SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-10725
FURR'S/BISHOP'S, INCORPORATED
INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION
NO.75-2350724
6901 QUAKER AVENUE, LUBBOCK, TX 79413
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (806)792-7151
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
- -------------------------------------------------------------------------------
As of November 10, 1998 there were 48,676,152 shares of Common Stock
outstanding.
Page 1 of 17
Exhibit Index Located on Page 16
FURR'S/BISHOP'S, INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 29, 1998(Unaudited) and December 30, 1997 3
Unaudited Condensed Consolidated Statements
Of Operations - For the thirteen weeks
ended September 29, 1998 and September 30, 1997 5
Unaudited Condensed Consolidated Statements
of Operations - For the thirty-nine weeks
ended September 29, 1998 and September 30, 1997 6
Unaudited Condensed Consolidated Statement
of Stockholders' Deficit - For the thirty-nine weeks
ended September 29, 1998 7
Unaudited Condensed Consolidated Statements
of Cash Flows - For the thirty-nine weeks
ended September 29, 1998 and September 30, 1997 8
Notes to Unaudited Condensed Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION 15
SIGNATURES
Page 2
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value amounts)
September 29, December 30,
1998 1997
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 11,056 $ 4,516
Accounts and notes receivable, net 750 882
Inventories 6,735 6,038
Prepaid expenses and other 986 1,122
----------- -----------
Total current assets 19,527 12,558
Property, plant and equipment, net 50,078 52,784
Other assets 448 459
----------- -----------
$ 70,053 $ 65,801
=========== ===========
See accompanying notes to unaudited condensed consolidated financial
statements.
(Continued on following page)
Page 3
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands, except par value amounts)
September 29, December 30,
1998 1997
----------- -----------
(Unaudited)
Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt $ 5,493 $ 5,493
Trade accounts payable 4,536 4,287
Other payables and accrued expenses 17,251 15,126
Reserve for store closings - current 809 1,344
----------- -----------
Total current liabilities 28,089 26,250
Reserve for store closings, net of current portion 3,066 3,331
Long-term debt, net of current portion 63,459 66,205
Other payables 7,533 7,276
Excess of future lease payments over fair value,
net of amortization 2,457 2,837
Contingencies
Stockholders' deficit:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued
Common stock, $.01 par value; 65,000,000
shares authorized, 48,676,152 and
48,675,168 issued and outstanding
in 1998 and 1997, respectively 487 487
Additional paid-in capital 55,871 55,870
Accumulated other comprehensive income (2,504) (2,504)
Accumulated deficit (88,405) (93,951)
----------- -----------
Total stockholders' deficit (34,551) (40,098)
----------- -----------
$ 70,053 $ 65,801
=========== ===========
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 4
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Thirteen weeks ended
---------------------------
September 29, September 30,
1998 1997
----------- -----------
Sales $ 48,011 $ 49,376
Costs and expenses:
Cost of sales (excluding depreciation) 14,152 14,851
Selling, general and administrative 29,251 30,233
Depreciation and amortization 2,543 2,821
Net special charges 7,560
----------- -----------
45,946 55,465
----------- -----------
Operating income (loss) 2,065 (6,089)
Interest expense 62 78
----------- -----------
Net income (loss) $ 2,003 $ (6,167)
=========== ===========
Weighted average number of shares
of common stock outstanding:
Basic 48,676,152 48,675,095
=========== ===========
Diluted 48,766,096 48,675,095
=========== ===========
Net income (loss) per share:
Basic $ 0.04 $ (0.13)
=========== ===========
Diluted $ 0.04 $ (0.13)
=========== ===========
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 5
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Thirty-nine weeks ended
---------------------------
September 29, September 30,
1998 1997
----------- -----------
Sales $ 142,255 $ 146,516
Costs and expenses:
Cost of sales (excluding depreciation) 41,918 44,195
Selling, general and administrative 86,435 90,393
Depreciation and amortization 7,570 8,235
Net special charges 610 9,991
----------- -----------
136,533 152,814
----------- -----------
Operating income (loss) 5,722 (6,298)
Interest expense 176 212
----------- -----------
Net income (loss) $ 5,546 $ (6,510)
=========== ===========
Weighted average number of shares
of common stock outstanding:
Basic 48,676,152 48,673,790
=========== ===========
Diluted 48,748,768 48,673,790
=========== ===========
Net income (loss) per share:
Basic $ 0.11 $ (0.13)
=========== ===========
Diluted $ 0.11 $ (0.13)
=========== ===========
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 6
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 1998
(dollars in thousands)
Accumulated
Additional Other Total
Common Paid-In Comprehensive Accumulated Stockholders'
Stock Capital Income Deficit Deficit
------ ---------- ------------ ----------- ------------
Balance at
December 30, 1997 $ 487 $ 55,870 $ (2,504) $ (93,951) $ (40,098)
Warrants exercised 1 1
Net income 5,546 5,546
------ ---------- ------------ ----------- ------------
Balance at
September 29, 1998 $ 487 $ 55,871 $ (2,504) $ (88,405) $ (34,551)
====== ========== ============ =========== ============
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 7
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Thirty-nine weeks ended
-------------------------
September 29, September 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 5,546 $ (6,510)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 7,570 8,235
(Gain) loss on disposition of assets (46) 223
Non-cash net special charges 5,191
Other, net 300 393
Changes in operating assets and liabilities:
Decrease in accounts and notes receivable 132 316
Increase in inventories (697) (545)
Increase (decrease) in prepaid expenses
and other 136 (877)
Increase in trade accounts payable, other
payables, accrued expenses and other
liabilities 2,374 3,118
----------- -----------
Net cash provided by operating activities 15,315 9,544
----------- -----------
Cash flows used in investing activities:
Purchases of property, plant and equipment (6,269) (4,032)
Expenditures charged to reserve for store
closings (1,045) (816)
Proceeds from the sale of property, plant
and equipment 1,106 154
Other, net 15 8
----------- -----------
Net cash used in investing activities (6,193) (4,686)
----------- -----------
Cash flows used in financing activities:
Payment of indebtedness (2,746) (5,493)
Other, net 164 (34)
----------- -----------
Net cash used in financing activities (2,582) (5,527)
----------- -----------
Increase (decrease) in cash and cash equivalents 6,540 (669)
Cash and cash equivalents at beginning of period 4,516 3,696
----------- -----------
Cash and cash equivalents at end of period $ 11,056 $ 3,027
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid, including $2,746 and $5,493
of interest in 1998 and 1997 classified as
payment of indebtedness $ 2,850 $ 5,499
=========== ===========
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 8
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: Summary of Significant Accounting Policies
Furr's/Bishop's, Incorporated, a Delaware corporation (the "Company"),
operates cafeterias and a buffet through its subsidiary Cafeteria Operators,
L.P., a Delaware limited partnership (together with its subsidiaries, the
"Partnership"). The financial statements presented herein are the unaudited
condensed consolidated financial statements of the Company and its majority
owned subsidiaries.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements, and notes thereto, which are
included in the Company's Form 10-K for the year ended December 30, 1997. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation.
The results of operations for the thirty-nine weeks ended September 29,
1998 may not be indicative of the results that may be expected for the fiscal
year ending December 29, 1998.
The following table reconciles the denominators of basic and diluted
earnings per share for the periods ended September 29, 1998 and September 30,
1997.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------- -------------------------
September 29, September 30, September 29, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Weighted average common
shares outstanding 48,676,152 48,675,095 48,676,152 48,673,790
Options 89,944 0 72,616 0
Warrants 0 0 0 0
----------- ----------- ----------- -----------
Total Shares 48,766,096 48,675,095 48,748,768 48,673,790
=========== =========== =========== ===========
Options outstanding for the thirteen and thirty-nine weeks ended September
30, 1997 and warrants outstanding for each of the periods were not considered
in the computation of net income (loss) per common share because their effect
is antidilutive.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income in a
full set of general-purpose financial statements. Comprehensive income
Page 9
includes net income and other comprehensive income which is generally comprised
of changes in the fair value of available-for-sale marketable securities,
foreign currency translation adjustments and adjustments to recognize
additional minimum pension liabilities. The Company had an accumulated other
comprehensive loss at December 30, 1997 of $2,504,000 consisting entirely of an
adjustment to recognize additional minimum pension liability. The Company had
no other comprehensive income for the thirty-nine weeks ended September 29,
1998 and September 30, 1997.
The Company is assessing the reporting and disclosure requirements of
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires a
public business enterprise to report financial and descriptive information
about its reportable operating segments. The statement is effective for
financial statements for periods beginning after December 31, 1997, but is not
required for interim financial statements in the initial year of its
application. The Company will adopt the provisions of this statement in its
December 29, 1998 consolidated financial statements.
NOTE B: Income Tax
During the thirty-nine week period ended September 29, 1998, the Company
had a net loss for income tax purposes. The resulting tax benefit from the net
operating loss has been offset by an increase in the tax valuation allowance.
NOTE C: Special Charges
For the quarter ended June 30, 1998, the Company recognized a special
charge of $610,000 related to the proxy contest for the election of the Board
of Directors.
For the quarter ended April 1, 1997, the Company recognized net special
charges of $2,431,000, including a charge of $1,888,000 for the writedown of
assets and adjustments to closed store reserves, a charge of $1,835,000 to
recognize the writedown of certain assets in accordance with Statement of
Financial Accounting Standards, No. 121, "Accounting for the Impairment of
Long-Lived Assets" ("SFAS121"), and a credit of $1,292,000 related to the
settlement of a lawsuit previously filed against the Company.
The loss from operations for the quarter ended September 30, 1997 includes
special charges of $7,560,000, which includes a charge of $4,800,000 for the
liability for the indemnification of litigation settlement costs and reasonable
expenses related to a suit filed by Michael J. Levenson, $1,563,000 for the
writedown of assets and adjustments to closed store reserves of units
previously closed and for two units to be closed, and $1,197,000 to recognize
the writedown of certain assets.
NOTE D: Contingencies
The Company, in the ordinary course of business, is a party to various
legal actions. In the opinion of management, these actions ultimately will be
disposed of in a manner which will not have a material adverse effect upon the
Company's financial condition or results of operations.
Page 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended September 29, 1998 Compared to Thirteen Weeks Ended
September 30, 1997
Results of operations. Sales for the third fiscal quarter of 1998 were
$48.0 million, a decrease of $1.4 million from the same quarter of 1997.
Operating income for the third quarter of 1998 was $2.1 million compared to an
operating loss of $6.1 million in the comparable period in the prior year. The
operating loss of the third quarter of 1997 included a special charge of $7.6
million. The net income for the third quarter of 1998 was $2.0 million
compared to a net loss of $6.2 million in the third quarter of 1997.
Sales. Restaurant sales in comparable units were 2.69% higher in the
third quarter of 1998 than the same quarter of 1997. Sales for the third
fiscal quarter were $2.4 million lower than the same period of the prior year
due to a decline in the number of units at period end from 110 in 1997 to 101
in 1998. Management anticipates that one or two additional units will close in
the last quarter of 1998. Sales by Dynamic Foods to third parties were $198
thousand lower in the third quarter of 1998 than the third quarter of the prior
year, reflecting an effort by management to improve margins by focusing on
sales to a smaller number of higher volume accounts.
Cost of sales. Excluding depreciation, cost of sales was 29.5% of sales
for the third quarter of 1998 as compared to 30.1% for the same quarter of
1997. The decrease in the percentage of sales was the result of changes in
pricing and menu mix. Produce costs in the current period were significantly
higher than the prior year period.
Selling, general and administrative. Selling, general and administrative
("SG&A") expense was lower in the aggregate by $982 thousand in the third
quarter of 1998 as compared to 1997 due primarily to there being fewer units
included in the operating results. Other changes in SG&A expense included an
increase of $95 thousand in marketing expense and $304 thousand in outside
professional fees that was partially offset by a decrease in salaries.
Depreciation and amortization. Depreciation and amortization expense was
lower by $278 thousand in the third quarter of 1998 due primarily to lower
depreciation on property, plant and equipment having been written down in
accordance with SFAS121.
Special charges. The operating loss for the quarter ended September 30,
1997 included special charges of $7.6 million, including $4.8 million for the
liability for the indemnification of litigation settlement costs and reasonable
expenses related to a lawsuit, $1.6 million for the writedown of assets and
adjustments to closed store reserves and $1.2 million to recognize the
writedown of certain assets.
Interest expense. Interest expense was $62 thousand in the third quarter
of 1998, which was slightly lower than the comparable period in the prior year.
In accordance with Statement of Financial Accounting Standards No. 15, the
Company's debt that was restructured at January 2, 1996 was recorded at the sum
of all future principal and interest payments and there is no recognition of
interest expense thereon.
Page 11
Thirty-nine Weeks Ended September 29, 1998 Compared to Thirty-nine Weeks Ended
September 30, 1997
Results of operations. Sales for the first thirty-nine weeks of 1998 were
$142.3 million, a decrease of $4.3 million from the same period of 1997.
Operating income for the first thirty-nine weeks of 1998 was $5.7 million
compared to an operating loss of $6.3 million in the comparable period in the
prior year. The operating income for the thirty-nine weeks of 1998 included a
special charge of $610 thousand, while the prior year period included net
special charges of $10.0 million. The net income for the first thirty-nine
weeks of 1998 was $5.5 million compared to a net loss of $6.5 million in the
same period of 1997.
Sales. Restaurant sales in comparable units were 2.51% higher in the
first thirty-nine weeks of 1998 than the same period of 1997. Sales for the
first thirty-nine weeks were $7.3 million lower than the same period of the
prior year due to there being nine fewer units included in operating results.
Sales by Dynamic Foods to third parties were $540 thousand lower in the first
thirty-nine weeks of 1998 than the same period of the prior year.
Cost of sales. Excluding depreciation, cost of sales was 29.5% of sales
for the first thirty-nine weeks of 1998 as compared to 30.2% for the same
period of 1997. The decrease in the percentage of sales was the result of
changes in pricing and menu mix. Produce costs in the current period were
higher than the prior year period.
Selling, general and administrative. Selling, general and administrative
("SG&A") expense was lower in the aggregate by $4.0 million in the first
thirty-nine weeks of 1998 as compared to 1997 due primarily to there being
fewer units included in the operating results. Other changes in SG&A expense
included an increase in 1998 of $375 thousand in outside professional fees that
was partially offset by a decrease in salaries, $286 thousand in marketing
expense and $244 thousand in labor and related benefits and a decrease of $248
thousand in utility expenses.
Depreciation and amortization. Depreciation and amortization expense was
lower by $665 thousand in the first thirty-nine weeks of 1998 due primarily to
lower depreciation on property, plant and equipment having been written down in
accordance with SFAS121.
Special charges. The operating income for the thirty-nine weeks ended
September 29, 1998 included a special charge of $610 thousand to reflect the
cost of the proxy contest for the election of the Board of Directors during the
second quarter. The loss from operations for the thirty-nine weeks ended
September 30, 1997 included net special charges of $10.0 million, which
included charges of $4.8 million for the liability for the indemnification of
litigation settlement costs and reasonable expenses related to a lawsuit,
charges of $3.5 million for the writedown of assets and adjustments to closed
store reserves, charges of $3.0 million for the writedown of certain assets and
a credit of $1.3 million related to the settlement of a lawsuit previously
filed against the Company.
Interest expense. Interest expense was $176 thousand in the first
thirty-nine weeks of 1998, which was slightly lower than the comparable period
in the prior year. In accordance with Statement of Financial Accounting
Standards No. 15, the Company's debt that was restructured at January 2, 1996
was recorded at the sum of all future principal and interest payments and there
is no recognition of interest expense thereon.
Page 12
LIQUIDITY AND CAPITAL RESOURCES OF
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
During the thirty-nine weeks ended September 29, 1998, cash provided by
operating activities of the Company was $15.3 million compared to $9.5 million
in the same period of 1997. The Company made capital expenditures of $6.3
million during the first thirty-nine weeks of 1998 compared to $4.0 million
during the same period of 1997. Most of the increase over the prior year
related to the remodels of eight cafeterias. Cash and cash equivalents were
$11.1 million at September 29, 1998 compared to $3.0 million at September 30,
1997. The current ratio of the Company was .70:1 at September 29, 1998
compared to .38:1 at September 30, 1997 and .48:1 at December 30, 1997. The
Company's total assets at September 29, 1998 aggregated $70.1 million, compared
to $66.0 million at September 30, 1997 and $65.8 million at December 30, 1997.
The improvement in results of operations in the thirty-nine weeks ended
September 29, 1998 over the comparable period of the prior year reflects the
impact of the present marketing program, operating cost controls and store
renovations.
The Company's restaurants are a cash business. Funds available from cash
sales are not needed to finance receivables and are not generally needed
immediately to pay for food, supplies and certain other expenses of the
restaurants. Therefore, the business and operations of the Company have not
historically required proportionately large amounts of working capital, which
is generally consistent with similar restaurant companies.
Total scheduled maturities of long-term debt and interest classified as
long-term debt of the Company and its subsidiaries over the next five calendar
years are: $2.7 million in the remainder of 1998, $5.5 million in 1999, $5.5
million in 2000 and $55.3 million in 2001.
The Company and its subsidiaries have significant annual interest payment
obligations under the $66.4 million of 12% Notes due December 31, 2001, which
includes $20.6 million of interest to maturity. The semi-annual interest
payments of $2.7 million on the 12% Notes are due on each March 31 and
September 30 and are not reflected as expense on the Company's statement of
operations, because of the manner in which that obligation was created in the
1995 restructuring. Instead, the entire amount of future interest payments is
reflected as part of the balance of the 12% Notes on the Company's balance
sheet. The obligations under the 12% Notes are secured by a security interest
in and a lien on all of the personal property of the Partnership and mortgages
on all fee and leasehold properties of the Partnership (to the extent such
properties are mortgageable). If the 12% Notes were to be settled for an
amount less than the carrying value on the Company's balance sheet, the Company
would report an extraordinary gain on its statement of operations. If the 12%
Notes were settled with proceeds from new indebtedness, interest on the new
indebtedness would be charged as expense on the Company's statement of
operations.
The Partnership has outstanding $2.5 million of 10.5% Notes due December
31, 2001. A semi-annual cash interest payment of approximately $134 thousand
is due on each June 30 and December 31.
In 1993, the Partnership entered into an amendment of a master sublease
agreement pursuant to which it leased 43 properties from Kmart Corporation
("Kmart"). Pursuant to the amendment and subject to the terms and conditions
Page 13
thereof, two properties were removed from the master sublease, and the
aggregate monthly rent for the period January 1, 1997 through and including
December 31, 1999 was reduced by 20%. The reductions in rent were subject to
termination by Kmart if Kevin E. Lewis ceased to be Chairman of the Board of
Directors of the Company. Mr. Lewis was not elected to the Board of Directors,
or as Chairman of the Board, at the meeting of stockholders on May 28, 1998 and
Kmart increased the rent, which is currently being paid under protest. The
additional rent payments through December 31, 1999 will amount to approximately
$1.8 million. The Company accounts for its rental payments under the
straight-line method, and the increase in rent through December 31, 1999 will
be amortized over the remaining life of the leases, which run through December
31, 2003, December 31, 2007, June 29, 2008 and December 31, 2008. The increase
in annual rent expense will be approximately $288 thousand.
Year 2000 Readiness Disclosure
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result, some
of these systems will not operate correctly after 1999 because they may
interpret "00" to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches, and
are commonly referred to as the "Year 2000 Problem."
The Company believes that it has identified all significant digital
systems and applications that will require modification to ensure Year 2000
compliance. The Company has commenced the process of modifying, upgrading and
replacing any digital systems that have been assessed as adversely affected,
and estimates that its compliance activities will be substantially completed no
later than the first quarter of 1999. The Company estimates that the total
costs of this effort during the 1998 and 1999 fiscal years will be less than
$500,000, which is being funded through operating cash flows. These estimates
are based on management's assumptions regarding future events, including the
continued availability of necessary resources and the effectiveness of hardware
and software solutions provided by third parties and by the Company's
information technology staff.
The Year 2000 Problem may also affect parties who provide critical goods
and services to the Company, for example banks, credit card companies, utility
providers and suppliers of raw and processed foodstuffs to the Company's
restaurants and its Dynamic Foods operation. The Company is evaluating the
extent to which the Company's operations are vulnerable to Year 2000 problems
of its material vendors and is seeking assurance of their Year 2000 compliance
status. Management believes that the Company's reliance upon large volumes of
independent consumer transactions at 100 restaurant locations, operation of its
own trucking fleet and utilization of the Dynamic Foods division to provide the
majority of its food products limit some aspects of the Company's Year 2000
exposure. However, the Company's ability to assure Year 2000 compliance by
many critical vendors is very limited. Year 2000 failures by one or more of
these vendors could disrupt materially the ability of the Company to operate.
The Company is in the process of preparing contingency plans to address the
possibility of significant performance failures by its material vendors, which
will include an analysis of advisable cash and inventory levels and
identification of alternative suppliers of critical goods and services. These
plans are expected to be completed by June 30, 1999. There is no assurance
that the Company can adequately plan for contingencies that may be associated
with Year 2000 failures by these third parties, or that alternative suppliers
Page 14
will be available and themselves unaffected by Year 2000 Problems. In
particular, management is not able to predict with any assurance the effect of
Year 2000 Problems in the food product industry or among the suppliers of
utilities such as electricity, water and telecommunications to the Company, and
specifically to its Dynamic Foods operation. An interruption of the operation
of Dynamic Foods may require the Company to close its restaurants until service
can be resumed.
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance includes certain statements that may
constitute "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995). Words such as "anticipate," "estimate,"
"project" and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements are subject to certain risks,
uncertainties and assumptions, including without limitation those discussed in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Should one or more of these risks materialize, or should any
of the underlying assumptions prove incorrect, actual results of current and
future operations may vary materially from those anticipated, estimated or
projected. Prospective investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company assumes no obligation to update any such forward-looking statements.
PART II
OTHER INFORMATION
Item 1. Legal Proceeding
(a) The Company filed a declaratory judgment lawsuit in State District
Court in Lubbock, Texas, in which it asks the Court to find that
the Company is not obligated to make severance payments that have
been demanded by Theodore Papit, the former President and CEO of
the Company. Mr. Papit submitted his resignation on May 28, 1998,
following the election at the Company's annual meeting of
shareholders of a slate of directors proposed by Teacher's
Insurance and Annuity Association of America ("TIAA"), the
Company's largest shareholder at that time. He subsequently
demanded payment of more than $500,000 of severance and other
amounts that he claimed were owing to him under a "President and
Chief Executive Officer Agreement" dated March 23, 1998. This
Agreement was approved by a split vote of the Board of Directors
after TIAA had publicly announced that it might take action
affecting the control of the Company. The Company has requested a
jury trial and believes that there are a number of grounds that
will support the Court in granting the requested relief, among them
being that the Agreement is void as an interested party transaction
that did not receive the necessary approval of independent,
disinterested directors, the terms of the Agreement are not fair to
the Company and the Agreement was entered into by the Company
without the benefit of full disclosure by Mr. Papit and
consideration by the Board of Directors of material information
regarding his management of the Company.
Page 15
(b) The Company and certain of its subsidiaries, the Cavalcade Pension
Plan, the Cavalcade Pension Plan Committee (consisting of Donald
Dodson, Kevin Lewis, Alton Smith and Carlene Stewart), Kmart
Corporation and its Pension Plan and Michael Levenson are
Defendants in a lawsuit brought against them in U.S. District Court
in Denver, Colorado by Robert H. Aull ("Plaintiff"), a former
employee of the Company and a participant in the Cavalcade Pension
Plan. The Plaintiff has requested that the Court certify a class
of other Plaintiffs who are similarly situated and seeks
unspecified damages.
The Plaintiff's allegations (all of which are disputed by the
Company) include: (i) that accrued benefits under the Cavalcade
Pension Plan have been improperly reduced, (ii) the "freeze" of the
Plan on June 30, 1989 was improper, (iii) an insufficient amount of
assets was transferred from the Kmart Pension Plan to the Cavalcade
Pension Plan in connection with the acquisition of the Company from
Kmart effected by Mr. Levenson and his affiliates, (iv) rent
concessions allowed to the Company by Kmart constituted prohibited
transactions that have bestowed illegal benefits upon the Company
and Mr. Lewis. The Court has deferred to February 1999 a scheduled
hearing on all pending motions in recognition of the expressed
desire of the parties to pursue mediation of the dispute with the
objective of achieving a settlement of all claims, which is
proceeding.
The Company has been defending this litigation vigorously.
Management believes that the Company, its affiliates and the Plan
Committee have meritorious defenses to the claims made by the
Plaintiff. Management also believes that the Cavalcade Pension
Plan is adequately funded to satisfy existing benefit levels and
that any increase in benefits that might result from this
litigation could be paid by the Plan from Plan assets or from
increased future contributions to the Plan in amounts that would
not have a material adverse effect on the financial condition or
results of operations of the Company. Because of the inherent
uncertainty of litigation, management cannot offer assurance that
the litigation will be resolved on terms that are favorable to the
Company or that will avoid the incurrence of material expense by
the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Risk Factors - Exhibit 99.1
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 2, 1998 with respect to
the appointment of Phillip Ratner as President and Chief Executive
Officer of the Company and the related Employment Agreement, the
Indemnification Agreement and the Nonqualified Stock Option
Agreement between the company and Mr. Ratner as of September 27,
1998.
The Board of Directors of the Company increased the size of the
board by one and elected Mr. Ratner to fill the newly created
opening.
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FURR'S/BISHOP'S, INCORPORATED FURR'S/BISHOP'S, INCORPORATED
BY: /s/Phillip Ratner /s/ Alton R. Smith
------------------------------ -----------------------------
Phillip Ratner Alton R. Smith
President and Chief Executive Officer Principal Accounting Officer
DATE: November 11, 1998
Page 17
Exhibit 99.1
RISK FACTORS
Prospective investors should carefully consider, among other things, the
significant factors described below which are associated with Furr's/Bishop's,
Incorporated (together with its subsidiaries, the "Company") before making an
investment in any security of the Company.
Capital Expenditures, Access to Capital
The Company has had limited funds in recent years to apply to capital
maintenance of many of its restaurants, and many of its restaurants have not
been recently updated. In 1997 the Company began implementing a plan to
remodel certain of its stores in designated markets, which has resulted in
generally positive effects on individual store revenues where the remodeling
has been completed. The results of the remodeling program to date suggest that
it would be beneficial for the Company to implement the remodeling program more
broadly. Management is also considering opening new restaurants in selected
markets to replace units closed due to lease terminations and to build on the
Company's name identification and marketing as well as to enhance operating
efficiencies in those markets. Substantial capital expenditures will be
required to meet the requirements of capital maintenance and to implement these
plans. Management believes that the proposed capital expenditure program is
necessary to enable the Company and its subsidiaries to maintain or improve
customer counts, increase revenues and improve profitability.
The Company, through its subsidiary Cafeteria Operators, L.P. (together
with its subsidiaries, the "Partnership"), will be required to make significant
payments with respect to its debt, and the Company will be required to make
significant payments with respect to obligations incurred in connection with
the settlement of litigation in prior periods. These payments will limit the
Company's ability to make future capital expenditures. The Company does not
presently have access to sufficient capital to satisfy all of the needs that
have been identified. In response, management is preparing a more detailed
capital plan and plans to seek additional capital in 1999, including a
potential refinancing of the Partnership's 12% Senior Secured Notes due
December 31, 2001 (the "12% Notes"). There is no assurance that the Company
will be able to obtain capital from sources outside the Company in amounts or
at a cost that will allow the Company to meet the capital needs identified
above or to refinance the 12% Notes. In the meantime, a capital plan is being
prepared to address some of the Company's most pressing needs within the limits
of the Company's anticipated cash flow for 1998 and 1999.
The Company's ability to implement these plans will be impaired if the
Company experiences any unexpected cash requirements or a decline in operating
cash flow to devote to these projects. The Company's ability to incur
additional debt to fund capital requirements or for other purposes is limited
by the terms of the Indenture governing the Partnership's 12% Notes (the
"Indenture"), which generally limit the Company to a $5 million revolving line
(which has not been implemented to date), purchase money debt and leasing as
sources of additional funding. Management believes that the Company is likely
to continue to experience impaired access to capital due to its recent losses,
the restructuring of its debt in 1995 and the absence of an active trading
market for its debt and equity securities. Management believes that the
Company can operate at levels comparable to recent periods while relying on
internal cash flow to fund capital requirements if recent results continue and
no unexpected contingencies arise. The Company's prospects for improved
operating results will depend on the availability of outside sources of
capital. If the Company's near and long-term capital needs cannot be met, the
Company's results of operations, cash flows and financial condition will be
materially adversely affected.
Leverage
As of September 29, 1998, the Partnership had outstanding $66.4 million of
the 12% Notes, which includes approximately $20.6 million of interest accrued
through maturity, and the Company had total indebtedness of approximately $69.0
million. At such date, the Company's total assets were approximately $70.1
million.
In addition to certain customary affirmative covenants, the Indenture
contains covenants that, among other things, restrict the ability of the
Company and each of its subsidiaries, subject to certain exceptions contained
therein, to incur debt, make distributions to the Company or transfer assets.
The restrictions may limit the ability of the Company to expand its business
and take other actions that the Company considers to be in its best interest.
The Company and its subsidiaries presently have significant annual
interest expense payment obligations under outstanding debt instruments. The
interest payments on the 12% Notes are not reflected as an expense on the
Company's statement of operations because of the manner in which that
obligation was created in the 1995 restructuring. Instead, the entire amount
of future interest payments is reflected as part of the balance of the 12%
Notes on the Company's balance sheet. If the 12% Notes were to be settled for
an amount less than their carrying value on the Company's balance sheet, the
Company would report an extraordinary gain on its statement of operations.
Thereafter, if the 12% Notes were settled with proceeds from new indebtedness,
interest on the new indebtedness would be charged as an expense on the
Company's statement of operations. See the footnotes to the Company's audited
financial statements included in the 1997 Form 10K.
The ability of the Company and its subsidiaries to satisfy their
respective obligations is dependent upon their future performance, which will
be subject to financial, business and other risk factors affecting the business
and operations of the Company, including risk factors beyond the control of the
Company and its subsidiaries, such as prevailing economic conditions. The
Company is presently in compliance with the terms of the Indenture and its
other debt obligations, but there is no assurance that the Company will be able
to maintain compliance with such terms, refinance its existing debt or that any
additional financing will be obtainable in order to pursue the Company's plans.
Ownership of the Company, Recent Management Changes
As a result of the comprehensive restructuring of the Company completed in
1995 and subsequent sales of its common stock, par value $.01 per share (the
"Common Stock") by certain security holders and purchases by other investors,
approximately 86% of the outstanding Common Stock is owned by seven investors
who have made filings with the Securities and Exchange Commission under Section
13 of the Securities Exchange Act of 1934, as amended. Management believes
these holders intend to vote separately upon all matters submitted to a vote of
security holders of the Company. To the Company's knowledge, there are no
agreements, arrangements or understandings among any of these security holders
concerning the voting or disposition of any of their Common Stock or any other
matter regarding the Company or which might be the subject of a vote of the
Company's stockholders. Also, no security holder (or affiliated group of
security holders) is a beneficial owner of more than 25% of the Common Stock;
accordingly, no single security holder or affiliated group could itself approve
any matter regarding the Company or which might be the subject of a vote of the
Company's stockholders.
In March 1998, Teacher's Insurance and Annuity Association of America
("TIAA"), the Company's largest single shareholder at that time, filed a
Schedule 13D indicating, among other things, that TIAA might take action to
influence the composition of the Company's Board of Directors. In April 1998,
TIAA proposed that the present members of the Board of Directors be elected as
the Board of Directors at the Company's Annual Meeting of Stockholders in
opposition to a slate of directors nominated by the nominating committee of the
Board of Directors serving at that time. The directors nominated by TIAA were
elected by a vote of more than 95% of the shares present and entitled to vote
at the Annual Meeting. None of such directors, however, is affiliated with
TIAA and, to the Company's knowledge, there is no agreement, understanding or
arrangement among any security holders or any such director concerning any
matter regarding the governance of the Company. In July 1998 TIAA withdrew its
Schedule 13D, which was replaced by a Schedule 13G.
The President and CEO of the Company at the time of the May 1998 Annual
Meeting of Stockholders resigned immediately following the election of the
current Board of Directors at that meeting. The former President and CEO had
been hired by the Company in March 1997 and had announced his resignation in
September 1997, which was followed by his service as interim CEO until March
1998 and as President and CEO through May 1998. From the time of the election
of the present Board of Directors in May 1998 until September 27, 1998, Suzanne
Hopgood, a member of the Board of Directors since 1996 and currently Chairman
of the Board, served as acting CEO while the Board of Directors conducted a
search for a new President and CEO. Only two of the seven members of the
current Board of Directors, Ms. Hopgood and Mr. Osnos, served as directors
prior to the May 1998 Annual Meeting. The new President and CEO, Phil Ratner,
was hired on September 27, 1998 and appointed to the Board of Directors. It is
possible that some period of time will be required before Mr. Ratner, as the
new CEO, can begin influencing the management and results of operations of the
Company.
History of Losses, Stockholders' Deficit
Through fiscal year 1995, the Company had not reported net income since
its inception in 1991. Although the Company reported net income from
operations of $8.4 million for fiscal year 1996, the Company reported a net
loss from operations of $5.4 million for fiscal year 1997. The Company
reported net income of $5.5 million for the thirty-nine week period ended
September 29, 1998, compared to a net loss of $6.5 million in the same period
of 1997. Among the causes contributing to the Company's losses have been
excessive leverage, litigation and settlement expenses and costs associated
with closing of its restaurants. The Company continues to have a significant
amount of indebtedness and related debt service will require the expenditure of
significant sums by the Company in the future. The Company continues to be
party to various litigation matters. While management believes that the
Company has adequate reserves established to address known contingencies, there
is no assurance that adverse results in litigation will not result in
additional material expense in the future. Management does not presently
anticipate material additional expenses from restaurant closings in 1998 or
1999, but the Company is preparing a strategic plan that will seek to improve
the Company's overall operating efficiency by emphasizing focusing on markets
where the Company has significant operations. There is no assurance that the
strategic plan adopted by the Company will not contemplate additional closings
of weaker restaurants that could result in material additional charges.
The Company's losses have contributed to a material continuing
stockholders' deficit. The Company's stockholders' deficit at December 30,
1997 was approximately $40.1 million and at September 29, 1998 was
approximately $34.6 million. The Company's operating cash flow since
completion of the 1995 restructuring has been sufficient to support its
operations and to satisfy all of its obligations as they have come due, and
management expects that this will continue to be the case. However, it is
likely that the Company will continue to have a substantial stockholders'
deficit for several years, at a minimum, and there is no assurance that the
Company's net income or additional capital infusions or other transactions will
be available or sufficient to produce a positive stockholders' capital.
Management believes that the principal disadvantages to the Company of its
stockholders' deficit are its diminished attractiveness as a recipient of
capital funding and favorable trade credit terms from vendors, potentially
resulting in higher capital and trade credit costs to the Company than would
otherwise be available.
Absence of an Established Public Market
The Company's Common Stock and the Partnership's 12% Notes are listed for
trading on the New York Stock Exchange. However, no assurance can be given as
to the prices or liquidity of the Common Stock or the 12% Notes. The liquidity
of any market for the Common Stock and the 12% Notes will depend upon the
number of holders of such securities, interest of securities dealers in making
a market in them and other factors. The liquidity of the Common Stock or the
12% Notes may also be adversely affected by general declines in the market for
similar securities. Such declines may adversely affect the liquidity of the
Common Stock or the 12% Notes, independent of the financial performance of, and
the prospects for, the Company. Accordingly, no assurance can be given that a
holder of the Common Stock or the 12% Notes will be able to sell its securities
in the future or that any future sale can be consummated at a price equal to or
higher than the price at which such securities were originally purchased.