-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pv7iJjIJVee1qggIiyKavrEx5xim7xp1RlVXUs41HjL9NhJx1FLHfp7Z0aONFvy8 TsHbnwiPO92CxyfYB3GSVg== 0000872548-98-000011.txt : 19981116 0000872548-98-000011.hdr.sgml : 19981116 ACCESSION NUMBER: 0000872548-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980929 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FURRS BISHOPS INC CENTRAL INDEX KEY: 0000872548 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 752350724 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10725 FILM NUMBER: 98745973 BUSINESS ADDRESS: STREET 1: 6901 QUAKER AVE CITY: LUBBOCK STATE: TX ZIP: 79413 BUSINESS PHONE: 8067927151 MAIL ADDRESS: STREET 1: 6901 QUAKER AVE CITY: LUBBOCK STATE: TX ZIP: 79413 10-Q 1 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. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FURR'S/BISHOP'S, INCORPORATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED SEPTEMBER 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-29-1998 DEC-31-1997 SEP-29-1998 11,056 0 777 27 6,735 19,527 104,751 54,673 70,053 28,089 63,459 0 0 487 (35,038) 70,053 142,255 142,255 41,918 41,918 94,615 0 176 5,546 0 5,546 0 0 0 5,546 0.11 0.11
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