<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 July 31, 1999 Commission file number 0-23496
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KFC National Purchasing Cooperative, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 61-0946155
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
950 Breckenridge Lane, Louisville, KY 40207
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(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 August 31, 1999
-------------------
Membership Common Stock 586
Store Common Stock 5637
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KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT FORM 10-Q
<TABLE>
<CAPTION>
Page(s)
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<S> <C>
Part 1 - Financial Information
Item 1 Financial Statements
Condensed Consolidated Statements of Income and Expenses
Three months ended July 31,1999 and 1998 3
Condensed Consolidated Statements of Income and Expenses
Nine months ended July 31, 1999 and 1998 4
Condensed Consolidated Balance Sheets
July 31, 1999 and October 31, 1998 5
Condensed Consolidated Statements of Cash Flows
Nine months ended July 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Part II - Other Information
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Expenses
For the three months ended July 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Net sales $ 3,614,892 $ 169,404,360
Cost of goods sold 3,401,203 164,976,667
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Gross profit 213,689 4,427,693
Share in earnings of the Unified Co-op 1,221,236 --
Selling, general and administrative expenses 75,348 3,527,639
Provision for losses on receivables (99,493) 347,410
Other income (expenses):
Service charges 43,831 42,960
Interest income 108,018 14,620
Interest expense (450) (35,080)
Miscellaneous 38,014 53,046
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189,413 75,546
----------- -------------
Income before patronage
dividend and income taxes 1,648,483 628,190
Patronage dividend 1,267,162 491,925
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Income before income taxes 381,321 136,265
Provision for income taxes 181,427 58,319
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Net income $ 199,894 $ 77,946
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</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
Part I - Financial Information
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Expenses
For the nine months ended July 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Net sales $ 243,971,617 $ 472,724,556
Cost of goods sold 237,814,593 460,024,244
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Gross profit 6,157,024 12,700,312
Share in earnings of the Unified Co-op 1,840,162 --
Selling, general and administrative expenses 4,661,005 10,302,297
Provision for losses on receivables 77,965 442,421
Other income (expenses):
Service charges 171,827 135,962
Interest income 131,533 191,752
Interest expense (204,588) (161,885)
Miscellaneous 131,471 95,383
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230,243 261,212
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Income before patronage
dividend and income taxes 3,488,459 2,216,806
Patronage dividend 2,981,338 1,798,052
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Income before income taxes 507,121 418,754
Provision for income taxes 233,341 182,230
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Net income $ 273,780 $ 236,524
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Derived from
audited
financial
statements
July 31, October 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 6,323,532 $ 271,853
Accounts receivable, less allowance for
losses of $1,042,958 at July 31, 1999 5,104,020 51,153,630
and $1,392,579 at October 31, 1998
Inventories 96,916 7,068,488
Prepaid expenses and other current assets 178 158,299
Current portion of deferred income taxes 585,245 635,505
Notes receivable from Unified Co-op 5,256,779 --
Notes receivable from related party 50,000 50,000
------------ ------------
Total Current Assets 17,416,670 59,337,775
------------ ------------
Investment in Unified Co-op 3,840,162 --
Note receivable from related party, excluding current portion 627,948 627,948
Deferred income taxes, excluding current portion -- 225,216
Other assets 206,891 1,147,063
------------ ------------
Total Assets $ 22,091,671 $ 61,338,002
============ ============
Liabilities and Members' Equity
Current Liabilities:
Short-term borrowings $ 1,000 $ 444,302
Notes payable -- 3,000,000
Notes payable to related party 298,122 --
Accounts payable 1,144,762 33,554,224
Accrued expenses 512,539 3,496,045
Premium deposits -- 328,807
Patronage dividend 2,981,338 2,618,914
------------ ------------
Total Current Liabilities 4,937,761 43,442,292
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Commitments and Contingencies
Members' Equity:
Membership common stock 5,870 7,070
Store common stock 1,480,724 1,950,708
Accumulated other comprehensive income (78,377) (52,323)
Retained earnings 15,745,693 15,990,255
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17,153,910 17,895,710
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Total Liabilities and Members' Equity $ 22,091,671 $ 61,338,002
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the nine months ended July 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 273,780 $ 236,524
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 128,687 303,934
Provision for losses on receivables 77,965 422,015
Gain on sale of investment (65,367) --
Undistributed share in earnings of the Unified Co-op (1,840,162) --
Changes in operating assets and liabilities:
Deferred income tax benefit (provision) 141,022 (171,917)
Decrease (increase) in accounts receivable 32,702,421 (3,552,943)
Decrease in inventories 5,806,928 1,964,373
Increase in notes receivable from Unified Co-op (4,586,488) --
Decrease in prepaid expenses and other current assets 33,877 15,873
Decrease in other assets 15,852 18,584
(Decrease) increase in accounts payable (27,965,148) 3,054,733
Decrease in accrued expenses (2,414,336) (1,564,393)
Decrease in premium deposits (258) (680)
Increase (decrease) in patronage dividend 362,424 (1,092,186)
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Net cash provided by (used in) operating activities 2,671,197 (366,083)
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Cash Flows from Investing Activities:
Increase in investment in Unified Co-op (1,000,000) --
Increase in notes receivable -- 831,789
Increase in notes receivable from Unified Co-op (1,000,000) --
Decrease in notes receivable from Taco Bell Coop 8,945,938 --
Sale (purchase) of marketable equity security 119,742 (54,375)
Additions to office equipment (75,405) (441,504)
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Net cash used in investing activities 6,990,275 335,910
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Cash Flows from Financing Activities:
(Decrease) increase in short-term borrowings (443,302) (154,972)
Repayment of note payable (3,000,000) --
Increase in note payable to related party 298,122 --
Proceeds from sale of stock, net of costs 82,736 232,207
Retirement of stock (219,780) (48,070)
Distribution to Taco Bell Coop (334,140) --
------------ -----------
Net cash provided by financing activities (3,616,364) 29,165
Effect of exchange rate changes on cash and cash equivalents 6,571 (26,586)
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Net increase in cash and cash equivalents 6,051,679 (27,594)
Cash and cash equivalents - beginning of period 271,853 160,065
------------ -----------
Cash and cash equivalents - end of period $ 6,323,532 $ 132,471
============ ===========
</TABLE>
Supplemental disclosure of non-cash investing activity
During the 3 months ended July 31, 1999 the KFC Coop converted the
$1,000,000 note receivable from the Unified Co-op into an investment in the
Unified Co-op
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE> 7
NOTES 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, 1998, 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, 1998, 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 necessary for fair presentation of this information have been
made.
2. Other Comprehensive Income
Effective November 1, 1998 the company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, Reporting Comprehensive Income. This statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in a financial statement. This statement also
requires that an entity classify items of other comprehensive earnings by their
nature in a financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments, minimum pension liability
adjustments and unrealized gains and losses on certain marketable securities.
Financial statements for prior periods have been reclassified, as required.
Comprehensive earnings consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 273,780 $ 236,524
Other comprehensive income (loss):
Foreign currency translation adjustment (net of related tax benefit
of $0 in 1999 and 1998) 6,571 (26,586)
Change in unrealized gain on marketable equity securities (32,625) 16,385
--------- ---------
Comprehensive income $ 247,726 $ 226,323
========= =========
</TABLE>
3. Change in Estimate
Due to the winding down of the KFC Coop operations and the out-sourcing of the
business to the Unified Co-op, which handles the billing and generations of the
accounts receivable, management has determined a reduction in the provision for
losses on receivables would more reasonably and accurately reflect the
collectibility of the remaining accounts receivable.
4. Contingencies
In April 1996, the KFC Coop entered into a finance program for stockholder
members cosponsored by the National Cooperative Bank. The program initially
provided up to $20,000,000 in loans to KFC Coop members which range from
$100,000 to an individual maximum of $2,000,000. The KFC Coop has guaranteed
from 10% to 25% of the declining balance based on each loan's classification.
The National Cooperative Bank has agreed to maintain a reserve account which
will be applied to losses prior to the KFC Coop incurring any loss. The reserve
account is funded pursuant to the program agreements. The National Cooperative
7
<PAGE> 8
Bank's commitment to provide such loans terminated in June 1997. As of October
31, 1998, the National Cooperative Bank has funded approximately $6.5 million of
credit risk associated with their guarantees through credit and monitoring
procedures associated with their approval and periodic payments and reporting
from the primary lender, the National Cooperative Bank. Currently, no losses are
expected by the KFC Coop under this program.
5. Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement is effective for financial statements for fiscal years beginning after
December 15, 1997. Management is continuing to assess the disclosure impacts of
adopting SFAS No. 131 in fiscal 1999.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits." This
statement is effective for financial statements for fiscal years beginning after
December 15, 1997. Management is continuing to assess the disclosure impacts of
adopting SFAS No. 132 in fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," later amended by
SFAS No. 137. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management believes that the adoption of
SFAS No. 133 will not have a material adverse affect on the Cooperative's
consolidated financial statements.
6. Recent Corporate Reorganization
On March 1, 1999, the Registrant joined with Tricon Global Restaurants, Inc.
("Tricon") and franchisee owners and operators of KFC, Taco Bell and Pizza Hut
restaurants to form Unified Foodservice Purchasing Co-op, LLC, (the "Unified
Co-op"), as a new purchasing cooperative focusing on the purchase of the food,
packaging, supplies, equipment, and related services used by such owners and
operators (the "Corporate Reorganization"). The Registrant believes that the
Unified Co-op will enable KFC, Taco Bell and Pizza Hut restaurant owners and
operators to reduce their store delivered costs of goods and equipment. In
addition to the Registrant, the other two members of the Unified Co-op are the
Taco Bell National Purchasing Coop, Inc. (the "Taco Bell Coop") and Pizza Hut
National Purchasing Coop, Inc. (the "Pizza Hut Coop"), both newly organized
Delaware corporations with shareholder members who are operators of Taco Bell
and Pizza Hut retail outlets, respectively. Each Concept Coop's Purchasing
Program Management Agreement with the Unified Co-op provides that the Unified
Co-op will (i) purchase, inventory and stage and/or arrange for the purchase,
inventory and staging of goods and equipment for sale or resale to operators
and/or their distributors, (ii) negotiate purchase arrangements with suppliers
of goods and equipment who sell directly to distributors and/or operators, (iii)
assist the Concept Coops in negotiating with distributors of goods and
equipment, (iv) monitor distribution performance, (v) work with regional
purchasing groups of operators, and (vi) make available to the Concept Coops and
operators other programs such as health and property insurance programs. Each
Purchasing Program Management Agreement also provides that after the end of each
fiscal quarter, the Unified Co-op will pay each Concept Coop (KFC Coop, Taco
Bell Coop, and Pizza Hut Coop) an amount equal to 70% of the income generated by
the Unified Co-op from each respective purchasing program, net of all expenses
allocable to the purchasing program for such quarter. After each fiscal year,
the Unified Co-op will pay each Concept Coop an amount equal to 90% of any net
income generated by its purchasing program, less any quarterly payments
described above. If a purchasing program generates a net loss for a fiscal
quarter or fiscal year, the Concept Coop will reimburse the Unified Co-op for
any and all of such net loss. Although these funds will be transferred to the
Concept Coops the proceeds may be contributed directly back to the Unified Co-op
in the form of working capital loans.
For more information concerning the Corporate Reorganization, see Item 2 -
Management's Discussion and Analysis of Financial Position and Results of
Operation - Recent Corporate Reorganization, contained herein. Additional
information concerning the Corporate Reorganization can also be found in the
Registrant's Form 8-K dated March 1, 1999, proxy statement filed on Schedule 14A
with the Commission on January 28, 1999 and the Registrant's tender offer filed
on Schedule 13e-4 with the Commission on January 28, 1999.
The following table reflects the corporate reorganization adjustment which took
place on March 1, 1999.
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<PAGE> 9
KFC National Purchasing Cooperative, Inc.
Unaudited Condensed Consolidated Balance Sheet
March 1, 1999
<TABLE>
<CAPTION>
Corporate Reorganization
Adjustments
----------------------------
Historical Taco Bell Unified As adjusted
Registrant Coop Co-op Registrant
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ (5,909,246) $ 300 $ (5,909,546)
Accounts and notes receivable, net 52,958,694 $ 12,158,183 24,164 40,776,347
Inventories 4,620,819 1,164,644 3,456,175
Note Receivable - Affiliate (8,608,568) (670,591) 9,279,159
Prepaid expenses and other current assets 125,158 3,241 111,736 10,181
------------ ------------ ------------ ------------
Total Current Assets 51,795,425 4,717,500 (534,391) 47,612,316
Investment in the Unified Coop 50,000 50,000
Deferred income taxes, excluding current portion 907,127 81,000 826,127
Other assets 1,287,964 705,559 582,405
------------ ------------ ------------ ------------
Total Assets $ 54,040,516 $ 4,798,500 $ 171,168 $ 49,070,848
============ ============ ============ ============
Liabilities and Members' Equity
Current Liabilities:
Notes Payable and short term borrowings $ 6,161,905 $ 6,161,905
Accounts payable 22,978,219 $ 3,759,401 19,218,818
Accrued expenses 3,122,879 183,382 $ 171,168 2,768,329
Patronage dividend payable 2,618,826 2,618,826
Patronage dividend accrued 1,152,486 1,152,486
------------ ------------ ------------ ------------
Total Current Liabilities 36,034,315 3,942,783 171,168 31,920,364
------------ ------------ ------------ ------------
Members' Equity:
Membership common stock 7,080 970 $ 6,110
Store common stock 1,994,763 336,400 1,658,363
Unrealized gain on marketable equity security 65,366 65,366
Accumulated Foreign Currency (76,717) (76,717)
Retained earnings, prior 15,990,253 518,347 15,471,906
Retained earnings, current 25,456 25,456
------------ ------------ ------------ ------------
Total Members' Equity 18,006,201 855,717 -- 17,150,484
------------ ------------ ------------ ------------
Total Liabilities and Members' Equity $ 54,040,516 $ 4,798,500 $ 171,168 $ 49,070,848
============ ============ ============ ============
</TABLE>
7. Affiliate - Unified Foodservice Purchasing Co-op, LLC
The Unified Co-op is owned by its members, consisting of the
Registrant, Taco Bell Coop, and Pizza Hut Coop.
Summarized financial information of the Unified Co-op as of and for the
three and five months ended July 31, 1999 is as follows:
<TABLE>
<CAPTION>
Taco Bell Pizza Hut Total Unified
Three Months ended July 31, 1999 Registrant Coop Coop Other Co-op
- -------------------------------- ------------ ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Sales $114,617,902 $32,936,017 $24,177,936 $190,415 $171,922,270
Sourcing Fee 1,739,590 2,349,934 1,811,965 -- 5,901,489
Gross profit 3,619,091 2,997,932 2,079,199 190,415 8,886,637
Net earnings 1,221,236 1,481,670 719,619 10,095 3,432,620
</TABLE>
<TABLE>
<CAPTION>
Taco Bell Pizza Hut Total Unified
Five Months ended July 31, 1999 Registrant Coop Coop Other Co-op
- ------------------------------- ------------ ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Sales $178,197,967 $56,926,449 $41,168,234 $328,505 $276,621,155
Sourcing Fee 2,561,021 3,612,539 2,700,716 -- 8,874,276
Gross profit 6,425,850 4,794,229 3,308,583 328,505 14,857,167
Net earnings 1,840,162 1,530,791 276,057 26,102 3,673,112
Current assets $ 67,618,552
Non-current assets 848,246
Current liabilities 58,483,493
Non-current liabilities 310,193
</TABLE>
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Position and Results
of Operation.
Recent Corporate Reorganization
On March 1, 1999, the KFC National Purchasing Cooperative, Inc. (the KFC Coop)
joined with Tricon Global Restaurants, Inc. ("Tricon") and franchisee owners and
operators of KFC, Taco Bell and Pizza Hut restaurants to form Unified
Foodservice Purchasing Co-op, LLC, (the "Unified Co-op"), as a new purchasing
cooperative focusing on the purchase of the food, packaging, supplies,
equipment, and related services used by such owners and operators (the
"Corporate Reorganization"). The KFC Coop believes that the Unified Co-op will
enable KFC, Taco Bell and Pizza Hut restaurant owners and operators to reduce
their store delivered costs of goods and equipment. In addition to the KFC Coop,
the other two members of the Unified Co-op are the Taco Bell National Purchasing
Coop, Inc. (the "Taco Bell Coop") and Pizza Hut National Purchasing Coop, Inc.
(the "Pizza Hut Coop"), both newly organized Delaware corporations with
shareholder members who are operators of Taco Bell and Pizza Hut retail outlets,
respectively.
To facilitate the Corporate Reorganization, the KFC Coop (i) executed agreements
which, among other things, facilitated (a) the KFC Coop's membership in the
Unified Co-op (the "Asset Contribution and Liability Assumption Agreement") and
(b) the spin off of the KFC Coop's Taco Bell business (the "Agreement and Plan
of Corporate Separation") and (ii) amended its bylaws to conform its patronage
dividend program to the operations of the Unified Co-op and to make other
changes which reflect the spin off of its Taco Bell business.
In exchange for its membership interest in the Unified Co-op, the KFC Coop
contributed certain operating assets and cash to the Unified Co-op. Pursuant to
the Asset Contribution and Liability Assumption Agreement, the KFC Coop
assigned, transferred, delivered, and generally set over to the Unified Co-op,
and the Unified Co-op accepted and assumed, certain "Assets," which mean certain
of the KFC Coop's Contracts, Leases, Equipment, and Prepaid Assets (other than
any of the same which were transferred to the Taco Bell Coop pursuant to the
Agreement and Plan of Corporate Separation), as defined in the Asset
Contribution and Liability Assumption Agreement. The Assets did not include any
other assets of the KFC Coop, including, without limitation, any accounts
receivable, cash or cash equivalents, or goodwill. In return, the Unified Co-op
assumed and agreed to perform and discharge in full any and all of the KFC
Coop's obligations and liabilities under its Contracts and Leases. The Unified
Co-op also made offers of employment to all of the employees of the KFC Coop on
terms and conditions substantially similar in the aggregate to those in effect
before the Corporate Reorganization, except for Thomas D. Henrion, the KFC
Coop's then president and chief executive officer. The KFC Coop and the Unified
Co-op entered into a Separation and Consulting Agreement with Mr. Henrion.
Before the Corporate Reorganization, the KFC Coop organized the Taco Bell Coop,
as a wholly owned subsidiary. On March 1, 1999, the Agreement and Plan of
Corporate Separation effected a division of the KFC Coop's business by
transferring all of the KFC Coop's Taco Bell related assets and liabilities to
the Taco Bell Coop (the "Taco Bell Assets and Liabilities") and spinning off the
Taco Bell Coop as an independent entity to the Taco Bell operators who were
stockholder members of the KFC Coop and who tendered their shares of the KFC
Coop's membership common stock and store common stock pursuant to a Tender Offer
dated January 28, 1999 (the "Tendering Members"). The nature and amount of
consideration given and received and the principle followed in determining the
amount of such consideration in the Agreement and Plan of Corporate Separation
were determined through negotiations among the KFC Coop, the Taco Bell Coop, and
Taco Bell franchisees and their representatives.
The Taco Bell Assets and Liabilities included Taco Bell product inventory and
equipment, records of Taco Bell operations, miscellaneous Taco Bell supplies and
signs, purchase commitment liabilities, intercompany liabilities attributable to
accounts payable and other liabilities related to Taco Bell operations paid or
assumed by the KFC Coop (the "Intercompany Liability"), and members' equity
related to the KFC Coop's Taco Bell operations including retained earnings from
prior years of $518,347. In exchange for and in consideration for
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<PAGE> 11
the transfer of the Taco Bell Assets and Liabilities to the Taco Bell Coop, the
Taco Bell Coop transferred to the KFC Coop the original issue of one share of
Taco Bell Coop membership common stock for each Tendering member's share of the
KFC Coop's membership common stock and one share of Taco Bell Coop store common
stock for each share of the KFC Coop's store common stock owned by each
Tendering Member.
The Taco Bell Coop's obligation to reimburse the KFC Coop for the Intercompany
Liability was reflected in a Promissory Note at 7.75% for a maximum six month
period. As of July 31, 1999, the promissory note has been paid in full.
The KFC Coop and Taco Bell Coop entered into the Agreement and Plan of Corporate
Separation, in part, so that Taco Bell operators could become members of a
concept purchasing cooperative in which only Tricon and Taco Bell franchisees
are members and the members of the KFC Coop would be members of a concept
purchasing cooperative in which only Tricon and KFC franchisees are members.
Following completion of the Corporate Reorganization, the KFC Coop will continue
to operate and will concentrate on its KFC purchasing cooperative business.
Although this business is now out-sourced and administered by the Unified Co-op,
the KFC purchasing program will be subject to significant control, advice and
counsel of the KFC Coop. The KFC Coop's Board will continue to exercise
policy-making decisions and administer the patronage dividend program in
accordance with past practices.
Also in connection with the Corporate Reorganization, the Unified Co-op and each
of the KFC Coop, Taco Bell Coop, and Pizza Hut Coop (the "Concept Coops")
entered into a Purchasing Program Management Agreement. The Purchasing Program
Management Agreement sets forth the terms pursuant to which the Unified Co-op
administers a purchasing program on behalf of each Concept Coop.
Each Concept Coop's Purchasing Program Management Agreement provides that the
Unified Co-op will (i) purchase, inventory and stage and/or arrange for the
purchase, inventory and staging of goods and equipment for sale or resale to
operators and/or their distributors, (ii) negotiate purchase arrangements with
suppliers of goods and equipment who sell directly to distributors and/or
operators, (iii) assist the Concept Coops in negotiating with distributors of
goods and equipment, (iv) monitor distribution performance, (v) work with
regional purchasing groups of operators, and (vi) make available to the Concept
Coops and operators other programs such as health and property insurance
programs.
Each Purchasing Program Management Agreement also provides that within 60 days
after the end of each fiscal quarter, the Unified Co-op will pay each Concept
Coop an amount equal to 70% of the income generated by the Unified Co-op from
each respective purchasing program, net of all expenses allocable to the
purchasing program for such quarter. Within 60 days of the end of each fiscal
year, the Unified Co-op will pay each Concept Coop an amount equal to 90% of any
net income generated by its purchasing program, less any quarterly payments
described above. Although these funds will be transferred to the Concept Coops
the proceeds may be contributed directly back to the Unified Co-op in the form
of working capital loans. If a purchasing program generates a net loss for a
fiscal quarter or fiscal year, the Concept Coop will reimburse the Unified Co-op
for any and all of such net loss.
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 KFC Coop's October 31, 1998, Form 10-K. The results of
operations for the three months and nine months ended July 31, 1999, are not
necessarily indicative of the operating results for the entire year.
11
<PAGE> 12
Results of Operations
Third Three Months of Fiscal 1999 Compared to the Third Three Months of Fiscal
1998.
The KFC Coop's Corporate Reorganization has materially affected the presentation
of its results of operations. As a result of the Corporate Reorganization, the
KFC Coop's primary source of revenues effective March 1, 1999 has been payments
pursuant to the KFC Coop's Purchasing Program Management Agreement with the
Unified Co-op. Because net sales previously recorded by the KFC Coop became net
sales of the Unified Co-op effective March 1, 1999, the KFC Coop's net sales for
the three months ended July 31, 1999, decreased significantly from the same
period ended July 31, 1998. Net sales for the KFC Coop for the period are
attributable to sales from its international subsidiary. Set forth below is
comparative information concerning net sales of the KFC Coop and the Unified
Co-op for the relevant periods.
<TABLE>
<CAPTION>
Sales ($000)
---------------------------------
Quarter Ended Quarter Ended
7/31/99 7/31/98
------------- -------------
<S> <C> <C>
KFC Coop $ 3,615 $169,404
Unified Co-op 171,922 N/A
-------- --------
$175,537 $169,404
======== ========
</TABLE>
Aggregate sales of the KFC Coop and the Unified Co-op increased by $6,133,000 or
3.6% for the three months ended July 31, 1999 compared to the same quarter in
1998. Of the aggregate amount, food and packaging sales decreased by
approximately $7,500,000. Combined food and packaging sales for KFC-Canada,
Dairy Queen, Long John Silvers and Fazoli's decreased by $30,066,000. The
decrease is a result of the termination of those programs at the time of the
formation of the Unified Co-op and the focus solely on the three Tricon brands
(KFC, Taco Bell and Pizza Hut). KFC-U.S. and Pizza Hut food and packaging sales
increased by $10,417,000 and $22,986,000, respectively for the three months
ended July 31, 1999, compared to the same quarter in 1998. Taco Bell food and
packaging sales decreased by $10,847,000 for the same period. Aggregate
equipment sales for the third fiscal quarter 1999 increased $13,825,000 over
1998. KFC-U.S., Taco Bell and Pizza Hut equipment sales increased by
$12,823,000, $2,350,000 and $1,091,000, respectively. International equipment
sales for the third quarter increased by $247,000. This increase was mitigated
by the decrease in volumes as a result of the termination of purchasing programs
related to the non-Tricon brands, similar to food and packaging, as discussed
previously.
Starting on March 1, 1999, for the quarter ended July 31, 1999 and future
quarters, the KFC Coop will generally recognize its portion of the income (loss)
generated through the Unified Co-op in accordance with the Purchasing Program
Management Agreement. Included in the income statement for the quarter ending
July 31, 1999, is $1,221,236 which represents the KFC Coop's share of the profit
generated from the Unified Co-op. In accordance with the operating agreement of
the Unified Co-op, the operations of the three Concept Coops were assigned to
the Unified Co-op and the synergies in purchasing, in addition to the sharing of
expenses, are expected to result in an overall savings to the three brands.
Future quarters for the KFC Coop will primarily reflect its share of earnings
from the Unified Co-op. For the three months ended July 31, 1999, Taco Bell
Coop's and Pizza Hut Coop's equity in earnings of the Unified Co-op were
$1,481,670 and $719,619, respectively.
A comparison of selling, general and administrative expenses for the quarters
ended July 31, 1999 and 1998 reflects a significant decrease. On March 1, 1999,
with the formation of the Unified Co-op, the employees of the KFC Coop and
Tricon's Supply Chain Management became employees of the Unified Co-op. The
Unified Co-op now provides purchasing services for the KFC Coop through the
Purchasing Program Management Agreement.
As part of the formation of the Unified Co-op, Kenco Insurance Agency, (Kenco) a
subsidiary of the KFC Coop, was transferred to the Unified Co-op. Before the
transfer, Kenco paid a dividend to the KFC Coop in the amount of $902,669,
representing earnings before March 1, 1999, the effective transfer date.
12
<PAGE> 13
Income before patronage dividend and income taxes for the quarter increased by
$1,020,293 or 162% which is attributable to the higher sales volumes for
KFC-U.S., as a result of the participation of all KFC restaurants, franchisees
and corporate members in the Unified Co-op's program, offset by the absorption
of various expenses in the formation of the Unified Co-op. These expenses are
primarily associated with a deferred compensation package for the former
President of the KFC Coop. Prior to March 1, 1999, the stores owned by the
franchiser of KFC restaurants had not participated significantly in the purchase
of goods and equipment from the KFC Coop since approximately 1989.
The provision for patronage dividend for 1999 has been calculated and accrued on
a formula approved by the Board of Directors. For the third quarter of fiscal
1999, the provision was $1,267,162 or a 158% increase over the same quarter last
year.
First Nine Months of Fiscal 1999 Compared to the First Nine Months of Fiscal
1998.
A comparison of material changes between the nine months ended July 31, 1999 and
the comparable period for the previous year shows:
The Corporate Reorganization affected the KFC Coop's results of operations for
the nine months ended July 31, 1999, similarly to the effects on the three month
period ended July 31, 1999 discussed above. The chart set forth below reflects
the sales volume of the two entities for the nine months periods ending July 31,
1999 and 1998:
<TABLE>
<CAPTION>
Net Sales ($000)
-------------------------------
Nine Months Nine Months
Ended Ended
1999 1998
----------- -----------
<S> <C> <C>
KFC Coop $243,972 $472,725
Unified Co-op 276,621 N/A
-------- --------
$520,593 $472,725
======== ========
</TABLE>
Total sales for the combined entities increased by $47,868,000 or 10.1%. Total
food and packaging sales increased by approximately $30,000,000. Food and
packaging sales related to the KFC-U.S. and Pizza Hut concepts increased by
$17,901,000 and $62,710,000, respectively. Taco Bell related sales decreased by
$343,000. The effect of the termination of the non-Tricon brand and KFC-Canada
sales programs as discussed above in the quarterly information carried forward
to the year to date information, offsetting the increases associated with the
Tricon brands. The year to date reduction in food and packaging attributed to
KFC-Canada, Diary Queen, Long John Silvers and Fazoli's sales was approximately
$51,000,000. With respect to the equipment business, KFC, Taco Bell and Pizza
Hut related sales had increases of $17,773,000, $6,970,000 and $3,781,000,
respectively. Equipment sales for terminated programs reflected decreases of
approximately $10,500,000.
Income before patronage dividend and income taxes increased by $1,271,653
primarily due to higher sales volumes for KFC-U.S., as a result of the
participation of all KFC restaurants, franchisees and corporate members in the
Unified Co-op's program offset by the reduction in expenses associated with the
formation of the Unified Co-op and the assumption thereof of certain expenses as
previously discussed. Prior to March 1, 1999, the stores owned by the franchiser
of KFC restaurants had not participated significantly in the purchase of goods
and equipment from the KFC Coop since approximately 1989.
Management believes the current provision for losses on uncollectible accounts
to be adequate.
The provision for patronage dividend for 1999 has been calculated and accrued on
a formula approved by the Board of Directors. For the third quarter of fiscal
1999, the provision was $2,981,338 an increase of $1,183,286 over the same
period last year. The increase is primarily associated with the income from the
Unified Co-op based on the allocation to the KFC Coop.
13
<PAGE> 14
Financial Condition at July 31, 1999 Compared to Financial Condition at October
31, 1998.
Net working capital at July 31, 1999, was $12,478,909, which was a decrease of
$3,416,574 since October 31, 1998. The investment in the Unified Co-op is the
primary use of this working capital. Cash and cash equivalents and notes
receivable from Unified Co-op increased by $6,051,679 and $5,256,779,
respectively. Short term borrowings, notes payable, accounts payable, accrued
expenses and premium deposits decreased by $443,302, $3,000,000, $32,409,462,
$2,983,506 and $328,807, respectively. These working capital items were offset
by decreases in accounts receivable, inventories, prepaid expenses, other
current assets and deferred income taxes of $46,049,610, $6,971,572, $158,121
and $50,260, respectively. Patronage dividend payable and note payable to
related party increased by $362,424 and $298,122, respectively.
The balance sheet is indicative of the transactions associated with the
formation of the Unified Co-op. The KFC Coop, on March 1, 1999, contributed
certain assets, primarily office equipment, to the Unified Co-op as part of the
capital contribution. In addition, as of July 31, 1999 the KFC Coop had invested
$2,000,000 in the Unified Co-op. The other two members also contributed capital
of equal amounts which provided the Unified Co-op capital in the amount of
$6,000,000 to fund its operations and start up. Based on the formulas to
determine working capital requirements by concept (KFC, Taco Bell, and Pizza
Hut) each member of the Unified Co-op is required to provide individually their
funds. Each concept co-op has its own line of credit and borrows or funds out of
its own working capital the needs required to support its own programs with the
Unified Co-op. As of July 31, 1999, KFC Coop had provided the Unified Co-op with
$5,256,779 in working capital loans in addition to its capital contribution.
Since the Unified Co-op provides the operational support for the concept co-ops,
the balance sheet of the KFC Coop has substantially changed. After March 1, 1999
receivables and inventory are assets of the Unified Co-op, so the KFC Coop is
winding down the collection of its receivables and has transferred substantially
all inventories to the Unified Co-op. Once this is accomplished the balance
sheet of the KFC Coop will primarily consist of cash, investments in and loans
to the Unified Co-op, and members' equity.
Beginning in August, 1999, various distribution centers, which currently place
their orders directly with the Unified Co-op and generate sales dollars, will be
transitioning to a "non-title" status in which they purchase directly from
suppliers under terms arranged by the Unified Co-op. The Unified Co-op will
cease billing and generating accounts receivables and migrate to the collection
of a sourcing fee, primarily from distributors. The corporate KFC business is
currently non-title business. The collection of the sourcing fee will be the
revenue recognized from non-title distributors in the future. Sales volumes for
succeeding quarters will be effected by this transition. The sourcing fee
collected will replace the current margin structure and provide the funds to
fund the operations of the Unified Co-op.
Year 2000
The KFC Coop's Year 2000 project is substantially complete. The project
addressed the ability of computer programs and embedded computer chips to
distinguish the 20th century date from the 21st century date, and considered our
trading partners, application systems, central & distributed computing
infrastructure, telephone communications, and physical systems. The KFC Coop has
contracted with EDS data systems to review the results of our Year 2000 testing
and has certified that all actions, detailed below, are complete in minimizing
risk. The KFC Coop is jointly working with Tricon to address certification for
our suppliers and distributors. Contingency plans are nearing completion for
suppliers & distributors which are considered to be "high and medium risk" to
our business operations.
14
<PAGE> 15
The KFC Coop's core business operations are run on a third party software that
was purchased from American Software, Inc (ASI) in 1989, which have been heavily
enhanced in-house. These systems are comprised of accounting systems, supply
chain systems, and Electronic Data Interchange (EDI). In 1996, the KFC Coop
contracted with a consulting firm to modify all accounting applications, which
was completed in January 1997. The KFC Coop's Supply chain systems have been
modified to be Year 2000 compliant by the KFC Coop internal programming staff.
On March 1, 1999 the software and systems were transferred to the Unified Co-op
which now provides the operational support to the KFC Coop. Changes to EDI
communications have been upgraded to support either Y2K compliant or
non-compliant EDI document specifications, and the Unified Co-op is working
closely with our EDI partners as they are upgrading to compliant EDI to insure
continued uninterrupted operations. Subsequent to the transfer of these systems
to the Unified Co-op, these systems were reviewed by EDS services, a third party
consulting firm, and were found to be Year 2000 compliant. The Unified Co-op is
utilizing third party vendors for payroll processing through ADP, which has
provided documentation as year 2000 compliant. Non-title business information is
supported by a third party arrangement with Tricon, which has provided written
documentation as Y2K compliant.
The Unified Co-op's core business operations are supported on an IBM AS/400
which has been verified through independent testing as Year 2000 compliant, both
for hardware and operating systems. The Unified Co-op's NT based LAN environment
has been upgraded to the latest Microsoft Y2K compliant software and the Unified
Co-op has researched its routers, and network equipment of our vendors, and has
been provided with certification of Y2K compliance. Kenco, a division of the
Unified Co-op, operates on a separate system to support its billing and
accounting functions and is in the process of upgrading its Novell server to
address Y2K compliance. The Unified Co-op's desktop PC's and the telephone
systems' hardware and software have been upgraded to make them Year 2000
compliant. Other hardware devices have been confirmed to be Y2K compliant by
their respective vendors.
Management believes that the external total cost incurred in connection with the
Year 2000 project was approximately $80,000. The KFC Coop does not expect any
subsequent costs to have a material effect on its results of operations or
financial conditions. Any additional cost will be borne by the Unified Co-op.
Based on the progress the Unified Co-op has made in addressing its Year 2000
issues, management does not foresee interruption in its normal business
activities or operations associated with its Year 2000 compliance at this time.
However, the Unified Co-op is developing contingency plans as part of its
compliance management to further mitigate risk. Even given best efforts and
execution of the aforementioned planning and testing, disruptions and unexpected
business problems may occur as a result of the Year 2000 issue.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of customer and third-party suppliers,
including utility companies and customers, the company is unable to conclude
that the consequences of Year 2000 failures will not have a material impact on
the company's results of operations, liquidity or financial position.
The discussion and analysis of the Year 2000 issue included herein contains
forward-looking statements and is based on management's best estimates of future
events. Risks related to completing the KFC Coop's and the Unified Co-op's Year
2000 plan include the availability of resources, the Unified Co-op's ability to
timely discover and correct the potential Year 2000 sensitive problems which
could have a serious impact on the KFC Coop's and Unified Co-op's operations,
the ability of suppliers to bring their systems into Year 2000 compliance, and
the Unified Co-op's ability to identify and implement effective contingency
plans to address Year 2000 failures.
15
<PAGE> 16
Safe-Harbor
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although the
KFC Coop believes that the forward-looking statements are based upon reasonable
assumptions, there can be no assurance that the forward-looking statements will
prove to be accurate. Factors that could cause actual results to differ from the
results anticipated in the forward-looking statements include, but are not
limited to: economic conditions (both generally and more specifically in the
markets in which the KFC Coop and its customers operate); competition for the
KFC Coop's customers from other distributors; material unforeseen changes in the
liquidity, results of operations, or financial condition of the KFC Coop's
customers; material unforeseen complications related to addressing the Year 2000
Problem experienced by the KFC Coop, its suppliers, customers and governmental
agencies; and other risks detailed in the KFC Coop's filings with the Securities
and Exchange Commission, all of which are difficult to predict and any of which
are beyond the control of the KFC Coop. The KFC Coop undertakes no obligation to
republish forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Trademarks
"Fazoli's," "Long John Silver's," "Dairy Queen," "Pizza Hut," "Taco Bell," and
"KFC," are registered trademarks of Seed Restaurant Group Inc., Long John
Silver's Inc., American Dairy Queen Corporation, Pizza Hut Corporation, Taco
Bell Corporation and KFC Corporation, respectively, and are used in these
materials for identification purposes only. KFC National Purchasing Cooperative,
Inc. is not affiliated with the Seed Restaurant Group Inc., Long John Silver's
Inc., American Dairy Queen Corporation, Pizza Hut Corporation, Taco Bell
Corporation or KFC Corporation, except that KFC Corporation is a stockholder
member of the Registrant.
16
<PAGE> 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 Financial Data Schedule (for SEC use only)
17
<PAGE> 18
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: September 13, 1999 KFC National Purchasing Cooperative, Inc.
--------------------
By: /s/ Daniel E. Woodside
------------------------------------------
Daniel E. Woodside, President
Date: September 13, 1999
--------------------
By: /s/ William L. Bickley
------------------------------------------
William L. Bickley,
Sr. Vice President/Chief
Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 6,323,532
<SECURITIES> 0
<RECEIVABLES> 5,104,020
<ALLOWANCES> 1,042,958
<INVENTORY> 96,916
<CURRENT-ASSETS> 17,416,670
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,091,671
<CURRENT-LIABILITIES> 4,937,761
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,153,910
<TOTAL-LIABILITY-AND-EQUITY> 22,091,671
<SALES> 243,971,617
<TOTAL-REVENUES> 243,971,617
<CGS> 237,814,593
<TOTAL-COSTS> 237,814,593
<OTHER-EXPENSES> 4,661,005
<LOSS-PROVISION> 77,965
<INTEREST-EXPENSE> 204,588
<INCOME-PRETAX> 507,121
<INCOME-TAX> 233,341
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273,780
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>