FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 1, 2002, JANUARY 2, 2001 AND DECEMBER 28, 1999
(Dollars in Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Furr’s Restaurant Group, Inc. (the “Company”), a Delaware corporation, operates cafeterias and buffets through its subsidiary Cafeteria Operators, L.P., a Delaware limited partnership (together with its subsidiaries, the “Partnership”). The financial statements presented herein are the consolidated financial statements of Furr’s Restaurant Group, Inc. and its majority owned subsidiaries. All material intercompany transactions and account balances have been eliminated in consolidation.
Fiscal Year - The Company operates on a 52-53 week fiscal year ending on the Tuesday nearest December 31. Fiscal year 2000 represents a 53-week year; fiscal years 2001 and 1999 represent 52-week years.
Business Segments - The Company operates in two vertically integrated operating segments, namely the operation of food purchasing, processing, warehousing and distribution of products and the operation of cafeterias, including food preparation and retail sales, in 11 states in the Southwest, West and Midwest areas of the United States.
Cash and Cash Equivalents - The Company has a cash management program which provides for the investment of excess cash balances in short-term investments. These investments have original or remaining maturities of three months or less at date of acquisition, are highly liquid and are considered to be cash equivalents for purposes of the consolidated balance sheets and consolidated statements of cash flows. Since April 2001, available cash is used to reduce the balance of the Company’s revolving credit line, resulting in a book cash overdraft at January 1, 2002, which is included in accounts payable.
Inventories - Inventories are stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment - Property, plant and equipment is generally recorded at cost, while certain assets considered to be impaired are recorded at estimated fair value. All property, plant and equipment is depreciated at annual rates based upon the estimated useful lives of the assets using the straight-line method. Restaurant equipment is generally depreciated over a period of 5 years, while the estimated useful life of manufacturing equipment is considered to be 5 to 10 years. Buildings are depreciated over a 30-year useful life, while improvements to owned buildings have estimated useful lives of 3 to 5 years. Provisions for amortization of leasehold improvements are made at annual rates based upon the estimated useful lives of the assets or terms of the leases, whichever is shorter.
Valuation of Long-Lived Assets - Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company groups and evaluates its assets for impairment at the individual restaurant level. The Company considers a restaurant’s assets to be impaired if a forecast of undiscounted future cash flows directly related to the assets, including disposal value, if any, is less than the carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Charges of $678 for year end January 1, 2002, $440 for the year ended January 2, 2001 and $392 for the year ended December 28, 1999 were recorded to recognize the write-down of certain property, plant and equipment to estimated fair value, based on expected future cash flows.
Start-Up and Closing Cost of Restaurants - Start-up and preopening costs incurred in connection with a new restaurant becoming operational are expensed as incurred.
When the decision to close a restaurant is made, the present value of all fixed and determinable costs to be incurred after operations cease is accrued. These fixed and determinable costs consist primarily of obligations defined in lease agreements such as rent and common area maintenance, reduced by sublease income, if any.
Advertising Costs - Advertising costs are expensed as incurred. Total advertising expense was $4,628, $3,860 and $4,257 for the years ended January 1, 2002, January 2, 2001 and December 28, 1999, respectively.
Stock-Based Compensation - The Company has adopted the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) which permits the recognition
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as expense over the vesting period of the fair value of all stock based awards on the date of grant. Alternatively, under the provisions of SFAS 123, the Company is allowed to continue accounting for such compensation as provided by Accounting Principles Board (“APB”) Opinion No. 25. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide proforma disclosure in accordance with the provisions of SFAS 123.
Unfavorable Leases - For leases acquired through purchase, the net excess of future lease payments over the fair value of these payments is being amortized over the terms of the leases to which the differences relate.
Income Taxes - The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income Per Share - Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the year. Diluted earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding plus the number of additional shares that would have been outstanding if potentially dilutive securities had been issued. The following table reconciles the denominators of basic and diluted earnings per share for the fiscal years ended January 1, 2002, January 2, 2001 and December 28, 1999.
January 1, 2002 January 2, 2001 December 28, 1999
--------------- --------------- -----------------
Weighted average common
shares outstanding 9,760,406 9,757,918 9,757,123
Options - 219 43,426
---------- --------- --------
Total shares 9,760,406 9,758,137 9,800,549
========= ========= =========
For fiscal years 2001, 2000 and 1999, outstanding options totaling 859,584, 696,000 and 382,415, respectively, and outstanding warrants totaling 512,246 for fiscal year 1999, were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods and actual results may differ from such estimates.
Reclassification - Certain amounts in the prior year financial statements have been reclassified to conform with current year classification.
2. OTHER PAYABLES AND ACCRUED EXPENSES
Included in other payables and accrued expenses are the following:
January 1, 2002 January 2, 2001
--------------- ---------------
Taxes other than income taxes $ 2,914 $ 3,545
Salaries, wages and commissions 4,602 4,951
Insurance 1,844 1,863
Accrued pension plan costs 2,893 2,159
Interest 508 -
Legal and accounting expenses 175 192
Rent 598 693
Gift certificates outstanding 1,154 1,025
Utilities 543 536
Other payables and accrued expenses 502 895
------- -------
$ 15,733 $ 15,859
======== ========
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3. LONG-TERM DEBT
Effective January 2, 1996, as part of a series of financial restructuring transactions, the Partnership issued $41,700 of 12% Senior Secured Notes, due December 31, 2001 (the "12% Notes"), to replace $40,000 of 11% Senior Secured Notes, due June 30, 1998 (the "11% Notes") and the interest accrued thereon and to satisfy a $5,408 judgment and the interest accrued thereon. In January 1996, the Partnership also issued $4,073 of 12% Notes as payment in kind for all interest accrued as of January 23, 1996. All of the assets of the Partnership were pledged as collateral security on behalf of the holders of the 12% Notes. The Partnership also issued limited partner interests equal to 95% of the outstanding partnership interests in exchange for and in full satisfaction of the remaining $152,854 of 11% Notes then outstanding, together with all interest accrued thereon.
Payments of interest on the 12% Notes were due each March 31 and September 30. However, for financial accounting reporting purposes, the financial restructuring transactions were considered a troubled debt restructuring and the terms of this restructuring were such that no interest expense has been recorded in the accompanying consolidated financial statements related to the 12% Notes under the provisions of Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" ("SFAS 15"). All of the interest on the 12% Notes through maturity has been included in the carrying amount of the debt.
In 1997, the Partnership issued $2,551 of 10.5% Notes, due December 31, 2001. Payments of interest on these notes were due each June 30 and December 31.
On April 10, 2001, the Company entered into a new $55 million Revolving Credit and Term Loan Agreement (Credit Agreement) with various banks and lenders. Concurrent with the execution of this new agreement the Company defeased and gave notice of redemption of it's 12% Notes and repaid in full the $2.6 million of 10.5% Notes. This refinancing transaction was completed prior to the issuance of the fiscal 2000 consolidated financial statements. Accordingly, the balance of these notes, less the current portion of the new term loan, was classified as long term at January 2, 2001. After the redemption of the 12% Notes and the 10.5% Notes, the Company had $44 million outstanding under the new Credit Agreement. The Credit Agreement contains covenants with regard to maintaining certain leverage ratios, achieving certain levels of EBITDA, operating cash flow and limits on capital expenditures. In addition there are certain restrictions on the payment of dividends and additional indebtedness. The Credit Agreement allows the Company to borrow at either a Federal Funds Rate plus an applicable margin or at a Eurocurrency Reserve Rate plus an applicable margin.
The Credit Agreement provides that the Company can borrow up to $20 million on a revolving basis until April, 2006, of which $9 million was drawn at closing, with the remaining $11 million of available borrowings to be used for working capital and capital expenditures. The Credit Agreement contains a $30 million Term loan A and a $5 million Term loan B. The Term loan A and Term loan B provide for quarterly amortization through April, 2006 and April, 2007, respectively, with the remaining amounts outstanding then due. The Company's obligations under the Credit Agreement are secured by a security interest in and liens upon substantially all of the Company's assets.
As a result of retiring the 12% Notes, the Company reported an extraordinary gain of $3.6 million in the second quarter of fiscal 2001, which represented future interest payments recorded as debt that will not be paid.
Long-term debt consists of the following:
Stated
Maturity January 1, January 2,
Date 2002 2001
---------- --------
Term A Notes April, 2006 27,000 -
Term B Notes April, 2007 5,000 -
Revolving Credit Notes April, 2006 6,500 -
12% Notes, including interest accrued
through maturity of $6,896 December, 2001 - 52,668
10.5% Notes December, 2001 - 2,551
--------- ---------
38,500 55,219
Current maturities of long-term debt (5,100) ( 3,000)
--------- ---------
Long-term debt, net of current maturities $ 33,400 $ 52,219
========= =========
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Following are the maturities of the $30,000 Term loan A and $5,000 Term loan B for each of the next five years:
2002 $5,100
2003 5,100
2004 5,600
2005 6,600
2006 5,100
4. STOCKHOLDERS' EQUITY
The 1995 Stock Option Plan - The Board of Directors adopted, and on January 2, 1996, the stockholders approved the 1995 Stock Option Plan (the “1995 Option Plan”). 980,544 shares are reserved under the 1995 Option Plan, after equitable adjustment for the reverse stock splits approved by stockholders on May 20, 1999 and March 14, 1996. A Committee of the Board of Directors administers the 1995 Option Plan, including determining the employees to whom awards will be made, the size of such awards and the specific terms and conditions applicable to awards, such as vesting periods, circumstances of forfeiture and the form and timing of payment. Grants including stock options, stock appreciation rights and restricted stock may be made to selected employees of the Company and its subsidiaries and non-employee directors of the Company.
All options are granted at an exercise price not less than the fair market value of the common stock at the date of grant. Generally, these options vest over a three-year period and expire in 10 years if not exercised.
Following is a summary of activity in the 1995 Option Plan for the three years ended January 1, 2002:
Weighted Average
Exercise Price Per Options Options
Share-option Outstanding Outstanding Exercisable
------------------------ ----------- -----------
Balance at December 29, 1998 $ 5.02 515,665 2,666
Granted 3.87 160,000 -
Became exercisable - - 162,555
Canceled or expired 8.86 (29,000) -
-------- --------- ---------
Balance at December 28, 1999 4.70 646,665 165,221
Granted 3.67 269,000 -
Became exercisable - - 215,333
Canceled or expired 4.60 (192,665) (81,948)
-------- -------- ---------
Balance at January 2, 2001 4.30 723,000 298,606
Granted 3.24 534,750 -
Became exercisable - - 307,000
Canceled or expired 4.00 (398,166) (282,514)
-------- -------- ---------
Balance at January 1, 2002 $ 3.82 859,584 323,092
======== ========= =========
Exercise prices for options outstanding as of January 1, 2002, ranged from $2.00 to $5.94 per share and the weighted average remaining life of the stock options was eight and one-half years. The options exercisable as of January 1, 2002 have a weighted average exercise price of $4.64 per share.
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The Company has elected to follow APB 25, “Accounting for Stock Issued to Employees.” Since options are granted to employees at no less than the market price on the date of grant, no compensation expense is recognized. However, SFAS No. 123 requires presentation of pro forma net income and earnings per share as if the Company had accounted for stock options granted to employees under the fair value method of that statement. Had the Company determined compensation cost based on the fair value at the grant date for its stock options issued in 2001, 2000 and 1999 under SFAS No. 123, the Company’s net income would have been changed to the pro forma amounts indicated below:
January 1, 2002 January 2, 2001 December 28, 1999
-------------------- -------------------- -----------------
As Pro As Pro As Pro
reported forma reported forma reported forma
-------- ----- -------- ----- -------- -----
Net income $6,509 $6,300 $8,521 $8,010 $ 31,262 $ 30,403
Net income per basic common share $ .67 $ .65 $ .87 $ .82 $ 3.20 $ 3.12
Net income per diluted common share $ .67 $ .65 $ .87 $ .82 $ 3.19 $ 3.10
The weighted average fair value of the individual options granted during 2001, 2000 and 1999 is estimated at approximately $2.46, $2.74 and $4.03, respectively, per share on the date of grant.
The fair values of options issued during 2001, 2000 and 1999 were determined using a Black-Scholes option pricing model with the following assumptions applicable for the date of grant:
2001 2000 1999
---- ---- ----
Dividend yield - - -
Volatility 69% to 72% 70% to 73% 97% to 139%
Risk-free interest rate 4.75% 4.75% 4.75% to 6.08%
Expected life 3 years 3 years 3 years
The table below provides weighted average exercise prices and weighted average remaining contractual life of options outstanding at January 1, 2002, segregated based upon ranges of exercise prices.
Weighted
Weighted Weighted average
average average remaining
Number Number exercise exercise contractual
of options of options price price life
outstanding exercisable (outstanding) (exercisable) (outstanding)
----------- ----------- ----------- ----------- -----------
$2.00 - $3.00 401,000 111,003 $2.92 $2.98 8.68
$3.75 - $3.81 253,250 20,420 3.75 3.75 9.47
$5.00 - $5.94 205,334 191,669 5.65 5.70 6.93
5. INCOME TAXES
Following is a summary of income tax expense (benefit) for the fiscal years ended January 1, 2002, January 2, 2001 and December 28, 1999:
January 1, January 2, December 28,
2002 2001 1999
----------- ----------- -----------
Current $ 42 $ 35 $ (2,969)
Deferred 463 1,668 20,846
---------- ----------- -----------
$ 505 $ 1,703 $23,815
========== =========== ===========
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Following is a reconciliation of the expected income tax expense (benefit) at the statutory tax rate of 35% to the actual income tax expense (benefit) for the fiscal years ended January 1, 2002, January 2, 2001 and December 28, 1999:
January 1, January 2, December 28,
2002 2001 1999
----------- ----------- -----------
Expected income tax expense (benefit) at the $ 1,181 $ 3,578 $ 2,606
statutory tax rate
Reduction in prior year's income tax liability (A) - - (2,969)
Interest expense recorded as debt reduction per
SFAS 15 (695) (1,922) (1,922)
Increase (decrease) in valuation allowance - - (21,546)
Other 19 47 16
----------- ----------- -----------
Actual income tax expense (benefit) $ 505 1,703 $ (23,815)
=========== =========== ============
(A) During fiscal 1999, the company settled a prior year Internal Revenue Service examination and reversed an income tax liability of $2.9 million which had been previously recorded for issues related to the examination.
Following is a summary of the types and amounts of existing temporary differences and net operating loss carry forwards at the statutory tax rate of 35%, and tax credits:
January 1, 2002 January 2, 2001
Deferred Tax Deferred Tax
------------ ------------
Assets Liabilities Assets Liabilities
------ ---------- ------ -----------
Net operating loss carryforward $39,953 $40,827
Tax credit carryforwards 1,292 1,316
Reserve for store closing for
financial statement purposes
and not for tax purposes 928 1,073
Other reserves 1,479 1,259
Excess of future lease payments over fair
values, net of amortization 69 193
Property, plant and equipment, net 8,400 6,986
Other temporary differences 1,912 - 2,631 -
-------- ---------- -------- ----------
Deferred tax assets and liabilities 54,033 - 54,285 -
========== ==========
Valuation allowance (35,107) (35,107)
-------- -------
Deferred tax asset, net $18,926 $19,178
======= =======
As of January 1, 2002, the Company had consolidated net operating loss carryforwards (NOLs) of approximately $113,777 for income tax reporting purposes that expire from 2002 through 2019. Prior to fiscal 1999, the income tax benefit associated with the NOLs had not been recognized since, in the opinion of management, there was not sufficient positive evidence of future taxable income to justify recognition of a benefit. During 1999, management again evaluated all evidence, both positive and negative, in determining whether a valuation allowance to reduce the carrying value of deferred tax assets was still needed and concluded the Company more likely than not will realize a partial benefit from the loss carryforwards. Accordingly, the Company recorded a deferred tax asset of $20,846 in fiscal 1999, which recognized the benefit of $59,560 of the NOLs. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences and NOLs become deductible or are utilized. Management believes it is currently more likely than not the Company will realize the benefits of
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these deductible differences and NOL carryforwards. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Approximately $3,700 and $11,400 of the operating loss carryforwards for income tax reporting purposes, which are subject to limited use, relate to the subsidiary operations of Cavalcade Holdings, Inc. (“Holdings”) and its subsidiary, Cavalcade Foods, Inc. (“Foods”), respectively, for periods prior to their inclusion in this Company-affiliated group.
Current tax laws and regulations relating to specified changes in ownership limit the availability of the Company’s utilization of Holdings’ and Foods’ net operating loss and tax credit carryforwards (collectively, tax attributes). A change in ownership of greater than 50% of a corporation within a three-year period causes such annual limitations to be placed into effect. Such a change in ownership is deemed to have occurred in connection with an ownership change in 1993. This ownership change limits the utilization of the Company-affiliated group tax attributes incurred during the period March 28, 1991 through June 24, 1993 to approximately $1,200 annually. Additionally, a second change of ownership is deemed to have occurred on March 28, 1996, when the holders of 95% of the limited partner interest of the Partnership exchanged such interest for 95% of the outstanding Common Stock of the Company in connection with the financial restructuring of the Company. As a result, net operating losses of $53,000 incurred during the period June 25, 1993 through March 28, 1996 will be limited to approximately $4,900 annually. As of January 1, 2002, the Company-affiliated group tax attributes not subject to limitation are approximately $49,622.
As of January 1, 2002, the Company has general business credit carryforwards of approximately $1,292, which have expiration dates through 2010. Approximately $74 of the general business credit carryforwards relate to Foods for periods prior to its inclusion in the Company-affiliated group. These credits are subject to limited use.
While the restructuring transactions completed in 1996 were intended to result in no income tax expense to the Company, the transactions result in a substantial restriction on the ability of the Company to utilize certain net operating loss carryforwards. In addition, no assurance can be given that the Internal Revenue Service will not successfully assert that the restructuring transactions result in a substantial reduction of certain tax attributes (such as the net operating losses and tax basis of property) of the Company and the Partnership.
6. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan for which benefit accruals were frozen effective June 30, 1989. The funding policy is to make the minimum annual contribution required by applicable regulations.
The Company is subject to the additional minimum liability requirements of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”). SFAS 87 requires the recognition of an additional pension liability in the amount of the Partnership’s unfunded accumulated benefit obligation in excess of accrued pension cost with an equal amount to be recognized as either an intangible asset or a reduction of equity through other comprehensive loss. Based upon plan actuarial and asset information as of January 1, 2002, January 2, 2001 and December 28, 1999, the Company recorded an increase of $2,389 in 2001, an increase of $1,793 in 2000 and a decrease of $1,129 in 1999 to the noncurrent pension liability with corresponding charges or credits to the other comprehensive income (loss) component of stockholders’ equity (deficit).
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The funded status of the plan amounts recognized in the balance sheets and major assumptions used to determine these amounts are as follows:
Years Ended
------------------------------------------
January 1, January 2, December 28,
2002 2001 1999
---------- ---------- ------------
Accumulated benefit obligation at end of year $ 14,317 $ 13,692 $ 16,218
========== ========== =============
Change in benefit obligation
Benefit obligation at beginning of year $ 13,692 $ 16,218 $ 18,207
Service cost - - -
Interest cost 924 1,030 1,066
Actuarial (gain) loss 1,190 5 (2,099)
Benefits paid (1,489) (3,561) (1,031)
Cost of IRS and litigation settlements - - 75
---------- ---------- -------------
Benefit obligation at end of year 14,317 13,692 16,218
---------- ---------- -------------
Change in plan assets
Fair value of plan assets at beginning of year 7,264 11,800 12,795
Actual return on plan assets (953) (975) (39)
Employer contribution 2,159 - -
Kmart contribution to IRS and litigation settlement - - 75
Benefits paid (1,489) (3,561) (1,031)
---------- ---------- -------------
Fair value of plan assets at end of year 6,981 7,264 11,800
---------- ---------- -------------
Funded status (7,336) (6,428) (4,418)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions 5,910 3,521 1,728
---------- ---------- -------------
Net amount recognized $ (1,426) $ (2,907) $ (2,690)
========== ========== =============
Amounts recognized in the consolidated balance sheet
consist of:
Accrued benefit cost $ (7,336) $ (6,428) $(4,418)
Accumulated other comprehensive loss 5,910 3,521 1,728
---------- ---------- -------------
Net amount recognized $ (1,426) (2,907) $ (2,690)
========== ========== =============
Major assumptions:
Discount rate 6.75% 7.00% 7.25%
Expected long-term rate of return on plan assets 9.00% 9.00% 9.00%
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The components of net periodic pension cost for the years ended January 1, 2002, January 2, 2001and December 28, 1999 are as follows:
2001 2000 1999
---- ---- ----
Service cost - benefits earned during the period $ - $ - $ -
Interest cost on projected benefit obligation 924 1,030 1,066
Expected return on plan assets (525) (826) (1,035)
Amortization of prior service cost - - -
Amortization of transition asset - - -
Recognized actuarial loss 279 13 125
------ ------ ------
Net periodic pension cost $ 678 $ 217 $ 156
====== ====== ======
The Company also has a voluntary savings plan (the “401(k) plan”) covering all eligible employees of the Company and its subsidiaries through which it may contribute discretionary amounts as approved by the Board of Directors. Administrative expenses paid by the Company for the years ended January 1, 2002, January 2, 2001 and December 28, 1999 amounted to $8, $10 and $19, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Partnership leases restaurant properties under various noncancelable operating lease agreements which expire on various dates through 2020 and require various minimum annual rentals. Certain leases contain escalation clauses. Further, many leases have renewal options ranging from one five-year period to ten five-year periods. Certain of the leases also require the payment of property taxes, maintenance charges, advertising charges, insurance and parking lot charges, and additional rentals based on percentages of sales in excess of specified amounts.
The total minimum annual rental commitment and future minimum sublease rental income under noncancelable operating leases are as follows as of January 1, 2002:
Minimum Sublease
Rent Income
----------- --------
2002 $ 10,839 $ 1,012
2003 9,977 890
2004 9,669 936
2005 9,241 936
2006 8,681 857
For the remaining terms of the leases 15,332 1,218
Total rental expense included in the statements of operations is $10,329, $10,455 and $10,881, which includes $747, $628 and $980 of additional rent based on net sales, for the years ended January 1, 2002, January 2, 2001 and December 28, 1999, respectively.
The Company operate 38 restaurants which are leased from Kmart Corporation (“Kmart”) under full premises or ground leases (the “Furr’s/Kmart Leases”). Substantially all of these properties are themselves leased by Kmart from one of several parties who either own title to the properties or lease the properties from the titleholder (the “Owner/Kmart Leases”). Kmart filed a Chapter 11 bankruptcy proceeding in January 2002 and has announced its intention to “reject” the Owner/Kmart Leases and Furr’s/Kmart Leases relating to one ground lease and 30 full premise leases. In response to this announcement, two of the property owners, accounting for 22 properties, have themselves filed Chapter 11 bankruptcy proceedings and it is unclear what action may be taken by various holders of mortgage loans secured by these properties.
The Company believes that the United States Bankruptcy Code, applicable state law and the doubtful existence of more valuable uses of the leased premises all will support its continued occupancy of the former Kmart leased premises without a material adverse effect. However, the loss of possession of some of these restaurants could have a material adverse effect upon the Company’s results of operations and financial position, and could result in the occurrence of one or more events of default under its credit agreement.
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The Company has begun discussions with the relevant parties which are intended to result in the establishment of direct lease relationships with these parties on fair market terms and that do not include Kmart, but the Company is not able at this time to predict the results of these discussions. The Company’s management believes that the landowners are likely to accept market rents and that the properties generally do not have alternative uses that would offer an owner a higher economic return. Accordingly, the Company believes that the property owners/mortgage holders will not have an economic incentive to challenge its continued occupancy of the properties.
In 1998 the Company, the Cavalcade Pension Plan, the members of the Cavalcade Pension Plan Committee, Kmart Corporation and its pension plan agreed to settle litigation relating to claimed benefits under the Cavalcade Pension Plan (the “Settlement”). In December 1999 the Settlement was approved by the court as “fair” to all members of the plaintiff class after notice to all purported class members, and the litigation was dismissed with prejudice.
The cash impact of the settlement on the Company included payment in 2000 of approximately $1,500 of expenses for legal and professional fees, with the remainder of the settlement to be paid to the Plan in future years to fund increased benefit payments to former and current employees. The settlement required payments by the Company to the Plan of $2,159 in 2001 and is expected to require payments of approximately $2,893 in 2002, with additional funding payments required in subsequent years in amounts that are expected to decline over time, subject to the overall funding status of the Plan. Management does not believe that payment of these amounts in 2001 and subsequent years will have a material adverse effect on the Company’s planned operations.
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
Thirteen Weeks Ended
------------------------------------------------
April 3 July 3 October 2 January 1
------- ------ --------- ---------
Year ended January 1, 2002:
Sales $47,487 $47,555 $45,351 $44,508
Gross profit (1) 34,165 33,585 32,311 31,094
Net income (loss) before extraordinary items 2,331 284 1,235 (981)
Net income (loss) before extraordinary item
per common share 0.24 0.03 0.13 (0.10)
Net income (loss) 2,331 3,924 1,235 (981)
Net income (loss) per common share 0.24 0.40 0.13 (0.10)
Fourteen
Thirteen Weeks Ended Weeks Ended
---------------------------------------- -----------
March 28 June 27 September 26 January 2
-------- ------- ------------ ---------
Year ended January 2, 2001:
Sales $47,764 $48,188 $49,597 $50,498
Gross profit (1) 33,728 33,999 34,953 35,991
Net income 2,096 2,428 1,722 2,275
Net income per common share 0.21 0.25 0.18 0.23
(1) Gross profit is computed using cost of sales excluding depreciation expense.
9. RELATED PARTY TRANSACTIONS
In settlement of the Company's indemnification obligations to the persons listed below (the "Affiliated Indemnitees") with respect to the Affiliated Indemnitees' litigation expenses arising from the Company's restructuring transaction completed in 1995, the Company entered into release agreements with, and made the additional payments noted below to, each of the Affiliated Indemnitees. The Company (i) delivered to Teachers Insurance and Annuity Association of America as payee a promissory note dated January 14, 1998 in the principal sum of $756, (ii) delivered to The Northwestern Mutual Life Insurance Company as payee a promissory note dated February 24, 1998 in the principal sum of $488 and made a cash payment to The Northwestern Mutual Life Insurance Company of $6, (iii) delivered to John Hancock Mutual Life Insurance Company as payee a promissory note dated March 4, 1998 in the principal sum of $476, (iv) made a cash payment to the Mutual Life Insurance Company of New York of $218, (v) made a cash payment to Principal Mutual Life Insurance Company of $175 and (vi) delivered to the Equitable Life Assurance Society of the
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United States ("Equitable") as payee a promissory note dated March 23, 1998 in the principal sum of $830. Each of the promissory notes was retired in April 2001 with proceeds from the Company's new Credit Agreement described in Note 3, "Long-Term Debt." Except for Equitable, each of the Affiliated Indemnitees owned more than five percent of the Common Stock at the time the agreements were signed. Equitable is an affiliate of EQ Asset Trust 1993, a business trust that owns more than five percent of the outstanding Common Stock.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"). The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
At January 1, 2002 and January 2, 2001, the carrying amount and the estimated fair value of the Company's financial instruments, as determined under SFAS 107, was as follows:
January 1, 2002 January 2, 2001
--------------- ---------------
Long-term debt, including current portion
and interest accrued through maturity:
Carrying amount $38,500 $55,219
Estimated fair value 38,500 48,324
The Company’s outstanding debt at January 1, 2002 bears interest at a variable rate. Accordingly, management believes carrying value approximates fair value. The Company’s 12% Notes were held by a limited number of holders and were not actively traded, and as a result, market quotes were not readily available. The fair value of the long-term debt at January 2, 2001, was based upon the face amount of the debt, as management believed that this was most indicative of the fair value. The carrying values of accounts receivable and accounts payable approximate fair value due to the short maturity of these financial instruments. As discussed further in note 11, management has estimated the fair value of its interest rate swap agreement to be a liability of $587 at January 1, 2002.
11. INTEREST RATE MANAGEMENT
The Company uses variable-rate debt to finance its operations. In particular, it has borrowed money under a Credit Agreement providing for variable-rate interest. The variable interest rate on the debt obligations exposes the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases and conversely, if interest rates decrease, interest expense also decreases.
Management believes it is prudent to limit the variability of a portion of its interest payments. It is the Company’s objective to hedge between 50 and 70 percent of its variable-rate long-term debt interest payments. The Company’s Credit Agreement also requires that the Company hedge at least $20,000 for a period of two years.
To meet this requirement, the Company has entered into a derivative instrument, in the form of an interest rate swap, to manage fluctuations in cash flows resulting from interest rate risk. The interest rate swap changes the variable-rate cash flow exposure to fixed-rate cash flows by entering into a receive-variable, pay-fixed interest rate swap. Under the interest rate swap, which has a notional amount of $20,000 and a two-year term, the Company receives variable interest rate payments based on LIBOR and makes fixed interest rate payments at 4.99%. The Company accounts for the interest rate swap in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 requires that all derivative instruments be recorded in the balance sheet at fair value. The interest rate swap is a cash flow hedge under SFAS No. 133 and, accordingly, changes in fair value are reported in other comprehensive income and such amounts are reclassified into interest expense as a yield adjustment in the same period in which the related expense on the variable rate debt affects operations.
The Company does not enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Company does not speculate using derivative instruments.
F18
The Company assesses interest rate cash flow risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
12. BUSINESS SEGMENTS
The Company has two reportable segments: the operation of cafeterias, including food preparation and retail sales, and the operation of Dynamic Foods, which purchases, processes, warehouses and distributes food products and supplies to the cafeterias and external customers. These reportable segments are vertically integrated business units that offer different products and services.
The accounting policies of the segments are the same as those in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before non-recurring special charges or credits and before income tax provisions.
F19
Following is a summary of segment information of the Company for the fiscal years ended January 1, 2002, January 2, 2001, and December 28, 1999:
Cafeterias Dynamic Foods Total
---------- ------------- -----
2001:
External revenues $182,746 $2,155 $184,901
Intersegment revenues - 56,551 56,551
Depreciation and amortization 9,442 1,024 10,466
Segment profit 4,578 1,210 5,788
Segment assets 63,915 12,734 76,649
Expenditures for segment assets 2,613 1,447 4,060
2000:
External revenues $194,314 $1,733 $196,047
Intersegment revenues - 62,459 62,459
Depreciation and amortization 9,892 1,052 10,944
Segment profit 9,022 1,052 10,074
Segment assets 76,908 12,523 89,431
Expenditures for segment assets 12,156 531 12,687
1999:
External revenues $186,866 $1,194 $188,060
Intersegment revenues - 59,731 59,731
Depreciation and amortization 9,360 975 10,335
Segment profit 7,077 844 7,921
Segment assets 75,793 13,670 89,463
Expenditures for segment assets 19,164 686 19,850
Following is a reconciliation of reportable segments to the Company’s consolidated totals for the fiscal years ended January 1, 2002, January 2, 2001 and December 28, 1999.
January 1, January 2, December 28,
2002 2001 1999
---- ---- ----
Revenues
Total revenues of reportable segments $241,452 $258,506 $247,791
Elimination of inter-segment revenue (56,551) (62,459) (59,731)
-------- ------- -------
Total consolidated revenues $184,901 $196,047 $188,060
======== ======== ========
Profits
Total profit of reportable segments $ 5,788 $10,074 $ 7,921
Elimination of inter-segment profit - - -
--------- --------- ----------
Total consolidated profit $ 5,788 $10,074 $ 7,921
======= ======= =======
Assets
Total assets of reportable segments $ 76,649 $89,431 $89,463
Elimination of inter-segment assets - - -
--------- --------- -------
Total consolidated assets $ 76,649 $89,431 $89,463
======== ======= =======
13. SPECIAL CHARGES
The operating results for fiscal 1999 include a special charge of $566 thousand for expenses related to the relocation of the corporate offices from Lubbock, Texas to Richardson, Texas.
* * * * * *
F20
Item 9. Changes in and Disagreements with Accounts on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, information required by this item is furnished by incorporation by reference of information in the definitive Proxy Statement for the 2002 Annual Meeting of Stockholders of Furr's under the captions "Proposal 1 - Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Executive Officers."
Item 11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, information required by this item is furnished by incorporation by reference of information found in the Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders of Furr's under the caption "Executive Compensation," subcaptions "Summary Compensation Table," "Option Plan," "Option Grants," "Director Options," "Director Fees," "Employment Contracts and Termination of Employment and Change of Common Agreements," "Compensation Committee Interlocks," "Board Compensation Committee Report on Executive Compensation", "Board Audit Committee Report" and "Comparison of Cumulative Total Return of Company Stock, Industry Index and Broad Market."
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Pursuant to General Instruction G(3) of Form 10-K, information required by this item is furnished by incorporation by reference of all information under the caption "Executive Compensation," subcaption "Transactions with Management and Others" in the Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders of Furr's.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) of Form 10-K, information required by this item is furnished by incorporation by reference of all information under the caption "Executive Compensation," subcaption "Transactions with Management and Others" in the Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders of Furr's.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
| (a) | The following documents are filed as a part of this Annual Report on Form 10-K: |
| | The financial statements filed as part of this report are listed in the |
| | "Index to Consolidated Financial Statements" at Item 8. |
| | (2) | Financial Statement Schedule Furr's Restaurant Group, Inc. |
16
| | | Page |
| Schedule | Description | | No. |
| II- | Consolidated Valuation and Qualifying Accounts | 20 |
Schedules not listed above have been omitted because they are either not applicable, not material or the required information has been given in the financial statements or in notes to the financial statements.
| A report on Form 8-K was filed on October 17, 2001 with respect to the appointment of |
| Craig S. Miller as President and Chief Executive Officer of the Company and his election |
| as a member of the Company's Board of Directors. |
| 3.1 | Amended and Restated Certificate of Incorporation of Furr's/Bishop's, Incorporated, incorporated by |
| reference from the Registrant's Registration Statement on Form S-4 (File No. 33-38978). |
| 3.2 | By-laws of Furr's/Bishop's, Incorporated, as amended December 3, 1997, incorporated by reference from |
| the Registrant's Registration Statement on Form S-1 (amended on Form S-3) (File No. 333-4576). |
| 3.3 | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Furr's/Bishop's, |
| Incorporated, incorporated by reference from the Registrant's Registration Statement on Form S-4 |
| (File No. 33-92236). |
| 3.4 | Second Certificate of Amendment to the Amended and Restated Certificate of Incorporation of |
| Furr's/Bishop's, Incorporated, incorporated by reference from the Registrant's Form 10-K for |
| the year ended January 2, 1996. |
| 3.5 | Third Certificate of Amendment to the Amended and Restated Certificate of Incorporation of |
| Furr's/Bishop's Incorporated as filed with the Secretary of State of Delaware on December 10, 1999. |
| 3.6 | Fourth Certificate of Amendment to the Amended and Restated Certificate of Incorporation of |
| Furr's/Bishop's Incorporated as filed with the Secretary of State of Delaware on December 10, 1999. |
| 3.7 | Certificate of Ownership and Merger of Subsidiary into parent, as filed with the Secretary of State of |
| Delaware on February 10, 2000. |
| 10.1 | Master Sublease Agreement, dated as of December 1, 1986, between Kmart Corporation and Cafeteria |
| Operators, L.P. (as successor in interest to Furr's Cafeterias, Inc.), incorporated by reference |
| from the Registration Statement on Form S-1 of Cavalcade Foods, Inc., Furr's Cafeterias, Inc. |
| and Bishop Buffets, Inc. (File No. 33-11842). |
| 10.2 | Amendment, with respect to the Master Sublease Agreement, dated as of December 1, 1993, between |
| Kmart Corporation and Cafeteria Operators, L.P., incorporated by reference from the registrant's |
| Form 8-K dated November 15, 1993. |
| 10.3 | 1995 Stock Option Plan of Furr's Restaurant Group, Inc., incorporated by reference from Annex B of the |
| Prospectus included in the Registrant's Registration Statement on Form S-4 (File No. 33-92236). |
| 10.4 | First Amendment to 1995 Stock Option Plan, dated as of June 18, 1998, incorporated by reference from |
| Furr's Restaurant Group, Inc.'s Form 10-Q for the fiscal quarter ended June 30, 1998. |
17
| 10.5 | Employment Agreement, dated as of October 9, 2001, between Craig S. Miller and Furr's Restaurant |
| Group, Inc., incorporated by reference from Furr's Restaurant Group, Inc.'s Form 10-Q for the fiscal |
| quarter ended October 2, 2001. |
| 10.6 | Nonqualified Stock Option Agreement, effective as of October 9, 2001, between Craig S. Miller and |
| Furr's Restaurant Group, Inc., incorporated by reference from Furr's Restaurant Group, Inc.'s |
| Form 10-Q for the fiscal quarter ended October 2, 2001. |
| 10.7 | Stock Grant Agreement, effective as of November 5, 2001, between Craig S. Miller and Furr's Restaurant |
| Group, Inc., incorporated by reference from Furr's Restaurant Group, Inc.'s Form 10-Q for the fiscal |
| quarter ended October 2, 2001. |
| 10.8 | Revolving Credit and Term Loan Agreement, dated as of April 10, 2001, between Furr's Restaurant |
| Group, Inc. and subsidiaries and Fleet National Bank as agent and other banks referenced therein (filed herewith.) |
| 10.9 | Form of Retention Bonus Agreement (filed herewith.) |
| 21.0 | Subsidiaries of the Registrant. |
| 27.0 | Financial Data Schedule. |
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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.
| | FURR'S RESTAURANT GROUP, INC. |
| DATE: | March 26, 2002 | /s/ Craig S. Miller |
| | | Craig S. Miller |
| | | President and |
| | | Chief 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 Furr's Restaurant Group, Inc. and on the dates indicated.
| DATE: | March 26, 2002 | /s/ Damien Kovary |
| | | Damien Kovary |
| | | Director, Chairman of the Board |
| DATE: | March 26, 2002 | /s/ Robert N. Dangremond |
| | | Robert N. Dangremond |
| | | Director |
| DATE: | March 26, 2002 | /s/ Margaret Bertelsen Hampton |
| | | Margaret Bertelsen Hampton |
| | | Director |
| DATE: | March 26, 2002 | /s/ Craig S. Miller |
| | | Craig S. Miller |
| | | Director (Chief Executive Officer and |
| | | Chief Financial Officer) |
| DATE: | March 26, 2002 | /s/ Max Pine |
| | | Max Pine |
| | | Director |
| DATE: | March 26, 2002 | /s/ Robert W. Sullivan |
| | | Robert W. Sullivan |
| | | Director |
| DATE: | March 26, 2002 | /s/ Nancy A. Ellefson |
| | | Nancy A. Ellefson |
| | | Vice President of Finance (Chief Accounting Officer) |
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SCHEDULE II
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Additions
---------
(credited)
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- -------- -------- ---------- ------
YEAR ENDED JANUARY 1, 2002:
Reserve for store closing $ 3,065 $ 295 $ - $ 710(1) $ 2,650
=========== =========== =========== ============ ==========
Allowance for doubtful
accounts receivable $ 89 $ 19 $ - $ - $ 108
=========== =========== =========== ============ ==========
Valuation allowance for
deferred tax asset $ 35,107 $ - $ - $ - $ 35,107
=========== =========== =========== ============ ==========
YEAR ENDED JANUARY 2, 2001:
Reserve for store closing $ 3,362 $ 702 $ - $ 999(1) $ 3,065
=========== =========== =========== ============ ==========
Allowance for doubtful
accounts receivable $ 14 $ 75 $ - $ - $ 89
=========== =========== =========== ============ ==========
Valuation allowance for
deferred tax asset $ 35,107 $ - $ - $ - $ 35,107
=========== =========== =========== ============ ==========
YEAR ENDED DECEMBER 31, 1999:
Reserve for store closing $ 4,596 $ 41 $ - $ 1,275(1) $ 3,362
=========== =========== =========== ============ ==========
Allowance for doubtful
accounts receivable $ 14 $ - $ - $ - $ 14
=========== =========== =========== ============ ==========
Valuation allowance for
deferred tax asset $ 56,653 $ (21,546) $ - $ - $ 35,107
=========== ========= =========== ============ ==========
(1) Includes costs and expenses incurred during the year on closed units and severance payments.
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EXHIBIT 21
SUBSIDIARIES OF
FURR'S RESTAURANT GROUP, INC.
Furr's/Bishop's Cafeterias, L.P. and Subsidiaries
Cafeteria Operators, L.P.
A Delaware limited partnership
Doing business as Furr's Cafeterias and Bishop's Buffets
Cavalcade Holdings, Inc. and Subsidiaries
Cavalcade Foods, Inc.
A Delaware corporation
21
