-----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, DJR2ERkf28v5CsojO9KWTfau7UJA+8BiWaLhrNhLllVVQVNNaEZxJzqGRxerZbTu kTpk9mMrl9UB1wcou3rGSQ== 0000950134-98-009765.txt : 19981218 0000950134-98-009765.hdr.sgml : 19981218 ACCESSION NUMBER: 0000950134-98-009765 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981217 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: 98771030 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 FOR PERIOD END SEPTEMBER 30, 1998 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, 1998 _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-4678 PANCHO'S MEXICAN BUFFET, INC. (Exact name of registrant as specified in its Charter) DELAWARE 75-1292166 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3500 NOBLE AVENUE, FORT WORTH, TEXAS 76111 (Address of principal executive offices) (Zip Code) (817) 831-0081 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.10 PER SHARE (Title of Class) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ___ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K [ ]. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON NOVEMBER 30, 1998, BASED ON THE ACTUAL STOCK PRICE ON SUCH DATE WAS $3,317,384. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 30, 1998:..................................................................4,358,723 DOCUMENTS INCORPORATED BY REFERENCE THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 27, 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 service, a diner simply raises the small flag on the table. The Company currently operates 48 restaurants located in the states of Texas (39), Louisiana (4), Arizona (2), Oklahoma (2) and New Mexico (1). In the quarter ended June 1998, the Company impaired assets at 22 locations based on its continuing evaluation of recoverability of long-lived store assets. In the same quarter, the Company adopted a restructuring plan to close 9 of those restaurants. Under the plan, in July and August 1998, the Company closed restaurants in Phoenix; Chalmette and Shreveport, Louisiana; Albuquerque; Oklahoma City; San Antonio, Galveston and Amarillo, Texas. No new restaurants were opened in fiscal 1998, and none are currently planned, as management intends to focus on improving sales and profitability and reducing debt. 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 has commissioned outside consultants to review the Pancho's concept and assist in developing a more modern prototype for future development and remodeling existing units. The goal is to refine food offerings, service systems and physical facilities to achieve increased customer count and require less labor than existing operations. The Company will conduct extensive testing and customer research while developing the new Pancho's. The Company's long-term strategy is to expand Pancho's Mexican Buffet within the Company's existing five-state market, and possibly 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; however, one Pancho's is currently being operated under a license agreement. 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. The current restaurant prototypes are undergoing review and modification as the Company seeks to improve sales and profitability. In its restaurants, the Company maintains distinctive styling and colorful decor using authentic artifacts in a Mexican motif. The current Pancho's concept is designed to combine the serving speed and economy of cafeteria-style service within an environment typical of table service restaurants. The customer selects and is served food and beverage items from the serving line. When the patron is seated a uniformed employee serves chips, hot sauce, sopaipillas (Mexican bread), beverage refills and more food on request for the "all-you-can-eat" patrons. This 3 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. These development costs are based on the current prototypes. The Company has not built any new restaurants since 1995. Inflation and changes to the Pancho's restaurant format may affect future development costs. In addition to the "all-you-can-eat" buffet, the menu includes competitively-priced limited-selection plates: the Super Combo value meal, lunch specials, fajitas, a taco salad, soup/salad bar, and a child's plate. Children five years of age and under are served free. Senior citizens who belong to Pancho's Seniors Club are given a 20% discount on their personal purchases. Beverages are priced separately. All menu items include the soup/salad bar and dessert bar. The Company is considering a variety of alternatives to its current price structure. 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 28 restaurants and accounted for 0.9% of the Company's sales for the year ended September 30, 1998. Pancho's restaurants offer food to go, which accounted for 10.8% of sales for the year ended September 30, 1998. The Company has standard procedures for customer service, sanitation, food preparation and other operational matters. Depending on the size of the restaurant and the time of the year, each Pancho's will have from 30 to 90 employees. Each restaurant is under the direction of a general manager, associate manager and production manager (chef). Additionally, higher volume units have a first assistant manager who typically has completed the Company's formal Manager Training Program. The basic three-manager team participates in an incentive compensation program based upon sales and profitability of their specific restaurant. Company Area Supervisors and Production Supervisors inspect the restaurants regularly and assist the unit management to assure compliance with quality standards set by the Company. They also participate in incentive compensation based on the restaurant group for which they are responsible. MARKETING AND ADVERTISING The Company emphasizes a Neighborhood Marketing Strategy in which local store marketing efforts reach out to each restaurant's specific neighborhood customers. Restaurant managers are encouraged to participate in community affairs and, with the assistance of the general office, to cater school, church and other community events. Pancho's supports local schools with gift certificate awards for honor roll and perfect attendance students, and sponsors sports leagues for local children. There is a birthday club for children under twelve which serves the child 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 neighborhood marketing is augmented by focused newspaper inserts, direct mail and billboards. 2 4 The Company uses extensive customer and employee surveys to help develop and evaluate marketing strategy and tactics. Local store marketing programs tailored to each restaurant are developed and implemented quarterly. PURCHASING AND DISTRIBUTION 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. HUMAN RESOURCES On September 30, 1998, the Company had about 2,147 employees, of whom 57 were corporate personnel, 2,078 were employed in restaurants and 12 were employed in maintenance and construction. The Company considers its employee relations to be good. Most employees, other than restaurant management and corporate personnel, are paid on an hourly basis. The Company believes that it provides working conditions and wages that compare favorably with those of its competition. The Company's employees are not covered by a collective bargaining agreement. COMPETITION All aspects of the restaurant business are highly competitive. Price, restaurant location, food quality, service and attractiveness of facilities are important aspects of competition. The competitive environment is often affected by factors beyond a particular restaurant's control, including changes in population, traffic patterns, economic conditions and consumer preferences. The Company's restaurants compete with a wide variety of Mexican food, fast food, value-priced and "all-you-can-eat" restaurants, ranging from national and regional restaurant chains to locally-owned restaurants. The Company believes that its principal competitive strengths lie in the value, variety and quality of food products served, in the distinctive atmosphere and in the strength of the Pancho's Mexican Buffet name. FORWARD-LOOKING STATEMENTS Certain statements in this report are forward-looking statements which represent the Company's expectations or beliefs concerning future events, including, but not limited to the following: statements regarding restaurant concept changes, plans to sell assets, ability to service debt and satisfy loan covenants, unit growth, future capital expenditures, future borrowings, future cash flows and future results of operations. The Company warns that many factors could, individually or in aggregate, cause actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following: consumer spending trends and habits; increased competition in the restaurant industry; weather conditions; and laws and regulations affecting labor and employee benefit costs. The Company does not expect to update such forward-looking statements continually as conditions change, and readers should consider that such statements pertain only to the date hereof. ITEM 2. PROPERTIES The Company owns a combination general office/warehouse building located at 3500 Noble Avenue, Fort Worth, Texas. The headquarters facility consists of general offices, freezer space of about 194,000 cubic 3 5 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. The sites of seven operating restaurants are owned by the Company. The Company is seeking to sell three closed restaurant sites, including buildings and land which it owns in Amarillo and Galveston, Texas, and Albuquerque, New Mexico. In October 1998, the Company completed the sale of land and buildings it held for sale in Phoenix and Shreveport. Forty-one operating restaurants are occupied pursuant to lease agreements with various expiration dates into the year 2009. Leases typically provide for a minimum rental based on the cost of improvements provided by the lessor and a maximum rental based upon the gross sales of the facility. The Company does not deem any individual restaurant lease to be significant in relation to its overall operations. At September 30, 1998, the Company had remaining lease obligations on five closed restaurant locations. At November 30, 1998, one of these locations was subleased, and the Company was seeking to sublease three other sites, for which the lease terms expire in 1999, 2000 and 2007. The other lease expires in February 1999. 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. 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. The cities and towns where the Company's restaurants are located are listed below: ARIZONA: Mesa Phoenix LOUISIANA: Baton Rouge Bossier City Lafayette Metairie NEW MEXICO: Albuquerque OKLAHOMA: Oklahoma City Tulsa TEXAS: Abilene Arlington-3 Baytown Beaumont Burleson Carrollton Conroe Corpus Christi* Dallas-3 Denton El Paso-2** Euless Fort Worth-3 Garland Houston-6 Humble Irving Killeen League City Lewisville Longview Mesquite North Richland Hills Plano Richardson San Antonio Sherman Texarkana Tyler Waco - --------------- * Operated by licensee ** Operated by A&A Foods ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 46 Chief Operations Officer -- also Director and officer of subsidiary companies Hollis Taylor................. Director and President and Since August 10, 1979 62 Chief Executive Officer -- also Director and officer of subsidiary companies Samuel L. Carlson............. Director and Senior Vice Since December 21, 1988 62 President, Administration and Secretary -- also Director and officer of subsidiary companies Brad Fagan.................... Vice President, Treasurer, CFO Since September 29, 1995 39 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, Chief Financial Officer and Assistant Secretary since September 1995. Mr. Fagan, a certified public accountant, was Controller from December 1991 through September 1995. 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 30, 1998, the number of record holders was about 680 and the Company estimates that on that date there were an additional 1200 beneficial owners. The following table sets forth the quarterly high and low bid prices of the common stock, as reported by Nasdaq, for the calendar quarters indicated.
SALES PRICES --------------- FISCAL QUARTER ENDED HIGH LOW DIVIDENDS -------------------- ------ ------ --------- December 31, 1996......................................... $2.750 $1.875 $.015 March 31, 1997............................................ 2.688 1.625 June 30, 1997............................................. 2.063 1.500 .015 September 30, 1997........................................ 2.500 1.563 December 31, 1997......................................... 2.500 1.750 .015 March 31, 1998............................................ 2.375 1.750 June 30, 1998............................................. 2.125 1.500 September 30, 1998........................................ 1.688 0.875
COMMON STOCK DIVIDENDS The Company has paid cash dividends for the past 18 years. In 1998, cash dividends were $.015 per share. Future cash dividends will depend on loan restrictions, earnings, financial position, capital requirements and other relevant factors. The Company's Loan Agreement with a bank limits cash dividends to $150,000 per fiscal year, and dividends are prohibited until the Company achieves trailing EBITDA of at least $3,000,000. 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, 1994 through 1998 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,
1998 1997 1996 1995 1994 -------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales................................... $ 64,146 $66,957 $71,487 $80,893 $86,062 -------- ------- ------- ------- ------- Costs and Expenses: Food costs............................ 17,413 18,792 19,681 22,910 23,347 Restaurant labor and related expenses........................... 25,606 25,235 26,561 30,400 30,806 Restaurant operating expenses......... 14,904 15,799 16,508 18,376 19,134 Depreciation and amortization......... 2,808 3,426 3,949 4,512 4,420 General and administrative expenses... 5,013 5,160 5,067 5,547 5,475 Asset impairment and restructuring charges(a)(c)(d)................... 6,601 5,066 7,572 (264) -------- ------- ------- ------- ------- Total......................... 72,345 73,478 71,766 89,317 82,918 -------- ------- ------- ------- ------- Operating income (loss)................. (8,199) (6,521) (279) (8,424) 3,144 Interest expense........................ (212) (348) (540) (590) (34) Other, including interest income........ 198 303 269 309 66 -------- ------- ------- ------- ------- Earnings (loss) before income taxes..... (8,213) (6,566) (550) (8,705) 3,176 Income tax expense (benefit)(b)......... 4,305 (1,850) (135) (3,343) 1,101 -------- ------- ------- ------- ------- Net earnings (loss)..................... $(12,518) $(4,716) $ (415) $(5,362) $ 2,075 ======== ======= ======= ======= ======= Cash dividends.......................... $ 66 $ 132 $ 132 $ 462 $ 1,056 ======== ======= ======= ======= ======= Per Share Data: Net earnings (loss), basic and diluted............................ $ (2.85) $ (1.07) $ (.09) $ (1.22) $ .47 Cash dividends........................ .015 .03 .03 .105 .24 At Year End: Total assets.......................... $ 20,418 $32,858 $37,968 $44,387 $49,159 Long-term debt........................ $ 1,761 $ 2,287 $ 3,489 $ 8,705 $ 5,840 Stockholders' equity.................. $ 9,724 $22,269 $26,521 $26,988 $33,155 Number of restaurants................. 48 57 65 64 72
- --------------- (a) Fiscal 1998 net income includes asset impairment and restructuring charges of $6,601,000. This includes impairment charges of $5,681,000 to impair assets at 22 locations and restructuring charges of $920,000 to exit nine locations closed in 1998. (b) Fiscal 1998 net income includes income tax expense of $4,305,000 resulting from providing a valuation allowance for deferred tax assets. (c) Fiscal 1997 includes asset impairment and restructuring charges of $5,066,000 to close seven restaurants, dispose of the Mexico joint venture, impair four other restaurants and increase restructuring reserves for two previously closed locations. 7 9 (d) Fiscal 1995 includes asset impairment and restructuring charges of $7,572,000 to close nine restaurants and impair asset values at eight other locations. 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, -------------------------- 1998 1997 1996 ------ ------ ------ Sales....................................................... 100.00% 100.0% 100.0% ------ ------ ------ Costs and Expenses: Food costs................................................ 27.1 28.1 27.5 Restaurant labor and related expenses..................... 39.9 37.7 37.2 Restaurant operating expenses............................. 23.2 23.6 23.1 Depreciation and amortization............................. 4.4 5.1 5.5 General and administrative expenses....................... 7.8 7.7 7.1 Asset impairment and restructuring charges................ 10.3 7.6 ------ ------ ------ Total............................................. 112.7 109.8 100.4 ------ ------ ------ Operating income (loss)..................................... (12.7) (9.8) (0.4) Interest expense............................................ (0.3) (0.5) (0.8) Other, including interest income............................ 0.3 0.5 0.4 ------ ------ ------ Earnings (loss) before income taxes......................... (12.7) (9.8) (0.8) Income tax expense (benefit)................................ 6.7 (2.8) (0.2) ------ ------ ------ Net earnings (loss)......................................... (19.4)% (7.0)% (0.6)% ====== ====== ====== Average sales (in thousands) for restaurants open throughout the year.................................................. $1,192 $1,123 $1,106 Number of restaurants open at end of year................... 48 57 65
Operating Results for Fiscal 1998 Compared to Fiscal 1997 Same-store sales increased 2.1% in fiscal 1998 versus 1997, reversing a three-year trend. Contributing to the increase was Pancho's most significant price increase since 1993, effective in July 1997. This price increase, plus two smaller subsequent increases, worked with the Company's neighborhood marketing strategy to provide four consecutive quarters of same-store sales increases through June 30, 1998. The Company experienced a 1.6% decline in same-store sales for the 1998 fiscal fourth quarter compared with the same 1997 quarter, reflecting lower customer traffic not compensated by price increases. The chart below shows quarterly and annual same-store sales comparisons over the past three fiscal years. COMPARABLE-STORE SALES BY QUARTER
1998 1997 1996 ---- ---- ----- 1st Quarter........................................ +2.7% -5.0% -12.7% 2nd Quarter........................................ +5.3 -7.4 - 5.3 3rd Quarter........................................ +1.9 -1.2 - 8.2 4th Quarter........................................ -1.6 +2.0 - 6.5 Fiscal Year................................... +2.1 -2.8 - 7.8
8 10 The Company increased average sales per store by 6.2%, to $1,192,000 in 1998. This increase was accomplished with the price increases and the benefits of closing lower volume restaurants. Total sales for 1998 were $64.1 million, down from $67 million in 1997 due to restaurant closings in 1998 and 1997. Fourth quarter average store sales were up 2%, to $305,000 in 1998. Total sales were $15.6 million and $17.1 million for the fourth quarter of 1998 and 1997, respectively. Restaurant closings were the main factor in the higher average and lower total sales for the quarter. Discounts increased to 4.2% of sales in 1998 from 2.2% of sales in 1997. Fourth quarter discounts were 4.5% and 2.9% of sales for 1998 and 1997, respectively. Discounting tactics are used to increase customer frequency and attract new customer trials. The increase in discounting has come mainly from coupons distributed by direct mail, newspaper inserts and a variety of neighborhood marketing promotions. The Company plans to reduce the level of discounting in fiscal 1999. In 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 strengthens 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, School Rewards programs and Seniors Club. Nine restaurants were closed in July and August 1998 as part of a restructuring plan adopted in the quarter ended June 30, 1998. Fourth quarter sales for the units closed under that plan were $932,000 and $2,175,000 for 1998 and 1997, respectively. Annual sales for the closed units were $6.8 million and $8 million in 1998 and 1997, respectively. 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. Under a 1997 restructuring 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 $2.9 million in sales in 1997. To respond to declining margins caused primarily by labor cost 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 offset the effect of the September federal minimum wage increase. A price increase of about 1% was implemented in April 1998. No new restaurants were opened in 1998, and none are planned for fiscal 1999. Management plans to focus on improving same store sales and operating margins at its existing units before adding new locations. Food cost was down 1% of sales in fiscal 1998. The benefit from the higher prices was partially offset by the increased discounting, cost inflation and use of higher quality items. Labor and related expenses were up 1.9% and 2.2% of sales for the fourth quarter and year 1998, respectively, compared with the same periods in 1997. The Company benefited from $57,000 and $1,058,000 to recognize effective management of employee injury and health insurance costs in fourth quarter 1998 and fiscal 1997, respectively. After eliminating the benefits of these gains, labor and related costs were up 2.3% and 0.8% of sales for the 1998 quarter and year, respectively, versus the same periods in 1997, despite the price increases. Hourly wage inflation increased labor cost about 2.1% and 2.3% of sales for the 1998 quarter and year, respectively. The federal minimum wage increased $0.40 September 1, 1997. Due to the increased federal minimum wage and a tight labor market, the Company's average hourly wage cost was 8.6% higher in 1998 than in 1997. A 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 as percentages of sales unless the sales trend improvement continues. 9 11 Health insurance costs rose 0.4% and 0.2% of sales for the fourth quarter and year of 1998 over the same periods in 1997. Fourth quarter 1998 restaurant bonuses were down 0.4% of sales from 1997, but higher sales per store increased restaurant bonuses 0.3% of sales for the year. The Company continued to augment its primary restaurant management bonus programs with additional bonus programs for restaurant service and management personnel to provide additional incentives for excellent service. 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 proportionally when sales decline, as staffing cannot be reduced below certain levels to maintain Pancho's standards for quality service and sanitation. The Company has commissioned outside consultants to address these issues as it develops a more modern and labor-efficient Pancho's for the future. Restaurant operating expenses, which include restaurant occupancy costs and advertising and promotion expenses, decreased 0.7% and 0.4% of sales for the 1998 quarter and year compared with the same 1997 periods. These percentages were down partially due to the price increases and restaurant closings in 1998 and 1997. Credits from reducing general liability insurance reserves lowered restaurant operating expenses by $58,000 and $212,000 in the fourth and second quarters of 1998, respectively. Maintenance expense and the cost of supplies rose in 1998. Utility costs declined as a percentage of sales in 1998, while other occupancy costs and operating expenses stayed about the same. Restaurant advertising and promotion costs rose 0.5% of sales to 2.9% of sales for fiscal 1998, but were 2.1% of sales in the fourth quarter of both years. Depreciation and amortization decreased $246,000, 1.2% of sales, and $618,000, 0.7% of sales, in the fourth quarter and year 1998, respectively, due to the asset write-downs taken in June 1998 and March 1997. In the quarter ended June 30, 1998, the Company impaired assets at 22 locations based on its continuing evaluation of recoverability of long-lived store assets at 13 locations and its intent to close and dispose of nine locations. The Company initially estimated asset impairment charges of $6,049,000 for 22 restaurant locations, including one previously closed and held for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the impairment charge for land and buildings held for sale, primarily based on the sale of one of the properties completed in October 1998 for significantly more than the previously estimated fair value less cost to sell. Impairment charges were determined in accordance with Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." The Company adopted a restructuring plan in the quarter ended June 30, 1998 which involved closing nine restaurants. The Company accrued exit costs of $920,000 for nine locations which were closed by August 10, 1998 under the plan. Four of those nine closures, plus one previously closed, included Company-owned land and buildings which the Company plans to sell. Those five owned sites are shown on the balance sheet as land and buildings held for sale. Under a previous restructuring plan, adopted in March 1997, a charge of $5,066,000 was recorded in fiscal 1997 to close seven U.S. restaurants, dispose of the Mexico operation, and impair assets at four other locations. The Company realized net gains on sales of assets of $153,000 and $256,000 in fiscal 1998 and 1997, respectively. Long-lived assets to be disposed of are carried at the lower of carrying amount or fair value less cost to sell. In fiscal 1998, interest expense was $136,000 lower than in 1997. Outstanding debt decreased from $2,479,000 on September 30, 1997 to $2,250,000 on September 30, 1998. As outstanding debt decreased, interest expense declined, from $58,000 in the fourth quarter of 1997 to $42,000 in the fourth quarter of 1998. Interest expense is expected to continue falling in 1999 as debt is reduced. 10 12 Due to the factors discussed above, the Company reported net losses of $12.5 million, or $2.85 per share, and $4.7 million, or $1.07 per share, for 1998 and 1997, respectively. The Company achieved fourth quarter net earnings of $391,000 and $125,000 in 1998 and 1997, respectively. The Company's future earnings depend largely on improving sales and maintaining tight cost controls in the highly-competitive restaurant industry. To enhance potential profitability, the Company is seeking to develop a restaurant model that increases sales and lowers labor costs as a percentage of sales. Provision for Income Taxes for 1998 Compared to 1997 Net deferred tax assets increased $3.0 million to $8.4 million in fiscal 1998, due mainly to increases in the federal net operating loss (NOL) carryforward and temporary book-tax differences resulting from asset impairments and restructuring charges taken in 1998. Due to the Company's net loss for the quarter ended June 30, 1998, combined with net losses for the three preceding years, it was considered necessary to provide a valuation allowance for all of its net deferred tax assets. The tax benefit of $3.0 million was offset by a $7.3 million increase in the valuation allowance, resulting in tax expense of $4.3 million for 1998. The valuation allowance currently offsets the full amount of deferred tax assets. Despite the valuation allowance, the deferred tax assets are still available to the Company for future use. If the Company returns to profitability, the Company may recognize tax benefits for all or a portion of the deferred tax assets at a future date, when the valuation allowance is reduced or the tax assets realized. The deferred tax assets include federal employer tax credits and NOL carryforwards which expire in years 2009 through 2013, and state NOL carryforwards which expire in years 1999 through 2013. The effective tax rate in fiscal 1997 was a benefit of 28.2% of the loss before income taxes. This benefit rate includes the effect of Mexico operations, which commenced in 1996, and for which no tax benefit was recognized. Adjusting pre-tax income to exclude Mexico operations reflects a U.S. tax benefit rate of 33.2% for 1997. The 1997 benefit rate was lower than prior years due to the increase in the valuation allowance in 1997. 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 valuation allowance changes, state income taxes, federal employer tax credits and the results of foreign operations. Liquidity and Capital Resources for 1998 Compared to 1997 The Company's current ratio was 0.3 to 1 at September 30, 1998 compared to 0.4 to 1 at fiscal year end 1997. Like many restaurant chains, the Company maintains a current ratio well below 1.0. Most of its current liabilities, primarily accounts payable and accrued wages and bonuses, flow through operations and roll over rather than being paid off. The Company keeps a low cash balance and draws on its line of credit only as needed. Operating activities provided net cash of $794,000 in 1998 compared with $882,000 in 1997. The Company's operations generated positive cash flow even though significant non-cash operating expenses led to net losses both years. Investing activities used $436,000 in 1998 and provided $622,000 in 1997. The Company invested $697,000 in asset additions in 1998, mainly to remodel three locations, upgrade point-of-sale (POS) systems and provide normal capital replacements. No new restaurants were opened or under construction in 1998, and none are planned for fiscal 1999. In 1999, the primary capital investments will involve remodeling to develop and test one or more different restaurant formats, as the Company seeks to improve sales and operating margins. Capital expenditures to remodel existing restaurants, install restaurant computer POS systems and provide routine capital replacements will continue within the constraints of available cash flow and Loan Agreement restrictions (see Note 3 to the consolidated financial statements). The Company closed nine restaurants in 1998, as part of its restructuring plan, and provided estimated reserves to exit those locations. The Company sold the land and building for two of the closed restaurants in October 1998, and is seeking to sell the land and building for the other closed locations which are included in 11 13 land and buildings held for sale on the balance sheet. Proceeds from real estate sales must be used mostly to pay down debt in accordance with the Loan Agreement. In 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 POS systems in two restaurants, and provide routine capital replacements. No new restaurants were opened in 1997. Financing activities consumed $284,000 and $1,217,000 in 1998 and 1997, respectively, primarily to reduce debt and pay dividends. Net cash used for debt reduction was $228,000 and $1,162,000 in 1998 and 1997, respectively. The Company plans to finance its 1999 operations and capital additions mainly with cash from operations and sales of land and buildings held for sale. The Company may also enter into lease agreements to acquire new POS systems or other equipment. The Company's revolving credit and term loan agreement (Loan Agreement) with a bank has reduced the revolving credit line from $12 million at December 31, 1995 to $2 million at September 30, 1998. The Company had $268,000 of credit available under the line at September 30, 1998. The proceeds from asset sales will be used mainly to reduce bank debt. In November 1998, the Company and the bank agreed to amend the Loan Agreement commitment reduction schedule and covenants, effective September 30, 1998. Under this amendment, the credit line limit is reduced the last day of each quarter until the agreement terminates September 30, 2000. The credit commitment reductions effective at each quarter end under the amended agreement, as of September 30, 1998, are shown below, subject to further reductions based on property sales:
COMMITMENT EFFECTIVE DATE REDUCTION - -------------- ---------- December 31, 1998........................ $ 100,000 March 31, 1999........................... 100,000 June 30, 1999............................ 200,000 September 30, 1999....................... 200,000 December 31, 1999........................ 100,000 March 31, 2000........................... 100,000 June 30, 2000............................ 200,000 September 30, 2000....................... 1,000,000
The loan is secured by all of the Company's real property. Two closed locations were sold in October 1998, and the commitment limit was subsequently reduced by 60% of the net proceeds. The maximum loan commitment will be further reduced by all proceeds from subsequent real estate sales, equally reducing the final scheduled commitment reduction. The Loan Agreement includes various financial covenants. One financial covenant requires the Company to achieve trailing three-months earnings before interest, taxes, depreciation and amortization (EBITDA) to equal or exceed established targets during each three-month period, beginning December 31, 1998. Cash capital expenditures are limited to $650,000 each fiscal year. Cash dividends are limited to $150,000 per fiscal year, and are prohibited until the Company achieves trailing 12-months EBITDA of at least $3 million. Due to the operating losses (as defined by the Loan Agreement) incurred by the Company in the quarters ended March 31 and June 30, 1998, the Company violated various loan covenants. The Company also exceeded the Loan Agreement capital expenditure limit for the 1998 fiscal year. The bank has subsequently granted permanent waivers for these covenant violations. The Company was in compliance with all other loan covenants at September 30, 1998. Management is taking steps to ensure that the Company will be able to comply with all of its covenants under the Loan Agreement in the future. However, if the bank declined to waive a future covenant violation, the bank would be required under the Loan Agreement to give the Company 15 days written notice of the 12 14 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. The Company paid a dividend of $.015 per share on December 9, 1997. Future cash dividends are prohibited by the Loan Agreement until the Company achieves an earnings target, and will also depend on earnings, financial position, capital requirements and other relevant factors. Operatory Results for 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 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 1997, versus $5,512,000 in 1996, a difference of $2,658,000. Each closed unit had been producing far below company average sales per unit. Sales decreased $4,530,000 in 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. 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. The Company included coupons, frequent diner cards and other discounts in its marketing tactics. Discounts rose to 2.9% and 2.2% of sales for the quarter and year ended September 30, 1997, compared with 1.4% and 1.2% of sales for the same periods in 1996. No new restaurants were opened in fiscal 1997. Food cost was down 0.7% of sales for the fourth quarter of fiscal 1997 versus the same period in 1996 due to the 1997 fourth quarter price increase. Food cost was 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 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 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. 13 15 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 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 augmented its primary restaurant management bonus programs with additional bonus programs for restaurant service and management personnel to provide additional 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. 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. 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. 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 the 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. The Company recorded asset impairment and restructuring charges of $5,066,000 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 reserve for exit costs of locations closed under the restructuring plan adopted in the quarter ended March 31, 1997. The rest of the restructuring charges consisted of a $455,000 loss from recognition of the Cumulative Foreign Currency 14 16 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 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 1996 to $58,000 in the fourth quarter of 1997. 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. 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. SFAS No. 123, "Accounting for Stock-Based Compensation", became 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 for 1997 Compared to 1996 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. 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 asset impairments, 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 was received in March 1998. Net deferred tax assets increased $1,288,000 in 1997. The increase was due mainly to the federal net operating loss (NOL) carryforward, accrued reserves to exit closed stores 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 1997 to provide for the federal portion of the NOL carryforward which might not be realized. No other assets relating to federal income taxes had 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 1997 to provide for state NOL 15 17 carryforwards likely to expire before being realized. State NOL carryforwards which expire on the fiscal yearend 1998 through 2002 represented $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, were 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. 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 store exit costs 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 for 1997 Compared to 1996 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 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. Operating activities provided net cash of $882,000 in fiscal 1997 compared with $4,657,000 in 1996. Significant non-cash expenses led to net losses in both years, even though operations generated positive cash flow. Investing activities provided $622,000 cash during 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. 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 five leased locations in Texas and two owned locations in Arizona. The Company provided estimated restructuring reserves to exit those locations. The Company sold the land and buildings for the closed Arizona restaurants in September 1997 and October 1998. 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. Financing activities used $1,217,000 and $5,291,000 in 1997 and 1996, respectively, mainly to reduce debt and pay dividends. The Company applied $1,162,000 and $5,226,000 in cash to debt reduction in 1997 and 1996, respectively. The Company's Loan Agreement with a bank 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 paid dividends of $.015 per share on December 10, 1996 and again on June 10, 1997. 16 18 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 in July and September 1997 and April 1998 to offset the labor cost increases due to higher minimum wage levels and wage rate inflation. Impact of Year 2000 Some computer hardware and software use only two digits to identify the year in date information. If not corrected, such systems could fail when processing dates for the year 2000 or later. The Company is in the process of evaluating its risk and the related costs of updating its computer hardware and software to properly process year 2000 and later dates. The Company has identified all significant hardware and applications that it believes will require modification to provide Year 2000 processing compliance. Internal and external resources are being used to make the required modifications and test Year 2000 processing. The key Company systems for which Year 2000 problems might pose a significant risk are the Company's restaurant point-of-sale (POS) register systems and the Company's corporate accounting system. The Company plans to complete the testing process of all significant applications by September 30, 1999. If some of these systems are not Year 2000 capable by September 30, 1999, there are a number of alternate systems available in the marketplace which have been designed to be Year 2000 capable. In addition, the Company has communicated with others with whom it does significant business to determine their Year 2000 readiness and the extent to which the Company may be vulnerable to third-party Year 2000 problems. However, there can be no guarantee that the systems of other companies will be converted timely, or that a failure to convert by another company will not have a material adverse effect on the Company. The total cost to the Company of these Year 2000 compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. These costs and the date on which the Company plans to complete the Year 2000 modifications and testing are based on management's best estimates, which were derived using numerous assumptions about future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ from those plans. Other Uncertainties and Trends The Company has been notified by Nasdaq that its common stock will be subject to de-listing from the Nasdaq National Market effective December 30, 1998 if it is unable to satisfy Nasdaq requirements for continued listing. The two key Nasdaq standards in question require common stock listed on the National Market to maintain a market value of public float of at least $5 million and a minimum share price of at least $1. If necessary, the Company plans to appeal the de-listing to Nasdaq, but there is significant doubt about the Company's ability to satisfy the minimum public float standard for National Market listing within the 17 19 period provided by Nasdaq. The Company is therefore planning to request that its common stock be listed on the Nasdaq SmallCap Market. There can be no assurance that Nasdaq will approve the Company's listing on the SmallCap Market. The SmallCap Market requires a minimum public float of $1 million and a minimum share price of $1. The Company's market value of public float is currently well over $1 million. The price per share of its common stock has fluctuated above and below $1 during the quarters ended September 30 and December 31, 1998. To address the minimum share price standard, the Company's Board of Directors has authorized a one-for-three reverse stock split. The reverse split is subject to shareholders' approval at the Company's annual shareholders meeting on January 27, 1999. If approved, it is anticipated that the reverse split will help establish a price per common share over $1. The actual price will be determined by the market, and there can be no assurances that the Company's common stock will meet the standards for continued listing on either the Nasdaq National or SmallCap Markets. 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. SFAS No. 121 requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers a history of operating losses or negative cash flows to be its main indicators of potential impairment. Assets are generally evaluated for impairment at the restaurant level. If a restaurant continues to incur negative cash flows or operating losses, an impairment or restaurant closing charge may be recognized in future periods. Special Note Regarding Forward-Looking Information Certain statements in this report are forward-looking statements which represent the Company's expectations or beliefs concerning future events, including, but not limited to the following: statements regarding restaurant concept changes, plans to sell assets, ability to service debt and satisfy loan covenants, unit growth, future capital expenditures, future borrowings, future cash flows and future results of operations. The Company warns that many factors could, individually or in aggregate, cause actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following: consumer spending trends and habits; increased competition in the restaurant industry; weather conditions; and laws and regulations affecting labor and employee benefit costs. The Company does not expect to update such forward-looking statements continually as conditions change, and readers should consider that such statements pertain only to the date hereof. ITEM 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 24. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 20 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, 1998, 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. (c) Compliance with Section 16(a) of the Exchange Act Information as to the compliance of the Company's directors and executive officers with Section 16(a) of the Exchange Act is set forth under the caption Section 16(a) Beneficial Ownership Reporting Compliance, appearing on page 4 of the Company's Proxy Statement dated December 22, 1998, and is incorporated herein by reference. 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 1998 AND 1998 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, 1998, 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, 1998, 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 10, 1998, appearing on page 3 of the Company's Proxy Statement dated December 22, 1998, 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 captions INDEBTEDNESS OF MANAGEMENT and TRANSACTIONS WITH MANAGEMENT AND OTHERS appearing on pages 7 and 10 of the Company's Proxy Statement dated December 22, 1998, and is incorporated herein by reference. 19 21 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 24. 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)
20 22
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(21) 10(aa) -- Amendment Number One to Pancho's Mexican Buffet, Inc. 1992 Stock Option Plan(22) 10(ab) -- Eighth Amendment to Revolving Credit and Term Loan Agreement, dated November 3, 1998 -- 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
21 23 - --------------- (1) Filed with the Commission as an Exhibit to Form S-1 Registration Statement No. 2-32378 -- such Exhibits are incorporated herein by reference. (2) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K as amended on Form 8 for the year ended September 30, 1981 -- such Exhibits are incorporated herein by reference. (3) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1982 -- such Exhibit is incorporated herein by reference. (4) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1983 -- such Exhibits are incorporated herein by reference. (5) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1984 -- such Exhibits are incorporated herein by reference. (6) Filed with the Commission as an Exhibit to Form 8-A Registration Statement on February 21, 1996 -- such Exhibit is incorporated herein by reference. (7) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1986 -- such Exhibits are incorporated herein by reference. (8) Filed with the Commission as an Exhibit to Form S-2 Registration Statement No. 33-14484 on May 22, 1987 -- such Exhibit is incorporated herein by reference. (9) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1988 -- such Exhibits are incorporated herein by reference. (10) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1990 -- such Exhibits are incorporated herein by reference. (11) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1991 -- such Exhibits are incorporated herein by reference. (12) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1993 -- such Exhibits are incorporated herein by reference. (13) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1995 -- such Exhibits are incorporated herein by reference. (14) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended June 30, 1995 -- such Exhibits are incorporated herein by reference. (15) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 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. (22) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended December 31, 1997 -- such Exhibits are incorporated herein by reference.
22 24 (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 1998. (c) Exhibits required by Item 601 of Regulation S-K. See (a)(3) above. (d) Financial Statement Schedules for Form 10-K. All financial statement schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial statements or related notes. 23 25 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
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-18
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. 24 26 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, -------------------------- 1998 1997 ----------- ----------- Current Assets: Cash and cash equivalents................................. $ 546,000 $ 429,000 Accounts and notes receivable, current portion............ 184,000 222,000 Income taxes receivable................................... 538,000 Inventories............................................... 473,000 539,000 Prepaid expenses.......................................... 443,000 117,000 Deferred income taxes..................................... 670,000 ----------- ----------- Total current assets.............................. 1,646,000 2,515,000 ----------- ----------- Property, Plant and Equipment: Land...................................................... 1,867,000 2,795,000 Buildings................................................. 6,885,000 9,013,000 Leasehold improvements.................................... 17,472,000 21,072,000 Equipment and furniture................................... 22,965,000 26,115,000 Construction in progress.................................. 15,000 ----------- ----------- Total............................................. 49,189,000 59,010,000 Less accumulated depreciation and amortization............ (33,136,000) (33,323,000) ----------- ----------- Property, plant and equipment -- net.............. 16,053,000 25,687,000 ----------- ----------- Other Assets: Land and buildings held for sale.......................... 2,380,000 500,000 Deferred income taxes..................................... 3,635,000 Other, including noncurrent portion of receivables........ 339,000 521,000 ----------- ----------- Total other assets................................ 2,719,000 4,656,000 ----------- ----------- Total............................................. $20,418,000 $32,858,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 1,227,000 $ 1,569,000 Debt classified as current................................ 490,000 192,000 Accrued wages and bonuses................................. 1,420,000 1,478,000 Accrued insurance costs, current.......................... 1,150,000 1,022,000 Other current liabilities................................. 1,864,000 1,528,000 ----------- ----------- Total current liabilities......................... 6,151,000 5,789,000 ----------- ----------- Other Liabilities: Long-term debt............................................ 1,761,000 2,287,000 Accrued insurance costs, non-current...................... 2,417,000 2,107,000 Restructuring reserves, non-current....................... 365,000 406,000 ----------- ----------- Total other liabilities........................... 4,543,000 4,800,000 ----------- ----------- 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 4,414,123 and 4,397,559 shares, respectively. Outstanding 4,348,723 and 4,389,159 shares, respectively.)................................. 441,000 440,000 Additional paid-in capital................................ 18,661,000 18,633,000 Retained earnings (accumulated deficit)................... (9,085,000) 3,499,000 Stock notes receivable.................................... (225,000) (290,000) Treasury stock at cost (65,400 and 8,400 shares, respectively).......................................... (68,000) (13,000) ----------- ----------- Stockholders' equity.............................. 9,724,000 22,269,000 ----------- ----------- Total............................................. $20,418,000 $32,858,000 =========== ===========
See notes to consolidated financial statements. F-1 27 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, ---------------------------------------- 1998 1997 1996 ------------ ----------- ----------- Sales.................................................. $ 64,146,000 $66,957,000 $71,487,000 ------------ ----------- ----------- Costs and Expenses: Food costs........................................... 17,413,000 18,792,000 19,681,000 Restaurant labor and related expenses................ 25,606,000 25,235,000 26,561,000 Restaurant operating expenses........................ 14,904,000 15,799,000 16,508,000 Depreciation and amortization........................ 2,808,000 3,426,000 3,949,000 General and administrative expenses.................. 5,013,000 5,160,000 5,067,000 Asset impairment and restructuring charges........... 6,601,000 5,066,000 ------------ ----------- ----------- Total........................................ 72,345,000 73,478,000 71,766,000 ------------ ----------- ----------- Operating income (loss)................................ (8,199,000) (6,521,000) (279,000) Interest expense....................................... (212,000) (348,000) (540,000) Other, including interest income....................... 198,000 303,000 269,000 ------------ ----------- ----------- Earnings (loss) before income taxes.................... (8,213,000) (6,566,000) (550,000) Income tax expense (benefit)........................... 4,305,000 (1,850,000) (135,000) ------------ ----------- ----------- Net earnings (loss).................................... $(12,518,000) $(4,716,000) $ (415,000) ============ =========== =========== Net earnings (loss) per share, basic and diluted....... $ (2.85) $ (1.07) $ (.09) ============ =========== ===========
See notes to consolidated financial statements. F-2 28 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CUMULATIVE RETAINED FOREIGN COMMON STOCK ADDITIONAL EARNINGS CURRENCY TREASURY STOCK ---------------------- PAID-IN (ACCUMULATED TRANSLATION ------------------------ SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT SHARES AMOUNT ---------- --------- ----------- ------------ ----------- ---------- ----------- 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) Net loss........................... (12,518,000) Dividends, $.015 per share......... (66,000) Treasury stock acquired............ 57,000 (55,000) Payments received on stock notes... Stock issued....................... 16,564 1,000 28,000 ---------- --------- ----------- ----------- --------- ---------- ----------- Balance, September 30, 1998.......... 4,414,123 $ 441,000 $18,661,000 $(9,085,000) $ 65,400 $ (68,000) ========== ========= =========== =========== ========= ========== =========== STOCK NOTES RECEIVABLE FROM STOCKHOLDERS' OFFICERS EQUITY ---------- ------------- 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 Net loss........................... (12,518,000) Dividends, $.015 per share......... (66,000) Treasury stock acquired............ (55,000) Payments received on stock notes... 65,000 65,000 Stock issued....................... 29,000 --------- ----------- Balance, September 30, 1998.......... $(225,000) $ 9,724,000 ========= ===========
See notes to consolidated financial statements. F-3 29 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Cash Flows From Operating Activities: Net earnings (loss).............................. $(12,518,000) $ (4,716,000) $ (415,000) ------------ ------------ ------------ Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization................. 2,808,000 3,426,000 3,949,000 Provision (benefit) for deferred income taxes....................................... 4,305,000 (1,288,000) 186,000 Impairment of long-lived assets............... 5,681,000 3,033,000 Provision for restructuring reserves.......... 920,000 1,538,000 Realization of foreign currency translation adjustment.................................. 455,000 Loss on writeoff of stock notes receivable.... 83,000 Gain on sale of assets........................ (153,000) (256,000) (141,000) Stock compensation to outside directors....... 29,000 Changes in operating assets and liabilities: Accounts and notes receivable............... (6,000) 9,000 216,000 Income taxes receivable..................... 538,000 (352,000) 1,041,000 Inventories, prepaid expenses and other assets................................... (231,000) 181,000 389,000 Accounts payable and accrued expenses....... 79,000 (272,000) (353,000) Restructuring reserves...................... (658,000) (959,000) (349,000) Other......................................... 134,000 ------------ ------------ ------------ Net cash provided by operating activities............................. 794,000 882,000 4,657,000 Cash Flows From Investing Activities: Property additions............................... (697,000) (459,000) (689,000) Proceeds from sale of assets..................... 261,000 1,081,000 278,000 ------------ ------------ ------------ Net cash provided by (used in) investing activities............................. (436,000) 622,000 (411,000) Cash Flows From Financing Activities: Short-term borrowings, net....................... 298,000 40,000 (10,000) Long-term borrowings............................. 19,706,000 28,583,000 28,676,000 Repayments of long-term borrowings............... (20,232,000) (29,785,000) (33,892,000) Dividends paid................................... (66,000) (132,000) (132,000) Payments on officer stock notes receivable....... 53,000 77,000 67,000 ------------ ------------ ------------ Net cash used in financing activities.... (296,000) (1,217,000) (5,291,000) Effect of Foreign Exchange Rate Change on Cash..... (3,000) (9,000) ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents...................................... 117,000 284,000 (1,054,000) Cash and Cash Equivalents at Beginning of Year..... 429,000 145,000 1,199,000 ------------ ------------ ------------ Cash and Cash Equivalents at End of Year........... $ 546,000 $ 429,000 $ 145,000 ============ ============ ============ Supplemental Information: Income taxes paid and (refunds received), net.... $ (541,000) $ (170,000) $ (1,348,000) Interest paid, net of capitalized amounts........ 206,000 306,000 533,000 Treasury stock acquired as reduction of receivables................................... 55,000 13,000
See notes to consolidated financial statements. F-4 30 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 which operated a restaurant in Guadalajara, Mexico. The minority interest balance in that subsidiary 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
Leasehold improvements are amortized over the term of the lease or the life of the improvement, whichever is shorter. F-5 31 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company capitalizes interest incurred on debt for major construction projects and includes the capitalized interest in the asset basis. No interest was capitalized in 1998, 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 to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. The Company considers a history of operating losses or negative cash flows to be its main indicators of potential impairment. Assets are generally evaluated for impairment at the operating unit level. An asset or group of assets is deemed to be impaired if a forecast of undiscounted future cash flows (excluding interest expense) directly related to the asset(s), including disposal value if any, is less than the carrying amount(s). If an asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. Considerable management judgment is necessary to estimate cash flows and expected fair values. Accordingly, it is reasonably possible that actual results could vary significantly from such estimates. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Assets held for sale are not depreciated. PREOPENING COSTS Preopening costs are expensed as incurred. EARNINGS (LOSS) PER SHARE The Company adopted SFAS No. 128, "Earnings per Share," in fiscal 1998. This standard replaced previous generally-accepted accounting principles for computing and disclosing earnings per share (EPS) information. Under SFAS No. 128, because it has potential common shares, the Company has a complex capital structure and must disclose both basic and diluted EPS. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of shares outstanding. Diluted EPS adds the effect of all dilutive potential shares to the weighted average number of shares outstanding. The weighted average outstanding shares were 4,395,000, 4,396,000 and 4,398,000 for the years ended September 30, 1998, 1997 and 1996, respectively. Due to the net loss, the Company's potential common shares are antidilutive and excluded from the loss per share calculation, so diluted and basic loss per share are the same. At September 30, 1998, there were 306,400 options outstanding which represented potential common shares which could be dilutive in the future. Earnings (loss) per share reported for the quarters and years ended September 30, 1997 and 1996 did not change due to the adoption of SFAS No. 128. 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. F-6 32 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, for 1997 and 1996, 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 balances held in foreign currencies is reported on a separate line in the consolidated statement of cash flows. STOCK-BASED COMPENSATION The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in fiscal 1997. Under the provisions of SFAS No. 123, companies can elect to account for stock-based compensation plans using a fair-value based method or continue measuring compensation expense for those plans using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. The Company has elected to continue using the intrinsic value method to account for its stock-based compensation plans. SFAS No. 123 requires companies electing to continue using the intrinsic value method to make certain pro forma disclosures (see Note 6). NEW ACCOUNTING STANDARDS 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 impact 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," which will be effective for fiscal years beginning after December 15, 1997. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a Company's operating segments. The Company operates as a single business segment, and accordingly, this standard will not affect the Company's future disclosures. 2. OTHER CURRENT LIABILITIES Other current liabilities consist of:
SEPTEMBER 30, ----------------------- 1998 1997 ---------- ---------- Accrued taxes other than income taxes....................... $1,030,000 $1,049,000 Restructuring reserves...................................... 649,000 346,000 Other....................................................... 185,000 133,000 ---------- ---------- Total............................................. $1,864,000 $1,528,000 ========== ==========
3. LONG-TERM DEBT The Company has a revolving credit and term loan agreement (Loan Agreement) with a bank. In November 1998, the Company and the bank agreed to amend the Loan Agreement commitment reduction schedule and covenants, effective September 30, 1998. Under this amendment, the credit line limit is reduced the last day of each quarter until the agreement terminates on September 30, 2000. The credit commitment F-7 33 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reductions effective at each quarter end under the amended agreement, as of September 30, 1998, are shown below, subject to further reductions based on property sales:
COMMITMENT EFFECTIVE DATE REDUCTION - -------------- ---------- December 31, 1998 $ 100,000 March 31, 1999 100,000 June 30, 1999 200,000 September 30, 1999 200,000 December 31, 1999 100,000 March 31, 2000 100,000 June 30, 2000 200,000 September 30, 2000 1,000,000
The loan is secured by all of the Company's real property. Two closed locations were sold in October 1998, and the commitment level was subsequently reduced by 60% of the net proceeds. The maximum loan commitment will be further reduced by all proceeds from subsequent real estate sales, equally reducing the final scheduled commitment reduction. The Loan Agreement includes various financial covenants. One financial covenant requires the Company to achieve trailing three-months earnings before interest, taxes, depreciation and amortization (EBITDA) to equal or exceed established targets during each three-month period, beginning December 31, 1998. Cash capital expenditures are limited to $650,000 each fiscal year. Cash dividends are limited to $150,000 per fiscal year, and are prohibited until the Company achieves trailing 12-months EBITDA of at least $3 million. Due to the operating losses (as defined by the Loan Agreement) incurred by the Company in the quarters ended March 31 and June 30, 1998, the Company violated various loan covenants. The Company also exceeded the Loan Agreement capital expenditure limit for the 1998 fiscal year. The bank has subsequently granted a permanent waiver for these covenant violations. The Company was in compliance with all other loan covenants at September 30, 1998. 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. The current portion of bank debt of $332,000 and $42,000 is included in debt classified as current at September 30, 1998 and 1997, respectively. The non-current amount was $1,400,000 and $2,000,000 at September 30, 1998 and 1997, respectively. 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 interest rate effective at September 30, 1998 was 9.25%. 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 1998, 1997 and 1996 to buy out the remaining lease terms of certain closed locations. The long-term portion of those notes was $361,000 and $287,000 at September 30, 1998 and 1997, respectively. The current portion of $158,000 and $150,000 is included in debt classified as current at September 30, 1998 and 1997, respectively. The effective interest rates range from 5.9% to 6.9%, with payments due monthly through November 2001. F-8 34 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The combined maturities of Company debt, as of September 30, 1998, subject to accelerated maturity based on property sales, are listed below:
YEARS ENDING SEPTEMBER 30, - ------------- 1999........................................................ $ 490,000 2000........................................................ 1,542,000 2001........................................................ 107,000 2002........................................................ 54,000 2003........................................................ 50,000 Later years................................................. 8,000 ---------- $2,251,000 ==========
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, 1998, exclusive of maintenance, taxes, etc., were as follows:
YEARS ENDING SEPTEMBER 30, - ------------- 1999................................................................... $2,363,000 2000................................................................... 1,859,000 2001................................................................... 1,437,000 2002................................................................... 1,081,000 2003................................................................... 751,000 Later years............................................................ 1,046,000 ---------- Total........................................................ $8,537,000 ==========
The composition of total yearly rental expense for operating leases is:
SEPTEMBER 30, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Minimum rentals................................ $2,625,000 $2,528,000 $2,533,000 Contingent rentals............................. 190,000 188,000 216,000 Less: Sublease rentals......................... (13,000) (33,000) (31,000) ---------- ---------- ---------- Total................................ $3,014,000 $2,683,000 $2,718,000 ========== ========== ==========
F-9 35 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES Income tax expense (benefit) consists of:
YEARS ENDED SEPTEMBER 30, ------------------------------------ 1998 1997 1996 ---------- ----------- --------- Current: U.S. federal.................................. $ $ (572,000) $(321,000) State......................................... 10,000 ---------- ----------- --------- Combined current........................... -- (562,000) (321,000) Deferred: U.S. federal.................................. 3,802,000 (1,326,000) 81,000 State......................................... 503,000 38,000 105,000 ---------- ----------- --------- Combined deferred.......................... 4,305,000 (1,288,000) 186,000 ---------- ----------- --------- Income tax expense (benefit)............. $4,305,000 $(1,850,000) $(135,000) ========== =========== =========
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, ------------------------------------- 1998 1997 1996 ----------- ----------- --------- Expected tax at federal statutory rate of 34%.......................................... $(2,792,000) $(2,232,000) $(187,000) Increase (decrease) in taxes due to: Change in valuation allowance................ 7,314,000 782,000 18,000 Tax effect of abandonment of foreign operations................................ (305,000) State income tax provision (benefit), net of federal income tax effect................. (137,000) (63,000) 69,000 Tax effect of employer tax credits........... (90,000) (45,000) (44,000) Eliminate tax benefit from losses of foreign operations................................ 76,000 Adjustment for prior year tax refunds received.................................. 6,000 (135,000) Other differences............................ 10,000 7,000 68,000 ----------- ----------- --------- Total................................ $ 4,305,000 $(1,850,000) $(135,000) =========== =========== =========
F-10 36 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Company's deferred tax assets and liabilities are as follows:
SEPTEMBER 30, ------------------------- 1998 1997 ----------- ---------- Deferred tax assets: Current: Restructuring costs, current........................... $ 232,000 $ 112,000 Accrued vacation pay................................... 140,000 140,000 Accrued insurance cost, current........................ 401,000 418,000 Current valuation allowance............................ (773,000) ----------- ---------- Current deferred tax asset, net of valuation allowance........................................... -- 670,000 ----------- ---------- Noncurrent: Accrued insurance costs................................ 853,000 860,000 Federal net operating loss carryforwards (expire 2012-2013)............................................ 3,057,000 1,983,000 Noncurrent restructuring costs......................... 141,000 149,000 Alternative minimum tax carryforward................... 383,000 383,000 State net operating loss carryforwards (expire 1999 -- 2013)......................................... 464,000 464,000 Property, plant and equipment.......................... 2,201,000 453,000 Federal employer tax credits (expire 2009 -- 2013)..... 515,000 416,000 Noncurrent valuation allowance......................... (7,366,000) (825,000) ----------- ---------- Noncurrent deferred tax asset, net of valuation allowance........................................... 248,000 3,883,000 ----------- ---------- Deferred tax liabilities: Noncurrent: Basis difference in note receivable.................... 248,000 248,000 ----------- ---------- Total non-current deferred tax liabilities........ 248,000 248,000 ----------- ---------- Net non-current deferred income taxes............. $ -- $3,635,000 =========== ==========
Net deferred tax assets increased $3.0 million to $8.4 million in the year ended September 30, 1998, due mainly to increases in the federal net operating loss (NOL) carryforward and temporary book-tax differences resulting from the impairment and restructuring charges taken in 1998. Due to the Company's net loss for the quarter ended June 30, 1998, combined with net losses for the three preceding fiscal years, it was considered necessary to provide a valuation allowance for all of its net deferred tax assets. The tax benefit of $3.0 million was offset by the $7.3 million increase in the valuation allowance, resulting in tax expense of $4.3 million for fiscal 1998. The valuation allowance currently offsets the full amount of the deferred tax assets net of deferred tax liabilities. Despite the valuation allowance, the deferred tax assets are still available to the Company for future use. If the Company returns to profitability, the Company may recognize tax benefits for all or a portion of the deferred tax assets at a future date, when the valuation allowance is reduced or the tax assets realized. The deferred tax assets include federal employer tax credits and NOL carryforwards which expire in years 2009 through 2013, and state NOL carryforwards which expire in years 1999 through 2013. The federal NOL carryforward was $3,033,000 and $5,959,000 for 1998 and 1997, respectively. The 1997 federal NOL carryforward included a loss related to the foreign operations. Due to the Company's recognition of these foreign losses, previous losses which were treated 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. In 1997, the valuation allowance was increased $671,000 to offset the increased federal NOL F-11 37 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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, the other in fiscal 1998, which provided 15,400 and 8,400 shares of treasury stock reflected on the balance sheet at September 30, 1998 and 1997, respectively. 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. 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 F-12 38 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commencing one year from date of grant and expire ten years from the date of grant. Options may be granted through November 5, 2002. On January 28, 1998, at the Annual Meeting of Stockholders, the stockholders of the Company approved Amendment Number One to the 1992 Stock Option Plan. This amendment increased the number of shares which the Company may sell pursuant to options under the plan to 600,000 shares, from 400,000 shares. The amendment also increased the annual option grant to non-employee directors to 4,000 shares each from 2,000 shares each. Summary information on stock option activity is shown below.
1998 1997 1996 -------------------------- -------------------------- -------------------------- WEIGHTED- WEIGHTED- RANGE OF NUMBER AVERAGE NUMBER AVERAGE NUMBER EXERCISE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES PRICES --------- -------------- --------- -------------- --------- -------------- Outstanding on October 1..................... 404,600 $ 9.82 407,350 $10.13 586,650 $3.19 - $15.25 Granted................. 16,000 2.06 10,000 2.06 10,000 2.63 Exercised............... Forfeited/expired....... (114,200) 9.45 (12,750) 13.69 (189,300) 5.88 - 11.38 -------- -------- -------- Outstanding September 30.......... 306,400 9.56 404,600 9.82 407,350 2.63 - 15.25 -------- -------- -------- Exercisable September 30.......... 273,400 10.34 306,600 10.05 236,638 2.63 - 15.25 -------- -------- -------- Common shares reserved and available for grant September 30.... 320,750 62,750 67,750 -------- -------- --------
For shares outstanding at September 30, 1998:
WEIGHTED- WEIGHTED-AVERAGE NUMBER AVERAGE REMAINING RANGE OF EXERCISE PRICES OF SHARES EXERCISE PRICE LIFE IN YEARS - ------------------------ --------- -------------- ---------------- $ 2.06 to $ 3.19......... 37,000 $ 2.34 8.2 $ 6.00 to $ 7.00......... 13,000 6.23 5.6 $ 7.25 to $ 8.38......... 40,400 7.81 3.8 $10.50 to $11.38......... 216,000 11.32 5.1 ------- ------ --- $ 2.06 to $11.38 306,400 $ 9.56 5.3 ------- ------ ---
The weighted-average fair value of options granted was $1.00 per share in 1998 and 1997. The pro forma effects of reporting stock options using the fair value approach under SFAS No. 123 are shown below.
YEAR ENDED SEPTEMBER 30 1998 1997 1996 - ----------------------- ------------ ----------- --------- Net loss As reported........... $(12,518,000) $(4,716,000) $(415,000) Pro forma............. (12,528,000) (4,722,000) (418,000) Net loss per share As reported........... (2.85) (1.07) (.09) Pro forma............. (2.85) (1.07) (.09)
F-13 39 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 1998, 1997 and 1996.
1998 1997 1996 ---- ---- ---- Dividend yield.............................................. 0.0% 1.0% 1.0% Expected volatility......................................... 50.0% 55.0% 55.0% Risk free interest rates.................................... 5.5% 6.3% 5.3% Expected life in years...................................... 5 5 5
ANNUAL STOCK GRANT TO NON-EMPLOYEE DIRECTORS Under the 1998 Restricted Stock Plan for Non-employee Directors, effective in January 1998, non-employee directors of the Company are granted $2,500 of common stock quarterly, based on the market price on the date of grant. The value of shares granted and recognized as directors' compensation was $29,000 in 1998. PREFERRED STOCK Shares of preferred stock, when issued, will have such rights, preferences and privileges as shall be adopted by the Board of Directors. 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, 1998, 1997, and 1996 include provisions for estimated expenses of the VEIB Plan of $440,000, $557,000, and $854,000, 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 $480,000, $233,000, and $417,000 for the years ended September 30, 1998, 1997 and 1996, 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, 1998, 1997 and 1996. An additional bonus plan compensates certain officers employed by the Company for the annual principal and interest payments on the stock notes receivable from officers (see Note 6). Under this plan, the Company recognized compensation expense of $124,000, $130,000 and $148,000 in fiscal years 1998, 1997 and 1996, 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. F-14 40 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company contributions vest immediately. Contributions are invested in common stock of the Company by a brokerage firm. The Company recognized expenses for contributions to the plan of $15,000, $23,000, and $36,000 for the years ended September 30, 1998, 1997 and 1996, respectively. 8. RELATED PARTY TRANSACTIONS The Company makes occasional sales of supplies and equipment to the family-owned restaurant operations of the Chairman of the Company. Sales amounts were $5,000, $7,000, and $7,000 for the years ended September 30, 1998, 1997, and 1996, respectively. The Chairman of the Company and the family-owned restaurant operations, collectively, were indebted to the Company in the amount of $58,000 and $88,000 on September 30, 1998 and 1997, respectively. Payments on this receivable balance in 1998 include 50,000 shares of Company common stock taken into Treasury Stock in September 1998. 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 balance at September 30, 1998 was secured by 40,000 shares of Company stock, in addition to the stock collateral under the officer stock note agreement. The Company purchases food products manufactured by a Company whose chairman and chief executive officer is a non-employee director of the Company. Purchases were $1,839,000, $2,728,000, and $2,714,000 for the years ended September 30, 1998, 1997 and 1996, respectively. The same vendor purchased items from the Company in the amount of $53,000, $75,000, and $81,000 in 1998, 1997 and 1996, 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 1998, 1997 and 1996. The Company and a former non-employee director were involved in a joint venture to operate a restaurant in Mexico. The Company invested $2,377,000 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 and $48,000 in fiscal 1997 and 1996, respectively. Due to 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. Those agreements expire in December 2001. The Company has been named in various lawsuits involving claims in the ordinary course of business, many of which are covered by insurance. Although the amounts of losses from such claims cannot be estimated, in the opinion of management, the ultimate disposition of these lawsuits and claims will not result in a material adverse effect on the Company's financial position, results of operations or cash flows. 10. ASSET IMPAIRMENT AND RESTRUCTURING COSTS In the quarter ended June 30, 1998, the Company impaired assets at 22 locations based on its continuing evaluation of recoverability of long-lived store assets at 13 locations and its intent to close and dispose of nine locations. The Company initially estimated asset impairment charges of $6,049,000 for 22 restaurant locations, including one previously closed and held for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the impairment charge for land and buildings held for sale, primarily based on the sale of one of the properties completed in October 1998 for significantly more than the previously estimated fair value less cost F-15 41 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to sell. Impairment charges were determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." The Company adopted a restructuring plan in the quarter ended June 30, 1998 which involved closing nine restaurants. The Company accrued exit costs of $920,000 for nine locations which were closed by August 10, 1998 under the plan. Four of those nine closures, plus one previously closed, included company-owned land and buildings which the Company plans to sell. Those five owned sites are shown on the balance sheet as land and buildings held for sale. The Company paid $658,000 and $959,000 in 1998 and 1997, respectively, against restructuring reserves, primarily lease and related expenses and exit costs. Sales for the nine restaurants closed under the 1998 restructuring plan were $932,000 and $6,832,000, respectively, for the quarter and year ended September 30, 1998. Sales for those units totaled $2,175,000 and $7,962,000, respectively, for the quarter and year ended September 30, 1997. In the quarter ended March 31, 1997, the Company established a restructuring plan which included closing seven underperforming restaurants, disposing of the Mexico joint venture, impairing four other restaurants and increasing the reserves for lease buyout for two previously closed locations. The Company recorded asset impairment and restructuring charges of $5,066,000 to execute the 1997 restructuring plan. Under the plan, the Company recognized $4,988,000 in asset impairment and 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, determined in accordance with SFAS No. 121. The charge also included $1,538,000 to reserve for exit 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 1997 plan, the Company closed seven U.S. locations on April 15, 1997. The Company has written off its entire investment and transferred its interest in the Mexico venture effective May 31, 1997 to its joint venture partner, a former non-employee director of the Company. Sales for the seven closed locations plus the Mexico operation were $2,854,000 and $5,512,000 for fiscal years 1997 and 1996, respectively. 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, 1998. The estimated fair value amounts are determined by using available market information and appropriate valuation methodologies. The Company's financial instruments under SFAS No. 107 include: accounts receivable, notes receivable, notes payable, accounts payable and long-term debt. The Company has estimated that the carrying amounts of accounts receivable, notes payable and accounts payable approximate fair value due to the short-term maturities of these instruments. Notes receivable bear interest at a rate that approximates the current market rate, therefore, the carrying value approximates the fair value. In addition, because the Company's long-term bank debt bears interest at rates which float with market rates, the Company has estimated that the carrying amount of its long-term debt also approximates its fair value. F-16 42 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, 1998 ------------------------------------------------- QUARTER ENDED -------------------------------------- 12/31 3/31 6/30 9/30 TOTAL ------- ------- -------- ------- -------- Sales...................................... $15,675 $16,128 $ 16,783 $15,560 $ 64,146 Operating income (loss).................... (472) (347) (7,769) 389 (8,199) Net earnings (loss)........................ (298) (246) (12,365) 391 (12,518) Net earnings (loss) per share.............. (0.07) (0.05) (2.82) 0.09 (2.85)
YEAR ENDED SEPTEMBER 30, 1997 ----------------------------------------------- QUARTER ENDED ------------------------------------- 12/31 3/31 6/30 9/30 TOTAL ------- ------- ------- ------- ------- Sales........................................ $16,574 $16,585 $16,745 $17,053 $66,957 Operating income (loss)...................... (939) (5,638) (124) 180 (6,521) Net earnings (loss).......................... (674) (4,087) (80) 125 (4,716) Net earnings (loss) per share................ (0.15) (0.93) (0.02) 0.03 (1.07)
YEAR ENDED SEPTEMBER 30, 1996 ----------------------------------------------- QUARTER ENDED ------------------------------------- 12/31 3/31 6/30 9/30 TOTAL ------- ------- ------- ------- ------- Sales........................................ $17,460 $17,915 $18,005 $18,107 $71,487 Operating income (loss)...................... (510) 65 259 (93) (279) Net earnings (loss).......................... (356) (37) 121 (143) (415) Net earnings (loss) per share................ (.08) (.01) .03 (.03) (.09)
- --------------- (1) Fourth quarter 1998 results include a pre-tax benefit of $368,000 to reverse third quarter impairment charges on land and buildings held for sale. (2) Fourth quarter 1998 results include a pre-tax benefit of $113,000 to reduce insurance reserves for workers' compensation and general liability claims. (3) Third quarter 1998 results include pre-tax asset impairment and restructuring charges of $6,969,000. (4) Third quarter 1998 results include income tax expense of $4,305,000 to provide a valuation allowance for deferred tax assets net of deferred tax liabilities. (5) Second quarter 1998 results include a pre-tax benefit of $212,000 to reduce general liability insurance reserves. (6) Third quarter 1997 includes pre-tax asset impairment and restructuring charges of $78,000. (7) 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. (8) Second quarter 1997 includes pre-tax asset impairment and restructuring charges of $4,988,000. (9) Second quarter 1997 results include a pre-tax benefit of $558,000 to reduce insurance reserves for workers' compensation and the VEIB Plan. (10) Fourth quarter 1996 results include a pre-tax benefit of $162,000 to reduce insurance reserves for workers' compensation and the VEIB Plan. (11) 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. (12) Second quarter 1996 results include a pre-tax benefit of $74,000 to reduce expenses for the employee health insurance plan. F-17 43 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Fort Worth, Texas November 13, 1998 F-18 44 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 11, 1998 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 11, 1998 - ------------------------------------------------------------ Jesse Arrambide, III, Chairman of the Board of Directors /s/ HOLLIS TAYLOR December 11, 1998 - ------------------------------------------------------------ Hollis Taylor, President and Chief Executive Officer and Director (Principal Executive Officer) /s/ W. BRAD FAGAN December 11, 1998 - ------------------------------------------------------------ Brad Fagan, Vice President, Treasurer, Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) /s/ SAMUEL L. CARLSON December 11, 1998 - ------------------------------------------------------------ Samuel L. Carlson, Director /s/ ROBERT L. LIST December 11, 1998 - ------------------------------------------------------------ Robert L. List, Director /s/ DAVID ODEN December 11, 1998 - ------------------------------------------------------------ David Oden, Director /s/ TOMAS ORENDAIN December 11, 1998 - ------------------------------------------------------------ Tomas Orendain, Director /s/ GEORGE N. RIORDAN December 11, 1998 - ------------------------------------------------------------ George N. Riordan, Director /s/ RUDOLPH RODRIGUEZ, JR. December 11, 1998 - ------------------------------------------------------------ Rudolph Rodriguez, Jr., Director
45 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)
46
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(21) 10(aa) -- Amendment Number One to Pancho's Mexican Buffet, Inc. 1992 Stock Option Plan(22) 10(ab) -- Eighth Amendment to Revolving Credit and Term Loan Agreement, dated November 3, 1998 -- 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.
47 (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. (22) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended December 31, 1997 -- such Exhibits are incorporated herein by reference.
EX-10.(AB) 2 8TH AMENDMENT TO REVOLVING CREDIT-TERM LOAN AGRMNT 1 EXHIBIT 10(ab) EIGHTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS EIGHTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT (hereinafter called this "Amendment") is entered into on November 3, 1998, to be effective as of September 30, 1998, (the "Effective Date"), between PMB ENTERPRISES WEST, INC., a New Mexico corporation (the "Company"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.) (the "Bank"). W I T N E S S E T H: WHEREAS, the Company and the Bank entered into that certain Revolving Credit and Term Loan Agreement dated February 16, 1994 (such Revolving Credit and Term Loan Agreement and all amendments thereto and restatements thereof are hereinafter collectively referred to as the "Agreement"); and WHEREAS, the Company and the Bank entered into that certain First Amendment to Revolving Credit and Term Loan Agreement dated February 9, 1995 (the "First Amendment"); and WHEREAS, the Company and the Bank entered into that certain Second Amendment to Revolving Credit and Term Loan Agreement dated May 9, 1995 (the "Second Amendment"); and WHEREAS, the Company and the Bank entered into that certain Third Amendment to Revolving Credit and Term Loan Agreement dated September 29, 1995 (the "Third Amendment"); and WHEREAS, the Company and the Bank entered into that certain Fourth Amendment to Revolving Credit and Term Loan Agreement dated February 16, 1996 (the "Fourth Amendment"); and WHEREAS, the Company and the Bank entered into that certain Fifth Amendment to Revolving Credit and Term Loan Agreement dated July 9, 1996 (the "Fifth Amendment"); and WHEREAS, the Company and the Bank entered into that certain Letter Agreement dated December 16, 1996 (the "First Letter Agreement"); and WHEREAS, the Company and the Bank entered into that certain Letter Agreement dated February 11, 1997 (the "Second Letter Agreement"); and WHEREAS, the Company and the Bank entered into that certain Sixth Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997 (the "Sixth Amendment"); and WHEREAS, the Company and the Bank entered into that certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated December 1, 1997 (the "Seventh Amendment"); and 2 WHEREAS, the Company has requested that the Bank amend (i) the required Commitment Reductions; (ii) the Termination Date; and (iii) certain financial covenants; and WHEREAS, subject to and upon the terms and conditions hereinafter stated, the Bank is willing to do so; NOW, THEREFORE, for and in consideration of the mutual covenants and agreements herein contained, the parties to this Amendment hereby agree as follows: SECTION 1. Terms Defined in Agreement. As used in this Amendment, except as may otherwise be provided herein, all capitalized terms which are defined in the Agreement shall have the same meaning herein as therein, all of such terms and their definitions being incorporated herein by reference. SECTION 2. Amendments to Agreement. Subject to the conditions precedent set forth in Section 3 hereof, the Agreement is hereby amended as follows: (a) The definition of "EBITDA" in Article I of the Agreement is amended to read in its entirety as follows: "`EBITDA' shall mean, with respect to Pancho's Mexican Buffet, Inc. and its Subsidiaries on a Consolidated basis for any fiscal period, without duplication, Consolidated Net Income plus (ii) depreciation, depletion, amortization and other non-cash items reducing Consolidated Net Income plus (iii) interest expense plus (iv) income tax expense, all determined in accordance with GAAP." (b) The definition of "Loan Documents" in Article I of the Agreement is amended to read in its entirety as follows: "`Loan Documents' shall mean this Loan Agreement, the Note (including any renewals, extensions and refundings thereof), the Guaranty, the Security Instruments and any agreements or documents (and with respect to this Loan Agreement, and such other agreements and documents, any amendment or supplements thereto or modifications thereof) executed or delivered pursuant to the terms of this Loan Agreement." (c) The definition of "Permitted Liens" in Article I of the Agreement is amended to read in its entirety as follows: "`Permitted Liens' shall mean: (i) purchase money liens relating to or securing obligations in an aggregate amount not to exceed five hundred thousand dollars ($500,000); (ii) pledges or deposits made to secure payment of Worker's Compensation (or to participate in any fund in connection with Worker's Compensation ), unemployment insurance, pensions or social security programs; (iii) Liens imposed by mandatory provisions of law such as for materialmen's, mechanics warehousemen's and other like Liens arising in the ordinary course of business, securing Indebtedness whose payment is not yet due unless the same are beings -2- 3 contested in good faith and for which adequate reserves have been provided; (iv) Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate reserves have been provided; (v) good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations, deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, customs duties or other similar charges; (vi) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such do not impair the use of such property for the uses intended, and none of which is violated by Company or any of its Subsidiaries in connection with existing or proposed structures or land use; and (vii) Liens created in favor of the Bank." (d) The following definition of "Phoenix Property" shall be added to Article I of the Agreement in alphabetical order: "`Phoenix Property' shall mean all real and personal property located at 8146 W. Indian School Road, Phoenix, Arizona as more fully described in that certain Arizona Deed of Trust, Security Agreement, Financing Statement, and Assignment of Rental dated as of September 29, 1995 from Company to Horace Weaver, Trustee, for the benefit of Bank, recorded in the official records of Maricopa County under File No. 96-0153894 on March 7, 1996." (e) The following definition of "Security Instruments" shall be added to Article I of the Agreement in alphabetical order: "`Security Instruments' shall mean any and all deeds of trust and security agreements delivered to the Bank pursuant to this Loan Agreement including, but not limited to, those instruments delivered to the Bank pursuant to Section 6.02(g) of this Loan Agreement." (f) The following definition of "Shreveport Property" shall be added to Article I of the Agreement in alphabetical order: "`Shreveport Property' shall mean all real and personal property located at 9165 Mansfield Road, Shreveport, Louisiana." (g) The definition of "Termination Date" in Article I of the Agreement is amended to read in its entirety as follows: "`Termination Date' shall mean September 30, 2000." (h) Subsection 2.01(a) of the Agreement is hereby deleted therefrom and the following subsection 2.01(a) is substituted in lieu thereof: "(a) Revolving Loan Commitments. Subject to the terms and conditions of this Loan Agreement, Bank agrees to extend to Company from -3- 4 the date hereof through the Termination Date (the "Revolving Credit Period"), a revolving line of credit which shall not exceed two million and no/100 dollars ($2,000,000.00) at any one time outstanding prior to December 31, 1998. On the last day of each and every calendar quarter beginning with the calendar quarter ended December 31, 1998, 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, 1998 $100,000.00 March 31, 1999 $100,000.00 June 30, 1999 $200,000.00 September 30, 1999 $200,000.00 December 31, 1999 $100,000.00 March 31, 2000 $100,000.00 June 30, 2000 $200,000.00 September 30, 2000 The lesser of $1,000,000.00 or actual Commitment outstanding
(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 one hundred percent (100%) of the amount of net proceeds from the sale of real property of Company or any Subsidiary applied to the payment of the Note, provided, however, that the amount of the Commitment shall be reduced by sixty percent (60%) of the amount of net proceeds from the sale of the Shreveport Property and the Phoenix Property. Any payments received from the proceeds of sale of real property of Company or any Subsidiary will not reduce or affect the amount of the next scheduled Commitment Reduction, but shall be applied in inverse order to the scheduled Commitment Reductions. (For example, the application of $1,100,000 in net proceeds from the sale of real estate would immediately permanently reduce the Commitment and would cause the Commitment Reduction required on September 30, 2000 to be reduced to zero and cause the required Commitment Reduction on June 30, 2000 to be reduced to $100,000, and the subsequent sale of the Phoenix Property for $100,000 would immediately permanently reduce the Commitment and would cause the then remaining required Commitment Reduction on June 30, 2000 to be reduced to $40,000.) 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- 5 (i) Subsection 8.01(g) of the Agreement, for sake of clarity, is restated in its entirety as follows: "(g) Requested Information: with reasonable promptness, such other financial data or other data or information related to the business or operations of Pancho's Mexican Buffet, Inc. or its Subsidiaries as Bank may reasonably request and which is available to Company on a "best efforts" basis. Bank agrees that Bank will not intentionally disclose any information given to Bank by the Company which is either proprietary or confidential and which is prominently marked as such; provided, however, that this restriction shall not apply to information which has at the time in question entered the public domain, nor will this restriction prohibit Bank from disclosing such information (a) as is required to be disclosed by Law or by any order, rule or regulation (whether valid or invalid) of any Tribunal, (b) to Bank's auditors, attorneys, or agents, or (c) to purchasers or prospective purchasers or Assignees of interests in the Loan Agreement or the Obligation." (j) Subsection 8.01(h) of the Agreement is deleted therefrom and the following Subsection 8.01(h) is substituted in lieu thereof: "(h) This Subsection 8.01(h) is intentionally left blank." (k) Section 9.01 of the Agreement is hereby deleted therefrom and the following Section 9.01 is substituted in lieu thereof: "9.01 This section intentionally left blank." (l) Section 9.02 of the Agreement is hereby deleted therefrom and the following Section 9.02 is substituted in lieu thereof: "9.02 Indebtedness to Net Worth. Permit the ratio of the total Indebtedness of Pancho's Mexican Buffet, Inc. and its Subsidiaries as of the end of the most recent fiscal quarter to Consolidated Tangible Net Worth as of the end of the most recent fiscal quarter to be greater than 1.4 to 1.0; or" (m) Section 9.04 of the Agreement is hereby deleted therefrom and the following Section 9.04 is substituted in lieu thereof: "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 Company's fiscal year 1998 or transfer any funds to PMB International, Inc. or its Subsidiaries during the Company's fiscal year 1999 or thereafter; or" (n) Section 9.10 of the Agreement, for sake of clarity, is restated in its entirety as follows: "9.10 Liquidation, Mergers and Disposition of Substantial Assets. Liquidate, dissolve or reorganize; merge or consolidate with any other company, firm or association in a transaction in which Company is not the -5- 6 surviving corporation except for a merger or consolidation with Pancho's Mexican Buffet, Inc. or one of its Subsidiaries; or make any other substantial change in its capitalization or its business; or" (o) Section 9.11 of the Agreement is hereby deleted therefrom and the following Section 9.11 is substituted in lieu thereof: "9.11 EBITDA. Permit EBITDA for the three-month period ending on the date set forth below to be less than the amount set forth below opposite such date:
Period Ended: Required Trailing-Three-Month EBITDA ------------- ------------------------------------ December 31, 1998 $100,000.00 March 31, 1999 $400,000.00 June 30, 1999 $600,000.00 September 30, 1999 $400,000.00 December 31, 1999 $400,000.00 March 31, 2000 $400,000.00 June 30, 2000 $600,000.00 September 30, 2000 $400,000.00; or"
(p) Section 9.13 of the Agreement is hereby deleted therefrom and the following Section 9.13 is substituted in lieu thereof: "9.13 This section intentionally left blank." (q) Section 9.15 of the Agreement is hereby deleted therefrom and the following Section 9.15 is substituted in lieu thereof: "9.15 Dividends. (a) Pay any Dividend unless the twelve-month rolling EBITDA exceeds three million dollars ($3,000,000) or (b) pay Dividends in excess of one hundred fifty thousand dollars ($150,000) in the aggregate during any fiscal year of Pancho's Mexican Buffet, Inc.; provided, however, that so long as no Default (other than non-compliance with Subsection 9.15(a) hereof) has occurred or would occur as a result of the following, Pancho's Mexican Buffet, Inc. may declare and pay cash Dividends on or before March 31, 1999 to any of its stockholders in an amount necessary to make a payment in lieu of fractional shares of Pancho's Mexican Buffet, Inc.'s common stock in connection with Pancho's Mexican Buffet, Inc.'s proposed reverse stock split, provided, further, that the aggregate amount of all such cash Dividends shall not exceed $10,000.00; or" (r) Section 9.16 of the Agreement is hereby deleted therefrom and the following Section 9.16 is substituted in lieu thereof: "9.16 This section intentionally left blank." (s) Subsection 10.01(j) of the Agreement is hereby deleted therefrom and the following Section 10.01(j) is substituted in lieu thereof: -6- 7 "(j) The failure of the Company to promptly apply net proceeds from sale of real property of Company or any of its Subsidiaries to the unpaid balance of the Note as set forth in Section 2.01(a) hereof; or" (t) Article XI of the Agreement is hereby deleted therefrom and the following Article XI is substituted in lieu thereof: "ARTICLE XI ARBITRATION PROGRAM 11.01 Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in Section 11.05 below) in accordance with the terms of this Loan Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. 11.02 Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in Texas selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. 11.03 No Waiver; Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, -7- 8 attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. 11.04 Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the Texas State Bar with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of Texas, (ii) may grant any remedy or relief that a court of the state of Texas could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. 11.05 Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Texas, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of Texas. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Texas. 11.06 Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by -8- 9 applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties." (t) Section 12.02 of the Agreement is hereby deleted therefrom and the following Section 12.02 is substituted in lieu thereof: "12.02 Notices. Any notices or other communications required or permitted to be given by this Loan Agreement, the Note or any of the other Loan Documents must be given in writing and personally delivered, sent by telecopy or telex (answerback received) or mailed by prepaid certified or registered mail, return receipt requested, to the party to whom such notice or communication is directed at the address of such party as follows: Company: PMB Enterprises West, Inc. 3500 Noble Avenue Fort Worth, Texas 76111 Attn: Chief Financial Officer Facsimile: (817) 838-1408 Bank: Wells Fargo Bank (Texas), National Association 1000 Louisiana 4th Floor Houston, Texas 77002 Attn: Roger Fruendt Facsimile: (713) 739-1076 Any such notice or other communication shall be deemed to have been given on the date it is personally delivered or sent by telecopy or telex as aforesaid or, if mailed, on the second day after it is mailed as aforesaid (whether actually received or not). Any party may change its address for purposes of this Loan Agreement by giving notice of such change to all other parties pursuant to this Section 12.02." (u) Section 12.04 of the Agreement is hereby deleted therefrom and the following Section 12.04 is substituted in lieu thereof: "12.04 Maximum Interest Rate. (a) It is the intention of the parties hereto to comply with applicable usury laws, if any; accordingly, notwithstanding any provision to the contrary in this Loan Agreement, the Note or in any of the other Loan Documents securing the payment hereof or otherwise relating hereto, in no event shall this Loan Agreement, the Note or such other Loan Documents require or permit the payment, taking, reserving, receiving, collection, or charging of any sums constituting interest under applicable laws which exceed the maximum amount permitted by such laws. If any such excess interest is called for, contracted for, charged, taken, reserved, or received in connection with the loans evidenced by the Note or in any of the Loan Documents securing the -9- 10 payment thereof or otherwise relating thereto, or in any communication by the Bank or any other Person to the Company or any other Person, or in the event all or part of the principal or interest thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved, or received on the amount of principal actually outstanding from time to time under the Note shall exceed the maximum amount of interest permitted by applicable usury laws, then in any such event it is agreed as follows: (i) the provisions of this paragraph shall govern and control, (ii) neither the Company nor any other Person or entity now or hereafter liable for the payment of the Note shall be obligated to pay the amount of such interest to the extent such interest is in excess of the maximum amount of interest permitted by applicable usury laws, (iii) any such excess which is or has been received notwithstanding this paragraph shall be credited against the then unpaid principal balance of the Note or, if the Note has been or would be paid in full, refunded to the Company, and (iv) the provisions of this Loan Agreement, the Note and the other Loan Documents securing the payment thereof and otherwise relating thereto, and any communication to the Company, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the maximum lawful rate allowed under applicable laws as now or hereafter construed by courts having jurisdiction hereof or thereof. Without limiting the foregoing, all calculations of the rate of the interest contracted for, charged, collected, taken, reserved, or received in connection with the Note or this Loan Agreement which are made for the purpose of determining whether such rate exceeds the maximum lawful rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of the loans, including all prior and subsequent renewals and extensions, all interest at any time contracted for, charged, taken, collected, reserved, or received. The terms of this paragraph shall be deemed to be incorporated in every document and communication relating to the Note, the loans or any other Loan Document. (b) Texas Finance Code, Chapter 346 (formerly Tex. Rev. Civ. Stat., Title 79, Chapter 15), which regulates certain revolving loan accounts and revolving triparty accounts, shall not apply to any revolving loan accounts created under the Note, this Loan Agreement or the other Loan Documents or maintained in connection therewith. (c) To the extent that the interest rate laws of the State of Texas are applicable to the Loans, the applicable interest rate ceiling is the weekly ceiling (formerly the indicated rate ceiling) determined in accordance with Tex. Rev. Civ. Stat., Title 79, Article 5069-1D.003, also codified at Texas Finance Code, Section 303.301 (formerly Article 5069-1.01(a)(1)), and, to the extent that this Loan Agreement, the Note or any other Loan Document is deemed an open end account as such term is defined in Tex. Rev. Civ. Stat., Title 79, Article 5069-1B.002(14), also codified at Texas Finance Code Section 3.01.001(3) (formerly Article 5069-1.01(f)), the Payee retains the right to modify the interest rate in accordance with applicable law." -10- 11 SECTION 3. Restructure Fee. At the time of execution of this Amendment, the Company shall pay to the Bank a fee in the amount of ten thousand dollars ($10,000) together with all attorneys' fees incurred by the Bank (the "Restructure Fee"). SECTION 4. Conditions of Effectiveness. As a condition precedent to the effectiveness of the Bank's agreements and obligations hereunder, the Company shall have taken the following actions and delivered to the Bank the following documents and instruments, in form and substance satisfactory to the Bank: (a) The Company shall have duly executed and delivered this Amendment. (b) The Company shall have paid all accrued and unpaid legal fees and expenses referred to in Section 12.03 of the Agreement and Section 8 hereof to the extent invoices for such fees and expenses have been delivered to the Company. (c) The Company shall have delivered corporate resolutions of the Company authorizing the execution of this Amendment. (d) The Company shall have delivered an incumbency certificate of the Company. (e) The Company shall have paid to the Bank the Restructure Fee. (f) The Company shall have duly executed and delivered amendments to the Security Instruments (hereinafter defined) requested by the Bank. (g) The Company shall have provided such other evidence as the Bank may reasonably request to establish the consummation of the transactions contemplated hereby, the taking of all proceedings in connection herewith and compliance with the conditions set forth in this Amendment. SECTION 5. Representations and Warranties of the Company. Each of the Company and the Guarantors, represents and warrants to the Bank, with full knowledge that the Bank is relying on the following representations and warranties in executing this Amendment, as follows: (a) Each of the Company and the Guarantors has corporate power and authority to execute, deliver and perform this Amendment, and all corporate action on the part of the Company and the Guarantors requisite for the due execution, delivery and performance of this Amendment has been duly and effectively taken. (b) The Agreement as amended by this Amendment and the Loan Documents and each and every other document executed and delivered in connection with this Amendment to which the Company or any of its Subsidiaries or any Guarantor is a party constitute the legal, valid and binding obligations of the Company and any of its Subsidiaries and each of the Guarantors to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms. -11- 12 (c) This Amendment does not and will not violate any provisions of the articles or certificate of incorporation or bylaws of the Company or any Guarantor or any contract, agreement, instrument or requirement of any Governmental Authority to which the Company or any Guarantor is subject. The Company's and the Guarantors' execution of this Amendment will not result in the creation or imposition of any lien upon any properties of the Company or either Guarantor, other than those permitted by the Agreement and this Amendment. (d) The Company's and the Guarantors' execution, delivery and performance of this Amendment does not require the consent or approval of any other Person, including, without limitation, any governmental authority. (e) The unaudited consolidated balance sheet of the Company and its Subsidiaries as of August 31, 1998, the related consolidated statements of earnings, capital accounts, and cash flows of the Company for the period then ended and the consolidated balance sheet and related consolidated statements of earnings, capital accounts and cash flows for the period commencing the first day of the fiscal year and ending on the last day of such quarter which have been furnished to the Bank, fairly present the financial condition of the Company and its Subsidiaries as at such date and the results of the operations of the Company and its Subsidiaries for the periods ended on such date, all in accordance with GAAP applied on a consistent basis, and since August 31, 1998, there has been no material adverse change in such condition or operations. (f) Except as expressly set forth in Section 7(a) hereof, each of the Company and the Guarantors has performed and complied with all agreements and conditions contained in the Agreement required to be performed or complied with by them prior to or at the time of delivery of this Amendment. Except as expressly waived pursuant to Section 7(a) hereof, no Default or Event of Default exists. (g) Nothing in this Section 5 of this Amendment is intended to amend any of the representations or warranties contained in the Agreement or the Loan Documents to which the Company or any of its Subsidiaries or any Guarantor is a party. The Company represents and warrants that all of the representations and warranties contained in the Agreement and in all instruments and documents executed pursuant thereto or contemplated thereby are true and correct in all material respects on and as of this date, except (i) such representations that relate solely to an earlier date and that were true and correct on such earlier date, and (ii) the breach or inaccuracy of representations and warranties about which the Bank has been notified in writing prior to the date of this Amendment. SECTION 6. Reference to and Effect on the Agreement. (a) Upon the effectiveness of Sections 2 and 3 hereof, on and after the Effective Date, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, shall mean and be a reference to the Agreement as amended hereby. (b) Except as expressly provided herein, the Agreement and the other Loan Documents shall remain in full force and effect in accordance with their respective -12- 13 terms, and this Amendment shall not be construed to impair the validity, perfection or priority of any lien or security interest securing the Obligations. SECTION 7. Limited Waiver. (a) In reliance upon the representations and warranties of the Company herein set forth, the Bank hereby waives any Default or Event of Default caused by the Company's failure to comply with Sections 9.01, 9.02, 9.11, 9.13, 9.14 and 9.16 of the Agreement during the months of April, May, June, July and August, 1998. (b) Each of the Company and the Guarantors agrees that, except as expressly waived pursuant to Section 7(a) above, no Event of Default and no Default has been waived or remedied by the execution of this Amendment by the Bank, and any such Default or Event or Default heretofore arising and currently continuing shall continue after the execution and delivery hereof. Nothing contained in this Amendment nor any past indulgence by the Bank nor any other action or inaction on behalf of the Bank (i) shall constitute or be deemed to constitute a waiver of any defaults or events of default which may exist under the Agreement or the other Loan Documents, or (ii) shall constitute or be deemed to constitute an election of remedies by the Bank or a waiver of any of the rights or remedies of the Bank provided in the Agreement or the other Loan Documents or otherwise afforded at law or in equity. SECTION 8. Cost, Expenses and Taxes. The Company agrees to pay on demand all reasonable costs and expenses of the Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including reasonable attorneys' fees and out-of-pocket expenses of the Bank. In addition, the Company shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. SECTION 9. Extent of Amendments. Except as otherwise expressly provided herein, the Agreement and the other Loan Documents are not amended, modified or affected by this Amendment. Each of the Company and the Guarantors ratifies and confirms that (i) except as expressly amended hereby, all of the terms, conditions, covenants, representations, warranties and all other provisions of the Agreement remain in full force and effect, (ii) each of the other Loan Documents are and remain in full force and effect in accordance with their respective terms, and (iii) the property referenced in the Security Instruments (such property herein the "Collateral") is unimpaired by this Amendment. SECTION 10. Guaranties. Each of the Guarantors hereby consents to and accepts the terms and conditions of this Amendment, agrees to be bound by the terms and conditions hereof and ratifies and confirms that its Unconditional Guaranty Agreement executed and delivered to the Bank on February 16, 1994, guaranteeing payment of the Obligations of the Company to the Bank, is and remains in full force and effect and secures payment of, among other things, the Note as renewed, rearranged and extended hereby. SECTION 11. Grant and Affirmation of Security Interest. The Company hereby grants to the Bank a security interest in the Collateral to secure payment and performance -13- 14 of the Note and the obligations described in the Agreement, the other Loan Documents, and all documents and instruments executed in connection therewith, and the Company hereby confirms and agrees that any and all liens, security interests and other security or Collateral now or hereafter held by the Bank as security for payment and performance of the Obligations hereby are renewed, extended and carried forth to secure payment and performance of all of the Obligations, including, without limitation, the Note. The Loan Documents (including without limitation, the Security Instruments) executed by the Company are and remain legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms. SECTION 12. Execution and Counterparts. This 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 Amendment by facsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. SECTION 13. Severability. In the event any one or more provisions contained in the Agreement or this Amendment should be held to be invalid, illegal or unenforceable in any respect, the validity, enforceability and legality of the remaining provisions contained herein and therein shall not be affected in any way or impaired thereby and shall be enforceable in accordance with their respective terms. SECTION 14. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas and, to the extent applicable, the federal laws of the United States of America. SECTION 15. Interpretation. In the event of any inconsistency between the terms of this Amendment and the Agreement or any of the other Loan Documents, this Amendment shall govern. Each of the Company and Guarantors acknowledge that it has consulted with counsel and with such other experts and advisors as it has deemed necessary in connection with the negotiation, execution and delivery of this Amendment. This Amendment shall be construed without regard to any presumption or rule requiring that it be construed against the party causing this Amendment or any part hereof to be drafted. SECTION 16. Headings. Section headings in this Amendment are included herein for convenience and reference only and shall not constitute a part of this Amendment for any other purpose. SECTION 17. Benefit of Agreement. This Amendment shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. No other Person shall be entitled to claim any right or benefit hereunder, including, without limitation, the status of a third-party beneficiary of this Amendment. SECTION 18. Arbitration Program. The parties agree to be bound by the terms and provisions of the Arbitration Program of the Bank set forth in Article XI of the Agreement which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes arising hereunder, under the Agreement, under any of the other Loan Documents, or under any of the documents and instruments -14- 15 contemplated thereby, or pertaining hereto or thereto, shall be resolved by mandatory binding arbitration upon the request of any party. SECTION 19. WAIVERS AND RELEASE OF CLAIMS. As additional consideration to the execution, delivery, and performance of this Amendment by the parties hereto and to induce the Bank to enter into this Amendment, each of the Company and each Guarantor represents and warrants that none of the Company and Guarantors knows of any facts, events, statuses or conditions which, either now or with the passage of time or the giving of notice, or both, constitute or will constitute a basis for any claim or cause of action against the Bank or any defense, counterclaim or right of setoff to the payment or performance of any obligations or indebtedness of the Company or any Guarantor to the Bank, and in the event any such facts, events, statuses or conditions exist or have existed, whether known or unknown, WHETHER DUE TO THE BANK'S, ITS REPRESENTATIVES', AGENTS', OFFICERS', DIRECTORS', EMPLOYEES', SHAREHOLDERS', OR SUCCESSORS' OR ASSIGNS' OWN NEGLIGENCE, each of the Company and the Guarantors for each of themselves, their respective Subsidiaries, their respective representatives, agents, officers, directors, employees, shareholders, and successors and assigns (collectively called the "Indemnifying Parties"), hereby fully, finally, completely, generally and forever releases, discharges, acquits, and relinquishes the Bank and its respective representatives, agents, officers, directors, employees, shareholders, and successors and assigns (collectively called the "Indemnified Parties"), from any and all claims, actions, demands, and causes of action of whatever kind or character, whether joint or several, whether known or unknown, WHETHER DUE TO ANY OF THE INDEMNIFIED PARTIES' OWN NEGLIGENCE, which may have arisen or accrued prior to the date of execution of this Amendment, for any and all injuries, harm, damages, penalties, costs, losses, expenses, attorneys' fees, and/or liabilities whatsoever and whenever incurred or suffered by any of them, including, without limitation, any claim, demand, action, damage, liability, loss, cost, expense, and/or detriment, of any kind or character, growing out of or in any way connected with or in any way resulting from any breach of any duty of loyalty, fair dealing, care, fiduciary duty, or any other duty, confidence, or commitment, undue influence, duress, economic coercion, conflict of interest, negligence, bad faith, violations of the racketeer influence and corrupt organizations act, intentional or negligent infliction of distress or harm, tortious interference with contractual relations, tortious interference with corporate governance or prospective business advantage, breach of contract, failure to perform any obligation under any of the Loan Documents, deceptive trade practices, libel, slander, conspiracy, interference with business, usury, strict liability, lender liability, breach of warranty or representation, fraud, or any other claim or cause of action (herein being collectively referred to as "Claims"). IT IS EXPRESSLY AGREED THAT THE CLAIMS RELEASED HEREBY INCLUDE THOSE ARISING FROM OR IN ANY MANNER ATTRIBUTABLE TO THE NEGLIGENCE (SOLE, CONCURRENT, ORDINARY, OR OTHERWISE), OR OTHER TORTIOUS CONDUCT OF ANY OF THE INDEMNIFIED PARTIES (other than any claims arising solely out of an Indemnified Party's willful misconduct or gross negligence). Notwithstanding any provision of this Amendment or any other Loan Document, this Section shall remain in full force and effect and shall survive the delivery and payment of the Note, this Amendment and the other Loan Documents and the making, extension, renewal, modification, amendment or restatement of any thereof. SECTION 20. INDEMNIFICATION. As additional consideration to the execution, delivery, and performance of this Amendment by the parties hereto and to induce the Bank to enter into this Amendment, the Indemnifying Parties hereby agree to -15- 16 indemnify, hold harmless, and defend each of the Indemnified Parties from and against any and all Claims of any nature or character, at law or in equity, known or unknown, which may have arisen prior to the date hereof, or accrued to, or could be claimed or asserted by, any third party prior to the date hereof, INCLUDING WITHOUT LIMITATION, ANY CLAIMS ARISING OUT OF OR IN ANY MANNER ATTRIBUTABLE TO THE NEGLIGENCE (SOLE, CONCURRENT, ORDINARY OR OTHERWISE), OR OTHER TORTIOUS CONDUCT OF ANY OF THE INDEMNIFIED PARTIES (other than any claims arising solely out of an Indemnified Party's willful misconduct or gross negligence). Notwithstanding any provision of this Amendment or any other Loan Document, this Section shall remain in full force and effect and shall survive the delivery and payment of the Note, this Agreement and the other Loan Documents and the making, extension, renewal, modification, amendment or restatement of any thereof. SECTION 21. NO ORAL AGREEMENTS. THE AGREEMENT (AS AMENDED BY THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN ON THE FOLLOWING PAGE] -16- 17 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized. THE BANK: THE COMPANY: WELLS FARGO BANK (TEXAS), PMB ENTERPRISES WEST, INC. NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.) By /s/ ROGER FRUENDT By /s/ SAMUEL L. CARLSON ---------------------------------- ------------------------------- Name: Roger Fruendt Name: Samuel L. Carlson Title: Vice President Title: SR V.P. & SEC CONSENTED AND AGREED TO THIS 3rd day of NOVEMBER, 1998 TO BE EFFECTIVE AS OF SEPTEMBER 30, 1998: PANCHO'S MEXICAN BUFFET, INC., a Delaware corporation By /s/ W. BRAD FAGAN ------------------------------------ Name: Brad Fagan Title: VP-TREASURER & CFO PAMEX OF TEXAS, INC., a Texas corporation By /s/ CAROLYN TETTS ------------------------------------ Name: Carolyn Tetts Title: SEC/TREAS PMB INTERNATIONAL, INC., a Delaware corporation By /s/ W. BRAD FAGAN ------------------------------------ Name: Brad Fagan Title: VP-TREASURER & CFO [THIS IS THE SIGNATURE PAGE TO THE EIGHTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT] 18 EXHIBIT C UNANIMOUS CONSENT OF DIRECTORS AND SHAREHOLDERS OF PMB ENTERPRISES WEST, INC. IN LIEU OF A SPECIAL MEETING The undersigned, being all members of the Board of Directors and all Shareholders of PMB Enterprises West, Inc., a New Mexico corporation (the "Corporation") do hereby consent to and authorize the adoption of the following recitals and resolutions without a meeting, dated this 30th day of September, 1998. WHEREAS, the Corporation is a party to that certain Revolving Credit and Term Loan Agreement dated February 16, 1994 by and between the Corporation and Wells Fargo Bank (Texas), National Association (formerly First Interstate Bank of Texas, N.A.,) (herein the "Bank") (the "Agreement") as same has been amended and modified by that certain First Amendment to Revolving Credit and Term Loan Agreement dated February 9, 1995 by and between the Corporation and the Bank (the "First Amendment"), that certain Second Amendment to Revolving Credit and Term Loan Agreement dated May 9, 1995 by and between the Corporation and the Bank (the "Second Amendment"), that certain Third Amendment to Revolving Credit and Term Loan Agreement dated September 29, 1995 by and between the Corporation and the Bank (the "Third Amendment"), that certain Fourth Amendment to Revolving Credit and Term Loan Agreement dated February 16, 1996 by and between the Corporation and the Bank (the "Fourth Amendment"), that certain Fifth Amendment to Revolving Credit and Term Loan Agreement dated July 9, 1996 by and between the Corporation and the Bank (the "Fifth Amendment"), that certain Letter Agreement dated December 16, 1996 by and between the Corporation and the Bank (the "First Letter Agreement"), that certain Letter Agreement dated February 11, 1997 by and between the Corporation and the Bank (the Second Letter Agreement"), that certain Sixth Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997 by and between the Corporation and the Bank (the "Sixth Amendment") and that certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated December 1, 1997 by and between the Corporation and the Bank (the "Seventh Amendment") (the Agreement as so amended is herein called the "Original Loan Agreement") WHEREAS, loans made under the Original Loan Agreement are evidenced by, other things, the promissory note of the Corporation payable to the order of the Bank, hereinafter called the "Note;" and 19 WHEREAS, loans made under the Original Loan Agreement are secured by certain real and personal property pursuant to the Security Instruments as more fully described in the Original Loan Agreement; and WHEREAS, the Corporation and the Bank now desire to amend certain terms and provisions of the Original Loan Agreement and the Security Instruments in accordance with the terms and provisions set forth in that certain Eighth Amendment dated as of September 30, 1998 by and between the Corporation and the Bank (the "Eighth Amendment") (the Original Loan Agreement, as amended, modified, corrected and supplemented by the Eighth Amendment is hereinafter the "Loan Agreement "), a copy of the Eighth Amendment and the Original Loan Agreement have been submitted to and reviewed by each of the Board of Directors; and NOW, THEREFORE, BE IT RESOLVED THAT, the form, terms and provisions of the Eighth Amendment, to be executed by the Corporation, which provides for, among other things, certain modifications and amendments of the Original Loan Agreement, is hereby approved; and RESOLVED FURTHER, the President, any Executive Vice-President or Vice-President or any other officer of the Corporation be, and each of them hereby is, authorized and empowered to execute and deliver in the name and on behalf of the Corporation (i) the Eighth Amendment substantially in the form approved in the foregoing resolutions, with such changes therein as shall be approved by the officer executing same, such approval to be conclusively evidenced by such officer's execution thereof, and (ii) any and all other agreements, financing statements, deeds of trust, security agreements, certificates, or other documents described in the Loan Agreement or necessary or required by the Bank (collectively herein the "Documents"), and to take any and all other actions relating to or in connection with these resolutions as may be necessary to effectuate the purpose of these resolutions; and RESOLVED FURTHER, the officers, employees and agents of the Corporation be, and they hereby are, and each of them acting singly hereby is, authorized and directed on behalf of the Corporation to do all acts and things required or provided for by the provisions of documents described in the foregoing resolutions and to do all acts and to execute and deliver any and all instruments, documents, consents, acknowledgments, agreements or certificates and to do or cause to be done any and all other things as may in the judgment of such officer, or agent be deemed necessary, appropriate or desirable in order to give effect to and carry out the foregoing resolutions or the matters pertaining to the documents described in the foregoing resolutions and the execution and delivery of such instruments, documents, consents, acknowledgments, agreements or certificates and the taking thereof by the officer and officers so acting shall be conclusive evidence that the same has been approved by the Corporation; and -2- 20 PMB ENTERPRISES WEST, INC. OFFICER'S CERTIFICATE The undersigned hereby certifies that he is the duly 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 September 30, 1998 (the "Resolutions"). The Resolution shave 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 Eighth Amendment To Revolving Credit and Term Loan Agreement dated as of September 30, 1998 (the "Eighth Amendment"), each of the Appointments of Successor Trustee and Amendment to Deed of Trust, Security Agreement, Financing Statement and Assignment of Rental dated as of September 30, 1998 and other documents required by the Eighth 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 3rd day of November, 1998 /s/ SAMUEL L. CARLSON --------------------------- Samuel L. Carson, Secretary 21 WHEREAS, loans made under the Original Loan Agreement are secured by certain real and personal property pursuant to the Security Instruments as more fully described in the Original Loan Agreement; and WHEREAS, the Corporation and the Bank now desire to amend certain terms and provisions of the Original Loan Agreement and the Security Instruments in accordance with the terms and provisions set forth in that certain Eighth Amendment dated as of September 30, 1998 by and between the Corporation and the Bank (the "Eighth Amendment") (the Original Loan Agreement, as amended, modified, corrected and supplemented by the Eighth Amendment is hereinafter the "Loan Agreement"), a copy of the Eighth Amendment and the Original Loan Agreement have been submitted to and reviewed by each of the Board of Directors; and NOW, THEREFORE, BE IT RESOLVED THAT, the form, terms and provisions of the Eighth Amendment, to be executed by the Corporation, which provides for, among other things, certain modifications and amendments of the Original Loan Agreement, is hereby approved; and RESOLVED FURTHER, the President, any Executive Vice-President or Vice-President or any other officer of the Corporation be, and each of them hereby is, authorized and empowered to execute and deliver in the name and on behalf of the Corporation (i) the Eighth Amendment substantially in the form approved in the foregoing resolutions, with such changes therein as shall be approved by the officer executing same, such approval to be conclusively evidenced by such officer's execution thereof, and (ii) any and all other agreements, financing statements, deeds of trust, security agreements, certificates, or other documents described in the Loan Agreement or necessary or required by the Bank (collectively herein the "Documents"), and to take any and all other actions relating to or in connection with these resolutions as may be necessary to effectuate the purpose of these resolutions; and RESOLVED FURTHER, the officers, employees and agents of the Corporation be, and they hereby are, and each of them acting singly hereby is authorized and directed on behalf of the Corporation to do all acts and things required or provided for by the provisions of documents described in the foregoing resolutions and to do all acts and to execute and deliver any and all instruments, documents, consents, acknowledgments, agreements or certificates and to do or cause to be done any and all other things as may in the judgment of such officer, or agent be deemed necessary, appropriate or desirable in order to give effect to and carry out the foregoing resolutions or the matters pertaining to the documents described in the foregoing resolutions and the execution and delivery of such instruments, documents, consents, acknowledgments, agreements or certificates and the taking thereof by the officer and officers so acting shall be conclusive evidence that the same has been approved by the Corporation; and -2- 22 RESOLVED FURTHER, that each of the President, any Executive Vice-president or Vice-President or any other officer of the Corporation is authorized hereby to enter into any agreement amending or modifying the terms of the Documents on such terms as such officer may deem to be in the best interest of the Corporation; and RESOLVED FURTHER, that the execution by the President, any Executive Vice-President or Vice-President or any other officer of any document authorized by the foregoing Resolutions or any document executed in the accomplishment of any action or actions so authorized, is, and/or shall become upon delivery the enforceable and binding act and obligation of the Corporation, without the necessity of the signature or attestation of any other officer of the Corporation or the affixing of the corporate seal; and RESOLVED FURTHER, that all acts, transactions, or agreements undertaken prior to the adoption of these resolutions by any of the officers or representatives of the Corporation in its name and for its account with the Bank, in connection with the foregoing matters are ratified, confirmed and adopted by the Corporation; and RESOLVED FURTHER, that a copy of the Agreement (including exhibits) reviewed by each of the Directors and approved by them shall be filed with the minutes of this meeting of the Board of Directors of the Corporation and shall be filed in the Corporation's records; and RESOLVED FURTHER, that the Secretary and any Assistant Secretary of the Corporation each is authorized and directed hereby to certify to the Bank the form of Agreement (with exhibits) approved by the Directors in these resolutions. IN WITNESS WHEREOF, the undersigned have signed this Consent effective as of the date first above written. /s/ HOLLIS TAYLOR ------------------------------------- Hollis Taylor /s/ JESSE ARRAMBIDE, III ------------------------------------- IN WITNESS WHEREOF, I have hereunto subscribed my Jesse Arrambide, III signature effective as of the 3rd day of November, 1998. /s/ SAMUEL L. CARLSON ------------------------------------- Samuel L. Carlson /s/ SAMUEL L. CARLSON ------------------------------------- Samuel L. Carlson, Secretary /s/ W. BRAD FAGAN ------------------------------------- W. Brad Fagan
-3- 23 CONSENT OF SHAREHOLDER OF PMB ENTERPRISES WEST, INC. Pursuant to Section 53-11-8 of the New Mexico Statutes, the undersigned corporation, being the sole shareholder of PMB ENTERPRISES WEST, INC., hereby consents to the above resolution and corporate action. Dated November 3, 1998 PANCHO'S MEXICAN BUFFET, INC. By: /s/ HOLLIS TAYLOR --------------------------------- HOLLIS TAYLOR, President and CEO 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 Statements No. 2-86238 and No. 33-60178 of Pancho's Mexican Buffet, Inc. on Form S-8 of our report dated November 13, 1998, appearing in this Annual Report on Form 10-K of Pancho's Mexican Buffet, Inc. for the year ended September 30, 1998. DELOITTE & TOUCHE LLP Fort Worth, Texas December 17, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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 CONSOLIDATED FINANCIAL STATEMENTS. YEAR SEP-30-1998 SEP-30-1998 546,000 0 184,000 0 473,000 1,646,000 49,189,000 (33,136,000) 20,418,000 6,151,000 0 0 0 441,000 9,283,000 20,418,000 64,146,000 64,146,000 17,413,000 60,731,000 11,614,000 0 212,000 (8,213,000) 4,305,000 (12,518,000) 0 0 0 (12,518,000) (2.85) (2.85)
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