<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended April 30, 1998 Commission file number 0-23496
-------------- -------
KFC National Purchasing Cooperative, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-0946155
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
950 Breckenridge Lane, Louisville, KY 40207
- --------------------------------------------------------------------------------
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (502) 896-5900
--------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 .
------- -----
Number of shares of common stock outstanding as of May 31, 1998
------------
Membership Common Stock 675
Store Common Stock 6412
1
<PAGE> 2
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT FORM 10-Q
<TABLE>
<CAPTION>
Part 1 - Financial Information
Page (s)
--------
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Income
and Expenses
Three months ended April 30, 1998 and 1997 3
Condensed Consolidated Statements of Income
and Expenses
Six months ended April 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets
April 30, 1998 and October 31, 1997 5
Consolidated Statements of Cash Flows
Six months ended April 30, 1998 and 1997 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II - Other Information
Item 4 Submission of Matters to a Vote of Security - Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
2
<PAGE> 3
Part I - Financial Information
- -----------------------------------
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Expenses
For the three months ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Net sales $153,740,546 137,125,725
Cost of goods sold 149,623,336 133,389,338
------------ -----------
Gross profit 4,117,210 3,736,387
Selling, general and administrative expenses 3,561,344 3,025,150
Provision for losses on receivables 52,505 38,822
Other income (expenses):
Service charges 48,262 14,096
Interest income 104,868 105,121
Interest expense (62,071) (65,724)
Miscellaneous 13,620 25,890
------------ -----------
104,679 79,383
------------ -----------
Income before patronage
dividend and income taxes 608,040 751,798
Patronage dividend 427,717 492,590
------------ -----------
Income before income taxes 180,323 259,208
Provision for income taxes 87,571 125,212
------------ -----------
Net income $ 92,752 133,996
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
Part I - Financial Information
- ----------------------------------
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Expenses
For the six months ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Net sales $303,320,196 273,983,392
Cost of goods sold 295,047,577 266,614,335
------------ -----------
Gross profit 8,272,619 7,369,057
Selling, general and administrative expenses 6,774,658 5,878,636
Provision for losses on receivables 95,011 77,750
Other income (expenses):
Service charges 93,002 28,263
Interest income 177,132 213,906
Interest expense (126,805) (140,342)
Miscellaneous 42,337 50,962
------------ -----------
185,666 152,789
------------ -----------
Income before patronage
dividend and income taxes 1,588,616 1,565,460
Patronage dividend 1,306,127 1,015,339
------------ -----------
Income before income taxes 282,489 550,121
Provision for income taxes 123,911 244,263
------------ -----------
Net income $ 158,578 305,858
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Assets April 30 October 31,
------ 1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,242,890 160,065
Accounts receivable, less allowance for
losses of $1,500,560 at April 30, 1998 39,917,410 41,039,523
and $1,408,727 at October 31, 1997
Inventories:
Food 1,868,978 1,661,623
Equipment and promotional items 1,372,406 3,852,811
------------ ------------
3,241,384 5,514,434
------------ ------------
Current portion of note receivable from related party 60,000 60,000
Prepaid expenses and other current assets 299,981 129,885
Current portion of deferred income taxes 635,178 614,294
------------ ------------
Total Current Assets 47,396,843 47,518,201
------------ ------------
Office equipment, net 738,635 659,945
Investment in marketable equity security available for sale 63,500 0
Note receivable from related party, excluding current portion 117,948 117,948
Note receivable, excluding current portion 0 831,789
Deferred income taxes, excluding current portion 130,301 108,028
Other assets 524,062 564,429
------------ ------------
Total Assets $ 48,971,289 49,800,340
============ ============
Liabilities and Member's Equity
-------------------------------
Current Liabilities:
Short-term borrowings $ 1,291,939 572,394
Accounts payable 22,574,224 21,124,259
Accrued expenses 2,599,558 4,298,449
Premium deposits 328,807 328,807
Patronage dividend 1,306,151 2,890,324
------------ ------------
Total Current Liabilities 28,100,679 29,214,233
------------ ------------
Long-term note payable 3,000,000 3,000,000
------------ ------------
Commitments and Contingencies
Members' Equity:
Membership common stock 6,700 6,650
Store common stock 1,823,374 1,700,490
Unrealized gain on marketable equity security 9,125 0
Retained earnings 16,088,429 15,929,848
Currency translation adjustment (57,018) (50,881)
------------ ------------
17,870,610 17,586,107
------------ ------------
Total Liabilities & Members' Equity $ 48,971,289 49,800,340
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 158,581 305,858
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 212,491 187,516
Disposal of assets -- 3,204
Provision for losses on receivables 95,011 77,750
Deferred income tax benefit (43,157) (24,546)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,027,102 (2,849,403)
(Increase) decrease in inventories 2,273,050 (1,240,080)
Decrease in refundable income taxes -- 32,115
(Increase) in prepaid expenses in other current assets (170,096) (51,942)
Increase (decrease) in accounts payable 1,449,965 (1,507,023)
Increase (decrease) in accrued expenses (1,698,891) 209,294
(Decrease) in premium deposits -- (1,534)
(Decrease) in patronage dividend (1,584,173) (1,746,378)
------------- -----------
Net cash provided by (used in) operating activities 1,719,883 (6,605,169)
------------- -----------
Cash Flows from Investing Activities:
(Increase) decrease in other assets 16,570 (402,694)
Decrease in note receivable from related party -- 24,664
Decrease in notes receivable 831,789 --
Purchase of marketable equity security (54,375) --
Additions to office equipment (267,824) (146,346)
------------- -----------
Net cash provided by (used in) investing activities 526,160 (524,376)
------------- -----------
Cash Flows from Financing Activities:
Increase in short-term borrowings 719,545 781,131
Proceeds from sale of stock, net of costs 160,364 48,370
Retirement of stock (37,430) (40,910)
------------- -----------
Net cash provided by financing activities 842,479 788,591
Effect of exchange rate changes on cash and cash equivalents (5,697) (19,784)
------------- -----------
Net increase (decrease) in cash and cash equivalents 3,082,825 (6,360,738)
Cash and cash equivalents - beginning of period 160,065 6,875,629
------------ -----------
Cash and cash equivalents - end of period $ 3,242,890 514,891
============ ===========
Supplemental information:
Income taxes paid $ 47,500 59,375
============ ===========
Interest paid $ 109,233 140,342
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------------------------------------------
1. Basis of Presentation
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by generally accepted accounting principles or those normally
made in the registrant's annual Form 10-K filing. Accordingly, the reader of
this Form 10-Q may wish to refer to the registrant's Form 10-K for the year
ended October 31, 1997, for further information in this regard.
The accompanying financial statements for comparative purposes have been made to
conform to the format of the registrant's Form 10-K for the year ended October
31, 1997, and have been prepared in accordance with the registrant's customary
accounting practices and have not been audited. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) necessary for
fair presentation of this information have been made.
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operation.
The following discussion and analysis of financial condition and the condensed
consolidated results of operations should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations in the company's October 31, 1997, Form 10-K. The results of
operations for the six months ended April 30, 1998, are not necessarily
indicative of the operating results for the entire year.
Results of Operations
Second Three Months of Fiscal 1998 Compared to the Second Three Months of Fiscal
1997.
A comparison of material changes between the three months ended April 30, 1998,
and the comparable period for the previous year shows:
Sales for the second quarter of 1998 were $153,740,000. When compared to the
same quarter of 1997 with sales at $137,126,000, the second quarter of 1998
increased by 12.1%. The increased sales were primarily attributable to Taco Bell
with record second quarter sales. Both Fazoli's and International posted
significant increases for the second quarter 1998 compared to 1997. KFC - U.S.
posted an increase of 6.3% for the quarter compared to last year.
First Six Months of Fiscal 1998 Compared to the First Six Months of Fiscal 1997.
A comparison of material changes between the six months ended April 30, 1998 and
the comparable period for the previous year shows:
Net sales increased by $29,336,804 or 10.71% from the first six months of 1998
compared to 1997. The increase in sales volume was primarily attributable to
increased consolidated food and packaging sales of $27,135,000. KFC and Taco
Bell combined year to date consolidated food and packaging sales, and equipment
sales were both up 13% for fiscal 1998 compared to fiscal 1997. Non-member
concepts showed a small decrease in sales for the period.
7
<PAGE> 8
Gross profit as a percentage of sales for the six months ended April 1998
increased to 2.73% from 2.69% in 1997. Gross margins are constantly being
evaluated to provide competitive prices to our customers while maintaining the
level of service required to fulfill the Cooperative's mission.
Our selling, general and administrative expenses, for the six months ended April
1998, increased to $6,774,658 from $5,878,636 in 1997. The primary cause of the
increase is the addition of staff in various departments such as equipment
customer operations, KFC concept field representative, international,
information technology, and equipment purchasing. In addition, expenses
associated with travel, consulting and meetings increased for the period
compared to last year. Although expenses reflect an increase the Cooperative
continues to meet the ever changing demands with the extra efforts of the entire
Cooperative team. Management is constantly monitoring costs to provide the
required service to the stockholder members and other customers.
Management believes the current provision for losses on uncollectible accounts
to be adequate. The Cooperative has conducted a purchasing program for Long John
Silver's operations. On May 27, 1998 the Cooperative notified Long John Silver's
that it was terminating the program before the end of June 1998. On June 1,
1998, Long John Silver's filed a voluntary petition for relief under Chapter 11
Reorganization pursuant to the United States Bankruptcy Code. The Cooperative
believes that it is adequately reserved for any potential loss associated with
this bankruptcy.
The provision for patronage dividend for 1998 has been calculated and accrued on
a formula approved by the Board of Directors. For the second quarter of fiscal
1998, the provision was $428,000, slightly less than last year due to planned
lower net margins and the increase in expenses as discussed above. For the first
six months the provision for the patronage dividend is up 28% to $1,306,000.
Patronage dividends for fiscal 1998 will be apportioned based on stockholder
concepts and their relative contribution to income before patronage dividend and
taxes.
In October 1997, PepsiCo, Inc. spun off its three primary restaurant divisions
- --- KFC, Taco Bell, and Pizza Hut --- into a new public company, Tricon Global
Restaurants, Inc. ("Tricon"). Also during fiscal 1997, PepsiCo sold its
restaurant distribution subsidiary, Pepsi Food Service ("PFS") to AmeriServe
Food Distribution, Inc. ("AmeriServe"). AmeriServe has been and continues to be
the second largest Cooperative customer, purchasing goods for distribution to
primarily KFC franchisees. When AmeriServe purchased PFS, it acquired rights
under a five-year distribution agreement. This agreement binds Tricon to use
AmeriServe distribution services for Tricon owned KFC, Taco Bell, and Pizza Hut
outlets. The agreement also extends to Taco Bell and Pizza Hut restaurants sold
as part of Tricon's announced program of refranchising certain Tricon-owned
restaurants to existing and new franchisees. AmeriServe does not purchase goods
through the Cooperative for distribution under its five-year Tricon agreement.
The Cooperative, Tricon, and organizations representing the KFC, Taco Bell and
Pizza Hut franchisees are currently discussing whether Tricon-system franchisee
or Tricon-system wide purchasing activities might be consolidated through the
Cooperative or a reorganized cooperative to lower store delivered costs of
goods. The discussions are preliminary and the outcome of the discussions cannot
be predicted.
On January 29, 1998 AmeriServe announced that it had signed a definitive merger
agreement under which AmeriServe will acquire all outstanding shares of
ProSource, Inc. ("ProSource"). The merger is subject to customary regulatory
approvals. The merger is expected to close in the second quarter of 1998. For
the year ended October 31, 1997 ProSource was the Cooperative's 6th largest
distributor with total sales of approximately $19,000,000. The Cooperative and
its members continue to monitor their relationship with AmeriServe. The impact
of Tricon's formation, AmeriServe's acquisition of PFS and the merger with
ProSource on the business of the Cooperative remains uncertain.
8
<PAGE> 9
Financial Condition at April 30, 1998 Compared to Financial Condition at October
31, 1997.
Net working capital at April 30, 1998, was $19,296,164, which is an increase of
$992,196 since October 31, 1997. Cash and cash equivalents, prepaid expenses and
other current asset, and deferred income taxes increased by $3,082,825, $170,096
and $20,884, respectively. Accrued expenses and patronage dividend decreased by
$1,698,891 and $1,584,173, respectively. These working capital items were offset
by an increase in short term borrowings and accounts payable of $719,545 and
$1,449,965, as well as a decrease in accounts receivable and inventories of
$1,122,113 and $2,273,050, respectively.
Trademarks
"Fazoli's," "Long John Silver's," "Dairy Queen," "Taco Bell," and "KFC," are
registered trademarks of Seed Restaurant Group Inc., Long John Silver's Inc.,
American Dairy Queen Corporation, Taco Bell Corporation and KFC Corporation,
respectively, and are used in these materials for identification purposes only.
KFC National Purchasing Cooperative, Inc. is an independent provider of products
and is not affiliated with the Seed Restaurant Group Inc., Long John Silver's
Inc., American Dairy Queen Corporation, Taco Bell Corporation or KFC
Corporation, except that KFC Corporation is a stockholder member of the
Cooperative.
9
<PAGE> 10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security - Holders
The annual meeting of the stockholder members (the "Annual Meeting") of the KFC
National Purchasing Cooperative, Inc. ("The Cooperative") was held on Friday,
April 3, 1998 at the Cooperative's offices.
At the Annual Meeting, James D. Olson, a Class III Director, whose term will
expire in 2000, and the following Class I Directors, whose terms of office will
expire in 2001, were elected by stockholder members:
<TABLE>
<CAPTION>
Series Class Director Term
------ ----- -------- ----
<S> <C> <C> <C>
L I Darlene L. Pfieffer 2001
L I Lois G. Foust 2001
N I Anthony P. Basile 2001
O I Grover G. Moss 2001
</TABLE>
The following persons are the remaining Class II and III Directors whose terms
of office will expire in 1999 or 2001 at the Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
Series Class Director Term
------ ----- -------- ----
<S> <C> <C> <C>
A III Jack M. Richards 2000
E III David G. Neal 2000
I III Paul A. Houston 2000
F III William E. Allen 2000
M III Ronald J. Young 2000
B II Robert P. Peck 1999
J II Edward Henriquez 1999
C II James G. Cocolin 1999
D II Calvin G. White 1999
G II Dean M. Sorgdrager 1999
Independent II Edward W. Rhawn 1999
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - During the quarter ended April 30, 1998, the
company did not file any reports on Form 8-K. Following the end of
the quarter ended April 30, 1998, the Company filed a Form 8-K
Current Report dated May 18, 1998, concerning Item 4, Changes in
Registrant's Certifying Accountant. No financial statements were
filed as a part of this Form 8-K Current Report.
10
<PAGE> 11
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.
Date: June 15, 1998 KFC National Purchasing Cooperative, Inc.
---------------
By: /s/ Thomas D. Henrion
---------------------------------------
Thomas D. Henrion, President
Date: June 15, 1998 By: /s/ William V. Holden
--------------- --------------------------------------
William V. Holden,
Vice President/Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 3,242,890
<SECURITIES> 0
<RECEIVABLES> 41,417,970
<ALLOWANCES> 1,500,560
<INVENTORY> 3,241,384
<CURRENT-ASSETS> 47,396,843
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,971,289
<CURRENT-LIABILITIES> 28,100,679
<BONDS> 3,000,000
0
0
<COMMON> 0
<OTHER-SE> 17,870,610
<TOTAL-LIABILITY-AND-EQUITY> 48,971,289
<SALES> 153,740,546
<TOTAL-REVENUES> 153,740,546
<CGS> 149,623,336
<TOTAL-COSTS> 149,623,336
<OTHER-EXPENSES> 3,561,344
<LOSS-PROVISION> 52,505
<INTEREST-EXPENSE> 62,071
<INCOME-PRETAX> 180,323
<INCOME-TAX> 87,571
<INCOME-CONTINUING> 95,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,752
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
