. The
Company may also use operating leases to acquire computer point-of-sale systems
for some or all of the 23 restaurants which have not yet been updated to the
computer system.
On October 18, 1996, the Company's board of directors declared a $.015 per
common share quarterly cash dividend, to be paid December 10, 1996 to holders of
record on November 26, 1996. During fiscal 1995, the dividend was reduced from a
quarterly rate of $.06 per share to $.015 per share semi-annually due to the
Company's recent financial performance. Future cash dividends will depend on
earnings, financial position, capital requirements and other relevant factors.
Fiscal 1995 Compared To Fiscal 1994
Sales decreased $5,169,000 (6.0%) for fiscal 1995 versus 1994 due to lower
comparable store sales, restaurant closings and outsourcing the Company's
grocery distribution operation in September 1994. In response to declining
sales, a corporate restructuring in June 1995 closed nine restaurants and wrote
down assets at eight others, and new unit growth was cut from nine in 1994 to 3
in 1995.
Comparable store sales (sales for restaurants open all of fiscal 1995 and
1994) were down 11.5% in 1995, compared to an increase of 7.6% in 1994. Fiscal
1994 comparable store sales reflect record increases due to the addition of
soup/salad and dessert bars, effective television advertising and a December
1993 price increase. By September 30, 1995, the Company had reported 15
consecutive months of comparable store sales declines versus prior year months,
which followed 13 consecutive months of increases through June 1994.
In June 1995, following declining sales and net operating losses in the
first two quarters of 1995, the Company adopted a restructuring plan in an
effort to return to profitability. The plan included closing nine
underperforming restaurants and writing down assets at seven restaurants
operating at lower sales volumes and at the Company's constructed but
then-unopened restaurant in Guadalajara, Mexico.
The nine restaurants closed in the June 1995 restructuring had sales of
$4,652,000 in 1995 and $7,512,000 in 1994, a decrease of $2,860,000. Those
closed locations had average sales of $835,000 in 1994, well below the Company
averages for restaurants open throughout the year of $1,190,000 and $1,219,000
in 1995 and 1994, respectively.
Two restaurants were closed in the last quarter of fiscal 1994 and two were
closed in the first quarter of fiscal 1995, in the regular course of eliminating
under-performing locations. Those closings represent a 1995 sales decrease of
$2,520,000 versus 1994. One location that was written down in the restructuring
was permanently closed at the end of business on September 30, 1995.
The 12 locations closed in 1995 totaled $5,430,000 in sales in 1995. Those
units averaged $806,000 in sales in 1994, and had low or negative earnings and
cash flow.
The 12 restaurants opened in fiscal years 1995 and 1994 contributed $9.1
million of revenue in 1995, and a price increase in December 1993 added about
$839,000 to sales in 1995.
Pancho's declining sales squeezed operating margins and cash flows, putting
some Pancho's locations below acceptable levels and leading to the restructuring
and restaurant closings. Even after these closings reduced low volume locations,
declining same store and average store sales continued to be a major concern.
Fourth quarter average store sales in restaurants open the entire quarter were
down 4.1%, to $297,000 in 1995 versus $309,000 in 1994.
Food cost increased 1.2% of sales in 1995 due to recipe and food offering
changes combined with higher prices for chicken, cheddar cheese, produce,
shortening and paper. Food offerings, preparation methods and recipes were
changed in the fiscal third quarter to improve quality and preserve variety
while lowering product cost. The benefits of these changes and seasonally lower
produce prices were realized in the fourth quarter of
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<PAGE> 15
fiscal 1995, as food cost decreased 1.2% of sales from the third quarter of
1995, and was up only 0.3% versus fourth quarter 1994.
Restaurant labor and related expenses increased 1.8% of sales in 1995. An
increase of 3.2% in average hourly pay rates caused an increase in labor cost of
0.8% of sales. As significant, sharply lower comparable-store sales raised labor
costs as a percentage of sales in established restaurants, and typically higher
labor costs in new restaurants contributed to the increase.
Lower sales caused restaurant operating expenses to increase 0.5% of sales
in 1995, despite spending $758,000 less. Advertising expenditures were reduced
by $597,000 when it was estimated that the benefits of additional advertising
would not exceed the cost. Fourth quarter 1995 operating costs were down 1.9% of
sales versus prior year because advertising costs decreased 1.3% of sales and
1994 included a $250,000 (.3% of sales) charge to close the Company's internal
distribution operation.
The asset write downs and restaurant closings under the restructuring
helped reduce fourth quarter 1995 depreciation and amortization $123,000
compared with fourth quarter 1994 and $112,000 compared with the third quarter
of 1995. For the year, depreciation and amortization was up $92,000 due to the
opening of three new restaurants in fiscal 1995 and nine new units in fiscal
1994, and remodeling and equipment upgrades throughout both years.
General and administrative expenses increased 0.4% of sales in 1995 due to
lower sales and a 0.1% of sales increase in dollars spent.
Under the restructuring plan, a pre-tax restructuring charge of $7,572,000
was recorded for the closing of nine restaurants and the impairment of eight
others, including the one in Guadalajara, Mexico. The charge included $6,624,000
to write down leasehold improvements and equipment and $948,000 for remaining
lease costs and other exit costs associated with the restaurant closings. The
charge for impairments was determined in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." See Note 10 to consolidated financial statements for more
information.
During the first quarter of fiscal 1994, the Company reported a pre-tax
benefit of $264,000 related to a reevaluation of previously established
restructuring reserves. The reevaluation resulted from the sale of a restaurant
site purchased for expansion in 1989 in Jacksonville, Florida and the sublease
of a closed restaurant location in Littleton, Colorado.
Interest expense increased $556,000 in 1995 due to increased debt, higher
interest rates and less interest capitalization due to reduced construction
activity.
Due to restructuring charges, weak sales and other factors discussed above,
the Company reported a net loss of $5,362,000 for 1995, compared to 1994 net
earnings of $2,075,000. These results were far below the expectations of
management and the investment community, including those viewpoints expressed on
Page 6 of the Company's fiscal 1994 annual report under the caption "What Wall
Street Says About Pancho's Mexican Buffet"(1). Management believes that
appropriate actions are being taken to return the Company to consistent
profitability. However, the restaurant industry is intensely competitive, and
the Company's future earnings will largely depend on its ability to generate a
sustained improvement in sales.
Seasonality
The Company's business is seasonal. Traditionally, sales are higher in
summer months, when students are not attending school.
- ---------------
(1) Pursuant to Item 601(b)(13) of Regulation S-K promulgated by the Securities
and Exchange Commission (SEC), the section of the Company's 1994 Annual
Report on page 6 under the caption "What Wall Street Says About Pancho's
Mexican Buffet" is not deemed to be filed with the SEC for purposes of the
Securities Exchange Act nor shall such section of the 1994 Annual Report be
deemed to be incorporated by reference in any past or future filing by the
Company under the Securities Exchange Act or the Securities Act of 1933, as
amended.
14
<PAGE> 16
Impact of Inflation
In the restaurant business, food, labor, and labor related costs are the
major cost factors that effect profits. Many of the Company's employees are paid
wages related to the statutory minimum wage and any increase in the minimum wage
would increase the Company's cost. Also, most of the Company's leases require
the payment of percentage rentals based on revenues, which along with taxes,
repairs and maintenance, utilities and insurance are subject to inflation. The
Company expects to be able to offset the effects of inflation through occasional
price increases and savings due to volume purchasing.
The federal minimum wage increased $.50 per hour effective October 1, 1996.
An additional increase of $.40 per hour is scheduled to be effective September
1, 1997. The Company plans to offset the labor cost increases due to higher
minimum wage levels with price increases.
Other Uncertainties and Trends
In recent years, there has been accelerated development of value-priced
menus and "all-you-can-eat" restaurant offerings. Pancho's Mexican Buffet has
operated as a value-priced, "all-you-can-eat" concept for over 30 years and
expects to compete effectively.
Mexico is continuing to suffer economic difficulties related to the
December 1994 devaluation of the Mexican peso. Management believes that the
economic difficulties in Mexico will have a long-term negative impact on the
Company's Guadalajara restaurant operations, and, accordingly, an impairment
charge of $812,000 was recorded in the quarter ended June 30, 1995. See Note 10
to the consolidated financial statements.
The long-term impact of this economic crisis on the Company's restaurant
operations in Mexico is difficult to estimate. Since opening in late October
1995, sales for the Company's Guadalajara restaurant have been lower than
expected, resulting in a net operating loss and negative cash flow for that
location's first eleven months of operation. Management is currently evaluating
methods to improve sales and reduce costs.
The Company has invested about $2.1 million in its Mexican subsidiaries and
operations, and expects that some additional investment may be required. If the
restaurant performs below projected levels, additional operating, impairment or
restaurant closing losses may be recognized in future periods. Future Company
restaurant development in Mexico depends on the success of the Guadalajara
restaurant.
In accordance with SFAS No. 52, "Foreign Currency Translation," the net
loss from foreign currency exchange rate changes for the investment in Mexican
operations is shown as a debit to Stockholders' Equity. If the Mexican
operations were disposed of or abandoned, then the cumulative foreign currency
translation adjustment would result in a charge to earnings. The debit balance
in this account decreased $13,000 in fiscal 1996, to $436,000 at September 30,
1996, based on the relatively stable peso-dollar exchange rate during the year.
The peso-to-dollar exchange rate further declined, from .1327 on September 30,
1996 to .1255 on October 31, 1996, spurring an increase in the Foreign Currency
translation adjustment debit balance to $459,000 on October 31, 1996. The debit
balance in this account had increased $419,000 in fiscal 1995 due to the effects
of the devaluation of the Mexican peso in relation to the U.S. dollar.
An economy with cumulative inflation over a three-year period of about 100%
or more is deemed to be highly-inflationary for accounting purposes as defined
by SFAS No. 52. The Mexican economy is expected to be deemed highly-inflationary
in 1997 based on the SFAS No. 52 guidelines. Under SFAS No. 52, future gains and
losses from foreign currency exchange rate changes in a highly-inflationary
economy would flow through the income statement.
Special Note Regarding Forward-Looking Information
The foregoing section contains various forward-looking statements which
represent the Company's expectations or beliefs concerning future events,
including, but not limited to the following: statements regarding unit growth,
future capital expenditures, future borrowings, future cash flow and future
results of operations. The Company warns that many factors could, individually
or in aggregate, cause actual results to
15
<PAGE> 17
differ materially from those included in the forward-looking statements,
including, without limitation, the following: consumer spending trends and
habits; increased competition in the restaurant industry; weather conditions;
and laws and regulations affecting labor and employee benefit costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto required by
this item are listed and set forth herein beginning on page 21.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of Registrant
Information as to the names, ages, positions and offices with the Company,
terms of office, periods of service, business experience during the past five
years and other directorships held by each director or person nominated to
become a director of the Company is set forth under the caption THE BOARD OF
DIRECTORS appearing on page 2 of the Company's Proxy Statement dated December
18, 1996, and is incorporated herein by reference.
(b) Executive Officers of the Registrant
At the meeting of the Board of Directors of the Registrant, which
immediately follows the annual meeting of stockholders, the Board of Directors
elects officers for the Registrant. Such officers hold office until death,
resignation, removal from office or until their successors are chosen and
qualified. The names and ages of all executive officers of the Registrant, as
well as all persons chosen to become executive officers, together with the
nature of any family relationships between them, all positions and offices with
the Registrant held by each person named and the period during which each person
named has served as such officer is included in Part I under Executive Officers
of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning remuneration received by the Company's directors and
executive officers, stock options and transactions with management is set forth
under the captions EXECUTIVE COMPENSATION, COMPENSATION OF DIRECTORS, AGGREGATED
OPTION EXERCISES IN 1996 AND 1996 YEAR-END OPTION VALUES, REPORT OF THE
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS and TRANSACTIONS WITH
MANAGEMENT AND OTHERS appearing on pages 5 through 10 of the Company's Proxy
Statement dated December 18, 1996, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information as to the security ownership of certain beneficial owners of
the Company and by each of its directors and nominees for directors and officers
as of December 5, 1996, and the amount of such shares with respect to which
certain of the directors or nominees and officers have the right to acquire
beneficial ownership, is set forth under the caption SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF DECEMBER 5, 1996, appearing on
page 3 of the Company's Proxy Statement dated December 18, 1995, and is
incorporated herein by reference.
16
<PAGE> 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning transactions with management and others and certain
business relationships is set forth under the caption TRANSACTIONS WITH
MANAGEMENT AND OTHERS appearing on page 10 of the Company's Proxy Statement
dated December 18, 1996, and is incorporated herein by reference.
17
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Financial Statement
Schedules -- see Index to Consolidated Financial Statements and
Schedules on page 21.
(a) 3. Exhibits Required by Item 601 of Regulation S-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------
<S> <C> <C>
2 -- Not applicable
3(a) -- Certificate of Incorporation of Pancho's Mexican Buffet, Inc.(2)
3(b) -- Certificates of Amendment of Certificate of Incorporation(3)
3(c) -- Certificate of Amendment of Certificate of Incorporation(5)
3(d) -- Certificate of Amendment of Certificate of Incorporation(8)
3(e) -- Bylaws of Pancho's Mexican Buffet, Inc. as amended through October 5,
1990(10)
3(f) -- Agreement and Plan of Merger dated December 31, 1968(1)
3(g) -- Certificate of Amendment of Certificate of Incorporation, dated January
25, 1995(15)
3(h) -- Restated Certificate of Incorporation, as revised January 25, 1995(15)
4(a) -- Certificate of Incorporation and Bylaws of Registrant, as amended. See
Exhibit 3 items above.
4(b) -- Rights Agreement dated as of January 30, 1996, between Pancho's Mexican
Buffet, Inc. and KeyCorp Shareholder Services, Inc. with Exhibit A (form
of Certificate of Designation, Preferences and Rights of Series A
Preferred Stock), Exhibit B (form of Right Certificate), and Exhibit C
(Summary of Rights to Purchase Series A Preferred Stock) attached(6)
9 -- Not applicable
10(a) -- 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican
Buffet, Inc.(4)
10(b) -- Amendment No. 1 and 2 to 1982 Stock Option Plan for Non-Employee
Directors of Pancho's Mexican Buffet, Inc.(9)
10(c) -- 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(4)
10(d) -- Amendment No. 1, 2 and 3 to Pancho's Mexican Buffet, Inc. 1982 Incentive
Stock Option Plan(9)
10(e) -- Pancho's Mexican Buffet, Inc. Employee Stock Purchase Plan(4)
10(i) -- Memo re: Officers Bonus Plan approved by Board of Directors of Pancho's
Mexican Buffet, Inc. on February 28, 1986(7)
10(j) -- Note, security agreement and investment letter -- re: sale of authorized
but unissued Common Stock of the Registrant to four executive officers in
1992(15)
10(k) -- Employment Contracts between the Registrant and four executive officers
dated May 23, 1986 and March 25, 1994(15)
10(l) -- Pancho's Mexican Buffet, Inc. Cafeteria Plan(9)
10(m) -- Amendment No. 4 to 1982 Incentive Stock Option Plan of Pancho's Mexican
Buffet, Inc.(11)
10(n) -- Amendment No. 3 to 1982 Stock Option Plan for Non-Employee Directors of
Pancho's Mexican Buffet, Inc.(11)
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------
<S> <C> <C>
10(o) -- 1992 Stock Option Plan of Pancho's Mexican Buffet, Inc.(12)
10(p) -- Revolving Credit and Term Loan Agreement dated February 16, 1994, between
PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(13)
10(q) -- First Amendment to Revolving Credit and Term Loan Agreement dated
February 9, 1995, between PMB Enterprises West, Inc. and First Interstate
Bank of Texas, N.A.(14)
10(r) -- Second Amendment to Revolving Credit and Term Loan Agreement dated May 9,
1995, between PMB Enterprises West, Inc. and First Interstate Bank of
Texas, N.A.(14)
10(s) -- Third Amendment to Revolving Credit and Term Loan Agreement dated
September 29, 1995(15)
10(t) -- Employment Contract between the Registrant and one executive officer,
dated September 29, 1995(15)
10(u) -- Fourth Amendment to Revolving Credit and Term Loan Agreement dated
February 16, 1996(16)
10(v) -- Fifth Amendment to Revolving Credit and Term Loan Agreement dated June
28, 1996(17)
10(w) -- Sixth Amendment to Revolving Credit and Term Loan Agreement dated
December 16, 1996 -- filed herewith
11 -- Not required -- Explanation of earnings per share computation is
contained in Notes to Consolidated Financial Statements.
12 -- Not applicable
13 -- Not applicable
16 -- Not applicable
18 -- Not applicable
21 -- Subsidiaries of the registrant -- filed herewith
22 -- Not applicable
23 -- Consent of Independent Public Accountants -- filed herewith
24 -- Not applicable
27 -- Financial Data Schedule -- filed herewith
28 -- Not applicable
</TABLE>
- ---------------
<TABLE>
<C> <S>
(1) Filed with the Commission as an Exhibit to Form S-1 Registration Statement No.
2-32378 -- such Exhibits are incorporated herein by reference.
(2) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K as
amended on Form 8 for the year ended September 30, 1981 -- such Exhibits are
incorporated herein by reference.
(3) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1982 -- such Exhibit is incorporated herein by reference.
(4) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1983 -- such Exhibits are incorporated herein by
reference.
(5) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1984 -- such Exhibits are incorporated herein by
reference.
(6) Filed with the Commission as an Exhibit to Form 8-A Registration Statement on February
21, 1996 -- such Exhibit is incorporated herein by reference.
</TABLE>
19
<PAGE> 21
<TABLE>
<C> <S>
(7) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1986 -- such Exhibits are incorporated herein by
reference.
(8) Filed with the Commission as an Exhibit to Form S-2 Registration Statement No. 33-14484
on May 22, 1987 -- such Exhibit is incorporated herein by reference.
(9) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1988 -- such Exhibits are incorporated herein by
reference.
(10) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1990 -- such Exhibits are incorporated herein by
reference.
(11) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1991 -- such Exhibits are incorporated herein by
reference.
(12) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1993 -- such Exhibits are incorporated herein by
reference.
(13) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31,
1995 -- such Exhibits are incorporated herein by reference.
(14) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30,
1995 -- such Exhibits are incorporated herein by reference.
(15) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1995 -- such Exhibits are incorporated herein by
reference.
(16) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31,
1996 -- such Exhibits are incorporated herein by reference.
(17) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30,
1996 -- such Exhibits are incorporated herein by reference.
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statement on Form S-8
No. 2-86238 (filed August 31, 1983):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
20
<PAGE> 22
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Financial Statements:
Consolidated Balance Sheets......................................... F-1
Consolidated Statements of Operations............................... F-2
Consolidated Statements of Stockholders' Equity..................... F-3
Consolidated Statements of Cash Flows............................... F-4
Notes to Consolidated Financial Statements.......................... F-5
Independent Auditors' Report.......................................... F-14
</TABLE>
All schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or notes thereto.
21
<PAGE> 23
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................... $ 145,000 $ 1,199,000
Accounts and notes receivable -- current portion............... 254,000 486,000
Income taxes receivable........................................ 186,000 1,227,000
Inventories.................................................... 640,000 907,000
Prepaid expenses............................................... 180,000 267,000
Deferred income taxes.......................................... 206,000 294,000
----------- -----------
Total current assets................................... 1,611,000 4,380,000
----------- -----------
Property, Plant and Equipment:
Land........................................................... 3,446,000 3,446,000
Buildings...................................................... 10,561,000 10,346,000
Leasehold improvements......................................... 22,532,000 22,465,000
Equipment and furniture........................................ 28,579,000 29,612,000
Construction in progress....................................... 7,000 517,000
----------- -----------
Total.................................................. 65,125,000 66,386,000
Less accumulated depreciation and amortization................. (32,359,000) (30,353,000)
----------- -----------
Property, plant and equipment -- net................... 32,766,000 36,033,000
----------- -----------
Other Assets:
Deferred income taxes.......................................... 2,811,000 2,909,000
Other, including noncurrent portion of receivables............. 780,000 1,065,000
----------- -----------
Total other assets..................................... 3,591,000 3,974,000
----------- -----------
Total.................................................. $ 37,968,000 $44,387,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................... $ 1,273,000 $ 1,209,000
Accrued wages and bonuses...................................... 1,485,000 2,141,000
Other current liabilities...................................... 1,398,000 2,120,000
----------- -----------
Total current liabilities.............................. 4,156,000 5,470,000
----------- -----------
Other Liabilities:
Long-term debt................................................. 3,489,000 8,705,000
Accrued insurance costs........................................ 3,802,000 3,031,000
Other.......................................................... 193,000
----------- -----------
Total other liabilities................................ 7,291,000 11,929,000
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $10 par value (Authorized 500,000 shares, none
issued.)
Common stock, $.10 par value (Authorized 20,000,000 shares.
Issued and outstanding, 4,397,559 shares.).................. 440,000 440,000
Additional paid-in capital..................................... 18,633,000 18,633,000
Retained earnings.............................................. 8,347,000 8,894,000
Cumulative foreign currency translation adjustment............. (436,000) (449,000)
Stock notes receivable......................................... (463,000) (530,000)
----------- -----------
Stockholders' equity................................... 26,521,000 26,988,000
----------- -----------
Total.................................................. $ 37,968,000 $44,387,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-1
<PAGE> 24
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Sales................................................... $71,487,000 $80,893,000 $86,062,000
----------- ----------- -----------
Costs and Expenses:
Food costs............................................ 19,681,000 22,910,000 23,347,000
Restaurant labor and related expenses................. 26,561,000 30,400,000 30,806,000
Restaurant operating expenses......................... 16,508,000 18,376,000 19,134,000
Depreciation and amortization......................... 3,949,000 4,512,000 4,420,000
General and administrative expenses................... 5,067,000 5,547,000 5,475,000
Restructuring charges................................. 7,572,000 (264,000)
----------- ----------- -----------
Total......................................... 71,766,000 89,317,000 82,918,000
----------- ----------- -----------
Operating Income (Loss)................................. (279,000) (8,424,000) 3,144,000
Interest Expense........................................ (540,000) (590,000) (34,000)
Other, Including Interest Income........................ 269,000 309,000 66,000
----------- ----------- -----------
Earnings (Loss) Before Income Taxes..................... (550,000) (8,705,000) 3,176,000
Provision (Benefit) for Income Taxes.................... (135,000) (3,343,000) 1,101,000
----------- ----------- -----------
Net Earnings (Loss)..................................... $ (415,000) $(5,362,000) $ 2,075,000
=========== =========== ===========
Net earnings (Loss) per share........................... $ (.09) $ (1.22) $ .47
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 25
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TREASURY
COMMON STOCK ADDITIONAL CURRENCY STOCK
----------------------- PAID-IN RETAINED TRANSLATION ----------
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES
---------- --------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993............. 5,512,841 $ 551,000 $25,911,000 $13,699,000 1,147,182
Exercise of stock options.......... 32,350 4,000 283,000
Income tax benefit from exercise of
stock options.................... 23,000
Net earnings....................... 2,075,000
Dividends, $.24 per share.......... (1,056,000)
Foreign currency translation
adjustment....................... $ (30,000 )
Treasury stock purchases........... 450
Payments received on stock notes...
----------- --------- ----------- ----------- --------- -----------
Balance, September 30, 1994.......... 5,545,191 555,000 26,217,000 14,718,000 (30,000 ) 1,147,632
Treasury stock retired............. (1,147,632) (115,000) (7,584,000) (1,147,632)
Net loss........................... (5,362,000)
Dividends, $.105 per share......... (462,000)
Foreign currency translation
adjustment....................... (419,000 )
Payments received on stock notes...
----------- --------- ----------- ----------- --------- -----------
Balance, September 30, 1995.......... 4,397,559 440,000 18,633,000 8,894,000 (449,000 ) 0
Net loss........................... (415,000)
Dividends, $.03 per share.......... (132,000)
Payments received on stock notes...
Foreign currency translation
adjustment....................... 13,000
----------- --------- ----------- ----------- --------- -----------
Balance, September 30, 1996.......... 4,397,559 $ 440,000 $18,633,000 $ 8,347,000 $(436,000 ) 0
=========== ========= =========== =========== ========= ===========
<CAPTION>
STOCK
NOTES
RECEIVABLE
FROM STOCKHOLDERS'
AMOUNT OFFICERS EQUITY
----------- ---------- -------------
<S> <<C> <C> <C>
Balance, October 1, 1993............. $(7,696,000) $ (682,000) $31,783,000
Exercise of stock options.......... 287,000
Income tax benefit from exercise of
stock options.................... 23,000
Net earnings....................... 2,075,000
Dividends, $.24 per share.......... (1,056,000)
Foreign currency translation
adjustment....................... (30,000)
Treasury stock purchases........... (3,000) (3,000)
Payments received on stock notes... 76,000 76,000
----------- --------- -----------
Balance, September 30, 1994.......... (7,699,000) (606,000) 33,155,000
Treasury stock retired............. 7,699,000 0
Net loss........................... (5,362,000)
Dividends, $.105 per share......... (462,000)
Foreign currency translation
adjustment....................... (419,000)
Payments received on stock notes... 76,000 76,000
----------- --------- -----------
Balance, September 30, 1995.......... 0 (530,000) 26,988,000
Net loss........................... (415,000)
Dividends, $.03 per share.......... (132,000)
Payments received on stock notes... 67,000 67,000
Foreign currency translation
adjustment....................... 13,000
----------- --------- -----------
Balance, September 30, 1996.......... $ 0 $ (463,000) $26,521,000
=========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 26
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss).............................. $ (415,000) $ (5,362,000) $ 2,075,000
------------ ------------ ------------
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Restructuring charges......................... 6,953,000
Depreciation and amortization................. 3,949,000 4,512,000 4,420,000
Provision for deferred income taxes........... 186,000 (2,057,000) 504,000
Amortization of restaurant start-up costs..... 36,000 127,000 102,000
Payment of restaurant start-up costs.......... (70,000) (169,000)
(Gain) Loss on sale of assets................. (141,000) 53,000 21,000
Income tax benefit from exercise of stock
options..................................... 23,000
Minority interest in net loss................. (138,000)
Changes in operating assets and liabilities:
Accounts and notes receivable............... 216,000 166,000 (488,000)
Income taxes receivable..................... 1,041,000 (1,139,000) (88,000)
Inventories, prepaid expenses and other
assets................................... 389,000 978,000 1,997,000
Accounts payable and accrued expenses....... (702,000) (559,000) (1,473,000)
Other....................................... 98,000
------------ ------------ ------------
Total adjustments........................ 5,072,000 8,826,000 4,849,000
------------ ------------ ------------
Net cash provided by operating
activities............................. 4,657,000 3,464,000 6,924,000
Cash Flows From Investing Activities:
Property additions............................... (689,000) (7,050,000) (12,989,000)
Proceeds from sale of assets..................... 278,000 638,000 836,000
Other............................................ 66,000
------------ ------------ ------------
Net cash (used in) investing
activities............................. (411,000) (6,412,000) (12,087,000)
Cash Flows From Financing Activities:
Short-term borrowings, net....................... (10,000) 162,000
Long-term borrowings............................. 28,676,000 43,950,000 17,520,000
Repayments of long-term borrowings............... (33,892,000) (41,085,000) (11,680,000)
Proceeds from increase in minority interest...... 100,000 138,000
Proceeds from exercise of stock options.......... 287,000
Treasury stock purchases......................... (3,000)
Dividends paid................................... (132,000) (725,000) (1,054,000)
Payments received on officer stock notes......... 67,000 76,000 76,000
------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. (5,291,000) 2,478,000 5,284,000
------------ ------------ ------------
Effect of Foreign Exchange Rate Change on Cash..... (9,000) 8,000 (29,000)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... (1,054,000) (462,000) 92,000
Cash and Cash Equivalents at Beginning of Year..... 1,199,000 1,661,000 1,569,000
------------ ------------ ------------
Cash and Cash Equivalents at End of Year........... $ 145,000 $ 1,199,000 $ 1,661,000
============ ============ ============
Supplemental Information:
Income taxes paid and (refunds received), net.... $ (1,348,000) $ 36,000 $ 662,000
Assets sold for notes receivable................. 140,000 160,000
Interest paid, net of capitalized amounts........ 533,000 555,000 39,000
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 27
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Pancho's Mexican Buffet, Inc. and its subsidiaries (the Company). The Company
owns 73% of a Mexican subsidiary formed to develop one or more restaurants in
Mexico. The minority interest in that subsidiary is shown on the consolidated
balance sheets. The minority interest balance has been reduced to zero by the
minority partner's interest in the operating losses of the joint venture. All
material intercompany balances and transactions have been eliminated.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those amounts.
CASH AND CASH EQUIVALENTS
For balance sheet classification and reporting cash flows, the Company
considers all highly liquid investments with maturities of three months or less
when purchased to be cash equivalents.
INVENTORIES
Inventories consist primarily of food and supplies, and are stated at the
lower of cost (first-in, first-out basis) or market.
DEFERRED INCOME TAXES
The Company accounts for and reports income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Applying SFAS 109, deferred tax assets and liabilities are
recognized for temporary differences caused when the tax basis of an asset or
liability differs from that reported in the financial statements, and for
carryforwards for tax credits and operating losses. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax expense or benefit is recognized for the
change in the asset or liability during the year.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided for buildings and equipment on a straight-line
basis over the following estimated service lives:
<TABLE>
<S> <C>
Buildings..................................................... 25 to 30 years
Equipment and furniture....................................... 3 to 10 years
</TABLE>
Leasehold improvements are amortized over the life of the original lease
term, including renewal periods if applicable, or the life of the improvement,
whichever is shorter.
The Company capitalizes interest incurred on debt for major construction
projects and includes the capitalized interest in the asset basis. The Company
capitalized $91,000 and $78,000 out of total interest incurred of $681,000 and
$112,000 in 1995 and 1994, respectively. No interest was capitalized in 1996.
F-5
<PAGE> 28
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in fiscal 1995.
In accordance with SFAS No. 121, the Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset or a group of assets may not be recoverable. The
Company considers a history of operating losses or negative cash flows to be its
main indicators of potential impairment. Assets are generally evaluated for
impairment at the operating unit level. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. An
asset or group of assets is deemed to be impaired if a forecast of undiscounted
future cash flows directly related to the asset(s), including disposal value if
any, is less than the carrying amount(s). If an asset is determined to be
impaired, the loss is measured as the amount by which the carrying amount of the
asset exceeds its fair value. The Company generally estimates fair value based
on expected net fair market value in an arm's length transaction. Considerable
management judgment is necessary to estimate cash flows and expected net fair
market values. Accordingly, it is reasonably possible that actual results could
vary significantly from such estimates.
PREOPENING COSTS
Certain direct and incremental costs related to the commencement of each
restaurant's operations, primarily training-related costs, are capitalized as
preopening costs. Amounts capitalized are amortized using the straight-line
method over 12 months.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are based on the weighted average number of
shares and equivalent shares (including stock options, when dilutive)
outstanding during each period. The weighted average of such shares for the
years ended September 30, 1996, 1995 and 1994 were 4,398,000, 4,398,000, and
4,438,000, respectively.
FOREIGN OPERATIONS AND CURRENCY TRANSLATION
The functional currency of the Company's Mexican operations is the new
peso. Financial statements of the Company's Mexican subsidiaries are translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Results of operations are translated using an average exchange
rate during the period, and assets and liabilities are translated using the year
end exchange rate. The resulting cumulative translation adjustment is shown as a
separate line in stockholders' equity.
STATEMENT OF CASH FLOWS
Cash flows from the Company's Mexican operations are calculated based on
the new peso, in accordance with SFAS No. 95, "Statement of Cash Flows." As a
result, amounts related to assets and liabilities reported on the consolidated
statement of cash flows will not necessarily agree to changes in the
corresponding balances on the consolidated balance sheets. The effect of
exchange rate changes on cash balances held in foreign currencies is reported on
a separate line in the consolidated statement of cash flows, below cash flows
from financing activities.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," will be effective
for the Company for the fiscal year beginning October 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to
F-6
<PAGE> 29
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to apply Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
2. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Accrued taxes other than income taxes....................... $1,094,000 $1,456,000
Restructuring reserves...................................... 173,000 329,000
Other....................................................... 131,000 335,000
---------- ----------
Total............................................. $1,398,000 $2,120,000
========= =========
</TABLE>
3. LONG-TERM DEBT
The Company's revolving credit and term loan agreement (Loan Agreement)
with a bank includes various financial covenants. Due to net losses incurred by
the Company in the month ended September 30, 1996 and the quarter ended December
31, 1995, and each of the three consecutive quarters ended June 30, 1995, the
Company violated certain of these covenants. The bank has granted permanent
waivers for each of those specific covenant violations.
In December 1996, the Loan Agreement was amended to reduce the revolving
credit line to $5.0 million effective December 16, 1996 and extend its
termination date to October 31, 1997. The amendment reduces the credit limit at
the end of each subsequent quarter by $500,000. It further reduces the limit by
75% of the Company's excess cash flow (as defined in the agreement) for each
fiscal quarter on the last day of the first month after each quarter end. Cash
capital expenditures are limited by the amendment to $500,000 each of the first
three quarters and a total of $1,900,000 in fiscal 1997. Cash dividend payments
are limited to $150,000 per fiscal year. The loan is collateralized with
substantially all of the Company's real property.
Management is taking steps to comply with all of the covenants under the
Loan Agreement in the future. However, should the bank decline to waive a future
covenant violation, the bank would be required under the Loan Agreement to give
the Company 15 days written notice of the violation, after which time the
Company would be in default. At the bank's option, it could then declare the
loan principal and all accrued interest current and payable and/or refuse to
make additional advances on the credit line. The Company could then be forced to
seek alternative sources of financing.
Interest is payable monthly at a variable rate equal to the bank's prime
rate or, at the Company's option, rates based upon the London Interbank Offering
Rate. The blended interest rate effective at September 30, 1996 was 8.1%. The
Company pays a commitment fee of 3/8 of 1 percent annually on the unused portion
of the credit line.
Notes payable were issued in July 1996 and September 1995 to buy out the
remaining lease terms of five closed locations. The long-term portion of those
notes was $39,000 and $125,000 at September 30, 1996 and 1995, respectively. The
current portion of $151,000 and $162,000 is included in accounts payable at
September 30, 1996 and 1995, respectively. The effective interest rates are 5.9%
to 6.0%, with payments due monthly through January 1999.
F-7
<PAGE> 30
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OPERATING LEASES
The Company leases restaurant facilities under operating leases with terms
expiring at various dates into 2007, some of which contain renewal options.
Certain of the leases have provisions for contingent rentals based on a
percentage of the excess of restaurant sales over stipulated minimum sales.
The minimum aggregate annual rentals required under operating leases in
effect at September 30, 1996, exclusive of maintenance, taxes, etc., were as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
- -------------
<S> <C> <C>
1997..................................................................... $ 2,809,000
1998..................................................................... 2,499,000
1999..................................................................... 2,048,000
2000..................................................................... 1,664,000
2001..................................................................... 1,112,000
Later years.............................................................. 2,290,000
-----------
Total.......................................................... $12,422,000
===========
</TABLE>
The composition of total yearly rental expense for operating leases is:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Minimum rentals................................ $2,533,000 $2,946,000 $2,917,000
Contingent rentals............................. 216,000 240,000 406,000
Less: Sublease rentals......................... (31,000) (126,000) (103,000)
---------- ---------- ----------
Total................................ $2,718,000 $3,060,000 $3,220,000
========== ========== ==========
</TABLE>
5. INCOME TAXES
Income taxes (benefits) consist of:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1996 1995 1994
--------- ----------- ----------
<S> <C> <C> <C>
Current:
U.S. federal.................................. $(321,000) $(1,286,000) $ 570,000
State......................................... 27,000
--------- ----------- ----------
Combined current........................... (321,000) (1,286,000) 597,000
Deferred:
U.S. federal.................................. 81,000 (1,658,000) 431,000
State......................................... 105,000 (399,000) 73,000
--------- ----------- ----------
Combined deferred.......................... 186,000 (2,057,000) 504,000
--------- ----------- ----------
Provision (benefit) for income taxes..... $(135,000) $(3,343,000) $1,101,000
========= =========== ==========
</TABLE>
F-8
<PAGE> 31
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amounts computed by
applying the U.S. federal statutory rate of 34 percent to net earnings (loss)
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1996 1995 1994
--------- ----------- ----------
<S> <C> <C> <C>
Expected tax at federal statutory rate of 34%... $(187,000) $(2,957,000) $1,080,000
Increase (decrease) in taxes due to:
State income tax provision (benefit), net of
federal income tax effect.................. 69,000 (399,000) 18,000
Tax effect of employer tax credits............ (44,000) (162,000) (85,000)
Eliminate tax effect of results of foreign
operations................................. 76,000 230,000
Benefit from prior year tax refunds
received................................... (135,000)
Other......................................... 86,000 (55,000) 88,000
--------- ----------- ----------
Total................................. $(135,000) $(3,343,000) $1,101,000
========= =========== ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Current:
Restructuring costs............................................ $ 65,000 $ 128,000
Accrued vacation pay........................................... 142,000 166,000
Current valuation allowance.................................... (1,000)
---------- ----------
Current deferred tax asset, net of valuation allowance....... 206,000 294,000
---------- ----------
Noncurrent:
Accrued insurance costs........................................ 1,517,000 1,512,000
Alternative minimum tax carryforward........................... 904,000 647,000
State net operating loss carryforwards (expire 1998 -- 2011)... 392,000 369,000
Property, plant and equipment.................................. 215,000
Federal employer tax credits (expire 2009 -- 2011)............. 321,000 303,000
Other.......................................................... 2,000 150,000
Noncurrent valuation allowance................................. (42,000) (25,000)
---------- ----------
Noncurrent deferred tax asset, net of valuation allowance.... 3,094,000 3,171,000
---------- ----------
Total deferred tax assets, net of valuation allowances.... 3,300,000 3,465,000
---------- ----------
Deferred tax liabilities:
Noncurrent:
Property, plant and equipment.................................. 35,000
Basis difference in note receivable............................ 248,000 248,000
Other.......................................................... 14,000
---------- ----------
Total deferred tax liabilities............................ 283,000 262,000
---------- ----------
Net deferred tax asset.................................... $3,017,000 $3,203,000
========== ==========
</TABLE>
The valuation allowance was increased to reduce deferred tax assets to the
amount that will more likely than not be realized. This reduction is necessary
due to uncertainty of the Company's ability to use all of the state net
operating loss carryforwards before they expire.
F-9
<PAGE> 32
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
STOCK NOTES RECEIVABLE
In April 1992, the Company sold 104,500 shares of common stock to certain
officers in exchange for notes receivable in the amount of $758,000, the current
balance of which is shown in the balance sheet as a deduction from stockholders'
equity. The notes bear interest at 7.83%, are payable in ten equal annual
installments plus interest and are secured by the common stock. The shares were
sold at the quoted market price on the day of sale.
STOCKHOLDERS' RIGHTS PLAN AND PREFERRED STOCK PURCHASE RIGHTS
In January 1996, the Company's Board of Directors adopted a Stockholders'
Rights Plan to replace a similar plan which expired on March 31, 1996. Under the
new plan, the Company declared a dividend distribution of one preferred share
purchase right (Right) for each share of common stock outstanding at the close
of business on March 29, 1996. Each Right entitles the holder to buy one
one-thousandth of a share of the Company's newly-designated Series A Junior
Participating Preferred Stock, for the exercise price of $10 per one
one-thousandth of a Preferred Share, subject to adjustment.
If any person or group (other than certain current stockholders and their
affiliates, associates and successors, which may acquire up to 28%) acquires 15%
of the Common Stock, all stockholders except the acquiring person (Acquiror)
will be entitled to purchase Common Stock having twice the market value of the
Rights exercise price. If the Company is involved in a merger or other business
combination, or sells 50% or more of its assets or earning power, all of the
Stockholders, other than the Acquiror, will be entitled to purchase Common
Shares of the other person having twice the market value of the exercise price.
Under the Plan's exchange provision, any time after such an acquisition but
before any person acquires a majority of the Common Stock, the Board of
Directors may exchange all or part of the outstanding Rights (other than the
Rights of the Acquiror) for Common Stock at a ratio of one Right per share.
The Rights trade with the common stock, and are not exercisable or
transferable apart from the common stock until 10 days after a person or group
acquires, or announces a tender offer for, 15% or more of the Company's
outstanding common stock. Before acquisition by someone of beneficial ownership
of 15% or more of the Company's common stock, the Rights are redeemable by the
Board for $.01 per Right. The Rights expire on March 27, 2006.
Under the Plan, the Company's Board of Directors has designated 10,000
shares of preferred stock as Series A Junior Participating Preferred Stock. This
designation is part of the 500,000 shares of preferred stock, par value $10,
previously authorized, none is issued.
STOCK OPTIONS
The Company's stock option plans authorize the grant of options to purchase
common stock to directors, officers, employees and consultants of the Company at
prices not less than the fair market value of the stock at dates of grant.
Outstanding options become exercisable cumulatively in four or five equal
annual installments commencing one year from date of grant and expire ten years
from the date of grant. Options may be granted through November 5, 2002.
F-10
<PAGE> 33
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option information for the three-year period ended September 30, 1996:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- --------------------------
OPTION PRICE NUMBER OPTION PRICE NUMBER OPTION PRICE NUMBER
PER SHARE OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES
-------------- --------- -------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding.................. $ 2.625-$15.25 407,350 $3.19-$15.25 586,650 $ 5.88-$15.25 575,600
Options exercisable.................. 2.625- 15.25 236,638 5.88- 15.25 284,810 5.88- 15.25 186,060
Shares available for future grants... 67,750 9,000 25,000
Option activity during the year:
Granted............................ 2.625 10,000 3.19- 6.00 17,000 10.50- 11.38 346,000
Forfeited.......................... 5.875- 11.375 88,100 7.25- 11.38 5,950 7.25- 11.38 8,720
Exercised.......................... 5.88- 9.55 32,350
Expired............................ 9.546 101,200
</TABLE>
PREFERRED STOCK
Shares of preferred stock, when issued, will have such rights, preferences
and privileges as shall be adopted by the Board of Directors.
SUBSEQUENT DIVIDEND
On October 18, 1996, the Company's Board of Directors declared a $.015 per
common share quarterly cash dividend, to be paid December 10, 1996 to holders of
record on November 26, 1996.
7. EMPLOYEE BENEFIT PLANS
VOLUNTARY EMPLOYEE INJURY BENEFIT PLAN
Concurrent with its decision to become a non-subscriber to the Workers'
Compensation Act of Texas in December 1990, the Company adopted a Voluntary
Employee Injury Benefit (VEIB) Plan to provide benefits for employees located in
Texas who incur job related injuries in connection with their employment. The
VEIB Plan, which is subject to Employee Retirement Income Security Act (ERISA)
rules and regulations, provides for medical, short-term wage replacement,
dismemberment and death benefits.
Coverage under the VEIB Plan is provided by the Company and through excess
liability insurance, which provides coverage for claims in excess of certain
stipulated amounts. The consolidated statements of operations for the years
ended September 30, 1996, 1995 and 1994 include provisions for estimated
benefits and expenses of the VEIB Plan of $854,000, $1,308,000 and $1,341,000,
respectively.
BONUS PLANS
The Company has a bonus plan for restaurant managers and supervisors which
provides bonuses based on restaurant performance. Such bonuses amounted to
$417,000, $365,000 and $475,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
The Company has a bonus plan for corporate officers as a group based on
stipulated operating results. Corporate officer bonuses amounted to $0, $0 and
$204,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
DEFERRED COMPENSATION PLAN
The Company offered a deferred compensation plan to certain key management
employees. Effective August 31, 1995, the plan participants agreed to terminate
the plan and distribute its assets to the participants. The distribution was
made November 6, 1995. The plan liability is included in other current
liabilities on the consolidated balance sheets for 1995.
F-11
<PAGE> 34
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PURCHASE PLAN
The Company maintains a voluntary employee stock purchase plan for all
eligible employees. The Company contributes 25% of the amount invested by the
employee plus all commissions and brokerage fees. Company contributions vest
immediately. Contributions are invested in common stock of the Company by a
brokerage firm. The Company recognized expenses for contributions to the plan of
$36,000, $36,000 and $40,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
8. RELATED PARTY TRANSACTIONS
The Company sold food and supplies on a cost-plus basis to the family-owned
restaurant operations of the Chairman of the Company, until the Company's food
distribution center was closed in September 1994. Occasional sales of supplies
and equipment are still made to those affiliates. Sales amounts were $7,000,
$4,000, and $663,000 for the years ended September 30, 1996, 1995, and 1994,
respectively.
The Company purchases food products manufactured by a Company whose
chairman and chief executive officer is a non-employee director of the Company.
Purchases were $2,714,000, $2,992,000 and $2,768,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. The same vendor purchased items
from the Company in the amount of $81,000, $122,000 and $73,000 in 1996, 1995
and 1994, respectively. In November 1994, this vendor also leased the company's
cold-storage facilities and purchased $17,000 of related equipment formerly used
by the Company's food distribution center. The lease term including options runs
through December 31, 2000, and represented $60,000 and $55,000 of rental revenue
for the company in fiscal 1996 and 1995, respectively.
The Company and one of its non-employee directors have entered into a joint
venture to open at least one restaurant in Mexico. The Company incurred expenses
in setting up the joint venture of about $60,000 and $150,000 for the years
ended September 30, 1995 and 1994, respectively. The Company has invested
$2,122,000 in its Mexican subsidiaries and operations related to the venture.
The joint venture subsidiaries are included in the Company's consolidated
financial statements. This non-employee director received fees from the joint
venture for management services of $48,000 and $48,000 in fiscal 1996 and 1995,
respectively.
A non-employee director of the Company is president of a firm which
provided architectural services to the Company. Charges for these services
totaled $54,000 in 1994.
9. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with four executives which call for
payment of salaries and benefits at or above current levels throughout the
contract periods. Three of those agreements expire in December 2000, and one
expires in December 1997.
The Company has been named in various lawsuits involving claims in the
ordinary course of business, many of which are covered by insurance. Although
the amounts of losses from such claims cannot be estimated, in the opinion of
management, the ultimate disposition of these lawsuits and claims will not
result in a material adverse effect on the Company's financial position, results
of operations or cash flows.
10. RESTRUCTURING COSTS
In June 1995, the Company adopted a restructuring plan in an effort to
return to profitability.
Based on the plan, a restructuring charge of $7,572,000 before income taxes
was recorded for the closing of nine restaurants and the impairment of eight
others, including the restaurant in Guadalajara, Mexico. The charge included
$6,624,000 to write down leasehold improvements and equipment and $948,000 for
remaining lease costs and other exit costs associated with the restaurant
closings. The charge for impairments was
F-12
<PAGE> 35
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The assets of closed locations were written down to net realizable value,
providing an impairment charge of $2,367,000. The net book value after the write
down of property, plant and equipment related to the company's closed restaurant
locations was $663,000. The remaining restaurant equipment will either be sold
or used elsewhere in the Company's operations. Sales for the nine closed
locations were $4,652,000 and $7,512,000 for fiscal 1995 and 1994, respectively.
An impairment charge of $3,445,000 was recognized for seven low sales
volume restaurants that the Company planned to continue to operate. Due to the
low or negative projected cash flows of these restaurants, fair value of the
assets was based on their estimated resale value. One of those impaired
restaurants was subsequently closed, without incurring any additional impairment
charges.
Due to the economic crisis in Mexico related to the December 1994 peso
devaluation, the Company's investment in a restaurant in Guadalajara was also
evaluated for impairment and a charge of $812,000 was recorded. Fair value of
the assets was estimated based on the discounted expected future cash flows from
operation of the restaurant.
Current and deferred income tax benefits of $2,366,000 were recognized in
the United States in connection with the restructuring. No tax benefits were
recognized for the write down of assets in Mexico.
During the first quarter of fiscal 1994, the Company reported a pre-tax
benefit of $264,000 related to a reevaluation of previously established
restructuring reserves. The reevaluation resulted from the sale of a restaurant
site purchased for expansion in 1989 in Jacksonville, Florida and the sublease
of a closed restaurant location in Littleton, Colorado.
11. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the provisions of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Company has estimated the fair value of
financial instruments as of September 30, 1996. The estimated fair value amounts
are determined by using available market information and appropriate valuation
methodologies.
The Company's financial instruments under SFAS No. 107 include: accounts
receivable, notes receivable, notes payable, accounts payable and long-term
debt. The Company has estimated that the carrying amount of accounts receivable,
notes payable and accounts payable approximates fair value due to the short-term
maturities of these instruments. Notes receivable bear interest at a rate that
approximates the current market rate, therefore, the carrying value approximates
the fair value. In addition, because the Company's long-term debt bears interest
at rates which float with market rates, the Company has estimated that the
carrying amounts of its long-term debt also approximates its fair value.
12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996 YEAR ENDED SEPTEMBER 30, 1995
----------------------------------------------- -----------------------------------------------
QUARTER ENDED QUARTER ENDED
(AMOUNTS IN THOUSANDS EXCEPT ------------------------------------- -------------------------------------
PER SHARE DATA) 12/31 3/31 6/30 9/30 TOTAL 12/31 3/31 6/30 9/30 TOTAL
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales......................... $17,460 $17,915 $18,005 $18,107 $71,487 $20,910 $19,868 $20,596 $19,519 $80,893
Operating income (loss)....... (510) 65 259 (93) (279) (360) (590) (7,856) 382 (8,424)
Net earnings (loss)........... (356) (37) 121 (143) (415) (279) (446) (5,348) 711 (5,362)
Net earnings (loss) per
share....................... (.08) (.01) .03 (.03) (.09) (.06) (.10) (1.22) .16 (1.22)
</TABLE>
F-13
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pancho's Mexican Buffet, Inc.:
We have audited the consolidated balance sheets of Pancho's Mexican Buffet,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pancho's Mexican Buffet, Inc.
and subsidiaries at September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Fort Worth, Texas
November 13, 1996
(December 16, 1996 as to the second paragraph of Note 3)
F-14
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PANCHO'S MEXICAN BUFFET, INC.
By /s/ HOLLIS TAYLOR
----------------------------------
Hollis Taylor, President and Chief
Executive Officer
(Principal Executive Officer)
December 13, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
- ------------------------------------------------------
<S> <C>
/s/ JESSE ARRAMBIDE, III December 13, 1996
- ------------------------------------------------------
Jesse Arrambide, III,
Chairman of the Board of Directors
/s/ HOLLIS TAYLOR December 13, 1996
- ------------------------------------------------------
Hollis Taylor, President and Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ W. BRAD FAGAN December 13, 1996
- ------------------------------------------------------
Brad Fagan, Vice President, Treasurer, Controller and
Assistant Secretary (Principal Financial and
Accounting Officer)
/s/ SAMUEL L. CARLSON December 13, 1996
- ------------------------------------------------------
Samuel L. Carlson, Director
/s/ MAURICIO SANCHEZ GARCIA December 13, 1996
- ------------------------------------------------------
Mauricio Sanchez Garcia, Director
/s/ ROBERT L. LIST December 13, 1996
- ------------------------------------------------------
Robert L. List, Director
/s/ TOMAS ORENDAIN December 13, 1996
- ------------------------------------------------------
Tomas Orendain, Director
/s/ GEORGE N. RIORDAN December 13, 1996
- ------------------------------------------------------
George N. Riordan, Director
/s/ RUDOLPH RODRIGUEZ, JR. December 13, 1996
- ------------------------------------------------------
Rudolph Rodriguez, Jr., Director
</TABLE>
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------
<S> <C> <C>
2 -- Not applicable
3(a) -- Certificate of Incorporation of Pancho's Mexican Buffet, Inc.(2)
3(b) -- Certificates of Amendment of Certificate of Incorporation(3)
3(c) -- Certificate of Amendment of Certificate of Incorporation(5)
3(d) -- Certificate of Amendment of Certificate of Incorporation(8)
3(e) -- Bylaws of Pancho's Mexican Buffet, Inc. as amended through October 5,
1990(10)
3(f) -- Agreement and Plan of Merger dated December 31, 1968(1)
3(g) -- Certificate of Amendment of Certificate of Incorporation, dated January
25, 1995(15)
3(h) -- Restated Certificate of Incorporation, as revised January 25, 1995(15)
4(a) -- Certificate of Incorporation and Bylaws of Registrant, as amended. See
Exhibit 3 items above
4(b) -- Rights Agreement dated as of January 30, 1996, between Pancho's Mexican
Buffet, Inc. and KeyCorp Shareholder Services, Inc. with Exhibit A (form
of Certificate of Designation, Preferences and Rights of Series A
Preferred Stock), Exhibit B (form of Right Certificate), and Exhibit C
(Summary of Rights to Purchase Series A Preferred Stock) attached(6)
9 -- Not applicable
10(a) -- 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican
Buffet, Inc.(4)
10(b) -- Amendment No. 1 and 2 to 1982 Stock Option Plan for Non-Employee
Directors of Pancho's Mexican Buffet, Inc.(9)
10(c) -- 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(4)
10(d) -- Amendment No. 1, 2 and 3 to Pancho's Mexican Buffet, Inc. 1982 Incentive
Stock Option Plan(9)
10(e) -- Pancho's Mexican Buffet, Inc. Employee Stock Purchase Plan(4)
10(i) -- Memo re: Officers Bonus Plan approved by Board of Directors of Pancho's
Mexican Buffet, Inc. on February 28, 1986(7)
10(j) -- Note, security agreement and investment letter -- re: sale of authorized
but unissued Common Stock of the Registrant to four executive officers in
1992(15)
10(k) -- Employment Contracts between the Registrant and four executive officers
dated March 25, 1994(15)
10(l) -- Pancho's Mexican Buffet, Inc. Cafeteria Plan(9)
10(m) -- Amendment No. 4 to 1982 Incentive Stock Option Plan of Pancho's Mexican
Buffet, Inc.(11)
10(n) -- Amendment No. 3 to 1982 Stock Option Plan for Non-Employee Directors of
Pancho's Mexican Buffet, Inc.(11)
10(o) -- 1992 Stock Option Plan of Pancho's Mexican Buffet, Inc.(12)
10(p) -- Revolving Credit and Term Loan Agreement dated February 16, 1994, between
PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(13)
10(q) -- First Amendment to Revolving Credit and Term Loan Agreement dated
February 9, 1995, between PMB Enterprises West, Inc. and First Interstate
Bank of Texas, N.A.(14)
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------
<S> <C> <C>
10(r) -- Second Amendment to Revolving Credit and Term Loan Agreement dated May 9,
1995, between PMB Enterprises West, Inc. and First Interstate Bank of
Texas, N.A.(14)
10(s) -- Third Amendment to Revolving Credit and Term Loan Agreement dated
September 29, 1995(15)
10(t) -- Employment Contract between the Registrant and one executive officer,
dated September 29, 1995(15)
10(u) -- Fourth Amendment to Revolving Credit and Term Loan Agreement dated
February 16, 1996(16)
10(v) -- Fifth Amendment to Revolving Credit and Term Loan Agreement dated June
28, 1996(17)
10(w) -- Sixth Amendment to Revolving Credit and Term Loan Agreement dated
December 16, 1996 -- filed herewith
11 -- Not required -- Explanation of earnings per share computation is
contained in Notes to Consolidated Financial Statements.
12 -- Not applicable
13 -- Not applicable
16 -- Not applicable
18 -- Not applicable
21 -- Subsidiaries of the registrant -- filed herewith
22 -- Not applicable
23 -- Consent of Independent Public Accountants -- filed herewith
24 -- Not applicable
27 -- Financial Data Schedule -- filed herewith
28 -- Not applicable
</TABLE>
- ---------------
<TABLE>
<C> <S>
(1) Filed with the Commission as an Exhibit to Form S-1 Registration Statement No.
2-32378 -- such Exhibits are incorporated herein by reference.
(2) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K as
amended on Form 8 for the year ended September 30, 1981 -- such Exhibits are
incorporated herein by reference.
(3) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1982 -- such Exhibit is incorporated herein by reference.
(4) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1983 -- such Exhibits are incorporated herein by
reference.
(5) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1984 -- such Exhibits are incorporated herein by
reference.
(6) Filed with the Commission as an Exhibit to Form 8-A Registration Statement on February
21, 1996 -- such Exhibit is incorporated herein by reference.
(7) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1986 -- such Exhibits are incorporated herein by
reference.
(8) Filed with the Commission as an Exhibit to Form S-2 Registration Statement No. 33-14484
on May 22, 1987 -- such Exhibit is incorporated herein by reference.
(9) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1988 -- such Exhibits are incorporated herein by
reference.
</TABLE>
<PAGE> 40
<TABLE>
<C> <S>
(10) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1990 -- such Exhibits are incorporated herein by
reference.
(11) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1991 -- such Exhibits are incorporated herein by
reference.
(12) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1993 -- such Exhibits are incorporated herein by
reference.
(13) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31,
1995 -- such Exhibits are incorporated herein by reference.
(14) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30,
1995 -- such Exhibits are incorporated herein by reference.
(15) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1995 -- such Exhibits are incorporated herein by
reference.
(16) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31,
1996 -- such Exhibits are incorporated herein by reference.
(17) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30,
1996 -- such Exhibits are incorporated herein by reference.
</TABLE>
<PAGE> 1
EXHIBIT 10(W)
WELLS FARGO LOGO
Commercial Banking Group
505 Main Street, Suite 300
Fort Worth, TX 76102
December 16, 1996
W. Brad Fagan
Vice President, Treasurer
Pancho's Mexican Buffet
3500 Noble Avenue
Fort Worth, TX 76111-0407
Re: Revolving Credit and Term Loan Agreement ("Agreement") dated as of
February 16, 1994, as amended, by and between PMB Enterprises West, Inc.
("Borrower") and Wells Fargo Bank (Texas), National Association, formerly
First Interstate Bank of Texas, N.A. ("Bank")
Dear Brad:
This letter will constitute an amendment to the Agreement. The changes to the
Agreement and the effective dates, thereof, are as follows:
o Commitment Level - Effective December 16, 1996, the Commitment will be
$5,000,000.
o Quarterly Commitment Reduction - Beginning with the quarter ended 12/31/96
and continuing each quarter thereafter, the commitment will reduce by
$500,000 effective December 16, 1996.
o Section 9.10 - Net Income requirement for the month required to be greater
than or equal to $0 is amended to the following: EBITDA (Operating Income
plus Depreciation and Amortization), on a rolling 3 months, calculated
monthly, must be greater than or equal to the following: October 31, 1996 -
$400,000; November 30, 1996 - ($50,000); December 31, 1996 - $100,000;
January 31, 1997 - $200,000; February 28, 1997 - $300,000; March 31, 1996 -
$600,000; April 30, 1997 - $850,000; May 31, 1997 - $1,000,000; June 30,
1997 - $1,000,000; - July 31, 1997 - $1,250,000; August 31, 1997 -
$1,100,000; September 30, 1997 - $1,100,000. The effective date is
October 31, 1996.
o Section 9.14 - Cash Capital Expenditures will be amended to be less than or
equal to $1,900,000 for the fiscal year ended September 30, 1997 and will be
less than or equal to $500,000 on a quarterly basis for the first three
quarters of fiscal 1997 ended
<PAGE> 2
12/31/96, 3/31/96, and 6/30/96. The balance remaining for Cash Capital
Expenditures may be spent in the fourth quarter provided that no Event
of Default has occurred or is occurring. The effective date is October
31, 1996.
o Section 3 of the Agreement is hereby amended as follows: "Termination
Date" shall mean (i) October 31, 1997, or (ii) such later date to which
the Revolving Credit Period is extended pursuant to Section 2.01(b) in
the Revolving Credit Agreement.
By executing this amendment, the Borrower warrants and represents that
it is not in default of any of the terms under this Agreement as amended by
this letter. The above amendments are the ONLY changes to the Agreement. The
Bank reserves all its rights and remedies under the Agreement.
Please execute the letter by signing in the "Acceptance" space
indicated on this page and return the original to me. Please make a copy for
your files.
Very Truly Yours,
/s/ Susan B. Sheffield
Susan B. Sheffield
Vice President
Accepted and Agreed upon:
By: /s/ W. Brad Fagan
Title: VP-Treasurer
Company: PMB Enterprises West, Inc.
Date: 12-16-96
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAMES UNDER WHICH
STATE OF SUBSIDIARY DOES
SUBSIDIARY INCORPORATION BUSINESS
- --------------------------- ------------- ---------------------------
<S> <C> <C>
PMB Enterprises West, Inc. New Mexico PMB Enterprises West, Inc.
Pancho's Mexican Buffet
Pancho's Mexican Buffet
Advertising
Pancho's Mexican Buffet
Commissary Supply Co.
Pancho's Mexican Buffet
Construction
</TABLE>
- ---------------
The above schedule includes all significant subsidiaries of the Company as
defined in Rule 1-02(w) of Regulation S-X.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
2-86238 of Pancho's Mexican Buffet, Inc. on Form S-8 of our report dated
November 13, 1996 (December 16, 1996 as to the second paragraph of Note 3),
appearing in this Annual Report on Form 10-K of Pancho's Mexican Buffet, Inc.
for the year ended September 30, 1996.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Fort Worth, Texas
December 16, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND THE
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE TWELVE-MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 145,000
<SECURITIES> 0
<RECEIVABLES> 254,000
<ALLOWANCES> 0
<INVENTORY> 640,000
<CURRENT-ASSETS> 1,611,000
<PP&E> 65,125,000
<DEPRECIATION> 32,539,000
<TOTAL-ASSETS> 37,968,000
<CURRENT-LIABILITIES> 4,156,000
<BONDS> 0
0
0
<COMMON> 440,000
<OTHER-SE> 26,081,000
<TOTAL-LIABILITY-AND-EQUITY> 37,968,000
<SALES> 71,487,000
<TOTAL-REVENUES> 71,487,000
<CGS> 19,681,000
<TOTAL-COSTS> 66,699,000
<OTHER-EXPENSES> 5,067,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 540,000
<INCOME-PRETAX> (550,000)
<INCOME-TAX> (135,000)
<INCOME-CONTINUING> (415,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415,000)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
