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 June 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-10725
CAFETERIA OPERATORS, L.P.
INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION
NO.75-2186655
3001 E. PRESIDENT GEORGE BUSH HIGHWAY, SUITE 200, RICHARDSON, TX 75082
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 808-2923
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
- -------------------------------------------------------------------------------
Page 1 of 19
<PAGE>
CAFETERIA OPERATORS, L.P.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 29, 1999(Unaudited) and December 29, 1998 3
Unaudited Condensed Consolidated Statements
Of Operations - For the thirteen weeks
ended June 29, 1999 and June 30, 1998 5
Unaudited Condensed Consolidated Statements
of Operations - For the twenty-six weeks
ended June 29, 1999 and June 30, 1998 6
Unaudited Condensed Consolidated Statement
of Partners' Deficit - For the twenty-six weeks
ended June 29, 1999 7
Unaudited Condensed Consolidated Statements
of Cash Flows - For the twenty-six weeks
ended June 29, 1999 and June 30, 1998 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 16
SIGNATURES
Page 2
<PAGE>
<TABLE>
CAFETERIA OPERATORS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value amounts)
<CAPTION>
June 29, December 29,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,403 $ 11,478
Accounts and notes receivable, net 999 623
Inventories 6,680 7,014
Prepaid expenses and other 1,114 442
----------- -----------
Total current assets
18,196 19,557
Property, plant and equipment, net 49,237 48,320
Receivable from affiliates 13,182 12,991
Other assets 841 503
----------- -----------
$ 81,456 $ 81,371
=========== ===========
</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, except par value amounts)
<CAPTION>
June 29, December 29,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Liabilities and Partners' Deficit
Current liabilities:
Current maturities of long-term debt $ 5,493 $ 5,493
Trade accounts payable 4,482 3,990
Other payables and accrued expenses 17,019 17,199
Reserve for store closings - current 1,193 1,316
----------- -----------
Total current liabilities 28,187 27,998
Reserve for store closings, net of current portion 2,868 3,280
Long-term debt, net of current portion 57,966 60,712
Other payables 16,032 15,586
Excess of future lease payments over fair value,
net of amortization 2,128 2,330
Contingencies
Partners' deficit (25,725) (28,535)
----------- -----------
$ 81,456 $ 81,371
=========== ===========
</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, except per share amounts)
<CAPTION>
Thirteen weeks ended
-------------------------
June 29, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Sales $ 47,196 $ 48,032
Costs and expenses:
Cost of sales (excluding depreciation) 13,953 14,218
Selling, general and administrative 29,346 28,909
Depreciation and amortization 2,444 2,510
----------- -----------
45,743 45,637
----------- -----------
Operating income 1,453 2,395
Interest expense 75 70
----------- -----------
Net income $ 1,378 $ 2,325
=========== ===========
</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, except per share amounts)
<CAPTION>
Twenty-six weeks ended
-------------------------
June 29, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Sales $ 93,199 $ 94,244
Costs and expenses:
Cost of sales (excluding depreciation) 27,612 27,766
Selling, general and administrative 57,193 56,845
Depreciation and amortization 4,871 5,019
Special charge 566 -
----------- -----------
90,242 89,630
----------- -----------
Operating income 2,957 4,614
Interest expense 147 114
----------- -----------
Net income $ 2,810 $ 4,500
=========== ===========
</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 TWENTY-SIX WEEKS ENDED June 29, 1999
(dollars in thousands)
<CAPTION>
Accumulated
Other Total
General Limited Comprehensive Partner's
Partner Partner Loss Deficit
--------- --------- --------------- -----------
<S> <C> <C> <C> <C>
Balance at
December 29, 1998 $ (40,650) $ 14,972 $ (2,857) $ (28,535)
Net income 2,810 2,810
--------- --------- --------------- -----------
Balance at
June 29, 1999 $ (37,840) $ 14,972 $ (2,857) $ (25,725)
========= ========= =============== ===========
</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>
Twenty-six weeks ended
-------------------------
June 29, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,810 $ 4,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,871 5,019
Gain on disposition of assets (208) (42)
Other, net 358 237
Changes in operating assets and liabilities:
Accounts and notes receivable (251) 13
Inventories 334 74
Prepaid expenses and other (672) (505)
Trade accounts payable, other payables,
accrued expenses and other liabilities 311 1,487
----------- -----------
Net cash provided by operating activities 7,553 10,783
----------- -----------
Cash flows used in investing activities:
Purchases of property, plant and equipment (8,124) (4,155)
Expenditures charged to reserve for store closings (649) (669)
Proceeds from the sale of property, plant and
equipment 2,215 1,100
Other, net (15) 14
----------- -----------
Net cash used in investing activities (6,573) (3,710)
----------- -----------
Cash flows used in financing activities:
Payment of indebtedness (2,746) (2,746)
Increase in receivable from affiliates (191) (772)
Other, net (118) (23)
----------- -----------
Net cash used in financing activities (3,055) (3,541)
----------- -----------
Increase in cash and cash equivalents (2,075) 3,532
Cash and cash equivalents at beginning of period 11,478 4,395
----------- -----------
Cash and cash equivalents at end of period $ 9,403 $ 7,927
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid, including $2,746 of interest in 1999
and 1998 classified as payment of indebtedness $ 2,887 $ 2,748
=========== ===========
</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 97 cafeterias and a buffet. 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 Company's Form 10-K for the year ended December 29, 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 twenty-six weeks ended June 29, 1999 may
not be indicative of the results that may be expected for the fiscal year
ending December 28, 1999.
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 the individual partners.
Accordingly, no provision for income taxes is reflected in the accompanying
financial statements.
NOTE C: Special Charges
For the twenty-six weeks ended June 29, 1999, the Partnership recognized a
special charge of $566,000 for the costs associated with the move of the
Partnership's support center from Lubbock, Texas to Richardson, Texas.
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<PAGE>
NOTE D: Business Segments
Following is a summary of segment information of the Partnership for the
thirteen weeks ended June 29, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Cafeterias Dynamic Foods Total
---------- ------------- ----------
<S> <C> <C> <C>
1999:
External revenues $ 46,933 $ 263 $ 47,196
Intersegment revenues - 15,083 15,083
Depreciation and amortization 2,209 235 2,444
Segment profit 1,012 366 1,378
1998:
External revenues 47,761 271 48,032
Intersegment revenues - 14,572 14,572
Depreciation and amortization 2,306 208 2,514
Segment profit 1,963 362 2,325
</TABLE>
Following is a summary of segment information of the Partnership for the
twenty-six weeks ended June 29, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Cafeterias Dynamic Foods Total
---------- ------------- ----------
<S> <C> <C> <C>
1999:
External revenues $ 92,696 $ 503 $ 93,199
Intersegment revenues - 29,678 29,678
Depreciation and amortization 4,395 476 4,871
Segment profit 1,947 590 2,537
1998:
External revenues 93,723 521 94,244
Intersegment revenues - 28,691 28,691
Depreciation and amortization 4,616 411 5,027
Segment profit 2,853 690 3,543
</TABLE>
Page 10
<PAGE>
Following is a reconciliation of reportable segments to the Partnership's
consolidated totals for the thirteen and twenty-six weeks ended June 29, 1999
and June 30, 1998:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Total revenues of
reportable segments $ 62,279 $ 62,604 $ 122,877 $ 122,935
Elimination of
inter-segment revenue (15,083) (14,572) (29,678) (28,691)
---------- ---------- ---------- ----------
Total consolidated
revenues $ 47,196 $ 48,032 $ 93,199 $ 94,244
========== ========== ========== ==========
</TABLE>
NOTE E: New Accounting Pronouncements
On January 1, 1999, the Partnership adopted the American Institute of
Certified Public Accountants Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires companies to capitalize certain internal-use software costs once
certain criteria are met. Adoption of this statement did not have a material
impact on the Partnership's consolidated financial position, results of
operations or cash flows.
On January 1, 1999, the Partnership adopted the American Institute of
Certified Public Accountants SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires costs of start-up activities to be expensed
when incurred. Adoption of this statement did not have a material impact on
the Partnership's consolidated financial position, results or operations or
cash flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended June 29, 1999 Compared to Thirteen Weeks Ended June 30,
1998
Results of operations. Sales for the second fiscal quarter of 1999 were
$47.2 million, a decrease of $836 thousand from the same quarter of 1998.
Operating income for the second quarter of 1999 was $1.5 million compared to
operating income of $2.4 million in the comparable period in the prior year.
The net income for the second quarter of 1999 was $1.4 million compared to net
income of $2.3 million in the second quarter of 1998.
Sales. Restaurant sales in comparable units were .93% higher in the second
quarter of 1999 than the same quarter of 1998. Sales for the second fiscal
quarter were $828 thousand lower than the same period of the prior year due to
Page 11
<PAGE>
there being a net of three fewer units included in the operating results.
Sales by Dynamic Foods to third parties were $8 thousand lower in the second
quarter of 1999 than the second quarter of the prior year.
Cost of sales. Excluding depreciation, cost of sales was 29.6% of sales
for the second quarter of 1999 and the same quarter of 1998.
Selling, general and administrative. Selling, general and administrative
("SG&A") expense was higher in the aggregate by $437 thousand in the second
quarter of 1999 as compared to 1998. Changes in SG&A expense included
increases of $254 thousand in professional services and $303 thousand in labor
and related expense. Other changes in SG&A expense included a decrease of $146
thousand in utility expense. Included in 1999 professional services are $100
thousand of contract employment created by the move of the Partnership's
support center.
Depreciation and amortization. Depreciation and amortization expense was
lower by $66 thousand in the second quarter of 1999 due primarily to lower
depreciation on property, plant and equipment previously written down in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121.
Interest expense. Interest expense was $75 thousand in the second quarter
of 1999, which was slightly higher than the comparable period in the prior
year. In accordance with SFAS 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.
Twenty-six Weeks Ended June 29, 1999 Compared to Twenty-six Weeks Ended June
30, 1998
Results of operations. Sales for the first twenty-six weeks of 1999 were
$93.2 million, a decrease of $1.0 million from the same period of 1998.
Operating income for the first twenty-six weeks of 1999 was $3.0 million
compared to operating income of $4.6 million in the comparable period in the
prior year. The operating income for the twenty-six weeks of 1999 included a
special charge of $566 thousand. The net income for the first twenty-six weeks
of 1999 was $2.8 million compared to 4.5 million in the same period of 1998.
Sales. Restaurant sales in comparable units were 1.94% higher in the first
twenty-six weeks of 1999 than the same period of 1998. Sales for the first
twenty-six weeks were $1.0 million lower than the same period of the prior year
due to there being a net of four fewer units included in operating results.
Sales by Dynamic Foods to third parties were $19 thousand lower in the first
twenty-six weeks of 1999 than the same period of the prior year.
Cost of sales. Excluding depreciation, cost of sales was 29.6% of sales
for the first twenty-six weeks of 1999 as compared to 29.5% for the same period
of 1998.
Selling, general and administrative. Selling, general and administrative
("SG&A") expense was higher in the aggregate by $348 thousand in the first
twenty-six weeks of 1999 as compared to 1998. Changes in SG&A expense included
increases of $574 thousand of labor and related expense and $146 thousand of
marketing expense. Other changes in SG&A expense included a decrease in 1999
of $377 thousand in utility expense.
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<PAGE>
Depreciation and amortization. Depreciation and amortization expense was
lower by $148 thousand in the first twenty-six weeks of 1999 due primarily to
lower depreciation on property, plant and equipment previously written down in
accordance with SFAS121.
Special charge. Operating income for the quarter ended March 30, 1999
included a special charge of $566 thousand to reflect the cost of the move of
the Partnership's support center from Lubbock, Texas to Richardson, Texas.
Interest expense. Interest expense was $147 thousand in the first
twenty-six weeks of 1999, which was higher 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.
LIQUIDITY AND CAPITAL RESOURCES OF
CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
During the twenty-six weeks ended June 29, 1999, cash provided by operating
activities of the Partnership was $7.6 million compared to $10.8 million in the
same period of 1998. The Partnership made capital expenditures of $8.1 million
during the first twenty-six weeks of 1999 compared to $4.2 million during the
same period of 1998. Cash and cash equivalents were $9.4 million at June 29,
1999 compared to $7.9 million at June 30, 1998. The current ratio of the
Partnership was .65:1 at June 29, 1999 compared to .60:1 at June 30, 1998 and
.70:1 at December 29, 1998. The Partnership's total assets at June 29, 1999
aggregated $81.5 million, compared to $79.9 million at June 30, 1998 and $81.4
million at December 29, 1998.
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 1999, $5.5 million in
2000, and $55.3 million in 2001.
The Partnership has outstanding $61.0 million of 12% Notes due December 31,
2001, which includes $15.1 million of interest to maturity. Under the terms of
the indenture covering the 12% Notes, a semi-annual cash interest payment of
approximately $2.7 million is due on each March 31 and September 30. The
obligations of the Partnership under the 12% Notes are secured by a security
interest in and a lien on all of the personal property of the Partnership and
mortgages on all fee and leasehold properties of the Partnership (to the extent
such properties are mortgageable).
The 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.
Page 13
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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 substantially completed the modification,
upgrading, and replacing of the digital systems that have been identified as
adversely affected by Y2K. The balance of these efforts will be completed by
September 30, 1999. The Partnership is awaiting the release of the most
current software from its accounting software vendor in August 1999 to finalize
systems testing. The Partnership estimates that the total costs of this effort
during the 1998 and 1999 fiscal years will be less than $500 thousand, 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 A
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.
The Partnership is in the process of completing contingency plans to
address the possibility of significant performance failures by its material
vendors. The material vendors have been identified and contingency plans
developed for the products they provide. Final documentation of a detailed
contingency plan for these vendors will be completed by August 31, 1999. There
is no 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 could require the Partnership to close its
restaurants until service can be resumed.
Page 14
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Quantitative and Qualitative Disclosure about Market Risk
The Partnership is exposed to market risk from changes in commodity prices.
The Partnership purchases certain commodities used in food preparation. These
commodities are generally purchased based upon market prices established with
vendors. These purchase arrangements may contain contractual features that
limit the price paid by establishing certain price floors or caps. The
Partnership does not use financial instruments to hedge commodity prices
because these purchase arrangements help control the ultimate cost paid and any
commodity price aberrations are generally short term in nature.
The Partnership's long term debt does not expose it to market risk as all
interest accrues at fixed rates. The Partnership does not use derivative
financial instruments to manage overall borrowing costs.
The discussion in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" of the Partnership's plans, and
management's expectations, relating to the Partnership's business, including
Year 2000 compliance, as well as other portions of this report, includes
certain statements that may constitute "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). Words such
as "anticipate," "estimate," "project" and similar expressions are intended to
identify such forward-looking statements. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including without
limitation those discussed in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report.
Should one or more of these risks materialize, or should any of the underlying
assumptions prove incorrect, actual results of current and future operations
may vary materially from those anticipated, estimated or projected.
Prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The
Partnership assumes no obligation to update any such forward-looking
statements.
Page 15
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Partnership and certain of its subsidiaries, the Cavalcade Pension
Plan, the Cavalcade Pension Plan Committee, Kmart Corporation and its
pension plan and Michael Levenson have since 1996 been defendants in a
lawsuit brought against them in U.S. District Court in Denver,
Colorado by Robert H. Aull ("Plaintiff"), a former employee of the
Partnership and a participant in the Cavalcade Pension Plan. The
Plaintiff requested that the Court certify a class of other plaintiffs
who are similarly situated and sought unspecified damages.
The Plaintiff's allegations (all of which are disputed by the
defendants in the case) included: (i) that accrued benefits under the
Cavalcade Pension Plan were improperly reduced during the period from
1988 to 1993, (ii) the "freeze" of the Plan on June 30, 1989 was
improper, (iii) an insufficient amount of assets was transferred from
the Kmart Corporation pension plan to the Cavalcade PensionPlan in
connection with the acquisition of the Partnership from Kmart effected
by Mr. Levenson and his affiliates in 1988 and (iv) rent concessions
allowed to the Partnership by Kmart commencing in 1993 constituted
prohibited transactions that bestowed illegal benefits upon the
Partnership and Mr. Kevin Lewis, former Chairman of the Board of the
Partnership.
The Partnership, the Cavalcade Pension Plan, the members of the
Cavalcade Pension Plan Committee, Kmart Corporation and its pension
plan have entered into definitive settlement agreement (the
"Agreement") with the plaintiff and his counsel that would resolve all
outstanding claims among them. The Agreement is subject to (1)
confirmation by an independent actuary of the calculations that
support the proposed settlement and (2) approval of the settlement as
"fair" to all members of the plaintiff class by the court after notice
to all purported class members and a hearing. The Agreement has
been filed with the court. The Partnership expected the required
hearing would be completed by the end of the second quarter of 1999.
Delays in obtaining confirmation by the independent actuary have
delayed the likely date of the fairness hearing to the fourth quarter
of 1999. The Partnership is not able to provide assurance that the
conditions to the proposed settlement will be satisfied or that the
proposed settlement will be implemented as described herein.
As a result of the settlement of the Aull litigation and the
concurrent resolution of an IRS audit of the Plan that focused on
substantially identical issues, the Partnership has recognized a
special charge of $5.8 million in the fourth quarter of 1998, of which
approximately $2.2 million relates to resolution of the IRS audit and
is not contingent upon actuarial review or the fairness hearing in the
Aull litigation.
The anticipated cash impact of the settlement on the Partnership
includes payment in 1999 of approximately $1.5 million of expenses for
legal and professional fees, with the remainder of the settlement to
be paid to the Plan in future years to fund increased benefit payments
to former and current employees. The settlement will not require any
Page 16
<PAGE>
funding payments to the Plan by the Partnership in 1999 but is
expected to require payments by the Partnership to the Plan of
approximately $1.7 million in 2000 and approximately $850 thousand in
2001, with additional funding payments required in subsequent years in
amounts that are expected to decline over time, subject to the overall
funding status of the Plan. The Agreement provides for Kmart
Corporation's pension plan to transfer $700 thousand to the Cavalcade
Pension Plan to fund a portion of the additional benefits required by
the Agreement. Management does not believe that payment of these
amounts in 1999 and subsequent years will have a material adverse
effect on the Partnership's planned operations.
The Partnership filed a declaratory judgement lawsuit in the State
District Court in Lubbock, Texas, in which it asks the Court to find
that the Partnership is not obligated to make severance payments that
have been demanded by Theodore Papit, the former President and CEO of
the Partnership. Mr. Papit submitted his resignation on May 28, 1998,
following the election at the Partnership's annual meeting of
shareholders of a slate of directors proposed by Teacher's Insurance
and Annuity Association of American ("TIAA"), the Partnership's
largest shareholder at that time. He subsequently demanded
payment of more than $500 thousand of severance and other amounts that
he claimed were owing to him under a "President and Chief Executive
Officer Agreement" dated March 23, 1998. This Agreement was approved
by a split vote of the Board of Directors after TIAA had publicly
announced that it might take action affecting the control of the
Partnership. The Partnership 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 Partnership and the
Agreement was entered into by the Partnership without the benefit of
full disclosure by Mr. Papit and consideration by the Board of
Directors of material information regarding his management of the
Partnership.
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Stockholders was held on May 20, 1999. At
the meeting, stockholders voted to elect ten directors to serve
one-year terms; to increase the aggregate number of shares of common
stock of the Partnership authorized for issuance under the 1995 Stock
Option Plan by 1,200,000; to amend the Partnership's Certificate of
Incorporation to effect a one-for-ten reverse stock split; and to
amend the Partnership's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 65 million to 150
million.
Page 17
<PAGE>
Following is a summary of the votes cast for each director nominee:
Jacob C. Baum 30,110,843
Ben Evans 30,113,142
Margaret B. Hampton 24,635,105
Suzanne Hopgood 30,111,018
Damien Kovary 30,110,871
William J. Nightingale 30,111,105
Gilbert C. Osnos 30,113,002
Max Pine 30,113,150
Phillip Ratner 30,112,625
Barry W. Ridings 30,109,466
Following is a summary of the tabulation of the vote for increasing
the aggregate number of common stock shares issued under the 1995
Stock Option Plan:
For Against
---------- ---------
28,961,540 1,342,853
Following is a summary of the tabulation of the vote for a one-for-ten
reverse stock split:
For Against
---------- ---------
29,413,150 898,595
Following is a summary of the tabulation of the vote for increasing
the number of authorized shares of Common Stock:
For Against
---------- ---------
28,942,893 1,366,039
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
No reports on Form 8K were filed during the quarter ended June 29,
1999.
Page 18
<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/ Paul G. Hargett
----------------------------- -----------------------------
Phillip Ratner Paul G. Hargett
President and Chief Executive Officer Chief Financial Officer
DATE: August 11, 1999
Page 19
<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 JUNE 29, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1999
<PERIOD-START> DEC-30-1998
<PERIOD-END> JUN-29-1999
<CASH> 9,403
<SECURITIES> 0
<RECEIVABLES> 1,016
<ALLOWANCES> 17
<INVENTORY> 6,680
<CURRENT-ASSETS> 18,196
<PP&E> 106,021
<DEPRECIATION> 56,784
<TOTAL-ASSETS> 81,456
<CURRENT-LIABILITIES> 28,187
<BONDS> 57,966
0
0
<COMMON> 0
<OTHER-SE> (25,725)
<TOTAL-LIABILITY-AND-EQUITY> 81,456
<SALES> 93,199
<TOTAL-REVENUES> 93,199
<CGS> 27,612
<TOTAL-COSTS> 27,612
<OTHER-EXPENSES> 62,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 2,810
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,810
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
