PANCHOS MEXICAN BUFFET INC /DE, 10-K, 1999-12-14

PANCHOS MEXICAN BUFFET INC /DE
10-K, 1999-12-14
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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, 1999

- ----- 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 26, 1999, BASED ON THE ACTUAL STOCK PRICE ON SUCH DATE
WAS $3,380,138.

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 26,
1999:..................................................................1,464,006

DOCUMENTS INCORPORATED BY REFERENCE

THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 2, 2000, IS INCORPORATED BY REFERENCE IN PART III HEREOF.
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<PAGE> 2

PART I

ITEM 1. BUSINESS

GENERAL

The Company, Pancho's Mexican Buffet, Inc. and subsidiaries, is principally
engaged in the operation and development of the Pancho's Mexican Buffet
restaurant chain, serving Mexican food cafeteria style. However, Pancho's is
more than a cafeteria because it 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).

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 of this reimaging program is to improve
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.

Under a 1998 restructuring plan, the Company closed nine restaurants in the
fourth quarter of 1998. No new restaurants were opened in fiscal 1999, and none
are currently planned, as management intends to focus on its reimaging program.

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 part
of the Company's reimaging program to improve sales and profitability.

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 is a unique variation of the
traditional cafeteria concept, providing full table service after a customer has
completed selection from the service line. The restaurants also feature
self-service salsa bars and dessert bars to provide greater food variety and
value. In its restaurants, the Company maintains distinctive styling and
colorful decor using authentic artifacts in a Mexican motif.
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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 existing prototypes. The
Company has not built any new restaurants since 1995. Inflation and changes to
the Pancho's restaurant design 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, 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 salsa bar and dessert bar.

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, a variety of sauces, tacos,
chalupas, pico de gallo, assorted relishes, chips, hot sauce and sopaipillas.
Pancho's restaurants offer food to go, which accounted for 11.2% of sales for
the year ended September 30, 1999. A variety of beverages are also available.
Alcoholic beverages are served in 28 restaurants and accounted for 0.7% of the
Company's sales for the year ended September 30, 1999.

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 free meal
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 gift
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 newspaper inserts, direct mail and billboards.

The Company uses 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

The Company uses The SYGMA Network, Inc. to purchase, warehouse and
distribute substantially all the food products and supplies for the Company's
restaurants. The SYGMA Network specializes in distribution for restaurant
chains. SYGMA's nationwide distribution network will allow the Company to

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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 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.

SEASONALITY

The Company's business is seasonal. Sales are typically higher in summer
months and other periods when students are not in school.

HUMAN RESOURCES

On September 30, 1999, the Company had about 2,040 employees, of whom 55
were corporate personnel, 1,973 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.

FINANCIAL INFORMATION ABOUT SEGMENTS

Because the Company operates as a single business segment, no segment
reporting is provided. See Note 1 to the Company's Consolidated Financial
Statements.

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 and design changes, plans to sell assets, ability to service debt, unit
growth, future capital expenditures, remodeling plans, future borrowings, claims
and payments related to the Company's insurance reserves, systems remediation
for year 2000, 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; the results of claims on the Company's insurance reserves and
related adjustments to those reserves; the availability and performance of
internal and external year 2000 systems remediation resources; 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.

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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 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 one closed restaurant site, including building and
land which it owns in Amarillo, Texas. In fiscal 1999, the Company completed the
sale of land and buildings it held for sale in Phoenix, Shreveport, Galveston
and Albuquerque.

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, 1999, the Company had remaining lease obligations on two
closed restaurant locations, with one lease expiring in November 1999 and one in
2007. Both of these locations are subleased.

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.

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-1**
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

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.

<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 47
Chief Operations
Officer -- also Director and
officer of subsidiary
companies
Hollis Taylor................. Director and President and Since August 10, 1979 63
Chief Executive
Officer -- also Director and
officer of subsidiary
companies
Samuel L. Carlson............. Director and Senior Vice Since December 21, 1988 63
President, Administration
and Secretary -- also
Director and officer of
subsidiary companies
Brad Fagan.................... Vice President, Treasurer, CFO Since September 29, 1995 40
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.

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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 on the Nasdaq
SmallCap Market System, under the symbol "PAMX." On November 23, 1999, the
number of record holders was about 650 and the Company estimates that on that
date there were an additional 900 beneficial owners. The following table sets
forth the quarterly high and low bid prices of the common stock, as reported by
Nasdaq, and dividends paid per share, for the calendar quarters indicated. All
per share amounts have been adjusted for the one-for-three reverse stock split
effective January 27, 1999.

<TABLE>
<CAPTION>
SALES PRICES
---------------
FISCAL QUARTER ENDED HIGH LOW DIVIDENDS
-------------------- ------ ------ ---------
<S> <C> <C> <C>
December 31, 1997......................... $7.500 $5.250 $.045
March 31, 1998............................ 7.125 5.250
June 30, 1998............................. 6.375 4.500
September 30, 1998........................ 5.064 2.625
December 31, 1998......................... 4.125 1.689
March 31, 1999............................ 4.000 1.968
June 30, 1999............................. 3.875 2.375
September 30, 1999........................ 4.750 3.094
</TABLE>

COMMON STOCK DIVIDENDS

The Company paid no cash dividends in 1999. In 1998, cash dividends were
$.045 per share. Future cash dividends will depend on earnings, financial
position, capital requirements and other relevant factors.

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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, 1995 through 1999 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
FISCAL YEARS ENDED SEPTEMBER 30,

<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------- -------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales..................................... $57,403 $ 64,146 $66,957 $71,487 $80,893
------- -------- ------- ------- -------
Costs and Expenses:
Food costs.............................. 15,214 17,413 18,792 19,681 22,910
Restaurant labor and related expenses... 21,839 25,606 25,235 26,561 30,400
Restaurant operating expenses........... 11,913 14,904 15,799 16,508 18,376
Depreciation and amortization........... 1,958 2,808 3,426 3,949 4,512
General and administrative expenses..... 4,999 5,013 5,160 5,067 5,547
Asset impairment and restructuring
charges(a)(c)(d)..................... 6,601 5,066 7,572
------- -------- ------- ------- -------
Total........................... 55,923 72,345 73,478 71,766 89,317
------- -------- ------- ------- -------
Operating income (loss)................... 1,480 (8,199) (6,521) (279) (8,424)
Interest expense.......................... (22) (212) (348) (540) (590)
Other, including interest income.......... 418 198 303 269 309
------- -------- ------- ------- -------
Earnings (loss) before income taxes....... 1,876 (8,213) (6,566) (550) (8,705)
Income tax expense (benefit)(b)........... (12) 4,305 (1,850) (135) (3,343)
------- -------- ------- ------- -------
Net earnings (loss)....................... $ 1,888 $(12,518) $(4,716) $ (415) $(5,362)
======= ======== ======= ======= =======
Cash dividends............................ $ -- $ 66 $ 132 $ 132 $ 462
======= ======== ======= ======= =======
Per Share Data:
Net earnings (loss), basic and
diluted.............................. $ 1.29 $ (8.54) $ (3.21) $ (.27) $ (3.66)
Cash dividends.......................... $ $ .045 $ .09 $ .09 $ .315
At Year End:
Total assets............................ $18,412 $ 20,418 $32,858 $37,968 $44,387
Long-term debt.......................... $ 222 $ 1,761 $ 2,287 $ 3,489 $ 8,705
Stockholders' equity.................... $11,703 $ 9,724 $22,269 $26,521 $26,988
Number of restaurants................... 48 48 57 65 64
</TABLE>

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(a) Fiscal 1998 net loss 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 loss 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.

(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.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Results of Operations

The following table sets forth for the periods indicated: (i) items in the
consolidated statements of operations as a percentage of sales; (ii) average
restaurant sales; and (iii) the number of restaurants open at the end of each
year.

<TABLE>
<CAPTION>
PERCENTAGE OF SALES
YEARS ENDED SEPTEMBER 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Sales....................................................... 100.0% 100.00% 100.0%
------ ------ ------
Costs and Expenses:
Food costs................................................ 26.5 27.1 28.1
Restaurant labor and related expenses..................... 38.0 39.9 37.7
Restaurant operating expenses............................. 20.8 23.2 23.6
Depreciation and amortization............................. 3.4 4.4 5.1
General and administrative expenses....................... 8.7 7.8 7.7
Asset impairment and restructuring charges................ 10.3 7.6
------ ------ ------
Total............................................. 97.4 112.7 109.8
------ ------ ------
Operating income (loss)..................................... 2.6 (12.7) (9.8)
Interest expense............................................ (0.3) (0.5)
Other, including interest income............................ 0.7 0.3 0.5
------ ------ ------
Earnings (loss) before income taxes......................... 3.3 (12.7) (9.8)
Income tax expense (benefit)................................ 6.7 (2.8)
------ ------ ------
Net earnings (loss)......................................... 3.3% (19.4)% (7.0)%
====== ====== ======
Average sales (in thousands) for restaurants open throughout
the year.................................................. $1,190 $1,192 $1,123
Number of restaurants open at end of year................... 48 48 57
</TABLE>

Fiscal 1999 Compared to Fiscal 1998

Same-store sales increased 0.4% in fiscal 1999, following an increase of
2.1% for 1998. Fourth quarter same-store sales were up 0.1% in 1999 compared
with a decline of 1.6% for the same period in 1998. The 1999 increase is due
primarily to sales gains at existing stores after nearby Pancho's were closed in
July and August 1998. A price increase of about 1% implemented in April 1998
also contributed. The chart below shows quarterly and annual same-store sales
comparisons over the past three fiscal years.

SAME-STORE SALES BY QUARTER

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
1st Quarter......................................... -0.3% +2.7% -5.0%
2nd Quarter......................................... +1.2 +5.3 -7.4
3rd Quarter......................................... +0.3 +1.9 -1.2
4th Quarter......................................... +0.1 -1.6 +2.0
Fiscal Year.................................... +0.4 +2.1 -2.8
</TABLE>

Total sales for 1999 were $57.4 million, down from $64.1 million in 1998
due to the closings of nine underperforming units in July and August 1998. The
closed units totaled $6.8 million in sales in 1998. Average annual sales per
unit were $1,190,000 for 1999 and $1,192,000 for 1998.

Average store sales were lower in 1999 due to the temporary closing for
remodel of one above average sales unit in late August 1999. The same store
sales increase reflects the effect of eliminating that unit's sales

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<PAGE> 10

from the 1998 average comparison. The closed unit is expected to re-open in
December 1999. October and November 1998 sales for that unit totaled $225,000.

Fourth quarter total sales were $14.6 million in 1999 and $15.6 million in
1998. The nine units closed in 1998 totaled $932,000 in sales in the fourth
quarter of 1998. Average sales per unit were $303,000 and $305,000 for the
quarters ended September 30, 1999 and 1998, respectively.

Sales discounts increased to 4.6% of sales in 1999 from 4.2% of sales in
1998. Fourth quarter discounts were 5.1% and 4.5% of sales for 1999 and 1998,
respectively. The company's discounting tactics include coupons distributed by
direct mail, newspaper inserts and a variety of neighborhood marketing
promotions.

The Company continues to emphasize a neighborhood marketing strategy to
strengthen Pancho's ties to each restaurant's community. A portfolio of specific
marketing tactics are developed for each location and complemented by existing
Company programs such as the Birthday Club, School Rewards programs and Seniors
Club.

To offset increases in labor costs and general inflation, the Company
implemented price increases of about 4% in October and November 1999.

No new restaurants were opened in 1999, and none are planned for fiscal
2000. Management plans to focus on continuing to improve same store sales and
operating margins at its existing units before adding new locations.

In 1999, the Company initiated a reimaging project to revitalize the
Pancho's concept and improve sales trends. The reimaging initiative considers
potential changes in restaurant design, recipes, food offerings and cooking and
service procedures. One restaurant in Fort Worth was remodeled in 1999 to
incorporate and test some of those changes. The Company's restaurant in
Mesquite, Texas (Dallas area) was temporarily closed in late August 1999 for a
more extensive remodel incorporating major changes in design and in cooking
procedures. The Mesquite store reopened in December 1999 featuring a fresh,
contemporary look with a new logo, lively interior design, new recipes and
exhibition grill cooking. Additional remodels will be scheduled based upon
customer response to the revamped Mesquite unit and available funds.

In October 1999, as part of the reimaging project, the Company began
rolling out new recipes and salsa bars to all of its restaurants. The new
recipes are generally spicier, with more complex flavor profiles to tempt
today's more discerning palates. The salsa bars feature a variety of exciting
salsas, salad and other condiments.

The Company reduced food cost 0.3% and 0.6% of sales for the quarter and
year ended September 30, 1999, respectively. Food costs as a percentage of sales
benefited from efficiencies after closing lower volume units in 1998 and the
April 1998 price increase. Under its reimaging project, the Company began
rolling out revamped recipes in October 1999. Many of these new recipes involve
ingredients which the Company expects might cause some increase in food cost as
a percentage of sales in fiscal 2000.

Labor and related expenses decreased 0.1% and 1.9% of sales for the 1999
fourth quarter and year, respectively, compared with the same 1998 periods. Due
to effective claims management and experience, the Company recognized benefits
of $525,000 to reduce employee injury insurance reserves in the second and third
quarters of 1999 and $57,000 in the fourth quarter of 1998. After eliminating
those gains, labor and related costs were down 0.5% and 1.1% of sales for the
quarter and year ended September 30, 1999, respectively.

Labor costs were lower as a percentage of sales due to the greater
efficiency of the higher volume stores left after the 1998 closings, despite
wage rate inflation. Due to the tight labor market, the Company's average hourly
wage cost was 5.3% higher in 1999 than in 1998.

Pancho's prepares a large quantity and variety of fresh food throughout the
day, and provides buffet-line and table service in each restaurant. Maintaining
a high level of quality service, sanitation and food preparation is labor
intensive. A tight labor market will continue to contribute to general wage
inflation. Congress is considering various increases in the federal minimum wage
to be mandated in the coming years. Higher wages make it difficult for the
Company to control labor and related costs unless the sales trend

9
<PAGE> 11

improvement continues. The Company will consider price increases and other
methods to compensate for labor cost increases.

Restaurant operating expenses include supplies, maintenance expense,
utilities, occupancy costs, insurance expense, and store marketing expenses.
This expense category decreased 0.4% and 2.4% of sales for the 1999 fourth
quarter and year, respectively. Due to effective case and risk management, the
Company reduced insurance reserves by $513,000, $56,000 and $268,000 in 1999,
fourth quarter 1998 and fiscal 1998, respectively. Eliminating those credits,
restaurant operating expenses decreased 0.7% and 2.0% of sales for the 1999
fourth quarter and year, respectively. Closing nine lower sales units in 1998
helped reduce the cost-to-sales ratio of this category.

Fourth quarter store marketing expenses increased 0.3% of sales for 1999
compared with 1998, as the Company spent more for fourth quarter promotions in
1999. Store marketing costs decreased 0.7% of sales for 1999. The Company spent
$253,000 less for marketing research and consulting in 1999 and reduced
advertising media costs $120,000. Spending on direct mail was $247,000 lower for
the year as the Company increased promotional spending by $131,000, emphasizing
newspaper inserts with coupons. The Company invested 2.2% and 2.9% of sales in
store marketing for 1999 and 1998, respectively.

Depreciation and amortization decreased $54,000, 0.1% of sales, and
$850,000, 1% of sales, in the fourth quarter and year 1999, respectively, due to
the asset write-downs taken in June 1998.

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 plan to close and dispose of nine
locations. The Company initially estimated asset impairment charges of
$6,049,000 for the 22 restaurant sites, which included 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, based primarily on the
October 1998 sale of one of the properties 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."
No impairment charges were taken in 1999.

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 site were included in
land and buildings held for sale at September 30, 1998. The Company completed
the sale of four of those sites in 1999, so only one site remained in land and
buildings held for sale at September 30, 1999.

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. No restaurants were closed in 1999.

The Company realized net gains on sale of assets of $367,000 and $153,000
in fiscal 1999 and 1998, respectively. Management believes that long-lived
assets held for sale or future use are carried at the lower of depreciated cost
or fair value. If conditions change and future circumstances indicate that
long-lived assets are carried at more than net realizable future cash flows,
then additional asset impairment charges would be necessary.

In fiscal 1999, interest expense was $190,000 lower than in 1998. The
Company paid off and terminated its bank line of credit before the 1999 fourth
quarter, so interest expense was zero in the 1999 fourth quarter versus $42,000
in the 1998 fourth quarter.

Net deferred tax assets decreased $702,000 to $7.4 million in fiscal 1999,
due mainly to the reversal of a significant portion of the book-tax differences
on fixed assets and accrued insurance costs. The tax provision of $702,000 was
offset by a $702,000 decrease in the valuation allowance. The $12,000 tax
benefit resulted from a tax refund received in 1999.

The valuation allowance was increased $7.3 million in 1998 to offset the
Company's total net deferred tax assets. 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

10
<PAGE> 12

deferred tax assets. Due to the 100% valuation allowance, the Company's net
effective tax rate was virtually zero for 1999. 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 changes in the valuation
allowance, state income taxes and federal employer tax credits.

The valuation allowance currently offsets the full amount of 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 maintains 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 net operating loss (NOL) carryforwards which
expire in years 2009 through 2014, and state NOL carryforwards which expire in
years 2000 through 2014.

Due to the factors discussed above, the Company reported 1999 net earnings
of $1.9 million, or $1.29 per share, compared with a 1998 net loss of $12.5
million, or $8.54 per share. The Company achieved fourth quarter net earnings of
$128,000, or $0.08 per share, and $391,000, or $0.27 per share, in 1999 and
1998, respectively. To aid in comparing operating results for 1999 and 1998, the
table below summarizes the effect of certain gains, adjustments, charges and
credits on operating income (loss) and net earnings (loss) for the quarters and
years ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income (loss) before
adjustments and charges................. $103,000 $(92,000) $ 442,000 $ (1,923,000)
Gain from insurance credits............. 113,000 1,038,000 325,000
Restructuring and impairment charges.... 368,000 (6,601,000)
-------- -------- ---------- ------------
Operating income (loss)....... 103,000 389,000 1,480,000 (8,199,000)
Gain on sale of assets.................. 8,000 35,000 367,000 153,000
Other income and expense................ 17,000 (33,000) 29,000 (167,000)
Tax benefit (provision)................. 12,000 (4,305,000)
-------- -------- ---------- ------------
Net earnings (loss)........... $128,000 $391,000 $1,888,000 $(12,518,000)
</TABLE>

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. The Company reopened its dramatically redesigned Mesquite unit in
December 1999.

Liquidity and Capital Resources for 1999 Compared with 1998

The Company's current ratio improved to 0.4 to 1 at September 30, 1999 from
0.3 to 1 at fiscal year end 1998. The current ratio increased in fiscal 1999 due
to an increase in cash of $696,000 accumulated after paying off the bank line of
credit in February 1999. Like many restaurant companies, much of the Company's
current liabilities, primarily accounts payable and accrued wages and bonuses,
flow through operations and roll over rather than being paid down to zero.

Operating activities provided net cash of $1.6 million in fiscal 1999
compared with $847,000 in 1998. The 1999 net earnings of $1.9 million included
non-cash charges of $2 million for depreciation and amortization. The 1998 net
loss of $12,518,000 included non-cash charges of $2,808,000 for depreciation and
amortization, $4,305,000 for deferred taxes, $5,681,000 to impair long-lived
assets and $920,000 to reserve for exit costs of closed locations.

Investing activities provided $988,000 in 1999 and used $436,000 in 1998.
The Company received $2.5 million for asset sales in 1999, primarily four
previously closed restaurant sites sold in 1999. The Company invested $1.5
million in capital additions in 1999, compared with $697,000 in 1998. In 1999,
one location was remodeled to test restaurant design changes, and another
remodel with more extensive changes

11
<PAGE> 13

was begun near the end of the year and completed in December 1999. Investment in
other remodels, property improvements and restaurant computer upgrades was
accelerated in 1999 to compensate for several years of limited investment due to
debt restrictions.

No new restaurants were opened or under construction in 1999, and none are
planned for fiscal 2000. The Company expects to invest between $1 million and $2
million in capital additions in 2000. Capital expenditures to remodel existing
restaurants, install restaurant computer systems and provide routine capital
replacements will continue within the constraints of available funds. The
Company also has one remaining closed restaurant site held for sale, which would
augment cash available for capital additions if sold.

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 four of the closed sites in 1999, and is seeking to
sell the land and building for the remaining closed location, which is included
in land and buildings held for sale on the balance sheet.

Financing activities consumed $1.9 million and $294,000 in 1999 and 1998,
respectively, primarily to reduce debt. The Company paid off its bank credit
line in 1999, and the only debt remaining are notes payable to buy out the lease
obligations on closed units at a discount.

The Company plans to finance its 1999 operations and capital additions
mainly with cash flow from operations and, possibly, the sale of the closed
restaurant site held for sale.

The Company paid a dividend of $.045 per share on December 9, 1997. The
future payment of cash dividends will depend on the Company's earnings,
financial position, capital requirements and other relevant factors.

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 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 came mainly from
coupons distributed by direct mail, newspaper inserts and a variety of
neighborhood marketing promotions.

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.

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.

No new restaurants were opened in 1998.

12
<PAGE> 14

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.

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.

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 supplemented its primary restaurant management bonus programs
with additional bonus programs for restaurant service and management personnel
to provide additional incentives for excellent service.

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."

13
<PAGE> 15

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.

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 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.

Due to the factors discussed above, the Company reported net losses of
$12.5 million, or $8.54 per share, and $4.7 million, or $3.21 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.

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.

Operating activities provided net cash of $847,000 in 1998 compared with
$959,000 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.

The Company closed nine restaurants in 1998, as part of its restructuring
plan, and provided estimated reserves to exit those locations.

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 $294,000 and $1,294,000 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.

14
<PAGE> 16

The Company's revolving credit and term loan agreement (Loan Agreement)
with a bank 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.

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 was reduced the last day of
each quarter, and by some or all of the proceeds from land and building sales,
until the loan was paid and the agreement was terminated in 1999.

The Loan Agreement included various financial covenants. One financial
covenant required 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 were limited to $650,000 each fiscal year. Cash
dividends were limited to $150,000 per fiscal year, and were prohibited until
the Company achieved 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 subsequently
granted permanent waivers for these covenant violations. The Company was in
compliance with all other loan covenants at September 30, 1998.

The Company paid a dividend of $.045 per share on December 9, 1997.

Seasonality

The Company's business is seasonal. Sales are typically higher in summer
months and other periods 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.

To help offset rising labor costs, the Company implemented a price increase
of about 4% in November 1999. 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.

Year 2000 Impact

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
updating its computer hardware and software to properly process year 2000 and
later dates.

The Company has identified all significant hardware and software 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.

In October and November 1999, the Company replaced its primary existing POS
software with a newer version provided by the same vendor at no charge. During
this process, the Company also installed or

15
<PAGE> 17

upgraded its restaurant POS hardware to accommodate year 2000 dates. The
hardware upgrade and software installation costs of about $80,000 were
capitalized in fiscal 2000, and the Company expensed about $31,000 in fiscal
2000 to train employees on the new software.

As of November 28, 1999, four of the Company's restaurants were still using
an older POS software and hardware system. The Company's tests indicate that
these older systems will properly process dates in the year 2000.

The Company installed the year 2000 compliant version of its corporate
accounting software in October 1999. Although the upgrade was provided at no
charge by the vendor, in 1999 the Company recorded about $25,000 in programming
expenses to modify custom programs related to the accounting software update. We
estimate the Company may incur an additional $20,000 to complete such
modifications in fiscal 2000.

Based on its testing and vendors' representations, the Company believes
that its POS systems and corporate accounting systems will properly process year
2000 dates.

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 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

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 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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 23.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

17
<PAGE> 19

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, 1999, and is incorporated herein by reference.

(b) Executive Officers of the Registrant

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. The information set forth under the caption "Executive Officers of
the Registrant" in Part I is incorporated herein by reference.

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, 1999, 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," "Summary Compensation Table,"
"Aggregated Option Exercises in 1999 and 1999 Year-End Option Values,"
"Employment Contracts, Termination of Employment and Change in Control,"
"Company Stock Price Performance," "Compensation of Directors" and "Report of
the Compensation Committee of the Board of Directors" appearing on pages 5
through 10 of the Company's Proxy Statement dated December 22, 1999, 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 16, 1999, 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 16, 1999," appearing on
page 3 of the Company's Proxy Statement dated December 22, 1999, 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, 1999, and is
incorporated herein by reference.

18
<PAGE> 20

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 23.

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)
3(i) -- Certificate of Amendment to Certificate of Incorporation, dated January 27, 1999(24)
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)
</TABLE>

19
<PAGE> 21

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
10(m) -- Amendment No. 4 to 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet,
Inc.(11)
10(n) -- Amendment No. 3 to 1982 Stock Option Plan for Non-Employee Directors of Pancho's
Mexican Buffet, Inc.(11)
10(o) -- 1992 Stock Option Plan of Pancho's Mexican Buffet, Inc.(12)
10(p) -- Revolving Credit and Term Loan Agreement dated February 16, 1994, between PMB
Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(13)
10(q) -- First Amendment to Revolving Credit and Term Loan Agreement dated February 9, 1995,
between PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(14)
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(23)
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>

20
<PAGE> 22

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

<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>

21
<PAGE> 23
<TABLE>
<S> <C>
(23) Filed with the Commission as an Exhibit to Form 10-K for the
year ended September 30, 1998 -- such Exhibits are
incorporated herein by reference.
(24) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended March 31, 1999 -- such Exhibits are
incorporated herein by reference.
</TABLE>

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter ended September 30,
1999.

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.

22
<PAGE> 24

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999

<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-17
</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.

23
<PAGE> 25

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 1,242,000 $ 546,000
Accounts and notes receivable, current portion............ 208,000 184,000
Inventories............................................... 469,000 473,000
Prepaid expenses.......................................... 242,000 443,000
------------ ------------
Total current assets.............................. 2,161,000 1,646,000
------------ ------------
Property, Plant and Equipment:
Land...................................................... 1,868,000 1,867,000
Buildings................................................. 6,900,000 6,885,000
Leasehold improvements.................................... 17,268,000 17,472,000
Equipment and furniture................................... 21,469,000 22,965,000
Construction in progress.................................. 429,000
------------ ------------
Total............................................. 47,934,000 49,189,000
Less accumulated depreciation and amortization............ (32,392,000) (33,136,000)
------------ ------------
Property, plant and equipment -- net.............. 15,542,000 16,053,000
------------ ------------
Other Assets:
Land and buildings held for sale.......................... 309,000 2,380,000
Other, including noncurrent portion of receivables........ 400,000 339,000
------------ ------------
Total other assets................................ 709,000 2,719,000
------------ ------------
Total............................................. $ 18,412,000 $ 20,418,000
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 701,000 $ 1,227,000
Debt classified as current................................ 139,000 490,000
Accrued wages and bonuses................................. 1,734,000 1,420,000
Accrued insurance costs, current.......................... 1,087,000 1,150,000
Other current liabilities................................. 1,331,000 1,864,000
------------ ------------
Total current liabilities......................... 4,992,000 6,151,000
------------ ------------
Other Liabilities:
Long-term debt............................................ 222,000 1,761,000
Accrued insurance costs, non-current...................... 1,149,000 2,417,000
Restructuring reserves, non-current....................... 346,000 365,000
------------ ------------
Total other liabilities........................... 1,717,000 4,543,000
------------ ------------
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 1,485,406 and 1,471,374 shares,
respectively. Outstanding 1,463,606 and 1,449,574
shares, respectively.)................................. 149,000 147,000
Additional paid-in capital................................ 18,988,000 18,955,000
Retained earnings (accumulated deficit)................... (7,197,000) (9,085,000)
Stock notes receivable.................................... (169,000) (225,000)
Treasury stock at cost (21,800 and 21,800 shares,
respectively).......................................... (68,000) (68,000)
------------ ------------
Stockholders' equity.............................. 11,703,000 9,724,000
------------ ------------
Total............................................. $ 18,412,000 $ 20,418,000
============ ============
</TABLE>

See notes to consolidated financial statements.

F-1
<PAGE> 26

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Sales.................................................. $57,403,000 $ 64,146,000 $66,957,000
----------- ------------ -----------
Costs and Expenses:
Food costs........................................... 15,214,000 17,413,000 18,792,000
Restaurant labor and related expenses................ 21,839,000 25,606,000 25,235,000
Restaurant operating expenses........................ 11,913,000 14,904,000 15,799,000
Depreciation and amortization........................ 1,958,000 2,808,000 3,426,000
General and administrative expenses.................. 4,999,000 5,013,000 5,160,000
Asset impairment and restructuring charges........... 6,601,000 5,066,000
----------- ------------ -----------
Total........................................ 55,923,000 72,345,000 73,478,000
----------- ------------ -----------
Operating income (loss)................................ 1,480,000 (8,199,000) (6,521,000)
Interest expense....................................... (22,000) (212,000) (348,000)
Other, including interest income....................... 418,000 198,000 303,000
----------- ------------ -----------
Earnings (loss) before income taxes.................... 1,876,000 (8,213,000) (6,566,000)
Income tax expense (benefit)........................... (12,000) 4,305,000 (1,850,000)
----------- ------------ -----------
Net earnings (loss).................................... $ 1,888,000 $(12,518,000) $(4,716,000)
=========== ============ ===========
Net earnings (loss) per share, basic and diluted....... $ 1.29 $ (8.54) $ (3.21)
=========== ============ ===========
</TABLE>

See notes to consolidated financial statements.

F-2
<PAGE> 27

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, 1996, as previously
reported.................................. 4,397,559 $ 440,000 $18,633,000 $ 8,347,000 $(436,000) $
Adjust for 1999 1-for-3 reverse stock
split................................. (2,931,706) (294,000) 294,000
---------- --------- ----------- ------------ --------- ------ --------
Adjusted Balance, September 30, 1996...... 1,465,853 146,000 18,927,000 8,347,000 (436,000)
Net loss................................ (4,716,000)
Dividends, $.09 per share............... (132,000)
Realization of foreign currency
translation adjustment................ 436,000
Treasury stock acquired................. 2,800 (13,000)
Payments and writeoffs on stock notes...
---------- --------- ----------- ------------ --------- ------ --------
Balance, September 30, 1997............... 1,465,853 146,000 18,927,000 3,499,000 2,800 (13,000)
Net loss................................ (12,518,000)
Dividends, $.045 per share.............. (66,000)
Treasury stock acquired................. 19,000 (55,000)
Payments received on stock notes........
Stock issued............................ 5,521 1,000 28,000
---------- --------- ----------- ------------ --------- ------ --------
Balance, September 30, 1998............... 1,471,374 147,000 18,955,000 (9,085,000) 21,800 (68,000)
Net earnings............................ 1,888,000
Payments received on stock notes........
Stock issued............................ 14,032 2,000 33,000
---------- --------- ----------- ------------ --------- ------ --------
Balance, September 30, 1999............... 1,485,406 $ 149,000 $18,988,000 $ (7,197,000) $ 21,800 $(68,000)
========== ========= =========== ============ ========= ====== ========

<CAPTION>
STOCK
NOTES
RECEIVABLE
FROM STOCKHOLDERS'
OFFICERS EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30, 1996, as previously
reported.................................. $(463,000) $ 26,521,000
Adjust for 1999 1-for-3 reverse stock
split.................................
--------- ------------
Adjusted Balance, September 30, 1996...... (463,000) 26,521,000
Net loss................................ (4,716,000)
Dividends, $.09 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, $.045 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
Net earnings............................ 1,888,000
Payments received on stock notes........ 56,000 56,000
Stock issued............................ 35,000
--------- ------------
Balance, September 30, 1999............... $(169,000) $ 11,703,000
========= ============
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 28

PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss)............................... $ 1,888,000 $(12,518,000) $ (4,716,000)
----------- ------------ ------------
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization.................. 1,958,000 2,808,000 3,426,000
Provision (benefit) for deferred income
taxes........................................ 4,305,000 (1,288,000)
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......................... (367,000) (153,000) (256,000)
Stock compensation to outside directors........ 35,000 29,000
Changes in operating assets and liabilities:
Accounts and notes receivable................ (26,000) (6,000) 9,000
Income taxes receivable...................... 538,000 (352,000)
Inventories, prepaid expenses and other
assets.................................... 227,000 (231,000) 181,000
Accounts payable and accrued expenses........ (1,673,000) 79,000 (272,000)
Restructuring reserves....................... (500,000) (658,000) (959,000)
Other.......................................... 56,000 53,000 77,000
----------- ------------ ------------
Net cash provided by operating
activities.............................. 1,598,000 847,000 959,000
Cash Flows From Investing Activities:
Property additions................................ (1,485,000) (697,000) (459,000)
Proceeds from sale of assets...................... 2,473,000 261,000 1,081,000
----------- ------------ ------------
Net cash provided by (used in) investing
activities.............................. 988,000 (436,000) 622,000
Cash Flows From Financing Activities:
Short-term borrowings, net........................ (351,000) 298,000 40,000
Long-term borrowings.............................. 6,637,000 19,706,000 28,583,000
Repayments of long-term borrowings................ (8,176,000) (20,232,000) (29,785,000)
Dividends paid.................................... (66,000) (132,000)
----------- ------------ ------------
Net cash used in financing activities..... (1,890,000) (294,000) (1,294,000)
Effect of Foreign Exchange Rate Change on Cash...... (3,000)
----------- ------------ ------------
Net Increase in Cash and Cash Equivalents........... 696,000 117,000 284,000
Cash and Cash Equivalents at Beginning of Year...... 546,000 429,000 145,000
----------- ------------ ------------
Cash and Cash Equivalents at End of Year............ $ 1,242,000 $ 546,000 $ 429,000
=========== ============ ============
Supplemental Information:
Income taxes paid and (refunds received), net..... $ (12,000) $ (541,000) $ (170,000)
Interest paid, net of capitalized amounts......... 37,000 206,000 306,000
Treasury stock acquired as reduction of
receivables.................................... 55,000 13,000
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 29

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> 30
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 1999, 1998 or 1997.

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.

1-FOR-3 REVERSE STOCK SPLIT

At the Annual Meeting of Stockholders on January 27, 1999, the stockholders
of the Company approved a one-for-three reverse stock split for the Company's
common stock, effective January 27, 1999. All common stock share data and
related stock option and earnings per share data in this report has been
adjusted to reflect the reverse split. Under the reverse split, the common stock
retained its previous par value of $.10 per share after the reverse split.
Therefore, the dollar amount of common stock on the balance sheet was reduced to
one-third of its previous balance, and additional paid-in capital was increased
by that dollar amount.

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 1,460,000, 1,465,000 and
1,465,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
For 1999, outstanding options had no dilutive effect because the average market
price was less than the option exercise prices. Due to the net losses for 1998
and 1997, the Company's potential common shares were antidilutive and excluded
from the loss per share calculation, so diluted and basic loss per share are the
same for those years. At September 30, 1999, there were 100,063 options
outstanding which represented potential common shares which could be dilutive in
the future.

F-6
<PAGE> 31
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FOREIGN OPERATIONS AND CURRENCY TRANSLATION

The functional currency of the Company's Mexican operations was the new
peso. 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.

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 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).

BUSINESS SEGMENTS

In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." 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.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and that it measure those instruments at fair
value. SFAS No. 133 is effective for all fiscal quarters in fiscal years
beginning after June 15, 2000. The Company has not yet assessed the impact that
SFAS No. 133 will have on its financial condition or results of operations.

2. OTHER CURRENT LIABILITIES

Other current liabilities consist of:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Accrued taxes other than income taxes....................... $ 943,000 $1,030,000
Restructuring reserves...................................... 167,000 649,000
Other....................................................... 221,000 185,000
---------- ----------
Total............................................. $1,331,000 $1,864,000
========== ==========
</TABLE>

F-7
<PAGE> 32
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT

In February 1999, the Company paid off its outstanding bank debt. In April
1999, the Company terminated its revolving credit and term loan agreement with
the bank.

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 $222,000 and $361,000 at September 30, 1999 and 1998,
respectively. The current portion of $139,000 and $158,000 is reported as debt
classified as current at September 30, 1999 and 1998, respectively. The
effective interest rates range from 5.8% to 6.9%, with payments due monthly
through November 2003.

The combined maturities of Company debt as of September 30, 1999, are
listed below:

<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
- -------------
<S> <C>
2000.............................................. $139,000
2001.............................................. 110,000
2002.............................................. 53,000
2003.............................................. 50,000
2004.............................................. 9,000
Later years....................................... 0
--------
$361,000
========
</TABLE>

4. OPERATING LEASES

The Company leases restaurant facilities under operating leases with terms
expiring at various dates into 2009, 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, 1999, exclusive of maintenance, taxes, etc., were as
follows:

<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
- -------------
<S> <C> <C>
2000.............................................. $2,305,000
2001.............................................. 1,836,000
2002.............................................. 1,491,000
2003.............................................. 1,100,000
2004.............................................. 635,000
Later years....................................... 588,000
----------
Total................................... $7,955,000
==========
</TABLE>

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

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals................................ $2,446,000 $2,638,000 $2,714,000
Contingent rentals............................. 203,000 190,000 188,000
Less: Sublease rentals......................... (34,000) (13,000) (33,000)
---------- ---------- ----------
Total................................ $2,615,000 $2,815,000 $2,869,000
========== ========== ==========
</TABLE>

F-8
<PAGE> 33
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,
------------------------------------
1999 1998 1997
--------- ---------- -----------
<S> <C> <C> <C>
Current:
U.S. federal.................................. $ (12,000) $ $ (572,000)
State......................................... 10,000
--------- ---------- -----------
Combined current........................... (12,000) -- (562,000)
Deferred:
U.S. federal.................................. 3,802,000 (1,326,000)
State......................................... 503,000 38,000
--------- ---------- -----------
Combined deferred.......................... 4,305,000 (1,288,000)
--------- ---------- -----------
Income tax expense (benefit)............. $ (12,000) $4,305,000 $(1,850,000)
========= ========== ===========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Expected tax at federal statutory rate of
34%............................................ $ 642,000 $(2,792,000) $(2,232,000)
Increase (decrease) in taxes due to:
Change in valuation allowance................ (702,000) 7,314,000 782,000
Tax effect of abandonment of foreign
operations................................ (305,000)
State income tax provision (benefit), net of
federal income tax effect................. 116,000 (137,000) (63,000)
Tax effect of employer tax credits........... (36,000) (90,000) (45,000)
Other differences............................ (32,000) 10,000 13,000
--------- ----------- -----------
Total expense (benefit).............. $ (12,000) $ 4,305,000 $(1,850,000)
========= =========== ===========
</TABLE>

F-9
<PAGE> 34
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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Current:
Restructuring costs, current........................... $ 61,000 $ 232,000
Accrued vacation pay................................... 137,000 140,000
Accrued insurance cost, current........................ 392,000 401,000
Current valuation allowance............................ (590,000) (773,000)
----------- -----------
Current deferred tax asset, net of valuation
allowance........................................... -- --
----------- -----------
Noncurrent:
Accrued insurance costs................................ 262,000 853,000
Federal net operating loss carryforwards (expire
2012-2014)............................................ 3,650,000 3,057,000
Noncurrent restructuring costs......................... 125,000 141,000
Alternative minimum tax carryforward................... 383,000 383,000
State net operating loss carryforwards (expire
2000 -- 2014)......................................... 500,000 464,000
Property, plant and equipment.......................... 1,560,000 2,201,000
Federal employer tax credits (expire 2009 -- 2014)..... 615,000 515,000
Noncurrent valuation allowance......................... (6,847,000) (7,366,000)
----------- -----------
Noncurrent deferred tax asset, net of valuation
allowance........................................... 248,000 248,000
----------- -----------
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............. $ -- $ --
=========== ===========
</TABLE>

Deferred tax assets net of deferred tax liabilities decreased $702,000 to
$7.4 million in the year ended September 30, 1999, due mainly to the reversal of
a significant portion of the book-tax differences on fixed assets and accrued
insurance costs. The tax provision of $702,000 was offset by a $702,000 decrease
in the valuation allowance. The $12,000 income tax benefit resulted from a
refund received in 1999.

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 maintains 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 net operating loss (NOL) carryforwards which
expire in years 2009 through 2014, and state NOL carryforwards which expire in
years 2000 through 2014. The amount of federal NOL carryforwards was $10,736,000
and $8,991,000 at September 30, 1999 and 1998, respectively. The amount of state
NOL carryforwards was $19,917,000 and $18,149,000 at September 30, 1999 and
1998, respectively.

F-10
<PAGE> 35
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
carryforward and $111,000 for state NOL carryforwards.

6. STOCKHOLDERS' EQUITY

STOCK NOTES RECEIVABLE

In April 1992, the Company sold 34,833 shares (adjusted for the 1999
1-for-3 reverse stock split) 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 5,133 shares of the treasury
stock reflected on the balance sheet at September 30, 1999 and 1998.

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

F-11
<PAGE> 36
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dates of grant. Outstanding options become exercisable cumulatively in four or
five equal annual installments commencing one year from date of grant and expire
ten years from the date of grant. Options may be granted through November 5,
2002.

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 200,000 shares, from 133,333 shares.
The amendment also increased the annual option grant to non-employee directors
to 1,333 shares each from 667 shares each.

Summary information on stock option activity is shown below.

<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------
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...... 102,109 $28.68 134,867 $29.46 135,784 $30.39
Granted....................... 6,998 3.38 5,333 6.18 3,333 6.18
Exercised.....................
Forfeited/expired............. (144) 21.75 (38,091) 28.35 (4,250) 41.07
-------- -------- --------
Outstanding
September 30................ 108,963 27.06 102,109 28.68 134,867 29.46
-------- -------- --------
Exercisable
September 30................ 94,721 30.16 91,133 31.02 102,200 30.15
-------- -------- --------
Common shares reserved and
available for grant
September 30................ 100,063 106,917 20,917
-------- -------- --------
</TABLE>

For shares outstanding at September 30, 1999:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-AVERAGE
NUMBER AVERAGE REMAINING
RANGE OF EXERCISE PRICES OF SHARES EXERCISE PRICE LIFE IN YEARS
- ------------------------ --------- -------------- ----------------
<S> <C> <C> <C>
$ 3.3750................. 6,998 $ 3.38 9.2
$ 6.1875 to $9.5625...... 12,325 7.01 7.2
$17.6250 to $21.7560..... 10,985 20.55 3.3
$25.1250 to $34.1250..... 78,655 33.22 0.5
------- ------ ---
$ 3.3750 to $34.1250..... 108,963 $27.06 4.6
------- ------ ---
</TABLE>

The weighted-average fair value of options granted was $2.47 in 1999 and
$3.12 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 1999 1998 1997
- ----------------------- ---------- ------------ -----------
<S> <C> <C> <C>
Net earnings (loss)
As reported........... $1,888,000 $(12,518,000) $(4,716,000)
Pro forma............. 1,874,000 (12,528,000) (4,722,000)
Net earnings (loss) per
share
As reported........... 1.29 (8.54) (3.21)
Pro forma............. 1.28 (8.55) (3.22)
</TABLE>

F-12
<PAGE> 37
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 1999, 1998 and 1997.

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield......................................... 0.0% 0.0% 1.0%
Expected volatility.................................... 60.0% 50.0% 55.0%
Risk free interest rates............................... 4.7% 5.5% 6.3%
Expected life in years................................. 10 5 5
</TABLE>

ANNUAL STOCK GRANT TO NON-EMPLOYEE DIRECTORS

Under the 1998 Restricted Stock Plan for Non-employee Directors, effective
in January 1998 through April 1999, non-employee directors of the Company were
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 $35,000 and $29,000 in 1999 and 1998, respectively.

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, 1999, and 1998 include provisions for estimated expenses of
the VEIB Plan of $176,000 and $754,000, respectively. The fiscal 1999 provision
was reduced by $394,000 to reverse VEIB Plan liability reserves. The
consolidated statement of operations for fiscal 1997 includes a gain of $17,000
for the VEIB Plan, due to credits of $946,000 to reverse VEIB Plan liability
reserves during the year.

BONUS PLANS

The Company has a bonus plan for restaurant managers and supervisors which
provides bonuses based on restaurant performance. Such bonuses amounted to
$438,000, $480,000, and $233,000 for the years ended September 30, 1999, 1998
and 1997, respectively.

The Company has a bonus plan for corporate officers as a group based on
stipulated operating results. Under this plan, a bonus of $203,000 was earned
for 1999, and no corporate officer bonuses were paid for the years ended
September 30, 1998 and 1997. A related bonus plan for other corporate employees
paid $60,000 in 1999, and no bonuses for the years ended September 30, 1998 and
1997.

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 $109,000, $124,000 and $130,000 in fiscal years 1999,
1998 and 1997, respectively.

F-13
<PAGE> 38
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK PURCHASE PLAN

The Company maintains a voluntary employee stock purchase plan for all
eligible employees. The Company contributes 25% of the amount invested by the
employee plus all commissions and brokerage fees. Company contributions vest
immediately. Contributions are invested in common stock of the Company by a
brokerage firm. The Company recognized expenses for contributions to the plan of
$14,000, $15,000, and $23,000 for the years ended September 30, 1999, 1998 and
1997, 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 $1,000, $5,000, and $7,000 for the years ended September 30, 1999, 1998,
and 1997, respectively.

The Chairman of the Company and the family-owned restaurant operations,
collectively, were indebted to the Company in the amount of $29,000 on September
30, 1998, excluding the stock note receivable secured by Company stock (see note
6). The September 30, 1998 balance included trade receivables for sales to the
family-owned restaurant operations and other advances.

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 $1,439,000, $1,839,000 and $2,728,000 for the years ended
September 30, 1999, 1998 and 1997, respectively. The same vendor purchased items
from the Company in the amount of $65,000, $53,000, and $75,000 in 1999, 1998
and 1997, 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 1999,
1998 and 1997.

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 of
$36,000 from the joint venture for management services in fiscal 1997. 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 available for exiting the Mexico market under the 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

F-14
<PAGE> 39
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 closed units, plus one previously closed, included
company-owned land and buildings which the Company planned to sell. Those five
owned sites were shown on the balance sheet as land and buildings held for sale
at September 30, 1998. Four of those sites were sold in 1999 and one is shown as
land and building held for sale on the September 30, 1999, balance sheet.

The Company paid $500,000, $658,000 and $959,000 in 1999, 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 $6,832,000, for the year ended September 30, 1998. Sales
for those units totaled $7,962,000, for the 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 for fiscal year 1997.

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, 1999. 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.

F-15
<PAGE> 40
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, 1999
-------------------------------------------------
QUARTER ENDED
--------------------------------------
12/31 3/31 6/30 9/30 TOTAL
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Sales...................................... $13,767 $14,350 $ 14,727 $14,559 $ 57,403
Operating income (loss).................... 7 424 946 103 1,480
Net earnings (loss)........................ 114 562 1,084 128 1,888
Net earnings (loss) per share.............. 0.08 0.39 0.74 0.08 1.29
</TABLE>

<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.............. (0.20) (0.17) (8.44) 0.27 (8.54)
</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.............. (0.45) (2.79) (0.06) 0.09 (3.21)
</TABLE>

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

(1) Second quarter 1999 results include $248,000 to reduce insurance reserves
for the Voluntary Employee Injury Benefit (VEIB) Plan, workers'
compensation and general liability.

(2) Third quarter 1999 results include $790,000 to reduce insurance reserves
for the VEIB Plan, workers' compensation and general liability.

(3) 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.

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

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

(6) 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.

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

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

(9) 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.

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

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

F-16
<PAGE> 41

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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.

LOGO
DELOITTE & TOUCHE LLP

Fort Worth, Texas
November 12, 1999

F-17
<PAGE> 42

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.

December 10, 1999 By /s/ HOLLIS TAYLOR
-----------------------------------
Hollis Taylor, President and Chief
Executive Officer
(Principal Executive Officer)

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 10, 1999
- ------------------------------------------------------------
Jesse Arrambide, III, Chairman of the Board of Directors
/s/ HOLLIS TAYLOR December 10, 1999
- ------------------------------------------------------------
Hollis Taylor, President and Chief Executive Officer and
Director
(Principal Executive Officer)

/s/ W. BRAD FAGAN December 10, 1999
- ------------------------------------------------------------
Brad Fagan, Vice President, Treasurer, Chief Financial
Officer and Assistant Secretary (Principal Financial and
Accounting Officer)

/s/ SAMUEL L. CARLSON December 10, 1999
- ------------------------------------------------------------
Samuel L. Carlson, Director

/s/ ROBERT L. LIST December 10, 1999
- ------------------------------------------------------------
Robert L. List, Director

/s/ DAVID ODEN December 10, 1999
- ------------------------------------------------------------
David Oden, Director

/s/ TOMAS ORENDAIN December 10, 1999
- ------------------------------------------------------------
Tomas Orendain, Director

/s/ GEORGE N. RIORDAN December 10, 1999
- ------------------------------------------------------------
George N. Riordan, Director

/s/ RUDOLPH RODRIGUEZ, JR. December 10, 1999
- ------------------------------------------------------------
Rudolph Rodriguez, Jr., Director
</TABLE>
<PAGE> 43

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(23)
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.
(23) Filed with the Commission as an Exhibit to Form 10-K for the
year ended September 30, 1998 -- such Exhibits are
incorporated herein by reference.
(24) Filed with the Commission as an Exhibit to Form 10-Q for the
quarter ended March 31, 1999 -- such Exhibits are
incorporated herein by reference.
</TABLE>

<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 12, 1999, appearing in this Annual Report on Form 10-K of
Pancho's Mexican Buffet, Inc. for the year ended September 30, 1999.

LOGO
DELOITTE & TOUCHE LLP

Fort Worth, Texas
December 10, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,242,000
<SECURITIES> 0
<RECEIVABLES> 208,000
<ALLOWANCES> 0
<INVENTORY> 469,000
<CURRENT-ASSETS> 2,161,000
<PP&E> 47,934,000
<DEPRECIATION> 32,392,000
<TOTAL-ASSETS> 18,412,000
<CURRENT-LIABILITIES> 4,992,000
<BONDS> 0
0
0
<COMMON> 149,000
<OTHER-SE> 11,554,000
<TOTAL-LIABILITY-AND-EQUITY> 18,412,000
<SALES> 57,403,000
<TOTAL-REVENUES> 57,403,000
<CGS> 15,214,000
<TOTAL-COSTS> 50,924,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> 1,876,000
<INCOME-TAX> (12,000)
<INCOME-CONTINUING> 1,888,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,888,000
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.29

</TABLE>