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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1995
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 0-23496
KFC NATIONAL PURCHASING COOPERATIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0946155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Breckinridge Lane, Louisville, Kentucky 40207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502)
896-5900.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Membership Common Stock, no par value
Store Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [x].
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of December 31, 1995.
Common stock $5,660(1)
Number of shares outstanding of each of the issuer's classes of common stock
as of December 31, 1995.
<TABLE>
<CAPTION>
Title of each class Number of Shares
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<S> <C>
Membership Common stock 581
Store Common Stock 5,796
</TABLE>
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(1)The aggregate market value stated above is the product of the current
offering price of Membership Common Stock multiplied by the number of shares of
Membership Common Stock outstanding held by nonaffiliates on December 31, 1995.
Store Common Stock held by non-affiliates has not been included because Store
Common Stock has no voting rights.
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PART I
ITEM 1. Business.
Summary
KFC National Purchasing Cooperative, Inc. (the "Cooperative"), was
formed to serve as a national purchasing cooperative on behalf, and for the
benefit, of Kentucky Fried Chicken ("KFC") retail outlet owners and operators,
including KFC National Management Company ("KFC Management"), a subsidiary of
KFC Corporation ("KFCC"). The Cooperative was incorporated under the General
Corporation Law of the State of Delaware in September 1978. Effective in the
first calendar quarter of 1992, through a newly formed subsidiary, the
Cooperative commenced purchasing and distribution for owners and operators of
KFC franchised retail outlets in Canada. The Cooperative sells primarily to
independent KFCC-approved distributors in Canada similar to the way it does
business in the United States. In November 1992, the Cooperative's members
adopted amendments to its Certificate of Incorporation and Bylaws to provide
for membership in the Cooperative by the International Association of Taco Bell
Franchisees, Inc. (the "IATBF") and owners and operators of Taco Bell retail
outlets. In addition, the Cooperative is actively developing business
opportunities with retail outlet operators of other fast food concepts,
including Long John Silver's, Dairy Queen, and Fazoli's. The Cooperative
currently does business under the name of FoodService Purchasing Cooperative,
Inc. The term "Operator" when used in this document includes (i) owners and
operators of Taco Bell retail outlets, (ii) KFC Management and Pepsi-Cola
Canada Ltd., and (iii) owners and operators of KFC franchised retail outlets.
The Cooperative makes volume purchases of various equipment, food,
packaging, and other consumable or disposable supplies ("Equipment and
Supplies") from manufacturers and suppliers for sale to Operators whether or not
they are members of the Cooperative, as well as to independent distributors who
supply Operators. The Cooperative endeavors to obtain low purchase prices by
making volume purchase commitments at fixed prices and by assuming other
procurement functions and risks that reduce the suppliers' costs. Cost savings
will be dependent upon a number of factors, including the volume of purchases
and resales to Operators and distributors, negotiation of favorable purchase
agreements, competitive conditions and the amount of overhead expenses. In an
effort to achieve additional cost savings, the Cooperative is actively working
with its suppliers and distributor customers with electronic data interchange.
The Cooperative hopes to achieve cost savings for its members; however, there
can be no assurance that it will be able to do so on a sustained basis.
The Cooperative provides its members with advisory services related to
the distribution of Equipment and Supplies, including industry data on
distribution costs and service levels to enable the members to negotiate more
effectively with distributors. The Cooperative also sponsors a Distributor
Monitoring Program to enhance the system of independent distributors available
to retail outlet operators.
The Cooperative, through its wholly-owned subsidiary, KFC Franchisee
Insurance Program, Inc. (the "Insurance Subsidiary"), sponsors programs of
property, casualty and workers' compensation insurance, and employee benefits,
including life, health, long-term disability and dental coverages for owners
and operators of fast food retail outlets. These programs are marketed through
the Cooperative's indirect subsidiary, Kenco Insurance Agency, Inc. (the
"Insurance Agency"). See "OPERATIONS - INSURANCE PROGRAM."
The Cooperative has an equipment staging operation with warehousing
facilities in Louisville, Kentucky.
The Cooperative has provided equipment financing from time to time
under certain circumstances for KFC franchisee members. In 1987, the
Cooperative initiated an equipment financing program to finance for franchisee
members their
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purchases from the Cooperative of equipment required for Operators to
participate in KFC's introduction of two new menu items. In 1992, the
Cooperative reactivated on a limited basis an equipment financing program to
finance equipment purchases for KFC franchisee members participating in the KFC
buffet bar, rotisserie chicken, and KFC signage rollouts. Although the
Cooperative has now terminated its equipment financing program, it does
actively help Operators obtain information concerning alternative financing
options.
"Dairy Queen," "Domino's Pizza," "Long John Silver's," "Taco Bell,"
"Fazoli's," and "KFC" are registered trademarks of American Dairy Queen
Corporation, Domino's Pizza, Inc., Long John Silver's, Inc., Taco Bell
Corporation, Seed Restaurant Group Inc., and KFCC, respectively, and are used
in these materials for identification purposes only. The Cooperative is an
independent provider of products and is not affiliated with American Dairy
Queen Corporation, Domino's Pizza, Inc., Long John Silver's Inc., Taco Bell
Corporation, Seed Restaurant Group Inc., or KFCC, except that KFCC is a
stockholder member of the Cooperative.
HISTORY
The Cooperative was organized by KFCC and the National Franchisee
Advisory Council (the "NFAC") with the objectives of: (i) obtaining Equipment
and Supplies at the lowest prices; and (ii) having the procurement function on
behalf of Operators of KFC retail outlets handled on an arm's-length basis
rather than through KFCC. The organization of the Cooperative was an outgrowth
of a feasibility study conducted by a consulting firm, engaged by KFCC in
conjunction with the Equipment and Supply Committee of the NFAC. The
consulting firm made recommendations about possible procurement alternatives to
the then current KFC Master Supply Agreement mechanism.
A primary premise upon which the Cooperative was founded was that
greater cost savings for Operators in the purchase of Equipment and Supplies
could be realized through one central procurement organization that made firm
purchase commitments, took title to goods, and made sales to Operators and
distributors, thereby relieving suppliers of certain costs of doing business
with numerous, small volume purchasers. These costs include credit, sales,
marketing, and billing expenses which would otherwise be expected to be
reflected ultimately in higher prices charged by the suppliers. Purchase
commitments made by the Cooperative also allow suppliers to plan production,
purchase raw materials, and control inventory levels, thereby further providing
suppliers with reduced costs.
In determining to organize the Cooperative, KFCC and the NFAC
concluded that, notwithstanding the inherent administrative complexity of a
member-controlled cooperative, the Cooperative better than any alternative,
could meet five important criteria:
- - Provide potential for lowest delivered cost of Equipment and
Supplies;
- - Promote confidence among Operators and KFCC that the best
interests of the entire KFC system would be served;
- - Minimize complexity of legal issues;
- - Support high product quality and consistency and maintain
service reliability; and
- - Support competition among distributors and suppliers and allow
for free selection of distributors and suppliers outside the
central procurement system.
In August 1989, KFCC announced its intention to withdraw its support
for the purchasing programs of the Cooperative and to begin in October 1989
direct purchasing from suppliers and distributing to KFCC-owned retail outlets
through a wholly owned subsidiary of PepsiCo. The Cooperative's Board of
Directors has
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approved sales by the Cooperative through distributors and directly of
equipment to certain other restaurant systems including Taco Bell. See
"OPERATIONS-PEPSICO" and "OPERATIONS -- EXPANSION OF SERVICES." In addition,
through a newly formed subsidiary, the Cooperative commenced purchasing and
distribution for owners and operators of KFC franchised retail outlets in
Canada during fiscal 1992. See "OPERATIONS -- CANADIAN OPERATIONS."
OPERATING PRINCIPLE
The Cooperative is a central procurement organization which, among
other functions, makes firm commitments to purchase Equipment and Supplies in
its own name and at its own risk, and takes title to and sells the Equipment
and Supplies to distributors and Operators. Members participate in
establishing strategic procurement policies through the Cooperative's Board of
Directors.
The success of the Cooperative depends on it being able to purchase
and resell goods at prices that will attract the business of Operators and/or
their distributors. The Cooperative attempts to obtain the lowest possible
purchase price by making firm commitments to purchase in large volumes and by
assuming other procurement functions and risks, such as dealing with numerous
purchasers, that should reduce the suppliers' costs.
The Cooperative provides the convenience of "one-stop" shopping for
distributors and Operators which otherwise might be required to deal with a
number of suppliers. The operation of the Cooperative also allows Operators to
benefit from the Cooperative's full-time professional purchasing staff working
solely for the benefit of Operators.
OPERATIONS
The following is a description of the Cooperative's United States
operations, primarily with respect to KFC and Taco Bell related activities. As
the Cooperative expands its operations into territories outside of the United
States and with other fast food concepts, the Cooperative intends to review
these operations and offer programs substantially similar to those described
below wherever feasible.
PRICING POLICY
The primary objective of the Cooperative is to purchase and resell
Equipment and Supplies to Operators and distributors at the lowest prices that
can be achieved by volume purchase commitments and the assumption of other
procurement functions and risks previously described. Consistent with this
objective, the Cooperative marks up the purchased Equipment and Supplies by the
least amount which it estimates to be sufficient to cover the Cooperative's
costs and to provide for working capital and prudent levels of reserves. The
Cooperative expects to maintain its minimal margins mark-up policy even though
it has implemented a patronage dividend program. See Item 5. "MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
SEASONALITY
The Cooperative's sales reflect the somewhat seasonal nature of the
volume of business done by Operators. Thus, the Cooperative's sales are
generally expected to be at their relatively lowest levels during the winter
months and are generally expected to be at their relatively highest levels in
the summer months. However, because of the growth in the Cooperative's sales
volume since it commenced operations as of March 1, 1980, no pattern of
absolute, rather than relative, seasonal changes has emerged.
EQUIPMENT AND SUPPLIES
In 1991 the Cooperative reorganized its purchasing and sales
departments along divisional lines relative to its distributor customers rather
than to the products. To provide the distributor customers with better service
and focus the
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Cooperative's efforts in a more appropriate manner, the purchasing, customer
service and distribution departments were realigned to provide better levels of
service.
As of November 1, 1993, the Cooperative reorganized its operations
with a focus on concepts versus products. The Cooperative has assigned general
managers responsibilities for each significant fast food concept with which the
Cooperative does business. These general managers are responsible for the
success and expenses associated with their particular concept. Management
believes this new focus will provide the needed expertise to provide the
required level of customer service over a broad spectrum of customers.
In an effort to achieve additional cost savings, the Cooperative is
actively coordinating its purchasing and distribution activities with its
suppliers and distributor customers using the computer-to-computer exchange of
business documents, i.e., electronic data interchange ("EDI"). Using EDI
facilitates the timely and efficient execution of the Cooperative's purchases
and sales.
CORN PROGRAM
The Cooperative makes substantial purchase commitments for frozen cob
corn on or about October 1, the beginning of a cob corn crop year, and takes
physical delivery of the purchased cob corn shortly thereafter. The cob corn
is stored by the Cooperative in freezer equipped storage facilities at various
locations across the United States until resold to distributors or franchisees.
For the crop year which commenced in October 1995, the Cooperative purchased or
committed to purchase approximately 635,000 cases of cob corn for purchase
prices totaling approximately $4,309,000.
INSURANCE PROGRAM
The following is a description of the Cooperative's insurance programs
for owners and operators of fast food retail outlets. During fiscal 1982, the
Cooperative organized the Insurance Subsidiary to engage in activities related
to a new KFC franchisee insurance program. The KFC franchisee insurance
program was developed as a voluntary insurance program by the Association of
Kentucky Fried Chicken Franchisees, Inc., and the Cooperative.
Through the Insurance Agency, the Cooperative currently offers two
types of insurance coverage through different insurance carriers, one offering
property, casualty, and workers' compensation coverage (the "Property and
Casualty Program"), and the other offering employee benefits, including life,
health, long-term disability and dental coverages (the "Life and Health
Program"). The Cooperative, through its Insurance Subsidiary, is the sponsor
of the two Programs. The Insurance Subsidiary's role in the two Programs is to
monitor the Programs and the performance of its insurance carriers and to
distribute general information about the Programs.
The Insurance Agency and its agents maintain Kentucky-resident
insurance licenses and nonresident licenses in all states. The Insurance
Agency is compensated for the administrative and operational activities it
performs by receiving a commission from insurance companies providing policies
to the franchisees. In fiscal 1995, the premium volume from the fully insured
Property and Casualty Program was $8.2 million and for the Life and Health
Program was $2.6 million.
FINANCING PROGRAMS
The Cooperative has provided or facilitated equipment financing from
time to time under certain circumstances for KFC franchisee members. On
December 8, 1995, the Board of Directors of the Cooperative approved in
principle a finance program for stockholder members co-sponsored by the
National Cooperative Bank (the "Bank"). The program is subject to negotiation
and execution of definitive agreements between the Cooperative and the Bank.
The program currently contemplates up to $20,000,000 in loans to Cooperative
members which range from
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$100,000 to an individual maximum of $2,000,000. The program is expected to
commence in early 1996. The Cooperative has agreed to guarantee from 10% to
25% of the declining balance of each loan based on the loan's risk
classification. The estimated maximum exposure of the Cooperative based on the
allocation of funds between loan classifications would be $3,500,000. The Bank
has agreed to maintain a specific reserve equal to .125 basis points to .50
basis points of all interest paid based on the loan's classification which will
be applied to losses prior to the Cooperative incurring any loss. The Bank
will be responsible for substantially all legal and administrative requirements
of the program.
EQUIPMENT STAGING
The Cooperative offers equipment staging services, which involve the
purchasing and warehousing of equipment by the Cooperative in an effort to
consolidate equipment into packages for timely shipment to owners and operators
of KFC, Taco Bell and other fast food retail outlets. The Cooperative has
leased warehouse space in Louisville, Kentucky, for its equipment staging
operation. See Item 2. "PROPERTIES."
During fiscal 1995, the Cooperative shipped equipment packages for an
aggregate sales price of approximately $9,978,000. On October 31, 1995, the
Cooperative had equipment inventory associated with the equipment staging
operation of approximately $1,330,000, which was financed through the
Cooperative's working capital.
DISTRIBUTION
Notwithstanding the establishment of the Cooperative, Operators
continue to choose individually their own distributors, subject to the approval
of distributors by the restaurant franchisors. All such distributors may buy
Equipment and Supplies from the Cooperative for resale to Operators, subject to
uniform and reasonable credit standards determined by the Cooperative from time
to time. Operators may buy directly from the Cooperative, buy from
distributors, whether or not the distributors purchase from the Cooperative, or
buy directly from suppliers. In fiscal year 1995, approximately 89% of the
dollar volume of goods sold by the Cooperative was sold to Operators through
distributors.
Distributors purchasing from the Cooperative may consolidate orders
from individual Operators and may place bulk orders with the Cooperative. The
Cooperative consolidates orders from all distributors and Operators for a given
item and issues shipping instructions to the supplier. The supplier then ships
the merchandise (usually in truckload quantities) to Operators and/or local
distributors who in turn, deliver the merchandise to Operators. Suppliers bill
the Cooperative, which, in turn, bills Operators and/or distributors for the
merchandise as shipped. The Cooperative takes title to the merchandise and
assumes the risks related to taking title. Except with respect to the
Cooperative's cob corn program and equipment staging program, the Cooperative
does not now take physical delivery of the merchandise, but is nevertheless
responsible for payment to the supplier.
Except when staged into equipment packages, certain restaurant
equipment sold by the Cooperative is generally shipped directly from the
manufacturer or the dealer to Operators rather than to local distributors.
Because the Cooperative extends short-term trade credit to its
customers, it bears the risk that accounts receivable may become uncollectible
or may not be paid in accordance with usual terms if the customer experiences
financial difficulty. The Cooperative has established a reserve for losses on
trade accounts receivable. See Note 2 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS."
KFCC has implemented a decision to have PepsiCo Food Systems, Inc.
("PFS"), a distributor which like KFCC and Taco Bell Corp. is a wholly owned
subsidiary of PepsiCo, directly purchase Equipment and Supplies, without the
involvement of the Cooperative, for distribution to corporate-owned and
franchisee-owned KFC and Taco Bell retail outlets. See "PEPSICO." The
Cooperative intends to emphasize
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and improve its support for the network of independent distributors.
Independent distributors will not only be in competition with PFS, but will
continue in competition with each other.
In fiscal 1990, the Cooperative initiated a Distributor Monitoring
Program (the "Monitoring Program") at the request of certain franchisees. The
Monitoring Program monitors prices and provides reports to franchisees and
committees organized by franchisees in distribution areas to assist franchisees
in negotiating with, and selecting among, distribution alternatives for the
best pricing and service. The Cooperative may provide certain clerical and
administrative assistance to such franchisee committees. The Cooperative
believes that the Monitoring Program and the formation of purchasing committees
will strengthen the system of independent distribution.
The Cooperative maintains an information bank which provides members,
upon request, with the following:
- - information concerning prices being paid by distributors for
merchandise purchased from the Cooperative so that members can
compare store-delivered cost with the distributors' cost for
the merchandise;
- - industry data to assist them in analyzing cash discounts,
earned weight discounts and other elements of the
distributors' cost;
- - industry data on average industry distributor markups, order
size discounts, cash discounts, distributor service levels and
other distributor performance guidelines; and
- - information on expected supply levels (especially possible
shortages) and on expected changes in prices of Equipment and
Supplies.
The Cooperative also provides its members with assistance in resolving
a wide variety of procurement problems including "out-of-stock" conditions,
shipping problems and returned goods disputes.
PRINCIPAL CUSTOMERS
Although the Cooperative sells primarily to distributors, the ultimate
customers for the goods sold by the Cooperative are Operators. In the United
States, KFC Management operates approximately 2,020 retail outlets and Harman
operates approximately 265 retail outlets. Purchases of Equipment and Supplies
for use in KFC Management outlets have materially declined since KFC
Management's decision to utilize PFS for purchasing and distribution. See
"PEPSICO." The Cooperative believes that it has substantial sales to Harman
and Scott's Hospitality, Inc. See "CANADA OPERATIONS." There can be no
assurance that Harman, Scott's Hospitality, Inc., or other Operators will
continue to make substantial purchases through the Cooperative even if the
Cooperative's prices and services are competitive with those which can be
obtained from other sources, including PFS. Other than advance purchase
commitments for cob corn, shortening and certain equipment made by certain
Operators, no member of the Cooperative has any contractual or other obligation
to purchase from the Cooperative.
The Cooperative sells goods to approximately 40 independent
distributors which make purchases from the Cooperative on a regular basis.
Substantially all of the purchases for Taco Bell Operators are currently
through McLane Foodservice Group.
The Cooperative's had sales to certain distributors in fiscal 1995 in
excess of 10% of the Cooperative's net sales. McLane Foodservice Group sales
for fiscal 1995 were $127,000,000, primarily in support of the Taco Bell
system. In fiscal 1995, sales to Ameriserv Food Company, Inc. were
approximately $70,000,000.
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SOURCES OF SUPPLY
The Cooperative purchases Equipment and Supplies from "approved
suppliers" for those items for which generally a particular restaurant
franchisor requires approval of suppliers, giving all such suppliers an
opportunity to compete for the Cooperative's business. Substantially in excess
of half of the dollar volume of goods sold by the Cooperative is provided by
"approved suppliers." The Cooperative does not itself approve suppliers, but
may be asked to provide information to a restaurant franchisor in its approval
process. In addition, the Cooperative may, from time to time, suggest to
members that potential suppliers seek "approved" status for their products.
The Cooperative's ability to obtain low prices for Equipment and Supplies
subject to a franchisor's approval is dependent upon the franchisor's approval
of enough suppliers for any particular product to create price competition
among "approved suppliers." For any item for which such approval is not
required, the Cooperative purchases products from a wide variety of sources
ranging from local suppliers to large multinational corporations. The
Cooperative attempts to obtain the lowest possible prices by making firm
commitments to purchase in volume based on its best estimates of resales to
Operators or their distributors and by assuming other procurement functions and
risks that reduce the suppliers' costs. Approved suppliers have established
varying minimum order quantities. The Cooperative occasionally, in conjunction
with a restaurant franchisor, monitors product quality and services of
suppliers.
The Cooperative is not dependent on any single supplier for the
Equipment and Supplies it sells. Many suppliers are generally available with
respect to any given item sold by the Cooperative. However, KFC proprietary
original recipe seasoning products and certain Taco Bell proprietary products
are available only through one or a limited number of suppliers in conjunction
with the franchisor.
COMPETITION
The Cooperative and independent distributors to which the Cooperative
sells are in substantial competition with PFS in the purchasing and
distribution of Equipment and Supplies to KFC and Taco Bell franchise
Operators. See "PEPSICO."
The Cooperative faces competition from manufacturers who sell
Equipment and Supplies directly to distributors and Operators. Because the
Cooperative does not provide warehousing and local transportation services, the
Cooperative generally does not compete with distributors for sales to Operators
which require the distributor to provide such services. However, the
Cooperative does compete with distributors whose functions and services overlap
with those of the Cooperative in direct sales of equipment.
PEPSICO
On October 1, 1986, a subsidiary of PepsiCo acquired KFCC and KFC
Management from R.J.R. Nabisco, Inc. Until August 1989, KFCC and KFC
Management generally supported the programs of the Cooperative. See "PRINCIPAL
CUSTOMERS" and "HISTORY AND OPERATING PRINCIPLE."
In August 1989, KFCC announced a decision to withdraw KFCC support for
the programs of the Cooperative. In October 1989, PFS and KFCC began direct
purchasing from suppliers and distributing to KFCC-owned outlets. PFS is
currently distributing to substantially all of the KFCC-owned outlets in the
United States.
PFS is a food distribution company owned by PepsiCo, engaged for
profit in the business of purchasing goods and equipment for resale and
distribution to restaurants, including the large number of restaurants in the
Pizza Hut and Taco Bell restaurant systems, both of which are owned by PepsiCo.
Although KFCC's decision was originally announced as a three market
"test," KFCC now purchases and distributes through PFS for substantially all
the KFC outlets owned by KFCC, and it is the understanding of the Cooperative's
Board of
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Directors that PFS intends to obtain the distribution business for as many KFC
and Taco Bell franchisee outlets as possible.
The Cooperative believes that PepsiCo intends that PFS, for profit,
dominate and control purchasing and distribution throughout PepsiCo's system of
approximately 27,000 worldwide company-owned, franchised and licensed
restaurant systems, including KFC, Pizza Hut and Taco Bell restaurants and
outlets. The Cooperative believes that PFS will attempt to eliminate the
Cooperative and force independent distributors out of the KFC and Taco Bell
business through initial low prices and other means such as a failure to
properly administer the process by which independent distributors are approved
and by which additional suppliers of Equipment and Supplies are approved.
During the Cooperative's November 16, 1989 Board of Director's
meeting, KFCC submitted the resignations of the two KFCC-elected Board members.
KFCC expressed its intention not to nominate or elect anyone to fill the
vacancies, but did express an interest in keeping lines of communication open
with the Cooperative. During the November 1989 meeting, an officer of KFCC
suggested that the Cooperative become an organization which monitors PFS's
purchasing and distribution performance rather than a purchasing cooperative.
Primarily as a result of the withdrawal by KFCC, which at the time the
withdrawal began amounted to about 35% of the Cooperative's sales at that time,
the Cooperative has developed business opportunities with retail outlet
operators of other fast food concepts, including Taco Bell, Long John Silver's,
Dairy Queen, Domino's Pizza, and Fazoli's. The continued stockholder member
support, along with the new volume of business from other fast food concepts,
has allowed the Cooperative to continue to make Equipment and Supplies
available to stockholder members at the lowest possible prices.
EXPANSION OF SERVICES
In late 1989, the Cooperative began to explore replacing business lost
because of KFCC's decision to purchase on a direct basis through PFS. The
Board of Directors of the Cooperative determined to take certain steps to help
assure that the Cooperative can make the volume commitments necessary and
consistent with obtaining the lowest possible prices. At the 1990 Annual
Meeting of Stockholders, the stockholder members of the Cooperative approved
amendments to the Cooperative's Certificate of Incorporation and Bylaws to
permit sales by the Cooperative of Equipment and Supplies to other restaurant
systems. Following discussions with the IATBF, the Cooperative determined to
establish a purchasing cooperative program of Equipment and Supplies for Taco
Bell Operators. In 1992, the Cooperative's stockholder members approved
amendments to the Cooperative's Certificate of Incorporation to provide that
the IATBF and Taco Bell Operators may become stockholder members of the
Cooperative. See Item 5. "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS."
In 1992, the franchisor of Long John Silver's Seafood Shoppes ceased
its purchase of equipment through its wholly owned subsidiary and began using
the Cooperative to coordinate such purchases. The Cooperative is actively
processing equipment purchases for both corporate and franchised Long John
Silver's retail outlets.
The Cooperative has also established with the Texas Dairy Queen
Operators Council a purchasing cooperative program of Equipment and Supplies
for the approximately 800 Dairy Queen retail outlets in Texas. The Cooperative
has also expanded its operations into Canada and is establishing a purchasing
program with owners and operators of Domino's Pizza franchised retail outlets
as discussed below.
On June 15, 1994, the Cooperative entered into a Purchasing
Affiliation Agreement (the "Affiliation Agreement") with the International
Franchisee Advisory Council, Inc. (the "IFAC"), which represents owners and
operators of Domino's Pizza franchised retail outlets ("Domino's Pizza
Franchisees"). The Affiliation Agreement contemplated that the Cooperative
would develop a program
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to purchase equipment and supplies for resale to Domino's Pizza Franchisees
(the "Domino's Pizza Purchasing Program"). Domino's Pizza Franchisees
currently own over 3,600 of the approximately 4,200 Domino's Pizza retail
outlets located in the United States. The Cooperative originally anticipated a
roll-out of the Domino's Pizza Purchasing Program during the second or third
quarter of fiscal 1995. The actions and policies of Domino's Pizza, Inc.
("DPI") have made it not possible for the Cooperative to commence an
appropriate purchasing and distribution program for Domino's Pizza Franchisees.
In the summer of 1995, certain representative Domino's Pizza Franchisees and
IFAC commenced litigation against DPI under the antitrust laws and on other
grounds. Although the Cooperative continues to sell some food and packaging
items to Domino's Pizza Franchisees with large commissaries and continues to
sell some Domino's Pizza equipment items, a significant cost-saving program for
Domino's Pizza Franchisees will not be possible until the franchisees have
successfully resolved issues with DPI.
During fiscal 1995, the Cooperative reorganized a portion of its
business with concepts other than KFC and Taco Bell into the "Horizon Group."
The Horizon Group consolidates the Cooperative's business with smaller-volume
concepts, such as Long John Silver's and Fazoli's, under one management team.
During fiscal 1995, sales to operators of retail outlets of quick
service restaurant systems other than KFC Operators in the United States were
approximately 35% of sales.
CANADIAN OPERATIONS
Effective in the first calendar quarter of 1992, through its newly
formed subsidiary, KFC Franchisee Purchasing of Canada, Inc. (the "Canadian
Subsidiary"), the Cooperative commenced to purchase and coordinate distribution
for owners and operators of KFC franchised retail outlets in Canada. The
Canadian Subsidiary sells primarily to independent KFC-approved distributors in
Canada similar to the way the Cooperative does business in the United States.
The Cooperative and the Canadian Subsidiary have entered into agreements with
Canadian distributors providing for substantially the same relationship as the
Cooperative has with United States distributors. See "DISTRIBUTION."
In Canada, franchisees own and operate 580 retail outlets, while
Pepsi-Cola Canada Ltd. owns approximately 232 retail outlets. Scott's
Hospitality, Inc. ("Scott's") is the largest franchisee in Canada, with
approximately 408 retail outlets. Scott's has indicated its intention that the
Cooperative handle substantially all its purchasing and distribution of food,
packaging and supplies. In addition, the Canada KFC Franchisees Association
formally requested that the Cooperative operate its programs in Canada by
virtue of a resolution adopted at that organization's October 1991 meeting. A
decision by Scott's to cease using the Cooperative's services would have a
materially adverse effect on the Cooperative's Canadian operations.
The Canadian Subsidiary's headquarters are located in Mississauga,
Ontario. The Canadian operations are supported with existing Cooperative
personnel and resources, supplemented by a small support staff in Canada. The
Canadian operations contributed approximately $49,700,000 in sales in fiscal
1995. See Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--ANALYSIS OF OPERATIONS."
TRADE REGULATION MATTERS
The following features of the Cooperative reflect the mutual concerns
of the Cooperative and its customers that the operations of the Cooperative be
consistent with the objective of fostering competition at both the supply and
distribution stages in the provision of Equipment and Supplies to Operators.
(1) Stock ownership and attendant rights in the Cooperative are
available to all Operators on a nondiscriminatory basis, and the purchase of
Common Stock
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<PAGE> 12
is completely voluntary. Operators need not own Common Stock to purchase goods
from the Cooperative directly or through a distributor.
(2) The Cooperative does not impose any requirement that members
or their distributors purchase any goods from the Cooperative. The success of
the Cooperative depends on it being able to purchase and resell goods at prices
that attract the business of Operators and/or their distributors in a free and
competitive market environment.
(3) The Cooperative does not control or restrict the distributors
with which Operators may deal. The choice of a distributor and the terms of
the distribution arrangement remain in the sole control of the Operator, and
all distributors are free to purchase from the Cooperative subject to uniform
and reasonable credit standards.
(4) The Cooperative does not control or restrict the manufacturers
who supply goods to Operators. All "approved suppliers" have the opportunity
to compete for the business of the Cooperative, and all such suppliers, whether
or not they sell to the Cooperative, are free to sell directly to Operators
and/or their distributors.
(5) The Cooperative does not finance its operations through
brokerage fees or rebates from suppliers with which it deals. The operation of
the Cooperative is financed by the capital contributions of its members, by the
mark- ups charged by it on goods it sells to cover the costs of its services,
and by borrowings from commercial lenders.
(6) The Cooperative does not solicit or induce unlawful price
discriminations from its suppliers. The cost prices paid by the Cooperative
are negotiated with, or competitively bid by, suppliers based on the
Cooperative's volume commitments to purchase and the cost savings realized by
suppliers from dealing with the Cooperative. The cost savings realized by
certain suppliers are reflected in sales and service allowances which operate
to reduce the Cooperative's cost prices.
(7) The Cooperative does not dictate or in any way control
delivered prices charged by distributors for goods purchased from the
Cooperative. The Cooperative does provide to its members information on the
Cooperative's prices, industry data on distribution costs and service levels,
and does monitor distributor prices to enable franchisees to negotiate more
effectively with distributors. See "DISTRIBUTION."
(8) The Cooperative does not disclose information that is
identified or identifiable as pertaining to the business of any particular
Operator (other than information relating to past due accounts owed to the
Cooperative) to any other Operator or representative thereof or to any other
person who is not employed by the Cooperative.
EMPLOYEES
The Cooperative presently has approximately 161 employees, including
temporaries. The Cooperative believes that its employee relations are
generally satisfactory.
ITEM 2. Properties.
The Cooperative does not own any real property or warehousing
facilities. The Cooperative currently leases approximately 47,761 square feet
of office space at 950 Breckinridge Lane, in Louisville, Kentucky, for its
executive offices under leases expiring on February 28, 1999. The Cooperative
leases commercial frozen food warehouse facilities on a short-term basis in
various locations in connection with its frozen cob corn purchase program. The
Cooperative currently leases approximately 19,650 square feet of warehouse
space in Louisville, Kentucky, for its equipment staging operation. The
Canadian Subsidiary also leases approximately 1,400 square feet of office space
in Mississauga, Ontario.
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<PAGE> 13
ITEM 3. Legal Proceedings.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
No market for the Cooperative's capital stock exists nor is any
expected to develop. Described below are the Cooperative's dividend policy,
patronage dividend program, and Membership Common Stock and Store Common Stock.
DIVIDEND POLICY
Although the Cooperative does not engage in business to generate
profits, if in any year the revenues from Equipment and Supplies sales exceed
expenses, the amortization of debt, and reasonable reserves, the Cooperative
may distribute all or a portion of the excess to the holders of Store Common
Stock as dividends or use the excess revenues to provide additional
procurement-related services. While the Cooperative is not precluded from
paying dividends, the principal purpose of the Cooperative is not to produce
profits to be distributed. Prior to the implementation of the Cooperative's
patronage dividend program, the Cooperative's Board of Directors declared a
dividend of $25.00 per share of Store Common Stock which was paid on March 31,
1982. There is no current intention to pay any dividends in the future on
Store Common Stock on a per share basis. The Cooperative will not pay dividends
at any time on Membership Common Stock.
The Cooperative has established a patronage dividend program. See
"PATRONAGE DIVIDEND PROGRAM." The payment of dividends based upon patronage
tends, of course, to reduce or eliminate funds available for dividends based
upon the number of shares of Store Common Stock owned.
PATRONAGE DIVIDEND PROGRAM
INTRODUCTION
Although the Cooperative does not engage in business to generate
profits, it may nonetheless, in any fiscal year, generate revenues in excess of
amounts needed to cover expenses, amortize indebtedness, and provide for
reasonable reserves. Thus, even though the Cooperative endeavors to minimize
markups on Equipment and Supplies to the least amount required to cover its
anticipated costs of operations, the Cooperative may have funds available for
distribution to members.
In 1982, the Cooperative implemented a program for the payment of
patronage dividends to members on the basis of the value of business done by
the Cooperative with regard to each member, respectively. At its August 23,
1994 meeting, the Cooperative's Board of Directors approved a change to the
patronage dividend program. Beginning with fiscal 1995, through an amendment
to Section 9.2 of its Bylaws set forth in its entirety herein, the Board of
Directors is authorized to distribute as patronage dividends amounts determined
in accordance with Section 9.2. Under the revised program, solely for
purposes of determining the amount of patronage dividends distributable to a
particular stockholder member, the Cooperative has established two separate
pools of allocated net earnings for purposes of making patronage dividend
determinations, the "KFC Pool" and the "Taco Bell Pool," as defined in Section
9.2, such that patronage dividends to stockholder members operating Taco Bell
retail outlets will be paid from the Taco Bell Pool and patronage dividends to
stockholder members operating KFC outlets
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<PAGE> 14
will be paid from the KFC Pool. In addition, in August 1994, the Cooperative's
Board of Directors determined that the Cooperative would pay patronage
dividends to its stockholder members, based separately for KFC stockholder
members on pre-tax income available from the KFC Pool and for Taco Bell
stockholder members based on pre-tax income available from the Taco Bell Pool,
for the period from November 1, 1994, through October 31, 1995, in an aggregate
amount equal to the lesser of (a) fifty percent (50%) of the Cooperative's
total "pre-tax income," as defined in the Cooperative's 1995 fiscal year
budget, or (b) the amount of the Cooperative's total "pre-tax income" for
fiscal 1995 reasonably allocable to sales with respect to which a patronage
dividend is payable. In August 1995, the Board of Directors determined that a
patronage dividend for fiscal 1996 would be paid on a formula similar to that
adopted for fiscal 1995, except that the patronage dividend would be based upon
60% of "pre-tax income," rather than 50%.
The Cooperative paid a patronage dividend totalling $888,000 in March
1994 for patronage in fiscal 1993. The Cooperative paid $569,000 in March 1995
for patronage in fiscal 1994. For patronage during fiscal 1995, a dividend
totalling $1,246,000 is payable in March 1996. KFC-related sales volumes and
net income were strong in fiscal 1995 primarily as a result of several KFC
product promotions, while Taco Bell sales volumes reflected a 10% decrease from
fiscal 1994 as a result of significantly lower beef prices. Therefore, most of
the fiscal 1995 patronage dividend will be paid with respect to KFC patronage.
BYLAW PROVISION
The Bylaw provision regarding patronage dividends is as follows:
Article IX
Patronage Dividends
9.1 Cooperative Basis. The Cooperative shall at
all times be operated on a cooperative basis for the benefit
of its stockholder members. The Cooperative shall always do
more than fifty percent (50%) in value of its business with
its stockholder members either directly or through
distributors ("participating distributors") which shall have
agreed to participate in the Cooperative's patronage dividend
program for its stockholder members by entering into
distributor participation agreements with the Cooperative in
such form as the President shall prescribe from time to time.
The Cooperative may operate on a for-profit basis with respect
to non-members.
9.2 Patronage Dividend Distributions.
(a) The Board of Directors is authorized, after
considering the Cooperative's need for capital and reserves,
to distribute as patronage dividends directly to each
stockholder member of the Cooperative amounts determined as
set forth below. Solely for the purpose of determining the
amount of patronage dividends distributable to a particular
stockholder member of the Cooperative, the Cooperative's
business with its stockholder members shall be segregated into
two distinct pools: (i) the "KFC Pool," under which shall be
determined the net earnings of the Cooperative from business
done by the Cooperative directly with stockholder members for
use by the stockholder members in KFC retail outlets owned or
operated by the stockholder members and the value of business
done by the Cooperative with participating distributors
resulting in resales by such distributors to such stockholder
members for such use; and (ii) the "Taco Bell Pool," under
which shall be
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<PAGE> 15
determined the net earnings of the Cooperative from business
done by the Cooperative directly with stockholder members for
use by the stockholder members in Taco Bell retail outlets
owned or operated by the stockholder members and the value of
business done by the Cooperative with participating
distributors resulting in resales by such distributors to such
stockholder members for such use.
The amount distributable by the Cooperative as
patronage dividends directly to each stockholder member of the
Cooperative shall be based on
(A) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in KFC retail outlets
owned or operated by the stockholder member and the
value of business done by the Cooperative with
participating distributors resulting in resales by
such distributors to such stockholder member for such
use, to
(ii) the net earnings of the Cooperative
in the KFC Pool, plus
(B) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in Taco Bell retail
outlets owned or operated by the stockholder member
and the value of business done by the Cooperative
with participating distributors resulting in resale
by such distributors to such stockholder member for
such use, to
(ii) the net earnings of the Cooperative
in the Taco Bell Pool.
(b) The distribution described in subparagraph
(a), is among all stockholder members, shall be directly
proportional for each taxable year of the Cooperative to the
purchases by each stockholder member, whether such purchases
are direct or through a participating distributor.
9.3 Timing of Payment of Patronage Dividends.
Each distribution of patronage dividends shall be made within
the payment period beginning with the first day of a taxable
year for which the Cooperative claims a deduction for
patronage dividends paid in the form of such distributions and
ending with the 15th day of the 9th month following the close
of such taxable year.
9.4 Character of Distributions. Twenty percent
or more of the amount of each distribution shall be paid in
cash or by a "qualified check" as defined in Section
1388(c)(4) of the Internal Revenue Code of 1986, as
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<PAGE> 16
amended. All amounts of such distributions not paid in money
or by "qualified check" shall be paid a "qualified written
notice of allocation" as defined in Section 1388(c)(1) of the
Internal Revenue Code of 1986, as amended.
9.5 Consent to Stockholder Members. Membership
in the Cooperative by stockholder members shall constitute a
consent of each such member to include in its gross income the
amount of any patronage dividend which is paid with respect to
direct sales from the Cooperative, and indirect sales through
participating distributors in money, "qualified checks,"
"qualified written notices of allocation" or other property
(except "non-qualified written notices of allocation" as
defined in Section 1388(d) of the Internal Revenue Code of
1986, as amended) and which is received by it during the
taxable year from the Cooperative. Each stockholder member of
the Cooperative, through initiating or retaining its
membership after adoption of this Article IX of these Bylaws,
as amended from time to time, consents to be bound hereby.
The provisions of this Article IX, as amended from time to
time, shall be a contract between the Cooperative and each
stockholder member as fully as though each stockholder member
had signed a specific separate instrument in which the
stockholder member agreed to be bound by all of the terms and
provisions of this Article IX, as amended from time to time.
9.6 Application of Patronage Dividends to Amounts
Due the Cooperative. Notwithstanding any of the foregoing
provisions of this Article IX, the portion of any patronage
dividends which would otherwise be payable in cash under any
provision of this Article IX to a stockholder member may be
applied by the Cooperative to the payment of any indebtedness,
the repayment of which is in default, owed to the Cooperative
by any such stockholder member to the extent of such
indebtedness instead of being distributed in cash, provided,
however, that an amount equal to twenty percent (20%) (or, in
the case of a stockholder member located in a jurisdiction to
which the special withholding requirements of Sections 1441 or
1442 of the Internal Revenue Code of 1986, as amended, apply,
thirty percent (30%)) of the total annual patronage dividends
distributable for the applicable year to any such stockholder
member shall nevertheless be paid in cash within the period
set forth in Section 9.3 if any such stockholder member so
requests in a writing received by the Cooperative within
thirty (30) days of the first day of the Cooperative's fiscal
year as established under Section 6.3.
FEATURES OF PROGRAM
The patronage dividend program implemented pursuant to the Bylaw
provision has the following, among other, features:
1. Members who are United States residents must consent to report
any patronage dividends received as gross income for federal
income tax purposes. The Cooperative will file with the
Internal Revenue Service a report, currently on Form
1099-PATR, of the amount of patronage dividends paid to each
member. Members resident of countries other than the United
States generally are subject to a flat United States tax of
30% on the amount of patronage dividends paid by the
Cooperative. The Cooperative is required to withhold
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<PAGE> 17
the 30% tax from the patronage dividend payment, unless the
treaty between the United States and a particular country
provides for a lower withholding rate. For example, a treaty
between the United States and Canada provides for withholding
at a 15% rate (although the Canadian member remains liable for
the remaining 15% tax).
2. While the Bylaw provision permits the Cooperative to operate
on a "for-profit basis" with respect to non-members, the
Cooperative has no intention of changing its pricing policy,
as described above, pursuant to which the Cooperative
endeavors to mark up prices on Equipment and Supplies by the
least amount necessary.
3. The validity of the Cooperative's allocation of participating
distributor purchases to the distributors' respective customer
Operators will depend upon the accuracy and timeliness of the
records maintained by the distributors and provided to the
Cooperative pursuant to agreements between the distributors
and the Cooperative. The Cooperative anticipates that
distributors serving members will perform the recordkeeping
functions in an accurate and timely manner. However, the
Cooperative cannot assume responsibility, as between the
Cooperative and its members, for the information provided, or
not provided, the Cooperative by distributors with respect to
purchases by individual Operators.
4. While the Cooperative is authorized to make distributions, in
part, in a form other than cash, the Cooperative anticipates
that in the foreseeable future any distributions would be
solely in the form of cash, subject to offset as discussed
below. In August 1993, the Cooperative's Board of Directors
adopted Article 9.6 set forth above providing for a possible
offset of a stockholder member's patronage dividend against
the payment of any indebtedness to the Cooperative, the
repayment of which is in default. As a matter of policy, the
Cooperative currently notifies any franchisee against whose
patronage dividend the Cooperative intends to offset against
an obligation of its intention by certified mail return
receipt requested, and the Cooperative will require any member
requesting that 20% of any patronage dividend to be offset
nevertheless be paid to the member in cash make the request by
certified mail return receipt requested.
5. KFC Management and Harman are eligible as are all other
members to receive patronage dividends on the same basis as
other members.
6. Distributions of patronage dividends are based solely on
patronage with the Cooperative and not on the basis of the
number of shares of Store Common Stock owned by a member. The
payment of dividends based on patronage with the Cooperative
necessarily reduces or eliminates funds available for
dividends based on the number of shares of Store Common Stock
owned.
7. Non-member Operators are ineligible to receive patronage
dividends, just as they are ineligible to receive dividends on
Store Common Stock.
8. The treatment of the Cooperative's payment of patronage
dividends under the federal income tax laws of the United
States is not free from uncertainty. See "UNITED STATES TAX
ASPECTS OF THE PATRONAGE DIVIDEND PROGRAM." If favorable tax
treatment of patronage dividends becomes unavailable, the
Cooperative will reevaluate the patronage dividend program and
may discontinue or modify it.
9. If the Cooperative is liquidated, any funds available after
redemption of Membership Common Stock will be distributed on
the basis of past patronage with the Cooperative rather than
number of shares of Store Common Stock owned.
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<PAGE> 18
UNITED STATES TAX ASPECTS OF THE PATRONAGE DIVIDEND PROGRAM
The United States Internal Revenue Code of 1986, as amended (the
"Code"), provides that corporations "operating on the cooperative basis"
generally may exclude from their taxable income amounts paid as "patronage
dividends." "Patronage dividends" are amounts paid to patrons (a) on the basis
of the quantity or value of business done with or for such patron, (b) under an
obligation of an organization to pay such amount, which obligation existed
before the organization received the amount so paid, and (c) which is
determined by reference to the net earnings of the organization from business
done with or for its patrons. The patronage dividend program described above
calls for the payment of patronage dividends, (a) to members with respect to
their purchases of Equipment and Supplies from the Cooperative, (b) pursuant to
an obligation to pay in the context of the provisions of the Bylaws set forth
above, and (c) determined on the basis of the net earnings of the Cooperative
from such business done with all of its members in accordance with Article 9.2.
Accordingly, the Cooperative believes that its patronage dividend program meets
the standards of the Code.
The Cooperative has been advised by the U.S. Internal Revenue Service
that the Service will not issue a favorable advance ruling concerning the
Cooperative's proposed exclusion from its taxable income of amounts paid as
patronage dividends. Accordingly, there can be no assurance that the
Cooperative's treatment will not be challenged on audit of the Cooperative's
federal income tax returns. If such a challenge were successful, the
Cooperative would be liable for taxes and interest for any amounts disallowed
as exclusions from its taxable income.
PATRONAGE DIVIDEND PROGRAM FOR CANADIAN STOCKHOLDERS
The payment of patronage dividends to members is based on the value of
business done by the Cooperative with regard to each member. Because
substantially all of the Cooperative's Canadian sales to Operators will be with
the Canadian Subsidiary, and not with the Cooperative itself, the value of
business done by Canadian stockholder members with the Cooperative will be
minimal. The amount of the patronage dividend paid to Canadian stockholder
members will be correspondingly minimal. The Cooperative, therefore, has
determined to provide a sales allowance to Canadian stockholder members based
on patronage with the Canadian Subsidiary. This allowance is intended to
provide the Canadian stockholder members with a program based on Canadian sales
similar to the current patronage dividend program. For fiscal 1996, the sales
allowance will be based on fifty percent (50%) of the Canadian Subsidiary's net
income. There can be no assurance that the Canadian Subsidiary's operations
will be successful on a sustained basis and that any such price reduction
program will continue.
As noted above in "Features of Program," upon liquidation of the
Cooperative any funds available after redemption of Membership Common Stock
will be distributed on the basis of past patronage with the Cooperative rather
than number of shares of Store Common Stock. In part, because such a
liquidating distribution with respect to Canadian stockholders would be
minimal, the Cooperative will enter into an agreement to repurchase any
Canadian stockholder member's Store Common Stock at its original purchase price
at any time after two years from the date of purchase. Under Delaware law, the
Cooperative may not repurchase any shares of its common stock when the capital
of the Cooperative is impaired or when such repurchase would cause any
impairment of the capital of the Cooperative.
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<PAGE> 19
CAPITAL STOCK
Membership Common Stock
The Cooperative is authorized to issue 2,000 shares of Membership
Common Stock, no par value, of which 586 shares were issued and outstanding on
October 31, 1995. The summary description of Membership Common Stock
provisions which follows is subject in all respects to the Certificate of
Incorporation and the Bylaws of the Cooperative.
Issuance in Series. Membership Common Stock is offered and issued in
series as indicated in the discussion below of Series A through Series Q. The
Cooperative's Certificate of Incorporation also provides for nine Series of
Membership Common Stock which are designated Series R through Series Z. The
Board of Directors has no current specific intention to issue any shares of the
Series R through Z Membership Common Stock and is prohibited from doing so
without further amendment of the Bylaws.
KFC Operators. Operators of KFC retail outlets, except for
KFC Management, the NFAC, Harman and Scott's, are entitled to purchase one
share of Membership Common Stock of Series A through Series G, inclusive,
depending upon their being deemed to operate a KFC retail outlet in one or more
of the states designated below:
<TABLE>
<CAPTION>
Series Area
<S> <C> <C>
A - Indiana, Michigan, Ohio and West Virginia
B - Arkansas, Colorado, Kansas, Missouri, New Mexico, Oklahoma and Texas
C - Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island and Vermont
D - Alaska, Hawaii, Idaho, Montana, Oregon, Washington and Wyoming
E - Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina,
Tennessee and Virginia
F - Illinois, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin
G - Arizona, California, Nevada and Utah
</TABLE>
Harman has purchased one share of Series H Membership Common Stock.
Scott's has purchased one share of Series I Membership Common Stock. Operators
of KFC retail outlets in Foreign Territories are entitled to purchase one share
of Series J Membership Common Stock. KFC Management has purchased one share of
Series K Membership Common Stock and the NFAC has purchased one share of Series
L Membership Common Stock. Operators of KFC retail outlets in Canada,
including Pepsi-Cola Canada Ltd., are entitled to purchase one share of Series
M Membership Common Stock.
The Series H and Series I Membership Common Stock held by Harman and
Scott's, respectively, each provides for the election of one director and the
series of such stock held by KFC Management and the NFAC each provide for the
election of two directors. The Bylaws of the Cooperative provide that if
Harman or Scott's at any time owns or operates fewer than 100 KFC outlets, or
if KFC Management owns or operates fewer than 200 KFC outlets, then the share
of Membership Common Stock owned by said Operator must be exchanged for one
share of Membership Common Stock of such other Series as such Operator is
otherwise eligible to purchase.
Taco Bell Operators. Section 2.4 of the Cooperative's Bylaws
designates Series N through Q as Series available to Taco Bell Franchisees.
The IATBF is permitted to purchase Series N. Depending upon the number of
shares of
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<PAGE> 20
Store Common Stock issued with respect to Taco Bell retail outlets ("Taco Bell
Store Common Stock"), Taco Bell Operators will be issued and hold Series N, O,
P or Q.
If less than 400 shares of Store Common Stock are issued and
outstanding with respect to Taco Bell retail outlets, only Series N, which will
also be held by the IATBF, will be issued to Taco Bell Operators. If and when
400 or more but less than 650 shares of Taco Bell Store Common Stock are issued
and outstanding, Taco Bell Operators will hold Series O Membership Common Stock
and only the IATBF will hold Series N Membership Common Stock. If and when 650
or more but less than 900 shares of Taco Bell Store Common Stock are issued and
outstanding, then Taco Bell Operators will hold Series O or Series P Membership
Common Stock (depending on the region in which the Stockholder Members' retail
outlets are located), and the IATBF will hold Series N Membership Common Stock.
If and when 900 or more shares of Taco Bell Store Common Stock are issued and
outstanding, then Taco Bell Operators will hold Series O, P, or Q Membership
Common Stock (depending on the region in which the Stockholder Members' retail
outlets are located), and the IATBF will hold Series N Membership Common Stock.
When the number of shares of Store Common Stock issued and outstanding
with respect to Taco Bell retail outlets increases or decreases to the various
thresholds described above, then the shares of Membership Common Stock held by
Taco Bell Operators will automatically convert into the appropriate Series.
Because of the possibility of this conversion, certificates representing shares
of Membership Common Stock held by Taco Bell Operators will bear a legend
indicating that there could be a conversion from one Series to another Series.
The various Series, number of shares of Store Common Stock required to
trigger a conversion into a new Series and the various Taco Bell regions are
set forth below:
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
-------- -------- --------
SERIES TACO BELL REGIONS NUMBER OF TACO BELL STORE SHARES
------ ----------------- --------------------------------
<S> <C> <C>
N 1 through 6 Less than 400
- -------------------------------------------------------------------------------------------
O 1 through 6 Less than 650, but
400 or more
- -------------------------------------------------------------------------------------------
O 1, 2 and 3 Less than 900, but
650 or more
P 4, 5 and 6
- -------------------------------------------------------------------------------------------
O 1 and 2
P 3 and 4 900 or more
Q 5 and 6
</TABLE>
The Taco Bell regions listed in Column 1 below include the areas set
forth in the corresponding line(s) of Column 2 below.
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<PAGE> 21
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2
-------- --------
REGION NUMBER REGION
------------- ------
<S> <C>
1 (Northeast): Connecticut, Delaware, District of Columbia, Maine, Maryland,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island,
Vermont, Virginia and West Virginia.
2 (Southeast): Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South
Carolina and Tennessee.
3 (Midwest): Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska,
North Dakota, Ohio, South Dakota and Wisconsin.
4 (Southwest): Arkansas, Arizona, Louisiana, New Mexico, Oklahoma and Texas.
5 (Northwest): Alaska, Colorado, Idaho, Montana, Oregon, Utah, Washington, Wyoming and
Northern California (all of California except the counties of San Luis Obispo, Santa
Barbara, Kern, Ventura, Los Angeles, San Bernardino, Orange, Riverside, San Diego and
Imperial).
6 (Far West): Hawaii, Guam, Nevada and the California counties of San Luis Obispo,
Santa Barbara, Kern, Ventura, Los Angeles, San Bernardino, Orange, Riverside, San
Diego and Imperial.
</TABLE>
Voting Rights. Each class of Series A through Series J and Series M
stockholders of Membership Common Stock is entitled to elect one member of the
Board of Directors, and Series K and Series L stockholders are entitled to
elect two members of the Board of Directors; provided, however, that until and
unless the holders of Series J and Series M Membership Common Stock hold 100 or
more shares of Store Common Stock purchased or held with respect to retail
outlets located in the specified region, the Series J or Series M member of the
Board of Directors shall be nominated by a holder of Series J or Series M
Membership Common Stock, as the case may be, but shall be elected by a
plurality vote of all the shares of Membership Common Stock entitled to vote at
the annual meeting of stockholders. In addition, when only Series N of the
various Series N through Series Q of Membership Common Stock established for
Taco Bell Operators is issued and outstanding, the IATBF will nominate an
individual to serve as the Series N member of the Board of Directors, who is
then elected by all stockholders holding shares of Series N Membership Common
Stock. When and if shares of Series O, P and/or Q are issued and outstanding,
holders of those series will nominate and elect a director to represent their
respective series. Each stockholder member is entitled to cast one vote to
elect a member of the Board of Directors to represent its series except for the
members of Series K and Series L, which are entitled to cast one vote to elect
each of two members of the Board of Directors from their respective series. On
all matters except the election of the Board of Directors, each holder of
Membership Common Stock is entitled to cast one vote on each matter on which
members are entitled to vote. The Bylaws provide that directors may be elected
by a plurality of the Series entitled to elect such director. Unless otherwise
provided by the Bylaws or required by law, the affirmative vote of two-thirds
of the members present at a meeting at which a quorum is in attendance is
necessary to decide in favor of any matter.
Dividend Rights. Dividends may not be declared or paid with respect
to Membership Common Stock.
Limitations on Ownership and Transfer; Redemption. Membership Common
Stock may be issued only to persons who satisfy the membership requirements and
no more than one share of such stock shall be issued to any one Operator,
except for the limited circumstances described below. Section 2.3 of the
Bylaws reflects the Cooperative's one franchisee, one vote principle for
franchisees as applied to
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<PAGE> 22
multiple franchises. See "ISSUANCE IN SERIES." When a corporation,
partnership or other entity is a franchisee Operator, the owner of more than
50% of the corporation, partnership or other entity is deemed to be the owner
of the share of Membership Common Stock issued by the Cooperative. Where no
person, corporation, partnership or other entity owns more than 50% of the
outstanding ownership interest of a franchisee Operator, the owners of the
corporation, partnership or other entity must designate among themselves who
will be deemed to own the share of Membership Common Stock.
Section 2.3 of the Cooperative's Bylaws concerns the Cooperative's
determination of precisely who is entitled to vote certain shares of Membership
Common Stock in situations involving individuals who, through different
corporations, partnerships or other affiliations, may have an interest in more
than one share of Membership Common Stock. The Bylaws provide that no person,
firm or entity is entitled to own or have an interest in, directly or
indirectly, more than one share of Membership Common Stock (the "Base Share"),
except for (a) any interest a franchisee may have in the share of Membership
Common Stock held by the NFAC, (b) any interest a franchisee may have in the
share of Membership Common Stock held by the IATBF, (c) any interest which a
franchisee may have in either (i) one (but only one) share of the Cooperative's
Series A through I Membership Common Stock if a franchisee's Base Share is a
share of the Cooperative's Series N through Q Membership Common Stock or (ii)
one (but only one) share of the Cooperative's Series N through Q Membership
Common Stock if a franchisee's Base Share is a share of the Cooperative's
Series A through I Membership Common Stock, (d) if a franchisee's Base Share is
not a share of the Cooperative's Series J Membership Common Stock, any interest
a franchisee may have in one (but only one) share of the Series J Membership
Common Stock, (e) if a franchisee's Base Share is not a share of the
Cooperative's Series M Membership Common Stock, any interest a franchisee may
have in one (but only one) share of the Series M Membership Common Stock, (f)
any interest which KFC Management may have in Pepsi-Cola Canada Ltd.'s Series M
share, and any interest which Pepsi-Cola Canada Ltd. may have in KFC
Management's Series K share by reason of KFC Management and Pepsi-Cola Canada
Ltd. each being subsidiaries or divisions of PepsiCo, and (g) any interest a
franchisee may have in a share of Membership Common Stock held by a firm or
entity in which the franchisee owns fifty percent or less and with respect to
which the franchisee refrains from voting or participating in the voting of the
share of Membership Common Stock.
If any holder of Membership Common Stock has ceased to be a member of
the Cooperative because it is no longer an Operator or owns less than the
required amount of Store Common Stock, such stock will be called for redemption
at $10.00 per share. Under Delaware law, the Cooperative may not repurchase
any shares of its common stock when the capital of the Cooperative is impaired
or when such repurchase would cause any impairment of the capital of the
Cooperative. Membership Common Stock may not be transferred to any person or
entity other than the Cooperative.
Liquidation Rights. In the event of any liquidation of the
Cooperative or other disposition of its assets, the holders of Membership
Common Stock would be entitled to receive $10.00 per share before any
distributions to the holders of Store Common Stock are made. Any net assets
remaining after the payment of the $10.00 per share to the holders of
Membership Common Stock shall be distributed to holders of the Store Common
Stock.
General. Membership Common Stock has no preemptive rights. The
shares of Membership Common Stock are, when issued, duly authorized, validly
issued and fully paid and nonassessable and the holders thereof will not be
liable for any payment of the Cooperative's debts.
Store Common Stock
The Cooperative is authorized to issue 10,000 shares of Store Common
Stock, no par value, of which 5,779 shares were issued and outstanding on
October 31, 1995. The summary description of Store Common Stock provisions
which follows is subject in all respects to the Certificate of Incorporation
and the Bylaws of the Cooperative.
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<PAGE> 23
Voting Rights. The holders of Store Common Stock are not thereby
entitled to vote for directors, to participate in meetings or management of the
Cooperative or to vote in any proceedings except in such statutory proceedings
as to which their votes are required by law.
Dividend Rights. The holders of Store Common Stock are entitled to
receive dividends if, when, and as declared by the Board of Directors. See
"DIVIDEND POLICY" and "PATRONAGE DIVIDEND PROGRAM."
Limitations on Ownership and Transfer; Redemption. Store Common Stock
may be issued only to persons who satisfy the stockholder membership
requirements, and generally each member must purchase one share of Store Common
Stock for each KFC or Taco Bell retail outlet which such member owns and
operates. Only holders of record of a share of Membership Common Stock may
purchase shares of Store Common Stock. Store Common Stock may be transferred
to persons, firms or entities who qualify for membership in the Cooperative
only if the Cooperative does not exercise its right of first refusal to
purchase such shares. A member desiring to transfer one or more shares of
Store Common Stock must first offer such shares to the Cooperative on the same
terms and conditions to which the member has agreed with such other person,
firm or entity making an offer to purchase said stock. If the Cooperative
declines its right of first refusal or does not respond to the offer within 90
days, the member, within 60 days thereafter, may sell, assign or otherwise
transfer the shares to the person, firm or entity making the offer to purchase
the shares, provided such person, firm or entity qualifies for membership in
the Cooperative. If the shares are not sold or otherwise transferred within
the 60 day period referred to above, the shares may not be sold or transferred
without the member again offering the shares to the Cooperative.
Pursuant to a policy adopted by the Cooperative's Board of Directors,
the Cooperative is authorized to purchase, for not more than the amount of the
member's equity per share at the end of the Cooperative's fiscal year next
preceding the date of purchase, a certain number of shares of Store Common
Stock in each of the Cooperative's fiscal quarters. The Cooperative therefor
may, but generally has no obligation to, repurchase shares of Store Common
Stock from a member which owns shares in excess of the number required for
membership. In any event, the Cooperative has no intention of repurchasing
substantial numbers of shares of Store Common Stock. For a discussion of a
commitment by the Cooperative to repurchase from Canadian stockholders shares
of Store Common Stock at the original purchase price, see "Patronage Dividend
Program - Patronage Dividend Program for Canadian Stockholders."
Liquidation Rights. In the event of any liquidation of the
Cooperative or other disposition of its assets, the holders of Store Common
Stock shall be entitled to receive the net assets of the Cooperative remaining
after payment of all debts and liabilities of the Cooperative and payment of
$10.00 per share to the holders of Membership Common Stock. Liquidating
distributions will be made on the basis of past patronage with the Cooperative
rather than number of shares of Store Common Stock owned. See "PATRONAGE
DIVIDEND PROGRAM."
General. Store Common Stock has no preemptive or conversion rights.
The shares of Store Common Stock are, when issued, duly authorized, validly
issued and fully paid and nonassessable and the holders thereof will not be
liable for any payment of the Cooperative's debts.
Reports to Stockholders
The Cooperative intends to send to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited financial statements.
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<PAGE> 24
ITEM 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Income:
Net sales $537,116 $528,010 $501,487 $384,024 $401,336
Income before
patronage dividend
and income taxes 2,771 1,343 2,055 538 1,423
Patronage dividend 1,246 569 888 1,002 1,281
Net income (loss) 909 461 749 (330) 93
Consolidated Balance Sheets
(at end of period):
Total assets $ 42,831 $ 42,767 $ 43,364 $ 29,026 $ 28,187
Long-term obligation 3,000 3,000 0 0 0
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ANALYSIS AND OPERATIONS
Fiscal Years Ended October 31, 1995, 1994, and 1993
The Cooperative offers supplies and most major equipment used
principally by KFC and Taco Bell Operators. The Cooperative's increases in net
sales and net income over the years have resulted primarily from increased
sales volume, the expansion of product lines and services, and the addition of
new customers.
Net sales for fiscal 1995 were $537,116,000 compared to $528,010,000
for fiscal 1994, an increase of 1.7%. The increase in sales for fiscal 1995 was
led by core business, primarily KFC-U.S. with an overall 8% increase from the
prior year. KFC-U.S. food and packaging sales were up by 12%, while equipment
sales were down by 23%. Dairy Queen sales were also up in fiscal 1995 by almost
14%, primarily food and packaging. New business for fiscal 1995 from Fazoli's
added $4,200,000 in sales, primarily equipment. Sales by the Cooperative's
Canadian subsidiary were down by 8% as a result of the withdrawal of KFC
corporate stores in Canada that had previously combined their purchasing with
the Canadian franchisees. Taco Bell also showed a 10% decrease in sales volume
as a result of significantly lower beef prices, reducing prices paid directly
by the Operators, but, in turn, reducing Cooperative sales on similar volumes.
In addition to product savings, same store sales at Taco Bell restaurants were
generally lower.
Net sales for fiscal 1994 increased by 5% to $528,010,000. The
increase is attributable to increased sales from concepts other than the
Cooperative's core business with KFC and Taco Bell. Combined sales to KFC (U.S.
and Canada) and Taco Bell Operators, representing 87% of total sales in fiscal
1994, were 1.3% lower in fiscal 1994 compared to fiscal 1993. KFC-U.S. sales
for fiscal 1994 were down by 12% compared to fiscal 1993, driven primarily by
lower equipment sales representing 8% of the decrease. KFC-U.S. equipment sales
in fiscal 1993 were at a higher-than-normal level as a result of a rotisserie
oven roll-out and new signage. Food and packaging sales through distributors
for KFC-U.S. were also down by 4% in 1995, primarily attributable to pricing
reductions on product lines. When the Cooperative meets its objective of lower
store delivered costs, the impact of this reduction lowers sales dollar
volumes, but delivers the total savings to Operators in the form of lower
costs. The Canadian subsidiary's sales increased by 30% over fiscal 1993 sales,
and Taco Bell sales reflected a 23% increase above fiscal 1993 sales. Sales
volume growth in non-core business was led by increases from Dairy Queen and
Long John Silver's. Both of these concepts reflected significant increases over
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<PAGE> 25
fiscal 1993, and as a result increased the non-core business components of
sales to 13% of the total sales in fiscal 1994 versus 7% of total sales in
1993.
The operations of the Canadian subsidiary (in U.S. dollars)
contributed approximately $49,700,000, $53,800,000, and $41,500,000 in sales in
fiscal 1995, 1994, and 1993, respectively. The Canadian subsidiary contributed
approximately $41,000, $42,000, and $40,000 in income before patronage dividend
and income taxes in fiscal 1995, 1994, and 1993, respectively. As of October
31, 1995, 1994, and 1993, the Canadian subsidiary had identifiable assets (in
U.S. dollars) of approximately $3,800,000, $4,200,000, and $3,200,000,
respectively, consisting of accounts receivable, property and equipment, and
amortizable costs.
Income before patronage dividend and income taxes for fiscal 1995 was
$2,771,000, an increase of $1,428,000 over fiscal 1994. An increase in the
gross profit on sales percentage to 2.5% in 1995, compared to 2.3% in 1994,
combined with the lower provision for losses and only a small increase in
expenses, provided the higher net income number.
Income before patronage dividend and income taxes for fiscal 1994
decreased from $2,055,000 in fiscal 1993 to $1,343,000 in 1994. Gross profit on
sales for fiscal 1994 was relatively unchanged from fiscal 1993 at 2.3% and
2.2%, respectively. The majority of the decrease in the income before patronage
dividend and income taxes for fiscal 1994 is from the increase in the provision
for losses on receivables. The provision for losses increased by $502,000,
representing management's concern over the potential collectibility of certain
receivables. Income before patronage dividend and income taxes was also
adversely affected by the costs associated with the development of new concept
business. In fiscal 1994, the Cooperative focused significant efforts in
developing a program for a fast food franchisee organization.
Other income and expenses for fiscal 1995 increased by $99,000
compared to fiscal 1994. The significant difference is primarily attributable
to the increase in interest income earned on overnight cash balances, offset by
a decrease in service charges, reflecting the improvement in the past-due
amounts.
Other income and expenses for fiscal 1994 decreased by $133,000 from
$322,000 in fiscal 1993 to $189,000 in fiscal 1994. The decrease is primarily
attributable to decreases in service charges of $90,000 and miscellaneous
income of $40,000.
Selling, general and administrative expenses increased by $492,000 in
fiscal 1995 compared to the prior year. A portion of the increase was
attributable to costs associated with the development of a new concept, which,
because of circumstances beyond the Cooperative's control, was suspended in
midyear. The Cooperative has reorganized a portion of this business into the
"Horizon Group" with the responsibility for consolidating the Cooperative's
smaller-volume concepts, such as Long John Silver's and Fazoli's, under one
management team. The combined revenues for the "Horizon Group" were
approximately $22,000,000 for fiscal 1995.
Selling, general and administrative expenses for fiscal 1994 increased
to 1.92% as a percentage of sales versus 1.84% in fiscal 1993. The increase is
primarily attributable to expenses associated with the development and
promotion of a program for an additional fast food franchisee group for which
sales were expected to be generated in fiscal 1995. As with the other new
concepts added over the last few years, this new concept, once implemented, was
expected to generate gross profits to absorb all of the operating expenses.
The volume of business added from the new concepts creates synergies
in purchasing power and economies of scale, allowing the Cooperative to
maintain and expand its level of service to all customers.
The Cooperative pays its member stockholders a patronage dividend
based on a formula approved by the board of directors. In fiscal 1995 the
dividend to be paid is $1,246,000, compared to $569,000 in fiscal 1994. The
dividend in fiscal 1994 was lower than fiscal 1993, primarily as a result of a
higher provision for losses in fiscal 1994.
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<PAGE> 26
Net income for fiscal 1995 was $909,000, an increase of $448,000 over
fiscal 1994. Net income, similar to income before patronage dividend and taxes,
is affected by the increased gross profit percentage and the reduction in the
provision for losses.
Net income for fiscal 1994 was $461,000 after a provision for
patronage dividend of $569,000. The patronage dividend for fiscal 1994 is
directly affected by the patronage sales and expenses. Patronage-based sales
were $18,576,000 lower in fiscal 1994 compared to fiscal 1993. The patronage
dividend is also directly affected by increased expenses, including the
increased provision for losses incurred in fiscal 1994. The $502,000 increase
in provision for losses was directly related to patronage-based revenues and
customers. The calculation of patronage dividend for fiscal 1994 was based on a
formula similar to fiscal 1993. In fiscal 1995, the patronage formula has been
restructured to allow for separate pools for each patronage concept. For fiscal
1995, the patronage dividend will be calculated and allocated based on the
earnings derived from the participating concepts, KFC and Taco Bell. Under the
allocation formula, all expenses, including provisions for losses, will be
allocated to each participating concept and the patronage dividend for each
concept's stockholder members will be directly related to these results.
Total assets as of October 31, 1995 were $42,831,000, a slight
increase from fiscal 1994 of $42,767,000. The asset mix was changed with a
decrease in accounts receivable of $982,000 and a decrease in inventories of
$1,261,000, offset by an increase in cash of $1,829,000 and an increase in
notes receivable of $795,000. The increase in notes receivable was generated
through a payoff agreement with a former distributor, secured by real estate.
Total assets as of October 31, 1994 decreased to $42,767,000 from
$43,364,000 at October 31, 1993. The decrease is primarily associated with the
reduction of inventory values of $1,286,000.
INFLATION
The prices paid by the Cooperative for Equipment and Supplies are, of
course, subject to the effects of inflation. In an effort to mitigate the
effects of inflation on both the Cooperative and its customers, the Cooperative
makes advance purchase commitments (but, except for certain items, such as cob
corn, salsa, and equipment for staging, does not take delivery), at fixed
prices, for the volume of Equipment and Supplies it anticipates selling within
a reasonable period of time. The Cooperative has provided its customers with
the benefit of forward purchase commitments on price-volatile commodities. By
virtue of the Cooperative's pricing policy, which is to minimize the margin
between the Cooperative's advance purchase costs and sales prices, and the
Cooperative's purchase program, the effects of inflation on the Cooperative's
financial condition may be less than on other businesses.
CAPITAL EXPENDITURES
In fiscal 1995, the Cooperative invested approximately $242,000 in
office furniture and equipment. Approximately $39,000 was expended to upgrade
hardware and software for the mainframe computer. The balance was office
equipment, including PCs and other functional equipment. The Cooperative is
constantly evaluating the technical needs of the business in light of the
demands of both customers and vendors. Given the Cooperative's business
environment, the Cooperative believes that increased technology results in cost
savings.
LIQUIDITY AND CAPITAL RESOURCES
The working capital needs of the Cooperative for sales growth and the
related accounts receivable, and for the corn and equipment inventories
associated with the Cooperative's corn and equipment staging programs, have
been met through a combination of (i) net income of $909,000 in fiscal 1995,
which increased the retained earnings of the Cooperative, and (ii) combined
bank financing, of which $3,877,000 was outstanding on October 31, 1995. The
ability of the Cooperative's Board of Directors to increase or decrease the
percentage of "pre-tax income" to be paid in patronage dividends is an
additional potential source of liquid assets.
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<PAGE> 27
The Cooperative's line of credit with its primary bank is currently
$8,000,000 and is available to meet short-term working capital needs. The
Cooperative's $8,000,000 line of credit expires on May 2, 1997. The
Cooperative's line of credit with a national bank for cooperatives is currently
$3,000,000 and expires on May 1, 1996. On October 31, 1995, the Cooperative had
a total of $11,000,000 remaining credit available under these lines of credit.
The Canadian subsidiary has established a line of credit for $4,000,000
(Canadian dollars) to provide working capital in support of that subsidiary.
The Canadian line of credit expires May 16, 1996. The Cooperative has provided
a guarantee for the payment to the bank.
In 1994, the Cooperative negotiated a long-term financing arrangement
with its primary bank. Under the agreement, the Cooperative was provided a
$3,000,000 term loan at a fixed interest rate of 6.95%. The loan requires
monthly interest payments with the entire principal due on May 2, 1999. The
costs associated with obtaining the new financing arrangements are being
amortized over the term of the loan.
The Cooperative's net working capital at October 31, 1995 was
$16,436,000, an increase of $625,000 since October 31, 1994. The changes in
working capital for fiscal 1995 include (i) a decrease in accrued expenses of
$2,027,000, (ii) a decrease in inventories of $1,261,000, and (iii) an increase
of $677,000 in the patronage dividend accrual. The decrease in both the accrued
expenses and inventories are associated with the timing of the acquisition of
frozen corn for fiscal 1996. The Cooperative expects to be able to fund its
business in fiscal 1996 with the capital resources available from its
continuing operations and lines of credit as discussed above. If the
Cooperative successfully expands its activities and adds new customers related
to fast food concepts, the Cooperative may require an increase in its lines of
credit on a temporary basis. Management believes that its current banking
relationships will be able to provide for these possible increases.
ITEM 8. Financial Statements and Supplementary Data.
See accompanying Index to Consolidated Financial Statements and
Schedule.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the Registrant's last two fiscal years and any subsequent
interim period, the Registrant has not had a principal accountant resign,
decline to stand for re-election or be dismissed.
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<PAGE> 28
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
MANAGEMENT
DIRECTORS AND OFFICERS
The Cooperative's Bylaws provide for a Board of Directors consisting
of up to twenty voting members plus the Cooperative's President, who is a
non-voting member. Up to nineteen directors will be elected by the holders of
various series of Membership Common Stock. Each series of Membership Common
Stock is generally entitled to elect one director, except that the NFAC and KFC
Management are each entitled to elect two directors. One director (the
"Independent Director") is nominated by the Board of Directors and elected by a
plurality vote of the shares of all series of Membership Common Stock entitled
to vote. The Independent Director must not be affiliated in any way with any
Operator. With the exception of the President and the Independent Director,
each director of the Cooperative must be a member of the Cooperative or a
shareholder, officer, employee or partner of the entity which is a member of
the Cooperative. Additionally, each director (other than the President and the
Independent Director) must be a member or an officer, director, shareholder,
employee or partner of the organization which is entitled to vote for such
director. All voting members of the Board of Directors serve three-year
staggered terms.
For a description of the Cooperative's directors and executive
officers and certain related information, see Item 12. "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
During the last five years, Messrs. Allen, Buckner, Dunafon, Giles,
Harman, Henriquez, Houston, Marsella, Moss, Neal, Peck, Richards, Royster,
White, and Young have been principally engaged in business as Operators, and
Mr. Rhawn has been Chairman and owner of Rhawn Enterprises, Inc., a Louisville
financial services holding company.
Dino DelNano has served as Director of Purchasing since 1993, and
currently serves as Vice President of Purchasing, Poultry and Commodities.
From 1985 to 1993, Mr. DelNano held various positions in purchasing with
Church's Fried Chicken, Inc. and Popeye's Famous Fried Chicken and Biscuits,
Inc.
Kenneth L. Hartung has served as a Vice President of the Cooperative
since 1993. From 1991 to February 1993, Mr. Hartung was Vice President of
Sales and Marketing for the E. S. Robbins Container Division. He had
previously served as Vice President of Development of the Liqui-Box Corporation
and in several positions, including Vice President of Marketing, with the
B-Bar-B Corporation.
Thomas D. Henrion joined the staff of the Cooperative in March 1980 as
its President and in 1993 also became Chief Executive Officer. In 1991, Mr.
Henrion was elected to serve as a director of the National Cooperative Bank.
Mr. Henrion also serves as a director of Wholesome and Hearty Foods, Inc.
Dale E. Holden has served as the Cooperative's Vice President of Sales
since 1993, and currently serves as Vice President/General Manager Taco Bell
Sales, Customer Service and Distribution. From 1988 to 1993, Mr. Holden served
in various capacities with McLane Foodservice Group or its affiliates,
including as Vice President of National Accounts for the foodservice company.
William V. Holden has been Vice President of the Cooperative since
1989 and served as Controller of the Cooperative from 1985 until he was
appointed Chief Financial Officer in 1991. Mr. Holden also serves the
Cooperative as Assistant Treasurer.
Judith L. Hollis has served in the Cooperative's sales division since
1991 and currently serves as Vice President/General Manager of KFC Sales,
Customer Service and Distribution. From 1990 until 1991, Ms. Hollis was Vice
President of Marketing Resources Plus, a division of US West.
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<PAGE> 29
W. Thomas Hutcherson has served as the Cooperative's Vice President of
Purchasing since 1994. He served as Vice President-Equipment Purchasing and
Sales from 1982 until 1994.
John W. Inwright has served as Vice President of Purchasing, managing
the food and packaging division, since 1991. Mr. Inwright has served the
Cooperative in its purchasing operations since 1984.
Robert R. Lewis has served as Vice President of Management Information
Services since 1994, and as Manager of the management information services of
the Cooperative since 1988.
James M. Tilley has served the Cooperative since 1994 and currently
serves as Vice President/General Manager of the Horizon Group Sales, Customer
Service and Distribution. Before July 1994, Mr. Tilley was Divisional Vice
President of Training and Quality Leadership for Domino's Pizza, Inc. He held
various positions with Domino's Pizza, Inc. from 1983 to 1994.
Gail J. Wilson has served in the Cooperative's Insurance division
since 1992 and became Vice President of Insurance in 1994. From 1986 to 1991,
Ms. Wilson was Product Manager for Progressive Insurance, Inc.
Except for Mr. Henrion, all officers of the Cooperative who are also
directors serve in such offices on a limited, part-time basis without
remuneration.
STANDING COMMITTEES
The Board of Directors of the Cooperative had four regular meetings in
fiscal 1995 and no special meetings. The Board of Directors has five standing
committees, each of which met four times during fiscal 1995: Executive,
Personnel, Audit and Budget, Insurance, and Nominating.
The Executive Committee is comprised of Messrs. Allen, Harman, Neal,
Peck and Royster. The Executive Committee, between the meetings of the Board
and while the Board is not in session, has all the powers and may exercise all
the duties of the Board of Directors in the management of the business of the
Cooperative which may lawfully be delegated to it by the Board.
The Audit and Budget Committee is comprised of Messrs. Buckner, Giles,
Henriquez, Moss, Neal and Young. The Audit and Budget Committee meets
periodically with management and representatives of the Cooperative's
independent accountants. The independent accountants have free access to the
Committee and the Board of Directors. The Committee considers the scope,
timing and fees for the annual audit and the results of audit examinations
performed by the independent public accountants, including certain
recommendations to improve the Cooperative's systems of accounting and internal
controls, and the follow-up reports prepared by management of the Cooperative
pursuant to such recommendations. The Committee reviews the Cooperative's
annual budget before its consideration by the Board of Directors.
The Insurance Committee is comprised of Messrs. Allen, Dunafon,
Richards and White. The Insurance Committee monitors the KFC Franchisee
Insurance Program and, in conjunction with the Executive Committee, makes
recommendations to the Board of Directors concerning the program.
The Nominating Committee is comprised of Messrs. Allen, Harman and
Neal. The Nominating Committee makes recommendations to the Board of Directors
concerning officer positions for the Cooperative. The Board of Directors
considers the nomination of the Independent Director. Members of the
Cooperative nominate their own candidates for director to represent their
respective Series of Membership Common Stock.
The Personnel Committee is comprised of Messrs. Harman, Houston,
Marsella, Peck, Rhawn and Royster. Pursuant to a former provision of the
Cooperative's Bylaws, Mr. Peck, as Chairman of the Board, served as the
Cooperative's Chief Executive Officer until May 1993; he received no
compensation from the Cooperative
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<PAGE> 30
except for the reimbursement for expenses as provided below under "COMPENSATION
OF DIRECTORS." The Personnel Committee considers personnel policy and
practices of the Cooperative and makes recommendations to the Board of
Directors concerning the compensation of all officers.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"1934 Act") requires the Cooperative's directors, executive officers and
certain persons to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission (the "SEC"). The
Cooperative believes that all such filing requirements were complied with in
fiscal 1995.
ITEM 11. Executive Compensation.
The following table shows all cash compensation paid by the
Cooperative for the years ended October 31, 1995, 1994, and 1993 to the most
highly compensated executive officers as to whom the total cash and
cash-equivalent remuneration exceeded $100,000 during fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Principal Fiscal All Other
Position Year Salary Bonus(1) Compensation(2)
------------------ ---- ------ -------- ---------------
<S> <C> <C> <C> <C>
Thomas D. Henrion 1995 $181,498 $51,480 $21,046
President and Chief 1994 175,116 51,383 19,440
Executive Officer 1993 165,361 53,370 19,098
William T. Hutcherson 1995 102,034 15,815 11,631
Vice President 1994 101,538 10,713 11,834
1993 101,904 17,831 12,500
William V. Holden 1995 92,067 14,406 10,531
Vice President and Chief 1994 85,381 10,522 10,024
Financial Officer 1993 77,082 14,048 9,659
Kenneth Hartung 1995 87,099 17,861 10,457
Vice President 1994 82,813 16,538 9,881
1993 53,125 5,040 4,535
Judith Hollis 1995 86,800 18,346 10,230
Vice President 1994 83,333 8,820 9,784
1993 78,583 16,800 10,048
</TABLE>
(1) The Cooperative has established bonus programs for all
officers under which, if they achieve certain objectives, they may
receive a bonus of not greater than 40% of their base salaries. In
addition, the fiscal 1994 amount for Mr. Henrion includes a one-time
payment of $21,330 to Mr. Henrion pursuant to a letter agreement dated
May 22, 1991, providing for such payment if Mr. Henrion remained
employed by the Cooperative through February 15, 1994.
(2) Includes employer contribution to the Cooperative's Thrift
Plan and Money Purchase Pension Plan in fiscal 1995 as follows: Mr.
Henrion $4,500 and $11,546, respectively; Mr. Hutcherson $3,382 and
$8,249, respectively; Mr. Holden $3,078 and $7,453, respectively; Mr.
Hartung $3,109 and $7,348, respectively; and Ms. Hollis $2,869 and
$7,361, respectively. For Mr. Henrion, the fiscal 1995 amount
includes $5,000, representing the value to Mr. Henrion of the
Cooperative's payments with respect to the insurance policy described
below.
- 30 -
<PAGE> 31
In addition, Mr. Henrion and the Cooperative have executed a
Supplemental Benefits/Consulting Agreement (the "Supplemental Agreement"),
effective January 1, 1994, whereby Mr. Henrion will receive deferred
compensation upon either his retirement or his voluntary or involuntary
termination not for cause, as defined. The Cooperative's determination to
enter into the Supplemental Agreement was primarily based on the Board of
Directors' subjective sense of the value of Mr. Henrion's continued loyalty and
service to the Cooperative, the Cooperative's desire to assist Mr. Henrion in
providing for his retirement, as well as the contingencies of death and
disability, and to provide Mr. Henrion with an incentive to provide advisory
services to the Cooperative in a consulting capacity upon his eventual
retirement.
Pursuant to the Supplemental Agreement, commencing upon his departure
from the Cooperative (so long as his departure is not the result of a
termination for cause) and for the duration of the "Period" as defined below,
Mr. Henrion will receive monthly compensation equivalent at least to
one-twelfth of 18% of his annual base compensation averaged over a three-year
period ("Averaged Annual Compensation"). The Period will be a number of months
equal to the number of months Mr. Henrion has worked for the Cooperative after
January 1, 1994. In addition, for one year following the expiration of the
Period, Mr. Henrion will receive, in equal monthly installments, an amount
equal to his Averaged Annual Compensation. As of October 31, 1995, Mr.
Henrion's Averaged Annual Compensation for purposes of the Supplemental
Agreement was $175,805, with one-twelfth of 18% of this amount equal to $2,637.
If Mr. Henrion chooses to provide consulting services following his
departure from the Cooperative, in lieu of the monthly supplemental retirement
benefits at the annual rate of 18% of his Averaged Annual Compensation, he will
receive monthly compensation equivalent to one-twelfth of 30% of his Averaged
Annual Compensation for so long as he provides such consulting services. In
any event, Mr. Henrion may not provide consulting services for longer than the
Period or seven years, if the Period exceeds seven years. Mr. Henrion may
elect to receive the supplemental retirement income described above in a lump
sum payment of the present value of such income, in lieu of the monthly
payments.
The Supplemental Agreement also provides Mr. Henrion with an
increasing death benefit whole life split-dollar insurance policy in an initial
face amount of $147,384 (the "Policy"). The Cooperative will pay the $10,000
annual premium on the Policy unless and until Mr. Henrion's employment ceases
for any reason. The Cooperative has a 50% interest in the death benefits and
cash value under the Policy. Should Mr. Henrion's employment terminate for any
reason before his death, Mr. Henrion has the option of purchasing the
Cooperative's interest in the Policy for 50% of its then cash value. If Mr.
Henrion does not exercise his right to purchase the Cooperative's interest in
the Policy, the Cooperative may either purchase Mr. Henrion's interest in the
Policy for 50% of its then cash value or elect that the Policy be surrendered,
in which case the cash value will be paid one-half to Mr. Henrion and one-half
to the Cooperative.
COMPENSATION OF DIRECTORS
No director, other than the Independent Director, receives any
remuneration from the Cooperative other than reimbursement for long distance
travel, hotel accommodations, and $400 per board meeting for out-of-pocket
expenses. The Independent Director receives an annual fee of $10,000, plus
fees of $1,000 per board meeting attended.
- 31 -
<PAGE> 32
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
MANAGEMENT OF THE COOPERATIVE
Directors and Executive Officers
The following table lists, in addition to other information, the
directors and executive officers of the Cooperative at December 31, 1995, their
ages, their position with the Cooperative, their present principal occupations,
and the number and percentages of shares of Store Common Stock beneficially
owned, directly or indirectly, by each. The information provided with respect
to the ages and number of shares beneficially owned is as of December 31, 1995.
<TABLE>
<CAPTION>
Positions Year First
and Offices Became
Currently Director or Term as Present Store Percent
held with Executive Director Series Principal Common Stock of Store
Name Age Cooperative Officer Expires Represented(*) Occupation Ownership Outstanding
- ---- --- ----------- ------- ------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. 56 Director, 1988 1997 F Operator 10 **
Allen Secretary
Charles 58 Director 1993 1996 G Operator 10 **
Buckner
Darrell M. 50 Director 1995 1998 N Operator 9 **
Dunafon
Ronald 50 Director 1995 1996 C Operator 4 **
Giles
Leon W. 76 Director, 1978 1997 H Founder 266 4.7
Harman Vice Chairman of Harman
of the Board Management
Corporation
Edward J. 58 Director 1994 1996 J Operator 12 **
Henriquez, Jr.
Paul A. Houston 46 Director 1995 1996 I President of 408 7.2
Scott's Food
Services, Inc.
John Marsella 49 Director 1995 1996 L Operator 6 **
Grover G. Moss 51 Director 1994 1998 O Operator 9 **
David G. Neal 49 Director, 1991+ 1997 E Operator 89 1.6
Treasurer
Robert P. 61 Director, 1990 1996 B Operator 5 **
Peck Chairman of
the Board
</TABLE>
- 32 -
<PAGE> 33
<TABLE>
<CAPTION>
Positions Year First
and Offices Became
Currently Director or Term as Present Store Percent
held with Executive Director Series Principal Common Stock of Store
Name Age Cooperative Officer Expires Represented(*) Occupation Ownership Outstanding
- ---- --- ----------- ------- ------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward W. Rhawn 57 Director 1992 1996 Independent Chairman -- --
of Rhawn
Enterprises, Inc.
Jack M. Richards 67 Director 1991 1997 A Operator 3 **
James B. 57 Director 1990 1998 L Operator 2 **
Royster
Calvin G. 41 Director 1992 1996 D Operator 3 **
White
Ronald J. Young 37 Director 1993 1997 M Operator 12 **
Thomas D. 53 Director, 1980 -- -- President & Chief -- --
Henrion President, Executive Officer,
Chief Executive Cooperative
Officer
William V. 46 Vice President, 1985 -- -- Vice President, -- --
Holden Chief Financial Chief Financial
Officer Officer, Cooperative
Judith L. 47 Vice President, 1991 -- -- Vice President, -- --
Hollis General Manager Cooperative
KFC Sales
W. Thomas 49 Vice President, 1982 -- -- Vice President -- --
Hutcherson Purchasing Cooperative
John W. 39 Vice President, 1991 -- -- Vice President, -- --
Inwright Purchasing Cooperative
Dale E. Holden 37 Vice President, 1993 -- -- Vice President, -- --
General Manager Cooperative
Taco Bell Sales
Kenneth L. Hartung 48 Vice President 1993 -- -- Vice President, -- --
Cooperative
</TABLE>
- 33 -
<PAGE> 34
<TABLE>
<CAPTION>
Positions Year First
and Offices Became
Currently Director or Term as Present Store Percent
held with Executive Director Series Principal Common Stock of Store
Name Age Cooperative Officer Expires Represented(*) Occupation Ownership Outstanding
- ---- --- ----------- ------- ------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gail J. Wilson 36 Vice President, 1994 -- -- Vice President, -- --
Insurance Cooperative
Robert R. Lewis 56 Vice President, 1994 -- -- Vice President, -- --
Mgt. Info Services Cooperative
Dino DelNano 36 Vice President, 1995 -- -- Vice President, -- --
Purchasing, Poultry Cooperative
and Commodities
James M. Tilley 50 Vice President, 1995 -- -- Vice President, -- --
General Mgr. for Cooperative
Horizon Group
- -----------------------
All directors and officers as a group (27 persons)++ 848 14.6
</TABLE>
* KFC Management has purchased one share of Series K Membership Common
Stock. On November 16, 1989, both directors representing KFC Management
resigned as members of the Board of Directors. KFC Management has not taken
any action to fill the two vacancies and has not indicated whether it will take
any action in the future to fill the vacancies. The total number of shares of
Store Common Stock listed as owned by directors and officers does not include
the 2,028 shares of Store Common Stock believed by the Cooperative to be owned
by KFC Management or affiliates, representing approximately 35.8% of the Store
Common Stock outstanding.
** Less than one-half of one percent.
+ Mr. Neal has previously served on the Board of Directors of the
Cooperative as one of the two directors representing NFAC, the holder of the
Series L share of Membership Common Stock. He first began serving on the Board
of Directors as a representative of Series E in February 1991.
++ Each director, other than Messrs. Henrion and Rhawn, is, or is
affiliated with a member which is, the owner of one share of Membership Common
Stock. All directors and officers as a group (27 persons) own 15 shares of
Membership Common Stock, 2.6 percent of the total number of Shares of
Membership Common Stock outstanding. The Store Common Stock ownership
reflects the number of shares which each director, other than Messrs. Henrion
and Rhawn, owns or which is owned by the member with which the director is
affiliated. Except as required by law, Store Common Stock has no voting
rights. Messrs. Henrion and Rhawn are neither the owners, nor affiliates of
owners, of any Membership or Store Common Stock.
- 34 -
<PAGE> 35
ITEM 13. Certain Relationships and Related Transactions.
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board of Directors, except the
Independent Director, are Operators or represent Operators and have purchased
or may purchase Equipment and Supplies from the Cooperative or from
distributors who purchase from the Cooperative. All purchases by directors or
their affiliates from the Cooperative are made on the same terms and conditions
as purchases by any other Operator. Several Operators, including KFC
Management, are also in the business of purchasing Equipment and Supplies for
sale and distribution to other Operators and may purchase such Equipment and
Supplies from the Cooperative. See Item 1 "BUSINESS-" "HISTORY," "OPERATING
PRINCIPLE," "OPERATIONS-- PRINCIPAL CUSTOMERS," "PEPSICO" and Note 7 of the
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a)(1) Financial Statements. See accompanying Index to Consolidated
Financial Statements and Schedule.
(a)(2) Financial Statement Schedules. See accompanying Schedule II
- -- Valuation and Qualifying Accounts.
(a)(3) Exhibits. Following is a list of Exhibits to this Form 10-K:
*3.1 Certificate of Incorporation of Registrant, as
amended.
**3.2 Bylaws of Registrant, as amended.
*4.1 Article IV of Certificate of Incorporation of
Registrant, as amended, filed as Exhibit 3.1 to this Form 10-K.
**4.2 Articles II, III, IV and IX of Bylaws of Registrant,
as amended, filed as Exhibit 3.2 to this Form 10-K.
**10.1 Loan and Security Agreement, dated May 6, 1994,
between Registrant and Liberty National Bank and Trust Company of Louisville.
***10.2 Employment Agreement between Thomas D. Henrion and
the Registrant.
***10.3 Lease, dated as of June 21, 1983, between Registrant,
as Lessee, and General Electric Corporation, as Lessor, and amended on June 20,
1988.
***10.4 Form of Distributor Participation Agreement between
Registrant and various distributors.
***10.5 Lease, dated April 8, 1988, between NTS/Breckinridge,
Ltd. d/b/a The Springs, as Lessor, and the Registrant, as Lessee.
****10.6 Non-Competition and Consulting Agreement dated as of
January 31, 1991, among Fred Jeffrey, Juliana Jeffrey and the Registrant.
****10.7 Letter Agreement dated May 11, 1991, between Thomas
D. Henrion and the Registrant.
**10.8 Purchasing Affiliation Agreement dated as of June 15,
1994, between the International Franchisee Advisory Council, Inc., and the
Registrant.
**10.9 Supplemental Benefits/Consulting Agreement between
Thomas D. Henrion and the Registrant effective as of January 1, 1994.
- 35 -
<PAGE> 36
10.10 Amendment No. 1 to Supplemental Benefits/Consulting
Agreement between Thomas D. Henrion and the Registrant effective January 1996.
****21 Subsidiaries of the Registrant.
24 Powers of Attorney.
27 Financial Data Schedule.
- -----------------------------
*Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1992 [File No. 2-63640].
**Incorporated by reference to the Post-Effective Amendment No.
2 to the Registration Statement on Form S-1 of the Registrant [File No.
33-56982]
***Incorporated by reference to the Registration Statement on Form
S-1 of the Registrant [File No. 33-33801]
****Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1991 [File No. 2-63640].
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The exhibits listed in response to Item 14(a)(3) are filed as a part
of this report.
(d) Financial Statement Schedules.
The financial statement schedule listed in response to Item 14(a)(2)
is filed as a part of this report.
- 36 -
<PAGE> 37
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
and Schedules
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets - October 31, 1995 and 1994 F-3
Consolidated Statements of Income - Years ended F-4
October 31, 1995, 1994 and 1993
Consolidated Statements of Members' Equity - Years ended F-5
October 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended F-6
October 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements F-7
</TABLE>
Financial statement schedule for the years ended October 31, 1995, 1994 and
1993 is included herein:
II - Valuation and Qualifying Accounts
All other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes.
F-1
<PAGE> 38
Independent Auditors' Report
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.:
We have audited the consolidated financial statements of KFC National
Purchasing Cooperative, Inc. (d/b/a FoodService Purchasing Cooperative, Inc.)
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Cooperative's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 KFC National
Purchasing Cooperative, Inc. and subsidiaries as of October 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended October 31, 1995, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
KPMG Peat Marwick LLP
Louisville, Kentucky
December 4, 1995, except as
to note 10, which is as of
December 8, 1995
F-2
<PAGE> 39
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Balance Sheets
October 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,443 614
Accounts receivable, less allowance for losses
of $1,188 in 1995 and $1,287 in 1994 34,521 35,503
Inventories:
Food 1,610 2,821
Equipment 1,330 1,380
------- ------
2,940 4,201
Refundable income taxes 38 43
Current note receivable from related party 60 60
Current notes receivable 217 49
Prepaid expenses 81 117
Deferred income taxes 618 593
------- ------
Total current assets 40,918 41,180
------- ------
Office equipment, at cost, less accumulated depreciation
of $2,535 in 1995 and $2,164 in 1994 756 897
Note receivable from related party, excluding current portion 253 319
Note receivable, excluding current portion 627 -
Deferred income taxes 125 113
Other assets 152 258
------- ------
$42,831 42,767
======= ======
Liabilities and Members' Equity
-------------------------------
Current liabilities:
Short-term borrowings $877 534
Accounts payable 19,759 19,626
Accrued expenses 2,238 4,265
Premium deposits 362 375
Patronage dividend 1,246 569
------- ------
Total current liabilities 24,482 25,369
Long-term note payable 3,000 3,000
------- ------
Total liabilities 27,482 28,369
Commitments and contingencies
Members' equity:
Membership common stock, voting, no par value; authorized 2,000 shares;
issued and outstanding, 586 shares in 1995 and 585 shares in 1994 6 6
Store common stock, no par value; authorized 10,000 shares; issued and
outstanding, 5,779 shares in 1995 and 5,669 shares in 1994 1,582 1,543
Retained earnings 13,796 12,887
Currency translation adjustment (35) (38)
------- ------
15,349 14,398
------- ------
$42,831 42,767
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 40
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Income
Years ended October 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Net sales $537,116 528,010 501,487
Cost of goods sold 523,724 516,002 490,312
-------- ------- -------
Gross profit 13,392 12,008 11,175
Selling, general and administrative expenses 10,645 10,153 9,243
Provision for losses on receivables 264 701 199
Other income (expenses):
Service charges 112 279 369
Interest income 352 144 156
Interest expense (267) (282) (291)
Miscellaneous 91 48 88
-------- ------- -------
288 189 322
-------- ------- -------
Income before patronage
dividend and income taxes 2,771 1,343 2,055
Patronage dividend 1,246 569 888
-------- ------- -------
Income before income taxes 1,525 774 1,167
Provision for income taxes 616 313 418
-------- ------- -------
Net income $ 909 461 749
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Members' Equity
Years ended October 31, 1995, 1994 and 1993
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
------------
Amount Currency
------------ Retained Translation
Shares Membership Store Earnings Adjustment
------ ------------ ----- -------- -----------
<S> <C> <C> <C> <C> <C>
Balances, October 31, 1992 $ 5 1,156 11,677 (18)
Proceeds from sales of common stock:
Membership, at $10 per share 95 1
Store, at $400 per share 485 194
Retirement of common stock:
Membership, at $10 per share (12)
Store, at $400 per share (29) (12)
Costs in connection with sales of
common stock (8)
Net loss for the year ended
October 31, 1993 749
Currency translation adjustment (16)
---------- ----- ------ ---
Balances, October 31, 1993 6 1,330 12,426 (34)
Proceeds from sales of common stock:
Membership, at $10 per share 35
Store, at $400 per share 579 232
Retirement of common stock:
Membership, at $10 per share (10)
Store, at $400 per share (36) (15)
Costs in connection with sales of
common stock (4)
Net income for the year ended
October 31, 1994 461
Currency translation adjustment (4)
---------- ----- ------ ---
Balances, October 31, 1994 6 1,543 12,887 (38)
Proceeds from sales of common stock:
Membership, at $10 per share 17
Store, at $400 per share 154 62
Retirement of common stock:
Membership, at $10 per share (16)
Store, at $400 per share (44) (18)
Costs in connection with sales of
common stock (5)
Net income for the year ended
October 31, 1995 909
Currency translation adjustment 3
---------- ----- ------ ---
Balances, October 31, 1995 $ 6 1,582 13,796 (35)
========== ===== ====== ===
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 42
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Cash Flows
Years ended October 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 909 461 749
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 487 573 580
Provision for losses on receivables 264 701 199
(Gain) loss on disposals 2 (1) -
Deferred income tax expense (benefit) (37) (9) 43
Changes in operating assets and liabilities:
Increase in accounts receivable (216) (2,105) (12,239)
(Increase) decrease in inventories 1,261 1,286 (2,756)
Decrease in refundable income taxes 5 41 441
(Increase) decrease in prepaid expenses 36 (8) (41)
Increase in accounts payable 133 7,539 2,600
Increase (decrease) in accrued expenses (2,027) (188) 1,982
Decrease in premium deposits (13) (41) (35)
Increase (decrease) in patronage dividend 677 (319) (114)
------- ------- -------
Net cash provided by (used in) operating activities 1,481 7,930 (8,591)
------- ------- -------
Cash flows from investing activities:
Repayments of loan from related party 66 59 62
Increase in notes receivable - - (722)
Repayments of notes receivable 139 804 118
(Increase) decrease in other assets - (86) 1
Additions to office equipment (242) (181) (742)
Proceeds from sale of office equipment - 1 -
------- ------- -------
Net cash provided by (used in) investing activities (37) 597 (1,283)
------- ------- -------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net 343 (11,258) 8,997
Proceeds from issuance of long-term note payable - 3,000 -
Proceeds from sale of stock, net of costs 57 228 187
Retirement of stock (18) (15) (12)
------- ------- -------
Net cash provided by (used in) financing
activities 382 (8,045) 9,172
------- ------- -------
Effect of change in exchange rates on cash and cash equivalents 3 (4) (16)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,829 478 (718)
Cash and cash equivalents - beginning of year 614 136 854
------- ------- -------
Cash and cash equivalents - end of year $ 2,443 614 136
======= ======= =======
Supplemental information:
Income taxes paid $ 470 244 142
======= ======= =======
Interest paid $ 267 307 267
======= ======= =======
Account receivable exchanged for note receivable $ 934 - -
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 43
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
October 31, 1995 and 1994
(1) Basis of Presentation
The primary purpose of KFC National Purchasing Cooperative, Inc. (d/b/a
FoodService Purchasing Cooperative, Inc.) and Subsidiaries (the
Cooperative) is to operate as a central procurement organization, making
volume purchases of various foods, equipment and supplies primarily for
the benefit of Kentucky Fried Chicken (KFC) and Taco Bell retail
operators and their distributors (see note 7).
KFC Franchisee Purchasing of Canada, Inc., a wholly-owned subsidiary,
is a procurement organization for the benefit of Canadian KFC retail
operators and their distributors. Kenco Insurance Agency, Inc. sponsors
and helps administer an insurance program primarily for KFC franchisees.
KFC Franchisee Finance Company, Inc., another wholly-owned subsidiary,
has provided financing for equipment purchases of KFC franchisees. In
view of the overall nature of its operations, the Cooperative is
considered to operate in a single industry segment. The more
significant accounting policies of the Cooperative are as follows:
(a) Consolidation
The accompanying financial statements include the accounts of KFC
National Purchasing Cooperative, Inc. and its wholly-owned
subsidiaries, KFC Franchisee Insurance Program, Inc. and its
wholly-owned subsidiary, Kenco Insurance Agency, Inc., KFC
Franchisee Purchasing of Canada, Inc., and KFC Franchisee Finance
Company, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Revenue Recognition
The Cooperative purchases a majority of merchandise for its customers
from suppliers without taking physical possession of the products.
The suppliers ship directly to the customers. The Cooperative
takes title to the merchandise and assumes the risks related to
taking title upon shipment to the customer based on purchase order
terms. As a convenience, for accounting purposes, the Cooperative
recognizes revenues and the related costs upon receipt of
notification of shipment, primarily an invoice, from the supplier.
Management believes the consistent application of this accounting
method does not have a significant impact upon the consolidated
financial statements.
(Continued)
F-7
<PAGE> 44
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(1) Basis of Presentation (Continued)
(c) Inventories
Inventories are stated at the lower of cost or market. At October 31,
1995 and 1994, cost of inventories was primarily determined on the
last-in, first-out (LIFO) method. If inventories were valued using
the first-in, first-out (FIFO) method, they would have been
approximately $91,000 and $207,000 higher at October 31, 1995 and
1994, respectively.
During 1995 and 1994, LIFO inventory layers were reduced. This
reduction resulted in charging lower inventory costs prevailing in
previous years to cost of goods sold, thus reducing costs of goods
sold by approximately $166,000 and $9,000 in 1995 and 1994,
respectively, below the amount that would have resulted from
replacing the liquidated inventory at end of year prices.
(d) Checks Drawn in Excess of Bank Balance
Included in accounts payable are checks drawn in excess of bank
balance. Such amounts were $524,000 and $1,220,000 at October 31,
1995 and 1994, respectively.
(e) Depreciation and Amortization Expense
Provision for depreciation and amortization is made on the basis of the
estimated useful lives of the assets. Principally, the double
declining-balance method is used for depreciation of office
equipment and the straight-line method is used for amortization of
other assets.
Other assets principally consist of the unamortized portion of
non-competition agreements, goodwill and loan origination fees. The
non-competition agreements are being amortized over 13 and 5 years.
Goodwill is being amortized over 5 years. The loan origination
fees are being amortized over 5 and 3 years.
(f) Statement of Cash Flows
For purposes of the consolidated statements of cash flows, the
Cooperative considers all short-term highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
(Continued)
F-8
<PAGE> 45
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(1) Basis of Presentation (Continued)
(g) Translation of Foreign Currency
The financial statements of KFC Franchisee Purchasing of Canada,
Inc. are translated in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation".
Foreign currency transaction gains and losses were not significant
in 1995, 1994 and 1993.
(h) Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Statement 109 requires a change from the deferred
method of accounting for income taxes of APB Opinion 11 to the
asset and liability method of accounting for income taxes. Under
the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date.
Effective November 1, 1993, the Cooperative adopted Statement 109.
The cumulative effect of the change in the method of accounting
for income taxes was not material and is recorded as a component
of income tax expense in the 1994 consolidated statement of income.
Pursuant to the deferred method under APB Opinion 11, which was
applied in 1993 and prior years, deferred income taxes are
recognized for income and expense items that are reported in
different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes are not
adjusted for subsequent changes in tax rates.
(i) Reclassifications
Certain reclassifications of 1994 and 1993 amounts have been made to
conform to the 1995 presentation.
(Continued)
F-9
<PAGE> 46
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(2) Accounts Receivable and Significant Group Concentration of Credit Risk
As of October 31, 1995 and 1994, substantially all of the
Cooperative's receivables are obligations of retail operators and
their distributors. The Cooperative does not require collateral or
other security on most of these accounts. The credit risk on these
accounts is controlled through credit approvals, limits and monitoring
procedures.
(3) Borrowing Arrangements
The Cooperative has a $3,000,000 term note with its primary bank.
Accounts receivable and other property are pledged as collateral.
Terms require monthly interest payments, with a balloon principal
payment due May 2, 1999. The outstanding balance accrues interest at
an annual fixed rate of 6.95%. The carrying amount of this term note
approximates its fair value at October 31, 1995.
The Cooperative has a line of credit of $8,000,000 with its primary
bank, of which the entire amount was available on October 31, 1995.
Accounts receivable and other property are pledged as collateral for
borrowings under the line. Borrowings on the line of credit bear
interest at an annual rate equal to the Federal Funds Rate plus 120
basis points (6.96% as of October 31, 1995). This line of credit
expires on May 2, 1997.
The Cooperative has a $3,000,000 line of credit with a second bank,
of which the entire amount was available as of October 31, 1995.
Equipment accounts receivable and equipment inventory are pledged as
collateral for borrowings under the line. Borrowings on this line of
credit bear interest at LIBOR plus 140 basis points (7.23% as of
October 31, 1995). This line of credit expires May 1, 1996.
The Cooperative has a $4,000,000 (Canadian dollars) line of credit
with a Canadian bank, of which approximately $2,821,000 (Canadian
dollars) is available at October 31, 1995. Accounts receivable of the
Cooperative's Canadian subsidiary are pledged as collateral for
borrowings under this line. Borrowings on this line of credit bear
interest at an annual rate equal to the bank's prime lending rate with
respect to Canadian dollar commercial loans made in Canada (8% as of
October 31, 1995).
(4) Patronage Dividend
The Board of Directors is authorized, after considering the
Cooperative's need for capital and reserves, to distribute patronage
cash dividends. The patronage dividend for 1995 is based upon
shareholder members' retaining membership in the Cooperative through
October 31, 1995 and the value of any purchase of equipment and
supplies made from the Cooperative, or through participating
distributors from November 1, 1994 through October 31, 1995. The
patronage dividends for 1994 and 1993 were based upon similar facts as
described in the preceding sentence.
(Continued)
F-10
<PAGE> 47
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(4) Patronage Dividend (Continued)
The Internal Revenue Code of 1986, as amended, provides that
corporations "operating on the cooperative basis" generally may
exclude from their taxable income amounts paid as patronage dividends.
(5) Income Taxes
As discussed in note 1, the Cooperative adopted Statement 109 as of
November 1, 1993 and the cumulative effect of this change was not
significant. Prior years' financial statements have not been restated
to apply the provisions of Statement 109.
Income tax expense for the years ended October 31, 1995, 1994 and 1993
consists of:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Currently payable:
Federal $551,000 271,000 324,000
State and local 102,000 51,000 51,000
Deferred - all taxing jurisdictions (37,000) (9,000) 43,000
-------- ------- -------
$616,000 313,000 418,000
======== ======= =======
</TABLE>
A reconciliation of the difference between income tax expense computed at
the Federal statutory rate of 34% and income tax expense follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Computed "expected" tax expense $519,000 263,000 397,000
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
federal income tax benefit 30,000 33,000 33,000
Other, net 67,000 17,000 (12,000)
-------- ------- -------
$616,000 313,000 418,000
======== ======= =======
</TABLE>
(Continued)
F-11
<PAGE> 48
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(5) Income Taxes (Continued)
For the year ended October 31, 1993, deferred income tax expense results
from timing differences in the recognition of income and expense for
income tax and financial reporting purposes. The sources and tax
effects of those timing differences are presented below:
<TABLE>
<S> <C>
Allowance for doubtful accounts receivable $(21,000)
Lease recognition 4,000
Accounting reserves not currently deductible for
income tax purposes -
Other, net 60,000
--------
$43,000
========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at October 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accounts receivable, principally due
to allowance for doubtful accounts $544,000 497,000
Lease recognition 103,000 101,000
Accounting reserves not currently
deductible for income tax purposes 47,000 79,000
Other 49,000 29,000
-------- -------
Net deferred tax asset $743,000 706,000
======== =======
</TABLE>
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences.
Accordingly, no valuation allowance for deferred tax assets was
recorded as of November 1, 1993 (date of adoption) or October 31, 1995
and 1994.
(6) Membership and Store Common Stock
Membership common stock may be issued only to persons who satisfy
shareholder membership requirements and no more than one share of such
stock will be issued to any one person. Membership common stock may
not be transferred to any person other than the Cooperative. In the
event that a shareholder no longer qualifies for membership, the
Cooperative is required to redeem such shareholder's membership common
stock at a redemption price of $10.00 per share.
(Continued)
F-12
<PAGE> 49
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(6) Membership and Store Common Stock (Continued)
Store common stock may be issued only to persons who satisfy the
shareholder membership requirements and each shareholder member must
generally purchase one share of store common stock for each KFC or Taco
Bell retail outlet which such shareholder member owns and operates.
Store common stock may be transferred to persons, firms or entities who
qualify for membership in the Cooperative if the Cooperative does not
exercise its right of first refusal to purchase such shares.
(7) Major Customers
The Cooperative had sales to certain distributors in excess of 10% of net
sales. One customer accounted for sales of approximately $127,000,000,
$139,000,000 and $111,000,000 for the years ended October 31, 1995,
1994 and 1993, respectively. This customer's outstanding accounts
receivable balances were approximately $7,183,000 and $8,767,000 at
October 31, 1995 and 1994, respectively. Another customer accounted
for sales of approximately $70,000,000 for the year ended October 31,
1995. This customer's outstanding accounts receivable balance was
$4,285,000 at October 31, 1995.
(8) Retirement Plan
The Cooperative has a thrift and profit-sharing plan and a money purchase
pension plan which covers all employees who meet certain requirements
as to age and length of service. The thrift and profit-sharing plan is
funded under two allocation methods. The first is funded through a
thrift plan agreement under Section 401(k) of the Internal Revenue Code
whereby contributions made by those employees who elect to participate
are matched, in accordance with plan guidelines and limitations, by the
Cooperative. The second allocation, which covers all employees and was
introduced in 1986, is funded by the Cooperative as determined by the
Board of Directors, subject to certain limitations. The money purchase
pension plan, established November 1, 1991, provides for a contribution
amounting to 3.0% of eligible compensation in 1995, 3.3% in 1994, and
3.7% in 1993.
The Cooperative's combined contributions relating to these plans were
approximately $416,000, $381,000 and $353,000 for 1995, 1994 and 1993,
respectively.
(Continued)
F-13
<PAGE> 50
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(9) Commitments and Contingencies
The following is a schedule of future lease obligations:
<TABLE>
<CAPTION>
Year ending October 31:
-----------------------
<S> <C>
1996 $ 836,000
1997 806,000
1998 768,000
1999 306,000
2000 57,000
----------
$2,773,000
==========
</TABLE>
Rental expense was approximately $664,000, $635,000 and $571,000 in 1995,
1994 and 1993, respectively.
In the ordinary course of business, the Cooperative becomes involved in
various claims and legal actions. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Cooperative's consolidated financial statements.
The Cooperative endeavors to obtain the lowest purchase prices by making
large volume purchase commitments at fixed prices and by assuming other
procurement functions and risks that reduce the suppliers' cost. These
commitments are made throughout the year based on anticipated demands
of the restaurant operators, with terms usually of less than a year and
conditions varying from product to product. Commitments made in the
past have resulted in minimal losses. No significant losses are
expected from existing commitments.
On January 31, 1991, the Cooperative acquired substantially all of the
KFC-related business of Jeffrey Enterprises of Kentucky, Inc.
(Enterprises). Before the acquisition, Enterprises had been a
brokerage organization which had coordinated the sale of goods to
operators and their distributors. The cost of the acquisition and the
impact upon operations of the Cooperative was not material. In
addition to the acquisition of the KFC-related business, the
Cooperative entered into a consulting agreement with Fred Jeffrey, the
president of Enterprises since its organization in 1975, providing for
the consulting services of Mr. Jeffrey with respect to the business
acquired, the Cooperative's strategic planning and as a liaison with
operators. The consulting agreement provides for an annual salary of
$70,000 and terminates December 31, 1998.
(Continued)
F-14
<PAGE> 51
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(10) Subsequent Event
On December 8, 1995, the Board of Directors of the Cooperative approved
in principle a finance program for stockholder members co-sponsored by
the National Cooperative Bank (the "Bank"). The program is subject to
negotiation and execution of definitive agreements between the
Cooperative and the Bank. The program currently contemplates up to
$20,000,000 in loans to Cooperative members which range from $100,000 to
an individual maximum of $2,000,000. The program is expected to
commence in early 1996. The Cooperative has agreed to guarantee from
10% to 25% of the declining balance based on each loan's
classification. The estimated maximum exposure of the Cooperative
based on the allocation of funds between loan classifications would be
$3,500,000. The Bank has agreed to maintain a specific reserve equal
to .125 basis points to .50 basis points of all interest paid based on
the loan's classification which will be applied to losses prior to the
Cooperative incurring any loss. The Bank will be responsible for all
legal and administrative requirements of the program.
F-15
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KFC NATIONAL PURCHASING
COOPERATIVE, INC.
January 29, 1996 By /s/ Thomas D. Henrion
-------------------------
Thomas D. Henrion, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<S> <C> <C>
* Director/Secretary January 29, 1996
- -------------------------
William E. Allen
- ------------------------- Director January __, 1996
Charles Buckner
* Director January 29, 1996
- -------------------------
Darrell M. Dunafon
* Director January 29, 1996
- -------------------------
Ronald Giles
- ------------------------- Director, Vice January __, 1996
Leon W. Harman Chairman of the Board
/s/ Thomas D. Henrion President and Chief January 29, 1996
- ------------------------- Executive Officer,
Thomas D. Henrion Director
- ------------------------- Director January __, 1996
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President and January 29, 1996
- ------------------------- Chief Financial Officer
William V. Holden (Principal Accounting
Officer) (Principal
Financial Officer)
* Director January 29, 1996
- -------------------------
Paul A. Houston
* Director January 29, 1996
- -------------------------
John Marsella
* Director January 29, 1996
- -------------------------
Grover G. Moss
</TABLE>
<PAGE> 53
<TABLE>
<S> <C> <C>
* Director/Treasurer January 29, 1996
- -------------------------
David G. Neal
* Director, Chairman January 29, 1996
- ------------------------- of the Board
Robert P. Peck
* Director January 29, 1996
- -------------------------
Edward W. Rhawn
* Director January 29, 1996
- -------------------------
Jack M. Richards
* Director January 29, 1996
- -------------------------
James B. Royster
* Director January 29, 1996
- -------------------------
Calvin G. White
* Director January 29, 1996
- -------------------------
Ronald J. Young
By /s/ Thomas D. Henrion January 29, 1996
- ------------------------------
Thomas D. Henrion
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Form
10-K.
</TABLE>
<PAGE> 54
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance Charged Charged
at to Costs to Other Balance
Beginning and Accounts Deductions at End
Description of Period Expenses Describe Describe of Period
----------- ---------- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for losses
on receivables:
Year ended:
October 31:
1995 $1,287,682 $264,109 -0- $363,543 (A) $1,188,248
1994 $ 848,383 $701,932 -0- $262,633 (A) $1,287,682
1993 $ 722,851 $199,146 -0- $ 73,614 (A) $ 848,383
</TABLE>
(A) Uncollectible accounts and notes written off
S-1
<PAGE> 1
EXHIBIT 10.10
AMENDMENT NO. 1
TO THE
KFC NATIONAL PURCHASING COOPERATIVE, INC.
SUPPLEMENTAL BENEFITS/CONSULTING AGREEMENT
This is Amendment No. 1 to the Supplemental Benefits/Consulting
Agreement (the "Agreement"), which was effective as of January 1, 1994, between
KFC National Purchasing Cooperative, Inc. (the "COOP") and Thomas D. Henrion
("Henrion"), which Amendment shall be effective as of the date of its adoption.
RECITAL
Pursuant to Section 8 of the Agreement, Henrion has purchased a policy
on his life, the COOP has paid the annual premiums on the policy and Henrion
has assigned to the COOP 50% ownership interest in the death benefit under the
policy. The parties now wish to amend the Agreement to provide that the COOP
will receive a 50% ownership interest in the cash value of the policy in
addition to its interest in the policy's death benefit and to provide terms
under which Henrion may purchase the COOP's interest in the policy upon his
termination of employment.
AGREEMENT
NOW, THEREFORE, the Agreement is hereby amended as follows:
1. Section 8.2 of the Agreement is hereby amended so that as
amended it shall read in its entirety as follows:
8.2 Assignment of the Policy to the COOP. Contemporaneously
with the purchase of the Policy, Henrion assigned a 50%
ownership interest in the death benefits payable under the
Policy to the COOP. Immediately upon execution of this
Amendment, Henrion agrees to execute and file with the Insurer
the attached Amended Assignment (the "Amended Assignment"),
which assigns to the COOP a 50% ownership interest in the cash
value of the Policy and continues the COOP's 50% ownership
interest in the death benefits payable under the Policy. The
Amended Assignment of the Policy to the COOP hereunder shall
not be terminated, altered or amended by Henrion without the
express written consent of the COOP.
<PAGE> 2
2. Section 8.5 of the Agreement is hereby amended so that as
amended it shall read in its entirety as follows:
8.5 Loans and Cash Withdrawals. Neither the COOP nor Henrion
shall be entitled to borrow or make cash withdrawals from the
Policy.
3. Section 8.6(b) of the Agreement is hereby amended so that as
amended it shall read in its entirety as follows:
(b) Upon Henrion's death, the COOP shall have the
unqualified right to receive a portion of the death benefit
payable under the Policy equal to the COOP's interest in the
death benefit provided under the Policy under Section 8.2.
The balance of the death benefit provided under the Policy
shall be paid directly to the beneficiary or beneficiaries
designated by Henrion, in the manner and in the amount or
amounts provided in the beneficiary designation provision of
the Policy. No amount shall be paid from such death benefit
to the beneficiary or beneficiaries designated by Henrion
until the full amount due the COOP hereunder has been paid.
The parties agree that the beneficiary designation provision
of the Policy shall conform to the provisions of this Section
8.
4. A new Section 8.9 is hereby added to the Agreement to read in
its entirety as follows:
8.9 Henrion's Option to Purchase the COOP's Interest in the
Policy. For 90 days after the date of the termination of
Henrion's employment with the COOP for any reason other than
death, Henrion shall have the option to purchase the COOP's
interest in the Policy. The purchase price shall equal 50% of
the then-cash surrender value of the Policy. Upon receipt of
such amount, the Amended Assignment to the COOP shall be
terminated and the COOP shall execute any document necessary
to evidence the release of such Amended Assignment.
Notwithstanding Section 8.5 of this Agreement, the COOP agrees
that Henrion may borrow or withdraw all or part of the cash
value of the Policy if the proceeds of such loan or withdrawal
are used immediately to purchase the COOP's interest in the
Policy under this Section 8.9.
- 2 -
<PAGE> 3
5. A new Section 8.10 is hereby added to the Agreement to read in
its entirety as follows:
8.10 COOP's Option for Transfer of Policy. If Henrion does
not exercise his right to purchase the COOP's interest in the
Policy under Section 8.9, the COOP may, within 90 days of the
expiration of Henrion's right to purchase the COOP's interest
in the Policy, purchase the Policy from Henrion. The purchase
price shall be equal to 50% of the then-cash surrender value
of the Policy. Upon receipt of such amount, Henrion shall
immediately transfer all of his right, title and interest in
and to the Policy to the COOP by the execution and delivery of
an appropriate instrument of transfer. Notwithstanding
Section 8.5 of this Agreement, Henrion agrees that the COOP
may borrow with withdraw all or part of the cash value of the
Policy if the proceeds of such loan or withdrawal are used
immediately to purchase the COOP's interest in the Policy
under this Section 8.10.
6. A new Section 8.11 is hereby added to the Agreement to read in
its entirety as follows:
8.11 Surrender of Policy. If Henrion and the COOP each
fail to exercise their rights to purchase the other's interest
in the Policy under Sections 8.9 and 8.10 within the time
prescribed, then Henrion agrees to cooperate with the COOP to
surrender the Policy for its then-cash surrender value, which
shall be split equally between the COOP and Henrion.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the COOP and Henrion have executed this Amendment
No. 1 as of the dates set forth below.
KFC NATIONAL PURCHASING
COOPERATIVE, INC.
By
-------------------------------
Title:
---------------------------
Date:
---------------------------
----------------------------------
Thomas D. Henrion
Date:
----------------------------
- 4 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-1-1994
<PERIOD-END> OCT-31-1995
<CASH> 2,443
<SECURITIES> 0
<RECEIVABLES> 35,709
<ALLOWANCES> 1,188
<INVENTORY> 2,940
<CURRENT-ASSETS> 40,918
<PP&E> 3,291
<DEPRECIATION> 2,535
<TOTAL-ASSETS> 42,831
<CURRENT-LIABILITIES> 24,482
<BONDS> 0
0
0
<COMMON> 1,588
<OTHER-SE> 13,761
<TOTAL-LIABILITY-AND-EQUITY> 42,831
<SALES> 537,116
<TOTAL-REVENUES> 537,116
<CGS> 523,724
<TOTAL-COSTS> 523,724
<OTHER-EXPENSES> 10,645
<LOSS-PROVISION> 264
<INTEREST-EXPENSE> 267
<INCOME-PRETAX> 1,525
<INCOME-TAX> 616
<INCOME-CONTINUING> 909
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 909
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
