UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
____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)
DELAWARE 75-1292166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 Noble Avenue, Fort Worth, Texas 76111
(Address of principal executive offices) (Zip Code)
817-831-0081
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 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
Number of shares of Common Stock outstanding as of May 13, 1997:
4,397,559.
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Introduction 1
Consolidated Condensed Balance Sheets,
March 31, 1997 and September 30,1996 2
Consolidated Condensed Statements of
Operations for the Three-Months and Six-Months
Ended March 31, 1997 and 1996 3
Consolidated Condensed Statements of Cash
Flows for the Six-Months
Ended March 31, 1997 and 1996 4
Notes to Consolidated Condensed Financial
Statements 5
Independent Accountants' Review Report 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. Other Information
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities (no response required)
Item 3. Defaults Upon Senior Securities (no
response required)
Item 4. Submission of Matters to a Vote of
Security Holders (no response required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated condensed financial statements included herein
have been prepared by the Company without audit as of March 31,
1997 and for the three-month and six-month periods ended March
31, 1997 and 1996 pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented
not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended
September 30, 1996. In the opinion of the Company, all
adjustments, consisting only of normal recurring adjustments
except as discussed in the notes to consolidated condensed
financial statements included herein, necessary to present
fairly the financial position of the Company as of March 31,
1997, and the results of operations and cash flows for the
indicated periods have been included. The results of operations
for such interim periods are not necessarily indicative of the
results to be expected for the fiscal year ending September 30,
1997.
Deloitte & Touche LLP, independent public accountants, has made
a limited review of the consolidated condensed financial
statements as of March 31, 1997 and for the six-month and
three-month periods ended March 31, 1997 and 1996 included
herein.
page 1
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
March 31, September 30,
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 485,000 $ 145,000
Accounts and notes receivable-current portion 262,000 254,000
Income taxes receivable 232,000 186,000
Inventories 674,000 640,000
Prepaid expenses 143,000 180,000
Deferred income taxes 372,000 206,000
Total current assets 2,168,000 1,611,000
PROPERTY, PLANT AND EQUIPMENT :
Land 3,316,000 3,446,000
Buildings 9,897,000 10,561,000
Leasehold improvements 21,523,000 22,532,000
Equipment and furniture 27,041,000 28,579,000
Construction in progress 20,000 7,000
Total 61,797,000 65,125,000
Less accumulated depreciation and amortization (33,668,000) (32,359,000)
Property, plant and equipment-net 28,129,000 32,766,000
OTHER ASSETS:
Deferred income taxes 4,330,000 2,811,000
Other, including noncurrent portion of receivables 568,000 780,000
Total other assets 4,898,000 3,591,000
TOTAL $ 35,195,000 $ 37,968,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,754,000 $ 1,273,000
Accrued wages and bonuses 1,468,000 1,485,000
Other current liabilities 2,052,000 1,398,000
Current portion of long-term debt 847,000
Total current liabilities 6,121,000 4,156,000
OTHER LIABILITIES:
Long-term debt 2,536,000 3,489,000
Accrued insurance costs 3,503,000 3,802,000
Restructuring reserves 834,000
Total other liabilities 6,873,000 7,291,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock 440,000 440,000
Additional paid-in capital 18,633,000 18,633,000
Retained earnings 3,520,000 8,347,000
Cumulative foreign currency translation adjustment (436,000)
Stock notes receivable (392,000) (463,000)
Stockholders' equity 22,201,000 26,521,000
TOTAL $ 35,195,000 $ 37,968,000
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES $ 16,585,000 $ 17,915,000 $ 33,159,000 $ 35,375,000
COSTS AND EXPENSES:
Food costs 4,775,000 4,880,000 9,391,000 9,847,000
Restaurant labor and related expenses 6,071,000 6,551,000 12,714,000 13,321,000
Restaurant operating expenses 3,992,000 4,188,000 8,060,000 8,051,000
Depreciation and amortization 924,000 979,000 1,858,000 1,993,000
General and administrative expenses 1,473,000 1,252,000 2,725,000 2,608,000
Restructuring charges 4,988,000 4,988,000
Total 22,223,000 17,850,000 39,736,000 35,820,000
OPERATING INCOME (LOSS) (5,638,000) 65,000 (6,577,000) (445,000)
INTEREST EXPENSE (123,000) (161,000) (200,000) (344,000)
OTHER, INCLUDING INTEREST INCOME 39,000 69,000 65,000 159,000
EARNINGS (LOSS) BEFORE INCOME TAXES (5,722,000) (27,000) (6,712,000) (630,000)
PROVISION (BENEFIT) FOR INCOME TAXES (1,635,000) 10,000 (1,951,000) (237,000)
NET EARNINGS (LOSS) $ (4,087,000) $ (37,000) $ (4,761,000) $ (393,000)
NET EARNINGS (LOSS) PER SHARE $ (0.93) $ (0.01) $ (1.08) $ (0.09)
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended March 31,
1997 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (4,761,000) $ (393,000)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Restructuring charges
Depreciation and amortization 1,858,000 1,993,000
Provision (benefit) for deferred income taxes (1,685,000) 65,000
Amortization of restaurant start-up costs 26,000
Payment of restaurant start-up costs
Provision for write down of long-lived assets 3,033,000
Provision for exit and carrying costs of closed locations 1,460,000
Write off of cumulative translation adjustment 455,000
Loss on extinguishment of stock notes receivable 71,000
(Gain) loss on sale of assets (22,000) (79,000)
Minority interest in net earnings (loss)
Changes in operating assets and liabilities:
Accounts and notes receivable (29,000) (1,000)
Income taxes receivable (46,000) 1,037,000
Inventories, prepaid expenses and other assets 13,000 279,000
Accounts payable and accrued expenses 346,000 (72,000)
Total adjustments 5,454,000 3,248,000
Net cash provided (used) by operating activities 693,000 2,855,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (247,000) (273,000)
Proceeds from sale of assets 219,000 131,000
Net cash provided (used) by investing activities (28,000) (142,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (85,000) (22,000)
Long-term borrowings 13,780,000 15,087,000
Repayments of long-term borrowings (13,953,000) (17,508,000)
Proceeds from increase in minority interest
Dividends paid (66,000) (66,000)
Payments received on officer stock notes
Net cash provided (used) by financing activities (324,000) (2,509,000)
EFFECT OF FOREIGN EXCHANGE RATE
CHANGE ON CASH (1,000) (51,000)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 340,000 153,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 145,000 1,199,000
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 485,000 $ 1,352,000
SUPPLEMENTAL INFORMATION:
Income taxes paid (refunds received), net $ (180,000) $ (1,362,000)
Interest paid, net of capitalized amounts 157,000 347,000
<FN>
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. NET LOSS PER SHARE
Net loss per share is 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 was 4,398,000 for both the three-months and
six-months ended March 31, 1997 and March 31, 1996.
2. LONG-TERM DEBT
The Company's revolving credit and term loan agreement ("Loan
Agreement") with a bank includes various financial covenants.
Due to the net loss incurred by the Company in the quarter ended
December 31, 1996, the Company violated a covenant. The bank
has subsequently granted a permanent waiver for this covenant
violation. The requirement to comply with an earnings-related
covenant has been suspended by the bank through May 1997.
In February 1997, the Company and the bank agreed to amend the
Loan Agreement limit-reduction schedule and covenants. Under
the amended agreement, the credit line limit is $4.5 million
until June 30, and is reduced by $500,000 then and each
subsequent quarter end. Cash capital expenditures are limited
by the amended agreement to $500,000 each of the first three
fiscal quarters and $1,900,000 for the fiscal year. Cash
dividends are limited to $150,000 per fiscal year, respectively.
Effective March 31, 1997, the Company and the bank further
amended the Loan Agreement. This amendment modified the net
cash flow covenant to consider the non-cash provisions of the
restructuring charge (discussed in Note 3). The termination
date of the loan agreement was extended until April 1, 1998.
At March 31, 1997, the Company had $1,220,000 of credit
available under the bank line of credit.
3. RESTRUCTURING COSTS
In the quarter ended March 31, 1997, the Company established a
restructuring plan in an effort to return to profitability. The
plan included closing seven underperforming restaurants,
disposing of the Mexico joint venture, impairing four other
restaurants and increasing the reserves for lease buyout for two
previously closed locations.
The Company recorded a restructuring charge of $4,988,000 to
execute the plan. The charge included $3,033,000 for the
impairment of land, buildings, leasehold improvements and
equipment. Impairment charges were determined in accordance
with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The charge also included
$1,460,000 to reserve for exit and carrying costs of closed
locations. The rest of the charge consisted of a $455,000 loss
from the recognition of the Cumulative Translation Adjustment
for disposal of the Mexico venture, plus $40,000 to record a
valuation allowance for deferred tax assets unlikely to be
realized due to the closing of two Arizona locations under the
restructuring.
Sales for the seven closed locations were $1,170,000 and
$2,337,000 for the quarter and half-year ended March 31, 1997,
respectively, and $4,920,000 for all of fiscal 1996.
While appropriate steps are being taken to dispose of its
interest, the Company will continue to participate in the Mexico
joint venture operations for part of the quarter ending June 30,
1997. The Company expensed $71,000 to reserve for exit and
carrying costs related to disposing of its interest in the
venture.
4. ADJUSTMENT OF INSURANCE RESERVES
In the quarter ended March 31, 1997, the Company recognized a
net benefit of $558,000 to reduce employee injury benefit
reserves, included in accrued insurance costs on the balance
sheet, based on an updated management analysis of claims
activity and results.
5. CASH DIVIDENDS
On April 11, 1997, the Company's board of directors declared a
$.015 per common share semi-annual cash dividend. The dividend
is payable on June 10, 1997 to holders of record on May 27,
1997. On December 10, 1996 the Company paid a $.015 per common
share semi-annual cash dividend to holders of record as of
November 26, 1996.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Pancho's Mexican Buffet, Inc.:
We have reviewed the accompanying consolidated condensed balance
sheet of Pancho's Mexican Buffet, Inc. and subsidiaries as of
March 31, 1997 and the related consolidated condensed statements
of operations and cash flows for the three-month and six-month
periods ended March 31, 1997 and 1996. These consolidated
condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical review procedures to financial data and of
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated condensed
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of
September 30, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year
then ended (not presented herein), and in our report dated
November 13, 1996 (December 16, 1996 as to the second paragraph
of Note 3 to those statements), we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of September 30, 1996,
is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 1, 1997
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
As of March 31, 1997, the Company's current ratio was 0.4 to 1,
unchanged from September 30, 1996. Cash and cash equivalents
increased $339,000 during the six-month period to a balance of
$485,000 at March 31, 1997, as cash provided by operations was
partially offset by debt payments and dividend payments.
Operating activities provided $693,000 and $2,855,000 cash for
the six-month periods ended March 31, 1997 and 1996,
respectively. The Company incurred net losses of $4,761,000 and
$393,000 for the first halves of fiscal 1997 and 1996,
respectively. The current period net loss included $1,858,000
in depreciation charges, non-cash restructuring charges of
$4,988,000 and a non-cash benefit of $1,685,000 for deferred tax
assets. The non-cash restructuring charges included $3,033,000
to impair fixed assets, $1,460,000 to record restructuring
reserves for carrying and exit costs of closed locations, a
$455,000 loss from the recognition of the Cumulative Translation
Adjustment, and a $40,000 valuation allowance for deferred tax
assets. Operating cash flow in the first half of 1996 included
receipt of $1,362,000 in tax refunds and $1,993,000 in
depreciation expense.
Investing activities used $28,000 of cash in the six-months just
ended. The Company spent $247,000 primarily for remodeling
existing restaurants, and recouped $219,000 from the sale of
equipment. In the first half of fiscal 1996, investing
activities used a net of $142,000. The Company spent $273,000
primarily for remodeling of existing restaurants and completion
of the Guadalajara restaurant, which opened in October 1995.
Proceeds from the sale of assets totaled $131,000 in the first
half of fiscal 1996.
No new restaurants were opened this year, and none are currently
planned, as management intends to focus on improving sales and
profitability and reducing debt. Capital expenditures to
remodel existing restaurants and to install restaurant computer
systems will continue within the constraint of available
operating cash flow and the loan agreement restrictions (see
Note 2 to the consolidated condensed financial statements). The
Company may also enter into lease agreements to acquire
restaurant computer systems.
Under the restructuring plan formulated in the quarter ended
March 31, 1997, the Company closed seven restaurants on April
15, 1997. Units closed include leased locations in Houston,
Dallas, San Antonio, Lubbock and College Station, Texas. The
Company provided estimated restructuring reserves to buy out of
the leases for those locations. The Company owns the land and
buildings of two units, in Phoenix and Tucson, Arizona, which
were closed. Plans are to sell those two restaurant properties
and to use the proceeds primarily to repay bank debt.
Financing activities used cash of $324,000 and $2,509,000 during
the first six-months of fiscal 1997 and 1996, respectively, due
primarily to the repayment of debt in each period. The Company
will continue to pay down debt, thereby reducing interest
expense, as quickly as possible within the constraints of
operating cash flows and restaurant maintenance needs.
The Company's revolving credit and term loan agreement ("Loan
Agreement") with a bank includes various financial covenants.
Due to the net loss incurred by the Company in the quarter ended
December 31, 1996, the Company violated a covenant. The bank
has subsequently granted a permanent waiver for this covenant
violation. The requirement to comply with an earnings-related
covenant has been suspended by the bank through May 1997.
In February 1997, the Company and the bank agreed to amend the
Loan Agreement limit-reduction schedule and covenants. In the
amended agreement, the credit line limit is $4.5 million until
June 30, and is reduced by $500,000 then and each subsequent
quarter end. Under this limit-reduction schedule, $780,000 of
the Company's bank debt is included in the current portion of
long-term debt.
Cash capital expenditures are limited by the amended agreement
to $500,000 each of the first three fiscal quarters and
$1,900,000 for the fiscal year. Cash dividends are limited to
$150,000 per fiscal year, respectively.
Effective March 31, 1997, the Company and the bank further
amended the Loan Agreement . This amendment modified the net
cash flow covenant to consider the non-cash provisions of the
restructuring charge. The termination date of the loan
agreement is April 1, 1998.
At March 31, 1997, the Company had $1,220,000 of credit
available under the bank line of credit.
Management is taking steps to ensure that the Company will be
able to comply with all of its covenants under the Loan
Agreement in the future. However, if the bank declined 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.
On April 11, 1997, the Company's board of directors declared a
$.015 per common share semi-annual cash dividend, payable on
June 10 to holders of record as of May 27. On December 10, 1996
the Company paid a $.015 per common share semi-annual cash
dividend to holders of record as of November 26. Future cash
dividends will depend on earnings, financial position, capital
requirements, debt restrictions and other relevant factors.
The Company believes it will realize substantial benefits from
the use of federal employer tax credits and state net operating
loss (NOL) carryforwards to reduce future federal and state
income tax liabilities. If the Company's results of operations
continue to decline or do not timely achieve levels needed to
use the employer tax credits or the state NOL carryforwards,
they could expire before use, resulting in a charge against
income.
In the quarter ended March 31, 1997, the Company increased its
valuation allowance for deferred tax assets to $700,000. The
valuation allowance includes $613,000 to fully reserve for
deferred tax assets related to disposal of the Mexico operation,
due to the uncertainty of their realizability. The remainder
of the increase in the deferred tax valuation allowance offsets
Arizona state NOL carryforwards and other deferred tax assets.
Results of Operations
Sales decreased $1,330,000 (7.4%) and $2,216,000 (6.3%) for the
quarter and half-year, respectively, ended March 31, 1997
compared to the same periods last year. The decrease is due to
same-store sales declines of 7.4% and 6.1%, respectively.
Average sales for restaurants open throughout the current three
and six month periods were $255,000 and $509,000, respectively.
Prior year average sales were $275,000 and $547,000 for the
first three and six month periods, respectively.
In response to declining sales, the Company formulated a
restructuring plan in the quarter ended March 31, 1997. The
restructuring included the closing of seven underperforming
restaurants and plans for discontinuing the Company's
participation in the Mexico joint venture. The seven
restaurants closed on April 15, 1997 contributed $1,170,000 and
$2,337,000 of sales in the current quarter and half-year, and
$4,920,000 in all of fiscal 1996. These represent average unit
sales well below those for the remaining 57 U.S. restaurants.
The Company expects restaurants near those closed in Houston,
Dallas and San Antonio, Texas and Phoenix, Arizona to show
improved sales trends due to customer traffic from the closed
locations.
The restructuring plan provides for the Company to continue to
participate in operating its Guadalajara, Mexico restaurant
through part of the quarter ending June 30, 1997, while
appropriate exit procedures are executed. The Company has
accrued restructuring reserves to provide for this exit process.
The Mexico operations have generated operating losses, and have
not contributed significant sales to the Company.
To improve sales, the Company has embraced a focused
neighborhood marketing strategy using company-wide and
store-specific neighborhood marketing tactics based on detailed
market research and analysis, supported by intensive planning
and training. Neighborhood marketing will strengthen Pancho's
ties to each restaurant's immediate community with a portfolio
of specific tactics developed for each location. A series of
Company-wide tactics complement existing Company programs such
as the Birthday Club and School Rewards programs. The results
of all marketing tactics will be carefully measured to evaluate
their impact on sales.
The Company introduced its 110% Satisfaction Guaranteed
promotion April 26 with a round of employee rallies that
demonstrated the Company's commitment to customer satisfaction.
At the rallies, the Company announced the rollout of its new
frequent diner program, which will be run intermittently to
increase visit frequency. The Company also presented new,
modern uniforms to add a fresh, updated look in the restaurants.
New graphics for menu boards and other design improvements will
be introduced during the summer to enhance restaurant appearance.
Food cost increased 1.6% and 0.5% of sales for the current
quarter and half-year, respectively, compared with the same
periods in fiscal 1996. The increase is due primarily to higher
usage of meats as the Company rolled out its all-you-can-eat
fajita promotion during fiscal 1997. Higher produce prices
resulting from disruptive weather conditions and smaller
production efficiencies resulting from lower sales compounded
the food cost problems. If the Company is unable to reduce food
costs with purchasing improvements and production efficiencies,
price increases will be considered.
Restaurant labor and related expenses were flat for the quarter
but up 0.6% of sales year-to-date, compared with the same
periods in fiscal 1996, despite the benefit of a $558,000 credit
to reduce employee injury benefit reserves in the current
quarter. These reserves were reduced to recognize effective
risk and case management based on management analysis of claims
activity and results.
Excluding the credit to reduce employee injury benefit reserves,
labor and related costs were up 3.4% and 2.3% of sales for the
current quarter and half-year, respectively. The increase was
caused by the combination of the higher federal minimum wage and
lower sales. Hourly wage inflation increased labor costs about
1.3% of sales. Due to the increased federal minimum wage and a
difficult labor market, the Company's average regular hourly
wage cost was $0.22 per hour higher for the first six-months of
1997 than for the first half of 1996. If the Company is unable
to reduce labor cost factors with management efficiencies and
sales increases, the Company will consider price increases.
Restaurant operating expenses, which include marketing and
occupancy costs, increased 0.7% and 1.5% of sales for the
current three-month and six-month periods versus the same
periods last year. For the quarter, the Company spent $196,000
less in 1997 than in 1996, and spending for the 1997 half-year
matched the 1996 half-year. Nevertheless, lower sales caused
higher cost percentages.
The Company spent 1.9% and 3.3% of sales on marketing in the
second quarters of fiscal 1997 and 1996, respectively. Due to
the strategic shift from broadcast advertising to neighborhood
marketing, the Company spent $277,000 less on marketing in the
current quarter. In the second quarter of 1996, the Company
spent $423,000 for broadcast media for TV ads, compared with
$8000 for broadcast media in the second quarter of 1997. These
savings were partially used to fund an additional $82,000 for
marketing research and consulting this quarter.
For marketing in the first half-year, the Company spent 2.5% of
sales and 2.6% of sales in fiscal 1997 and 1996, respectively.
Marketing costs were $78,000 lower this half-year, as the
Company spent $369,000 less for ad media and $163,000 more for
marketing research and consulting plus $89,000 more for
promotions. In fiscal 1997, management expects to continue
marketing expenditures at the fiscal 1996 rate of 2.7% of sales.
The remainder of the increase in restaurant operating costs as a
percentage of sales is due to the effect of lower sales on
relatively fixed occupancy costs, utilities and other operating
expenses.
Depreciation and amortization decreased $55,000 and $135,000 for
the three-month and six-month periods ended March 31, 1997
compared to the prior year periods, due to limited capital
additions this year.
For the quarter and half-year, general and administrative
expenses increased $221,000, up 1.9% of sales, and $117,000, up
0.8% of sales, respectively. The increase was partially due to
a $71,000 charge to reserve for extinguishment of stock notes
receivable from two former employees.
The Company recorded a restructuring charge of $4,988,000 to
execute the restructuring plan established in the quarter ended
March 31, 1997. This charge included $3,033,000 for the
impairment of land, buildings, leasehold improvements and
equipment. Impairment charges were determined in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The charge also included
$1,460,000 to reserve for exit and carrying costs of closed
locations. The rest of the charge consisted of a $455,000 loss
from recognition of the Cumulative Translation Adjustment for
disposal of the Mexico venture, plus $40,000 to record a
valuation allowance for deferred tax assets unlikely to be
realized due to the closing of two Arizona locations under the
restructuring.
Interest expense was $38,000 and $144,000 lower for the current
quarter and half-year, respectively, compared to the same
periods in fiscal 1996, due to lower outstanding debt.
The benefit for income taxes was $1,635,000 and $1,951,000 for
the current quarter and half-year, respectively. Year-to-date
that represents 34.1% of the US net loss before income taxes
versus a benefit rate of 37.6% for first six-months of fiscal
1996. No tax benefits have been recognized for the losses in
the Mexico operations. The prior year benefit was high due to
an increase in federal tax refunds receivable.
Due to lower sales and other factors discussed above, the
Company reported net losses of $4,087,000 and $4,761,000 for the
quarter and half-year ended March 31, 1997 versus net losses of
$37,000 and $393,000 for the same periods last year,
respectively. The restaurant industry is intensely competitive,
and the Company's future earnings depend on reversing the trend
of declining unit sales and improving the key cost factors.
Other Uncertainties and Trends
SFAS No. 121 requires the Company to review 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 restaurant level. If a
restaurant continues to incur negative cash flows or operating
losses, an impairment or restaurant closing charge may be
recognized in future periods.
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 flows and future
results of operations. The Company warns that many factors
could, individually or in aggregate, cause actual results to
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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number
2 Not applicable
4 Not applicable
10(y) Amendment to Revolving Credit and Term Loan Agreement,
dated March 31, 1997 -- filed herewith.
11 Not required--explanation of net earnings (loss) per
share computation is contained in notes to consolidated
condensed financial statements.
15 Letter re: unaudited interim financial
information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
May 14, 1997 /s/ Hollis Taylor
Hollis Taylor, President and Chief Executive
Officer (Principal Executive Officer)
May 14, 1997 /s/ W. Brad Fagan
Brad Fagan, Vice President, Treasurer,
Controller and Assistant Secretary (Principal
Financial and Accounting Officer)
SIXTH AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT
This Sixth Amendment To Revolving Credit and Term Loan
Agreement (this "Sixth Amendment") is made by and between PMB
Enterprises West, Inc., a New Mexico corporation ("Company"),
and Wells Fargo Bank (Texas), National Association (formerly
First Interstate Bank of Texas, N.A.) ("Bank").
WHEREAS, the parties entered into that one certain Revolving
Credit and Term Loan Agreement dated February 16, 1994 (the
Revolving Credit and Term Loan Agreement dated February 16, 1994
and all amendments thereto and restatements thereof are
hereinafter collectively referred to as the "Loan Agreement");
and
WHEREAS, the parties entered into that one certain First
Amendment To Revolving Credit and Term Loan Agreement dated
February 9, 1995 ("First Amendment"); and
WHEREAS, the parties entered into that one certain Second
Amendment To Revolving Credit and Term Loan Agreement dated May
9, 1995 ("Second Amendment"); and
WHEREAS, the parties entered into that one certain Third
Amendment To Revolving Credit and Term Loan Agreement dated
September 29, 1995 ("Third Amendment"); and
WHEREAS, the parties entered into that one certain Fourth
Amendment To Revolving Credit and Term Loan Agreement dated
February 16, 1996 ("Fourth Amendment"); and
WHEREAS, the parties entered into that one certain Fifth
Amendment To Revolving Credit and Term Loan Agreement dated July
9, 1996 ("Fifth Amendment"); and
WHEREAS, the parties desire to amend the Loan Agreement in
certain respects; and
WHEREAS, capitalized terms used herein shall have the meaning
assigned to them in the Loan Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, it is agreed by
and among the parties as follows:
1. The definition of Termination Date in Article I of the Loan
Agreement is amended to read in its entirety as follows:
"Termination Date" shall mean (i) April 1, 1998, or (ii)
such later date to which the Revolving Credit Period is extended
pursuant to Section 2.01(b) hereof.
2. Section 9.01 and Section 9.08 of the Loan Agreement are
amended to read in their entirety as follows:
9.01. Funded Debt to Net Cash Flow. Permit the ratio of
Funded Debt as of the end of any fiscal quarter to Net Cash Flow
of Pancho's Mexican Buffet, Inc. and its Subsidiaries for the
four quarter period ending as of the end of the preceding fiscal
quarter at any time to be greater than 2.5 to 1.0. In
calculating Net Cash Flow, there shall be excluded the
restructuring charge in the total amount of $3,488,018 incurred
in March 1997; or
9.08. Limitation on Additional Indebtedness. Incur or
assume or permit any Guarantor to incur or assume any
Indebtedness for borrowed money, except for (i) the indebtedness
evidenced by the Note; (ii) Consolidated Indebtedness (excluding
the indebtedness evidenced by the Note) not to exceed one
million five hundred thousand dollars ($1,500,000) in the
aggregate at any one time; and (iii) trade debt incurred in the
ordinary course of business; or
3. All net proceeds of the sale of the properties located at
8146 West Indian School Road, Phoenix, Arizona and 701 East
Broadway Boulevard, Tucson, Arizona, shall be promptly applied
to the unpaid balance of the Note. The failure of Borrower to
promptly apply all net proceeds of sale of such properties to
the unpaid balance of the Note shall constitute an event of
default under the Loan Agreement.
4. Except as amended by the First Amendment, the Second
Amendment, the Third Amendment, the Fourth Amendment, the Fifth
Amendment and this Sixth Amendment, the Loan Agreement is
ratified and confirmed and shall remain in full force and effect.
5. At the time of execution of this Sixth Amendment, Company
shall pay to Bank a fee in the amount of four thousand five
hundred dollars ($4,500).
6. The Company represents and warrants to the Bank, with full
knowledge that the Bank is relying on the following
representations and warranties in executing this Sixth
Amendment, as follows:
(a) The Company has corporate power and authority to execute,
deliver and perform this Sixth Amendment, and all corporate
action on the part of the Company requisite for the due
execution, delivery and performance of this Sixth Amendment has
been duly and effectively taken.
(b) The Loan Agreement and the Loan Documents and each and
every other document executed and delivered in connection with
this Sixth Amendment to which the Company or any of its
Subsidiaries is a party constitute the legal, valid and binding
obligations of the Company and any of its Subsidiaries to the
extent it is a party thereto, enforceable against such Person in
accordance with their respective terms.
(c) This Sixth Amendment does not and will not violate any
provisions of the articles or certificate of incorporation or
bylaws of the Company, or any contract, agreement, instrument or
requirement of any Governmental Authority to which the Company
is subject. The Company's execution of this Sixth Amendment
will not result in the creation or imposition of any lien upon
any properties of the Company, other than those permitted by the
Loan Agreement and this Sixth Amendment.
(d) The Company's execution, delivery and performance of this
Sixth Amendment do not require the consent or approval of any
other Person, including, without limitation, any regulatory
authority or governmental body of the United States of America
or any state thereof or any political subdivision of the United
States of America or any state thereof.
(e) All financial information previously presented to the Bank
fairly present the financial condition of the Company and its
Subsidiaries as at the date of such information and the results
of the operations of the Company and its Subsidiaries for the
periods ended on such dates, all in accordance with GAAP applied
on a consistent basis.
(f) The Company has performed and complied with all agreements
and conditions contained in the Loan Agreement required to be
performed or complied with by the Company prior to or at the
time of delivery of this Sixth Amendment.
(g) After giving effect to this Sixth Amendment, no Default or
Event of Default exists and all of the representations and
warranties contained in the Agreement and all instruments and
documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date.
(h) Nothing in this Section 5 of this Sixth Amendment is
intended to amend any of the representations or warranties
contained in the Loan Agreement or in the Loan Documents to
which the Company or any of the Subsidiaries is a party.
7. The effectiveness of this Sixth Amendment shall be
conditioned on the receipt by the Bank of each of the following:
(a) Corporate resolutions of Company authorizing the execution
of this Sixth Amendment;
(b) Incumbency certificate of Company; and
(c) The fee in the amount of four thousand five hundred dollars
($4,500).
8. Company hereby expressly ratifies, confirms and extends all
deed of trust and mortgage liens and all security interests in
favor of Bank and agrees that each deed of trust lien, mortgage
lien and security interest in favor of Bank shall remain in full
force and effect until all indebtedness of Company to Bank is
paid in full and all commitments of Bank to Company have
terminated.
9. Company agrees to pay any and all costs and expenses incurred
by Bank in connection with this Sixth Amendment (including, but
not limited to, any and all appraisal fees, cost of title
searches, costs of environmental reports, recording fees,
conveyance fees and reasonable attorneys fees) within ten (10)
days of the date of any invoice for such costs and expenses.
Company, at Company's expense, agrees to promptly execute and
deliver to Bank upon request any and all other and further
documents, agreements and instruments as may be requested by
Bank in connection with or relating to this Sixth Amendment and
the Loan Agreement or as may be necessary to correct any
omissions or defects in the documents, agreements or instruments
delivered to Bank in connection therewith.
10. The parties agree to be bound by the terms and provisions of
the current Arbitration Program of Wells Fargo Bank (Texas),
National Association, which is incorporated by reference herein
and is acknowledged as received by the parties pursuant to which
any and all disputes shall be resolved by mandatory binding
arbitration upon the request of any party.
11. Each of the Guarantors hereby consents to and accepts the
terms and conditions of this Sixth Amendment, agrees to be bound
by the terms and conditions hereof and ratifies and confirms
that its continuing Guaranty Agreement, executed and delivered
to the Bank as of February 16, 1994, guaranteeing payment of the
obligations is and remains in full force and effect.
12. This Sixth Amendment may be executed in any number of
counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall
be deemed to be an original and all of which taken together
shall constitute but one and the same instrument. Delivery of
an executed counterpart of the signature page of this Sixth
Amendment by facsimile shall be equally as effective as delivery
of a manually executed counterpart of this Sixth Amendment.
13. This Sixth Amendment shall be binding upon and inure to the
benefit of the parties and their respective successors and
assigns.
14. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS AMONG THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
Executed to be effective as of March 31, 1997.
PMB ENTERPRISES WEST, INC.
By: /s/Samuel L. Carlson
Samuel L. Carlson, Senior Vice
President
COMPANY
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
(formerly First Interstate Bank of Texas, N.A.)
By: /s/John R. Peloubet
John r. Peloubet, Vice President
BANK
AGREED TO:
PANCHO'S MEXICAN BUFFET, INC.
By: /s/W. Brad Fagan___________
Name: Brad Fagan__________
Title: VP - Treasurer________
PMB INTERNATIONAL, INC.
By: /s/W. Brad Fagan____________
Name: Brad Fagan___________
Title: VP - Treasurer_________
PAMEX OF TEXAS, INC.
By: /s/W. Brad Fagan_____________
Name: Brad Fagan____________
Title: VP - Treasurer__________
GUARANTORS
F-81999.1
<PAGE>
EXHIBIT 15
Pancho's Mexican Buffet, Inc.:
We have reviewed in accordance with standards established by the
American Institute of Certified Public Accountants the unaudited
interim financial information of Pancho's Mexican Buffet, Inc.
and subsidiaries for the three-months and six-months ended March
31, 1997 and 1996, as indicated in our report dated May 1, 1997;
because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, is incorporated by reference in
Registration Statements No. 2-86238 and No. 33-60178 on Form S-8.
We are also aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered
a part of the Registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 14, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheets as of March 31, 1997 and the consolidated
condensed statement of operations for the nine-months then ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 485,000
<SECURITIES> 0
<RECEIVABLES> 262,000
<ALLOWANCES> 0
<INVENTORY> 674,000
<CURRENT-ASSETS> 2,168,000
<PP&E> 61,797,000
<DEPRECIATION> 33,668,000
<TOTAL-ASSETS> 35,195,000
<CURRENT-LIABILITIES> 6,121,000
<BONDS> 0
0
0
<COMMON> 440,000
<OTHER-SE> 21,761,000
<TOTAL-LIABILITY-AND-EQUITY> 35,195,000
<SALES> 33,159,000
<TOTAL-REVENUES> 33,159,000
<CGS> 9,391,000
<TOTAL-COSTS> 32,023,000
<OTHER-EXPENSES> 7,713,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,000
<INCOME-PRETAX> (6,712,000)
<INCOME-TAX> (1,951,000)
<INCOME-CONTINUING> (4,761,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,761,000)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
