UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File No. 0-4678
Pancho's Mexican Buffet, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1292166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 Noble Avenue, Fort Worth, Texas 76111
(Address of principal executive offices) (Zip Code)
817-831-0081
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of shares of Common Stock outstanding as of January 22,
1999: 4,377,769.
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Introduction 1
Consolidated Condensed Balance Sheets,
December 31, 1998 and September 30,1998 2
Consolidated Condensed Statements of
Operations for the Three-Months Ended
December 31, 1998 and 1997 3
Consolidated Condensed Statements of Cash
Flows for the Three-Months Ended
December 31, 1998 and 1997 4
Notes to Consolidated Condensed Financial Statements 5
Independent Accountants' Review Report 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities (no response required)
Item 3. Defaults Upon Senior Securities (no response required)
Item 4. Submission of Matters to a Vote of Security Holders
(no response required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated condensed financial statements included herein
have been prepared by the Company without audit as of December
31, 1998 and for the three-month periods ended December 31, 1998
and 1997 pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated condensed
financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included
in the Company's annual report on Form 10-K for the fiscal year
ended September 30, 1998. In the opinion of the Company, all
adjustments, consisting only of normal recurring adjustments to
the consolidated condensed financial statements, necessary to
present fairly the financial position of the Company as of
December 31, 1998 and the results of operations and cash flows
for the indicated periods have been included. The results of
operations for such interim periods are not necessarily
indicative of the results to be expected for the fiscal year
ending September 30, 1999.
Deloitte & Touche LLP, independent public accountants, has made
a limited review of the consolidated condensed financial
statements as of December 31, 1998 and for the three-month
periods ended December 31, 1998 and 1997 included herein.
page 1
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
December 31, September 30,
1998 1998
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 671,000 $ 546,000
Accounts and notes receivable - current portion 181,000 184,000
Inventories 454,000 473,000
Prepaid expenses 275,000 443,000
Total current assets 1,581,000 1,646,000
Property, plant and equipment:
Land 1,867,000 1,867,000
Buildings 6,885,000 6,885,000
Leasehold improvements 17,633,000 17,472,000
Equipment and furniture 22,473,000 22,965,000
Total 48,858,000 49,189,000
Less accumulated depreciation and amortization (33,049,000) (33,136,000)
Property, plant and equipment - net 15,809,000 16,053,000
Other assets:
Land and buildings held for sale 1,408,000 2,380,000
Other, including noncurrent part of receivable 326,000 339,000
Total other assets 1,734,000 2,719,000
Total assets $ 19,124,000 $ 20,418,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 951,000 $ 1,227,000
Debt classified as current 150,000 490,000
Accrued wages and bonuses 1,539,000 1,420,000
Accrued insurance costs, current 920,000 1,150,000
Other current liabilities 2,056,000 1,864,000
Total current liabilities 5,616,000 6,151,000
Other liabilities:
Long-term debt 717,000 1,761,000
Accrued insurance costs, non-current 2,682,000 2,417,000
Restructuring reserves, non-current 261,000 365,000
Total other liabilities 3,660,000 4,543,000
Commitments and Contingencies
Stockholders' equity:
Preferred stock
Common stock 442,000 441,000
Additional paid-in capital 18,670,000 18,661,000
Retained earnings (accumulated deficit) (8,971,000) (9,085,000)
Treasury stock at cost (68,000) (68,000)
Stock notes receivable (225,000) (225,000)
Stockholders' equity 9,848,000 9,724,000
Total liabilities and stockholders' equity $ 19,124,000 $ 20,418,000
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended
December 31,
1998 1997
<S> <C> <C>
Sales $13,767,000 $15,675,000
Costs and Expenses:
Food costs 3,680,000 4,153,000
Restaurant labor and related expenses 5,324,000 6,264,000
Restaurant operating expenses 3,060,000 3,715,000
Depreciation and amortization 500,000 779,000
General and administrative expenses 1,196,000 1,236,000
Total 13,760,000 16,147,000
Operating Income (loss) 7,000 (472,000)
Interest Expense (17,000) (49,000)
Other, including interest income 124,000 81,000
Earnings (loss) before income taxes 114,000 (440,000)
Benefit for income taxes (142,000)
Net earnings (loss) $ 114,000 $ (298,000)
Basic and diluted earnings (loss) per share $ 0.03 $ (0.07)
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended December
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 114,000 $ (298,000)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 500,000 779,000
Benefit for deferred income taxes (142,000)
Gain on sale of assets (110,000) (74,000)
Stock compensation to directors 10,000
Changes in operating assets and liabilities:
Accounts and notes receivable 4,000 (41,000)
Inventories, prepaid expenses and other assets 183,000 (118,000)
Accounts payable and accrued expenses 164,000 41,000
Restructuring reserves (216,000) (119,000)
Net cash provided by operating activities 649,000 28,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (237,000) (129,000)
Proceeds from sale of assets 1,097,000 95,000
Net cash provided (used) by investing activities 860,000 (34,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (340,000) 120,000
Long-term borrowings 4,520,000 4,141,000
Repayments of long-term borrowings (5,564,000) (4,274,000)
Dividends paid (66,000)
Net cash used by financing activities (1,384,000) (79,000)
Net increase (decrease) in cash and cash equivalents 125,000 (85,000)
Cash and cash equivalents, beginning of period 546,000 429,000
Cash and cash equivalents, end of period $ 671,000 $ 344,000
SUPPLEMENTAL INFORMATION:
Interest paid, net of capitalized amounts $ 35,000 $ 52,000
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. NET EARNINGS (LOSS) PER SHARE
The Company reports earnings per share under Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." Because it has potential common shares, the Company
has a complex capital structure and must disclose both basic and
diluted EPS. Basic EPS is computed by dividing income available
to common shareholders by the weighted average number of shares
outstanding. Diluted EPS adds the effect of all dilutive
potential shares to the weighted average number of shares
outstanding.
The weighted average outstanding shares were 4,359,000 and
4,389,000 for the three-months ended December 31, 1998 and 1997,
respectively. The average price of the Company's common stock
for the quarter ended December 31, 1998 was below the strike
price of all outstanding options, therefore all the potential
common shares were antidilutive and excluded from the earnings
per share calculation for that period. Due to the net loss for
the first quarter of fiscal 1998, the Company's potential common
shares were antidilutive and excluded from the loss per share
calculation for that period. Therefore, there was no difference
between basic and diluted earnings (loss) per share in either
quarter. At December 31, 1998, there were 306,400 options
outstanding which represented potential common shares which
could be dilutive in the future.
2. LONG-TERM DEBT
The Company has a revolving credit and term loan agreement (Loan
Agreement) with a bank. In November 1998, the Company and the
bank agreed to amend the Loan Agreement commitment reduction
schedule and covenants, effective September 30, 1998. Under
this amendment, the credit line limit is reduced the last day of
each quarter until the agreement terminates September 30, 2000.
The credit commitment reductions effective at each quarter end
under the amended agreement are shown below, subject to further
reductions based on property sales:
Commitment
Effective Date_ Reduction
March 31, 1999 $100,000
June 30, 1999 200,000
September 30, 1999 200,000
December 31, 1999 100,000
March 31, 2000 100,000
June 30, 2000 200,000
September 30, 2000 414,000
The loan is secured by all of the Company's real property. Two
closed locations were sold in October 1998, and the commitment
limit was consequently reduced by 60% of the net proceeds. The
maximum loan commitment must, as required by the agreement, be
further reduced by all proceeds from subsequent real estate
sales.
The Loan Agreement includes various financial covenants. One
financial covenant requires the Company to achieve trailing
three-months earnings before interest, taxes, depreciation and
amortization (EBITDA) to equal or exceed established targets
during each fiscal quarter. Cash capital expenditures are
limited to $650,000 each fiscal year. Cash dividends are
limited to $150,000 per fiscal year, and are prohibited until
the Company achieves trailing 12-months EBITDA of at least $3
million. The Company was in compliance with these and all other
loan covenants at December 31, 1998.
Management is taking steps to ensure that the Company will be
able to comply with all of its covenants under the Loan
Agreement in the future. However, if the bank declined to waive
a future covenant violation, the bank would be required under
the Loan Agreement to give the Company 15 days written notice of
the violation, after which time the Company would be in default.
At the bank's option, it could then declare the loan principal
and all accrued interest current and payable and/or refuse to
make additional advances on the credit line. The Company could
then be forced to seek alternative sources of financing.
At December 31, 1998, the Company had $914,000 of credit
available under the bank line of credit.
3. INCOME TAXES
In the quarter ended June 30,1998, the Company increased its
valuation allowance for deferred tax assets to offset all of its
net deferred tax assets. This was considered necessary due to
the Company's net losses for that quarter and the previous three
years.
The net deferred tax assets were reduced by $41,000 in the
quarter ended December 31, 1998 due to the recognition of net
earnings for the quarter. The valuation allowance was reduced
by the same amount to match the net deferred tax asset balance.
Accordingly, the Company recognized no net tax expense or
benefit in the quarter ended December 31, 1998. At December 31,
1998, the valuation allowance offset the full amount of net
deferred tax assets.
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 in the future,
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 2013, and state NOL carryforwards which
expire in years 1999 through 2013.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Pancho's Mexican Buffet, Inc.:
We have reviewed the accompanying consolidated condensed balance
sheet of Pancho's Mexican Buffet, Inc. and subsidiaries as of
December 31, 1998 and the related consolidated condensed
statements of operations and cash flows for the three-month
periods ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical review procedures to financial data and of
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated condensed
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of
September 30, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year
then ended (not presented herein), and in our report dated
November 13, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated condensed
balance sheet as of September 30, 1998, is fairly stated in all
material respects in relation to the consolidated balance sheet
from which it has been derived.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Fort Worth, Texas
January 22, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
As of December 31, 1998, the Company's current ratio was 0.3 to
1, unchanged from September 30, 1998. Like many restaurant
chains, the Company maintains a current ratio well below 1.0.
Most of its current liabilities, primarily accounts payable and
accrued payroll costs, flow through operations and roll over
rather than being reduced to zero in subsequent periods. The
Company keeps a low cash balance and draws on its line of credit
only as needed.
In the quarter ended December 31, 1998, cash and cash
equivalents increased $125,000, compared with a decline of
$85,000 in the quarter ended December 31, 1997.
Operating activities provided $649,000 and $28,000 in the
quarters ended December 31, 1998 and 1997, respectively. The
increase in fiscal 1999 is due primarily to the $412,000
improvement in operating results.
Investing activities in the 1999 quarter contributed $860,000 in
cash, due to $1,097,000 of proceeds from sale of assets, mainly
from the sale of land and buildings of two closed locations.
Sale proceeds were partially-offset by the investment of
$237,000 in capital additions. Capital additions included
$123,000 to remodel an existing restaurant in Fort Worth as a
test site for developing a revitalized restaurant format. Cash
used for investing activities was limited to $34,000 in the
first quarter of 1998.
Management plans to invest more to develop an updated restaurant
format in 1999, including the remodel of other existing
restaurants for further testing. No new restaurants were opened
in the first quarter of 1999 or fiscal year 1998, and none are
currently planned, as management intends to focus on improving
sales and profitability of existing restaurants, reducing debt
and updating the concept. Capital expenditures to remodel
existing restaurants and to install restaurant computer systems
will continue within the constraint of available operating cash
flow and the loan agreement restrictions (see Note 2 to the
consolidated condensed financial statements). The Company may
also enter into lease agreements to acquire restaurant computer
systems.
The Company has land and buildings held for sale carried at $1.4
million, consisting of three closed restaurant sites. The
Company has a sale contract on one of those properties, the sale
is scheduled to be finalized in February 1999. Any surplus of
proceeds over outstanding debt may be used by the Company to
finance its restaurant revitalization program.
Financing activities consumed $1,384,000 in the quarter ended
December 31, 1998, as cash generated by operations and real
estate sales was mostly applied to debt reduction. In the same
quarter last year, $79,000 was used for financing activities,
mainly to pay dividends.
The Company has a revolving credit and term loan agreement (Loan
Agreement) with a bank. In November 1998, the Company and the
bank agreed to amend the Loan Agreement commitment reduction
schedule and covenants, effective September 30, 1998. Under
this amendment, the credit line limit is reduced the last day of
each quarter until the agreement terminates September 30, 2000.
The credit commitment reductions effective at each quarter end
under the amended agreement are shown below, subject to further
reductions based on property sales:
Commitment
Effective Date Reduction
March 31, 1999 $100,000
June 30, 1999 200,000
September 30, 1999 200,000
December 31, 1999 100,000
March 31, 2000 100,000
June 30, 2000 200,000
September 30, 2000 414,000
The loan is secured by all of the Company's real property. Two
closed locations were sold in October 1998, and the commitment
limit was consequently reduced by 60% of the net proceeds. The
maximum loan commitment must, as required by the agreement, be
further reduced by all proceeds from subsequent real estate
sales.
The Loan Agreement includes various financial covenants. One
covenant requires the Company to achieve trailing three-months
earnings before interest, taxes, depreciation and amortization
(EBITDA) to equal or exceed established targets during each
fiscal quarter. Cash capital expenditures are limited to
$650,000 each fiscal year. Cash dividends are limited to
$150,000 per fiscal year, and are prohibited until the Company
achieves trailing 12-months EBITDA of at least $3 million. The
Company was in compliance with these and all other loan
covenants at December 31, 1998.
Management is taking steps to ensure that the Company will be
able to comply with all of its covenants under the Loan
Agreement in the future. However, if the bank declined to waive
a future covenant violation, the bank would be required under
the Loan Agreement to give the Company 15 days written notice of
the violation, after which time the Company would be in default.
At the bank's option, it could then declare the loan principal
and all accrued interest current and payable and/or refuse to
make additional advances on the credit line. The Company could
then be forced to seek alternative sources of financing.
At December 31, 1998 the Company had $914,000 of credit
available under the bank line of credit.
In October 1997, the Company's board of directors declared a
$.015 per common share semi-annual cash dividend, which was paid
December 9, 1997. No other dividends have been paid since
then. Future cash dividends will depend on earnings, financial
position, capital requirements, debt restrictions and other
relevant factors.
Results of Operations
Same-store sales were virtually unchanged, at $287,000 and
$288,000 for the quarters ended December 31, 1998 and 1997,
respectively. Total sales were down $1.9 million due to the
closing of nine restaurants in July and August 1998 under the
restructuring plan adopted in fiscal 1998. Average sales
increased 4.3%, to $287,000, due to the closing of lower volume
restaurants under the 1998 restructuring.
The Company plans to continue its emphasis on a focused
neighborhood marketing strategy using company-wide and
store-specific neighborhood marketing tactics based on detailed
market research and analysis, supported by intensive planning
and training. Neighborhood marketing will strengthen Pancho's
ties to each restaurant's immediate community with a portfolio
of specific tactics developed for each location. A series of
Company-wide tactics complement existing Company programs such
as the Birthday Club and School Rewards programs.
Customer discounts were 3.8% and 2.8% of sales for the quarters
ended December 31, 1998 and 1997, respectively. Discounting
tactics are used to increase customer frequency and attract new
customer trials.
The Company is committed to developing a revitalized restaurant
format offering a more profitable balance of sales and operating
margins. This revitalization program includes changing its menu
offerings and recipes, modifying menu pricing, improving
operating efficiency, reducing labor costs and updating its
restaurant design. A restaurant consulting firm has been
engaged to assist in this program.
The Company began testing some elements of its revitalization
program in December 1998 at one of the Company's Fort Worth
restaurants. It is too early to determine the results of this
initial development phase. During 1999, the Company plans to
expand and diversify its testing program to other restaurants.
The Company plans to finance this program with the cash flow
from operations and the proceeds from sales of land and
buildings of closed restaurant sites, after meeting its debt
reduction obligations.
Food cost rose 0.2% of sales in the quarter ended December 31,
1998 compared with the same quarter last year. The use of more
expensive dessert bar items and a price increase in
non-alcoholic beverages were partially-offset by lower costs for
meats and dry goods.
Restaurant labor and related expenses were down 1.3% of sales,
due to the benefit of the 1998 closings of lower volume
restaurants, lower bonus expense, and labor cost control
efforts. This improvement was achieved despite a 4% increase in
average hourly wage rates.
Restaurant operating expenses include occupancy costs,
utilities, maintenance expense, supplies, restaurant marketing
and other costs. These costs decreased 1.5% of sales for the
first quarter of 1999 versus the same period last year. Many of
these costs do not vary directly with sales volume, so closing
lower sales restaurants helped lower this expense as a
percentage of sales. Most significantly, utilities, occupancy
costs, non-food supplies and maintenance expenses declined as a
percentage of sales due to this relationship. Restaurant
marketing and promotion expenses were 0.5% of sales less than
the prior year quarter, primarily due to reductions in marketing
research and consulting costs.
Due to the fiscal 1998 impairment of fixed assets and the
closure of nine restaurants, depreciation and amortization
decreased $279,000 for the quarter ended December 31, 1998
compared to the prior year quarter.
For the quarter, general and administrative expenses increased
0.8% of sales due to lower total sales, despite lower spending
of $40,000.
Debt reductions facilitated by property sales reduced interest
expense to $17,000 for the first quarter of fiscal 1999 compared
to $49,000 for the same period last year.
In the quarter ended June 30,1998, the Company increased its
valuation allowance for deferred tax assets to offset all of its
net deferred tax assets. This was considered necessary due to
the Company's net losses for that quarter and the previous three
years.
The net deferred tax assets were reduced by $41,000 in the
quarter ended December 31, 1998 due to the recognition of net
earnings for the quarter. The valuation allowance was reduced
by the same amount to match the net deferred tax asset balance.
Accordingly, the Company recognized no net tax expense or
benefit in the quarter ended December 31, 1998. At December 31,
1998, the valuation allowance offset the full amount of net
deferred tax assets.
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 in the future,
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 2013, and state NOL carryforwards which
expire in years 1999 through 2013.
Stable sales and margin improvements due to the 1998 closing of
lower volume restaurants and the reduction of depreciation due
to fixed asset impairments helped the Company earn $114,000 in
the first quarter of fiscal 1999, compared with a net loss of
$298,000 for the same quarter last year. Operating income was
$7,000 compared with an operating loss of $472,000 for the
quarters ended December 31, 1998 and 1997, respectively. First
quarter asset sales boosted other income by $110,000 and $74,000
in 1999 and 1998, respectively. The Company's future
profitability depends on increasing restaurant revenues and
reducing the key cost factors, particularly labor costs.
Market Listing of the Company's Common Stock
On February 11, 1999, Nasdaq will review the Company's written
appeal of the de-listing of its common stock from the Nasdaq
National Market. The de-listing action was undertaken by Nasdaq
due to the failure of the Company's common stock to meet Nasdaq
standards for minimum share price and minimum market value of
public float. The Company has taken some steps to resolve these
issues, but at January 22, 1999, the market value of public
float was still below the Nasdaq standard for continued listing
of $5 million. There can be no assurance that the Company's
common stock will not be de-listed from the Nasdaq National
Market after Nasdaq's review of the Company's appeal.
In the event that its stock is de-listed from the National
Market, the Company is pursuing admission to the Nasdaq SmallCap
Market. Although the Company believes that it satisfies all the
standards for moving from the National to the SmallCap Market,
there can be no assurance that Nasdaq will admit it to the
SmallCap Market if it is de-listed from the National Market.
The SmallCap Market requires a minimum public float of $1
million and a minimum share price of $1. On January 22, 1999,
the Company's common stock market value of public float was well
over $1 million and its closing share price was $1.125. The
price per share has fluctuated above and below $1 during the
quarter ended December 31, 1998.
To address the minimum share price standard, the Company's Board
of Directors authorized a one-for-three reverse stock split
which was approved by shareholders' at the Company's annual
shareholders meeting on January 27, 1999. It is anticipated
that the reverse split will help maintain a price per common
share over $1. The actual price will be determined by the
market, and there can be no assurances that the Company's common
stock will meet the standards for continued listing on either
the Nasdaq National or SmallCap Markets.
Impact of Year 2000
Some computer hardware and software use only two digits to
identify the year in date information. If not corrected, such
systems could fail when processing dates for the year 2000 or
later. The Company is in the process of evaluating its risk and
the related costs of updating its computer systems to properly
process year 2000 and later dates.
The Company has identified all significant hardware and
applications that it believes will require modification to
provide Year 2000 processing compliance. Internal and external
resources are being used to make the required modifications and
test Year 2000 processing. The key Company systems for which
Year 2000 problems might pose a significant risk are the
Company's restaurant point-of-sale (POS) register systems and
the Company's corporate accounting system. The Company plans to
complete the testing process of all significant applications by
September 30, 1999. If some of these systems are not Year 2000
capable by September 30, 1999, there are a number of alternate
systems available which have been designed to be Year 2000
capable.
In addition, the Company has communicated with others with whom
it does significant business to determine their Year 2000
readiness and the extent to which the Company may be vulnerable
to third-party Year 2000 problems. However, there can be no
guarantee that the systems of other companies will be converted
timely, or that a failure to convert by another company will not
have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 compliance
activities has not been and is not expected to be material to
its financial position or results of operations. These costs
and the date on which the Company plans to complete the Year
2000 modifications and testing are based on management's best
estimates, which were derived using numerous assumptions about
future events, including the continued availability of certain
resources, third-party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved, and actual results could differ from those plans.
Other Uncertainties and Trends
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
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 format or concept changes, plans
to sell assets, ability to service debt and satisfy loan
covenants, unit growth, capital expenditures, future borrowings,
future cash flows and future results of operations. The Company
warns that many factors could, individually or in aggregate,
cause actual results to differ materially from those included in
the forward-looking statements, including, without limitation,
the following: consumer spending trends and habits; increased
competition in the restaurant industry; weather conditions; and
laws and regulations affecting labor and employee benefit costs.
The Company does not expect to update such forward-looking
statements continually as conditions change, and readers should
consider that such statements pertain only to the date hereof.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number
2 Not applicable
4 Not applicable
10 Not applicable
11 Not required--explanation of net earnings (loss) per
share computation is contained in notes to consolidated
condensed financial statements.
15 Letter re: unaudited interim financial
information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PANCHO'S MEXICAN BUFFET, INC.
January 28, 1999 /s/ Hollis Taylor
Hollis Taylor, President and Chief Executive
Officer (Principal Executive Officer)
January 28, 1999 /s/ W. Brad Fagan
Brad Fagan, Vice President, Treasurer, Chief
Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT 15
Pancho's Mexican Buffet, Inc.:
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim financial information of Pancho's Mexican
Buffet, Inc. and subsidiaries for the three-month periods ended
December 31, 1998 and 1997, as indicated in our report dated
January 22, 1999; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, is incorporated by reference in
Registration Statements No. 2-86238 and No. 33-60178 as amended,
and No. 333-48295 on Form S-8.
We are also aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered
a part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Fort Worth, Texas
January 22, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheets as of December 31, 1998 and the
consolidated condensed statements of operations for the three-months then ended
and is qualified in its entirety by reference to such consolidated condensed
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 671,000
<SECURITIES> 0
<RECEIVABLES> 181,000
<ALLOWANCES> 0
<INVENTORY> 454,000
<CURRENT-ASSETS> 1,581,000
<PP&E> 48,858,000
<DEPRECIATION> (33,049,000)
<TOTAL-ASSETS> 19,124,000
<CURRENT-LIABILITIES> 5,616,000
<BONDS> 0
0
0
<COMMON> 442,000
<OTHER-SE> 9,406,000
<TOTAL-LIABILITY-AND-EQUITY> 19,124,000
<SALES> 13,767,000
<TOTAL-REVENUES> 13,767,000
<CGS> 3,680,000
<TOTAL-COSTS> 12,564,000
<OTHER-EXPENSES> 1,196,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,000
<INCOME-PRETAX> 114,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 114,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
