<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
DELAWARE 75-1292166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 Noble Avenue, Fort Worth, Texas 76111
(Address of principal executive offices) (Zip Code)
817-831-0081
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of shares of Common Stock outstanding as of August 7,
1998: 4,401,199.
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Introduction 1
Consolidated Condensed Balance Sheets,
June 30, 1998 and September 30,1997 2
Consolidated Condensed Statements of
Operations for the Three-Months and Nine-Months Ended
June 30, 1998 and 1997 3
Consolidated Condensed Statements of Cash
Flows for the Nine-Months Ended
June 30, 1998 and 1997 4
Notes to Consolidated Condensed Financial
Statements 5
Independent Accountants' Review Report 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II. Other Information
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities (no response required)
Item 3. Defaults Upon Senior Securities (no
response required)
Item 4. Submission of Matters to a Vote of
Security Holders (no response required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated condensed financial statements included herein
have been prepared by the Company without audit as of June 30,
1998 and for the three-month and nine-month periods ended June
30, 1998 and 1997 pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented
not misleading. It is suggested that these consolidated
condensed financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included
in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 1997. In the opinion of the Company, all
adjustments, consisting only of normal recurring adjustments
except as discussed in the notes to the consolidated condensed
financial statements, necessary to present fairly the financial
position of the Company as of June 30, 1998, and the results of
operations and cash flows for the indicated periods have been
included. The results of operations for such interim periods
are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 1998.
Deloitte & Touche LLP, independent public accountants, has made
a limited review of the consolidated condensed financial
statements as of June 30, 1998 and for the three-month and
nine-month periods ended June 30, 1998 and 1997 included herein.
page 1
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, September 30,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,702,000 $ 429,000
Accounts and notes receivable - current portion 225,000 222,000
Income taxes receivable 538,000
Inventories 510,000 539,000
Prepaid expenses 210,000 117,000
Deferred income taxes 670,000
Total current assets 2,647,000 2,515,000
PROPERTY, PLANT AND EQUIPMENT :
Land 1,867,000 2,795,000
Buildings 6,884,000 9,013,000
Leasehold improvements 17,930,000 21,072,000
Equipment and furniture 23,844,000 26,115,000
Construction in progress 79,000 15,000
Total 50,604,000 59,010,000
Less accumulated depreciation and amortization (34,218,000) (33,323,000)
Property, plant and equipment - net 16,386,000 25,687,000
OTHER ASSETS:
Deferred income taxes 3,635,000
Land and buildings held for sale 2,015,000 500,000
Other, including noncurrent portion of receivable 384,000 521,000
Total other assets 2,399,000 4,656,000
TOTAL $ 21,432,000 $ 32,858,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,456,000 $ 1,569,000
Debt classified as current 2,505,000 192,000
Accrued wages and bonuses 1,834,000 1,478,000
Accrued insurance costs, current 1,092,000 1,022,000
Other current liabilities 2,327,000 1,528,000
Total current liabilities 9,214,000 5,789,000
OTHER LIABILITIES:
Long-term debt 399,000 2,287,000
Accrued insurance costs, non-current 2,122,000 2,107,000
Restructuring reserves, non-current 350,000 406,000
Total other liabilities 2,871,000 4,800,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock 440,000 440,000
Additional paid-in capital 18,633,000 18,633,000
Retained earnings (deficit) (9,476,000) 3,499,000
Cumulative foreign currency translation adjustment
Treasury Stock at cost (25,000) (13,000)
Stock notes receivable (225,000) (290,000)
Stockholders' equity 9,347,000 22,269,000
TOTAL $ 21,432,000 $ 32,858,000
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
SALES $ 16,783,000 $16,745,000 $ 48,586,000 $ 49,904,000
COSTS AND EXPENSES:
Food costs 4,668,000 4,847,000 13,244,000 14,238,000
Restaurant labor and related expenses 6,685,000 6,051,000 19,407,000 18,765,000
Restaurant operating expenses 4,220,000 3,858,000 11,471,000 11,918,000
Depreciation and amortization 737,000 789,000 2,275,000 2,647,000
General and administrative expenses 1,273,000 1,247,000 3,808,000 3,972,000
Restructuring charges 6,969,000 78,000 6,969,000 5,066,000
Total 24,552,000 16,870,000 57,174,000 56,606,000
OPERATING INCOME (LOSS) (7,769,000) (125,000) (8,588,000) (6,702,000)
INTEREST EXPENSE (56,000) (89,000) (170,000) (289,000)
OTHER, INCLUDING INTEREST INCOME 34,000 88,000 154,000 153,000
EARNINGS (LOSS) BEFORE INCOME TAXES (7,791,000) (126,000) (8,604,000) (6,838,000)
PROVISION (BENEFIT) FOR INCOME TAXES 4,574,000 (46,000) 4,305,000 (1,997,000)
NET EARNINGS (LOSS) $(12,365,000) $ (80,000) $(12,909,000) $ (4,841,000)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (2.82) $ (0.02) $ (2.94) $ (1.10)
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(12,909,000) $(4,841,000)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 2,275,000 2,647,000
Provision (benefit) for deferred income taxes 4,305,000 (1,570,000)
Provision for impairment of long lived assets 6,049,000 3,033,000
Provision for exit and carrying costs of closed locations 920,000 1,538,000
Provision for cumulative translation adjustment 455,000
Loss on extinguishment of stock notes receivable 83,000
(Gain) loss on sale of assets (118,000) (114,000)
Changes in operating assets and liabilities:
Accounts and notes receivable (2,000) 13,000
Income taxes receivable 538,000 (247,000)
Inventories, prepaid expenses and other assets (35,000) 115,000
Accounts payable and accrued expenses 618,000 (674,000)
Restructuring reserves (474,000) (677,000)
Total adjustments 14,076,000 4,602,000
Net cash provided (used) by operating activities 1,167,000 (239,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (513,000) (352,000)
Proceeds from sale of assets 207,000 339,000
Net cash used by investing activities (306,000) (13,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 1,091,000 4,176,000
Long-term borrowings 14,126,000 21,122,000
Repayments of long-term borrowings (14,792,000) (24,348,000)
Treasury stock acquired (12,000)
Dividends paid (66,000) (132,000)
Payments on officer stock notes receivable 65,000 77,000
Net cash provided by financing activities 412,000 895,000
EFFECT OF FOREIGN EXCHANGE RATE
CHANGE ON CASH (4,000)
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,273,000 639,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 429,000 145,000
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,702,000 $ 784,000
SUPPLEMENTAL INFORMATION:
Income tax refunds received, net $ 541,000 $ 180,000
Interest paid, net of capitalized amounts $ 161,000 $ 240,000
<FN>
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards
(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 4,398,000 and
4,394,000 for the three-months and nine-months ended June 30,
1998, respectively, and 4,398,000 for the same periods in 1997.
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 June 30,
1998, there were 406,400 options outstanding which represented
potential common shares which could be dilutive in the future.
Earnings (loss) per share reported for the quarter and nine
months ended June 30, 1997 did not change due to the adoption of
SFAS No. 128.
2. LONG-TERM DEBT
The Company has a revolving credit and term loan agreement (Loan
Agreement) with a bank. Effective December 1, 1997, the Company
and the bank agreed to amend the Loan Agreement limit-reduction
schedule and loan covenants.
Under the amended agreement, the credit line limit was reduced
to $2,563,000 effective June 30, 1998, and will be reduced by
varying amounts on the last day of each quarter through June 30,
2000, when the limit will be reduced to zero.
The amended agreement requires the Company's trailing
three-months earnings before interest, taxes, depreciation and
amortization (EBITDA) to equal or exceed the sum of 125% of the
next scheduled commitment reduction plus capital expenditures
during each three-month period, beginning March 31, 1998. Cash
capital expenditures are limited by the amended agreement to
$650,000 each fiscal year. Cash dividends are prohibited until
the Company achieves trailing 12-months EBITDA of at least $3
million, and if this threshold is met, cash dividends are
limited to $150,000 per fiscal year. The loan is secured by all
of the Company's real property, and any proceeds from real
property sales must be applied against the loan.
At June 30, 1998, and for the three-months then ended, the
Company was not in compliance with the Loan Agreement covenant
regarding the minimum trailing 3-months EBITDA requirement. The
Company projects that it may not be in compliance with this
covenant for some periods in the next 12 months, unless the
covenant is amended. The Company is seeking waivers from the
bank for the existing covenant violations, and is seeking
adjustments to the loan covenants to prevent future violations.
Due to these covenant violations, the outstanding balance of the
loan is classified as current debt on the balance sheet.
The Company is taking steps to comply with all of its Loan
Agreement covenants in the future. However, if the Company
failed to meet a loan covenant in the future, and the bank
declined to waive such 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 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 owns the land and buildings of five
closed restaurants which it is seeking to sell to raise cash to
retire this loan. Additionally, the Company owns other assets
which management believes it could sell for sufficient value to
retire the loan.
3. CASH DIVIDENDS
On October 17, 1997, prior to its current loan agreement
dividend restriction, the Company's Board of Directors declared
a $.015 per common share cash dividend. The dividend was paid
December 9, 1997 to holders of record on November 25, 1997.
To comply with the loan restriction on dividends (described in
note 2), the Company has not declared a second cash dividend in
the current fiscal year. Future dividends may be declared at
the discretion of the company's Board of Directors, in
compliance with the restrictions of its loan agreement.
4. STOCK OPTION PLAN
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 share grant to non-employee directors from
2,000 shares each to 4,000 shares each.
5. RESTRUCTURING PLAN
In the quarter ended June 30, 1998, the Company established a
restructuring plan based on its continuing evaluation of
recoverability of long-lived store assets. The Company recorded
restructuring charges of $6,969,000 to execute the plan, which
included closing nine underperforming restaurants and impairing
assets at 12 other locations. Land and building at a restaurant
that was previously impaired, closed and held for sale was
further impaired due to market conditions.
Under the plan, the Company recognized asset impairment charges
of $6,049,000 for 22 restaurant locations, including the nine
slated for closure and the one previously closed. 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 also accrued exit and carrying costs of $920,000
for nine locations which were closed by August 10, 1998 under
the plan. Four of those nine closings, plus one previously
closed, included company-owned land and buildings which the
Company plans to sell.
Sales for the nine restaurants closed under the 1998
restructuring plan were $2,097,000 and $5,900,000, respectively,
for the quarter and nine-months ended June 30, 1998. Sales for
those units totaled $2,077,000, $5,787,000 and $7,962,000,
respectively, for the quarter and nine-months ended June 30,
1997, and fiscal year 1997.
Under a previous restructuring plan, adopted in March 1997, a
restructuring 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.
6. DEFERRED TAX VALUATION ALLOWANCE
Net deferred tax assets increased $3.1 million to $8.3 million
in the nine-months ended June 30, 1998, due mainly to increases
in the federal net operating loss (NOL) carryforward and
temporary book - tax differences resulting from the
restructuring. 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 $3.1 million was offset by the $7.4 million
increase in the valuation allowance, resulting in tax expense of
$4.3 million for the nine months ended June 30, 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 1998 through 2013.
7. ADJUSTMENT OF INSURANCE RESERVES
The Company recognized benefits of $212,000 to reduce general
liability insurance reserves in the quarter ended June 30, 1998.
The Company recognized benefits of $500,000 and $558,000 to
reduce employee injury benefit reserves in the quarters ended
June 30, 1997 and March 31, 1997, respectively. These reserves,
which are included in accrued insurance costs on the balance
sheet, were reduced based on an updated management analysis of
claims activity and results.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Pancho's Mexican Buffet, Inc.:
We have reviewed the accompanying consolidated condensed balance
sheet of Pancho's Mexican Buffet, Inc. and subsidiaries as of
June 30, 1998, and the related consolidated condensed statements
of operations for the three-month and nine-month periods ended
June 30, 1998 and 1997 and of cash flows for the nine-month
periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical review procedures to financial data and of
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated condensed
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of
September 30, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year
then ended (not presented herein), and in our report dated
November 14, 1997 (December 19, 1997 as to the first and second
paragraphs of Note 3 to those statements), we expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of September 30, 1997,
is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
August 5, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
As of June 30, 1998, the Company's current ratio was 0.3 to 1,
down 0.1 from September 30, 1997 due to increases in current
debt and current restructuring reserves. Cash and cash
equivalents increased $1,273,000 during the nine-months ended
June 30, 1998, to a balance of $1,702,000, as cash provided by
operations and financing more than offset cash used for
investing activities.
Operations provided $1,167,000 and consumed $239,000 cash in the
nine-months ended June 30, 1998 and 1997, respectively. The
Company incurred net losses of $12,909,000 and $4,841,000 for
the first nine months of fiscal 1998 and 1997, respectively.
The current period net loss included non-cash restructuring
charges of $6,969,000, $2,275,000 in depreciation and
amortization charges, and a non-cash charge of $4,305,000 for
deferred income taxes. The net loss in the first nine months of
fiscal 1997 included non-cash restructuring-related charges of
$5,066,000, depreciation and amortization expense of $2,647,000,
and non-cash benefit of $1,570,000 for deferred income taxes.
Investing activities used $306,000 and $13,000 in the first nine
months of fiscal 1998 and 1997, respectively. With capital
improvements limited by debt restrictions, the Company spent
$513,000 and $352,000 on property additions in the first nine
months of 1998 and 1997, respectively. These expenditures were
partially offset by the sale of assets. The Company is
currently holding the land and buildings of five closed
restaurant sites for sale.
No new restaurants were opened in fiscal 1997 or the first three
quarters of 1998, and none are currently planned, as management
intends to focus on improving sales and profitability and
reducing debt. Capital expenditures to remodel existing
restaurants and to install restaurant computer systems will
continue within the constraints of available operating cash flow
and the loan agreement restrictions (see Note 2 to the
consolidated condensed financial statements).
Financing activities provided $412,000 and $895,000 during the
first nine months of fiscal 1998 and 1997, respectively, due
mainly to net increases in short-term borrowings.
The Company has a revolving credit and term loan agreement (Loan
Agreement) with a bank. Effective December 1, 1997, the Company
and the bank agreed to amend the Loan Agreement limit-reduction
schedule and loan covenants.
Under the amended agreement, the credit line limit was reduced
to $2,563,000 effective June 30, 1998, and will be reduced by
varying amounts on the last day of each quarter through June 30,
2000, when the limit will be reduced to zero.
The amended agreement requires the Company to achieve trailing
three-months earnings before interest, taxes, depreciation and
amortization (EBITDA) to equal or exceed the sum of 125% of the
next scheduled commitment reduction plus capital expenditures
during each three-month period, beginning March 31, 1998. Cash
capital expenditures are limited by the amended agreement to
$650,000 each fiscal year. Cash dividends are prohibited until
the Company achieves trailing 12-months EBITDA of at least $3
million, and if this threshold is met, cash dividends are
limited to $150,000 per fiscal year. The loan is secured by all
of the Company's real property, and any proceeds from real
property sales must be applied against the loan.
At June 30, 1998, and for the three-months then ended, the
Company was not in compliance with the Loan Agreement covenant
regarding the minimum trailing 3-months EBITDA requirement. The
Company projects that it may not be in compliance with this
covenant for some periods in the next 12 months, unless the
covenant is amended. The Company is seeking waivers from the
bank for the existing covenant violations, and is seeking
adjustments to the loan covenants to prevent future violations.
Due to these covenant violations, the outstanding balance of the
loan is classified as current debt on the balance sheet.
The Company is taking steps to comply with all of its Loan
Agreement covenants 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 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 owns the land and buildings of five
closed restaurants which it is seeking to sell to raise cash to
retire the bank loan. Additionally, the Company owns other
assets which management believes it could sell for sufficient
value to retire the loan.
On October 17, 1997, prior to its current loan agreement
dividend restriction, the Company's Board of Directors declared
a $.015 per common share cash dividend. The dividend was paid
December 9, 1997 to holders of record on November 25, 1997.
To comply with the loan restriction on dividends (described in
note 2), the Company has not declared a second cash dividend in
the current fiscal year. When permitted under the loan
restrictions, future dividends may be declared at the discretion
of the Company's Board of Directors, in compliance with its loan
covenants.
Results of Operations
Same-store sales for the three months and nine months ended June
30, 1998 were up 1.9% and 3.3.% compared with the same periods
last year. The Company has reported improved same-store sales
for four consecutive quarters based on price increases
partially-offset by a decrease in customer counts.
Total sales for the quarter and nine months were up $38,000 and
down $1,318,000, respectively, with fewer restaurants open this
year. Under the restructuring plan adopted in the quarter ended
March 31, 1997, eight restaurants were closed or disposed of in
the quarter ended June 30, 1997. Those eliminated locations
accounted for $281,000 and $2.9 million in sales in the quarter
and nine months ended June 30, 1997, respectively.
Average sales for restaurants open throughout the quarter and
nine months ended June 30, 1998 were $294,000 and $851,000, up
1.9% and 3.3%, respectively, from the same periods last year.
Average sales grew due to the price increases as well as the
elimination of eight low volume stores under the fiscal 1997
restructuring plan.
Marketing promotions in fiscal 1998 increased sales discounts
4.6% and 2.0% of sales for the current quarter and nine months.
The Company plans to reduce the amount of discounting, but may
continue to use discounting tactics as part of its overall
marketing strategy.
The Company plans to continue its 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 immediate community with a portfolio of specific
tactics developed for each location. Company-wide tactics
complement existing Company programs such as the Birthday Club
and School Rewards programs. The results of all marketing
tactics are carefully measured to evaluate their impact on sales.
Under a restructuring plan adopted in the quarter ended June 30,
1998, nine underperforming restaurants were slated for closing
in the next quarter. Sales for the nine restaurants closed
under the 1998 restructuring plan were $2,097,000 and
$5,900,000, respectively for the quarter and nine-months ended
June 30, 1998. Sales for those units totaled $2,077,000.
$5,787,000 and $7,962,000, respectively for the quarter and
nine-months ended June 30, 1997 and fiscal year 1997.
Average-store sales for those locations was $656,000 for the
nine-months ended June 30, 1998, 23% below the company average
for the same period.
The Company's menu price increases reduced food cost 1.1% and
1.2% of sales for the current quarter and nine months,
respectively, compared with the same periods in fiscal 1997.
Labor and related costs were 39.8% and 39.9% of sales for the
quarter and nine-months ended June 30, 1998. The Company
recognized benefits to labor-related costs of $500,000 and
$558,000 to reduce employee injury benefit reserves in the
second and third quarters of fiscal 1997, respectively. After
removing those unusual gains from the 1997 amounts, labor and
related costs were 39.1% and 39.7% of sales for the three- and
nine-month periods ended June 30, 1997.
Significantly higher hourly wage rates due to the September 1997
federal minimum wage rate hike were only partially offset as a
percentage of sales by the Company's menu price increases. Due
to the increased federal minimum wage and a tight labor market,
the Company's average hourly wage cost was $0.41 and $0.38 per
hour higher in the three months and nine months ended June 30,
1998, respectively, than in the same periods of 1997. Without
the benefit of the price increases, this hourly wage inflation
would have increased labor costs about 2.1% of sales. If the
Company is unable to reduce labor cost factors with operating
efficiencies and sales growth, the Company will consider
additional price increases.
Restaurant operating expenses include restaurant marketing
costs, repairs and maintenance, supplies, utilities and
occupancy costs. These costs were up 2.1% and down 0.3% of
sales for the three months and nine months ended June 30, 1998
versus the same periods last year. Costs were up for the
quarter due mainly to increases in marketing costs and repairs
and maintenance expenses.
Restaurant operating expenses for the current nine months
declined mainly due to a benefit of $212,000 in the quarter
ended March 31, 1998 to reduce general liability insurance
reserves. The price increases and the elimination of eight low
sales units last year helped lower the cost-to-sales ratio of
this category, particularly for utilities and occupancy costs.
These gains were partially offset by higher marketing costs in
fiscal 1998.
Due to earlier implementation of the marketing plan this year,
store marketing costs were up 1.0% and 0.3% of sales for the
quarter and nine months ended June 30, 1998 compared with the
same periods last year. Savings on print media, primarily
newspaper ads, were eclipsed by higher spending for direct mail
advertising and promotions. The Company invested 3.3% and 2.8%
of sales on restaurant marketing in the current three-months and
nine-months, respectively, versus 2.3% and 2.5% for the same
periods last year.
Due to the impairment of fixed assets under the 1997
restructuring, depreciation and amortization decreased $372,000
for the nine months ended June 30, 1998 compared to the same
period last year. The Company expects the asset write downs
associated with its current quarter restructuring to
significantly lower depreciation expense in future periods.
For the current quarter and nine-months, general and
administrative expenses were up 0.2% and down 0.2% of sales,
respectively, compared with the same periods last year.
In the quarter ended June 30, 1998, the Company established a
restructuring plan based on its continuing evaluation of
recoverability of long-lived store assets. The Company recorded
restructuring charges of $6,969,000 to execute the plan, which
included closing nine underperforming restaurants and impairing
assets at 12 other locations. Land and building at a restaurant
that was previously impaired, closed and held for sale was
further impaired due to market conditions.
Under the plan, the Company recognized asset impairment charges
of $6,049,000 for 22 restaurant locations, including the nine
slated for closure and the one previously closed. 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 also accrued exit and carrying costs of $920,000 for
nine locations which were closed by August 10, 1998 under the
plan. Four of those nine closings, plus one previously closed,
included company-owned land and buildings which the Company
plans to sell.
Under a previous restructuring plan, adopted in March 1997, a
restructuring 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.
Due to debt reduction, interest expense was $33,000 and $119,000
lower in the three months and nine months ended June 30, 1998,
respectively, than in the same periods in 1997.
Net deferred tax assets increased $3.1 million to $8.3 million
in the nine-months ended June 30, 1998, due mainly to increases
in the federal net operating loss (NOL) carryforward and
temporary book - tax differences resulting from the
restructuring. 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 $3.1 million was offset by the $7.4 million
increase in the valuation allowance, resulting in tax expense
of $4.3 million for the nine months ended June 30, 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 1998 through 2013.
Due to the factors discussed above, the Company reported net
losses of $12,365,000 and $12,909,000 for the three months and
nine months ended June 30, 1998, compared with net losses of
$80,000 and $4,841,000 for the same periods in 1997,
respectively. The Company's future profitability depends on
improving unit sales and reducing the key cost factors,
particularly labor costs.
Other Uncertainties and Trends
SFAS No. 121 requires the Company to review long-lived assets
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company considers a history of operating
losses or negative cash flows to be its main indicators of
potential impairment. Assets are generally evaluated for
impairment at the restaurant level. If a restaurant continues
to incur negative cash flows or operating losses, an impairment
or restaurant closing charge may be recognized in future periods.
Special Note Regarding Forward-Looking Information
The foregoing section contains various forward-looking
statements which represent the Company's expectations or beliefs
concerning future events, including, but not limited to the
following: statements regarding plans to sell assets, ability
to service debt and resolve loan covenant violations, 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: the bank's responses to loan covenant violations;
ability to restructure the loan agreement; consumer spending
trends and habits; increased competition in the restaurant
industry; weather conditions; and laws and regulations affecting
labor and employee benefit costs.<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number
2 Not applicable
4 Not applicable
11 Not required--explanation of net earnings (loss) per
share computation is contained in notes to consolidated
condensed financial statements.
15 Letter re: unaudited interim financial
information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PANCHO'S MEXICAN BUFFET, INC.
August 10, 1998 /s/ Hollis Taylor
Hollis Taylor, President and Chief Executive Officer (Principal
Executive Officer)
August 10, 1998 /s/ W. Brad Fagan
Brad Fagan, Vice President, Treasurer, Chief Financial Officer
and Assistant Secretary (Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT 15
Pancho's Mexican Buffet, Inc.:
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim financial information of Pancho's Mexican
Buffet, Inc. and subsidiaries for the three-month and nine-month
periods ended June 30, 1998 and 1997, as indicated in our report
dated August 5, 1998; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, is incorporated by reference in
Registration Statements No. 2-86238, No. 33-60178 as amended,
and No. 333-48295 on Form S-8.
We are also aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered
a part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
August 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheets as of June 30, 1998 and teh consolidated
condensed statements of operatons for the nine-months then ended and is
qualified in its entirety by reference to such consolidated condensed financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,702,000
<SECURITIES> 0
<RECEIVABLES> 225,000
<ALLOWANCES> 0
<INVENTORY> 510,000
<CURRENT-ASSETS> 2,647,000
<PP&E> 50,604,000
<DEPRECIATION> 34,218,000
<TOTAL-ASSETS> 21,432,000
<CURRENT-LIABILITIES> 9,214,000
<BONDS> 0
0
0
<COMMON> 440,000
<OTHER-SE> 8,907,000
<TOTAL-LIABILITY-AND-EQUITY> 21,432,000
<SALES> 48,586,000
<TOTAL-REVENUES> 48,586,000
<CGS> 13,244,000
<TOTAL-COSTS> 46,397,000
<OTHER-EXPENSES> 10,777,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,000
<INCOME-PRETAX> (8,604,000)
<INCOME-TAX> 4,305,000
<INCOME-CONTINUING> (12,909,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,909,000)
<EPS-PRIMARY> (2.94)
<EPS-DILUTED> (2.94)
</TABLE>
