PANCHOS MEXICAN BUFFET INC /DE, 10-K, 1998-12-17

PANCHOS MEXICAN BUFFET INC /DE
10-K, 1998-12-17
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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, 1998

_____ 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)
(817) 831-0081
(Registrant's telephone number, including 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 [ ].

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT ON NOVEMBER 30, 1998, BASED ON THE ACTUAL STOCK PRICE ON SUCH DATE
WAS $3,317,384.

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 30,
1998:..................................................................4,358,723

DOCUMENTS INCORPORATED BY REFERENCE

THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 27, 1998, IS INCORPORATED BY REFERENCE IN PART III HEREOF.
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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 features "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 service, a diner simply raises the small flag on the table.
The Company currently operates 48 restaurants located in the states of Texas
(39), Louisiana (4), Arizona (2), Oklahoma (2) and New Mexico (1).

In the quarter ended June 1998, the Company impaired assets at 22 locations
based on its continuing evaluation of recoverability of long-lived store assets.
In the same quarter, the Company adopted a restructuring plan to close 9 of
those restaurants. Under the plan, in July and August 1998, the Company closed
restaurants in Phoenix; Chalmette and Shreveport, Louisiana; Albuquerque;
Oklahoma City; San Antonio, Galveston and Amarillo, Texas.

No new restaurants were opened in fiscal 1998, and none are currently
planned, as management intends to focus on improving sales and profitability and
reducing debt.

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 has commissioned outside consultants to review the Pancho's
concept and assist in developing a more modern prototype for future development
and remodeling existing units. The goal is to refine food offerings, service
systems and physical facilities to achieve increased customer count and require
less labor than existing operations. The Company will conduct extensive testing
and customer research while developing the new Pancho's.

The Company's long-term strategy is to expand Pancho's Mexican Buffet
within the Company's existing five-state market, and possibly 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; however, one
Pancho's is currently being operated under a license agreement.

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.
The current restaurant prototypes are undergoing review and modification as the
Company seeks to improve sales and profitability. In its restaurants, the
Company maintains distinctive styling and colorful decor using authentic
artifacts in a Mexican motif.

The current Pancho's concept is designed 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, sopaipillas (Mexican bread), beverage refills and more food on
request for the "all-you-can-eat" patrons. This
<PAGE> 3

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 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. These development costs are based on the current prototypes. The
Company has not built any new restaurants since 1995. Inflation and changes to
the Pancho's restaurant format may affect future development costs.

In addition to the "all-you-can-eat" buffet, the menu includes
competitively-priced limited-selection plates: the Super Combo value meal, lunch
specials, fajitas, a taco salad, soup/salad bar, and a child's plate. Children
five years of age and under are served 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. The Company is considering a variety of alternatives to its current
price structure.

More than 20 items of Mexican food are served, including tamales, refried
beans, Mexican rice, flautas, five kinds of enchiladas, 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 28 restaurants
and accounted for 0.9% of the Company's sales for the year ended September 30,
1998. Pancho's restaurants offer food to go, which accounted for 10.8% of sales
for the year ended September 30, 1998.

The Company has standard procedures for customer service, sanitation, food
preparation and other operational matters. Depending on the size of the
restaurant and the time of the year, each Pancho's will have from 30 to 90
employees. 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 Supervisors 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 based on the restaurant group for which they are responsible.

MARKETING AND ADVERTISING

The Company emphasizes a Neighborhood Marketing Strategy in which 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 gift
certificate awards for honor 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
neighborhood marketing is augmented by focused newspaper inserts, direct mail
and billboards.

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The Company uses extensive customer and employee surveys to help develop
and evaluate marketing strategy and tactics. Local store marketing programs
tailored to each restaurant are developed and implemented quarterly.

PURCHASING AND DISTRIBUTION

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 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.

HUMAN RESOURCES

On September 30, 1998, the Company had about 2,147 employees, of whom 57
were corporate personnel, 2,078 were employed in restaurants and 12 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. The competitive environment is often affected
by factors beyond a particular restaurant's control, including changes in
population, traffic patterns, economic conditions and consumer preferences. The
Company's restaurants compete with a wide variety of Mexican food, fast food,
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 in the strength of
the Pancho's Mexican Buffet name.

FORWARD-LOOKING STATEMENTS

Certain statements in this report are forward-looking statements which
represent the Company's expectations or beliefs concerning future events,
including, but not limited to the following: statements regarding restaurant
concept changes, plans to sell assets, ability to service debt and satisfy loan
covenants, 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. The Company does not
expect to update such forward-looking statements continually as conditions
change, and readers should consider that such statements pertain only to the
date hereof.

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, freezer space of about 194,000 cubic

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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.

The sites of seven operating restaurants are owned by the Company. The
Company is seeking to sell three closed restaurant sites, including buildings
and land which it owns in Amarillo and Galveston, Texas, and Albuquerque, New
Mexico. In October 1998, the Company completed the sale of land and buildings it
held for sale in Phoenix and Shreveport.

Forty-one operating restaurants are occupied pursuant to lease agreements
with various expiration dates into the year 2009. 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.

At September 30, 1998, the Company had remaining lease obligations on five
closed restaurant locations. At November 30, 1998, one of these locations was
subleased, and the Company was seeking to sublease three other sites, for which
the lease terms expire in 1999, 2000 and 2007. The other lease expires in
February 1999.

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.

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.

The cities and towns where the Company's restaurants are located are listed
below:

ARIZONA:
Mesa
Phoenix

LOUISIANA:
Baton Rouge
Bossier City
Lafayette
Metairie

NEW MEXICO:
Albuquerque

OKLAHOMA:
Oklahoma City
Tulsa

TEXAS:
Abilene
Arlington-3
Baytown
Beaumont
Burleson
Carrollton
Conroe
Corpus Christi*
Dallas-3
Denton
El Paso-2**
Euless
Fort Worth-3
Garland
Houston-6
Humble
Irving
Killeen
League City
Lewisville
Longview
Mesquite
North Richland Hills
Plano
Richardson
San Antonio
Sherman
Texarkana
Tyler
Waco

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* Operated by licensee

** Operated by A&A Foods

ITEM 3. LEGAL PROCEEDINGS

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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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 46
Chief Operations
Officer -- also Director and
officer of subsidiary
companies
Hollis Taylor................. Director and President and Since August 10, 1979 62
Chief Executive
Officer -- also Director and
officer of subsidiary
companies
Samuel L. Carlson............. Director and Senior Vice Since December 21, 1988 62
President, Administration
and Secretary -- also
Director and officer of
subsidiary companies
Brad Fagan.................... Vice President, Treasurer, CFO Since September 29, 1995 39
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, Chief Financial Officer and
Assistant Secretary since September 1995. Mr. Fagan, a certified public
accountant, was Controller from December 1991 through September 1995.

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, 1998, the number of record holders was about
680 and the Company estimates that on that date there were an additional 1200
beneficial owners. The following table sets forth the quarterly high and low bid
prices of the common stock, as reported by Nasdaq, for the calendar quarters
indicated.

<TABLE>
<CAPTION>
SALES PRICES
---------------
FISCAL QUARTER ENDED HIGH LOW DIVIDENDS
-------------------- ------ ------ ---------
<S> <C> <C> <C>
December 31, 1996......................................... $2.750 $1.875 $.015
March 31, 1997............................................ 2.688 1.625
June 30, 1997............................................. 2.063 1.500 .015
September 30, 1997........................................ 2.500 1.563
December 31, 1997......................................... 2.500 1.750 .015
March 31, 1998............................................ 2.375 1.750
June 30, 1998............................................. 2.125 1.500
September 30, 1998........................................ 1.688 0.875
</TABLE>

COMMON STOCK DIVIDENDS

The Company has paid cash dividends for the past 18 years. In 1998, cash
dividends were $.015 per share. Future cash dividends will depend on loan
restrictions, earnings, financial position, capital requirements and other
relevant factors. The Company's Loan Agreement with a bank limits cash dividends
to $150,000 per fiscal year, and dividends are prohibited until the Company
achieves trailing EBITDA of at least $3,000,000.

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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, 1994 through 1998 has been derived from the
more detailed consolidated financial statements and notes thereto of the Company
contained elsewhere in this report or in previous reports.

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30,

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales................................... $ 64,146 $66,957 $71,487 $80,893 $86,062
-------- ------- ------- ------- -------
Costs and Expenses:
Food costs............................ 17,413 18,792 19,681 22,910 23,347
Restaurant labor and related
expenses........................... 25,606 25,235 26,561 30,400 30,806
Restaurant operating expenses......... 14,904 15,799 16,508 18,376 19,134
Depreciation and amortization......... 2,808 3,426 3,949 4,512 4,420
General and administrative expenses... 5,013 5,160 5,067 5,547 5,475
Asset impairment and restructuring
charges(a)(c)(d)................... 6,601 5,066 7,572 (264)
-------- ------- ------- ------- -------
Total......................... 72,345 73,478 71,766 89,317 82,918
-------- ------- ------- ------- -------
Operating income (loss)................. (8,199) (6,521) (279) (8,424) 3,144
Interest expense........................ (212) (348) (540) (590) (34)
Other, including interest income........ 198 303 269 309 66
-------- ------- ------- ------- -------
Earnings (loss) before income taxes..... (8,213) (6,566) (550) (8,705) 3,176
Income tax expense (benefit)(b)......... 4,305 (1,850) (135) (3,343) 1,101
-------- ------- ------- ------- -------
Net earnings (loss)..................... $(12,518) $(4,716) $ (415) $(5,362) $ 2,075
======== ======= ======= ======= =======
Cash dividends.......................... $ 66 $ 132 $ 132 $ 462 $ 1,056
======== ======= ======= ======= =======
Per Share Data:
Net earnings (loss), basic and
diluted............................ $ (2.85) $ (1.07) $ (.09) $ (1.22) $ .47
Cash dividends........................ .015 .03 .03 .105 .24
At Year End:
Total assets.......................... $ 20,418 $32,858 $37,968 $44,387 $49,159
Long-term debt........................ $ 1,761 $ 2,287 $ 3,489 $ 8,705 $ 5,840
Stockholders' equity.................. $ 9,724 $22,269 $26,521 $26,988 $33,155
Number of restaurants................. 48 57 65 64 72
</TABLE>

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(a) Fiscal 1998 net income includes asset impairment and restructuring charges
of $6,601,000. This includes impairment charges of $5,681,000 to impair
assets at 22 locations and restructuring charges of $920,000 to exit nine
locations closed in 1998.

(b) Fiscal 1998 net income includes income tax expense of $4,305,000 resulting
from providing a valuation allowance for deferred tax assets.

(c) Fiscal 1997 includes asset impairment and restructuring charges of
$5,066,000 to close seven restaurants, dispose of the Mexico joint venture,
impair four other restaurants and increase restructuring reserves for two
previously closed locations.

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<PAGE> 9

(d) Fiscal 1995 includes asset impairment and restructuring charges of
$7,572,000 to close nine restaurants and impair asset values at eight other
locations.

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
year.

<TABLE>
<CAPTION>
PERCENTAGE OF SALES
YEARS ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales....................................................... 100.00% 100.0% 100.0%
------ ------ ------
Costs and Expenses:
Food costs................................................ 27.1 28.1 27.5
Restaurant labor and related expenses..................... 39.9 37.7 37.2
Restaurant operating expenses............................. 23.2 23.6 23.1
Depreciation and amortization............................. 4.4 5.1 5.5
General and administrative expenses....................... 7.8 7.7 7.1
Asset impairment and restructuring charges................ 10.3 7.6
------ ------ ------
Total............................................. 112.7 109.8 100.4
------ ------ ------
Operating income (loss)..................................... (12.7) (9.8) (0.4)
Interest expense............................................ (0.3) (0.5) (0.8)
Other, including interest income............................ 0.3 0.5 0.4
------ ------ ------
Earnings (loss) before income taxes......................... (12.7) (9.8) (0.8)
Income tax expense (benefit)................................ 6.7 (2.8) (0.2)
------ ------ ------
Net earnings (loss)......................................... (19.4)% (7.0)% (0.6)%
====== ====== ======
Average sales (in thousands) for restaurants open throughout
the year.................................................. $1,192 $1,123 $1,106
Number of restaurants open at end of year................... 48 57 65
</TABLE>

Operating Results for Fiscal 1998 Compared to Fiscal 1997

Same-store sales increased 2.1% in fiscal 1998 versus 1997, reversing a
three-year trend. Contributing to the increase was Pancho's most significant
price increase since 1993, effective in July 1997. This price increase, plus two
smaller subsequent increases, worked with the Company's neighborhood marketing
strategy to provide four consecutive quarters of same-store sales increases
through June 30, 1998. The Company experienced a 1.6% decline in same-store
sales for the 1998 fiscal fourth quarter compared with the same 1997 quarter,
reflecting lower customer traffic not compensated by price increases. The chart
below shows quarterly and annual same-store sales comparisons over the past
three fiscal years.

COMPARABLE-STORE SALES BY QUARTER

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
1st Quarter........................................ +2.7% -5.0% -12.7%
2nd Quarter........................................ +5.3 -7.4 - 5.3
3rd Quarter........................................ +1.9 -1.2 - 8.2
4th Quarter........................................ -1.6 +2.0 - 6.5
Fiscal Year................................... +2.1 -2.8 - 7.8
</TABLE>

8
<PAGE> 10

The Company increased average sales per store by 6.2%, to $1,192,000 in
1998. This increase was accomplished with the price increases and the benefits
of closing lower volume restaurants. Total sales for 1998 were $64.1 million,
down from $67 million in 1997 due to restaurant closings in 1998 and 1997.

Fourth quarter average store sales were up 2%, to $305,000 in 1998. Total
sales were $15.6 million and $17.1 million for the fourth quarter of 1998 and
1997, respectively. Restaurant closings were the main factor in the higher
average and lower total sales for the quarter.

Discounts increased to 4.2% of sales in 1998 from 2.2% of sales in 1997.
Fourth quarter discounts were 4.5% and 2.9% of sales for 1998 and 1997,
respectively. Discounting tactics are used to increase customer frequency and
attract new customer trials. The increase in discounting has come mainly from
coupons distributed by direct mail, newspaper inserts and a variety of
neighborhood marketing promotions. The Company plans to reduce the level of
discounting in fiscal 1999.

In 1997, the Company 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 strengthens Pancho's ties to each restaurant's
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, School Rewards programs and Seniors Club.

Nine restaurants were closed in July and August 1998 as part of a
restructuring plan adopted in the quarter ended June 30, 1998. Fourth quarter
sales for the units closed under that plan were $932,000 and $2,175,000 for 1998
and 1997, respectively. Annual sales for the closed units were $6.8 million and
$8 million in 1998 and 1997, respectively. No other closings are currently
planned, but management will continue to evaluate operating results and consider
closing other locations based on profitability and cash flow.

Under a 1997 restructuring plan, the Company closed seven low sales
restaurants on April 15, 1997, and disposed of its interest in the Mexico
operations effective May 31, 1997. Those eight locations contributed $2.9
million in sales in 1997.

To respond to declining margins caused primarily by labor cost inflation,
the Company raised its menu pricing mix effective July 1, 1997 an estimated
average of 5.1%. Another price increase, of about 1.5% was instituted in
mid-September 1997 to offset the effect of the September federal minimum wage
increase. A price increase of about 1% was implemented in April 1998.

No new restaurants were opened in 1998, and none are planned for fiscal
1999. Management plans to focus on improving same store sales and operating
margins at its existing units before adding new locations.

Food cost was down 1% of sales in fiscal 1998. The benefit from the higher
prices was partially offset by the increased discounting, cost inflation and use
of higher quality items.

Labor and related expenses were up 1.9% and 2.2% of sales for the fourth
quarter and year 1998, respectively, compared with the same periods in 1997. The
Company benefited from $57,000 and $1,058,000 to recognize effective management
of employee injury and health insurance costs in fourth quarter 1998 and fiscal
1997, respectively. After eliminating the benefits of these gains, labor and
related costs were up 2.3% and 0.8% of sales for the 1998 quarter and year,
respectively, versus the same periods in 1997, despite the price increases.

Hourly wage inflation increased labor cost about 2.1% and 2.3% of sales for
the 1998 quarter and year, respectively. The federal minimum wage increased
$0.40 September 1, 1997. Due to the increased federal minimum wage and a tight
labor market, the Company's average hourly wage cost was 8.6% higher in 1998
than in 1997.

A tight labor market will continue to contribute to general wage inflation.
Higher wages will make it difficult for the Company to achieve reductions in
labor and related costs as percentages of sales unless the sales trend
improvement continues.

9
<PAGE> 11

Health insurance costs rose 0.4% and 0.2% of sales for the fourth quarter
and year of 1998 over the same periods in 1997.

Fourth quarter 1998 restaurant bonuses were down 0.4% of sales from 1997,
but higher sales per store increased restaurant bonuses 0.3% of sales for the
year. The Company continued to augment its primary restaurant management bonus
programs with additional bonus programs for restaurant service and management
personnel to provide additional incentives for excellent service.

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, sanitation and food
preparation makes it difficult to reduce labor costs proportionally when sales
decline, as staffing cannot be reduced below certain levels to maintain Pancho's
standards for quality service and sanitation. The Company has commissioned
outside consultants to address these issues as it develops a more modern and
labor-efficient Pancho's for the future.

Restaurant operating expenses, which include restaurant occupancy costs and
advertising and promotion expenses, decreased 0.7% and 0.4% of sales for the
1998 quarter and year compared with the same 1997 periods. These percentages
were down partially due to the price increases and restaurant closings in 1998
and 1997.

Credits from reducing general liability insurance reserves lowered
restaurant operating expenses by $58,000 and $212,000 in the fourth and second
quarters of 1998, respectively. Maintenance expense and the cost of supplies
rose in 1998. Utility costs declined as a percentage of sales in 1998, while
other occupancy costs and operating expenses stayed about the same. Restaurant
advertising and promotion costs rose 0.5% of sales to 2.9% of sales for fiscal
1998, but were 2.1% of sales in the fourth quarter of both years.

Depreciation and amortization decreased $246,000, 1.2% of sales, and
$618,000, 0.7% of sales, in the fourth quarter and year 1998, respectively, due
to the asset write-downs taken in June 1998 and March 1997.

In the quarter ended June 30, 1998, the Company impaired assets at 22
locations based on its continuing evaluation of recoverability of long-lived
store assets at 13 locations and its intent to close and dispose of nine
locations. The Company initially estimated asset impairment charges of
$6,049,000 for 22 restaurant locations, including one previously closed and held
for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the
impairment charge for land and buildings held for sale, primarily based on the
sale of one of the properties completed in October 1998 for significantly more
than the previously estimated fair value less cost to sell. Impairment charges
were determined in accordance with Statement of Financial Accounting Standard
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of."

The Company adopted a restructuring plan in the quarter ended June 30, 1998
which involved closing nine restaurants. The Company accrued exit costs of
$920,000 for nine locations which were closed by August 10, 1998 under the plan.
Four of those nine closures, plus one previously closed, included Company-owned
land and buildings which the Company plans to sell. Those five owned sites are
shown on the balance sheet as land and buildings held for sale.

Under a previous restructuring plan, adopted in March 1997, a charge of
$5,066,000 was recorded in fiscal 1997 to close seven U.S. restaurants, dispose
of the Mexico operation, and impair assets at four other locations.

The Company realized net gains on sales of assets of $153,000 and $256,000
in fiscal 1998 and 1997, respectively. Long-lived assets to be disposed of are
carried at the lower of carrying amount or fair value less cost to sell.

In fiscal 1998, interest expense was $136,000 lower than in 1997.
Outstanding debt decreased from $2,479,000 on September 30, 1997 to $2,250,000
on September 30, 1998. As outstanding debt decreased, interest expense declined,
from $58,000 in the fourth quarter of 1997 to $42,000 in the fourth quarter of
1998. Interest expense is expected to continue falling in 1999 as debt is
reduced.

10
<PAGE> 12

Due to the factors discussed above, the Company reported net losses of
$12.5 million, or $2.85 per share, and $4.7 million, or $1.07 per share, for
1998 and 1997, respectively. The Company achieved fourth quarter net earnings of
$391,000 and $125,000 in 1998 and 1997, respectively. The Company's future
earnings depend largely on improving sales and maintaining tight cost controls
in the highly-competitive restaurant industry. To enhance potential
profitability, the Company is seeking to develop a restaurant model that
increases sales and lowers labor costs as a percentage of sales.

Provision for Income Taxes for 1998 Compared to 1997

Net deferred tax assets increased $3.0 million to $8.4 million in fiscal
1998, due mainly to increases in the federal net operating loss (NOL)
carryforward and temporary book-tax differences resulting from asset impairments
and restructuring charges taken in 1998. Due to the Company's net loss for the
quarter ended June 30, 1998, combined with net losses for the three preceding
years, it was considered necessary to provide a valuation allowance for all of
its net deferred tax assets. The tax benefit of $3.0 million was offset by a
$7.3 million increase in the valuation allowance, resulting in tax expense of
$4.3 million for 1998.

The valuation allowance currently offsets the full amount of deferred tax
assets. Despite the valuation allowance, the deferred tax assets are still
available to the Company for future use. If the Company returns to
profitability, the Company may recognize tax benefits for all or a portion of
the deferred tax assets at a future date, when the valuation allowance is
reduced or the tax assets realized. The deferred tax assets include federal
employer tax credits and NOL carryforwards which expire in years 2009 through
2013, and state NOL carryforwards which expire in years 1999 through 2013.

The effective tax rate in fiscal 1997 was a benefit of 28.2% of the loss
before income taxes. This benefit rate includes the effect of Mexico operations,
which commenced in 1996, and for which no tax benefit was recognized. Adjusting
pre-tax income to exclude Mexico operations reflects a U.S. tax benefit rate of
33.2% for 1997. The 1997 benefit rate was lower than prior years due to the
increase in the valuation allowance in 1997. 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 valuation
allowance changes, state income taxes, federal employer tax credits and the
results of foreign operations.

Liquidity and Capital Resources for 1998 Compared to 1997

The Company's current ratio was 0.3 to 1 at September 30, 1998 compared to
0.4 to 1 at fiscal year end 1997. Like many restaurant chains, the Company
maintains a current ratio well below 1.0. Most of its current liabilities,
primarily accounts payable and accrued wages and bonuses, flow through
operations and roll over rather than being paid off. The Company keeps a low
cash balance and draws on its line of credit only as needed.

Operating activities provided net cash of $794,000 in 1998 compared with
$882,000 in 1997. The Company's operations generated positive cash flow even
though significant non-cash operating expenses led to net losses both years.

Investing activities used $436,000 in 1998 and provided $622,000 in 1997.
The Company invested $697,000 in asset additions in 1998, mainly to remodel
three locations, upgrade point-of-sale (POS) systems and provide normal capital
replacements.

No new restaurants were opened or under construction in 1998, and none are
planned for fiscal 1999. In 1999, the primary capital investments will involve
remodeling to develop and test one or more different restaurant formats, as the
Company seeks to improve sales and operating margins. Capital expenditures to
remodel existing restaurants, install restaurant computer POS systems and
provide routine capital replacements will continue within the constraints of
available cash flow and Loan Agreement restrictions (see Note 3 to the
consolidated financial statements).

The Company closed nine restaurants in 1998, as part of its restructuring
plan, and provided estimated reserves to exit those locations. The Company sold
the land and building for two of the closed restaurants in October 1998, and is
seeking to sell the land and building for the other closed locations which are
included in

11
<PAGE> 13

land and buildings held for sale on the balance sheet. Proceeds from real estate
sales must be used mostly to pay down debt in accordance with the Loan
Agreement.

In 1997, the Company realized $1,081,000 in proceeds from asset sales,
including the Tucson land and building. The Company spent $459,000 cash to
remodel three existing restaurants, install computer POS systems in two
restaurants, and provide routine capital replacements. No new restaurants were
opened in 1997.

Financing activities consumed $284,000 and $1,217,000 in 1998 and 1997,
respectively, primarily to reduce debt and pay dividends. Net cash used for debt
reduction was $228,000 and $1,162,000 in 1998 and 1997, respectively.

The Company plans to finance its 1999 operations and capital additions
mainly with cash from operations and sales of land and buildings held for sale.
The Company may also enter into lease agreements to acquire new POS systems or
other equipment.

The Company's revolving credit and term loan agreement (Loan Agreement)
with a bank has reduced the revolving credit line from $12 million at December
31, 1995 to $2 million at September 30, 1998. The Company had $268,000 of credit
available under the line at September 30, 1998. The proceeds from asset sales
will be used mainly to reduce bank debt.

In November 1998, the Company and the bank agreed to amend the Loan
Agreement commitment reduction schedule and covenants, effective September 30,
1998. Under this amendment, the credit line limit is reduced the last day of
each quarter until the agreement terminates September 30, 2000. The credit
commitment reductions effective at each quarter end under the amended agreement,
as of September 30, 1998, are shown below, subject to further reductions based
on property sales:

<TABLE>
<CAPTION>
COMMITMENT
EFFECTIVE DATE REDUCTION
- -------------- ----------
<S> <C>
December 31, 1998........................ $ 100,000
March 31, 1999........................... 100,000
June 30, 1999............................ 200,000
September 30, 1999....................... 200,000
December 31, 1999........................ 100,000
March 31, 2000........................... 100,000
June 30, 2000............................ 200,000
September 30, 2000....................... 1,000,000
</TABLE>

The loan is secured by all of the Company's real property. Two closed
locations were sold in October 1998, and the commitment limit was subsequently
reduced by 60% of the net proceeds. The maximum loan commitment will be further
reduced by all proceeds from subsequent real estate sales, equally reducing the
final scheduled commitment reduction.

The Loan Agreement includes various financial covenants. One financial
covenant requires the Company to achieve trailing three-months earnings before
interest, taxes, depreciation and amortization (EBITDA) to equal or exceed
established targets during each three-month period, beginning December 31, 1998.
Cash capital expenditures are limited to $650,000 each fiscal year. Cash
dividends are limited to $150,000 per fiscal year, and are prohibited until the
Company achieves trailing 12-months EBITDA of at least $3 million.

Due to the operating losses (as defined by the Loan Agreement) incurred by
the Company in the quarters ended March 31 and June 30, 1998, the Company
violated various loan covenants. The Company also exceeded the Loan Agreement
capital expenditure limit for the 1998 fiscal year. The bank has subsequently
granted permanent waivers for these covenant violations. The Company was in
compliance with all other loan covenants at September 30, 1998.

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

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 paid a dividend of $.015 per share on December 9, 1997. Future
cash dividends are prohibited by the Loan Agreement until the Company achieves
an earnings target, and will also depend on earnings, financial position,
capital requirements and other relevant factors.

Operatory Results for Fiscal 1997 Compared to Fiscal 1996

The Company's same store sales trend turned positive in the fourth quarter
of fiscal 1997, up 2.0% over the fourth quarter of 1996. This reversed quarterly
same store sales decreases ranging from 1.2% to 12.7% over the past three fiscal
years. Same store customer counts were down 1.4% for the fourth quarter of
fiscal 1997, but price increases July 1 and mid-September 1997 helped raise
average sales per customer significantly.

The Company adopted a restructuring plan in the quarter ended March 31,
1997. Under the plan, the Company closed seven low sales restaurants on April
15, 1997, and disposed of its interest in the Mexico operations effective May
31,1997. Those eight locations contributed $2,854,000 in sales in 1997, versus
$5,512,000 in 1996, a difference of $2,658,000. Each closed unit had been
producing far below company average sales per unit.

Sales decreased $4,530,000 in 1997 due to the store closings and same store
sales declines in the first three fiscal quarters. Same-store sales were down
2.8% in fiscal 1997 compared with a decrease of 7.8% in fiscal 1996. The price
increases and restructuring steps helped raise average sales for restaurants
open throughout 1997 to $1,123,000, up 1.5% over 1996.

Total fourth quarter sales were down $1,054,000 in 1997 due to the
restructuring. The eight eliminated locations accounted for $1,391,000 in fourth
quarter 1996 sales. The restructuring and price increases brought a 7.4%
increase in average sales for restaurants open throughout the fourth quarter of
1997 versus average sales for the fourth quarter of 1996.

To respond to declining margins caused primarily by wage inflation, the
Company raised its menu pricing mix effective July 1, 1997 an estimated average
of 5.1%. Another price increase, of about 1.5% was instituted in mid-September
1997 to partially offset the effect of the September federal minimum wage
increase.

The Company included coupons, frequent diner cards and other discounts in
its marketing tactics. Discounts rose to 2.9% and 2.2% of sales for the quarter
and year ended September 30, 1997, compared with 1.4% and 1.2% of sales for the
same periods in 1996.

No new restaurants were opened in fiscal 1997.

Food cost was down 0.7% of sales for the fourth quarter of fiscal 1997
versus the same period in 1996 due to the 1997 fourth quarter price increase.
Food cost was up 0.6% of sales for the year. Meat cost was up 0.4% and 0.8% for
the fourth quarter and year of 1997 compared with the same periods in 1996.

Labor and related expenses were up 1.5% and 0.5% of sales for the fourth
quarter and year 1997, respectively, compared with the same periods in 1996. The
benefits from 1997 adjustments to employment-related insurance reserves were
more than offset by the effects of lower sales and wage rate inflation.

The Company benefited from reductions to the workers' compensation and
Voluntary Employee Injury Benefit (VEIB) Plan insurance reserves of $500,000 in
the third quarter and $558,000 in the second quarter of 1997. The reduction of
VEIB Plan reserves recognized the benefits from effective risk and case
management, based on closing out claim years 1990 through 1992. After removing
the benefit from the VEIB Plan and workers' compensation credits, labor costs
were 37.9% of sales for the fourth quarter and 39.3% for 1997.

Labor costs in 1996 benefited from a $128,000 refund of prior year health
insurance payments and a $125,000 reduction in VEIB Plan reserves in the second
and third quarters, plus fourth quarter reserve reductions of $82,000 for the
VEIB Plan and $80,000 for workers' compensation. Without these benefit cost
adjustments, labor costs were 37.3% and 37.8% of sales for the fourth quarter
and year of 1996.

13
<PAGE> 15

After removing the benefit of the above adjustments from all quarters and
years, labor costs were up 0.6% and 1.5% of sales for the fourth quarter and
year 1997 versus the same periods for 1996. Although the Company has had success
with its loss control and risk management programs, the gains from adjustment of
reserves should be considered one-time gains which may not be repeated in the
future.

Labor and related expenses were up for 1997 due to higher restaurant
salaries and wages caused by wage rate inflation and lower sales. Health
insurance costs were up 0.2% over 1996 due to inflation and the refund benefit
in 1996. Lower profitability in 1997 reduced store bonuses 0.2% of sales
compared with 1996. The Company augmented its primary restaurant management
bonus programs with additional bonus programs for restaurant service and
management personnel to provide additional incentives for excellent service.

Fourth quarter restaurant salaries and wages were the same percentage of
sales in 1997 and 1996, reflecting the benefit of the fourth quarter 1997 price
increases. The fourth quarter operating results improvement increased store
bonuses 0.2% of sales.

The federal minimum wage increased $0.50 per hour effective October 1,
1996, the first day of the Company's fiscal 1997, and $0.40 more September 1,
1997. Pancho's experienced increases of 7.8% and 5.9% in average hourly wage
rates for the 1997 fourth quarter and year, respectively, versus the same
periods in 1996. This wage rate inflation represented hourly labor cost
increases of 1.6% and 2.2% of sales for the fourth quarter and year of 1997,
respectively, compared with the same 1996 periods.

Restaurant operating expenses rose 0.5% of sales in 1997 compared with
1996. The percentage increase for the year resulted from lower total sales
despite spending $711,000 less in 1997 than in 1996.

Restaurant operating expenses include occupancy costs, which rose 0.6% of
sales in 1997 due equally to higher maintenance costs, property taxes and rent
on lower sales. Restaurant supplies and other operating expenses each rose 0.2%
of sales. These increases were partially offset by reductions of 0.3% of sales
for marketing, and 0.2% of sales for restaurant general and administrative
costs.

The Company spent $1,591,000, 2.4% of sales, and $1,908,000, 2.7% of sales,
on marketing in fiscal 1997 and 1996, respectively. Due to its strategic shift
from broadcast media to more local store marketing, the Company spent $953,000
less for advertising media, but $276,000 more for marketing research and
consulting, plus $187,000 more for promotions.

The price increase and the restructuring helped reduce fourth quarter
restaurant operating expenses 1.4% of sales in 1997. Utilities were down 0.3% of
sales, marketing was down 0.6% of sales, supplies were down 0.4% and other
operating costs were down 0.4% of sales. These were partially offset by the 0.4%
increase in fourth quarter occupancy costs.

The Company spent 2.1% versus 2.7% of sales on marketing in the fourth
quarter of fiscal 1997 and 1996, respectively. The Company spent $130,000 less
in the 1997 fourth quarter due to the strategic shift from broadcast advertising
to local store marketing. In the fourth quarter of 1996, the Company spent
$243,000 for broadcast media for TV ads, compared with zero dollars for
broadcast media in the fourth quarter of 1997. The savings were partially offset
by $57,000 more spent on marketing consulting and research, and $15,000 more on
promotions.

Depreciation and amortization decreased $199,000, 0.8% of sales, and
$521,000, 0.4% of sales, in the fourth quarter and year 1997, respectively, due
to the asset write-downs taken in the March 1997 restructuring.

The Company recorded asset impairment and restructuring charges of
$5,066,000 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 costs of locations closed under the
restructuring plan adopted in the quarter ended March 31, 1997. The rest of the
restructuring charges consisted of a $455,000 loss from recognition of the
Cumulative Foreign Currency

14
<PAGE> 16

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.

The Company realized net gains on sale of assets of $256,000 and $141,000
in fiscal 1997 and 1996, respectively. Long-lived assets held for sale are
carried at the lower of depreciated cost or fair value less cost to sell.

In 1997, interest expense was $192,000 lower than in 1996. Outstanding debt
decreased from $3,641,000 on September 30, 1996 to $2,479,000 on September 30,
1997. As outstanding debt decreased, interest expense declined, from $84,000 in
the fourth quarter of 1996 to $58,000 in the fourth quarter of 1997.

The Company achieved net earnings of $125,000 in the fourth quarter of
1997, compared with a net loss of $143,000 for the 1996 fourth quarter. The
price increases and restructuring helped improve operating margins in the final
quarter of 1997.

Due to the factors discussed above, the Company reported net losses of
$4,716,000 and $415,000 for fiscal years 1997 and 1996, respectively. The 1997
restructuring charge and net loss resulted from declining sales trends that
could not be fully offset with cost controls.

SFAS No. 123, "Accounting for Stock-Based Compensation", became effective
for the Company for the 1997 fiscal year. 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
earning per share (see Note 6 to the consolidated financial statements).

Provision for Income Taxes for 1997 Compared to 1996

The effective tax rate in fiscal 1997 was a benefit of 28.2% of the total
loss before income taxes, compared to a benefit of 24.6% for fiscal 1996. These
effective rates include the results of Mexico operations, which commenced 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 for
1997, resulting primarily from the asset impairments, 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. The income tax receivable of
$538,000 was received in March 1998.

Net deferred tax assets increased $1,288,000 in 1997. The increase was due
mainly to the federal net operating loss (NOL) carryforward, accrued reserves to
exit closed stores and tax-book differences for fixed assets. These increases
were partially offset by the reduction of insurance reserves, and the $783,000
increase in the valuation allowance to offset federal and state NOL
carryforwards more likely than not to expire before realization. Note 5 to the
consolidated financial statements identifies the components of the deferred tax
assets and liabilities.

The deferred federal tax assets totaled $4,511,000 at September 30, 1997.
Of that amount, $1,983,000 was a federal NOL carryforward which expires
September 30, 2012, and $416,000 were employer tax credits which expire in
fiscal years 2009 through 2012. The valuation allowance was increased $671,000
in 1997 to provide for the federal portion of the NOL carryforward which might
not be realized. No other assets relating to federal income taxes had expiration
dates.

State deferred tax assets were a net $464,000 after subtracting the related
valuation allowance at September 30, 1997. The valuation allowance was increased
$111,000 in 1997 to provide for state NOL

15
<PAGE> 17

carryforwards likely to expire before being realized. State NOL carryforwards
which expire on the fiscal yearend 1998 through 2002 represented $149,000 of
those deferred tax assets, net of the related valuation allowances. Another
$167,000 in deferred tax assets, net of related valuation allowances, were based
on state NOL carryforwards which expire in fiscal years 2003 through 2012. The
remaining $148,000 of state deferred tax assets do not have expiration dates.

Net deferred tax assets decreased $186,000, to $3,017,000 from September
30, 1995 to September 30, 1996. The decrease was due mainly to the reversal of
tax-book differences for fixed assets and the realization of tax benefits as
store exit costs were actually paid. These decreases were partially offset by
the tax loss, which increased the federal alternative minimum tax carryforwards
and the state 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.

Current and deferred income tax benefits were recognized in 1996, resulting
primarily from operating losses. The federal income tax refund receivable
September 30, 1996 of about $180,000 was received in February 1997.

Liquidity and Capital Resources for 1997 Compared to 1996

The Company's current ratio was 0.43 to 1 at September 30, 1997 compared
with 0.39 to 1 at September 30, 1996. The increase was due to a $321,000
reduction in current accrued insurance costs plus the $284,000 increase in cash
equivalents and $352,000 increase in income taxes receivable. The current ratio
had decreased during fiscal 1996 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.

Operating activities provided net cash of $882,000 in fiscal 1997 compared
with $4,657,000 in 1996. Significant non-cash expenses led to net losses in both
years, even though operations generated positive cash flow.

Investing activities provided $622,000 cash during 1997. The Company
realized $1,081,000 in proceeds from asset sales, including the Tucson land and
building. The Company spent $459,000 cash to remodel three existing restaurants,
install computer point-of-sale systems in two restaurants, and provide routine
capital replacements. No new restaurants were opened or under construction in
fiscal 1997.

Under the restructuring plan formulated in the quarter ended March 31,
1997, the Company closed seven restaurants on April 15, 1997 and disposed of its
interest in the Mexico venture. Units closed included five leased locations in
Texas and two owned locations in Arizona. The Company provided estimated
restructuring reserves to exit those locations. The Company sold the land and
buildings for the closed Arizona restaurants in September 1997 and October 1998.

Investing activities used a net of $411,000 in fiscal 1996. 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.

Financing activities used $1,217,000 and $5,291,000 in 1997 and 1996,
respectively, mainly to reduce debt and pay dividends. The Company applied
$1,162,000 and $5,226,000 in cash to debt reduction in 1997 and 1996,
respectively.

The Company's Loan Agreement with a bank reduced the revolving credit line
limit from $6,483,000 at September 30, 1996 to $2,962,000 at September 30, 1997.
The Company had $920,000 of credit available under the line at September 30,
1997.

The Company paid dividends of $.015 per share on December 10, 1996 and
again on June 10, 1997.

16
<PAGE> 18

Seasonality

The Company's business is seasonal. Traditionally, sales are higher in
summer months, when students are not attending school.

Impact of Inflation

In the restaurant business, food, labor, and labor-related expenses 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,
and further increased $.40 per hour effective September 1, 1997. The Company
implemented price increases in July and September 1997 and April 1998 to offset
the labor cost increases due to higher minimum wage levels and wage rate
inflation.

Impact of Year 2000

Some computer hardware and software use only two digits to identify the
year in date information. If not corrected, such systems could fail when
processing dates for the year 2000 or later. The Company is in the process of
evaluating its risk and the related costs of updating its computer hardware and
software to properly process year 2000 and later dates.

The Company has identified all significant hardware and applications that
it believes will require modification to provide Year 2000 processing
compliance. Internal and external resources are being used to make the required
modifications and test Year 2000 processing. The key Company systems for which
Year 2000 problems might pose a significant risk are the Company's restaurant
point-of-sale (POS) register systems and the Company's corporate accounting
system. The Company plans to complete the testing process of all significant
applications by September 30, 1999. If some of these systems are not Year 2000
capable by September 30, 1999, there are a number of alternate systems available
in the marketplace which have been designed to be Year 2000 capable.

In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 readiness and the extent to
which the Company may be vulnerable to third-party Year 2000 problems. However,
there can be no guarantee that the systems of other companies will be converted
timely, or that a failure to convert by another company will not have a material
adverse effect on the Company.

The total cost to the Company of these Year 2000 compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modifications and testing are based on
management's best estimates, which were derived using numerous assumptions about
future events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could differ
from those plans.

Other Uncertainties and Trends

The Company has been notified by Nasdaq that its common stock will be
subject to de-listing from the Nasdaq National Market effective December 30,
1998 if it is unable to satisfy Nasdaq requirements for continued listing. The
two key Nasdaq standards in question require common stock listed on the National
Market to maintain a market value of public float of at least $5 million and a
minimum share price of at least $1.

If necessary, the Company plans to appeal the de-listing to Nasdaq, but
there is significant doubt about the Company's ability to satisfy the minimum
public float standard for National Market listing within the

17
<PAGE> 19

period provided by Nasdaq. The Company is therefore planning to request that its
common stock be listed on the Nasdaq SmallCap Market. There can be no assurance
that Nasdaq will approve the Company's listing on the SmallCap Market.

The SmallCap Market requires a minimum public float of $1 million and a
minimum share price of $1. The Company's market value of public float is
currently well over $1 million. The price per share of its common stock has
fluctuated above and below $1 during the quarters ended September 30 and
December 31, 1998.

To address the minimum share price standard, the Company's Board of
Directors has authorized a one-for-three reverse stock split. The reverse split
is subject to shareholders' approval at the Company's annual shareholders
meeting on January 27, 1999. If approved, it is anticipated that the reverse
split will help establish a price per common share over $1. The actual price
will be determined by the market, and there can be no assurances that the
Company's common stock will meet the standards for continued listing on either
the Nasdaq National or SmallCap Markets.

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.

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 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

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 24.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

18
<PAGE> 20

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
22, 1998, 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.

Information as to the compliance of the Company's directors and executive
officers with Section 16(a) of the Exchange Act is set forth under the caption
Section 16(a) Beneficial Ownership Reporting Compliance, appearing on page 4 of
the Company's Proxy Statement dated December 22, 1998, and is incorporated
herein by reference.

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 1998 AND 1998 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 22, 1998, 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 11, 1998, 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 10, 1998, appearing on
page 3 of the Company's Proxy Statement dated December 22, 1998, and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning transactions with management and others and certain
business relationships is set forth under the captions INDEBTEDNESS OF
MANAGEMENT and TRANSACTIONS WITH MANAGEMENT AND OTHERS appearing on pages 7 and
10 of the Company's Proxy Statement dated December 22, 1998, and is incorporated
herein by reference.

19
<PAGE> 21

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 24.

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)
4(c) -- Amendment to Rights Agreement, dated July 25, 1997(21)
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)
</TABLE>

20
<PAGE> 22

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
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)
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(18)
10(x) -- Amendment to Revolving Credit and Term Loan Agreement, dated February 11, 1997(19)
10(y) -- Amendment to Revolving Credit and Term Loan Agreement, dated March 31, 1997(20)
10(z) -- Seventh Amendment to Revolving Credit and Term Loan Agreement, dated December 1,
1997(21)
10(aa) -- Amendment Number One to Pancho's Mexican Buffet, Inc. 1992 Stock Option Plan(22)
10(ab) -- Eighth Amendment to Revolving Credit and Term Loan Agreement, dated November 3,
1998 -- 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
</TABLE>

21
<PAGE> 23

- ---------------

<TABLE>
<S> <C>
(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.
(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.
(18) Filed with the Commission as an Exhibit to form 10-K for the
year ended September 30, 1996 -- such Exhibits are
incorporated herein by reference.
(19) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended December 31, 1996 -- such Exhibits are
incorporated herein by reference.
(20) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended March 31, 1997 -- such Exhibits are
incorporated herein by reference.
(21) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended June 30, 1997 -- such Exhibits are
incorporated herein by reference.
(22) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended December 31, 1997 -- such Exhibits are
incorporated herein by reference.
</TABLE>

22
<PAGE> 24

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter ended September 30,
1998.

See (a)(3) above.

(d) Financial Statement Schedules for Form 10-K.

All financial statement schedules are omitted, as the required information
is not applicable or the information is presented in the consolidated
financial statements or related notes.

23
<PAGE> 25

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998

<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-18
</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.

24
<PAGE> 26

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 546,000 $ 429,000
Accounts and notes receivable, current portion............ 184,000 222,000
Income taxes receivable................................... 538,000
Inventories............................................... 473,000 539,000
Prepaid expenses.......................................... 443,000 117,000
Deferred income taxes..................................... 670,000
----------- -----------
Total current assets.............................. 1,646,000 2,515,000
----------- -----------
Property, Plant and Equipment:
Land...................................................... 1,867,000 2,795,000
Buildings................................................. 6,885,000 9,013,000
Leasehold improvements.................................... 17,472,000 21,072,000
Equipment and furniture................................... 22,965,000 26,115,000
Construction in progress.................................. 15,000
----------- -----------
Total............................................. 49,189,000 59,010,000
Less accumulated depreciation and amortization............ (33,136,000) (33,323,000)
----------- -----------
Property, plant and equipment -- net.............. 16,053,000 25,687,000
----------- -----------
Other Assets:
Land and buildings held for sale.......................... 2,380,000 500,000
Deferred income taxes..................................... 3,635,000
Other, including noncurrent portion of receivables........ 339,000 521,000
----------- -----------
Total other assets................................ 2,719,000 4,656,000
----------- -----------
Total............................................. $20,418,000 $32,858,000
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,227,000 $ 1,569,000
Debt classified as current................................ 490,000 192,000
Accrued wages and bonuses................................. 1,420,000 1,478,000
Accrued insurance costs, current.......................... 1,150,000 1,022,000
Other current liabilities................................. 1,864,000 1,528,000
----------- -----------
Total current liabilities......................... 6,151,000 5,789,000
----------- -----------
Other Liabilities:
Long-term debt............................................ 1,761,000 2,287,000
Accrued insurance costs, non-current...................... 2,417,000 2,107,000
Restructuring reserves, non-current....................... 365,000 406,000
----------- -----------
Total other liabilities........................... 4,543,000 4,800,000
----------- -----------
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 4,414,123 and 4,397,559 shares,
respectively. Outstanding 4,348,723 and 4,389,159
shares, respectively.)................................. 441,000 440,000
Additional paid-in capital................................ 18,661,000 18,633,000
Retained earnings (accumulated deficit)................... (9,085,000) 3,499,000
Stock notes receivable.................................... (225,000) (290,000)
Treasury stock at cost (65,400 and 8,400 shares,
respectively).......................................... (68,000) (13,000)
----------- -----------
Stockholders' equity.............................. 9,724,000 22,269,000
----------- -----------
Total............................................. $20,418,000 $32,858,000
=========== ===========
</TABLE>

See notes to consolidated financial statements.
F-1
<PAGE> 27

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Sales.................................................. $ 64,146,000 $66,957,000 $71,487,000
------------ ----------- -----------
Costs and Expenses:
Food costs........................................... 17,413,000 18,792,000 19,681,000
Restaurant labor and related expenses................ 25,606,000 25,235,000 26,561,000
Restaurant operating expenses........................ 14,904,000 15,799,000 16,508,000
Depreciation and amortization........................ 2,808,000 3,426,000 3,949,000
General and administrative expenses.................. 5,013,000 5,160,000 5,067,000
Asset impairment and restructuring charges........... 6,601,000 5,066,000
------------ ----------- -----------
Total........................................ 72,345,000 73,478,000 71,766,000
------------ ----------- -----------
Operating income (loss)................................ (8,199,000) (6,521,000) (279,000)
Interest expense....................................... (212,000) (348,000) (540,000)
Other, including interest income....................... 198,000 303,000 269,000
------------ ----------- -----------
Earnings (loss) before income taxes.................... (8,213,000) (6,566,000) (550,000)
Income tax expense (benefit)........................... 4,305,000 (1,850,000) (135,000)
------------ ----------- -----------
Net earnings (loss).................................... $(12,518,000) $(4,716,000) $ (415,000)
============ =========== ===========
Net earnings (loss) per share, basic and diluted....... $ (2.85) $ (1.07) $ (.09)
============ =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-2
<PAGE> 28

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
RETAINED FOREIGN
COMMON STOCK ADDITIONAL EARNINGS CURRENCY TREASURY STOCK
---------------------- PAID-IN (ACCUMULATED TRANSLATION ------------------------
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT SHARES AMOUNT
---------- --------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995.......... 4,397,559 $ 440,000 $18,633,000 $ 8,894,000 $(449,000) $
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)
Net loss........................... (4,716,000)
Dividends, $.03 per share.......... (132,000)
Realization of foreign currency
translation adjustment........... 436,000
Treasury stock acquired............ 8,400 (13,000)
Payments and writeoffs on stock
notes............................
---------- --------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1997.......... 4,397,559 440,000 18,633,000 3,499,000 -- 8,400 (13,000)
Net loss........................... (12,518,000)
Dividends, $.015 per share......... (66,000)
Treasury stock acquired............ 57,000 (55,000)
Payments received on stock notes...
Stock issued....................... 16,564 1,000 28,000
---------- --------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1998.......... 4,414,123 $ 441,000 $18,661,000 $(9,085,000) $ 65,400 $ (68,000)
========== ========= =========== =========== ========= ========== ===========

<CAPTION>
STOCK
NOTES
RECEIVABLE
FROM STOCKHOLDERS'
OFFICERS EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30, 1995.......... $(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.......... (463,000) 26,521,000
Net loss........................... (4,716,000)
Dividends, $.03 per share.......... (132,000)
Realization of foreign currency
translation adjustment........... 436,000
Treasury stock acquired............ (13,000)
Payments and writeoffs on stock
notes............................ 173,000 173,000
--------- -----------
Balance, September 30, 1997.......... (290,000) 22,269,000
Net loss........................... (12,518,000)
Dividends, $.015 per share......... (66,000)
Treasury stock acquired............ (55,000)
Payments received on stock notes... 65,000 65,000
Stock issued....................... 29,000
--------- -----------
Balance, September 30, 1998.......... $(225,000) $ 9,724,000
========= ===========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 29

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss).............................. $(12,518,000) $ (4,716,000) $ (415,000)
------------ ------------ ------------
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 2,808,000 3,426,000 3,949,000
Provision (benefit) for deferred income
taxes....................................... 4,305,000 (1,288,000) 186,000
Impairment of long-lived assets............... 5,681,000 3,033,000
Provision for restructuring reserves.......... 920,000 1,538,000
Realization of foreign currency translation
adjustment.................................. 455,000
Loss on writeoff of stock notes receivable.... 83,000
Gain on sale of assets........................ (153,000) (256,000) (141,000)
Stock compensation to outside directors....... 29,000
Changes in operating assets and liabilities:
Accounts and notes receivable............... (6,000) 9,000 216,000
Income taxes receivable..................... 538,000 (352,000) 1,041,000
Inventories, prepaid expenses and other
assets................................... (231,000) 181,000 389,000
Accounts payable and accrued expenses....... 79,000 (272,000) (353,000)
Restructuring reserves...................... (658,000) (959,000) (349,000)
Other......................................... 134,000
------------ ------------ ------------
Net cash provided by operating
activities............................. 794,000 882,000 4,657,000
Cash Flows From Investing Activities:
Property additions............................... (697,000) (459,000) (689,000)
Proceeds from sale of assets..................... 261,000 1,081,000 278,000
------------ ------------ ------------
Net cash provided by (used in) investing
activities............................. (436,000) 622,000 (411,000)
Cash Flows From Financing Activities:
Short-term borrowings, net....................... 298,000 40,000 (10,000)
Long-term borrowings............................. 19,706,000 28,583,000 28,676,000
Repayments of long-term borrowings............... (20,232,000) (29,785,000) (33,892,000)
Dividends paid................................... (66,000) (132,000) (132,000)
Payments on officer stock notes receivable....... 53,000 77,000 67,000
------------ ------------ ------------
Net cash used in financing activities.... (296,000) (1,217,000) (5,291,000)
Effect of Foreign Exchange Rate Change on Cash..... (3,000) (9,000)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 117,000 284,000 (1,054,000)
Cash and Cash Equivalents at Beginning of Year..... 429,000 145,000 1,199,000
------------ ------------ ------------
Cash and Cash Equivalents at End of Year........... $ 546,000 $ 429,000 $ 145,000
============ ============ ============
Supplemental Information:
Income taxes paid and (refunds received), net.... $ (541,000) $ (170,000) $ (1,348,000)
Interest paid, net of capitalized amounts........ 206,000 306,000 533,000
Treasury stock acquired as reduction of
receivables................................... 55,000 13,000
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 30

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). Effective May
31, 1997, the Company abandoned its interest in a Mexican partnership. That
partnership owned 73% of a Mexican subsidiary which operated a restaurant in
Guadalajara, Mexico. The minority interest balance in that subsidiary was
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.

ACCOUNT CLASSIFICATION

Certain prior year amounts have been reclassified to conform to the current
year presentation.

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 No. 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 consolidated 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 term of the lease or the life
of the improvement, whichever is shorter.

F-5
<PAGE> 31
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company capitalizes interest incurred on debt for major construction
projects and includes the capitalized interest in the asset basis. No interest
was capitalized in 1998, 1997 or 1996.

LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
reviews long-lived assets to be held and used 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.

An asset or group of assets is deemed to be impaired if a forecast of
undiscounted future cash flows (excluding interest expense) 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.
Considerable management judgment is necessary to estimate cash flows and
expected fair values. Accordingly, it is reasonably possible that actual results
could vary significantly from such estimates.

Long-lived assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell. Assets held for sale are not
depreciated.

PREOPENING COSTS

Preopening costs are expensed as incurred.

EARNINGS (LOSS) PER SHARE

The Company adopted SFAS No. 128, "Earnings per Share," in fiscal 1998.
This standard replaced previous generally-accepted accounting principles for
computing and disclosing earnings per share (EPS) information. Under SFAS No.
128, because it has potential common shares, the Company has a complex capital
structure and must disclose both basic and diluted EPS. Basic EPS is computed by
dividing income available to common shareholders by the weighted average number
of shares outstanding. Diluted EPS adds the effect of all dilutive potential
shares to the weighted average number of shares outstanding.

The weighted average outstanding shares were 4,395,000, 4,396,000 and
4,398,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
Due to the net loss, the Company's potential common shares are antidilutive and
excluded from the loss per share calculation, so diluted and basic loss per
share are the same. At September 30, 1998, there were 306,400 options
outstanding which represented potential common shares which could be dilutive in
the future. Earnings (loss) per share reported for the quarters and years ended
September 30, 1997 and 1996 did not change due to the adoption of SFAS No. 128.

FOREIGN OPERATIONS AND CURRENCY TRANSLATION

The functional currency of the Company's Mexican operations was the new
peso. Financial statements of the Company's Mexican subsidiaries were translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Results of operations were translated using an average exchange
rate during the period, and assets and liabilities were translated using the
year end exchange rate. The resulting cumulative foreign currency translation
adjustment was shown as a separate line in stockholders' equity at September 30,
1996. When the plan to dispose of its Mexican operations was adopted in the
quarter ended March 31, 1997, the balance of the cumulative foreign currency
translation adjustment was expensed as part of the restructuring charge for that
quarter.

F-6
<PAGE> 32
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

Cash flows from the Company's Mexican operations were calculated based on
the new peso, in accordance with SFAS No. 95, "Statement of Cash Flows." As a
result, for 1997 and 1996, 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.

STOCK-BASED COMPENSATION

The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in fiscal 1997. Under the provisions of SFAS No. 123, companies
can elect to account for stock-based compensation plans using a fair-value based
method or continue measuring compensation expense for those plans using the
intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.
The Company has elected to continue using the intrinsic value method to account
for its stock-based compensation plans. SFAS No. 123 requires companies electing
to continue using the intrinsic value method to make certain pro forma
disclosures (see Note 6).

NEW ACCOUNTING STANDARDS

SFAS No. 130 -- In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting on Comprehensive Income," which is effective for
periods beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and presenting comprehensive income in the financial statements.
Management believes that the adoption of this statement will not impact the
Company's financial statements.

SFAS No. 131 -- In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which will be effective for fiscal years beginning after December
15, 1997. SFAS No. 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
Company's operating segments. The Company operates as a single business segment,
and accordingly, this standard will not affect the Company's future disclosures.

2. OTHER CURRENT LIABILITIES

Other current liabilities consist of:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Accrued taxes other than income taxes....................... $1,030,000 $1,049,000
Restructuring reserves...................................... 649,000 346,000
Other....................................................... 185,000 133,000
---------- ----------
Total............................................. $1,864,000 $1,528,000
========== ==========
</TABLE>

3. LONG-TERM DEBT

The Company has a revolving credit and term loan agreement (Loan Agreement)
with a bank. In November 1998, the Company and the bank agreed to amend the Loan
Agreement commitment reduction schedule and covenants, effective September 30,
1998. Under this amendment, the credit line limit is reduced the last day of
each quarter until the agreement terminates on September 30, 2000. The credit
commitment

F-7
<PAGE> 33
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reductions effective at each quarter end under the amended agreement, as of
September 30, 1998, are shown below, subject to further reductions based on
property sales:

<TABLE>
<CAPTION>
COMMITMENT
EFFECTIVE DATE REDUCTION
- -------------- ----------
<S> <C>
December 31, 1998 $ 100,000
March 31, 1999 100,000
June 30, 1999 200,000
September 30, 1999 200,000
December 31, 1999 100,000
March 31, 2000 100,000
June 30, 2000 200,000
September 30, 2000 1,000,000
</TABLE>

The loan is secured by all of the Company's real property. Two closed
locations were sold in October 1998, and the commitment level was subsequently
reduced by 60% of the net proceeds. The maximum loan commitment will be further
reduced by all proceeds from subsequent real estate sales, equally reducing the
final scheduled commitment reduction.

Due to the operating losses (as defined by the Loan Agreement) incurred by
the Company in the quarters ended March 31 and June 30, 1998, the Company
violated various loan covenants. The Company also exceeded the Loan Agreement
capital expenditure limit for the 1998 fiscal year. The bank has subsequently
granted a permanent waiver for these covenant violations. The Company was in
compliance with all other loan covenants at September 30, 1998.

Management is taking steps to ensure that the Company will be able to
comply with all of the 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.

The current portion of bank debt of $332,000 and $42,000 is included in
debt classified as current at September 30, 1998 and 1997, respectively. The
non-current amount was $1,400,000 and $2,000,000 at September 30, 1998 and 1997,
respectively.

Interest is payable monthly at a variable rate equal to the bank's prime
rate plus a margin of 0 to 1% or, after the Company meets certain earnings
goals, rates based upon the London Interbank Offering Rate. The interest rate
effective at September 30, 1998 was 9.25%. 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 fiscal 1998, 1997 and 1996 to buy out the
remaining lease terms of certain closed locations. The long-term portion of
those notes was $361,000 and $287,000 at September 30, 1998 and 1997,
respectively. The current portion of $158,000 and $150,000 is included in debt
classified as current at September 30, 1998 and 1997, respectively. The
effective interest rates range from 5.9% to 6.9%, with payments due monthly
through November 2001.

F-8
<PAGE> 34
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The combined maturities of Company debt, as of September 30, 1998, subject
to accelerated maturity based on property sales, are listed below:

<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
- -------------
<S> <C>
1999........................................................ $ 490,000
2000........................................................ 1,542,000
2001........................................................ 107,000
2002........................................................ 54,000
2003........................................................ 50,000
Later years................................................. 8,000
----------
$2,251,000
==========
</TABLE>

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, 1998, exclusive of maintenance, taxes, etc., were as
follows:

<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
- -------------
<S> <C> <C>
1999................................................................... $2,363,000
2000................................................................... 1,859,000
2001................................................................... 1,437,000
2002................................................................... 1,081,000
2003................................................................... 751,000
Later years............................................................ 1,046,000
----------
Total........................................................ $8,537,000
==========
</TABLE>

The composition of total yearly rental expense for operating leases is:

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals................................ $2,625,000 $2,528,000 $2,533,000
Contingent rentals............................. 190,000 188,000 216,000
Less: Sublease rentals......................... (13,000) (33,000) (31,000)
---------- ---------- ----------
Total................................ $3,014,000 $2,683,000 $2,718,000
========== ========== ==========
</TABLE>

F-9
<PAGE> 35
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES

Income tax expense (benefit) consists of:

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
Current:
U.S. federal.................................. $ $ (572,000) $(321,000)
State......................................... 10,000
---------- ----------- ---------
Combined current........................... -- (562,000) (321,000)
Deferred:
U.S. federal.................................. 3,802,000 (1,326,000) 81,000
State......................................... 503,000 38,000 105,000
---------- ----------- ---------
Combined deferred.......................... 4,305,000 (1,288,000) 186,000
---------- ----------- ---------
Income tax expense (benefit)............. $4,305,000 $(1,850,000) $(135,000)
========== =========== =========
</TABLE>

The income tax benefit differs from the amounts computed by applying the
U.S. federal statutory rate of 34 percent to the net loss before income taxes as
follows:

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Expected tax at federal statutory rate of
34%.......................................... $(2,792,000) $(2,232,000) $(187,000)
Increase (decrease) in taxes due to:
Change in valuation allowance................ 7,314,000 782,000 18,000
Tax effect of abandonment of foreign
operations................................ (305,000)
State income tax provision (benefit), net of
federal income tax effect................. (137,000) (63,000) 69,000
Tax effect of employer tax credits........... (90,000) (45,000) (44,000)
Eliminate tax benefit from losses of foreign
operations................................ 76,000
Adjustment for prior year tax refunds
received.................................. 6,000 (135,000)
Other differences............................ 10,000 7,000 68,000
----------- ----------- ---------
Total................................ $ 4,305,000 $(1,850,000) $(135,000)
=========== =========== =========
</TABLE>

F-10
<PAGE> 36
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Current:
Restructuring costs, current........................... $ 232,000 $ 112,000
Accrued vacation pay................................... 140,000 140,000
Accrued insurance cost, current........................ 401,000 418,000
Current valuation allowance............................ (773,000)
----------- ----------
Current deferred tax asset, net of valuation
allowance........................................... -- 670,000
----------- ----------
Noncurrent:
Accrued insurance costs................................ 853,000 860,000
Federal net operating loss carryforwards (expire
2012-2013)............................................ 3,057,000 1,983,000
Noncurrent restructuring costs......................... 141,000 149,000
Alternative minimum tax carryforward................... 383,000 383,000
State net operating loss carryforwards (expire
1999 -- 2013)......................................... 464,000 464,000
Property, plant and equipment.......................... 2,201,000 453,000
Federal employer tax credits (expire 2009 -- 2013)..... 515,000 416,000
Noncurrent valuation allowance......................... (7,366,000) (825,000)
----------- ----------
Noncurrent deferred tax asset, net of valuation
allowance........................................... 248,000 3,883,000
----------- ----------
Deferred tax liabilities:
Noncurrent:
Basis difference in note receivable.................... 248,000 248,000
----------- ----------
Total non-current deferred tax liabilities........ 248,000 248,000
----------- ----------
Net non-current deferred income taxes............. $ -- $3,635,000
=========== ==========
</TABLE>

Net deferred tax assets increased $3.0 million to $8.4 million in the year
ended September 30, 1998, due mainly to increases in the federal net operating
loss (NOL) carryforward and temporary book-tax differences resulting from the
impairment and restructuring charges taken in 1998. Due to the Company's net
loss for the quarter ended June 30, 1998, combined with net losses for the three
preceding fiscal years, it was considered necessary to provide a valuation
allowance for all of its net deferred tax assets. The tax benefit of $3.0
million was offset by the $7.3 million increase in the valuation allowance,
resulting in tax expense of $4.3 million for fiscal 1998.

The valuation allowance currently offsets the full amount of the deferred
tax assets net of deferred tax liabilities. Despite the valuation allowance, the
deferred tax assets are still available to the Company for future use. If the
Company returns to profitability, the Company may recognize tax benefits for all
or a portion of the deferred tax assets at a future date, when the valuation
allowance is reduced or the tax assets realized. The deferred tax assets include
federal employer tax credits and NOL carryforwards which expire in years 2009
through 2013, and state NOL carryforwards which expire in years 1999 through
2013.

The federal NOL carryforward was $3,033,000 and $5,959,000 for 1998 and
1997, respectively. The 1997 federal NOL carryforward included a loss related to
the foreign operations. Due to the Company's recognition of these foreign
losses, previous losses which were treated as permanent differences were
reclassified as temporary differences in 1997 and included in the 1997 federal
NOL carryforward.

The valuation allowance is required to reduce deferred tax assets to the
amount that will more likely than not be realized. In 1997, the valuation
allowance was increased $671,000 to offset the increased federal NOL

F-11
<PAGE> 37
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carryforward and $111,000 for state NOL carryforwards. The valuation allowance
was increased $18,000 in 1996 for state NOL carryforwards.

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 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.

In fiscal 1997, the Company recognized expense of $83,000 to write off the
excess of stock notes receivable over the market value of stock collateral held
for two former employees for which the receivable balances were considered
uncollectable. One of those employees returned the stock collateral in fiscal
1997, the other in fiscal 1998, which provided 15,400 and 8,400 shares of
treasury stock reflected on the balance sheet at September 30, 1998 and 1997,
respectively.

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

F-12
<PAGE> 38
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

commencing one year from date of grant and expire ten years from the date of
grant. Options may be granted through November 5, 2002.

On January 28, 1998, at the Annual Meeting of Stockholders, the
stockholders of the Company approved Amendment Number One to the 1992 Stock
Option Plan. This amendment increased the number of shares which the Company may
sell pursuant to options under the plan to 600,000 shares, from 400,000 shares.
The amendment also increased the annual option grant to non-employee directors
to 4,000 shares each from 2,000 shares each.

Summary information on stock option activity is shown below.

<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- RANGE OF
NUMBER AVERAGE NUMBER AVERAGE NUMBER EXERCISE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES PRICES
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding on October
1..................... 404,600 $ 9.82 407,350 $10.13 586,650 $3.19 - $15.25
Granted................. 16,000 2.06 10,000 2.06 10,000 2.63
Exercised...............
Forfeited/expired....... (114,200) 9.45 (12,750) 13.69 (189,300) 5.88 - 11.38
-------- -------- --------
Outstanding
September 30.......... 306,400 9.56 404,600 9.82 407,350 2.63 - 15.25
-------- -------- --------
Exercisable
September 30.......... 273,400 10.34 306,600 10.05 236,638 2.63 - 15.25
-------- -------- --------
Common shares reserved
and available for
grant September 30.... 320,750 62,750 67,750
-------- -------- --------
</TABLE>

For shares outstanding at September 30, 1998:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-AVERAGE
NUMBER AVERAGE REMAINING
RANGE OF EXERCISE PRICES OF SHARES EXERCISE PRICE LIFE IN YEARS
- ------------------------ --------- -------------- ----------------
<S> <C> <C> <C>
$ 2.06 to $ 3.19......... 37,000 $ 2.34 8.2
$ 6.00 to $ 7.00......... 13,000 6.23 5.6
$ 7.25 to $ 8.38......... 40,400 7.81 3.8
$10.50 to $11.38......... 216,000 11.32 5.1
------- ------ ---
$ 2.06 to $11.38 306,400 $ 9.56 5.3
------- ------ ---
</TABLE>

The weighted-average fair value of options granted was $1.00 per share in
1998 and 1997. The pro forma effects of reporting stock options using the fair
value approach under SFAS No. 123 are shown below.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 1998 1997 1996
- ----------------------- ------------ ----------- ---------
<S> <C> <C> <C>
Net loss
As reported........... $(12,518,000) $(4,716,000) $(415,000)
Pro forma............. (12,528,000) (4,722,000) (418,000)
Net loss per share
As reported........... (2.85) (1.07) (.09)
Pro forma............. (2.85) (1.07) (.09)
</TABLE>

F-13
<PAGE> 39
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996.

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield.............................................. 0.0% 1.0% 1.0%
Expected volatility......................................... 50.0% 55.0% 55.0%
Risk free interest rates.................................... 5.5% 6.3% 5.3%
Expected life in years...................................... 5 5 5
</TABLE>

ANNUAL STOCK GRANT TO NON-EMPLOYEE DIRECTORS

Under the 1998 Restricted Stock Plan for Non-employee Directors, effective
in January 1998, non-employee directors of the Company are granted $2,500 of
common stock quarterly, based on the market price on the date of grant. The
value of shares granted and recognized as directors' compensation was $29,000 in
1998.

PREFERRED STOCK

Shares of preferred stock, when issued, will have such rights, preferences
and privileges as shall be adopted by the Board of Directors.

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, 1998, 1997, and 1996 include provisions for estimated
expenses of the VEIB Plan of $440,000, $557,000, and $854,000, 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
$480,000, $233,000, and $417,000 for the years ended September 30, 1998, 1997
and 1996, respectively.

The Company has a bonus plan for corporate officers as a group based on
stipulated operating results. Under this plan, no corporate officer bonuses were
paid for the years ended September 30, 1998, 1997 and 1996.

An additional bonus plan compensates certain officers employed by the
Company for the annual principal and interest payments on the stock notes
receivable from officers (see Note 6). Under this plan, the Company recognized
compensation expense of $124,000, $130,000 and $148,000 in fiscal years 1998,
1997 and 1996, respectively.

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.

F-14
<PAGE> 40
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $15,000, $23,000, and $36,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.

8. RELATED PARTY TRANSACTIONS

The Company makes occasional sales of supplies and equipment to the
family-owned restaurant operations of the Chairman of the Company. Sales amounts
were $5,000, $7,000, and $7,000 for the years ended September 30, 1998, 1997,
and 1996, respectively.

The Chairman of the Company and the family-owned restaurant operations,
collectively, were indebted to the Company in the amount of $58,000 and $88,000
on September 30, 1998 and 1997, respectively. Payments on this receivable
balance in 1998 include 50,000 shares of Company common stock taken into
Treasury Stock in September 1998. This indebtedness includes the loan to
purchase Company stock (see Note 6 regarding officer stock notes receivable,
secured by Company stock), trade receivables for sales to the family-owned
restaurant operations, and other advances. The balance at September 30, 1998 was
secured by 40,000 shares of Company stock, in addition to the stock collateral
under the officer stock note agreement.

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 $1,839,000, $2,728,000, and $2,714,000 for the years ended
September 30, 1998, 1997 and 1996, respectively. The same vendor purchased items
from the Company in the amount of $53,000, $75,000, and $81,000 in 1998, 1997
and 1996, respectively. This vendor also leases the company's cold-storage
facilities. The lease term including options runs through October 31, 2000, and
represented $60,000 of annual rental revenue for the company in fiscal 1998,
1997 and 1996.

The Company and a former non-employee director were involved in a joint
venture to operate a restaurant in Mexico. The Company invested $2,377,000 in
its Mexican subsidiaries and operations related to the venture. The joint
venture subsidiaries are included in the Company's consolidated financial
statements. A company owned by this non-employee director received fees from the
joint venture for management services of $36,000 and $48,000 in fiscal 1997 and
1996, respectively. Due to operating losses and negative cash flows for the
Mexico operations, the Company transferred its interest in the Mexico operations
to its joint venture partner effective May 31, 1997. The Company believes this
was the most appropriate method of exiting the Mexico market under the available
circumstances.

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. Those agreements expire in December 2001.

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. ASSET IMPAIRMENT AND RESTRUCTURING COSTS

In the quarter ended June 30, 1998, the Company impaired assets at 22
locations based on its continuing evaluation of recoverability of long-lived
store assets at 13 locations and its intent to close and dispose of nine
locations. The Company initially estimated asset impairment charges of
$6,049,000 for 22 restaurant locations, including one previously closed and held
for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the
impairment charge for land and buildings held for sale, primarily based on the
sale of one of the properties completed in October 1998 for significantly more
than the previously estimated fair value less cost
F-15
<PAGE> 41
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to sell. Impairment charges were determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of."

The Company adopted a restructuring plan in the quarter ended June 30, 1998
which involved closing nine restaurants. The Company accrued exit costs of
$920,000 for nine locations which were closed by August 10, 1998 under the plan.
Four of those nine closures, plus one previously closed, included company-owned
land and buildings which the Company plans to sell. Those five owned sites are
shown on the balance sheet as land and buildings held for sale.

The Company paid $658,000 and $959,000 in 1998 and 1997, respectively,
against restructuring reserves, primarily lease and related expenses and exit
costs. Sales for the nine restaurants closed under the 1998 restructuring plan
were $932,000 and $6,832,000, respectively, for the quarter and year ended
September 30, 1998. Sales for those units totaled $2,175,000 and $7,962,000,
respectively, for the quarter and year ended September 30, 1997.

In the quarter ended March 31, 1997, the Company established a
restructuring plan which 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 asset impairment and restructuring charges of
$5,066,000 to execute the 1997 restructuring plan. Under the plan, the Company
recognized $4,988,000 in asset impairment and 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, determined in accordance with SFAS No.
121. The charge also included $1,538,000 to reserve for exit 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 1997 plan, the Company closed seven U.S. locations on April 15,
1997. The Company has written off its entire investment and transferred its
interest in the Mexico venture effective May 31, 1997 to its joint venture
partner, a former non-employee director of the Company.

Sales for the seven closed locations plus the Mexico operation were
$2,854,000 and $5,512,000 for fiscal years 1997 and 1996, respectively.

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, 1998. 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 amounts of accounts
receivable, notes payable and accounts payable approximate 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 bank
debt bears interest at rates which float with market rates, the Company has
estimated that the carrying amount of its long-term debt also approximates its
fair value.

F-16
<PAGE> 42
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-------------------------------------------------
QUARTER ENDED
--------------------------------------
12/31 3/31 6/30 9/30 TOTAL
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Sales...................................... $15,675 $16,128 $ 16,783 $15,560 $ 64,146
Operating income (loss).................... (472) (347) (7,769) 389 (8,199)
Net earnings (loss)........................ (298) (246) (12,365) 391 (12,518)
Net earnings (loss) per share.............. (0.07) (0.05) (2.82) 0.09 (2.85)
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
-----------------------------------------------
QUARTER ENDED
-------------------------------------
12/31 3/31 6/30 9/30 TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales........................................ $16,574 $16,585 $16,745 $17,053 $66,957
Operating income (loss)...................... (939) (5,638) (124) 180 (6,521)
Net earnings (loss).......................... (674) (4,087) (80) 125 (4,716)
Net earnings (loss) per share................ (0.15) (0.93) (0.02) 0.03 (1.07)
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996
-----------------------------------------------
QUARTER ENDED
-------------------------------------
12/31 3/31 6/30 9/30 TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales........................................ $17,460 $17,915 $18,005 $18,107 $71,487
Operating income (loss)...................... (510) 65 259 (93) (279)
Net earnings (loss).......................... (356) (37) 121 (143) (415)
Net earnings (loss) per share................ (.08) (.01) .03 (.03) (.09)
</TABLE>

- ---------------

(1) Fourth quarter 1998 results include a pre-tax benefit of $368,000 to
reverse third quarter impairment charges on land and buildings held for
sale.

(2) Fourth quarter 1998 results include a pre-tax benefit of $113,000 to reduce
insurance reserves for workers' compensation and general liability claims.

(3) Third quarter 1998 results include pre-tax asset impairment and
restructuring charges of $6,969,000.

(4) Third quarter 1998 results include income tax expense of $4,305,000 to
provide a valuation allowance for deferred tax assets net of deferred tax
liabilities.

(5) Second quarter 1998 results include a pre-tax benefit of $212,000 to reduce
general liability insurance reserves.

(6) Third quarter 1997 includes pre-tax asset impairment and restructuring
charges of $78,000.

(7) Third quarter 1997 results include a pre-tax benefit of $500,000 to reduce
insurance reserves for workers' compensation and the Voluntary Employee
Injury Benefit (VEIB) Plan.

(8) Second quarter 1997 includes pre-tax asset impairment and restructuring
charges of $4,988,000.

(9) Second quarter 1997 results include a pre-tax benefit of $558,000 to reduce
insurance reserves for workers' compensation and the VEIB Plan.

(10) Fourth quarter 1996 results include a pre-tax benefit of $162,000 to reduce
insurance reserves for workers' compensation and the VEIB Plan.

(11) Third quarter 1996 results include a pre-tax benefit of $179,000 to reduce
insurance reserves for the VEIB Plan and to reduce expenses for the
employee health insurance plan.

(12) Second quarter 1996 results include a pre-tax benefit of $74,000 to reduce
expenses for the employee health insurance plan.

F-17
<PAGE> 43

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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.

Fort Worth, Texas
November 13, 1998

F-18
<PAGE> 44

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 11, 1998

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 11, 1998
- ------------------------------------------------------------
Jesse Arrambide, III, Chairman of the Board of Directors

/s/ HOLLIS TAYLOR December 11, 1998
- ------------------------------------------------------------
Hollis Taylor, President and Chief Executive Officer and
Director
(Principal Executive Officer)

/s/ W. BRAD FAGAN December 11, 1998
- ------------------------------------------------------------
Brad Fagan, Vice President, Treasurer, Chief Financial
Officer and Assistant Secretary (Principal Financial and
Accounting Officer)

/s/ SAMUEL L. CARLSON December 11, 1998
- ------------------------------------------------------------
Samuel L. Carlson, Director

/s/ ROBERT L. LIST December 11, 1998
- ------------------------------------------------------------
Robert L. List, Director

/s/ DAVID ODEN December 11, 1998
- ------------------------------------------------------------
David Oden, Director

/s/ TOMAS ORENDAIN December 11, 1998
- ------------------------------------------------------------
Tomas Orendain, Director

/s/ GEORGE N. RIORDAN December 11, 1998
- ------------------------------------------------------------
George N. Riordan, Director

/s/ RUDOLPH RODRIGUEZ, JR. December 11, 1998
- ------------------------------------------------------------
Rudolph Rodriguez, Jr., Director
</TABLE>
<PAGE> 45

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
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(18)
10(x) -- Amendment to Revolving Credit and Term Loan Agreement, dated February 11, 1997(19)
10(y) -- Amendment to Revolving Credit and Term Loan Agreement, dated March 31, 1997(20)
10(z) -- Seventh Amendment to Revolving Credit and Term Loan Agreement, dated December 1,
1997(21)
10(aa) -- Amendment Number One to Pancho's Mexican Buffet, Inc. 1992 Stock Option Plan(22)
10(ab) -- Eighth Amendment to Revolving Credit and Term Loan Agreement, dated November 3,
1998 -- 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>
<S> <C>
(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.
(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.
(18) Filed with the Commission as an Exhibit to form 10-K for the
year ended September 30, 1996 -- such Exhibits are
incorporated herein by reference.
(19) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended December 31, 1996 -- such Exhibits are
incorporated herein by reference.
(20) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended March 31, 1997 -- such Exhibits are
incorporated herein by reference.
(21) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended June 30, 1997 -- such Exhibits are
incorporated herein by reference.
(22) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended December 31, 1997 -- such Exhibits are
incorporated herein by reference.
</TABLE>

<PAGE> 1
EXHIBIT 10(ab)

EIGHTH AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT

THIS EIGHTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT
(hereinafter called this "Amendment") is entered into on November 3, 1998, to be
effective as of September 30, 1998, (the "Effective Date"), between PMB
ENTERPRISES WEST, INC., a New Mexico corporation (the "Company"), and WELLS
FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of
Texas, N.A.) (the "Bank").

W I T N E S S E T H:

WHEREAS, the Company and the Bank entered into that certain Revolving
Credit and Term Loan Agreement dated February 16, 1994 (such Revolving Credit
and Term Loan Agreement and all amendments thereto and restatements thereof are
hereinafter collectively referred to as the "Agreement"); and

WHEREAS, the Company and the Bank entered into that certain First
Amendment to Revolving Credit and Term Loan Agreement dated February 9, 1995
(the "First Amendment"); and

WHEREAS, the Company and the Bank entered into that certain Second
Amendment to Revolving Credit and Term Loan Agreement dated May 9, 1995 (the
"Second Amendment"); and

WHEREAS, the Company and the Bank entered into that certain Third
Amendment to Revolving Credit and Term Loan Agreement dated September 29, 1995
(the "Third Amendment"); and

WHEREAS, the Company and the Bank entered into that certain Fourth
Amendment to Revolving Credit and Term Loan Agreement dated February 16, 1996
(the "Fourth Amendment"); and

WHEREAS, the Company and the Bank entered into that certain Fifth
Amendment to Revolving Credit and Term Loan Agreement dated July 9, 1996 (the
"Fifth Amendment"); and

WHEREAS, the Company and the Bank entered into that certain Letter
Agreement dated December 16, 1996 (the "First Letter Agreement"); and

WHEREAS, the Company and the Bank entered into that certain Letter
Agreement dated February 11, 1997 (the "Second Letter Agreement"); and

WHEREAS, the Company and the Bank entered into that certain Sixth
Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997 (the
"Sixth Amendment"); and

WHEREAS, the Company and the Bank entered into that certain Seventh
Amendment to Revolving Credit and Term Loan Agreement dated December 1, 1997
(the "Seventh Amendment"); and

<PAGE> 2

WHEREAS, the Company has requested that the Bank amend (i) the required
Commitment Reductions; (ii) the Termination Date; and (iii) certain financial
covenants; and

WHEREAS, subject to and upon the terms and conditions hereinafter
stated, the Bank is willing to do so;

NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained, the parties to this Amendment hereby agree as
follows:

SECTION 1. Terms Defined in Agreement. As used in this Amendment,
except as may otherwise be provided herein, all capitalized terms which are
defined in the Agreement shall have the same meaning herein as therein, all of
such terms and their definitions being incorporated herein by reference.

SECTION 2. Amendments to Agreement. Subject to the conditions precedent
set forth in Section 3 hereof, the Agreement is hereby amended as follows:

(a) The definition of "EBITDA" in Article I of the Agreement is amended
to read in its entirety as follows:

"`EBITDA' shall mean, with respect to Pancho's Mexican Buffet,
Inc. and its Subsidiaries on a Consolidated basis for any fiscal
period, without duplication, Consolidated Net Income plus (ii)
depreciation, depletion, amortization and other non-cash items reducing
Consolidated Net Income plus (iii) interest expense plus (iv) income
tax expense, all determined in accordance with GAAP."

(b) The definition of "Loan Documents" in Article I of the Agreement is
amended to read in its entirety as follows:

"`Loan Documents' shall mean this Loan Agreement, the Note
(including any renewals, extensions and refundings thereof), the
Guaranty, the Security Instruments and any agreements or documents (and
with respect to this Loan Agreement, and such other agreements and
documents, any amendment or supplements thereto or modifications
thereof) executed or delivered pursuant to the terms of this Loan
Agreement."

"`Permitted Liens' shall mean: (i) purchase money liens
relating to or securing obligations in an aggregate amount not to
exceed five hundred thousand dollars ($500,000); (ii) pledges or
deposits made to secure payment of Worker's Compensation (or to
participate in any fund in connection with Worker's Compensation ),
unemployment insurance, pensions or social security programs; (iii)
Liens imposed by mandatory provisions of law such as for materialmen's,
mechanics warehousemen's and other like Liens arising in the ordinary
course of business, securing Indebtedness whose payment is not yet due
unless the same are beings

-2-

<PAGE> 3

contested in good faith and for which adequate reserves have been
provided; (iv) Liens for taxes, assessments and governmental charges or
levies imposed upon a Person or upon such Person's income or profits or
property, if the same are not yet due and payable or if the same are
being contested in good faith and as to which adequate reserves have
been provided; (v) good faith deposits in connection with tenders,
leases, real estate bids or contracts (other than contracts involving
the borrowing of money), pledges or deposits to secure public or
statutory obligations, deposits to secure (or in lieu of) surety, stay,
appeal or customs bonds and deposits to secure the payment of taxes,
assessments, customs duties or other similar charges; (vi) encumbrances
consisting of zoning restrictions, easements, or other restrictions on
the use of real property, provided that such do not impair the use of
such property for the uses intended, and none of which is violated by
Company or any of its Subsidiaries in connection with existing or
proposed structures or land use; and (vii) Liens created in favor of
the Bank."

(d) The following definition of "Phoenix Property" shall be added to
Article I of the Agreement in alphabetical order:

"`Phoenix Property' shall mean all real and personal property
located at 8146 W. Indian School Road, Phoenix, Arizona as more fully
described in that certain Arizona Deed of Trust, Security Agreement,
Financing Statement, and Assignment of Rental dated as of September 29,
1995 from Company to Horace Weaver, Trustee, for the benefit of Bank,
recorded in the official records of Maricopa County under File No.
96-0153894 on March 7, 1996."

(e) The following definition of "Security Instruments" shall be added
to Article I of the Agreement in alphabetical order:

"`Security Instruments' shall mean any and all deeds of trust
and security agreements delivered to the Bank pursuant to this Loan
Agreement including, but not limited to, those instruments delivered to
the Bank pursuant to Section 6.02(g) of this Loan Agreement."

(f) The following definition of "Shreveport Property" shall be added to
Article I of the Agreement in alphabetical order:

"`Shreveport Property' shall mean all real and personal
property located at 9165 Mansfield Road, Shreveport, Louisiana."

(g) The definition of "Termination Date" in Article I of the Agreement
is amended to read in its entirety as follows:

"`Termination Date' shall mean September 30, 2000."

(h) Subsection 2.01(a) of the Agreement is hereby deleted therefrom and
the following subsection 2.01(a) is substituted in lieu thereof:

"(a) Revolving Loan Commitments. Subject to the terms and
conditions of this Loan Agreement, Bank agrees to extend to Company
from

-3-

<PAGE> 4

the date hereof through the Termination Date (the "Revolving Credit
Period"), a revolving line of credit which shall not exceed two million
and no/100 dollars ($2,000,000.00) at any one time outstanding prior to
December 31, 1998. On the last day of each and every calendar quarter
beginning with the calendar quarter ended December 31, 1998, the
maximum principal amount which may at any one time be outstanding under
the revolving line of credit shall be further and additionally reduced
by Company by the amount set forth opposite the particular quarter
below:
<TABLE>
<CAPTION>

Quarter Commitment Reduction
------- --------------------
<S> <C>
December 31, 1998 $100,000.00
March 31, 1999 $100,000.00
June 30, 1999 $200,000.00
September 30, 1999 $200,000.00
December 31, 1999 $100,000.00
March 31, 2000 $100,000.00
June 30, 2000 $200,000.00
September 30, 2000 The lesser of $1,000,000.00 or
actual Commitment outstanding
</TABLE>

(each maximum amount outstanding under the line of credit from time to
time in effect is hereinafter referred to as the "Commitment"). The
amount of the Commitment shall also be reduced by one hundred percent
(100%) of the amount of net proceeds from the sale of real property of
Company or any Subsidiary applied to the payment of the Note, provided,
however, that the amount of the Commitment shall be reduced by sixty
percent (60%) of the amount of net proceeds from the sale of the
Shreveport Property and the Phoenix Property. Any payments received
from the proceeds of sale of real property of Company or any Subsidiary
will not reduce or affect the amount of the next scheduled Commitment
Reduction, but shall be applied in inverse order to the scheduled
Commitment Reductions. (For example, the application of $1,100,000 in
net proceeds from the sale of real estate would immediately permanently
reduce the Commitment and would cause the Commitment Reduction required
on September 30, 2000 to be reduced to zero and cause the required
Commitment Reduction on June 30, 2000 to be reduced to $100,000, and
the subsequent sale of the Phoenix Property for $100,000 would
immediately permanently reduce the Commitment and would cause the then
remaining required Commitment Reduction on June 30, 2000 to be reduced
to $40,000.) Bank shall not be obligated to make any Advance hereunder
if, immediately after giving effect thereto, the aggregate amount of
the Obligations of Company to Bank hereunder exceeds Bank's Commitment
in effect at such time.

Within the limits of this Section 2.01 during the Revolving
Credit Period, Company may borrow, prepay pursuant to Section 4.04
hereof and reborrow under this Section 2.01. Each advance made by Bank
under Section 2.01 and Section 2.02 is herein called an "Advance" and
all Advances made by Bank hereunder are herein collectively called a
`Revolving Credit Loan.'"

-4-

<PAGE> 5

(i) Subsection 8.01(g) of the Agreement, for sake of clarity, is
restated in its entirety as follows:

"(g) Requested Information: with reasonable promptness, such
other financial data or other data or information related to the
business or operations of Pancho's Mexican Buffet, Inc. or its
Subsidiaries as Bank may reasonably request and which is available to
Company on a "best efforts" basis. Bank agrees that Bank will not
intentionally disclose any information given to Bank by the Company
which is either proprietary or confidential and which is prominently
marked as such; provided, however, that this restriction shall not
apply to information which has at the time in question entered the
public domain, nor will this restriction prohibit Bank from disclosing
such information (a) as is required to be disclosed by Law or by any
order, rule or regulation (whether valid or invalid) of any Tribunal,
(b) to Bank's auditors, attorneys, or agents, or (c) to purchasers or
prospective purchasers or Assignees of interests in the Loan Agreement
or the Obligation."

(j) Subsection 8.01(h) of the Agreement is deleted therefrom and the
following Subsection 8.01(h) is substituted in lieu thereof:

"(h) This Subsection 8.01(h) is intentionally left blank."

(k) Section 9.01 of the Agreement is hereby deleted therefrom and the
following Section 9.01 is substituted in lieu thereof:

"9.01 This section intentionally left blank."

(l) Section 9.02 of the Agreement is hereby deleted therefrom and the
following Section 9.02 is substituted in lieu thereof:

"9.02 Indebtedness to Net Worth. Permit the ratio of the total
Indebtedness of Pancho's Mexican Buffet, Inc. and its Subsidiaries as
of the end of the most recent fiscal quarter to Consolidated Tangible
Net Worth as of the end of the most recent fiscal quarter to be greater
than 1.4 to 1.0; or"

(m) Section 9.04 of the Agreement is hereby deleted therefrom and the
following Section 9.04 is substituted in lieu thereof:

"9.04 Transfer of Assets. Transfer any funds or assets to PMB
International, Inc. and its Subsidiaries in an amount in excess of
$100,000 during the Company's fiscal year 1998 or transfer any funds to
PMB International, Inc. or its Subsidiaries during the Company's fiscal
year 1999 or thereafter; or"

(n) Section 9.10 of the Agreement, for sake of clarity, is restated in
its entirety as follows:

"9.10 Liquidation, Mergers and Disposition of Substantial
Assets. Liquidate, dissolve or reorganize; merge or consolidate with
any other company, firm or association in a transaction in which
Company is not the

-5-

<PAGE> 6

surviving corporation except for a merger or consolidation with
Pancho's Mexican Buffet, Inc. or one of its Subsidiaries; or make any
other substantial change in its capitalization or its business; or"

(o) Section 9.11 of the Agreement is hereby deleted therefrom and the
following Section 9.11 is substituted in lieu thereof:

"9.11 EBITDA. Permit EBITDA for the three-month period ending
on the date set forth below to be less than the amount set forth below
opposite such date:

Period Ended: Required Trailing-Three-Month EBITDA
------------- ------------------------------------
<S> <C>
December 31, 1998 $100,000.00
March 31, 1999 $400,000.00
June 30, 1999 $600,000.00
September 30, 1999 $400,000.00
December 31, 1999 $400,000.00
March 31, 2000 $400,000.00
June 30, 2000 $600,000.00
September 30, 2000 $400,000.00; or"
</TABLE>

(p) Section 9.13 of the Agreement is hereby deleted therefrom and the
following Section 9.13 is substituted in lieu thereof:

"9.13 This section intentionally left blank."

(q) Section 9.15 of the Agreement is hereby deleted therefrom and the
following Section 9.15 is substituted in lieu thereof:

"9.15 Dividends. (a) Pay any Dividend unless the twelve-month
rolling EBITDA exceeds three million dollars ($3,000,000) or (b) pay
Dividends in excess of one hundred fifty thousand dollars ($150,000) in
the aggregate during any fiscal year of Pancho's Mexican Buffet, Inc.;
provided, however, that so long as no Default (other than
non-compliance with Subsection 9.15(a) hereof) has occurred or would
occur as a result of the following, Pancho's Mexican Buffet, Inc. may
declare and pay cash Dividends on or before March 31, 1999 to any of
its stockholders in an amount necessary to make a payment in lieu of
fractional shares of Pancho's Mexican Buffet, Inc.'s common stock in
connection with Pancho's Mexican Buffet, Inc.'s proposed reverse stock
split, provided, further, that the aggregate amount of all such cash
Dividends shall not exceed $10,000.00; or"

(r) Section 9.16 of the Agreement is hereby deleted therefrom and the
following Section 9.16 is substituted in lieu thereof:

"9.16 This section intentionally left blank."

(s) Subsection 10.01(j) of the Agreement is hereby deleted therefrom
and the following Section 10.01(j) is substituted in lieu thereof:

-6-

<PAGE> 7

"(j) The failure of the Company to promptly apply net proceeds
from sale of real property of Company or any of its Subsidiaries to the
unpaid balance of the Note as set forth in Section 2.01(a) hereof; or"

(t) Article XI of the Agreement is hereby deleted therefrom and the
following Article XI is substituted in lieu thereof:

"ARTICLE XI

ARBITRATION PROGRAM

11.01 Arbitration. Upon the demand of any party, any Dispute
shall be resolved by binding arbitration (except as set forth in
Section 11.05 below) in accordance with the terms of this Loan
Agreement. A "Dispute" shall mean any action, dispute, claim or
controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under
or in connection with, or in any way pertaining to, any of the Loan
Documents, or any past, present or future extensions of credit and
other activities, transactions or obligations of any kind related
directly or indirectly to any of the Loan Documents, including without
limitation, any of the foregoing arising in connection with the
exercise of any self-help, ancillary or other remedies pursuant to any
of the Loan Documents. Any party may by summary proceedings bring an
action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any
other party shall bear all costs and expenses incurred by such other
party in compelling arbitration of any Dispute.

11.02 Governing Rules. Arbitration proceedings shall be
administered by the American Arbitration Association ("AAA") or such
other administrator as the parties shall mutually agree upon in
accordance with the AAA Commercial Arbitration Rules. All Disputes
submitted to arbitration shall be resolved in accordance with the
Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the
Loan Documents. The arbitration shall be conducted at a location in
Texas selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms
and procedures set forth herein shall control. All statutes of
limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the
protections afforded to it under 12 U.S.C. ss.91 or any similar
applicable state law.

11.03 No Waiver; Provisional Remedies, Self-Help and
Foreclosure. No provision hereof shall limit the right of any party to
exercise self-help remedies such as setoff, foreclosure against or sale
of any real or personal property collateral or security, or to obtain
provisional or ancillary remedies, including without limitation
injunctive relief, sequestration,

-7-

<PAGE> 8

attachment, garnishment or the appointment of a receiver, from a court
of competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall
not waive the right of any party to compel arbitration hereunder.

11.04 Arbitrator Qualifications and Powers; Awards.
Arbitrators must be active members of the Texas State Bar with
expertise in the substantive laws applicable to the subject matter of
the Dispute. Arbitrators are empowered to resolve Disputes by summary
rulings in response to motions filed prior to the final arbitration
hearing. Arbitrators (i) shall resolve all Disputes in accordance with
the substantive law of the state of Texas, (ii) may grant any remedy or
relief that a court of the state of Texas could order or grant within
the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery
of all costs and fees, to impose sanctions and to take such other
actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the Texas Rules of
Civil Procedure or other applicable law. Any Dispute in which the
amount in controversy is $5,000,000 or less shall be decided by a
single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission
to a single arbitrator, each party expressly waives any right or claim
to recover more than $5,000,000. Any Dispute in which the amount in
controversy exceeds $5,000,000 shall be decided by majority vote of a
panel of three arbitrators; provided however, that all three
arbitrators must actively participate in all hearings and
deliberations.

11.05 Judicial Review. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific,
written findings of fact and conclusions of law. In such arbitrations
(i) the arbitrators shall not have the power to make any award which is
not supported by substantial evidence or which is based on legal error,
(ii) an award shall not be binding upon the parties unless the findings
of fact are supported by substantial evidence and the conclusions of
law are not erroneous under the substantive law of the state of Texas,
and (iii) the parties shall have in addition to the grounds referred to
in the Federal Arbitration Act for vacating, modifying or correcting an
award the right to judicial review of (A) whether the findings of fact
rendered by the arbitrators are supported by substantial evidence, and
(B) whether the conclusions of law are erroneous under the substantive
law of the state of Texas. Judgment confirming an award in such a
proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under
the substantive law of the state of Texas.

11.06 Miscellaneous. To the maximum extent practicable, the
AAA, the arbitrators and the parties shall take all action required to
conclude any arbitration proceeding within 180 days of the filing of
the Dispute with the AAA. No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results
thereof, except for disclosures of information by a party required in
the ordinary course of its business, by

-8-

<PAGE> 9

applicable law or regulation, or to the extent necessary to exercise
any judicial review rights set forth herein. If more than one agreement
for arbitration by or between the parties potentially applies to a
Dispute, the arbitration provision most directly related to the Loan
Documents or the subject matter of the Dispute shall control. This
arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the
parties."

(t) Section 12.02 of the Agreement is hereby deleted therefrom and the
following Section 12.02 is substituted in lieu thereof:

"12.02 Notices. Any notices or other communications required
or permitted to be given by this Loan Agreement, the Note or any of the
other Loan Documents must be given in writing and personally delivered,
sent by telecopy or telex (answerback received) or mailed by prepaid
certified or registered mail, return receipt requested, to the party to
whom such notice or communication is directed at the address of such
party as follows:

Company: PMB Enterprises West, Inc.
3500 Noble Avenue
Fort Worth, Texas 76111
Attn: Chief Financial Officer
Facsimile: (817) 838-1408

Bank: Wells Fargo Bank (Texas), National Association
1000 Louisiana 4th Floor
Houston, Texas 77002
Attn: Roger Fruendt
Facsimile: (713) 739-1076

Any such notice or other communication shall be deemed to have been
given on the date it is personally delivered or sent by telecopy or
telex as aforesaid or, if mailed, on the second day after it is mailed
as aforesaid (whether actually received or not). Any party may change
its address for purposes of this Loan Agreement by giving notice of
such change to all other parties pursuant to this Section 12.02."

(u) Section 12.04 of the Agreement is hereby deleted therefrom and the
following Section 12.04 is substituted in lieu thereof:

"12.04 Maximum Interest Rate. (a) It is the intention of the
parties hereto to comply with applicable usury laws, if any;
accordingly, notwithstanding any provision to the contrary in this Loan
Agreement, the Note or in any of the other Loan Documents securing the
payment hereof or otherwise relating hereto, in no event shall this
Loan Agreement, the Note or such other Loan Documents require or permit
the payment, taking, reserving, receiving, collection, or charging of
any sums constituting interest under applicable laws which exceed the
maximum amount permitted by such laws. If any such excess interest is
called for, contracted for, charged, taken, reserved, or received in
connection with the loans evidenced by the Note or in any of the Loan
Documents securing the

-9-

<PAGE> 10

payment thereof or otherwise relating thereto, or in any communication
by the Bank or any other Person to the Company or any other Person, or
in the event all or part of the principal or interest thereof shall be
prepaid or accelerated, so that under any of such circumstances or
under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, reserved, or received on the amount of
principal actually outstanding from time to time under the Note shall
exceed the maximum amount of interest permitted by applicable usury
laws, then in any such event it is agreed as follows: (i) the
provisions of this paragraph shall govern and control, (ii) neither the
Company nor any other Person or entity now or hereafter liable for the
payment of the Note shall be obligated to pay the amount of such
interest to the extent such interest is in excess of the maximum amount
of interest permitted by applicable usury laws, (iii) any such excess
which is or has been received notwithstanding this paragraph shall be
credited against the then unpaid principal balance of the Note or, if
the Note has been or would be paid in full, refunded to the Company,
and (iv) the provisions of this Loan Agreement, the Note and the other
Loan Documents securing the payment thereof and otherwise relating
thereto, and any communication to the Company, shall immediately be
deemed reformed and such excess interest reduced, without the necessity
of executing any other document, to the maximum lawful rate allowed
under applicable laws as now or hereafter construed by courts having
jurisdiction hereof or thereof. Without limiting the foregoing, all
calculations of the rate of the interest contracted for, charged,
collected, taken, reserved, or received in connection with the Note or
this Loan Agreement which are made for the purpose of determining
whether such rate exceeds the maximum lawful rate shall be made to the
extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full term of the
loans, including all prior and subsequent renewals and extensions, all
interest at any time contracted for, charged, taken, collected,
reserved, or received. The terms of this paragraph shall be deemed to
be incorporated in every document and communication relating to the
Note, the loans or any other Loan Document.

(b) Texas Finance Code, Chapter 346 (formerly Tex.
Rev. Civ. Stat., Title 79, Chapter 15), which regulates certain
revolving loan accounts and revolving triparty accounts, shall not
apply to any revolving loan accounts created under the Note, this Loan
Agreement or the other Loan Documents or maintained in connection
therewith.

(c) To the extent that the interest rate laws of the
State of Texas are applicable to the Loans, the applicable interest
rate ceiling is the weekly ceiling (formerly the indicated rate
ceiling) determined in accordance with Tex. Rev. Civ. Stat., Title 79,
Article 5069-1D.003, also codified at Texas Finance Code, Section
303.301 (formerly Article 5069-1.01(a)(1)), and, to the extent that
this Loan Agreement, the Note or any other Loan Document is deemed an
open end account as such term is defined in Tex. Rev. Civ. Stat., Title
79, Article 5069-1B.002(14), also codified at Texas Finance Code
Section 3.01.001(3) (formerly Article 5069-1.01(f)), the Payee retains
the right to modify the interest rate in accordance with applicable
law."

-10-

<PAGE> 11

SECTION 3. Restructure Fee. At the time of execution of this Amendment,
the Company shall pay to the Bank a fee in the amount of ten thousand dollars
($10,000) together with all attorneys' fees incurred by the Bank (the
"Restructure Fee").

SECTION 4. Conditions of Effectiveness. As a condition precedent to the
effectiveness of the Bank's agreements and obligations hereunder, the Company
shall have taken the following actions and delivered to the Bank the following
documents and instruments, in form and substance satisfactory to the Bank:

(a) The Company shall have duly executed and delivered this
Amendment.

(b) The Company shall have paid all accrued and unpaid legal
fees and expenses referred to in Section 12.03 of the Agreement and Section 8
hereof to the extent invoices for such fees and expenses have been delivered to
the Company.

(d) The Company shall have delivered an incumbency certificate
of the Company.

(e) The Company shall have paid to the Bank the Restructure
Fee.

(f) The Company shall have duly executed and delivered
amendments to the Security Instruments (hereinafter defined) requested by the
Bank.

(g) The Company shall have provided such other evidence as the
Bank may reasonably request to establish the consummation of the transactions
contemplated hereby, the taking of all proceedings in connection herewith and
compliance with the conditions set forth in this Amendment.

SECTION 5. Representations and Warranties of the Company. Each of the
Company and the Guarantors, represents and warrants to the Bank, with full
knowledge that the Bank is relying on the following representations and
warranties in executing this Amendment, as follows:

(a) Each of the Company and the Guarantors has corporate power
and authority to execute, deliver and perform this Amendment, and all corporate
action on the part of the Company and the Guarantors requisite for the due
execution, delivery and performance of this Amendment has been duly and
effectively taken.

(b) The Agreement as amended by this Amendment and the Loan
Documents and each and every other document executed and delivered in connection
with this Amendment to which the Company or any of its Subsidiaries or any
Guarantor is a party constitute the legal, valid and binding obligations of the
Company and any of its Subsidiaries and each of the Guarantors to the extent it
is a party thereto, enforceable against such Person in accordance with their
respective terms.

-11-

<PAGE> 12

(c) This Amendment does not and will not violate any
provisions of the articles or certificate of incorporation or bylaws of the
Company or any Guarantor or any contract, agreement, instrument or requirement
of any Governmental Authority to which the Company or any Guarantor is subject.
The Company's and the Guarantors' execution of this Amendment will not result in
the creation or imposition of any lien upon any properties of the Company or
either Guarantor, other than those permitted by the Agreement and this
Amendment.

(d) The Company's and the Guarantors' execution, delivery and
performance of this Amendment does not require the consent or approval of any
other Person, including, without limitation, any governmental authority.

(e) The unaudited consolidated balance sheet of the Company
and its Subsidiaries as of August 31, 1998, the related consolidated statements
of earnings, capital accounts, and cash flows of the Company for the period then
ended and the consolidated balance sheet and related consolidated statements of
earnings, capital accounts and cash flows for the period commencing the first
day of the fiscal year and ending on the last day of such quarter which have
been furnished to the Bank, fairly present the financial condition of the
Company and its Subsidiaries as at such date and the results of the operations
of the Company and its Subsidiaries for the periods ended on such date, all in
accordance with GAAP applied on a consistent basis, and since August 31, 1998,
there has been no material adverse change in such condition or operations.

(f) Except as expressly set forth in Section 7(a) hereof, each
of the Company and the Guarantors has performed and complied with all agreements
and conditions contained in the Agreement required to be performed or complied
with by them prior to or at the time of delivery of this Amendment. Except as
expressly waived pursuant to Section 7(a) hereof, no Default or Event of Default
exists.

(g) Nothing in this Section 5 of this Amendment is intended to
amend any of the representations or warranties contained in the Agreement or the
Loan Documents to which the Company or any of its Subsidiaries or any Guarantor
is a party. The Company represents and warrants that all of the representations
and warranties contained in the Agreement and in all instruments and documents
executed pursuant thereto or contemplated thereby are true and correct in all
material respects on and as of this date, except (i) such representations that
relate solely to an earlier date and that were true and correct on such earlier
date, and (ii) the breach or inaccuracy of representations and warranties about
which the Bank has been notified in writing prior to the date of this Amendment.

SECTION 6. Reference to and Effect on the Agreement.

(a) Upon the effectiveness of Sections 2 and 3 hereof, on and
after the Effective Date, each reference in the Agreement to "this Agreement,"
"hereunder," "hereof," "herein," or words of like import, shall mean and be a
reference to the Agreement as amended hereby.

(b) Except as expressly provided herein, the Agreement and the
other Loan Documents shall remain in full force and effect in accordance with
their respective

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<PAGE> 13

terms, and this Amendment shall not be construed to impair the validity,
perfection or priority of any lien or security interest securing the
Obligations.

SECTION 7. Limited Waiver. (a) In reliance upon the representations and
warranties of the Company herein set forth, the Bank hereby waives any Default
or Event of Default caused by the Company's failure to comply with Sections
9.01, 9.02, 9.11, 9.13, 9.14 and 9.16 of the Agreement during the months of
April, May, June, July and August, 1998.

(b) Each of the Company and the Guarantors agrees that, except
as expressly waived pursuant to Section 7(a) above, no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by the
Bank, and any such Default or Event or Default heretofore arising and currently
continuing shall continue after the execution and delivery hereof. Nothing
contained in this Amendment nor any past indulgence by the Bank nor any other
action or inaction on behalf of the Bank (i) shall constitute or be deemed to
constitute a waiver of any defaults or events of default which may exist under
the Agreement or the other Loan Documents, or (ii) shall constitute or be deemed
to constitute an election of remedies by the Bank or a waiver of any of the
rights or remedies of the Bank provided in the Agreement or the other Loan
Documents or otherwise afforded at law or in equity.

SECTION 8. Cost, Expenses and Taxes. The Company agrees to pay on
demand all reasonable costs and expenses of the Bank in connection with the
preparation, reproduction, execution and delivery of this Amendment and the
other instruments and documents to be delivered hereunder, including reasonable
attorneys' fees and out-of-pocket expenses of the Bank. In addition, the Company
shall pay any and all stamp and other taxes and fees payable or determined to be
payable in connection with the execution and delivery, filing or recording of
this Amendment and the other instruments and documents to be delivered
hereunder, and agrees to save the Bank harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes or fees.

SECTION 9. Extent of Amendments. Except as otherwise expressly provided
herein, the Agreement and the other Loan Documents are not amended, modified or
affected by this Amendment. Each of the Company and the Guarantors ratifies and
confirms that (i) except as expressly amended hereby, all of the terms,
conditions, covenants, representations, warranties and all other provisions of
the Agreement remain in full force and effect, (ii) each of the other Loan
Documents are and remain in full force and effect in accordance with their
respective terms, and (iii) the property referenced in the Security Instruments
(such property herein the "Collateral") is unimpaired by this Amendment.

SECTION 10. Guaranties. Each of the Guarantors hereby consents to and
accepts the terms and conditions of this Amendment, agrees to be bound by the
terms and conditions hereof and ratifies and confirms that its Unconditional
Guaranty Agreement executed and delivered to the Bank on February 16, 1994,
guaranteeing payment of the Obligations of the Company to the Bank, is and
remains in full force and effect and secures payment of, among other things, the
Note as renewed, rearranged and extended hereby.

SECTION 11. Grant and Affirmation of Security Interest. The Company
hereby grants to the Bank a security interest in the Collateral to secure
payment and performance

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<PAGE> 14

of the Note and the obligations described in the Agreement, the other Loan
Documents, and all documents and instruments executed in connection therewith,
and the Company hereby confirms and agrees that any and all liens, security
interests and other security or Collateral now or hereafter held by the Bank as
security for payment and performance of the Obligations hereby are renewed,
extended and carried forth to secure payment and performance of all of the
Obligations, including, without limitation, the Note. The Loan Documents
(including without limitation, the Security Instruments) executed by the Company
are and remain legal, valid and binding obligations of the parties thereto,
enforceable in accordance with their respective terms.

SECTION 12. Execution and Counterparts. This 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 Amendment by facsimile shall be equally as effective as delivery of a
manually executed counterpart of this Amendment.

SECTION 13. Severability. In the event any one or more provisions
contained in the Agreement or this Amendment should be held to be invalid,
illegal or unenforceable in any respect, the validity, enforceability and
legality of the remaining provisions contained herein and therein shall not be
affected in any way or impaired thereby and shall be enforceable in accordance
with their respective terms.

SECTION 14. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, the federal laws of the United States of America.

SECTION 15. Interpretation. In the event of any inconsistency between
the terms of this Amendment and the Agreement or any of the other Loan
Documents, this Amendment shall govern. Each of the Company and Guarantors
acknowledge that it has consulted with counsel and with such other experts and
advisors as it has deemed necessary in connection with the negotiation,
execution and delivery of this Amendment. This Amendment shall be construed
without regard to any presumption or rule requiring that it be construed against
the party causing this Amendment or any part hereof to be drafted.

SECTION 16. Headings. Section headings in this Amendment are included
herein for convenience and reference only and shall not constitute a part of
this Amendment for any other purpose.

SECTION 17. Benefit of Agreement. This Amendment shall be binding upon
and inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns. No other Person shall be entitled to claim
any right or benefit hereunder, including, without limitation, the status of a
third-party beneficiary of this Amendment.

SECTION 18. Arbitration Program. The parties agree to be bound by the
terms and provisions of the Arbitration Program of the Bank set forth in Article
XI of the Agreement which is incorporated by reference herein and is
acknowledged as received by the parties pursuant to which any and all disputes
arising hereunder, under the Agreement, under any of the other Loan Documents,
or under any of the documents and instruments

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<PAGE> 15

contemplated thereby, or pertaining hereto or thereto, shall be resolved by
mandatory binding arbitration upon the request of any party.

SECTION 19. WAIVERS AND RELEASE OF CLAIMS. As additional consideration
to the execution, delivery, and performance of this Amendment by the parties
hereto and to induce the Bank to enter into this Amendment, each of the Company
and each Guarantor represents and warrants that none of the Company and
Guarantors knows of any facts, events, statuses or conditions which, either now
or with the passage of time or the giving of notice, or both, constitute or will
constitute a basis for any claim or cause of action against the Bank or any
defense, counterclaim or right of setoff to the payment or performance of any
obligations or indebtedness of the Company or any Guarantor to the Bank, and in
the event any such facts, events, statuses or conditions exist or have existed,
whether known or unknown, WHETHER DUE TO THE BANK'S, ITS REPRESENTATIVES',
AGENTS', OFFICERS', DIRECTORS', EMPLOYEES', SHAREHOLDERS', OR SUCCESSORS' OR
ASSIGNS' OWN NEGLIGENCE, each of the Company and the Guarantors for each of
themselves, their respective Subsidiaries, their respective representatives,
agents, officers, directors, employees, shareholders, and successors and assigns
(collectively called the "Indemnifying Parties"), hereby fully, finally,
completely, generally and forever releases, discharges, acquits, and
relinquishes the Bank and its respective representatives, agents, officers,
directors, employees, shareholders, and successors and assigns (collectively
called the "Indemnified Parties"), from any and all claims, actions, demands,
and causes of action of whatever kind or character, whether joint or several,
whether known or unknown, WHETHER DUE TO ANY OF THE INDEMNIFIED PARTIES' OWN
NEGLIGENCE, which may have arisen or accrued prior to the date of execution of
this Amendment, for any and all injuries, harm, damages, penalties, costs,
losses, expenses, attorneys' fees, and/or liabilities whatsoever and whenever
incurred or suffered by any of them, including, without limitation, any claim,
demand, action, damage, liability, loss, cost, expense, and/or detriment, of any
kind or character, growing out of or in any way connected with or in any way
resulting from any breach of any duty of loyalty, fair dealing, care, fiduciary
duty, or any other duty, confidence, or commitment, undue influence, duress,
economic coercion, conflict of interest, negligence, bad faith, violations of
the racketeer influence and corrupt organizations act, intentional or negligent
infliction of distress or harm, tortious interference with contractual
relations, tortious interference with corporate governance or prospective
business advantage, breach of contract, failure to perform any obligation under
any of the Loan Documents, deceptive trade practices, libel, slander,
conspiracy, interference with business, usury, strict liability, lender
liability, breach of warranty or representation, fraud, or any other claim or
cause of action (herein being collectively referred to as "Claims"). IT IS
EXPRESSLY AGREED THAT THE CLAIMS RELEASED HEREBY INCLUDE THOSE ARISING FROM OR
IN ANY MANNER ATTRIBUTABLE TO THE NEGLIGENCE (SOLE, CONCURRENT, ORDINARY, OR
OTHERWISE), OR OTHER TORTIOUS CONDUCT OF ANY OF THE INDEMNIFIED PARTIES (other
than any claims arising solely out of an Indemnified Party's willful misconduct
or gross negligence). Notwithstanding any provision of this Amendment or any
other Loan Document, this Section shall remain in full force and effect and
shall survive the delivery and payment of the Note, this Amendment and the other
Loan Documents and the making, extension, renewal, modification, amendment or
restatement of any thereof.

SECTION 20. INDEMNIFICATION. As additional consideration to the
execution, delivery, and performance of this Amendment by the parties hereto and
to induce the Bank to enter into this Amendment, the Indemnifying Parties hereby
agree to

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<PAGE> 16

indemnify, hold harmless, and defend each of the Indemnified Parties from and
against any and all Claims of any nature or character, at law or in equity,
known or unknown, which may have arisen prior to the date hereof, or accrued to,
or could be claimed or asserted by, any third party prior to the date hereof,
INCLUDING WITHOUT LIMITATION, ANY CLAIMS ARISING OUT OF OR IN ANY MANNER
ATTRIBUTABLE TO THE NEGLIGENCE (SOLE, CONCURRENT, ORDINARY OR OTHERWISE), OR
OTHER TORTIOUS CONDUCT OF ANY OF THE INDEMNIFIED PARTIES (other than any claims
arising solely out of an Indemnified Party's willful misconduct or gross
negligence). Notwithstanding any provision of this Amendment or any other Loan
Document, this Section shall remain in full force and effect and shall survive
the delivery and payment of the Note, this Agreement and the other Loan
Documents and the making, extension, renewal, modification, amendment or
restatement of any thereof.

SECTION 21. NO ORAL AGREEMENTS. THE AGREEMENT (AS AMENDED BY THIS
AMENDMENT) AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[SIGNATURES BEGIN ON THE FOLLOWING PAGE]

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<PAGE> 17

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized.

THE BANK: THE COMPANY:

WELLS FARGO BANK (TEXAS), PMB ENTERPRISES WEST, INC.
NATIONAL ASSOCIATION (formerly
First Interstate Bank of Texas, N.A.)

By /s/ ROGER FRUENDT By /s/ SAMUEL L. CARLSON
---------------------------------- -------------------------------
Name: Roger Fruendt Name: Samuel L. Carlson
Title: Vice President Title: SR V.P. & SEC

CONSENTED AND AGREED TO THIS
3rd day of NOVEMBER, 1998 TO BE
EFFECTIVE AS OF SEPTEMBER 30, 1998:

PANCHO'S MEXICAN BUFFET, INC., a
Delaware corporation

By /s/ W. BRAD FAGAN
------------------------------------
Name: Brad Fagan
Title: VP-TREASURER & CFO

PAMEX OF TEXAS, INC., a Texas
corporation

By /s/ CAROLYN TETTS
------------------------------------
Name: Carolyn Tetts
Title: SEC/TREAS

PMB INTERNATIONAL, INC., a Delaware
corporation

By /s/ W. BRAD FAGAN
------------------------------------
Name: Brad Fagan
Title: VP-TREASURER & CFO

[THIS IS THE SIGNATURE PAGE TO THE EIGHTH AMENDMENT
TO REVOLVING CREDIT AND TERM LOAN AGREEMENT]

<PAGE> 18
EXHIBIT C

UNANIMOUS CONSENT
OF
DIRECTORS AND SHAREHOLDERS
OF
PMB ENTERPRISES WEST, INC.
IN LIEU OF A SPECIAL MEETING

The undersigned, being all members of the Board of Directors and all
Shareholders of PMB Enterprises West, Inc., a New Mexico corporation (the
"Corporation") do hereby consent to and authorize the adoption of the following
recitals and resolutions without a meeting, dated this 30th day of September,
1998.

WHEREAS, the Corporation is a party to that certain Revolving Credit
and Term Loan Agreement dated February 16, 1994 by and between the
Corporation and Wells Fargo Bank (Texas), National Association (formerly
First Interstate Bank of Texas, N.A.,) (herein the "Bank") (the
"Agreement") as same has been amended and modified by that certain First
Amendment to Revolving Credit and Term Loan Agreement dated February 9,
1995 by and between the Corporation and the Bank (the "First Amendment"),
that certain Second Amendment to Revolving Credit and Term Loan Agreement
dated May 9, 1995 by and between the Corporation and the Bank (the "Second
Amendment"), that certain Third Amendment to Revolving Credit and Term Loan
Agreement dated September 29, 1995 by and between the Corporation and the
Bank (the "Third Amendment"), that certain Fourth Amendment to Revolving
Credit and Term Loan Agreement dated February 16, 1996 by and between the
Corporation and the Bank (the "Fourth Amendment"), that certain Fifth
Amendment to Revolving Credit and Term Loan Agreement dated July 9, 1996 by
and between the Corporation and the Bank (the "Fifth Amendment"), that
certain Letter Agreement dated December 16, 1996 by and between the
Corporation and the Bank (the "First Letter Agreement"), that certain
Letter Agreement dated February 11, 1997 by and between the Corporation and
the Bank (the Second Letter Agreement"), that certain Sixth Amendment to
Revolving Credit and Term Loan Agreement dated March 31, 1997 by and
between the Corporation and the Bank (the "Sixth Amendment") and that
certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated
December 1, 1997 by and between the Corporation and the Bank (the "Seventh
Amendment") (the Agreement as so amended is herein called the "Original
Loan Agreement")

WHEREAS, loans made under the Original Loan Agreement are evidenced
by, other things, the promissory note of the Corporation payable to the
order of the Bank, hereinafter called the "Note;" and

<PAGE> 19

WHEREAS, loans made under the Original Loan Agreement are secured by
certain real and personal property pursuant to the Security Instruments as
more fully described in the Original Loan Agreement; and

WHEREAS, the Corporation and the Bank now desire to amend certain
terms and provisions of the Original Loan Agreement and the Security
Instruments in accordance with the terms and provisions set forth in that
certain Eighth Amendment dated as of September 30, 1998 by and between the
Corporation and the Bank (the "Eighth Amendment") (the Original Loan
Agreement, as amended, modified, corrected and supplemented by the Eighth
Amendment is hereinafter the "Loan Agreement "), a copy of the Eighth
Amendment and the Original Loan Agreement have been submitted to and
reviewed by each of the Board of Directors; and

NOW, THEREFORE, BE IT RESOLVED THAT, the form, terms and provisions of
the Eighth Amendment, to be executed by the Corporation, which provides
for, among other things, certain modifications and amendments of the
Original Loan Agreement, is hereby approved; and

RESOLVED FURTHER, the President, any Executive Vice-President or
Vice-President or any other officer of the Corporation be, and each of them
hereby is, authorized and empowered to execute and deliver in the name and
on behalf of the Corporation (i) the Eighth Amendment substantially in the
form approved in the foregoing resolutions, with such changes therein as
shall be approved by the officer executing same, such approval to be
conclusively evidenced by such officer's execution thereof, and (ii) any
and all other agreements, financing statements, deeds of trust, security
agreements, certificates, or other documents described in the Loan
Agreement or necessary or required by the Bank (collectively herein the
"Documents"), and to take any and all other actions relating to or in
connection with these resolutions as may be necessary to effectuate the
purpose of these resolutions; and

RESOLVED FURTHER, the officers, employees and agents of the
Corporation be, and they hereby are, and each of them acting singly hereby
is, authorized and directed on behalf of the Corporation to do all acts and
things required or provided for by the provisions of documents described in
the foregoing resolutions and to do all acts and to execute and deliver any
and all instruments, documents, consents, acknowledgments, agreements or
certificates and to do or cause to be done any and all other things as may
in the judgment of such officer, or agent be deemed necessary, appropriate
or desirable in order to give effect to and carry out the foregoing
resolutions or the matters pertaining to the documents described in the
foregoing resolutions and the execution and delivery of such instruments,
documents, consents, acknowledgments, agreements or certificates and the
taking thereof by the officer and officers so acting shall be conclusive
evidence that the same has been approved by the Corporation; and

-2-

<PAGE> 20

PMB ENTERPRISES WEST, INC.

OFFICER'S CERTIFICATE

The undersigned hereby certifies that he is the duly elected,
qualified and acting Secretary of PMB Enterprises West, Inc., a New Mexico
corporation (the "Company," and as such officer, he is familiar with the
Company's properties, affairs and records. The undersigned hereby certifies
as follows:

1. Attached hereto as Exhibit "A" is a true and correct copy of the
Articles of Incorporation of the Company, as filed with the Secretary of
State of the State of New Mexico. Such Articles of Incorporation have not
been amended, modified or restated except as shown in Exhibit "A," and are
in full force and effect as of the date hereof.

2. Attached hereto as Exhibit "B" is a true and correct copy of the
Bylaws of the Company. Such Bylaws are in full force and effect as of the
date hereof and have not been amended, supplemented, altered or repealed.

3. Attached hereto as Exhibit "C" is a true, complete and correct copy
of certain resolutions adopted effective as of September 30, 1998 (the
"Resolutions"). The Resolution shave not been amended, modified, repealed
or otherwise altered in any manner and are in full force and effect as of
the date hereof.

4. Each officer of the Company has been duly authorized to execute and
deliver the Eighth Amendment To Revolving Credit and Term Loan Agreement
dated as of September 30, 1998 (the "Eighth Amendment"), each of the
Appointments of Successor Trustee and Amendment to Deed of Trust, Security
Agreement, Financing Statement and Assignment of Rental dated as of
September 30, 1998 and other documents required by the Eighth Amendment for
and on behalf of the Company.

5. The persons named below are on the date hereof the duly elected and
qualified officers of the Company holding the office set forth opposite
their respective names and their signatures appearing on the right of their
respective names are the genuine signatures of said officers.

<TABLE>
<CAPTION>
Officer Name Signature of Officer
------- ---- -----------------------
<S> <C> <C>
President Hollis Taylor /s/ HOLLIS TAYLOR
-----------------------

Senior Vice President Samuel L. Carlson /s/ SAMUEL L. CARLSON
and Secretary -----------------------

Assistant Secretary William Brad Fagan /s/ William Brad Fagan
-----------------------
</TABLE>

IN WITNESS WHEREOF, I have hereunto subscribed my signature effective
as of the 3rd day of November, 1998

/s/ SAMUEL L. CARLSON
---------------------------
Samuel L. Carson, Secretary

<PAGE> 21

WHEREAS, the Corporation and the Bank now desire to amend certain
terms and provisions of the Original Loan Agreement and the Security
Instruments in accordance with the terms and provisions set forth in that
certain Eighth Amendment dated as of September 30, 1998 by and between the
Corporation and the Bank (the "Eighth Amendment") (the Original Loan
Agreement, as amended, modified, corrected and supplemented by the Eighth
Amendment is hereinafter the "Loan Agreement"), a copy of the Eighth
Amendment and the Original Loan Agreement have been submitted to and
reviewed by each of the Board of Directors; and

RESOLVED FURTHER, the officers, employees and agents of the
Corporation be, and they hereby are, and each of them acting singly hereby
is authorized and directed on behalf of the Corporation to do all acts and
things required or provided for by the provisions of documents described in
the foregoing resolutions and to do all acts and to execute and deliver any
and all instruments, documents, consents, acknowledgments, agreements or
certificates and to do or cause to be done any and all other things as may
in the judgment of such officer, or agent be deemed necessary, appropriate
or desirable in order to give effect to and carry out the foregoing
resolutions or the matters pertaining to the documents described in the
foregoing resolutions and the execution and delivery of such instruments,
documents, consents, acknowledgments, agreements or certificates and the
taking thereof by the officer and officers so acting shall be conclusive
evidence that the same has been approved by the Corporation; and

-2-

<PAGE> 22

RESOLVED FURTHER, that each of the President, any Executive
Vice-president or Vice-President or any other officer of the Corporation is
authorized hereby to enter into any agreement amending or modifying the
terms of the Documents on such terms as such officer may deem to be in the
best interest of the Corporation; and

RESOLVED FURTHER, that the execution by the President, any Executive
Vice-President or Vice-President or any other officer of any document
authorized by the foregoing Resolutions or any document executed in the
accomplishment of any action or actions so authorized, is, and/or shall
become upon delivery the enforceable and binding act and obligation of the
Corporation, without the necessity of the signature or attestation of any
other officer of the Corporation or the affixing of the corporate seal; and

RESOLVED FURTHER, that all acts, transactions, or agreements
undertaken prior to the adoption of these resolutions by any of the
officers or representatives of the Corporation in its name and for its
account with the Bank, in connection with the foregoing matters are
ratified, confirmed and adopted by the Corporation; and

RESOLVED FURTHER, that a copy of the Agreement (including exhibits)
reviewed by each of the Directors and approved by them shall be filed with
the minutes of this meeting of the Board of Directors of the Corporation
and shall be filed in the Corporation's records; and

RESOLVED FURTHER, that the Secretary and any Assistant Secretary of
the Corporation each is authorized and directed hereby to certify to the
Bank the form of Agreement (with exhibits) approved by the Directors in
these resolutions.

IN WITNESS WHEREOF, the undersigned have signed this Consent
effective as of the date first above written.

<TABLE>
<S> <C>
/s/ HOLLIS TAYLOR
-------------------------------------
Hollis Taylor

/s/ JESSE ARRAMBIDE, III
-------------------------------------
IN WITNESS WHEREOF, I have hereunto subscribed my Jesse Arrambide, III
signature effective as of the 3rd day of November, 1998.

/s/ SAMUEL L. CARLSON
-------------------------------------
Samuel L. Carlson
/s/ SAMUEL L. CARLSON
-------------------------------------
Samuel L. Carlson, Secretary
/s/ W. BRAD FAGAN
-------------------------------------
W. Brad Fagan
</TABLE>

-3-

<PAGE> 23

CONSENT OF SHAREHOLDER OF
PMB ENTERPRISES WEST, INC.

Pursuant to Section 53-11-8 of the New Mexico Statutes, the undersigned
corporation, being the sole shareholder of PMB ENTERPRISES WEST, INC., hereby
consents to the above resolution and corporate action.

Dated November 3, 1998

PANCHO'S MEXICAN BUFFET, INC.

By: /s/ HOLLIS TAYLOR
---------------------------------
HOLLIS TAYLOR, President and CEO

<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 Statements No.
2-86238 and No. 33-60178 of Pancho's Mexican Buffet, Inc. on Form S-8 of our
report dated November 13, 1998, appearing in this Annual Report on Form 10-K of
Pancho's Mexican Buffet, Inc. for the year ended September 30, 1998.

DELOITTE & TOUCHE LLP

Fort Worth, Texas
December 17, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 546,000
<SECURITIES> 0
<RECEIVABLES> 184,000
<ALLOWANCES> 0
<INVENTORY> 473,000
<CURRENT-ASSETS> 1,646,000
<PP&E> 49,189,000
<DEPRECIATION> (33,136,000)
<TOTAL-ASSETS> 20,418,000
<CURRENT-LIABILITIES> 6,151,000
<BONDS> 0
0
0
<COMMON> 441,000
<OTHER-SE> 9,283,000
<TOTAL-LIABILITY-AND-EQUITY> 20,418,000
<SALES> 64,146,000
<TOTAL-REVENUES> 64,146,000
<CGS> 17,413,000
<TOTAL-COSTS> 60,731,000
<OTHER-EXPENSES> 11,614,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,000
<INCOME-PRETAX> (8,213,000)
<INCOME-TAX> 4,305,000
<INCOME-CONTINUING> (12,518,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,518,000)
<EPS-PRIMARY> (2.85)
<EPS-DILUTED> (2.85)

</TABLE>