<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, 1999 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, 1999
Membership Common Stock 600
Store Common Stock 5673
<PAGE> 2
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT FORM 10-Q
Part 1 - Financial Information
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Income
Three months ended April 30, 1999 and 1998 3
Condensed Consolidated Statements of Income and Expense
Six months ended April 30, 1999 and 1998 4
Condensed Consolidated Balance Sheets
April 30, 1999 and October 31, 1998 5
Consolidated Statements of Cash Flows
Six months ended April 30, 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 10-15
Part II - Other Information
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
</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 April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 61,819,049 $ 153,740,546
Cost of goods sold 60,349,149 149,623,336
------------ -------------
Gross profit 1,469,900 4,117,210
Equity in earnings from Affiliate - Unified Co-op 618,926 --
Selling, general and administrative expenses 1,196,753 3,561,344
Provision for losses on receivables 132,571 52,505
Other income (expenses):
Service charges 48,860 48,262
Interest income 15,125 104,868
Interest expense (48,629) (62,071)
Miscellaneous 62,905 13,620
------------ -------------
78,261 104,679
------------ -------------
Income before patronage
dividend and income taxes 837,763 608,040
Patronage dividend 895,047 427,717
------------ -------------
(Loss) income before income taxes (57,284) 180,323
(Benefit) provision for income taxes (11,905) 87,571
------------ -------------
Net (loss) income $ (45,379) $ 92,752
============ =============
</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 six months ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 240,356,725 303,320,196
Cost of goods sold 234,413,390 295,047,577
------------- ------------
Gross profit 5,943,335 8,272,619
Equity in earnings from Affiliate - Unified Co-op 618,926 --
Selling, general and administrative expenses 4,585,657 6,774,658
Provision for losses on receivables 177,458 95,011
Other income (expenses):
Service charges 127,996 93,002
Interest income 23,515 177,132
Interest expense (204,138) (126,805)
Miscellaneous 93,457 42,337
------------- ------------
40,830 185,666
------------- ------------
Income before patronage
dividend and income taxes 1,839,976 1,588,616
Patronage dividend 1,714,176 1,306,127
------------- ------------
Income before income taxes 125,800 282,489
Provision for income taxes 51,914 123,911
------------- ------------
Net income $ 73,886 158,578
============= ============
</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
Assets April 30, October 31,
------ 1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,505,956 $ 271,853
Accounts receivable, less allowance for
losses of $1,153,455 at April 30, 1999 4,924,781 51,153,630
and $1,392,579 at October 31, 1998
Inventories 2,060,477 7,068,488
Prepaid expenses and other current assets 178 158,299
Current portion of deferred income taxes 651,893 635,505
Notes receivable from Unified Co-op 5,865,591 --
Notes receivable from related parties 428,592 50,000
------------ ------------
Total Current Assets 16,437,468 59,337,775
------------ ------------
Investment in Unified Co-op 1,618,926 --
Note receivable from Unified Co-op 1,000,000 --
Notes receivable from related parties, excluding current portion 627,948 627,948
Deferred income taxes, excluding current portion 52,640 225,216
Other assets 438,953 1,147,063
------------ ------------
Total Assets $ 20,175,935 $ 61,338,002
============ ============
Liabilities and Members' Equity
Current Liabilities:
Short-term borrowings $ 1,000 $ 444,302
Notes payable -- 3,000,000
Accounts payable 586,203 33,554,224
Accrued expenses 703,950 3,496,045
Premium deposits -- 328,807
Patronage dividend 1,714,175 2,618,914
------------ ------------
Total Current Liabilities 3,005,328 43,442,292
------------ ------------
Commitments and Contingencies
Members' Equity:
Membership common stock 6,250 7,070
Store common stock 1,683,163 1,950,708
Accumulated other comprehensive income (64,611) (52,323)
Retained earnings 15,545,805 15,990,255
------------ ------------
17,170,607 17,895,710
------------ ------------
Total Liabilities and Members' Equity $ 20,175,935 $ 61,338,002
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the six months ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 73,886 $ 158,578
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 119,373 212,491
Provision for losses on receivables 177,458 95,011
Gain on sale of investment (65,367) --
Equity in earnings of affiliate (618,926) --
Changes in operating assets and liabilities:
Deferred income tax benefit 21,734 (43,157)
Decrease in accounts receivable 32,782,173 1,027,102
Decrease in inventories 3,843,367 2,273,050
(Increase) in notes receivable from Unified Co-op (5,195,300) --
Decrease (increase) in prepaid expenses and other current assets 33,877 (170,096)
Decrease (increase) in other assets (31,645) 16,570
(Decrease) increase in accounts payable (28,523,707) 1,449,965
(Decrease) in accrued expenses (2,222,925) (1,698,888)
(Decrease) in premium deposits (258) --
(Decrease) in patronage dividend (904,739) (1,584,173)
------------ -----------
Net cash provided by (used in) operating activities (510,999) 1,736,453
------------ -----------
Cash Flows from Investing Activities:
Increase in investment in Unified Co-op (1,000,000) --
Increase in notes receivable (175,251) 831,789
Increase in notes receivable from Unified Co-op (1,000,000) --
Decrease in notes receivable from Taco Bell Coop 8,567,346 --
Sale (purchase) of marketable equity security 119,742 (54,375)
Additions to office equipment (75,405) (267,824)
------------ -----------
Net cash used in investing activities 6,436,432 509,590
------------ -----------
Cash Flows from Financing Activities:
(Decrease) increase in short-term borrowings (443,302) 719,545
(Decrease) in notes payable (3,000,000) --
Proceeds from sale of stock, net of costs 80,525 160,364
Retirement of stock (14,750) (37,430)
Distribution to Taco Bell Coop (334,140) --
------------ -----------
Net cash provided by financing activities (3,711,667) 842,479
Effect of exchange rate changes on cash and cash equivalents 20,337 (5,697)
------------ -----------
Net increase in cash and cash equivalents 2,234,103 3,082,825
Cash and cash equivalents - beginning of period 271,853 160,065
------------ -----------
Cash and cash equivalents - end of period $ 2,505,956 $ 3,242,890
============ ===========
</TABLE>
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>
Six Months Ended
April 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 73,886 $ 158,578
Other comprehensive income (loss):
Foreign currency translation adjustment (net of related tax benefit
of $0 in 1999 and 1998) 20,337 (5,697)
Change in unrealized gain on marketable equity securities (29,612) 9,125
-------- ---------
Comprehensive income $ 64,611 $ 162,006
======== =========
</TABLE>
3. 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.
7
<PAGE> 8
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.
8
<PAGE> 9
The following transaction took place on March 1, 1999 .
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.
KFC National Purchasing Cooperative, Inc.
Unaudited Condensed Consolidated Balance Sheet
March 1, 1999
<TABLE>
<CAPTION>
Corporate Reorganization
Adjustments
Historical ------------------------------ As adjusted
Registrant Taco Bell Coop Unified 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) 279,409 8,329,159
Prepaid expenses and other current assets 125,158 3,241 111,736 10,181
------------ ------------ ------------ -----------
Total Current Assets 51,795,425 4,717,500 415,609 46,662,316
Investment in the Unified Coop 50,000 (950,000) 1,000,000
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>
4. 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 two months ended April 30, 1999 is as follows:
<TABLE>
<CAPTION>
Total
Registrant Taco Bell Coop Pizza Hut Coop Other Unified Co-op
---------- -------------- -------------- ----- -------------
<S> <C> <C> <C> <C> <C>
Sales $63,580,065 $23,990,432 $ 16,990,298 $138,090 $104,698,885
Sourcing Fee 821,431 1,262,605 888,751 -- 2,972,787
Gross profit 2,806,759 1,796,297 1,229,384 138,090 5,970,530
Net earnings 618,926 49,121 (443,562) 16,007 240,492
- -----------------------------------------------------------------------------------------------
Current assets $ 58,358,763
Non-current assets 876,016
Current liabilities 53,696,218
Non-current liabilities 3,328,549
- -----------------------------------------------------------------------------------------------
</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 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.
10
<PAGE> 11
The Taco Bell Coop's obligation to reimburse the KFC Coop for the Intercompany
Liability is reflected in a Promissory Note at 7.75% for a maximum six month
period. The original principal amount of $8,608,568 is collateralized by
security interests granted by the Taco Bell Coop to the KFC Coop pursuant to a
Security Agreement. As of April 30, 1999, the remaining principal balance on the
note was $378,592.
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. 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 ended April 30, 1999, are not necessarily
indicative of the operating results for the entire year.
Results of Operations
Second Three Months of Fiscal 1999 Compared to the Second Three Months of Fiscal
1998.
The KFC Coop's Corporate Reorganization has materially affected 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 April 30, 1999, decreased significantly from the same period ended April
30, 1998. Set forth below is comparative information concerning net sales of the
KFC Coop and the Unified Co-op for the relevant periods.
11
<PAGE> 12
<TABLE>
<CAPTION>
Sales ($000)
--------------------------------------------------
Quarter Ended 4/30/99 Quarter Ended 4/30/98
--------------------- ---------------------
<S> <C> <C>
KFC Coop $ 61,819 $153,741
Unified Co-op 104,699 N/A
-------- --------
$166,518 $153,741
======== ========
</TABLE>
Aggregate sales of the KFC Coop and the Unified Co-op increased by $12,777,000
or 8.3% for the three months ended April 30, 1999 compared to the same quarter
in 1998. Of the aggregate amount, food and packaging sales increased by
$11,936,000 or 9%, in part due to the Unified Co-op's implementation of the
Pizza Hut purchasing program which contributed $23,237,000 in food and packaging
sales. Combined sales for KFC-Canada, Dairy Queen, Long John Silvers and
Fazoli's decreased by $17,485,000. The decrease is in part 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. food and packaging sales increased by $4,221,000 for the three months
ended April 30, 1999, compared to the same quarter in 1998. Aggregate equipment
sales for the second fiscal quarter 1999 increased $1,256,000 over 1998.
KFC-U.S. equipment sales increased by $2,969,000. 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.
For the quarter ended April 30, 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 as of April 30, 1999, is $618,926 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 two
months ended April 30, 1999, Taco Bell Coop's and Pizza Hut Coop's equity in
earnings of the Unified Co-op were $49,121 and $(443,562), respectively.
A comparison of selling, general and administrative expenses for the quarters
ended April 30, 1999 and 1998 reflects a significant decrease. The 1999 quarter
reflects expense through February, 28, 1999. 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.
Income before patronage dividend and income taxes increased by $229,723 or 37.8%
which is attributable to the higher sales volumes for KFC-U.S. 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.
Patronage dividend exceeds the income before patronage dividend and income taxes
as a result of a losses in the international and insurance divisions which are
excluded from the patronage dividend calculation for the quarter.
12
<PAGE> 13
First Six Months of Fiscal 1999 Compared to the First Six Months of Fiscal 1998.
A comparison of material changes between the six months ended April 30, 1999 and
the comparable period for the previous year shows:
The Corporate Reorganization affected the KFC Coop's results of operations for
the six months ended April 30, 1999, similarly to the effects on the three month
period ended April 30, 1999 discussed above. The chart set forth below reflects
the sales volume of the two entities for the six months periods ending April 30,
1999 and 1998:
<TABLE>
<CAPTION>
Net Sales ($000)
----------------------------------------------
Six Months Ended Six Months Ended
1999 1998
---- ----
<S> <C> <C>
KFC Coop $240,357 $303,321
Unified Co-op 104,699 N/A
-------- --------
$345,056 $303,321
======== ========
</TABLE>
Total sales for the combined entities increased by $41,735,000 or 13.8%. Total
food and packaging sales increased by $37,892,000. Food and packaging sales
related to the Pizza Hut concept increased by $39,724,000, Taco Bell related
sales increased by $10,505,000 and KFC-U.S. related sales increased by
$7,485,000. 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
$21,000,000. With respect to the equipment business, KFC, Taco Bell and Pizza
Hut related sales had increases of $4,950,000, $4,620,000 and $2,690,000,
respectively. Equipment sales for terminated programs reflected decreases of
approximately $7,800,000.
Income before patronage dividend and income taxes increased by $251,360
primarily due to the reduction in expenses associated with the formation of the
Unified Co-op and the assumption thereof of certain expenses as previously
discussed.
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 second quarter of fiscal
1999, the provision was $1,714,176 an increase of $408,049 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.
Financial Condition at April 30, 1999 Compared to Financial Condition at October
31, 1998.
Net working capital at April 30, 1999, was $13,432,140, which was a decrease of
$2,463,343 since October 31, 1998. The investment and loan to the Unified Co-op
is the primary use of this working capital. Cash and cash equivalents, notes
receivable from Unified Co-op, notes receivable from related parties and
deferred income taxes increased by $2,234,103, $5,865,591, $378,592 and $16,388,
respectively. Short term borrowings, notes payable, accounts payable, accrued
expenses, premium deposits, and patronage dividends decreased by $443,302,
$3,000,000, $32,968,021, $2,792,095 , $328,807 and $904,739, respectively. These
working capital items were offset by decreases in accounts receivable,
inventories and prepaid expenses and other current assets of $46,228,849,
$5,008,011 and $158,121, 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, the KFC Coop loaned an additional $1,000,000
in the form of a note. The other two members also contributed capital and loans
of equal amounts which provided the Unified Co-op capital and
13
<PAGE> 14
loans 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 April 30, 1999, KFC Coop had provided the Unified Co-op
with $5,865,591 in working capital loans in addition to its capital
contribution. The KFC Coop also funded, through a note, the spin off of the Taco
Bell assets and equity to the Taco Bell Coop. As of April 30, 1999 the balances
of this note was $378,592.
Since the Unified Co-op provides the operational support for the Concept Coop,
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 transferring inventory to the
Unified Co-op as needed. 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.
Year 2000
On March 1, 1999 the software and systems were transferred to the Unified Co-op.
The Year 2000 project is addressing the ability of computer programs and
embedded computer chips to distinguish the 20th century date from the 21st
century date, and is considering our trading partners, application systems,
central & distributed computing infrastructure, telephone communications, and
physical systems. The Unified Co-op has contracted with EDS data systems to
review the results of our Year 2000 testing and to certify that the all actions,
detailed below, are complete in minimizing risk. The Unified Co-op is jointly
working with Tricon to address certification for our suppliers and distributors.
Contingency plans will be developed for suppliers & distributors which are
considered to be "high risk" to our business operations.
The KFC Coop's core business operations, supported by the Unified Co-op, 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 had been modified to be Year 2000 compliant by the
KFC Coop internal programming staff. Changes to EDI communications have been
upgraded to support either Y2K compliant or non-compliant EDI document
specifications. The Unified Co-op is working closely with their EDI partners as
they are upgrading to compliant EDI to facilitate continued uninterrupted
operations. The Unified Co-op is utilizing third party vendors for payroll
processing through ADP, which has provided documentation that their system is
year 2000 compliant. Non-title business information is supported by a third
party arrangement with Tricon, which is in the process of providing written
documentation that this system is also Y2K compliant.
The Unified Co-op's core business operations are supported on an IBM AS/400. IBM
AS/400 has been verified as Year 2000 compliant, both for hardware and operating
systems, which the Unified Co-op has confirmed through independent testing. The
Unified Co-op's NT based LAN environment has been upgraded to the latest
Microsoft Y2K compliant software. The Unified Co-op has researched its routers,
and network equipment 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. Kenco will upgrade its
Novell server to address Y2K compliance. The Unified Co-op's desktop PC's have
been upgraded or replaced and the telephone systems' hardware and software has
been upgraded such that both are Y2K compliant. Other hardware devices have been
confirmed to be Y2K compliant by their respective vendors.
Management believes that external total cost incurred in connection with the
Year 2000 project, for the KFC Coop, 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.
14
<PAGE> 15
Based on the progress the Unified Co-op has made in addressing its Year 2000
issues, management does not foresee interruption in normal business activities
or operations associated with its Year 2000 compliance at this time. However, if
the Unified Co-op identifies significant risks related to its compliance
management, then it will develop a contingency plan to address those risks. 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 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 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.
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," "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 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 Registrant.
15
<PAGE> 16
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security - Holders
The Registrant held a special meeting of stockholder members (the
"Special Meeting") on February 26, 1999. A proposal to approve a corporate
reorganization of the Registrant as more fully described in the Registrant's
proxy materials filed with the SEC on Schedule 14A was approved by at least
two-thirds of the outstanding shares of the Registrant's membership common stock
and at least two-thirds of the outstanding shares of Series O and P membership
common stock (the "Taco Bell Shares"). A total of 483 shares of membership
common stock were voted in favor of the proposal; 9 shares were voted against;
and 11 shares abstained. Voting also as a separate voting group, a total of 71
Taco Bell Shares were voted in favor of the proposal and no Taco Bell Shares
were voted against or abstained. There were no broker non-votes in connection
with the Special Meeting.
The Registrant held its annual meeting of the stockholder members (the
"Annual Meeting") on June 7, 1999. At the Annual Meeting, the following
directors were elected by stockholder members:
<TABLE>
<CAPTION>
Series Class Director Term
------ ----- -------- ----
<S> <C> <C> <C>
A III James R. Royster 2000
B II Benjamin Edwards 2002
C II James G. Cocolin 2002
D II Robert Carle 2002
G II Dean M. Sorgdrager 2002
J II Edward Henriquez 2002
K I Charles Rawley 2001
K I Chris Campbell 2001
Independent II William R. Carden 2000
</TABLE>
The following persons are continuing directors whose terms of office will expire
in 2000 or 2001 at the Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
Series Class Director Term
------ ----- -------- ----
<S> <C> <C> <C>
E III David G. Neal 2000
F III William E. Allen 2000
H III James D. Olson 2000
I III Paul A. Houston 2000
L I Darlene L. Pfeiffer 2001
L I Lois G. Foust 2001
M III Ronald J. Young 2000
</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, 1999,
the Registrant filed a Form 8-K Current Report dated March 1,
1999, in connection with the Registrant's corporate
reorganization. No financial statements were filed as a part
of this Form 8-K Current Report. The following pro forma
financial information was filed:
KFC National Purchasing Cooperative, Inc. Pro Forma
Consolidated Balance Sheet as of October 31, 1998 (unaudited)
KFC National Purchasing Cooperative, Inc. Pro Forma
Consolidated Statement of Income for the year ended October
31, 1998 (unaudited).
KFC National Purchasing Cooperative, Inc. Notes to
Pro Forma Consolidated Financial Statements (unaudited).
16
<PAGE> 17
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 14, 1999 KFC National Purchasing Cooperative, Inc.
By: / s / Daniel E. Woodside
-----------------------------------------
Daniel E. Woodside, President
Date: June 14, 1999 By: / s / William E. Bickley
-----------------------------------------
William E. Bickley,
Vice President/Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 2,505,956
<SECURITIES> 0
<RECEIVABLES> 4,924,781
<ALLOWANCES> 1,153,455
<INVENTORY> 2,060,477
<CURRENT-ASSETS> 16,437,468
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,175,935
<CURRENT-LIABILITIES> 3,005,328
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,170,607
<TOTAL-LIABILITY-AND-EQUITY> 20,175,935
<SALES> 240,356,725
<TOTAL-REVENUES> 240,356,725
<CGS> 234,413,390
<TOTAL-COSTS> 234,413,390
<OTHER-EXPENSES> 4,585,657
<LOSS-PROVISION> 177,458
<INTEREST-EXPENSE> 204,138
<INCOME-PRETAX> 125,800
<INCOME-TAX> 51,914
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,886
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
