-----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, Kl837x6+2kGa25GIon+o0EdsBJ4StNgGs4a9wA5oyNkK8ItVBoNUuN6ztaxxdL6n CM/2SZosIrsWQR/59nMLAA== 0000950134-99-011013.txt : 19991215 0000950134-99-011013.hdr.sgml : 19991215 ACCESSION NUMBER: 0000950134-99-011013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991214 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: 99773899 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 FISCAL YEAR END SEPTEMBER 30, 1999 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, 1999 - ----- 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 26, 1999, BASED ON THE ACTUAL STOCK PRICE ON SUCH DATE WAS $3,380,138. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 26, 1999:..................................................................1,464,006 DOCUMENTS INCORPORATED BY REFERENCE THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD FEBRUARY 2, 2000, 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). 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 of this reimaging program is to improve 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. Under a 1998 restructuring plan, the Company closed nine restaurants in the fourth quarter of 1998. No new restaurants were opened in fiscal 1999, and none are currently planned, as management intends to focus on its reimaging program. 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 part of the Company's reimaging program to improve sales and profitability. The current Pancho's concept is designed to combine the serving speed and economy of cafeteria-style service within an environment typical of table service restaurants. The customer selects and is served food and beverage items from the serving line. When the patron is seated a uniformed employee serves chips, hot sauce, sopaipillas (Mexican bread), beverage refills and more food on request for the all-you-can-eat patrons. This is a unique variation of the traditional cafeteria concept, providing full table service after a customer has completed selection from the service line. The restaurants also feature self-service salsa bars and dessert bars to provide greater food variety and value. In its restaurants, the Company maintains distinctive styling and colorful decor using authentic artifacts in a Mexican motif. 3 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 existing prototypes. The Company has not built any new restaurants since 1995. Inflation and changes to the Pancho's restaurant design may affect future development costs. In addition to the all-you-can-eat buffet, the menu includes competitively-priced limited-selection plates: the Super Combo value meal, lunch specials, fajitas, a taco salad, and a child's plate. Children five years of age and under are served free. Senior citizens who belong to Pancho's Seniors Club are given a 20% discount on their personal purchases. Beverages are priced separately. All menu items include the salsa bar and dessert bar. More than 20 items of Mexican food are served, including tamales, refried beans, Mexican rice, flautas, five kinds of enchiladas, red chili stew, green chili stew, chili rellenos, chili con queso, a variety of sauces, tacos, chalupas, pico de gallo, assorted relishes, chips, hot sauce and sopaipillas. Pancho's restaurants offer food to go, which accounted for 11.2% of sales for the year ended September 30, 1999. A variety of beverages are also available. Alcoholic beverages are served in 28 restaurants and accounted for 0.7% of the Company's sales for the year ended September 30, 1999. 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 free meal awards for honor roll and perfect attendance students, and sponsors sports leagues for local children. There is a birthday club for children under twelve which serves the child free on his or her birthday and also provides a free gift for the birthday celebration. A senior citizens program includes registered membership that entitles the member to a 20% discount. The neighborhood marketing is augmented by newspaper inserts, direct mail and billboards. The Company uses 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 The Company uses The SYGMA Network, Inc. to purchase, warehouse and distribute substantially all the food products and supplies for the Company's restaurants. The SYGMA Network specializes in distribution for restaurant chains. SYGMA's nationwide distribution network will allow the Company to 2 4 develop new markets without capital investments to expand an internal distribution system. The SYGMA Network is a subsidiary of SYSCO Corporation, one of the nation's largest food service and distribution organizations. The Company believes that its system of central purchasing and distribution is critical to control of product cost and quality and permits restaurant managers to concentrate on quality of food preparation and customer service. SEASONALITY The Company's business is seasonal. Sales are typically higher in summer months and other periods when students are not in school. HUMAN RESOURCES On September 30, 1999, the Company had about 2,040 employees, of whom 55 were corporate personnel, 1,973 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. FINANCIAL INFORMATION ABOUT SEGMENTS Because the Company operates as a single business segment, no segment reporting is provided. See Note 1 to the Company's Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS Certain statements in this report are forward-looking statements which represent the Company's expectations or beliefs concerning future events, including, but not limited to the following: statements regarding restaurant concept and design changes, plans to sell assets, ability to service debt, unit growth, future capital expenditures, remodeling plans, future borrowings, claims and payments related to the Company's insurance reserves, systems remediation for year 2000, 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; the results of claims on the Company's insurance reserves and related adjustments to those reserves; the availability and performance of internal and external year 2000 systems remediation resources; 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. 3 5 ITEM 2. PROPERTIES The Company owns a combination general office/warehouse building located at 3500 Noble Avenue, Fort Worth, Texas. The headquarters facility consists of general offices, freezer space of about 194,000 cubic feet and warehouse dry storage of approximately 31,400 square feet. 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 one closed restaurant site, including building and land which it owns in Amarillo, Texas. In fiscal 1999, the Company completed the sale of land and buildings it held for sale in Phoenix, Shreveport, Galveston and Albuquerque. 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, 1999, the Company had remaining lease obligations on two closed restaurant locations, with one lease expiring in November 1999 and one in 2007. Both of these locations are subleased. The Company has leased its Fort Worth cold storage facility to a food manufacturing concern whose chairman and chief executive officer is a non-employee director of the Company. The remainder of the space formerly occupied by the Company's internal distribution operation is currently used for equipment and document storage. 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-1** 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 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.
POSITION AND OFFICE PERIOD OF NAME WITH REGISTRANT PRESENT OFFICE AGE ---- ------------------- -------------- --- Jesse Arrambide, III.......... Chairman of the Board and Since December 9, 1994 47 Chief Operations Officer -- also Director and officer of subsidiary companies Hollis Taylor................. Director and President and Since August 10, 1979 63 Chief Executive Officer -- also Director and officer of subsidiary companies Samuel L. Carlson............. Director and Senior Vice Since December 21, 1988 63 President, Administration and Secretary -- also Director and officer of subsidiary companies Brad Fagan.................... Vice President, Treasurer, CFO Since September 29, 1995 40 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 on the Nasdaq SmallCap Market System, under the symbol "PAMX." On November 23, 1999, the number of record holders was about 650 and the Company estimates that on that date there were an additional 900 beneficial owners. The following table sets forth the quarterly high and low bid prices of the common stock, as reported by Nasdaq, and dividends paid per share, for the calendar quarters indicated. All per share amounts have been adjusted for the one-for-three reverse stock split effective January 27, 1999.
SALES PRICES --------------- FISCAL QUARTER ENDED HIGH LOW DIVIDENDS -------------------- ------ ------ --------- December 31, 1997......................... $7.500 $5.250 $.045 March 31, 1998............................ 7.125 5.250 June 30, 1998............................. 6.375 4.500 September 30, 1998........................ 5.064 2.625 December 31, 1998......................... 4.125 1.689 March 31, 1999............................ 4.000 1.968 June 30, 1999............................. 3.875 2.375 September 30, 1999........................ 4.750 3.094
COMMON STOCK DIVIDENDS The Company paid no cash dividends in 1999. In 1998, cash dividends were $.045 per share. Future cash dividends will depend on earnings, financial position, capital requirements and other relevant factors. 6 8 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company for each of the five fiscal years ended September 30, 1995 through 1999 has been derived from the more detailed consolidated financial statements and notes thereto of the Company contained elsewhere in this report or in previous reports. PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA FISCAL YEARS ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995 ------------- -------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales..................................... $57,403 $ 64,146 $66,957 $71,487 $80,893 ------- -------- ------- ------- ------- Costs and Expenses: Food costs.............................. 15,214 17,413 18,792 19,681 22,910 Restaurant labor and related expenses... 21,839 25,606 25,235 26,561 30,400 Restaurant operating expenses........... 11,913 14,904 15,799 16,508 18,376 Depreciation and amortization........... 1,958 2,808 3,426 3,949 4,512 General and administrative expenses..... 4,999 5,013 5,160 5,067 5,547 Asset impairment and restructuring charges(a)(c)(d)..................... 6,601 5,066 7,572 ------- -------- ------- ------- ------- Total........................... 55,923 72,345 73,478 71,766 89,317 ------- -------- ------- ------- ------- Operating income (loss)................... 1,480 (8,199) (6,521) (279) (8,424) Interest expense.......................... (22) (212) (348) (540) (590) Other, including interest income.......... 418 198 303 269 309 ------- -------- ------- ------- ------- Earnings (loss) before income taxes....... 1,876 (8,213) (6,566) (550) (8,705) Income tax expense (benefit)(b)........... (12) 4,305 (1,850) (135) (3,343) ------- -------- ------- ------- ------- Net earnings (loss)....................... $ 1,888 $(12,518) $(4,716) $ (415) $(5,362) ======= ======== ======= ======= ======= Cash dividends............................ $ -- $ 66 $ 132 $ 132 $ 462 ======= ======== ======= ======= ======= Per Share Data: Net earnings (loss), basic and diluted.............................. $ 1.29 $ (8.54) $ (3.21) $ (.27) $ (3.66) Cash dividends.......................... $ $ .045 $ .09 $ .09 $ .315 At Year End: Total assets............................ $18,412 $ 20,418 $32,858 $37,968 $44,387 Long-term debt.......................... $ 222 $ 1,761 $ 2,287 $ 3,489 $ 8,705 Stockholders' equity.................... $11,703 $ 9,724 $22,269 $26,521 $26,988 Number of restaurants................... 48 48 57 65 64
- --------------- (a) Fiscal 1998 net loss includes asset impairment and restructuring charges of $6,601,000. This includes impairment charges of $5,681,000 to impair assets at 22 locations and restructuring charges of $920,000 to exit nine locations closed in 1998. (b) Fiscal 1998 net loss includes income tax expense of $4,305,000 resulting from providing a valuation allowance for deferred tax assets. (c) Fiscal 1997 includes asset impairment and restructuring charges of $5,066,000 to close seven restaurants, dispose of the Mexico joint venture, impair four other restaurants and increase restructuring reserves for two previously closed locations. (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. 7 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth for the periods indicated: (i) items in the consolidated statements of operations as a percentage of sales; (ii) average restaurant sales; and (iii) the number of restaurants open at the end of each year.
PERCENTAGE OF SALES YEARS ENDED SEPTEMBER 30, -------------------------- 1999 1998 1997 ------ ------ ------ Sales....................................................... 100.0% 100.00% 100.0% ------ ------ ------ Costs and Expenses: Food costs................................................ 26.5 27.1 28.1 Restaurant labor and related expenses..................... 38.0 39.9 37.7 Restaurant operating expenses............................. 20.8 23.2 23.6 Depreciation and amortization............................. 3.4 4.4 5.1 General and administrative expenses....................... 8.7 7.8 7.7 Asset impairment and restructuring charges................ 10.3 7.6 ------ ------ ------ Total............................................. 97.4 112.7 109.8 ------ ------ ------ Operating income (loss)..................................... 2.6 (12.7) (9.8) Interest expense............................................ (0.3) (0.5) Other, including interest income............................ 0.7 0.3 0.5 ------ ------ ------ Earnings (loss) before income taxes......................... 3.3 (12.7) (9.8) Income tax expense (benefit)................................ 6.7 (2.8) ------ ------ ------ Net earnings (loss)......................................... 3.3% (19.4)% (7.0)% ====== ====== ====== Average sales (in thousands) for restaurants open throughout the year.................................................. $1,190 $1,192 $1,123 Number of restaurants open at end of year................... 48 48 57
Fiscal 1999 Compared to Fiscal 1998 Same-store sales increased 0.4% in fiscal 1999, following an increase of 2.1% for 1998. Fourth quarter same-store sales were up 0.1% in 1999 compared with a decline of 1.6% for the same period in 1998. The 1999 increase is due primarily to sales gains at existing stores after nearby Pancho's were closed in July and August 1998. A price increase of about 1% implemented in April 1998 also contributed. The chart below shows quarterly and annual same-store sales comparisons over the past three fiscal years. SAME-STORE SALES BY QUARTER
1999 1998 1997 ---- ---- ---- 1st Quarter......................................... -0.3% +2.7% -5.0% 2nd Quarter......................................... +1.2 +5.3 -7.4 3rd Quarter......................................... +0.3 +1.9 -1.2 4th Quarter......................................... +0.1 -1.6 +2.0 Fiscal Year.................................... +0.4 +2.1 -2.8
Total sales for 1999 were $57.4 million, down from $64.1 million in 1998 due to the closings of nine underperforming units in July and August 1998. The closed units totaled $6.8 million in sales in 1998. Average annual sales per unit were $1,190,000 for 1999 and $1,192,000 for 1998. Average store sales were lower in 1999 due to the temporary closing for remodel of one above average sales unit in late August 1999. The same store sales increase reflects the effect of eliminating that unit's sales 8 10 from the 1998 average comparison. The closed unit is expected to re-open in December 1999. October and November 1998 sales for that unit totaled $225,000. Fourth quarter total sales were $14.6 million in 1999 and $15.6 million in 1998. The nine units closed in 1998 totaled $932,000 in sales in the fourth quarter of 1998. Average sales per unit were $303,000 and $305,000 for the quarters ended September 30, 1999 and 1998, respectively. Sales discounts increased to 4.6% of sales in 1999 from 4.2% of sales in 1998. Fourth quarter discounts were 5.1% and 4.5% of sales for 1999 and 1998, respectively. The company's discounting tactics include coupons distributed by direct mail, newspaper inserts and a variety of neighborhood marketing promotions. The Company continues to emphasize a neighborhood marketing strategy to strengthen Pancho's ties to each restaurant's community. A portfolio of specific marketing tactics are developed for each location and complemented by existing Company programs such as the Birthday Club, School Rewards programs and Seniors Club. To offset increases in labor costs and general inflation, the Company implemented price increases of about 4% in October and November 1999. No new restaurants were opened in 1999, and none are planned for fiscal 2000. Management plans to focus on continuing to improve same store sales and operating margins at its existing units before adding new locations. In 1999, the Company initiated a reimaging project to revitalize the Pancho's concept and improve sales trends. The reimaging initiative considers potential changes in restaurant design, recipes, food offerings and cooking and service procedures. One restaurant in Fort Worth was remodeled in 1999 to incorporate and test some of those changes. The Company's restaurant in Mesquite, Texas (Dallas area) was temporarily closed in late August 1999 for a more extensive remodel incorporating major changes in design and in cooking procedures. The Mesquite store reopened in December 1999 featuring a fresh, contemporary look with a new logo, lively interior design, new recipes and exhibition grill cooking. Additional remodels will be scheduled based upon customer response to the revamped Mesquite unit and available funds. In October 1999, as part of the reimaging project, the Company began rolling out new recipes and salsa bars to all of its restaurants. The new recipes are generally spicier, with more complex flavor profiles to tempt today's more discerning palates. The salsa bars feature a variety of exciting salsas, salad and other condiments. The Company reduced food cost 0.3% and 0.6% of sales for the quarter and year ended September 30, 1999, respectively. Food costs as a percentage of sales benefited from efficiencies after closing lower volume units in 1998 and the April 1998 price increase. Under its reimaging project, the Company began rolling out revamped recipes in October 1999. Many of these new recipes involve ingredients which the Company expects might cause some increase in food cost as a percentage of sales in fiscal 2000. Labor and related expenses decreased 0.1% and 1.9% of sales for the 1999 fourth quarter and year, respectively, compared with the same 1998 periods. Due to effective claims management and experience, the Company recognized benefits of $525,000 to reduce employee injury insurance reserves in the second and third quarters of 1999 and $57,000 in the fourth quarter of 1998. After eliminating those gains, labor and related costs were down 0.5% and 1.1% of sales for the quarter and year ended September 30, 1999, respectively. Labor costs were lower as a percentage of sales due to the greater efficiency of the higher volume stores left after the 1998 closings, despite wage rate inflation. Due to the tight labor market, the Company's average hourly wage cost was 5.3% higher in 1999 than in 1998. Pancho's prepares a large quantity and variety of fresh food throughout the day, and provides buffet-line and table service in each restaurant. Maintaining a high level of quality service, sanitation and food preparation is labor intensive. A tight labor market will continue to contribute to general wage inflation. Congress is considering various increases in the federal minimum wage to be mandated in the coming years. Higher wages make it difficult for the Company to control labor and related costs unless the sales trend 9 11 improvement continues. The Company will consider price increases and other methods to compensate for labor cost increases. Restaurant operating expenses include supplies, maintenance expense, utilities, occupancy costs, insurance expense, and store marketing expenses. This expense category decreased 0.4% and 2.4% of sales for the 1999 fourth quarter and year, respectively. Due to effective case and risk management, the Company reduced insurance reserves by $513,000, $56,000 and $268,000 in 1999, fourth quarter 1998 and fiscal 1998, respectively. Eliminating those credits, restaurant operating expenses decreased 0.7% and 2.0% of sales for the 1999 fourth quarter and year, respectively. Closing nine lower sales units in 1998 helped reduce the cost-to-sales ratio of this category. Fourth quarter store marketing expenses increased 0.3% of sales for 1999 compared with 1998, as the Company spent more for fourth quarter promotions in 1999. Store marketing costs decreased 0.7% of sales for 1999. The Company spent $253,000 less for marketing research and consulting in 1999 and reduced advertising media costs $120,000. Spending on direct mail was $247,000 lower for the year as the Company increased promotional spending by $131,000, emphasizing newspaper inserts with coupons. The Company invested 2.2% and 2.9% of sales in store marketing for 1999 and 1998, respectively. Depreciation and amortization decreased $54,000, 0.1% of sales, and $850,000, 1% of sales, in the fourth quarter and year 1999, respectively, due to the asset write-downs taken in June 1998. In the quarter ended June 30, 1998, the Company impaired assets at 22 locations based on its continuing evaluation of recoverability of long-lived store assets at 13 locations and its plan to close and dispose of nine locations. The Company initially estimated asset impairment charges of $6,049,000 for the 22 restaurant sites, which included one previously-closed and held for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the impairment charge for land and buildings held for sale, based primarily on the October 1998 sale of one of the properties for significantly more than the previously estimated fair value less cost to sell. Impairment charges were determined in accordance with Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." No impairment charges were taken in 1999. The Company adopted a restructuring plan in the quarter ended June 30, 1998 which involved closing nine restaurants. The Company accrued exit costs of $920,000 for nine locations which were closed by August 10, 1998 under the plan. Four of those nine closures, plus one previously-closed site were included in land and buildings held for sale at September 30, 1998. The Company completed the sale of four of those sites in 1999, so only one site remained in land and buildings held for sale at September 30, 1999. No other closings are currently planned, but management will continue to evaluate operating results and consider closing other locations based on profitability and cash flow. No restaurants were closed in 1999. The Company realized net gains on sale of assets of $367,000 and $153,000 in fiscal 1999 and 1998, respectively. Management believes that long-lived assets held for sale or future use are carried at the lower of depreciated cost or fair value. If conditions change and future circumstances indicate that long-lived assets are carried at more than net realizable future cash flows, then additional asset impairment charges would be necessary. In fiscal 1999, interest expense was $190,000 lower than in 1998. The Company paid off and terminated its bank line of credit before the 1999 fourth quarter, so interest expense was zero in the 1999 fourth quarter versus $42,000 in the 1998 fourth quarter. Net deferred tax assets decreased $702,000 to $7.4 million in fiscal 1999, due mainly to the reversal of a significant portion of the book-tax differences on fixed assets and accrued insurance costs. The tax provision of $702,000 was offset by a $702,000 decrease in the valuation allowance. The $12,000 tax benefit resulted from a tax refund received in 1999. The valuation allowance was increased $7.3 million in 1998 to offset the Company's total net deferred tax assets. Due to the Company's net loss for the quarter ended June 30, 1998, combined with net losses for the three preceding fiscal years, it was considered necessary to provide a valuation allowance for all of its net 10 12 deferred tax assets. Due to the 100% valuation allowance, the Company's net effective tax rate was virtually zero for 1999. As detailed in Note 5 to the consolidated financial statements, the effective tax rates differed from the base federal rate of 34% each year due primarily to changes in the valuation allowance, state income taxes and federal employer tax credits. The valuation allowance currently offsets the full amount of deferred tax assets net of deferred tax liabilities. Despite the valuation allowance, the deferred tax assets are still available to the Company for future use. If the Company maintains profitability, the Company may recognize tax benefits for all or a portion of the deferred tax assets at a future date, when the valuation allowance is reduced or the tax assets realized. The deferred tax assets include federal employer tax credits and net operating loss (NOL) carryforwards which expire in years 2009 through 2014, and state NOL carryforwards which expire in years 2000 through 2014. Due to the factors discussed above, the Company reported 1999 net earnings of $1.9 million, or $1.29 per share, compared with a 1998 net loss of $12.5 million, or $8.54 per share. The Company achieved fourth quarter net earnings of $128,000, or $0.08 per share, and $391,000, or $0.27 per share, in 1999 and 1998, respectively. To aid in comparing operating results for 1999 and 1998, the table below summarizes the effect of certain gains, adjustments, charges and credits on operating income (loss) and net earnings (loss) for the quarters and years ended September 30, 1999 and 1998.
THREE MONTHS ENDED TWELVE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Operating income (loss) before adjustments and charges................. $103,000 $(92,000) $ 442,000 $ (1,923,000) Gain from insurance credits............. 113,000 1,038,000 325,000 Restructuring and impairment charges.... 368,000 (6,601,000) -------- -------- ---------- ------------ Operating income (loss)....... 103,000 389,000 1,480,000 (8,199,000) Gain on sale of assets.................. 8,000 35,000 367,000 153,000 Other income and expense................ 17,000 (33,000) 29,000 (167,000) Tax benefit (provision)................. 12,000 (4,305,000) -------- -------- ---------- ------------ Net earnings (loss)........... $128,000 $391,000 $1,888,000 $(12,518,000)
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. The Company reopened its dramatically redesigned Mesquite unit in December 1999. Liquidity and Capital Resources for 1999 Compared with 1998 The Company's current ratio improved to 0.4 to 1 at September 30, 1999 from 0.3 to 1 at fiscal year end 1998. The current ratio increased in fiscal 1999 due to an increase in cash of $696,000 accumulated after paying off the bank line of credit in February 1999. Like many restaurant companies, much of the Company's current liabilities, primarily accounts payable and accrued wages and bonuses, flow through operations and roll over rather than being paid down to zero. Operating activities provided net cash of $1.6 million in fiscal 1999 compared with $847,000 in 1998. The 1999 net earnings of $1.9 million included non-cash charges of $2 million for depreciation and amortization. The 1998 net loss of $12,518,000 included non-cash charges of $2,808,000 for depreciation and amortization, $4,305,000 for deferred taxes, $5,681,000 to impair long-lived assets and $920,000 to reserve for exit costs of closed locations. Investing activities provided $988,000 in 1999 and used $436,000 in 1998. The Company received $2.5 million for asset sales in 1999, primarily four previously closed restaurant sites sold in 1999. The Company invested $1.5 million in capital additions in 1999, compared with $697,000 in 1998. In 1999, one location was remodeled to test restaurant design changes, and another remodel with more extensive changes 11 13 was begun near the end of the year and completed in December 1999. Investment in other remodels, property improvements and restaurant computer upgrades was accelerated in 1999 to compensate for several years of limited investment due to debt restrictions. No new restaurants were opened or under construction in 1999, and none are planned for fiscal 2000. The Company expects to invest between $1 million and $2 million in capital additions in 2000. Capital expenditures to remodel existing restaurants, install restaurant computer systems and provide routine capital replacements will continue within the constraints of available funds. The Company also has one remaining closed restaurant site held for sale, which would augment cash available for capital additions if sold. The Company closed nine restaurants in 1998, as part of its restructuring plan, and provided estimated reserves to exit those locations. The Company sold the land and building for four of the closed sites in 1999, and is seeking to sell the land and building for the remaining closed location, which is included in land and buildings held for sale on the balance sheet. Financing activities consumed $1.9 million and $294,000 in 1999 and 1998, respectively, primarily to reduce debt. The Company paid off its bank credit line in 1999, and the only debt remaining are notes payable to buy out the lease obligations on closed units at a discount. The Company plans to finance its 1999 operations and capital additions mainly with cash flow from operations and, possibly, the sale of the closed restaurant site held for sale. The Company paid a dividend of $.045 per share on December 9, 1997. The future payment of cash dividends will depend on the Company's earnings, financial position, capital requirements and other relevant factors. Operating Results for Fiscal 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 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 came mainly from coupons distributed by direct mail, newspaper inserts and a variety of neighborhood marketing promotions. 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. 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. No new restaurants were opened in 1998. 12 14 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. 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. 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 supplemented its primary restaurant management bonus programs with additional bonus programs for restaurant service and management personnel to provide additional incentives for excellent service. 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, are shown on the balance sheet as land and buildings held for sale at September 30, 1998. 13 15 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. 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 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. Due to the factors discussed above, the Company reported net losses of $12.5 million, or $8.54 per share, and $4.7 million, or $3.21 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. 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. Operating activities provided net cash of $847,000 in 1998 compared with $959,000 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. The Company closed nine restaurants in 1998, as part of its restructuring plan, and provided estimated reserves to exit those locations. 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 $294,000 and $1,294,000 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. 14 16 The Company's revolving credit and term loan agreement (Loan Agreement) with a bank 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. 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 was reduced the last day of each quarter, and by some or all of the proceeds from land and building sales, until the loan was paid and the agreement was terminated in 1999. The Loan Agreement included various financial covenants. One financial covenant required 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 were limited to $650,000 each fiscal year. Cash dividends were limited to $150,000 per fiscal year, and were prohibited until the Company achieved 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 subsequently granted permanent waivers for these covenant violations. The Company was in compliance with all other loan covenants at September 30, 1998. The Company paid a dividend of $.045 per share on December 9, 1997. Seasonality The Company's business is seasonal. Sales are typically higher in summer months and other periods when students are not attending school. Impact of Inflation In the restaurant business, food, labor, and labor-related expenses are the major cost factors that effect profits. Many of the Company's employees are paid wages related to the statutory minimum wage and any increase in the minimum wage would increase the Company's cost. 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. To help offset rising labor costs, the Company implemented a price increase of about 4% in November 1999. 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. Year 2000 Impact 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 updating its computer hardware and software to properly process year 2000 and later dates. The Company has identified all significant hardware and software 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. In October and November 1999, the Company replaced its primary existing POS software with a newer version provided by the same vendor at no charge. During this process, the Company also installed or 15 17 upgraded its restaurant POS hardware to accommodate year 2000 dates. The hardware upgrade and software installation costs of about $80,000 were capitalized in fiscal 2000, and the Company expensed about $31,000 in fiscal 2000 to train employees on the new software. As of November 28, 1999, four of the Company's restaurants were still using an older POS software and hardware system. The Company's tests indicate that these older systems will properly process dates in the year 2000. The Company installed the year 2000 compliant version of its corporate accounting software in October 1999. Although the upgrade was provided at no charge by the vendor, in 1999 the Company recorded about $25,000 in programming expenses to modify custom programs related to the accounting software update. We estimate the Company may incur an additional $20,000 to complete such modifications in fiscal 2000. Based on its testing and vendors' representations, the Company believes that its POS systems and corporate accounting systems will properly process year 2000 dates. 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 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 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 and design changes, plans to sell assets, ability to service debt, unit growth, future capital expenditures, remodeling plans, future borrowings, claims and payments related to the Company's insurance reserves, systems remediation for year 2000, 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; the results of claims on the Company's insurance reserves and related adjustments to those reserves; the availability and performance of internal and external year 2000 systems remediation resources; 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. 16 18 ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and related notes thereto required by this item are listed and set forth herein beginning on page 23. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 19 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, 1999, and is incorporated herein by reference. (b) Executive Officers of the Registrant The names and ages of all executive officers of the Registrant, as well as all persons chosen to become executive officers, together with the nature of any family relationships between them, all positions and offices with the Registrant held by each person named and the period during which each person named has served as such officer is included in Part I under Executive Officers of the Registrant. The information set forth under the caption "Executive Officers of the Registrant" in Part I is incorporated herein by reference. (c) 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, 1999, 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," "Summary Compensation Table," "Aggregated Option Exercises in 1999 and 1999 Year-End Option Values," "Employment Contracts, Termination of Employment and Change in Control," "Company Stock Price Performance," "Compensation of Directors" and "Report of the Compensation Committee of the Board of Directors" appearing on pages 5 through 10 of the Company's Proxy Statement dated December 22, 1999, 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 16, 1999, 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 16, 1999," appearing on page 3 of the Company's Proxy Statement dated December 22, 1999, 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, 1999, and is incorporated herein by reference. 18 20 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 23. 3. Exhibits Required by Item 601 of Regulation S-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 -- Not applicable 3(a) -- Certificate of Incorporation of Pancho's Mexican Buffet, Inc.(2) 3(b) -- Certificates of Amendment of Certificate of Incorporation(3) 3(c) -- Certificate of Amendment of Certificate of Incorporation(5) 3(d) -- Certificate of Amendment of Certificate of Incorporation(8) 3(e) -- Bylaws of Pancho's Mexican Buffet, Inc. as amended through October 5, 1990(10) 3(f) -- Agreement and Plan of Merger dated December 31, 1968(1) 3(g) -- Certificate of Amendment of Certificate of Incorporation, dated January 25, 1995(15) 3(h) -- Restated Certificate of Incorporation, as revised January 25, 1995(15) 3(i) -- Certificate of Amendment to Certificate of Incorporation, dated January 27, 1999(24) 4(a) -- Certificate of Incorporation and Bylaws of Registrant, as amended. See Exhibit 3 items above. 4(b) -- Rights Agreement dated as of January 30, 1996, between Pancho's Mexican Buffet, Inc. and KeyCorp Shareholder Services, Inc. with Exhibit A (form of Certificate of Designation, Preferences and Rights of Series A Preferred Stock), Exhibit B (form of Right Certificate), and Exhibit C (Summary of Rights to Purchase Series A Preferred Stock) attached(6) 4(c) -- Amendment to Rights Agreement, dated July 25, 1997(21) 9 -- Not applicable 10(a) -- 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(4) 10(b) -- Amendment No. 1 and 2 to 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(9) 10(c) -- 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(4) 10(d) -- Amendment No. 1, 2 and 3 to Pancho's Mexican Buffet, Inc. 1982 Incentive Stock Option Plan(9) 10(e) -- Pancho's Mexican Buffet, Inc. Employee Stock Purchase Plan(4) 10(i) -- Memo re: Officers Bonus Plan approved by Board of Directors of Pancho's Mexican Buffet, Inc. on February 28, 1986(7) 10(j) -- Note, security agreement and investment letter -- re: sale of authorized but unissued Common Stock of the Registrant to four executive officers in 1992(15) 10(k) -- Employment Contracts between the Registrant and four executive officers dated May 23, 1986 and March 25, 1994(15) 10(l) -- Pancho's Mexican Buffet, Inc. Cafeteria Plan(9)
19 21
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10(m) -- Amendment No. 4 to 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(11) 10(n) -- Amendment No. 3 to 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(11) 10(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(23) 11 -- Not required -- Explanation of earnings per share computation is contained in Notes to Consolidated Financial Statements. 12 -- Not applicable 13 -- Not applicable 16 -- Not applicable 18 -- Not applicable 21 -- Subsidiaries of the registrant -- filed herewith 22 -- Not applicable 23 -- Consent of Independent Public Accountants -- filed herewith 24 -- Not applicable 27 -- Financial Data Schedule -- filed herewith
20 22 - --------------- (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.
21 23 (23) Filed with the Commission as an Exhibit to Form 10-K for the year ended September 30, 1998 -- such Exhibits are incorporated herein by reference. (24) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1999 -- such Exhibits are incorporated herein by reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 1999. (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. 22 24 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999
PAGE Consolidated Financial Statements: Consolidated Balance Sheets............................... F-1 Consolidated Statements of Operations..................... F-2 Consolidated Statements of Stockholders' Equity........... F-3 Consolidated Statements of Cash Flows..................... F-4 Notes to Consolidated Financial Statements................ F-5 Independent Auditors' Report................................ F-17
All schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. 23 25 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, ---------------------------- 1999 1998 ------------ ------------ Current Assets: Cash and cash equivalents................................. $ 1,242,000 $ 546,000 Accounts and notes receivable, current portion............ 208,000 184,000 Inventories............................................... 469,000 473,000 Prepaid expenses.......................................... 242,000 443,000 ------------ ------------ Total current assets.............................. 2,161,000 1,646,000 ------------ ------------ Property, Plant and Equipment: Land...................................................... 1,868,000 1,867,000 Buildings................................................. 6,900,000 6,885,000 Leasehold improvements.................................... 17,268,000 17,472,000 Equipment and furniture................................... 21,469,000 22,965,000 Construction in progress.................................. 429,000 ------------ ------------ Total............................................. 47,934,000 49,189,000 Less accumulated depreciation and amortization............ (32,392,000) (33,136,000) ------------ ------------ Property, plant and equipment -- net.............. 15,542,000 16,053,000 ------------ ------------ Other Assets: Land and buildings held for sale.......................... 309,000 2,380,000 Other, including noncurrent portion of receivables........ 400,000 339,000 ------------ ------------ Total other assets................................ 709,000 2,719,000 ------------ ------------ Total............................................. $ 18,412,000 $ 20,418,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 701,000 $ 1,227,000 Debt classified as current................................ 139,000 490,000 Accrued wages and bonuses................................. 1,734,000 1,420,000 Accrued insurance costs, current.......................... 1,087,000 1,150,000 Other current liabilities................................. 1,331,000 1,864,000 ------------ ------------ Total current liabilities......................... 4,992,000 6,151,000 ------------ ------------ Other Liabilities: Long-term debt............................................ 222,000 1,761,000 Accrued insurance costs, non-current...................... 1,149,000 2,417,000 Restructuring reserves, non-current....................... 346,000 365,000 ------------ ------------ Total other liabilities........................... 1,717,000 4,543,000 ------------ ------------ Commitments and Contingencies Stockholders' Equity: Preferred stock, $10 par value (Authorized 500,000 shares, none issued.) Common stock, $.10 par value (Authorized 20,000,000 shares. Issued 1,485,406 and 1,471,374 shares, respectively. Outstanding 1,463,606 and 1,449,574 shares, respectively.)................................. 149,000 147,000 Additional paid-in capital................................ 18,988,000 18,955,000 Retained earnings (accumulated deficit)................... (7,197,000) (9,085,000) Stock notes receivable.................................... (169,000) (225,000) Treasury stock at cost (21,800 and 21,800 shares, respectively).......................................... (68,000) (68,000) ------------ ------------ Stockholders' equity.............................. 11,703,000 9,724,000 ------------ ------------ Total............................................. $ 18,412,000 $ 20,418,000 ============ ============
See notes to consolidated financial statements. F-1 26 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 1997 ----------- ------------ ----------- Sales.................................................. $57,403,000 $ 64,146,000 $66,957,000 ----------- ------------ ----------- Costs and Expenses: Food costs........................................... 15,214,000 17,413,000 18,792,000 Restaurant labor and related expenses................ 21,839,000 25,606,000 25,235,000 Restaurant operating expenses........................ 11,913,000 14,904,000 15,799,000 Depreciation and amortization........................ 1,958,000 2,808,000 3,426,000 General and administrative expenses.................. 4,999,000 5,013,000 5,160,000 Asset impairment and restructuring charges........... 6,601,000 5,066,000 ----------- ------------ ----------- Total........................................ 55,923,000 72,345,000 73,478,000 ----------- ------------ ----------- Operating income (loss)................................ 1,480,000 (8,199,000) (6,521,000) Interest expense....................................... (22,000) (212,000) (348,000) Other, including interest income....................... 418,000 198,000 303,000 ----------- ------------ ----------- Earnings (loss) before income taxes.................... 1,876,000 (8,213,000) (6,566,000) Income tax expense (benefit)........................... (12,000) 4,305,000 (1,850,000) ----------- ------------ ----------- Net earnings (loss).................................... $ 1,888,000 $(12,518,000) $(4,716,000) =========== ============ =========== Net earnings (loss) per share, basic and diluted....... $ 1.29 $ (8.54) $ (3.21) =========== ============ ===========
See notes to consolidated financial statements. F-2 27 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, 1996, as previously reported.................................. 4,397,559 $ 440,000 $18,633,000 $ 8,347,000 $(436,000) $ Adjust for 1999 1-for-3 reverse stock split................................. (2,931,706) (294,000) 294,000 ---------- --------- ----------- ------------ --------- ------ -------- Adjusted Balance, September 30, 1996...... 1,465,853 146,000 18,927,000 8,347,000 (436,000) Net loss................................ (4,716,000) Dividends, $.09 per share............... (132,000) Realization of foreign currency translation adjustment................ 436,000 Treasury stock acquired................. 2,800 (13,000) Payments and writeoffs on stock notes... ---------- --------- ----------- ------------ --------- ------ -------- Balance, September 30, 1997............... 1,465,853 146,000 18,927,000 3,499,000 2,800 (13,000) Net loss................................ (12,518,000) Dividends, $.045 per share.............. (66,000) Treasury stock acquired................. 19,000 (55,000) Payments received on stock notes........ Stock issued............................ 5,521 1,000 28,000 ---------- --------- ----------- ------------ --------- ------ -------- Balance, September 30, 1998............... 1,471,374 147,000 18,955,000 (9,085,000) 21,800 (68,000) Net earnings............................ 1,888,000 Payments received on stock notes........ Stock issued............................ 14,032 2,000 33,000 ---------- --------- ----------- ------------ --------- ------ -------- Balance, September 30, 1999............... 1,485,406 $ 149,000 $18,988,000 $ (7,197,000) $ 21,800 $(68,000) ========== ========= =========== ============ ========= ====== ======== STOCK NOTES RECEIVABLE FROM STOCKHOLDERS' OFFICERS EQUITY ---------- ------------- Balance, September 30, 1996, as previously reported.................................. $(463,000) $ 26,521,000 Adjust for 1999 1-for-3 reverse stock split................................. --------- ------------ Adjusted Balance, September 30, 1996...... (463,000) 26,521,000 Net loss................................ (4,716,000) Dividends, $.09 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, $.045 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 Net earnings............................ 1,888,000 Payments received on stock notes........ 56,000 56,000 Stock issued............................ 35,000 --------- ------------ Balance, September 30, 1999............... $(169,000) $ 11,703,000 ========= ============
See notes to consolidated financial statements. F-3 28 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, ----------------------------------------- 1999 1998 1997 ----------- ------------ ------------ Cash Flows From Operating Activities: Net earnings (loss)............................... $ 1,888,000 $(12,518,000) $ (4,716,000) ----------- ------------ ------------ Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization.................. 1,958,000 2,808,000 3,426,000 Provision (benefit) for deferred income taxes........................................ 4,305,000 (1,288,000) 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......................... (367,000) (153,000) (256,000) Stock compensation to outside directors........ 35,000 29,000 Changes in operating assets and liabilities: Accounts and notes receivable................ (26,000) (6,000) 9,000 Income taxes receivable...................... 538,000 (352,000) Inventories, prepaid expenses and other assets.................................... 227,000 (231,000) 181,000 Accounts payable and accrued expenses........ (1,673,000) 79,000 (272,000) Restructuring reserves....................... (500,000) (658,000) (959,000) Other.......................................... 56,000 53,000 77,000 ----------- ------------ ------------ Net cash provided by operating activities.............................. 1,598,000 847,000 959,000 Cash Flows From Investing Activities: Property additions................................ (1,485,000) (697,000) (459,000) Proceeds from sale of assets...................... 2,473,000 261,000 1,081,000 ----------- ------------ ------------ Net cash provided by (used in) investing activities.............................. 988,000 (436,000) 622,000 Cash Flows From Financing Activities: Short-term borrowings, net........................ (351,000) 298,000 40,000 Long-term borrowings.............................. 6,637,000 19,706,000 28,583,000 Repayments of long-term borrowings................ (8,176,000) (20,232,000) (29,785,000) Dividends paid.................................... (66,000) (132,000) ----------- ------------ ------------ Net cash used in financing activities..... (1,890,000) (294,000) (1,294,000) Effect of Foreign Exchange Rate Change on Cash...... (3,000) ----------- ------------ ------------ Net Increase in Cash and Cash Equivalents........... 696,000 117,000 284,000 Cash and Cash Equivalents at Beginning of Year...... 546,000 429,000 145,000 ----------- ------------ ------------ Cash and Cash Equivalents at End of Year............ $ 1,242,000 $ 546,000 $ 429,000 =========== ============ ============ Supplemental Information: Income taxes paid and (refunds received), net..... $ (12,000) $ (541,000) $ (170,000) Interest paid, net of capitalized amounts......... 37,000 206,000 306,000 Treasury stock acquired as reduction of receivables.................................... 55,000 13,000
See notes to consolidated financial statements. F-4 29 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 30 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 1999, 1998 or 1997. 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. 1-FOR-3 REVERSE STOCK SPLIT At the Annual Meeting of Stockholders on January 27, 1999, the stockholders of the Company approved a one-for-three reverse stock split for the Company's common stock, effective January 27, 1999. All common stock share data and related stock option and earnings per share data in this report has been adjusted to reflect the reverse split. Under the reverse split, the common stock retained its previous par value of $.10 per share after the reverse split. Therefore, the dollar amount of common stock on the balance sheet was reduced to one-third of its previous balance, and additional paid-in capital was increased by that dollar amount. EARNINGS (LOSS) PER SHARE The Company adopted SFAS No. 128, "Earnings per Share," in fiscal 1998. This standard replaced previous generally-accepted accounting principles for computing and disclosing earnings per share (EPS) information. Under SFAS No. 128, because it has potential common shares, the Company has a complex capital structure and must disclose both basic and diluted EPS. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of shares outstanding. Diluted EPS adds the effect of all dilutive potential shares to the weighted average number of shares outstanding. The weighted average outstanding shares were 1,460,000, 1,465,000 and 1,465,000 for the years ended September 30, 1999, 1998 and 1997, respectively. For 1999, outstanding options had no dilutive effect because the average market price was less than the option exercise prices. Due to the net losses for 1998 and 1997, the Company's potential common shares were antidilutive and excluded from the loss per share calculation, so diluted and basic loss per share are the same for those years. At September 30, 1999, there were 100,063 options outstanding which represented potential common shares which could be dilutive in the future. F-6 31 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOREIGN OPERATIONS AND CURRENCY TRANSLATION The functional currency of the Company's Mexican operations was the new peso. When the plan to dispose of its Mexican operations was adopted in the quarter ended March 31, 1997, the balance of the cumulative foreign currency translation adjustment was expensed as part of the restructuring charge for that quarter. STATEMENT OF CASH FLOWS Cash flows from the Company's Mexican operations were calculated based on the new peso, in accordance with SFAS No. 95, "Statement of Cash Flows." As a result, for 1997 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). BUSINESS SEGMENTS In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a Company's operating segments. The Company operates as a single business segment. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and that it measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters in fiscal years beginning after June 15, 2000. The Company has not yet assessed the impact that SFAS No. 133 will have on its financial condition or results of operations. 2. OTHER CURRENT LIABILITIES Other current liabilities consist of:
SEPTEMBER 30, ----------------------- 1999 1998 ---------- ---------- Accrued taxes other than income taxes....................... $ 943,000 $1,030,000 Restructuring reserves...................................... 167,000 649,000 Other....................................................... 221,000 185,000 ---------- ---------- Total............................................. $1,331,000 $1,864,000 ========== ==========
F-7 32 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LONG-TERM DEBT In February 1999, the Company paid off its outstanding bank debt. In April 1999, the Company terminated its revolving credit and term loan agreement with the bank. Notes payable were issued in fiscal 1998, 1997 and 1996 to buy out the remaining lease terms of certain closed locations. The long-term portion of those notes was $222,000 and $361,000 at September 30, 1999 and 1998, respectively. The current portion of $139,000 and $158,000 is reported as debt classified as current at September 30, 1999 and 1998, respectively. The effective interest rates range from 5.8% to 6.9%, with payments due monthly through November 2003. The combined maturities of Company debt as of September 30, 1999, are listed below:
YEARS ENDING SEPTEMBER 30, - ------------- 2000.............................................. $139,000 2001.............................................. 110,000 2002.............................................. 53,000 2003.............................................. 50,000 2004.............................................. 9,000 Later years....................................... 0 -------- $361,000 ========
4. OPERATING LEASES The Company leases restaurant facilities under operating leases with terms expiring at various dates into 2009, some of which contain renewal options. Certain of the leases have provisions for contingent rentals based on a percentage of the excess of restaurant sales over stipulated minimum sales. The minimum aggregate annual rentals required under operating leases in effect at September 30, 1999, exclusive of maintenance, taxes, etc., were as follows:
YEARS ENDING SEPTEMBER 30, - ------------- 2000.............................................. $2,305,000 2001.............................................. 1,836,000 2002.............................................. 1,491,000 2003.............................................. 1,100,000 2004.............................................. 635,000 Later years....................................... 588,000 ---------- Total................................... $7,955,000 ==========
The composition of total yearly rental expense for operating leases is:
SEPTEMBER 30, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Minimum rentals................................ $2,446,000 $2,638,000 $2,714,000 Contingent rentals............................. 203,000 190,000 188,000 Less: Sublease rentals......................... (34,000) (13,000) (33,000) ---------- ---------- ---------- Total................................ $2,615,000 $2,815,000 $2,869,000 ========== ========== ==========
F-8 33 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, ------------------------------------ 1999 1998 1997 --------- ---------- ----------- Current: U.S. federal.................................. $ (12,000) $ $ (572,000) State......................................... 10,000 --------- ---------- ----------- Combined current........................... (12,000) -- (562,000) Deferred: U.S. federal.................................. 3,802,000 (1,326,000) State......................................... 503,000 38,000 --------- ---------- ----------- Combined deferred.......................... 4,305,000 (1,288,000) --------- ---------- ----------- Income tax expense (benefit)............. $ (12,000) $4,305,000 $(1,850,000) ========= ========== ===========
The income tax expense (benefit) differs from the amounts computed by applying the U.S. federal statutory rate of 34 percent to the net earnings (loss) before income taxes as follows:
YEARS ENDED SEPTEMBER 30, ------------------------------------- 1999 1998 1997 --------- ----------- ----------- Expected tax at federal statutory rate of 34%............................................ $ 642,000 $(2,792,000) $(2,232,000) Increase (decrease) in taxes due to: Change in valuation allowance................ (702,000) 7,314,000 782,000 Tax effect of abandonment of foreign operations................................ (305,000) State income tax provision (benefit), net of federal income tax effect................. 116,000 (137,000) (63,000) Tax effect of employer tax credits........... (36,000) (90,000) (45,000) Other differences............................ (32,000) 10,000 13,000 --------- ----------- ----------- Total expense (benefit).............. $ (12,000) $ 4,305,000 $(1,850,000) ========= =========== ===========
F-9 34 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, -------------------------- 1999 1998 ----------- ----------- Deferred tax assets: Current: Restructuring costs, current........................... $ 61,000 $ 232,000 Accrued vacation pay................................... 137,000 140,000 Accrued insurance cost, current........................ 392,000 401,000 Current valuation allowance............................ (590,000) (773,000) ----------- ----------- Current deferred tax asset, net of valuation allowance........................................... -- -- ----------- ----------- Noncurrent: Accrued insurance costs................................ 262,000 853,000 Federal net operating loss carryforwards (expire 2012-2014)............................................ 3,650,000 3,057,000 Noncurrent restructuring costs......................... 125,000 141,000 Alternative minimum tax carryforward................... 383,000 383,000 State net operating loss carryforwards (expire 2000 -- 2014)......................................... 500,000 464,000 Property, plant and equipment.......................... 1,560,000 2,201,000 Federal employer tax credits (expire 2009 -- 2014)..... 615,000 515,000 Noncurrent valuation allowance......................... (6,847,000) (7,366,000) ----------- ----------- Noncurrent deferred tax asset, net of valuation allowance........................................... 248,000 248,000 ----------- ----------- 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............. $ -- $ -- =========== ===========
Deferred tax assets net of deferred tax liabilities decreased $702,000 to $7.4 million in the year ended September 30, 1999, due mainly to the reversal of a significant portion of the book-tax differences on fixed assets and accrued insurance costs. The tax provision of $702,000 was offset by a $702,000 decrease in the valuation allowance. The $12,000 income tax benefit resulted from a refund received in 1999. The valuation allowance was increased $7.3 million in 1998 to offset the Company's total net deferred tax assets. Due to the Company's net loss for the quarter ended June 30, 1998, combined with net losses for the three preceding fiscal years, it was considered necessary to provide a valuation allowance for all of its net deferred tax assets. The valuation allowance currently offsets the full amount of the deferred tax assets net of deferred tax liabilities. Despite the valuation allowance, the deferred tax assets are still available to the Company for future use. If the Company maintains profitability, the Company may recognize tax benefits for all or a portion of the deferred tax assets at a future date, when the valuation allowance is reduced or the tax assets realized. The deferred tax assets include federal employer tax credits and net operating loss (NOL) carryforwards which expire in years 2009 through 2014, and state NOL carryforwards which expire in years 2000 through 2014. The amount of federal NOL carryforwards was $10,736,000 and $8,991,000 at September 30, 1999 and 1998, respectively. The amount of state NOL carryforwards was $19,917,000 and $18,149,000 at September 30, 1999 and 1998, respectively. F-10 35 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 carryforward and $111,000 for state NOL carryforwards. 6. STOCKHOLDERS' EQUITY STOCK NOTES RECEIVABLE In April 1992, the Company sold 34,833 shares (adjusted for the 1999 1-for-3 reverse stock split) of common stock to certain officers in exchange for notes receivable in the amount of $758,000, the balance of which is shown in the balance sheet as a deduction from stockholders' equity. The notes bear interest at 7.83%, are payable in ten equal annual installments plus interest and are secured by the common stock. The shares were sold at the quoted market price on the day of sale. 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 5,133 shares of the treasury stock reflected on the balance sheet at September 30, 1999 and 1998. 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 F-11 36 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) dates of grant. Outstanding options become exercisable cumulatively in four or five equal annual installments commencing one year from date of grant and expire ten years from the date of grant. Options may be granted through November 5, 2002. On January 28, 1998, at the Annual Meeting of Stockholders, the stockholders of the Company approved Amendment Number One to the 1992 Stock Option Plan. This amendment increased the number of shares which the Company may sell pursuant to options under the plan to 200,000 shares, from 133,333 shares. The amendment also increased the annual option grant to non-employee directors to 1,333 shares each from 667 shares each. Summary information on stock option activity is shown below.
1999 1998 1997 -------------------------- -------------------------- -------------------- 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...... 102,109 $28.68 134,867 $29.46 135,784 $30.39 Granted....................... 6,998 3.38 5,333 6.18 3,333 6.18 Exercised..................... Forfeited/expired............. (144) 21.75 (38,091) 28.35 (4,250) 41.07 -------- -------- -------- Outstanding September 30................ 108,963 27.06 102,109 28.68 134,867 29.46 -------- -------- -------- Exercisable September 30................ 94,721 30.16 91,133 31.02 102,200 30.15 -------- -------- -------- Common shares reserved and available for grant September 30................ 100,063 106,917 20,917 -------- -------- --------
For shares outstanding at September 30, 1999:
WEIGHTED- WEIGHTED-AVERAGE NUMBER AVERAGE REMAINING RANGE OF EXERCISE PRICES OF SHARES EXERCISE PRICE LIFE IN YEARS - ------------------------ --------- -------------- ---------------- $ 3.3750................. 6,998 $ 3.38 9.2 $ 6.1875 to $9.5625...... 12,325 7.01 7.2 $17.6250 to $21.7560..... 10,985 20.55 3.3 $25.1250 to $34.1250..... 78,655 33.22 0.5 ------- ------ --- $ 3.3750 to $34.1250..... 108,963 $27.06 4.6 ------- ------ ---
The weighted-average fair value of options granted was $2.47 in 1999 and $3.12 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 1999 1998 1997 - ----------------------- ---------- ------------ ----------- Net earnings (loss) As reported........... $1,888,000 $(12,518,000) $(4,716,000) Pro forma............. 1,874,000 (12,528,000) (4,722,000) Net earnings (loss) per share As reported........... 1.29 (8.54) (3.21) Pro forma............. 1.28 (8.55) (3.22)
F-12 37 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 1999, 1998 and 1997.
1999 1998 1997 ---- ---- ---- Dividend yield......................................... 0.0% 0.0% 1.0% Expected volatility.................................... 60.0% 50.0% 55.0% Risk free interest rates............................... 4.7% 5.5% 6.3% Expected life in years................................. 10 5 5
ANNUAL STOCK GRANT TO NON-EMPLOYEE DIRECTORS Under the 1998 Restricted Stock Plan for Non-employee Directors, effective in January 1998 through April 1999, non-employee directors of the Company were 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 $35,000 and $29,000 in 1999 and 1998, respectively. PREFERRED STOCK Shares of preferred stock, when issued, will have such rights, preferences and privileges as shall be adopted by the Board of Directors. 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, 1999, and 1998 include provisions for estimated expenses of the VEIB Plan of $176,000 and $754,000, respectively. The fiscal 1999 provision was reduced by $394,000 to reverse VEIB Plan liability reserves. The consolidated statement of operations for fiscal 1997 includes a gain of $17,000 for the VEIB Plan, due to credits of $946,000 to reverse VEIB Plan liability reserves during the year. BONUS PLANS The Company has a bonus plan for restaurant managers and supervisors which provides bonuses based on restaurant performance. Such bonuses amounted to $438,000, $480,000, and $233,000 for the years ended September 30, 1999, 1998 and 1997, respectively. The Company has a bonus plan for corporate officers as a group based on stipulated operating results. Under this plan, a bonus of $203,000 was earned for 1999, and no corporate officer bonuses were paid for the years ended September 30, 1998 and 1997. A related bonus plan for other corporate employees paid $60,000 in 1999, and no bonuses for the years ended September 30, 1998 and 1997. 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 $109,000, $124,000 and $130,000 in fiscal years 1999, 1998 and 1997, respectively. F-13 38 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK PURCHASE PLAN The Company maintains a voluntary employee stock purchase plan for all eligible employees. The Company contributes 25% of the amount invested by the employee plus all commissions and brokerage fees. Company contributions vest immediately. Contributions are invested in common stock of the Company by a brokerage firm. The Company recognized expenses for contributions to the plan of $14,000, $15,000, and $23,000 for the years ended September 30, 1999, 1998 and 1997, 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 $1,000, $5,000, and $7,000 for the years ended September 30, 1999, 1998, and 1997, respectively. The Chairman of the Company and the family-owned restaurant operations, collectively, were indebted to the Company in the amount of $29,000 on September 30, 1998, excluding the stock note receivable secured by Company stock (see note 6). The September 30, 1998 balance included trade receivables for sales to the family-owned restaurant operations and other advances. The Company purchases food products manufactured by a Company whose chairman and chief executive officer is a non-employee director of the Company. Purchases were $1,439,000, $1,839,000 and $2,728,000 for the years ended September 30, 1999, 1998 and 1997, respectively. The same vendor purchased items from the Company in the amount of $65,000, $53,000, and $75,000 in 1999, 1998 and 1997, 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 1999, 1998 and 1997. 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 of $36,000 from the joint venture for management services in fiscal 1997. 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 available for exiting the Mexico market under the 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, F-14 39 PANCHO'S MEXICAN BUFFET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) including one previously closed and held for sale. In the 1998 fourth quarter, the Company reversed $368,000 of the impairment charge for land and buildings held for sale, primarily based on the sale of one of the properties completed in October 1998 for significantly more than the previously estimated fair value less cost to sell. Impairment charges were determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." The Company adopted a restructuring plan in the quarter ended June 30, 1998 which involved closing nine restaurants. The Company accrued exit costs of $920,000 for nine locations which were closed by August 10, 1998 under the plan. Four of those nine closed units, plus one previously closed, included company-owned land and buildings which the Company planned to sell. Those five owned sites were shown on the balance sheet as land and buildings held for sale at September 30, 1998. Four of those sites were sold in 1999 and one is shown as land and building held for sale on the September 30, 1999, balance sheet. The Company paid $500,000, $658,000 and $959,000 in 1999, 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 $6,832,000, for the year ended September 30, 1998. Sales for those units totaled $7,962,000, for the 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 for fiscal year 1997. 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, 1999. The estimated fair value amounts are determined by using available market information and appropriate valuation methodologies. The Company's financial instruments under SFAS No. 107 include: accounts receivable, notes receivable, notes payable, accounts payable and long-term debt. The Company has estimated that the carrying amounts of accounts receivable, notes payable and accounts payable approximate fair value due to the short-term maturities of these instruments. Notes receivable bear interest at a rate that approximates the current market rate, therefore, the carrying value approximates the fair value. F-15 40 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, 1999 ------------------------------------------------- QUARTER ENDED -------------------------------------- 12/31 3/31 6/30 9/30 TOTAL ------- ------- -------- ------- -------- Sales...................................... $13,767 $14,350 $ 14,727 $14,559 $ 57,403 Operating income (loss).................... 7 424 946 103 1,480 Net earnings (loss)........................ 114 562 1,084 128 1,888 Net earnings (loss) per share.............. 0.08 0.39 0.74 0.08 1.29
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.............. (0.20) (0.17) (8.44) 0.27 (8.54)
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.............. (0.45) (2.79) (0.06) 0.09 (3.21)
- --------------- (1) Second quarter 1999 results include $248,000 to reduce insurance reserves for the Voluntary Employee Injury Benefit (VEIB) Plan, workers' compensation and general liability. (2) Third quarter 1999 results include $790,000 to reduce insurance reserves for the VEIB Plan, workers' compensation and general liability. (3) 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. (4) Fourth quarter 1998 results include a pre-tax benefit of $113,000 to reduce insurance reserves for workers' compensation and general liability claims. (5) Third quarter 1998 results include pre-tax asset impairment and restructuring charges of $6,969,000. (6) 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. (7) Second quarter 1998 results include a pre-tax benefit of $212,000 to reduce general liability insurance reserves. (8) Third quarter 1997 includes pre-tax asset impairment and restructuring charges of $78,000. (9) 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. (10) Second quarter 1997 includes pre-tax asset impairment and restructuring charges of $4,988,000. (11) Second quarter 1997 results include a pre-tax benefit of $558,000 to reduce insurance reserves for workers' compensation and the VEIB Plan. F-16 41 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. LOGO DELOITTE & TOUCHE LLP Fort Worth, Texas November 12, 1999 F-17 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PANCHO'S MEXICAN BUFFET, INC. December 10, 1999 By /s/ HOLLIS TAYLOR ----------------------------------- Hollis Taylor, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE ------------------- ---- /s/ JESSE ARRAMBIDE, III December 10, 1999 - ------------------------------------------------------------ Jesse Arrambide, III, Chairman of the Board of Directors /s/ HOLLIS TAYLOR December 10, 1999 - ------------------------------------------------------------ Hollis Taylor, President and Chief Executive Officer and Director (Principal Executive Officer) /s/ W. BRAD FAGAN December 10, 1999 - ------------------------------------------------------------ Brad Fagan, Vice President, Treasurer, Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) /s/ SAMUEL L. CARLSON December 10, 1999 - ------------------------------------------------------------ Samuel L. Carlson, Director /s/ ROBERT L. LIST December 10, 1999 - ------------------------------------------------------------ Robert L. List, Director /s/ DAVID ODEN December 10, 1999 - ------------------------------------------------------------ David Oden, Director /s/ TOMAS ORENDAIN December 10, 1999 - ------------------------------------------------------------ Tomas Orendain, Director /s/ GEORGE N. RIORDAN December 10, 1999 - ------------------------------------------------------------ George N. Riordan, Director /s/ RUDOLPH RODRIGUEZ, JR. December 10, 1999 - ------------------------------------------------------------ Rudolph Rodriguez, Jr., Director
43 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) 3(i) -- Certificate of Amendment to Certificate of Incorporation, dated January 27, 1999(24) 4(a) -- Certificate of Incorporation and Bylaws of Registrant, as amended. See Exhibit 3 items above. 4(b) -- Rights Agreement dated as of January 30, 1996, between Pancho's Mexican Buffet, Inc. and KeyCorp Shareholder Services, Inc. with Exhibit A (form of Certificate of Designation, Preferences and Rights of Series A Preferred Stock), Exhibit B (form of Right Certificate), and Exhibit C (Summary of Rights to Purchase Series A Preferred Stock) attached(6) 4(c) -- Amendment to Rights Agreement, dated July 25, 1997(21) 9 -- Not applicable 10(a) -- 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(4) 10(b) -- Amendment No. 1 and 2 to 1982 Stock Option Plan for Non-Employee Directors of Pancho's Mexican Buffet, Inc.(9) 10(c) -- 1982 Incentive Stock Option Plan of Pancho's Mexican Buffet, Inc.(4) 10(d) -- Amendment No. 1, 2 and 3 to Pancho's Mexican Buffet, Inc. 1982 Incentive Stock Option Plan(9) 10(e) -- Pancho's Mexican Buffet, Inc. Employee Stock Purchase Plan(4) 10(i) -- Memo re: Officers Bonus Plan approved by Board of Directors of Pancho's Mexican Buffet, Inc. on February 28, 1986(7) 10(j) -- Note, security agreement and investment letter -- re: sale of authorized but unissued Common Stock of the Registrant to four executive officers in 1992(15) 10(k) -- Employment Contracts between the Registrant and four executive officers dated May 23, 1986 and March 25, 1994(15) 10(l) -- Pancho's Mexican Buffet, Inc. Cafeteria Plan(9) 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)
44
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(23) 11 -- Not required -- Explanation of earnings per share computation is contained in Notes to Consolidated Financial Statements. 12 -- Not applicable 13 -- Not applicable 16 -- Not applicable 18 -- Not applicable 21 -- Subsidiaries of the registrant -- filed herewith 22 -- Not applicable 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.
45 (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. (23) Filed with the Commission as an Exhibit to Form 10-K for the year ended September 30, 1998 -- such Exhibits are incorporated herein by reference. (24) Filed with the Commission as an Exhibit to Form 10-Q for the quarter ended March 31, 1999 -- such Exhibits are incorporated herein by reference.
EX-21 2 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 3 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 12, 1999, appearing in this Annual Report on Form 10-K of Pancho's Mexican Buffet, Inc. for the year ended September 30, 1999. LOGO DELOITTE & TOUCHE LLP Fort Worth, Texas December 10, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS. YEAR SEP-30-1999 SEP-30-1999 1,242,000 0 208,000 0 469,000 2,161,000 47,934,000 32,392,000 18,412,000 4,992,000 0 0 0 149,000 11,554,000 18,412,000 57,403,000 57,403,000 15,214,000 50,924,000 0 0 22,000 1,876,000 (12,000) 1,888,000 0 0 0 1,888,000 1.29 1.29
-----END PRIVACY-ENHANCED MESSAGE-----