SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-4578
CAFETERIA OPERATORS, L.P.
INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION
NO.75-2186655
6901 QUAKER AVENUE, LUBBOCK, TX 79413
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (806)792-7151
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Page 1 of 18
Exhibit Index Located on Page 17
<PAGE>
CAFETERIA OPERATORS, L.P.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 29, 1998(Unaudited) and December 30, 1997 3
Unaudited Condensed Consolidated Statements
Of Operations - For the thirteen weeks
ended September 29, 1998 and September 30, 1997 5
Unaudited Condensed Consolidated Statements
of Operations - For the thirty-nine weeks
ended September 29, 1998 and September 30, 1997 6
Unaudited Condensed Consolidated Statement
of Stockholders' Deficit - For the thirty-nine weeks
ended September 29, 1998 7
Unaudited Condensed Consolidated Statements
of Cash Flows - For the thirty-nine weeks
ended September 29, 1998 and September 30, 1997 8
Notes to Unaudited Condensed Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION 15
SIGNATURES
Page 2
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<CAPTION>
September 29, December 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,960 $ 4,395
Accounts and notes receivable, net 708 856
Inventories 6,735 6,038
Prepaid expenses and other 985 1,122
----------- -----------
Total current assets 19,388 12,411
Property, plant and equipment, net 50,078 52,784
Receivable from affiliates 12,850 11,604
Other assets 504 515
----------- -----------
$ 82,820 $ 77,314
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
(Continued on following page)
Page 3
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands)
<CAPTION>
September 29, December 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Liabilities and Partners' Deficit
Current liabilities:
Current maturities of long-term debt $ 5,493 $ 5,493
Trade accounts payable 4,536 4,212
Other payables and accrued expenses 17,160 15,008
Reserve for store closings - current 809 1,344
----------- -----------
Total current liabilities 27,998 26,057
Reserve for store closings, net of current portion 3,066 3,331
Long-term debt, net of current portion 63,459 66,205
Other payables 7,458 7,179
Excess of future lease payments over fair value,
net of amortization 2,457 2,837
Contingencies
Partners' deficit (21,618) (28,295)
----------- -----------
$ 82,820 $ 77,314
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 4
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<CAPTION>
Thirteen weeks ended
---------------------------
September 29, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 48,011 $ 49,376
Costs and expenses:
Cost of sales (excluding depreciation) 14,152 14,851
Selling, general and administrative 29,082 30,025
Depreciation and amortization 2,538 2,817
Net special charges 7,560
----------- -----------
45,772 55,253
----------- -----------
Operating income (loss) 2,239 (5,877)
Interest expense 62 78
----------- -----------
Net income (loss) $ 2,177 $ (5,955)
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 5
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<CAPTION>
Thirty-nine weeks ended
---------------------------
September 29, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 142,255 $ 146,516
Costs and expenses:
Cost of sales (excluding depreciation) 41,918 44,195
Selling, general and administrative 85,927 89,958
Depreciation and amortization 7,557 8,223
Net special charges 9,991
----------- -----------
135,402 152,367
----------- -----------
Operating income (loss) 6,853 (5,851)
Interest expense 176 212
----------- -----------
Net income (loss) $ 6,677 $ (6,063)
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 6
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 1998
(dollars in thousands)
<CAPTION>
Total
General Limited Partners'
Partner Partners Capital
--------- --------- ---------
<S> <C> <C> <C>
Balance at
December 30, 1997 $ (40,788) $ 12,493 $ (28,295)
Net income 6,677 6,677
--------- --------- ---------
Balance at
September 29, 1988 $ (34,111) $ 12,493 $ (21,618)
========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 7
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<CAPTION>
Thirty-nine weeks ended
-------------------------
September 29, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,677 $ (6,063)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 7,557 8,223
(Gain) loss on disposition of assets (46) 223
Non-cash net special charges 5,191
Other, net 300 393
Changes in operating assets and liabilities:
Decrease in accounts and notes receivable 148 345
Increase in inventories (697) (546)
Increase (decrease) in prepaid expenses
and other 137 (871)
Increase in trade accounts payable, other
payables, accrued expenses and other
liabilities 2,476 2,998
----------- -----------
Net cash provided by operating activities 16,552 9,893
----------- -----------
Cash flows used in investing activities:
Purchases of property, plant and equipment (6,269) (4,032)
Expenditures charged to reserve for store
closings (1,045) (816)
Proceeds from the sale of property, plant
and equipment 1,106 148
Other, net 15 14
----------- -----------
Net cash used in investing activities (6,193) (4,686)
----------- -----------
Cash flows used in financing activities:
Payment of indebtedness (2,746) (5,493)
Increase in receivables from affiliates (1,247) (372)
Other, net 199 (38)
----------- -----------
Net cash used in financing activities (3,794) (5,903)
----------- -----------
Increase (decrease) in cash and cash equivalents 6,565 (696)
Cash and cash equivalents at beginning of period 4,395 3,668
----------- -----------
Cash and cash equivalents at end of period $ 10,960 $ 2,972
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid, including $2,746 and $5,493
of interest in 1998 and 1997 classified
as payment of indebtedness $ 2,850 $ 5,499
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
Page 8
<PAGE>
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: Summary of Significant Accounting Policies
Cafeteria Operators, L.P., a Delaware limited partnership (the
"Partnership"), is wholly owned by Furr's/Bishop's, Incorporated (the
"Company") and operates cafeterias. The financial statements presented herein
are the unaudited condensed consolidated financial statements of the
Partnership and its majority owned subsidiaries.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements, and notes thereto, which are
included in the Partnership's Form 10-K for the year ended December 30, 1997.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation.
The results of operations for the thirty-nine weeks ended September 29,
1998 may not be indicative of the results that may be expected for the fiscal
year ending December 29, 1998.
Effective January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income in a
full set of general-purpose financial statements. Comprehensive income
includes net income and other comprehensive income which is generally comprised
of changes in the fair value of available-for-sale marketable securities,
foreign currency translation adjustments and adjustments to recognize
additional minimum pension liabilities. The Partnership had an accumulated
other comprehensive loss at December 30, 1997 of $2,504,000, which is included
in the Partners' deficit, and consists entirely of an adjustment to recognize
additional minimum pension liability. The Partnership had no other
comprehensive income for the thirty-nine weeks ended September 29, 1998 and
September 30, 1997.
The Company is assessing the reporting and disclosure requirements of
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires a
public business enterprise to report financial and descriptive information
about its reportable operating segments. The statement is effective for
financial statements for periods beginning after December 31, 1997, but is not
required for interim financial statements in the initial year of its
application. The Partnership will adopt the provisions of this statement in
its December 29, 1998 consolidated financial statements.
NOTE B: Income Tax
For state and federal income tax purposes, the Partnership 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, is
included in the state and federal returns of individual partners. Accordingly,
Page 9
<PAGE>
no provision for income taxes is reflected in the accompanying financial
statements.
NOTE C: Special Charges
For the quarter ended April 1, 1997, the Partnership recognized net
special charges of $2,431,000, including a charge of $1,888,000 for the
writedown of assets and adjustments to closed store reserves, a charge of
$1,835,000 to recognize the writedown of certain assets in accordance with
Statement of Financial Accounting Standards, No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS121"), and a credit of $1,292,000
related to the settlement of a lawsuit previously filed against the Company.
The loss from operations for the quarter ended September 30, 1997 includes
special charges of $7,560,000, which includes a charge of $4,800,000 for the
liability for the indemnification of litigation settlement costs and reasonable
expenses related to a suit filed by Michael J. Levenson, $1,563,000 for the
writedown of assets and adjustments to closed store reserves of units
previously closed and for two units to be closed, and $1,197,000 to recognize
the writedown of certain assets.
NOTE D: Contingencies
The Partnership, 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
Partnership's financial condition or results of operations.
Page 10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended September 29, 1998 Compared to Thirteen Weeks Ended
September 30, 1997
Results of operations. Sales for the third fiscal quarter of 1998 were
$48.0 million, a decrease of $1.4 million from the same quarter of 1997.
Operating income for the third quarter of 1998 was $2.2 million compared to an
operating loss of $5.9 million in the comparable period in the prior year. The
operating loss of the third quarter of 1997 included a special charge of $7.6
million. The net income for the third quarter of 1998 was $2.2 million
compared to a net loss of $6.0 million in the third quarter of 1997.
Sales. Restaurant sales in comparable units were 2.69% higher in the
third quarter of 1998 than the same quarter of 1997. Sales for the third
fiscal quarter were $2.4 million lower than the same period of the prior year
due to a decline in the number of units at period end from 110 in 1997 to 101
in 1998. Management anticipates that one or two additional units will close in
the last quarter of 1998. Sales by Dynamic Foods to third parties were $198
thousand lower in the third quarter of 1998 than the third quarter of the prior
year, reflecting an effort by management to improve margins by focusing on
sales to a smaller number of higher volume accounts.
Cost of sales. Excluding depreciation, cost of sales was 29.5% of sales
for the third quarter of 1998 as compared to 30.1% for the same quarter of
1997. The decrease in the percentage of sales was the result of changes in
pricing and menu mix. Produce costs in the current period were significantly
higher than the prior year period.
Selling, general and administrative. Selling, general and administrative
("SG&A") expense was lower in the aggregate by $943 thousand in the third
quarter of 1998 as compared to 1997 due primarily to there being fewer units
included in the operating results. Other changes in SG&A expense included an
increase of $95 thousand in marketing expense and $304 thousand in outside
professional fees that was partially offset by a decrease in salaries.
Depreciation and amortization. Depreciation and amortization expense was
lower by $279 thousand in the third quarter of 1998 due primarily to lower
depreciation on property, plant and equipment having been written down in
accordance with SFAS121.
Special charges. The operating loss for the quarter ended September 30,
1997 included special charges of $7.6 million, including $4.8 million for the
liability for the indemnification of litigation settlement costs and reasonable
expenses related to a lawsuit, $1.6 million for the writedown of assets and
adjustments to closed store reserves and $1.2 million to recognize the
writedown of certain assets.
Interest expense. Interest expense was $62 thousand in the third quarter
of 1998, which was slightly lower than the comparable period in the prior year.
In accordance with Statement of Financial Accounting Standards No. 15, the
Partnership's debt that was restructured at January 2, 1996 was recorded at the
sum of all future principal and interest payments and there is no recognition
of interest expense thereon.
Page 11
<PAGE>
Thirty-nine Weeks Ended September 29, 1998 Compared to Thirty-nine Weeks Ended
September 30, 1997
Results of operations. Sales for the first thirty-nine weeks of 1998 were
$142.3 million, a decrease of $4.3 million from the same period of 1997.
Operating income for the first thirty-nine weeks of 1998 was $6.9 million
compared to an operating loss of $5.9 million in the comparable period in the
prior year. The operating income for the thirty-nine weeks of 1997 included
net special charges of $10.0 million. The net income for the first thirty-nine
weeks of 1998 was $6.7 million compared to a net loss of $6.1 million in the
same period of 1997.
Sales. Restaurant sales in comparable units were 2.51% higher in the
first thirty-nine weeks of 1998 than the same period of 1997. Sales for the
first thirty-nine weeks were $7.3 million lower than the same period of the
prior year due to there being nine fewer units included in operating results.
Sales by Dynamic Foods to third parties were $540 thousand lower in the first
thirty-nine weeks of 1998 than the same period of the prior year.
Cost of sales. Excluding depreciation, cost of sales was 29.5% of sales
for the first thirty-nine weeks of 1998 as compared to 30.2% for the same
period of 1997. The decrease in the percentage of sales was the result of
changes in pricing and menu mix. Produce costs in the current period were
higher than the prior year period.
Selling, general and administrative. Selling, general and administrative
("SG&A") expense was lower in the aggregate by $4.0 million in the first
thirty-nine weeks of 1998 as compared to 1997 due primarily to there being
fewer units included in the operating results. Other changes in SG&A expense
included an increase in 1998 of $375 thousand in outside professional fees that
was partially offset by a decrease in salaries, $286 thousand in marketing
expense and $244 thousand in labor and related benefits and a decrease of $248
thousand in utility expenses.
Depreciation and amortization. Depreciation and amortization expense was
lower by $666 thousand in the first thirty-nine weeks of 1998 due primarily to
lower depreciation on property, plant and equipment having been written down in
accordance with SFAS121.
Special charges. The loss from operations for the thirty-nine weeks ended
September 30, 1997 included net special charges of $10.0 million, which
included charges of $4.8 million for the liability for the indemnification of
litigation settlement costs and reasonable expenses related to a lawsuit,
charges of $3.5 million for the writedown of assets and adjustments to closed
store reserves, charges of $3.0 million for the writedown of certain assets and
a credit of $1.9 million for the $1.3 million related to the settlement of a
lawsuit previously filed against the Company.
Interest expense. Interest expense was $176 thousand in the first
thirty-nine weeks of 1998, which was slightly lower than the comparable period
in the prior year. In accordance with Statement of Financial Accounting
Standards No. 15, the Partnership's debt that was restructured at January 2,
1996 was recorded at the sum of all future principal and interest payments and
there is no recognition of interest expense thereon.
Page 12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES OF
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
During the thirty-nine weeks ended September 29, 1998, cash provided by
operating activities of the Partnership was $16.6 million compared to $9.9
million in the same period of 1997. The Partnership made capital expenditures
of $6.3 million during the first thirty-nine weeks of 1998 compared to $4.0
million during the same period of 1997. Most of the increase over the prior
year related to the remodels of eight cafeterias. Cash and cash equivalents
were $11.0 million at September 29, 1998 compared to $3.0 million at September
30, 1997. The current ratio of the Partnership .69:1 at September 29, 1998
compared to .37:1 at September 30, 1997 and .48:1 at December 30, 1997. The
Partnership's total assets at September 29, 1998 aggregated $82.8 million,
compared to $77.3 million at September 30, 1997 and $77.3 million at December
30, 1997.
The improvement in results of operations in the thirty-nine weeks ended
September 29, 1998 over the comparable period of the prior year reflects the
impact of the present marketing program, operating cost controls and store
renovations.
The Partnership'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 Partnership have
not historically required proportionately large amounts of working capital,
which is generally consistent with similar restaurant companies.
Total scheduled maturities of long-term debt and interest classified as
long-term debt of the Partnership and its subsidiaries over the next five
calendar years are: $2.7 million in the remainder of 1998, $5.5 million in
1999, $5.5 million in 2000 and $55.3 million in 2001.
The Partnership has significant annual interest payment obligations under
the $66.4 million of 12% Notes due December 31, 2001, which includes $20.6
million of interest to maturity. The semi-annual interest payments of $2.7
million on the 12% Notes are due on each March 31 and September 30 and are not
reflected as expense on the Partnership's statement of operations, because of
the manner in which that obligation was created in the 1995 restructuring.
Instead, the entire amount of future interest payments is reflected as part of
the balance of the 12% Notes on the Partnership's balance sheet. The
obligations under the 12% Notes are secured by a security interest in and a
lien on all of the personal property of the Partnership and mortgages on all
fee and leasehold properties of the Partnership (to the extent such properties
are mortgageable). If the 12% Notes were to be settled for an amount less than
the carrying value on the Partnership's balance sheet, the Partnership would
report an extraordinary gain on its statement of operations. If the 12% Notes
were settled with proceeds from new indebtedness, interest on the new
indebtedness would be charged as expense on the Partnership's statement of
operations.
The Partnership has outstanding $2.5 million of 10.5% Notes due December
31, 2001. A semi-annual cash interest payment of approximately $134 thousand
is due on each June 30 and December 31.
In 1993, the Partnership entered into an amendment of a master sublease
agreement pursuant to which it leased 43 properties from Kmart Corporation
("Kmart"). Pursuant to the amendment and subject to the terms and conditions
Page 13
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thereof, two properties were removed from the master sublease, and the
aggregate monthly rent for the period January 1, 1997 through and including
December 31, 1999 were reduced by 20%. The reductions in rent were subject to
termination by Kmart if Kevin E. Lewis ceased to be Chairman of the Board of
Directors of the Company. Mr. Lewis was not elected to the Board of Directors,
or as Chairman of the Board, at the meeting of stockholders on May 28, 1998 and
Kmart increased the rent, which is currently being paid under protest. The
additional rent payments through December 31, 1999 will amount to approximately
$1.8 million. The Partnership accounts for its rental payments under the
straight-line method, and the increase in rent through December 31, 1999 will
be amortized over the remaining life of the leases, which run through December
31, 2003, December 31, 2007, June 29, 2008 and December 31, 2008. The increase
in annual rent expense will be approximately $288 thousand.
Year 2000 Readiness Disclosure
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result, some
of these systems will not operate correctly after 1999 because they may
interpret "00" to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches, and
are commonly referred to as the "Year 2000 Problem."
The Partnership believes that it has identified all significant digital
systems and applications that will require modification to ensure Year 2000
compliance. The Partnership has commenced the process of modifying, upgrading
and replacing any digital systems that have been assessed as adversely
affected, and estimates that its compliance activities will be substantially
completed no later than the first quarter of 1999. The Partnership estimates
that the total costs of this effort during the 1998 and 1999 fiscal years will
be less than $500,000, which is being funded through operating cash flows.
These estimates are based on management's assumptions regarding future events,
including the continued availability of necessary resources and the
effectiveness of hardware and software solutions provided by third parties and
by the Partnership's information technology staff.
The Year 2000 Problem may also affect parties who provide critical goods
and services to the Partnership, for example banks, credit card companies,
utility providers and suppliers of raw and processed foodstuffs to the
Partnership's restaurants and its Dynamic Foods operation. The Partnership is
evaluating the extent to which the Partnership's operations are vulnerable to
Year 2000 problems of its material vendors and is seeking assurance of their
Year 2000 compliance status. Management believes that the Partnership's
reliance upon large volumes of independent consumer transactions at 100
restaurant locations, operation of its own trucking fleet and utilization of
the Dynamic Foods division to provide the majority of its food products limit
some aspects of the Partnership's Year 2000 exposure. However, the
Partnership's ability to assure Year 2000 compliance by many critical vendors
is very limited. Year 2000 failures by one or more of these vendors could
disrupt materially the ability of the Partnership to operate.
The Partnership is in the process of preparing contingency plans to
address the possibility of significant performance failures by its material
vendors, which will include an analysis of advisable cash and inventory levels
and identification of alternative suppliers of critical goods and services.
These plans are expected to be completed by June 30, 1999. There is no
Page 14
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assurance that the Partnership can adequately plan for contingencies that may
be associated with Year 2000 failures by these third parties, or that
alternative suppliers will be available and themselves unaffected by Year 2000
Problems. In particular, management is not able to predict with any assurance
the effect of Year 2000 Problems in the food product industry or among the
suppliers of utilities such as electricity, water and telecommunications to the
Partnership, and specifically to its Dynamic Foods operation. An interruption
of the operation of Dynamic Foods may require the Partnership to close its
restaurants until service can be resumed.
The discussion of the Partnership's efforts, and management's
expectations, relating to Year 2000 compliance includes certain statements that
may constitute "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995). Words such as "anticipate,"
"estimate," "project" and similar expressions are intended to identify such
forward-looking statements. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including without limitation
those discussed in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Should one or more of these risks
materialize, or should any of the underlying assumptions prove incorrect,
actual results of current and future operations may vary materially from those
anticipated, estimated or projected. Prospective investors are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of their dates. The Partnership assumes no obligation to update any such
forward-looking statements.
PART II
OTHER INFORMATION
Item 1. Legal Proceeding
(a) The Company filed a declaratory judgment lawsuit in State District
Court in Lubbock, Texas, in which it asks the Court to find that
the Company is not obligated to make severance payments that have
been demanded by Theodore Papit, the former President and CEO of
the Company. Mr. Papit submitted his resignation on May 28, 1998,
following the election at the Company's annual meeting of
shareholders of a slate of directors proposed by Teacher's
Insurance and Annuity Association of America ("TIAA"), the
Company's largest shareholder at that time. He subsequently
demanded payment of more than $500,000 of severance and other
amounts that he claimed were owing to him under a "President and
Chief Executive Officer Agreement" dated March 23, 1998. This
Agreement was approved by a split vote of the Board of Directors
after TIAA had publicly announced that it might take action
affecting the control of the Company. The Company has requested a
jury trial and believes that there are a number of grounds that
will support the Court in granting the requested relief, among them
being that the Agreement is void as an interested party transaction
that did not receive the necessary approval of independent,
disinterested directors, the terms of the Agreement are not fair to
the Company and the Agreement was entered into by the Company
without the benefit of full disclosure by Mr. Papit and
consideration by the Board of Directors of material information
regarding his management of the Company.
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(b) The Company and certain of its subsidiaries, the Cavalcade Pension
Plan, the Cavalcade Pension Plan Committee (consisting of Donald
Dodson, Kevin Lewis, Alton Smith and Carlene Stewart), Kmart
Corporation and its Pension Plan and Michael Levenson are
Defendants in a lawsuit brought against them in U.S. District Court
in Denver, Colorado by Robert H. Aull ("Plaintiff"), a former
employee of the Company and a participant in the Cavalcade Pension
Plan. The Plaintiff has requested that the Court certify a class
of other Plaintiffs who are similarly situated and seeks
unspecified damages.
The Plaintiff's allegations (all of which are disputed by the
Company) include: (i) that accrued benefits under the Cavalcade
Pension Plan have been improperly reduced, (ii) the "freeze" of the
Plan on June 30, 1989 was improper, (iii) an insufficient amount of
assets was transferred from the Kmart Pension Plan to the Cavalcade
Pension Plan in connection with the acquisition of the Company from
Kmart effected by Mr. Levenson and his affiliates, (iv) rent
concessions allowed to the Company by Kmart constituted prohibited
transactions that have bestowed illegal benefits upon the Company
and Mr. Lewis. The Court has deferred to February 1999 a scheduled
hearing on all pending motions in recognition of the expressed
desire of the parties to pursue mediation of the dispute with the
objective of achieving a settlement of all claims, which is
proceeding.
The Company has been defending this litigation vigorously.
Management believes that the Company, its affiliates and the Plan
Committee have meritorious defenses to the claims made by the
Plaintiff. Management also believes that the Cavalcade Pension
Plan is adequately funded to satisfy existing benefit levels and
that any increase in benefits that might result from this
litigation could be paid by the Plan from Plan assets or from
increased future contributions to the Plan in amounts that would
not have a material adverse effect on the financial condition or
results of operations of the Partnership. Because of the inherent
uncertainty of litigation, management cannot offer assurance that
the litigation will be resolved on terms that are favorable to the
Partnership or that will avoid the incurrence of material expense
by the Partnership.
Item 5. Other Information
(a) Registration and Listing of 12% Senior Secured Notes
The Partnership determined it would be in its best interest to
register the 12% Senior Secured Notes due December 31, 2001 (the
"12% Notes") with the Securities and Exchange Commission (the
"Commission") under the Securities and Exchange Act of 1934, as
amended, and to list the 12% Notes with the New York Stock
Exchange. The registration statement with respect to the 12% Notes
was filed with the Commission on September 29, 1998 and the 12%
Notes began trading on the New York Stock Exchange on October 28,
1998.
Page 16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 2, 1998 with respect to
the appointment of Phillip Ratner as President and Chief Executive
Officer of the Company and the related Employment Agreement, the
Indemnification Agreement and the Nonqualified Stock Option
Agreement between the Company and Mr. Ratner as of September 27,
1998.
The Board of Directors of the Company increased the size of the
board by one and elected Mr. Ratner to fill the newly created
opening.
Page 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAFETERIA OPERATORS, L.P.
by FURR'S/BISHOP'S, INCORPORATED, its Managing General Partner
BY: /s/Phillip Ratner /s/ Alton R. Smith
------------------------------ -----------------------------
Phillip Ratner Alton R. Smith
President and Chief Executive Officer Principal Accounting Officer
DATE: November 11, 1998
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CAFETERIA OPERATORS, L.P. FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD
ENDED SEPTEMBER 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-29-1998
<CASH> 10,960
<SECURITIES> 0
<RECEIVABLES> 735
<ALLOWANCES> 27
<INVENTORY> 6,735
<CURRENT-ASSETS> 19,388
<PP&E> 104,751
<DEPRECIATION> 54,673
<TOTAL-ASSETS> 82,820
<CURRENT-LIABILITIES> 27,998
<BONDS> 63,459
0
0
<COMMON> 0
<OTHER-SE> (21,618)
<TOTAL-LIABILITY-AND-EQUITY> 82,820
<SALES> 142,255
<TOTAL-REVENUES> 142,255
<CGS> 41,918
<TOTAL-COSTS> 41,918
<OTHER-EXPENSES> 93,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> 6,677
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,677
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
