<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 June 30, 2000 Commission file number 0-23496
------------- -------
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 July 31, 2000
Membership Common Stock 568
Store Common Stock 5176
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Part 1 - Financial Information
Page (s)
--------
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Income
For the three months ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Income
For the six months ended June 30, 2000 and 1999 4
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 5
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Part II - Other Information
Item 1 Legal Proceedings 14
Item 4 Submission of Matter to a Vote of Security - Holders 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the three months ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ -- $ 3,405,338
Cost of goods sold -- 3,215,592
----------- -----------
Gross profit -- 189,746
Share in earnings of UFPC 1,792,811 2,651,504
Selling, general and administrative expenses 46,031 171,849
(Benefit) provision for losses on receivables (124,453) 6,000
Other income (expenses):
Service charges 615 61,240
Interest income 252,743 71,576
Interest expense (7,419) (5,383)
Miscellaneous 1,660 17,459
----------- -----------
247,599 144,892
----------- -----------
Income before patronage
dividend and income taxes 2,118,832 2,808,293
Patronage dividend 1,746,813 2,253,667
----------- -----------
Income before income taxes 372,019 554,626
Provision for income taxes 159,948 224,474
----------- -----------
Net income $ 212,071 $ 330,152
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the six months ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -------------
<S> <C> <C>
Net sales $ 777,514 $ 118,977,616
Cost of goods sold 744,774 115,945,105
----------- -------------
Gross profit 32,740 3,032,511
Share in earnings of UFPC 2,707,075 2,490,980
Selling, general and administrative expenses 146,645 2,456,235
(Benefit) provision for losses on receivables (119,453) 152,863
Other income (expenses):
Service charges 615 95,877
Interest income 372,011 88,964
Interest expense (7,425) (113,520)
Miscellaneous 9,209 79,627
----------- -------------
374,410 150,948
----------- -------------
Income before patronage
dividend and income taxes 3,087,033 3,065,341
Patronage dividend 2,574,147 2,698,844
----------- -------------
Income before income taxes 512,886 366,497
Provision for income taxes 216,576 168,002
----------- -------------
Net income $ 296,310 $ 198,495
=========== =============
</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>
JUNE 30, DECENBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,569,869 $ 9,623,071
Accounts and note receivable, less allowance for
losses of $265,668 in 2000 and $1,151,040 in 1999 -- 633,161
Deferred income taxes 345,737 532,691
Note receivable from related party 50,000 50,000
------------ ------------
Total Current Assets 13,965,606 10,838,923
Note receivable from UFPC -- 8,263,865
Notes receivable from related party, excluding current portion 400,000 577,948
Investment in UFPC 2,990,029 3,767,462
Marketable debt securities 3,186,314 --
Deferred income taxes 4,542 9,603
Other assets 32,518 139,575
------------ ------------
Total Assets $ 20,579,009 $ 23,597,376
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,000 $ 1,000
Accounts payable 144 188,264
Accounts payable to related parties 11,963 23,946
Accrued expenses 144,801 825,683
Patronage dividend payable 2,574,147 4,841,901
------------ ------------
Total Current Liabilities 2,732,055 5,880,794
------------ ------------
Commitments and Contingencies
Members' Equity:
Membership common stock 5,670 5,780
Store common stock 1,315,366 1,479,924
Accumulated other comprehensive income (69,525) (68,255)
Retained earnings 16,595,443 16,299,133
------------ ------------
17,846,954 17,716,582
------------ ------------
Total Liabilities and Members' Equity $ 20,579,009 $ 23,597,376
============ ============
</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 June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 296,310 $ 198,495
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization -- 119,373
(Benefit) provision from losses on receivables (119,453) 168,525
Distributed (undistributed) share of earnings in UFPC 777,433 (4,201,744)
Deferred income taxes 192,015 74,831
Changes in operating assets and liabilities:
Accounts receivable 752,614 37,415,058
Accounts receivable from related party -- 905,885
Inventories -- 6,554,787
Prepaid expenses -- (119,143)
Other assets 107,057 50,166
Accounts payable (188,120) (24,744,246)
Accounts payable to related party (11,983) 102,288
Accrued expenses (680,882) (2,370,223)
Premium deposits -- (258)
Patronage dividend payable (2,267,754) 4,207
------------ ------------
Net cash (used in) provided by operating activities (1,142,763) 14,158,001
------------ ------------
Cash Flows from Investing Activities:
Purchase of marketable debt securities (3,186,314) --
Investment in UFPC -- (1,000,000)
Notes receivable from UFPC 8,263,865 (9,137,928)
Notes receivable from related party 177,948 8,974,034
Additions to office equipment -- 631,695
------------ ------------
Net cash provided by (used in) investing activities 5,255,499 (532,199)
------------ ------------
Cash Flows from Financing Activities:
Short-term borrowings -- (9,234,814)
Note payable to related party -- 289,693
Proceeds from sale of stock, net of costs 16,742 40,785
Retirement of stock (181,410) (197,120)
Distribution to Taco Bell Co-op -- (334,140)
------------ ------------
Net cash used in financing activities (164,668) (9,435,596)
Effect of exchange rate changes on cash and cash equivalents (1,270) (44,380)
------------ ------------
Net increase in cash and cash equivalents 3,946,798 4,145,826
Cash and cash equivalents - beginning of period 9,623,071 919,856
------------ ------------
Cash and cash equivalents - end of period $ 13,569,869 $ 5,065,682
============ ============
Supplemental information:
Income taxes paid $ 450,800 $ 58,000
============ ============
Interest paid $ 24 $ 104,696
============ ============
</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, 1999 and the Transition Report on Form 10-Q for the two months
ended December 31, 1999, 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, 1999 and the Transition Report on Form 10-Q for the two months ended
December 31, 1999, 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 (which include only normal recurring adjustments)
necessary for fair presentation of this information have been made.
On December 8, 1999, the KFC Co-op's Board of Directors determined to change the
Registrant's fiscal year end from October 31 to December 31. In connection with
the change in fiscal year, the KFC Co-op filed a report on Form 10-Q covering
the transition period from October 31, 1999 to December 31, 1999.
2. Comprehensive Income
Comprehensive income consist of the following:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Net income $ 296,310 $ 198,495
Other comprehensive (loss):
Foreign currency translation adjustment (net of related tax benefit
of $0 in 2000 and 1999) (1,270) (44,380)
--------- ---------
Comprehensive income $ 295,040 $ 154,115
========= =========
</TABLE>
3. Contingencies
In April 1996, the KFC National Purchasing Cooperative, Inc. ("KFC Co-op")
entered into a finance program for stockholder members co-sponsored by the
National Cooperative Bank. The program initially provided for up to $20,000,000
in loans to KFC Co-op members, which range from $110,000 to an individual
maximum of $2,000,000. The KFC Co-op 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 that will be applied to losses
prior to the KFC Co-op incurring any loss. The reserve account is funded
pursuant to the program agreements. The National Cooperative Bank's commitment
to provide such loans terminated in June 1997. As of June 30, 2000, the National
Cooperative Bank had funded approximately $8 million of borrowings outstanding
under this program. The KFC Co-op evaluates the 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, the KFC Co-op under this program expects
no losses.
7
<PAGE> 8
4. Marketable Debt Securities
At June 30, 2000, corporate debt securities have been categorized as available
for sale and are stated at fair value based on quoted market prices. At June 30,
2000, there were no unrealized holding gains and losses included as a component
of other comprehensive income. Available for sale securities at June 30, 2000
mature from July 1, 2010 through July 1, 2020.
5. Revenue Recognition in Financial Statements
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
All registrants are expected to apply the accounting and disclosure requirements
that are described in SAB 101 no later than the fourth quarter of the fiscal
year beginning after December 15, 1999. Management of the KFC Co-op is currently
analyzing the impact of SAB 101, but anticipates that the adoption of SAB 101
will not have a material effect on the KFC Co-op's results of operation or
financial position.
6. AmeriServe Food Distribution, Inc.
On January 31, 2000, AmeriServe Food Distribution, Inc. ("AmeriServe") and
certain of its affiliates filed in Delaware for protection under Chapter 11 of
the U.S. bankruptcy code. AmeriServe is the primary U.S. food and dry goods
distributor for Tricon Global Restaurants, Inc. ("Tricon"). The bankruptcy court
in Delaware has approved financing commitments to AmeriServe from Tricon. In
addition, to provide its suppliers confidence to continue shipping to KFC, Taco
Bell and Pizza Hut restaurants, Tricon has told its suppliers that it would be
responsible for payment of goods approved by and purchased by Tricon through
AmeriServe for use at any Tricon owned, franchised or licensed restaurant from
January 31, 2000 until further notice by Tricon. Tricon anticipates that
AmeriServe will continue the administrative functions of ordering and invoicing,
in AmeriServe's name, of Tricon purchased goods. As in most bankruptcies
involving a primary supplier or distributor, the AmeriServe bankruptcy poses
certain risks and uncertainties to the KFC Co-op, as well as to our stockholder
members that rely on AmeriServe to distribute supplies to their restaurants.
Significant adverse developments in any of these risks or uncertainties could
have a material adverse impact on the KFC Co-op's results of operations,
financial condition or cash flow. The long-term impact of AmeriServe's
bankruptcy on the business of the KFC Co-op remains uncertain. The KFC Co-op's
share of earnings from the Unified Foodservice Purchasing Co-op, LLC ("UFPC")
was reduced by approximately $1,121,000, during the six months ended June 30,
2000, arising from the KFC Co-op's portion of UFPC's AmeriServe accounts
receivables and AmeriServe related expenses. AmeriServe has announced that it is
in discussions to sell its distribution business to the McLane Company Inc., a
subsidiary of Wal-Mart Stores, Inc.
7. Legal Proceedings
On July 31, 1998, the KFC Co-op filed a complaint against Fred Jeffrey, a
former consultant to the KFC Co-op, and his wife, Julianna Jeffrey
(collectively, the "Jeffreys"), alleging breach of contract, conversion and
unjust enrichment. The KFC Co-op alleged in its complaint that the Jeffreys
breached certain contracts with the KFC Co-op by not fully repaying a $600,000
loan from the KFC Co-op and for converting certain funds that were to be used to
repay that loan. At the time of filing the complaint, the Jeffreys were in
default for approximately $194,000 under the loan. The Jeffreys each filed
separate answers to the complaint, denying that they were in default and
asserting that the loan was non-recourse in nature. Fred Jeffrey filed a
counterclaim against the KFC Co-op, alleging that the KFC Co-op fraudulently
induced him into selling his business and becoming a consultant to the KFC
Co-op. He also alleged fraud and deceit, unjust enrichment and quantum meruit,
wrongful discharge/breach of contract, and breach of contract and tortious
interference with a known contractual relationship. He asked for more than $3.7
million in compensatory damages and an unspecified amount in punitive damages.
Julianna Jeffrey also filed a counterclaim, alleging fraud and deceit. She
requested more than $1.4 million in damages. Trial began on February 22, 2000,
and the jury returned its verdict on March 8, 2000. The jury awarded zero
damages on the Jeffreys' three fraud claims, zero damages on Mr. Jeffrey's claim
for tortious interference with a contract, and $50,000 on Mr. Jeffrey's breach
of contract claim related to the early termination of his consulting agreement
with the KFC Co-op. The court dismissed the Cooperative's claims for repayment
of the loan. The KFC Co-op has appealed the court's decision to dismiss the KFC
Co-op's claims and the jury's award of $50,000.
8
<PAGE> 9
8 Investment in Unified Foodservice Purchasing Co-op, LLC
UFPC is owned by its members, consisting of the KFC Co-op, Taco Bell National
Purchasing Co-op, Inc. ("Taco Bell Co-op") and Pizza Hut National Purchasing
Co-op, Inc. ("Pizza Hut Co-op"). The KFC Co-op accounts for its investment in
UFPC based on the Cooperative's share of earnings net of distributions of UFPC
in accordance with Purchasing Program Management Agreement. Earnings of UFPC are
divided between KFC Co-op, Taco Bell Co-op, and Pizza Hut Co-op, the ("Concept
Co-ops") primarily on the basis of patronage. During the six months ended June
30, 2000 the KFC Co-op received cash distributions from UFPC of $3,484,507.
Summarized financial information of UFPC as of and for the three months and six
months ended June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Taco Bell Pizza Hut
Three Months ended 6/30/00 KFC Co-op Co-op Co-op Kenco Total UFPC
-------------------------- ----------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Sales $82,630,006 $7,837,952 $ 2,412,655 $210,493 $93,091,106
Gross profit 2,690,305 523,826 203,011 210,493 3,627,635
Sourcing Fee 1,249,478 5,711,496 2,097,530 -- 9,058,504
Net income (loss) 1,792,811 4,076,066 (624,272) 16,573 5,261,178
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Taco Bell Pizza Hut
Six Months ended 6/30/00 KFC Co-op Co-op Co-op Kenco Total UFPC
------------------------ ----------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Sales $158,064,546 $15,984,978 $5,436,247 $422,098 $179,907,869
Gross profit 4,886,219 970,330 333,313 422,098 6,611,960
Sourcing Fee 3,308,350 9,546,611 4,069,303 -- 16,924,264
Net income 2,707,075 1,326,931 73,442 42,124 4,149,572
Current assets $ 44,133,391
Non-current assets 1,391,177
Current liabilities 30,973,473
Non-current liabilities 292,118
Members' Equity 14,258,977
--------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The KFC National Purchasing Cooperative, Inc. ("KFC Co-op") is a purchasing
cooperative which focuses on the purchase of the food, packaging, supplies,
equipment and related services used by owners and operators of KFC restaurants,
including Tricon Global Restaurants, Inc. ("Tricon"). Along with cooperatives
representing owners and operators of Taco Bell and Pizza Hut restaurants, we are
a member of the Unified Foodservice Purchasing Co-op, LLC, ("UFPC") which
administers our purchasing program. Tricon, together with its subsidiaries, is
the franchisor and licensor of the KFC, Taco Bell and Pizza Hut concepts, the
developer of products used and sold by the Tricon concepts, and an operator of
many KFC, Taco Bell and Pizza Hut retail outlets.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with management's discussion and
analysis of financial condition and results of operations in the KFC Co-op's
October 31, 1999, Form 10-K and December 31, 1999 Transition Report on Form
10-Q. The results of operations for the six months ended June 30, 2000, are not
necessarily indicative of the operating results for the entire year.
Results of Operations
Second Three Months of Fiscal 2000 Compared to the Second Three Months of Fiscal
1999
The KFC Co-op's Corporate Reorganization has materially affected the
presentation of its results of operations. As a result of the Corporate
Reorganization, the KFC Co-op's primary source of revenues effective March 1,
1999 has been earnings pursuant to the KFC Co-op's Purchasing Program Management
Agreement with UFPC. Because net sales previously recorded by the KFC Co-op
became net sales of UFPC effective March 1, 1999, the KFC Co-op's net sales for
the second three months ended June 30, 2000, decreased significantly from the
same period ended June 30, 1999. Net sales for the KFC Co-op for the three month
period ended June 30, 1999 were attributable to sales from its international
subsidiary. The International subsidiary is currently winding down operations
and has not processed new orders since January, 2000. Set forth below is
comparative information concerning net sales of the KFC Co-op and UFPC for the
relevant periods.
<TABLE>
<CAPTION>
Sales ($000)
---------------------------------
Three Months Three Months
Ended 6/30/00 Ended 6/30/99
------------- -------------
<S> <C> <C>
KFC Co-op $ 0 $ 3,405
UFPC 93,091 165,562
-------- --------
$ 93,091 $168,967
======== ========
</TABLE>
Aggregate sales of the KFC Co-op and UFPC decreased by $75,876,000 or 44.9% for
the second three months ended June 30, 2000 compared to the same period in 1999.
Food and packaging sales decreased by approximately $76,998,000. Sales for
KFC-Canada, International, and all other non-Tricon brands decreased by
$2,397,000 resulting from the termination of those programs at the time of the
formation of UFPC and the focus solely on the three Tricon brands (KFC, Taco
Bell and Pizza Hut). KFC-U.S., Taco Bell and Pizza Hut food and packaging sales
decreased by $17,512,000, $31,146,000, and $25,943,000, respectively for the
three months ended June 30, 2000, compared to the same three month period in
1999. These reductions are indicative of the movement to "non-title" for certain
distributors for all three brands. Aggregate equipment sales for the three
months of 2000 increased by $1,122,000 from 1999. KFC-U.S equipment sales
decreased by $3,049,000. Taco Bell and Pizza Hut equipment sales increased
approximately $3,993,000 and $1,312,000, respectively, when compared to the same
three months in 1999. International equipment sales for the second three months
decreased by $1,119,000. All other non-Tricon brands decreased by $15,000 during
the second three months of 2000 when compared to the same period last year.
10
<PAGE> 11
On January 31, 2000, AmeriServe Food Distribution, Inc. ("AmeriServe") filed in
Delaware for protection under Chapter 11 of the U.S. bankruptcy code. AmeriServe
is the primary U.S. food and dry goods distributor for Tricon. The bankruptcy
court in Delaware has approved financing commitments to AmeriServe from Tricon.
In addition, to provide its suppliers confidence to continue shipping to KFC,
Taco Bell and Pizza Hut restaurants, Tricon has told its suppliers that it would
be responsible for payment of goods approved by and purchased by Tricon through
AmeriServe for use at any Tricon owned, franchised or licensed restaurant from
January 31, 2000 until further notice by Tricon. Tricon anticipates that
AmeriServe will continue the administrative functions of ordering and invoicing,
in AmeriServe's name, of Tricon purchased goods. As in most bankruptcies
involving a primary supplier or distributor, the AmeriServe bankruptcy poses
certain risks and uncertainties to the KFC Co-op, as well as to our stockholder
members that rely on AmeriServe to distribute supplies to their restaurants.
Significant adverse developments in any of these risks or uncertainties could
have a material adverse impact on the KFC Co-op's results of operations,
financial condition or cash flow. The long-term impact of AmeriServe's
bankruptcy on the business of the KFC Co-op remains uncertain.
Starting on March 1, 1999, for the period ended December 31, 1999 and future
calendar quarters, the KFC Co-op will generally recognize its portion of the
income (loss) generated through UFPC in accordance with the Purchasing Program
Management Agreement. Included in the income statement for the three months
ending June 30, 2000, is $1,792,811, which represents the KFC Co-op's share of
the profit generated from the KFC purchasing program. The KFC Co-op's share of
earnings from UFPC was reduced by approximately $1,121,000 arising from the KFC
Co-op's portion of UFPC's write-off of receivables related to the bankruptcies
of AmeriServe and one of its subsidiaries. In accordance with the operating
agreement of UFPC, the operations of the three Concept Co-ops were assigned to
UFPC 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 Co-op will primarily reflect its share of earnings from
UFPC. For the second three months ended June 30, 2000, Taco Bell National
Purchasing Co-op, Inc. ("Taco Bell Co-op's") share of earnings from UFPC was
$4,076,066. Pizza Hut National Purchasing Co-op, Inc. ("Pizza Hut Co-op's")
share in the losses of the Pizza Hut purchasing programs was $624,272.
A comparison of selling, general and administrative expenses for the three
months ended June 30, 2000 and 1999 reflects a decrease of $125,818. Expenses
reflected for the current year are primarily legal fees associated with the
legal proceeding discussed previously. The 1999 expenses were associated with
the operation of the international subsidiary. On March 1, 1999, with the
formation of UFPC, the employees of the KFC Co-op and Tricon's Supply Chain
Management became employees of UFPC. UFPC now provides purchasing services for
the KFC Co-op through the Purchasing Program Management Agreement.
As part of the formation of UFPC, Kenco Insurance Agency, (Kenco) a subsidiary
of the KFC Co-op, was transferred to UFPC. Before the transfer, Kenco paid a
dividend to the KFC Co-op in the amount of $902,669, representing earnings
before March 1, 1999, the effective transfer date.
Income before patronage dividend and income taxes for the second three months
decreased by $689,461 or 24.6% which is attributable to the movement to
"non-title" and the impact of the UFPC write off of receivables relative to the
AmeriServe bankruptcy. Prior to March 1, 1999, the stores owned by Tricon, the
franchisor of KFC restaurants had not participated significantly in the purchase
of goods and equipment from the KFC Co-op since approximately the early 1990's.
Management believes the current provision for losses on uncollectible accounts
to be adequate.
The provision for patronage dividend for 2000 has been calculated and accrued on
a formula approved by the Board of Directors. For the second three months of
2000, the provision was $1,746,813, a decrease of $506,854 over the same period
last year. The decrease is primarily associated with the reduction in earnings
from UFPC based on the allocation to the KFC Co-op.
11
<PAGE> 12
First Six Months of Fiscal 2000 Compared to the First Six Months of Fiscal 1999.
A comparison of material changes between the six months ended June 30, 2000 and
the comparable period for the previous year shows:
The Corporate Reorganization affected the KFC Co-op's results of operations for
the six months ended June 30, 2000, similarly to the effects on the three month
period ended June 30, 1999 discussed above. The chart set forth below reflects
the sales volume of the two entities for the six months periods ending June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Net Sales ($000)
-----------------------------
Six Months Six Months
Ended Ended
2000 1999
-------- --------
<S> <C> <C>
KFC Co-op $ 778 $118,978
Unified Co-op 179,908 219,113
-------- --------
$180,686 $338,091
======== ========
</TABLE>
Total sales for the combined entities decreased by $157,405,000 or 46.6%. Total
food and packaging sales decreased by $157,528,000. As a result of the movement
to "non-title", food and packaging sales relative to KFC, Taco Bell and Pizza
Hut decreased by $32,120,000, $57,508,000 and $45,462,000, respectively. The
effect of the termination of the non-Tricon brand and KFC-Canada sales programs
as discussed above in the second three month information carried forward to the
year to date information. The year to date reduction in food and packaging sales
attributed to KFC-Canada, Diary Queen, Long John Silvers, Fazoli's and the
international subsidiary was approximately $22,438,000. With respect to the
equipment business, total equipment sales decreased $62,000. KFC reported a
decrease in sales of $2,184,000. Taco Bell and Pizza Hut related sales had
increases of $2,759,000, and $1,022,000, respectively for the six months ended
June 30, 2000. Equipment sales for terminated programs reflected decreases of
approximately $1,659,000. The insurance subsidiary revenues increased $185,000
during the this period.
Income before patronage dividend and income taxes for the period was $3,087,033,
only slightly higher than the $3,065,341 in 1999.
Management believes the current provision for losses on uncollectible accounts
to be adequate.
The provision for patronage dividend for 2000 has been calculated and accrued on
a formula approved by the Board of Directors. For the second quarter of 2000,
the provision was $2,574,147 a decrease of $124,697 over the same period last
year. While income before patronage dividend and income tax for the two years
was relatively the same, the amount for 2000 included non-patronage source
income from the international subsidiary.
Financial Condition at June 30, 2000 Compared to Financial Condition at
December 31, 1999
Net working capital at June 30, 2000 was $11,233,551, an increase of $6,275,422
since December 31, 1999. Cash and cash equivalents increased by $3,946,798. This
working capital increase was offset by decreases in accounts receivable,
deferred income taxes, accounts payable, accounts payable to related parties,
accrued expenses and patronage dividend of $633,161, $186,954, $188,120,
$11,983, $680,882 and $2,267,754, respectively. The balance sheet is indicative
of the transactions associated with the formation of UFPC. The KFC Co-op, on
March 1, 1999, contributed certain assets, primarily office equipment, to UFPC
as part of the capital contribution. In addition, as of June 30, 2000 the KFC
Co-op had invested $2,000,000 in UFPC. The other two Concept Co-op's also
contributed capital of equal amounts that provided UFPC 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 KFC Co-op, Taco Bell Co-op, and Pizza
Hut Co-op, the ("Concept Co-ops") each member of UFPC 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 UFPC.
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Since UFPC provides the operational support for the Concept Co-ops, the balance
sheet of the KFC Co-op has substantially changed. After March 1, 1999
receivables and inventory are assets of UFPC. As of June 30, 2000, the KFC Co-op
has transferred all its receivables and inventories to UFPC. Currently, the
balance sheet of the KFC Co-op consists of cash, investment in UFPC, amounts due
to and due from related parties, and members' equity.
Beginning in August, 1999, various distribution centers, which currently place
their orders directly with UFPC and generate sales dollars, began transitioning
to a "non-title" status in which they purchase directly from suppliers under
terms arranged by UFPC. The KFC business for Tricon-owned restaurants 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 years will be affected by this transition. The sourcing fee collected
has replaced a portion of the current margin structure and principally provided
the funds to fund the operations of UFPC.
Revenue Recognition in Financial Statements
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
All registrants are expected to apply the accounting and disclosure requirements
that are described in SAB 101 no later than the fourth quarter of the fiscal
year beginning after December 15, 1999. Management of the KFC Co-op is currently
analyzing the impact of SAB 101, but anticipates that the adoption of SAB 101
will not have a material effect on the KFC Co-op's results of operation or
financial position.
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 Co-op 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 Co-op and its customers operate); competition for the
KFC Co-op's customers from other distributors; material unforeseen changes in
the liquidity, results of operations, or financial condition of the KFC Co-op's
customers and UFPC's suppliers and distributors; and other risks detailed in the
KFC Co-op'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
Co-op. The KFC Co-op 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
"Pizza Hut," "Taco Bell," and "KFC," are registered trademarks of 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 Pizza Hut Corporation, Taco
Bell Corporation or KFC Corporation, except that KFC Corporation is a
stockholder member of the Registrant.
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Part II - Other Information
Item 1. Legal Proceedings
On July 31, 1998, the KFC Co-op filed a complaint against Fred Jeffrey, a
former consultant to the KFC Co-op, and his wife, Julianna Jeffrey
(collectively, the "Jeffreys"), alleging breach of contract, conversion and
unjust enrichment. The KFC Co-op alleged in its complaint that the Jeffreys
breached certain contracts with the KFC Co-op by not fully repaying a $600,000
loan from the KFC Co-op and for converting certain funds that were to be used to
repay that loan. At the time of filing the complaint, the Jeffreys were in
default for approximately $194,0000 under the loan. The Jeffreys each filed
separate answers to the complaint, denying that they were in default and
asserting that the loan was non-recourse in nature. Fred Jeffrey filed a
counterclaim against the KFC Co-op, alleging that the KFC Co-op fraudulently
induced him into selling his business and becoming a consultant to the KFC
Co-op. He also alleged fraud and deceit, unjust enrichment and quantum meruit,
wrongful discharge/breach of contract, and breach of contract and tortious
interference with a known contractual relationship. He asked for more than $3.7
million in compensatory damages and an unspecified amount in punitive damages.
Julianna Jeffrey also filed a counterclaim, alleging fraud and deceit. She
requested more than $1.4 million in damages. Trial began on February 22, 2000,
and the jury returned its verdict on March 8, 2000. The jury awarded zero
damages on the Jeffreys' three fraud claims, zero damages on Mr. Jeffrey's claim
for tortious interference with a contract, and $50,000 on Mr. Jeffrey's breach
of contract claim related to the early termination of his consulting agreement
with the KFC Co-op. The court dismissed the Cooperative's claims for repayment
of the loan. The KFC Co-op has appealed the court's decision to dismiss the KFC
Co-op's claims and the jury's award of $50,000.
Item 4. Submission of Matters to a Vote of Security - Holders - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27.1 Financial Data Schedule (for SEC use only)
(b) Report on Form 8-K - None
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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: August 14, 2000 KFC National Purchasing Cooperative, Inc.
-----------------
By: /s/ Daniel E. Woodside
----------------------------------------
Daniel E. Woodside, President
Date: August 14, 2000 By: /s/ William L. Bickley
----------------- ----------------------------------------
William L. Bickley,
Sr. Vice President/Chief Financial
Officer
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