<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-4578
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 18
Exhibit Index Located on Page 17
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CAFETERIA OPERATORS, L.P.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 28, 1999(Unaudited) and December 29, 1998 3
Unaudited Condensed Consolidated Statements
Of Operations - For the thirteen weeks ended
September 28, 1999 and September 29, 1998
5
Unaudited Condensed Consolidated Statements
of Operations - For the thirty-nine weeks
ended September 28, 1999 and September 29, 1998 6
Unaudited Condensed Consolidated Statement
of Stockholders' Deficit - For the thirty-nine weeks
ended September 28, 1999 7
Unaudited Condensed Consolidated Statements
of Cash Flows - For the thirty-nine weeks
ended September 28, 1999 and September 29, 1998 8
Notes to Unaudited Condensed Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 28, December 29,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,373 $ 11,478
Accounts and notes receivable, net 1,126 623
Inventories 6,990 7,014
Prepaid expenses and other 1,087 422
----------- ----------
Total current assets 15,576 19,557
Property, plant and equipment, net 53,471 48,320
Receivable from affiliates 13,389 12,991
Other assets 850 503
----------- ----------
$ 83,286 $ 81,371
----------- ----------
----------- ----------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
(Continued on following page)
3
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CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
September 28, December 29,
1999 1998
---- ----
(Unaudited)
LIABILITIES AND PARTNERS' DEFICIT
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 5,493 $ 5,493
Trade accounts payable 5,240 3,990
Other payables and accrued expenses 15,971 17,199
Reserve for store closings - current portion 1,147 1,316
----------- -----------
Total current liabilities 27,851 27,998
Reserve for store closings, net of current portion 2,662 3,280
Long-term debt, net of current portion 57,966 60,712
Other payables 16,017 15,586
Excess of future lease payments over fair value,
net of amortization 2,024 2,330
Contingencies
Partners' deficit (23,234) (28,535)
----------- ------------
$ 83,286 $ 81,371
----------- ------------
----------- ------------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
4
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CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------------------
September 28, September 29,
1999 1998
---- ----
<S> <C> <C>
Sales $ 47,788 $ 48,011
Costs and expenses:
Cost of sales (excluding depreciation) 14,552 14,152
Selling, general and administrative 28,228 29,082
Depreciation and amortization 2,432 2,538
45,212 45,772
------------ ------------
Operating income 2,576 2,239
Interest expense 85 62
------------ ------------
Net income $ 2,491 $ 2,177
------------ ------------
------------ ------------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
5
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CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
-------------------------------------------
September 28, September 29,
1999 1998
---- ----
<S> <C> <C>
Sales $ 140,987 $ 142,255
Costs and expenses:
Cost of sales (excluding depreciation) 42,164 41,918
Selling, general and administrative 85,421 85,927
Depreciation and amortization 7,303 7,557
Net special charges 566
------------ ------------
135,454 135,402
------------ ------------
Operating income 5,533 6,853
Interest expense 232 176
------------ ------------
Net income $ 5,301 $ 6,677
------------ ------------
------------ ------------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
6
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CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
General Limited Comprehensive Partners'
Partner Partner Income Deficit
----------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Balance at
December 29, 1998 $ (40,650) $ 12,972 $ (2,857) $ (28,535)
Net income 5,301 5,301
----------- ---------- ----------- ---------
Balance at
September 28, 1999 $ (35,349) $ 12,972 $ (2,857) $ (23,234)
----------- ---------- ----------- ---------
----------- ---------- ----------- ---------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
7
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CAFETERIA OPERATORS, L.P. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
-----------------------
September 28, September 29,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,301 $ 6,677
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,303 7,557
Gain on disposition of assets 148 (46)
Other, net 334 300
Changes in operating assets and liabilities:
Accounts and notes receivable (378) 148
Inventories 24 (697)
Prepaid expenses and other (647) 137
Trade accounts payable, other payables,
accrued expenses and other liabilities 22 2,476
-------- --------
Net cash provided by operating activities 11,811 16,552
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (15,495) (6,269)
Expenditures charged to reserve for store closings (940) (1,045)
Proceeds from the sale of property, plant and equipment 2,756 1,106
Other, net (19) 15
-------- --------
Net cash used in investing activities (13,698) (6,193)
-------- --------
Cash flows from financing activities:
Payment of indebtedness (2,746) (2,746)
Increase in receivables from affiliates (398) (1,247)
Other, net (74) 199
-------- --------
Net cash used in financing activities (3,218) (3,794)
-------- --------
Increase (decrease) in cash and cash equivalents (5,105) 6,565
Cash and cash equivalents at beginning of period 11,478 4,395
-------- --------
Cash and cash equivalents at end of period $ 6,373 $ 10,960
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Interest paid, including $2,746 of interest in 1999
and 1998 classified as payment of indebtedness $ 2,905 $ 2,850
-------- --------
-------- --------
Non-cash investing activity:
Note receivable for sale of asset $ 125 $ -
-------- --------
-------- --------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
8
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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 Partnership's Form 10-K for the year ended December
29, 1998. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation.
The results of operations for the thirty-nine weeks ended September 28,
1999 may not be indicative of the results that may be expected for the fiscal
year ending December 28, 1999.
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,
no provision for income taxes is reflected in the accompanying financial
statements.
NOTE C: Special Charges
For the quarter ended March 30, 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.
9
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NOTE D: Business Segments
Following is a summary of segment information of the Partnership for the
thirteen weeks ended September 28, 1999 and September 29, 1998:
<TABLE>
<CAPTION>
Cafeterias Dynamic Foods Total
---------- ------------- ------------
<S> <C> <C> <C>
1999:
External revenues $ 47,425 $ 363 $ 47,788
Intersegment revenues - 15,115 15,115
Depreciation and amortization 2,196 236 2,432
Segment profit 2,445 46 2,491
1998:
External revenues 47,757 254 48,011
Intersegment revenues - 14,925 14,925
Depreciation and amortization 2,335 203 2,538
Segment profit 1,755 422 2,177
</TABLE>
Following is a summary of segment information of the Partnership for the
thirty-nine weeks ended September 28, 1999 and September 29, 1998:
<TABLE>
<CAPTION>
Cafeterias Dynamic Foods Total
---------- ------------- ------------
<S> <C> <C> <C>
1999:
External revenues $ 140,120 $ 867 $ 140,987
Intersegment revenues - 44,794 44,794
Depreciation and amortization 6,591 712 7,303
Segment profit 4,665 636 5,301
1998:
External revenues 141,480 775 142,255
Intersegment revenues - 43,616 43,616
Depreciation and amortization 6,943 614 7,557
Segment profit 5,565 1,112 6,677
</TABLE>
Following is a reconciliation of revenue of the reportable segments to the
Partnership's consolidated totals for the thirteen and thirty-nine weeks ended
September 28, 1999 and September 29, 1998:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- ------------------------
September 28, September 29, September 28, September 29,
1999 1998 1999 1998
------------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Revenues
Total revenues of reportable segments $ 62,903 $ 62,936 $ 185,781 $ 185,871
Elimination of inter-segment revenue (15,115) (14,925) (44,794) (43,616)
------------ ---------- ---------- ----------
Total consolidated revenues $ 47,788 $ 48,011 $ 140,987 $ 142,255
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
10
<PAGE>
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 of operations or
cash flows.
NOTE F: Contingencies
As discussed in Part II, Item 1 of this report on Form 10-Q and in the
Partnership's 1998 Form 10-K, the Partnership, in the ordinary course of
business, is a party to various legal action. In the opinion of management,
these actions ultimately will be disposed of in a manner which will not have a
material adverse effect upon the Partnership's equity, results of operations,
and liquidity and capital resources after consideration of the applicable
amounts previously accrued.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1999 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 1998
RESULTS OF OPERATIONS. Sales for the third fiscal quarter of 1998 were
$47.8 million, a decrease of $223 thousand from the same quarter of 1998.
Operating income for the third quarter of 1999 was $2.6 million compared to
$2.2 million in the comparable period in the prior year. The net income for
the third quarter of 1999 was $2.5 million compared to $2.2 million in the
third quarter of 1998.
SALES. Restaurant sales in comparable units were 1.6% higher in the
third quarter of 1999 than the same quarter of 1998 due primarily to the
Partnership's reimaging program. Sales for the third fiscal quarter were $333
thousand lower than the same period of the prior year due to there being a
net of three fewer units included in the operating results. Sales by Dynamic
Foods to third parties were $109 thousand higher in the third quarter of 1999
than the third quarter of the prior year.
COST OF SALES. Excluding depreciation, cost of sales was 30.5% of sales
for the third quarter of 1999 as compared to 29.5% for the same quarter of
1998. Fish costs in the current period were significantly higher than the
prior year period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was lower in the aggregate by $854 thousand in the third
quarter of 1999 as compared to 1998. Changes in SG&A expense included increases
of $250 thousand in marketing expense and $230 thousand in labor and related
expense. Other changes in SG&A expense included decreases of $1.3 million in
workers' comp and casualty insurance expense due to improved risk management
efforts and claims experience.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
lower by $106 thousand in the third quarter of 1999 due primarily to the
writing off of property, plant and equipment lacking a useful life in
restaurants being remodeled during the current year.
INTEREST EXPENSE. Interest expense was $85 thousand in the third quarter
of 1999, which was $23 thousand higher than the comparable period in the
prior year. In accordance with SFAS No. 15, the 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.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 1998
RESULTS OF OPERATIONS. Sales for the first thirty-nine weeks of 1999
were $141.0 million, a decrease of $1.3 million from the same period of 1998.
Operating income for the first thirty-nine weeks of 1999 was $5.5 million
compared to $6.9 million in the comparable period in the prior year.
Operating income for the thirty-nine weeks of 1999 included a special charge
of $566 thousand. The net income for the first thirty-nine weeks of 1999 was
$5.3 million compared to $6.7 million in the same period of 1998.
SALES. Restaurant sales in comparable units were 1.8% higher in the
first thirty-nine weeks of 1999 than the same period of 1998 due primarily to
the Partnership's reimaging program. Sales for the first thirty-nine weeks
were $1.4 million lower than the same period of the prior year due to there
being a net of three fewer units included in operating results. Sales by
Dynamic Foods to third parties were $92 thousand higher in the first
thirty-nine weeks of 1999 than the same period of the prior year.
COST OF SALES. Excluding depreciation, cost of sales was 29.9% of sales
for the first thirty-nine weeks of 1998 as compared to 29.5% for the same
period of 1998. Fish costs in the current period were significantly higher
than the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was lower in the aggregate by $506 thousand in the first
thirty-nine weeks of 1999 as
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compared to 1998. Changes in SG&A expense included increases in 1999 of $1.3
million in labor and related expense and $475 thousand in marketing expense.
Other changes in SG&A expense included decreases of $1.8 million in workers'
comp and casualty insurance expense due to improved risk management efforts and
claims experience.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
lower by $254 thousand in the first thirty-nine weeks of 1999 due primarily to
the writing off of property, plant and equipment lacking a useful life in
restaurants being remodeled during the current year.
SPECIAL CHARGES. Operating income for the thirty-nine weeks ended
September 28, 1999 included a special charge of $566 thousand to reflect the
cost of the move of the Partnership's support center from Lubbock, Texas to
Richardson, Texas.
INTEREST EXPENSE. Interest expense was $232 thousand in the first
thirty-nine weeks of 1999, which was $56 thousand higher than the comparable
period in the prior year. In accordance with Statement of Financial
Accounting Standards No. 15, the 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 thirty-nine weeks ended September 28, 1999, cash provided by
operating activities of the Partnership was $11.8 million compared to $16.6
million in the same period of 1998. The Partnership made capital expenditures
of $15.5 million during the first thirty-nine weeks of 1999 compared to $6.3
million during the same period of 1998. Most of the increase over the prior
year related to the remodels of twenty cafeterias. Cash and cash equivalents
were $6.4 million at September 28, 1999 compared to $11.5 million at
September 29, 1998. The current ratio of the Partnership was .56:1 at
September 28, 1999 compared to .69:1 at September 29, 1998 and .70:1 at
December 29, 1998. The Partnership's total assets at September 28, 1999
aggregated $83.3 million, compared to $82.8 million at September 29, 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. The
semi-annual interest payments of $2.7 million on the 12% Notes are due on
each March 31 and September 30. The obligations under the 12% Notes are
secured by a security interest in and a lien on all of the personal property
of the Partnership and mortgages on all fee and leasehold properties of the
Partnership (to the extent such properties are mortgageable).
The Partnership has outstanding $2.5 million of 10.5% Notes due December
31, 2001. A
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semi-annual cash interest payment of approximately $134 thousand is due on each
June 30 and December 31.
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 completed the modification, upgrading, and
replacing of the digital systems that have been identified as adversely
affected by Y2K. The Partnership's total costs of this effort during the 1998
and 1999 fiscal years has been approximately $400 thousand, which is being
funded through operating cash flows.
The Year 2000 Problem may also affect parties who provide critical goods
and services to the 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
has evaluated the extent to which the Partnership's operations are vulnerable
to Year 2000 problems of its material vendors and has sought assurance of
their Year 2000 compliance status. Management believes that the 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 has sent Y2K readiness questionnaires to all of its
major vendors. Although not all vendors have provided the Partnership with
Year 2000 compliance assurances, the Partnership does not anticipate any
material problems with its major vendors. However, the Partnership has
completed contingency plans to address the possibility of significant
performance failures by its major vendors. 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.
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
14
<PAGE>
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.
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 Pension Plan in
connection with the acquisition of the Company from Kmart effected by
Mr. Levenson and his affiliates in 1988 and (iv) rent concessions
allowed to the 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
Company.
The Partnership, the Cavalcade Pension Plan, the members of the
Cavalcade Pension Plan Committee, Kmart Corporation and its pension
plan have entered into a definitive settlement agreement (the
"Agreement") with the plaintiff and his counsel that would resolve
all outstanding claims among them. The Agreement is subject to (1)
confirmation by an independent actuary of the calculations that
support the proposed settlement and (2) approval of the settlement
as "fair" to all members of the plaintiff class by the court after
notice to all purported class members and a hearing. The Agreement
has been filed with the court. The 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 proposed settlement on the
Partnership includes payment in 2000 of approximately $1.5 million
of expenses for legal and professional fees, with the remainder of
the settlement to be paid to the Plan in future years to fund
increased benefit payments to former and current employees. The
settlement will not require any funding payments to the Plan by the
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.
16
<PAGE>
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 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 American
("TIAA"), the Company's largest shareholder at that time. He
subsequently demanded payment of more than $500 thousand of
severance and other amounts that he claimed were owing to him under
a "President and Chief Executive Officer Agreement" dated March 23,
1998. This Agreement was approved by a split vote of the Board of
Directors after TIAA had publicly announced that it might take
action affecting the control of the Company. The 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27-Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
September 28, 1999.
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/ Paul G. Hargett
---------------------------------- --------------------------
Phillip Ratner Paul G. Hargett
President and Chief Executive Officer Chief Financial Officer
DATE: November 9, 1999
18
<TABLE> <S> <C>
<PAGE>
<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
28, 1999 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-28-1999
<PERIOD-START> DEC-30-1998
<PERIOD-END> SEP-28-1999
<CASH> 6,373
<SECURITIES> 0
<RECEIVABLES> 1,143
<ALLOWANCES> 17
<INVENTORY> 6,990
<CURRENT-ASSETS> 15,576
<PP&E> 111,897
<DEPRECIATION> 58,426
<TOTAL-ASSETS> 83,286
<CURRENT-LIABILITIES> 27,851
<BONDS> 57,966
0
0
<COMMON> 0
<OTHER-SE> (23,234)
<TOTAL-LIABILITY-AND-EQUITY> 83,286
<SALES> 140,987
<TOTAL-REVENUES> 140,987
<CGS> 42,164
<TOTAL-COSTS> 42,164
<OTHER-EXPENSES> 93,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 5,301
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,301
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
