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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
REGISTRATION NO. 333-4578
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CAFETERIA OPERATORS, L.P.
(Exact name of registrant as specified in its charter)
---------------------
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DELAWARE 5812 75-2186655
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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6901 QUAKER AVENUE
LUBBOCK, TEXAS 79413
(806) 792-7151
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
THEODORE J. PAPIT
CAFETERIA OPERATORS, L.P.
6901 QUAKER AVENUE
LUBBOCK, TEXAS 79413
(806) 792-7151
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
With a copy to:
KENNETH L. STEWART, ESQ.
FULBRIGHT & JAWORSKI L.L.P.
2200 ROSS AVENUE, SUITE 2800
DALLAS, TX 75201
(214) 855-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
From time to time after this Registration Statement became effective.
If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number off the earlier effective
registration statement for the same offering. [ ] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CAFETERIA OPERATORS, L.P.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY FORM S-1
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REGISTRATION STATEMENT ITEM LOCATION IN PROSPECTUS
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A. Information About the Transaction
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Facing Page; Cross Reference Sheet; Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... *
6. Dilution............................................. *
7. Selling Security Holders............................. Selling Security Holders
8. Plan of Distribution................................. Plan of Distribution
9. Description of Securities to be Registered........... Description of Notes
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information With Respect to the Registrant........... Outside Front Cover Page; Available
Information; Prospectus Summary;
Background; The Restructuring;
Business; Risk Factors; Selected
Historical Financial Data; Management's
Discussion and Analysis of Results of
Operations and Financial Condition;
Management; Security Ownership of
Certain Beneficial Owners and
Management; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
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* Omitted because the item is inapplicable or the answer is negative.
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PROSPECTUS
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CAFETERIA OPERATORS, L.P.
$31,620,870.04 12% SENIOR SECURED NOTES DUE DECEMBER 31, 2001
---------------------
This Prospectus relates to the public offering by the selling note holders
(the "Selling Note Holders") of $31,620,870.04 aggregate principal amount of 12%
Senior Secured Notes due December 31, 2001 (the "Notes") of Cafeteria Operators,
L.P. (the "Company"), a Delaware limited partnership and indirect wholly owned
partnership subsidiary of Furr's/Bishop's, Incorporated, a Delaware corporation
(the "Parent"). The Notes were originally issued by the Company pursuant to the
Amended and Restated Indenture (the "Indenture") dated as of November 15, 1995
between the Company and Fleet National Bank of Massachusetts (f/k/a Shawmut
Bank, N.A.), as trustee. State Street Bank and Trust Company (the "Trustee") has
replaced Fleet National Bank of Massachusetts as Indenture trustee. The Notes
being offered hereby represent a majority of the Notes issued under the
Indenture. Interest on the Notes is payable semi-annually on March 31 and
September 30 of each year, commencing March 31, 1996. The Notes are redeemable
at the option of the Company at any time, upon not less than 30 nor more than 60
days' notice, in whole or in part, at 103% of the principal amount if the
redemption occurs on or before September 30, 1998, and at 100% of the principal
amount if the redemption occurs after September 30, 1998, in each case together
with the accrued interest thereon to the redemption date. The Company is
required to redeem Notes from the proceeds of certain property transfers and
casualty losses which are not, within 180 days of the date of receipt thereof,
applied, in the case of transfer, to purchase certain assets used or useful in
the business of the Company, or, in the case of casualty loss, to either repair
or replace the property that gave rise to such casualty loss. The obligations
under the Notes are secured by a security interest in substantially all of the
property and assets of the Company, including the Company's partnership interest
in Furr's/Bishop's Specialty Group, L.P. ("Specialty"). The obligations of the
Company in respect of the Notes and the Indenture are fully and unconditionally
guaranteed by Specialty, which guarantee is secured by a security interest in
substantially all of the property and assets of Specialty. Specialty, however,
has no material assets. The Notes rank pari passu with all existing and future
senior indebtedness of the Company. As of the date hereof, there is no other
senior indebtedness outstanding. The Indenture contains limitations with respect
to the amount of additional indebtedness that can be incurred by the Company and
its subsidiaries. The Company, however, may obtain a revolving credit facility
in the amount of $5.0 million and, under certain circumstances, release certain
collateral, or subordinate to such facility, the liens securing the Notes.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN RISKS
INVOLVED IN THE PURCHASE OF THE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Selling Note Holders directly or through agents, dealers or
underwriters may sell the Notes from time to time on terms to be determined at
the time of sale. To the extent required, the specific Notes to be sold, the
names of the Selling Note Holders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter and applicable
commissions or discounts with respect to a particular offering will be set forth
in an accompanying Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part. See
"Plan of Distribution." Each of the Selling Note Holders reserves the sole right
to accept or to reject, in whole or in part, any proposed purchase of its Notes.
The Company will not receive any proceeds from this offering but, by
agreement, will pay substantially all expenses of this offering, other than the
commissions or discounts of underwriters, dealers or agents, but including the
fees and disbursements of one counsel to certain of the Selling Note Holders.
The Selling Note Holders, and any underwriters, dealers or agents that
participate with the Selling Note Holders in the distribution of the Notes, may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Notes purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Plan of
Distribution" and "Description of Notes" for a description of indemnification
arrangements between the Company and the Selling Note Holders and
indemnification arrangements for underwriters.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 14, 1997.
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION SET FORTH HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Parent and the Company are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Parent can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission at Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048 and are available at http://www.sec.gov on the world wide web. Copies of
such material also can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, material filed by the Parent can also be
inspected at the offices of the New York Stock Exchange ("NYSE"), 20 Broad
Street, Seventh Floor, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act") with respect to
the Notes. This Prospectus does not contain all the information set forth or
incorporated by reference in the Registration Statement and the exhibits and
schedules relating thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement and the exhibits
filed or incorporated as a part thereof, which are on file at the offices of the
Commission and may be obtained upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
Statements contained in this Prospectus as to the contents of other documents
referred to herein are complete in all material respects, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, and each such
statement is qualified in all respects by such reference.
The Indenture pursuant to which the Notes were issued requires the Company
to distribute to the Trustee and holders of the Notes copies of quarterly,
annual and current reports and of other information, documents and other reports
which the Company is required to file with the Commission pursuant to Section 13
or Section 15(d) of the Exchange Act or the rules and regulations of the
Commission promulgated thereunder.
CONCURRENT FILING
The Parent has filed a separate Registration Statement (File No. 333-4576)
with the Commission under the Securities Act with respect to the offer and sale
by certain persons (the "Selling Stock Holders") of up to 42,060,043 shares of
the Common Stock, par value $.01 per share, of the Parent (the "Common Stock").
The Selling Stock Holders include certain of the Selling Note Holders. See
"Background; The Restructuring."
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY...................... 4
The Company........................... 4
Background; The Restructuring......... 4
Risk Factors.......................... 5
The Offering.......................... 5
Summary Financial Data................ 8
RISK FACTORS............................ 9
Capital Expenditures.................. 9
Leverage.............................. 9
Ownership of the Parent............... 9
History of Operating Losses........... 10
Absence of an Established Public
Market............................. 10
Resignation of Chief Executive
Officer............................ 10
RECENT DEVELOPMENTS..................... 11
CAPITALIZATION.......................... 12
USE OF PROCEEDS......................... 12
BACKGROUND; THE RESTRUCTURING........... 12
Certain Income Tax Ramifications of
the Restructuring.................. 12
SELECTED HISTORICAL FINANCIAL
INFORMATION........................... 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL
CONDITION............................. 15
New Accounting Pronouncements......... 18
Liquidity and Capital Resources....... 18
BUSINESS................................ 20
General............................... 20
Family Dining Division................ 20
Marketing and Advertising............. 20
Dynamic Foods......................... 21
Restaurant Management................. 21
Service Marks and Trademarks.......... 21
Seasonality........................... 21
Working Capital Requirements.......... 22
Competition........................... 22
Capital Expenditure Program........... 22
Employees............................. 23
Regulation............................ 23
Properties and Restaurant Locations... 23
Legal Proceedings..................... 24
Partnership Agreement................. 24
MANAGEMENT.............................. 25
Directors and Executive Officers...... 25
Executive Compensation................ 27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................. 30
SELLING SECURITY HOLDERS................ 31
PLAN OF DISTRIBUTION.................... 32
DESCRIPTION OF NOTES.................... 33
General............................... 33
Interest.............................. 34
Optional Redemption................... 34
Required Redemption................... 34
Ranking............................... 35
Security and Guaranty................. 35
Certain Covenants..................... 35
Events of Default and Remedies........ 40
Amendments and Waivers................ 42
Transfer.............................. 43
Defeasance............................ 43
Information Concerning the Trustee.... 44
Definitions........................... 44
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.......................... 55
LEGAL MATTERS........................... 55
EXPERTS................................. 55
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. It is not, and is not intended to be complete. Reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained elsewhere in this Prospectus. Unless otherwise defined,
capitalized terms used in this Summary have the meanings ascribed to them
elsewhere in this Prospectus. Prospective purchasers are encouraged to read
carefully all of the information contained in this Prospectus in its entirety.
THE COMPANY
Cafeteria Operators, L.P., a Delaware limited partnership (the "Company"),
was formed on June 22, 1987. The Company's sole general partner is
Furr's/Bishop's, Incorporated, a Delaware corporation (the "Parent"). The Parent
owns 94% of the outstanding limited partnership interest in the Company and
Furr's/Bishop's Cafeterias, L.P., a Delaware limited partnership and indirect
wholly owned partnership subsidiary of the Parent ("FBLP"), owns 6% of the
outstanding limited partnership interest in the Company. The principal executive
offices of the Company and the Parent are located at 6901 Quaker Avenue,
Lubbock, Texas 79413, and the telephone number is (806) 792-7151. Unless the
context otherwise requires, all references in this Prospectus to the "Company"
include the Company and its subsidiaries.
The Company is one of the largest operators of family-style cafeteria
restaurants in the United States (based on the number of cafeterias operated).
The Company believes that its cafeterias and buffets, which are operated under
the "Furr's" and "Bishop's" names, are well recognized in their regional markets
for their value, convenience, food quality and friendly service. The Company's
106 cafeterias and one buffet are located in 12 states in the Southwest, West
and Midwest. In addition, the Company operates Dynamic Foods, its food
preparation, processing and distribution division, in Lubbock, Texas. Dynamic
Foods provides approximately 85% of the food and supply requirements of the
Company's cafeteria and buffet restaurants. Dynamic Foods also sells pre-cut
produce, bakery items, meats and seafood and various prepared foods to the
restaurant, food service and retail markets. See "Business."
BACKGROUND; THE RESTRUCTURING
In 1996, the Company continued to streamline its operating focus after
completing a major restructuring of its financial position in fiscal 1995 (the
"Restructuring"). On January 2, 1996, the Company received the approval of its
lenders and the stockholders of the Parent of the Restructuring, which resulted
in a reduction of the Company's debt and other obligations by over $200 million,
a significant reduction in interest expense and an increase in net worth.
Approval of the Restructuring concluded nearly three years of discussions aimed
at providing the Company with greater financial stability and the resources to
compete in an increasingly competitive industry.
As part of the Restructuring, the Company executed the Amended and Restated
Indenture (the "Indenture") dated as of November 15, 1995 between the Company
and Fleet National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.), as trustee,
pursuant to which, among other things, the terms of $40.0 million aggregate
principal amount outstanding under the Company's 11% Senior Secured Notes due
June 30, 1998 (the "11% Notes"), issued pursuant to the Indenture dated as of
March 27, 1992 between the Company and Shawmut Bank, N.A., as collateral agent
(the "Old Indenture"), were amended, with the consent of the holders of the 11%
Notes at such time (the "Original 11% Noteholders"), to constitute $40.0 million
(subject to the issuance of additional notes in payment of the first interest
installment) aggregate principal amount of 12% Senior Secured Notes ("12%
Notes") issued pursuant to the Indenture. In addition, the Company issued a 12%
Note in the original principal amount of $1.7 (plus interest) million to the
Trustees of General Electric Pension Trust ("GEPT") in settlement of a $5.4
million judgment against Furr's/Bishop's Cafeterias, L.P., a Delaware limited
partnership and indirect wholly owned partnership subsidiary of the Company
("FBLP"). As part of the Restructuring, Wells Fargo Bank, National Association
("Wells Fargo") received an option to purchase 2.5% of the outstanding Common
Stock (the "Wells Fargo Option") in satisfaction of approximately $6.1 million
principal amount (plus approximately $1.6 million of
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accrued and unpaid interest) of indebtedness of a subsidiary of the Parent.
State Street Bank and Trust Company is currently the trustee under the
Indenture.
As a result of the Restructuring, indebtedness of the Company in the amount
of approximately $153 million aggregate principal amount (plus approximately
$46.6 million in accrued and unpaid interest) outstanding under the Old
Indenture was exchanged by holders on January 2, 1996 of the 11% Notes (the
"Exchanging 11% Noteholders" and together with the Original 11% Noteholders, the
"former 11% Noteholders") for an aggregate of 95% of the limited partnership
interests of the Company and the right to put to the Parent their 95% limited
partnership interests in the Company in exchange for 95% of the outstanding
Common Stock (the "Put Option"). In addition, outstanding warrants to purchase
capital stock of the Parent held by certain of the Exchanging 11% Noteholders
were cancelled.
On March 12, 1996, a majority of the Exchanging 11% Noteholders exercised
the Put Option and, accordingly, all Exchanging 11% Noteholders put their
aggregate 95% limited partnership interests to the Parent in exchange for 95% of
the outstanding Common Stock. On March 15, 1996, Wells Fargo exercised the Wells
Fargo Option thereby becoming the beneficial owner of 2.5% of the outstanding
Common Stock. On March 22, 1996, a fifteen-to-one reverse stock split became
effective upon the filing of an amendment to the Parent's Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware.
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Notes, see "Risk Factors" beginning on page 9.
THE OFFERING
Securities Offered............ $31,620,870.04 aggregate principal amount of
12% Senior Secured Notes due December 31, 2001
(the "Notes") held by selling note holders (the
"Selling Note Holders"). Notes in the aggregate
principal amount of $40.0 million were
originally issued in a private placement by the
Company pursuant to the Amended and Restated
Indenture (the "Indenture") dated as of
November 15, 1995 between the Company and Fleet
National Bank of Massachusetts (f/k/a Shawmut
Bank, N.A.), as trustee, in exchange for 11%
Notes of the Company. State Street Bank and
Trust Company is currently the trustee (the
"Trustee") under the Indenture. A Note in the
original principal amount of $1.7 million was
issued to GEPT in settlement of a judgment and
Notes in the aggregate principal amount of
approximately $4.1 million were issued in
payment of the first interest installment under
the Indenture. The Notes offered hereby are
being offered for sale by the Selling Note
Holders and the Company will not receive any
part of the proceeds from any sale thereof. No
additional Notes were issued or may be issued
pursuant to the Indenture.
Interest Rate................. 12% per annum, except that upon a default in
the payment of interest for 30 days or
principal at maturity, such interest rate shall
be increased to the lesser of 13% per annum and
the highest rate allowed by applicable law.
Interest Payment Dates........ January 24, 1996 and each March 31 and
September 30 thereafter, commencing on March
31, 1996. Interest accrued from April 1, 1995
through January 24, 1996 was paid on January
24, 1996 by the issuance of additional Notes.
The Company has made all other
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interest payments in cash, and all future
interest payments must be made in cash.
Maturity Date................. December 31, 2001.
Optional Redemption........... The Notes are redeemable at the option of the
Company at any time, upon not less than 30 nor
more than 60 days notice, in whole or in part,
at 103% of the principal amount if the
redemption occurs on or before September 30,
1998 and at 100% of the principal amount of the
Notes to be redeemed if the redemption occurs
after September 30, 1998, in each case together
with the accrued interest thereon to the
redemption date.
Required Redemption........... The Company is required to redeem Notes from
the proceeds of certain transfers of property
and casualty losses which are not, within 180
days of the date of receipt thereof, applied,
in the case of transfer, to purchase certain
assets used or useful in the business of the
Company or its subsidiaries, or, in the case of
casualty loss, to either repair or replace the
property that gave rise to such casualty loss.
Ranking....................... The Notes are senior obligations of the
Company. The obligations under the Notes are
secured by a security interest in substantially
all of the property and assets of the Company.
The Notes rank pari passu with all existing and
future senior indebtedness of the Company. As
of the date hereof, there is no other senior
indebtedness outstanding. The Indenture
contains limitations with respect to the amount
of additional indebtedness that can be incurred
by the Company and its subsidiaries. The
Company may obtain a revolving credit facility
in the amount of $5.0 million and, under
certain circumstances, release certain
collateral, or subordinate to such facility the
liens, securing the Notes. See "Description of
the Notes -- Security and Guaranty."
Security and Guaranty......... Pursuant to the Collateral Documents (as
defined in the Indenture), the Notes are
secured by a valid, perfected security interest
in certain assets and property of the Company,
including, without limitation, certain real
property, inventory, equipment, accounts
receivable and intellectual property of the
Company, and by a pledge of the partnership
interest of the Company in and to Furr's/
Bishop's Specialty Group, L.P. ("Specialty").
The obligations of the Company in respect of
the Notes and the Indenture are fully and
unconditionally guaranteed by Specialty, which
guarantee is secured by a security interest in
substantially all of the property and assets of
Specialty. Specialty, however, has no material
assets. The liens and security interests with
respect to certain property may be subject to
prior liens and encumbrances, including liens
which may be created to secure a working
capital facility not exceeding $5.0 million. In
addition, collateral may be released in
connection with a permitted sale of assets by
the Company. There can be no assurance that the
amount realized upon any enforcement in respect
of such collateral would be sufficient to
satisfy the Company's payment obligations in
respect of the Notes.
Covenants..................... In addition to certain customary affirmative
covenants, the Indenture contains covenants
that, among other things, restrict the
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ability of the Company and each of its
subsidiaries, subject to certain exceptions
contained therein, to (i) create, incur, assume
or guarantee any indebtedness, (ii) consolidate
or merge with, or transfer substantially all of
its assets and properties to any other person
or entity, (iii) make certain investments, (iv)
make any dividend or other distribution to the
holders of its partnership interests, make any
payment on account of the purchase, redemption,
retirement or acquisition of its partnership
interests or make any optional prepayment of
any subordinated indebtedness, (v) create or
permit to exist any liens (other than liens
securing the Notes and certain purchase money
liens) securing any indebtedness upon certain
of the properties and assets owned by the
Company or any of its subsidiaries, or agree
for the benefit of certain other creditors to
restrict its right to create any such liens,
(vi) transfer all or any part of its assets
(other than transfers of inventory in the
ordinary course of business), (vii) enter into
any transaction with any affiliate of the
Company or any subsidiary thereof on terms that
would be less favorable than those obtained
through an arm's length negotiation with an
unaffiliated third party or (vii) permit any
subsidiary of the Company to enter into certain
agreements, restricting the subsidiary's
ability to pay dividends and make distributions
to, create or pay indebtedness owing to or
transfer any of its property to, the Company.
Defaults and Remedies......... If the Company or certain of its subsidiaries
shall (i) fail to pay amounts due, or observe
any other covenant beyond certain grace
periods, in respect of the Notes, the Indenture
or the Credit Documents relating thereto, (ii)
default in the payment of certain other
indebtedness or allow to remain unpaid certain
judgments, (iii) become the subject of certain
events of bankruptcy or insolvency or (iv)
sustain uninsured casualties in respect of
certain of their properties; or if certain
events rendering unenforceable the obligations
of the Company or the liens granted for the
benefit of the holders of the Notes shall have
occurred and be continuing, then the Trustee or
the holders of a majority in principal amount
of the Notes may accelerate the maturity of the
Notes, and the Trustee may (and upon direction
by holders of a majority of the outstanding
principal amount of the Notes shall) proceed
against the collateral securing the Notes and
pursue all other available legal remedies.
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SUMMARY FINANCIAL DATA
The following table presents, in summary form, historical financial data
derived from the audited and unaudited historical consolidated financial
statements of the Company and subsidiaries. The interim unaudited financial
statements have been prepared pursuant to the rules and regulations of the
Commission. In management's opinion, all adjustments and eliminations,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial statements, have been made. The results of
operations for such interim periods are not necessarily indicative of the
results of operations for the full year. The data should be read in conjunction
with the historical financial statements, and the respective notes thereto, and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," included elsewhere in this Prospectus. See "Selected Historical
Financial Information" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
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TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 1997 JULY 2, 1996 DEC. 31, 1996 JAN. 2, 1996 JAN. 3, 1995 DEC. 28, 1993 JAN. 2, 1993
------------ ------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales............ $ 97,140 $99,358 $197,427 $210,093 $ 225,186 $ 253,700 $268,057
Gross Profit......... 67,796 68,590 135,756 142,330 154,998 177,910 189,568
Income (Loss) Before
Interest, Taxes and
Extraordinary
Items.............. 26 5,616 8,789 (10,945)(a) 3,860 (141,281)(b) 20,936
Income (Loss) before
extraordinary
items.............. (108) 5,493 8,550 (37,154)(a) (19,710) (163,386)(b) (457)
BALANCE SHEET DATA:
Cash................. 4,457 5,045 3,668 964 1,475 2,891 8,624
Net Working Capital
Deficiency......... (14,013) (16,599) (16,144) (20,323) (237,344) (223,931) (7,139)
Total Assets......... 81,262 89,036 86,342 86,066 103,430 111,615 257,238
Total Debt........... 71,894 77,387 74,640 78,408 226,824(c) 203,808(c) 193,014
Partners' Capital
(Deficit).......... (24,075) (29,453) (23,967) (34,946) (160,120) (144,775) 22,077
Ratio (Deficit) of
Earnings to Fixed
Charges............ (0.96):1(d) 2.91:1(d) 2.49:1(d) (0.42):1 0.16:1 (6.39):1 0.98:1
Amount of Coverage
Deficiency......... 108 n/a n/a 37,154 19,710 163,386 457
</TABLE>
- ---------------
(a) Does not include a net gain of $157,619 from financial restructuring
transactions in the fourth quarter of the fiscal year ended January 2, 1996.
(b) Includes a write-off of goodwill of approximately $135,208 in the fourth
quarter of the fiscal year ended December 28, 1993.
(c) Includes interest subject to restructuring of $33,903 and $10,838 at January
3, 1995 and December 28, 1993, respectively.
(d) Includes interest not expensed in accordance with SFAS 15 of $2,746 for the
26 weeks ended July 1, 1997 and July 2, 1996 and $5,493 for the year ended
December 31, 1996.
\
8
<PAGE> 11
RISK FACTORS
In considering the matters set forth in this Prospectus, prospective
investors should carefully consider, among other things, the significant factors
described below which are associated with the Notes before making an investment
in the Notes.
CAPITAL EXPENDITURES
The Company may make significant capital expenditures in each of the next
three fiscal years to remodel existing cafeterias, implement special programs to
enhance customer traffic and develop new restaurants. The Company believes that
its capital expenditure program is necessary to enable the Company and its
subsidiaries to increase revenues and attain profitability in order to service
their respective remaining obligations under outstanding debt instruments. Such
obligations and debt instruments, as well as indemnification payments the
Company must make to certain persons (See "Business -- Legal Proceedings"),
limit the Company's ability to make future capital expenditures. There can be no
assurance that the Company will be able to complete its capital expenditure
program, service its financial obligations and meet the financial covenants
contained in outstanding debt instruments. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
LEVERAGE
As of October 1, 1997, the Company's total indebtedness was approximately
$69.1 million (including approximately $23.4 million of interest accrued through
maturity). At such date, the Company's total assets were approximately $77.3
million.
In addition to certain customary affirmative covenants, the Indenture
(hereinafter defined) 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 Parent or
transfer assets. The restrictions may limit the ability of the Company to expand
its business and take other actions that the Parent considers to be in the
Company's best interest.
The Company and its subsidiaries presently have significant annual interest
expense payment obligations under outstanding debt instruments. The ability of
the Company and its subsidiaries to satisfy their respective obligations is
dependent upon their future performances, which will be subject to financial,
business and other factors affecting the business and operations of the Company,
including factors beyond the control of the Company and its subsidiaries, such
as prevailing economic conditions. Over the long term, the Company's performance
will depend on, among other things, the Company's ability to implement
successfully its expansion strategies and control costs. See
"Business -- Capital Expenditure Program" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources." If the Company is unable to comply with the terms of
outstanding debt instruments and any future debt instruments and fails to
generate sufficient cash flow from operations in the future, it may be required
to refinance all or a portion of its existing debt or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained, particularly in view of the
Company's anticipated high levels of debt and the fact that a significant
portion of the Company's assets have been pledged as collateral to secure
indebtedness. These factors could have a material adverse effect on the
marketability and value of the Notes.
OWNERSHIP OF THE PARENT
As a result of the comprehensive Restructuring of the Company and the
Parent and subsequent sales of Common Stock by the Selling Note Holders, certain
of the Selling Note Holders own approximately 70% of the outstanding Common
Stock of the Parent. Such Selling Note Holders, however, are seven separate
holders (or groups of affiliated holders) who are entitled to, and who the
Company believes intend to, vote separately upon all matters submitted to a vote
of security holders of the Parent (including any mergers, sales of all or
substantially all of the assets of the Parent or the Company and going private
transactions). To the Company's knowledge, there are no agreements, arrangements
or understandings among any of the Selling
9
<PAGE> 12
Note Holders concerning the voting or disposition of any of such Common Stock or
any other matter regarding the Company or the Parent or which might be the
subject of a vote of the Parent's stockholders. Also, no Selling Note Holder (or
affiliated group of Selling Note Holders) is a beneficial owner of more than 18%
of the Common Stock; accordingly, no single Selling Note Holder or affiliated
group could itself approve any matter regarding the Company or the Parent or
which might be the subject of a vote of the Parent's stockholders.
In addition, as a part of the Restructuring, certain 11% Noteholders
designated for nomination a majority of the members of the Board of Directors of
the Parent. These directors were duly nominated and elected by holders of the
former classes of the Parent's capital stock at a meeting of the stockholders
held prior to certain 11% Noteholders having exercised the Put Option. Certain
of these directors continue to serve on the Board of Directors of the Parent,
and such directors will generally have the power to direct the Parent's
operations. None of such directors, however, is affiliated with any former 11%
Noteholder or Selling Note Holder and to the Company's knowledge there is no
agreement, understanding or arrangement among any former 11% Noteholders,
Selling Note Holders or any such director concerning any matter regarding the
governance of the Parent or the Company.
HISTORY OF OPERATING LOSSES
Through fiscal year 1995, the Company had not reported net income since
fiscal year 1990. The Company has reported net losses from continuing operations
of approximately $457 thousand, $163.4 million and $19.7 million for the fiscal
years 1992, 1993 and 1994, respectively. After giving effect to the
Restructuring, but before the extraordinary credit associated therewith, the
Company reported net loss from continuing operations of approximately $37.2
million for fiscal year 1995. Although the Company reported net income from
continuing operations of $8.6 million for fiscal year 1996, the Company reported
a net loss from continuing operations of $108 thousand for the 26-week period
ended July 1, 1997.
ABSENCE OF AN ESTABLISHED PUBLIC MARKET
The Notes are not listed or admitted for trading on any securities exchange
or national market system, and the Company does not anticipate obtaining any
such listing or admission to trading. At present, almost all of the Notes
offered hereby are owned by a small number of institutional investors, and there
is no established public market for the Notes. No assurance can be given as to
the prices or liquidity of, or trading markets for, the Notes. The liquidity of
any market for the Notes will depend upon the number of holders of Notes,
interest of securities dealers in making a market in the Notes and other
factors. The absence of any established active market for the Notes could
adversely affect the liquidity of the Notes. The liquidity of, and trading
markets for, the Notes may also be adversely affected by general declines in the
market for similar grade debt. Such declines may adversely affect the liquidity
of, and the trading markets for, the Notes, independent of the financial
performance of, and the prospects for, the Company. Accordingly, no assurance
can be given that a holder of the Notes will be able to sell its Notes in the
future or that any future sale can be consummated at a price equal to or higher
than the price at which the Notes were originally purchased.
RESIGNATION OF CHIEF EXECUTIVE OFFICER
Theodore J. Papit has announced that he will resign his position as Chief
Executive Officer and President of the Parent effective mid-December, 1997,
based on personal reasons and a desire to pursue other long-term professional
opportunities. If the Parent is unable to hire a full-time replacement for Mr.
Papit reasonably soon, the failure of the Parent to have a full time Chief
Executive Officer could have a material adverse effect on the Company.
10
<PAGE> 13
RECENT DEVELOPMENTS
The Company recorded a special charge of approximately $7.5 million in the
Company's consolidated statement of operations for the 13-week period ended
September 30, 1997, in connection with (i) the Company's obligations to make
indemnification payments to certain persons (see "Business -- Legal
Proceedings"), (ii) certain closed store reserves, (iii) certain produce
department writedowns and (iv) certain corporate writedowns.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the debt and capitalization of the Company
at July 1, 1997. The information set forth below should be read in conjunction
with the Company's financial statements appearing elsewhere in this Prospectus.
<TABLE>
<S> <C>
Short-term debt and current portion of long-term debt....... $ 5,493
Long-term debt (excluding current portion):
12% Notes, including $20.7 million interest accrued
through maturity....................................... $ 66,401
Partners' Deficit........................................... $(24,075)
Total Capitalization........................................ $ 42,326
</TABLE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Notes
offered pursuant to this Prospectus. The Selling Note Holders will receive all
of the net proceeds from any sale of the Notes offered hereby.
BACKGROUND; THE RESTRUCTURING
In 1996, the Company continued to streamline its operating focus after
completing the Restructuring in fiscal 1995. On January 2, 1996, the Company
received the approval of its lenders and the stockholders of the Parent of the
Restructuring. Approval of the Restructuring concluded nearly three years of
discussions aimed at providing the Company with greater financial stability and
the resources to compete in an increasingly competitive industry.
As part of the Restructuring, the Company executed the Indenture pursuant
to which, among other things, the terms of $40.0 million aggregate principal
amount outstanding under the Company's 11% Senior Secured Notes due June 30,
1998, issued pursuant to the Old Indenture, were amended, with the consent of
the Original 11% Noteholders, to constitute $40.0 million (subject to the
issuance of additional notes in payment of the first interest installment)
aggregate principal amount of the 12% Notes issued pursuant to the Indenture. In
addition, the Company issued a 12% Note in the original principal amount of $1.7
(plus interest) million to GEPT in settlement of a $5.4 million judgment against
FBLP. As part of the Restructuring, Wells Fargo received the Wells Fargo Option
in satisfaction of approximately $6.1 million principal amount (plus
approximately $1.6 million of accrued and unpaid interest) of indebtedness of a
subsidiary of the Parent.
As a result of the Restructuring, indebtedness of the Company in the amount
of approximately $153 million aggregate principal amount (plus approximately
$46.6 million in accrued and unpaid interest) outstanding under the Old
Indenture was exchanged on January 2, 1996 by the Exchanging 11% Noteholders for
an aggregate of 95% of the limited partnership interests of the Company and the
Put Option. In addition, outstanding warrants to purchase capital stock of the
Parent held by certain of the Exchanging 11% Noteholders were cancelled.
On March 12, 1996, a majority of the Exchanging 11% Noteholders exercised
the Put Option and, accordingly, all Exchanging 11% Noteholders put their
aggregate 95% limited partnership interests to the Parent in exchange for 95% of
the outstanding Common Stock. On March 15, 1996, Wells Fargo exercised the Wells
Fargo Option thereby becoming the beneficial owner of 2.5% of the outstanding
Common Stock. On March 22, 1996, a fifteen-to-one reverse stock split became
effective upon the filing of an amendment to the Parent's Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware.
CERTAIN INCOME TAX RAMIFICATIONS OF THE RESTRUCTURING
As described above, the Restructuring was a complex series of transactions
which had a variety of federal income tax implications for the Parent. The
Recapitalization likely resulted in an ownership change (within
12
<PAGE> 15
the meaning of Section 382 of the Internal Revenue Code), which is likely to
substantially restrict the ability of the Parent to utilize existing net
operating loss carryovers to offset future income. In addition, although the
Parent believes that such possibility is unlikely, no assurance can be given
that the Internal Revenue Service might not successfully recharacterize the
Recapitalization in a manner which would reduce certain tax attributes of the
Parent and the other partners of the Company (all of which are subsidiaries of
the Parent) in an amount equal to the excess of the outstanding amount of 11%
Notes outstanding prior to the Recapitalization over the fair market value of
the 11% Notes at such time.
13
<PAGE> 16
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents summary historical financial data derived from
the audited and unaudited historical financial statements of the Company and
subsidiaries. The interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Commission. In management's
opinion, all adjustments and eliminations, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial statements, have
been made. The results of operations for such interim periods are not
necessarily indicative of the results of operations for the full year. The data
should be read in conjunction with the historical financial statements of the
Company and the respective notes thereto, and "Management's Discussion and
Analysis of Results of Operations and Financial Condition," included elsewhere
in this Prospectus.
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS WEEKS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 1997 JULY 2, 1996 DEC. 31, 1996 JAN. 2, 1996 JAN. 3, 1995 DEC. 28, 1993
------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales................. $ 97,140 $ 99,358 $197,427 $210,093 $ 225,186 $ 253,700
Gross Profit.............. 67,796 68,590 135,756 142,330 154,998 177,910
Income (Loss) Before
Interest, Taxes and
Extraordinary Items..... 26 5,616 8,789 (10,945)(a) 3,860 (141,281)(b)
Income (Loss) before
extraordinary items..... (108) 5,493 8,550 (37,154)(a) (19,710) (163,386)(b)
BALANCE SHEET DATA:
Cash...................... 4,457 5,045 3,668 964 1,475 2,891
Net Working Capital
Deficiency.............. (14,013) (16,599) (16,144) (20,323) (237,344) (223,931)
Total Assets.............. 81,262 89,036 86,342 86,066 103,430 111,615
Total Debt................ 71,894 77,387 74,640 78,408 226,824(c) 203,808(c)
Partners' Capital
(Deficit)............... (24,075) (29,453) (23,967) (34,946) (160,120) (144,775)
Ratio (Deficit) of
Earnings to Fixed
Charges................. (0.96):1(d) 2.91:1(d) 2.49:1(d) (0.42):1 0.16:1 (6.39):1
Amount of Coverage
Deficiency.............. 108 n/a n/a 37,154 19,710 163,386
<CAPTION>
YEAR ENDED
JAN. 2, 1993
------------
<S> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales................. $268,057
Gross Profit.............. 189,568
Income (Loss) Before
Interest, Taxes and
Extraordinary Items..... 20,936
Income (Loss) before
extraordinary items..... (457)
BALANCE SHEET DATA:
Cash...................... 8,624
Net Working Capital
Deficiency.............. (7,139)
Total Assets.............. 257,238
Total Debt................ 193,014
Partners' Capital
(Deficit)............... 22,077
Ratio (Deficit) of
Earnings to Fixed
Charges................. 0.98:1
Amount of Coverage
Deficiency.............. 457
</TABLE>
- ---------------
(a) Does not include a net gain of $157,619 from financial restructuring
transactions in the fourth quarter of the fiscal year ended January 2, 1996.
(b) Includes a write-off of goodwill of approximately $135,208 in the fourth
quarter of the fiscal year ended December 28, 1993.
(c) Includes interest subject to restructuring of $33,903 and $10,838 at January
3, 1995 and December 28,1993, respectively.
(d) Includes interest not expensed in accordance with SFAS 15 of $2,746 for the
26 weeks ended July 1, 1997 and July 2, 1996 and $5,493 for the year ended
December 31, 1996.
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The Company's fiscal year is a 52-53 week year. Fiscal 1996 included 52
weeks, fiscal 1995 included 52 weeks and fiscal 1994 included 53 weeks. The
Company's fiscal year ends on the Tuesday nearest December 31.
The following table sets forth certain statement of operations data and
restaurant data for the periods indicated (dollars in thousands, except sales
per unit):
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS ENDED YEAR ENDED
----------------- ------------------------------
JULY 1, JULY 2, DEC. 31, JAN. 2, JAN. 3,
1997 1996 1996 1996 1995
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Sales.................................... $97,140 $99,358 $197,427 $210,093 $225,186
Costs and expenses
Cost of sales (excluding depreciation)... 29,344 30,768 61,671 67,763 70,188
As a percent of sales................. 30.2% 31.0% 31.2% 32.3% 31.2%
Selling, general and administrative...... 59,933 58,966 117,953 127,000 137,604
As a percent of sales................. 61.7% 59.3% 59.7% 60.4% 61.1%
Depreciation and amortization............ 5,406 4,611 10,152 14,002 11,320
Special charges (credits)................ 2,431 (603) (1,138) 12,273 2,214
------- ------- -------- -------- --------
Total costs and expenses......... 97,114 93,742 188,638 221,038 221,326
------- ------- -------- -------- --------
Operating income (loss).................. 26 5,616 8,789 (10,945) 3,860
Interest expense......................... 134 123 239 26,209 23,570
------- ------- -------- -------- --------
Income (loss) before extraordinary
credit................................ $ (108) $ 5,493 $ 8,550 $(37,154) $(19,710)
======= ======= ======== ======== ========
Restaurant Units in Operation:
Beginning of period...................... 115 129 142
Opened................................... -- -- 1
Closed................................... (5) (14) (14)
-------- -------- --------
End of Period............................ 110 115 129
======== ======== ========
Restaurant units reserved to be closed at
the end of period........................ 0 2 4
======== ======== ========
Average weekly sales per restaurant unit
(for units open at year end and which
operated the full year).................. $ 33,449 $ 32,916 $ 32,533
======== ======== ========
</TABLE>
On January 2, 1996, at a special meeting of the Parent, stockholders
approved the Restructuring. A series of financial restructuring transactions
resulted in the recognition of a $157,619 extraordinary credit in the fiscal
year ended January 2, 1996.
TWENTY-SIX WEEKS ENDED JULY 1, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 2,
1996
Results of operations. Sales for the 26 weeks ended July 1, 1997 were $97.1
million, a decrease of $2.2 million from the same period of 1996. The operating
loss for the 26 week period of 1997 was $26 thousand compared to income of $5.6
million in the comparable period in the prior year. The operating results of the
26 week period of the prior year includes net special credits of $603 thousand.
The net loss for the period in 1997 was $108 thousand compared to income of $5.5
million in the same period of 1996. During the first quarter of 1997, sales were
negatively impacted by severe winter weather and by including fewer units in the
operating results.
15
<PAGE> 18
Sales. Restaurant sales in comparable units were 0.5% lower in the 26 weeks
of 1997 than the same period of 1996. Sales for the period were $604 thousand
lower than 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 $1.2 million
lower in the first 26 weeks of 1997 than the prior year.
Cost of sales. Excluding depreciation, cost of sales was 30.2% of sales for
the first 26 weeks of 1997 as compared to 31.0% for the same period of 1996. The
decrease in the percentage of sales was the result of changes in pricing, menu
mix and lower product costs.
Selling, general and administrative. Selling, general and administrative
expense was higher in the aggregate by $967 thousand in the first 26 weeks of
1997 as compared to 1996 due to increases in some expense categories being
partially offset by there being fewer units included in the operating results.
The change in selling, general and administrative expense included increases of
$981 thousand in marketing expense, $199 thousand in salaries, wages and related
benefits and a decrease of $216 thousand in utility expense.
Depreciation and amortization. Depreciation and amortization expense was
higher by $795 thousand in the first 26 weeks of 1997 due primarily to higher
depreciation on newly acquired property, plant and equipment, along with the use
of shorter depreciation periods.
Special charges. The loss from operations for the 26 weeks ended July 1,
1997 includes net special charges of $2.4 million. The results of operations
includes a charge of $1.9 million for the writedown of assets and adjustments to
closed store reserves of units previously closed, as well as units to be closed,
and a charge of $1.8 million to recognize the writedown of certain assets in
property, plant and equipment to estimated fair values in accordance with SFAS
121. The results of operations includes a credit of $1.3 million related to the
settlement of a lawsuit. The income from operations for the prior year period
includes net special credits of $603 thousand, including $699 thousand for
insurance proceeds related to a fire loss and a charge of $96 thousand related
to a consulting agreement with Kevin E. Lewis, Chairman of the Board.
Interest expense. Interest expense was $134 thousand in the 26 weeks ended
1997, which was slightly higher than the comparable period in the prior year. In
accordance with Statement of Financial Accounting Standard No. 15, the
restructured debt was recorded at the sum of all future principal and interest
payments and there is no recognition of interest expense thereon.
FIFTY-TWO WEEKS ENDED DECEMBER 31, 1996 COMPARED TO FIFTY-TWO WEEKS ENDED
JANUARY 2, 1996
Results of operations. Sales for the 52-week fiscal year ended December 31,
1996 were $197.4 million, a decrease of $12.7 million from the fiscal year ended
January 2, 1996. The operating income for the 1996 fiscal year was $8.8 million
compared to a loss of $10.9 million in fiscal year 1995. The operating results
of fiscal 1996 included net special credits of $1.1 million compared to special
charges of $12.3 million in the prior year. Net income for fiscal 1996 was $8.6
million, compared to a net loss before extraordinary items of $37.2 million for
fiscal 1995.
Sales. Restaurant sales in comparable units were 0.04% higher in fiscal
1996 than 1995. For the units that were open for the entire year, average weekly
sales were $33.4 thousand in fiscal 1996. Sales in 1996 were lower than the
prior year by $10.9 million as a result of 16 fewer units being included in the
results of operations in the current year. Revenues in fiscal year 1996 included
$2.9 million of Dynamic Foods sales to third parties and $1.9 million from the
two Zoo-Kini's Soups, Salads and Grill restaurants.
Cost of sales. Excluding depreciation, cost of sales was 31.2% of sales for
fiscal year 1996 compared to 32.3% for fiscal year 1995. The decrease in the
percentage of sales was principally the result of lower product costs that were
partially offset by changes in the menu mix.
Selling, general and administrative. Selling, general and administrative
expense was lower in the aggregate by $9.0 million in fiscal year 1996. Of the
decrease, $7.6 million was due to operating results including 16 fewer units.
SG&A expense includes decreases of $1.9 million in marketing expense, including
discounts, $339 thousand in repair and maintenance, $283 thousand in utility
expenses and $234 thousand in supplies expenses. SG&A expense includes an
increase of $601 thousand in professional service expenses.
16
<PAGE> 19
Depreciation and amortization. Depreciation and amortization expense was
$3.8 million lower than the prior year, due to the reduction of certain
depreciable assets in 1995 in accordance with SFAS 121 partially offset by the
reduction in the useful lives of certain depreciable assets in the prior year.
Special credits and charges. The operating results for fiscal 1996 include
net special credits aggregating $1.1 million. Included in the total are credits
of $699 thousand for the insurance proceeds related to a fire loss, $709
thousand for the termination of a trademark royalty agreement and the
modification and extension of a lease related to the Company's former El Paso
Bar-B-Que Company restaurants and a charge of $270 thousand related to the
search for a new Chief Executive Officer and a consulting agreement with Kevin
E. Lewis, Chairman of the Board. The loss from operations for the fiscal year
ended January 2, 1996 includes special charges of $12.3 million, which includes
charges to reserves of $4.5 million related to the closing of 14 units,
including two units to be closed in future periods, and adjustments to the units
previously reserved. Also included is $7.8 million to recognize the write-down
of certain assets to estimated fair values in accordance with the adoption of
SFAS 121.
Interest expense. Interest expense was lower than the prior year by $26.0
million as a result of the Restructuring. In accordance with SFAS 15, the
restructured debt was recorded at the sum of all future principal and interest
payments and there is no recognition of interest expense thereon.
Extraordinary credit. The results of fiscal year 1995 include an
extraordinary credit of $157.6 million relating to the reduction of debt in a
series of financial restructuring transactions.
FIFTY-TWO WEEKS ENDED JANUARY 2, 1996 COMPARED TO FIFTY-THREE WEEKS ENDED
JANUARY 3, 1995
Results of operations. Sales for the 52-week fiscal year ended January 2,
1996 were $210.1 million, a decrease of $15.1 million from the 53-week fiscal
year ended January 3, 1995. The operating loss for the fiscal year ended 1995
was $10.9 million compared to income of $3.9 million in fiscal year 1994. The
operating results of fiscal 1995 included special charges of $12.3 million
compared to $2.2 million in the prior year. Net loss before extraordinary items
for fiscal 1995 was $37.2 million, compared to $19.7 million for fiscal 1994.
Sales. Restaurant sales in comparable units were 2.2% lower in fiscal 1995
than 1994. For the units that were open for the entire year, average weekly
sales were $32.9 thousand in fiscal 1995. Sales in 1995 were lower than the
prior year by $6.8 million as a result of 16 fewer units being included in the
results of operations in the current year and were lower by $2.7 million as a
result of three fewer specialty restaurants being included in the results of
operations in the current year. Sales were lower in fiscal 1995 by approximately
$3.7 million due to there being one less week than the prior fiscal year. Sales
in fiscal year 1995 included $4.6 million of Dynamic Foods sales to third
parties and $1.9 million from the two Zoo-Kini's Soups, Salads and Grill
restaurants.
Cost of sales. Excluding depreciation, cost of sales was 32.1% of sales for
fiscal year 1995 compared to 31.0% for fiscal year 1994. The increase in the
percentage of sales was the result of continued changes in the menu mix designed
to improve food quality and variety and to create a better value for the guest.
Selling, general and administrative. Selling, general and administrative
expense was lower in the aggregate by $10.6 million in fiscal year 1995 than in
fiscal year 1994. Of the decrease, $6.3 million was due to operating results
including 16 fewer units and $2.0 million due to operating three fewer specialty
restaurants. SG&A expense includes decreases of $2.8 million in salaries, wages
and related benefits, $3.5 million in marketing expense, including discounts,
$902 thousand in taxes, and $442 thousand in travel and related expenses. SG&A
expense includes increases of $878 thousand in professional service expenses and
$417 thousand in repair and maintenance expenses. Corporate overhead expense in
fiscal 1995 (included in the variances above) was $1.0 million lower than the
prior year.
Special charges. The loss from operations for the fiscal year ended January
2, 1996 includes special charges of $12.3 million, which includes charges to
reserves of $4.5 million related to the closing of 14 units, including two units
to be closed in future periods, and adjustments to the units previously
reserved. Also included is $7.8 million to recognize the write-down of certain
assets to estimated fair values in accordance with the adoption of SFAS 121. The
loss from operations for the fiscal year ended January 3, 1995 includes
17
<PAGE> 20
special charges of $2.7 million resulting primarily from the closing of one
buffet restaurant and one specialty restaurant and a credit of $442 thousand
related to the settlement of a lawsuit.
Depreciation and amortization. Depreciation and amortization expense was
$2.7 million higher than the prior year, due primarily to the reduction in the
estimated useful lives of certain depreciable assets.
Interest expense. Interest expense was $2.6 million higher than the prior
year as a result of the deferral of the interest payments that were due on dates
from December 31, 1993, through and including December 31, 1995 and the related
interest thereon.
Extraordinary credit. The results of fiscal year 1995 include an
extraordinary credit of $157.6 million relating to the reduction of debt in a
series of financial restructuring transactions.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock for both interim
and annual periods ending after December 15, 1997. Management of the Company
does not expect the adoption of the provisions of SFAS 128 in fiscal year 1997
to have a material impact.
LIQUIDITY AND CAPITAL RESOURCES
During the 26 weeks ended July 1, 1997, cash provided by operating
activities of the Company was $6.9 million compared to $9.2 million in the same
period of 1996. The Company made capital expenditures of $2.7 million during the
first 26 weeks of 1997 compared to $4.4 million during the same period of 1996.
Cash, temporary investments and marketable securities were $4.5 million at July
1, 1997 compared to $5.1 million at July 2, 1996. The cash balance in the prior
year included $800 thousand which was restricted pursuant to collateral
requirements in a letter of credit agreement. The current ratio of the Company
was .47:1 at July 1, 1997 compared to .41:1 at July 2, 1996. The Company's total
assets at July 1, 1997 aggregated $70.0 million, following the net special
charges of $2.4 million, compared to $80.8 million at July 2, 1996.
During fiscal 1996, cash provided from operating activities of the Company
was $17.8 million compared to $9.9 million in 1995. Cash used for the payment of
interest was approximately $3.8 million in 1996 compared to $36 thousand during
1995. The Company made capital expenditures of $10.1 million during 1996
compared to $8.0 million during 1995. Cash, temporary investments and marketable
securities were $3.7 million at December 31, 1996 compared to $964 thousand at
January 2, 1996. The cash balance at January 2, 1996 included $800 thousand
which was restricted pursuant to collateral requirements in a letter of credit
agreement. The current ratio of the Company was .40:1 at December 31, 1996
compared to .30:1 at January 2, 1996. The Company's total assets at December 31,
1996 aggregated $86.3 million compared to $86.1 million at January 2, 1996.
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 common among similar restaurant companies. If Dynamic Foods expanded
its sales to third parties, the accounts receivable and inventory related to
such sales could require the Company to maintain additional working capital.
The Company intends to pursue a program of remodeling existing cafeterias,
opening a new restaurant and possibly acquiring existing restaurants or food
service companies. The Company anticipates expending approximately $5 million to
$7 million in fiscal 1997 to remodel existing cafeterias and open a new
restaurant and to make other capital expenditures.
Following the September 30, 1997 interest payment on the 12% Notes, total
scheduled maturities of long-term debt of the Company and its subsidiaries over
the next four fiscal years are: $5.5 million in 1998, $5.5 million in 1999, $5.5
million in 2000 and $52.7 million in 2001.
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<PAGE> 21
Following the September 30, 1997 interest payment on the 12% Notes, the
Company has outstanding $69.1 million of 12% Notes due December 31, 2001, which
includes $23.4 million of interest to maturity. Under the terms of the
Indenture, a semi-annual cash interest payment of approximately $2.7 million is
due on each March 31 and September 30. The obligations of the Company under the
12% Notes are secured by a security interest in and a lien on all of the of the
personal property of the Company and mortgages on all fee and leasehold
properties of the Company (to the extent such properties are mortgageable).
In July 1997, the Parent and the Company reached a settlement of the
litigation filed by Michael J. Levenson, the former Chairman of the Board of the
Parent, and others. The settlement involved a payment by the Parent to the
plaintiffs of a net amount of approximately $275 thousand. All settling
defendants, including the Parent and the Company and their subsidiaries,
received mutual releases with respect to all matters alleged in the litigation.
The Parent and the Company are required to indemnify certain of the defendants
originally named in the litigation (including certain of the Selling Note
Holders) (the "Levenson Indemnitees") for certain settlement costs and
reasonable expenses the Levenson Indemnitees incurred in connection with the
litigation. The Company recorded a special charge of $4.8 million in the
Company's consolidated statements of operations for the 13-week period ended
September 30, 1997, as a reserve against the Company's obligations to the
Levenson Indemnitees. The exact amount of the Company's obligations to the
Levenson Indemnitees may be more or less than this charge.
The Company, from time to time, considers whether disposition of certain of
its assets, including its food processing and distribution operations, real
estate owned in fee simple and leasehold interests, or potential acquisitions of
assets would be beneficial or appropriate for the long-term goals of the Company
and in order to increase shareholder value.
The Company, the sponsor of the Cavalcade Pension Plan, has agreed to
provide for funding at least two-thirds of the $4.6 million of the unfunded
current liability which existed at the end of fiscal 1992 by the end of 1998. If
the agreed upon funding is not satisfied by the minimum required annual
contributions, as adjusted for the deficit reduction contribution and determined
under Section 412 of the Internal Revenue Code, the Company will make
contributions in excess of the minimum annual requirement.
On November 15, 1993, the Company entered into the Amendment to Master
Sublease Agreement, dated as of December 1, 1986, with Kmart pursuant to which,
among other things, the aggregate monthly rent for the period September 1, 1993
through and including December 31, 1996 was reduced by 25% or approximately $1.6
million annually, and the aggregate monthly rent for the period January 1, 1997
through and including December 31, 1999 was reduced by approximately 1.2 million
annually; provided that, during such period, among other things, Kevin E. Lewis
remains as Chairman of the Board of the Parent. On June 7, 1996, the Parent
entered into an agreement with Mr. Lewis pursuant to which Mr. Lewis would
resign as Chairman of the Board of the Parent on December 31, 1996, unless
requested by the board of directors of the Parent to continue until December 31,
1997. See "Management -- Executive Compensation -- Employment and Consulting
Arrangements." In December 1996, Mr. Lewis was requested to continue as Chairman
of the Board of the Parent into 1997, and in October 1997, Mr. Lewis agreed to
continue as Chairman of the Board of the Parent into 1998. If Mr. Lewis ceases
to be Chairman of the Board of the Parent, the Company intends to enter into
negotiations with Kmart to modify the amendment to remove the provisions
requiring Mr. Lewis to remain as Chairman of the Board of the Parent until the
end of 1999. No assurance can be given that Kmart will agree to such
modification.
19
<PAGE> 22
BUSINESS
GENERAL
The Company was formed in 1987 and is one of the largest operators of
family-style cafeteria restaurants in the United States. The Company believes
that its cafeterias and buffet, which are operated under the "Furr's" and
"Bishop's" names, are well recognized in their regional markets for their value,
convenience, food quality and friendly service. The Company's 106 cafeterias and
one buffet are located in 12 states in the Southwest, West and Midwest. In
addition, the Company operates Dynamic Foods, its food preparation, processing
and distribution division in Lubbock, Texas. Dynamic Foods provides in excess of
85% of the food and supply requirements of the Company's cafeteria and buffet
restaurants. Dynamic Foods also sells pre-cut produce, bakery items and various
prepared foods to the restaurant, food service and retail markets.
FAMILY DINING DIVISION
The Family Dining Division consists of the Company's 106 cafeterias and one
pay-at-the-door buffet-style restaurant.
Cafeterias. Cafeterias occupy a long standing niche in the food service
industry, providing the customer with a pleasant, moderately-priced alternative
to fast-food chains and conventional full-service restaurants. The Company's
cafeterias offer a wide variety of meals appealing to a broad range of personal
tastes, including chicken, beef, fish and pasta entrees; soup, salad and
vegetable choices; non-alcoholic beverages; and freshly baked pies and cakes.
The food is prepared for serving by the individual cafeteria. The Company's
cafeterias are generally characterized by quick service and modest prices per
guest. Guest tickets for the fiscal years ended December 31, 1996 and January 2,
1996 averaged approximately $5.37 and $5.14, respectively. The Company's
cafeterias average approximately 10,000 square feet in size and have average
seating capacity for approximately 300 guests. Virtually all of the Company's
cafeterias feature "All-You-Can-Eat" at a fixed price all day, every day, as
well as the traditional "a la carte" pricing alternative.
Management believes that the "Furr's" and "Bishop's" names are widely
recognized in their regional markets. Management's emphasis on consistent food
quality, variety, cleanliness and service has led to a loyal guest base. The
Company's customer base consists principally of people over 45 years of age,
shoppers, working people and young families.
The Company considers its cafeteria business to be a relatively mature
business, but believes that earnings growth can be achieved through successful
implementation of its cost control, remodeling, marketing and growth strategies.
Virtually all cafeterias offer the choice of "All-You-Can-Eat" and "a la
carte" pricing options. As a result, customers choose the pricing and dining
format which they find most attractive. The Company's goal is to be the value
leader in its segment.
Buffet. The Company's buffet-style restaurant features traditional American
and ethnic foods at a fixed price that entitles each guest to unlimited servings
of all menu items and beverages. Food items are served in a "scatter bar" format
at buffet islands centrally located in the restaurant's food service area. The
"scatter-bar" buffet format emphasizes customer choice by allowing customers to
select at their own pace in self selected portions, thereby improving the
restaurant experience for the guest. The buffet unit is approximately 10,000
square feet in size and has seating capacity for approximately 300 guests. Guest
tickets for the fiscal year ended December 31, 1996 averaged approximately
$5.64.
MARKETING AND ADVERTISING
The Company's marketing program utilizes a variety of media to attract
customers to the Company's restaurants and to create a targeted image for the
Company's restaurants. Television advertisements are also used by the Company to
enhance its image with respect to food quality and value pricing. The Company
utilizes point of sale advertising within its restaurants to focus customers on
the various food items and promotions being offered at the restaurant. Billboard
advertising, newspaper and direct mail programs within
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<PAGE> 23
the communities in which the Company has a large presence are used to direct
customers to the Company's restaurants and to promote specific programs,
including the one-price "All-You-Can-Eat" concept. In addition, store managers
and other personnel are encouraged to participate in local public relations and
promotional efforts.
DYNAMIC FOODS
The Company operates Dynamic Foods, a food preparation, processing and
distribution facility in Lubbock, Texas which supplies in excess of 85% of the
food and supply requirements of the Company's family dining restaurants,
providing the Company with uniform quality control and the ability to make
volume purchases.
Dynamic Foods prepares and processes approximately 150 separate food items,
including over 20 salad and other fresh vegetable offerings under the "Dynamic
Foods" and "Furr's Carry Out Kitchen" labels. Currently, over 90% of Dynamic
Food's manufacturing output is used at the Company's restaurants and the
remainder is sold to third parties.
In 1993, Dynamic Foods commenced third party sales of pre-cut produce,
meats and seafood, bakery goods and other prepared foods and entrees. Third
party sales by Dynamic Foods aggregated $2.9 million in fiscal year 1996 and
$865 thousand for the 26 weeks ended July 1, 1997.
RESTAURANT MANAGEMENT
The success of each restaurant's operation is largely dependent upon the
quality of in-store management and mid-level supervisory management. Experienced
and well trained in-store management is important to assure good service,
quality food and the cleanliness of each restaurant, to control costs, and to
monitor local eating habits and traffic.
Each cafeteria and buffet is operated under the supervision of a general
manager, a food and beverage manager and one or two associate managers. Each
cafeteria generally employs between 40 and 70 workers of whom approximately 20%
are part-time workers. The buffet-style restaurant typically employs fewer
persons as the "scatter-bar" concept reduces service staffing requirements.
The general managers of the Company's family dining restaurants report to
13 regional managers who, in turn, report to the Vice President of Field
Operations. The general managers have responsibility for day-to-day operations,
including food ordering, labor scheduling, menu planning, customer relations and
personnel hiring and supervision. The regional managers visit each restaurant
regularly and work with the in-store managers to evaluate and maintain overall
operating standards. They also make quality control checks, train personnel in
operating procedures and evaluate procedures developed by cafeteria and buffet
personnel for possible use in all Company owned family dining units.
SERVICE MARKS AND TRADEMARKS
The Company utilizes and is dependent upon certain registered service
marks, including "Furr's Cafeterias," "Bishop Buffets" and "Dynamic Foods," and
a stylized "F" trademarked by Furr's. Other trademarks are current and are
renewable on dates ranging from December 1997 to February 2008. The Company is
not aware of any party who could prevail in a contest of the validity of such
service marks and trademarks. In October 1994, the Company licensed the use of
its "El Paso Bar-B-Que Company" and related trademarks to M&B Restaurants, L.C.
under a License and Development Agreement. This agreement was terminated in
September 1996 and the related trademarks were sold. In September 1997, the
Company sold its two Zoo-kini's Soup Salad and Grill restaurants and the rights
to the use of the "Zoo-kini's Soup Salad and Grill" name.
SEASONALITY
Customer volume on a Company-wide basis at most established restaurants is
generally somewhat lower in the winter months, due primarily to weather
conditions in certain of the markets for the Company's
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<PAGE> 24
restaurants. As a consequence, the first and fourth quarters of the year
historically produce lower sales and results of operations. A harsh winter
season has a negative effect on the Company's revenues, results of operations
and liquidity.
WORKING CAPITAL REQUIREMENTS
The Company's restaurants are a cash business. Funds available from cash
sales are not needed to finance receivables and are generally not 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 common among similar restaurant companies. Should Dynamic Foods expand
its sales to third parties, the accounts receivables and inventory related to
such sales could require it to maintain additional working capital. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
COMPETITION
The food service business is highly competitive in each of the markets in
which the Company's restaurants operate and is often affected by changes in
consumer tastes, economic conditions and demographic and local traffic patterns.
In each area in which the Company's restaurants operate, there is a large number
of other food service outlets including other cafeterias, buffets and fast-food
and limited-menu restaurants which compete directly and vigorously with the
Company's restaurants in all aspects, including quality and variety of food,
price, customer service, location and the quality of the overall dining
experience.
Neither the Company nor any of its competitors has a significant share of
the total food service market in any area in which the Company competes. The
Company believes that its principal competitors are other cafeterias and
buffets; moderately-priced, conventional restaurants, fast-food outlets, and
eat-at-home alternatives. Many of the Company's competitors, including its
primary cafeteria and buffet competitors, have greater financial resources and
lower total debt-to-equity ratios than does the Company. The Company competes
with other food service outlets for management personnel based on salary,
opportunity for advancement and stability of employment. The Company believes it
offers existing and prospective management personnel an attractive compensation
and benefits package in a stable segment of the food service industry.
The food manufacturing and distribution business is highly competitive and
many of Dynamic Foods' competitors are large regional or national food
processors and distributors with significantly greater financial resources than
the Company. Accordingly, there can be no assurance that Dynamic Foods will be
able to generate significantly higher revenue or increase the profitability of
the Company.
CAPITAL EXPENDITURE PROGRAM
During the fiscal years ended December 31, 1996, January 2, 1996 and
January 3, 1995, the Company expended $10.1 million, $8.0 million and $5.7
million, respectively, principally to maintain and remodel existing cafeterias,
upgrade its computer and information systems, construct one new unit and improve
the facility operated by Dynamic Foods. The Company believes that the aggregate
level of capital expenditures over such period has been below that required to
expand the Company's cafeteria operations and to remodel existing cafeterias as
required by competitive conditions in the restaurant industry. The Company's
capital expenditure program is necessary to enable the Company and its
subsidiaries to increase their revenue and profitability.
Subject to its ability to generate necessary funds from operations or to
obtain funds from other sources, the Company intends to pursue a program of
remodeling existing restaurants and opening a new restaurant. The Company
anticipates expending approximately $5 million to $7 million in fiscal year 1997
to open a new restaurant, remodel existing cafeterias and make other capital
expenditures. No assurance can be given that the Company will generate
sufficient funds from operations or obtain alternative financing to enable it to
make the desired capital expenditures. See "Risk Factors -- Capital
Expenditures."
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<PAGE> 25
EMPLOYEES
As of October 1, 1997, the Company employed approximately 5,800 persons, of
whom approximately 4,500 were employed on a full-time basis. The Company
employed approximately 350 persons as managers or assistant managers of its
restaurants, 13 persons as regional managers and approximately 80 persons in
executive, administrative or clerical positions in the corporate office. None of
the Company's employees are covered by collective bargaining agreements. The
Company believes that its relations with its employees are satisfactory.
The majority of the Company's restaurants pay average wages in excess of
the current minimum wage standards. Any future increase in the federal minimum
wage could have the effect of increasing the Company's labor costs. In recent
years, the market for those employees who have traditionally been employed in
the restaurant industry has become increasingly competitive due to fewer persons
entering this category of wage earner and the increased government regulation of
immigrants entering and working in the United States. In response to this
decrease in the available labor pool, the Company has increased its average
hourly wage and expanded its hiring and training efforts.
REGULATION
The Company's restaurants are subject to numerous federal, state and local
laws affecting health, sanitation, waste water, fire and safety standards, as
well as to state and local licensing regulating the sale of alcoholic beverages.
The Federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. Such act became
effective as to public accommodations and employment in 1992. The Company could
be required to expend funds to modify its restaurants in order to provide
service to, or make reasonable accommodations for the employment of, disabled
persons, as it proceeds with remodeling existing restaurants.
The Company believes that it is in substantial compliance with applicable
laws and regulations governing its operations.
PROPERTIES AND RESTAURANT LOCATIONS
The following table sets forth the number of restaurants that the Company
operates in certain states as of October 1, 1997.
<TABLE>
<CAPTION>
NUMBER OF
STATE RESTAURANTS
- ----- -----------
<S> <C>
Arizona............................................ 8
Arkansas........................................... 2
California......................................... 3
Colorado........................................... 10
Illinois........................................... 1
Iowa............................................... 7
Kansas............................................. 8
Missouri........................................... 3
Nevada............................................. 2
New Mexico......................................... 15
Oklahoma........................................... 10
Texas.............................................. 38
---
107
</TABLE>
Site Selection. The Company generally intends to open new restaurants or
reposition existing restaurants in markets in which the Company's restaurants
are presently located and in adjacent markets, in order to improve the Company's
competitive position and increase operating margins by obtaining economies of
scale in merchandising, advertising, distribution, purchasing and supervision.
The primary criteria considered by the
23
<PAGE> 26
Company in selecting new locations are a high level of customer traffic,
convenience to both lunch and dinner customers in demographic groups that tend
to favor the Company's restaurants and the occupancy cost of the proposed
restaurant. The ability of the Company to open new restaurants depends on a
number of factors, including its ability to find suitable locations and
negotiate acceptable leases, its ability to attract and retain a sufficient
number of qualified restaurant managers and the availability of sufficient
financing.
Properties. Forty-nine of the Company's restaurants are leased from third
parties, another 33 are subleased under a master sublease agreement, 16 are
owned and are situated on land leased from third parties and 9 are owned in fee
simple. Most of the leases have initial terms of from 10 to 20 years and contain
provisions permitting renewal for one or more specified terms at specified
rental rates. Some leases provide for fixed annual rent plus rent based on a
percentage of sales. The average restaurant contains approximately 10,000 square
feet and seats approximately 300 guests.
Dynamic Foods' food manufacturing and distribution facility contains
approximately 175,000 square feet and is situated on approximately 24 acres
owned in fee simple by the Company in Lubbock, Texas. In addition, a grocery
warehouse of approximately 36,000 square feet, a truck terminal of approximately
7,200 square feet and a sales office of approximately 4,000 square feet are
located adjacent to the distribution facility.
The Company's executive offices in Lubbock, Texas consist of approximately
34,000 square feet situated on approximately three acres of land owned in fee
simple by the Company. The Company believes that its properties will be adequate
to conduct its current operations for the foreseeable future.
The Company leases one property from a third party and seven under a master
sublease, owns eight buildings situated on land leased from third parties and
owns two buildings on land owned in fee simple, which are not used in the
Company's restaurant business and are periodically leased to third parties.
LEGAL PROCEEDINGS
In July 1997, the Parent and the Company reached a settlement of the
litigation filed by Michael J. Levenson, the former Chairman of the Board of the
Parent, and others. The settlement involved a payment by the Parent to the
plaintiffs of a net amount of approximately $275 thousand. All settling
defendants, including the Parent and the Company and their subsidiaries,
received mutual releases with respect to all matters alleged in the litigation.
The Parent and the Company are required to indemnify the Levenson Indemnitees
for certain settlement costs and reasonable expenses the Levenson Indemnitees
incurred in connection with the litigation. The Company recorded a special
charge of $4.8 million in the Company's consolidated statements of operations
for the 13-week period ended September 30, 1997, as a reserve against the
Company's obligations to the Levenson Indemnitees. The exact amount of the
Company's obligations to the Levenson Indemnitees may be more or less than this
charge.
PARTNERSHIP AGREEMENT
Pursuant to the Company's Partnership Agreement, subject to certain
circumstances, the Parent, as sole general partner, has the power to, among
other things, (i) make and enter into contracts on behalf of the partnership,
(ii) compromise claims in favor of or against the partnership, (iii) make or
revoke any election for tax purposes, (iv) do all acts necessary or appropriate
for the preservation of the partnership's assets, (v) make distributions and
allocations to the partners, (vi) execute documents or instruments to carry out
the purposes of the partnership, (vii) file state income tax returns, (viii)
invest partnership funds, (ix) select and dismiss employees, (x) borrow money on
behalf of the partnership, (xi) commence or defend litigation, (xii) sell,
transfer or assign assets of the partnership and (xiii) enter into leases for
real or personal property. The Company may not, without the consent of the
limited partners, (i) sell, transfer or assign substantially all of the
partnership's assets, (ii) approve an amendment to the Partnership Agreement and
(iii) change the name of the partnership.
The Parent, as sole general partner of the Company and sole general partner
of FBLP (FBLP being the sole limited partner of the Company) may in its absolute
discretion from time to time amend any term of the Partnership Agreement.
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<PAGE> 27
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Parent is the general partner of the Company. As the sole general
partner of the Company, the Parent will generally have the exclusive right,
responsibility and discretion in the management and control of the Company. See
"Business -- Partnership Agreement." The names and ages of all current directors
and executive officers of the Parent are set forth below. The business address
of each of the directors and executive officers listed below is c/o
Furr's/Bishop's, Incorporated, 6901 Quaker Avenue, Lubbock, Texas 79413.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS:
Suzanne Hopgood(1)........................... 48 Director
Kevin E. Lewis(2)(1)......................... 32 Director, Chairman of the Board
Gilbert C. Osnos(2).......................... 67 Director
Theodore J. Papit(3)......................... 52 Director, President and Chief Executive
Officer
Kenneth F. Reimer(1)......................... 58 Director
E.W. Williams, Jr.(2)........................ 70 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Papit has announced that he will resign his position as Chief Executive
Officer and President of the Company effective mid-December, 1997.
OTHER EXECUTIVE OFFICERS:
<TABLE>
<S> <C> <C>
Donald M. Dodson............................. 59 Vice President, Operations Services
Rodger L. Fisher............................. 48 Vice President, Administration
Jim H. Hale.................................. 55 Vice President, Field Operations
Alton R. Smith............................... 44 Executive Vice President
</TABLE>
Suzanne Hopgood has served as President of the Hopgood Group since founding
the company in 1985. The company provides consulting, development and brokerage
services to clients interested in hotel investments. Prior to founding the
Hopgood Group, she served as Second Vice President at Aetna Realty Investors
where she oversaw one-third of the corporation's multi-billion dollar real
estate equity portfolio. Before joining Aetna, she was Vice President and Senior
Loan Officer of the Lowell Institution for Savings in Lowell, Massachusetts. Ms.
Hopgood serves on the board of directors of the Greater Hartford Arts Council
and The Hartford Ballet, and is a director emirate of the Connecticut Business &
Industry Association. She holds memberships in the Real Estate Exchange, Real
Estate Finance Association and the Urban Land Institute. She is a senior fellow
of the American Leadership Forum and a recognized speaker at Pension Real Estate
Association and Commercial Real Estate Finance Securitization conferences.
Kevin E. Lewis was elected Chairman of the Board of the Parent on June 24,
1993 and served as President and Chief Executive Officer of the Parent from July
1994 through December 1996. Prior to serving as Chairman of the Board of the
Parent, Mr. Lewis was a Managing Director in the New York office of Houlihan,
Lokey, Howard & Zukin, Inc., a specialty investment banking firm, where he had
previously served as a Senior Vice President (January 1992 -- March 1993), Vice
President (January 1990 -- December 1991) and Associate (June 1988 -- December
1989). Mr. Lewis was a director of the LVI Group, Inc. from December 1991 to May
1993 and was a director of Robertson-Ceco Corporation from July 1993 to May
1997. Mr. Lewis has been a director of Norton Drilling Services, Inc. since
April 1997.
Gilbert C. Osnos has been President of the consulting firm Gilbert C. Osnos
& Co., Inc. since 1981, and a partner in Grisanti Galef & Osnos Associates since
1981, providing consulting and interim management services. Mr. Osnos began with
Grisanti Galef in 1979 and became a partner in 1981. Gilbert C. Osnos & Co.,
25
<PAGE> 28
Inc. was also formed in 1981 doing business as Grisanti Galef & Osnos
Associates. Mr. Osnos was a director of the Turnaround Management Association
from 1988 to 1993 and Chairman in 1990-91 and a director of Trivest Financial
Services Corporation and Reprise Capital from 1989 to 1991. Mr. Osnos has served
on the boards of directors of Mrs. Fields, Inc. since 1983 and American Mirrex
since March 1996.
Theodore J. Papit has served as President and Chief Executive Officer of
the Company since March 1997. Prior to joining the Company, Mr. Papit served as
President and Chief Executive Officer of Black-Eyed Pea Restaurants, Inc. and
Casa Bonita Incorporated from 1988 to 1996. Prior to that, Mr. Papit served with
Jerrico, Inc., an operator of over 1,400 Long John Silver's Seafood Restaurants
and 79 Jerry's Coffee Shops, from 1975 to 1988 where his most recent position
was that of Senior Executive Vice President and Chief Operating Officer.
Kenneth F. Reimer has been Chairman and Chief Executive Officer of Reimer
Enterprises, Inc. and Cactus Enterprises, Inc. engaging in management consulting
activities and investment in child care centers since 1993. Mr. Reimer was
President and Chief Executive Officer of the Parent from January 1997 until late
March 1997. Mr. Reimer was a director of S. A. Telecommunications, Inc. from
1993 to 1995. Prior to that, Mr. Reimer was Chief Executive Officer, President
and a director of Roma Corporation from 1984 to 1993 and is past Chairman of the
Board of Trustees of St. Edward's University.
E.W. Williams, Jr. is Chairman of the Board of the Citizens Bank in Slaton,
Texas and Bank of Commerce in McLean, Texas; Chairman of the Executive Committee
of the Hale County State Bank, Plainview, Texas and First National Bank in
Clayton, New Mexico. Mr. Williams is also Chairman of LubCo BancShares, Inc.,
HaleCo BancShares, Inc., GrayCo BancShares, Inc. and Union Bancshares, Inc. and
is Chairman of the Board of Coyote Lake Feedyard, Inc., Muleshoe, Texas. Mr.
Williams has held each of these positions for longer than five years. Mr.
Williams was previously a director and executive committee member of the Texas
Tech University President's Council; founder of the West Texas A&M University
President's Council, and was previous director of the Southern Methodist
University Foundation and Alumni Association. Mr. Williams also served as
Chairman of the Amarillo Hospital District. Mr. Williams currently has farming
and ranching interests in Garza County and Bailey County, Texas.
The business experience during the past five years of each executive
officer who is not a director is summarized below.
Donald M. Dodson has been Vice President of Operations Services since 1993
and was formerly Vice President Food and Beverage from 1990 until 1993. He was
Vice President of Operations from 1987 to 1990. Mr. Dodson joined the Company in
1958 and managed several cafeterias before becoming a District Manager in 1968.
Jim H. Hale has been Vice President of Field Operations since April 1996
and was formerly Regional Vice President of Operations from 1975. Mr. Hale
joined the Parent in 1964 and managed several cafeterias before being promoted
to regional management.
Rodger L. Fisher has been Vice President of Administration of the Company
since May 1997. Prior to joining the Company, Mr. Fisher served as director of
Corporate Services of Black-Eyed Pea Restaurants, Inc. from 1989 to 1997. Prior
to that, Mr. Fisher served with Electronic Data Systems, Inc. from 1984 to 1989,
where his most recent position was that of Payroll Operations Manager.
Alton R. Smith has been Executive Vice President of the Company since 1993,
Secretary since 1995 and was formerly Executive Vice President and Chief
Financial Officer from 1989 until 1993. He was Vice President and Controller
between 1986 and 1989. Prior to 1986, Mr. Smith served as Controller and
Assistant Secretary from 1985 until 1986. Mr. Smith was Assistant Controller and
Assistant Secretary from 1982 to 1985, Director of Taxation from 1978 to 1982
and Tax Manager from 1974 to 1978. He is a certified public accountant and
joined the Company in 1974.
26
<PAGE> 29
EXECUTIVE COMPENSATION
There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company and its subsidiaries,
and to the Parent, for the fiscal years ended December 31, 1996, January 2, 1996
and January 3, 1995 of those persons who were, at December 31, 1996, (i) the
chief executive officer, and (ii) the four other most highly compensated
executive officers of the Parent for the 1996 fiscal year (the "Named
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
-------------------------------- --------------------
COMPENSATION
AWARDS PAYOUTS
-------- ---------
STOCK LONG-TERM
NAME AND PRINCIPAL OPTIONS INCENTIVE ALL OTHER
POSITION YEAR SALARY BONUS OTHER (SHARES) PAYOUTS COMPENSATION
------------------ ---- ------- ------- ----- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kevin E. Lewis 1996 383,654 151,550 -- -- -- 160,500(2)
Chairman, former
President 1995 406,539 50,000 -- -- -- --
and Chief Executive 1994 463,400 42,000 -- -- -- --
Officer(1)
Alton R. Smith 1996 129,808 41,125 -- -- -- --
Executive 1995 120,994 5,000 -- -- -- --
Vice President 1994 121,500 -- -- 15,000 -- --
Jim Hale 1996 121,731 39,480 -- -- -- --
Vice President 1995 106,474 19,000 -- -- -- --
Field Operations 1994 100,000 8,395 -- -- -- --
Donald M. Dodson 1996 129,808 27,875 -- -- -- --
Vice President 1995 120,994 2,500 -- -- -- --
Operations 1994 125,000 10,000 -- -- -- --
John R. Egenbacher 1996 119,423 37,835 -- -- -- --
Vice President 1995 111,314 2,500 -- -- -- --
Real Estate 1994 100,000 7,500 -- -- -- --
</TABLE>
- ---------------
(1) Mr. Lewis resigned as President and Chief Executive Officer effective
December 31, 1996.
(2) Payments made to Mr. Lewis in 1996 pursuant to the Consulting Agreement (as
defined below).
Option Grants
No grants of options were made during the fiscal year ended December 31,
1996 to the Named Officers which are reflected in the Summary Compensation
Table. No appreciation rights were granted during fiscal 1996.
Option Exercises and Fiscal Year-End Values
At December 31, 1996, there were no options outstanding to the Named
Officers.
Certain Compensation Plans
The Company has a qualified defined benefit pension plan (the "Pension
Plan") covering employees and former employees of the Company and its
affiliates, including those who were participants in the Kmart Corporation
Employees' Retirement Pension Plan ( the "Kmart Pension Plan"). The Pension Plan
assumed all of the obligations of the Kmart Pension Plan relating to benefits
that accrued for employees and former employees of certain of the Company's
subsidiaries through the consummation of the acquisition of such subsidiaries
from Kmart. Kmart agreed to transfer an amount of plan assets equal to the
actuarially computed accumulated benefits applicable to the Furr's and Bishop's
employees in the Kmart Pension Plan.
27
<PAGE> 30
Benefits for service prior to 1987 were based on the provisions of the
Kmart Pension Plan and are frozen for such service. Effective December 31, 1988,
the Pension Plan was frozen for highly compensated participants and effective
June 30, 1989 benefit accruals of all participants in the Pension Plan were
frozen indefinitely.
The Pension Plan covers all employees who are at least 21 years old and
have one year or more of participation service and is integrated with Social
Security. A participant's benefit under the Pension Plan will be the greater of
(i) a benefit provided by the participant's "cash balance account" defined
below, or (ii) the sum of (x) the participant's accrued benefit under the Kmart
Pension Plan plus (y) for each year of service after 1986, 0.75% of the
participant's "considered pay" for the year plus (z) 0.75% of considered pay
exceeding the Social Security integration level for the year. "Considered pay"
is comprised of total W-2 compensation, excluding extraordinary items, such as
moving expenses and imputed income, and including pre-tax amounts deferred under
the Employees' Savings Plan described below. The Social Security integration
level is one-half of the Social Security Taxable Wage Base for the year, rounded
to the next highest $1,000. A participant's cash balance account will contain an
amount equal to the sum of (i) 2% of 1986 considered pay multiplied by the
number of years of benefit service prior to 1987, plus (ii) 2% of considered pay
for each year thereafter, plus (iii) 6% interest per annum. The normal form of
benefit under the Pension Plan will be a life annuity for an unmarried
participant and a 50% joint and survivor annuity in the case of a married
participant. Alternatively, participants may elect an optional form of payment
which is the actuarial equivalent of the life annuity. Participants are fully
vested in accrued benefits under the Pension Plan after five years of vesting
service. Unreduced benefits are payable at age 65, or, if earlier, when age plus
years of service equals ninety.
The following table shows the amounts payable using the pension plan
formula and the benefits accrued under the predecessor plans.
Approximate Annual Pension at Age 65*
TOTAL SERVICE AS OF 12/31/88
<TABLE>
<CAPTION>
CURRENT
COMPENSATION 5 YEARS 15 YEARS 25 YEARS 35 YEARS
- ------------ ------- -------- -------- --------
<C> <C> <C> <C> <C>
$ 75,000 $ 3,700 $ 9,500 $15,400 $21,400
100,000 5,000 13,500 21,800 30,100
125,000 6,300 17,300 28,000 38,600
150,000 7,700 21,100 34,200 47,200
175,000 9,000 25,000 40,300 55,700
200,000 10,400 28,800 46,500 64,200
225,000 11,700 32,600 52,700 72,800
325,000 17,000 48,300 77,800 94,023
</TABLE>
- ---------------
* Estimates of frozen pension plan benefits.
The total plan years of service at June 30, 1989 (the date benefit accruals
were frozen) of the five Named Officers of the Company and its subsidiaries are
Kevin E. Lewis 0, Alton R. Smith 15, Donald M. Dodson 31, Jim H. Hale 26, and
John R. Egenbacher 1. If Mr. Smith, Mr. Dodson, Mr. Hale and Mr. Egenbacher were
to retire on their respective retirement dates, they would receive monthly
payments of $848, $3,265, $2,027 and $117, respectively.
The Company established an Employees 401K Plan which is qualified under
Sections 401(a) and 401(k) of the Code (the "401K Plan"). Under the 401K Plan,
participants may elect to make pre-tax contributions, in an amount equal to from
1% to 12% of "considered pay", which consists of total W-2 compensation for
personal services, excluding extraordinary pay, such as moving expenses and
imputed income. Pre-tax contributions were limited to $9,500 in 1996.
Additionally, the Company may make discretionary contributions to the 401K Plan.
Employees will be eligible to participate in the 401K Plan at age 21 with one
year of participation service.
28
<PAGE> 31
Participants' contributions are always fully vested. The Board of Directors
of the Parent will either designate the Company and the Parent contributions as
fully vested when made, or the Company and the Parent contributions will be
subject to a vesting schedule under which 100% of the contributions are vested
after seven years. Employee contributions may be invested either in a fixed
income fund, consisting of guaranteed interest contracts and government
securities, or five different equity funds with various growth and income
objectives. Loans from participants' pre-tax accounts are permitted after two
years of participation.
Participants may generally receive their vested account balances at the
earlier of retirement or separation from service.
Non-employee directors of the Parent receive a fee of $1,500 per month and
$1,000 per board meeting attended as compensation for their services. In
addition, non-employee directors who are members of any Committee of the Board
receive $500 for each meeting attended. Also, after January 1, 1998, Kevin
Lewis, who is Chairman of the Board of the Parent, will receive the compensation
described below.
The Board of Directors of the Parent adopted, and on January 2, 1996 the
stockholders approved, the 1995 Stock Option Plan authorizing an aggregate of
40,540,795 shares of Common Stock of the Parent (the "1995 Option Plan"). After
giving effect to the reverse stock split, there are 2,702,720 shares of Common
Stock reserved for issuance pursuant to the 1995 Option Plan. A Committee of the
Board of Directors administers the 1995 Option Plan, including determining the
employees to whom awards will be made, the size of such awards and the specific
terms and conditions applicable to awards, such as vesting periods,
circumstances of forfeiture and the form and timing of payment. Grants including
stock options, stock appreciation rights and restricted stock may be made to
selected employees of the Company and its subsidiaries and non-employee
directors of the Parent. On November 22, 1996, options to purchase 6,666 shares
of Common Stock were issued to each non-employee director of the Parent pursuant
to the provisions of the 1995 Option Plan.
On June 7, 1996, the Parent, the Company and Kevin E. Lewis entered into
the Consulting and Indemnity Agreement and General Release (the "Consulting
Agreement") pursuant to which, among other things, Mr. Lewis would resign as
President and Chief Executive Officer of the Parent effective September 30,
1996, and would resign his position as Chairman of the Board of the Parent on
December 31, 1996, unless requested by the Board of Directors to continue until
December 31, 1997. On September 17, 1996, at the request of the Board of
Directors, Mr. Lewis agreed to remain President and Chief Executive Officer
beyond September 30, 1996, with no change to the financial terms of the
Consulting Agreement. On December 24, 1996, Mr. Lewis resigned as President and
Chief Executive Officer effective December 31, 1996, and was requested by the
Board to continue as Chairman of the Board into 1997. After his resignation as
President and Chief Executive Officer of the Parent, Mr. Lewis will serve as a
consultant to the Company and the Parent until December 31, 1997. Pursuant to
the Consulting Agreement, Mr. Lewis received an annual base salary of $350,000,
pro-rated through the end of 1996 and will receive $250,000 through the end of
1997. Mr. Lewis received $75,000 upon the execution of the Consulting Agreement,
$75,000 on September 30, 1996, and will receive $100,000 on December 31, 1997.
In addition, Mr. Lewis is entitled to receive $100,000 if requested to assist in
certain negotiations on behalf of the Company and additional compensation based
upon the success of such negotiations. Furthermore, the Company agreed to pay,
among other things, certain legal expenses of Mr. Lewis incurred in connection
with the negotiation of the Consulting Agreement and certain travel and moving
related expenses.
In October 1997, Mr. Lewis agreed to remain as Chairman of the Board of the
Parent until the earlier of (i) the election of a new Chairman of the Board of
the Parent, which may occur at any time after January 1, 1998, (ii) the day
immediately preceding the next stockholders' meeting of the Parent, if and only
if Mr. Lewis fails to receive sufficient votes to be elected director at such
stockholders' meeting, or (iii) May 30, 1998. Mr. Lewis will receive $50,000 on
execution of an agreement containing the foregoing terms, and, in addition to
the fees received by all non-employee directors (see "Business -- Certain
Compensation Plans"), will receive a stipend of $7,500 per month commencing
January 1, 1998.
29
<PAGE> 32
Kenneth Reimer was President and Chief Executive Officer of the Parent from
January 1, 1997 until April 1, 1997. The Parent paid Mr. Reimer $25,000 per
month for his services plus an additional $25,000 on his resignation.
Theodore J. Papit's employment contract requires the Parent to pay Mr.
Papit $25,000 per month for his services as President and Chief Executive
Officer of the Parent. Mr. Papit's employment contract also (i) guarantees Mr.
Papit a minimum first year bonus of $100,000, (ii) requires the Parent to grant
Mr. Papit stock options convertible into 500,000 shares of Common Stock and to
provide an apartment in Lubbock, Texas to Mr. Papit and (iii) provides that the
Parent will enter into a one-year severance agreement in the event of a "change
in control" (as defined in Mr. Papit's employment contract) or a separation for
reasons other than "cause" (as defined in Mr. Papit's employment contract).
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a Delaware limited partnership. Its sole general partner is
the Parent and its sole limited partner is FBLP, an indirect wholly owned
partnership subsidiary of the Parent. The following table sets forth certain
information, as of July 31, 1996, with respect to beneficial ownership of each
stockholder of the Parent known by the Parent to be the beneficial owner of more
than five percent of the Parent's equity securities.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES COMMON STOCK
------------------- --------- ------------
<S> <C> <C>
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, NY 10011 8,607,637 17.7
EQ Asset Trust 1993
1345 Avenue of The Americas
New York, New York 10105 8,499,857(1) 17.5
John Hancock Mutual Life Insurance Company
P.O. Box 111
Boston, MA 02117 5,477,994 11.3
The Northwestern Mutual Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, WI 53202 5,471,679 11.2
The Mutual Life Insurance Company of New York
1740 Broadway
New York, NY 10019 4,105,339 8.4
Principal Mutual Life Insurance Company
711 High Street
Des Moines, IA 50392 3,286,701 6.8
Mr. Peter Collery
Mr. Gary Siegler
c/o Siegler, Collery & Co.
712 5th Avenue
New York, NY 10019 3,186,842(2) 6.6
Rock Finance, L.P.
1560 Sherman Avenue
Evanston, IL 60201 2,998,860 6.2
</TABLE>
- ---------------
(1) These shares of the Common Stock (the "Equitable Shares") are held of record
by EQ Asset Trust 1993, a Delaware business trust (the "Trust"). The
Equitable Companies Incorporated ("Equitable") is the beneficiary and owner
of the Trust. The Trust is managed by Alliance Capital Management, L.P.
("Alliance") pursuant to a Collateral Management Agreement. A wholly-owned
subsidiary of Equitable
30
<PAGE> 33
is the general partner of Alliance; through wholly-owned subsidiaries, Equitable
owns a majority of the equity interest in Alliance. The Equitable Shares and
such Collateral Management Agreement have been pledged to The Chase Manhattan
Bank, N.A., as trustee for the benefit and security of holders of certain
notes of the Trust.
AXA beneficially owns approximately 60.7% of Equitable's outstanding common
stock as well as certain convertible preferred stock of Equitable. AXA is
indirectly controlled by the Mutuelles AXA (five French mutual insurance
companies, acting as a group). AXA and the Mutuelles AXA and certain of
their affiliates disclaim beneficial ownership of the Equitable Shares.
(2) Constitutes 2,163,625 shares owned by The SC Fundamental Value Fund, L.P.
("LP") and 1,023,217 shares owned by SC Fundamental Value BVI, Ltd. ("Ltd").
Messrs. Siegler and Collery, by virtute of their status as controlling
stockholders of the general partner of LP and the managing general partner
of the investment manager of Ltd, may be deemed to beneficially own the
shares owned by LP and Ltd. Messrs. Siegler and Collery have disclaimed
beneficial ownership of the shares owned directly by LP and Ltd. The
information included in this table is based upon the Amendment No. 2 to
Schedule 13D filed with the Securities and Exchange Commission on April 10,
1997, on behalf of Messrs. Siegler and Collery and the other reporting
persons identified therein.
The following table sets forth certain information, as of October 1, 1997
with respect to beneficial ownership of each director, certain officers and all
officers and directors as a group. Unless otherwise indicated the business
address of each director and executive officer is 6901 Quaker Avenue, Lubbock,
Texas 79413.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES COMMON STOCK
------------------- --------- ------------
<S> <C> <C>
Donald M. Dodson.......................................... 2,063(1) *
Jim H. Hale............................................... 3,691(2) *
Suzanne Hopgood........................................... 2,000 *
Kevin E. Lewis............................................ 530,827(3) 1.1
Gilbert C. Osnos.......................................... 10,000 *
Kenneth F. Reimer......................................... 1,500 *
Alton Smith............................................... 696(4) *
E.W. Williams, Jr......................................... 44,934(5) 0.1
All officers and directors as a group..................... 597,466(6) 1.2
</TABLE>
- ---------------
* Owns less than 0.1%
(1) Includes warrants to purchase 1,319 shares of common stock at $1.11 per
share.
(2) Includes warrants to purchase 3,691 shares of common stock at $1.11 per
share.
(3) Includes warrants to purchase 520,827 shares of common stock at $1.11 per
share.
(4) Includes warrants to purchase 445 shares of common stock at $1.11 per share.
(5) Includes warrants to purchase 28,765 shares of common stock at $1.11 per
share.
(6) Includes warrants to purchase 556,170 shares of common stock at $1.11 per
share.
SELLING SECURITY HOLDERS
The following table provides certain information with respect to the Notes
held by each Selling Note Holder. As a result of the comprehensive Restructuring
of the Company and the Parent and subsequent sales of Common Stock by Selling
Note Holders, certain of the Selling Note Holders own approximately 70% of the
outstanding Common Stock of the Parent. Such Selling Note Holders are seven
separate holders of Notes. No Selling Note Holder (or affiliated group of
Selling Note Holders) is a beneficial owner of more than 18% of the Common
Stock; accordingly, no single Selling Note Holder or affiliated group could
itself approve any matter regarding the Company or the Parent or which might be
the subject of a vote of the Parent's
31
<PAGE> 34
stockholders. Since the Selling Note Holders may sell all or some of their
Notes, no estimate can be made of the aggregate amount of the Notes that are to
be offered hereby or that will be owned by each Selling Note Holder upon
completion of the offering to which this Prospectus relates.
As a part of the Restructuring, certain 11% Noteholders designated for
nomination a majority of the members of the Board of Directors of the Parent.
These directors were duly nominated and elected by holders of the former classes
of the Parent's capital stock at a meeting of stockholders held prior to the
Exchanging 11% Noteholders having exercised the Put Option. Certain of these
directors continue to serve on the Board of Directors of the Parent. None of
such directors, however, is affiliated with any former 11% Noteholder or Selling
Note Holder and to the Company's knowledge there is no agreement, understanding
or arrangement among any former 11% Noteholder, Selling Note Holder or any such
director concerning any matter regarding the governance of the Parent or the
Company. See "Risk Factors -- Ownership of the Parent."
The Notes offered by his Prospectus may be offered from time to time by the
Selling Note Holders named below:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT OF
NOTES BENEFICIALLY OWNED
NAME AND BEING REGISTERED
---- ------------------------
<S> <C>
Teachers Insurance and Annuity Association of America....... $8,177,438.84
EQ Asset Trust 1993......................................... $8,075,045.42
John Hancock Mutual Life Insurance Company.................. $5,204,211.54
The Northwestern Mutual Life Insurance Company.............. $5,198,212.13
Principal Mutual Life Insurance Company..................... $3,122,435.77
The Ohio National Life Insurance Company.................... $ 935,048.67
CUNA Mutual Life Insurance Company.......................... $ 908,477.67
</TABLE>
Equitable Real Estate Investment Management, Inc. ("EREIMI"), a former
affiliate of EQ Asset Trust 1993, is the owner of six properties in Illinois and
Iowa which are leased by the Company. The aggregate amount paid by the Company
to EREIMI in respect of periodic rental installments during fiscal 1996 was
$537,034.75. Such lease was entered into by the Company and EREIMI prior to EQ
Asset Trust 1993's acquisition of an interest in the Company in connection with
the Restructuring. Such lease was negotiated at arm's length on terms no less
favorable than the Company would have obtained from an unrelated landlord.
PLAN OF DISTRIBUTION
The Company will receive none of the proceeds from this offering. The Notes
may be sold from time to time to purchasers directly by any of the Selling Note
Holders. Alternatively, the Selling Note Holders may from time to time offer the
Notes through underwriters, brokers, dealers or agents, pursuant to (a) a block
trade in which a broker or dealer will attempt to sell the Notes as agent but
may position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus or (c) ordinary
brokerage transactions and transactions in which the broker or dealer solicits
purchasers. In effecting such sales, underwriters, brokers or dealers engaged by
the Selling Note Holders may arrange for other brokers or dealers to participate
in the resales. Such sales may be effected at market prices and on terms
prevailing at the time of sale, at prices related to such market prices, at
negotiated prices or at fixed prices. In addition, the Selling Note Holders may
engage in hedging or other similar transactions, and may pledge the Notes being
offered, and, upon default, the pledgee may effect sales of the pledged Notes
pursuant to this prospectus. Underwriters, brokers, dealers and agents may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Note Holders or the purchasers of Notes for whom
they may act as agent. The Selling Note Holders and any underwriters, dealers or
agents that participate in the distribution of Notes may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of Notes by them and any discounts, commissions or concessions received by
any such underwriters, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act.
32
<PAGE> 35
There is currently no established public market for the Notes. The Company
does not currently anticipate listing the Notes on any stock exchange.
Therefore, any trading that does develop with respect to the Notes will occur in
the over-the-counter market. The Company has not been advised by any broker or
dealer that a broker or dealer intends to make a market in the Notes.
At the time a particular offering of Notes is made, a Prospectus Supplement
or a post-effective amendment to the Registration Statement, if required, will
be distributed which will set forth the aggregate amount and type of Notes being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Note Holders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the Notes will be offered or sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain jurisdictions the Notes
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or an exemption from registration or qualification is
available and is complied with.
There is no assurance that the Selling Note Holders will sell any of the
Notes. In addition, any Notes covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold pursuant to Rule 144
rather than pursuant to this prospectus.
Pursuant to the Exchange Agreement (the "Exchange Agreement") dated as of
November 15, 1995 between the Parent, the Company and former 11% Noteholders,
some of which are Selling Note Holders, the Company will pay the expenses of
former 11% Noteholders incident to the offering and sale of the Notes to the
public, other than commissions, concessions and discounts of underwriters,
dealers or agents, but including the fees and disbursements of one counsel to
such Selling Security Holders. In addition, the Company has agreed to indemnify
the Selling Security Holders, and, if requested, any underwriter they may
utilize, against certain civil liabilities, including liabilities under the
Securities Act and, if such indemnification is unavailable, to contribute to
payments required to be made by any of them in respect of such liabilities. The
Exchange Agreement requires the Company to keep the registration statement of
which this prospectus is a part continuously effective until the earlier of (a)
July 18, 1999, and (b) the date upon which all Notes have either (i) been
disposed of under this prospectus, (ii) been distributed to the public pursuant
to Rule 144 or Rule 145 under the Securities Act, (iii) been otherwise
transferred and subsequent disposition of them shall not require registration or
qualification of them under the Securities Act or any similar state law then in
force, or (iv) ceased to be outstanding.
DESCRIPTION OF NOTES
The following is only a summary of the material terms of the Notes, does
not purport to be a full description thereof and is qualified in its entirety by
reference to the Indenture, the Notes and the other exhibits to the Indenture
(including certain terms defined in such documents), copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Available Information." The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as in effect on the date of the Indenture (the "Trust
Indenture Act"). The definitions of the material terms used herein are set forth
in "Definitions" contained elsewhere in this Prospectus.
GENERAL
Notes in the aggregate principal amount of $40.0 million were originally
issued in a private placement by the Company pursuant to the Indenture in
amendment of $40 million principal amount of the 11% Notes of the Company. In
addition, a Note in the original principal amount of $1.7 million was issued to
GEPT in settlement of a judgment against FBLP. On January 24, 1996,
approximately $4.1 million aggregate principal amount of Notes were issued in
payment of the first interest installment under the Indenture. No additional
Notes may be issued pursuant to the Indenture and all future payments of
interest must be made in cash. The
33
<PAGE> 36
maturity date of the Notes is December 31, 2001. The Notes offered hereby are
being offered for sale by the Selling Security Holders and the Company will not
receive any part of the proceeds from any sale thereof.
The Notes are issuable only in registered form without coupons in
denominations of one thousand dollars ($1,000) and any integral multiple
thereof, except as necessary to reflect principal amounts not evenly divisible
by one thousand dollars ($1,000). As provided in the Indenture and subject to
certain limitations therein, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same. No service charge shall be made for any
registration of transfer or exchange or redemption of Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
INTEREST
The Notes bear interest at 12% per annum, except that upon a default in the
payment of interest for thirty days or principal at maturity, such interest rate
shall be increased to the lesser of 13% per annum and the highest rate allowed
by applicable law. Interest on the Notes is payable semi-annually on March 31
and September 30. Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months. Interest on the Notes which is payable,
and is punctually paid by the Company to the Trustee or duly provided for, on
any Interest Payment Date shall be paid by the Trustee to the Person in whose
name the Notes are registered at the close of business on the Regular Record
Date for such interest. On January 24, 1996, approximately $4.1 million
aggregate principal amount of Notes were issued in payment of the first interest
installment. No additional Notes are issuable under the Indenture and all future
interest payments shall be made in cash.
OPTIONAL REDEMPTION
The Notes are redeemable at the option of the Company at any time, upon not
less than thirty nor more than sixty days notice, in whole or in part, at 103%
of the principal amount of the Notes to be redeemed if the redemption occurs on
or before September 30, 1998 and at 100% of the principal amount if the
redemption occurs after September 30, 1998, in each case together with the
accrued interest thereon to the redemption date.
In the case of any redemption of Notes, interest installments whose Stated
Maturity is on or prior to the Redemption Date will be payable to the Trustee
for payment to the Holders of record of such Notes at the close of business on
the relevant Regular Record Date. Notes (or portions thereof) for whose
redemption and payment provision is made in accordance with the Indenture shall
cease to bear interest from and after the date fixed for redemption.
REQUIRED REDEMPTION
The Company is required to redeem Notes from the proceeds of certain
transfers of assets or property or casualty losses which are not, within 180
days of the date of receipt thereof, applied, in the case of transfer, to
purchase certain assets used or useful in the business of the Company, or, in
the case of casualty loss, to either repair or replace the property that gave
rise to such casualty loss except that such proceeds may not be used to purchase
assets if a Default or Event of Default shall have occurred and be continuing.
In the event that a Specified Asset Sale shall be deemed to have occurred,
or a Specified Casualty Loss Event shall occur, the Company shall irrevocably
offer to redeem Notes without premium in the aggregate principal amount equal to
the Net Cash Proceeds of such Specified Asset Sale, or an amount equal to such
Specified Casualty Loss Payment, as the case may be, if such proceeds exceed
$1.0 million. Notwithstanding the preceding sentence, the Company is required to
irrevocably offer to redeem Notes without premium in the aggregate principal
amount equal to all Collected Amounts aggregating $1.0 million. Failure to
affirmatively accept such offer in the manner specified in the Indenture shall
be deemed to be a rejection of such prepayment offer. A Holder may not elect to
have redeemed less than or more than all of the portion of the Securities held
by such Holder which the Company offers to redeem.
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RANKING
The Notes are senior obligations of the Company. The obligations under the
Notes are secured by a security interest in substantially all of the property
and assets of the Company. See "Security and Guaranty". The Notes rank pari
passu with all existing and future senior indebtedness of the Company. As of the
date hereof, there is no other senior indebtedness outstanding. The Indenture
contains limitations with respect to the amount of additional indebtedness that
can be incurred by the Company and its subsidiaries. The Company may obtain a
revolving credit facility in the amount of $5.0 million and, under certain
circumstances, release certain collateral, or subordinate to such facility the
liens, securing the Notes. See "-- Security and Guaranty."
SECURITY AND GUARANTY
Pursuant to the Collateral Documents, the Notes are secured by a valid,
perfected security interest in substantially all of the assets and property of
the Company, including, without limitation, certain real property, all
inventory, equipment, accounts receivable and intellectual property of the
Company, and by a pledge of the partnership interest of the Company in
Specialty. The obligations of the Company in respect of the Notes and the
Indenture are fully and unconditionally guaranteed by Specialty, which guarantee
is secured by a security interest in substantially all of the property and
assets of Specialty. Specialty, however, has no material assets. The liens and
security interest with respect to certain property may be subject to prior liens
and encumbrances. In addition, property and assets of the Company may be
released from the liens of the Collateral Documents in connection with a
transfer permitted under the provisions described in "Covenants -- Restricted
Transfers of Assets."
In the event the Company desires to obtain a revolving credit or similar
facility from another lender, the Trustee shall, at the request of the Company,
either (i) subordinate the Liens of the Collateral Documents to the Lien of such
lender in an amount not to exceed $5.0 million or (ii) release the Lien of the
Collateral Documents upon particularly identified Collateral which has a fair
market value not to exceed $8.0 million.
As of October 1, 1997, the Company's total indebtedness was approximately
$69.1 million (including approximately $23.4 million of interest accrued through
maturity). At such date, the Company's total assets were approximately $77.3
million. There can be no assurance that the amount realized upon any enforcement
against the Collateral following an Event of Default would be sufficient to
satisfy the Company's payment obligations in respect of the Notes.
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Restricted Payments and Restricted Investments.
The Company will not declare or make, or incur any liability to declare or
make, or permit any of its Subsidiaries to declare or make, or incur any
liability to declare or make, any Restricted Payment or any Restricted
Investment, except that, at any time after the last day of the fiscal quarter
during which the Second Closing Date occurs, the Company may, and may permit any
Subsidiary to take the foregoing actions, so long as, immediately prior to
giving effect to such declaration or payment, and immediately thereafter and
after giving effect thereto, both:
(a) no Default or Event of Default shall have occurred or be
continuing; and
(b) the aggregate amount of all Restricted Payments made during the
period (treated as a single accounting period) beginning on the Second
Closing Date and ending on such date, plus the aggregate amount of all
Restricted Investments made after Second Closing Date and remaining
outstanding on such date, does not exceed the difference of:
(i) fifty percent (50%) of Consolidated Net Income accrued during
the period (treated as a single accounting period) beginning on the
Second Closing Date and ending on the last day of the full fiscal
quarter of the Company most recently ended as of such date; minus
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(ii) (A) if Consolidated Net Income for the period commencing on
the first day of the period of four (4) full consecutive fiscal quarters
then most recently ended (or, if later, the Second Closing Date) and
ending on the last day of the fiscal quarter of the Company then most
recently ended as of such date is a loss, one hundred percent (100%) of
the positive amount of such loss; and
(B) if Consolidated Net Income for the period referred to in
(b)(ii)(A) above is not a loss, Zero Dollars ($0).
Limitations on Indebtedness.
The Company shall not, and shall not permit any of its Subsidiaries to,
create, incur, assume, or Guarantee any Indebtedness except:
(a) the Company and the Subsidiaries may create, incur, assume or
Guarantee Indebtedness pursuant to a revolving credit or similar facility,
and may from time to time obtain advances in respect of such facility, so
long as the aggregate amount of Indebtedness outstanding thereunder at any
time, after giving effect to such creation, incurrence, assumption or
Guarantee, or such advance, shall not exceed Five Million Dollars
($5,000,000); and
(b) any Subsidiary may incur unsecured Indebtedness to the Company or
any Guarantor Subsidiary, and the Company may incur Subordinated
Intercompany Indebtedness;
(c) the Company and its Subsidiaries may incur, create, assume or
Guarantee any other Indebtedness (including Indebtedness in excess of Five
Million Dollars ($5,000,000) in respect of the revolving credit or similar
facility referred to in clause (a) above) so long as immediately after, and
after giving effect to, such creation, incurrence, assumption or Guarantee
and the concurrent prepayment, redemption, retirement or acquisition of any
Indebtedness of the Company being prepaid, redeemed, retired or acquired
concurrently with the proceeds of such Indebtedness, the Pro Forma Interest
Coverage Ratio calculated at such time exceeds the "Percentage" set forth
in the following table below associated with the period in which such date
falls:
<TABLE>
<CAPTION>
PERIOD "PERCENTAGE"
------ ------------
<S> <C>
the period beginning on the Second Closing Date and
ending on (and including) January 2, 1996............. 250%
the period beginning on (and including) January 3, 1996
and ending on (and including) January 7, 1997......... 275%
the period beginning on (and including) January 8, 1997
and ending on (and including) January 6, 1998......... 300%
the period beginning on January 7, 1998................. 325%
</TABLE>
Negative Pledge.
The Company will not create or assume, or permit any of its Subsidiaries to
create or assume, any Lien securing any Indebtedness on any asset or property,
whether now owned or hereafter acquired by it, except:
(a) Liens in favor of the Trustee, for the benefit of the Trustee and
the Holders, including such Liens contemplated by the Collateral Documents;
(b) Liens upon property securing Indebtedness which refinances,
renews, replaces or extends Indebtedness secured by Liens on such Property
in existence on the date of the Indenture, but not any increase in the
principal amount of any thereof or the extension thereof to any other
property of the Company or any of its Subsidiaries (except as otherwise
permitted by the Indebtedness covenant and clause (e) of this covenant);
(c) Liens securing the revolving credit or similar facility referred
to in "Limitations on Indebtedness," so long as such Liens secure an amount
not in excess of Five Million Dollars ($5,000,000) (except as otherwise
permitted by certain provisions of the Indenture); with respect to such
Liens, the Trustee, if
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<PAGE> 39
requested by the Company to take either the action specified in clauses (i)
or (ii) below (but not both) shall, if the lender under such facility is
unwilling to make such facility available upon terms satisfactory to the
Company unless the Trustee takes the action requested by the Company,
either:
(i) enter into an agreement for the benefit of such lender or
lenders subordinating the Liens of the Collateral Documents (but not the
rights of the Holders to receive payment generally) to the Lien of such
lender securing the obligations owing such lender under such facility,
but only insofar as such obligations do not exceed Five Million Dollars
($5,000,000); or
(ii) release the Lien of the Collateral Documents upon particularly
identified Collateral specified in such Company Order (but no other
Collateral) including, without limitation, any particularly identified
Collateral thereafter acquired, which specified Collateral has a fair
market value of not greater than Eight Million Dollars ($8,000,000) at
any time;
(d) Purchase Money Mortgages by the Company or any of its Subsidiaries
(including, without limitation, Capital Leases), so long as (i) such
Purchase Money Mortgage secures only the obligation to pay the purchase
price of such asset (or the obligations under such Capital Lease) or a
Subsidiary being acquired, together with related fees and expenses, (ii)
the initial amount secured by such Purchase Money Mortgage shall not be
more than one hundred percent (100%) of the purchase price of such asset
(or the obligation under such Capital Lease) or such Subsidiary being
acquired, together with related fees and expenses, and (iii) the aggregate
Indebtedness secured by all such Purchase Money Mortgages (other than
Capital Leases) shall not exceed in the aggregate for the Company and its
Subsidiaries twenty percent (20%) of the aggregate amount of assets
reflected on a consolidated balance sheet of the Company and the
Subsidiaries, as at the end of the fiscal quarter of the Company then most
recently ended; which Purchase Money Mortgages may rank senior to the Lien,
if any, of the Collateral Documents in respect of the property or assets so
acquired; provided, however, that in the event that the Company or any
Subsidiary shall apply any Entire Cash Proceeds in respect of any Transfer,
or any Casualty Loss Payment in respect of any Casualty Loss, to the
purchase of any property or assets in accordance with certain provisions of
the Indenture, as the case may be, and the purchase price of such property
or assets exceeds the amount of Entire Cash Proceeds or Casualty Loss
Payment, the Company or such Subsidiary (subject to certain provisions of
the Indenture) may finance the amount of such excess and may secure such
financing with a Purchase Money Mortgage upon such property or assets,
subject to the limitations set forth in this paragraph, as if the "purchase
price," as such term is used above, were equal to the amount of such
excess; and
(e) subject to the Liens described in clause (a) above, other Liens
securing Indebtedness, so long as, at the time such Lien is created or
assumed, the Indebtedness secured thereby is permitted to be created and
incurred pursuant to the provisions restricting Indebtedness.
Limitations on Negative Pledges.
The Company will not, and will not permit any of its Subsidiaries to enter
into any agreement prohibiting the creation or assumption of any Lien upon the
properties or assets of the Company or any of its Subsidiaries in favor of the
Trustee (except under Capital Leases and Purchase Money Mortgage or Lien
documents permitted hereunder but only to the extent such prohibition relates
solely to the property or asset purchased or leased thereunder) or requiring an
obligation to be secured if any Obligations are secured.
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<PAGE> 40
Restricted Transfers of Assets.
The Company shall not, nor shall it permit any Subsidiary to, Transfer all
or any part of its assets (other than conveyances or transfers of the properties
and assets of the Company substantially as an entirety in compliance with the
provisions of the Indenture governing successors and other than Permitted
Transfers) or agree to do any of the foregoing, unless the Company, no later
than the date following the date of such Transfer, pays the Entire Cash Proceeds
in respect of such Transfer to the Trustee, subject to release to the Company.
All such Entire Cash Proceeds shall be held in trust for the equal and ratable
benefit of the Holders, and the Company granted to the Trustee a Lien in all
such Entire Cash Proceeds.
In the event that, within one hundred eighty (180) days after the
occurrence of any Transfer, the Company wishes to apply all or a portion of the
Entire Cash Proceeds therefrom to purchase one or more assets constituting
either fixed assets, real property, machinery or equipment, in each case, used
or useful in the business of the Company or such Subsidiary, then, so long as no
Default or Event of Default shall have occurred and be continuing, the Company
may request the Trustee to pay to the Company or to its order all or any portion
of the amount of such Entire Cash Proceeds actually applied to any such
purchase; provided, however, that the Company and its Subsidiaries shall not be
entitled to apply to any such purchase any Entire Cash Proceeds, or any portion
thereof, which have become Net Cash Proceeds. As promptly as practicable
following receipt by the Trustee of a Company order specifying the amount of the
Entire Cash Proceeds to be paid by the Trustee, accompanied by an officers'
certificate certifying that such amount is to be applied to purchase one or more
assets constituting either fixed assets, real property, leasehold improvements,
machinery or equipment, in each case, used or useful in the business of the
Company or such Subsidiary, the Trustee shall pay the requested amount of such
Entire Cash Proceeds to the Company or its order in payment for the purchase
price of such purchase, so long as (i) at or prior to the time of such purchase,
the Company or such Subsidiary grants to the Trustee a Lien in such acquired
property and (ii) such acquired property shall be owned by the Company or such
Subsidiary, as the case may be, free and clear of all Liens, other than Liens
not securing Indebtedness and other than those permitted by certain provisions
of the Indenture.
Upon the transfer of property or assets permitted by these provisions, the
lien of the Collateral Documents in respect of the property or assets so
transferred shall be released, but the lien of the Collateral Documents shall
continue in the proceeds of such transfer.
Limitations on Transactions with Affiliates.
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into any transaction (including, without
limitation, the purchase, sale or exchange of property or the rendering of a
service), whether or not in the ordinary course of business, with any Affiliate
of the Company or such Subsidiary unless (a) such transaction is entered into
upon terms and conditions no less favorable to the Company, or the affected
Subsidiary, as those that would be obtained through an arm's-length negotiation
with an unaffiliated third party, and (b) the terms of any such transaction
shall be approved by a majority of the directors who are not parties to, and
have no interest in, such transaction. The foregoing restrictions shall not
apply to (i) any issuance of capital stock of the Parent, or options, stock
appreciation rights or similar rights in respect thereof, or other awards or
grants, in cash or otherwise, pursuant to, or the funding of, employee benefit
plans approved by a majority of the disinterested directors of the board of
directors of the General Partner (or, if the General Partner is a partnership,
the general partner of the General Partner), (ii) loans or advances to employees
in the ordinary course of business, (iii) transactions between and among the
Company and the Guarantor Subsidiaries, (iv) transactions and the making of
payments contemplated by the Reimbursement Agreement and (v) any agreements to
do any of the foregoing acts described in clauses (i) through (iv).
Future Property.
The Company will, with respect to all property (other than real property
and improvements thereon) acquired by the Company after the date hereof (and, if
such acquisition were financed, if there were no prohibition in the documents
governing such financing to encumbrances on such property), duly execute and
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<PAGE> 41
deliver to the Trustee, not later than thirty (30) days after the acquisition
thereof, such pledge agreements, security agreements or other like agreements
with respect to such property creating in the Trustee's favor for the ratable
benefit of the Holders a valid, perfected and enforceable first priority (except
for Liens permitted by certain provisions of the Indenture) Lien on such
property, such pledge agreements, security agreements or other like agreements
to be, to the extent applicable, substantially in the forms of such agreements
executed by the Company in favor of the Trustee on the date of the Old Indenture
(except for changes authorized under the Indenture) reasonably acceptable to the
Trustee, together with such other documents, certificates, opinions of counsel
and the like as the Trustee shall reasonably request in connection therewith.
The Company will, with respect to its real property and improvements
thereon (other than any leasehold interests of the Company in real property and
improvements thereon) acquired by the Company after the date hereof (and, if
such acquisition were financed, if there was no prohibition in the documents
governing such financing to encumbrances on such property), duly execute and
deliver to the Trustee, not later than thirty (30) days after the acquisition
thereof, Mortgages creating in the Trustee's favor for the ratable benefit of
the Holders, upon recordation thereof, a valid, perfected and enforceable first
priority (except for Liens permitted by certain provisions of the Indenture)
Lien on all such real property and improvements thereon, such Mortgages to
contain substantially the same terms as the Mortgages securing the Obligations
on the date after the date of this Indenture and which shall be reasonably
acceptable to the Trustee, and the enforceability, proper filing and proper
recording of which shall be supported by an opinion of counsel acceptable to the
Trustee. The Company shall use its best efforts to cause to be executed and
delivered to the Trustee, prior to or concurrently with the delivery by the
Company of the aforesaid Mortgages to the Trustee (or if such is not possible,
as promptly as possible thereafter), any and all necessary estoppel
certificates, non-disturbance agreements, waivers, consents of third parties
thereto to the extent deemed necessary or appropriate by the Trustee, and the
Company shall cause such Mortgages to be duly recorded in the appropriate
recording office or offices and shall pay all fees and taxes payable in
connection therewith.
Maintenance of Liens.
Except for the filing of continuation statements and the making of other
filings by the Trustee as secured party or assignee, the Company shall at all
times take all action necessary to maintain the Liens provided for under or
pursuant to the Collateral Documents as valid and perfected first priority Liens
on the property intended to be covered thereby (subject only to Liens expressly
permitted hereunder) and supply all information to the Trustee necessary for
such maintenance.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries.
The Company will not, and will not permit any of its Subsidiaries to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any such Subsidiary to
(a) pay dividends or make any other distribution on any of such Subsidiary's
Capital Stock owned by the Company or any Subsidiary of the Company, (b) pay any
Indebtedness owed to the Company or any other Subsidiary, (c) make loans or
advances to the Company or any other Subsidiary, or (d) transfer any of its
property or assets to the Company or any other Subsidiary; except, in each case,
for (i) any restrictions created by the Credit Documents; (ii) any restrictions
existing under any agreements in effect on the date of the Original Indenture;
(iii) any renewals or extensions of the restrictions referred to in clause (i)
or (ii); (iv) with respect to clause (d) above only, Capital Leases or Purchase
Money Mortgage or Lien documents permitted hereunder (but only with respect to
the property leased or purchased thereunder), and customary non-assignment
provisions of any leases governing any leasehold interest or any supply, license
or other similar agreement entered into in the ordinary course of business; and
(v) any restrictions existing by reason of applicable law.
Limitations on Merger, Consolidation and Sale of Substantially All Assets
The Company shall not consolidate with or merge with or into, Transfer its
properties and assets substantially as an entirety to or purchase or acquire the
properties and assets substantially as an entirety of any of the Parent
Restricted Subsidiaries. The Company shall not consolidate with or merge with or
into any
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<PAGE> 42
other Person, or Transfer its properties and assets substantially as an entirety
to any Person, unless (a) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by Transfer the properties and assets of the Company substantially as an
entirety (the "Surviving Person") shall be a corporation or partnership
organized and existing under the laws of the United States of America or any
State or the District of Columbia, and shall expressly assume the due and
punctual payment of the principal of (and premium, if any) and interest on all
the Notes, the performance of every covenant of the Indenture and the other
Credit Documents on the part of the Company to be performed or observed, and all
other Obligations of the Company pursuant to the Indenture, the Notes and the
Credit Documents, (b) immediately after, and after giving effect to, such
transaction, no Default or Event of Default shall have occurred and be
continuing, (c) either (i) immediately after, and after giving effect to, such
transaction, both (A) the Tangible Net Worth of the Company or the surviving
person, as the case may be, and its Subsidiaries on a consolidated basis shall
be equal to or greater than the Tangible Net Worth of the Company and its
Subsidiaries on a consolidated basis immediately prior to the consummation of
such transaction and (B) the Company or the Surviving Person, as the case may
be, shall be entitled to incur at least One Dollar ($1.00) of additional
Indebtedness pursuant to certain provisions of the Indenture or (ii) such
transaction involves a merger of the Company with and into, or a Transfer of its
properties and assets substantially as an entirety to, the Parent, so long as,
but only so long as, the Parent shall not, at any time prior to or
contemporaneously with such transaction, have consolidated with or merged with
or into, Transferred its properties and assets substantially as an entirety to
or purchased or acquired the properties and assets substantially as an entirety
of, any of the Parent Restricted Subsidiaries, and (d) the Company or the
Surviving Person, as the case may be, has executed and delivered to the Trustee
certain certificates and opinions all necessary assignments, amendments to
financing statements under the Uniform Commercial Code of any jurisdiction and
other documents necessary to maintain the Trustee's right, title and interest in
and to the Trust Estate.
SEC Reports
Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the Company shall file with the Securities and
Exchange Commission (the "Commission") and provide the Trustee and Holders with
such annual reports and such information, documents and other reports specified
in Section 13 and 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines Event of Default as any one of the following events:
(a) if default shall be made in the due and punctual payment of the principal,
premium, if any, and interest of any of the Notes when due and payable and in
the case of interest such default shall continue unremedied for a period of
thirty (30) days; (b) if (A) a default shall be made in the performance or
observance of any covenant, agreement or provision described above in
"-- Certain Covenants" and such default shall continue unremedied for a period
of thirty (30) days after any officer of the General Partner becomes aware of
such default, (B) a default shall be made in the due and punctual payment of any
amounts payable under the Indenture or under any other Credit Document when due
and payable or a default shall be made in the performance or observance of any
covenant, agreement or provision contained in the Indenture or the Notes or in
any other Credit Document, and such default shall continue unremedied for a
period of thirty (30) days after there has been given, in the manner
contemplated by the Indenture by the Holders of twenty-five percent (25%) or
more in aggregate principal amount of outstanding Notes, a written notice
specifying such default or breach, requiring it to be remedied and stating that
such notice is a "Notice of Default," (C) the Indenture or any other Credit
Document shall terminate, be terminated or become void or unenforceable without
the prior written consent of the Holders, or (D) any of the Liens created by the
Collateral Documents shall cease to be enforceable or shall not have the
priority purported to be created thereby with respect to Collateral having a
fair market value in excess of two million five hundred thousand dollars
($2,500,000); (c) if a default shall occur (A) in the payment of any principal
or interest (after giving effect to any applicable grace period) with respect to
any Indebtedness of the Company or any of its Subsidiaries or any General
Partner (other than the Notes) or
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<PAGE> 43
(B) under any agreement pursuant to which any such indebtedness may have been
issued, created, assumed, Guaranteed or secured by the Company or any of its
Subsidiaries or any General Partner, and, as a result thereof, such Indebtedness
shall be declared due and payable prior to the stated maturity thereof or shall
not be paid in full at the stated maturity thereof, provided, however, that the
aggregate amount of all Indebtedness as to which such a payment default or such
other default causing acceleration shall occur exceeds (x) one million dollars
($1,000,000) in Indebtedness other than Non-Recourse Indebtedness or (y) two
million five hundred thousand dollars ($2,500,000) in Indebtedness consisting of
Non-Recourse Indebtedness; (d) if the Company or any of its Significant
Subsidiaries or any General Partner (A) is dissolved, (B) files a petition to
take advantage of any insolvency act, (C) makes an assignment for the benefit of
its creditors of itself or of the whole or any substantial part of its property,
(D) commences a proceeding for the appointment of a receiver, trustee,
liquidator or conservator of itself or of the whole or any substantial part of
its property or (E) files a petition or answer seeking reorganization or similar
relief under applicable law or statute of the United States of America, any
state thereof or any foreign country; (e) if a court of competent jurisdiction
(A) shall enter an order, judgment or decree appointing a custodian, receiver,
trustee, liquidator or conservator of the Company or any of its Significant
Subsidiaries or any General Partner or of the whole or any substantial part of
their respective properties, or approve a petition filed against the Company or
any of its Significant Subsidiaries or any General Partner seeking
reorganization or similar relief under applicable law or statute of the United
States of America, any state thereof or any foreign country, (B) under the
provisions of any other law for the relief or aid of debtors, shall assume
custody or control of the Company or any of its Significant Subsidiaries or any
General Partner or of the whole or any substantial part of their respective
properties, or (C) if there is commenced against the Company or any of its
Significant Subsidiaries or any General Partner any proceeding for any of the
foregoing relief and such proceeding remains undismissed for a period of sixty
(60) days or the Company or any of its Significant Subsidiaries or any General
Partner by any act indicates its consent to or approval of any such proceeding
or petition; (f) if (A) one or more judgments exceeding the insurance coverage
in respect thereof by more than two million five hundred thousand dollars
($2,500,000) in the aggregate are rendered against any of the Company or any of
its Subsidiaries or any General Partner or (B) there are any attachments or
executions against any of the properties of the Company or any of its
Subsidiaries or any General Partner for amounts in excess of two million five
hundred dollars ($2,500,000) in the aggregate and (C) such judgments,
attachments or executions remain unpaid, unstayed or undismissed for any period
of sixty (60) consecutive days; (g) if there shall occur the loss, theft,
substantial damage to or destruction of any portion of the Collateral not fully
covered by insurance (less deductibles in an amount permitted hereunder), which
uncovered portion of the Collateral by itself has a fair market value in excess
of two million five hundred thousand dollars ($2,500,000) or with other such
losses, thefts, damage or destruction of uncovered portions of Collateral
occurring while this Indenture is in effect have an aggregate fair market value
in excess of two million five hundred thousand dollars ($2,500,000); or (h) the
partnership agreement of the Company shall be amended in any manner so that the
partnership agreement shall violate, conflict with or breach any provision of
the Indenture, any of the Collateral Documents or any other document delivered
thereunder or the partnership agreement shall prohibit or prevent the
performance by the Company of any of its obligations or agreements made in the
Indenture, any of the Collateral Documents or any other such documents.
If an Event of Default specified in clause (d) or (e) above with respect to
the Company occurs and is continuing, then the principal amount of the Notes,
together with accrued interest on the principal amount of such Notes as well as
all other Obligations, shall automatically become immediately due and payable,
without any declaration or other act on the part of the Trustee or any Holder.
If an Event of Default (other than an Event of Default specified in clause (d)
or (e) above with respect to the Company) occurs and is continuing, then and in
every such case the Holders of not less than a majority of the principal amount
of the Notes outstanding may, and the Trustee upon the request of the Holders of
not less than a majority of the principal amount of the Notes outstanding shall,
by written notice to the Company (and to the Trustee if given by Holders)
declare the principal of the Notes, together with accrued interest on the
principal amount of such Notes as well as all other Obligations, to be
immediately due and payable and the same shall become immediately due and
payable without any further declaration or other act on the part of the Trustee
or any
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Holder. Under certain circumstances, the Holders of the Requisite Amount of the
Notes outstanding may rescind any such acceleration with respect to the Notes
and its consequences.
The Holders of the Requisite Amount of the Notes Outstanding may on behalf
of the Holders of all the Notes waive any past Default hereunder or under any
other Credit Document and its consequences, except a Default in the payment of
the principal of (or premium, if any) or interest on any Security or in respect
of a covenant or provision in the Indenture or under any other Credit Document
which under the provisions of the Indenture cannot be modified or amended
without the consent of the Holder of each Outstanding Security affected. Upon
any such waiver, such Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured, for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.
The Holders of the Requisite Amount of the Notes outstanding shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, whether before or after the occurrence of an Event of Default,
provided that such direction shall not be in conflict with any rule of law or
with the Indenture and the Trustee may, but shall not be required to, take any
other action deemed proper by the Trustee which is not inconsistent with such
direction.
In addition to exercise of all other rights and remedies permitted to be
exercised by the Trustee hereunder, in the event that either (a) the Stated
Maturity of the Notes is accelerated in accordance with the provisions of the
Indenture or (b) under certain circumstances, an Event of Default has occurred
and is continuing, and the Trustee is directed to do so in writing by the
Holders of the Requisite Amount of Notes, then the Trustee shall proceed,
subject to certain provisions of the Indenture, to enforce the rights of the
Trustee and the Holders of Notes pursuant to the provisions of the Collateral
Documents. In no event may a Holder exercise any right or remedy with respect to
any Collateral under any Collateral Document, such right of exercise being
vested solely in the Trustee as herein provided and as provided in the
Collateral Documents.
No Holder of any Notes shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder
has previously given written notice to the Trustee of a continuing Event of
Default, (b) the Holders of not less than twenty-five percent (25%) in principal
amount of the Outstanding Notes shall have made written request to the Trustee
to institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder, (c) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be incurred
in compliance with such request, (d) the Trustee for sixty (60) days after its
receipt of such notice, request and offer of indemnity has failed to institute
any such proceeding, and (e) no direction inconsistent with such written request
has been given to the Trustee during such sixty (60) day period by the Holders
of the Requisite Amount of the Notes outstanding; it being understood and
intended that no one or more Holders shall have any right in any manner whatever
by virtue of, or by availing of, any provision of the Indenture to affect,
disturb or prejudice the rights of any other Holders, or to obtain priority or
preference over any other Holders or to enforce any right under the Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all the Holders.
The Company will be required to furnish annually to the Trustee a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
AMENDMENTS AND WAIVERS
Without prior notice to or the Consent of the Holders of Notes outstanding,
the Company (and additionally for any Credit Document as to which the Company is
not the sole obligor, such other obligor(s); or for any Credit Document as to
which the Company is not the obligor, the obligor of such document) and the
Trustee may enter into an indenture or indentures supplemental to the Indenture
or amendments or waivers to other Credit Documents constituting Collateral
Documents or Guarantees, but solely for one or more of the following purposes
(a) to evidence the succession of a successor to the Company or such obligor,
and the assumption by such successor of the covenants of the Company or such
obligor under the Indenture, in the Notes and in the other Credit Documents to
which the Company or such obligor is a party contained,
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(b) to add to the covenants of the Company or such other obligor, for the
benefit of the Holders, or to surrender any right or power herein or therein
conferred upon the Company or such other obligor, (c) to cure any ambiguity, to
correct or supplement any provision of the Indenture which may be inconsistent
with any other provision of the Indenture or in such Credit Documents or to make
any other provisions with respect to matters arising thereunder which shall not
be inconsistent with the provisions of the Indenture; provided, however, such
action shall not adversely affect the interests of the Holders, and (d) to
modify, eliminate or add to the provisions of the Indenture to the extent
necessary to effect the qualification of the Indenture under, or the compliance
by the Indenture with the provisions of, the Trust Indenture Act.
With the Consent of the Holders, the Company (and additionally for any
Credit Document as to which the Company is not the sole obligor, such other
obligor(s); or for any Credit Document as to which the Company is not the
obligor, the obligor of such document) and the Trustee may enter into an
indenture or indentures supplemental to the Indenture or amendments or waivers
to other Credit Documents constituting Collateral Documents or Guarantees for
the purpose of adding, amending or waiving compliance with any provisions of the
Indenture or any such other Credit Document or of modifying in any manner the
rights of the Holders under the Indenture or under any such other Credit
Document; provided, however, that no such supplemental indenture, amendment or
waiver shall, without the consent of the Holder of each outstanding Note
affected thereby (a) change the Stated Maturity of or any Redemption Date with
respect to the principal of, or of any installment of interest on or any premium
payable upon the redemption of, any Note, or reduce the principal amount thereof
or the rate of interest thereon payable upon the redemption or other payment
thereof, or change the coin or currency in which, any Note or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment after the Stated Maturity thereof (or, in the case of
redemption, on or after any Redemption Date), (b) reduce the percentage in
principal amount of the outstanding Notes, the consent of whose Holders is
required for any such supplemental indenture, amendment or waiver, (c) modify
certain remedial provisions of the Indenture, except to increase any such
percentage or to provide that certain or other provisions of this Indenture
cannot be modified or waived without the consent of the Holder of each Note
affected thereby, (d) waive a Default or Event of Default in the payment of
principal of or interest on, or redemption payment with respect to, any
Security, or (e) modify any of the provisions of the Indenture relating to the
pro rata redemption of Notes.
It shall not be necessary for the Holders to approve the particular form of
any proposed supplemental indenture, amendment or waiver, but it shall be
sufficient if they shall approve the substance thereof.
After a supplemental indenture, amendment or waiver under the Indenture
with respect to a Credit Document is effective, the Company shall mail to each
Holder a copy of such supplemental indenture, amendment or waiver. Any failure
of the Company to so mail such copy shall not, however, in any way impair or
affect the validity of any such supplemental indenture, amendment or waiver.
TRANSFER
The Notes will be issued in registered form in denominations of one
thousand dollars ($1,000) and any integral multiple thereof, except as necessary
to reflect principal amounts not evenly divisible by one thousand dollars
($1,000), and will be transferable only upon surrender of the Notes being
transferred for registration of transfer. The Company may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection with certain transfers and exchanges.
DEFEASANCE
The Indenture shall cease to be of further effect (except as to any
surviving rights of transfer or exchange of Notes expressly provided for), and
the Trustee, on demand of and at the expense of the Company, shall execute
proper instruments acknowledging satisfaction and discharge of this Indenture
and release of the Liens of the Collateral Documents securing the Obligations,
when (a) either (i) all Notes theretofore authenticated and delivered (other
than Notes which have been destroyed, lost or stolen and which have been
replaced) have been delivered to the Trustee cancelled or for cancellation or
(ii) all such Notes not theretofore delivered to the Trustee cancelled or for
cancellation (A) have become due and payable in full, or
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(B) will become due and payable at their Stated Maturity within six (6) months
or (C) are to be called for redemption within six (6) months under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company; and the Company, in the
case of (A), (B) or (C) above, has deposited or caused to be deposited with the
Trustee as trust funds in trust for the purpose an amount in cash sufficient
(without giving effect to any income or gain in respect of the investment of
such amount) to pay and discharge the entire indebtedness on such Securities not
theretofore delivered to the Trustee cancelled or for cancellation, for
principal (and premium, if any) and interest to the date of such deposit (in the
case of Notes which have become due and payable), or to the Stated Maturity or
Redemption Date, as the case may be (b) the Company has paid or caused to be
paid all other sums payable hereunder by the Company and (c) the Company has
delivered to the Trustee certain officers' certificates and opinions of counsel.
Notwithstanding the satisfaction and discharge of the Indenture, the obligations
of the Company pursuant to certain Sections of the Indenture shall survive.
INFORMATION CONCERNING THE TRUSTEE
The Trustee and its subsidiaries may from time to time in the future
provide the Company and its Subsidiaries with banking and financial services in
the ordinary course of their business.
DEFINITIONS
Affiliate -- means, with respect to any Person, any other Person (the
"Subject Affiliate") that, directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such Person and, without limiting the generality of the foregoing, includes:
(a) any Subject Affiliate which beneficially owns or holds ten percent
(10%) or more of any class of voting securities of such Person or ten
percent (10%) or more of the equity interest in such Person;
(b) any Subject Affiliate ten percent (10%) or more of any class of
voting securities (or, in the case of any Person which is not a
corporation, ten percent (10%) or more of the equity interest) in which is
held by such Person; and
(c) any director or executive officer of such Person or an Affiliate
of such Person;
provided, however, that in no event shall any Person who was a holder of
Original Securities on the day prior to the date of the Indenture be deemed, at
any time or for any purpose under the Indenture, to be an Affiliate of the
Company, the Parent, and General Partner or any of their respective
Subsidiaries; and provided, further, that the Parent, the General Partner and
their respective Subsidiaries shall be deemed to be Affiliates of the Company
whether or not they would otherwise be included by virtue of the foregoing
provisions of this definition.
The term "control" (including, with correlative meanings, the terms
"controlled by" and "under common control") means the possession, directly or
indirectly, of the power either to direct or cause the direction of the
management or policies of a Person, or to vote a majority of the securities
having ordinary voting power for the election of directors of such Person, in
either case whether through the ownership of voting securities, by contract, by
proxy or otherwise. The term "Affiliate," when used with respect to any
particular Person, means an Affiliate of the Company.
Capital Expenditures -- means, with respect to any Person, any item which,
pursuant to GAAP, would be classified on the financial statements of such Person
as a "capital expenditure."
Capital Lease -- means, as to any Person, any lease of property, real or
personal, the obligations under which are, or should be in conformity with GAAP,
capitalized on a consolidated balance sheet of such Person.
Casualty Loss -- means and includes each separate loss, damage or injury to
any tangible property subject to the Lien of the Trustee or any condemnation or
eminent domain proceedings in respect of any such property.
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Casualty Loss Payment -- means and includes any payment of proceeds of any
insurance required to be maintained on account of each separate loss, damage or
injury to any tangible property subject to the Lien of the Trustee or any
payment of proceeds of any condemnation or eminent domain proceedings in respect
of any such property.
Collateral -- means all property and interests therein (real and personal,
tangible and intangible) in which a Lien is now or hereafter held by the Trustee
or granted by the Company or any other Person to the Trustee for the ratable
benefit of the Holders as security for the payment and performance of any or all
of the Obligations.
Collateral Documents -- means and includes each document, agreement,
assignment, mortgage or deed of trust executed or delivered with the Old
Indenture, the Indenture or from time to time granting a Lien in any property in
favor of the Trustee for the ratable benefit of the Holders to secure the
payment and performance of any or all of the Obligations.
Collected Amount -- Redemption Amounts less than $1,000,000 plus certain
excess amounts of past Redemption Amounts.
Consent of the Holders -- means the requisite principal amount of the
Securities Outstanding with respect to any consent of the Holders pursuant to
the Indenture which, except as otherwise specifically stated in any provision of
the Indenture, shall be more than fifty percent (50%) of the principal amount of
the Securities Outstanding.
Consolidated Cash Flow -- means, for any period, the sum of:
(a) Consolidated Net Income for such period; provided, however, that
for purposes of calculating Consolidated Cash Flow only:
(i) extraordinary non-cash charges (to the extent deducted in
calculating Consolidated Net Income) shall be added back to Consolidated
Net Income; and
(ii) extraordinary non-cash revenue (to the extent included in
calculating Consolidated Net Income) shall be deducted from Consolidated
Net Income;
plus
(b) the sum of (but in each case, only to the extent not included in
Consolidated Net Income for such period) the following, without
duplication:
(i) Consolidated Interest Expense; plus
(ii) Consolidated Income Tax Expense; plus
(iii) Consolidated Depreciation and Amortization Expense.
Consolidated Depreciation and Amortization Expense -- means, for any
period, the consolidated depreciation and amortization expense of the Company
and its Subsidiaries for such period, calculated on a consolidated basis in
accordance with GAAP.
Consolidated Income Tax Expense -- means, for any period, the aggregate of
all current and deferred taxes based upon income and franchise tax expense of
the Company and its Subsidiaries for such period determined on a consolidated
basis in accordance with GAAP.
Consolidated Interest Expense -- means, for any period, the interest
expense of the Company and its Subsidiaries (including amortization of original
issue discount on any Indebtedness, the interest portion of any deferred payment
obligation, the net costs associated with interest rate swap obligations or
agreements and the interest component of rentals in respect of Capital Leases)
for such period calculated on a consolidated basis, such consolidation to be
performed in accordance with GAAP.
Consolidated Net Income -- means, for any period, the aggregate of the Net
Income of the Company and its Subsidiaries, determined on a consolidated basis.
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Consolidated Revenues -- means, for any period, the aggregate revenue for
such period of the Company and its Subsidiaries, determined on a consolidated
basis in accordance with GAAP.
Credit Documents -- means, collectively, the Indenture, the Securities, the
Collateral Documents, the Specialty Guaranty, any other Guarantees of any or all
of the Obligations and any and all other documents, instruments and agreements
now or hereafter executed and/or delivered in connection therewith.
Default -- means an event, act or condition that, with notice or lapse of
time, or both, would become an Event of Default.
Defaulted Interest -- any interest which is payable, but is not punctually
paid or duly provided for on any Interest Payment Date.
Entire Cash Proceeds -- means, with respect to any Transfer of assets, the
difference of:
(a) the cash proceeds (whenever received) actually received by the
Company or any Subsidiary of the Company from such Transfer; minus
(b) the sum of:
(i) commissions and other fees and expenses (including fees and
expenses of counsel, accountants and investment bankers) related to such
Transfer; plus
(ii) provisions for all taxes paid or payable as a result thereof
and in connection therewith and payments made to retire Indebtedness
(other than the Securities or the Original Securities) secured by or
otherwise relating directly to such assets being sold or otherwise
disposed of where payment of such Indebtedness is required in connection
therewith.
Event of Default -- has the meaning described in "Description of
Notes -- Events of Default."
GAAP -- means generally accepted accounting principles in effect from time
to time in the United States applied on a consistent basis.
General Partner -- means the Parent or any other general partner of the
Company.
Governmental Authority -- means any federal, state, local, foreign or other
governmental or administrative body, instrumentality, department or agency or
any court, tribunal, administrative hearing body, arbitration panel, commission
or other similar dispute resolving panel or body.
Guarantee -- means, with respect to any Person, any guarantee or other
contingent liability (other than any endorsement for collection or deposit in
the ordinary course of business), direct or indirect, of such Person with
respect to any obligation of another Person, through an agreement or otherwise,
including, without limitation:
(a) any other endorsement or discount with recourse or undertaking
substantially equivalent to or having economic effect similar to a
guarantee in respect of any such obligation; and
(b) any agreement:
(i) to purchase, or to advance or supply funds for the payment or
purchase of, any such obligation;
(ii) to purchase, sell or lease property, products, materials,
supplies, transportation or services, to enable such other Person to pay
any such obligation or to assure the owner thereof against loss
regardless of the delivery or nondelivery of the property, products,
materials, supplies, transportation or services; or
(iii) to make any Investment in, or to otherwise provide funds to
or for, such other Person to enable such Person to satisfy any
obligation (including any liability for a dividend, stock liquidation
payment or expense) or to assure a minimum equity, working capital or
other balance sheet condition in respect of any such obligation.
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The amount of any Guarantee shall be equal to the outstanding amount of the
obligation directly or indirectly guaranteed. The term "Guarantee" used as a
verb has a corresponding meaning.
Guarantor Subsidiary -- means Specialty.
Holder -- means a Person in whose name a Security is registered in the
Security register.
Indebtedness -- of a Person means, without duplication:
(a) all indebtedness of such Person for borrowed money or evidenced by
bonds, notes, debentures or similar instruments;
(b) all obligations of such Person under leases which have been or, in
accordance with GAAP, should be, recorded as Capital Leases;
(c) all indebtedness of such Person arising under acceptance
facilities;
(d) the face amount of all letters of credit (other than letters of
credit securing solely the payment of insurance premiums) issued for the
account of such Person and, without duplication, all drafts drawn
thereunder;
(e) all liabilities secured by any Lien on any property owned by such
Person, to the extent attributable to such Person's interest in such
property, even though such Person has not assumed or become liable for the
payment thereof;
(f) all obligations of such Person under any interest rate swap,
interest rate future, interest rate cap, interest rate option or other form
of interest rate hedging agreement or arrangement designed to protect
against fluctuations in interest rates; and
(g) any Guarantee of such Person with respect to Indebtedness of
another Person.
Investment -- means any investment in any Person, whether by means of asset
or share or equity purchase, capital contribution, loan, advance, time deposit,
purchase of notes, bonds or other evidences of Indebtedness or otherwise, other
than:
(a) the purchase by such Person of assets either constituting Capital
Expenditures or made in the ordinary course of such Person's business;
(b) the exchange of the Original Securities pursuant to the provisions
of, and the consummation of the transactions contemplated by, the Exchange
Agreement; and
(c) repurchases of the Securities.
Junior Indebtedness -- means any Indebtedness of the Company which is
subordinated to the Securities in right of payment.
Lien -- means any mortgage, deed of trust, pledge, hypothecation,
assignment for security, deposit arrangement, encumbrance, lien (statutory or
other), security interest, easement, defect in or exception to title or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever, including, without limitation, any conditional
sale or other title retention agreement, any Capital Lease having substantially
the same economic effect as any of the foregoing, and the filing of any
financing statement (other than notice filings not perfecting a security
interest) under the Uniform Commercial Code or comparable law of any
jurisdiction in respect of any of the foregoing.
Mortgages -- means each and every mortgage, deed of trust, collateral
assignment of leases, collateral assignment of rents or similar instrument
granting the Trustee an interest in or Lien upon any real property and securing
the Obligations, in each case, as amended through and including the date hereof
and as hereafter amended.
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Net Cash Proceeds -- means:
(a) in respect of a Specified Asset Sale described in clause (a) of
the definition of "Specified Asset Sale", the Entire Cash Proceeds with
respect to such Specified Asset Sale; and
(b) in respect of a Specified Asset Sale described in clause (b) of
the definition of "Specified Asset Sale", an amount equal to the difference
of:
(i) the Entire Cash Proceeds in respect of such Transfer; minus
(ii) the amount of such Entire Cash Proceeds in respect of such
Transfer actually applied to purchase assets used or useful in the
business of the Company or its Subsidiaries;
together, in either case, with any amounts previously retained by the Trustee
required to be added thereto.
Net Income -- means, for any Person and for any period, the net income
(loss) of such Person for such period, determined in accordance with GAAP;
provided, however, that:
(a) no gains and no losses realized by such Person and its
Subsidiaries upon the sale or other disposition (including, without
limitation, pursuant to Sale-Leaseback Transactions, sales or disposals of
business segments, or sales or abandonment of properties, plants and
equipment of such Person and its Subsidiaries) of property or assets which
are not sold or otherwise disposed of in the ordinary course of business,
or pursuant to the sale of any Capital Stock of or other equity or
ownership interest in such Person or any Subsidiary, shall be considered in
calculating Net Income;
(b) no writedowns, writeoffs or writeups by such Person and its
Subsidiaries of receivables, inventories, fixed assets, real property, real
estate leasehold interests or intangible assets (not including amortization
of intangible assets in accordance with GAAP) shall be considered in
calculating Net Income;
(c) net income or net loss of any Person combined with such Person on
a "pooling of interests" basis attributable to any period prior to the date
of such combination shall not be considered in calculating Net Income; and
(d) net income or net loss of any Person which is not consolidated
with such Person shall not be considered in calculating Net Income except
to the extent of the amount of dividends or distributions paid to such
Person or any of its Subsidiaries.
Non-Recourse Indebtedness -- owing by any Person means Indebtedness for
money borrowed or evidenced by a Lien, wherein liability is limited solely to
the security therefor without any liability on the part of such Person for any
deficiency, or with respect to which the holder of such Indebtedness has
irrevocably made the election under Section 1111(b)(1)(A)(i) of Title 11 of the
United States Code, as amended.
Obligations -- means any and all obligations and liabilities of the
Company, now or hereafter incurred, under or with respect to the Securities, the
Indenture, the Collateral Documents or any other Credit Document, whether or not
such obligations and liabilities are reduced to judgment, liquidated,
unliquidated, evidenced by any note or other instrument, direct or indirect,
absolute or contingent, due or to become due, disputed, undisputed, legal,
equitable, secured or unsecured, and whether or not any such obligations and
liabilities are discharged, stayed or otherwise affected by any dissolution,
insolvency or similar proceeding such obligations and liabilities to include
without limitation:
(a) the payment of the principal and interest (and premium, if any) on
all of the Securities now and hereafter issued and delivered and
outstanding;
(b) the payment of all other sums owing hereunder and under each of
the other Credit Documents to any Holder or to the Trustee;
(c) all costs and expenses (including attorneys' fees) incurred or
payable in connection with any Credit Document; and
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(d) the performance of the respective covenants of the Company herein
and in each of the other Credit Documents contained.
Omnibus Amendment -- means that certain Omnibus Amendment Agreement, dated
as of the date hereof, among the Company, Specialty and the Trustee.
Original Holders -- means the holders of the Original Securities on the day
preceding the date of the Indenture.
Parent Restricted Subsidiaries -- means and includes Cavalcade Holdings,
Inc.; Cavalcade Foods, Inc.; Cavalcade Development, L.P.; Furr's/Bishop's
Cafeterias, L.P.; any of their respective subsidiaries; or any of their
respective successors and assigns.
Paying Agent -- means the Person or Persons authorized by the Company to
pay the principal of (and premium, if any) or interest on any Securities on
behalf of the Company. The Company initially appoints the Trustee to act as
Paying Agent. For purposes of redemption of the Notes, neither the Company nor
any Affiliate may act as Paying Agent.
Permitted Transfers -- means and includes:
(a) sales of inventory in the ordinary course of business;
(b) Transfers of obsolete or worn-out machinery and equipment, and
subleases of leased property, no longer used or useful in the conduct of
the business of the Company and its Subsidiaries;
(c) Transfers of assets from any Subsidiary of the Company to the
Company; and Transfers from the Company to any Guarantor Subsidiary;
(d) with respect to cafeteria or other restaurant properties acquired
after the date hereof and in accordance with the terms hereof, Transfers of
land adjacent to or in the immediate proximity of any such cafeteria or
restaurant not necessary for the operation of such cafeteria's or
restaurant's business;
(e) so long as no Default or Event of Default shall have occurred and
be continuing, with respect to any land, buildings or equipment acquired
after the date hereof and in accordance with the terms hereof,
Sale-Leaseback Transactions of any such assets; and
(f) so long as no Default or Event of Default shall have occurred and
be continuing, Transfers of any assets or property of the Company, so long
as the aggregate fair market value for all such assets or property so sold
or disposed of in any one calendar year does not exceed Five Million
Dollars ($5,000,000).
Person -- means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
Governmental Authority or any agency or political subdivision thereof.
Priority Indebtedness -- means and includes, without duplication:
(a) Indebtedness secured by any Lien (including, without limitation,
any Purchase Money Mortgage) on any property owned by the Company or any of
its Subsidiaries, to the extent attributable to such Person's interest in
such property, whether or not such Person has not assumed or become liable
for the payment thereof;
(b) all Indebtedness of, and all preferred stock (valued at the
liquidation preference thereof), of Subsidiaries of the Company (other than
Guarantor Subsidiaries), except:
(i) such Indebtedness owing to, or such preferred stock
beneficially owned by, the Company; and
(ii) in the case of any such Indebtedness owing to, or preferred
stock beneficially owned by, a Subsidiary of the Company, for the amount
thereof owing (directly or indirectly through Subsidiaries of the
Company) to the Company; and
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(c) with respect to any Sale-Leaseback Transaction, the net amount of
all rent required to be paid in respect of the lease of the property
subject thereto by the Company or any of its Subsidiaries during the
remaining primary term thereof, discounted from the respective due dates
thereof to such date at the rate per annum implicit in such lease.
Pro Forma -- means, for any period, with respect to any calculation of
Consolidated Cash Flow or Consolidated Interest Expense, in connection with the
incurrence of any Indebtedness during such period, the amount of Consolidated
Cash Flow or Consolidated Interest Expense, as the case may be, which would have
resulted during and for such period, assuming that:
(a) any assets acquired with the proceeds of the Indebtedness being
incurred had been acquired, and such Indebtedness had been incurred,
created, assumed or Guaranteed, on the first day of such period;
(b) any other Indebtedness repaid with the proceeds of such
Indebtedness had been repaid on the first day of such period;
(c) the rate of interest in effect for floating rate Indebtedness
shall at all times be the rate of interest in effect on the date of
determination;
(d) the entire principal amount of such newly incurred Indebtedness
shall be outstanding for each day during such period; and
(e) if the Second Closing Date occurred during such period, the Second
Closing Date had occurred, and the transactions contemplated to occur on
the Second Closing Date pursuant to the provisions of the Exchange
Agreement had occurred, on the first day of such period.
Pro Forma Interest Coverage Ratio -- means, at any time of calculation, the
ratio, expressed as a percentage, of:
(a) Pro Forma Consolidated Cash Flow for the period of four (4) full
consecutive fiscal quarters of the Company most recently ended at such
time; to
(b) Pro Forma Consolidated Interest Expense for such period.
Purchase Money Mortgage -- means:
(a) a Lien held by any Person (whether or not the seller of such
assets) on tangible property (other than assets acquired to replace,
repair, upgrade or alter tangible property owned by the Company or any of
its Subsidiaries on the date hereof) acquired or constructed by the Company
or any of its Subsidiaries after the date hereof, which Lien secures all or
a portion of the related purchase price or construction costs of such
property; provided, however, that such Lien is created not later than one
hundred eighty (180) days after acquisition or completion of construction
of such property;
(b) any Lien existing on any fixed assets at the time such fixed
assets are acquired by the Company or any of its Subsidiaries; and
(c) any Lien existing on any fixed assets of any Person at the time it
becomes a direct or indirect Subsidiary of the Company;
provided, however, that no such Lien extends to any other asset or property of
the Company or any of its Subsidiaries.
Redemption Amount -- the aggregate Net Cash Proceeds and Specified Casualty
Loss Payments prompting an offer of redemption.
Redemption Date -- when used with respect to any Securities to be redeemed
means the date fixed for such redemption by or pursuant to the Indenture.
50
<PAGE> 53
Redemption Price -- when used with respect to any Security to be redeemed
means the price at which it is to be redeemed pursuant to the Indenture
(including, without limitation, any accrued and unpaid interest thereon payable
with respect to such redemption).
Regular Record Date -- for the interest payable on any Interest Payment
Date (other than the first Interest Payment Date and other than on December 31,
2001) means the March 15 or September 15 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date or, in the case of the
first Interest Payment Date, the Second Closing Date.
Reimbursement Agreement -- means the Reimbursement Agreement, dated as of
the date hereof, among the Company, the Parent and Furr's/Bishop's Cafeterias,
L.P., a Delaware limited partnership.
Requisite Amount -- means the requisite principal amount of the Securities
Outstanding with respect to any request, demand or other action of the Holders
pursuant to the Indenture which, except as otherwise specifically stated in any
provision of the Indenture, shall be more than fifty percent (50%) of the
principal amount of the Notes outstanding.
Restricted Investment -- means any Investment made by the Company or any
Subsidiary of the Company except:
(a) Investments in stock or partnership interests of any Subsidiaries
of the Company existing on the date hereof, but not any increase in the
amount thereof;
(b) Temporary Cash Investments, which shall be pledged to the Trustee
for the ratable benefit of the Holders as collateral security for the
payment of the Obligations pursuant to a pledge agreement in form and
substance stated in an opinion of counsel to be effective to accomplish the
valid pledge thereof to the Trustee; provided, however, that to the extent
that such pledge agreement and such opinion of counsel covers specified
after-acquired Temporary Cash Investments, no new pledge agreement or
opinion of counsel shall be necessary upon the subsequent acquisition of
such after-acquired Temporary Cash Investments if the Lien thereupon is
perfected in the manner contemplated in such opinion of counsel and the
Company so states in an officers' certificate delivered to the Trustee;
(c) Investments in Guarantor Subsidiaries or Persons which,
contemporaneously with the making of such Investment become Guarantor
Subsidiaries;
(d) for the formation of other Subsidiaries of the Company created and
utilized solely to satisfy state and local alcoholic beverage licensing
requirements for the Company's businesses and any of its current or future
retail liquor sales establishments; and
(e) Investments in Subsidiaries of the Company:
(i) in which the Company has contributed less than One Million
Dollars ($1,000,000) (whether in cash, property, assets or otherwise) in
the aggregate, which contributions (to the extent subject to a Lien in
favor of the Trustee) shall remain subject to the Lien of the Trustee
after giving effect to such contribution (and such Subsidiaries shall
acknowledge same); and
(ii) so long as the Company has no Indebtedness and no other
obligations owing to such Subsidiaries or to any third party with
respect to such Subsidiary.
Restricted Payment -- means, with respect to any Person:
(a) any dividend or other distribution in respect of such Person's
capital stock, or incurrence of a liability for such dividend or
distribution, in cash, properties or other assets, on any shares of such
Person's capital stock, but excluding any dividend or distribution
consisting solely of capital stock of such Person;
(b) any payment (including, without limitation, the setting aside of
assets or the deposit of funds therefor) on account of the purchase,
redemption, retirement or acquisition of:
(i) any capital stock of such Person, the Company or any of its
Subsidiaries; or
51
<PAGE> 54
(ii) any option, warrant or other right to acquire any security or
interest described in the immediately preceding clause (i); and
(c) any optional payment or prepayment of principal or premium on
account of Junior Indebtedness (other than Non-Recourse Indebtedness paid
solely out of the property or assets securing such Non-Recourse
Indebtedness) or any optional purchase, defeasance, redemption, retirement
or acquisition of any principal on any such Junior Indebtedness (including,
without limitation, the setting aside of assets or the deposit of funds
therefor);
provided, however, that:
(A) no such dividend, distribution or payment made by any
Subsidiary to the Company or any Guarantor Subsidiary shall be deemed
to be a Restricted Payment;
(B) no such dividend, distribution or payment made by any
Subsidiary to another Subsidiary shall be deemed to be a Restricted
Payment to the extent of the Company's direct or indirect equity
interest in such Subsidiary;
(C) the exchange, conversion or exercise of any option on the
part of holders of the limited partnership interests of the Company
to exchange, convert, exercise or otherwise transfer such interests
to the Parent or any Affiliate of the Parent, solely in exchange for
Capital Stock of the Parent or such Affiliate, shall not constitute a
Restricted Payment; and
(D) payments made by the Company and the Subsidiaries pursuant
to the Reimbursement Agreement shall not constitute Restricted
Payments; and
(E) payments made by the Company to any Person which is or was a
partner of the Company solely to reimburse such Person for income
taxes payable and paid by such partner in respect of the income of
the Company for any period, shall not constitute a Restricted
Payment.
Sale-Leaseback Transaction -- means any arrangements, directly or
indirectly, with any Person, whereby the Company or any of its Subsidiaries
shall sell or transfer any property, whether now owned or hereafter acquired,
used or useful in its business, in connection with the rental or lease of the
property so sold or transferred or of other property which the Company or such
Subsidiary intends to use for substantially the same purpose or purposes as the
property so sold or transferred.
Second Closing Date -- January 2, 1996.
Significant Subsidiary -- means a Subsidiary, including its Subsidiaries,
which meets any of the following conditions:
(a) the Company's and its other Subsidiaries' investments in and
advances to the Subsidiary exceed ten percent (10%) of the total assets of
the Company and its Subsidiaries consolidated as of the end of the most
recently completed fiscal year of the Company; or
(b) the total assets (after intercompany eliminations) of the
Subsidiary exceed ten percent (10%) of the total assets of the Company and
its Subsidiaries consolidated as of the end of the most recently completed
fiscal year of the Company; or
(c) the Company's and its other Subsidiaries' equity in the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of the Subsidiary
exceeds ten percent (10%) of such income of the Company and its
Subsidiaries consolidated for the most recently completed fiscal year of
the Company.
Specialty Guaranty -- means that certain Unlimited Guaranty of Specialty,
dated March 27, 1992, for the benefit of the Trustee, as amended by the Omnibus
Amendment and as thereafter amended from time to time.
52
<PAGE> 55
Specified Asset Sales -- means:
(a) the receipt by the Company or any of its Subsidiaries of any
Entire Cash Proceeds in respect of any Transfer (other than Permitted
Transfers), if any Default or Event of Default is continuing at the time of
receipt of such proceeds; and
(b) the failure of the Company to apply the entire amount of Entire
Cash Proceeds from any such Transfer to purchase assets used or useful in
the business of the Company or its Subsidiaries within one hundred eighty
(180) days of the date of receipt thereof.
Specified Casualty Loss Event -- means:
(a) the receipt by the Company or any of its Subsidiaries of any
Casualty Loss Payment in respect of any Casualty Loss, if any Default or
Event of Default is continuing at the time of receipt of such Casualty Loss
Payment; and
(b) the failure of the Company to apply the entire amount of any
Casualty Loss Payment to either repair or replace the property that gave
rise to such Casualty Loss within one hundred eighty (180) days of the date
of receipt thereof.
Specified Casualty Loss Payment -- means:
(a) in respect of a Specified Casualty Loss Event described in clause
(a) of the definition of "Specified Casualty Loss Event", the entire
Casualty Loss Payment with respect to such Specified Casualty Loss Event;
and
(b) in respect of a Specified Casualty Loss Event described in clause
(b) of the definition of "Specified Casualty Loss Event", an amount equal
to the difference of:
(i) the entire Casualty Loss Payment in respect of such Casualty
Loss; minus
(ii) the amount of such Casualty Loss Payment in respect of such
Casualty Loss actually applied to either repair or replace the property
that gave rise to such Casualty Loss;
together, in either case, with any excess amounts previously retained by the
Trustee and required to be added thereto.
Stated Maturity -- when used with respect to any Security or any
installment of interest thereon means the date specified in such Security as the
fixed date on which the principal of such Security (disregarding any mandatory
redemption payments required by the terms of the Indenture) or such installment
of interest is due and payable.
Subordinated Intercompany Indebtedness -- means unsecured Indebtedness of
the Company or any Guarantor Subsidiary, owing solely to one or more Guarantor
Subsidiaries, which is subordinated to the Securities in right of payment and
the terms of which do not permit the Company to make any payment in respect
thereof at any time:
(a) during which an Event of Default shall have occurred or shall be
continuing; or
(b) following acceleration of the maturity of the Securities or the
exercise of any other remedy in respect thereof, pursuant to any Collateral
Document or otherwise, until after the final and indefeasible payment in
full of all the Securities.
Subsidiary -- means, with respect to any Person, any corporation or other
Person with respect to which more than fifty percent (50%) of the Capital Stock
or other equity or ownership interests having ordinary voting power (other than
stock or other equity or ownership interests having such power only by reason of
the happening of a contingency) is at the time owned by such Person or by one or
more Subsidiaries of such Person or by such Person and one or more Subsidiaries
of such Person.
53
<PAGE> 56
Tangible Net Worth -- means, with respect to any Person or group of
consolidated Persons, at any time, the difference of:
(a) the stockholders' equity (or, in the case of a partnership, the
partners' equity) of such Person or group determined on a consolidated
basis in accordance with GAAP at such time; minus
(b) the sum of:
(i) the aggregate amount of deferred assets, other than prepaid
insurance and prepaid taxes;
(ii) patents, copyrights, trademarks, trade names, franchises,
goodwill and other similar intangible assets; and
(iii) unamortized debt discount and expense;
of such Person or group of consolidated Persons at such time.
Temporary Cash Investments -- means and includes Investments in:
(a) securities issued or directly and fully guaranteed or insured by
the United States Government or any agency or instrumentality thereof
having maturities of not more than one (1) year from the date of
acquisition;
(b) certificates of deposit and Eurodollar time deposits with
maturities of not more than six (6) months from the date of acquisition,
bankers' acceptances with maturities not exceeding six (6) months and
overnight bank deposits, in each case, with:
(i) Amarillo National Bank;
(ii) any domestic commercial bank having capital and surplus in
excess of One Hundred Million Dollars ($100,000,000) and a long-term
unsecured debt rating from both Moody's Investors Services, Inc. and
Standard & Poor's Ratings Group (a division of McGraw Hill, Inc.) of at
least "A";
(c) repurchase obligations with respect to securities of the types
described in clauses (a) and (b), entered into with any financial
institution meeting the qualifications specified in clause (b) above and
having a term not in excess of fourteen (14) days;
(d) commercial paper rated at least A-2 or the equivalent thereof by
Standard & Poor's Ratings Group (a division of McGraw Hill, Inc.) or at
least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and
in either case maturing within six (6) months after the date of
acquisition;
(e) certificates of deposit with maturities of not greater than six
(6) months from the date of acquisition with any domestic commercial bank
at which the Company has an operating account aggregating not greater than
One Hundred Thousand Dollars ($100,000) at any one time outstanding for all
such certificates of deposit at any one such bank and not greater than Five
Hundred Thousand Dollars ($500,000) at any one time outstanding for all
such certificates of deposits under this clause (e); and
(f) money market mutual funds subject to regulation as investment
companies under the Investment Company Act of 1940, as amended, so long as
such mutual fund:
(i) has assets of at least One Hundred Million Dollars
($100,000,000);
(ii) is either:
(A) an Affiliate of, or managed by, Fidelity Management &
Research Company; or
(B) rated "A" or better by Standard & Poor's Ratings Group (a
division of McGraw Hill, Inc.) or an equivalent rating by another
nationally recognized rating service;
(iii) invests solely in Investments listed in clause (a) and clause
(c) of this definition of "Temporary Cash Investments;"
54
<PAGE> 57
(iv) permits redemptions to be made on any Business Day; and
(v) has as a fundamental investment goal the maintenance of a
constant net asset value.
Transfer -- means, with respect to any assets or property, to sell, lease,
transfer, convey or otherwise dispose of such assets or property.
Trust Estate -- means all Collateral granted to the Trustee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since February 1996, Cactus Enterprises, Inc., a company wholly owned by
Kenneth Reimer, has performed certain management consulting services for the
Board. Compensation for such services has been paid by the Company at a rate of
$2,000 per day. Total fees and expenses paid in 1996 were approximately $68,000.
From January 1, 1996, to March 27, 1997, Mr. Reimer assumed the duties of
President and Chief Executive Officer of the Company on an interim basis and
received a total of $100,000 for such activity. In June 1996 the Company and the
Parent entered into certain agreements with Kevin E. Lewis in connection with
his resignation as President and Chief Executive Officer of the Parent. In
December 1996 and in October 1997, the Parent and the Company entered into
certain agreements with Mr. Lewis in connection with Mr. Lewis serving as
Chairman of the Board of and consultant to the Parent. See "Business -- Certain
Compensation Plans."
LEGAL MATTERS
Certain legal matters in connection with the Notes offered hereby are being
passed upon for the Company by Fulbright & Jaworski L.L.P.
EXPERTS
The consolidated financial statements and schedule of Cafeteria Operators,
L.P. as of and for the fifty-two week year ended December 31, 1996 have been
included herein and in the registration statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, included herein
and upon the authority of said firm as experts in accounting and auditing.
The consolidated balance sheet as of January 2, 1996 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the fifty-two week year ended January 2, 1996, and the
fifty-three week year ended January 3, 1995 included in this Prospectus, have
been audited by Deloitte & Touche LLP, independent certified public accountants,
as stated in their report appearing herein, and are included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
55
<PAGE> 58
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Cafeteria Operators, L.P. and Subsidiaries
Independent Auditors' Report of KPMG Peat Marwick LLP....... F-2
Independent Auditors' Report of Deloitte & Touche LLP....... F-3
Consolidated Balance Sheets, as of July 1, 1997 (unaudited),
December 31, 1996 and January 2, 1996..................... F-4
Consolidated Statements of Operations
Twenty-six weeks ended July 1, 1997 and July 2, 1996
(unaudited),
Fifty-two weeks ended December 31, 1996,
Fifty-two weeks ended January 2, 1996 and
Fifty-three weeks ended January 3, 1995................... F-5
Consolidated Statements of Partners' Deficit
Fifty-three weeks ended January 3, 1995,
Fifty-two weeks ended January 2, 1996,
Fifty-two weeds ended December 31, 1996 and twenty-six
weeks
ended July 1, 1997 (unaudited)............................ F-6
Consolidated Statements of Cash Flows
Twenty-six weeks ended July 1, 1997 and July 2, 1996,
(unaudited),
Fifty-two weeks ended December 31, 1996,
Fifty-two weeks ended January 2, 1996, and
Fifty-three weeks ended January 3, 1995................... F-7
Notes to Consolidated Financial Statements
Fifty-two weeks ended December 31, 1996,
Fifty-two weeks ended January 2, 1996, and
Fifty-three weeks ended January 3, 1995................... F-8
Financial Statement Schedule -- Consolidated Valuation and
Qualifying Accounts
Twenty-six weeks ended July 1, 1997 (unaudited),
Fifty-two weeks ended December 31, 1996,
Fifty-two weeks ended January 2, 1996,
and Fifty-three weeks ended January 3, 1995............... S-1
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
To the Partners
Cafeteria Operators, L.P.
Lubbock, Texas
We have audited the accompanying consolidated balance sheet of Cafeteria
Operators, L.P., (a Delaware limited partnership wholly owned by
Furr's/Bishop's, Incorporated) and subsidiaries (collectively, the Partnership)
as of December 31, 1996, and the related consolidated statements of operations,
partners' deficit and cash flows for the 52-week year then ended. Our audit also
included the financial statement schedule for the 52-week year ended December
31, 1996 listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the December 31, 1996 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Cafeteria Operators, L.P. and subsidiaries as of December 31, 1996
and the results of their operations and their cash flows for the 52-week year
then ended, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule for the 52-week year
ended December 31, 1996, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
As discussed in Notes 1 and 11 to the consolidated financial statements,
effective January 2, 1996, the Company changed its method of accounting for
impairment of long-lived assets and for long-lived assets to be disposed of to
conform to Statement of Financial Accounting Standards No. 121.
KPMG Peat Marwick LLP
February 7, 1997
Dallas, Texas
F-2
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Partners
Cafeteria Operators, L.P.
Lubbock, Texas
We have audited the accompanying consolidated balance sheet of Cafeteria
Operators, L.P., (a Delaware limited partnership wholly owned by
Furr's/Bishop's, Incorporated) and subsidiaries (collectively, the Partnership)
as of January 2, 1996 and the related consolidated statements of operations,
partners' deficit and cash flows for the 52-week year ended January 2, 1996 and
the 53-week year ended January 3, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cafeteria Operators, L.P. and
subsidiaries, as of January 2, 1996 and the results of their operations and
their cash flows for the 52-week year ended January 2, 1996 and the 53-week year
ended January 3, 1995, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 11 to the consolidated financial statements,
effective January 2, 1996, the Partnership changed its method of accounting for
impairment of long-lived assets and for long-lived assets to be disposed of to
conform to Statement of Financial Accounting Standards No. 121.
DELOITTE & TOUCHE LLP
March 28, 1996
Dallas, Texas
F-3
<PAGE> 61
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
JULY 1, 1997 (UNAUDITED), DECEMBER 31, 1996 AND JANUARY 2, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 1, DECEMBER 31, JANUARY 2,
1997 1996 1996
----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ($800 restricted at January 2,
1996).................................................. $ 4,457 $ 3,668 $ 964
Accounts and notes receivable (net of allowance for
doubtful accounts of $19 and $27, respectively)........ 478 1,186 745
Inventories............................................... 5,771 5,722 5,831
Prepaid expenses and other................................ 1,271 306 1,355
-------- -------- --------
Total current assets.............................. 11,977 10,882 8,895
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 9,119 9,119 10,424
Buildings................................................. 33,616 39,619 40,623
Leasehold improvements.................................... 20,115 21,247 21,139
Equipment................................................. 42,912 48,195 45,762
Construction in progress.................................. 126 1,340 442
-------- -------- --------
105,888 119,520 118,390
Less accumulated depreciation and amortization and reserve
for impairment......................................... (48,527) (55,714) (52,263)
-------- -------- --------
Total property, plant and equipment............... 57,361 63,806 66,127
RECEIVABLE FROM AFFILIATES, NET............................. 11,333 11,129 10,503
OTHER ASSETS................................................ 591 525 541
-------- -------- --------
TOTAL ASSETS................................................ $ 81,262 $ 86,342 $ 86,066
======== ======== ========
LIABILITIES AND PARTNER'S CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 5,493 $ 5,493 $ 3,798
Trade accounts payable.................................... 6,398 5,498 5,074
Other payables and accrued expenses....................... 13,184 14,957 18,134
Reserve for store closings -- current portion............. 915 1,078 2,212
-------- -------- --------
Total current liabilities......................... 25,990 27,026 29,218
RESERVE FOR STORE CLOSINGS, NET OF CURRENT PORTION.......... 2,534 2,470 3,443
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 66,401 69,147 74,610
OTHER PAYABLES, INCLUDING ACCRUED PENSION COST.............. 7,188 8,184 9,611
EXCESS OF FUTURE LEASE PAYMENTS OVER FAIR VALUE, NET OF
AMORTIZATION.............................................. 3,224 3,482 4,130
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT........................................... (24,075) (23,967) (34,946)
-------- -------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIT..................... $ 81,262 $ 86,342 $ 86,066
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 62
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX FIFTY-TWO FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 1, JULY 2, DECEMBER 31, JANUARY 2, JANUARY 3,
1997 1996 1996 1996 1995
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales..................... $97,140 $99,358 $197,427 $210,093 $225,186
Costs and Expenses:
Cost of sales (excluding
depreciation)........ 29,344 30,768 61,671 67,763 70,188
Selling, general and
administrative....... 59,933 58,966 117,953 127,000 137,604
Depreciation and
amortization......... 5,406 4,611 10,152 14,002 11,320
Special charges
(credits)............ 2,431 (603) (1,138) 12,273 2,214
------- ------- -------- -------- --------
97,114 93,742 188,638 221,038 221,326
------- ------- -------- -------- --------
Operating income (loss)... 26 5,616 8,789 (10,945) 3,860
Interest expense.......... 134 123 239 26,209 23,570
------- ------- -------- -------- --------
Income (loss) before
extraordinary item...... (108) 5,493 8,550 (37,154) (19,710)
Extraordinary item -- net
gain on financial
restructuring........... 157,619
------- ------- -------- -------- --------
Net income (loss)......... $ (108) $ 5,493 $ 8,550 $120,465 $(19,710)
======= ======= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 63
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
FISCAL YEARS ENDED JANUARY 3, 1995, JANUARY 2, 1996 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS DEFICIT
--------- -------- ---------
<S> <C> <C> <C>
BALANCE, DECEMBER 28, 1993................................ $(144,775) $ $(144,775)
Net loss................................................ (15,388) (4,322) (19,710)
Pension liability adjustment............................ 43 4,322 4,365
--------- ------- ---------
BALANCE, JANUARY 3, 1995.................................. (160,120) (160,120)
Net income.............................................. 115,452 5,013 120,465
Capital contribution.................................... 9,742 9,742
Distributions declared.................................. (3,041) (3,041)
Pension liability adjustment............................ (20) (1,972) (1,992)
--------- ------- ---------
BALANCE JANUARY 2, 1996................................... (44,688) 9,742 (34,946)
Net income.............................................. 8,550 8,550
Pension liability adjustment............................ 24 2,405 2,429
--------- ------- ---------
BALANCE, DECEMBER 31, 1996................................ $ (36,114) $12,147 $ (23,967)
Net Loss................................................ (108) (108)
--------- ------- ---------
BALANCE, JULY 1, 1997
(Unaudited)............................................. $ (36,222) $12,147 $ (24,075)
========= ======= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 64
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX FIFTY-TWO FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 1, JULY 2, DECEMBER 31, JANUARY 2, JANUARY 3,
1997 1996 1996 1996 1995
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ (108) $ 5,493 $ 8,550 $ 120,465 $(19,710)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 5,406 4,611 10,152 14,002 11,320
Loss on sale of property, plant and equipment and
other assets....................................... 199 24 365 203 111
Provision for (reversal of) closed store............. 111 168 (29) (339) (645)
Special charges (credits)............................ 2,431 (699) (699) 12,273 2,214
Deferred charges..................................... 198 341 808 499 853
Net gain on financial restructuring.................. (157,619)
Changes in operating assets and liabilities:
Decrease in restricted cash.......................... 800
(Increase) decrease in accounts and notes
receivable......................................... 708 140 (441) 167 943
(Increase) decrease in inventories................... (49) (180) 109 647 1,512
(Increase) decrease in prepaid expenses and other.... (964) (30) 1,049 (3,501) (3,126)
Increase (decrease) in trade accounts payable........ 901 264 424 (1,147) (4,572)
Increase (decrease) in other payables and accrued
expenses........................................... (1,774) (867) (3,179) 24,821 18,899
Increase (decrease) in other payables, including
accrued pension cost............................... 33 100 (123) (547) (826)
------- ------- -------- --------- --------
Net cash provided by operating activities............ 7,092 9,365 17,786 9,924 6,973
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............. $(2,687) $(4,415) $(10,133) $ (8,019) $ (5,695)
Expenditures charged to reserve for store closings..... (664) (1,248) (2,077) (1,794) (2,330)
Proceeds from the sale of property, plant and equipment
and other assets..................................... 16 1,615 2,019 41 700
Other, net............................................. 1 68 62 (1) (34)
------- ------- -------- --------- --------
Net cash used in investing activities................ (3,334) (3,980) (10,129) (9,773) (7,359)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of indebtedness................................ (2,746) (1,021) (3,767) (53) (49)
Paid to affiliates..................................... (204) (226) (627) (530) (761)
Other, net............................................. (19) (58) 241 (79) (220)
------- ------- -------- --------- --------
Net cash used in financing activities................ (2,969) (1,305) (4,153) (662) (1,030)
------- ------- -------- --------- --------
INCREASE (DECREASE) IN UNRESTRICTED CASH AND CASH
EQUIVALENTS.......................................... 789 4,080 3,504 (511) (1,416)
UNRESTRICTED CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR................................................. 3,668 965 164 675 2,091
------- ------- -------- --------- --------
UNRESTRICTED CASH AND CASH EQUIVALENTS AT END OF
YEAR................................................. $ 4,457 $ 5,045 $ 3,668 $ 164 $ 675
======= ======= ======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, including $3,753 of interest
classified as payment of indebtedness during the
fiscal year ended December 31, 1996................ $ 2,750 $ 1,019 $ 3,774 $ 36 $ 242
======= ======= ======== ========= ========
Pension liability adjustment......................... $ -- $ -- $ (2,429) $ 1,992 $ (4,365)
======= ======= ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 65
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, JANUARY 2, 1996 AND JANUARY 3, 1995
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Cafeteria Operators, L.P. (the "Company"), a
Delaware limited partnership, is wholly owned by Furr's/Bishop's, Incorporated
(the "Parent") and operates cafeterias and specialty restaurants. The financial
statements presented herein are the consolidated financial statements of
Cafeteria Operators, L.P. and its subsidiaries. All material intercompany
transactions and account balances have been eliminated in consolidation.
The financial statements reflect the results of a series of transactions
relating to the financial restructuring of the Parent at January 2, 1996, as
described in Note 2.
The activities of the Company are governed by the terms of the partnership
agreement, as amended (the "Partnership Agreement"). Prior to the financial
restructuring described in Note 2, the Company owned the 1% general partner
interest in the Company and wholly owned the 99% limited partner interest
through its wholly owned subsidiary Furr's/Bishop's Cafeterias, L.P. (the
"Holding Partnership"). As a result of a series of transactions relating to the
financial restructuring, 95% of the limited partner interest was transferred to
the Parent. The Parent, as the general partner, has exclusive and complete
discretion in managing the business and operations of the Company, as provided
in the Partnership Agreement.
Fiscal Year -- The Company operates on a 52-53 week fiscal year ending on
the Tuesday nearest December 31. The fiscal years ended December 31, 1996 and
January 2, 1996 each represent a 52-week year and the fiscal year ended January
3, 1995 represents a 53-week year.
Business Segments -- The Company operates in a single business segment,
namely the operation of cafeterias and restaurants which includes retailing,
food processing, warehousing and distribution of food products, and real estate
in twelve states in the Southwest, West and Midwest areas of the United States.
Cash and Cash Equivalents -- The Company has a cash management program
which provides for the investment of excess cash balances in short-term
investments. These investments have original or remaining maturities of three
months or less at date of acquisition, are highly liquid and are considered to
be cash equivalents for purposes of the consolidated balance sheets and
consolidated statements of cash flows.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Prepaid Expenses and Other -- Direct costs comprising legal and consulting
fees of $2,144 relating to the restructuring discussed in Note 2 were
capitalized at January 3, 1995 and as of January 2, 1996 were charged off as a
part of the extraordinary item. As of December 31, 1996 and January 2, 1996,
this account balance included prepaid rent of $3 and $748, respectively, along
with other assets recorded in the ordinary course of business.
Property, Plant and Equipment -- Property, plant and equipment is generally
recorded at cost, while certain assets considered to be impaired are recorded at
the estimated fair value. All property, plant and equipment is depreciated at
annual rates based upon the estimated useful lives of the assets using the
straight-line method. Restaurant equipment is generally depreciated over a
period of 1 to 5 years, while the useful life of manufacturing equipment is
considered to be 5 to 10 years. Buildings are depreciated over a 30 year useful
life, while improvements to owned buildings have estimated useful lives of 3 to
5 years. Provisions for amortization of leasehold improvements are made at
annual rates based upon the estimated useful lives of the assets or terms of the
leases, whichever is shorter.
Valuation of Long-Lived Assets -- Effective January 2, 1996, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived
F-8
<PAGE> 66
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") and recorded a
special charge of $7,772 for the year ended January 2, 1996 to recognize the
write-down of certain assets in property, plant and equipment to estimated fair
value, based on expected future cash flows. SFAS 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Start-Up and Closing Costs of Restaurants -- Start-up and preopening costs
incurred in connection with a new restaurant becoming operational are expensed
as incurred.
When the decision to close a restaurant is made, the present value of all
fixed and determinable costs to be incurred after operations cease is accrued.
These fixed and determinable costs consist primarily of obligations defined in
lease agreements such as rent and common area maintenance, reduced by sublease
income, if any. If a decision is made to keep or reopen such restaurants, the
remaining costs are reversed.
Advertising Costs -- Advertising costs are expensed as incurred. Total
advertising expense was $2,085, $4,455 and $8,970 for the years ended December
31, 1996, January 2, 1996 and January 3, 1995.
Unfavorable Leases -- For leases acquired through purchase, the net excess
of future lease payments over the fair value of these payments is being
amortized over the lives of the leases to which the differences relate.
Income Taxes -- For state and federal income tax purposes, the Company is
not a tax-paying entity. As a result, the taxable income or loss, which may vary
substantially from income or loss reported for financial reporting purposes,
should be included in the state and federal tax returns of the individual
partners. Accordingly, no provision for income taxes is reflected in the
accompanying financial statements.
Allocation of Results of Operations -- Each item of income, gain, loss and
deduction is allocated in accordance with the Partnership Agreement.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of certain assets,
liabilities, revenues and expenses as of and for the reporting periods and
actual results may differ from such estimates.
Reclassification -- Certain amounts in the prior year financial statements
have been reclassified to conform with current year classification.
2. RESTRUCTURING
On January 25, 1995, the Parent announced that it had entered into an
Agreement in Principle dated as of January 24, 1995 (the "Agreement in
Principle") among the Parent, its subsidiaries, the holders of the 11% Notes of
the Company (the "11% Noteholders"), the holder of the 9% Note of Cavalcade
Foods (both as defined in Note 4), the Trustees of General Electric Pension
Trust ("GEPT"), and Kmart Corporation ("Kmart").
The Agreement in Principle provided for (i) the exchange of an aggregate of
approximately $249,344 of debt of the Company for the issuance of $40,000
principal amount of new senior secured notes of the Company due 2001 pursuant to
a new indenture and 95% of the limited partner interest of the Partnership, (ii)
the exchange of warrants to purchase an aggregate of approximately 21.5% of the
Parent's common stock for options to acquire an aggregate of 95% of a new class
of common stock of the Parent ("Common Stock") and new five year warrants to
purchase an aggregate of 1% of the fully diluted Common Stock, (iii) the
exchange of $6,117 of other obligations of the Company for the issuance of
$1,700 principal amount of new senior secured notes of the Company due 2001
pursuant to a new indenture, (iv) the exchange of $11,737 of debt of Cavalcade
Foods, Inc., an indirect subsidiary of the Parent ("Foods"), for options to
acquire 2.5% of
F-9
<PAGE> 67
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Common Stock and an interest in certain land owned by a subsidiary of the
Parent and (v) the exchange of the Parent's outstanding shares of Class A
Common, Class B Common and Convertible Preferred Stock for an aggregate of 2.5%
of the Common Stock and five year warrants to purchase an aggregate of 4% of the
fully diluted Common Stock (together, the "Restructuring"). The Restructuring
became effective upon approval of the stockholders at a meeting held January 2,
1996.
The Restructuring has been accounted for in accordance with Statement of
Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for
Troubled Debt Restructurings" ("SFAS 15"), under which the transactions include
both a partial settlement and modification of terms. The fair value of the 95%
limited partner interest issued by the Company as partial settlement of
indebtedness in connection with the Restructuring was estimated based upon
discounted cash flows anticipated from the reorganized business. The remaining
indebtedness was recorded at the sum of all future principal and interest
payments and, accordingly, interest expense is no longer recognized on the
restructured debt. The amounts of indebtedness subject to modification in excess
of the amount recorded in accordance with SFAS 15 was recorded as an
extraordinary gain of $157,619, net of all expenses associated with the
Restructuring. The extraordinary item is made up of the following:
<TABLE>
<S> <C> <C>
Long-term debt reclassified as current...................... $192,854
Accrued interest subject to restructuring................... 60,118
Partnership distribution.................................... 3,041
Long-term debt, issued for payment of interest.............. (3,627)
Capital contribution........................................ (9,742)
Expenses related to series of financial transactions........ (10,415)
Long-term debt, including accrued interest.................. (74,610)
--------
$157,619
========
</TABLE>
3. OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1996 1996
------------ ----------
<S> <C> <C>
Salaries, wages and commissions............................. $ 4,092 $ 3,441
Rent........................................................ 1,031 1,072
Taxes other than income taxes............................... 3,692 3,892
Restructuring expenses...................................... 1,783 4,795
Insurance................................................... 2,003 2,152
Gift certificates outstanding............................... 926 1,045
Utilities................................................... 701 728
Other payables and accrued expenses......................... 729 1,009
------- -------
$14,957 $18,134
======= =======
</TABLE>
4. LONG-TERM DEBT
Effective January 2, 1996, as part of the series of financial restructuring
transactions described in Note 2, the Company issued $41,700 of 12% Senior
Secured Notes, due December 31, 2001 (the "12% Notes"), to replace $40,000 of
11% Senior Secured Notes, due June 30, 1998 (the "11% Notes") and the interest
accrued thereon and to terminate a $5,408 judgment and the interest accrued
thereon. In January 1996, the Company also issued $4,073 of 12% Notes as payment
in kind for all interest accrued as of January 23, 1996. All of the
F-10
<PAGE> 68
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets of the Company are pledged as collateral security on behalf of the
holders of the 12% Notes. The Company also issued limited partner interests
equal to 95% of the outstanding partnership interests in exchange for and in
full satisfaction of the remaining $152,854 of 11% Notes, together with all
interest accrued thereon.
Payments of interest on the 12% Notes are due each March 31 and September
30. However, for financial accounting reporting purposes, no interest expense
will be recorded under SFAS 15, as all of the interest through maturity has been
recorded as a liability.
The Company had other mortgages outstanding on certain real estate
properties totaling $14 that were paid in full in 1996.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
STATED
MATURITY DECEMBER 31, JANUARY 2,
DATE 1996 1996
-------- ------------ ----------
<S> <C> <C> <C>
12% Notes, including $28,867 interest accrued
through maturity................................. 2001 $74,640 $78,394
Real Estate Mortgages.............................. 1996 -- 14
------- -------
74,640 78,408
Current maturities of long-term debt............... (5,493) (14)
Interest classified as current maturities
of long-term debt................................ (3,784)
------- -------
Long-term debt..................................... $69,147 $74,610
======= =======
</TABLE>
At December 31, 1996, the scheduled aggregate amount of all maturities of
long-term debt and interest classified as long-term debt for the next five years
and thereafter is as follows:
<TABLE>
<S> <C>
1997............................................... $ 5,493
1998............................................... 5,493
1999............................................... 5,493
2000............................................... 5,493
2001............................................... 52,668
-------
$74,640
=======
</TABLE>
5. PARTNERS' CAPITAL
On January 2, 1996, the Company issued an aggregate 95% limited partner
interest to the 11% Noteholders in exchange for reductions of debt and interest
thereon, as described in Note 2. Subsequent to year end, the holders of the 95%
limited partner interest exercised their option to put the limited partner
interest to the Parent in exchange for common stock of the Parent. As a result
of a series of financial restructuring transactions, the Parent owns a 1%
general partner interest and 95% limited partner interest and indirectly owns
the remaining 4% limited partner interest through the Holding Partnership.
The Company made a distribution to the Holding Partnership during 1996 by
issuing 12% Notes in the amount of $1,700. The liability for the notes was
recorded as $3,041, including interest accrued through maturity of the notes in
accordance with SFAS 15.
F-11
<PAGE> 69
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each item of income, gain, loss and deduction is allocated in accordance
with the Partnership Agreement based on the partners' respective percentage
interest. The allocation of losses and deductions, including those of subsidiary
partnerships, are limited to the respective partners' bases.
6. INCOME TAXES
The Company is currently a nontaxable entity.
The Internal Revenue Service (the "Service") has examined the federal
income tax returns of certain of the Parent's subsidiaries for years prior to
1990. The Service asserts deficiencies of approximately $2,500, plus interest
from the date such amounts are deemed payable. Petitions have been filed to
dispute the claims and the parties are negotiating toward a settlement. The
Parent intends to vigorously contest the Service's assessment and believes that
the outcome of the litigation will not have a material adverse effect on its
equity, results of operations, and liquidity and capital resources after
consideration of the applicable amounts previously accrued.
7. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan for which
benefit accruals were frozen effective June 30, 1989. The funding policy is to
make the minimum annual contribution required by applicable regulations. The
Company, the sponsor of the plan, agreed to provide for funding by the 1998 plan
year, of at least two-thirds of the $4,569 of the unfunded current liability
which existed at the beginning of the 1993 plan year. If the agreed upon funding
is not satisfied by the minimum required annual contributions, as adjusted for
the deficit reduction contribution, determined under Section 412 of the Internal
Revenue Code, the Company will make contributions in excess of the minimum
annual requirement. Pension expense was $590, $592 and $785 for the years ended
December 31, 1996, January 2, 1996 and January 3, 1995, respectively.
The Company is required to recognize the additional minimum liability
aspects of Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions" ("SFAS 87"). SFAS 87 requires the recognition of an
additional pension liability in the amount of the Company's unfunded accumulated
benefit obligation in excess of accrued pension cost with an equal amount to be
recognized as either an intangible asset or a reduction of equity. Based upon
plan actuarial and asset information as of January 2, 1996 and December 31,
1996, the Company recorded an increase at January 2, 1996 and a decrease at
December 31, 1996 to the noncurrent pension liability and a corresponding
decrease or increase to partners' deficit of $1,992 and $2,429, respectively.
F-12
<PAGE> 70
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the plan amounts recognized in the balance sheets and
major assumptions used to determine these amounts are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, JANUARY 2, JANUARY 3,
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Components of pension expense:
Interest cost................................... $ 903 $ 966 $ 972
Actual return on plan assets.................... (864) (1,475) (74)
Net amortization and deferral................... 551 1,101 (113)
Service cost....................................
-------- -------- -----
Net pension expense............................... $ 590 $ 592 $ 785
======== ======== =====
Actuarial present value of projected benefit
obligations:
Vested.......................................... $(11,947) $(14,211)
Plan assets at fair value (primarily money market
cash investments, corporate equities, and
corporate bonds)................................ 10,803 10,349
-------- --------
Projected benefit obligation in excess of plan
assets.......................................... (1,144) (3,862)
Net loss.......................................... 2,871 5,283
Additional liability for unfunded accumulated
benefit obligation.............................. (2,871) (5,283)
-------- --------
Accrued pension cost.............................. $ (1,144) $ (3,862)
======== ========
Major assumptions at beginning of year:
Discount rate................................... 7.75% 7.00%
Expected long-term rate of return on plan
assets....................................... 9.00% 9.00%
</TABLE>
Effective December 31, 1996, for purposes of calculating benefit
obligations, the assumed discount rate increased from 7.00% to 7.75% to reflect
the current financial market for high-quality debt instruments. There have been
no other changes in the plan's major actuarial assumptions for the two years
ended December 31, 1996.
The Company also has a voluntary savings plan covering all eligible
employees of the Company and its subsidiaries through which it may contribute
discretionary amounts as approved by the Board of Directors of the Parent.
Administrative expenses paid by the Company for the years ended December 31,
1996, January 2, 1996 and January 3, 1995 amounted to $7, $2 and $24,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases restaurant properties under various noncancelable
operating lease agreements which expire between 1997 and 2015 and require
various minimum annual rentals. Certain leases contain escalation clauses.
Further, many leases have renewal options ranging from one five-year period to
ten five-year periods. Certain of the leases also require the payment of
property taxes, maintenance charges, advertising charges, insurance and parking
lot charges, and additional rentals based on percentages of sales in excess of
specified amounts.
On November 15, 1993, the Company entered into an amendment of a master
sublease agreement pursuant to which it leased 43 properties from Kmart.
Pursuant to the amendment and subject to the terms and conditions thereof, two
properties were removed from the master sublease, and the aggregate monthly for
the period August 1, 1993 through and including December 31, 1996 was reduced by
25% and the aggregate monthly rent for the period January 1, 1997 through and
including December 31, 1999 has been reduced by
F-13
<PAGE> 71
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20%. The reductions in rent are subject to termination by Kmart if Kevin E.
Lewis ceases to be Chairman of the Board of Directors of the Parent. On June 7,
1996, the Parent and the Company entered into an agreement with Mr. Lewis
pursuant to which Mr. Lewis would resign as Chairman of the Board on December
31, 1996, unless requested by the Board of Directors to continue until December
31, 1997. In December 1996, Mr. Lewis was requested to continue as Chairman of
the Board into 1997. As a consequence of this action, the Parent anticipates
entering into negotiations with Kmart to modify the amendment to remove the
provisions requiring Mr. Lewis to remain as Chairman of the Board until the end
of 1999. No assurance can be given that Kmart will agree to such modification.
In consideration for these lease term modifications, the Parent granted Kmart
warrants to purchase 1.7 million shares of Class A Common Stock of the Parent on
or before September 1, 2003, at $0.75 per share. As a part of the Restructuring,
effective January 2, 1996, these warrants were terminated and replaced with
warrants to purchase 8,108,159 shares of Common Stock on or before January 2,
2001, at $0.074 per share, and following the reverse stock split, Kmart retained
warrants to purchase 540,544 shares at $1.11 per share.
The total minimum annual rental commitment and future minimum sublease
rental income under noncancelable operating leases are as follows as of December
31, 1996:
<TABLE>
<CAPTION>
MINIMUM SUBLEASE
RENT INCOME
------- --------
<S> <C> <C>
1997........................................................ $9,821 $ 851
1998........................................................ 8,783 855
1999........................................................ 8,321 855
2000........................................................ 9,023 765
2001........................................................ 8,612 805
For the remaining terms of the leases....................... 42,276 2,528
</TABLE>
Total rental expense included in the statements of operations is $10,916,
$11,929 and $12,375, which includes $1,077, $1,187 and $1,095 of additional rent
based on net sales for the years ended December 31, 1996, January 2, 1996 and
January 3, 1995, respectively. The results of operations include sublease rent
income of $760, $717 and $312 for the years ended December 31, 1996, January 2,
1996 and January 3, 1995, respectively.
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 equity, results of operations, and liquidity and capital resources
after consideration of the applicable amounts previously accrued.
On August 11, 1995, a complaint was filed in the District Court of Travis
County, Texas by former Chairman of the Board of the Parent, Michael J.
Levenson, both individually and on behalf of his minor son Jonathan Jacob
Levenson, James Rich Levenson, Benjamin Aaron Levenson, S.D. Levenson, General
Consulting Group, Inc. and Cerros Morado. The complaint named as defendants the
Parent, the Company, Furr's/Bishop's Cafeterias, L.P., Cavalcade & Co.,
individual members of the Board of Directors, Houlihan, Lokey, Howard & Zukin,
Inc., KL Park Associates, L.P. ("KL Park"), KL Group, Inc. ("KL Group"),
Skadden, Arps, Slate, Meagher & Flom, certain of the then current and former 11%
Noteholders, Deloitte & Touche LLP, Kmart and certain partners and employees of
the foregoing.
The complaint alleged, among other things, that the Parent and certain
defendants conspired to wrest control of the Parent away from the Levensons by
fraudulently inducing them to transfer their working control of the Parent
through a series of transactions in which the Levensons transferred Class B
Common Stock and stock options in the Parent to KL Park and KL Group. Plaintiffs
initially sought actual damages of approximately $16,425, as well as punitive
damages. In a Fifth Amended Petition filed on or about February 3,
F-14
<PAGE> 72
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, plaintiffs sought an unspecified amount of actual damages, alleging only
that their actual damages claim is "no more than $400 million." The Parent's
management believes the allegations are completely without merit and intends to
defend the action vigorously.
On October 6, 1995, the Levensons filed a Notice of Non-Suit as to certain
of the defendants, including the Parent, the Company, Furr's/Bishop's
Cafeterias, L.P., Cavalcade & Co. and specific individual members of the Board
of Directors (other than William E. Prather and Kevin E. Lewis) and amended
their complaint. As a result of such Notice of Non-Suit, the named entities and
individuals are no longer defendants in the Levenson litigation. In addition,
Deloitte & Touche LLP has settled with the plaintiffs and has been voluntarily
dismissed from the case.
The Parent is required to indemnify certain of the defendants originally
named in the Levensons' complaint, including the individual members of the Board
of Directors and certain of their affiliated entities pursuant to the Parent's
Certificate of Incorporation and otherwise, for any and all damages that may
result from such complaint. As part of the Restructuring, the Parent also agreed
to indemnify certain parties named as defendants in the Levensons' complaint,
including the 11% Noteholders, KL Group, KL Park and Kmart, from and against all
claims, actions, suits and other legal proceedings, damages, costs, interest,
charges, counsel fees and other expenses and penalties which such entity may
sustain or incur to any person whatsoever (excluding judgments in the case of KL
Group and KL Park) by reason of or arising out of the Levenson litigation. Under
no circumstances will the Parent be obligated to indemnify any party for any
liability resulting from such party's willful misconduct or bad faith.
On June 7, 1996, the Parent, the Company and Kevin E. Lewis entered into
the Consulting and Indemnity Agreement and General Release pursuant to which the
Parent and the Company agreed to release any claims it may have against Mr.
Lewis and to indemnify and hold harmless Mr. Lewis, to the fullest extent
permitted by law, from and against all judgments, costs, interest, charges,
counsel fees and other expense relating to or in connection with any claims,
actions, suits and other proceedings by reason of or arising out of any action
or inaction by Mr. Lewis in his capacity as an officer, director, employee or
agent of the Company and its affiliates, including the Parent, except to the
extent that such claim or indemnification arises directly from any claim or
cause of action that the Company or its affiliates may have that relates to or
arises from Mr. Lewis' knowingly fraudulent, dishonest or willful misconduct, or
receipt of any personal profit or advantage that he is not legally entitled to
receive. The amount of legal fees and other expenses paid in respect to the
Levenson litigation decreases the amount of cash available to the Parent to pay
its outstanding indebtedness and other obligations. An adverse judgment against
the Parent or any of the other defendants which the Parent is required to
indemnify, a settlement by any defendant which the Parent is required to
indemnify or the continued payment of substantial legal fees and other expenses
could have a material adverse effect on the Parent.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------------------
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31,
1996 1996 1996 1996
-------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Sales................................. $48,817 $50,678 $50,002 $47,930
Gross profit(1)....................... 33,402 34,643 33,880 32,825
Net income............................ 2,084 3,409(2) 2,164(2) 893
</TABLE>
F-15
<PAGE> 73
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------------------------
APRIL 4, JULY 4, OCTOBER 3, JANUARY 2,
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended January 2, 1996:
Sales............................... $52,754 $54,216 $53,944 $ 49,179
Gross profit(1)..................... 35,618 36,190 36,441 33,018
Loss before extraordinary item...... (5,683) (5,851) (6,539) (19,081)(2)
Net income (loss)................... (5,683) (5,851) (6,539) 138,538(2)(3)
</TABLE>
- ---------------
(1) Gross profit is computed using cost of sales including depreciation expense.
(2) See Note 11 Special Charges and Credits.
(3) See Note 2 Restructuring.
10. RELATED PARTY TRANSACTIONS
The Company had receivables from the general partner of $157 and $28 at
December 31, 1996 and January 2, 1996, respectively.
On June 7, 1996, the Parent, the Company and Kevin E. Lewis entered into
the Consulting and Indemnity Agreement and General Release (the "Consulting
Agreement") pursuant to which, among other things, Mr. Lewis would resign as
President and Chief Executive Officer effective September 30, 1996 and would
resign his position as Chairman of the Board on December 31, 1996, unless
requested by the Board of Directors to continue until December 31, 1997. On
September 17, 1996, at the request of the Board of Directors, Mr. Lewis agreed
to remain President and Chief Executive Officer beyond September 30, 1996 with
no change to the financial terms of the Consulting Agreement. On December 24,
1996, Mr. Lewis resigned as President and Chief Executive Officer effective
December 31, 1996 and was requested by the Board to continue as Chairman of the
Board into 1997. After his resignation as President and Chief Executive Officer,
Mr. Lewis will serve as a consultant to the Company until December 31, 1997.
Pursuant to the Consulting Agreement, Mr. Lewis will receive an annual base
salary of $350 pro-rated through the end of 1996 and $250 through the end of
1997. Mr. Lewis received $75 upon the execution of the Consulting Agreement, $75
on September 30, 1996 and $100 on December 31, 1997. In addition, Mr. Lewis is
entitled to receive $100 if requested to assist in certain negotiations on
behalf of the Parent and additional compensation based upon the success of such
negotiations. Furthermore, the Parent agreed to pay, among other things, certain
legal expenses of Mr. Lewis incurred in connection with the negotiation of the
Consulting Agreement and certain travel and moving related expenses. Effective
January 1, 1997, Kenneth Reimer assumed the duties of President and Chief
Executive Officer of the Parent on an interim basis. Mr. Reimer will receive $25
per month for each full or partial month of service and an additional $25 upon
his resignation, if after March 31, 1997, or removal. The Board of Directors is
conducting a search for an individual to serve as a permanent President and
Chief Executive Officer of the Parent.
Since February 1996, Cactus Enterprises, Inc., a company wholly owned by
Kenneth Reimer, has performed certain management consulting services for the
Board. Compensation for such services has been paid by the Parent at a rate of
$2 per day. Total fees and expenses paid in 1996 were approximately $68.
11. SPECIAL CHARGES AND CREDITS
Operating income for the thirteen week period ended October 1, 1996
includes a special credit of $709 for the proceeds received from the sale of
certain trademarks and the termination of a trademark royalty agreement and the
modification and extension of a lease related to the Parent's former El Paso
Bar-B-Que Company restaurants. In addition, the Company recognized $174 of
charges related to the Consulting Agreement and the search for a new President
and Chief Executive Officer for the thirteen week period ended
F-16
<PAGE> 74
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP WHOLLY OWNED BY FURR'S/BISHOP'S, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
October 1, 1996 and $96 for the thirteen week period ended July 2, 1996.
Operating income for the thirteen week period ended July 2, 1996 includes a
special credit of $699 for insurance proceeds received related to a fire loss
incurred in February 1994.
Operating loss for the thirteen week period ended January 2, 1996 includes
special charges of $12,273, which includes $4,501 related to the reserve for
store closings. Also included in the special charges is $7,772 to recognize the
write-down of certain assets in property, plant and equipment to estimated fair
values in accordance with the adoption of SFAS 121.
Operating income for the fifty-three week period ended January 3, 1995
includes special charges to reserves of $2,656 for the estimated costs of
closing five cafeteria locations and one specialty restaurant, including
approximately $1,164 for the write-down of certain assets in property, plant and
equipment to estimated fair value. Also included is a credit of $442 related to
the settlement of a lawsuit by the Internal Revenue Service.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments" ("SFAS 107"). The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
At December 31, 1996 and January 2, 1996, the carrying amount and the fair
value of the Company's financial instruments, as determined under SFAS 107, were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1996 1996
------------ ----------
<S> <C> <C>
Long-term debt, including current portion and interest
accrued through maturity:
Carrying amount........................................... $74,640 $80,951
Estimated fair value...................................... 45,773 47,538
</TABLE>
The Parent's long-term debt is held by a limited number of holders and is
not publicly traded, and as a result, market quotes are not readily available.
The fair value of the long-term debt at December 31, 1996 and January 2, 1996 is
based upon the face amount of the debt resulting from the Restructuring
described in Note 2 as management believes that this is most indicative of the
fair value. The carrying values of accounts receivable, receivable from
affiliates and accounts payable approximate fair value due to the short maturity
of these financial instruments.
F-17
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, to be paid in connection with the sale
of the Notes being registered, all of which will be paid by the registrant. All
amounts are estimates except the registration fee.
<TABLE>
<S> <C>
Registration Fee............................................ $15,784
Accounting Fees and Expenses................................ $10,000
Legal Fees and Expenses..................................... $50,000
Trustee's Fees and Expenses................................. $ 5,000
Printing and Engraving Fees and Expenses.................... $ 7,500
Miscellaneous............................................... $ 7,500
Total............................................. $95,784
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law enables a
Delaware corporation to provide in its certificate of incorporation, and the
Parent has so provided in its Restated Certificate of Incorporation, for the
elimination or limitation of the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that a director's liability is not
eliminated or limited: (1) for any breach of the director's duty of loyalty to
the corporation or its stockholders; (2) for acts or omissions not in good faith
or which involve an intentional misconduct or a knowing violation of law; (3)
under Section 174 of the Delaware General Corporation Law (which imposes
liability on directors for unlawful payment of dividends or unlawful stock
purchases or redemptions); or (4) for any transaction from which the director
derived an improper personal benefit. The Restated Certificate of Incorporation
further provides that if the Delaware General Corporation Law is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as amended.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify any person who was or is a party or witness or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise. Depending on the character of the
proceeding, a corporation may indemnify against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if the person
indemnified acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. If the person indemnified is not wholly successful in
such action, suit or proceeding, but is successful, on the merits or otherwise,
in one or more but less than all claims, issues or matters in such proceeding,
he or she may be indemnified against expenses actually and reasonably incurred
in connection with each successfully resolved claim, issue or matter. In the
case of an action or suit by or in the right of the corporation, no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine that despite the adjudication of liability
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper. Section 145 provides that to the extent a
director, officer, employee or agent of a corporation has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or manner therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.
II-1
<PAGE> 76
The By-laws of the Parent provide that, to the fullest extent permitted by
the Delaware General Corporation Law, the Parent shall indemnify any person who
was or is a party or is threatened to be made a party to any action, suit or
proceeding of the type described above by reason of the fact that he or she is
or was a director or officer of the Parent or is or was serving at the request
of the Parent as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. No expenses will be paid
in advance except, as authorized by the Board of Directors, to a director or
officer for expenses incurred while acting in his or her capacity as a director
or officer, who has delivered an undertaking to the corporation to repay all
amounts advanced if it should be later determined that such director or officer
was not entitled to indemnification. The By-laws further provide that the above
rights of indemnification are not exclusive of any other rights of
indemnification that a director or officer may be entitled to from any other
source.
In addition, the Partnership Agreement of the Company provides that the
Company shall indemnify and hold harmless each general partner, and any former
general partner, of the Company, their respective affiliates and all officers,
directors, partners, employees and agents of each general partner, former
general partner and their respective affiliates (individually, an "Indemnitee";
provided, however, under no circumstances shall Michael J. Levenson or any of
his affiliates be considered an Indemnitee) from and against all losses, claims,
demands, costs, damages, liabilities, joint and several, expenses (including
attorneys' fees and disbursements), judgments, fines, settlements and other
amounts arising from any and all claims, demands, actions, suits, or
proceedings, civil, criminal, administrative or investigative, in which an
Indemnitee may be involved, or threatened to be involved, as a party or
otherwise, relating to or arising out of the Company, its property, business or
affairs, regardless of whether the Indemnitee continues to be a general partner,
an affiliate or an officer, director, partner, employee or agent of a general
partner or an affiliate at the time any such liability or expense is paid or
incurred, if the Indemnitee acted in good faith and in a manner the Indemnitee
reasonably believed to be in the best interest of the Company and the
Indemnitee's course of conduct does not constitute actual fraud, gross
negligence or willful or wanton misconduct; provided, however, that such
indemnification will be recoverable only out of the assets of the Company. The
indemnification provided by the Partnership Agreement of the Company is in
addition to any other rights to which the Indemnitee may be entitled to under
any agreement with the Company or by vote of the partners, as a matter of law,
or otherwise, as to both an action in the Indemnitee's capacity and any action
in another capacity, and shall continue as to Indemnitee who has ceased to serve
in such capacity and shall inure to the benefit of the heirs, successors,
assigns, administrators, and personal representatives of the Indemnitee. An
Indemnitee shall not be denied indemnification because the Indemnitee had an
interest in the transaction with respect to which the indemnification applies if
the transaction was not prohibited by the terms of the Partnership Agreement of
the Company.
Expenses incurred (including legal fees and expenses) by, or on behalf of,
the Indemnitee shall, from time to time, be paid by the Company in advance of
any final disposition upon the approval of the general partner and the receipt
of a written undertaking by, or on behalf of, the Indemnitee to repay such
amounts if it shall ultimately be determined by a final, non-appealable judgment
of a court of competent jurisdiction that the Indemnitee is not entitled to be
indemnified by the Company. The Company may purchase and maintain insurance on
behalf of any Indemnitee, enter into indemnity contracts with Indemnitees and
adopt written procedures pursuant to which arrangements are made for the
advancement of expenses and the funding of indemnification obligations.
Each current director of the Parent has entered into an Indemnification
Agreement by and between the Parent and such director pursuant to which the
Parent will indemnify such director and hold such director harmless from any and
all losses, expenses and fines to the fullest extent authorized, permitted or
not prohibited by the Delaware General Corporation Law or any other applicable
law (including judicial, regulatory or administrative interpretations or
readings thereof), the Parent's Certificate of Incorporation or By-laws as in
effect on the date of execution of the agreement or other statutory provision
authorizing such indemnification adopted after the date of execution of such
agreement. In the event that after the date of the agreements the Parent
provides any greater right of indemnification, in any respect, to any other
person serving as an officer or director of the Parent, then such greater right
of indemnification shall inure to the benefit of the
II-2
<PAGE> 77
respective director and shall be deemed to be incorporated in the relevant
agreement as a basis for indemnity, at each director's election, together with
the indemnity expressly set forth therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 30, 1995, as part of the Restructuring, the Company issued to
former 11% Noteholders $40.0 million aggregate principal amount of 12% Notes in
exchange for $40.0 million aggregate principal amount of 11% Notes in reliance
upon the exemptions provided by Sections 4(2) and 3(a)(9) of the Securities Act.
On January 2, 1996, as part of the Restructuring, the Company issued to
former 11% Noteholders an aggregate of 95% of the limited partnership interests
of the Company in exchange for approximately $153 aggregate principal amount
(plus approximately $46.6 million in accrued and unpaid interest) of 11% Notes
in reliance upon the exemptions provided by Sections 4(2) and 3(a)(9) of the
Securities Act.
On January 2, 1996, as part of the Restructuring, the Company issued a 12%
Note in the principal amount of $1.7 million to the Trustees of General Electric
Pension Trust in settlement of a $5.4 million, plus interest, judgment against
Furr's/Bishop's Cafeterias, L.P. in reliance upon the exemption provided by
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*3.1 -- Certificate of Amendment to the Certificate of Limited
Partnership of Cafeteria Operators, L.P dated July 11,
1995.
**3.2 -- Second Amended and Restated Agreement of Limited
Partnership of Cafeteria Operators, L.P. (included as
Exhibit I to the Exchange Agreement filed as Exhibit
10.1)
**4.1 -- Amended and Restated Indenture, dated as of November 15,
1995, by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.).
***4.2 -- First Supplemental Indenture dated as of January 24, 1996
by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.).
*4.3 -- General Security Agreement dated March 27, 1992 by and
between Cafeteria Operators, L.P. and Shawmut Bank, N.A.
*4.4 -- Security Agreement dated March 27, 1992 by and between
Cafeteria Operators, L.P. and Shawmut Bank, N.A.
*4.5 -- Form of Assignment and Security Agreements relating to
deposits at Amarillo National Bank and Carlsbad National
Bank dated March 27, 1992 by and between Cafeteria
Operators, L.P. and Shawmut Bank, N.A.
*4.6 -- General Security Agreement dated March 27, 1992 by and
between Furr's/Bishop's Specialty Group, L.P. and Shawmut
Bank, N.A.
*4.7 -- Assignment for Security (Trademarks) dated March 27, 1992
by Cafeteria Operators, L.P. filed with the Patent and
Trademark Office.
*4.8 -- Assignment for Security (Trademarks) dated as of December
28, 1995 by Cafeteria Operators, L.P. filed with the
Patent and Trademark Office.
*4.9 -- Assignment for Security (Trademarks) dated as of December
28, 1995 by Furr's/Bishop's Specialty Group, L.P. filed
with the Patent and Trademark Office.
</TABLE>
II-3
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*4.10 -- Amended and Restated Security Agreement and
Mortgage-Trademarks and Patents dated as of December 31,
1995 by and among Cafeteria Operators, L.P.,
Furr's/Bishop's Specialty Group, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.).
*4.11 -- Special Power of Attorney dated March 27, 1992 by
Cafeteria Operators, L.P.
*4.12 -- Special Power of Attorney dated as of December 28, 1995
by Cafeteria Operators, L.P.
*4.13 -- Special Power of Attorney dated as of December 28, 1995
by Furr's/Bishop's Specialty Group, L.P.
**4.14 -- Omnibus Agreement dated November 15, 1996 by and among
Cafeteria Operators, L.P., Specialty Group, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) (included as Exhibit E to the Exchange Agreement
filed as Exhibit 10.1).
*4.15 -- First Amendment to Deed of Trust, dated as of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) for premises located at Pima County, Arizona.
*4.16 -- First Amendment to Deed of Trust, dated as of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) for premises located at Jefferson County, Colorado.
*4.17 -- First Amendment to Deed of Trust, dated as of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) for premises located at Clark County, Nevada.
*4.18 -- First Amendment to Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of
Rents and Leases, dated as of November 15, 1995 by and
between Cafeteria Operators, L.P. and Fleet National Bank
of Massachusetts (f/k/a Shawmut Bank, N.A.) for premises
located at San Bernardino County, California.
*4.19 -- First Amendment to Mortgage, Security Agreement and
Assignment of Leases and Rents, dated as of November 15,
1995 by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.)
for premises located at Johnson County, Kansas.
*4.20 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases and Rents, dated as of November 15,
1995 by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.)
for premises located at St. Louis County, Missouri.
*4.21 -- First Amendment to New Mexico Deed of Trust, of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.). for premises located at Bernalillo County, New
Mexico.
*4.22 -- First Amendment to Mortgage with Power of Sale, dated as
of November 15, 1995 by and between Cafeteria Operators,
L.P. and Fleet National Bank of Massachusetts (f/k/a
Shawmut Bank, N.A.) for premises located at Tulsa County,
Oklahoma.
*4.23 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Taylor County, Texas.
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*4.24 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Cameron County, Texas.
*4.25 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Dallas County, Texas.
*4.26 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Lubbock County, Texas.
*4.27 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Grayson County, Texas.
*4.28 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Hopkins County, Texas.
5.1 -- Opinion of Fulbright & Jaworski L.L.P.
**10.1 -- Exchange Agreement, dated as of November 15, 1995, among
Furr's/Bishop's, Incorporated, Cafeteria Operators, L.P.
and holders of the 11% Senior Secured Notes.
+10.2 -- Consulting and Indemnity Agreement and General Release,
dated as of June 7, 1996 by and between Kevin E. Lewis,
Furr's/Bishop's, Incorporated and Cafeteria Operators,
L.P.
++10.3 -- First Amendment to Consulting and Indemnity Agreement and
General Release, dated as of September 17, 1996 by and
between Kevin E. Lewis, Furr's/Bishop's, Incorporated and
Cafeteria Operators, L.P.
+++10.4 -- Employment Letter Agreement, dated as of March 24, 1997,
by and among Theodore J. Papit and Furr's/Bishop's,
Incorporated.
*12.1 -- Statement re Computation of Ratios.
++21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP, as independent
certified public accountants.
23.2 -- Consent of Deloitte & Touche LLP, as independent
certified public accountants.
23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in their
opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney (included in the Signature Page to this
Registration Statement).
*25.1 -- Statement of Eligibility of Trustee.
</TABLE>
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION PAGE
- -------- ----------- ----
<C> <S> <C>
II Consolidated Valuation and Qualifying Accounts S-1
</TABLE>
- ---------------
* Previously filed.
II-5
<PAGE> 80
** Incorporated by reference from Furr's/Bishop's, Incorporated's Registration
Statement on Form S-4, File No. 33-38978.
*** Incorporated by reference from Furr's/Bishop's, Incorporated Form 10-K for
the year ended January 2, 1996.
+ Incorporated by reference from Furr's/Bishop's, Incorporated Registration
Statement on Form S-1, File No. 333-4576.
++ Incorporated by reference from Cafeteria Operators, L.P. Form 10-K for the
year ended December 31, 1996.
+++ Incorporated by reference from Furr's/Bishop's, Incorporated Form 10-Q for
the interim period ended April 1, 1997.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold as of the
termination of the offering.
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-6
<PAGE> 81
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Post-Effective
Amendment No. 2 to Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Lubbock, State of
Texas, on November 12, 1997.
CAFETERIA OPERATORS, L.P.
By: FURR'S/BISHOP'S, INCORPORATED
By: /s/ THEODORE J. PAPIT
--------------------------------
Theodore J. Papit
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THEODORE J. PAPIT President, Chief Executive November 12, 1997
- ----------------------------------------------------- Officer and Director
Theodore J. Papit
* Chairman of the Board and November 12, 1997
- ----------------------------------------------------- Director
Kevin E. Lewis
* Director November 12, 1997
- -----------------------------------------------------
E.W. Williams, Jr.
* Director November 12, 1997
- -----------------------------------------------------
Suzanne Hopgood
* Director November 12, 1997
- -----------------------------------------------------
Gilbert C. Osnos
* Director November 12, 1997
- -----------------------------------------------------
Kenneth R. Reimer
/s/ ALTON R. SMITH Principal Accounting and November 12, 1997
- ----------------------------------------------------- Principal Financial
Alton R. Smith Officer
By: /s/ KEVIN E. LEWIS
-------------------------------------------------
Kevin E. Lewis
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 83
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
TWENTY-SIX WEEKS ENDED JULY 1, 1997
Reserve for store closing............... $3,548 $ 565 $ -- $ 664(a) $3,449
====== ====== ==== ====== ======
Allowance for doubtful accounts
receivable $ 20 $ 7 $ -- $ 2 $ 25
====== ====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1996:
Reserve for store closing............... $5,839 $ 226 $160 $2,677(a) $3,548
====== ====== ==== ====== ======
Allowance for doubtful accounts
receivable........................... $ 27 $ (1)(b) $ -- $ 6(c) $ 20
====== ====== ==== ====== ======
YEAR ENDED JANUARY 2, 1996
Reserve for store closing............... $3,479 $4,155 $ -- $1,795(a) $5,839
====== ====== ==== ====== ======
Allowance for doubtful accounts
receivable........................... $ 64 $ (16)(b) $ -- $ 21(c) $ 27
====== ====== ==== ====== ======
YEAR ENDED JANUARY 3, 1995
Reserve for store closing............... $4,749 $1,083 $ -- $2,353(a) $3,479
====== ====== ==== ====== ======
Allowance for doubtful accounts
receivable........................... $ 35 $ 29 $ -- $ -- $ 64
====== ====== ==== ====== ======
</TABLE>
- ---------------
(a) Includes costs and expenses incurred during the year on closed units and
severance payments.
(b) Net adjustment reflects $12 reversal of expense in 1996 and $16 in 1995.
(c) Related asset account was written off.
S-1
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*3.1 -- Certificate of Amendment to the Certificate of Limited
Partnership of Cafeteria Operators, L.P dated July 11,
1995.
**3.2 -- Second Amended and Restated Agreement of Limited
Partnership of Cafeteria Operators, L.P. (included as
Exhibit I to the Exchange Agreement filed as Exhibit
10.1)
**4.1 -- Amended and Restated Indenture, dated as of November 15,
1995, by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.).
***4.2 -- First Supplemental Indenture dated as of January 24, 1996
by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.).
*4.3 -- General Security Agreement dated March 27, 1992 by and
between Cafeteria Operators, L.P. and Shawmut Bank, N.A.
*4.4 -- Security Agreement dated March 27, 1992 by and between
Cafeteria Operators, L.P. and Shawmut Bank, N.A.
*4.5 -- Form of Assignment and Security Agreements relating to
deposits at Amarillo National Bank and Carlsbad National
Bank dated March 27, 1992 by and between Cafeteria
Operators, L.P. and Shawmut Bank, N.A.
*4.6 -- General Security Agreement dated March 27, 1992 by and
between Furr's/Bishop's Specialty Group, L.P. and Shawmut
Bank, N.A.
*4.7 -- Assignment for Security (Trademarks) dated March 27, 1992
by Cafeteria Operators, L.P. filed with the Patent and
Trademark Office.
*4.8 -- Assignment for Security (Trademarks) dated as of December
28, 1995 by Cafeteria Operators, L.P. filed with the
Patent and Trademark Office.
*4.9 -- Assignment for Security (Trademarks) dated as of December
28, 1995 by Furr's/Bishop's Specialty Group, L.P. filed
with the Patent and Trademark Office.
*4.10 -- Amended and Restated Security Agreement and Mortgage
-Trademarks and Patents dated as of December 31, 1995 by
and among Cafeteria Operators, L.P., Furr's/Bishop's
Specialty Group, L.P. and Fleet National Bank of
Massachusetts (f/k/a Shawmut Bank, N.A.).
*4.11 -- Special Power of Attorney dated March 27, 1992 by
Cafeteria Operators, L.P.
*4.12 -- Special Power of Attorney dated as of December 28, 1995
by Cafeteria Operators, L.P.
*4.13 -- Special Power of Attorney dated as of December 28, 1995
by Furr's/Bishop's Specialty Group, L.P.
**4.14 -- Omnibus Agreement dated November 15, 1996 by and among
Cafeteria Operators, L.P., Specialty Group, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) (included as Exhibit E to the Exchange Agreement
filed as Exhibit 10.1).
*4.15 -- First Amendment to Deed of Trust, dated as of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) for premises located at Pima County, Arizona.
*4.16 -- First Amendment to Deed of Trust, dated as of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) for premises located at Jefferson County, Colorado.
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
*4.17 -- First Amendment to Deed of Trust, dated as of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.) for premises located at Clark County, Nevada.
*4.18 -- First Amendment to Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of
Rents and Leases, dated as of November 15, 1995 by and
between Cafeteria Operators, L.P. and Fleet National Bank
of Massachusetts (f/k/a Shawmut Bank, N.A.) for premises
located at San Bernardino County, California.
*4.19 -- First Amendment to Mortgage, Security Agreement and
Assignment of Leases and Rents, dated as of November 15,
1995 by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.)
for premises located at Johnson County, Kansas.
*4.20 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases and Rents, dated as of November 15,
1995 by and between Cafeteria Operators, L.P. and Fleet
National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.)
for premises located at St. Louis County, Missouri.
*4.21 -- First Amendment to New Mexico Deed of Trust, of November
15, 1995 by and between Cafeteria Operators, L.P. and
Fleet National Bank of Massachusetts (f/k/a Shawmut Bank,
N.A.). for premises located at Bernalillo County, New
Mexico.
*4.22 -- First Amendment to Mortgage with Power of Sale, dated as
of November 15, 1995 by and between Cafeteria Operators,
L.P. and Fleet National Bank of Massachusetts (f/k/a
Shawmut Bank, N.A.) for premises located at Tulsa County,
Oklahoma.
*4.23 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Taylor County, Texas.
*4.24 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Cameron County, Texas.
*4.25 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Dallas County, Texas.
*4.26 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Lubbock County, Texas.
*4.27 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Grayson County, Texas.
*4.28 -- First Amendment to Deed of Trust, Security Agreement and
Assignment of Leases, dated as of November 15, 1995 by
and between Cafeteria Operators, L.P. and Fleet National
Bank of Massachusetts (f/k/a Shawmut Bank, N.A.) for
premises located at Hopkins County, Texas.
</TABLE>
<PAGE> 86
<TABLE>
<C> <S>
5.1 -- Opinion of Fulbright & Jaworski L.L.P.
**10.1 -- Exchange Agreement, dated as of November 15, 1995, among Furr's/Bishop's, Incorporated,
Cafeteria Operators, L.P. and holders of the 11% Senior Secured Notes.
+10.2 -- Consulting and Indemnity Agreement and General Release, dated as of June 7, 1996 by and
between Kevin E. Lewis, Furr's/Bishop's, Incorporated and Cafeteria Operators, L.P.
++10.3 -- First Amendment to Consulting and Indemnity Agreement and General Release, dated as of
September 17, 1996 by and between Kevin E. Lewis, Furr's/Bishop's, Incorporated and
Cafeteria Operators, L.P.
+++10.4 -- Employment Letter Agreement, dated as of March 24, 1997, by and among Theodore J. Papit
and Furr's/Bishop's, Incorporated.
*12.1 -- Statement re Computation of Ratios.
++21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP, as independent certified public accountants.
23.2 -- Consent of Deloitte & Touche LLP, as independent certified public accountants.
23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in their opinion filed as Exhibit
5.1).
24.1 -- Power of Attorney (included in the Signature Page to this Registration Statement).
*25.1 -- Statement of Eligibility of Trustee.
</TABLE>
- ---------------
* Previously filed.
** Incorporated by reference from Furr's/Bishop's, Incorporated's Registration
Statement on Form S-4, File No. 33-38978.
*** Incorporated by reference from Furr's/Bishop's, Incorporated Form 10-K for
the year ended January 2, 1996.
+ Incorporated by reference from Furr's/Bishop's, Incorporated Registration
Statement on Form S-1, File No. 333-4576.
++ Incorporated by reference from Cafeteria Operators, L.P. Form 10-K for the
year ended December 31, 1996.
+++ Incorporated by reference from Furr's/Bishop's, Incorporated Form 10-Q for
the interim period ended April 1, 1997.
<PAGE> 1
EXHIBIT 5.1
OPINION OF FULBRIGHT & JAWORSKI L.L.P.
[LETTERHEAD]
November 13, 1997
Board of Directors
Furr's/Bishop's Incorporated
6901 Quaker Avenue
Lubbock, Texas 97413
Re: Cafeteria Operators, L.P.
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as special counsel to Cafeteria Operators, L.P., a Delaware
limited partnership (the "Company"), in connection with the sale by the selling
security holders named in the Registration Statement referred to below of up to
$32,303,874.51 aggregate principal amount of 12% Senior Secured Notes due
December 31, 2001 (the "Notes") of the Company.
This opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Registration Statement of the Company on Form S-1 filed with the
Securities and Exchange Commission (the "Commission") on the date hereof (the
"Registration Statement"), (ii) the Amended and Restated Indenture dated as of
November 15, 1995 by and between the Company and Fleet National Bank of
Massachusetts (f/k/a Shawmut Bank, N.A.), as trustee (the "Indenture"), (iii)
the form of the certificates evidencing the Notes, (iv) the Certificate of
Incorporation of the Company, as amended to date, and (v) resolutions adopted by
the general partner of the Company relating to, among other things, the issuance
of the Notes. We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of such records of the Company and such
agreements, certificates of public officials, certificates of officers or other
representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinion set forth herein.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies, and the
authenticity of originals of such copies. Additionally, we have assumed that the
Company has sufficient rights to and interest in the collateral for a security
interest to attach. As to the facts material to this opinion which we did not
independently establish or verify, we have relied upon statements or
representations of officers and other representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the Notes are valid
and binding obligations of the Company entitled to the benefits of the Indenture
and enforceable against the Company in accordance with
<PAGE> 2
their terms, except to the extent that (i) enforcement thereof may be limited by
(a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally and (b) general
principals of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity) and (ii) any waiver with respect to the exercise
of remedies against the collateral granted pursuant to the Collateral Documents
(as defined in the Indenture) may be deemed unenforceable. Notwithstanding the
foregoing, with respect to Section 607 of the Indenture, we express no opinion
regarding the enforceability of the Notes should limits on the compensation of
trustees be enacted in the future.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference of
our firm under the caption "Legal Matters" in the Registration Statement.
Sincerely,
Fulbright & Jaworski L.L.P.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cafeteria Operators, L.P.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus. The report of KPMG Peat
Marwick LLP covering the December 31, 1996 consolidated financial statements
refers to a change in method of accounting, effective January 2, 1996, for
impairment of long-lived assets and for long-lived assets to be disposed of to
conform to Statement of Financial Accounting Standards No. 121.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP
Dallas, Texas
November 13, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to
Registration Statement No. 333-4578 of Cafeteria Operators, L.P. on Form S-1 of
our report dated March 28, 1996, appearing in the prospectus and to the
reference to us under the heading "Experts" in the Prospectus, which is part of
such Registration Statement.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Cafeteria Operators,
L.P. included in Item 16(b). This financial statement schedule is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November 13, 1997
