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 28, 1999
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
3001 E. PRESIDENT GEORGE BUSH HIGHWAY, SUITE 200, RICHARDSON, TX 75082
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 808-2923
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 8, 1999 there were 48,789,544 shares of Common Stock
outstanding.
Page 1 of 18
Exhibit Index Located on Page 17
1
FURR'S/BISHOP'S, INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 28, 1999(Unaudited) and December 29, 1998 3
Unaudited Condensed Consolidated Statements
Of Operations - For the thirteen weeks ended
September 28, 1999 and September 29, 1998
5
Unaudited Condensed Consolidated Statements
of Operations - For the thirty-nine weeks
ended September 28, 1999 and September 29, 1998 6
Unaudited Condensed Consolidated Statement
of Stockholders' Deficit - For the thirty-nine weeks
ended September 28, 1999 8
Unaudited Condensed Consolidated Statements
of Cash Flows - For the thirty-nine weeks
ended September 28, 1999 and September 29, 1998 10
Notes to Unaudited Condensed Consolidated
Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Page 2
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value amounts)
September 28, December 29,
1999 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,415 $ 11,571
Accounts and notes receivable, net 1,191 715
Inventories 6,990 7,014
Prepaid expenses and other 1,088 441
----------- ----------
Total current assets 15,684 19,741
Property, plant and equipment, net 53,471 48,320
Other assets 794 448
----------- ----------
$ 69,949 $ 68,509
=========== ==========
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 28, December 29,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 5,493 $ 5,493
Trade accounts payable 5,240 3,990
Other payables and accrued expenses 16,077 17,303
Reserve for store closings - current portion 1,147 1,316
---------- -----------
Total current liabilities 27,957 28,102
Reserve for store closings, net of current portion 2,662 3,280
Long-term debt, net of current portion 57,966 60,712
Other payables 16,017 15,697
Excess of future lease payments over fair value,
net of amortization 2,024 2,330
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, 48,789,544 and
48,736,606 issued and outstanding
in 1999 and 1998, respectively 488 487
Additional paid-in capital 55,996 55,938
Accumulated other comprehensive income (2,857) (2,857)
Accumulated deficit (90,304) (95,180)
----------- ------------
Total stockholders' deficit (36,677) (41,612)
----------- ------------
$ 69,949 $ 68,509
=========== ============
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 28, September 29,
1999 1998
---- ----
Sales $ 47,788 $ 48,011
Costs and expenses:
Cost of sales (excluding depreciation) 14,552 14,152
Selling, general and administrative 28,380 29,251
Depreciation and amortization 2,432 2,543
----------- ------------
45,364 45,946
------------ ------------
Operating income 2,424 2,065
Interest expense 85 62
------------ ------------
Net income $ 2,339 $ 2,003
=========== ============
Weighted average number of shares of common stock outstanding:
Basic 48,789,544 48,676,152
============ ============
Diluted 48,793,767 48,766,096
============ ============
Net income per share:
Basic $ 0.05 $ 0.04
============ ============
Diluted $ 0.05 $ 0.04
============ =============
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 28, September 29,
1999 1998
---- ----
Sales $ 140,987 $ 142,255
Costs and expenses:
Cost of sales (excluding depreciation) 42,164 41,918
Selling, general and administrative 85,846 86,435
Depreciation and amortization 7,303 7,570
Special charge 566 610
------------ -----------
135,879 136,533
------------ -----------
Operating income 5,108 5,722
Interest expense 232 176
------------ -----------
Net income $ 4,876 $ 5,546
============ ===========
Weighted average number of shares of common stock outstanding:
Basic 48,784,355 48,676,152
============ ===========
Diluted 48,995,087 48,748,768
============ ===========
Net income per share:
Basic $ 0.10 $ 0.11
============ ===========
Diluted $ 0.10 $ 0.11
============ ============
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 28, 1999
(dollars in thousands)
Accumulated
Additional Other Total
Common Paid-In Comprehensive Accumulated Stockholders'
Stock Capital Income Deficit Deficit
----- ---------- ------------- ----------- -------------
Balance at
December 29, 1998 $ 487 $ 55,938 $ (2,857) $ (95,180) $ (41,612)
Warrants exercised 1 58 59
Net income 4,876 4,876
-------- ----------- ----------- ---------- ---------
Balance at
September 28, 1999 $ 488 $ 55,996 $ (2,857) $ (90,304) $ (36,677)
======== ========== ========== ========== ==========
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 28, September 29,
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) $ 4,876 $ 5,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,303 7,570
Gain on disposition of assets (148) (46)
Other, net 334 300
Changes in operating assets and liabilities:
Accounts and notes receivable (351) 132
Inventories 24 (697)
Prepaid expenses and other (647) 136
Trade accounts payable, other payables,
accrued expenses and other liabilities 24 2,374
---------- ---------
Net cash provided by operating activities 11,415 15,315
---------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (15,495) (6,269)
Expenditures charged to reserve for store closings (940) (1,045)
Proceeds from the sale of property, plant and equipment 2,756 1,106
Other, net (19) 15
---------- ---------
Net cash used in investing activities (13,698) (6,193)
---------- ----------
Cash flows from financing activities:
Payment of indebtedness (2,746) (2,746)
Other, net (127) 164
---------- ---------
Net cash used in financing activities (2,873) (2,582)
---------- ----------
Increase (decrease) in cash and cash equivalents (5,156) 6,540
Cash and cash equivalents at beginning of period 11,571 4,516
---------- ---------
Cash and cash equivalents at end of period $ 6,415 $ 11,056
========== =========
Supplemental disclosure of cash flow information:
Interest paid, including $2,746 of interest in 1999
and 1998 classified as payment of indebtedness $ 2,905 $ 2,850
========== ==========
Non-cash investing activity:
Note receivable for sale of asset $ 125 $ -
========== ==========
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 97 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 29, 1998. 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 28,
1999 may not be indicative of the results that may be expected for the fiscal
year ending December 28, 1999.
The following table reconciles the weighted average number of shares in
computing of basic and diluted earnings per share for the periods ended
September 28, 1999 and September 29, 1998.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- ---------------------------
September 28, September 29, September 28, September 29,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average common
shares outstanding 48,789,544 48,676,152 48,784,355 48,676,152
Options 4,223 89,944 210,732 72,616
Warrants 0 0 0 0
---------- ---------- ---------- ----------
Total Shares 48,793,767 48,766,096 48,995,087 48,748,768
========== ========== ========== ==========
Warrants outstanding for the thirteen and thirty-nine weeks ended
September 28, 1999 and September 29, 1998 were not considered in the computation
of net income per common share because their effect is antidilutive.
NOTE B: Income Tax
During the thirty-nine week period ended September 28, 1999, 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 March 30,1999, the Company recognized a special
charge of $566,000 for the costs associated with the move of the Company's
support center from Lubbock, Texas to Richardson, Texas. 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.
Page 9
NOTE D: Business Segments
Following is a summary of segment information of the Company for the
thirteen weeks ended September 28, 1999 and September 29, 1998:
Cafeterias Dynamic Foods Total
---------- ------------- -----
1999:
External revenues $ 47,425 $ 363 $ 47,788
Intersegment revenues - 15,115 15,115
Depreciation and amortization 2,196 236 2,432
Segment profit 2,293 46 2,339
1998:
External revenues 47,757 254 48,011
Intersegment revenues - 14,925 14,925
Depreciation and amortization 2,340 203 2,543
Segment profit 1,581 422 2,003
Following is a summary of segment information of the Company for the thirty-nine
weeks ended September 28, 1999 and September 29, 1998:
Cafeterias Dynamic Foods Total
---------- ------------- -----
1999:
External revenues $ 140,120 $ 867 $ 140,987
Intersegment revenues - 44,794 44,794
Depreciation and amortization 6,591 712 7,303
Segment profit 4,240 636 4,876
1998:
External revenues 141,480 775 142,255
Intersegment revenues - 43,616 43,616
Depreciation and amortization 6,956 614 7,570
Segment profit 4,434 1,112 5,546
Following is a reconciliation of revenues of the reportable segments to the
Company's consolidated totals for the thirteen and thirty-nine weeks ended
September 28, 1999 and September 29, 1998:
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------------- ----------------------------------
September 28, September 29, September 28, September 29,
1999 1998 1999 1998
------------- ------------- ------------ -------------
Revenues
Total revenues of reportable segments $ 62,903 $ 62,936 $ 185,781 $ 185,871
Elimination of inter-segment revenue (15,115) (14,925) (44,794) (43,616)
------------ ---------- ---------- ----------
Total consolidated revenues $ 47,788 $ 48,011 $ 140,987 $ 142,255
============ ========== ========== ==========
Page 10
NOTE E: New Accounting Pronouncements
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use".
SOP 98-1 requires companies to capitalize certain internal-use software costs
once certain criteria are met. Adoption of this statement did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants SOP 98-5, "Reporting on the Costs of Start-up
Activities". SOP 98-5 requires costs of start-up activities to be expensed when
incurred. Adoption of this statement did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
NOTE F: Contingencies
As discussed in Part II, Item 1 of this report on Form 10-Q and in the
Company's 1998 Form 10-K, the Company, in the ordinary course of business, is a
party to various legal action. 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 equity, results of operations, and liquidity
and capital resources after consideration of the applicable amounts previously
accrued.
Page 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1999 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 1998
RESULTS OF OPERATIONS. Sales for the third fiscal quarter of 1999 were
$47.8 million, a decrease of $223 thousand from the same quarter of 1998.
Operating income for the third quarter of 1999 was $2.4 million compared to $2.1
million in the comparable period in the prior year. The net income for the third
quarter of 1999 was $2.3 million compared to $2.0 million in the third quarter
of 1998.
SALES. Restaurant sales in comparable units were 1.6% higher in the
third quarter of 1999 than the same quarter of 1998, due primarily to the
Company's reimaging program. Sales for the third fiscal quarter were $333
thousand lower than the same period of the prior year due to there being a net
of three fewer units included in the operating results. Sales by Dynamic Foods
to third parties were $109 thousand higher in the third quarter of 1999 than the
third quarter of the prior year.
COST OF SALES. Excluding depreciation, cost of sales was 30.5% of sales
for the third quarter of 1999 as compared to 29.5% for the same quarter of 1998.
Fish 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 $871 thousand in
the third quarter of 1999 as compared to 1998. Changes in SG&A expense included
increases of $250 thousand in marketing expense and $230 thousand in labor and
related expense. Other changes in SG&A expense included decreases of $1.3
million in workers' comp and casualty insurance expense due to improved risk
management efforts and claims experience.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was lower by $111 thousand in the third quarter of 1999 due primarily to the
writing off of property, plant and equipment lacking a useful life in
restaurants being remodeled during the current year.
INTEREST EXPENSE. Interest expense was $85 thousand in the third
quarter of 1999, which was $23 thousand higher than the comparable period in the
prior year. In accordance with SFAS 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.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 1998
RESULTS OF OPERATIONS. Sales for the first thirty-nine weeks of 1999
were $141.0 million, a decrease of $1.3 million from the same period of 1998.
Operating income for the first thirty-nine weeks of 1999 was $5.1 million
compared to $5.7 million in the comparable period in the prior year. Operating
income for the thirty-nine weeks of 1999 included a special charge of $566
thousand, while the prior year period included a special charge of $610
thousand. The net income for the first thirty-nine weeks of 1999 was $4.9
million compared to $5.5 million in the same period of 1998.
SALES. Restaurant sales in comparable units were 1.8% higher in the
first thirty-nine weeks of 1999 than the same period of 1998,due primarily to
the Company's reimaging program. Sales for the first thirty-nine weeks were $1.4
million lower than the same period of the prior year due to there being a net of
three fewer units included in operating results. Sales by Dynamic Foods to third
parties were $92 thousand higher in the first thirty-nine weeks of 1999 than the
same period of the prior year.
COST OF SALES. Excluding depreciation, cost of sales was 29.9% of sales
for the first thirty-nine weeks of 1999 as compared to 29.5% for the same period
of 1998. Fish costs in the current period were significantly higher than the
prior year period.
Page 12
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expense was lower in the aggregate by $589 thousand in
the first thirty-nine weeks of 1999 as compared to 1998. Changes in SG&A expense
included increases in 1999 of $1.3 million in labor and related expense and $475
thousand in marketing expense. Other changes in SG&A expense included decreases
of $1.8 million in workers' comp and casualty insurance expense due to improved
risk management efforts and claims experience.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was lower by $267 thousand in the first thirty-nine weeks of 1999 due primarily
to the writing off of useful life in restaurants being remodeled during the
current year.
SPECIAL CHARGES. Operating income for the thirty-nine weeks ended
September 28, 1999 included a special charge of $566 thousand to reflect the
cost of the move of the Company's Support Center from Lubbock, Texas to
Richardson, Texas. 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.
INTEREST EXPENSE. Interest expense was $232 thousand in the first
thirty-nine weeks of 1999, which was $56 thousand higher 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.
LIQUIDITY AND CAPITAL RESOURCES OF
FURR'S/BISHOP'S, INCORPORATED AND SUBSIDIARIES
During the thirty-nine weeks ended September 28, 1999, cash provided by
operating activities of the Company was $11.4 million compared to $15.3 million
in the same period of 1998. The Company made capital expenditures of $15.5
million during the first thirty-nine weeks of 1999 compared to $6.3 million
during the same period of 1998. Most of the increase over the prior year related
to the remodels of twenty cafeterias. Cash and cash equivalents were $6.4
million at September 28, 1999 compared to $11.1 million at September 29, 1998.
The current ratio of the Company was .56:1 at September 28, 1999 compared to
.70:1 at September 29, 1998 and .70:1 at December 29,1998. The Company's total
assets at September 28, 1999 aggregated $69.9 million, compared to $70.1 million
at September 29, 1998 and $68.5 million at December 29, 1998.
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 1999, $5.5 million in 2000 and $55.3
million in 2001.
The Company has outstanding $61.0 million of 12% Notes due December 31,
2001, which includes $15.1 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. 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).
The Company has outstanding $2.5 million of 10.5% Notes due
December 31, 2001. A semi-
Page 13
annual cash interest payment of approximately $134 thousand is due on each
June 30 and December 31.
The Company is pursuing a program of remodeling existing cafeterias and
opening new restaurants. The Company anticipates expending approximately $15 to
$20 million in fiscal year 1999 to remodel existing cafeterias and open new
restaurants and to make other capital expenditures, of which $15.1 million has
been expended to date. No assurance can be given that the Company will generate
sufficient funds from operations or obtain alternative financing sources to
enable it to fully implement the anticipated capital expenditures.
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 completed the modification, upgrading, and replacing
of the digital systems that have been identified as adversely affected by Y2K.
The Company's total costs of this effort during the 1998 and 1999 fiscal years
has been approximately $400 thousand, which is being funded through operating
cash flows.
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 has evaluated the
extent to which the Company's operations are vulnerable to Year 2000 problems of
its material vendors and has sought 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.
The Company has sent Y2K readiness questionnaires to all of its major
vendors. Although not all vendors have provided the Company with Year 2000
compliance assurances, the Company does not anticipate any material problems
with its major vendors. However, the Company has completed contingency plans to
address the possibility of significant performance failures by its major
vendors. 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 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 could require the
Company to close its restaurants until service can be resumed.
Page 14
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in commodity prices.
The Company purchases certain commodities used in food preparation. These
commodities are generally purchased based upon market prices established with
vendors. These purchase arrangements may contain contractual features that limit
the price paid by establishing certain price floors or caps. The Company does
not use financial instruments to hedge commodity prices because these purchase
arrangements help control the ultimate cost paid and any commodity price
aberrations are generally short term in nature.
The Company's long term debt does not expose it to market risk as all
interest accrues at fixed rates. The Company does not use derivative financial
instruments to manage overall borrowing costs.
The discussion in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" of the Company's plans, and management's
expectations, relating to the Company's business, including Year 2000
compliance, as well as other portions of this report, 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" and elsewhere in this report. 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.
Page 15
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
(a) The Company and certain of its subsidiaries, the
Cavalcade Pension Plan, the Cavalcade Pension Plan Committee,
Kmart Corporation and its pension plan and Michael Levenson
have since 1996 been 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
requested that the Court certify a class of other plaintiffs
who are similarly situated and sought unspecified damages.
The Plaintiff's allegations (all of which are
disputed by the defendants in the case) included: (i) that
accrued benefits under the Cavalcade Pension Plan were
improperly reduced during the period from 1988 to 1993, (ii)
the "freeze" of the Plan on June 30, 1989 was improper, (iii)
an insufficient amount of assets was transferred from the
Kmart Corporation pension plan to the Cavalcade Pension Plan
in connection with the acquisition of the Company from Kmart
effected by Mr. Levenson and his affiliates in 1988 and (iv)
rent concessions allowed to the Company by Kmart commencing in
1993 constituted prohibited transactions that bestowed illegal
benefits upon the Company and Mr. Kevin Lewis, former Chairman
of the Board of the Company.
The Company, the Cavalcade Pension Plan, the members
of the Cavalcade Pension Plan Committee, Kmart Corporation and
its pension plan have entered into a definitive settlement
agreement (the "Agreement") with the plaintiff and his counsel
that would resolve all outstanding claims among them. The
Agreement is subject to (1) confirmation by an independent
actuary of the calculations that support the proposed
settlement and (2) approval of the settlement as "fair" to all
members of the plaintiff class by the court after notice to
all purported class members and a hearing. The Agreement has
been filed with the court. The Company expected the required
hearing would be completed by the end of the second quarter of
1999. Delays in obtaining confirmation by the independent
actuary have delayed the likely date of the fairness hearing
to the fourth quarter of 1999. The Company is not able to
provide assurance that the conditions to the proposed
settlement will be satisfied or that the proposed settlement
will be implemented as described herein.
As a result of the settlement of the Aull litigation
and the concurrent resolution of an IRS audit of the Plan that
focused on substantially identical issues, the Company has
recognized a special charge of $5.8 million in the fourth
quarter of 1998, of which approximately $2.2 million relates
to resolution of the IRS audit and is not contingent upon
actuarial review or the fairness hearing in the Aull
litigation.
The anticipated cash impact of the proposed
settlement on the Company includes payment in 2000 of
approximately $1.5 million 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 will
not require any funding payments to the Plan by the Company in
1999 but is expected to require payments by the Company to the
Plan of approximately $1.7 million in 2000 and approximately
$850 thousand in 2001, 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. The Agreement provides for Kmart Corporation's
pension plan to transfer $700 thousand to the Cavalcade
Pension Plan to fund a portion of the additional benefits
required by the Agreement. Management does not believe that
payment of these amounts in 1999 and subsequent years will
have a material adverse effect on the Company's planned
operations.
Page 16
(b) The Company filed a declaratory judgement lawsuit in
the 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 thousand 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27-Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
September 28, 1999.
Page 17
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/ Paul G. Hargett
------------------------------------- -----------------------------
Phillip Ratner Paul G. Hargett
President and Chief Executive Officer Chief Financial Officer
DATE: November 9, 1999
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