<PAGE>
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, 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. 0-04678
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)
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 [ X ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant on November 27, 2000, based on the actual stock price on such date
was $4,003,918.
Number of shares of Common Stock outstanding as of November 27,
2000:...............................................................1,474,017.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
Item 1. Business
GENERAL
The Company, Pancho's Mexican Buffet, Inc., and subsidiaries, is principally
engaged in the operation and development of the Pancho's Mexican Buffet/(R)/
restaurant chain, serving Mexican food cafeteria style. However, Pancho's is
more than a cafeteria because it features all-you-can-eat meals 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 seated. 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
Starting in fiscal year 1999, the Company 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 was to improve food offerings, service systems and physical facilities
to achieve increased customer count.
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 Company's new, nine-variety salsa bar is designed to
satisfy the widest variety of customer tastes. The new-look bar lists each
salsa's fresh ingredients and includes "salsa meters" indicating the range of
heat levels from mild to hot. Flavors include: Chili Pequin Salsa, Salsa Verde,
Chimayo Red Chili, Pico de Gallo, Fresh Tomato, Fiery Chipotle, Fire Roasted
Vegetable, Salsa Bravo, and Pancho's Original Salsa.
Coinciding with the new and improved food offerings, the Company developed a
new look and atmosphere for its restaurants providing customers with a high-
energy and exciting dining environment. The new look includes updated and
brighter color schemes, contemporary furniture and fixtures, and fiesta-style
plates, tablecloths and decor, all providing a fun fiesta atmosphere to the
restaurants. The Company invested $1.5 million over the past year and a half to
develop the new concept. The Company remodeled three stores as prototypes to
test the new look: one in Mesquite, Texas and two in Houston, Texas.
The Mesquite, Texas location was closed for remodeling in August 1999 and
reopened in December 1999 as "Pancho's Buffet & Grill(TM)". The restaurant has
generated significant sales increases and positive customer response. The
Mesquite remodel features an exciting new design with rich, bold colors, softer
lighting and a high-energy atmosphere.
The Company remodeled two stores in Houston, Texas under a slightly modified
concept using the name "Panchito's $4.99 Buffet(TM)". The idea was to offer
customers the same high quality buffet style
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format utilizing a more limited and lower priced menu. The goal was to achieve
operating efficiencies while developing a brand extension for smaller markets.
Results were not persuasive enough to continue the concept, and the stores will
be converted to the new Pancho's Mexican Buffet(R) (with new recipes and
menu). Management believes that the "Panchito's" concept would be a viable
concept in new markets or small markets where potential customers have not
previously experienced the wider food variety of the Pancho's Mexican Buffet(R)
core concept.
With the successful results of the Pancho's Buffet & Grill(TM) in Mesquite,
Texas, the Company plans to roll out the reimaging plan throughout the Company
under the banners Pancho's Buffet & Grill(TM)and Pancho's Mexican Buffet(R).
In connection with the reimaging plan, the Company has retained the services
of an investment banking firm to explore strategic financial alternatives for
the Company to enhance future growth and maximize shareholder value.
Management intends to focus on the reimaging plan for the Company's existing
restaurants to improve sales and profitability. The Company has developed
various levels of remodels to achieve the new look at costs that range from
$70,000 to $300,000 depending upon the location, estimated sales potential, and
current condition. Management currently has no plans for new restaurants until
the reimaging project is completed. Long term, the Company's strategy includes
expanding within the Company's existing five-state market, and possibly other
contiguous states. The Company has no plans for franchising; however, one
Pancho's is currently being operated under a license agreement.
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.
The Company continues to build brand awareness and customer loyalty while
extending its leadership position in the casual and family dining and Mexican
buffet segments. The Company is focused on improving unit economics and offering
a wide variety of high quality menu items.
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 people. New restaurants, and higher volume restaurants in which seating
capacity has been expanded, average approximately 9,000 square feet and seat 240
to 300 people.
A typical new restaurant in a strip shopping center costs about $900,000 to
$1,000,000 to develop, including equipment and leasehold improvements.
Freestanding 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.
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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 11.1% of sales for
the year ended September 30, 2000. 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, 2000.
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 restaurant 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. These supervisors 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 a free meal 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. Newspaper
inserts, direct mail and billboard advertisements augment the neighborhood
marketing.
The Company uses customer and employee surveys and data gathered from point of
sale systems 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 gives the Company the ability to develop new
markets without capital investments to expand an internal distribution system.
The SYGMA Network is a subsidiary of SYSCO Corporation, one of the nation's
largest food service and distribution organizations.
The 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.
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Seasonality
The Company's business is seasonal. Sales are typically higher in summer
months and other periods when students are not in school.
Trademarks
The Company currently holds or has pending the following trademarks:
Pancho's Mexican Buffet(R)
Pancho's Buffet & Grill(TM)
Panchito's Buffet(TM)
the Panchito character
Spanish Galleon(TM)
The Company considers the Pancho's name to be very valuable to its operations
as much of its customer loyalty has been dependent on brand recognition over the
years. Trademarks are good for a duration of 10 years, and are renewable upon
expiration.
Human Resources
On September 30, 2000, the Company employed approximately 2,001 employees, of
whom 56 were corporate personnel, 1,931 were employed in the restaurants and 14
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(R) 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
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
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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.
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. In fiscal 2000, the Company sold
land and a warehouse that adjoined the general office/warehouse property.
The Company owns the sites of seven operating restaurants. The Company is
seeking to sell one closed restaurant site, including building and land, which
it owns in Amarillo, Texas.
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, 2000, the Company had remaining lease obligations on one
closed restaurant location with the lease expiring in 2007. The location is
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 and office space.
Substantially all of the equipment and furniture used in the operation of the
restaurants and the headquarters facility are owned by the Company.
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The cities and towns where the Company's restaurants are located are listed
below:
<TABLE>
<S> <C> <C>
Arizona: Texas: Humble
Mesa Abilene Irving
Phoenix Arlington-3 Killeen
Baytown League City
Louisiana: Beaumont Lewisville
Baton Rouge Burleson Longview
Bossier City Carrollton Mesquite
Lafayette Conroe North Richland Hills
Metairie Corpus Christi* Plano
Dallas-3 Richardson
New Mexico: Denton San Antonio
Albuquerque El Paso** Sherman
Euless Texarkana
Oklahoma: Fort Worth-3 Tyler
Oklahoma City Garland Waco
Tulsa Houston-6
</TABLE>
____________
* 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 48
Chief Operations Office -- also
Director and officer of
subsidiary companies
Hollis Taylor......... Director and President, Chief Since August 10, 1979 64
Executive Officer and
Treasurer -- also
Director and officer of
subsidiary companies
Samuel L. Carlson..... Director and Senior Vice Since December 21, 1988 64
President, Administration and
Secretary -- also Director and
officer of subsidiary companies
Julie Anderson........ Vice President, Controller and Since May 26, 2000 31
Assistant Treasurer
</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. He was appointed Treasurer May 2000.
Samuel L. Carlson has been a Director since November 1993. He has been Senior
Vice President, Administration and Secretary since December 1988.
On May 26, 2000, Julie Anderson was appointed Vice President, Controller, and
Assistant Treasurer. She was previously the Company's accounting manager.
Prior to joining the Company in 1999, Ms. Anderson, CPA, was the controller for
Dealers Auto Auction (a Manheim Auction) based in Dallas, Texas. From 1993-1998
she was an accountant with Craig Hamilton & Company, P.C. and Arthur Andersen,
LLP, public accounting firms. She received her BBA in Accounting from the
University of Texas at Arlington.
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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 27, 2000, the number of
record holders was about 575, and the Company estimates that on that date there
were an additional 800 beneficial owners. The following table sets forth the
quarterly high and low bid prices of the common stock, as reported by Nasdaq,
for the calendar quarters indicated. 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
-------------------- ----- -----
<S> <C> <C>
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
December 31, 1999............. 3.500 2.375
March 31, 2000................ 4.500 2.750
June 30, 2000................. 4.000 3.063
September 30, 2000............ 3.938 3.375
</TABLE>
Common Stock Dividends
The Company paid no cash dividends in 2000 or 1999. 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, 1996 through 2000 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>
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Sales $ 55,963 $ 57,403 $ 64,146 $ 66,957 $ 71,487
-------- -------- -------- -------- --------
Costs and Expenses:
Food costs 14,788 15,214 17,413 18,792 19,681
Restaurant labor and related expenses 21,781 21,839 25,606 25,235 26,561
Restaurant operating expenses 12,516 11,913 14,904 15,799 16,508
Depreciation and amortization 1,959 1,958 2,808 3,426 3,949
General and administrative expenses 4,695 4,999 5,013 5,160 5,067
Asset impairment and restructuring
charges (a) (c) 6,601 5,066
Preopening costs 54
-------- -------- -------- -------- --------
Total 55,793 55,923 72,345 73,478 71,766
-------- -------- -------- -------- --------
Operating Income (Loss) 170 1,480 (8,199) (6,521) (279)
Interest Expense (17) (22) (212) (348) (540)
Other, including interest income 96 418 198 303 269
-------- -------- -------- -------- --------
Earnings (loss) before income taxes 249 1,876 (8,213) (6,566) (550)
-------- -------- -------- -------- --------
Income tax expense (benefit) (b) (12) 4,305 (1,850) (135)
-------- -------- -------- -------- --------
Net earnings (loss) $ 249 $ 1,888 $(12,518) $ (4,716) $ (415)
======== ======== ======== ======== ========
Cash dividends $ - $ - $ 66 $ 132 $ 132
======== ======== ======== ======== ========
Per Share Data:
Net earnings (loss), basic and diluted $ 0.17 $ 1.29 $ (8.54) $ (3.21) $ (0.27)
Cash dividends $ - $ - $ 0.045 $ 0.090 $ 0.090
At Year End:
Total assets $ 17,364 $ 18,412 $ 20,418 $ 32,858 $ 37,968
Long-term debt $ 112 $ 222 $ 1,761 $ 2,287 $ 3,489
Stockholders' equity $ 12,047 $ 11,703 $ 9,724 $ 22,269 $ 26,521
Number of restaurants 48 48 48 57 65
</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.
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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,
-----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
------------- ------------- -------------
Costs and Expenses:
Food costs 26.4% 26.5% 27.1%
Restaurant labor and related expenses 38.9% 38.0% 39.9%
Restaurant operating expenses 22.4% 20.8% 23.2%
Depreciation and amortization 3.5% 3.4% 4.4%
General and administrative expenses 8.4% 8.7% 7.8%
Asset impairment and restructuring
charges (a) (c) 10.3%
Preopening costs 0.1%
------------- ------------- -------------
Total 99.7% 97.4% 112.7%
Operating Income (Loss) 0.3% 2.6% (12.7%)
Interest Expense (0.3%)
Other, including interest income 0.2% 0.7% 0.3%
------------- ------------- -------------
Earnings (loss) before income taxes 0.5% 3.3% (12.7%)
Income tax expense (b) 6.7%
------------- ------------- -------------
Net earnings (loss) 0.5% 3.3% (19.4%)
============= ============= =============
Average sales (in thousands) for restaurants open throughout the year $ 1,168 $ 1,190 $ 1,192
============= ============= =============
Number of restaurants open at end of year 48 48 48
</TABLE>
Fiscal 2000 Compared to Fiscal 1999
Same-store sales decreased 3.1% in fiscal 2000, following an increase
of 0.4% for 1999. Fourth quarter same-store sales were down 4.4% in 2000
compared with an increase of 0.1% for the same period in 1999.
Same-Store Sales By Quarter
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
1st Quarter -2.4% -0.3% +2.7%
2nd Quarter -1.4% +1.2% +5.3%
3rd Quarter -1.9% +0.3% +1.9%
4th Quarter -4.4% +0.1% -1.6%
Fiscal Year -3.1% +0.4% +2.1%
</TABLE>
10
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Total sales for 2000 were $56.0 million, down from $57.4 million in 1999.
Average annual sales per unit were $1,168,000 for 2000 and $1,190,000 for 1999.
The Company implemented a price increase of about 4.5% in the quarter ended
December 31, 1999 to offset increases in labor costs and general inflation.
This increase was rolled out to restaurants market by market during that
quarter, so its effect for the fiscal year is estimated at about 4.1%.
Fourth quarter total sales were $14.1 million in 2000 and $14.6 million in
1999. Average sales per unit were $294,000 and $303,000 for the quarters ended
September 30, 2000 and 1999, respectively.
Management believes that the sales decline is primarily due to the dated look
of the Company's restaurants and has developed a reimaging plan to change the
look of its restaurants, including changes in restaurant design, recipes, food
offerings and cooking and service procedures.
The new look for the Company's restaurants features a new logo, updated and
brighter color schemes for a lively interior design, contemporary furniture and
fixtures, softer lighting, exhibition grill cooking, and a high-energy, fiesta
atmosphere. The Company's restaurant in Mesquite, Texas was completely
remodeled in 1999 to serve as a prototype restaurant featuring the new look.
The restaurant, located in the Dallas area, was temporarily closed in August
1999 for the remodel. The restaurant, reopened as Pancho's Buffet & Grill(TM)
in December 1999, has received very good customer response and has seen a 41%
comparable sales increase since the remodel.
In October 1999, as part of the reimaging plan, 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.
As a complement to the Mesquite prototype restaurant, Pancho's Buffet &
Grill(TM), the Company developed 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 in May and June of 2000 in the new Panchito's
$4.99 Buffet(TM) format, which features the new look of the Company's reimaging
plan but not all of the menu items and new recipes. The format was designed to
reinvigorate certain smaller or lower sales units while achieving operating
efficiencies to justify the lower buffet price. Sale results from the
Panchito's $4.99 Buffet(TM) were not persuasive enough to continue the concept,
however, and the stores will be converted to the new Pancho's Mexican
Buffet(R) concept featuring the new recipes and menu items.
With the successful results of the Pancho's Buffet & Grill(TM) in Mesquite,
Texas, the Company plans to roll out the reimaging plan throughout the Company
under the banners Pancho's Buffet & Grill(TM) and Pancho's Mexican Buffet(R).
The Company is in the process of creating a three-year capital expenditure plan
so that it may complete the remodels and put sales on an upward trend.
No new restaurants were opened in 2000, and none are planned for fiscal 2001.
Management plans to focus on continuing to improve same store sales and
operating margins at its existing units before adding new locations.
Sales discounts increased to 5% of sales in 2000 from 4.6% of sales in 1999.
Fourth quarter discounts were 4.9% and 5.1% of sales for 2000 and 1999,
respectively. To motivate new trials and more frequent visits, the Company
relies heavily on discount coupons. The Company's discounting tactics include
coupons distributed by direct mail, newspaper inserts and a variety of
neighborhood marketing promotions.
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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.
The Company reduced food cost 0.7% and 0.1% of sales for the quarter and year
ended September 30, 2000, respectively. Food costs as a percentage of sales
benefited from the fall 1999 price increase. This price increase offset the
higher costs in many of the new recipes developed under the Company's reimaging
project.
Labor and related expenses increased 1.2% and 0.9% of sales for the 2000
fourth quarter and year, respectively, compared with the same 1999 periods. Due
to settlement of claims for substantially less than reserved, the Company
reduced its reserves for workers' injury insurance by $809,000 for the year
ended September 30, 2000. The Company also reduced these reserves by $525,000
for the year ended September 30, 1999. After eliminating the benefit of these
adjustments, labor costs rose 1.2% and 1.4% of sales for the quarter and year
ended September 30, 2000.
Wage rate inflation and the effect of lower sales were the main reasons for
the labor cost increase. Due to the tight labor market, the Company's average
hourly wage cost was 1.2% of sales higher in 2000 than in 1999.
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 will make it difficult
for the Company to control labor and related costs unless it can improve the
current sales trend. The Company will consider price increases and other
methods to compensate for labor cost increases.
Restaurant operating expenses include occupancy costs, utilities, liability
insurance, maintenance expense, supplies, restaurant marketing and other related
costs. This expense category increased 1.7% and 1.6% of sales for the 2000
fourth quarter and year, respectively. Due to the settlement of claims for
substantially less than reserved, liability insurance reserves were reduced by
$211,000 for the year ended September 30, 2000, and by $513,000 for the year
ended September 30, 1999. After eliminating these adjustments, restaurant
operating costs rose 1.7% and 1.1% of sales for the quarter and year ended
September 30, 2000 versus the same period last year.
Occupancy costs led the increase in operating expenses by 1.1% and 0.4% of
sales for the 2000 fourth quarter and year respectively because of one-time
adjustments made in fiscal 1999 for over accrued property taxes related to
fiscal years 1998 and earlier. Utilities costs are up by 0.6% and 0.3% of sales
for the 2000 fourth quarter and year due to higher gas and electric costs. The
remaining increase in restaurant operating costs was due mainly to higher
supplies costs incurred to purchase new uniforms and small wares to support the
roll out of the new recipes and salsa bars as part of the reimaging plan.
Fourth quarter store marketing expenses decreased 0.6% of sales for 2000
compared with 1999. Store marketing costs increased 0.1% of sales for the
fiscal year 2000 over the fiscal year 1999. The Company's total marketing
expenditures were up $53,000 for the year, primarily from increased printing
costs for coupons. The Company invested 2.3% and 2.2% of sales in store
marketing for 2000 and 1999, respectively.
12
<PAGE>
The Company's general and administrative expenses are down 0.2% and 0.3% of
sales for the quarter and year ended September 30, 2000 versus the same periods
for 1999.
The Company's Mesquite, Texas restaurant was closed from late August 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 year. Preopening costs include labor related costs prior to
opening, including recruiting expenses, food costs for preopening testing and
training.
The Company closed two locations in Houston, Texas during May and June of 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 fiscal year 2000 totaled
$54,000.
Impairment charges are 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 2000 or 1999.
The Company adopted a restructuring plan in the quarter ended June 30, 1998
which involved closing nine restaurants. Only one site, located in Amarillo,
Texas, remained in land and buildings held for sale at September 30, 2000. No
restaurant 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 2000 or 1999.
The Company realized net gains on sale of assets of $52,000 and $367,000 in
fiscal 2000 and 1999, 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 2000, interest expense was $17,000 versus $22,000 in 1999, a $5,000
decrease. The Company paid off and terminated its bank line of credit during
1999, so the Company has incurred only small amounts of interest on vendor
payables since then.
Net deferred tax assets decreased $78,000 to $7.4 million in fiscal 2000, due
mainly to the reduction in insurance reserves netted against unearned revenues.
The valuation allowance was decreased by the same amount to match the net
deferred tax asset balance. Accordingly, the Company recognized no net tax
benefit for the year ended September 30, 2000.
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 deferred tax assets. Due to the 100% valuation allowance, the
Company's net effective tax rate was virtually zero for 2000. As detailed in
Note 6 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 as-
13
<PAGE>
sets realized. The deferred tax assets include federal employer tax credits and
net operating loss (NOL) carryforwards which expire in years 2012 through 2020,
and state NOL carryforwards which expire in years 2000 through 2014.
Due to the factors discussed herein, the Company reported 2000 net earnings of
$249,000, or $0.17 per share, compared with 1999 net earnings of $1.9 million,
or $1.29 per share. The Company incurred a fourth quarter net loss of $191,000,
or $0.13 per share, and achieved fourth quarter earnings of $128,000, or $0.08
per share, in 2000 and 1999, respectively. To aid in comparing operating
results for 2000 and 1999, 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, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
-------------------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income (loss)
before adjustments................. $ (213,000) $ 103,000 $ (850,000) $ 442,000
Gain from insurance credits......... 1,020,000 1,038,000
-------------------------------------------------------------------------------
Operating income (loss)......... (213,000) 103,000 170,000 1,480,000
Gain on sale of assets.............. 9,000 8,000 52,000 367,000
Other income and expense............ 13,000 17,000 27,000 29,000
Tax benefit......................... 12,000
-------------------------------------------------------------------------------
Net earnings (loss)............. $ (191,000) $ 128,000 $ 249,000 $ 1,888,000
</TABLE>
The Company's future profitability depends on increasing restaurant revenues
and reducing key cost factors, particularly labor costs. Management plans to
address these issues through its reimaging plan, marketing programs,
reorganization of operations management, and the continuation of the Company's
brand extension programs.
Liquidity and Capital Resources for 2000 Compared with 1999
The Company's current ratio was flat at 0.4 to 1 for fiscal year 2000. 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.
Operating activities provided net cash of $1.2 million in fiscal 2000 compared
with $1.6 million in 1999. The 2000 net earnings of $249,000 included non-cash
charges of $2 million for depreciation and amortization. The 1999 net earnings
of $1.9 million also included non-cash charges of $2 million for depreciation
and amortization.
The Company reduced its accrued insurance reserves by $1,020,000 and
$1,038,000 in fiscal years 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.
Investing activities used $1.4 million in 2000 and provided $988,000 in 1999.
The Company received $530,000 for asset sales in 2000, primarily from the sale
of a warehouse next to its corporate headquarters. The Company invested $2
million in capital additions in 2000, compared with $1.5 million in 1999. As
part of its reimaging program, the Company completed the extensive remodel of
its Mesquite, Texas location to use as a prototype for the new Pancho's Buffet &
Grill(TM) concept, and started and completed remodels of two of its Houston,
Texas locations to test the Panchito's $4.99 Buffet(TM) concept.
14
<PAGE>
In order for the Company to complete its reimaging program to boost sales and
profitability, management assumes that it will need to spend approximately $6
million over a three year period remodeling its restaurants. Management has
developed a staggered rollout strategy to maximize resources and minimize
restaurant downtime. The Company will complete more extensive remodels in above
average stores it feels will benefit the greatest in terms of return of
investment. Many stores will require more basic cosmetic changes, which include
repainting, new seating, tablecloths, curtains and menu boards thus allowing the
Company to maintain continuity and feel throughout the organization.
In connection with the reimaging plan, the Company has retained the services
of an investment banking firm to explore strategic financial alternatives for
the Company to enhance future growth and maximize shareholder value.
No new restaurants were opened or under construction in 2000, and none are
planned for fiscal 2001. The Company expects to invest approximately $500,000
in capital additions in 2001 in addition to the capital expenditures for the
reimaging program. The $500,000 will be used for routine capital replacements
and will be spent within the constraints of available funds from operations.
The Company also has one closed restaurant site held for sale, which would
augment cash available for capital additions if sold.
Financing activities consumed $74,000 and $1.8 million in 2000 and 1999,
respectively, primarily to reduce debt. The Company paid off its bank credit
line during 1999, and the only debt remaining is notes payable to buy out the
lease obligations on closed units.
The Company plans to finance its 2001 operations and capital additions, with
the exception of store remodels, mainly with cash flow from operations and,
possibly, the sale of the closed restaurant site held for sale. 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 2001, management is pursuing a working
capital line of credit for short-term operating needs. Proceeds from any
borrowings on a line of credit will be used to provide additional liquidity
during peak cyclical seasonal demands.
No dividends have been paid since fiscal 1997, and 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 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 was 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.
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 stores
increase reflects the effect of eliminating that unit's sales from the 1998
average comparison. The closed unit reopened 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.
15
<PAGE>
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 included coupons distributed by
direct mail, newspaper inserts and a variety of neighborhood marketing
promotions.
The Company continued to emphasize a neighborhood marketing strategy to
strengthen Pancho's ties to each restaurant's community. A portfolio of
specific marketing tactics were 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 were planned for fiscal 2000.
Management planned 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 considered 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 would 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 were
generally spicier, with more complex flavor profiles to tempt today's more
discerning palates. The salsa bars featured 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
involved ingredients which the Company expected might cause some increase in
food costs 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
16
<PAGE>
preparation is labor intensive. A tight labor market continued to contribute to
general wage inflation. Congress was considering various increases in the
federal minimum wage to be mandated in the coming years. Higher wages made it
difficult for the Company to control labor and related costs unless the sales
trend improvement continued. The Company would consider price increases and
other methods to compensate for labor cost increases.
Restaurant operating expenses included 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 were currently planned, but management would 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 believed that long-lived assets
held for sale or future use are carried at the lower of depreciated cost or fair
value. If conditions changed and future circumstances indicated that long-lived
assets are carried at more than net realizable future cash flows, then
additional asset impairment charges would be necessary.
17
<PAGE>
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 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 6 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 offset the full amount of deferred tax assets net of
deferred tax liabilities. Despite the valuation allowance, the deferred tax
assets were still available to the Company for future use. If the Company
maintained profitability, the Company might have recognized 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
included federal employer tax credits and net operating loss (NOL) carryforwards
which were to expire in years 2009 through 2014, and state NOL carryforwards
which were to expire in years 2000 through 2014.
Due to the factors discussed herein, 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.
The Company's future earnings depended largely on improving sales and
maintaining tight cost controls in the highly competitive restaurant industry.
To enhance potential profitability, the Company was 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 to 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 though 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 from four
previously closed restaurant sites sold in 1999.
18
<PAGE>
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 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 were
planned for fiscal 2000. The Company expected 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 would continue within the constraints of available funds.
The Company also had 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 was 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 financed its 1999 operations and capital additions mainly with
cash flow from operations.
The Company paid a dividend of $.045 per share on December 9, 1997. The
future payment of cash dividends would depend on the Company's earnings,
financial position, capital requirements and other relevant factors.
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 (Congress is considering various
increases in the federal minimum wage to be mandated in the coming years).
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
from volume purchasing.
Wage rate inflation drove the Company's average hourly wage costs up 1.2% of
sales in 2000 and 5.3% of sales in 1999. To help offset the rising labor costs,
the Company implemented a price increase of about 4.5% in November 1999.
19
<PAGE>
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/(R)/ 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
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.
Item 7A. 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 35.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
<TABLE>
<CAPTION>
Proposed
Term or
Director Term to
Name Age Since Expire All Positions Held Past Five Years
---- ----- ---------- --------- ----------------------------------
<S> <C> <C> <C> <C>
Samuel L. Carlson 64 1993 2004 Senior Vice President, Administration and
Secretary.
David Oden 40 1998 2004 Executive Vice President and Chief Financial
Officer, TX C.C., Inc., operator of the Texas
Land & Cattle Steak House Restaurant chain, since
February 2000; Senior Vice President and Chief
Financial Officer, TX. C. C., Inc., October 1998 to
February 2000; Chief Financial Officer, TX. C. C.,
Inc. from July 1997 to October 1998; Senior Vice
President and Chief Financial Officer, Silver Diner,
Inc. from September 1995 to July 1997.
Rudolph Rodriquez, Jr. 68 1993 2004 Chairman, and Chief Executive Officer,
Rodriquez Festive Foods, Inc., a manufacturer
of Mexican Food products; Advisory Board
Member, Chase Bank of Texas NA, Fort
Worth, Texas.
Robert L. List 63 1993 2003 President, "Hammond's Candies Since 1920,
LLC" since May 1997, and President, West
Indies Candy Company; Director, Mercury
Air Group, Inc.
George N. Riordan 67 1994 2003 Managing partner, George Riordan & Co.,
investment bankers; Chairman of the Board,
MSC Software Corporation, January 1997 to
January 1999. Director 1983 to date.
Hollis Taylor 64 1974 2003 President, Chief Executive Officer, and
Treasurer.
Jesse Arrambide, III 48 1977 2002 Chairman of the Board of Directors and Chief
Operations Officer; President, A & A Foods,
Inc. and President, A & A Foods No. 2, Inc.
Joanne Keates 43 2000 2002 Director - Investor Relations for MSC Software
Corporation since 1996. Partner, George
Riordan & Co., investment bankers, from 1992
to 1996.
Tomas Orendain 67 1993 2002 President, T.S. Orendain Associates, Inc., an
architectural firm. Chairman of the Board,
Orendain Telecommunication Services, Inc.
</TABLE>
21
<PAGE>
(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 the caption "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.
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") and the Nasdaq initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Executive officers, Directors and greater than ten-percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. To the Company's knowledge, based solely
on review of the copies of such reports furnished to the Company and written
representations from the executive officers and Directors that no other reports
were required, for the year ended September 30, 2000, all Section 16(a) filing
requirements applicable to its executive officers, Directors and greater than
ten-percent beneficial owners were filed on a timely basis.
22
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following sets forth information concerning the compensation of the
Company's Chief Executive Officer and each of the other most highly compensated
executive officers of the Company (the "Named Executive Officers") for the
fiscal years shown, when compensation equaled or exceeded $100,000.
<TABLE>
<CAPTION>
Long Term
Compensation All Other
Fiscal Annual Compensation Other Annual Awards Compensation
------------------------------------------- ------------
Name and Principal Position Year Salary ($) Bonus ($) (1) Bonus ($) (2) Compensation (3) Options (6) ($) (4)
--------------------------------- ------- ------------ ------------- --------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hollis Taylor 2000 $ 195,000 $ 28,626 14,000 $ 3,465
President, Chief Executive 1999 195,000 $ 64,000 30,441 4,405
Officer and Treasurer 1998 194,465 31,949 4,496
Jesse Arrambide III 2000 160,000 13,254 10,000 640
Chairman of the Board and 1999 160,000 42,000 14,094 722
Chief Operations Officer 1998 155,557 15,975 722
Samuel L. Carlson 2000 125,000 21,469 1,211
Senior Vice President 1999 125,000 33,000 21,141 1,656
Administration and 1998 123,524 22,172 1,688
Secretary
W. Brad Fagan (5) 2000 73,077 5,000 23
Vice President, Treasurer 1999 100,000 26,000 33
and Assistant Secretary 1998 95,382 390
</TABLE>
---------------------
(1) Annual incentive plan. (see Board Compensation Committee Report on
---------------------
Executive Compensation)
(2) Stock bonus program. (see Board Compensation Committee Report on Executive
--------------------
Compensation)
(3) "Other Annual Compensation" is intended to cover forms of annual
compensation not properly categorized as salary or bonus, including
perquisities. No named executive received such compensation or perquisities
which exceeded a threshold level for disclosure purposes.
(4) The totals in the columns reflect the value of the Company contributions to
each named executive under the Employee Stock Purchase Program and
additional life insurance. These amounts for the 2000 fiscal year were as
follows: Hollis Taylor: $1,500 and $1,965. Jesse Arrambide III: $600 and
$40. Samuel L. Carlson: $0 and $1,211 and W. Brad Fagan: $23 and $0.
(5) Mr. Fagan resigned June 30, 2000.
(6) Granted April 14, 2000 at $3.719.
23
<PAGE>
Option Grants in Fiscal Year 2000
<TABLE>
<CAPTION>
% of Potential
Total Realized Value at
Number of Options Assumed Annual
Securities Granted to Rates of Stock Price
Underlying Employees Exercise Appreciation
Options in Fiscal Price Expiration for Option Term
--------------------------------
Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($)
------------------------- -------------- -------------- ------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Hollis Taylor 14,000 20.2% 3.719 4/14/2010 $ 2,603 $ 5,207
Jesse Arrambide III 10,000 14.4% 3.719 4/14/2010 1,860 3,719
</TABLE>
Aggregated Option Exercises in Fiscal Year 2000 and 2000 Fiscal Year-End
Option Values
<TABLE>
Number of Unexercised Value of Unexercised
Shares Options at In-The-Money Options at
Acquired Value September 30, 2000 September 30, 2000 (1) (2)
----------------------------- --------------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
------------------------- -------------- -------------- ------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Hollis Taylor 0 N.A. 24,666 14,000 $ - $ -
Jesse Arrambide III 0 N.A. 24,666 10,000 - -
</TABLE>
-------------
(1) Market value less exercise price, before payment of applicable income taxes.
(2) At September 30, 2000 the exercise price was higher than the market price of
Company's stock.
24
<PAGE>
Compensation of Directors
Each member of the Board of Directors who is not an employee of the Company
receives a Director's fee in the amount of $10,000 cash annually in addition to
$500 cash for each board, committee or other official meeting attended, and
reimbursement of actual expenses incurred. Directors who are not employees of
the Company have in the past received options under both the Stock Option Plan
for Non-Employee Directors and the 1992 Stock Option Plan. Non-employee
Directors will receive future automatic option grants under the 1992 Stock
Option Plan, and under the 1998 Restricted Stock Plan for Directors will receive
shares of the Company's stock in the amount of $2,500 quarterly, based on market
price.
1992 Stock Option Plan
The 1992 Stock Option Plan ("1992 Plan") was approved by the shareholders at
the Annual Meeting held January 27, 1993, and amended at the Annual Meeting held
January 28, 1998. Under the 1992 Plan, each Director of the Company who was not
an employee automatically received a non-qualified stock option immediately
following the Annual Meeting of Stockholders held on January 27, 1993, in the
amount of 1,666 shares of the Company's Common Stock. At each Annual Meeting of
the stockholders thereafter, each Director of the Company who is not an employee
of the Company will automatically receive a non-qualified stock option covering
1,333 shares of the Company's Common Stock. All options granted under the 1992
Plan will have an exercise price equal to the fair market value of the Common
Stock on the date of the Annual Meeting of the stockholders to which it relates.
Each option granted will have a term not to exceed ten (10) years and generally
will become exercisable at the rate of twenty-five percent (25%) for each year
the optionee remains with the Company as a Director. Options granted to a
Director can, in no event, be exercised until the lapse of six (6) months from
the date of grant.
Other than in the case of a reincorporation of the Company in another state,
in the event of (i) dissolution or liquidation of the Company, (ii) a
transaction in which more than 50% of the shares of the Company that are
entitled to vote are exchanged, or (iii) any merger or consolidation or other
reorganization in which the Company is not the surviving corporation (or in
which the Company becomes a subsidiary of another corporation), outstanding
options under the 1992 Plan shall become fully exercisable immediately prior to
any such event.
Unless terminated earlier by reason of expiration of the option term, options
under the 1992 Plan will terminate (a) three months after the optionee's
directorship terminates for reasons other than death or disability; (b) 12
months after termination for disability; and (c) the normal termination date, in
the case of death. All options granted under the 1992 Plan will be non-
transferable by the optionee other than by will or the laws of descent and
distribution. Such options may contain such other terms, provisions and
conditions not inconsistent with the 1992 Plan.
Pursuant to the terms of the 1992 Plan, 6,665 shares were granted at a price
of $3.25 to non-employee Directors and 7,500, 49,500 and 6,000 shares at a price
of $2.875, $3.719 and $3.563, respectively, were granted to officers and
employees during the current fiscal year. On March 7, 2001, options covering
8,331 shares will automatically be granted to the non-employee directors.
Options to purchase 173,765 shares of the Company's Common Stock were
outstanding under the 1992 Plan as of September 30, 2000. No options were
exercised during the 2000 fiscal year.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
There currently exist Employment Agreements between the Company and Messrs.
Hollis Taylor, Jesse Arrambide, III and Sam L. Carlson, providing that Messrs.
Taylor, Arrambide, and Carlson are to be em-
25
<PAGE>
ployed by the Company at a base salary of not less that $195,000, $160,000, and
$125,000 per year, respectively. These agreements are considered for automatic
renewal on December 31 of each succeeding year for a period of five years,
expressly subject to approval of the Compensation Committee. As these contracts
have not been renewed, they are scheduled to expire by their terms on December
31, 2001, which is five years from the date of the last automatic renewal on
December 31, 1996. During the term of the aforesaid Employment Agreements, these
individuals are to serve as officers of the Company and perform such services
similar to and not inconsistent with the present positions held by each with the
Company. In addition, they shall be eligible to participate in all Company
benefit, bonus and other plans. Under the terms of each Employment Agreement,
such employment may be terminated for "cause" as defined in each Employment
Agreement. See 1992 Stock Option Plan for a discussion of change in control
provisions.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors establishes the general
compensation policies of the Company, the compensation plans and specific
compensation levels for executive officers and administers the Company's annual
incentive plan and stock option plan. The Compensation Committee is comprised
of three independent, non-employee directors who have no interlocking
relationships as defined by the SEC.
The compensation committee relies primarily on data supplied by outside
consultants. Base salary, annual incentive and long-term comparisons are made
relative to companies within the food and restaurant industry with revenues
closely comparable to the Company.
The compensation program for executives is viewed as a total compensation
package comprised of base salary, annual incentives and long-term capital
appreciation opportunities in the form of stock options and a stock purchase
program. The total cash compensation is comprised of base salaries that are
targeted to be slightly less than the average market salaries for comparable
companies with an annual incentive opportunity dependent upon Company
performance.
Annual Incentive
The Officer's Bonus program is designed to reward executives for the annual
growth of the Company. Officers become eligible for a bonus only after a
predetermined level of consolidated earnings, before income taxes and payouts of
officers' bonuses has been met. Once the plan target has been met, bonuses as a
percentage of base salary are paid to executives based upon a graduated
schedule. The bonus percentage depends upon the degree to which the plan was
exceeded. Hollis Taylor is eligible for an additional 25% above the target
bonus. To be eligible, all officers must be employed at the end of the fiscal
year and any new officer would receive a bonus based on a pro-rata basis.
Payment of bonuses is made after the annual audit. Incentive bonuses were not
paid in fiscal 2000 as earnings before income taxes (including consideration for
incentive bonus expense) did not meet the plan target.
Long-term Incentives
The stock bonus program utilized by the Company is designed to (1) align
executives with the long-term goals of the Company, (2) create an environment
whereby executives are aligned closely with shareholders and (3) encourage high
levels of stock ownership. Primary emphasis of the total compensation package
for executives is placed on the long-term component. The program of the Company
provides loans to executives to purchase shares of stock at a fixed market
price. The loan must be paid off ratably over ten years. If the financial
position of the Company and individual performance warrants, the Company pays to
the executive a stock bonus to cover the cost of the annual loan payment. While
this program has been successful, the long-term incentive compensation is below
market.
26
<PAGE>
CEO Compensation
The Compensation Committee believes that the Chief Executive Officer's (CEO)
compensation should be influenced by Company performance. Therefore, although
there is necessarily some subjectivity in setting the CEO's salary, elements of
the compensation package are directly tied to Company performance. The
Committee establishes the CEO's salary by reviewing annually the salaries of
CEO's of comparably sized companies and their performance according to data
obtained by the Committee from independent outside consultants. In addition,
the CEO participates in the annual incentive plan described above.
The number of shares granted to the CEO is determined by the subjective
evaluation of the executive's ability to influence the Company's long-term
growth and profitability. The CEO received a grant of 14,000 shares in fiscal
2000 at a market price of $3.719. All shares available to be purchased by the
executive are granted at the current market price. A loan was made to the CEO
in 1992 to purchase 6,666 shares at a market price of $23.625 per share. The
loan is payable over ten years plus interest. It has been Company policy to
bonus to the CEO in an amount to cover the annual loan cost if the Company is in
a financial position to make such a payment and if the CEO's performance
warranted such stock bonus. During the fiscal year, the Company paid a stock
bonus of $28,626 to the CEO.
Compensation Committee
Robert L. List
George N. Riordan
Rudolph Rodriguez, Jr.
27
<PAGE>
Company Stock Price Performance
The graph below compares the cumulative total shareholder return on $100
invested at market close on September 30, 1995, assuming the reinvestment of all
dividends, on the Common Stock of the Company for the last five years with the
cumulative total return of the Nasdaq Stock Market Index (US Companies) and the
Nasdaq Eating and Drinking places (US Companies).
Comparison of Five Year-Cumulative Total Returns
Performance Graph for
Pancho's Mexican Buffet, Inc.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
_______ Pancho's Mexican Buffet, Inc. 100.0 65.4 74.4 28.4 37.8 39.2
----- ----- ----- ----- -----
__ __ __ Nasdaq Stock Market Index (US Companies) 100.0 118.7 162.9 165.5 270.4 359.0
----- ----- ----- ----- -----
_ _ _ _ Nasdaq Eating & Drinking Planes (US Companies) 100.0 100.3 92.0 61.1 62.6 77.9
----- ----- ----- ----- -----
</TABLE>
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 9/29/1995.
28
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As Of November 30, 2000
The Company has only one outstanding class of equity securities, its Common
Stock, par value $.10. Unless otherwise indicated, all shares are owned
directly and the owner has sole voting and investment powers with respect
thereto.
The security ownership, as of November 30, 2000, of certain beneficial owners
known to the Company to own more than five percent of the Company's Common Stock
was:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- ---------
<S> <C> <C>
Stephen Oyster 140,092 9.50%
3825 Lake Austin Blvd.
Austin, Texas 78703
Dimensional Fund Advisors Inc. (1) 84,363 5.72%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Carolina S. Arrambide (2) 79,974 5.43%
3116 Westador Drive
Arlington, Texas 76015
</TABLE>
_________________
(1) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 84,363 shares of Pancho's
Mexican Buffet, Inc., all of which shares are held in portfolios of DFA
Investment Dimensions Group, Inc., a registered open-end investment company,
or in series of The DFA Investment Trust Company, a Delaware business trust,
or the DFA Group Trust and the DFA Participating Group Trust, investment
vehicles for qualified employee benefit plans, all of which Dimensional Fund
Advisors Inc. serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares.
(2) Carolina S. Arrambide is the sole beneficiary of the Estate of Jesse
Arrambide Jr. which includes 61,086 shares of Pancho's Mexican Buffet, Inc.
common stock.
Cede & Co. and other central clearinghouses were the record holders of
approximately 1,103,145 shares (74.8%), which include shares beneficially owned
by some of the entities listed above.
29
<PAGE>
The security ownership as of November 30, 2000 including shares subject to
options that are exercisable in the next 60 days, (all Common Stock) of (i)
Directors and executive officers and (ii) Directors and executive officers as a
group, was:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership (1) (2) of Class
-------------------- ----------------------------- ---------
<S> <C> <C>
Hollis Taylor 67,982 (3) 4.11%
Jesse Arrambide, III 37,966 (3) (6) 1.26%
Samuel L. Carlson 20,886 2.29%
Robert L. List 11,516 (4) *
Rudolph Rodriguez, Jr. 12,849 (4) *
Tomas S. Orendain 11,516 (4) *
George N. Riordan 11,517 (7) *
David Oden 4,556 (8) *
Joanne Keates 677 *
All Directors and executive
officers as a group 179,465 (5) 10.85%
</TABLE>
_________________
* Less than 1%
(1) Includes shares purchased by the employee stock purchase plan through
October 30, 2000.
(2) Based on presently exercisable options which are indicated in the following
footnotes to this table, the percentage ownership is calculated on the
assumption that the shares presently purchasable, or purchasable within the
next sixty days, underlying such options are outstanding.
(3) This amount includes 24,666 shares subject to options that are exercisable
within the next sixty days.
(4) This amount includes 5,163 shares subject to options that are exercisable
within the next sixty days.
(5) This amount includes 69,735 shares that directors and executive officers
have the right to acquire within the next sixty days through the exercise
of stock options.
(6) Estate of Jesse Arrambide has pledged 13,542 of the Company's common shares
for various loans. Jesse Arrambide, III acts as Independent Executor and
has sole voting power of these shares. Jesse Arrambide, III disclaims
beneficial ownership of these securities.
(7) This amount includes 4,497 shares subject to options that are exercisable
within the next sixty days.
(8) This amount includes 417 shares subject to options that are exercisable
within the next sixty days.
Item 13. Certain Relationships and Related Transactions
Rudolph Rodriguez, Jr., Director, is Chairman and Chief Executive Officer of
Rodriguez Festive Foods, Inc., which sold products to the Company's outside
distributor, which are then purchased by the Company, in the amount of
$1,172,482 during the fiscal year ended September 30, 2000. In the same fiscal
year, Rodriguez Festive Foods, Inc. purchased items in the amount of $43,966
from the Company. Rodriguez Festive Foods, Inc. also leases the Company's cold
storage facilities formerly used by the Company's food distribution center. The
lease is for $5,000 per month expiring on October 31, 2000. Five-year option at
$5,500 monthly effective November 1, 2000 has been exercised. All of the
foregoing transactions with Rodriguez Festive Foods, Inc. were entered into in
the ordinary course of business, and it is believed that the terms and
conditions are no less favorable to the Company than they would have been for
similar transactions with unrelated parties.
Occasional sales of supplies and equipment are made on a cost plus basis to
the family owned restaurant operations of Jesse Arrambide III, Chairman of the
Board and Chief Operations Officer of the Company. Sales were $8,823 for the
year ended September 30, 2000.
30
<PAGE>
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 35.
3. Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number Description
------ -----------
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)
31
<PAGE>
Exhibit
Number Description
------ -----------
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(0) - 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
24 - Not applicable
27 - Financial Data Schedule -- filed herewith
32
<PAGE>
_____________
(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 IO-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.
33
<PAGE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
(c) Exhibits required by Item 601 of Regulation S-K.
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.
34
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended September 30, 2000
Page
----
Independent Auditors' Report................................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheets................................ F-2
Consolidated Statements of Operations...................... F-3
Consolidated Statements of Stockholders' Equity............ F-4
Consolidated Statements of Cash Flows...................... F-5
Notes to Consolidated Financial Statements................. F-6
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.
35
<PAGE>
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2000, in conformity with auditing standards generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
November 9, 2000
F-1
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30,
-------------------------------------------------------
2000 1999
----------------------- ------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 900,000 $ 1,242,000
Accounts and notes receivable, current portion 152,000 208,000
Inventories 451,000 469,000
Prepaid expenses 130,000 242,000
----------------------- ------------------------
Total current assets 1,633,000 2,161,000
----------------------- ------------------------
Property, Plant and Equipment:
Land 1,654,000 1,868,000
Buildings 6,633,000 6,900,000
Leasehold improvements 17,779,000 17,268,000
Equipment and furniture 21,013,000 21,469,000
Construction in progress 429,000
----------------------- ------------------------
Total 47,079,000 47,934,000
Less accumulated depreciation and amortization (31,926,000) (32,392,000)
----------------------- ------------------------
Property, plant and equipment - net 15,153,000 15,542,000
----------------------- ------------------------
Other Assets:
Land and buildings held for sale 309,000 309,000
Other, including noncurrent portion of receivables 269,000 400,000
----------------------- ------------------------
Total other assets 578,000 709,000
----------------------- ------------------------
Total $ 17,364,000 $ 18,412,000
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 767,000 $ 701,000
Debt classified as current 107,000 139,000
Accrued wages and bonuses 1,317,000 1,734,000
Accrued insurance costs, current 425,000 1,087,000
Other current liabilities 1,825,000 1,331,000
----------------------- ------------------------
Total current liabilities 4,441,000 4,992,000
----------------------- ------------------------
Other Liabilities:
Long-term debt 112,000 222,000
Capital leases 29,000
Accrued insurance costs, non-current 425,000 1,149,000
Restructuring reserves, non-current 310,000 346,000
----------------------- ------------------------
Total other liabilities 876,000 1,717,000
----------------------- ------------------------
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
1,492,021 and 1,485,406 shares, respectively. Outstanding 1,469,955
and 1,463,606 shares, respectively.) 149,000 149,000
Additional paid-in capital 19,013,000 18,988,000
Retained earnings (accumulated deficit) (6,948,000) (7,197,000)
Stock notes receivable (98,000) (169,000)
Treasury stock at cost (22,066 and 21,800 shares, respectively) (69,000) (68,000)
----------------------- ------------------------
Stockholders' equity 12,047,000 11,703,000
----------------------- ------------------------
Total $ 17,364,000 $ 18,412,000
======================= ========================
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------------------
2000 1999 1998
------------------- ----------------- --------------------
<S> <C> <C> <C>
Sales $ 55,963,000 $ 57,403,000 $ 64,146,000
------------------- ----------------- --------------------
Costs and Expenses:
Food costs 14,788,000 15,214,000 17,413,000
Restaurant labor and related expenses 21,781,000 21,839,000 25,606,000
Restaurant operating expenses 12,516,000 11,913,000 14,904,000
Depreciation and amortization 1,959,000 1,958,000 2,808,000
General and administrative expenses 4,695,000 4,999,000 5,013,000
Asset impairment and restructuring charges 6,601,000
Preopening costs 54,000
------------------- ----------------- -------------------
Total 55,793,000 55,923,000 72,345,000
------------------- ----------------- --------------------
Operating Income (Loss) 170,000 1,480,000 (8,199,000)
Interest Expense (17,000) (22,000) (212,000)
Other, including interest income 96,000 418,000 198,000
------------------- ----------------- --------------------
Earnings (loss) before income taxes 249,000 1,876,000 (8,213,000)
Income tax expense (benefit) (12,000) 4,305,000
------------------- ----------------- -------------------
Net earnings (loss) $ 249,000 $ 1,888,000 $ (12,518,000)
=================== ================= ===================
Net earnings (loss) per share, basic and diluted $ 0.17 $ 1.29 $ (8.54)
=================== ================= ===================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-in (Accumulated
--------------------------
Shares Amount Capital Deficit)
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 1,465,853 $146,000 $18,927,000 $ 3,499,000
Net loss (12,518,000)
Dividends, $.045 per share (66,000)
Treasury stock acquired
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)
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)
Net earnings 249,000
Treasury stock issued
Treasury stock acquired
Payments received on stock notes
Stock issued 6,615 25,000
--------- -------- ------------ ------------
Balance, September 30, 2000 1,492,021 $149,000 $19,013,000 $ (6,948,000)
========= ======== ============ ============
<CAPTION>
Stock
Notes
Receivable
Treasury Stock from Stockholders'
--------------------------
Shares Amount Officers Equity
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 2,800 $ (13,000) $ (290,000) $ 22,269,000
Net loss (12,518,000)
Dividends, $.045 per share (66,000)
Treasury stock acquired 19,000 (55,000) (55,000)
Payments received on stock notes 65,000 65,000
Stock issued 29,000
---------- ----------- ----------- ------------
Balance, September 30, 1998 21,800 (68,000) (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 21,800 (68,000) (169,000) 11,703,000
Net earnings 249,000
Treasury stock issued (400) 2,000 2,000
Treasury stock acquired 666 (3,000) (3,000)
Payments received on stock notes 71,000 71,000
Stock issued 25,000
--------- ----------- ----------- ------------
Balance, September 30, 2000 22,066 $ (69,000) $ (98,000) $ 12,047,000
========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------------
2000 1999 1998
-------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss) $ 249,000 $ 1,888,000 $ (12,518,000)
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,959,000 1,958,000 2,808,000
Provision for deferred income taxes 4,305,000
Impairment of long-lived assets 5,681,000
Provision for restructuring reserves 920,000
Adjustment of insurance reserves (1,020,000) (1,038,000) (325,000)
Gain on sale of assets (52,000) (367,000) (153,000)
Stock compensation to outside directors 25,000 35,000 29,000
Other 2,000 (12,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 54,000 (26,000) (6,000)
Income taxes receivable 538,000
Inventories, prepaid expenses and other assets 141,000 227,000 (231,000)
Accounts payable and accrued expenses (148,000) (635,000) 404,000
Restructuring reserves (42,000) (500,000) (658,000)
-------------- ---------------- --------------
Net cash provided by operating activities 1,168,000 1,542,000 782,000
-------------- ---------------- --------------
Cash Flows From Investing Activities:
Property additions (1,966,000) (1,485,000) (697,000)
Proceeds from sale of assets 530,000 2,473,000 261,000
-------------- ---------------- --------------
Net cash provided by (used in) investing activities (1,436,000) 988,000 (436,000)
-------------- ---------------- --------------
Cash Flows From Financing Activities:
Short-term borrowings, net (32,000) (351,000) 298,000
Long-term borrowings 6,637,000 19,706,000
Repayments of long-term borrowings (110,000) (8,176,000) (20,232,000)
Dividends paid (66,000)
Treasury stock acquired (3,000)
Payments on officer stock notes receivable 71,000 56,000 65,000
-------------- ---------------- --------------
Net cash used in financing activities (74,000) (1,834,000) (229,000)
-------------- ---------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (342,000) 696,000 117,000
Cash and Cash Equivalents at Beginning of Year 1,242,000 546,000 429,000
-------------- ---------------- --------------
Cash and Cash Equivalents at End of Year $ 900,000 $ 1,242,000 $ 546,000
============== ================ ==============
Supplemental Information:
Income taxes paid and (refunds received), net $ $ (12,000) $ (541,000)
Interest paid, net of capitalized amounts 17,000 37,000 206,000
Treasury stock acquired as reduction of receivables 55,000
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
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). 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.
F-6
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Property, Plant and Equipment
Depreciation is provided for buildings and equipment on a straight-line basis
over the following estimated service lives:
Buildings................................ 25 to 30 years
Equipment and furniture ................. 3 to 10 years
Leasehold improvements are amortized over the term of the lease or the life of
the improvement, whichever is shorter.
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 2000, 1999 or 1998.
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.
l-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 have 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.
F-7
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 1,467,000, 1,460,000 and
1,465,000 for the years ended September 30, 2000, 1999, and 1998, respectively.
Basic weighted average shares outstanding for 2000 were 1,466,000. For 1999,
outstanding options had no dilutive effect because the average market price was
less than the option exercise prices. Due to the net loss for 1998, 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. At
September 30, 2000, there were 173,765 options which represented potential
common shares which could be dilutive in the future.
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 7).
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 impact that SFAS No. 133 will have on its
financial condition and results of operations is not expected to be material.
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. The impact of the
adoption of SAB 101 on the Company's financial position, results of operations,
and cash flows is not expected to be material.
F-8
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
September 30, .
--------------------------
2000 1999 .
---------- ----------
<S> <C> <C>
Accrued taxes other than income taxes ...... $1,027,000 $ 943,000
Unearned income ............................ 387,000 -
Accrued annual percentage rent ............. 202,000 177,000
Restructuring reserves ..................... 161,000 167,000
Other ...................................... 48,000 44,000
---------- ----------
Total ..................................... $1,825,000 $1,331,000
========== ==========
</TABLE>
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 $112,000 and $222,000 at September 30, 2000 and 1999,
respectively. The current portion of $107,000 and $139,000 is reported as debt
classified as current at September 30, 2000 and 1999, 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, 2000 are listed
below:
<TABLE>
<CAPTION>
Years ending
September 30,
-------------
<S> <C>
2001 .................................. $107,000
2002 .................................. 53,000
2003 .................................. 50,000
2004 .................................. 9,000
Later years ........................... 0
--------
$219,000
========
</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, 2000, exclusive of maintenance, taxes, etc., were as follows:
F-9
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Years ending
September 30,
-------------
<S> <C>
2001......................................... $2,360,000
2002......................................... 2,061,000
2003......................................... 1,630,000
2004......................................... 1,164,000
2005......................................... 732,000
Later years.................................. 500,000
----------
$8,447,000
==========
</TABLE>
The composition of total yearly rental expense for operating leases
is:
<TABLE>
<CAPTION>
September 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals $2,497,000 $2,446,000 $2,638,000
Contingent rentals 203,000 203,000 190,000
Less: Sublease rentals (62,000) (34,000) (13,000)
---------- ---------- ----------
Total $2,638,000 $2,615,000 $2,815,000
========== ========== ==========
</TABLE>
5. CAPITAL LEASES
In September of 2000, the Company obtained a capital lease for an office
copier. The lease expires in 2005 and may be renewed annually thereafter, or
the copier may be purchased. The copier is included in equipment and furniture
on the balance sheet at $29,000 gross and net, as no amortization has yet been
taken on it as of September 30, 2000.
Minimum future lease payments and present value of the net minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Years ending
September 30,
-------------
<S> <C>
2001 ............................................................. $ 8,000
2002 ............................................................. 8,000
2003 ............................................................. 8,000
2004 ............................................................. 8,000
2005 ............................................................. 8,000
--------
Total minimum lease payments .............................. 40,000
--------
Less: Imputed interest ........................................... (11,000)
--------
Present value of net minimum lease payments ............... $ 29,000
========
</TABLE>
F-10
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
6. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------
2000 1999 1998
-------------- -------------- -----------------
<S> <C> <C> <C>
Current:
U.S. federal $ - $ (12,000) $ -
-------------- -------------- -----------------
Deferred:
U.S. federal - - 3,802,000
State - - 503,000
-------------- -------------- -----------------
Combined deferred - - 4,305,000
-------------- -------------- -----------------
Income tax expense (benefit) $ - $ (12,000) $ 4,305,000
============== ============== =================
</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,
---------------------------------------------------
2000 1999 1998
------------- -------------- ----------------
<S> <C> <C> <C>
Expected tax at federal statutory rate of 34% $ 85,000 $ 638,000 $ (2,792,000)
Increase (decrease) in taxes due to:
Change in valuation allowance (78,000) (702,000) 7,314,000
State income tax provision (benefit), net of federal
income tax effect 43,000 116,000 (137,000)
Tax effect of employer tax credits (42,000) (36,000) (90,000)
Other differences (8,000) (28,000) 10,000
------------- -------------- ----------------
Total expense (benefit) $ - $ (12,000) $ 4,305,000
============= ============== ================
</TABLE>
F-11
<PAGE>
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,
--------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Deferred tax assets:
Current:
Restructuring costs, current $ 58,000 $ 61,000
Accrued vacation pay 136,000 137,000
Accrued insurance cost, current 57,000 392,000
Unearned revenue, current 32,000 -
Current valuation allowance (283,000) (590,000)
-------------- ---------------
Current deferred tax asset, net of valuation allowance - -
-------------- ---------------
Noncurrent:
Accrued insurance costs 136,000 262,000
Unearned revenue 105,000 -
Federal operating loss carryforwards (expire 2012-2020) 3,859,000 3,650,000
Noncurrent restructuring costs 111,000 125,000
Alternative minimum tax carryforward 383,000 383,000
State net operating loss carryforwards (expire 2000-2014) 487,000 500,000
Property, plant and equipment 1,560,000 1,560,000
Federal employer tax credits (expire 2009-2020) 682,000 615,000
Noncurrent valuation allowance (7,077,000) (6,847,000)
-------------- ---------------
Noncurrent deferred tax asset, net of valuation allowance 246,000 248,000
-------------- ---------------
Deferred tax liabilities:
Noncurrent:
Basis difference in note receivable 246,000 248,000
-------------- ---------------
Total noncurrent deferred tax liabilities 246,000 248,000
-------------- ---------------
Net noncurrent deferred income taxes $ - $ -
============== ===============
</TABLE>
Deferred tax assets net of deferred tax liabilities decreased $78,000 to
$7.4 million in the year ended September 30, 2000, due mainly to the reduction
in insurance reserves offset by unearned revenues. The tax provision of $78,000
was offset by a $78,000 decrease in the valuation allowance.
Deferred tax assets net of deferred tax liabilites 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 was increased 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 deferred tax assets.
F-12
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 2012 through 2020, and state NOL carryforwards which
expire in years 2000 through 2014. The amount of federal NOL carryforwards was
$11,350,000 and $10,736,000 at September 30, 2000 and 1999, respectively. The
amount of state NOL carryforwards was $19,936,000 and $19,917,000 at September
30, 2000 and 1999, respectively.
7. STOCKHOLDERS' EQUITY
Stock Notes Receivable
In April 1992, the Company sold 34,833 shares (adjusted for the 1999 l-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.
Stockholders' Rights Plan and Preferred Stock Purchase Rights
In January 1996, the Company's Board of Directors adopted a Stockholders'
Rights Plan (the 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 common stock, all stockholders except the acquiring person (Acquirer) 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 Acquirer, will be entitled to purchase common stock
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
Acquirer) 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.
F-13
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock Options
The Company's stock option plans authorize the grant of options to
purchase common stock to directors, officers, employees and consultants of the
Company at prices not less than the fair market value of the stock at dates of
grant. Outstanding options become exercisable cumulatively in four or five equal
annual installments 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>
2000 1999 1998
------------------------------ ------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
----------- ---------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding on October 1 108,963 $ 27.06 102,109 $ 28.68 134,867 $ 29.46
Granted 74,165 3.55 6,998 3.38 5,333 6.18
Exercised
Forfeited/expired (9,363) 10.69 (144) 21.75 (38,091) 28.35
----------- ------------ ------------
Outstanding September 30 173,765 17.79 108,963 27.06 102,109 28.68
----------- ------------ ------------
Exercisable September 30 94,273 29.43 94,721 30.16 91,133 31.02
----------- ------------ ------------
Common shares reserved
and available for grant
September 30 35,261 100,063 106,917
----------- ------------ ------------
</TABLE>
For shares outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Weighted- Weighted-Average
Number Average Remaining
Range of Exercise Prices of Shares Exercise Price Life in Years
------------------------ --------- -------------- -------------
<S> <C> <C> <C>
$ 2.875 to $ 3.719 76,663 $ 3.55 9.3
$ 6.1875 to $ 9.5625 10,659 6.61 6.5
$17.625 to $21.75 9,454 20.38 2.4
$25.125 to $34.125 76,989 33.20 3.0
------- -------------- ---
$2.875 to $34.125 173,765 $ 17.79 6.0
-------- -------------- ---
</TABLE>
F-14
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The weighted-average fair value of options granted was $2.24 in 2000,
$2.47 in 1999, and $3.12 per share in 1998. 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 2000 1999 1998
------------------------------- ------------------ ----------------- -------------------
<S> <C> <C> <C>
Net earnings (loss)
As reported $ 249,000 $ 1,888,000 $(12,518,000)
Pro forma 194,000 1,874,000 (12,528,000)
Net earnings (loss) per
share
As reported 0.17 1.29 (8.54)
Pro forma 0.13 1.28 (8.55)
</TABLE>
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 2000, 1999, and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
------------------ ----------------- -------------------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 60.0% 60.0% 50.0%
Risk free interest rates 5.9% to 6.6% 4.7% 5.5%
Expected life in years 10 10 5
</TABLE>
Annual Stock Grant to Non-employee Directors
Under the 1998 Restricted Stock Plan for Non-employee Directors,
non-employee directors of the Company were granted $2,500 of common stock
quarterly, based on the market price on the date of grant, for the second and
third quarters of 2000. The value of shares granted and recognized as directors'
compensation was $25,000 and $35,000 in 2000 and 1999, 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.
8. 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 was subject to Employee Retirement Income Security Act
(ERISA) rules and regulations, provided for medical, short-term wage
replacement, dismemberment and death benefits.
F-15
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Coverage under the VEIB Plan was provided by the Company and through excess
liability insurance, which provided coverage for claims in excess of certain
stipulated amounts. The consolidated statements of operations for the years
ended September 30, 2000, and 1999 include provisions for estimated expenses of
the VEIB Plan of $549,000 and $176,000, respectively. For fiscal 2000, the
Company had a credit for its provision due to a reduction of the VEIB Plan
liability reserves of $639,000 and due to termination of the VEIB Plan. The
fiscal 1999 provision was reduced by $394,000 to reverse VEIB Plan liability
reserves.
The Company replaced its VEIB Plan with a guaranteed policy for workers'
compensation in January of 2000.
Bonus Plans
The Company has a bonus plan for restaurant managers and supervisors which
provides bonuses based on restaurant performance. Such bonuses amounted to
$240,000, $438,000, and $480,000 for the years ended September 30, 2000, 1999
and 1998, respectively.
The Company has a bonus plan for corporate officers as a group based on
stipulated operating results. No bonuses were paid under the plan for 2000. A
bonus of $203,000 was earned under the plan for 1999. No corporate officer
bonuses were paid for the year ended September 30, 1998. A related bonus plan
for other corporate employees paid $60,000 in 1999, and no bonuses for the years
ended September 30, 2000 and 1998.
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 7). Under this plan, the Company recognized compensation
expense of $95,000, $109,000, and $124,000 in fiscal years 2000, 1999 and 1998,
respectively.
Stock Purchase Plan
The Company maintains a voluntary employee stock purchase plan for all
eligible employees. The Company contributes 25% of the amount invested by the
employee plus all commissions and brokerage fees. 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, $14,000, and $15,000 for the years ended September 30, 2000, 1999 and
1998, respectively.
9. INSURANCE RESERVES
At September 30, 2000, a total of $850,000 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 in states other than Texas 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.
F-16
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Periodically, as claims are identified and resolved, the Company reassesses
its insurance loss reserves. The Company reduced its reserves by $1,020,000 and
$1,038,000 for the years ended September 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.
10. 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
$8,000, $1,000, and $5,000 for the years ended September 30, 2000, 1999, and
1998, respectively.
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 $1,172,000, $1,439,000, and $1,839,000 for the years ended September 30,
2000, 1999 and 1998, respectively. The same vendor purchased items from the
Company in the amount of $44,000, $65,000, and $53,000 in 2000, 1999 and 1998,
respectively. This vendor also leases the Company's cold-storage facilities. The
lease term including options runs through October 31, 2005, and represented
$60,000 of annual rental revenue for the Company in fiscal 2000, 1999 and 1998.
11. 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.
12. ASSET IMPAIRMENT AND RESTRUCTURING COSTS
In the quarter ended June 30, 1998, the Company impaired assets at 22
locations based on its continuing evaluation of recoverability of long-lived
store assets at 13 locations and its intent to close and dispose of nine
locations. The Company initially estimated asset impairment charges of
$6,049,000 for 22 restaurant locations, including one previously closed and held
for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the
impairment charge for land and buildings held for sale, primarily based on the
sale of one of the properties completed in October 1998 for significantly more
than the previously estimated fair value less cost 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. Four of those sites
were sold in 1999 and one is shown as land and building held for sale on the
September 30, 2000, balance sheet.
F-17
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company paid $42,000, $500,000, and $658,000 in 2000, 1999 and 1998,
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.
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.
13. 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, 2000. 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-18
<PAGE>
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (Amounts in thousands except per
share data)
<TABLE>
<CAPTION>
Year ended September 30, 2000
----------------------------------------------------------------------------------------
Quarter ended
----------------------------------------------------------------------
12/31 3/31 6/30 9/30 Total
---------------- ----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales $ 13,307 $ 14,155 $ 14,366 $ 14,135 $ 55,963
Operating income (loss) (369) 813 (61) (213) 170
Net earnings (loss) (377) 840 (23) (191) 249
Net earnings (loss) per share (0.26) 0.58 (0.02) (0.13) 0.17
<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
<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>
--------------
(1) First quarter 2000 results include $137,000 to reduce insurance
reserves for the Voluntary Employee Injury Benefit (VEIB) Plan,
workers' compensation and general liability.
(2) Second quarter 2000 results include $883,000 to reduce insurance
reserves for the Voluntary Employee Injury Benefit (VEIB) Plan,
workers' compensation and general liability.
(3) Second quarter 1999 results include $248,000 to reduce insurance
reserves for the Voluntary Employee Injury Benefit (VEIB) Plan,
workers' compensation and general liability.
(4) Third quarter 1999 results include $790,000 to reduce insurance
reserves for the VEIB Plan, workers' compensation and general
liability.
(5) 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.
(6) Fourth quarter 1998 results include a pre-tax benefit of $113,000 to
reduce insurance reserves for workers' compensation and general
liability claims.
(7) Third quarter 1998 results include pre-tax asset impairment and
restructuring charges of $6,969,000.
(8) 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.
(9) Second quarter 1998 results include a pre-tax benefit of $212,000 to
reduce general liability insurance reserves.
F-19
<PAGE>
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 8, 2000
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 8, 2000
--------------------------------------------------------------------------
Jesse Arrambide, III, Chairman of the Board of Directors
/s/ HOLLIS TAYLOR December 8, 2000
--------------------------------------------------------------------------
Hollis Taylor, President and Chief Executive Officer and Director
(Principal Executive Officer) and Treasurer (Principal Financial Officer)
/s/ JULIE ANDERSON December 8, 2000
--------------------------------------------------------------------------
Julie Anderson, Vice President, Controller and Assistant
Treasurer (Principal Accounting Officer)
/s/ SAMUEL L. CARLSON December 8, 2000
--------------------------------------------------------------------------
Samuel L. Carlson, Director
/s/ ROBERT L. LIST December 8, 2000
--------------------------------------------------------------------------
Robert L. List, Director
/s/ DAVID ODEN December 8, 2000
--------------------------------------------------------------------------
David Oden, Director
/s/ TOMAS ORENDAIN December 8, 2000
--------------------------------------------------------------------------
Tomas Orendain, Director
/s/ GEORGE N. RIORDAN December 8, 2000
--------------------------------------------------------------------------
George N. Riordan, Director
/s/ RUDOLPH RODRIGUEZ, JR. December 8, 2000
--------------------------------------------------------------------------
Rudolph Rodriguez, Jr., Director
/s/ JOANNE KEATES December 8, 2000
--------------------------------------------------------------------------
Joanne Keates, Director
</TABLE>
