-----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, KUaXWeR5qqrm8nbwRDI4nfQhDOxbezLzBOk4XNmX6UweKue3VfTFXe40LVe+abRh nKNNmdb3o4/Psco8Lbyxmg== 0000950134-97-009477.txt : 19971223 0000950134-97-009477.hdr.sgml : 19971223 ACCESSION NUMBER: 0000950134-97-009477 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971222 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-K SEC ACT: SEC FILE NUMBER: 000-04678 FILM NUMBER: 97742093 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-K 1 FORM 10-K YEAR ENDED SEPTEMBER 30, 1997 1 ================================================================================ 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, 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 (I.R.S. Employer of incorporation or organization) Identification No.) 3500 NOBLE AVENUE, FORT WORTH, TEXAS 76111 (Address of principal executive offices) (Zip Code) 831-0081 817 (Registrant's telephone number) (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 [ ]. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON NOVEMBER 28, 1997, BASED ON THE ACTUAL STOCK PRICE ON SUCH DATE WAS $7,717,077. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 28, 1997:..................................................................4,389,159 DOCUMENTS INCORPORATED BY REFERENCE THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 28, 1998, IS INCORPORATED BY REFERENCE IN PART III HEREOF. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL The Company, Pancho's Mexican Buffet, Inc. and subsidiaries, is principally engaged in the operation and development of the Pancho's Mexican Buffet restaurant chain serving Mexican food cafeteria style. However, Pancho's is more than a cafeteria, because it features "all-you-can-eat" at a fixed price. Along the cafeteria line, servers fill a piping hot platter with a diner's choices from more than 20 items of freshly prepared Mexican food. Pancho's becomes a full-service restaurant when a diner is at the table. A waitress or waiter brings refills, or other food a diner may request from the buffet, at no extra charge. For more service, a diner simply raises the small flag on the table. The Company currently operates 57 restaurants located in the states of Texas (43), Louisiana (6), Arizona (3), Oklahoma (3) and New Mexico (2). The Company opened a restaurant in Guadalajara, Mexico in October 1995. This operation was the result of a joint venture between the Company and one of its non-employee directors to test the Mexican market for possible expansion. No other new restaurants were opened in fiscal 1996. No new restaurants were opened in fiscal 1997, and none are currently planned, as management intends to focus on improving sales and profitability and reducing debt. In March 1997, the Company established a restructuring plan in an effort to improve cash flow and 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 carrying costs of two previously closed locations. Under the plan, the Company closed seven U.S. locations on April 15, 1997 and disposed of its interest in the Mexico venture effective May 31, 1997. In June 1995, following declining sales and net operating losses in the first two quarters of 1995, the Company adopted a restructuring plan. The plan included closing nine underperforming restaurants and writing down assets at seven restaurants operating at lower sales volumes and at the Company's constructed but then-unopened restaurant in Guadalajara, Mexico. Consistent with ongoing efforts to improve operating margins, three other restaurants were closed during the year, and two locations formerly operated as Emiliano's Buffet Mexicano restaurants were re-opened as Pancho's Mexican Buffets. Jesse Arrambide, a Company founder, developed and opened the first Pancho's Mexican Buffet in El Paso, Texas in 1958. The Company was organized under the laws of the State of Delaware in December 1968 to succeed to the business operated by predecessor corporations which were merged into the Company on January 23, 1969. The Company's principal offices are located at 3500 Noble Avenue, Fort Worth, Texas 76111 (telephone number [817] 831-0081). BUSINESS DEVELOPMENT The Company's long-term strategy is to expand Pancho's Mexican Buffet within the Company's existing five-state market and other contiguous states. The Company intends to concentrate on the development of existing markets to reduce its supervision expense as a percentage of sales and to improve the Company's competitive position, marketing potential and profitability. There can be no assurance that the Company will be able to achieve these objectives. The Company has no plans for franchising in the U.S.; however, one Pancho's is currently being operated under a license agreement. Due to its losses on the Guadalajara restaurant, the Company does not plan further development in Mexico. The most important factors in selecting new locations are the demographics of the immediate market area within a radius of three to four miles and the occupancy cost of the proposed restaurant. The Company's experience indicates that it is relatively immaterial whether the location is free-standing or in a mall or shopping center. Senior management inspects each restaurant site prior to its acquisition. The Company has developed prototypes of both a free-standing building design and a shopping center space design to enhance site flexibility. In its restaurants, the Company maintains distinctive styling and colorful decor using authentic artifacts in a Mexican motif. 3 The 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. During fiscal 1993, the Company added self-service soup/salad bars and dessert bars to provide greater food variety and value. RESTAURANT OPERATIONS The Company's restaurants serve continuously from 11:00 a.m. to 9:00 p.m. seven days a week. The restaurants are family-oriented and are designed to match serving-line service speed (three to three and one half patrons per minute) to seating capacity for optimum utilization of space and return on investment. Older Pancho's average approximately 7,300 square feet and seat 180 to 200. New restaurants, and higher volume restaurants in which seating capacity has been expanded, average approximately 9,000 square feet and seat 240 to 300. A typical new restaurant in a strip shopping center costs about $900,000 to $1,000,000 to develop, including equipment and leasehold improvements. Free-standing units cost from $1.5 million to $1.9 million for land, building and equipment. In addition to the "all-you-can-eat" buffet, the menu includes competitively-priced limited-selection plates (the Super Combo value meal), fajitas, a taco salad, soup/salad bar, and a child's plate. Children five years of age and under are served any three items 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 soup/salad 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, three kinds of sauces, tacos, chalupas, pico de gallo, assorted relishes, chips, hot sauce and sopaipillas. Beverages are also available. Alcoholic beverages are served in 35 restaurants and accounted for 0.9% of the Company's sales for the year ended September 30, 1997. Pancho's restaurants offer food to go, which accounted for 10.3% of sales for the year ended September 30, 1997. The Company has standard procedures for customer service, sanitation, food preparation and other operational matters. Each restaurant is under the direction of a general manager, associate manager and production manager (chef). Additionally, higher volume units have a first assistant manager who typically has completed the Company's formal Manager Training Program. The basic three-manager team participates in an incentive compensation program based upon sales and profitability of their specific restaurant. Company Area Supervisors and Production Supervisors inspect the restaurants regularly and assist the unit management to assure compliance with quality standards set by the Company. They also participate in incentive compensation based on the restaurant group for which they are responsible. Depending on the size of the restaurant and the time of the year, each Pancho's will have from 30 to 90 employees. Special attention is directed to personnel planning for new restaurants. "Blue Ribbon Teams" which assist in the opening of new restaurants are selected from existing restaurants on the basis of superior employee performance in all categories of restaurant operations. This program provides recognition for superior employee performance and ensures immediate compliance with Company standards of service in newly-opened restaurants. MARKETING AND ADVERTISING From fiscal 1993 through fiscal 1996, the Company employed a mix of television, radio and newspaper advertising combined with local store marketing programs. Same-store sales increases in the fourth quarter of fiscal 1993 and the first three quarters of fiscal 1994 were subsequently offset by declining same-store sales. Management has concluded that television advertising is not efficient for the Company's size and market, and so plans to focus on local store marketing. 2 4 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 meals for honor roll and perfect attendance students, and sponsors sports leagues for local children. There is a birthday club for children under twelve which serves the child free on his or her birthday and also provides a free pinata for the birthday celebration. A senior citizens program includes registered membership that entitles the member to a 20% discount. The Company has engaged the marketing consulting firm of Feltenstein Partners to assist in conducting market research, developing marketing strategy and tactics, and implementing marketing programs. The Company's previous market research was updated in fiscal 1997, and is being updated again in fiscal 1998. Local store marketing programs tailored to each restaurant were implemented during 1997, and will be updated in 1998. PURCHASING AND DISTRIBUTION The Company owns a warehouse and cold storage facility located at its headquarters in Fort Worth, Texas. Until September 1994, grocery products and supplies were distributed to the Company's restaurants from that facility. In July 1994, the Company entered into an agreement with The SYGMA Network, Inc. to purchase, warehouse and distribute substantially all the food products and supplies for the Company's restaurants. This agreement provided immediate benefits through increased delivery frequency at lower cost and decreased investment in inventory. SYGMA's nationwide distribution network will also allow the Company 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 SYGMA Network specializes in distribution for restaurant chains. 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. Minimal items are purchased locally. HUMAN RESOURCES On September 30, 1997, the Company had about 2,598 employees, of whom 63 were corporate personnel, 2,521 were employed in 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, and the competitive environment is often affected by factors beyond a particular restaurant's control, including changes in population, traffic patterns and economic conditions. The Company's restaurants compete with a wide variety of 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 food presentation, and in the strength of the Pancho's Mexican Buffet name. 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 and freezer space of about 194,000 3 5 cubic feet and warehouse dry storage of approximately 31,400 square feet. The Company also owns land (85,500 sq. ft.) and a warehouse building (25,000 sq. ft.) adjoining its present general office/warehouse property and land (42,600 sq. ft.) located at 3565 McCart Street, Fort Worth, Texas. The Company plans to sell or lease the McCart Street property. The sites of eleven operating restaurants are owned by the Company. The Company is seeking to sell a closed restaurant building and land which it owns in Phoenix, Arizona. Forty-six operating restaurants are occupied pursuant to lease agreements which have varying expiration dates into the year 2007. At September 30, 1997, the Company had remaining lease obligations on four closed restaurant locations. As of November 30, 1997, three of these locations were subleased, and the Company is seeking to sublease the other site, for which the lease term expires in February 1999. 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. 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 is being held for future office expansion. In connection with its revolving credit and term loan agreement with a bank, the bank has a security interest in substantially all of the real property owned by the Company. Substantially all of the equipment and furniture used in the operation of the restaurants and the headquarters facility are owned by the Company. Information as to restaurant locations is set forth below: ARIZONA: Mesa Phoenix-2 LOUISIANA: Baton Rouge Bossier City Chalmette Lafayette Metairie Shreveport NEW MEXICO: Albuquerque-2 OKLAHOMA: Oklahoma City-2 Tulsa TEXAS: Abilene Amarillo Arlington-3 Baytown Beaumont Burleson Carrollton Conroe Corpus Christi* Dallas-3 Denton El Paso-2** Euless Fort Worth-3 Galveston Garland Houston-6 Humble Irving Killeen League City Lewisville Longview Mesquite North Richland Hills Plano Richardson San Antonio Sherman South Houston Texarkana Tyler Waco Windcrest - --------------- * Operated by licensee ** Operated by A&A Foods ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 4 6 EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION AND OFFICE PERIOD OF NAME WITH REGISTRANT PRESENT OFFICE AGE ---- ------------------- -------------- --- Jesse Arrambide, III.......... Chairman of the Board and Since December 9, 1994 45 Chief Operations Officer -- also Director and officer of subsidiary companies Hollis Taylor................. Director and President and Since August 10, 1979 61 Chief Executive Officer -- also Director and officer of subsidiary companies Samuel L. Carlson............. Director and Senior Vice Since December 21, 1988 61 President, Administration and Secretary -- also Director and officer of subsidiary companies Brad Fagan.................... Vice President, Treasurer, Since September 29, 1995 38 Controller and Assistant Secretary -- also Director and officer of subsidiary companies
Jesse Arrambide, III has been a Director since 1977. He has been Chairman of the Board of Directors since August 1993, and Chief Operations Officer since December 1994. He was Vice President, Operations from November 1984 to August 1993. Hollis Taylor has been a Director since March 1974. He has been President and Chief Executive Officer since August 1979. Samuel L. Carlson has been a Director since November 1993. He has been Senior Vice President, Administration and Secretary since December 1988. Brad Fagan has been Vice President, Treasurer and Assistant Secretary since September 1995 and Controller since December 1991. Mr. Fagan, a certified public accountant, was Controller of Staffing Services, Inc. from July 1989 through April 1991. He was a corporate audit supervisor for PepsiCo, Inc. from May 1985 through July 1989, and worked for the accounting firm of Arthur Andersen & Co. from July 1983 to May 1985. 5 7 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 in the National Association of Securities Dealers, Inc. (NASDAQ) National Market System, under the symbol "PAMX." On November 28, 1997, the number of record holders was about 685 and the Company estimates that on that date there were an additional 1300 beneficial owners. The following table sets forth the quarterly high and low closing prices of the common stock, as reported by NASDAQ, for the calendar quarters indicated.
FISCAL QUARTER ENDED HIGH LOW -------------------- ------ ------ December 31, 1995........................................... $3.750 $2.625 March 31, 1996.............................................. 3.500 2.250 June 30, 1996............................................... 3.000 1.875 September 30, 1996.......................................... 2.563 1.875 December 31, 1996........................................... 2.750 1.875 March 31, 1997.............................................. 2.688 1.625 June 30, 1997............................................... 2.063 1.500 September 30, 1997.......................................... 2.500 1.563
COMMON STOCK DIVIDENDS The Company has paid cash dividends for the past 17 years. In 1997, cash dividends were $.03 per share. Future cash dividends will depend on loan restrictions, earnings, financial position, capital requirements and other relevant factors. 6 8 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company for each of the five fiscal years ended September 30, 1993 through 1997 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 YEARS ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993 ------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales.................................... $66,957 $71,487 $80,893 $86,062 $75,968 ------- ------- ------- ------- ------- Costs and Expenses: Food costs............................. 18,792 19,681 22,910 23,347 20,956 Restaurant labor and related expenses............................ 25,235 26,561 30,400 30,806 27,256 Restaurant operating expenses.......... 15,799 16,508 18,376 19,134 16,014 Depreciation and amortization.......... 3,426 3,949 4,512 4,420 3,635 General and administrative expenses.... 5,160 5,067 5,547 5,475 5,203 Restructuring charges.................. 5,066 7,572 (264) ------- ------- ------- ------- ------- Total.......................... 73,478 71,766 89,317 82,918 73,064 ------- ------- ------- ------- ------- Operating income (loss).................. (6,521) (279) (8,424) 3,144 2,904 Interest expense......................... (348) (540) (590) (34) Other, including interest income......... 303 269 309 66 147 ------- ------- ------- ------- ------- Earnings (loss) before income taxes and cumulative effect of change in accounting principle................... (6,566) (550) (8,705) 3,176 3,051 Provision (benefit) for income taxes..... (1,850) (135) (3,343) 1,101 937 ------- ------- ------- ------- ------- Net earnings (loss) before cumulative effect of change in accounting principle.............................. (4,716) (415) (5,362) 2,075 2,114 Cumulative effect of change in accounting for income taxes....................... 722 ------- ------- ------- ------- ------- Net earnings (loss)...................... $(4,716) $ (415) $(5,362) $ 2,075 $ 2,836 ======= ======= ======= ======= ======= Cash dividends........................... $ 132 $ 132 $ 462 $ 1,056 $ 1,051 ======= ======= ======= ======= ======= Per Share Data: Net earnings (loss) before cumulative effect of change in accounting principle........................... $ (1.07) $ (.09) $ (1.22) $ .47 $ .48 Net earnings (loss).................... (1.07) (.09) (1.22) .47 .64 Cash dividends......................... .03 .03 .105 .24 .24 At Year End: Total assets........................... $32,858 $37,968 $44,387 $49,159 $43,092 Long-term debt......................... 2,287 3,489 8,705 5,840 Stockholders' equity................... 22,269 26,521 26,988 33,155 31,783 Number of restaurants.................. 57 65 64 72 66
7 9 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.
PERCENTAGE OF SALES YEARS ENDED SEPTEMBER 30, -------------------------- 1997 1996 1995 ------ ------ ------ Sales....................................................... 100.0% 100.0% 100.0% ------ ------ ------ Costs and Expenses: Food costs................................................ 28.1 27.5 28.3 Restaurant labor and related expenses..................... 37.7 37.2 37.6 Restaurant operating expenses............................. 23.6 23.1 22.7 Depreciation and amortization............................. 5.1 5.5 5.6 General and administrative expenses....................... 7.7 7.1 6.8 Restructuring charges..................................... 7.6 9.4 ------ ------ ------ Total............................................. 109.8 100.4 110.4 ------ ------ ------ Operating income (loss)..................................... (9.8) (0.4) (10.4) Interest expense............................................ (0.5) (0.8) (0.7) Other, including interest income............................ 0.5 0.4 0.3 ------ ------ ------ Earnings (loss) before income taxes......................... (9.8) (0.8) (10.8) Income tax benefit.......................................... (2.8) (0.2) (4.2) ------ ------ ------ Net earnings (loss)......................................... (7.0)% (0.6)% (6.6)% ====== ====== ====== Average sales (in thousands) for restaurants open throughout the year.................................................. $1,123 $1,106 $1,190 Number of restaurants open at end of year................... 57 65 64
Fiscal 1997 Compared to Fiscal 1996 The Company's same store sales trend turned positive in the fourth quarter of fiscal 1997, up 2.0% over the fourth quarter of 1996. This reversed quarterly same store sales decreases ranging from 1.2% to 12.7% over the past three fiscal years. Same store customer counts were down 1.4% for the fourth quarter of fiscal 1997, but price increases July 1 and mid-September 1997 helped raise average sales per customer significantly. The chart below shows quarterly and annual same store sales comparisons over the past four fiscal years. COMPARABLE-STORE SALES BY QUARTER
1997 1996 1995 1994 ---- ----- ----- ----- 1st Quarter............................. -5.0% -12.7% - 9.6% +14.3% 2nd Quarter............................. -7.4 - 5.3 -11.3 +15.1 3rd Quarter............................. -1.2 - 8.2 -11.8 + 9.2 4th Quarter............................. +2.0 - 6.5 -11.7 - 6.2 Fiscal Year........................ -2.8 - 7.8 -11.5 + 7.6
To address unsatisfactory results of operations, the Company adopted a restructuring plan in the quarter ended March 31, 1997. Under the plan, the Company closed seven low sales restaurants on April 15, 1997, and disposed of its interest in the Mexico operations effective May 31,1997. Those eight locations contributed $2,854,000 in sales in fiscal 1997, versus $5,512,000 in fiscal 1996, a difference of $2,658,000. Each closed unit had been producing far below company average sales per unit. No other closings are currently planned, but management will continue to evaluate operating results and consider closing other locations based on profitability and cash flow. 8 10 Sales decreased $4,530,000 in fiscal 1997 due to the store closings and same store sales declines in the first three fiscal quarters. Same-store sales were down 2.8% in fiscal 1997 compared with a decrease of 7.8% in fiscal 1996. The price increases and restructuring steps helped raise average sales for restaurants open throughout 1997 to $1,123,000, up 1.5% over 1996. Total fourth quarter sales were down $1,054,000 in 1997 due to the restructuring. The eight eliminated locations accounted for $1,391,000 in fourth quarter 1996 sales. The restructuring and price increases brought a 7.4% increase in average sales for restaurants open throughout the fourth quarter of 1997 versus average sales for the fourth quarter of 1996. This trend continued into fiscal 1998, as October 1997 average unit sales were up 8.2% compared with October 1996. In fiscal 1997, the Company 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 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 marketing consulting firm of Feltenstein Partners was engaged to assist in developing and implementing marketing strategy and tactics. The Company's first major external marketing tactic in fiscal 1997 was initiated in July 1997 after the first major price increase since December 1993. To respond to declining margins caused primarily by wage inflation, the Company raised its menu pricing mix effective July 1, 1997 an estimated average of 5.1%. Another price increase, of about 1.5% was instituted in mid-September 1997 to partially offset the effect of the September federal minimum wage increase. No new restaurants were opened in fiscal 1997, and none are planned for fiscal 1998. Management plans to continue to improve same store sales and operating margins at its existing units before adding new locations. Thanks to the fourth quarter 1997 price increases, food cost was down 0.7% of sales for the fourth quarter of fiscal 1997 versus the same period in 1996, despite being up 0.6% of sales for the year. Meat cost was up 0.4% and 0.8% for the fourth quarter and year of 1997 compared with the same periods in 1996. Labor and related expenses were up 1.5% and 0.5% of sales for the fourth quarter and year 1997, respectively, compared with the same periods in 1996. The benefits from 1997 adjustments to employment-related insurance reserves were more than offset by the effects of lower sales and wage rate inflation. The Company benefited from reductions to the workers' compensation and Voluntary Employee Injury Benefit (VEIB) Plan insurance reserves of $500,000 in the third quarter and $558,000 in the second quarter of fiscal 1997. The reduction of VEIB Plan reserves recognized the benefits from effective risk and case management, based on closing out claim years 1990 through 1992. After removing the benefit from the VEIB Plan and workers' compensation credits, labor costs were 37.9% of sales for the fourth quarter and 39.3% for 1997. Labor costs in fiscal 1996 benefited from a $128,000 refund of prior year health insurance payments and a $125,000 reduction in VEIB Plan reserves in the second and third quarters, plus fourth quarter reserve reductions of $82,000 for the VEIB Plan and $80,000 for workers' compensation. Without these benefit cost adjustments, labor costs were 37.3% and 37.8% of sales for the fourth quarter and year of 1996. After removing the benefit of the above adjustments from all quarters and years, labor costs were up 0.6% and 1.5% of sales for the fourth quarter and year 1997 versus the same periods for 1996. Although the Company has had success with its loss control and risk management programs, the gains from adjustment of prior year reserves should be considered one-time gains which may not be repeated in the future. Labor and related expenses were up for 1997 due to higher restaurant salaries and wages caused by wage rate inflation and lower sales. Health insurance costs were up 0.2% over 1996 due to inflation and the refund benefit in 1996. Lower profitability in 1997 reduced store bonuses 0.2% of sales compared with 1996. The Company continued to augment its primary restaurant management bonus programs with additional bonus 9 11 programs for restaurant service and management personnel to provide increased incentives for excellent service. Fourth quarter restaurant salaries and wages were the same percentage of sales in 1997 and 1996, reflecting the benefit of the fourth quarter 1997 price increases. The fourth quarter operating results improvement increased store bonuses 0.2% of sales. The federal minimum wage increased $0.50 per hour effective October 1, 1996, the first day of the Company's fiscal 1997, and $0.40 more September 1, 1997. Pancho's experienced increases of 7.8% and 5.9% in average hourly wage rates for the 1997 fourth quarter and year, respectively, versus the same periods in 1996. This wage rate inflation represented hourly labor cost increases of 1.6% and 2.2% of sales for the fourth quarter and year of 1997, respectively, compared with the same 1996 periods. An increasingly tight labor market will continue to contribute to general wage inflation. Higher wages will make it difficult for the Company to achieve reductions in labor and related costs unless the sales trend improvement continues. Pancho's prepares a large quantity and variety of fresh food in small batches throughout the day, and provides buffet-line and table service in each restaurant. Maintaining a high level of quality service, sanitation and food preparation makes it difficult to reduce labor costs in proportion to recent sales declines, as staffing cannot be reduced below certain levels to maintain Pancho's standards for quality service and sanitation. Restaurant operating expenses rose 0.5% of sales in 1997 compared with 1996. The percentage increase for the year resulted from lower total sales despite spending $711,000 less in 1997 than in 1996. As many restaurant operating costs are fixed or semi-fixed, such as occupancy costs, future changes in this cost factor will bear an inverse relationship to sales trends Restaurant operating expenses include occupancy costs, which rose 0.6% of sales in 1997 due equally to higher maintenance costs, property taxes and rent on lower sales. Restaurant supplies and other operating expenses each rose 0.2% of sales. These increases were partially offset by reductions of 0.3% of sales for marketing, and 0.2% of sales for restaurant general and administrative costs, which benefited from discontinuing employment practices insurance. The Company spent $1,591,000, 2.4% of sales, and $1,908,000, 2.7% of sales, on marketing in fiscal 1997 and 1996, respectively. Due to its strategic shift from broadcast media to more local store marketing, the Company spent $953,000 less for advertising media, but $276,000 more for marketing research and consulting, plus $187,000 more for promotions. The price increase and restructuring helped reduce fourth quarter restaurant operating expenses 1.4% of sales in 1997. Utilities were down 0.3% of sales, marketing was down 0.6% of sales, supplies were down 0.4% and other operating costs were down 0.4% of sales. These were partially offset by the 0.4% increase in fourth quarter occupancy costs. The Company spent 2.1% versus 2.7% of sales on marketing in the fourth quarter of fiscal 1997 and 1996, respectively. The Company spent $130,000 less in the 1997 fourth quarter due to the strategic shift from broadcast advertising to local store marketing. In the fourth quarter of 1996, the Company spent $243,000 for broadcast media for TV ads, compared with zero dollars for broadcast media in the fourth quarter of 1997. The savings were partially offset by $57,000 more spent on marketing consulting and research, and $15,000 more on promotions. Depreciation and amortization decreased $199,000, 0.8% of sales, and $521,000, 0.4% of sales, in the fourth quarter and year 1997, respectively, due to the asset write-downs taken in the March 1997 restructuring. In fiscal 1997, the Company recorded a restructuring charge of $5,066,000 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 $1,538,000 to 10 12 reserve for exit and carrying costs of closed locations. The rest of the charges consisted of a $455,000 loss from recognition of the Cumulative Foreign Currency 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. The Company realized net gains on sale of assets of $256,000 and $141,000 in fiscal 1997 and 1996, respectively. Long-lived assets held for sale are carried at the lower of depreciated cost or fair value less cost to sell. In fiscal 1997, interest expense was $192,000 lower than in 1996. Outstanding debt decreased from $3,641,000 on September 30, 1996 to $2,479,000 on September 30, 1997. As outstanding debt decreased, interest expense declined, from $84,000 in the fourth quarter of fiscal 1996 to $58,000 in the fourth quarter of fiscal 1997. Interest expense is expected to continue falling in fiscal 1998 as debt is reduced. The Company achieved net earnings of $125,000 in the fourth quarter of 1997, compared with a net loss of $143,000 for the 1996 fourth quarter. The price increases and restructuring helped improve operating margins in the final quarter of 1997. The Company's future profitability depends on its ability to stabilize or improve customer counts and to offset cost inflation with price increases. Due to the factors discussed above, the Company reported net losses of $4,716,000 and $415,000 for fiscal years 1997 and 1996, respectively. The 1997 restructuring charge and net loss resulted from declining sales trends that could not be fully offset with cost controls. The Company's future earnings depend largely on improving sales and maintaining tight cost controls in the highly-competitive restaurant industry. SFAS No. 123, "Accounting for Stock-Based Compensation", is effective for the Company for the 1997 fiscal year. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earning per share (see Note 6 to the consolidated financial statements). Provision for Income Taxes The effective tax rate in fiscal 1997 was a benefit of 28.2% of the total loss before income taxes, compared to a benefit of 24.6% for fiscal 1996 and a benefit of 38.4% for fiscal 1995. These effective rates include the results of Mexico operations, which commenced in fiscal 1996, and for which no tax benefit was recognized. As detailed in Note 5 to the consolidated financial statements, the effective tax rates differed from the base federal rate of 34% each year due primarily to the effects of state income taxes, federal employer tax credits and the results of foreign operations. Significant current and deferred income tax benefits were recognized for 1997, resulting primarily from the restructuring charges and operating losses. Income taxes receivable and deferred tax assets were recorded for these benefits based on tax loss carry back opportunities and the Company's long history of and expected future taxable income. The income tax receivable of $538,000 is expected to be received in March 1998. Net deferred tax assets increased $1,288,000 in fiscal 1997. The increase was due mainly to the federal net operating loss (NOL) carryforward, accrued restructuring reserves and tax-book differences for fixed assets. These increases were partially offset by the reduction of insurance reserves, and the $783,000 increase in the valuation allowance to offset federal and state NOL carryforwards more likely than not to expire before realization. Note 5 to the consolidated financial statements identifies the components of the deferred tax assets and liabilities. The deferred federal tax assets totaled $4,511,000 at September 30, 1997. Of that amount, $1,983,000 was a federal NOL carryforward which expires September 30, 2012, and $416,000 were employer tax credits which expire in fiscal years 2009 through 2012. The valuation allowance was increased $671,000 in fiscal 1997 11 13 to provide for the federal portion of the NOL carryforward which might not be realized. No other assets relating to federal income taxes have expiration dates. State deferred tax assets were a net $464,000 after subtracting the related valuation allowance at September 30, 1997. The valuation allowance was increased $111,000 in fiscal 1997 to provide for state NOL carryforwards likely to expire before being realized. State NOL carryforwards which expire on the fiscal yearend 1998 through 2002 represent $149,000 of those deferred tax assets, net of the related valuation allowances. Another $167,000 in deferred tax assets, net of related valuation allowances, are based on state NOL carryforwards which expire in fiscal years 2003 through 2012. The remaining $148,000 of state deferred tax assets do not have expiration dates. The Company believes it will realize substantial benefits from the use of the federal NOL carryforward and employer tax credits and the state NOL carryforwards to reduce future federal and state income tax liabilities. Full realization of these and other deferred tax assets depends on the Company achieving certain levels of taxable income in the future. If the Company's results from operations fail to timely achieve the levels necessary to use the employer tax credits or the state NOL carryforwards, they could expire before use, resulting in charges against income. The Company has established a valuation allowance to offset the amount of deferred tax assets it believes are likely to not be realized. If the Company does not achieve an operating profit for the year ending September 30, 1998, the Company may be required to write off all or a portion of the deferred tax assets on that date. Net deferred tax assets decreased $186,000, to $3,017,000 from September 30, 1995 to September 30, 1996. The decrease was due mainly to the reversal of tax-book differences for fixed assets and the realization of tax benefits as restructuring reserves were actually paid. These decreases were partially offset by the tax loss, which increased the federal alternative minimum tax carryforwards and the state NOL carryforwards. The valuation allowance was increased to $43,000 from $25,000 based on the expectation that not all the state NOL carryforwards will be realized before they expire. Current and deferred income tax benefits were recognized in 1996, resulting primarily from operating losses. The federal income tax refund receivable September 30, 1996 of about $180,000 was received in February 1997. Liquidity and Capital Resources The Company's current ratio was 0.43 to 1 at September 30, 1997 compared with 0.39 to 1 at September 30, 1996. The increase was due to a $321,000 reduction in current accrued insurance costs plus the $284,000 increase in cash equivalents and $352,000 increase in income taxes receivable. The current ratio had decreased 0.5 during fiscal 1996 mainly because about $1.2 million received for income taxes receivable plus about $1 million in cash at September 30, 1995 was applied primarily to reduce long-term debt. Cash equivalents decreased $1,054,000 in 1996 to a balance of $145,000 at September 30 as all available cash was applied to reduce long-term debt. Cash equivalents decreased $462,000 in fiscal 1995, as capital spending exceeded cash provided by operating and financing activities. Operating activities provided net cash of $882,00 in fiscal 1997 compared with $4,657,000 in 1996. The 1997 net loss of $4,716,000 included non-cash charges of $3,426,000 for depreciation and amortization, $3,033,000 for asset impairments, $1,538,000 for restructuring reserves, $455,000 to recognize the cumulative foreign currency translation adjustment, and a non-cash deferred tax benefit of $1,288,000. Cash was used to reduce accounts payable and accrued liabilities by $272,000, restructuring reserves by $961,000, and income taxes receivable increased $352,000. The 1996 net loss of $415,000 included non-cash charges of $3,949,000 for depreciation and amortization and a $186,000 provision for deferred income taxes. The receipt of the 1995 income tax receivable caused a net reduction in income taxes receivable of $1,041,000. 12 14 Operating activities provided net cash of $3,464,000 in fiscal 1995. The 1995 loss included pre-tax non-cash restructuring charges of $7,572,000 for restaurant closings and impairments, and non-cash income tax benefits of $3,343,000 included in income taxes receivable and deferred tax assets. Investing activities provided $622,000 cash during fiscal 1997. The Company realized $1,081,000 in proceeds from asset sales, including the Tucson land and building. The Company spent $459,000 cash to remodel three existing restaurants, install computer point-of-sale systems in two restaurants, and provide routine capital replacements. No new restaurants were opened or under construction in fiscal 1997, and none are planned for fiscal 1998. Management plans to continue to emphasize improving sales and operating margins in existing units. Capital expenditures to remodel existing restaurants, install restaurant computer systems and provide routine capital replacements will continue within the constraints of available operating cash flow and Loan Agreement restrictions (see Note 3 to the consolidated financial statements). The Company may also enter into lease agreements to acquire computer point-of-sale systems or other equipment. Under the restructuring plan formulated in the quarter ended March 31, 1997, the Company closed seven restaurants on April 15, 1997 and disposed of its interest in the Mexico venture. Units closed included 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 sold the land and building for the closed Tucson restaurant in September 1997, and is seeking to sell the land and building for the closed Phoenix location. Proceeds from real estate sales must be used to pay down debt in accordance with the Company's bank loan requirements. Investing activities used a net of $411,000 in fiscal 1996. Capital additions to remodel two existing restaurants, install computer point-of-sale systems in three restaurants and provide ordinary replacements were partially recouped by $278,000 in proceeds from the sale of fixed assets. The Company opened its Guadalajara restaurant in October 1995. No other new restaurants were opened in fiscal 1996. Investing activities used $6.4 million in fiscal 1995. The Company invested $7 million cash to build new restaurants, remodel existing restaurants, install restaurant computer systems and pay accrued construction costs from the prior year. Three new Pancho's Mexican Buffet restaurants, in Pasadena, Baytown and Galveston, Texas were opened in 1995 and two former Emiliano's Buffet Mexicano restaurants were reopened as Pancho's Mexican Buffets. Also in 1995, the Company sold a restaurant site in Colorado for $290,000, and sold a closed restaurant building to the landowner for $175,000 and termination of the ground lease. Financing activities consumed $1,217,000 in fiscal 1997, primarily to reduce total debt by $1,162,000 and pay $132,000 in dividends. Financing activities used $5,291,000 in fiscal 1996, mainly for net debt reduction of $5,226,000 and dividends paid of $132,000. In 1995, financing activities provided net cash of $2,478,000, based primarily on net long-term borrowings of $2,865,000 less the payment of cash dividends of $725,000. The Company's revolving credit and term loan agreement (Loan Agreement) with a bank has reduced the revolving credit line limit from $6,483,000 at September 30, 1996 to $2,962,000 at September 30, 1997. The Company had $920,000 of credit available under the line at September 30, 1997. The Company plans to finance its fiscal 1997 operations and capital additions mainly with cash flow from operations and the line of credit. The Company may also use operating leases to acquire new point-of-sale systems for some or all of the 17 restaurants which have not yet been updated to the newer system. In December 1997, the Company and the bank agreed to amend the Loan Agreement limit-reduction schedule and covenants, effective December 1, 1997. Under this amendment, the credit line limit is reduced 13 15 the last day of each quarter until the agreement terminates June 30, 2000. The credit limits effective through each quarter end under the amended agreement are shown below.
CREDIT FROM THROUGH LIMIT ---- ------- ------ December 19, 1997 December 30, 1997 $3,461,748 December 31, 1997 March 30, 1998 3,300,000 March 31, 1998 June 29, 1998 3,200,000 June 30, 1998 September 29, 1998 2,600,000 September 30, 1998 December 30, 1998 2,000,000 December 31, 1998 March 30, 1999 1,900,000 March 31, 1999 June 29, 1999 1,700,000 June 30, 1999 September 29, 1999 1,100,000 September 30, 1999 December 30, 1999 500,000 December 31, 1999 March 30, 2000 400,000 March 31, 2000 June 29, 2000 200,000 June 30, 2000 -0-
One financial covenant requires the Company to achieve trailing three-months earnings before interest, taxes, depreciation and amortization (EBITDA) to equal or exceed the sum of 125% of the next scheduled commitment reduction plus capital expenditures during each three-month period, beginning March 31, 1998. Cash capital expenditures are limited by the amended agreement to $650,000 each fiscal year. Cash dividends are limited by the amendment to $150,000 per fiscal year, and are prohibited until the Company achieves trailing 12-months EBITDA of $3 million. The loan is secured with all of the Company's real property. The Loan Agreement includes various financial covenants. Due to the operating loss (as defined by the Loan Agreement) incurred by the Company in the quarter ended December 31, 1996, the Company violated a loan covenant. The bank has subsequently granted a permanent waiver for this covenant violation. The Company was in compliance with this and all other loan covenants at September 30, 1997. Due to the net losses incurred by the Company in September 1996 and the quarter ended December 31, 1995, and in each of the first three quarters of fiscal 1995, the Company violated certain loan covenants. The bank has subsequently granted permanent waivers for each of those past covenant violations. However, to obtain the waivers, the Company agreed to collateralize the loan with substantially all of its real property. 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 October 17, 1997, the Company's board of directors declared a $.015 per share dividend to be paid December 9, 1997 to holders of record on November 25, 1997. The Company paid a dividend of $.015 per share on December 10, 1996 and again on June 10, 1997 to holders of record on November 26, 1996 and May 27, 1997, respectively. Future cash dividends will depend on loan restrictions, earnings, financial position, capital requirements and other relevant factors. The Loan Agreement prohibits cash dividends until an earnings target is met, and limits them to $150,000 per fiscal year. Fiscal 1996 Compared to Fiscal 1995 Sales decreased $9,406,000 in fiscal 1996 due to lower same-store sales and twelve restaurant closings in fiscal 1995. 14 16 Same-store sales were down 7.8% in fiscal 1996 compared with a decrease of 11.5% in 1995. Comparable-store sales decreases continued to be significant, but the rate of decrease was less severe in 1996. Stores open all of fiscal 1996 averaged sales of $1,106,000, a decrease of 7.1% from 1995. Fourth quarter average store sales were down 5.6% in fiscal 1996 versus 1995. This trend continued into fiscal 1997, as October 1996 average unit sales were down 6.6% compared with October 1995. The Company closed nine restaurants under a June 1995 restructuring plan and closed three others in the ordinary course of business in fiscal 1995. The closed locations contributed $5,430,000 in sales in fiscal 1995. Each closed unit had been producing far below company average sales per unit. The Guadalajara, Mexico restaurant was opened in October 1995, and three new restaurants were opened in fiscal 1995. These four new restaurants contributed $1,615,000 more sales in fiscal 1996 than in 1995. Food costs decreased 0.8% of sales for fiscal 1996 compared to the prior year. Increased costs for some items were more than offset by ingredient changes, more efficient usage and effective purchasing. Fourth quarter food costs increased 0.2% of sales in fiscal 1996 versus fiscal 1995. Labor and related expenses were down 0.4% of sales in 1996 due to lower benefits costs. Proactive risk management helped the Company reduce its costs for the Voluntary Employee Injury Benefit (VEIB) Plan (see Note 7 to the consolidated financial statements) by 0.3% of sales from fiscal 1995 to fiscal 1996. Based on lower than expected claims costs for prior years, the Company received a $128,000 refund from its previous health insurance provider, which contributed to a 0.2% of sales decline in employee health insurance expenses for fiscal 1996. Despite disappointing restaurant margins, incentive compensation was up 0.1% of sales for fiscal 1996. The Company increased bonus expense by introducing additional bonus programs for restaurant service and management personnel to provide increased incentives for excellent service. In fiscal 1996, the Company absorbed a 2.1% increase in average hourly wages by reducing overtime worked and achieving a better sales per hour worked ratio. This management focus on labor cost controls maintained other labor-related costs about stable despite the effect of lower sales and general wage inflation. The fiscal 1996 fourth quarter labor and related expenses were 0.3% of sales lower than in the fourth quarter of fiscal 1995, reflecting continued emphasis on labor cost control. Restaurant operating expenses were up 0.4% in fiscal 1996. The increase was due mainly to the effect of lower sales on expenses that are fixed or semi-fixed, such as rent and utilities. The fourth quarter of fiscal 1996 reflected an increase in restaurant operating costs of 2.2% of sales compared with the fourth quarter of 1995. Fourth quarter advertising costs increased 1.2% of sales due to increased spending on broadcast, newspaper and billboard media. Occupancy costs were up 0.8% of sales versus the prior year quarter due primarily to lower sales compared with generally fixed costs. Depreciation and amortization decreased $563,000 in fiscal year 1996, down 0.1% of sales, due to the asset write-downs taken in the June 1995 restructuring. Fourth quarter depreciation expense was up 0.1% of sales in fiscal 1996 due to lower sales despite being $49,000 lower. General and administrative expenses rose 0.3% of sales for the year and fourth quarter in fiscal 1996 versus 1995. The percentage increase resulted from the effect of lower sales despite cost savings from staff reductions and other cost cutting measures of $480,000 and $40,000 for the year and quarter, respectively. The Company recorded a charge of $7.6 million during the third quarter of 1995 for asset impairments and store closings. The asset impairments primarily resulted from the closing of 9 restaurants in June 1995, the write-down of asset values in 7 restaurants that were kept in operation despite low sales, and the write-down of the Company's restaurant in Guadalajara, Mexico. One of the impaired locations, in Tulsa, Oklahoma, was subsequently closed, with no additional impairment charges incurred. The 1995 charge also included asset impairments on new and used equipment inventory and property held for disposition, as well as exit and carrying costs for the closed locations. 15 17 In fiscal 1996, interest expense was $50,000 lower than in 1995 due to a decreasing debt balance, partially offset by slightly higher interest rates and no capitalization of interest in fiscal 1996. Outstanding debt has decreased from a quarterly high of $10,310,000 on June 30, 1995 to $3,640,000 on September 30, 1996. As outstanding debt decreased, interest expense steadily declined, from $191,000 in the fourth quarter of fiscal 1995 to $84,000 in the fourth quarter of fiscal 1996. Due to the factors discussed above, the Company reported net losses of $415,000 and $5,362,000 for fiscal years 1996 and 1995, respectively. The 1996 loss resulted from lower sales that could not be fully-offset with the benefits of cost control measures. Seasonality The Company's business is seasonal. Traditionally, sales are higher in summer months, when students are not attending school. Impact of Inflation In the restaurant business, food, labor, and labor related expenses are the major cost factors that effect profits. Many of the Company's employees are paid wages related to the statutory minimum wage and any increase in the minimum wage would increase the Company's cost. Also, most of the Company's leases require the payment of percentage rentals based on revenues, which along with taxes, repairs and maintenance, utilities and insurance are subject to inflation. The Company expects to be able to offset the effects of inflation through occasional price increases and savings due to volume purchasing. The federal minimum wage increased $.50 per hour effective October 1, 1996, and further increased $.40 per hour effective September 1, 1997. The Company implemented price increases July 1, 1997 and mid-September 1997 to offset the labor cost increases due to higher minimum wage levels. Other Uncertainties and Trends In recent years, there has been accelerated development of value-priced menus and "all-you-can-eat" restaurant offerings. Pancho's Mexican Buffet has operated as a value-priced, "all-you-can-eat" concept for over 30 years and expects to compete effectively. Some computer hardware and software use only two digits to identify the year in date information. If not corrected, such systems could fail when processing dates for the year 2000 or later. The Company is in the process of evaluating its risk and the related costs of updating its computer hardware and software to properly process year 2000 and later dates. 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 flow 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. 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 22. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors of Registrant Information as to the names, ages, positions and offices with the Company, terms of office, periods of service, business experience during the past five years and other directorships held by each director or person nominated to become a director of the Company is set forth under the caption THE BOARD OF DIRECTORS appearing on page 2 of the Company's Proxy Statement dated December 22, 1997, and is incorporated herein by reference. (b) 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. The names and ages of all executive officers of the Registrant, as well as all persons chosen to become executive officers, together with the nature of any family relationships between them, all positions and offices with the Registrant held by each person named and the period during which each person named has served as such officer is included in Part I under Executive Officers of the Registrant. ITEM 11. EXECUTIVE COMPENSATION Information concerning remuneration received by the Company's directors and executive officers, stock options and transactions with management is set forth under the captions EXECUTIVE COMPENSATION, COMPENSATION OF DIRECTORS, AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES, REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS and TRANSACTIONS WITH MANAGEMENT AND OTHERS appearing on pages 5 through 10 of the Company's Proxy Statement dated December 22, 1997, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information as to the security ownership of certain beneficial owners of the Company and by each of its directors and nominees for directors and officers as of December 11, 1997, and the amount of such shares with respect to which certain of the directors or nominees and officers have the right to acquire beneficial ownership, is set forth under the caption SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF DECEMBER 11, 1997, appearing on page 3 of the Company's Proxy Statement dated December 22, 1997, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning transactions with management and others and certain business relationships is set forth under the caption TRANSACTIONS WITH MANAGEMENT AND OTHERS appearing on page 10 of the Company's Proxy Statement dated December 22, 1997, and is incorporated herein by reference. 17 19 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 21. (a) 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) 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) 10(m) -- Amendment No. 4 to 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(11)
18 20
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10(n) -- Amendment No. 3 to 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(11) 10(o) -- 1992 Stock Option Plan of Pancho's Mexican Buffet, Inc.(12) 10(p) -- Revolving Credit and Term Loan Agreement dated February 16, 1994, between PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(13) 10(q) -- First Amendment to Revolving Credit and Term Loan Agreement dated February 9, 1995, between PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(14) 10(r) -- Second Amendment to Revolving Credit and Term Loan Agreement dated May 9, 1995, between PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(14) 10(s) -- Third Amendment to Revolving Credit and Term Loan Agreement dated September 29, 1995(15) 10(t) -- Employment Contract between the Registrant and one executive officer, dated September 29, 1995(15) 10(u) -- Fourth Amendment to Revolving Credit and Term Loan Agreement dated February 16, 1996(16) 10(v) -- Fifth Amendment to Revolving Credit and Term Loan Agreement dated June 28, 1996(17) 10(w) -- Sixth Amendment to Revolving Credit and Term Loan Agreement dated December 16, 1996(18) 10(x) -- Amendment to Revolving Credit and Term Loan Agreement, dated February 11, 1997(19) 10(y) -- Amendment to Revolving Credit and Term Loan Agreement, dated March 31, 1997(20) 10(z) -- Seventh Amendment to Revolving Credit and Term Loan Agreement, dated December 1, 1997 -- filed herewith 11 -- Not required -- Explanation of earnings per share computation is contained in Notes to Consolidated Financial Statements. 12 -- Not applicable 13 -- Not applicable 16 -- Not applicable 18 -- Not applicable 21 -- Subsidiaries of the registrant -- filed herewith 22 -- Not applicable 23 -- Consent of Independent Public Accountants -- filed herewith 24 -- Not applicable 27 -- Financial Data Schedule -- filed herewith 28 -- Not applicable
- --------------- (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.
19 21 (3) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1982 -- such Exhibit is incorporated herein by reference. (4) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1983 -- such Exhibits are incorporated herein by reference. (5) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1984 -- such Exhibits are incorporated herein by reference. (6) Filed with the Commission as an Exhibit to Form 8-A Registration Statement on February 21, 1996 -- such Exhibit is incorporated herein by reference. (7) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1986 -- such Exhibits are incorporated herein by reference. (8) Filed with the Commission as an Exhibit to Form S-2 Registration Statement No. 33-14484 on May 22, 1987 -- such Exhibit is incorporated herein by reference. (9) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1988 -- such Exhibits are incorporated herein by reference. (10) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1990 -- such Exhibits are incorporated herein by reference. (11) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1991 -- such Exhibits are incorporated herein by reference. (12) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1993 -- such Exhibits are incorporated herein by reference. (13) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1995 -- such Exhibits are incorporated herein by reference. (14) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1995 -- such Exhibits are incorporated herein by reference. (15) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 -- such Exhibits are incorporated herein by reference. (16) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1996 -- such Exhibits are incorporated herein by reference. (17) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1996 -- such Exhibits are incorporated herein by reference. (18) Filed with the Commission as an Exhibit to form 10-K for the year ended September 30, 1996 -- such Exhibits are incorporated herein by reference. (19) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended December 31, 1996 -- such Exhibits are incorporated herein by reference. (20) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 -- such Exhibits are incorporated herein by reference. (21) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1997 -- such Exhibits are incorporated herein by reference. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 1997. 20 22 For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 No. 2-86238 (filed August 31, 1983): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 21 23 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
PAGE Consolidated Financial Statements: Consolidated Balance Sheets............................... F-1 Consolidated Statements of Operations..................... F-2 Consolidated Statements of Stockholders' Equity........... F-3 Consolidated Statements of Cash Flows..................... F-4 Notes to Consolidated Financial Statements................ F-5 Independent Auditors' Report................................ F-17
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. 22 24 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, -------------------------- 1997 1996 ----------- ----------- Current Assets: Cash and cash equivalents................................. $ 429,000 $ 145,000 Accounts and notes receivable, current portion............ 222,000 254,000 Income taxes receivable................................... 538,000 186,000 Inventories............................................... 539,000 640,000 Prepaid expenses.......................................... 117,000 180,000 Deferred income taxes..................................... 670,000 742,000 ----------- ----------- Total current assets.............................. 2,515,000 2,147,000 ----------- ----------- Property, Plant and Equipment: Land...................................................... 2,995,000 3,446,000 Buildings................................................. 9,477,000 10,561,000 Leasehold improvements.................................... 21,072,000 22,532,000 Equipment and furniture................................... 26,115,000 28,579,000 Construction in progress.................................. 15,000 7,000 ----------- ----------- Total............................................. 59,674,000 65,125,000 Less accumulated depreciation and amortization............ (33,487,000) (32,359,000) ----------- ----------- Property, plant and equipment -- net.............. 26,187,000 32,766,000 ----------- ----------- Other Assets: Deferred income taxes..................................... 3,635,000 2,275,000 Other, including noncurrent portion of receivables........ 521,000 780,000 ----------- ----------- Total other assets................................ 4,156,000 3,055,000 ----------- ----------- Total............................................. $32,858,000 $37,968,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 1,761,000 $ 1,273,000 Accrued wages and bonuses................................. 1,478,000 1,485,000 Accrued insurance costs, current.......................... 1,022,000 1,343,000 Other current liabilities................................. 1,528,000 1,398,000 ----------- ----------- Total current liabilities......................... 5,789,000 5,499,000 ----------- ----------- Other Liabilities: Long-term debt............................................ 2,287,000 3,489,000 Accrued insurance costs, non-current...................... 2,107,000 2,459,000 Restructuring reserves, non-current....................... 406,000 ----------- ----------- Total other liabilities........................... 4,800,000 5,948,000 ----------- ----------- 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 4,397,559 shares, and 4,389,159 shares outstanding.).......................................... 440,000 440,000 Additional paid-in capital................................ 18,633,000 18,633,000 Retained earnings......................................... 3,499,000 8,347,000 Cumulative foreign currency translation adjustment........ -- (436,000) Stock notes receivable.................................... (290,000) (463,000) Treasury stock at cost (8,400 shares)..................... (13,000) -- ----------- ----------- Stockholders' equity.............................. 22,269,000 26,521,000 ----------- ----------- Total............................................. $32,858,000 $37,968,000 =========== ===========
See notes to consolidated financial statements. F-1 25 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Sales................................................... $66,957,000 $71,487,000 $80,893,000 ----------- ----------- ----------- Costs and Expenses: Food costs............................................ 18,792,000 19,681,000 22,910,000 Restaurant labor and related expenses................. 25,235,000 26,561,000 30,400,000 Restaurant operating expenses......................... 15,799,000 16,508,000 18,376,000 Depreciation and amortization......................... 3,426,000 3,949,000 4,512,000 General and administrative expenses................... 5,160,000 5,067,000 5,547,000 Restructuring charges................................. 5,066,000 7,572,000 ----------- ----------- ----------- Total......................................... 73,478,000 71,766,000 89,317,000 ----------- ----------- ----------- Operating income (loss)................................. (6,521,000) (279,000) (8,424,000) Interest expense........................................ (348,000) (540,000) (590,000) Other, including interest income........................ 303,000 269,000 309,000 ----------- ----------- ----------- Earnings (loss) before income taxes..................... (6,566,000) (550,000) (8,705,000) Income tax benefit...................................... (1,850,000) (135,000) (3,343,000) ----------- ----------- ----------- Net earnings (loss)..................................... $(4,716,000) $ (415,000) $(5,362,000) =========== =========== =========== Net earnings (loss) per share........................... $ (1.07) $ (.09) $ (1.22) =========== =========== ===========
See notes to consolidated financial statements. F-2 26 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CUMULATIVE FOREIGN COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK ---------------------- PAID-IN RETAINED TRANSLATION ------------------------ SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES AMOUNT ---------- --------- ----------- ----------- ----------- ---------- ----------- Balance, October 1, 1994............. 5,545,191 $ 555,000 $26,217,000 $14,718,000 $ (30,000) 1,147,632 $(7,699,000) Treasury stock retired............. (1,147,632) (115,000) (7,584,000) (1,147,632) 7,699,000 Net loss........................... (5,362,000) Dividends, $.105 per share......... (462,000) Foreign currency translation adjustment....................... (419,000) Payments received on stock notes... ---------- --------- ----------- ----------- --------- ---------- ----------- Balance, September 30, 1995.......... 4,397,559 440,000 18,633,000 8,894,000 (449,000) Net loss........................... (415,000) Dividends, $.03 per share.......... (132,000) Payments received on stock notes... Foreign currency translation adjustment....................... 13,000 ---------- --------- ----------- ----------- --------- ---------- ----------- Balance, September 30, 1996.......... 4,397,559 440,000 18,633,000 8,347,000 (436,000) Net loss........................... (4,716,000) Dividends, $.03 per share.......... (132,000) Realization of foreign currency translation adjustment........... 436,000 Treasury stock acquired............ 8,400 (13,000) Payments and writeoffs on stock notes............................ ---------- --------- ----------- ----------- --------- ---------- ----------- Balance, September 30, 1997.......... 4,397,559 $ 440,000 $18,633,000 $ 3,499,000 $ -- 8,400 $ (13,000) ========== ========= =========== =========== ========= ========== =========== STOCK NOTES RECEIVABLE FROM STOCKHOLDERS' OFFICERS EQUITY ---------- ------------- Balance, October 1, 1994............. $(606,000) $33,155,000 Treasury stock retired............. 0 Net loss........................... (5,362,000) Dividends, $.105 per share......... (462,000) Foreign currency translation adjustment....................... (419,000) Payments received on stock notes... 76,000 76,000 --------- ----------- Balance, September 30, 1995.......... (530,000) 26,988,000 Net loss........................... (415,000) Dividends, $.03 per share.......... (132,000) Payments received on stock notes... 67,000 67,000 Foreign currency translation adjustment....................... 13,000 --------- ----------- Balance, September 30, 1996.......... (463,000) 26,521,000 Net loss........................... (4,716,000) Dividends, $.03 per share.......... (132,000) Realization of foreign currency translation adjustment........... 436,000 Treasury stock acquired............ (13,000) Payments and writeoffs on stock notes............................ 173,000 173,000 --------- ----------- Balance, September 30, 1997.......... $(290,000) $22,269,000 ========= ===========
See notes to consolidated financial statements. F-3 27 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Cash Flows From Operating Activities: Net earnings (loss).............................. $ (4,716,000) $ (415,000) $ (5,362,000) ------------ ------------ ------------ Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization................. 3,426,000 3,949,000 4,512,000 Provision (benefit) for deferred income taxes....................................... (1,288,000) 186,000 (2,057,000) Impairment of long-lived assets............... 3,033,000 6,624,000 Provision for exit and carrying costs of closed locations............................ 1,538,000 948,000 Realization of foreign currency translation adjustment.................................. 455,000 Loss on writeoff of stock notes receivable.... 83,000 Amortization of restaurant start-up costs..... 36,000 127,000 Payment of restaurant start-up costs.......... (70,000) (Gain) loss on sale of assets................. (256,000) (141,000) 53,000 Minority interest in net loss................. (138,000) Changes in operating assets and liabilities: Accounts and notes receivable............... 9,000 216,000 166,000 Income taxes receivable..................... (352,000) 1,041,000 (1,139,000) Inventories, prepaid expenses and other assets................................... 181,000 389,000 978,000 Accounts payable and accrued expenses....... (272,000) (353,000) (544,000) Restructuring reserves...................... (959,000) (349,000) (634,000) Other....................................... 98,000 ------------ ------------ ------------ Total adjustments........................ 5,598,000 5,072,000 8,826,000 ------------ ------------ ------------ Net cash provided by operating activities............................. 882,000 4,657,000 3,464,000 Cash Flows From Investing Activities: Property additions............................... (459,000) (689,000) (7,050,000) Proceeds from sale of assets..................... 1,081,000 278,000 638,000 ------------ ------------ ------------ Net cash provided by (used in) investing activities............................. 622,000 (411,000) (6,412,000) Cash Flows From Financing Activities: Short-term borrowings, net....................... 40,000 (10,000) 162,000 Long-term borrowings............................. 28,583,000 28,676,000 43,950,000 Repayments of long-term borrowings............... (29,785,000) (33,892,000) (41,085,000) Proceeds from increase in minority interest...... 100,000 Treasury stock purchases......................... (13,000) Dividends paid................................... (132,000) (132,000) (725,000) Payments on officer stock notes receivable....... 90,000 67,000 76,000 ------------ ------------ ------------ Net cash provided by (used in) financing activities............................. (1,217,000) (5,291,000) 2,478,000 ------------ ------------ ------------ Effect of Foreign Exchange Rate Change on Cash..... (3,000) (9,000) 8,000 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents...................................... 284,000 (1,054,000) (462,000) Cash and Cash Equivalents at Beginning of Year..... 145,000 1,199,000 1,661,000 ------------ ------------ ------------ Cash and Cash Equivalents at End of Year........... $ 429,000 $ 145,000 $ 1,199,000 ============ ============ ============ Supplemental Information: Income taxes paid and (refunds received), net.... $ (170,000) $ (1,348,000) $ 36,000 Assets sold for notes receivable................. 140,000 Interest paid, net of capitalized amounts........ 306,000 533,000 555,000
See notes to consolidated financial statements. F-4 28 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Pancho's Mexican Buffet, Inc. and its subsidiaries (the Company). Effective May 31, 1997, the Company abandoned its interest in a Mexican partnership. That partnership owned 73% of a Mexican subsidiary formed to develop one or more restaurants in Mexico. The minority interest in that subsidiary is reflected in the consolidated balance sheets as of September 30, 1996. The minority interest balance was reduced to zero by the minority partner's interest in the operating losses of the joint venture. All material intercompany balances and transactions have been eliminated. ACCOUNTING ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those amounts. ACCOUNT CLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year presentation. CASH AND CASH EQUIVALENTS For balance sheet classification and reporting cash flows, the Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. INVENTORIES Inventories consist primarily of food and supplies, and are stated at the lower of cost (first-in, first-out basis) or market. DEFERRED INCOME TAXES The Company accounts for and reports income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Applying SFAS No. 109, deferred tax assets and liabilities are recognized for temporary differences caused when the tax basis of an asset or liability differs from that reported in the consolidated financial statements, and for carryforwards for tax credits and operating losses. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is recognized for the change in the asset or liability during the year. PROPERTY, PLANT AND EQUIPMENT Depreciation is provided for buildings and equipment on a straight-line basis over the following estimated service lives: Buildings................................................... 25 to 30 years Equipment and furniture..................................... 3 to 10 years
F-5 29 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Leasehold improvements are amortized over the life of the original lease term, including renewal periods if applicable, 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. The Company capitalized $91,000 out of total interest incurred of $681,000 in 1995. No interest was capitalized in 1997 or 1996. 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 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. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. An asset or group of assets is deemed to be impaired if a forecast of undiscounted future cash flows 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. PREOPENING COSTS Certain direct and incremental costs related to the commencement of each restaurant's operations, primarily training-related costs, are capitalized as preopening costs. Amounts capitalized are amortized using the straight-line method over 12 months. No preopening costs are capitalized at September 30, 1997 or 1996. EARNINGS (LOSS) PER SHARE Earnings (loss) per share are 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 for the years ended September 30, 1997, 1996 and 1995 were 4,396,000, 4,398,000, and 4,398,000, respectively. FOREIGN OPERATIONS AND CURRENCY TRANSLATION The functional currency of the Company's Mexican operations was the new peso. Financial statements of the Company's Mexican subsidiaries were translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Results of operations were translated using an average exchange rate during the period, and assets and liabilities were translated using the year end exchange rate. The resulting cumulative foreign currency translation adjustment was shown as a separate line in stockholders' equity at September 30, 1996. When the plan to dispose of its Mexican operations was adopted in the quarter ended March 31, 1997, the balance of the cumulative foreign currency translation adjustment was expensed as part of the restructuring charge for that quarter. STATEMENT OF CASH FLOWS Cash flows from the Company's Mexican operations were calculated based on the new peso, in accordance with SFAS No. 95, "Statement of Cash Flows." As a result, amounts related to assets and liabilities reported on the consolidated statement of cash flows will not necessarily agree to changes in the corresponding balances on the consolidated balance sheets. The effect of exchange rate changes on cash F-6 30 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) balances held in foreign currencies is reported on a separate line in the consolidated statement of cash flows, below cash flows from financing activities. 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 our stock-based compensation plans. SFAS No. 123 requires companies electing to continue using the intrinsic value method to make certain pro forma disclosures (see Note 6). NEW ACCOUNTING STANDARDS SFAS No. 128 -- "Earnings Per Share" specifies new computation, presentation and disclosure requirements. The statement will be effective for both interim and annual periods ending after December 15, 1997. Management believes that the adoption of this statement will not have a material impact on the earnings per share presented. SFAS No. 130 -- In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting on Comprehensive Income," which is effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and presenting comprehensive income in the financial statements. Management believes that the adoption of this statement will not have a material impact on the Company's financial statements. SFAS No. 131 -- In June 1997, the Financial Accounting Standards Board issued 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. Management believes that the adoption of SFAS No. 131 will not have a material effect on the Company's future disclosures. 2. OTHER CURRENT LIABILITIES Other current liabilities consist of:
SEPTEMBER 30, ------------------------ 1997 1996 ---------- ---------- Accrued taxes other than income taxes....................... $1,049,000 $1,094,000 Restructuring reserves...................................... 346,000 173,000 Other....................................................... 133,000 131,000 ---------- ---------- Total............................................. $1,528,000 $1,398,000 ========== ==========
3. LONG-TERM DEBT The Company has a revolving credit and term loan agreement (Loan Agreement) with a bank. In December 1997, the Company and the bank agreed to amend the Loan Agreement limit-reduction schedule and covenants, effective December 1, 1997. Under this amendment, the credit line limit is reduced the last day F-7 31 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of each quarter until the agreement terminates June 30, 2000. The credit limits effective through each quarter end under the amended agreement are shown below:
CREDIT FROM THROUGH LIMIT ---- ------- ------ December 19, 1997 December 30, 1997 $3,461,748 December 31, 1997 March 30, 1998 3,300,000 March 31, 1998 June 29, 1998 3,200,000 June 30, 1998 September 29, 1998 2,600,000 September 30, 1998 December 30, 1998 2,000,000 December 31, 1998 March 30, 1999 1,900,000 March 31, 1999 June 29, 1999 1,700,000 June 30, 1999 September 29, 1999 1,100,000 September 30, 1999 December 30, 1999 500,000 December 31, 1999 March 30, 2000 400,000 March 31, 2000 June 29, 2000 200,000 June 30, 2000 -0-
One financial covenant requires the Company to achieve trailing three-months earnings before interest, taxes, depreciation and amortization (EBITDA) to equal or exceed the sum of 125% of the next scheduled commitment reduction plus capital expenditures during each three-month period, beginning March 31, 1998. Cash capital expenditures are limited by the amended agreement to $650,000 each fiscal year. Cash dividends are limited by the amendment to $150,000 per fiscal year, and are prohibited until the Company achieves trailing 12-months EBITDA of at least $3 million. The loan is secured by all of the Company's real property. Any proceeds from real estate sales must be applied to loan repayment. The Loan Agreement includes various financial covenants. Due to the operating loss (as defined by the Loan Agreement) incurred by the Company in the quarter ended December 31, 1996, the Company violated a loan covenant. The bank has subsequently granted a permanent waiver for this covenant violation. The Company was in compliance with this and all other loan covenants at September 30, 1997. Due to the net losses incurred by the Company in September 1996 and the quarter ended December 31, 1995, and in each of the first three quarters of fiscal 1995, the Company violated certain loan covenants. The bank has subsequently granted permanent waivers for each of those past covenant violations. However, to obtain the waivers, the Company agreed to collateralize the loan with substantially all of its real property. Management is taking steps to ensure that the Company will be able to comply with all of the 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. Interest is payable monthly at a variable rate equal to the bank's prime rate plus a margin of 0 to 1% or, after the Company meets certain earnings goals, rates based upon the London Interbank Offering Rate. The blended interest rate effective at September 30, 1997 was 8.1%. The Company pays a commitment fee of 3/8 of 1 percent annually on the unused portion of the credit line. Notes payable were issued in fiscal 1997 and 1996 to buy out the remaining lease terms of certain closed locations. The long-term portion of those notes was $287,000 and $39,000 at September 30, 1997 and 1996, respectively. The current portion of $150,000 and $151,000 is included in accounts payable at September 30, F-8 32 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1997 and 1996, respectively. The effective interest rates range from 5.9% to 6.9%, with payments due monthly through November 2001. 4. OPERATING LEASES The Company leases restaurant facilities under operating leases with terms expiring at various dates into 2007, 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, 1997, exclusive of maintenance, taxes, etc., were as follows:
YEARS ENDING SEPTEMBER 30, - ------------- 1998................................................................... $ 2,526,000 1999................................................................... 2,132,000 2000................................................................... 1,770,000 2001................................................................... 1,231,000 2002................................................................... 954,000 Later years............................................................ 1,187,000 ----------- Total........................................................ $ 9,800,000 ===========
The composition of total yearly rental expense for operating leases is:
SEPTEMBER 30, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Minimum rentals................................ $2,528,000 $2,533,000 $2,946,000 Contingent rentals............................. 188,000 216,000 240,000 Less: Sublease rentals......................... (33,000) (31,000) (126,000) ---------- ---------- ---------- Total................................ $2,683,000 $2,718,000 $3,060,000 ========== ========== ==========
5. INCOME TAXES Income tax benefits consist of:
YEARS ENDED SEPTEMBER 30, ------------------------------------- 1997 1996 1995 ----------- --------- ----------- Current: U.S. federal................................. $ (572,000) $(321,000) $(1,286,000) State........................................ 10,000 ----------- --------- ----------- Combined current.......................... (562,000) (321,000) (1,286,000) Deferred: U.S. federal................................. (1,326,000) 81,000 (1,658,000) State........................................ 38,000 105,000 (399,000) ----------- --------- ----------- Combined deferred......................... (1,288,000) 186,000 (2,057,000) ----------- --------- ----------- Income tax benefit...................... $(1,850,000) $(135,000) $(3,343,000) =========== ========= ===========
F-9 33 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The income tax benefit differs from the amounts computed by applying the U.S. federal statutory rate of 34 percent to the net loss before income taxes as follows:
YEARS ENDED SEPTEMBER 30, --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Expected tax at federal statutory rate of 34%......................................... $(2,232,000) $ (187,000) $(2,957,000) Increase (decrease) in taxes due to: Change in valuation allowance............... 782,000 18,000 5,000 Tax effect of abandonment of foreign operations............................... (305,000) State income tax provision (benefit), net of federal income tax effect................ (63,000) 69,000 (399,000) Tax effect of employer tax credits.......... (45,000) (44,000) (162,000) Eliminate tax benefit from losses of foreign operations............................... 76,000 230,000 Adjustment for prior year tax refunds received................................. 6,000 (135,000) Other....................................... 7,000 68,000 (60,000) ----------- ----------- ----------- Total............................... $(1,850,000) $ (135,000) $(3,343,000) =========== =========== ===========
Significant components of the Company's deferred tax assets and liabilities are as follows:
SEPTEMBER 30, ------------------------ 1997 1996 ---------- ---------- Deferred tax assets: Current: Restructuring costs.................................... $ 112,000 $ 65,000 Accrued vacation pay................................... 140,000 142,000 Accrued insurance cost, current........................ 418,000 536,000 Current valuation allowance............................ (1,000) ---------- ---------- Current deferred tax asset, net of valuation allowance........................................... 670,000 742,000 ---------- ---------- Noncurrent: Accrued insurance costs................................ 860,000 981,000 Federal net operating loss carryforwards (expires 2012)................................................. 1,983,000 2,000 Noncurrent restructuring costs......................... 149,000 Alternative minimum tax carryforward................... 383,000 904,000 State net operating loss carryforwards (expire 1998 -- 2012)......................................... 464,000 392,000 Property, plant and equipment.......................... 453,000 Federal employer tax credits (expire 2009 -- 2012)..... 416,000 321,000 Noncurrent valuation allowance......................... (825,000) (42,000) ---------- ---------- Noncurrent deferred tax asset, net of valuation allowance........................................... 3,883,000 2,558,000 ---------- ---------- Deferred tax liabilities: Noncurrent: Property, plant and equipment.......................... 35,000 Basis difference in note receivable.................... 248,000 248,000 ---------- ---------- Total deferred tax liabilities.................... 248,000 283,000 ---------- ---------- Net deferred non-current tax asset................ $3,635,000 $2,275,000 ========== ==========
The 1997 federal NOL carryforward, of $5,832,000, includes the loss on abandonment of the Mexico partnership. Due to the Company's abandonment of its Mexico partnership, previous losses which were treated F-10 34 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as permanent differences were reclassified as temporary differences in 1997 and included in the 1997 federal NOL carryforward. The valuation allowance is required to reduce deferred tax assets to the amount that will more likely than not be realized. This reduction is necessary due to uncertainty of the Company's ability to use all of the federal and state net operating loss (NOL) carryforwards before they expire. In 1997, the valuation allowance was increased $671,000 for the increased federal NOL carryforward and $111,000 for state NOL carryforwards. The valuation allowance was increased $18,000 in 1996 for state NOL carryforwards. 6. STOCKHOLDERS' EQUITY STOCK NOTES RECEIVABLE In April 1992, the Company sold 104,500 shares of common stock to certain officers in exchange for notes receivable in the amount of $758,000, the current balance of which is shown in the balance sheet as a deduction from stockholders' equity. The notes bear interest at 7.83%, are payable in ten equal annual installments plus interest and are secured by the common stock. The shares were sold at the quoted market price on the day of sale. In fiscal 1997, the Company recognized expense of $83,000 to write off the excess of stock notes receivable over the market value of stock collateral held for two former employees for which the receivable balances were considered uncollectable. One of those employees returned the stock collateral in fiscal 1997, which provided the treasury stock reflected on the balance sheet at September 30, 1997. STOCKHOLDERS' RIGHTS PLAN AND PREFERRED STOCK PURCHASE RIGHTS In January 1996, the Company's Board of Directors adopted a Stockholders' Rights Plan to replace a similar plan which expired on March 31, 1996. Under the new plan, the Company declared a dividend distribution of one preferred share purchase right (Right) for each share of common stock outstanding at the close of business on March 29, 1996. Each Right entitles the holder to buy one one-thousandth of a share of the Company's newly-designated Series A Junior Participating Preferred Stock, for the exercise price of $10 per one one-thousandth of a Preferred Share, subject to adjustment. If any person or group (other than certain current stockholders and their affiliates, associates and successors, which may acquire up to 28%) acquires 15% of the Common Stock, all stockholders except the acquiring person (Acquiror) will be entitled to purchase Common Stock having twice the market value of the Rights exercise price. If the Company is involved in a merger or other business combination, or sells 50% or more of its assets or earning power, all of the Stockholders, other than the Acquiror, will be entitled to purchase Common Shares of the other person having twice the market value of the exercise price. Under the Plan's exchange provision, any time after such an acquisition but before any person acquires a majority of the Common Stock, the Board of Directors may exchange all or part of the outstanding Rights (other than the Rights of the Acquiror) for Common Stock at a ratio of one Right per share. The Rights trade with the common stock, and are not exercisable or transferable apart from the common stock until 10 days after a person or group acquires, or announces a tender offer for, 15% or more of the Company's outstanding common stock. Before acquisition by someone of beneficial ownership of 15% or more of the Company's common stock, the Rights are redeemable by the Board for $.01 per Right. The Rights expire on March 27, 2006. Under the Plan, the Company's Board of Directors has designated 10,000 shares of preferred stock as Series A Junior Participating Preferred Stock. This designation is part of the 500,000 shares of preferred stock, par value $10, previously authorized. None is issued. F-11 35 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. Summary information on stock option activity is shown below.
1997 1996 1995 -------------------------- -------------------------- -------------------------- WEIGHTED- RANGE OF RANGE OF NUMBER AVERAGE NUMBER EXERCISE NUMBER EXERCISE OF SHARES EXERCISE PRICE OF SHARES PRICES OF SHARES PRICES --------- -------------- --------- -------------- --------- -------------- Outstanding on October 1...................... 407,350 $10.13 586,650 $3.19 - $15.25 575,600 $5.88 - $15.25 Granted.................. 10,000 2.06 10,000 2.63 17,000 3.19 - 6.00 Exercised................ Forfeited/Expired........ (12,750) 13.69 (189,300) 5.88 - 11.38 (5,950) 7.25 - 11.38 ------- ------ -------- -------------- ------- -------------- Outstanding September 30........... 404,600 $ 9.82 407,350 $2.63 - $15.25 586,650 $3.19 - $15.25 ------- ------ -------- -------------- ------- -------------- Exercisable September 30........... 306,600 $10.05 236,638 $2.63 - $15.25 284,810 $5.88 - $15.25 ------- ------ -------- -------------- ------- -------------- Available for Grant September 30........... 62,750 67,750 9,000 ------- -------- -------
For shares outstanding at September 30, 1997:
WEIGHTED- WEIGHTED-AVERAGE NUMBER AVERAGE REMAINING RANGE OF EXERCISE PRICES OF SHARES EXERCISE PRICE LIFE IN YEARS ------------------------ --------- -------------- ---------------- $ 2.06 to $ 3.19.......... 25,000 $ 2.51 8.5 $ 5.88 to $ 7.00.......... 15,000 6.20 6.7 $ 7.25 to $ 8.38.......... 85,600 7.69 3.0 $10.50 to $11.38.......... 279,000 11.33 6.1 ------- ------ --- $ 2.06 to $11.38 404,600 $ 9.82 5.6 ------- ------ ---
The weighted-average fair value of options granted in 1997 was $1.00 per share. The pro forma effects of reporting stock options using the fair value approach under SFAS No. 123 are shown below.
YEAR ENDED SEPTEMBER 30 1997 1996 ----------------------- ----------- --------- Net loss As reported............ $(4,716,000) $(415,000) Pro forma.............. (4,722,000 (418,000) Net loss per share As reported............ (1.07) (0.09) Pro forma.............. (1.07) (0.09)
F-12 36 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996.
1997 1996 ----- ----- Dividend yield.............................................. 1.00% 1.00% Expected volatility......................................... 55.00% 55.00% Risk free interest rates.................................... 6.30% 5.30% Expected life in years...................................... 5 5
PREFERRED STOCK Shares of preferred stock, when issued, will have such rights, preferences and privileges as shall be adopted by the Board of Directors. SUBSEQUENT DIVIDEND On October 17, 1997, the Company's Board of Directors declared a $.015 per common share quarterly cash dividend, to be paid December 9, 1997 to holders of record on November 25, 1997. 7. EMPLOYEE BENEFIT PLANS VOLUNTARY EMPLOYEE INJURY BENEFIT PLAN Concurrent with its decision to become a non-subscriber to the Workers' Compensation Act of Texas in December 1990, the Company adopted a Voluntary Employee Injury Benefit (VEIB) Plan to provide benefits for employees located in Texas who incur job related injuries in connection with their employment. The VEIB Plan, which is subject to Employee Retirement Income Security Act (ERISA) rules and regulations, provides for medical, short-term wage replacement, dismemberment and death benefits. Coverage under the VEIB Plan is provided by the Company and through excess liability insurance, which provides coverage for claims in excess of certain stipulated amounts. The consolidated statements of operations for the years ended September 30, 1997, 1996, and 1995 include provisions for estimated benefits and expenses of the VEIB Plan of $557,000, $854,000, and $1,308,000, respectively. BONUS PLANS The Company has a bonus plan for restaurant managers and supervisors which provides bonuses based on restaurant performance. Such bonuses amounted to $233,000, $417,000, and $365,000 for the years ended September 30, 1997, 1996 and 1995, respectively. The Company has a bonus plan for corporate officers as a group based on stipulated operating results. Under this plan, no corporate officer bonuses were paid for the years ended September 30, 1997, 1996 and 1995. An additional bonus plan compensates participants employed by the Company for the annual principal and interest payments on the stock notes receivable from officers (see Note 6). Under this plan, the Company recognized compensation expense of $130,000, $148,000 and $135,000 in fiscal years 1997, 1996 and 1995, 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 F-13 37 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) brokerage firm. The Company recognized expenses for contributions to the plan of $23,000, $36,000, and $36,000 for the years ended September 30, 1997, 1996 and 1995, respectively. 8. RELATED PARTY TRANSACTIONS The Company sold food and supplies on a cost-plus basis to the family-owned restaurant operations of the Chairman of the Company, until the Company's food distribution center was closed in September 1994. Occasional sales of supplies and equipment are still made to those affiliates. Sales amounts were $7,000, $7,000, and $4,000 for the years ended September 30, 1997, 1996, and 1995, respectively. The Chairman of the Company and the family-owned restaurant operations, collectively, were indebted to the Company in the amount of $88,000 and $86,000 on September 30, 1997 and 1996, respectively. This indebtedness includes the loan to purchase Company stock (see Note 6 regarding officer stock notes receivable, secured by Company stock), trade receivables for sales to the family-owned restaurant operations, and other advances. The Company purchases food products manufactured by a Company whose chairman and chief executive officer is a non-employee director of the Company. Purchases were $2,728,000, $2,714,000, and $2,992,000 for the years ended September 30, 1997, 1996 and 1995, respectively. The same vendor purchased items from the Company in the amount of $75,000, $81,000, and $122,000 in 1997, 1996 and 1995, respectively. This vendor also leases the company's cold-storage facilities. The lease term including options runs through October 31, 2000, and represented $60,000 of annual rental revenue for the company in fiscal 1997, 1996 and 1995. The Company and one of its non-employee directors were involved in a joint venture to open at least one restaurant in Mexico. The Company incurred expenses in setting up the joint venture of about $60,000 for the year ended September 30, 1995. The Company invested $2,323,000 in its Mexican subsidiaries and operations related to the venture. The joint venture subsidiaries are included in the Company's consolidated financial statements. A company owned by this non-employee director received fees from the joint venture for management services of $36,000, $48,000 and $48,000 in fiscal 1997, 1996 and 1995, respectively. Due to continuing operating losses and negative cash flows for the Mexico operations, the Company transferred its interest in the Mexico operations to its joint venture partner effective May 31, 1997. The Company believes this was the most appropriate method of exiting the Mexico market under the available circumstances. 9. COMMITMENTS AND CONTINGENCIES The Company has employment contracts with four executives which call for payment of salaries and benefits at or above current levels throughout the contract periods. Three of those agreements expire in December 2001, and one expires in December 1998. The Company has been named in various lawsuits involving claims in the ordinary course of business, many of which are covered by insurance. Although the amounts of losses from such claims cannot be estimated, in the opinion of management, the ultimate disposition of these lawsuits and claims will not result in a material adverse effect on the Company's financial position, results of operations or cash flows. 10. 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. F-14 38 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company recorded restructuring charges of $5,066,000 in fiscal 1997 to execute the plan. Under the plan, the Company recognized $4,988,000 in restructuring charges in the quarter ended March 31, 1997, and $78,000 more in the quarter ended June 30, 1997. The charges included $3,033,000 for the impairment of land, buildings, leasehold improvements and equipment. 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 $1,538,000 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. Under the plan, the Company closed seven U.S. locations on April 15, 1997. The Company has written off its entire investment in the Mexico venture and has reserved for exit and carrying costs to dispose of its interest. The Company has transferred its interest in the Mexico venture effective May 31, 1997 to its joint venture partner, a non-employee director of the Company. Sales for the seven closed locations plus the Mexico operation were $2,854,000, $5,512,000 and $5,624,000 for fiscal years 1997, 1996 and 1995, respectively. Under a previous restructuring plan, adopted in June 1995, a restructuring charge of $7,572,000 before income taxes was recorded for the closing of nine restaurants and the impairment of eight others, including the restaurant in Guadalajara, Mexico. The charge included $6,624,000 to write down leasehold improvements and equipment and $948,000 for remaining lease costs and other exit costs associated with the restaurant closings. The charge for impairments was determined in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The assets of the locations closed under the 1995 restructuring were written down to fair value less disposal costs, providing an impairment charge of $2,367,000. The net book value after the write down of property, plant and equipment related to the company's closed restaurant locations was $663,000. The remaining restaurant equipment will either be sold or used elsewhere in the Company's operations. Sales for the nine closed locations totaled $4,652,000 for fiscal 1995. An impairment charge of $3,445,000 was recognized under the 1995 restructuring for seven low sales volume restaurants that the Company planned to continue to operate. Due to the low or negative projected cash flows of these restaurants, the assets were written down to fair value. One of those impaired restaurants was subsequently closed, without incurring any additional impairment charges. The Company's investment in a restaurant in Guadalajara, Mexico was also evaluated for impairment and a charge of $812,000 was recorded in the 1995 restructuring. Fair value of the assets was estimated based on the discounted expected future cash flows from operation of the restaurant. Current and deferred income tax benefits of $2,366,000 were recognized in the United States in connection with the 1995 restructuring. No tax benefits were recognized for the write down of assets in Mexico. 11. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," the Company has estimated the fair value of financial instruments as of September 30, 1997. The estimated fair value amounts are determined by using available market information and appropriate valuation methodologies. The Company's consolidated 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 F-15 39 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) carrying amount of accounts receivable, notes payable and accounts payable approximates 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. In addition, because the Company's long-term debt bears interest at rates which float with market rates, the Company has estimated that the carrying amounts of its long-term debt also approximates its fair value. 12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1997 YEAR ENDED SEPTEMBER 30, 1996 ----------------------------------------------- ----------------------------------------------- QUARTER ENDED QUARTER ENDED ------------------------------------- ------------------------------------- (AMOUNTS IN THOUSANDS EXCEPT 12/31 3/31 6/30 9/30 TOTAL 12/31 3/31 6/30 9/30 TOTAL PER SHARE DATA) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Sales......................... $16,574 $16,585 $16,745 $17,053 $66,957 $17,460 $17,915 $18,005 $18,107 $71,487 Operating income (loss)....... (939) (5,638) (124) 180 (6,521) (510) 65 259 (93) (279) Net earnings (loss)........... (674) (4,087) (80) 125 (4,716) (356) (37) 121 (143) (415) Net earnings (loss) per share....................... (0.15) (0.93) (0.02) 0.03 (1.07) (.08) (.01) .03 (.03) (.09)
- --------------- (1) Third quarter 1997 results include a pre-tax benefit of $500,000 to reduce insurance reserves for workers' compensation and the Voluntary Employee Injury Benefit (VEIB) Plan. (2) Second quarter 1997 results include a pre-tax benefit of $558,000 to reduce insurance reserves for workers' compensation and the VEIB Plan. (3) Fourth quarter 1996 results include a pre-tax benefit of $162,000 to reduce insurance reserves for workers' compensation and the VEIB Plan. (4) Third quarter 1996 results include a pre-tax benefit of $179,000 to reduce insurance reserves for the VEIB Plan and to reduce expenses for the employee health insurance plan. (5) Second quarter 1996 results include a pre-tax benefit of $74,000 to reduce expenses for the employee health insurance plan. F-16 40 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pancho's Mexican Buffet, Inc. and subsidiaries at September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Fort Worth, Texas November 14, 1997 (December 19, 1997 as to the first and second paragraph of Note 3) F-17 41 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. By /s/ HOLLIS TAYLOR ----------------------------------- Hollis Taylor, President and Chief Executive Officer (Principal Executive Officer) December 19, 1997 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.
SIGNATURE AND TITLE DATE ------------------- ---- /s/ JESSE ARRAMBIDE, III December 19, 1997 - ------------------------------------------------------------ Jesse Arrambide, III, Chairman of the Board of Directors /s/ HOLLIS TAYLOR December 19, 1997 - ------------------------------------------------------------ Hollis Taylor, President and Chief Executive Officer and Director (Principal Executive Officer) /s/ W. BRAD FAGAN December 19, 1997 - ------------------------------------------------------------ Brad Fagan, Vice President, Treasurer, Controller and Assistant Secretary (Principal Financial and Accounting Officer) /s/ SAMUEL L. CARLSON December 19, 1997 - ------------------------------------------------------------ Samuel L. Carlson, Director /s/ MAURICIO SANCHEZ GARCIA December 19, 1997 - ------------------------------------------------------------ Mauricio Sanchez Garcia, Director /s/ ROBERT L. LIST December 19, 1997 - ------------------------------------------------------------ Robert L. List, Director /s/ TOMAS ORENDAIN December 19, 1997 - ------------------------------------------------------------ Tomas Orendain, Director /s/ GEORGE N. RIORDAN December 19, 1997 - ------------------------------------------------------------ George N. Riordan, Director /s/ RUDOLPH RODRIGUEZ, JR. December 19, 1997 - ------------------------------------------------------------ Rudolph Rodriguez, Jr., Director
42 EXHIBIT INDEX
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) 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) 10(m) -- Amendment No. 4 to 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(11) 10(n) -- Amendment No. 3 to 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(11) 10(o) -- 1992 Stock Option Plan of Pancho's Mexican Buffet, Inc.(12) 10(p) -- Revolving Credit and Term Loan Agreement dated February 16, 1994, between PMB Enterprises West, Inc. and First Interstate Bank of Texas, N.A.(13)
43
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 -- filed herewith 11 -- Not required -- Explanation of earnings per share computation is contained in Notes to Consolidated Financial Statements. 12 -- Not applicable 13 -- Not applicable 16 -- Not applicable 18 -- Not applicable 21 -- Subsidiaries of the registrant -- filed herewith 22 -- Not applicable 23 -- Consent of Independent Public Accountants -- filed herewith 24 -- Not applicable 27 -- Financial Data Schedule -- filed herewith 28 -- Not applicable
- --------------- (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.
44 (6) Filed with the Commission as an Exhibit to Form 8-A Registration Statement on February 21, 1996 -- such Exhibit is incorporated herein by reference. (7) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1986 -- such Exhibits are incorporated herein by reference. (8) Filed with the Commission as an Exhibit to Form S-2 Registration Statement No. 33-14484 on May 22, 1987 -- such Exhibit is incorporated herein by reference. (9) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1988 -- such Exhibits are incorporated herein by reference. (10) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1990 -- such Exhibits are incorporated herein by reference. (11) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1991 -- such Exhibits are incorporated herein by reference. (12) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1993 -- such Exhibits are incorporated herein by reference. (13) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1995 -- such Exhibits are incorporated herein by reference. (14) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1995 -- such Exhibits are incorporated herein by reference. (15) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 -- such Exhibits are incorporated herein by reference. (16) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1996 -- such Exhibits are incorporated herein by reference. (17) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1996 -- such Exhibits are incorporated herein by reference. (18) Filed with the Commission as an Exhibit to form 10-K for the year ended September 30, 1996 -- such Exhibits are incorporated herein by reference. (19) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended December 31, 1996 -- such Exhibits are incorporated herein by reference. (20) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 -- such Exhibits are incorporated herein by reference. (21) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1997 -- such Exhibits are incorporated herein by reference. EX-10.Z 2 7TH AMEND TO REVOLVING CREDIT & TERM LOAN AGMT 1 EXHIBIT 10(z) SEVENTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT This Seventh Amendment To Revolving Credit and Term Loan Agreement (this "Seventh 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 2 WHEREAS, the parties entered into a letter agreement dated December 16, 1996; and WHEREAS, the parties entered into a letter agreement dated February 11, 1997; and WHEREAS, the parties entered into that one certain Sixth amendment To Revolving Credit and Term Loan Agreement dated March 31, 1997 ("Sixth 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 June 30, 2000. 2. The following new definitions are added to Article I of the Loan Agreement: "Applicable Margin" shall mean the rate per annum set forth below for the type of advance indicated in effect from time to time in the case of a Floating Prime Advance and at the time of Advance in the case of a Eurodollar Advance: 2 3
12-Month Trailing Floating Prime Eurodollar EBITDA Advance Advance ----------------- -------------- ---------- <$3,200,000 1.0% N/A $3,200,000 - $4,000,000 .5% N/A $4,000,000 - $4,500,000 -0- N/A >$4,500,000 -0- 2.75%
"Commitment Reduction" shall mean the amount shown opposite each calendar quarter in section 2.01(a). "EBITDA" shall mean earnings before interest, taxes, depreciation and amortization. 3. Section 2.01(a) of the Loan Agreement is amended to read as follows: (a) Revolving Loan Commitments. Subject to the terms and conditions of this Loan Agreement, Bank agrees to extend to Company from the date hereof through the Termination Date (the "Revolving Credit Period"), a revolving line of credit which shall not exceed three million four hundred sixty-one thousand seven hundred forty-seven and 80/100 dollars ($3,461,747.80) at any one time outstanding prior to December 31, 1997. On the last day of each and every calendar quarter beginning with the calendar quarter ended December 31, 1997 the maximum principal amount which may at any one time be outstanding under the revolving line of credit shall be further and additionally reduced by Company by the amount set forth opposite the particular quarter below:
Quarter Commitment Reduction ------- -------------------- December 31, 1997 $161,747.80 March 31, l998 100,000.00 June 30, 1998 600,000.00 September 30, 1998 600,000.00 December 31, 1998 100,000.00 March 31, 1999 200,000.00 June 30, 1999 600,000.00 September 30, 1999 600,000.00 December 31, 1999 100,000.00 March 31, 2000 200,000.00 June 30, 2000 200,000.00
(each maximum amount outstanding under the line of credit from time to time in effect is hereinafter referred to as the "Commitment"). The amount of the Commitment shall also be reduced by the amount of net proceeds from the sale of real property of Borrower or any Subsidiary applied to the payment of the Note. Any payments received from the proceeds of sale of real property of Borrower or any Subsidiary will not reduce or affect the next scheduled Commitment Reduction, but shall be applied in inverse order to the scheduled 3 4 Commitment Reductions. For example, the application of $300,000 in net proceeds from the sale of real estate will first cause the Commitment Reduction on March 31, 2000 to be reduced to zero and cause the Commitment Reduction on December 31, 1999 to be reduced to $300,000, and the subsequent application of $400,000 of net proceeds from a second sale of real estate will reduce the Commitment Reduction on December 31, 1999 to zero and cause the Commitment Reduction on September 30, 1999 to be reduced to $400,000. Bank shall not be obligated to make any Advance hereunder if, immediately after giving effect thereto, the aggregate amount of the Obligations of Company to Bank hereunder exceeds Bank's Commitment in effect at such time. Within the limits of this Section 2.01, during the Revolving Credit Period, Company may borrow, prepay pursuant to Section 4.04 hereof and reborrow under this Section 2.01. Each advance made by Bank under Section 2.01 and Section 2.02 is herein called an "Advance" and all Advances made by Bank hereunder are herein collectively called a "Revolving Credit Loan". 4. Section 2.02(a) of the Loan Agreement is amended to read as follows: (a) Request for Advance. Each request by Company to Bank for an Advance under Section 2.01 hereof (a "Request for Advance") shall be in writing and specify the aggregate amount of such requested Advance, the requested date of such Advance, and when the Request for Advance specifies a Eurodollar Advance, the Interest Period which shall be applicable thereto; provided, however, Borrower shall not be entitled to request a Eurodollar Advance unless 12-months trailing EBITDA exceeds four million five hundred thousand dollars ($4,500,000). The aggregate number of unpaid Eurodollar Advances shall not exceed four (4) at any time. Company shall furnish to Bank the Request for Advance by at least 11:00 a.m. (Fort Worth time) three (3) Eurodollar Business Days prior to the requested Eurodollar Advance date (which must be a Eurodollar Business Day) and by at least 2:00 p.m. (Fort Worth time) on the requested borrowing date (which must be a Business Day) for a Floating Prime Advance. Any written Request for Advance shall: (i) in the case of a Floating Prime Advance, be in the form attached hereto as Exhibit "C," and (ii) in the case of a Eurodollar Advance, be in the form attached hereto as Exhibit "D." Each Floating Prime Advance shall be in an aggregate principal amount of ten thousand dollars ($10,000.00) or any integral multiple of ten thousand dollars ($10,000.00). Each Eurodollar Advance shall be in an amount of at least one million dollars ($1,000,000.00) or any higher integral multiple of $1,000,000.00. Prior to making a Request for Advance, Company may (without specifying whether the anticipated Advance shall be a Floating Prime Advance or Eurodollar Advance) request that Bank provide Company with the most recent Interbank Offered Rate available to Bank. Bank shall endeavor to provide such quoted rates to Company on the date of such request. 4 5 Each Request for Advance shall be irrevocable and binding on Company and, in respect of the Advance specified in such Request for Advance, Company shall indemnify Bank against any cost, loss or expense incurred by Bank as a result of any failure to fulfill, on or before the date specified for such Advance, the conditions to such Advance set forth herein, including without limitation, any cost, loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund the Advance to be made by Bank as part of such Advance when such Advance, as a result of such failure, is not made on such date. 5. Section 2.02(c) of the Loan Agreement is amended to read in its entirety as follows: (c) Selection of Interest Option. Upon making a Request for Advance under Section 2.02(a) hereof, Company shall advise Bank as to whether the Advance shall be (i) a Eurodollar Advance, in which case Company shall specify the applicable Interest Period therefor, or (ii) a Floating Prime Advance. At least three (3) Eurodollar Business Days prior to the termination of each Interest Period with respect to a Eurodollar Advance (whether such termination occurs before or after the Termination Date) Company shall give Bank written notice (the "Rollover Notice") of the interest option which shall be applicable to such Advance to be rolled over upon the expiration of such Interest Period. If Company shall specify that such Advance shall be a Eurodollar Advance, such Rollover Notice shall also specify the length of the succeeding Interest Period selected by Company with respect to such Advance. Each Rollover Notice shall be irrevocable and effective upon notification thereof to Bank. If the required Rollover Notice shall not have been timely received by Bank prior to the expiration of the then relevant Interest Period, then Company shall be deemed to have elected to have such Advance be a Floating Prime Advance. With respect to any Floating Prime Advance, Company shall have the right, on any Eurodollar Business Day (a "Conversion Date") to convert such Floating Prime Advance to a Eurodollar Advance by giving Bank a Rollover Notice of such selection at least three (3) Eurodollar Business Days prior to such Conversion Date if at such time twelve (12) months trailing EBITDA exceeds four million five hundred thousand dollars ($4,500,000). Notwithstanding anything to the contrary contained herein, Company shall have no right to request a Eurodollar Advance if (a) the interest rate applicable thereto under Section 2.03 hereof would exceed the Maximum Rate in effect on the first day of the Interest Period applicable to such Eurodollar Advance, (b) at such time twelve (12) months trailing EBITDA is equal to or less than four million five hundred thousand dollars ($4,500,000), or (c) if an Event of Default has occurred and is continuing. 5 6 6. Section 2.03 of the Loan Agreement is amended to read in its entirety as follows: 2.03. Interest Rates. The unpaid principal of each Floating Prime Advance shall bear interest from the date of advance until paid at a rate per annum which shall from day to day be equal to the lesser of: (a) the Floating Prime Rate, plus the Applicable Margin in effect from day to day or (b) the Maximum Rate. The unpaid principal of each Eurodollar Advance shall bear interest from the date of advance until paid at a rate per annum which shall be equal to the lesser of (a) the sum of the Adjusted Interbank Rate for the applicable Interest Period, plus the Applicable Margin or (b) the Maximum Rate. All past due principal of, and to the extent permitted by applicable law, interest on the Note shall bear interest at the Past Due Rate. Notwithstanding the foregoing, the unpaid principal balance of the Note shall bear interest as provided in Section 4.05(c) hereof, upon the occurrence of the circumstances described in such section. 7. A new section 8.19 is added to the Loan Agreement which shall read in its entirety as follows: 8.19. Real Estate Sales. Company and its Subsidiaries shall promptly apply all net proceeds of the sale of real estate owned by Company or any of its Subsidiaries to the payment of the Note and the amount of such payment shall reduce the amount of the Commitment in section 2.01(a) in inverse order. 8. Section 9.01, Section 9.04, Section 9.14 and Section 9.15 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 2.25 to 1.0; or *** 9.04. Transfer of Assets. Transfer any funds or assets to PMB International, Inc. and its Subsidiaries in an amount in excess of $100,000 during the fiscal year 1998 or transfer any funds to PMB International, Inc. or its Subsidiaries in fiscal 1999 or any year thereafter; or 6 7 9.14 Capital Expenditure. Permit the cash paid for Capital Expenditures on a Consolidated basis to exceed six hundred fifty thousand dollars ($650,000) per fiscal year. 9.15 Dividends. Pay any Dividends until 12-month rolling EBITDA exceeds three million dollars ($3,000,000) or pay any Dividends in excess of one hundred fifty thousand dollars ($150,000) in the aggregate during any fiscal year of Company. 9. A new section 9.16 is added to the Loan Agreement which shall read as follows: 9.16. EBITDA. Permit trailing three (3) months EBITDA to be less than the sum of (a) 125% of the amount of the next scheduled Commitment Reduction and (b) Capital Expenditures during any 3-month period beginning with the quarter ended March 31, 1998. 10. New sections 10.01(j) and Section 10.01(k) are added to the Loan Agreement which shall read in their entirety as follows: (j) The failure of Company to promptly apply all net proceeds from sale of real property of Company or any of its Subsidiaries to the unpaid balance of the Note; or (k) The failure of Company to reduce the unpaid principal balance of the Note to an amount equal to or less than the amount of the Commitment then in effect. Except as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment and the letter agreements dated December 16, 1996 and February 11, 1997, the Loan Agreement is ratified and confirmed and shall remain in full force and effect. 12. At the time of execution of this Seventh Amendment, Company shall pay to Bank a fee in the amount of fifteen thousand dollars ($15,000) and all attorney's fees incurred by Bank. 7 8 13. 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 Seventh Amendment, as follows: (a) The Company has corporate power and authority to execute, deliver and perform this Seventh Amendment, and all corporate action on the part of the Company requisite for the due execution, delivery and performance of this Seventh 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 Seventh 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 Seventh 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 Seventh 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 Seventh Amendment. (d) The Company's execution, delivery and performance of this Seventh 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 of 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 Seventh Amendment. (g) After giving effect to this Seventh 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. 8 9 14. The effectiveness of this Seventh 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 Seventh Amendment; (b) Incumbency certificate of Company; (c) The fee in the amount of fifteen thousand dollars ($15,000); and (d) The payment of all attorney's fees incurred by Bank. 15. 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. 16. Company agrees to pay any and all costs and expenses incurred by Bank in connection with this Seventh 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 Seventh 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. 17. 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. 18. Each of the Guarantors hereby consents to and accepts the terms and conditions of this Seventh Amendment, agrees to be bound by the terms and conditions hereof and ratifies and confirms that its continuing Guaranty Agreement, executed and delivered 9 10 to the Bank as of February 16, 1994, guaranteeing payment of the obligations is and remains in full force and effect. 19. This Seventh 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 Seventh Amendment by facsimile shall be equally as effective as delivery of a manually executed counterpart of this Seventh Amendment. 20. This Seventh Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 21. 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 December 1, 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/ ROGER FRUENDT ---------------------------------------- Roger Fruendt, Vice President BANK 10 11 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/ CAROLYN TETTS ---------------------------------------- Name: Carolyn Tetts Title: SEC/TREAS. GUARANTORS 11 12 PMB ENTERPRISES WEST, INC. OFFICER'S CERTIFICATE The undersigned hereby certifies that he is the duty elected, qualified and acting Secretary of PMB Enterprises West, Inc., a New Mexico corporation (the "Company"), and as such officer, he is familiar with the Company's properties, affairs and records. The undersigned hereby certifies as follows: 1. Attached hereto as Exhibit "A" is a true and correct copy of the Articles of Incorporation of the Company, as filed with the Secretary of State of the State of New Mexico. Such Articles of Incorporation have not been amended, modified or restated except as shown in Exhibit "A", and are in full force and effect as of the date hereof. 2. Attached hereto as Exhibit "B" is a true and correct copy of the Bylaws of the Company. Such Bylaws are in full force and effect as of the date hereof and have not been amended, supplemented, altered or repealed. 3. Attached hereto as Exhibit "C" is a true, complete and correct copy of certain resolutions adopted effective as of December 1, 1997 (the "Resolutions"). The Resolutions have not been amended, modified, repealed or otherwise altered in any manner and are in full force and effect as of the date hereof. 4. Each officer of the Company has been duly authorized to execute and deliver the Seventh Amendment To Revolving Credit and Term Loan Agreement dated December 1, 1997 (the "Seventh Amendment") and loan and other documents required by the Seventh Amendment for and on behalf of the Company. 5. The persons named below are on the date hereof the duly elected and qualified officers of the Company holding the office set forth opposite their respective names and their signatures appearing on the right of their respective names are the genuine signatures of said officers.
Officer Name Signature of Officer ------- ---- -------------------- President Hollis Taylor /s/ HOLLIS TAYLOR ------------------------------- Senior Vice President Samuel L. Carlson /s/ SAMUEL L. CARLSON and Secretary ------------------------------- Assistant Secretary William Brad Fagan /s/ WILLIAM BRAD FAGAN -------------------------------
IN WITNESS WHEREOF, I have hereunto subscribed my signature effective as of the 1 day of December, 1997. /s/ SAMUEL L. CARLSON ---------------------------- Samuel L. Carlson, Secretary 12 13 EXHIBIT A PAGE 1 OF 3 ARTICLES OF INCORPORATION OF PMB ENTERPRISES WEST, INC. ARTICLE I The name of the proposed corporation shall be PMB Enterprises West, Inc. ARTICLE II The period limited for the duration of the corporation is ninety-nine (99) years from the date hereof. ARTICLE III The nature of the business, or objects, or purposes proposed to be transacted, promoted, or carried on is: 1. To own, lease, manage, or otherwise operate motels, restaurants, night clubs, including related facilities thereto; 2. To acquire, purchase, lease, option, own, sell, mortgage, work or otherwise deal in land and personal property; 3. To engage in any and all activities authorized by the Business Corporation Act of the State of New Mexico. ARTICLE IV 1. The amount of total authorized capital stock of this corporation shall be $25,000 divided into 25,000 shares of common stock of par value of ONE DOLLAR ($1.00) each. 2. The corporation will not commence business until consideration of the value of at least $1,000 has been received for the issuance of 1,000 shares of common stock. 3. Any stock of the corporation may be issued for money, property, services rendered, labor done, cash advances for the company, or for any other assets of value in accordance with the action of the Board of Directors, whose judgment as to value received in return therefor shall be conclusive and said stock when issued shall be fully paid and non-assessable. 14 EXHIBIT A PAGE 2 OF 3 ARTICLE V The location of the corporation's initial registered office shall be 8200 1/2 Menaul NE, Albuquerque, New Mexico, 87110, and the name of its registered agent at such address is Joe Armijo. ARTICLE VI The names and addresses of the persons who are to serve as directors until the first annual meeting of shareholders or until their successors are elected and qualified are: Joe Armijo Mary Lou Armijo 3843 Riverview Drive, N.W. 3843 Riverview Drive, N.W. Albuquerque, New Mexico Albuquerque, New Mexico Vincent Arroyo 1616 Speronelli Road, N.W. Albuquerque, New Mexico Jesse Arrambide III 1617 Rim Road El Paso, Texas ARTICLE VII The management of the corporation shall be vested in a Board of not less than three nor more than fifteen directors. The number of directors, within the aforesaid limits, may be fixed from time to time by the by-laws and until so fixed shall remain at three. The directors shall be chosen annually by the stockholders at the time and place provided by the by-laws, and shall hold office for one year and until others are chosen and qualify in their stead. Power is hereby conferred upon the Board of Directors to make and alter the by-laws of the corporation. ARTICLE VIII Pre-emptive rights shall not be allowed to the holders of the capital stock of this corporation. ARTICLE IX Cumulative voting shall not be allowed. ARTICLE X The name and address of the incorporators: Joe Armijo 3843 Riverview Drive, N.W. Albuquerque, New Mexico. 15 EXHIBIT A PAGE 3 OF 3 IN WITNESS WHEREOF, I have hereunto set my hand and seal this 4th day of May, 1976. /s/ JOE ARMIJO ----------------- JOE ARMIJO STATE OF NEW MEXICO ) ) ss. COUNT OF SANTA FE ) The foregoing instrument was acknowledged before me this 4th day of May, 1976, by JOE ARMIJO. /s/ ANNETTE BYRNES ---------------------- Notary Public My Commission Expires: 1-10-79 - ---------------------- 16 EXHIBIT B PAGE 1 OF 6 BY-LAWS of PMB ENTERPRISES WEST, INC. ARTICLE 1 - OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be established and maintained at 8200 1/2 Menaul NE, Albuquerque, New Mexico, 87110, in the County of Bernalillo in the State of New Mexico. SECTION 2. OTHER OFFICES. The corporation may have other offices, either within or without the State of New Mexico, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II - MEETING OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting, shall be held at such place, either within or without the State of New Mexico, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the registered office of the corporation in New Mexico on April 25. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and may transact such other corporate business as shall be stated in the notice of the meeting. SECTION 2. OTHER MEETINGS. Meetings of stockholders for any purpose other than the election of directors may be held at such time and place within or without the State of New Mexico, as shall be stated in the notice of the meeting. SECTION 3. VOTING. Each stockholder entitled to vote in accordance with the terms and provisions of the Certificate of Incorporation and these By-Laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Upon the demand of any stockholder, the vote for directors and upon any question before the meeting shall be by ballot. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the State of New Mexico. SECTION 4. STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall at least 10 days before each meeting of stockholders prepare a complete alphabetically addressed list of the stockholders entitled to vote at the ensuing election, with the number of shares held by each. Said list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held. Which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be available for inspection at the meeting. 17 EXHIBIT B PAGE 2 OF 6 SECTION 5. QUORUM. Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the directors or stockholders entitled to vote. Such request shall state the purpose of the proposed meeting. SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation, not less than ten nor more than fifty days before the date of the meeting. SECTION 8. BUSINESS TRANSACTED. No business other than that stated in the notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote thereat. SECTION 9. ACTION WITHOUT MEETING. Except as otherwise provided by the Certificate of Incorporation, whenever the vote of stockholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provisions of the statutes or the Certificate of Incorporation or these By-Laws, the meeting and vote of stockholders may be dispensed with, if all the stockholders who would have been entitled to vote upon the action if such meeting were held, shall consent in writing to such corporate action being taken. ARTICLE III - DIRECTORS SECTION 1. NUMBER AND TERM. The number of directors shall be not less than three. The directors shall be elected at the annual meeting of stockholders and each director shall be elected to serve until his successor shall be elected and shall qualify. The number of directors may not be less than three except that where all the shares of the corporation are owned beneficially and of record by either one or two stockholders, the number of directors may be less than three but not less than the number of stockholders. SECTION 2. RESIGNATIONS. Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. If the office of any director, member of a committee or other officer becomes vacant, the remaining directors in office, though less than a quorum by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 4. REMOVAL. Any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled 18 EXHIBIT B PAGE 3 OF 6 to vote, at a special meeting of the stockholders called for the purpose and the vacancies thus created may be filled, at the meeting held for the purpose of removal, by the affirmative vote of a majority in interest of the stockholders entitled to vote. SECTION 5. INCREASE OF NUMBER. The number of directors may be increased by amendment of these By-Laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. SECTION 6. COMPENSATION. Directors shall not receive any stated salary for their services as directors or as members of committees, but by resolution of the board a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 7. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior of such action a written consent thereto is signed by all members of the board, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee. ARTICLE IV - OFFICERS SECTION 1. OFFICERS. The officers of the corporation shall consist of a President, a Treasurer, and a Secretary, and shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect a Chairman, one or more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers as it may deem proper. None of the officers of the corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. More than two offices may be held by the same person. SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such power and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. CHAIRMAN. The Chairman of the Board of Directors if one be elected, shall preside at all meetings of the Board of Directors and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 4. PRESIDENT. The President shall be the chief executive officer of the corporation and shall have the general powers and duties of supervision and management usually vested in the office of President of a corporation. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of the Chairman of the Board of Directors, at all meetings of the Board of Directors, and shall have general supervision, direction and control of the business of the corporation except as the Board of Directors shall authorize the execution thereof in some other manner, he shall execute bonds, mortgages, and other contracts in behalf of the corporation and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer. SECTION 5. VICE-PRESIDENT. Each Vice-President shall have such powers and shall perform such duties as shall be assigned to him by the directors. 19 EXHIBIT B PAGE 4 OF 6 SECTION 6. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. He shall deposit all moneys and other valuables in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. He shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the board shall prescribe. SECTION 7. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect to do so, any such notice may be given by any person thereunto directed by the President, or by the directors, or stockholders, upon whose requisition the meeting is called as provided in these By-Laws. He shall record all the proceedings of the meetings of the corporation and of directors in a book to be kept for that purpose, and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. SECTION 8. ASSISTANT TREASURERS & ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. ARTICLE V SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president and the treasurer or an assistant treasurer, or the secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations, or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, the signatures of such officers may be facsimiles. SECTION 2. LOST CERTIFICATE. New certificates of stock may be issued in the place of any certificate therefore issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate or his legal representatives, to give the corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the corporation against it on account of the alleged loss of any such new certificate. 20 EXHIBIT B PAGE 5 OF 6 SECTION 3. TRANSFER OF SHARES. The shares of stock of the corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other persons as the directors may designate, by who they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. STOCKHOLDERS RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the day of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 5. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when they deem expedient. Before declaring any dividends there may be set apart out of any funds of the corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the corporation. SECTION 6. SEAL. The corporate seal shall contain the name of the corporation, and the words "CORPORATE SEAL". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. SECTION 7. FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. SECTION 8. CHECKS. All checks, drafts, or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by officer or officers, agent or agents of the corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 9. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the corporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed proper notice. 21 EXHIBIT B PAGE 6 OF 6 ARTICLE VI - AMENDMENTS These By-Laws may be altered and repealed and By-Laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice thereof is contained in the notice of such special meeting by the affirmative vote of a majority of the stock issued and outstanding or entitled to vote thereat, or by the regular meeting of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice thereof is contained in the notice of such special meeting. 22 CORPORATION RESOLUTION OF PMB ENTERPRISES WEST, INC. I, SAMUEL L. CARLSON, do hereby certify that I am the Secretary of PMB ENTERPRISES WEST, INC., a New Mexico Corporation, and that the following is a full, true and correct copy of resolution adopted by the Board of Directors, to-wit: "RESOLVED that PMB Enterprises West, Inc. (the "Corporation")is authorized to execute the Seventh Amendment to Revolving Credit and Term Loan Agreement between the Corporation and Wells Fargo Bank (Texas) National Association in the form attached to these resolutions. "RESOLVED FURTHER that Hollis Taylor, the president of the Corporation, Samuel L. Carlson, the senior vice president of the Corporation, or William Brad Fagan, the assistant secretary of the Corporation, are each authorized to execute, on behalf of the Corporation, the Seventh Amendment to Revolving Credit and Term Loan Agreement in the form attached to these resolutions. WITNESS MY HAND AND THE SEAL OF PMB ENTERPRISES WEST, INC., December 1, 1997. /s/ SAMUEL L. CARLSON ----------------------- SAMUEL L. CARLSON SUBSCRIBED and sworn to before me by SAMUEL L. CARLSON, Secretary of PANCHO'S MEXICAN BUFFET, INC. this 1st day of December, 1997. [Notary Public Seal] /s/ CAROLYN TETTS ----------------------- Notary Public, Tarrant County, Texas My commission expires: 5-24-01 ----------------------- STATE OF TEXAS () COUNTY OF TARRANT () BEFORE ME, a Notary Public in and for said County and State on this 1st day of December, 1997, personally appeared SAMUEL L. CARLSON, Secretary of PANCHO'S MEXICAN BUFFET, INC., a Delaware Corporation, well known to me to be the officer and person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes therein expressed, and in the capacity therein stated, and as the act and deed of said corporation. [Notary Public Seal] /s/ CAROLYN TETTS ----------------------- Notary Public, Tarrant County, Texas My commission expires: 5-24-01 ----------------------- EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
NAMES UNDER WHICH STATE OF SUBSIDIARY DOES SUBSIDIARY INCORPORATION BUSINESS ---------- ------------- ----------------- PMB Enterprises West, Inc. New Mexico PMB Enterprises West, Inc. Pancho's Mexican Buffet Pancho's Mexican Buffet Advertising Pancho's Mexican Buffet Commissary Supply Co. Pancho's Mexican Buffet Construction
- --------------- The above schedule includes all significant subsidiaries of the Company as defined in Rule 1-02(w) of Regulation S-X. EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 2-86238 of Pancho's Mexican Buffet, Inc. on Form S-8 of the report of Deloitte & Touche dated November 14, 1997 (December 19, 1997 as to the first and second paragraph of Note 3), appearing in this Annual Report on Form 10-K of Pancho's Mexican Buffet, Inc. for the year ended September 30, 1997. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Fort Worth, Texas December 19, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS. YEAR SEP-30-1997 SEP-30-1997 429,000 0 222,000 0 539,000 2,515,000 59,674,000 (33,487,000) 32,858,000 1,761,000 0 0 0 440,000 21,829,000 32,858,000 66,957,000 66,957,000 18,792,000 63,252,000 10,226,000 0 348,000 (6,566,000) (1,850,000) (4,716,000) 0 0 0 (4,716,000) (1.07) (1.07)
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