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 June 30, 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 August 11,
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,
June 30, 1997 (unaudited) and September 30,1996 2
Consolidated Condensed Statements of
Operations for the Three Months and Nine Months
Ended June 30, 1997 and 1996 (unaudited) 3
Consolidated Condensed Statements of Cash
Flows for the Nine Months
Ended June 30, 1997 and 1996 (unaudited) 4
Notes to Consolidated Condensed Financial
Statements (unaudited) 5
Independent Accountants' Review Report 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
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 16
Signatures 17
<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 June 30,
1997 and for the three-month and nine-month periods ended June
30, 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 June 30,
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 June 30, 1997 and for the three-month and
nine-month periods ended June 30, 1997 and 1996 included herein.
page 1
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, September 30,
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 784,000 $ 145,000
Accounts and notes receivable - current portion 220,000 254,000
Income taxes receivable 433,000 186,000
Inventories 565,000 640,000
Prepaid expenses 151,000 180,000
Deferred income taxes 317,000 206,000
Total current assets 2,470,000 1,611,000
PROPERTY, PLANT AND EQUIPMENT :
Land 3,295,000 3,446,000
Buildings 9,900,000 10,561,000
Leasehold improvements 21,529,000 22,532,000
Equipment and furniture 26,846,000 28,579,000
Construction in progress 70,000 7,000
Total 61,640,000 65,125,000
Less accumulated depreciation and amortization (34,207,000) (32,359,000)
Property, plant and equipment - net 27,433,000 32,766,000
OTHER ASSETS:
Deferred income taxes 4,230,000 2,811,000
Other, including noncurrent portion of receivables 550,000 780,000
Total other assets 4,780,000 3,591,000
TOTAL $ 34,683,000 $ 37,968,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,032,000 $ 1,121,000
Accrued wages and bonuses 1,600,000 1,485,000
Other current liabilities 1,814,000 1,398,000
Debt classified as current 4,329,000 152,000
Total current liabilities 8,775,000 4,156,000
OTHER LIABILITIES:
Long-term debt 263,000 3,489,000
Accrued insurance costs 2,988,000 3,802,000
Restructuring reserves 513,000
Total other liabilities 3,764,000 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 3,374,000 8,347,000
Cumulative foreign currency translation adjustment (436,000)
Stock notes receivable (303,000) (463,000)
Stockholders' equity 22,144,000 26,521,000
TOTAL $ 34,683,000 $ 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 Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES $ 16,745,000 $ 18,005,000 $ 49,904,000 $ 53,380,000
COSTS AND EXPENSES:
Food costs 4,847,000 4,870,000 14,238,000 14,717,000
Restaurant labor and related expenses 6,051,000 6,651,000 18,765,000 19,972,000
Restaurant operating expenses 3,858,000 4,079,000 11,918,000 12,130,000
Depreciation and amortization 789,000 976,000 2,647,000 2,969,000
General and administrative expenses 1,247,000 1,170,000 3,972,000 3,778,000
Restructuring charges 78,000 5,066,000
Total 16,870,000 17,746,000 56,606,000 53,566,000
OPERATING INCOME (LOSS) (125,000) 259,000 (6,702,000) (186,000)
INTEREST EXPENSE (89,000) (112,000) (289,000) (456,000)
OTHER, INCLUDING INTEREST INCOME 88,000 58,000 153,000 217,000
EARNINGS (LOSS) BEFORE INCOME TAXES (126,000) 205,000 (6,838,000) (425,000)
PROVISION (BENEFIT) FOR INCOME TAXES (46,000) 84,000 (1,997,000) (153,000)
NET EARNINGS (LOSS) $ (80,000) $ 121,000 $ (4,841,000) $ (272,000)
NET EARNINGS (LOSS) PER SHARE $ (0.02) $ 0.03 $ (1.10) $ (0.06)
<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>
Nine Months Ended June 30,
1997 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (4,841,000) $ (272,000)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Restructuring charges
Depreciation and amortization 2,647,000 2,969,000
Provision (benefit) for deferred income taxes (1,570,000) (4,000)
Amortization of restaurant start-up costs 36,000
Payment of restaurant start-up costs
Provision for impairment of long-lived assets 3,073,000
Provision for exit and carrying costs of closed locations 1,538,000
Provision for cumulative translation adjustment 456,000
Loss on impairment of stock notes receivable 83,000
(Gain) on sale of assets (114,000) (109,000)
Minority interest in net earnings (loss)
Changes in operating assets and liabilities:
Accounts and notes receivable 13,000 219,000
Income taxes receivable (247,000) 1,212,000
Inventories, prepaid expenses and other assets 115,000 446,000
Exit and carrying cost reserves of closed locations (677,000)
Accounts payable and accrued expenses (715,000) (712,000)
Other 33,000
Total adjustments 4,602,000 4,090,000
Net cash provided (used) by operating activities (239,000) 3,818,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (352,000) (621,000)
Proceeds from sale of assets 339,000 228,000
Net cash (used) by investing activities (13,000) (393,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 4,176,000 (20,000)
Long-term borrowings 21,122,000 22,767,000
Repayments of long-term borrowings (24,348,000) (26,224,000)
Proceeds from increase in minority interest
Dividends paid (132,000) (132,000)
Payments received on officer stock notes 77,000 67,000
Net cash provided (used) by financing activities 895,000 (3,542,000)
EFFECT OF FOREIGN EXCHANGE RATE
CHANGE ON CASH (4,000) (21,000)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 639,000 (138,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 145,000 1,199,000
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 784,000 $ 1,061,000
SUPPLEMENTAL INFORMATION:
Income taxes paid (refunds received), net (180,000) $ (1,348,000)
Interest paid, net of capitalized amounts $ 240,000 450,000
<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 EARNINGS (LOSS) PER SHARE
Net earnings (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 the three months and
nine months ended June 30, 1997 and June 30, 1996.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," which the Company is required to
adopt in the quarter beginning October 1, 1997. Management
believes that the adoption of SFAS No. 128 will not have a
material effect on the Company's financial statements.
2. LONG-TERM DEBT
Payment of the Company's outstanding debt under its revolving
credit and term loan agreement ("Loan Agreement") with a bank is
due April 1, 1998. Management is currently negotiating with the
bank to extend its debt agreement. The Company does not
currently have an extension agreement with the bank or an
alternate financing agreement, which raises substantial doubt
about the Company's ability to continue as a going concern. If
an agreement is not reached, then management will seek an
alternate source of financing, however, there are no assurances
that alternate financing will be found. Management expects the
Company to have funds available for some debt reduction before
April 1, 1998, from various sources, including operating cash
flow, income tax refunds and sales of closed restaurant sites.
The Loan Agreement includes various financial covenants. Due to
the operating loss (as defined by the Loan Agreement) 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 was suspended by the
bank through May 1997. The Company was in compliance with this
and all other loan covenants at June 30, 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 million
effective June 30, 1997, and is reduced by $500,000 each
subsequent quarter end through March 31, 1998. At June 30,
1997, the Company had no additional credit available under the
bank line of credit.
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 must not exceed
$150,000 per fiscal year.
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 has recorded restructuring charges of $5,066,000 to
execute the plan. Under the plan, the Company recognized
$4,988,000 in restructuring charges in the quarter ended March
31, 1997, and $78,000 more in the quarter ended June 30, 1997.
The charges 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 $1,538,000 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.
Under the plan, the Company closed seven U.S. locations on April
15, 1997. The Company has written off its entire investment in
the Mexico venture and has reserved for exit and carrying costs
to dispose of its interest. The Company has transferred its
interest in the Mexico venture effective May 31, 1997 to its
joint venture partner, a non-employee director of the Company.
Sales for the seven closed locations plus the Mexico operation
were $281,000 and $2,854,000 for the quarter and nine-months
ended June 30, 1997, respectively, and $5,512,000 for all of
fiscal 1996.
4. ADJUSTMENT OF INSURANCE RESERVES
The Company recognized net benefits of $500,000 and $558,000 to
reduce employee injury benefit reserves in the quarters ended
June 30, 1997 and March 31, 1997, respectively. These reserves,
which are included in accrued insurance costs on the balance
sheet, were reduced based on an updated management analysis of
claims activity and results.
5. CASH DIVIDENDS
On June 10, 1997, the Company paid a $.015 per common share
semi-annual cash dividend 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.
6. DEFERRED TAX ASSETS
In the quarter ended June 30, 1997, the Company increased its
valuation allowance for deferred tax assets to $836,000. The
valuation allowance includes $635,000 to fully reserve for
deferred tax assets related to disposal of the Mexico operation,
due to the uncertainty for their realizability. The remainder
of the increase in the deferred tax valuation allowance offsets
Arizona and Texas net operating loss carryforwards and other
deferred tax assets.
<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 (the
"Company") as of June 30, 1997 and the related consolidated
condensed statements of operations for the three-month and
nine-month periods ended June 30, 1997 and 1996 and the
statements of cash flows for the nine months then ended. 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.
The accompanying consolidated condensed financial statements
have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 2 to the condensed
consolidated financial statements, certain conditions raise
substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters
are also described in Note 2.
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
August 5, 1997
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
At June 30, 1997, the Company's current ratio was 0.3 to 1, down
0.1 from September 30, 1996, because the outstanding debt under
its bank line of credit was shown as current at June 30, 1997,
due to its April 1, 1998 maturity.
Payment of the Company's outstanding debt under its revolving
credit and term loan agreement ("Loan Agreement") with a bank is
due April 1, 1998. Management is currently negotiating with the
bank to extend its debt agreement. The Company does not
currently have an extension agreement with the bank or an
alternate financing agreement, which raises substantial doubt
about the Company's ability to continue as a going concern. If
an agreement is not reached, then management will seek an
alternate source of financing. Management expects the Company
to have funds available for some debt reduction before April 1,
1998, from various sources, including operating cash flow,
income tax refunds and sales of closed restaurant sites.
The Loan Agreement includes various financial covenants. Due to
the operating loss (as defined by the Loan Agreement) 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 was suspended by the
bank through May 1997. The Company was in compliance with this
and all other loan covenants at June 30, 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 million
effective June 30, 1997, and is reduced by $500,000 each
subsequent quarter end through March 31, 1998. At June 30,
1997, the Company had no additional credit available under the
bank line of credit.
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 must not exceed
$150,000 per fiscal year.
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.
Cash and cash equivalents increased $639,000 during the
nine-month period to a balance of $784,000 at June 30, 1997, as
cash provided by net borrowings was partially-offset by cash
used for operations and investment.
Operating activities used $239,000 and provided $3,818,000 in
the nine-month periods ended June 30, 1997 and 1996,
respectively. The Company incurred net losses of $4,841,000 and
$272,000 for the first nine months of fiscal 1997 and 1996,
respectively. The current period net loss included $2,647,000
in depreciation charges, restructuring charges of $5,066,000 and
a benefit of $1,570,000 for deferred tax assets. The
restructuring charges included $3,033,000 to impair fixed
assets, $1,538,000 to record restructuring reserves for carrying
and exit costs of closed locations, a $455,000 loss from the
recognition of the Cumulative Foreign Currency Translation
Adjustment, and a $40,000 valuation allowance for deferred tax
assets. Operating cash flow in the first nine-months of 1996
included $2,969,000 in depreciation expense and receipt of
$1,362,000 in tax refunds.
Investing activities used $13,000 of cash in the nine months
just ended. The Company spent $352,000 primarily for capital
replacements and remodeling existing restaurants, and recouped
$339,000 from the sale of equipment. In the first nine months
of fiscal 1996, investing activities used a net of $393,000.
The Company spent $621,000 primarily for remodeling of existing
restaurants and completion of the Guadalajara restaurant, which
opened in October 1995. Proceeds from the sale of assets
totaled $228,000 in the first nine months 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 included 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 to reduce bank debt.
Financing activities provided $895,000 and used $3,542,000 in
the first nine months of fiscal 1997 and 1996, respectively.
Bank debt under the line of credit was $720,000 higher at June
30, 1997, than at September 30, 1996. Current and long-term
notes payable were further increased by lease buyout notes
issued to landlords in fiscal 1997 to reduce lease expenses for
closed locations, effectively moving off-balance sheet lease
liabilities to the balance sheet as debt. Cash was used in
financing activities in the first nine months of 1996 primarily
for repayment of debt. The Company will continue to pay down
debt, thereby reducing interest expense, as quickly as possible
within the constraints of operating cash flows.
On June 10, 1997, the Company paid a $.015 per common share
semi-annual cash dividend 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. 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 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. The Company has
established a valuation allowance to offset the amount of
deferred tax assets it believes are likely not to be realized.
In the quarter ended June 30, 1997, the Company increased its
valuation allowance for deferred tax assets to $836,000. The
valuation allowance includes $635,000 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 and Texas state NOL carryforwards and other deferred tax
assets.
Results of Operations
Sales decreased $1,260,000 (7.0%) and $3,476,000 (6.5%) for the
quarter and nine months, respectively, ended June 30, 1997
compared to the same periods last year. Sales for the seven
closed U.S. restaurants plus the Mexico operation were
$1,061,000 and $1,267,000 higher in the quarter and nine months
ended June 30, 1996, respectively, than in the same periods this
year. The rest of the decrease is due to same-store sales
declines of 1.2% and 4.5% for the quarter and nine months,
respectively.
Average sales for restaurants open throughout the current three
and nine-month periods were $288,000 and $824,000, respectively.
The increase over prior year average sales of $277,000 and
$825,000 for the same periods, respectively, is primarily due to
the elimination of the lower sales volume locations under the
restructuring plan. Continuing this positive sales trend,
average store sales were up over 7% for July 1997 compared with
July 1996.
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 plus the Mexico operation
contributed $281,000 and $2,854,000 of sales in the current
quarter and nine months, and $5,512,000 in all of fiscal 1996.
These represent average unit sales well below those for the
remaining 57 U.S. restaurants. Those restaurants near locations
closed in Houston, Dallas and San Antonio, Texas and Phoenix,
Arizona have shown much improved sales trends due to customer
traffic from the closed locations.
The Company continued to participate in operating its
Guadalajara, Mexico restaurant through May 31, 1997, as
appropriate exit procedures were executed. The Company has
written off its entire investment in the Mexico venture and has
reserved for exit and carrying costs to dispose of its interest.
The Company has transferred its interest in the Mexico venture
to its joint venture partner, a non-employee director of the
Company.
In response to increased wage and other cost factors, the
Company implemented new menu pricing effective in July 1997.
This change is the Company's first major price increase since
December 1993, and is expected to represent an average price
increase of 5.1%. Additional increases are being considered for
fiscal 1998 in response to the federal minimum wage increase
September 1, 1997, and other cost increases.
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. Fourth quarter promotions will include a targeted
newspaper insert with coupons, frequent diner discounts and a
variety of store-specific tactics.
Food cost increased 1.9% and 0.9% of sales for the current
quarter and nine months, 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, which was discontinued in most restaurants on
July 1, 1997. Higher produce prices resulting from disruptive
weather conditions and smaller production efficiencies resulting
from lower sales compounded the food cost problems. The July
1997 price increase is expected to significantly reduce food
cost as a percentage of sales.
Restaurant labor and related expenses were down 0.8% of sales
for the quarter but up 0.4% of sales year-to-date, compared with
the same periods in fiscal 1996. Higher wages were offset in
the quarter and partially-offset year-to-date by reductions of
$500,000 and $558,000 to the employee injury benefit reserves
in the quarters ended June 30 and March 31, 1997, respectively.
These reserves were reduced to recognize effective risk and case
management based on management analysis of claims activity and
results.
Excluding the credits to reduce employee injury benefit
reserves, labor and related costs were up 2.2% and 2.6% of sales
for the current quarter and nine months, respectively. The
higher federal minimum wage combined with lower sales to cause
the increase as a percentage of sales.
Hourly wage inflation increased labor costs about 1.8% and 1.5%
of sales for the quarter and nine months, respectively. Due to
the increased federal minimum wage and a difficult labor market,
the Company's average regular hourly wage cost was $0.287 and
$0.248 higher per hour for the quarter and nine months of 1997,
respectively, than for the same periods in 1996. The price
increase is expected to lower labor costs as a percentage of
sales. Additional price increases are being considered for
fiscal 1998 due to the $0.40 per hour federal minimum wage
increase effective September 1, 1997.
Restaurant operating expenses, which include marketing,
supplies, repair and maintenance, and occupancy costs, increased
0.3% and 1.2% of sales for the current three-month and
nine-month periods versus the same periods last year. The
Company spent $221,000 and $212,000 less in the 1997 quarter and
nine months than the same periods in 1996, but lower sales
caused higher cost percentages.
The cost of supplies was up 0.5% and 0.4% of sales for the
quarter and nine months in fiscal 1997, respectively, versus the
same periods in fiscal 1996. Maintenance costs were up 0.3% and
0.4% of sales for the current quarter and year-to-date,
respectively, compared with the same periods in 1996.
The Company spent 2.3% and 2.8% of sales on marketing in the
third quarters of fiscal 1997 and 1996, respectively. Due to
the strategic shift from broadcast advertising to neighborhood
marketing, the Company spent $110,000 less on marketing in the
current quarter. The Company spent $304,000 for broadcast media
for TV ads in the third fiscal quarter of 1996, compared with
none in the third quarter of 1997. These savings were partially
offset in the current quarter by spending $49,000 more for
marketing research and consulting, $83,000 more for promotions
and $40,000 more on other local marketing.
For marketing in the first nine months, the Company spent 2.5%
and 2.6% of sales in fiscal 1997 and 1996, respectively.
Marketing costs were $187,000 lower this nine months, as the
Company spent $688,000 less for ad media and $220,000 more for
marketing research and consulting, plus $172,000 more for
promotions. Management expects to continue marketing
expenditures at about the same rate as the fiscal 1996 rate of
2.7% of sales.
As a percentage of sales, the mostly fixed occupancy costs and
utilities were up year-to-date despite lower dollar cost due to
lower sales, but were slightly down in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996.
Depreciation and amortization decreased $187,000 and $322,000
for the three-month and nine-month periods ended June 30, 1997
compared to the prior year periods, due to the closing of low
sales volume stores and limited capital additions this year.
For the current quarter and nine months, general and
administrative expenses increased $77,000, up 0.9% of sales, and
$194,000, up 0.9% of sales, respectively. The increase was
partially due to an $82,000 charge for impairment of stock notes
receivable from two former employees and due to higher
accounting services costs.
In fiscal 1997, the Company recorded a restructuring charge of
$5,066,000 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
$1,538,000 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 Foreign Currency 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 $23,000 and $167,000 lower for the current
quarter and nine months, respectively, compared to the same
periods in fiscal 1996, due to lower outstanding debt.
The benefit for income taxes was $46,000 and $1,997,000 for the
current quarter and nine months, respectively. Year-to-date
that represents 34.1% of the U.S. net loss before income taxes.
Higher than expected federal income tax refunds caused a benefit
rate of 58.1% on the U.S. loss for the first nine months of
fiscal 1996. No tax benefits have been recognized for the
losses in the Mexico operations.
Due to lower sales and other factors discussed above, the
Company reported net losses of $80,000 and $4,841,000 for the
quarter and nine months ended June 30, 1997 versus net income of
$121,000 and a net loss of $272,000 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
operating margin.
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>
<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(c) Amendment to Rights Agreement dated as of January 30, 1996
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 financia 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 June 30, 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.
August 14, 1997 /s/ Hollis Taylor
Hollis Taylor, President and Chief Executive
Officer (Principal Executive Officer)
August 14, 1997 /s/ W. Brad Fagan
Brad Fagan, Vice President, Treasurer,
Controller and Assistant Secretary
(Principal Financial and Accounting Officer)
<PAGE>
AMENDMENT TO RIGHTS AGREEMENT
This amendment to Rights Agreement (this "Amendment") is made as of this
25th day of July, 1997, by and between Pancho's Mexican Buffet, Inc., a
Delaware corporation (the "Company"), and Continental Stock Transfer &
Trust Company, a New York corporation ("Continental"), as successor Rights
Agent to KeyCorp. Shareholder Services, Inc. (the "Rights Agent"):
WHEREAS, the Company has removed KeyCorp. as Rights Agent
pursuant to Section 21 ("Section 21") of the Rights Agreement
(the "Rights Agreement") between the Company and KeyCorp., as
Rights Agent, and appointed Continental as successor Rights Agent
pursuant to Section 21; and
WHEREAS, Continental does not have a regular office in the State
of Texas as is currently required of a Rights Agent by Section 21
or a combined capital and surplus in an amount required by
Section 21.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements herein set forth, the parties hereby agree as follows:
1. The fifth sentence of Section 21 is hereby amended and
restated to read in its entirety as follows:
Any successor Rights Agent, whether appointed by the
Company or by such a Court, shall be a corporation
organized and doing business under the laws of the
United States or of any state of the United States,
in good standing, having an office in the United
States which is authorized under such laws to
exercise corporate trust powers and is subject to
supervision or examination by federal or state
authority.
2. All references in the Rights Agreement to KeyCorp.
Shareholder Services, Inc. as the Rights Agent shall be
replaced by references to Continental Stock Transfer &
Trust Company, as successor Rights Agent.
3. The Rights Agreement, as amended by this Amendment,
shall remain in full force and effect in accordance with
its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the date and year first above
written.
PANCHO'S MEXICAN BUFFET, INC.
By: /s/Samuel L. Carlson
Samuel L. Carlson
Senior Vice President, Administration
and Secretary
Attest:
/s/Brad Fagan
Vice President, Treasurer
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
By: /s/Roger Bernhammer
Roger Bernhammer
Vice President
Attest:
/s/Thomas Jennings
Thomas Jennings
Assistant Secretary
<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 nine-months ended June
30, 1997 and 1996, as indicated in our report dated August 5,
1997, which includes an explanatory paragraph with regard to the
Company's ability to continue as a going concern; 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 June 30, 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
August 14, 1997<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This scHedule contains summary financial information extracted from the
consolidated condensed balance sheets as of June 30, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 784,000
<SECURITIES> 0
<RECEIVABLES> 220,000
<ALLOWANCES> 0
<INVENTORY> 565,000
<CURRENT-ASSETS> 2,470,000
<PP&E> 61,640,000
<DEPRECIATION> 34,207,000
<TOTAL-ASSETS> 34,683,000
<CURRENT-LIABILITIES> 8,775,000
<BONDS> 0
0
0
<COMMON> 440,000
<OTHER-SE> 21,704,000
<TOTAL-LIABILITY-AND-EQUITY> 34,683,000
<SALES> 49,904,000
<TOTAL-REVENUES> 49,904,000
<CGS> 14,238,000
<TOTAL-COSTS> 47,568,000
<OTHER-EXPENSES> 9,038,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289,000
<INCOME-PRETAX> (6,838,000)
<INCOME-TAX> (1,997,000)
<INCOME-CONTINUING> (4,841,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,841,000)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
