U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31 1998
Commission file number 0-24681
UNISERVICE CORPORATION
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(Name of Small Business Issuer in its Charter)
Florida 69-0516177
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1900 Glades Road, Suite 351, Boca Raton, Florida 33431
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(Address of Principal Executive Offices) (Zip Code)
(561) 416-8930
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(Issuer's Telephone Number)
Securities registered under Section 12(b)
of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, $.0001 par value Class A Common Stock Warrants
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $ 13,415,518
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $3.25 as of March 29, 1999.
Based on the closing price of the Class A Common Stock quoted on the Nasdaq
Small Cap Market as reported on March 29, 1999 ($3.25), the aggregate market
value of the 1,430,000 shares of the Common Stock held by the persons other than
officers, directors and persons known to the Registrant to be the beneficial
owner (as that term is defined under the rules of the Securities and Exchange
Commission) of more than five percent of the Common Stock on that date was
approximately $4,578,275.
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: March 29, 1999: 1,430,000 Shares of
Class A Common Stock and 1,400,000 Shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
- - None -
Transitional Small Business Disclosure Format (Check One)
Yes No X
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BUSINESS
General
Uniservice Corporation ("USC") was organized in November 1997 as a
holding company to acquire a 99.97% interest in Kentucky Foods Chile S.A. ("KyF
Chile"), a Chilean corporation incorporated in November 1986. KyF Chile
currently owns and operates, under license, 34 Kentucky Fried Chicken(R)
("KFC(R)") restaurants in Chile, the majority of which are located in Santiago,
pursuant to the Franchise Agreement with KFCIH. See "Business Franchise
Agreement with KFCIH." KyF Chile is currently the sole KFC(R) franchisee in
Chile and is the largest KFC(R) franchisee in Central and South America. KFCIH
has no equity interest in the Company and does not warrant the results of the
operations of the Company.
The Company's strategy is to (i) develop new KyF(R) restaurants to
enhance its operating leverage and increase overall margins and profitability;
(ii) achieve operating efficiencies through centralized management and advanced
management information systems; and (iii) capitalize on KyF(R)'s strong,
international brand name. The Company believes that this strategy will enable
the Company to increase the number of KyF(R) restaurants it currently owns and
operates by constructing approximately three to five new restaurants each year
for the next five years (for a total of 49 Company owned restaurants by 2003).
The Company intends to open at least three new KyF(R) restaurants during the
next twelve months.
On August 4, 1998, the Company acquired 99.7% of Inversiones
Inmobiliaria Kyoto, S.A.'s ("Kyoto") interest in KyF Chile in exchange for
1,399,900 shares of the Company's Class B Common Stock which was effected as of
the closing of the Company's initial public offering. In order to comply with
Chilean law and the requirements of the Central Bank of Chile for foreign
investments two stock purchase agreements were effectuated at the time of the
closing of the initial public offering of the Company's Common Stock whereby (i)
Kyoto purchased 1,399,900 shares of Class B Common Stock for $2.2 Million; and
(ii) the Company purchased Kyoto's 99.97% interest in KYF Chile for $2.2 Million
and KyF Chile became a majority owned (99.97%) subsidiary of the Company. The
remaining shares of KyF Chile are owned by Ricardo Vilensky, individually, who
is also the principal shareholder of Kyoto. The Company's offices are currently
located at 1900 Glades Road, Suite 351, Boca Raton, FL 33431, and its telephone
number is (561) 416-8930.
Background
USC was organized as a Florida corporation on November 21, 1997 under
the name Uniservice Corp. and on January 5, 1998, changed its name to Uniservice
Corporation. KyF Chile was organized under the name Alimentos Merced Limitada on
November 6, 1986, as a Chilean limited partnership and on January 14, 1991, was
reorganized as a Chilean corporation and changed its name to Alimentos Merced
S.A. On October 3, 1995, that corporation changed its name to Kentucky Foods
Chile S.A.
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Since its formation, the Company has been involved in fast-food
restaurants specializing in chicken products. Initially, the Company operated
its first four restaurants under the name "Papa Pollo." During the second half
of 1991, the Company changed the name of its restaurants to "Chicken Inn" and by
1993, the Company had nine restaurants. It then purchased an additional five
restaurants, and in January 1994, the Company entered into the Franchise
Agreement and converted all of its restaurants into KFC(R) restaurants.
The Fast Food Restaurant Industry
Overview
The fast food service industry consists of quick service restaurants
("QSRs"), full service restaurants, other commercial restaurants (including
cafeterias) and non-commercial restaurants such as those in schools and
hospitals. According to KFCIH's public reports, the QSR segment of the fast food
service industry had total sales of approximately $170 billion worldwide in
1998. The Company believes that KFC(R) is the leading chain in the chicken
segment of the QSR industry.
The Fast Food Restaurant Industry in Chile
With the continued economic stability in Chile and the economic growth
of its middle class, the demand for goods and services, including fast food, has
grown. Listed below is the number of restaurants for each of the major fast food
franchises located in Chile as of December 1998.
Number of Major Types
Name Restaurants of Products
Lomiton(R) 74 Pork sandwiches
Doggis(R) 54 Hot dogs
KFC(R) 35 Chicken
Pizza Hut(R) 31 Pizza
McDonald's(R) 43 Hamburgers
Burger King(R) 32 Hamburgers
Domino's(R) 18 Pizza
Embers(R) 17 Roast beef sandwiches
Mr. Chips(R) 11 Roast beef sandwiches
Taco Bell(R) 11 Tacos and burritos
Submarine(TM) 12 Subs/hoagies
Mei Lin Ta(R) 10 Chinese food
Burger Inn(TM) 10 Hamburgers
Natural Juice(TM) 7 Salads and natural juices
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The KFC(R) Restaurant Concept
The KFC(R) Restaurant Concept was founded in Corbin, Kentucky by
Harland D. Sanders, an early developer of the QSR business and a pioneer of the
restaurant franchise concept. He perfected his recipe for Kentucky Fried Chicken
in 1939 and signed up his first franchisee in 1952. Today, KFC(R) restaurants
have grown to approximately 10,000 units in over 80 countries and territories.
The KFC(R) mission is based upon its "CHAMPS" philosophy which stands
for Cleanliness, Hospitality, Accuracy, Maintenance, Product, Speed ("CHAMPS").
In particular, (1) all restaurants and employees are to be clean and hygienic,
(2) all restaurants and employees will be hospitable and welcoming to all
customers, (3) all orders served will be correct and as requested by a customer,
(4) all restaurants will be well maintained, (5) all products offered and served
will be of high quality and consistent, and (6) the restaurants will offer
quality and efficient service.
Part of the KFC(R) concept is to offer full meal options with
alternative choices, as opposed to offering only sandwiches or burgers. These
full meal options include chicken, side orders such as salads, mashed potatoes
and gravy, french fries, biscuits, rice, and cole slaw, dessert and beverages.
KFC(R) restaurants also offer options in the preparation of chicken, including
three types of fried and rotisserie chicken entrees sold under the brand names
of Original Recipe(R), Extra Tasty Crispy(R) and Tender Roast(R), as well as
other entree items include Chunky Chicken Pot Pies(TM), Colonel's Crispy
Strips(R) and various chicken sandwiches. Restaurant exteriors, decor and
packaging are characterized by KFC(R)'s distinctive trade dress, including the
image of Colonel Sanders and the "Bucket" of chicken.
Business Strategy
The Company's business strategy as it pertains to KFC(R) is as follows:
o Develop new KFC(R)restaurants to enhance its operating leverage and
increase overall margins and profitability. In particular, management
believes that it will be able to continue to spread its corporate
overhead and continue to reduce its cost of operations by
centralization of management and purchasing of food and other products
in greater quantities as the number of restaurants that it owns and
operates steadily increases. Management also believes that its risks of
expansion are substantially reduced due to (i) the proven success of
the KFC(R)concept in Chile as well as the stable Chilean economy, which
has resulted in an increased middle class with discretionary income;
(ii) the predictability of development costs and restaurant
profitability; and (iii) management's extensive experience within the
KFC(R)franchise system. The Company currently intends to open
approximately 70% of its new KFC(R)restaurants in the Santiago area and
the remaining 30% in metropolitan areas in Chile with populations of
approximately 100,000 or more. See "The Company's Restaurants."
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o Achieve operating efficiencies through continued centralized management
and advanced management information systems. This enables the Company
to (i) control corporate overhead and individual restaurant costs, (ii)
capture economics of scale by utilizing its existing corporate
management structure, and (iii) continuously monitor point-of-sale data
to more efficiently manage its restaurant operations. The Company has
experienced both restaurant level and corporate level savings as a
result of its size and related bargaining power, particularly with
respect to food and paper purchasing and distribution, and restaurant
maintenance services. As the number of its restaurants increases, the
Company believes its bargaining power should continue to increase.
o Capitalize on KFC'(R)s strong international brand name. The Company
believes that it realizes significant benefits from its affiliation
with KFCIH as a result of: (i) the widespread recognition of the KFC(R)
brand name and products; and (ii) the historical availability of
international marketing and promotion of KFC(R) products.
The Company Operations
Overview
All executive management, financing, marketing and operations support
functions are conducted centrally at the Company's Santiago Chile headquarters.
At its headquarters, the Company maintains a state-of-the-art centralized
computer system that is linked with the cash register at each KFC(R) restaurant.
Through this computer system, the Company has access to up-to-the-minute
information including, among other things, revenues, inventory control, and the
ability to monitor the progress of various promotions. The Company intends to
restrict its business to the KFC(R) brand in Chile. Pursuant to the Franchise
Agreement, the Company is presently prohibited from engaging in any KFC(R) brand
business outside of Chile. Subject to compliance with the Franchise Agreement
and the Development Agreement, the Company may, however, engage in other
businesses which do not conflict with the KFC(R) brand, subject to prior
approval by KFCIH.
Training
KFCIH issues detailed training manuals which cover all aspects of the
operations of KFC(R) restaurants, including food handling and product
preparation procedures, safety and quality issues, equipment maintenance,
facility standards, marketing, and accounting procedures. The restaurant
management teams are responsible for the day-to-day operation of each unit and
for ensuring compliance with operating standards.
In addition to the training manuals, the Company maintains a
comprehensive training and development program based upon the CHAMPS concept for
all of its personnel. This program emphasizes the KFC(R) system-wide operating
procedures, food preparation methods and customer service standards.
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The Company's Restaurants
KFC(R) restaurants are of distinctive design and are generally located
in high-traffic areas including shopping malls, food courts, shopping centers,
and downtown areas. The Company's KFC(R) restaurants generally consist of one of
several building types with various layouts and seating capacities. The Company
believes that convenience of location, speed of service, quality of food and
price/value of food served are the primary competitive advantages of KFC(R)
restaurants.
The Company opened its first five KFC(R) restaurants in 1994, and an
additional eight, seven, five and seven restaurants during 1995, 1996, 1997, and
1998, respectively. The Company currently has 34 restaurants, of which 19 are in
malls and shopping centers, 11 are in store fronts (in line), and four are free
standing. Thirty-three of its thirty-four restaurants are open seven days a
week, typically from 10:00 a.m. to midnight. Currently, the Company does not
accept credit cards, although it may elect to do so in the future. All free
standing restaurants also offer drive-through windows. Home delivery is
available at no-charge from eight of its restaurants.
During 1999, the Company expects to open three to five new KFC(R)
restaurants, one of which will be located in a shopping center, and three of
which will be in-line. The Company anticipates that three of the restaurants
will be located in Santiago and one in the coastal region of Chile. The Company
anticipates that it will open 25 new restaurants in the future. Sixteen will be
in-line and nine will be free standing. The Company anticipates that it will
open 9 restaurants in the Santiago metropolitan area, 9 in the Southern Region
of Chile, 4 in the Coastal Region of Chile and 3 in the Northern Region of
Chile. In the future, the Company may also seek to enter into franchise
agreements with other KFCIH affiliated restaurants (including Pizza Hut(R) and
Taco Bell(R) restaurants).
All of the Company's KFC(R) restaurants offer a full line of KFC(R)
products, including chicken pieces, chicken sandwiches, a variety of side items
including cole slaw, mashed potatoes, salads and corn, and dessert. In addition
to a full-line of soft drinks, 17 of the Company's current restaurants are
licensed to sell beer (the drinking age in Chile is 18).
Quality Assurance
The Company's operations are focused on achieving a high level of
customer satisfaction, with speed, accuracy and quality of service closely
monitored. The Company's senior management and restaurant management staff are
principally responsible for ensuring compliance with the Company's and KFCIH's
operating procedures. The Company and KFCIH have uniform operating standards and
specifications relating to the quality, preparation and selection of menu items,
maintenance and cleanliness of the premises and employee conduct. Detailed
reports from the Company's own management information system and surveys
conducted by the Company or KFCIH are tabulated and distributed to management on
a regular basis to help maintain compliance. In addition to customer
satisfaction, these reports track comparable sales and customer counts, labor
and food costs, inventory levels, waste losses and cash balances.
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The Company and its management closely supervise the operation of all
of its restaurants to help ensure that standards and policies are followed and
that product quality, customer service and cleanliness of the restaurants are
maintained. Management also conducts unscheduled inspections of its restaurants
to ensure quality.
The KFC(R) restaurants are also subject to standards set by Chilean,
provincial and local governmental laws and regulations. These standards include
food preparation rules regarding, among other things, minimum cooking times and
temperatures, sanitation and cleanliness. In addition, KFC(R) has set maximum
time standards for holding unsold prepared food in order to maintain freshness
of its products.
Supplies and Distribution
Pursuant to the Franchise Agreement, the Company is required to buy
food supplies, ingredients, seasonings, and equipment only from approved
suppliers who are required to meet or exceed system standards designed to ensure
product quality, safety and consistency. The Company purchases KFC(R)'s
pre-packaged seasoning which contain KFC(R)'s proprietary recipes directly from
KFCIH's principal U.S. supplier.
From time to time, the Company may inspect the facilities of its
suppliers and request samples for testing and other quality control monitoring.
Many of these suppliers, such as poultry producers, are also subject to Chilean
government inspection. In addition, representatives of the Company's quality
assurance department visit restaurants from time to time to ensure that food is
properly stored, handled and prepared in accordance with prescribed standards
and specifications, as well as to provide training in food safety and sanitation
measures to the restaurant operators. The quality assurance department is also
responsible for remaining current on issues related to food safety, and
interacting with regulatory agencies as may be required or desirable on these
matters.
The Company purchases much of its products by means of centralized
buying in order to obtain the best prices. As the number of the Company's
restaurants increase, the Company believes that its bargaining power to purchase
goods at the best prices and on favorable terms should also increase. The
Company purchases its supplies and foodstuffs from vendors on favorable terms
and conditions (including quantity discounts) and all suppliers used by the
Company have been approved by KFCIH, as a condition of the Franchise Agreement.
The Company believes there are a number of vendors who can supply the Company
with adequate quantities of products and that the loss of any one supplier would
not have a material impact on the Company's operations.
Additionally, to ensure the wholesomeness of all food products,
suppliers are required to meet or exceed strict quality control standards.
Competitive bids, long-term contracts and long-term vendor relationships have
been used to ensure availability of products. The Company has not experienced
any significant continuous shortages of supplies. Prices paid for these supplies
may be subject to fluctuation. When prices increase, the Company may be
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able to pass on such increases to its customers, although there is no assurance
this can be done in the future. In particular, the quality assurance departments
of KFCIH help ensure that the systems' restaurants provide high quality,
wholesome food products in clean and safe environments.
Personnel
The Company and KFCIH believe that high quality, customer-focused
restaurant management is critical to long-term success. Generally, each of the
Company's restaurants has one restaurant general manager, two supervisors and
teams of workers. KFC(R)'s restaurant management structure varies by unit size.
Each restaurant usually has between 10 and 35 hourly employees, most of whom
work part-time. The Company pays an hourly wage of $1.20 per hour, the average
hourly wage in Chile. Overtime is paid (one and one half time minimum wage, or
$1.80 per hour) to any employee that works more than 48 hours weekly. However,
Chilean law only permits employees to work a maximum of two extra hours daily.
Overtime (of two times minimum wage, or $2.40 per hour) is paid on Sundays and
holidays. Restaurant general managers receive base salaries, as well as
incentive bonuses, based upon that KFC(R) restaurant's productivity and
profitability.
Marketing, Advertising and Promotion
The Company believes that one of the major advantages of being a KFC(R)
franchisee is the marketing support and international brand name promotion by
KFCIH and its franchisees. Each year, the Company typically introduces different
types of promotions, either in conjunction with KFCIH or independently,
including, among others, (1) value-type combination meals, (2) new products, (3)
kids meals, (4) coupons, and (5) promotion of new KFC(R) restaurants.
A portion of its marketing and advertising plan includes participating
in certain of KFCIH's internationally licensed promotions, for which it pays a
fee to KFCIH pursuant to the Franchise Agreement, which may include giveaways
for children. During 1998, the Company took part in promotions for the
"Godzilla" film, "The Simpsons" television characters and "Chicky/Camelot
Quest," (a new logo/character identified with KFC(R) restaurants). The Company
also advertises on cable television and radio.
Franchise Agreement with KFCIH
The Company and KFCIH have orally agreed and confirmed in writing to a
New Franchise Agreement that will replace the Original Franchise Agreement. The
New Franchise Agreement, consistent with the Original Franchise Agreement,
permits the Company to use, among other things, KFCIH's proprietary trade names,
trademarks, service marks, recipes, and trade dress. The Company is also
permitted to sell and promote only KFC(R) approved products.
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Under the Original Franchise Agreement ("Franchise Agreement"), at all
times, Mr. Vilensky must retain voting control of KyF Chile and USC. As result,
the Company has created two classes of common stock--Class A Common Stock and
Class B Common Stock-- which are identical except that holders of Class B Common
Stock are entitled to ten votes for each one share held (all of which shares of
Class B Common Stock are owned or controlled by Mr. Vilensky). See "Description
of Securities." Additionally, unless Mr. Vilensky obtains approval from KFCIH,
Mr. Vilensky must retain at all times a minimum of 30% ownership of the Company.
As a condition to the Franchise Agreement, Mr. Vilensky may sell up to the
lesser of (a) 10% of the outstanding amount of capital stock of the Company or
(b) such amount so that Mr. Vilensky's ownership interest will not be below 30%
provided, however, that the proceeds from such sale received by Mr. Vilensky may
not be used to start a new company. Under the proposed New Franchise Agreement,
the Company and KFCIH are currently negotiating to allow Mr. Valensky to retain
less than 30% ownership as long as he retains more than 50% voting control of
the Company.
As a condition of the Franchise Agreement, the Company is also required
to have a "designated operator", which is the person that oversees the
management of the day-to-day operations of the Company's restaurants. Currently,
the designated operator is Mr. Vilensky. In the event Mr. Vilensky is unwilling
to serve as the designated operator or becomes disabled or deceased, management
or Mr. Vilensky's heirs will propose a new designated operator, who will be
subject to approval by KFCIH. KFCIH has indicated that it prefers if the
designated operator also controls the ownership of the Company. In the event
that KFCIH determines that the proposed designated operator is not capable of
performing the necessary duties and obligations, Mr. Vilensky or his heirs are
required to use their best efforts to sell their interest in the Company within
six months thereafter. In the event that no sale is completed within the six
month period, KFCIH thereafter has the option to purchase Mr. Vilensky's
interest, or the interest of Mr. Vilensky's heirs, in the Company for a market
value determined by three appraisers. There can be no assurance that the Company
will be in a position to meet the criteria required by KFCIH in the event Mr.
Vilensky is unable or unwilling to continue as the designated operator and/or
controls not less than a 30% ownership interest in the Company.
The initial franchise term for each restaurant is ten years, which
expires between December 31, 2003 and December 31, 2007, depending on when the
particular restaurant was opened. The initial franchise term is renewable for
additional ten year periods, provided that, among other things, (i) the renewal
is permitted by local law, (ii) the Company has corrected any default under the
Franchise Agreement and has not been in material default within the 24 months
preceding the renewal request; (iii) the Company complies with annual
performance criteria; (iv) the Company requests renewal within 12 to 18 months
prior to the expiration of the initial term; (v) the Company agrees to make
capital improvements to conform with KFCIH's then current standards and
completes the improvements, as agreed; (vi) the Company agrees to relocate any
restaurants KFCIH determines cannot be renovated to meet the then current
standards; (vii) the Company executes a new franchise agreement if the current
form has been modified; (viii) the Company is current in all obligations,
monetary or otherwise, to KFCIH; and (ix) the Company pay a renewal fee as
agreed upon with KFCIH.
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The monthly royalty fees for each KFC(R) restaurant currently owned by
the Company is 5% of net revenues. Pursuant to the Franchise Agreement, KFCIH's
approval is required for the development of any new KFC(R) restaurants by the
Company and KFCIH's consent to such renewals, acquisitions or development may be
withheld in KFCIH's sole discretion.
The Company and KFCIH have orally agreed to the New Franchise
Agreement, under which, the Company has agreed to construct, develop, open and
operate 15 additional new KFC(R) restaurants during the next five years (three
per year), for a total of 49 restaurants to be owned and operated by the Company
by the end of 2003. Royalty rates for the KFC(R) restaurants that opened in 1998
will be 6% for two years and thereafter decrease to 5% for eight years. An
initial fee of $25,000 per restaurant is due for four restaurants that opened in
1998. All restaurants opened in 1998 were covered by temporary licenses. Initial
fees for restaurants opening in 1999 through 2000 will be $15,000 each for the
first 3 restaurants and $10,000 for each additional restaurant. Royalty rates
for these restaurants will be 5% for the first eight years they are open and
thereafter increase to 6% for two years. The first 3 restaurants that open in
2001 will each have initial fees of $25,000, while each additional restaurant
will have an initial fee of $10,000. Royalties for restaurants opened in 2001
are 5% for the first five years, increasing to 6% for five years. Restaurant
development in 2002 is subject to the same initial fees as the preceding year,
however any restaurant opened in 2002 will be subject to a 6% royalty rate for
10 years. Restaurants opened in 2003 through 2005 will each have an initial fee
of $3,000 and be subject to a 6% royalty rate for 10 years.
Additionally, under the new development right schedule that has been
orally agreed upon, restaurants opened above and beyond the development schedule
will not count toward the development obligations of the following years.
Non-traditional stores may not count toward the development schedule
obligations.
Until March 31, 1999, the Company operated 8 KFC restaurants pursuant
to a temporary license granted by KFCIH. The purpose of the temporary license
was to permit such 8 restaurants to continue operating while the Company and
KFCIH were negotiating the terms of a new development agreement and franchise
agreement. The new agreement will govern the operation of the 8 restaurants
covered by the temporary license, as well as the additional restaurants that the
Company will be granted the right to establish under the new agreement. While
the temporary license terminated on March 31, 1999, the Company has received a
written proposal from KFCHI outlining the new terms and conditions of the new
development and franchise agreement. The Company in principle has agreed to
these terms and conditions pending review by its legal counsel.
The New Franchise Agreement will provide that the Company will be in
default if certain events occur, including but not limited to, the insolvency or
dissolution of the Company, the Company contesting in any court or proceeding
the validity of, or KFCIH's ownership of, any trademarks, trade secrets or
proprietary aspects of the Kentucky Fried Chicken system, the Company failing to
fully correct or diligently remedy any notice, or summons issued by any
government authority regarding any matter involving safety, sanitation or
health, the Company breaching any term or condition of the Franchise Agreement
or any other agreement with KFCIH, or the Company defaulting under or failing to
perform any term or condition of any lease, mortgage, deed or trust or other
agreement covering any KFC restaurant locations.
Competition
The overall food service industry and the QSR segment are intensely
competitive with respect to food quality, price, service, convenience,
restaurant location and concept. The restaurant business is often affected by
changes in consumer tastes; national, regional or local economic conditions;
demographic trends; traffic patterns; the type, number and location of competing
restaurants; and disposable purchasing power. The Company competes within each
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market with international and regional chains as well as locally-owned
restaurants, not only for customers, but also for management and hourly
personnel and suitable real estate sites. Typically, international chains such
as McDonalds(R) and Burger King(R) compete with one another and do not serve a
variety of chicken products, while the Company's actual competitors are fast
food restaurants that offer similar menus which include chicken. Certain of
these companies may have greater financing, personnel, technical and other
resources than the Company. There can be no assurance that the Company will be
able to compete successfully with these companies. During 1998 there was an
increase of approximately 28% in the number of QSRs in Chile from 267 to 365
(see "Management's Discussion and Analysis").
Government Regulation
The Company is subject to various Chilean national, provincial, and
municipal laws affecting its business. Each of the Company's restaurants must
comply with various licensing requirements and regulations of governmental
authorities, including health, sanitation, safety and fire agencies in the
region and municipality in which the restaurant is located. To date, the Company
has obtained all necessary licenses and approvals.
A small portion of the Company's sales are attributable to the sale of
beer. A license is required from the provincial governing authority for each
restaurant that sells beer and regulations governing the sale of beer relate to
many aspects of restaurant operations, including the minimum age (18) of patrons
to purchase beer.
The Company is also subject to Chilean national minimum wage laws
governing such matters as overtime and working conditions. Since the bulk of the
Company's employees are paid on an hourly basis at rates related to the minimum
wage, increases in the minimum wage could significantly increase the Company's
labor costs. The Company has not to date been materially adversely affected by
such laws. Furthermore, the Company's business is subject to the full range of
governmental regulation and supervision generally applicable to companies
engaged in business in Chile, including labor laws, social security laws, public
health, environmental laws, securities laws and anti-trust laws.
Foreign Corrupt Practices Act.
Substantially all of the Company's operations are transacted in South
America. To the extent that the Company conducts operations and sells its
products outside the U.S., the Company is subject to the Foreign Corrupt
Practices Act which makes it unlawful for any issuer to pay or offer to pay, any
money or anything of value to any foreign official, foreign political party or
official thereof or any candidate for foreign political office ("Foreign
Officials") or any person with knowledge that all or a portion of such money or
thing of value will be offered, given, or promised, directly or indirectly, to
any Foreign Official.
The Company has not made any offers, payments, promises to pay, or
authorization of any money or anything of value to any Foreign Official and has
implemented a policy to be
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followed by its officers, directors, employees and anyone acting on its behalf,
that no such payments can and will be made. The Company has made all employees
cognizant of the need for compliance with the Foreign Corrupt Practices Act and
any violation of the Company policy will result in dismissal. Further, the
Company conducts periodic reviews of this policy with all employees to ensure
full compliance.
Foreign Investment Laws and Regulations
The Chilean Constitution establishes that any Chilean or foreigner may
freely develop any activity in Chile so long as the activity in Chile does not
contravene existing laws dealing with public morals, public safety or national
security and follows the laws that regulate such activity. It also establishes
the principle of non-discrimination, thus guaranteeing foreign investors equal
protection under Chilean law. Additionally, Chilean law prohibits any
discretionary acts by the Chilean government or other entities against the
rights of persons or property in derogation of this principle. Foreign investors
may transfer capital and net profits abroad. There are no exchange control
regulations which restrict the repatriation of the investment or earnings except
that the remittance of capital may take place starting a year after the date the
funds were brought into the country, but net profits can be remitted at any
time, after deduction of applicable withholding income taxes. Therefore, equity
investments in Chile by persons who are not Chilean residents follow the same
rules as investments made by Chilean citizens.
These principles are the basis for the DL 600. Based on DL 600, the
foreign investor and the government sign a legally-binding investment contract
which may only be modified by mutual consent. The contract sets forth the
current tax and foreign exchange laws as each relates to the specific
investments by that investor in Chile. Thus, the investor is protected against
any subsequent changes in the law which could adversely affect the investor or
his investments in Chile. Although the Chilean Government has been successful in
keeping this principle in place for the last 24 years, there can be no
assurances that a breach by the Government will not occur in the future or that
it would not adversely affect the rights of the Company to do business in Chile.
Moreover, while there has been no precedent that political changes had
determined changes in these rules, no assurances can be made that such changes
will not occur in the future.
Employees
As of March 31, 1999, the Company employed 849 employees, of which 31
were full-time salaried employees in administration, 107 were full-time salaried
employees in supervisory and management positions and 711 were full-time and
part-time hourly employees who were employed in food preparation and serving.
Substantially all of the Company's management and employees who reside in Chile
speak Spanish and its senior management team in Chile also communicates in
English. None of the Company's employees are covered by a collective bargaining
agreement. The Company believes that the dedication of its employees is critical
to its success, and that its relations with its employees are good.
13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Properties
All of the Company's restaurants are presently located in leased space.
The leases for the Company's KFC(R) restaurants are for a period ranging from
six years to 15 years and provide for one or more options to renew for at least
one additional term. The leases generally specify a fixed annual rent with fixed
increases. Generally, the leases are net leases which require the Company to pay
all or a portion of the cost of taxes, maintenance and utilities. Certain of the
leases provide that in the event of non-payment of rent, he lessor may terminate
the lease without notice. Chilean law provides that a landlord may not evict a
tenant without a court hearing, although the tenant is responsible for all costs
related to such court hearing.
The Company leases approximately 380 square meters of executive offices
in Santiago, Chile from Inmobiliaria KilKil S.A., an affiliate of the Company,
at a rate of $9,050 per month, plus common area maintenance and general expenses
of $1,100 per month. The lease is for ten years, ending May 1, 2007.
In August, 1998, the Company entered into a two year lease with Andean
Engineering & Finance Corp. for its corporate U.S. offices in Boca Raton,
Florida, which lease may be renewed for an additional two year term. David
Mayer, a Director of USC, is the sole shareholder, officer and director of AEFC.
The annual lease amount will be $10,000 annually, payable quarterly, which
includes all telephone and facsimile, secretarial and other expenses. These
terms were negotiated on an arm's length basis and such terms are competitive
with current lease terms for similar arrangements in the South Florida area.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings arising in the ordinary course of
business. The Company is not involved in any legal proceedings that it believes
will result, individually or in the aggregate, in a material adverse effect upon
its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Class A Common Stock and its Class A Common Stock
Warrants are traded on the Nasdaq Small Cap Market Class A Common Stock under
the symbols "UNSRW" and "UNSRA, respectively, and commenced their trading on
August 4, 1998. The following table sets forth the high and low bid quotations
for the Common Stock and Warrant for the periods indicated. These quotations, as
reported by North American Quotations, reflect prices between dealers, do not
include retail mark-ups, markdowns, commissions and may not necessarily
represent actual transactions.
Period High Low
- ------ ---- ---
Common Stock
August 4, 1998 through September 30, 1998 $4.87 $2.37
Quarter ended December 31, 1998 $4.00 $2.43
Warrants
August 4, 1998 through September 30, 1998 $1.53 $0.62
Quarter ended December 31, 1998 $1.05 $0.62
As of December 31, 1998, there were approximately 300 holders of record of the
Company's Class A Common Stock.
The Company has never paid dividends on its Class A Common Stock since its
formation in November 1997. However, KyF Chile has declared dividends in the
aggregate of $730,648, $768,018 and $19,305 for the years 1995, 1996 and 1997,
respectively, to its shareholders. Of the $730,648 declared in 1995, the total
amount was reinvested in the Company as paid-in-capital. Of the $768,018
declared in 1996, $139,909 was distributed in 1996 and the balance ($628,409)
was distributed in 1997, of which $324,286 of the $628,409 was reinvested in KyF
Chile. The Company currently intends to retain earnings for use in its business
and therefore does not anticipate paying dividends in the foreseeable future.
The issuance of any dividends in the future is subject to compliance with the
terms and conditions of the Franchise Agreement, which include the approval by
KFCIH of the issuance of any dividends by the Company.
Upon distribution of a dividend by KyF Chile, the Company, as a foreign
non-resident shareholder of a Chilean corporation, will be subject to a 35%
withholding tax less a credit for any corporate taxes paid by the Chilean
corporation. However, payment of the foreign (Chilean) taxes may be credited
against U.S. federal income tax.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Management's Discussion and Analysis contains various "forward looking
statements" within the meaning of the Securities Act of 1933, as amended, the
Securities and Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act 1995. Such statements consist of any statement other than
a recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may", "expect", "anticipate", "estimate" or
"continue" or the negative thereof or other variation thereon or comparable
terminology.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially form
those contained in the forward-looking statements, that these forward-looking
statements are necessarily speculative, and there are certain risk and
uncertainties that could cause actual events or results to differ materially
form those referred to in such forward-looking statements.
The Company does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the Company over time means that actual events are bearing out as
estimated in such forward-looking statements.
Overview
The Company generates revenues from the sales of products from
restaurant locations and the sale of coupon books. Sales at restaurant locations
represents 94% and 92% of total revenues for 1998 and 1997, respectively.
Typically, business entities will receive coupon books from the Company and give
them to employees as incentives. The coupon holders present the coupons to the
individual restaurants which will subsequently bill the employer for the food
purchased by the coupon holders.
The Company incurs costs primarily for raw food and paper supplies,
which represent approximately 37% and 40% of the total revenues for 1998 and
1997, respectively. Payroll represents 22% and 19%, and rent represents 13% and
12%, respectively, for 1998 and 1997.
16
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Results of Operations
Gross revenues decreased from $14,562,157 in 1997 to $13,415,518 in
1998, a decrease of $1,146,643 or approximately 8%. This decrease is due to a
number of components. Although the Company opened six new restaurants in 1998,
five were opened in December 1998 and one in August 1998. Therefore, the gross
revenues from the new restaurants were not sufficient to offset the decrease due
to the pricing of the "combination meals" and the devaluation of the Chilean
peso. During 1998, the Company increased the price of the "combination" meals
first introduced in 1997 which resulted in a decrease in the volume of sales and
an increase in the gross profit margin. Also during 1998, the Chilean peso in
relation to the dollar decreased by 8%. This decrease of the peso was caused in
part by the economic crisis in Asia and Brazil. As a consequence of the Chilean
government devaluing its currency, interest rates increased to as much as 22%.
This increase in interest rates reduced the overall discretionary spending and
contributed to the decrease in gross revenues. In addition, there was an
increase in the number of fast food restaurants of approximately 28% which
created more competition.
Costs of operations for the year ended December 31, 1998 decreased
$723,498 from $5,712,350 to $4,988,852 a decrease of approximately 13%. This
decrease is due to (i) the decrease in revenue discussed above; (ii) favorable
pricing obtained for fresh chicken and (iii) the devaluation of the Chilean peso
discussed above.
Gross profit margins increased from 61% in 1997 to 63% in 1998 as a
result of the increase in the price of the combination meal coupled with the
decrease in the cost of fresh chicken.
Selling and administrative expenses for the year ended December 31,
1998 were $7,677,293 compared to $7,817,129 in 1997 a decrease of $139,836 or
2%. This decrease is due to the devaluation of the Chilean peso offset in part
by increases in payroll and other costs associated with the opening of the six
new restaurants.
Other income (expenses) increased from $281,271 during 1997 to $417,022
for the year ended December 31, 1998. This increase of $135,751 is due to an
increase of $360,683 in incentive fees for the restaurants opened in 1998 offset
by an increase in interest expense of $63,942 and a decrease in miscellaneous
income of $113,632. Interest expense increased due to the increase in interest
rate. Miscellaneous income decreased as a result of the one time revenue
generated from related parties in 1997.
Net income for the year ended December 31, 1998 was $1,139,312 compared
to $1,313,949 for the year ended December 31, 1997, a decrease of $174,637 or
13%. This decrease is due to the decrease in revenues as described above.
17
<PAGE>
Liquidity and Capital Resources
While the Company and its restaurants have a significant presence in
Chile and particularly in Santiago, the Company is seeking to accelerate its
growth and expand its operations not only in the Santiago area, but also in
other cities in Chile with populations of approximately 100,000 or more. The
Company's growth to date has been financed through internally generated revenues
and bank financing. The Company completed its initial public offering on August
4, 1998; selling 1,400,000 shares of common stock and 1,610,000 warrants and
received approximately $6,483,750 after deducting underwriting discounts. A
portion of the proceeds from the public offering was used to reduce long-term
debt of approximately $1,651,000; payment of back royalties of approximately
$874,000; repayments of loans to related parties of approximately $680,000.
Prior to the public offering the Company's growth has been financed through
internally generated revenues and bank financing. Since the completion of the
public offering, the Company has opened six new KFC restaurants and will open
another KFC restaurant during January of 1999. The Company intends to open three
to five new restaurants during 1999. From the proceeds of its public offering
the Company has used: approximately $441,000 for construction costs and for
equipment related to the opening of new restaurants. The Company has working
capital of approximately $1,606,000 from the offering and intends to use this
and its internally generated revenues to open additional restaurants during
1999.
At December 31, 1998, accounts receivable decreased by $268,885 to
$105,061 from $373,946 at December 31, 1997. The amount of receivables
outstanding and the number of days outstanding is attributable to the time of
recognition of revenues as compared to the date of payment. Furthermore, during
1998, in order to provide greater financial strength to the Company, management
emphasized an acceleration of collections in an attempt to reduce short term
liabilities, in particular accounts payable. As of result of these efforts, both
accounts receivable and accounts payable have decreased substantially.
Other current assets increased to $236,647 at December 31, 1998 from
$114,722 at December 31, 1997, an increase of $121,925 due to the prepayment of
certain expenses.
Current obligations to the banks decreased to $147,668 at December 31,
1998 from $319,249 at December 31, 1997, a decreased of $171,581. This decrease
is attributable to management's efforts to reduce debt as well as a decrease in
working capital needs.
The Company did not incur Chilean income taxes in 1998 or 1997 as a
result of various Chilean government incentives designed to promote expansion
and continued development of business in the country. Tax credits for building
acquisitions, rapid acceleration of depreciation,
18
<PAGE>
and employee education have resulted in the elimination of any tax liability for
the Company. This tax benefit is not anticipated to continue in the future.
The Company utilizes bank lines of credit for periodic operation
expenses. At December 31, 1998, the Company had approximately $356,000
outstanding on its line of credit of approximately $450,000.
During 1998, the Company repaid all long term obligations with banks
with a portion of the proceeds from the public offering. In the future, the
Company may have to borrow additional funds for continued expansion beyond the
construction of the restaurants referred to above.
The Company's cost of capital, to the extent determinable, is TAB plus
2% (TAB is the average interest rate Chilean banks pay on deposits which varies
between 6%-8%). While cash flow form the Company's current business may provide
a cushion with respect to the operating expenses to be incurred in connection
with its asset based expansion, management intends to provide separate sources
of funding for the present and proposed projects.
In 1994, the Company entered into an agreement with Pepsico requiring
the exclusive use of Pepsi products for each new KFC restaurant then owned by
the Company for the following five years. Additionally, the agreement also
provided that each new KFC restaurant owned by the Company would be subject to a
similar agreement for a period of five years from the opening of such
restaurant. In exchange for this exclusivity agreement, the Company received
approximately $780,000, net in taxes, which is being recognized and amortized
over a five year period. For the years ended December 31, 1998 and 1997, the
Company recognized approximately $136,000 and $150,000, respectively, of the
deferred revenue. The Company is presently negotiating a new exclusivity
contract with Pepsico which it hopes to have in place by August 1999.
The Company has entered into an Engagement Agreement with Nutmeg
Securities, Ltd. ("Nutmeg"). Under this Engagement Agreement, Nutmeg will offer
an aggregate of approximately $5,000,000 in the form of the Company's
Convertible Preferred Securities through a private placement. The Convertible
Preferred Securities shall have terms and conditions to be set forth in a
Confidential Private Placement Memorandum to be prepared by the Company.
Inflation
Over the past five years, Chile has experienced a decrease in
inflation. The Chilean economic system is based on an indexed inflation system
and therefore, no material inflation is anticipated in the immediate future.
Year 2000 Compliance
19
<PAGE>
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company has established processes for evaluating and managing the risks and
costs associated with this problem.
Major areas of potential business impact have been identified and
initial conversion efforts are underway. The Company also is communicating with
suppliers, dealers, financial institutions and others with which it does
business to coordinate year 2000 conversion. The preliminary estimate for the
year 2000 coversion ranges from $75,000 to $100,000 of which approximately
$30,000 have been incurred.
Exchange Rates
Unless otherwise specified, references herein to "U.S. dollars",
"dollars", "$", or "U.S.$" are to United States dollars and references to
"pesos" or "Ch$" are to Chilean pesos, the legal currency of Chile, and
peso-denominated monetary unit. As of March 31, 1998, the exchange rate was one
(1) U.S. dollar to 454.18 pesos. No representation is made that the peso or U.S.
dollar amounts shown in this Prospectus could have been or could be converted
into U.S. dollars or pesos, as the case may be, at such rate or at any other
rate.
Chile's Ley Organica Constitucional del Banco Central de Chile No.
18.840 ("Central Bank Act") enacted in 1989, liberalized the rules that govern
the ability to buy and sell foreign exchange. Prior to 1989, the law permitted
the purchase and sale of foreign exchange only in those cases explicitly
authorized by the Central Bank of Chile. Under the Central Bank Act, the Company
may purchase and sell foreign exchange freely without authorization from the
Central Bank of Chile. Such provisions allow the Company to expatriate earnings
at the market exchange rate.
The following table sets forth the annual high, low, and average
monthly exchange rate for U.S. dollars for each year starting in 1990 as
reported by the Central Bank of Chile.
20
<PAGE>
Exchange Rates of Ch$ per U.S.$
-------------------------------
Year Low(1) High(1) Average(2)
---- ------ ------- ----------
1990 295.40 336.86 306.42
1991 336.67 374.50 349.21
1992 343.93 382.33 362.58
1993 382.12 431.04 404.17
1994 397.87 433.69 420.18
1995 368.75 418.98 396.77
1996 402.25 424.97 412.27
1997 411.85 439.81 419.31
1998 439.18 460.33 465.25
Source: Central Bank of Chile
- ---------------
(1) Exchange rates are the actual high and low, on a month-to-month basis for
each period.
(2) The average monthly rates during the period.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this report are pending hereto
commencing on F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
21
<PAGE>
PART III
ITEM 9. DIRECTORS. EXECUTIVE OFFICERS, PROMOTIONS AND CONTROL
PERSON.
Directors and Executive Officers of Uniservice Corporation
Name Age Position
- ---- --- --------
Ricardo Vilensky 43 Chief Executive Officer,
President, Chairman of the
Board of Directors
Mauricio Aguirre 35 Chief Financial Officer, Vice
President of Finance and
Administration, Director
Juan Carlos Cerda 43 Director
Avram Fritch 41 Director
David Mayer 57 Director, Assistant Secretary
Sergio Vivanco(2) 46 Director
- -------------
Ricardo Vilensky has served as the Chief Executive Officer, President and
Chairman of USC since its formation in November 1997 and as the CEO, President
and Chairman of Kentucky Foods Chile, S.A. since its formation in 1986. From
July 1991 to the present, Mr. Vilensky has served as the Chairman and owns a 50%
interest in Ann Arbor Foods, S.A., which owns 15 Domino's pizza franchises in
Chile. See "Certain Relationships and Related Transactions." From June 1991 to
September 1996, Mr. Vilensky was the general manager of Commercial Submarine
Chile Limitada, which owns 10 submarine and hoagie restaurants in Chile. See
"Certain Relationships and Related Transactions." From August 1988 to September
1995, he was a Director of Cafe Santos, S.A., which owned and operated six full
service restaurants in Chile. From 1982 to 1994, Mr. Vilensky was the general
manager and legal representative for "El Vegetariano," a vegetarian restaurant
in Santiago, Chile. Mr. Vilensky is also the principal owner and general manager
of Kyoto, the principal shareholder of the Company. See "Certain Relationships
and Related Transactions."
Mauricio Aguirre has served as USC's Chief Financial Officer, Vice President of
Finance and Administration, and a Director of USC since August 1998. He has
served as Vice President of Administration and Finance of KyF Chile S.A. since
September 1994 and as a Director of KyF Chile since October 1995. From 1989 to
September 1994, Mr. Aguirre was the Controller and a Vice-President of Lan
Chile, the national airline of Chile. Mr. Aguirre is a commercial engineer, a
public accountant and auditor.
Juan Carlos Cerda has served as a Director of USC since August 1998. He has
served as a member of the Board of Directors of KyF Chile since May 1996. Since
June 1994, Mr. Cerda
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<PAGE>
has been a partner with the law firm of Estudio Juridico Figueroa and Valenzuela
Abogados in Chile as a tax consultant. Since March 1994, Mr. Cerda has been a
professor of Planification and Tributary Management at the University of
Santiago. From 1991 through May 1994, he was a tax advisor to the Arauco
Enterprise Group in Chile.
Avram Fritch has served as a Director of USC since August 1998. Mr. Fritch is
the founder of and has served as General Director of General Security Chile,
S.A., a residential and commercial security and alarm company located in
Santiago, Chile, since 1991. Mr. Fritch is a mechanical engineer and was a
captain in the Defense Force of Israel.
David Mayer has served as a Director and Assistant Secretary of USC since its
formation in November 1997 and has entered into a ten (10) year consulting
agreement with the Company. Since July 1997, Mr. Mayer has served as the
President of Andean Engineering and Finance Corp. See "Certain Relationships and
Related Transactions." From January 1992 to March 1996, Mr. Mayer was a
consultant to Premier Artists Services, Inc., Corporate Entertainment
Productions, Inc. and Alliance Entertainment, Inc., companies where he assisted
in the implementation of their respective business plans, as well as in
connection with mergers and acquisitions.
Sergio Vivanco has served as a member of USC's Board of Directors since August
1998. Mr. Vivanco has been a member of the Board of Directors of KyF Chile since
1991 and is a member of the Board of Directors of Inversiones Huillimapu S.A.,
an affiliate of Kyoto. Mr. Vivanco has been an attorney since 1979 and has
served as general counsel since 1986 to Kyoto and to KyF Chile. Mr. Vivanco is a
partner in the law firm of Abud, Vivanco and Vergara in Santiago, Chile, which
serves as the Company's legal counsel in Chile.
Directors and Executive Officers of KyF Chile
The directors and executive officers of KyF Chile are as follows:
Name Age Position
- ---- --- --------
Ricardo Vilensky(1) 43 Chief Executive Officer,
President, Chairman of the
Board, Director
Mauricio Aguirre(1) 35 Chief Financial Officer, Vice
President of Finance and
Administration, Director
Juan Carlos Cerda(1) 43 Director
Fernando Abud 48 Director
Sergio Vivanco(1) 46 Director
- ------------
(1) See "Directors and Executive Officers of USC."
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<PAGE>
Fernando Abud has been a partner with the law firm of Abud, Vivanco y
Vergara Abogados since March 1995, which firm also include Sergio Vivanco, a
Director of KyF Chile and of USC. Between 1977 and 1993, Mr. Abud was a partner
with the law firm of Abud y Cia, Abogados. Between 1977 and 1993, he was an
attorney for the Copper Chilean Commission, where he served as the legal
subdirector from 1978 to 1986 and from 1986 to 1993, as Secretary General. Mr.
Abud's law firm is the Company's legal counsel in Chile.
USC's non-employee Directors, David Mayer, Avram Fritch, and Carlos
Cerda, will receive $200 plus expenses for attendance at each meeting of the
Board of Directors, as well as reimbursement of reasonable out-of-pocket
expenses incurred in connection with their attendance at the meetings. The
Company intends to purchase directors and officers insurance as soon as
practicable to the extent that it is available and cost effective to do so.
Committees of the Board of Directors
The Audit Committee consists of Juan Carlos Cerda, Sergio Vivanco, and
Avram Fritch. The Audit Committee will review the work of the audit staff and
direct reports covering such work to be prepared. The Audit Committee will
oversee the Company's continuous audit program to protect against improper and
unsound practices and to furnish adequate protection for all of its assets and
records. The Audit Committee also will act as liaison to the Company's
independent certified public accountants, and will conduct such audit work as is
necessary and will receive written reports, supplemented by such oral reports as
it deems necessary, from the Company's independent certified public accountants.
The Compensation and Stock Option Committee consists of Messrs.
Vivanco, Fritch, Cerda, and Mayer. The Compensation and Stock Option Committee
will make recommendations with respect to compensation of senior officers and
granting of stock options and stock awards.
The Nominating Committee consists of Messrs. Vilensky, Fritch, Cerda,
and Mayer. The Nominating Committee will make recommendations with respect to
qualified individuals to become members of the Company's Board of Directors.
Of the six members of the Board of Directors, Messrs. Cerda, Fritch,
and Mayer are non-employee directors. However, Mr. Mayer has entered into a
consulting agreement with the Company. See "Certain Relationships and Related
Transactions."
There are no family relationships among any of the executive officers
or directors.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and each executive officer whose
compensation exceeded $100,000 for the year ended December 31, 1998. [The
Company did not grant any stock
24
<PAGE>
options, restricted stock awards or stock appreciation rights or make any
long-term incentive plan payments during 1998].
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Other Annual
Name and Principal Position Year Salary($) Bonus ($) Compensation($)
- --------------------------- ---- --------- --------- ---------------
<S> <C> <C> <C> <C>
Ricardo Vilensky, CEO, 1998 -0- -0- -0-
President and Chairman 1997(1) $85,868 -0- 19,305(2)
1996(1) -0- -0- $109,629(2)
</TABLE>
- ---------
(1) This table is based solely upon compensation received from KyF Chile.
(2) Represents dividends paid to Kyoto. Mr. Vilensky is the principal
shareholder of Kyoto. See "Certain Relationships and Related Transactions."
Employment Agreements
Ricardo Vilensky, Chief Executive Officer, President and Chairman. The
Company has entered into a written three-year employment agreement with Mr.
Vilensky, which commenced August 1998. Pursuant to the terms and conditions of
his employment agreement, Mr. Vilensky shall receive an initial annual base
salary of $80,000, annual bonuses of up to $100,000, as determined by the
Company's Board of Directors, including a vacation bonus of $20,000, and other
annual compensation of $90,000, which includes (i) $15,000 for school expenses
for Mr. Vilensky's children, (ii) $10,000 for entertainment, (iii) $20,000 for
travel, (iv) $20,000 for medical reimbursement, and (v) $28,000 for automobile
expenses including cost of vehicle, maintenance and insurance. Mr. Vilensky
shall be reimbursed for his ordinary and necessary business expenses including
fees for membership in one business or social club, up to a maximum of $5,000
per year, and in other clubs and organizations as the Company and Mr. Vilensky
shall mutually agree are necessary and appropriate. In 1998 Mr. Vilensky waived
all compensation due to him. Mr. Vilensky's employment contract is being
re-negotiated.
Mauricio Aguirre, Chief Financial Officer. The Company has entered into
a written one year employment agreement with Mauricio Aguirre, which commenced
August 1998. Pursuant to the terms and conditions of his employment agreement,
Mr. Aguirre shall receive an initial annual base salary of $60,000, bonuses of
up to $30,000 per year, as determined by the Company's Board of Directors, and
other annual compensation of $20,000, which includes (i) $10,000 for medical
reimbursement and (ii) $10,000 for automobile expenses. Prior to the Effective
Date, Mr. Aguirre entered into a written employment agreement with KyF Chile,
which employment agreement will terminate upon the Effective Date of the written
employment agreement with the Company described herein.
ISAPRE. Messrs. Vilensky and Aguirre are also entitled to receive
certain social security benefits pursuant to Chilean law. The Social Security
laws in Chile were established as a private system that requires all companies
to retain approximately 20% of the gross salaries of its employees, up to a
maximum of $1,892.80 per year, which is used to pay both Administrators of
Pension Funds Companies ("AFP") and Institutions of Previsional Health
("ISAPRE").
25
<PAGE>
The allocation of this 20% to each service is approximately as follows:
(a) 10% to the AFP: This amount is deposited in an individual
interest-bearing account of each employee to cover their retirement. In Chile,
the age of retirement is 60 for women and 65 for men.
(b) 3% to the AFP: This amount covers any partial or permanent
disability and, in the case of death, will provide a monthly amount to the
deceased's spouse. The amount paid corresponds to 70% of an employee's average
salary, based upon the last 10 years of the employee's life.
(c) 7% to the ISAPRE: This amount covers medical fees, hospitalization
and clinical examinations. This percentage may be voluntarily increased by the
employee according to the employee's contractual agreement with the employee's
ISAPRE. In many instances it may be necessary for individuals to pay additional
costs for health care.
Additionally, Chilean law requires the payment of one month salary (up
to a maximum of approximately $2,839.20) for each year (or portion thereof in
excess of six months worked in the last year), worked by the employee when he is
dismissed without cause, subject to a maximum of eleven months (up to a maximum
of $1,892.80 per month, or an aggregate of $20,820.80). When the employee
terminates his or her employment, no compensation is legally required.
Option Grants in Last Fiscal Year
During fiscal year 1998, there were no option or SAR grants to any
persons, including any of the Company's executive officers or directors.
Incentive and Non-Qualified Stock Option Plan
On January 5, 1998, the Board of Directors and a majority of USC's
shareholders adopted the Company's Stock Option Plan (the "Plan"). The purpose
of the Plan is to increase the employees', advisors', consultants', and
directors' proprietary interest in USC, to align more closely their interests
with the interests of USC's shareholders, and to enable the Company to attract
and retain the services of experienced and highly qualified employees and
directors. USC has reserved an aggregate of 200,000 shares of Class A Common
Stock under the Plan.
The Company's Board of Directors, or a committee thereof, administers
and interprets the Plan and is authorized to grant options thereunder to all
eligible employees of the Company, including officers and directors (whether or
not employees) of the Company. The Plan provides for the granting of "incentive
stock options" (as defined in Section 422 of the Internal Revenue Code),
non-statutory stock options and "reload options." Options may be granted under
the Plan on such terms and at such prices as determined by the Board, or a
committee thereof, except that in the case of an incentive stock option granted
to a 10% shareholder, the per share exercise price will not be less than 110% of
such fair market value. The aggregate fair market value of the shares covered by
incentive stock options granted under the Plan that become exercisable by a
grantee for the first time in any calendar year is subject to a $100,000 limit.
The exercise price for any option under the Plan may be paid in cash,
in shares of Class A Common Stock or such other consideration that is acceptable
to the Board of Directors or the committee
26
<PAGE>
thereof. If the exercise price is paid in whole or in part in Class A Common
Stock, such exercise may result in the issuance of additional options, known as
"reload options," for the same number of shares of Class A Common Stock
surrendered upon the exercise of the underlying option. The reload option would
be generally subject to the same provisions and restrictions set forth in the
Plan with respect to the underlying option except as varied by the Board of
Directors or the committee thereof. A reload option enables the optionee to
ultimately own the same number of shares as the optionee would have owned if the
optionee had exercised all options for cash.
Options granted under the Plan will be exercisable after the period or
periods specified in the option agreement. Options granted under the Plan are
not exercisable after the expiration of five years from the date of grant and
are not transferable other than by will or by the laws of descent and
distribution. The Plan also authorizes the Company to make loans to optionees to
enable them to exercise their options.
No options have been granted pursuant to the Plan and no options may be
granted without the express written consent of the representative of the
Company's initial public offering for a period of one year following the
effective date of the offering. Furthermore, to the extent that any options
granted within the first year are exercised, the underlying shares of Class A
Common Stock will be subject to a 24 month lock-up period commencing on the
effective date. of the offering.
Option Exercises and Holdings
To date, the Company has not issued any options or SARs to any
persons. No options or SARs were exercised or unexercised during fiscal year
1998.
ITEM 11. PRINCIPAL SHAREHOLDERS.
The following table sets forth certain information regarding the Common
Stock beneficially owned as of March 1, 1998 (i) by each person who is known by
USC to own beneficially 5% or more of the Common Stock; (ii) by each of USC's
executive officers and directors; and (iii) by all executive officers and
directors of USC as a group. Unless otherwise set forth, the mailing addresses
for the individuals named below is Carmencita #25, Office 102, Santiago, Chile.
<TABLE>
<CAPTION>
Number of Shares
Name and Address of of Common Stock Ownership Voting
Beneficial Owner Beneficially Owned Percentage Percentage
- ---------------- --------------------- ---------- ----------
<S> <C> <C> <C> <C>
Ricardo Vilensky 1,400,000(1)(2)(9) 97.9% 90.7%
Mauricio Aguirre -0- -0- -0-
Juan Carlos Cerda -0- -0- -0-
Avram Fritch -0- -0- -0-
David Mayer(5) 6,800(6) -0- -0-
Sergio Vivanco -0- -0- -0-
Inversiones e Inmobiliaria
Kyoto Limitada(8) 1,399,900(7) 97.9% 90.7%
All executive officers and
directors as a group (6 persons) 1,406,800 98.3% 99.8%
</TABLE>
27
<PAGE>
- --------------------
(1) Represents 1,400,000 shares of Class B Common Stock that have 10 votes
for each share of Class B Common Stock held. See "Description of
Securities."
(2) Includes 1,399,900 shares of Class B Common Stock issued to Kyoto in
connection with the stock purchases of August 1998. [See Note 1 to
"Notes to Financial Statements."] Kyoto is owned and controlled by Mr.
Vilensky. See "Certain Relationships and Related Transactions." The
remaining 100 shares of Class B Common Stock were issued to Mr.
Vilensky as founder's shares.
(3) While the shares held by Mr. Vilensky, directly or indirectly, will
represent 49.5% of the outstanding Common Stock issued, they will
represent an approximately 90.7% voting interest in the Company, since
holders of Class B Common Stock are entitled to 10 votes for each share
of Class B Common Stock held.
(5) Mr. Mayer's address is 1900 Glades Road, Suite 351, Boca Raton, Florida
33301.
(6) Represents shares of Class A Common Stock.
(7) Represents 1,399,900 shares of Class B Common Stock that have 10 votes
for each share of Class B Common Stock held.
(8) Includes 1,399,900 shares of Class B Common Stock issued to Kyoto in
connection with the Stock Purchases. Kyoto is owned and controlled by
Mr. Vilensky. See "Certain Relationships and Related Transactions."
(9) Does not include the 14,500 shares of Class A Common Stock held by
Jessica Vilensky, Mr. Vilensky's wife, which he disclaims beneficial
ownership.
ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On August 4, 1998, Kyoto purchased 1,399,900 shares of Class B Common
Stock from the Company for $2,200,000, and (ii) the Company shall purchase
Kyoto's 99.97% interest in KyF Chile for $2,200,000 and KyF Chile became a
majority owned (99.97%) subsidiary of the Company. The remaining 15 shares of
KyF Chile stock are owned by Ricardo Vilensky, individually, who is also the
principal shareholder of Kyoto (Chilean law requires that a Chilean corporation
be owned by not less than two shareholders). Kyoto is a Chilean limited
partnership whose partners are Inversiones Huillimapu S.A. ("IHSA") (99%) and
Ricardo Vilensky (1%), who is also its general manager. The shareholders of IHSA
are Ricardo Vilensky (90%) and Compania Administradora de Restaurantes Limitada
("CARL") (10%). The partners of CARL are Kyoto (98%) and Mr. Vilensky (2%). The
general manager of CARL is Mr. Vilensky.
In May 1991, KyF Chile agreed to guaranty certain liabilities of Kyoto
that are due to Leasing Andino S.A. in connection with certain lease obligations
for office space. As of December 31, 1998, the Company estimates that the
current remaining obligations of Kyoto under the lease are approximately
$95,000.
28
<PAGE>
In January 1992, KyF Chile agreed to guarantee certain liabilities of
Inversiones y Rentas Quebrada Honda S.A. ("IRQH"), whose shareholders are Mr.
Vilensky's brother and sister-in-law. Such liabilities are due to Banestado
Leasing S.A. in connection with certain lease obligations. As of December 31,
1998, the Company estimates that the current remaining obligations of IRQH are
approximately $59,000.
Mr. Vilensky owns a 50% interest in Ann Arbor Foods S.A. ("Ann Arbor"),
which owns fifteen (15) Domino's Pizza restaurants in Chile. Mr. Vilensky has
agreed to resign as an officer and director in Ann Arbor and to divest himself
of all interest in these franchises in the future.
On October 3, 1997, the Company entered into a loan agreement with
Kyoto whereby Kyoto loaned the Company the principal sum of $279,095, at an
interest rate of 9% per annum. The proceeds from this loan were used for working
capital. The loan has been repayed. On November 6, 1997, the Company entered
into a loan agreement with Kyoto whereby Kyoto loaned the Company the principal
sum of $400,000 at an interest rate of 7.8% per annum. These funds were used to
reduce the amount of back royalties due to KFCIH. The Company repayed the
$400,000 loan (plus accrued interest) from the proceeds of the Offering. The
remaining loan in the principal amount of $279,095 (plus accrued interest) was
repaid from the Company's operations by the end of 1998 in accordance with the
terms of the promissory note.
On April 30, 1997, KyF Chile sold its office facility in Santiago,
Chile to Imobiliaria KilKil S.A. ("IKK"), whose shareholders include IHSA (99%)
and Mr. Vilensky (1%). In consideration for the payment price of $577,574, IKK
issued to KyF Chile a promissory note (the "Note") for the total amount due, and
in turn, KyF Chile transferred the Note to its principal shareholder, Kyoto. Of
the total amount due, $303,191 was paid in the form of dividends to Kyoto for
1996 and $274,383 has been used to satisfy a loan obligation due by KyF Chile to
Kyoto in connection with the remodelling of two of the Company's KFC(R)
restaurants. On May 1, 1997, KyF Chile entered into a ten year lease agreement
with IKK, at a rate of $9,050 per month, plus common area maintenance and
general expenses of $1,100 per month.
See "Business - Properties."
Upon the Effective Date, the Company will enter into a two year lease,
which lease may be renewed for an additional term of two years, with AEFC to use
a portion of AEFC's facilities in Boca Raton, Florida, for the Company's
corporate U.S. offices. David Mayer, a Director of USC, is the sole shareholder,
officer and director of AEFC. The annual lease amount will be $10,000 payable
quarterly or as otherwise agreed upon between the parties. These terms were
negotiated on an arm's length basis and such terms are competitive with the
going rates.
In August 1998, the Company entered into a one year agreement with AEFC
to provide certain services to the Company including acting as the U.S. liaison
for the Company. In consideration for these services, AEFC will receive $20,000
annually, payable in quarterly installments.
In August 1998, KyF Chile entered into a ten year agreement with David
Mayer, a Director of USC, whereby Mr. Mayer shall perform certain services for
the Company, including advising in the preparation and implementation of the
Company's business plan, research, evaluation and negotiations with strategic
partners and alternative sources of credit and financial opportunities,
assisting in conducting market surveys, assisting in shareholder and investor
relations, assisting in the preparation of reports to shareholders and
investors, and acting as the U.S. liaison to KFCIH and to U.S. vendors. In
consideration
29
<PAGE>
for these services, Mr. Mayer receives an annual fee of approximately $35,000,
or as otherwise agreed upon by the parties, commencing August 1998. As of
December 31, 1998, the Company prepaid approximately $85,417 of the amounts due.
All ongoing transactions were ratified by a majority of the Company's
independent directors who do not have an interest in the transactions. The
Company believes that all transactions between the Company and its officers,
shareholders and each of their affiliated companies have been made on terms no
less favorable to the Company than those available from unaffiliated parties. In
the future, the Company intends to handle transactions of a similar nature on
terms no less favorable to the Company than those available from unaffiliated
parties. In addition, any forgiveness of loans will be approved by a majority of
the Company's independent directors who do not have an interest in the
transaction and who have access, at the Company's expense, to the Company's
counsel or independent counsel.
ITEM 12. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement(1.1)*
2.1 Stock Purchase Agreement between Kyoto and the Company for the purchase of Class B Common Stock(2.1)*
2.2 Stock Purchase Agreement between the Company and Kyoto for the purchase of shares of Kentucky Foods Chile S.A.
Stock(2.2)*
3.1(a) Company's Amended and Restated Articles of Incorporation(3.1(a))*
3.1(b) Articles of Amendment to Articles of Incorporation(3.1(b))*
3.2 Company's Bylaws(3.2)*
4.1 Form of Warrant Agreement together with the form of Warrant Certificate(4.1)*
4.2 Form of Representative's Warrant Agreement together with the form of Representative's Warrant Certificate(4.2)*
4.3 Form of Class A Common Stock Certificate(4.3)*
10.1 Stock Option Plan(10.1)*
10.2 Master Franchise Agreement between Kentucky Foods Chile, S.A. and Kentucky Fried Chicken International Holdings,
Inc., as amended(10.2).
10.6 Employment Agreement between the Company and Ricardo Vilensky(10.6)*
10.7 Employment Agreement between the Company and Mauricio Aguirre(10.7)*
10.8 Lease Agreement between KyF Chile and Imobiliaria Kilkil S.A.(10.8)*
10.9 Recognition of Debt Note(10.9)*
21 Subsidiaries of Registrant(21)*
27 Financial Data Schedule(27)
</TABLE>
- --------------------
(*) Previously filed in the Company's Registration Statement, Registration
No. 333-50897 under the same exhibit number.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunder duly authorized .
UNISERVICE CORPORATION
By: /s/ Ricardo Vilensky
---------------------------
Ricardo Vilensky
President and
Chief Executive Officer
In accordance with the Exchange Act, this Report was signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/Ricardo Vilensky President and Chief March 31, 1999
- ------------------- Executive Officer and
Ricardo Vilensky Director (Principal
Executive, Financial
and Accounting Officer)
/s/David Mayer Director March 31, 1999
- --------------------
David Mayer
/s/Mauricio Aguirre Chief Financial Officer and March 31, 1999
- -------------------- Director (Vice President of
Mauricio Aguirre Finance and Administration)
/s/Juan Carlos Cerda Director March 31, 1999
- --------------------
Juan Carlos Cerda
/s/Avram Fritch Director March 31, 1999
- --------------------
Avram Fritch
/s/Sergio Vivanco Director March 31, 1999
- --------------------
Sergio Vivanco
</TABLE>
31
<PAGE>
UNISERVICE CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report................................................F-2
Consolidated Balance Sheet..................................................F-3
Consolidated Statements of Income...........................................F-4
Consolidated Statements of Stockholders' Equity.............................F-5
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
Uniservice Corporation and Subsidiary
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of Uniservice
Corporation and Subsidiary (the "Company") as of December 31, 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years ended December 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Uniservice
Corporation and Subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles.
/S/ SPEAR, SAFER, HARMON & CO.
- ------------------------------
SPEAR, SAFER, HARMON & CO.
Miami, Florida
February 26 , 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
UNISERVICE CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1998
A S S E T S
<S> <C>
Current Assets:
Cash and cash equivalents $ 1,618,179
Accounts receivable, net 105,061
Due from related party 120,038
Other receivables (Note 2) 208,939
Inventory 430,361
Income taxes receivable (Note 3) 155,754
Other current assets (Note 4) 236,647
---------------
Total Current Assets 2,874,979
Property and Equipment, net (Note 5) 8,304,932
Prepaid expense 50,417
Intangibles, net (Note 6) 98,787
Deposits (Note 7) 445,431
---------------
$ 11,774,546
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 8) $ 1,187,074
Lines-of-credit (Note 9) 94,322
Current portion of capital lease obligations (Note 10) 502,549
Deferred revenue (Note 11) 88,889
---------------
Total Current Liabilities 1,872,834
---------------
Long-Term Liabilities:
Capital lease obligations, excluding current portion (Note 10) 1,022,249
---------------
Stockholders' Equity: (Note 12)
Class A common stock 143
Class B common stock 140
Preferred stock -
Additional paid-in capital 8,707,157
Retained earnings 1,232,488
Cumulative translation adjustment (1,060,465)
---------------
Total Stockholders' Equity 8,879,463
---------------
$ 11,774,546
===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
UNISERVICE CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1998 and 1997
1998 1997
-------------------------------------------
<S> <C> <C>
Revenues $ 13,415,518 $ 14,562,157
Cost of Operations 4,988,852 5,712,350
---------------- ---------------
Gross Profit 8,426,666 8,849,807
---------------- ---------------
Selling and Administrative Expenses:
Payroll and employee benefits 3,089,405 2,776,949
Occupancy 1,677,986 1,708,515
Other selling and administrative 2,936,985 3,331,665
---------------- ---------------
7,704,776 7,817,129
---------------- ---------------
Income from Operations 722,290 1,032,678
Other Income (Expenses):
Other, net (Note 13) 762,010 562,317
Interest expense (344,988) (281,046)
---------------- ----------------
417,022 281,271
---------------- ---------------
Net Income $ 1,139,312 $ 1,313,949
================ ===============
Net Income Per Common Share $ 0.57 $ 0.94
================ ===============
Weighted Average Common Shares Outstanding 2,005,833 1,400,000
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
UNISERVICE CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1997
Class A Class B Additional Retained
Common Common Paid-in Earnings
Stock Stock Capital (Deficit)
----- ----- ------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ - $ 140 $ 2,963,476 $ (574,520)
Dividends reinvested - - 324,286 (324,286)
Net income - - - 1,313,949
Dividends to stockholders - - - (321,967)
Translation adjustment - - - -
---------- ---------- ------------ ------------
Balance at December 31, 1997 - 140 3,287,762 93,176
Issuance of Class A common stock from public offering, net 140 - 5,325,648 -
Issuance of Class A common stock for bridge financing 3 - 67,497 -
Over allotment of warrants - - 26,250 -
Net income - - - 1,139,312
Dividends to stockholders - - -
Translation adjustment - - -
---------- ---------- ------------- ------------
Balance at December 31, 1998 $ 143 $ 140 $ 8,707,157 $ 1,232,488
========== ========== ============= ============
(RESTUBBED TABLE)
Cumulative Total
Translation Stockholders'
Adjustment Equity
---------- ------
Balance at December 31, 1996 $ (89,345) $ 2,299,751
Dividends reinvested - -
Net income - 1,313,949
Dividends to stockholders - (321,967)
Translation adjustment (116,174) (116,174)
------------ -------------
Balance at December 31, 1997 (205,519) 3,175,559
Issuance of Class A common stock from public offering, net - 5,325,788
Issuance of Class A common stock for bridge financing - 67,500
Over allotment of warrants - 26,250
Net income 1,139,312
Dividends to stockholders
Translation adjustment (854,946) (854,946)
------------ -------------
Balance at December 31, 1998 $ (1,060,465) $ 8,879,463
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
UNISERVICE CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997
Cash Flows from Operating Activities: 1998 1997
--------------- ---------------
<S> <C> <C>
Net income $ 1,139,312 $ 1,313,949
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 685,918 715,555
Deferred income taxes - (1,156)
Loss on sale of building - 7,852
Translation adjustment (854,946) (116,174)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable, net 268,885 211,986
Other receivables (323,616) 22,593
Inventory 85,202 (208,507)
Income taxes receivable (10,319) 82,939
Other current assets (121,924) 68,743
Prepaid contract 50,417 -
Intangibles 9,733 (4,199)
Deposits 27,828 (80,020)
Increase (decrease) in:
Accounts payable and accrued expenses (1,121,334) (26,182)
Deferred revenue (150,446) (156,404)
--------------- ---------------
Net Cash (Used in) Provided by Operating Activities 416,124 1,830,975
--------------- ---------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (1,636,245) (448,507)
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
UNISERVICE CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1998 and 1997
Cash Flows from Financing Activities: 1998 1997
-------------- ---------------
<S> <C> <C>
Net repayments of note payable to banks $ (70,206) $ (586,946)
Dividends paid - (321,967)
Net proceeds (repayment) of lines-of-credit 13,205 (701,671)
Net (repayments) proceeds from related parties (421,261) 531,095
Repayments on capital lease obligations (385,606) (352,350)
Net proceeds from public offering 6,483,750 -
Payment of offering costs (945,901) (118,311)
Proceeds from bridge loan 150,000 -
Repayment of bridge loan (150,000) -
Net (repayment) proceeds of long-term debt (1,650,982) 672,456
------------- --------------
Net Cash Provided by (Used in) Financing Activities 3,022,999 (759,383)
------------- --------------
Increase in Cash and Cash Equivalents 970,630 504,774
Cash and Cash Equivalents - Beginning of Year 647,549 142,775
------------- --------------
Cash and Cash Equivalents - End of Year $ 1,618,179 $ 647,549
============= ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 529,503 $ 274,371
Supplemental Disclosure of Non-Cash Financing Activities:
Dividends reinvested - 324,286
Note received in exchange for sale of building - 568,545
Issuance of Class A Common stock in connection
with bridge loan - 67,500
Acquisition of property and equipment subject
to capital lease 855,474 77,704
Capital leases reclassified to property,
plant and equipment 557,547 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Uniservice Corporation, (the "Company"), is a
Florida corporation incorporated in November 1997 as a holding
company to acquire Inversiones e Inmobiliaria Kyoto, S.A.'s
("Kyoto") 99.97% interest in Kentucky Foods Chile, S.A. ("KyF
Chile" collectively, the "Company"). KyF Chile is in the fast food
service business and presently operates 36 restaurants in the
Santiago, Chile area pursuant to its international franchise
agreement with Tricon Global Restaurants, Inc.
("Tricon").
Basis of Presentation - In August 1998, the Company acquired 99.7%
of Kyoto's interest in KyF Chile in exchange for 1,399,900 shares
of Class B common stock which occurred simultaneously with the
closing of the initial public offering of the Company's stock. In
order to comply with Chilean law and the requirements of the
Central Bank of Chile for foreign investments, two stock purchase
agreements were effectuated at the time of the closing of the
initial public offering of the Company's stock whereby (i) Kyoto
purchased 1,399,900 shares of Class B common stock for $2.2
million, and, (ii) the Company purchased Kyoto's 99.97% interest
in Kentucky Foods Chile, S.A. for $2.2 million and KyF Chile
became a majority owned (99.97%) subsidiary of the Company. The
substance of this transaction was an exchange of shares between
the Company and Kyoto which was accounted for by the pooling of
interests. Accordingly, the consolidated financial statements for
the periods presented have been prepared assuming the acquisition
by the Company took place on January 1, 1997, that the Company was
incorporated on that date, and the exchange of shares was affected
at that time.
Functional Currency - The financial statements have been
translated in accordance with the provisions set forth in
Statement of Financial Accounting Standards No. 52, from Chilean
pesos (the functional currency) into US dollars (the reporting
currency).
Revenue Recognition - Revenue is recognized at the point of sale
of goods to its customers on a daily basis.
Cash and Cash Equivalents - Cash equivalents consist of highly
liquid investments, which are readily convertible into cash and
have maturities of three months or less. The Company places its
cash with high credit quality financial institutions and, at
times, maintain balances in excess of insured limits.
Fair Values of Financial Instruments - The fair value of a
financial Instrument is the amount at which the instrument could
be exchanged in the current transaction between willing parties.
The fair value of cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximate their carrying
amounts at December 31, 1998.
F-8
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Accounts Receivable - In Chile, it is customary to offer various
sorts of coupons and coupon books to other corporations who
provide meal services to their employees, as well as, for bonuses
to its customers. The Company bills the various corporations, on a
monthly basis, for coupons redeemed and recognizes income,
accordingly. Approximately 6% and 8%, respectively, of revenues
generated in 1998 and 1997 were due from these coupon books.
Included in accounts receivable are amounts due from the various
corporations in connection with coupon redemptions. Historically,
the Company has had very few non-remittances on its billings. As a
result, the Company has provided an allowance for doubtful
accounts of $17,099 as of December 31, 1998.
Inventory - Inventory consists primarily of fresh chicken, produce
and restaurant supplies and are stated at the lower of cost or
market. Cost is determined using the first-in, first-out (FIFO)
method.
Offering Costs - Offering costs representing legal, accounting,
and underwriting fees incurred in connection with the public
offering of the Company's shares are charged against paid in
capital. Offering costs amounted to approximately $1,849,000.
Property and Equipment - Property and equipment are recorded at
cost. Depreciation is provided on a straight-line method based on
the estimated useful life of the asset ranging from three to ten
years.
Income Taxes - The Company was not liable for U.S. income taxes
for the years ended December 31, 1998 and December 31, 1997,
because all earnings were generated by the Chilean subsidiary and
no earnings were repatriated to the Company for these reporting
periods. Therefore, no deferred tax assets or liabilities are
attributable to these years other than those reported by the
subsidiary in its regional operations.
Foreign Operations - As the Company operates exclusively in Chile,
one must be aware of the potential for both economic and political
change in the business environment, different than that of the
United States. The success of the Company depends on the success
of the Chilean operations and a stable economic and political
environment.
Earnings Per Common Share - Earnings per common share are based on
the weighted average number of shares outstanding of 2,005,833 and
1,400,000,respectively, for the years ended December 31, 1998 and
1997, giving effect to common stock equivalents, none of which
existed in the aforementioned periods.
F-9
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Comprehensive Income - Effective January 1, 1998, the Company
adopted SFAS #130, Reporting Comprehensive Income. SFAS #130
establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. The Statement requires only additional disclosures in
the financial statements; it does not affect the Company's
financial position or results of operations. For the year ended
December 31, 1998, comprehensive income is equal to net income.
Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications - Certain accounts in the 1997 consolidated
financial statements have been reclassified for comparative
purposes to conform with the presentation in the 1998 consolidated
financial statements.
Year 2000 Compliance - The Company recognizes the need to ensure
its operations will not be adversely impacted by Year 2000
software failures. Software failures due to processing errors
potentially arising from calculations using the year 2000 date are
a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the
reliability of operational systems. The Company has established
processes for evaluation and managing the risks and costs
associated with this problem.
Major areas of potential business impact have been identified and
initial conversion efforts are underway. The Company also is
communicating with suppliers, dealers, financial institutions and
others with which it does business to coordinate year 2000
conversion. After evaluations of the responses from such
communications, the Company will prepare a contingency plan to
mitigate year 2000 issues, if necessary. The preliminary estimate
for Year 2000 conversion ranges from $75,000 to $100,000 of which
approximately $30,000 have been incurred to date.
Recent Pronouncements - The Financial Accounting Standards Board
(FASB) has issued the following statements which are to be applied
prospectively, #131 - Disclosures About Segments of an Enterprise
and Related Information, #132 - Employer's Disclosures About
Pensions and Other Retirement Benefits. None of these
pronouncements have a material impact on the financial
statements of the Company.
F-10
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
NOTE 2 - OTHER RECEIVABLES
Other receivables consist of the following at December 31, 1998:
<S> <C>
Advances to vendors $ 98,250
Advance payments for custom duties 18,289
Travel and other sundry advances 66,031
Other 26,369
--------------
$ 208,939
==============
</TABLE>
NOTE 3 - INCOME TAXES
In Chile, the Company is subject to income taxes at a statutory
rate of 15% of taxable income, as defined. For the years ended
December 31, 1998 and 1997, the Company had no taxable income, due
to various credits and incentives provided by the government of
Chile. Therefore, no provision for income taxes were made. These
government credits and incentives are not anticipated to continue
in the future with the continued strong earnings previously
reported and expected in the future. In addition, the Company made
estimated income tax payments during those years and is due a
refund.
The following is a reconciliation of the statutory tax rates:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Statutory tax rate 15 % 15 %
Credits and incentives from government (15) (15)
----- ------
Effective tax rate 0 % 0 %
===== ======
</TABLE>
As mentioned above, while the Company has incurred no income taxes
for the years ended December 31, 1998 and 1997, it has made
monthly estimated tax payments which coupled with the
aforementioned credits has yielded income tax recoverables.
Following are the components of the income tax receivable balance
at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $ 145,435
Payments of estimated income taxes 115,370
Credit for educational expenses 11,448
Refunds received (145,435)
Other, net 28,936
-------------
$ 155,754
=============
</TABLE>
F-11
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31,
1998:
<TABLE>
<CAPTION>
<S> <C>
Deferred income taxes $ 32,111
Prepaid expenses 204,536
---------------
$ 236,647
===============
</TABLE>
Deferred income taxes is due to a deferred tax asset. Deferred tax
assets and liabilities are determined based on temporary
differences between the financial carrying amounts and tax bases
of assets and liabilities, principally depreciation, using enacted
tax rates in effect.
NOTE 5 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 6,459,923
Office equipment and machinery 2,134,234
Capital leases 2,136,377
Other 255,408
--------------
10,985,942
Less accumulated depreciation
and amortization (2,681,010)
--------------
$ 8,304,932
==============
</TABLE>
Depreciation and amortization expense approximated $655,000 and
$712,000 for the years ended December 31, 1998 and 1997,
respectively.
F-12
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 6 - INTANGIBLES, NET
Intangibles, net consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $ 106,519
Trademarks, licenses and other 26,884
-------------
133,403
Less accumulated amortization (34,616)
-------------
$ 98,787
=============
</TABLE>
Intangibles are being amortized using the straight-line method.
Goodwill is being amortized over a period of 40 years and
trademarks, licenses and other are being amortized over a period
of 17 years. Amortization commenced during 1997. For the year
ended December 1, 1998, amortization expense amounted to $30,884.
NOTE 7 - DEPOSITS
KyF Chile conducts its operations in leased facilities which
require security deposits based on the square footage, location,
and term of each lease (see Note 15). The balance of the security
deposits at December 31, 1998 amounted to approximately $445,000.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Vendors $ 812,983
Sales tax and withholdings 147,668
Salaries and other employee benefits 101,138
Franchise fees 83,676
Other 29,109
-----------------
$ 1,174,574
=================
</TABLE>
F-13
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - LINES-OF-CREDIT
The Company has lines-of-credit with several Chilean banks with
monthly semiannual and annual maturity dates. The lines-of-credit
bear interest at rates ranging from 9.02% to 11% per annum and are
collateralized by a personal guarantee from a stockholder and
certain assets of the Company. As of December 31, 1998,
approximately $356,000 was available to the Company in Chilean
Pesos and UF.
Interest rates on all of these flexible rate loans are based on
the Asociacion de Bancos y Entidades Financieras, (T.A.B.) rate,
which represents a daily average of the interest paid by banks on
its deposits. The rate is then adjusted upwards approximately 1.5%
for the banks profit, and then an additional 1.0%-1.7% reflecting
the individual risk of the bank on the individual loan. There are
no covenants or restrictions imposed on the aforementioned
obligations with any of the banks involved.
The weighted average interest rate was 8.03% and 7.9% for the
years ended December 31, 1998 and 1997, respectively.
The UF is an indexed unit of account expressed in pesos and
adjusted according to inflation (CPI).
NOTE 10 - CAPITAL LEASE OBLIGATIONS
KyF Chile leases various equipment under capital leases. The
capital leases in effect as of December 31, 1998, are scheduled to
expire between the years 1999 and 2009. At the expiration of the
lease terms, KyF Chile may exercise options to purchase the
equipment at a bargain purchase price. As of December 31, 1998,
the gross amount of assets recorded under capital leases totaled
$2,136,377. Amortization is computed by the straight-line method
and has been included in depreciation. Accumulated amortization
related to those assets totaled $110,544 as of December 31, 1998.
F-14
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - CAPITAL LEASE OBLIGATIONS (Continued)
The following is a schedule of future minimum lease payments:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
2000 $ 418,783
2001 315,692
2002 108,874
2003 99,587
2004 99,587
Thereafter 482,275
-------------
1,524,798
Current portion (502,549)
-------------
Long-term portion $ 1,022,249
=============
</TABLE>
NOTE 11 - DEFERRED REVENUE
In August 1994, KyF Chile entered into an agreement with Pepsico
requiring the exclusive use of Pepsi products in the Company's
restaurants. In exchange for this exclusivity agreement, KyF Chile
received approximately $780,000, net of taxes, which is being
recognized and amortized over that five year period. For the years
ended December 31, 1998 and 1997, KyF Chile recognized
approximately $136,000 and $150,000, respectively, of the deferred
revenue.
NOTE 12 - STOCKHOLDERS' EQUITY
The Company is currently authorized to issue 20,000,000 shares of
Class A common stock, 2,000,000 shares of Class B common stock,
8,000,000 shares of undesignated common stock and 5,000,000 shares
of preferred stock all at $.0001 per share par value. As of
December 31, 1998, the Company had 1,430,000 shares of Class A
common stock and 1,400,000 shares of Class B common stock issued
and outstanding. There were no shares of preferred stock issued or
outstanding at December 31, 1998.
As part of its initial public offering, the Company issued
1,400,000 shares of Class A common stock and 1,610,000 warrants to
the public. This increased the outstanding shares of Class A
common stock to 1,430,000 for a total outstanding shares of
2,830,000, without giving effect to the exercise of the warrants.
F-15
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 13 - OTHER INCOME (EXPENSES)
Other, net consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Exclusivity income $ 135,554 $ 149,912
Incentive fee 591,847 231,164
Other 67,609 181,241
-------------- ----------------
$ 762,010 $ 562,317
============== ================
</TABLE>
NOTE 14 - RELATED PARTY TRANSACTIONS
In April 1997, KyF Chile sold the new office facilities to a third
party, whose 2% shareholder is the owner of KyF Chile. In
consideration for the approximate price of $568,000, KyF Chile
issued a promissory note for the total amount due which was later
transferred to Kyoto as part of various loans due Kyoto from KyF
Chile. In May 1997, KyF Chile entered into a ten year lease
agreement with the purchaser at a monthly rate of $9,050 plus
common area maintenance and general expenses of $1,100 per month.
In addition, the Company received advances for $679,095 from Kyoto
bearing interest rates of 7.8% and 9% per annum. A portion of the
proceeds from the closing of the initial public offering was used
to repay Kyoto during 1998
Also during 1997, the Company declared dividends to eliminate
related party receivables. Total dividends declared amounted to
$321,967.
In August 1998, the Company entered into a two year lease
agreement with an affiliate of one of the Company's Directors for
the rental space of its Florida office at an annual payment of
$10,000. Simultaneously, the Company entered into a one year
agreement with this affiliate to provide certain services to the
Company including acting as a U.S. liaison for the Company. In
consideration for these services, this affiliate will receive
$20,000 annually. For the year ended December 31, 1998, $12,500
has been accrued.
F-16
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
KyF Chile conducts its operations in facilities which are leased
under terms ranging from six to 15 years expiring between the
years 2006 and 2019. Most leases provide for one or more options
to renew for at least one additional term. In addition to a
minimum monthly base rent, some of the leases provide for
additional rents which are calculated on a percentage of gross
sales over a base sales amount.
Future minimum obligations over the primary terms of KyF Chile's
long-term leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1999 $ 1,639,517
2000 1,690,230
2001 1,406,388
2002 1,162,657
2003 1,101,832
Thereafter 5,357,738
---------------
Total Minimum Lease Payments Required $ 12,358,362
===============
</TABLE>
Franchise Agreement
KyF Chile entered into a franchise agreement with KFCIH to use the
trademark, service mark and trade name Kentucky Fried Chicken.
Under the franchise agreement, at all times, Ricardo Vilensky, the
Company's CEO, President, and Chairman, is to retain voting
control of KyF Chile and a minimum of 30% ownership of the
Company. Provided that any proceeds received are not used to start
a new company, Mr. Vilensky may sell up to the lesser of (a) 10%
of the outstanding capital stock of the Company or (b) such amount
so that Mr. Vilensky's ownership interest will not be below 30% of
the outstanding capital stock. However, to the extent that Mr.
Vilensky wants to retain less than a 30% interest in the Company,
KFCIH must approve.
As a condition of the franchise agreement, the Company is also
required to have a "designated operator", which is the person that
oversees the management of the day-to-day operations of the
Company's restaurants. Currently, the designated operator is Mr.
Vilensky. There can be no assurance that the Company will be in a
position to meet the criteria required by KFCIH in the event Mr.
Vilensky is unable or unwilling to continue as the designated
operator and/or control not less than a 30% ownership interest in
the Company.
F-17
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
The initial franchise term for each restaurant is ten years, which
expires between December 31, 2003 and December 31, 2017, depending
on when the particular restaurant was opened. The initial
franchise term is renewable for additional ten year periods,
provided that, among other things, (i) the renewal is permitted by
local law; (ii) the Company has corrected any default under the
agreement and has not been in material default within the 24
months preceding the renewal request; (iii) the Company complies
with annual performance criteria; (iv) the Company requests
renewal within 12 to 18 months prior to the expiration of the
initial term; (v) the Company agrees to make capital improvements
to conform with KFCIH's then current standards and completes the
improvements, as agreed; (iv) the Company agrees to relocate any
restaurants KFCIH determines cannot be renovated to meet the then
current standards; (vii) the Company executes a new franchise
agreement if the current form has been modified; (viii) the
Company is current in all obligations, monetary or otherwise, to
KFCIH; and (ix) the Company pay a renewal fee as agreed upon with
KFCIII.
Pursuant to current KFCIH policies and procedures, KFCIH's
approval is required for the development of any new KyF
restaurants by the Company and KFCIH's consent to such renewals,
acquisitions or development may be withheld in KFCIH's sole
discretion.
The agreement requires a monthly franchise fee of 5% of revenues,
as defined, subject to a monthly minimum which may be set and
updated by KFCIH from time to time. The agreement also requires
the Company to contribute annually for advertising and promotions
not less than 5% of its annual revenues, as defined. Franchise
fees totaled approximately $671,000 and $728,000 for the years
ended December 31, 1998 and 1997, respectively, of which
approximately $84,000 remain unpaid as of December 31, 1998 and is
included in accounts payable and accrued expenses in the
accompanying consolidated balance sheet.
F-18
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Until March 31, 1999, the Company operated 8 KFC restaurants pursuant
to a temporary license granted by KFCIH. The purpose of the temporary
license was to permit such 8 restaurants to continue operating while
the Company and KFCIH were negotiating the terms of a new development
agreement and franchise agreement. The new agreement will govern the
operation of the 8 restaurants covered by the temporary license, as
well as the additional restaurants that the Company will be granted
the right to establish under the new agreement. While the temporary
license terminated on March 31, 1999, the Company has received a
written proposal from KFCHI outlining the new terms and conditions of
the new development and franchise agreement. The Company in principle
has agreed to these terms and conditions pending review by its legal
counsel.
The Company and KFCIH have orally agreed to a new franchise agreement,
under which, the Company has agreed to construct, develop, open and
operate 15 additional new KyF restaurants during the next five years,
for a total of 49 restaurants to be owned and operated by the Company
by the end of 2003. Royalty rates for the KyF restaurants that opened
in 1998 will be 6% for two years and thereafter decrease to 5% for
eight years. An initial fee of $25,000 per restaurant is due for four
restaurants that opened in 1998. Initial fees for restaurants opening
in 1999 through 2000 will be $15,000 each for the first three
restaurants and $10,000 for each additional restaurant. Royalty rates
for these restaurants will be 5% for the first eight years they are
open and thereafter increase to 6% for two years. The first three
restaurants that open in 2001 will each have initial fees of $25,000,
which each additional restaurant will have an initial fee of $10,000.
Royalties for restaurants opened in 2001 are 5% for the first five
years, increasing to 6% for the remaining five years. Restaurant
development in 2002 is subject to the same initial fees as the
preceding year, however, any restaurant opened in 2002 will be subject
to a 6% royalty rate for 10 years. Restaurants opened in 2003 through
2005 will each have an initial fee of $3,000 and be subject to a 6%
royalty rate for 10 years.
Consulting Agreement - In August 1998, the Company entered into a
ten year agreement with one of its Directors who shall perform
certain services for the Company, including advising in the
preparation and implementation of the Company's business plan,
research, evaluation and negotiations with strategic partners and
alternative sources of credit and financial opportunities,
assisting in conducting market surveys, assisting in shareholder
and investor relations, assisting in the preparation of reports to
shareholders and investors, and acting as the U.S. liaison to
KFCIH and to U.S. vendors. In consideration for these services,
the Director receives an annual fee of approximately $35,000, or
as otherwise agreed upon by the parties, commencing August 1998.
As of December 31, 1998, the Company prepaid approximately
$85,417 of which $35,000 is included in other current assets on
the accompanying consolidated balance sheet.
Employment Agreements - In 1998, the Company entered into a three
year employment agreement with the Company's President and Chief
Financial Officer. Pursuant to the terms and conditions of the
employment agreements, the President shall receive an initial
annual base salary of $80,000 and the Chief Financial Officer
shall receive an initial annual base salary of $60,000. In
addition to the base salaries, they are entitled to receive
various incentives and other compensation amounting to $190,000
and $50,000 for the President and Chief Financial Officer,
respectively. For 1998, Mr. Vilensky waived all compensation due
to him. This contract is being re-negotiated.
F-19
<PAGE>
UNISERVICE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Stock Option Plan - In January 1998, the Board of Directors of the
Company and a majority of the Company's shareholders adopted a
Stock Option Plan (the "Plan"). The Company has reserved an
aggregate of 200,000 shares of Class A common stock for issuance
under this Plan. No options have been issued under the Plan.
Off Balance Sheet - KyF Chile has guaranteed certain obligations
for affiliated entities. As of December 31, 1998, these
obligations amounted to approximately $154,000.
NOTE 16 - OTHER MATTERS
The Company completed its initial public offering in August 1998;
selling 1,400,000 shares of common stock and 1,610,000 warrants and
received approximately $6,483,750 after deducting underwriting
discounts. A portion of the proceeds from the public offering was used
to reduce long-term debt of approximately $1,651,000; payment of back
royalties of approximately $874,000 and repayment of loans to related
parties of approximately $680,000. Since the completion of the public
offering, the Company has opened six new KFC restaurants and will open
another KFC restaurant during January 1999. The Company intends to
open three to five new restaurants during 1999. From the proceeds of
its public offering, the Company has used approximately $441,000 for
construction costs and for equipment related to the opening of new
restaurants. The Company has working capital of approximately
$1,606,000 from the offering and intends to use this and its
internally generated revenues to open additional restaurants during
1999.
Also in 1998, the Company entered into a bridge loan in the amount
of $150,000 with an investor which was used for short-term
operations. This loan was evidenced by a promissory note bearing
an interest rate of 8.5% per year. The Company repaid this note at
the closing of the aforementioned initial public offering. As
additional consideration, the investor received 30,000 shares of
Class A common stock.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> Chilean Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 473
<CASH> 1,618,179
<SECURITIES> 0
<RECEIVABLES> 122,160
<ALLOWANCES> 17,099
<INVENTORY> 430,361
<CURRENT-ASSETS> 392,401
<PP&E> 10,985,942
<DEPRECIATION> 2,681,010
<TOTAL-ASSETS> 11,774,546
<CURRENT-LIABILITIES> 1,872,834
<BONDS> 0
0
0
<COMMON> 283
<OTHER-SE> 8,879,180
<TOTAL-LIABILITY-AND-EQUITY> 11,459,129
<SALES> 13,415,518
<TOTAL-REVENUES> 13,415,518
<CGS> 4,988,852
<TOTAL-COSTS> 7,704,776
<OTHER-EXPENSES> (762,010)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344,988
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 722,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,139,312
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0
</TABLE>
