-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ul8WjcPEPD7ZXU4u8MzlELvAUTgeg40LT9EsfcbTEWSxgCsqaTLSZXUVbILLJdoK MCkUEcY6dsjdTPZHbA+I4g== 0000075929-97-000007.txt : 19970520 0000075929-97-000007.hdr.sgml : 19970520 ACCESSION NUMBER: 0000075929-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PANCHOS MEXICAN BUFFET INC /DE CENTRAL INDEX KEY: 0000075929 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 751292166 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04678 FILM NUMBER: 97608208 BUSINESS ADDRESS: STREET 1: 3500 NOBLE AVENUE CITY: FORT WORTH STATE: TX ZIP: 76111-0407 BUSINESS PHONE: 8178310081 MAIL ADDRESS: STREET 1: PO BOX 7407 CITY: FT WORTH STATE: TX ZIP: 76111-0407 FORMER COMPANY: FORMER CONFORMED NAME: PAMEX FOODS INC DATE OF NAME CHANGE: 19820811 FORMER COMPANY: FORMER CONFORMED NAME: PANCHOS MEXICAN BUFFET INC DATE OF NAME CHANGE: 19720519 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 ____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ TO _______ Commission File No. 0-4678 Pancho's Mexican Buffet, Inc. (Exact name of registrant as specified in its charter) DELAWARE 75-1292166 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 Noble Avenue, Fort Worth, Texas 76111 (Address of principal executive offices) (Zip Code) 817-831-0081 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Number of shares of Common Stock outstanding as of May 13, 1997: 4,397,559. PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES INDEX Page No. Part I. Financial Information Item 1. Financial Statements: Introduction 1 Consolidated Condensed Balance Sheets, March 31, 1997 and September 30,1996 2 Consolidated Condensed Statements of Operations for the Three-Months and Six-Months Ended March 31, 1997 and 1996 3 Consolidated Condensed Statements of Cash Flows for the Six-Months Ended March 31, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements 5 Independent Accountants' Review Report 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information Item 1. Legal Proceedings (no response required) Item 2. Changes in Securities (no response required) Item 3. Defaults Upon Senior Securities (no response required) Item 4. Submission of Matters to a Vote of Security Holders (no response required) Item 5. Other Information (no response required) Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements The consolidated condensed financial statements included herein have been prepared by the Company without audit as of March 31, 1997 and for the three-month and six-month periods ended March 31, 1997 and 1996 pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 1996. In the opinion of the Company, all adjustments, consisting only of normal recurring adjustments except as discussed in the notes to consolidated condensed financial statements included herein, necessary to present fairly the financial position of the Company as of March 31, 1997, and the results of operations and cash flows for the indicated periods have been included. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 1997. Deloitte & Touche LLP, independent public accountants, has made a limited review of the consolidated condensed financial statements as of March 31, 1997 and for the six-month and three-month periods ended March 31, 1997 and 1996 included herein. page 1 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
March 31, September 30, 1997 1996 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 485,000 $ 145,000 Accounts and notes receivable-current portion 262,000 254,000 Income taxes receivable 232,000 186,000 Inventories 674,000 640,000 Prepaid expenses 143,000 180,000 Deferred income taxes 372,000 206,000 Total current assets 2,168,000 1,611,000 PROPERTY, PLANT AND EQUIPMENT : Land 3,316,000 3,446,000 Buildings 9,897,000 10,561,000 Leasehold improvements 21,523,000 22,532,000 Equipment and furniture 27,041,000 28,579,000 Construction in progress 20,000 7,000 Total 61,797,000 65,125,000 Less accumulated depreciation and amortization (33,668,000) (32,359,000) Property, plant and equipment-net 28,129,000 32,766,000 OTHER ASSETS: Deferred income taxes 4,330,000 2,811,000 Other, including noncurrent portion of receivables 568,000 780,000 Total other assets 4,898,000 3,591,000 TOTAL $ 35,195,000 $ 37,968,000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,754,000 $ 1,273,000 Accrued wages and bonuses 1,468,000 1,485,000 Other current liabilities 2,052,000 1,398,000 Current portion of long-term debt 847,000 Total current liabilities 6,121,000 4,156,000 OTHER LIABILITIES: Long-term debt 2,536,000 3,489,000 Accrued insurance costs 3,503,000 3,802,000 Restructuring reserves 834,000 Total other liabilities 6,873,000 7,291,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock Common stock 440,000 440,000 Additional paid-in capital 18,633,000 18,633,000 Retained earnings 3,520,000 8,347,000 Cumulative foreign currency translation adjustment (436,000) Stock notes receivable (392,000) (463,000) Stockholders' equity 22,201,000 26,521,000 TOTAL $ 35,195,000 $ 37,968,000 See notes to consolidated condensed financial statements.
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended March 31, March 31, 1997 1996 1997 1996 SALES $ 16,585,000 $ 17,915,000 $ 33,159,000 $ 35,375,000 COSTS AND EXPENSES: Food costs 4,775,000 4,880,000 9,391,000 9,847,000 Restaurant labor and related expenses 6,071,000 6,551,000 12,714,000 13,321,000 Restaurant operating expenses 3,992,000 4,188,000 8,060,000 8,051,000 Depreciation and amortization 924,000 979,000 1,858,000 1,993,000 General and administrative expenses 1,473,000 1,252,000 2,725,000 2,608,000 Restructuring charges 4,988,000 4,988,000 Total 22,223,000 17,850,000 39,736,000 35,820,000 OPERATING INCOME (LOSS) (5,638,000) 65,000 (6,577,000) (445,000) INTEREST EXPENSE (123,000) (161,000) (200,000) (344,000) OTHER, INCLUDING INTEREST INCOME 39,000 69,000 65,000 159,000 EARNINGS (LOSS) BEFORE INCOME TAXES (5,722,000) (27,000) (6,712,000) (630,000) PROVISION (BENEFIT) FOR INCOME TAXES (1,635,000) 10,000 (1,951,000) (237,000) NET EARNINGS (LOSS) $ (4,087,000) $ (37,000) $ (4,761,000) $ (393,000) NET EARNINGS (LOSS) PER SHARE $ (0.93) $ (0.01) $ (1.08) $ (0.09) See notes to consolidated condensed financial statements.
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended March 31, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (4,761,000) $ (393,000) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Restructuring charges Depreciation and amortization 1,858,000 1,993,000 Provision (benefit) for deferred income taxes (1,685,000) 65,000 Amortization of restaurant start-up costs 26,000 Payment of restaurant start-up costs Provision for write down of long-lived assets 3,033,000 Provision for exit and carrying costs of closed locations 1,460,000 Write off of cumulative translation adjustment 455,000 Loss on extinguishment of stock notes receivable 71,000 (Gain) loss on sale of assets (22,000) (79,000) Minority interest in net earnings (loss) Changes in operating assets and liabilities: Accounts and notes receivable (29,000) (1,000) Income taxes receivable (46,000) 1,037,000 Inventories, prepaid expenses and other assets 13,000 279,000 Accounts payable and accrued expenses 346,000 (72,000) Total adjustments 5,454,000 3,248,000 Net cash provided (used) by operating activities 693,000 2,855,000 CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (247,000) (273,000) Proceeds from sale of assets 219,000 131,000 Net cash provided (used) by investing activities (28,000) (142,000) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net (85,000) (22,000) Long-term borrowings 13,780,000 15,087,000 Repayments of long-term borrowings (13,953,000) (17,508,000) Proceeds from increase in minority interest Dividends paid (66,000) (66,000) Payments received on officer stock notes Net cash provided (used) by financing activities (324,000) (2,509,000) EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH (1,000) (51,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 340,000 153,000 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 145,000 1,199,000 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 485,000 $ 1,352,000 SUPPLEMENTAL INFORMATION: Income taxes paid (refunds received), net $ (180,000) $ (1,362,000) Interest paid, net of capitalized amounts 157,000 347,000 See notes to consolidated condensed financial statements.
PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. NET LOSS PER SHARE Net loss per share is based on the weighted average number of shares and equivalent shares (including stock options, when dilutive) outstanding during each period. The weighted average of such shares was 4,398,000 for both the three-months and six-months ended March 31, 1997 and March 31, 1996. 2. LONG-TERM DEBT The Company's revolving credit and term loan agreement ("Loan Agreement") with a bank includes various financial covenants. Due to the net loss incurred by the Company in the quarter ended December 31, 1996, the Company violated a covenant. The bank has subsequently granted a permanent waiver for this covenant violation. The requirement to comply with an earnings-related covenant has been suspended by the bank through May 1997. In February 1997, the Company and the bank agreed to amend the Loan Agreement limit-reduction schedule and covenants. Under the amended agreement, the credit line limit is $4.5 million until June 30, and is reduced by $500,000 then and each subsequent quarter end. Cash capital expenditures are limited by the amended agreement to $500,000 each of the first three fiscal quarters and $1,900,000 for the fiscal year. Cash dividends are limited to $150,000 per fiscal year, respectively. Effective March 31, 1997, the Company and the bank further amended the Loan Agreement. This amendment modified the net cash flow covenant to consider the non-cash provisions of the restructuring charge (discussed in Note 3). The termination date of the loan agreement was extended until April 1, 1998. At March 31, 1997, the Company had $1,220,000 of credit available under the bank line of credit. 3. RESTRUCTURING COSTS In the quarter ended March 31, 1997, the Company established a restructuring plan in an effort to return to profitability. The plan included closing seven underperforming restaurants, disposing of the Mexico joint venture, impairing four other restaurants and increasing the reserves for lease buyout for two previously closed locations. The Company recorded a restructuring charge of $4,988,000 to execute the plan. The charge included $3,033,000 for the impairment of land, buildings, leasehold improvements and equipment. Impairment charges were determined in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The charge also included $1,460,000 to reserve for exit and carrying costs of closed locations. The rest of the charge consisted of a $455,000 loss from the recognition of the Cumulative Translation Adjustment for disposal of the Mexico venture, plus $40,000 to record a valuation allowance for deferred tax assets unlikely to be realized due to the closing of two Arizona locations under the restructuring. Sales for the seven closed locations were $1,170,000 and $2,337,000 for the quarter and half-year ended March 31, 1997, respectively, and $4,920,000 for all of fiscal 1996. While appropriate steps are being taken to dispose of its interest, the Company will continue to participate in the Mexico joint venture operations for part of the quarter ending June 30, 1997. The Company expensed $71,000 to reserve for exit and carrying costs related to disposing of its interest in the venture. 4. ADJUSTMENT OF INSURANCE RESERVES In the quarter ended March 31, 1997, the Company recognized a net benefit of $558,000 to reduce employee injury benefit reserves, included in accrued insurance costs on the balance sheet, based on an updated management analysis of claims activity and results. 5. CASH DIVIDENDS On April 11, 1997, the Company's board of directors declared a $.015 per common share semi-annual cash dividend. The dividend is payable on June 10, 1997 to holders of record on May 27, 1997. On December 10, 1996 the Company paid a $.015 per common share semi-annual cash dividend to holders of record as of November 26, 1996. INDEPENDENT ACCOUNTANTS' REVIEW REPORT Pancho's Mexican Buffet, Inc.: We have reviewed the accompanying consolidated condensed balance sheet of Pancho's Mexican Buffet, Inc. and subsidiaries as of March 31, 1997 and the related consolidated condensed statements of operations and cash flows for the three-month and six-month periods ended March 31, 1997 and 1996. These consolidated condensed financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of September 30, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (not presented herein), and in our report dated November 13, 1996 (December 16, 1996 as to the second paragraph of Note 3 to those statements), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of September 30, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Fort Worth, Texas May 1, 1997 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition As of March 31, 1997, the Company's current ratio was 0.4 to 1, unchanged from September 30, 1996. Cash and cash equivalents increased $339,000 during the six-month period to a balance of $485,000 at March 31, 1997, as cash provided by operations was partially offset by debt payments and dividend payments. Operating activities provided $693,000 and $2,855,000 cash for the six-month periods ended March 31, 1997 and 1996, respectively. The Company incurred net losses of $4,761,000 and $393,000 for the first halves of fiscal 1997 and 1996, respectively. The current period net loss included $1,858,000 in depreciation charges, non-cash restructuring charges of $4,988,000 and a non-cash benefit of $1,685,000 for deferred tax assets. The non-cash restructuring charges included $3,033,000 to impair fixed assets, $1,460,000 to record restructuring reserves for carrying and exit costs of closed locations, a $455,000 loss from the recognition of the Cumulative Translation Adjustment, and a $40,000 valuation allowance for deferred tax assets. Operating cash flow in the first half of 1996 included receipt of $1,362,000 in tax refunds and $1,993,000 in depreciation expense. Investing activities used $28,000 of cash in the six-months just ended. The Company spent $247,000 primarily for remodeling existing restaurants, and recouped $219,000 from the sale of equipment. In the first half of fiscal 1996, investing activities used a net of $142,000. The Company spent $273,000 primarily for remodeling of existing restaurants and completion of the Guadalajara restaurant, which opened in October 1995. Proceeds from the sale of assets totaled $131,000 in the first half of fiscal 1996. No new restaurants were opened this year, and none are currently planned, as management intends to focus on improving sales and profitability and reducing debt. Capital expenditures to remodel existing restaurants and to install restaurant computer systems will continue within the constraint of available operating cash flow and the loan agreement restrictions (see Note 2 to the consolidated condensed financial statements). The Company may also enter into lease agreements to acquire restaurant computer systems. Under the restructuring plan formulated in the quarter ended March 31, 1997, the Company closed seven restaurants on April 15, 1997. Units closed include leased locations in Houston, Dallas, San Antonio, Lubbock and College Station, Texas. The Company provided estimated restructuring reserves to buy out of the leases for those locations. The Company owns the land and buildings of two units, in Phoenix and Tucson, Arizona, which were closed. Plans are to sell those two restaurant properties and to use the proceeds primarily to repay bank debt. Financing activities used cash of $324,000 and $2,509,000 during the first six-months of fiscal 1997 and 1996, respectively, due primarily to the repayment of debt in each period. The Company will continue to pay down debt, thereby reducing interest expense, as quickly as possible within the constraints of operating cash flows and restaurant maintenance needs. The Company's revolving credit and term loan agreement ("Loan Agreement") with a bank includes various financial covenants. Due to the net loss incurred by the Company in the quarter ended December 31, 1996, the Company violated a covenant. The bank has subsequently granted a permanent waiver for this covenant violation. The requirement to comply with an earnings-related covenant has been suspended by the bank through May 1997. In February 1997, the Company and the bank agreed to amend the Loan Agreement limit-reduction schedule and covenants. In the amended agreement, the credit line limit is $4.5 million until June 30, and is reduced by $500,000 then and each subsequent quarter end. Under this limit-reduction schedule, $780,000 of the Company's bank debt is included in the current portion of long-term debt. Cash capital expenditures are limited by the amended agreement to $500,000 each of the first three fiscal quarters and $1,900,000 for the fiscal year. Cash dividends are limited to $150,000 per fiscal year, respectively. Effective March 31, 1997, the Company and the bank further amended the Loan Agreement . This amendment modified the net cash flow covenant to consider the non-cash provisions of the restructuring charge. The termination date of the loan agreement is April 1, 1998. At March 31, 1997, the Company had $1,220,000 of credit available under the bank line of credit. Management is taking steps to ensure that the Company will be able to comply with all of its covenants under the Loan Agreement in the future. However, if the bank declined to waive a future covenant violation, the bank would be required under the Loan Agreement to give the Company 15 days written notice of the violation, after which time the Company would be in default. At the bank's option, it could then declare the loan principal and all accrued interest current and payable and/or refuse to make additional advances on the credit line. The Company could then be forced to seek alternative sources of financing. On April 11, 1997, the Company's board of directors declared a $.015 per common share semi-annual cash dividend, payable on June 10 to holders of record as of May 27. On December 10, 1996 the Company paid a $.015 per common share semi-annual cash dividend to holders of record as of November 26. Future cash dividends will depend on earnings, financial position, capital requirements, debt restrictions and other relevant factors. The Company believes it will realize substantial benefits from the use of federal employer tax credits and state net operating loss (NOL) carryforwards to reduce future federal and state income tax liabilities. If the Company's results of operations continue to decline or do not timely achieve levels needed to use the employer tax credits or the state NOL carryforwards, they could expire before use, resulting in a charge against income. In the quarter ended March 31, 1997, the Company increased its valuation allowance for deferred tax assets to $700,000. The valuation allowance includes $613,000 to fully reserve for deferred tax assets related to disposal of the Mexico operation, due to the uncertainty of their realizability. The remainder of the increase in the deferred tax valuation allowance offsets Arizona state NOL carryforwards and other deferred tax assets. Results of Operations Sales decreased $1,330,000 (7.4%) and $2,216,000 (6.3%) for the quarter and half-year, respectively, ended March 31, 1997 compared to the same periods last year. The decrease is due to same-store sales declines of 7.4% and 6.1%, respectively. Average sales for restaurants open throughout the current three and six month periods were $255,000 and $509,000, respectively. Prior year average sales were $275,000 and $547,000 for the first three and six month periods, respectively. In response to declining sales, the Company formulated a restructuring plan in the quarter ended March 31, 1997. The restructuring included the closing of seven underperforming restaurants and plans for discontinuing the Company's participation in the Mexico joint venture. The seven restaurants closed on April 15, 1997 contributed $1,170,000 and $2,337,000 of sales in the current quarter and half-year, and $4,920,000 in all of fiscal 1996. These represent average unit sales well below those for the remaining 57 U.S. restaurants. The Company expects restaurants near those closed in Houston, Dallas and San Antonio, Texas and Phoenix, Arizona to show improved sales trends due to customer traffic from the closed locations. The restructuring plan provides for the Company to continue to participate in operating its Guadalajara, Mexico restaurant through part of the quarter ending June 30, 1997, while appropriate exit procedures are executed. The Company has accrued restructuring reserves to provide for this exit process. The Mexico operations have generated operating losses, and have not contributed significant sales to the Company. To improve sales, the Company has embraced a focused neighborhood marketing strategy using company-wide and store-specific neighborhood marketing tactics based on detailed market research and analysis, supported by intensive planning and training. Neighborhood marketing will strengthen Pancho's ties to each restaurant's immediate community with a portfolio of specific tactics developed for each location. A series of Company-wide tactics complement existing Company programs such as the Birthday Club and School Rewards programs. The results of all marketing tactics will be carefully measured to evaluate their impact on sales. The Company introduced its 110% Satisfaction Guaranteed promotion April 26 with a round of employee rallies that demonstrated the Company's commitment to customer satisfaction. At the rallies, the Company announced the rollout of its new frequent diner program, which will be run intermittently to increase visit frequency. The Company also presented new, modern uniforms to add a fresh, updated look in the restaurants. New graphics for menu boards and other design improvements will be introduced during the summer to enhance restaurant appearance. Food cost increased 1.6% and 0.5% of sales for the current quarter and half-year, respectively, compared with the same periods in fiscal 1996. The increase is due primarily to higher usage of meats as the Company rolled out its all-you-can-eat fajita promotion during fiscal 1997. Higher produce prices resulting from disruptive weather conditions and smaller production efficiencies resulting from lower sales compounded the food cost problems. If the Company is unable to reduce food costs with purchasing improvements and production efficiencies, price increases will be considered. Restaurant labor and related expenses were flat for the quarter but up 0.6% of sales year-to-date, compared with the same periods in fiscal 1996, despite the benefit of a $558,000 credit to reduce employee injury benefit reserves in the current quarter. These reserves were reduced to recognize effective risk and case management based on management analysis of claims activity and results. Excluding the credit to reduce employee injury benefit reserves, labor and related costs were up 3.4% and 2.3% of sales for the current quarter and half-year, respectively. The increase was caused by the combination of the higher federal minimum wage and lower sales. Hourly wage inflation increased labor costs about 1.3% of sales. Due to the increased federal minimum wage and a difficult labor market, the Company's average regular hourly wage cost was $0.22 per hour higher for the first six-months of 1997 than for the first half of 1996. If the Company is unable to reduce labor cost factors with management efficiencies and sales increases, the Company will consider price increases. Restaurant operating expenses, which include marketing and occupancy costs, increased 0.7% and 1.5% of sales for the current three-month and six-month periods versus the same periods last year. For the quarter, the Company spent $196,000 less in 1997 than in 1996, and spending for the 1997 half-year matched the 1996 half-year. Nevertheless, lower sales caused higher cost percentages. The Company spent 1.9% and 3.3% of sales on marketing in the second quarters of fiscal 1997 and 1996, respectively. Due to the strategic shift from broadcast advertising to neighborhood marketing, the Company spent $277,000 less on marketing in the current quarter. In the second quarter of 1996, the Company spent $423,000 for broadcast media for TV ads, compared with $8000 for broadcast media in the second quarter of 1997. These savings were partially used to fund an additional $82,000 for marketing research and consulting this quarter. For marketing in the first half-year, the Company spent 2.5% of sales and 2.6% of sales in fiscal 1997 and 1996, respectively. Marketing costs were $78,000 lower this half-year, as the Company spent $369,000 less for ad media and $163,000 more for marketing research and consulting plus $89,000 more for promotions. In fiscal 1997, management expects to continue marketing expenditures at the fiscal 1996 rate of 2.7% of sales. The remainder of the increase in restaurant operating costs as a percentage of sales is due to the effect of lower sales on relatively fixed occupancy costs, utilities and other operating expenses. Depreciation and amortization decreased $55,000 and $135,000 for the three-month and six-month periods ended March 31, 1997 compared to the prior year periods, due to limited capital additions this year. For the quarter and half-year, general and administrative expenses increased $221,000, up 1.9% of sales, and $117,000, up 0.8% of sales, respectively. The increase was partially due to a $71,000 charge to reserve for extinguishment of stock notes receivable from two former employees. The Company recorded a restructuring charge of $4,988,000 to execute the restructuring plan established in the quarter ended March 31, 1997. This charge included $3,033,000 for the impairment of land, buildings, leasehold improvements and equipment. Impairment charges were determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The charge also included $1,460,000 to reserve for exit and carrying costs of closed locations. The rest of the charge consisted of a $455,000 loss from recognition of the Cumulative Translation Adjustment for disposal of the Mexico venture, plus $40,000 to record a valuation allowance for deferred tax assets unlikely to be realized due to the closing of two Arizona locations under the restructuring. Interest expense was $38,000 and $144,000 lower for the current quarter and half-year, respectively, compared to the same periods in fiscal 1996, due to lower outstanding debt. The benefit for income taxes was $1,635,000 and $1,951,000 for the current quarter and half-year, respectively. Year-to-date that represents 34.1% of the US net loss before income taxes versus a benefit rate of 37.6% for first six-months of fiscal 1996. No tax benefits have been recognized for the losses in the Mexico operations. The prior year benefit was high due to an increase in federal tax refunds receivable. Due to lower sales and other factors discussed above, the Company reported net losses of $4,087,000 and $4,761,000 for the quarter and half-year ended March 31, 1997 versus net losses of $37,000 and $393,000 for the same periods last year, respectively. The restaurant industry is intensely competitive, and the Company's future earnings depend on reversing the trend of declining unit sales and improving the key cost factors. Other Uncertainties and Trends SFAS No. 121 requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset 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 restaurant level. If a restaurant continues to incur negative cash flows or operating losses, an impairment or restaurant closing charge may be recognized in future periods. Special Note Regarding Forward-Looking Information The foregoing section contains various forward-looking statements which represent the Company's expectations or beliefs concerning future events, including, but not limited to the following: statements regarding unit growth, future capital expenditures, future borrowings, future cash flows and future results of operations. The Company warns that many factors could, individually or in aggregate, cause actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following: consumer spending trends and habits; increased competition in the restaurant industry; weather conditions; and laws and regulations affecting labor and employee benefit costs. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Required by Item 601 of Regulation S-K Exhibit Number 2 Not applicable 4 Not applicable 10(y) Amendment to Revolving Credit and Term Loan Agreement, dated March 31, 1997 -- filed herewith. 11 Not required--explanation of net earnings (loss) per share computation is contained in notes to consolidated condensed financial statements. 15 Letter re: unaudited interim financial information 18 Not applicable 19 Not applicable 22 Not applicable 23 Not applicable 24 Not applicable 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PANCHO'S MEXICAN BUFFET, INC. May 14, 1997 /s/ Hollis Taylor Hollis Taylor, President and Chief Executive Officer (Principal Executive Officer) May 14, 1997 /s/ W. Brad Fagan Brad Fagan, Vice President, Treasurer, Controller and Assistant Secretary (Principal Financial and Accounting Officer) EX-10 2 SIXTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT This Sixth Amendment To Revolving Credit and Term Loan Agreement (this "Sixth Amendment") is made by and between PMB Enterprises West, Inc., a New Mexico corporation ("Company"), and Wells Fargo Bank (Texas), National Association (formerly First Interstate Bank of Texas, N.A.) ("Bank"). WHEREAS, the parties entered into that one certain Revolving Credit and Term Loan Agreement dated February 16, 1994 (the Revolving Credit and Term Loan Agreement dated February 16, 1994 and all amendments thereto and restatements thereof are hereinafter collectively referred to as the "Loan Agreement"); and WHEREAS, the parties entered into that one certain First Amendment To Revolving Credit and Term Loan Agreement dated February 9, 1995 ("First Amendment"); and WHEREAS, the parties entered into that one certain Second Amendment To Revolving Credit and Term Loan Agreement dated May 9, 1995 ("Second Amendment"); and WHEREAS, the parties entered into that one certain Third Amendment To Revolving Credit and Term Loan Agreement dated September 29, 1995 ("Third Amendment"); and WHEREAS, the parties entered into that one certain Fourth Amendment To Revolving Credit and Term Loan Agreement dated February 16, 1996 ("Fourth Amendment"); and WHEREAS, the parties entered into that one certain Fifth Amendment To Revolving Credit and Term Loan Agreement dated July 9, 1996 ("Fifth Amendment"); and WHEREAS, the parties desire to amend the Loan Agreement in certain respects; and WHEREAS, capitalized terms used herein shall have the meaning assigned to them in the Loan Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is agreed by and among the parties as follows: 1. The definition of Termination Date in Article I of the Loan Agreement is amended to read in its entirety as follows: "Termination Date" shall mean (i) April 1, 1998, or (ii) such later date to which the Revolving Credit Period is extended pursuant to Section 2.01(b) hereof. 2. Section 9.01 and Section 9.08 of the Loan Agreement are amended to read in their entirety as follows: 9.01. Funded Debt to Net Cash Flow. Permit the ratio of Funded Debt as of the end of any fiscal quarter to Net Cash Flow of Pancho's Mexican Buffet, Inc. and its Subsidiaries for the four quarter period ending as of the end of the preceding fiscal quarter at any time to be greater than 2.5 to 1.0. In calculating Net Cash Flow, there shall be excluded the restructuring charge in the total amount of $3,488,018 incurred in March 1997; or 9.08. Limitation on Additional Indebtedness. Incur or assume or permit any Guarantor to incur or assume any Indebtedness for borrowed money, except for (i) the indebtedness evidenced by the Note; (ii) Consolidated Indebtedness (excluding the indebtedness evidenced by the Note) not to exceed one million five hundred thousand dollars ($1,500,000) in the aggregate at any one time; and (iii) trade debt incurred in the ordinary course of business; or 3. All net proceeds of the sale of the properties located at 8146 West Indian School Road, Phoenix, Arizona and 701 East Broadway Boulevard, Tucson, Arizona, shall be promptly applied to the unpaid balance of the Note. The failure of Borrower to promptly apply all net proceeds of sale of such properties to the unpaid balance of the Note shall constitute an event of default under the Loan Agreement. 4. Except as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment and this Sixth Amendment, the Loan Agreement is ratified and confirmed and shall remain in full force and effect. 5. At the time of execution of this Sixth Amendment, Company shall pay to Bank a fee in the amount of four thousand five hundred dollars ($4,500). 6. The Company represents and warrants to the Bank, with full knowledge that the Bank is relying on the following representations and warranties in executing this Sixth Amendment, as follows: (a) The Company has corporate power and authority to execute, deliver and perform this Sixth Amendment, and all corporate action on the part of the Company requisite for the due execution, delivery and performance of this Sixth Amendment has been duly and effectively taken. (b) The Loan Agreement and the Loan Documents and each and every other document executed and delivered in connection with this Sixth Amendment to which the Company or any of its Subsidiaries is a party constitute the legal, valid and binding obligations of the Company and any of its Subsidiaries to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms. (c) This Sixth Amendment does not and will not violate any provisions of the articles or certificate of incorporation or bylaws of the Company, or any contract, agreement, instrument or requirement of any Governmental Authority to which the Company is subject. The Company's execution of this Sixth Amendment will not result in the creation or imposition of any lien upon any properties of the Company, other than those permitted by the Loan Agreement and this Sixth Amendment. (d) The Company's execution, delivery and performance of this Sixth Amendment do not require the consent or approval of any other Person, including, without limitation, any regulatory authority or governmental body of the United States of America or any state thereof or any political subdivision of the United States of America or any state thereof. (e) All financial information previously presented to the Bank fairly present the financial condition of the Company and its Subsidiaries as at the date of such information and the results of the operations of the Company and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP applied on a consistent basis. (f) The Company has performed and complied with all agreements and conditions contained in the Loan Agreement required to be performed or complied with by the Company prior to or at the time of delivery of this Sixth Amendment. (g) After giving effect to this Sixth Amendment, no Default or Event of Default exists and all of the representations and warranties contained in the Agreement and all instruments and documents executed pursuant thereto or contemplated thereby are true and correct in all material respects on and as of this date. (h) Nothing in this Section 5 of this Sixth Amendment is intended to amend any of the representations or warranties contained in the Loan Agreement or in the Loan Documents to which the Company or any of the Subsidiaries is a party. 7. The effectiveness of this Sixth Amendment shall be conditioned on the receipt by the Bank of each of the following: (a) Corporate resolutions of Company authorizing the execution of this Sixth Amendment; (b) Incumbency certificate of Company; and (c) The fee in the amount of four thousand five hundred dollars ($4,500). 8. Company hereby expressly ratifies, confirms and extends all deed of trust and mortgage liens and all security interests in favor of Bank and agrees that each deed of trust lien, mortgage lien and security interest in favor of Bank shall remain in full force and effect until all indebtedness of Company to Bank is paid in full and all commitments of Bank to Company have terminated. 9. Company agrees to pay any and all costs and expenses incurred by Bank in connection with this Sixth Amendment (including, but not limited to, any and all appraisal fees, cost of title searches, costs of environmental reports, recording fees, conveyance fees and reasonable attorneys fees) within ten (10) days of the date of any invoice for such costs and expenses. Company, at Company's expense, agrees to promptly execute and deliver to Bank upon request any and all other and further documents, agreements and instruments as may be requested by Bank in connection with or relating to this Sixth Amendment and the Loan Agreement or as may be necessary to correct any omissions or defects in the documents, agreements or instruments delivered to Bank in connection therewith. 10. The parties agree to be bound by the terms and provisions of the current Arbitration Program of Wells Fargo Bank (Texas), National Association, which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. 11. Each of the Guarantors hereby consents to and accepts the terms and conditions of this Sixth Amendment, agrees to be bound by the terms and conditions hereof and ratifies and confirms that its continuing Guaranty Agreement, executed and delivered to the Bank as of February 16, 1994, guaranteeing payment of the obligations is and remains in full force and effect. 12. This Sixth Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of the signature page of this Sixth Amendment by facsimile shall be equally as effective as delivery of a manually executed counterpart of this Sixth Amendment. 13. This Sixth Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 14. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS AMONG THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. Executed to be effective as of March 31, 1997. PMB ENTERPRISES WEST, INC. By: /s/Samuel L. Carlson Samuel L. Carlson, Senior Vice President COMPANY WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.) By: /s/John R. Peloubet John r. Peloubet, Vice President BANK AGREED TO: PANCHO'S MEXICAN BUFFET, INC. By: /s/W. Brad Fagan___________ Name: Brad Fagan__________ Title: VP - Treasurer________ PMB INTERNATIONAL, INC. By: /s/W. Brad Fagan____________ Name: Brad Fagan___________ Title: VP - Treasurer_________ PAMEX OF TEXAS, INC. By: /s/W. Brad Fagan_____________ Name: Brad Fagan____________ Title: VP - Treasurer__________ GUARANTORS F-81999.1 EX-15 3 EXHIBIT 15 Pancho's Mexican Buffet, Inc.: We have reviewed in accordance with standards established by the American Institute of Certified Public Accountants the unaudited interim financial information of Pancho's Mexican Buffet, Inc. and subsidiaries for the three-months and six-months ended March 31, 1997 and 1996, as indicated in our report dated May 1, 1997; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated by reference in Registration Statements No. 2-86238 and No. 33-60178 on Form S-8. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Fort Worth, Texas May 14, 1997 EX-27 4
5 This schedule contains summary financial information extracted from the consolidated condensed balance sheets as of March 31, 1997 and the consolidated condensed statement of operations for the nine-months then ended and is qualified in its entirety by reference to such financial statements. 6-MOS SEP-30-1997 MAR-31-1997 485,000 0 262,000 0 674,000 2,168,000 61,797,000 33,668,000 35,195,000 6,121,000 0 0 0 440,000 21,761,000 35,195,000 33,159,000 33,159,000 9,391,000 32,023,000 7,713,000 0 200,000 (6,712,000) (1,951,000) (4,761,000) 0 0 0 (4,761,000) (1.08) (1.08)
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