<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
________ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
________ 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 July 20, 2000: 1,469,955.
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements:
Introduction 1
Consolidated Condensed Balance Sheets,
June 30, 2000 and September 30,1999 2
Consolidated Condensed Statements of Operations
for the Three Months and Nine Months Ended
June 30, 2000 and 1999 3
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended June 30, 2000 and 1999 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(no response required)
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 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated condensed financial statements included herein have
been prepared by the Company without audit as of June 30, 2000 and for the
three-month and nine-month periods ended June 30, 2000 and 1999 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 accounting principles generally accepted
in the United States of America 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,
1999. 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 June 30,
2000 and the results of operations and cash flows for the indicated periods have
been included. The results of operations for such interim period is not
necessarily indicative of the results to be expected for the fiscal year ending
September 30, 2000.
Deloitte & Touche LLP, independent public accountants, has made a
limited review of the consolidated condensed financial statements as of June 30,
2000 and for the three-month and nine-month periods ended June 30, 2000 and 1999
included herein.
Page 1
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 September 30,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,299,000 $ 1,242,000
Accounts and notes receivable, current portion 137,000 208,000
Inventories 487,000 469,000
Prepaid expenses 197,000 242,000
------------ ------------
Total current assets 2,120,000 2,161,000
------------ ------------
Property, plant and equipment:
Land 1,654,000 1,868,000
Buildings 6,625,000 6,900,000
Leasehold improvements 17,754,000 17,268,000
Equipment and furniture 21,526,000 21,469,000
Construction in progress 0 429,000
------------ ------------
Total 47,559,000 47,934,000
Less accumulated depreciation and amortization (32,161,000) (32,392,000)
------------ ------------
Property, plant and equipment - net 15,398,000 15,542,000
------------ ------------
Other assets:
Land and buildings held for sale 309,000 309,000
Other, including noncurrent portion of receivables 299,000 400,000
------------ ------------
Total other assets 608,000 709,000
------------ ------------
Total assets $ 18,126,000 $ 18,412,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 916,000 $ 701,000
Debt classified as current 117,000 139,000
Accrued wages and bonuses 1,571,000 1,734,000
Accrued insurance costs, current 315,000 1,087,000
Other current liabilities 1,883,000 1,331,000
------------ ------------
Total current liabilities 4,802,000 4,992,000
------------ ------------
Other liabilities:
Long-term debt 134,000 222,000
Accrued insurance costs, non-current 637,000 1,149,000
Restructuring reserves, non-current 315,000 346,000
------------ ------------
Total other liabilities 1,086,000 1,717,000
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock
Common stock 149,000 149,000
Additional paid-in capital 19,013,000 18,988,000
Retained earnings (accumulated deficit) (6,757,000) (7,197,000)
Treasury stock at cost (69,000) (68,000)
Stock notes receivable (98,000) (169,000)
------------ ------------
Stockholders' equity 12,238,000 11,703,000
------------ ------------
Total liabilities and stockholders' equity $ 18,126,000 $ 18,412,000
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
Page 2
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 14,366,000 $ 14,727,000 $ 41,828,000 $ 42,844,000
------------ ------------ ------------ ------------
Costs and Expenses:
Food costs 3,828,000 3,877,000 11,135,000 11,358,000
Restaurant labor and related expenses 5,703,000 5,425,000 16,004,000 16,059,000
Restaurant operating expenses 3,140,000 2,719,000 9,202,000 8,753,000
Depreciation and amortization 484,000 494,000 1,474,000 1,479,000
General and administrative expenses 1,261,000 1,266,000 3,576,000 3,818,000
Preopening costs 11,000 54,000
------------ ------------ ------------ ------------
Total 14,427,000 13,781,000 41,445,000 41,467,000
------------ ------------ ------------ ------------
Operating Income (Loss) (61,000) 946,000 383,000 1,377,000
Interest Expense (17,000) (22,000)
Other, including interest income 38,000 138,000 74,000 393,000
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (23,000) 1,084,000 440,000 1,748,000
Benefit for income taxes (12,000)
------------ ------------ ------------ ------------
Net earnings (loss) $ (23,000) $ 1,084,000 $ 440,000 $ 1,760,000
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (0.02) $ 0.74 $ 0.30 $ 1.21
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
Page 3
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 440,000 $ 1,760,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,474,000 1,479,000
Adjustment of insurance reserves (1,020,000) (1,039,000)
Gain on sale of assets (43,000) (359,000)
Stock compensation to outside directors 25,000 35,000
Other 2,000
Changes in operating assets and liabilities:
Accounts and notes receivable 72,000 9,000
Inventories, prepaid expenses and other assets 38,000 157,000
Accounts payable and accrued expenses 411,000 493,000
Restructuring reserves (31,000) (421,000)
----------- -----------
Net cash provided by operating activities 1,368,000 2,114,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,781,000) (777,000)
Proceeds from sale of assets 512,000 2,072,000
----------- -----------
Net cash provided (used) by investing activities (1,269,000) 1,295,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (22,000) (342,000)
Long-term borrowings 6,650,000
Repayments of long-term borrowings (88,000) (8,161,000)
Treasury stock aquired (3,000)
Payments on officer stock notes receivable 71,000 56,000
----------- -----------
Net cash used by financing activities (42,000) (1,797,000)
----------- -----------
Net increase in cash and cash equivalents 57,000 1,612,000
Cash and cash equivalents, beginning of period 1,242,000 546,000
----------- -----------
Cash and cash equivalents, end of period $ 1,299,000 $ 2,158,000
=========== ===========
SUPPLEMENTAL INFORMATION:
Income tax refunds received $ 12,000
Interest paid, net of capitalized amounts $ 17,000 $ 37,000
See notes to consolidated condensed financial statements.
</TABLE>
Page 4
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. NET EARNINGS PER SHARE
The company reports earnings per share (EPS) 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.
All per share amounts have been adjusted for the effect of the
one-for-three reverse stock split of the company's common stock,
effective January 27, 1999.
The basic weighted average shares outstanding were 1,467,000 and
1,463,000 for the three months ended June 30, 2000 and 1999,
respectively. Due to the net loss for the quarter ended June 30, 2000,
the potential common shares were antidilutive and excluded from the
loss per share calculation. The average price of the company's stock
for the quarter ended June 30, 1999 was below the exercise price of all
outstanding options, therefore all potential common shares were
antidilutive.
Basic weighted average shares outstanding were 1,465,000 and 1,458,000
for the nine months ended June 30, 2000 and 1999, respectively. Fully
diluted weighted average shares were 1,466,000 for the nine months
ended June 30, 2000. For the nine months ended June 30, 1999,
outstanding options had no dilutive effect because the average market
price was less than the option exercise price. At June 30, 2000, there
were 177,284 options outstanding which represented potential common
shares which could be dilutive in the future.
2. INCOME TAXES
Deferred tax assets net of deferred tax liabilities increased $1,000 in
the nine months ended June 30, 2000, to $7.4 million. The increase was
due mainly to the reduction of insurance reserves netted against
unearned revenues. The valuation allowance was increased by the same
amount to match the net deferred tax asset balance. Accordingly, the
company recognized no net tax benefit in the nine months ended June 30,
2000.
Page 5
<PAGE>
Despite the valuation allowance, the deferred tax assets are still
available to the company for future use. If the company realizes
profitability, it 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) carry
forwards which expire in years 2009 through 2020, and state NOL carry
forwards which expire in years 2000 through 2015.
3. RESTRUCTURING RESERVES
At June 30, 2000, a total of $482,000 in restructuring reserves was
included on the company's balance sheet, split between other current
liabilities and restructuring reserves, noncurrent. The company reduced
its total restructuring reserves by $31,000 paid on restructuring costs
during the nine months ended June 30, 2000.
4. INSURANCE RESERVES
At June 30, 2000, a total of $952,000 in insurance reserves was
included on the company's balance sheet, split between current and
noncurrent liabilities. These are reserves for estimated losses on
claims originating in prior years on the company's retrospective
insurance plans for workers' compensation and general liability, and on
the self-insured Voluntary Employee Injury Benefits (VEIB) Plan.
The company has replaced its retrospective policies and self-insured
insurance plans with guaranteed premium policies. The company obtained
guaranteed policies for workers' compensation and general liability
beginning in calendar year 1998. The company replaced its VEIB Plan
with its guaranteed workers' compensation policy effective for calendar
year 2000. Therefore, the company is no longer accruing for estimated
self-insurance and retrospective insurance losses.
Periodically, as claims are identified and resolved, the company
reassesses its insurance loss reserves. In the quarter and nine months
ended June 30, 2000, the company reduced its reserves by $0 and
$1,020,000, respectively. In the quarter and nine months ended June 30,
1999, the company reduced its insurance reserves by $790,000 and
$1,039,000, respectively. These reductions were based on updated
liability estimates derived from additional information available in
the periods involved, including the resolution of significant claims
and a general improvement in claims experience.
Page 6
<PAGE>
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 is effective for the company's financial
statements no later than the first quarter of fiscal year 2001 and
requires the company to recognize revenue only when it is realized or
realizable and earned. Management has not completed evaluating the
impact of the adoption of SAB 101 on the company's financial position,
results of operations, or cash flows.
Page 7
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Pancho's Mexican Buffet, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Pancho's Mexican Buffet, Inc. and subsidiaries as of June 30, 2000 and the
related condensed consolidated statements of operations for the three-month and
nine-month periods ended June 30, 2000 and 1999 and the consolidated condensed
statements of cash flows for the nine-month periods ended June 30, 2000 and
1999. 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 auditing standards generally accepted in the United States of
America, 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 condensed consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet of Pancho's
Mexican Buffet, Inc. and subsidiaries as of September 30, 1999, 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 12,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of September 30, 1999 is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 25, 2000
Page 8
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
As of June 30, 2000, the company's current ratio was 0.4 to 1, resulting in no
change from September 30, 1999. Like many restaurant chains, the company
maintains a current ratio well below 1. Most of its current liabilities,
primarily accounts payable, accrued payroll and accrued insurance costs, flow
through operations and roll over rather than being reduced to zero in subsequent
periods. Cash flow from operations provided $1,368,000 and $2,114,000 in the
nine months ended June 30, 2000 and 1999, respectively.
The company invested $1,781,000 in property additions in the nine months ended
June 30, 2000, mainly to complete the remodel of the Mesquite location and to
remodel the Long Point and Uvalde locations. The company realized $512,000 in
cash proceeds from the sale of assets in the same period, mainly for the sale of
a warehouse and land adjacent to its corporate headquarters. In the nine months
ended June 30, 1999, the company invested $777,000 in property additions and
realized $2,072,000 from the sale of land, buildings and other property from
previously closed restaurants.
Capital spending in fiscal 2000 is expected to be between $2 million and $3
million, as the company continues its reimaging campaign. The company plans to
pay for property additions this year with cash flow from operations and proceeds
from the sale of land and buildings held for sale. To increase customer counts
and total sales, the company is pursuing a reimaging strategy that includes the
development of a new appearance and atmosphere for its restaurants. In September
1999, the company began a complete remodel of its Mesquite, Texas restaurant.
That unit reopened under the banner Pancho's Buffet & Grill/(TM)/ in December
1999 and has generated significant sales increases and positive customer
response. The company plans to spend approximately $400,000 to remodel one more
restaurant with the same style this calendar year.
In February 2000, the company announced plans to develop a Pancho's Express
Buffet format offering customers a convenient all-you-can-eat buffet at a lower
price point than the traditional Pancho's Mexican Buffet/(R)/. Subsequently, the
name was changed to Panchito's $4.99 Buffet/(TM)/.
Page 9
<PAGE>
In May 2000, the company remodeled and opened its first Panchito's $4.99
Buffet/(TM)/ at its location on Long Point Road in Houston, Texas. In June 2000,
the second Panchito's $4.99 Buffet/(TM)/ was remodeled and opened at the
location on Uvalde in Houston, Texas. Depending on available cash flow, the
company plans to convert one additional restaurant to the Panchito's $4.99
Buffet/(TM)/ concept before the calendar year end.
No new restaurants were opened in the first nine months of 2000 or fiscal year
1999, and none are currently planned, as management intends to remodel existing
restaurants to develop and expand its new Pancho's Buffet & Grill/(TM)/ and
Panchito's $4.99 Buffet/(TM)/ formats. Other capital spending will include
normal operating replacements and upgrades.
Financing activities used $110,000 to repay debt in the nine months ended June
30, 2000, versus $1,853,000 in the same period last year. Debt payments
decreased in fiscal 2000 because the company paid off its bank debt in February
1999. The company continues to make payments on notes issued in prior years to
buy out leases on closed restaurant sites.
The company does not currently have a line of credit to finance working capital
needs. Although the company expects cash flow from operations to be sufficient
to fund its anticipated operating needs in fiscal 2000, management may pursue
some form of working capital credit in the future.
The company reduced its accrued insurance reserves by $1,020,000 and $1,039,000
in the nine months ended June 30, 2000 and 1999, respectively. These reductions
were based on updated liability estimates derived from additional information
available in the periods involved, including the resolution of significant
claims and a general improvement in claims experience. Effective for calendar
year 2000, the company is no longer self-insured, and is therefore no longer
accruing additional insurance loss reserves.
No dividends have been paid since December 1997. The determination to pay cash
dividends in the future will depend on earnings, financial position, capital
requirements and other relevant factors.
Results of Operations
Total sales were down $361,000 and $1,016,000 for the quarter and nine months
ended June 30, 2000 compared to the same periods last year. Same store sales
decreased 1.9% and 2.6% for the quarter and nine months versus the prior year
periods. Average sales per unit were $304,000 and $874,000 for the quarter and
nine months ended June 30, 2000, respectively, compared with $306,000 and
$891,000 for
Page 10
<PAGE>
the prior year periods.
The company implemented a price increase of about 4.5% in the quarter ended
December 31, 1999. This increase was rolled out to restaurants market by market
during that quarter, so its effect during the nine months ended June 30, 2000 is
estimated at about 4.0%.
In 1999, the company initiated a reimaging project to revitalize the Pancho's
concept and improve sales trends. The reimaging initiative addresses changes in
restaurant design, recipes, food offerings and cooking and service procedures.
This reimaging includes the Mesquite location remodel under the Pancho's Buffet
& Grill/(TM)/ banner and the streamlined Panchito's $4.99 Buffet/(TM)/.
The Mesquite remodel features an exciting new design with rich, bold colors,
softer lighting and a high-energy atmosphere. The Mesquite restaurant reopened
as Pancho's Buffet & Grill/(TM)/ in December 1999, and has maintained strong
early sales gains and customer response. Management plans to remodel one more
existing restaurant this year based on the Mesquite prototype.
The company is also continuing to develop its Panchito's $4.99 Buffet/(TM)/
format offering customers a convenient all-you-can-eat buffet for only $4.99 per
person. Two locations in Houston reopened during the quarter ended June 30, 2000
in the new Panchito's $4.99 Buffet/(TM)/ format. This format is designed to
reinvigorate certain smaller or lower sales units. The company currently plans
to remodel one more existing unit to the express format in 2000.
The company has thus developed a strategy to boost sales and improve margins by
remodeling some units with the Pancho's Buffet & Grill/(TM)/ prototype and by
developing its Panchito's $4.99 Buffet/(TM)/ format in other locations. As it
rolls out these two divergent formats, the company will evaluate their return on
investment potential for remodeling other Pancho's locations.
Management views these two alternative formats as brand extensions of its
existing Pancho's Mexican Buffet/(R)/ restaurants. It will continue to operate
and promote its traditional Pancho's Mexican Buffet/(R)/ units as it develops
the potential for these brand extensions.
The company continues to emphasize a neighborhood marketing strategy to
strengthen Pancho's ties to each restaurant's community. A portfolio of specific
tactics is developed for each location and complemented by company programs such
as the Birthday Club and School Rewards programs and Seniors Club.
Food costs rose 0.3% and 0.1% of sales for the quarter and nine months ended
June
Page 11
<PAGE>
30, 2000 compared with the same periods last year.
Due to settlement of claims for substantially less than reserved, the company
reduced its reserves for workers' injury insurance by $0 and $809,000 in the
quarter and nine months ended June 30, 2000. The company also reduced these
reserves by $326,000 and $525,000 in the quarter and nine months ended June 30,
1999. After eliminating the benefit of these adjustments, labor costs rose 0.6%
and 1.2% of sales for the quarter and nine months ended June 30, 2000. Wage rate
inflation and the effect of lower sales were the main reasons for this cost
increase.
Restaurant operating expenses include occupancy costs, utilities, liability
insurance, maintenance expense, supplies, restaurant marketing and other costs.
Due to the settlement of claims for substantially less than reserved, liability
insurance reserves were reduced by $0 and $211,000 for the quarter and nine
months ended June 30, 2000, and by $464,000 and $514,000 in the quarter and nine
months ended June 30, 1999. After eliminating these adjustments, restaurant
operating costs rose 0.3% and 0.9% of sales for the quarter and nine months
ended June 30, 2000 versus the same period last year.
Restaurant marketing and promotion expenses decreased 0.1% and increased 0.4% of
sales as compared to the 1999 quarter and nine months, respectively. Supply
costs were also up for the nine months, mainly due to the purchase of new
uniforms and small wares for the roll out of new recipes and salsa bars during
the second quarter. Many other operating costs, notably utilities, maintenance
and occupancy costs, do not vary directly with sales volume, so lower sales
exerts upward pressure on the cost-to-sales ratio.
The company's Mesquite restaurant was closed from September through November
1999 for a complete reimaging remodel and was reopened in December 1999 under
the new name Pancho's Buffet & Grill/(TM)/. Preopening costs of $43,000 for this
unit were recorded in the first quarter of fiscal 2000, and no preopening costs
were recorded in the prior year because no new or rebranded units were opened in
the prior period. Preopening costs include labor related costs prior to opening,
including recruiting expenses, food costs for preopening testing and training.
The company closed two locations during the quarter ended June 30, 2000 for
remodeling to the Panchito's $4.99 Buffet/(TM)/. Preopening costs for the two
locations were $11,000. Total preopening costs for the nine months ended June
30, 2000 total $54,000.
Other, including interest income includes gains of $32,000 and $43,000 on the
sale of assets in the quarter and nine months ended June 30, 2000, versus
$122,000 and $359,000 for the same periods last year.
Page 12
<PAGE>
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.
Deferred tax assets net of deferred tax liabilities increased $1,000 in the nine
months ended June 30, 2000, to $7.4 million, due mainly to the reduction in
insurance reserves netted against unearned revenues. The valuation allowance was
increased by the same amount to match the net deferred tax asset balance.
Accordingly, the company recognized no net tax benefit in the nine months ended
June 30, 2000.
Unearned revenues were recorded during the first quarter for prepaid rebates.
The balance of unearned income at June 30, 2000 was $404,000.
Despite the valuation allowance, the deferred tax assets are still available to
the company for future use. If the company realizes profitability, it 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) carry forwards which expire in years 2009 through 2020, and state NOL
carry forwards which expire in years 2000 through 2015.
For the reasons detailed above, the company had a net loss of $23,000 and net
earnings of $440,000 for the quarter and nine months ended June 30, 2000,
respectively, compared with earnings of $1,084,000 and $1,760,000 for the same
periods last year. The company's future profitability depends on increasing
restaurant revenues and reducing the key cost factors, particularly labor costs.
Management plans to address these issues through its marketing programs,
reorganization of operations management, and the continuation of the company's
remodeling and brand extension programs.
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.
Page 13
<PAGE>
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, remodeling plans, plans to sell assets, unit growth, capital
expenditures, future borrowings, future cash flows, claims, payments and
adjustments related to the company's insurance reserves, and future results of
operations. The company warns that many factors could, individually or in
aggregate, cause actual results to differ materially from those included in the
forward-looking statements, including, without limitation, the following: the
effects of changes in the company's restaurant format or concept; consumer
spending trends and habits; increased competition in the restaurant industry;
weather conditions; the results of claims on the company's insurance reserves;
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 14
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Events
On May 18, 2000, Rena Simmons-Graver was appointed Vice President of Marketing.
In this newly created position, she will be responsible for marketing,
advertising and public relations for the company.
On May 23, 2000, Julie Anderson was appointed Vice President - Controller. Ms.
Anderson was previously the company's accounting manager. Hollis Taylor assumed
the duties of treasurer.
On July 31, 2000, Joanne Keates was appointed to the company's Board of
Directors, increasing the number of directors to nine members. Ms. Keates will
serve in the class of directors whose term expires at the annual meeting of
stockholders to be held in 2002. Since 1996, Ms. Keates has served as Director -
Investor Relations for Los Angeles-based MSC Software Corporation.
Page 15
<PAGE>
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 June 30,
2000.
Page 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANCHO'S MEXICAN BUFFET, INC.
August 11, 2000 /s/ Hollis Taylor
-----------------------------------
Hollis Taylor, President and Chief
Executive Officer (Principal
Executive Officer) and Treasurer
(Principal Financial Officer)
August 11, 2000 /s/ Julie Anderson
-----------------------------------
Julie Anderson, Vice President,
Controller and Assistant Treasurer
(Principal Accounting Officer)
Page 17
