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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996
[ ] 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 __________
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
-----
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 [ ].
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of December 31, 1996.
Common stock $6,040 (1)
Number of shares outstanding of each of the issuer's classes of common
stock as of December 31, 996.
<TABLE>
<CAPTION>
Title of each class Number of Shares
------------------- ----------------
<S> <C>
Membership Common stock 619
Store Common Stock 5,961
</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, 1996.
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.
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The Cooperative has provided financing from time to time under certain
circumstances for its stockholder members. In 1987, the Cooperative initiated an
equipment financing program to finance for franchisee members their 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
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- 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
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."
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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
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 1996, the Cooperative purchased or
committed to purchase approximately 955,000 cases of cob corn for purchase
prices totaling approximately $6,741,000.
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
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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 1996, the premium volume from the fully insured Property
and Casualty Program was $7.5 million and for the Life and Health Program was
$2.2 million.
FINANCING PROGRAMS
The Cooperative has provided or facilitated equipment financing from time
to time under certain circumstances for KFC franchisee members. In April 1996,
the Cooperative established a finance program for stockholder members
co-sponsored by the National Consumer Cooperative Bank (the "Bank"). The program
currently provides up to $20,000,000 in loans to Cooperative members which range
from $100,000 to an individual maximum of $2,000,000. Under certain
circumstances, individual loans with an initial principal balance greater than
$2,000,000 may be made. The Cooperative has agreed to guarantee from 10% to 25%
of the declining balance of each loan based on the loan's risk classification,
with a maximum guarantee of $100,000 per any loan with an initial principal
balance greater than $2,000,000. The estimated maximum exposure of the
Cooperative based on the allocation of funds between loan classifications would
be $3,250,000. 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 1996, the Cooperative shipped equipment packages for an
aggregate sales price of approximately $11,931,000. On October 31, 1996, the
Cooperative had equipment inventory associated with the equipment staging
operation of approximately $980,000, 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 1996, approximately 88% 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 Coop-
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erative, 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 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.
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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 264 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
Management Corporation ("Harman") and Scott's Restaurants, Inc. See "CANADA
OPERATIONS." There can be no assurance that Harman, Scott's Restaurants, 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, frozen chicken products, 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 35 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 1996 in
excess of 10% of the Cooperative's net sales. McLane Foodservice Group sales for
fiscal 1996 were $120,000,000, primarily in support of the Taco Bell system. In
fiscal 1996, sales to Nebco/Ameriserv Food Company, Inc. were approximately
$84,000,000. In fiscal 1996, sales to Sysco Corporation were approximately
$80,300,000.
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.
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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.
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 Directors that PFS intends to obtain the distribution business for as
many KFC and Taco Bell franchisee outlets as possible. PFS currently distributes
more than $3 billion worth of restaurant equipment and supplies each year,
primarily to Pizza Hut, Taco Bell and KFC restaurants. On January 23, 1997,
PepsiCo announced that it would pursue a plan to spin off its restaurant
businesses, including KFC, Pizza Hut and Taco Bell, to PepsiCo shareholders as
an independent company. PepsiCo also announced that it is examining the sale of
PFS.
The Cooperative believes that PepsiCo intends that PFS, for profit,
dominate and control purchasing and distribution throughout PepsiCo's system of
approximately 29,000 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. It is uncertain how the
announced possible sale of PFS will affect the operations of PFS or the
Cooperative.
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.
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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
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 related issues with DPI.
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During fiscal 1996, 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, Dairy Queen, and Fazoli's, under one management team.
During fiscal 1996, sales to operators of retail outlets of quick service
restaurant systems other than KFC and Taco Bell Operators in the United States
were approximately 23% of sales.
In the first quarter of fiscal 1997, the Cooperative established a new
subsidiary, FoodService Purchasing Cooperative International, Inc., to develop
the Cooperative's sales of equipment to quick service restaurant operators
located outside of the United States and Canada. Through this subsidiary, the
Cooperative acquired the international equipment business of Hall and
Associates, Inc., on December 31, 1996.
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 635 retail outlets, while Pepsi-Cola
Canada Ltd. owns approximately 230 retail outlets. Scott's Restaurants, Inc.
("Scott's") is the largest franchisee in Canada, with approximately 400 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 $50,613,000 in sales in fiscal 1996. 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
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
- 12 -
<PAGE> 12
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 153 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.
- 13 -
<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. 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
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<PAGE> 14
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 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%. In August 1996, the Board of
Directors determined that a patronage dividend for fiscal 1997 would be paid on
a formula similar to that adopted for fiscal 1995, except that the patronage
dividend would be based upon 70% of pre-tax income.
The Cooperative paid a patronage dividend totalling $569,000 in March 1995
for patronage in fiscal 1994. The Cooperative paid $1,246,000 in March 1996 for
patronage in fiscal 1995. For patronage during fiscal 1996, a dividend totalling
$2,762,000 is payable in March 1997. 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 was paid with respect to KFC patronage.
Similarly, most of the fiscal 1996 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
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<PAGE> 15
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
determined the net earnings of the Cooperative from business done by
the Cooperative directly with stock holder members for use by the
stockholder members in Taco Bell retail outlets owned or operated by
the stock holder 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
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<PAGE> 16
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 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 Coopera tive, 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.
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<PAGE> 17
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 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.
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<PAGE> 18
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.
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 1997, the sales allowance
will be based on seventy percent (70%) 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.
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<PAGE> 19
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.
CAPITAL STOCK
Membership Common Stock
The Cooperative is authorized to issue 2,000 shares of Membership Common
Stock, no par value, of which 624 shares were issued and outstanding on October
31, 1996. 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
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<PAGE> 20
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 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:
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<PAGE> 21
<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.
<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
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<PAGE> 22
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 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
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<PAGE> 23
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. For these purposes, a franchisee includes a
licensee.
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 5,946 shares were issued and outstanding on October 31,
1996. 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.
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 that number of shares of Store Common
Stock equal to the total number of KFC or Taco Bell retail outlets which such
member owns and operates. For these purposes, (a) the term "total number...of
retail outlets" means the total number of traditional retail outlets, plus
one-half rounded up to the nearest even number of the total number of
non-traditional outlets, and (b) the term "non-traditional retail outlet" means
an outlet with more than one of the following characteristics: (i) a five-year
or shorter license, (ii) a limited menu, (iii) sales from a kiosk or other
transportable unit, (iv) sales from a segregated food service area at a location
in a facility (such as an airport, athletic stadium, university or school)
established for a primary purpose other than selling food for reasonably
immediate consumption, (v) anticipated sales volume less than anticipated sales
volume for a traditional unit, (vi) sales in conjunction with sales of another
food concept, or (vii) such other characteristics as the Board of Directors may
determine are indicative of a non-traditional retail outlet. Only holders of
record of a share of Membership Common Stock may purchase shares of
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<PAGE> 24
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> 25
ITEM 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Income:
Net sales $580,441 $537,116 $528,010 $501,487 $384,024
Income before
patronage dividend
and income taxes 5,057 2,771 1,343 2,055 538
Patronage dividend 2,762 1,246 569 888 1,002
Net income (loss) 1,386 909 461 749 (330)
Consolidated Balance Sheets
(at end of period):
Total assets $ 49,445 $ 42,831 $ 42,767 $ 43,364 $ 29,026
Long-term obligation 3,000 3,000 3,000 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, 1996, 1995, and 1994
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 1996 were $580,441,000 compared to $537,116,000 for
fiscal 1995, an increase of 8.1%. Approximately 88% of fiscal 1996 sales were
attributable to food and packaging, with substantially all of the remainder to
equipment. The fiscal 1996 increase is primarily attributable to KFC Operators
located in the United States. KFC-U.S. equipment sales increased by
approximately 49% in fiscal 1996, while food and packaging sales for KFC-U.S.
increased approximately 6%. Sales related to the Cooperative's Canadian
subsidiary increased approximately 2%, primarily driven by increased equipment
sales. Dairy Queen sales increased approximately 16% for fiscal 1996 compared to
fiscal 1995, attributable primarily to an increase in food and packaging sales.
Taco Bell sales decreased approximately 4% for fiscal 1996 compared to fiscal
1995. This decrease was primarily the result of lower store sales and improved
purchasing prices on certain items. Sales related to Fazoli's in fiscal 1996
were approximately $14,381,000, primarily equipment sales. The Fazoli's sales
reflected an increase of approximately $10,115,000 compared to fiscal 1995.
Net sales for fiscal 1995 increased by 1.7% to $537,116,000. Approximately
90% of fiscal 1995 sales were attributable to food and packaging with
substantially all of the remainder to equipment. 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
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<PAGE> 26
showed a 10% decrease in sales volume primarily as a result of significantly
lower beef prices.
The operations of the Canadian subsidiary (in U.S. dollars) contributed
approximately $50,600,000, $49,700,000, and $53,800,000 in sales in fiscal 1996,
1995, and 1994, respectively. The Canadian subsidiary contributed approximately
$62,000, $41,000, and $25,000 in income after patronage dividend and income
taxes in fiscal 1996, 1995, and 1994, respectively. As of October 31, 1996,
1995, and 1994, the Canadian subsidiary had identifiable assets (in U.S.
dollars) of approximately $4,300,000, $3,800,000, and $4,200,000, respectively,
consisting of accounts receivable, property and equipment, and amortizable
costs.
Income before patronage dividend and income taxes for fiscal 1996 was
$5,057,000, an increase of $2,286,000 over fiscal 1995. The increase was a
result of an increase in gross profit to 2.8% compared to 2.5% in fiscal 1995
and only a slight increase in expenses coupled with the increase in sales
volume.
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 income before patronage dividend and income taxes.
Other income (expenses) for fiscal 1996 increased by $110,000 compared to
fiscal 1995. Interest income accounted for this increase, reflecting the
improved cash flow attributable to a significant reduction in past due
receivables and the resulting improvement in cash flow.
Other income (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.
Selling, general and administrative expenses increased by only 3.4% in
fiscal 1996 compared to fiscal 1995, while sales increased 8.1%. Expenses as a
percentage of sales dropped to 1.90% for fiscal 1996 compared with 1.98% in
fiscal 1995. The Cooperative continually makes every attempt to focus on
expenses and the various opportunities to provide the best service and products
to our members and customers. In some areas, technology has allowed the
Cooperative to do more with less, resulting in a small reduction in staffing
levels. The continued investment in technology should improve our ability to
deliver on our objectives. The Cooperative's restructuring of our customer
service groups into a single unit, along with the creation of field
representatives will allow the opportunity to significantly improve the
Cooperative's overall service to our customers.
Selling, general and administrative expenses had 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 volume of business added from non-member 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 1996, the dividend to be
paid is $2,762,000 compared to $1,246,000 in fiscal 1995. For fiscal 1994 and
prior years, the patronage dividend was allocated based upon patronage earnings
in the aggregate and not through separate pools for each patronage concept. For
fiscal 1996 and 1995, the patronage dividend was 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, are
allocated
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<PAGE> 27
to each participating concept and the patronage dividend for each concept's
stockholder members are directly related to these results.
Net income for fiscal 1996 was $1,386,000 compared to $909,000 in fiscal
1995, an increase of $477,000. As discussed above, the increase in sales
volumes, at the slightly higher gross profit margin, along with the nominal
increase in expenses, accounted for the increase in net income.
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.
Total assets as of October 31, 1996 were $49,445,000, an increase of
$6,614,000 compared to fiscal 1995. The increases in cash and accounts
receivable were the main contributors to the overall increase. Although accounts
receivables increased by $2,584,000, the improvement in the past due balances
helped the cash position increase by $4,433,000.
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 $729,000. The increase in notes receivable was generated through a payoff
agreement with a former distributor, secured by real estate.
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 advanced 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 1996, the Cooperative invested approximately $291,000 in office
furniture and equipment. Approximately $85,000 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 investments in technology result 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 inventories associated with the
Cooperative's various programs, have been met through a combination of (i) net
income of $1,386,000 in fiscal 1996, which increased the retained earnings of
the Cooperative, and (ii) combined bank financing, of which $4,438,000 was
outstanding on October 31, 1996. 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> 28
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 the National Bank for Cooperatives is
currently $3,000,000 and expires on May 1, 1997. On October 31, 1996, 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, 1997. 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, 1996 was $17,841,000,
an increase of $1,405,000 since October 31, 1995. The primary changes in working
capital for fiscal 1996 include (i) an increase in cash of $4,433,000, (ii) an
increase in accounts receivable of $2,584,000, (iii) a decrease in inventories
of $462,000, (iv) an increase in short-term borrowings, accounts payable and
accrued expenses of $561,000, $2,318,000, and $789,000, respectively, and (v) an
increase in patronage dividend payable of $1,516,000.
The Cooperative expects to be able to fund its business in fiscal 1997 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> 29
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. In addition to the twenty voting members and the President
described above, the Cooperative's Bylaws provide that the Board of Directors
may from time to time appoint one or more non-voting members of the Board of
Directors to serve at the pleasure and upon such terms and conditions as the
Board of Directors may provide.
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, Cocolin, Dunafon, Edwards,
Harman, Henriquez, Houston, Moss, Neal, Peck, Richards, Royster, Sorgdrager,
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.
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., and Span-America
Medical Systems, Inc.
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> 30
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 Operations since April
1996, and served as Vice President of Purchasing for food and packaging from May
1991 to April 1996. Mr. Inwright has served the Cooperative in its purchasing
operations since 1984.
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 has five standing committees: 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. Cocolin, Edwards,
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,
Sorgdrager 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, Neal and
Royster. 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.
PERSONNEL COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Personnel Committee is comprised of Messrs. Harman, Houston, 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 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.
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<PAGE> 31
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING 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"). Based solely upon a
review of forms filed by the appropriate persons and written representations
from such persons, the Cooperative believes that all such filing requirements
were complied with in fiscal 1996 except that two directors filed untimely
reports on transactions in the Company's stock as follows: Robert P. Peck, one
report regarding one transaction, and Calvin G. White, one report regarding two
transactions.
ITEM 11. Executive Compensation.
The following table shows all cash compensation paid by the Cooperative for
the years ended October 31, 1996, 1995 and 1994 to the most highly compensated
executive officers as to whom the total cash and cash-equivalent remuneration
exceeded $100,000 during fiscal 1996.
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 1996 $191,798 $58,466 $22,578
President and Chief 1995 181,498 51,480 21,046
Executive Officer 1994 175,116 51,383 19,440
William T. Hutcherson 1996 101,379 16,000 13,279
Vice President 1995 102,034 15,815 11,631
1994 101,538 10,713 11,834
William V. Holden 1996 95,421 16,432 12,444
Vice President and 1995 92,067 14,406 10,531
Chief Financial 1994 85,381 10,522 10,024
Officer
Kenneth L. Hartung 1996 93,896 15,288 12,662
Vice President 1995 87,099 17,861 10,457
1994 82,813 16,538 9,881
Judith L. Hollis 1996 91,133 18,520 12,404
Vice President 1995 86,800 18,346 10,230
1994 83,333 8,820 9,784
</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 1996 as follows: Mr. Henrion $6,495
and $11,083, respectively; Mr. Hutcherson $5,075 and $8,204, respectively;
Mr. Holden $4,756 and $7,688, respectively; Mr. Hartung $4,839 and $7,823,
respectively; and Ms. Hollis $4,740 and $7,664, respectively. For Mr.
Henrion, the fiscal 1996 amount includes $5,000, representing the value to
Mr. Henrion of the
- 32 -
<PAGE> 32
Cooperative's payments with respect to the insurance policy described
below.
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, 1996, Mr. Henrion's Averaged Annual Compensation
for purposes of the Supplemental Agreement was $185,175, with one-twelfth of 18%
of this amount equal to $2,778.
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.
- 33 -
<PAGE> 33
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, 1996, 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, 1996.
<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. 57 Director, 1988 1997 F Operator 10 **
Allen Secretary
James G. 47 Director 1996 1999 C Operator 13 **
Cocolin
Darrell M. 51 Director 1995 1998 N Operator 9 **
Dunafon
Ben E. 54 Director 1996 1997 L Operator 10 **
Edwards
Leon W. 77 Director, 1978 1997 H Founder 266 4.5
Harman Vice Chairman of Harman
of the Board Management
Corporation
Edward J. 59 Director 1994 1999 J Operator 12 **
Henriquez, Jr.
Paul A. Houston 47 Director 1995 1999 I President of 408 6.8
Scott's Restaurants, Inc.
Grover G. Moss 52 Director 1994 1998 O Operator 10 **
David G. Neal 50 Director, 1991+ 1997 E Operator 89 1.5
Treasurer
Robert P. 62 Director, 1990 1999 B Operator 3 **
Peck Chairman of
the Board
</TABLE>
- 34 -
<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>
Edward W. Rhawn 58 Director 1992 1999 Independent Chairman -- --
of Rhawn
Enterprises, Inc.
Jack M. Richards 68 Director 1991 1997 A Operator 3 **
James B. 58 Director 1990 1998 L Operator 2 **
Royster
Dean M. 34 Director 1996 1999 G Operator 1 **
Sorgdrager
Calvin G. 42 Director 1992 1999 D Operator 12 **
White
Ronald J. Young 38 Director 1993 1997 M Operator 12 **
Thomas D. 54 Director, 1980 -- -- President & Chief -- --
Henrion President, Executive Officer,
Chief Executive Cooperative
Officer
William V. 47 Vice President, 1985 -- -- Vice President, -- --
Holden Chief Financial Chief Financial
Officer Officer, Cooperative
Judith L. 48 Vice President, 1991 -- -- Vice President, -- --
Hollis General Manager Cooperative
KFC Sales
W. Thomas 50 Vice President, 1982 -- -- Vice President -- --
Hutcherson Purchasing Cooperative
Kenneth L. Hartung 49 Vice President 1993 -- -- Vice President, -- --
Cooperative
John W. Inwright 40 Vice President, 1991 -- -- Vice President, -- --
Operations Cooperative
860 14.4
- -----------------------
All directors and executive officers as a group (22 persons)++
</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
- 35 -
<PAGE> 35
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 34.0% 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 executive officers as a group (22 persons) own 15 shares of
Membership Common Stock, 2.4 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.
- 36 -
<PAGE> 36
ITEM 13. Certain Relationships and Related Transactions.
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board of Directors, except the Inde
pendent 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.
- 37 -
<PAGE> 37
**10.9 Supplemental Benefits/Consulting Agreement between Thomas D.
Henrion and the Registrant effective as of January 1, 1994.
*****10.10 Amendment No. 1 to Supplemental Benefits/Consulting
Agreement between Thomas D. Henrion and the Registrant effective January
1996.
10.11 Guaranty Agreement dated as of April 18, 1996 between the
Registrant and National Consumer Cooperative Bank.
10.12 Loan Origination and Purchase Agreement dated as of April 18,
1996 between the Registrant and National Consumer Cooperative Bank.
****21 Subsidiaries of the Registrant.
24 Powers of Attorney.
27 Financial Data Schedule (for SEC use only).
- ---------------------
* 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].
***** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1995 [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.
- 38 -
<PAGE> 38
KFC NATIONAL PURCHASING COOPERATIVE, INC.
AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Financial Statements
October 31, 1996 and 1995
With Independent Auditors' Report Thereon
<PAGE> 39
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Index to Consolidated Financial Statements and Schedules
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets--October 31, 1996 and 1995 F-2
Consolidated Statements of Income--Years ended
October 31, 1996 1995 and 1994 F-3
Consolidated Statements of Members' Equity--Years ended
October 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows--Years ended
October 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
Financial statement schedule for the years ended October 31, 1996, 1995,
and 1994 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.
<PAGE> 40
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, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended October 31, 1996, 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 5, 1996
F-1
<PAGE> 41
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Balance Sheets
October 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1996 1995
------ -------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,876 2,443
Accounts and note receivable, less allowance for losses
of $1,329 in 1996 and $1,188 in 1995 37,322 34,738
Inventories:
Food 1,498 1,610
Equipment 980 1,330
-------- -------
2,478 2,940
Refundable income taxes 32 38
Current note receivable from related party 60 60
Prepaid expenses 133 81
Deferred income taxes 583 618
-------- -------
Total current assets 47,484 40,918
-------- -------
Office equipment, at cost, less accumulated depreciation
of $2,880 in 1996 and $2,535 in 1995 669 756
Note receivable from related party, excluding current portion 174 253
Note receivable, excluding current portion 832 627
Deferred income taxes 116 125
Other assets 170 152
-------- -------
$ 49,445 42,831
======== =======
Liabilities and Members' Equity
-------------------------------
Current liabilities:
Short-term borrowings $ 1,438 877
Accounts payable 22,077 19,759
Accrued expenses 3,027 2,238
Premium deposits 339 362
Patronage dividend 2,762 1,246
-------- -------
Total current liabilities 29,643 24,482
Long-term note payable 3,000 3,000
-------- -------
Total liabilities 32,643 27,482
Commitments and contingencies
Members' equity:
Membership common stock, voting, no par value; authorized 2,000 shares;
issued and outstanding, 624 shares in 1996 and 586 shares in 1995 6 6
Store common stock, no par value; authorized 10,000 shares; issued and
outstanding, 5,946 shares in 1996 and 5,779 shares in 1995 1,646 1,582
Retained earnings 15,182 13,796
Currency translation adjustment (32) (35)
-------- -------
16,802 15,349
-------- -------
$ 49,445 42,831
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 42
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Income
Years ended October 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Net sales $ 580,441 537,116 528,010
Cost of goods sold 564,370 523,724 516,002
--------- -------- --------
Gross profit 16,071 13,392 12,008
Selling, general and administrative expenses 11,006 10,645 10,153
Provision for losses on receivables 406 264 701
Other income (expense):
Service charges 90 112 279
Interest income 508 352 144
Interest expense (270) (267) (282)
Miscellaneous 70 91 48
--------- -------- --------
398 288 189
--------- -------- --------
Income before patronage
dividend and income taxes 5,057 2,771 1,343
Patronage dividend 2,762 1,246 569
--------- -------- --------
Income before income taxes 2,295 1,525 774
Provision for income taxes 909 616 313
--------- -------- --------
Net income $ 1,386 909 461
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 43
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Members' Equity
Years ended October 31, 1996, 1995 and 1994
(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, 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)
Proceeds from sales of common stock:
Membership, at $10 per share 55
Store, at $400 per share 225 90
Retirement of common stock:
Membership, at $10 per share (17)
Store, at $400 per share (58) (22)
Costs in connection with sales of
common stock (4)
Net income for the year ended
October 31, 1996 1,386
Currency translation adjustment 3
------- ------ ------ ---
Balances, October 31, 1996 $ 6 1,646 15,182 (32)
======= ====== ====== ===
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 44
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Cash Flows
Years ended October 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,386 909 461
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 418 487 573
Provision for losses on receivables 406 264 701
(Gain) loss on disposals (1) 2 (1)
Deferred income tax expense (benefit) 44 (37) (9)
Changes in operating assets and liabilities:
Increase in accounts receivable (3,207) (216) (2,105)
Decrease in inventories 462 1,261 1,286
Decrease in refundable income taxes 6 5 41
(Increase) decrease in prepaid expenses (52) 36 (8)
Increase in accounts payable 2,318 133 7,539
Increase (decrease) in accrued expenses 789 (2,027) (188)
Decrease in premium deposits (23) (13) (41)
Increase (decrease) in patronage dividend 1,516 677 (319)
------- ------ -------
Net cash provided by operating activities 4,062 1,481 7,930
------- ------ -------
Cash flows from investing activities:
Repayments of loan from related party 79 66 59
Repayments of notes receivable 12 139 804
Increase in other assets (74) -- (86)
Additions to office equipment (291) (242) (181)
Proceeds from sale of office equipment 17 -- 1
------- ------ -------
Net cash provided by (used in) investing
activities (257) (37) 597
------- ------ -------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net 561 343 (11,258)
Proceeds from issuance of long-term note payable -- -- 3,000
Proceeds from sale of stock, net of costs 86 57 228
Retirement of stock (22) (18) (15)
------- ------ -------
Net cash provided by (used in) financing
activities 625 382 (8,045)
------- ------ -------
Effect of change in exchange rates on cash and cash
equivalents 3 3 (4)
------- ------ -------
Net increase in cash and cash equivalents 4,433 1,829 478
Cash and cash equivalents - beginning of year 2,443 614 136
------- ------ -------
Cash and cash equivalents - end of year $ 6,876 2,443 614
======= ====== =======
Supplemental information:
Income taxes paid $ 937 470 244
======= ====== =======
Interest paid $ 270 267 307
======= ====== =======
Account receivable exchanged for note receivable $ -- 934 --
======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 45
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
October 31, 1996 and 1995
(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 insurance programs 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.
F-6
<PAGE> 46
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, 1996 and 1995, 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 $59,000 and $91,000 higher at October
31, 1996 and 1995, respectively.
During 1996, 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 $18,000, $166,000 and $9,000 in
1996, 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 $424,000 and $524,000 at October 31,
1996 and 1995, 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 and loan origination fees. The
non-competition agreements are being amortized over 13 and 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-7
<PAGE> 47
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 1996, 1995 and 1994.
(h) Income Taxes
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. 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.
(i) Reclassifications
Certain reclassifications of 1995 amounts have been made to conform
to the 1996 presentation.
(j) Use of Estimates
Management of the Cooperative has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ
from those estimates.
(continued)
F-8
<PAGE> 48
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, 1996 and 1995, 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.
The note receivable is due from a former distributor customer. In 1995,
the Cooperative converted an account receivable from this customer to
a note receivable. The note calls for weekly principal and interest
payments of $5,000. The note bears interest at 6%. The customer has
not made timely payments as prescribed by the note and is in default,
however, the Cooperative believes it has adequately provided for the
eventual loss, if any, related to this note. The note is secured by a
second mortgage on a building owned by the customer who is actively
attempting to sell the property. Management believes that the value of
the building is greater than the first and second mortgages.
(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 Cooperative has a line of credit of $8,000,000 with its primary bank,
of which the entire amount was available on October 31, 1996. 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
(6.42% as of October 31, 1996). This line of credit expires on May 2,
1997.
The Cooperative has a $3,000,000 line of credit with National Cooperative
Bank (the Bank), of which the entire amount was available as of
October 31, 1996. 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 (6.775% as of October 31, 1996). This line of credit
expires May 1, 1997. The President of the Cooperative currently serves
as the chairman of the Board of the Bank.
The Cooperative has a $4,000,000 (Canadian dollars) line of credit with a
Canadian bank, of which approximately $2,075,000 (Canadian dollars) is
available at October 31, 1996. 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 (5% as of
October 31, 1996).
(continued)
F-9
<PAGE> 49
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(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 1996 is based upon shareholder members'
retaining membership in the Cooperative through October 31, 1996 and
the value of any purchase of equipment and supplies made from the
Cooperative, or through participating distributors from November 1,
1995 through October 31, 1996. The patronage dividends for 1995 and
1994 were based upon similar facts as described in the preceding
sentence.
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
Income tax expense for the years ended October 31, 1996, 1995 and 1994
consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Currently payable:
Federal $663,000 551,000 271,000
State and local 202,000 102,000 51,000
Deferred - all taxing jurisdictions 44,000 (37,000) (9,000)
-------- -------- --------
$909,000 616,000 313,000
======== ======== ========
</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>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense $780,000 519,000 263,000
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
federal income tax benefit 133,000 67,000 33,000
Other, net (4,000) 30,000 17,000
-------- -------- --------
$909,000 616,000 313,000
======== ======== ========
</TABLE>
(continued)
F-10
<PAGE> 50
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(5) Income Taxes (Continued)
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>
1996 1995
-------- -------
<S> <C> <C>
Accounts receivable, principally due to
allowance for doubtful accounts $545,000 544,000
Lease recognition 85,000 103,000
Accounting reserves not currently deductible
for income tax purposes 61,000 47,000
Other 8,000 49,000
-------- -------
Net deferred tax asset $699,000 743,000
======== =======
</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 October 31, 1996 and 1995.
(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.
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.
(continued)
F-11
<PAGE> 51
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(7) Major Customers
The Cooperative had sales to certain distributors in excess of 10% of net
sales. One customer accounted for sales of approximately $120,000,000,
$127,000,000 and $139,000,000 for the years ended October 31, 1996,
1995 and 1994, respectively. This customer's outstanding accounts
receivable balances were approximately $7,094,000 and $7,183,000 at
October 31, 1996 and 1995, respectively. A second customer accounted
for sales of approximately $84,000,000 and $70,000,000 for the years
ended October 31, 1996 and 1995, respectively. This customer's
outstanding accounts receivable balance was $6,104,000 and $4,285,000
at October 31, 1996 and 1995, respectively. A third customer accounted
for sales of approximately $80,300,000 for the year ended October 31,
1996. This customer's outstanding accounts receivable balance was
$4,758,000 at October 31, 1996.
(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 an employer matching contribution of 2% to 7% of
eligible compensation.
The Cooperative's combined contributions relating to these plans were
approximately $498,000, $416,000 and $381,000 for 1996, 1995 and 1994,
respectively.
(9) Commitments and Contingencies
The following is a schedule of future lease obligations:
<TABLE>
<CAPTION>
Year ending October 31:
-----------------------
<S> <C>
1997 $ 897,000
1998 947,000
1999 408,000
2000 77,000
----------
$2,329,000
==========
</TABLE>
(continued)
F-12
<PAGE> 52
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(9) Commitments and Contingencies (Continued)
Rental expense was approximately $719,000, $664,000 and $635,000 in 1996,
1995 and 1994, 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.
In April 1996, the Cooperative entered into a finance program for
stockholder members co-sponsored by the Bank. The program provides up
to $20,000,000 in loans to Cooperative members which range from
$100,000 to an individual maximum of $2,000,000. The Cooperative has
guaranteed from 10% to 25% of the declining balance based on each
loan's classification. The Bank has agreed to maintain a reserve
account which will be applied to losses prior to the Cooperative
incurring any loss. The reserve account is funded pursuant to the
program agreements. As of October 31, 1996, the Bank has funded
approximately $5.5 million of borrowings under this program. The
Cooperative monitors the credit risk associated with their guarantees
through credit and monitoring procedures associated with their
approval and periodic payments and reporting from the primary lender,
the Bank.
(continued)
F-13
<PAGE> 53
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(10) Financial Instruments
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Differences can arise between the fair value and carrying amount of
financial instruments that are recognized at historical amounts.
The carrying amounts of cash and cash equivalents, accounts receivable
(net), short-term borrowings, accounts payable and accrued expenses
approximate the fair value of these instruments because of the short
maturity of these instruments.
The carrying amount of the long-term note payable approximates fair value
because the interest rate approximates that currently offered to the
Cooperative for similar debt instruments.
It is not practical to estimate the fair value of the note receivable
from related party due to the related party nature of that instrument.
It is not practical to estimate the fair value of the note receivable as
the Cooperative is unable to estimate the timing and form of the
ultimate settlement of the amounts due the Cooperative.
F-14
<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:
1996 $1,188,248 $406,490 -0- $265,869 (A) $1,328,869
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
</TABLE>
(A) Uncollectible accounts and notes written off
S-1
<PAGE> 55
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, 1997 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, 1997
- -------------------------
William E. Allen
* Director January 29, 1997
- -------------------------
James G. Cocolin
* Director January 29, 1997
- -------------------------
Darrell M. Dunafon
* Director January 29, 1997
- -------------------------
Ben E. Edwards
- ------------------------- Director, Vice January __, 1997
Leon W. Harman Chairman of the Board
/s/ Thomas D. Henrion President and Chief January 29, 1997
- ------------------------- Executive Officer,
Thomas D. Henrion Director
* Director January 29, 1997
- -------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President and January 29, 1997
- ------------------------- Chief Financial Officer
William V. Holden (Principal Accounting
Officer) (Principal
Financial Officer)
* Director January 29, 1997
- -------------------------
Paul A. Houston
* Director January 29, 1997
- -------------------------
Grover G. Moss
</TABLE>
<PAGE> 56
<TABLE>
<S> <C> <C>
* Director/Treasurer January 29, 1997
- -------------------------
David G. Neal
* Director, Chairman January 29, 1997
- ------------------------- of the Board
Robert P. Peck
* Director January 29, 1997
- -------------------------
Edward W. Rhawn
* Director January 29, 1997
- -------------------------
Jack M. Richards
* Director January 29, 1997
- -------------------------
James B. Royster
* Director January 29, 1997
- -------------------------
Dean M. Sorgdrader
* Director January 29, 1997
- -------------------------
Calvin G. White
* Director January 29, 1997
- -------------------------
Ronald J. Young
By /s/ Thomas D. Henrion January 29, 1997
---------------------------
Thomas D. Henrion
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Form
10-K.
</TABLE>
<PAGE> 1
Exhibit 10.11 EXECUTION COPY
GUARANTY AGREEMENT
dated as of
April 18, 1996
between
KFC NATIONAL PURCHASING COOPERATIVE, INC.,
d/b/a FOODSERVICE PURCHASING COOPERATIVE
as Guarantor
and
NATIONAL CONSUMER COOPERATIVE BANK
as Buyer
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
DEFINITIONS
<S> <C> <C>
SECTION 1.01 Defined Terms............................................ 1
ARTICLE II
GUARANTOR AND GUARANTY
SECTION 2.01 Guarantor's Guaranty..................................... 2
SECTION 2.02 Reserve Account.......................................... 2
ARTICLE III
GUARANTOR REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Guarantor Representations and Warranties................. 3
ARTICLE IV
COVENANT OF GUARANTOR
ARTICLE V
GUARANTOR DEFAULTS
SECTION 5.01 Guarantor Defaults....................................... 4
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Further Assurances....................................... 5
SECTION 6.02 Indemnities.............................................. 5
SECTION 6.03 No Waiver; Remedies Cumulative........................... 6
SECTION 6.04 Governing Law............................................ 6
SECTION 6.05 Consent to Jurisdiction: Waiver of Immunities........... 6
SECTION 6.06 Notices.................................................. 6
SECTION 6.07 Assignment............................................... 7
SECTION 6.08 Capital Markets Funding.................................. 7
SECTION 6.09 Severability............................................. 7
SECTION 6.10 Attorney's Fees.......................................... 7
SECTION 6.11 Setoff................................................... 7
SECTION 6.12 Limitation on Third Party Beneficiaries.................. 8
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 6.13 Term of the Agreement; Termination; Renewal.............. 8
SECTION 6.14 Entire Agreement; Amendment.............................. 8
SECTION 6.15 Headings................................................. 8
SECTION 6.16 Counterparts............................................. 8
</TABLE>
ii
<PAGE> 4
GUARANTY AGREEMENT
This GUARANTY AGREEMENT is executed as of April 18, 1996 between KFC
NATIONAL PURCHASING COOPERATIVE, INC., d/b/a FOODSERVICE PURCHASING COOPERATIVE,
a Delaware corporation, as guarantor (the "Guarantor" or "FoodService") and
NATIONAL CONSUMER COOPERATIVE BANK, a financial institution organized under the
laws of the United States ("Buyer" or "NCB").
WHEREAS, FoodService, as seller, and NCB, as Buyer, entered into a certain
Loan Origination and Purchase Agreement dated as of April 18, 1996 (the "Loan
Agreement") which provides for NCB to underwrite, process and originate, as
agent for, and in the name of, FoodService, Loans as described in the Loan
Agreement, which Loans will be immediately sold by FoodService to NCB and
thereafter serviced by NCB pursuant to the terms and conditions set forth in the
Loan Agreement; and
WHEREAS, in order to induce the Buyer to enter into the Loan Agreement, the
Guarantor has agreed to provide certain guaranties with respect to the Loans;
and
WHEREAS, the parties have determined to enter into this Guaranty Agreement
(this "Agreement") in which the Guarantor's guaranties for the benefit of the
Buyer will be set out.
NOW, THEREFORE, for full and fair consideration, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Defined Terms. Terms used herein and not otherwise defined
shall have the meanings given in Article I of the Loan Agreement. In addition,
the following terms, as used herein, have the following meanings:
"Guaranty" shall mean the first loss guaranty of Liquidation Losses
provided by Guarantor in accordance with Section 2.01 of this Agreement.
"Guaranty Amount" shall mean, for each Loan, at any time, an amount
equal to (a) if such Loan is a Preferred Loan or a Superior Loan, ten percent
(10%) of the Principal Balance of such Loan, (b) if such Loan is a Standard
Loan, twenty-five percent (25%) of the Principal Balance of such Loan, and (c)
if such Loan is a Large Loan, $100,000 per each Large Loan, provided that the
aggregate Guaranty Amount for all Large Loans shall in no event exceed $500,000.
"Guaranty Payments" shall mean (i) the amounts paid by Guarantor to the
Buyer pursuant to the Guaranty and (ii) the amounts transferred from the Reserve
Account to the Buyer in payment of the Guaranty.
<PAGE> 5
ARTICLE II
GUARANTOR AND GUARANTY
SECTION 2.01 Guarantor's Guaranty. In order to induce Buyer to purchase
the Loans, Guarantor hereby agrees to provide to the Buyer a Guaranty of
Liquidation Losses with respect to each Loan, equal at any time to the then
current Guaranty Amount for each such Loan. Following (i) the earlier of (A)
the collection of all Liquidation Proceeds and other amounts with respect to a
Defaulted Loan and (B) a Defaulted Loan being deemed to be a Liquidated Loan,
and (ii) determination of Liquidation Loss thereon (which in the case of a
Defaulted Loan deemed to be a Liquidated Loan may be the full Principal Balance
of such Loan), the Buyer shall notify Guarantor of the amount of Liquidation
Loss. Within five (5) Business Days of receipt of such notice, Guarantor shall
make a Guaranty Payment to the Buyer in the amount of such Liquidation Loss
from either or both of the following sources, at the Guarantor's option: one,
funds available in the Reserve Account and/or two, payment by the Guarantor;
provided, however, that in the event the Guarantor does not make a Guaranty
Payment when due, the Buyer shall withdraw such Guaranty Payment from the
Reserve Account; and provided further, however, that Guarantor's obligation to
make a Guaranty Payment with respect to any Loan shall be limited to the then
available Guaranty Amount for such Loan and, in the case of a Large Loan which
is a Defaulted Loan, shall be further limited such that the Guaranty Amount to
be paid with respect to such Large Loan would not exceed $100,000.
Notwithstanding anything to the contrary herein, the Guaranty Amount to be paid
with respect to all Loans (excluding Large Loans) shall not exceed $2,750,000
or with respect to Large Loans, shall not exceed $500,000. The maximum Guaranty
Amount shall be increased if the Maximum Purchase Amount is increased pursuant
to the terms of the Loan Purchase Agreement.
SECTION 2.02 Reserve Account. The Guarantor and Buyer acknowledge that the
Reserve Account has been established pursuant to Section 5.02 of the Loan
Agreement, will be maintained for the benefit of the Guarantor, and will be
applied as provided herein and in Section 5.02 of the Loan Agreement. The
parties also acknowledge that moneys in the Reserve Account are the functional
equivalent of the Guaranty and that amounts in the Reserve Account will, unless
the Guarantor notifies the Buyer that it will make the Guaranty Payment and the
Guarantor makes such Guaranty Payment when due, be first applied to make any
Guaranty Payment for Liquidation Loss demanded of the Guarantor. Subject to the
provisions of this Agreement, the Guarantor hereby pledges to the Buyer any and
all of its right, title and interest in and to the Reserve Account, including
any and all moneys, instruments and securities therein to secure its payment
2
<PAGE> 6
of the Guaranty.
ARTICLE III
GUARANTOR REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Guarantor Representations and Warranties. The Guarantor
hereby represents and warrants to, and agrees as follows as of each Closing
Date and as of the date of execution of this Agreement:
(a) The execution, delivery and performance of Guarantor's obligations
under this Agreement, and the consummation of the transactions herein
contemplated will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of Guarantor or any of its Subsidiaries pursuant to the terms of, any indenture,
mortgage, deed of trust, loan agreement or other agreement (other than this
Agreement) or instrument to which it or any of its Subsidiaries is a party or by
which it or any of its subsidiaries is bound or to which any of its property or
assets is subject, nor will such action result in any violation of the
provisions of its Certificate of Incorporation or By-Laws or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over it or any of its properties; and no consent, approval,
authorization, order, registration or qualification of or with any court or any
such regulatory authority or other governmental agency or body is required for
the consummation of the other transactions contemplated by this Agreement.
(b) This Agreement has been duly authorized, executed and delivered by
Guarantor and this Agreement is the valid and legally binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms, subject
as to enforcement to bankruptcy, insolvency, reorganization and other similar
laws of general applicability relating to or affecting creditors' rights and to
general principles of equity.
(c) Except as described in Reports on Form 10-K, 10-Q or 8-K filed by
the Guarantor with the Securities and Exchange Commission, there are no actions,
proceedings, investigations, or claims against or affecting Guarantor now
pending before any court, arbitrator or other Governmental Authority (nor to the
knowledge of Guarantor has any thereof been threatened nor does any basis exist
therefor) which if determined adversely to the Guarantor would be likely to have
a material adverse effect on the financial condition or operations of Guarantor
or on Guarantor's ability to perform its obligations under this Agreement. With
respect to the litigation described in the
3
<PAGE> 7
reports filed by the Guarantor with the Securities and Exchange Commission, a
determination in such litigation that is materially adverse to the Guarantor
would not have a material adverse effect on the financial condition or
operations of Guarantor or on Guarantor's ability to perform its obligations
under this Agreement.
ARTICLE IV
COVENANT OF GUARANTOR
At all times prior to the later of (i) the Termination Date or (ii) the
date on which all obligations of the Seller under the Loan Agreement and
Guarantor under this Agreement have been performed in full, Guarantor agrees to
obtain and promptly furnish to Buyer, from time to time, evidence of all such
Government Approvals as may be required, if any, to enable the Guarantor to
comply with its obligations under this Agreement.
ARTICLE V
GUARANTOR DEFAULTS
SECTION 5.01 Guarantor Defaults. Any of the following acts or occurrences
shall constitute "Guarantor Defaults" under this Agreement.
(a) Guarantor Default. Guarantor shall fail to make any payment due
under its Guaranty and such failure shall remain unremedied for five (5)
Business Days after written notice thereof shall have been given to Guarantor by
Buyer; or
(b) Performance Default. Guarantor shall fail to perform or observe any
other obligation, covenant or term of this Agreement and such failure shall
remain unremedied for thirty (30) days after written notice thereof shall have
been given to Guarantor by Buyer; or
(c) Voluntary Bankruptcy, Etc. Guarantor shall: (1) file a petition
seeking relief for itself under Title 11 of the United States Code, as now
constituted or hereafter amended, or file an answer consenting to, admitting the
material allegations of or otherwise not controverting, or fail timely to
controvert a petition filed against it seeking relief under Title 11 of the
United States Code, as now constituted or hereafter amended; or (2) file such
petition or answer with respect to relief under the provisions of any other now
existing or future applicable bankruptcy, insolvency, or other similar law of
the United States of America or any State thereof or of any other country or
jurisdiction providing for the reorganization, winding-up or
4
<PAGE> 8
liquidation of corporations or an arrangement, composition, extension or
adjustment with creditors; or
(d) Involuntary Bankruptcy, Etc. An order for relief shall be entered
against Guarantor under Title 11 of the United States Code, as now constituted
or hereafter amended, which order is not stayed; or upon the entry of an order,
judgment or decree by operation of law or by a court having jurisdiction in the
premises which is not stayed adjudging it a bankrupt or insolvent under, or
ordering relief against it under, or approving as properly filed a petition
seeking relief against it under the provisions of any other now existing or
future applicable bankruptcy, insolvency or other similar law of the United
States of America or any State thereof or of any other country or jurisdiction
providing for the reorganization, winding-up or liquidation of corporations or
any arrangement, composition, extension or adjustment with creditors, or
appointing a receiver, liquidator, assignee, sequestrator, trustee or custodian
of the or Guarantor, or of any substantial part of the property of Guarantor or
ordering the reorganization, winding-up or liquidation of its affairs, or upon
the expiration of one hundred twenty (120) days after the filing of any
involuntary petition against it seeking any of the relief specified in Section
5.01(c) or this Section 5.01(d) without the petition being dismissed prior to
that time; or
(e) Insolvency, Etc. Guarantor shall (i) make a general assignment for
the benefit of its creditors or (ii) consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, or custodian of all or
a substantial part of the property of Guarantor, or (iii) admit its insolvency
or liability to pay its debts generally as they become due, or (iv) fail
generally to pay its debts as they become due, or (v) take any action (or suffer
any action to be taken by its directors or shareholders) looking to the
dissolution or liquidation of Guarantor;
then, in the event of any Guarantor Default, the Buyer shall have the right to
pursue all legal remedies available to it and to terminate the Guarantor's
rights under this Agreement or the Loan Agreement.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Further Assurances. Each party hereto agrees to execute and
deliver to the other party and to perform all such other acts as the other
party may reasonably request to carry out the transactions contemplated by this
Agreement.
SECTION 6.02 Indemnities. Guarantor will defend and
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<PAGE> 9
hereby indemnify Buyer and its successors, assigns, servants and agents
(hereinafter "Indemnitees") against and agree to protect, save and keep harmless
and make whole each thereof, from any and all liabilities, obligations, losses,
damages, penalties, claims, actions, suits, costs, expenses and disbursements,
including reasonable attorneys' fees, of whatever kind and nature imposed on,
incurred by or asserted against any Indemnitee in any way relating to or arising
out of (i) any breach or alleged breach of any covenant, agreement or other
obligation by the Guarantor under this Agreement or by the Seller under the Loan
Agreement and (ii) any representation or warranty made by the Guarantor under
this Agreement or the Seller under the Loan Agreement which was untrue or
allegedly untrue when made or delivered. Any indemnity payments required under
this Section 6.02 shall be paid within thirty (30) days following notice thereof
from the Indemnitee to Guarantor (which notice shall describe in reasonable
detail the matter with respect to which indemnification is required and shall
set forth the computation used in determining the amount of the indemnity
payment). All of the rights and privileges of each Indemnitee under this Section
6.02, and the rights, privileges and obligations of Guarantor hereunder, shall
survive the expiration or other termination of this Agreement.
SECTION 6.03 No Waiver; Remedies Cumulative. No failure by the Guarantor
or Buyer to exercise, and no delay in exercising, any right, power or remedy
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or remedy under this Agreement preclude
any other or further exercise thereof or the exercise of any other right,
power, or remedy. The rights and remedies provided herein are cumulative and
not exclusive of any right or remedy provided by law.
SECTION 6.04 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6.05 Consent to Jurisdiction: Waiver of Immunities. Guarantor and
Buyer hereby irrevocably submit to the jurisdiction of any state or federal
court sitting in the District of Columbia in any action or proceeding brought
to enforce or otherwise arising out of or relating to this Agreement and
irrevocably waive to the fullest extent permitted by law any objection which
they may now or hereafter have to the laying of venue in any such action or
proceeding in any such forum, and hereby further irrevocably waive any claim
that any such forum is an inconvenient forum. The parties agree that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in any other jurisdiction by suit on the judgment or in any other
manner provided by law.
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<PAGE> 10
SECTION 6.06 Notices. All notices and other communications provided
for in this Agreement shall be in writing or (unless otherwise specified) by
telex, telegram or cable and shall be sent for next Business Day delivery to
each party at the address set forth under its name on the signature page hereof,
or at such other address as shall be designated by such party in a written
notice to the other party. Except as otherwise specified, all such notices and
communications if duly given or made shall be effective upon receipt.
SECTION 6.07 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective Successors and assigns.
Notwithstanding the foregoing, the Guarantor may not assign or otherwise
transfer all or any part of its rights or obligations hereunder without the
prior written consent of the other parties, and any such assignment or transfer
purported to be made without such consent shall be ineffective. Buyer may,
however, sell, assign or transfer its rights hereunder, the Loans and related
Property and the guaranties provided herein, including any sale or assignment
to achieve a capital markets funding, without the consent of the Guarantor.
Further, the Guarantor agrees to recognize any such buyers or assignees as
Successors and assigns of the Buyer hereunder, with all rights of the Buyer
hereunder.
SECTION 6.08 Capital Markets Funding. Guarantor hereby agrees to cooperate
with Buyer in making such reasonable modifications to this Agreement, in
executing such other documents and certificates, in causing to be prepared and
delivered such opinions, certificates, financial reports and letters, and in
taking such other actions, as are reasonably necessary to achieve capital
markets funding of the Loans and the related Property or to improve the
execution of such funding. The Buyer shall be responsible for all fees and
expenses incurred in connection with a capital markets funding of the Loans,
except for any fees and expenses incurred by FoodService or its legal counsel
or agents up to $2,500. The Buyer shall be responsible for any fees and
expenses of Seller's counsel in excess of $2,500, provided that the Seller
shall be responsible for the cost of obtaining a New York law opinion with
respect to the enforceability of this Agreement and the Loan Agreement from a
law firm of the Guarantor's choice resonably acceptable to the Buyer.
SECTION 6.09 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall as to such jurisdiction
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties waive any provision of law which
renders any provision hereof prohibited or unenforceable in any respect.
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SECTION 6.10 Attorney's Fees. In the event it is necessary for any party
hereto or its Successors or assigns to institute suit in connection with this
Agreement or the breach thereof, the prevailing party in such suit shall be
entitled to reimbursement for its reasonable costs, expenses and attorney's
fees incurred including fees incurred on any appeal.
SECTION 6.11 Setoff. In addition to any rights now or hereafter
granted under applicable law, upon the occurrence of any Termination Event,
Buyer is hereby authorized by Guarantor at any time, with notice to Guarantor,
to set off and to appropriate and to apply to the amounts then owed by Guarantor
to Buyer hereunder, any and all deposits (general or special, including, but not
limited to, indebtedness evidenced by certificates of deposit, whether matured
or unmatured, but not including trust accounts) and any other indebtedness at
any time held or owing by Buyer to Guarantor.
SECTION 6.12 Limitation on Third Party Beneficiaries. No provision,
warranty, representation, or agreement herein, whether express or implied, is
intended to or shall be construed as conferring upon any Person not a party
hereto (including, without limitation, any Obligor) any rights or remedies
whatsoever.
SECTION 6.13 Term of the Agreement; Termination; Renewal. This Guaranty
Agreement shall remain in full force and effect until, and shall terminate on
the earlier of (i) the day following the date on which the Loan Agreement is
terminated or (ii) June 1, 2000; provided, however, that termination of this
Agreement on such termination date shall not affect in any manner the liability
of the Guarantor with respect to (a) any Guaranty Amount due and owing prior to
such termination date, (b) any other rights accrued to the Buyer prior to such
termination date under this Agreement or the Loan Agreement, (c) the
indemnification rights set forth in Section 6.02 hereof (clauses (a), (b) and
(c) collectively referred to as the "Prior Obligations"), or (d) extension or
renewals of, interest accruing on, or the fees, costs or expenses incurred with
respect to, such Prior Obligations prior to, on or after such termination date.
The Guarantor and the Buyer may agree in writing to extend or renew this
Guaranty Agreement for additional 3-year periods or such other period as is
reasonably acceptable to both parties.
SECTION 6.14 Entire Agreement; Amendment. This Agreement comprises the
entire agreement of the parties and may not be amended or modified except by
written agreement of the parties hereto. No provision of this Agreement may be
waived except in writing and then only in the specific instance and for the
specific purpose for which given.
SECTION 6.15 Headings. The headings of the various provisions of this
Agreement are for convenience of reference
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only, do not constitute a part hereof, and shall not affect the meaning or
construction of any provision hereof.
SECTION 6.16 Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by the parties hereto shall be
deemed to constitute a complete, executed original for all purposes.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Guaranty Agreement
to be executed by their respective officers or agents thereunto duly authorized
as of the date first above written.
KFC NATIONAL PURCHASING COOPERATIVE, INC.,
d/b/a FOODSERVICE PURCHASING COOPERATIVE,
as Guarantor
By ___________________________________
Its _______________________________
Notice Address:
950 Breckenridge Lane
Louisville, Kentucky 40232
Attention: Chief Financial Officer
NATIONAL CONSUMER COOPERATIVE BANK,
as Buyer
By ___________________________________
Its _______________________________
Notice Address:
1401 Eye Street, N.W.
Suite 700
Washington, D.C. 20005
10
<PAGE> 1
Exhibit 10.12 EXECUTION COPY
LOAN ORIGINATION AND PURCHASE AGREEMENT
dated as of
April 18, 1996
between
KFC NATIONAL PURCHASING COOPERATIVE, INC.,
d/b/a FOODSERVICE PURCHASING COOPERATIVE
as Seller
and
NATIONAL CONSUMER COOPERATIVE BANK
as Buyer
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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ARTICLE I
DEFINITIONS
<S> <C> <C>
SECTION 1.01 Defined Terms.................................................... 1
SECTION 1.02 General Principles Applicable to Definitions..................... 13
SECTION 1.03 Accounting Terms................................................. 13
ARTICLE II
THE COMMITMENT
SECTION 2.01 Origination of Loans............................................. 14
SECTION 2.02 Purchases........................................................ 15
SECTION 2.03 Commitment Termination Date...................................... 16
SECTION 2.04 Authorization and Agency......................................... 16
ARTICLE III
CLOSING PROCEDURE; CONDITIONS TO PURCHASE
SECTION 3.01 Payment.......................................................... 18
SECTION 3.02 Effective Date................................................... 18
SECTION 3.03 Buyer's Conditions Precedent to Acceptance....................... 18
SECTION 3.04 Additional Delivery Requirements for Initial Closing Date........ 19
SECTION 3.05 Seller's Conditions Precedent.................................... 19
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01 Seller's Corporate Representations and Warranties................ 21
SECTION 4.02 Buyer's Representations and Warranties........................... 22
ARTICLE V
DOCUMENTATION, SERVICING AND COLLECTION
SECTION 5.01 Documentation, Servicing and Collections......................... 24
</TABLE>
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<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 5.02 Reserve Account.................................................. 24
SECTION 5.03 Documentation and Servicing; Maintenance of System and Lien
Priority......................................................... 24
SECTION 5.04 Loan Reports..................................................... 25
SECTION 5.05 Optional Repurchase of Defaulted Loans and after Obligor
Default.......................................................... 25
ARTICLE VI
SELLER'S COVENANTS
SECTION 6.01 Covenants........................................................ 26
ARTICLE VII
TERMINATION EVENTS
SECTION 7.01 Termination Events............................................... 29
SECTION 7.02 Consequences of Termination Event................................ 30
SECTION 7.03 Remedies of a Secured Party...................................... 30
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 Further Assurances............................................... 32
SECTION 8.02 No Waiver: Remedies Cumulative.................................. 32
SECTION 8.03 Governing Law.................................................... 32
SECTION 8.04 Consent to Jurisdiction; Waiver of Immunities.................... 32
SECTION 8.05 Notices.......................................................... 32
SECTION 8.06 Assignment....................................................... 32
SECTION 8.07 Capital Markets Funding.......................................... 33
SECTION 8.08 Confidentiality.................................................. 33
SECTION 8.09 Severability..................................................... 34
SECTION 8.10 Attorney's Fees.................................................. 34
SECTION 8.11 Limitation on Third Party Beneficiaries.......................... 34
SECTION 8.12 Term of Agreement................................................ 34
SECTION 8.13 Entire Agreement; Amendment...................................... 34
SECTION 8.14 Headings......................................................... 34
SECTION 8.15 Counterparts..................................................... 35
Exhibit A - Forms of Note and Related Documents
</TABLE>
ii
<PAGE> 4
LOAN ORIGINATION AND PURCHASE AGREEMENT
This LOAN ORIGINATION AND PURCHASE AGREEMENT is executed as of April 18,
1996 between KFC NATIONAL PURCHASING COOPERATIVE, INC., d/b/a FOODSERVICE
PURCHASING COOPERATIVE, a Delaware corporation, as Seller (the "Seller" or
"FoodService") and NATIONAL CONSUMER COOPERATIVE BANK, a financial institution
organized under the laws of the United States (the "Buyer" or "NCB").
NOW, THEREFORE, for full and fair consideration, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Defined Terms. The following terms, as used herein, have the
following meanings:
"Affiliate" shall mean, with respect to a Person, any other Person (or
group of related Persons) which (i) directly or indirectly controls, is
controlled by or is under common control with, such Person, or (ii) directly or
indirectly owns more than 5% of such Person's voting stock, or (iii) is a
director or corporate officer of such Person. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Bank Act" shall mean the National Consumer Cooperative Bank Act, 12 U.S.C.
ss.ss. 3001-3051, and any regulations and policies adopted thereunder.
"Business Day" shall mean any day other than Saturday, Sunday and a day on
which banks in Washington, D.C. are authorized to close.
"Buyer" shall mean NCB.
"Cash Flow Ratio" shall mean, with respect to an Obligor, at any date and
for the period reflected in the related Obligor Financial Statements, the
consolidated ratio (expressed as a number taken to 2 decimal places) of (a)
EBITDA to (b) Cash Interest Expense plus CPLTD; provided that if such Obligor
has taken on new debt which is not reflected on the Obligor Financial
Statements, or if a new loan has been approved but not yet funded, the
denominator of the ratio will be adjusted to account for the CPLTD of the new
debt or loan and related interest expense.
"Cash Interest Expense" shall mean, for any period, gross interest expense
for such period determined in accordance with U.S. GAAP.
<PAGE> 5
"Closing Date" shall mean, with respect to each Loan, the date on which
such Loan is originated and sold to the Buyer.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral" shall mean all or any portion of the collateral, whether real
or personal, tangible or intangible, or otherwise, pledged by any Obligor or
Loan Guarantor to secure repayment of its Loan and the related Note (other than
Cooperative Assets).
"Collateral Coverage Ratio" shall mean, with respect to any Loan, as of any
date, the consolidated ratio (expressed as a number taken to 2 decimal places)
of (a) the value of all Primary Collateral which secures such Loan, to (b) the
aggregate Principal Balance of such Loan; provided that if such Loan (1) either
(A) is being purchased simultaneously with any other Obligor Group Loan or Loans
or (B) is the second or later Loan to be purchased with respect to the related
Obligor Group, and (2) shares Cross Collateral with such simultaneously--or
previously--purchased Obligor Group Loans, the Collateral Coverage Ratio with
respect to such Loan shall mean the consolidated ratio (expressed as a
percentage) of (a) the value of all Primary Collateral (which includes Cross
Collateral) to (b) the aggregate Principal Balance of such Loan and the other
Obligor Group Loans which share Cross Collateral. The value of different types
of Collateral will be determined as follows: (i) furniture, fixtures, equipment
and inventory will be valued at 100% of net book value as reflected on the
related Obligor Financial Statements; and (ii) real estate will be valued at
either (x) the assessed value, as shown on the local assessor's lists,
established no earlier than 9 months before the date of the Purchase by the
Buyer hereunder, (y) the value established by an MAI appraisal dated no earlier
than 9 months before the date of the Purchase by the Buyer hereunder, or (z) any
other value acceptable to the Buyer.
"Collections" shall mean any and all amounts received in respect of Loans
and related Notes or Related Documents, whether from the Obligors or any other
source, including any Liquidation Proceeds.
"Commitment Termination Date" shall mean June 1, 1997, or such earlier or
later date as provided by Section 2.03 hereof.
"Consolidated Net Worth" shall mean, with respect to any Person, as of any
date of determination, the consolidated balance sheet "net worth" of such Person
determined in accordance with U.S. GAAP.
"Consolidated Tangible Net Worth" means, with respect
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<PAGE> 6
to any Person, at any date, Consolidated Net Worth less (i) all assets which
should be classified as intangible assets (such as good will, patents,
trademarks, copyrights, franchises and covenants not to compete) and (ii) to the
extent not already deducted from total assets, all reserves including those for
deferred income taxes, depreciation, obsolescence or amortization of properties
and (iii) all capital stock or other investments in any direct or indirect
subsidiary other than in (x) any offshore investment subsidiary, or (y) a
subsidiary having all or substantially all of its operations in the United
States.
"Controlled Group" means, with respect to any Person, all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which (1) together with such Person are
treated as a single employer under Section 414(b) or 414(c) of the Code or (2)
solely for purposes of potential liability under Section 302(c)(11) of ERISA and
Section 412(c)(11) of the Code and the lien created under Section 302(f) of
ERISA and Section 412(n) of the Code, described in Section 414(m) or (n) of the
Code, includes such Person as a member.
"Cooperative Assets" shall mean the assets (including cash) owned or earned
by an Obligor relating to its membership in the Seller, including the Seller's
capital stock and patronage dividends.
"CPLTD" shall mean, with respect to any Person, as of any date, that
portion of such Person's long-term Debt (that is, Debt with a term of greater
than one year) which matures and is due and payable within one year.
"Cross Collateral" shall mean, with respect to any Loan, all or any portion
of the Primary Collateral pledged to secure any other Obligor Group Loan or
Loans previously purchased by the Buyer, which also secures such Loan.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments or
agreements (including obligations of the parties under this Agreement or the
Guaranty Agreement), (iii) all obligations of such Person to pay the deferred
purchase price of property or services other than trade receivables and open
accounts arising in the ordinary course, (iv) all obligations of such Person as
lessee which are capitalized in accordance with generally accepted accounting
principles, (v) all Debt secured by a lien on any asset owned of such Person,
whether or not such Debt is otherwise an obligation of such Person which Debt,
if Non-Recourse to such Person, shall be deemed to be in an amount equal to the
lesser of the principal amount of such obligations or the aggregate fair market
value of such assets, and (vi) all Guaranteed Debt (including, in the case
3
<PAGE> 7
of the Guarantor, the Guarantor's obligations under the Guaranty Agreement).
"Defaulted Loan" shall mean, as of any date, a Loan with respect to which
any of the following has occurred: (a) there has occurred an Obligor Default
with respect to such Loan and such Obligor Default has been continuing for a
period of 15 days, or (b) the Obligor under such Loan has sought protection
under the United States Bankruptcy Code or is the subject of an involuntary
bankruptcy.
"EBITDA" means, for any Person, for any period, the consolidated net income
(or net loss) of such Person for such period as determined in accordance with
U.S. GAAP, plus (a) the sum of (i) depreciation expense, (ii) amortization
expense, (iii) Cash Interest Expense, (iv) total income tax expense, and (v)
extraordinary or unusual losses (and other after-tax losses on sales of assets
outside of the ordinary course of business and not otherwise included in U.S.
GAAP extraordinary or unusual losses), less (b) the sum of (i) extraordinary or
unusual gains (and other after tax gains on sales of assets outside of the
ordinary course of business and not otherwise included in U.S. GAAP
extraordinary or unusual gains) of the Person for such period and (ii) the net
income (or loss) of any Person that is accounted for by the equity method of
accounting, except to the extent of the amount of dividends or distributions
paid to such Person.
"Eligible Loan" shall mean a Loan which has a credit and underwriting
approval from NCB and which, on the applicable Closing Date, satisfies each of
the following applicable criteria:
i) The Loan was originated in the United States and monthly payments
on such Loan are payable on the first day of each month in U.S. Dollars by
an Obligor domiciled in the United States;
(ii) The Loan has an original Principal Balance of at least $100,000
and no greater than $2,000,000;
(iii) The related Note and all other Notes executed by the related
Obligor (or other Person directly or indirectly controlling, controlled by
or under common control with, such Obligor), together with any other
promissory notes or evidences of indebtedness executed by such Obligors for
the benefit of the Buyer (either directly or as buyer or assignee), shall
have an aggregate outstanding balance of less than $2,000,000;
(iv) The Loan has an original term to maturity of no greater than
seven years (or, in the case of a Loan the primary purpose of which is to
finance real estate, 10 or 15
4
<PAGE> 8
years);
(v) The related Note provides that the principal be amortized monthly
over the term of such Note with level monthly payments of principal and
interest;
(vi) The Obligor with respect to such Loan is a member in good
standing of FoodService;
(vii) The Obligor with respect to such Loan has a positive net worth
as accounted for under U.S. GAAP, consistently applied, is not the subject
of any bankruptcy proceeding, and has no present intention to seek relief
under the federal bankruptcy laws;
(viii) With respect to such Loan, Uniform Commercial Code financing
statements and/or mortgages have been duly filed in all places where filing
is necessary, and all other or additional acts have been taken as are
necessary to perfect Buyer's first priority security interests arising
pursuant to the Related Documents in the related Primary Collateral and
such other related Collateral as is governed by the Uniform Commercial
Code;
(ix) As of the applicable Closing Date, if such Loan is a Standard
Loan, the aggregate Principal Balance of such Loan and all other Loans
(including Loans purchased on previous Closing Dates, if any) classified as
Standard Loans is no greater than 25% of the Maximum Purchase Amount;
(x) If such Loan is (a) a Superior Loan, it shall bear interest at
either a fixed rate equal to the Treasury Rate in effect at the time of
origination plus 300 basis points or a variable rate of LIBOR from time to
time plus 275 basis points; (b) a Preferred Loan, it shall bear interest at
either a fixed rate equal to the Treasury Rate in effect at the time of
origination plus 325 basis points or a variable rate of LIBOR from time to
time plus 300 basis points; and (c) a Standard Loan, it shall bear interest
at either a fixed rate equal to the Treasury Rate in effect at the time of
origination plus 525 basis points or a variable rate of LIBOR from time to
time plus 500 basis points; provided that if such Loan has an original
Principal Balance greater than $500,000, the interest rate for such Loan
shall be 25 basis points lower than the applicable number of basis points
specified above; and
(xi) The purpose for which the Loan is being made is to provide to the
related Obligor (who is either a new or existing franchisee of a KFC or
Taco Bell store and business) financing or refinancing for capital
improvements, equipment purchases, and acquisitions, expansions or
renovations of new or existing KFC or Taco Bell franchises.
5
<PAGE> 9
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Funded Debt" means Debt which matures by its terms more than one year from
the date it was originally incurred, or is unconditionally renewable or
extendible at the option of the debtor to a date more than one year from such
date, or which arises under a revolving credit or similar agreement which
obligates the lender or lenders to extend credit over a period of more than one
year from such date.
"Government Approval" means an approval, permit, license, authorization,
certificate or consent of any Governmental Authority.
"Governmental Authority" means the government of the United States or any
State or any foreign country or any political subdivision of any thereof or any
branch, department, agency, instrumentality, court, tribunal or regulatory
authority which constitutes a part or exercises any sovereign power of any of
the foregoing.
"Guaranteed Debt" shall mean, as applied to any debt, for any Person (i) a
guarantee by such Person (other than by endorsement for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such debt or (ii) a similar agreement, direct or indirect, contingent or
otherwise, providing for the payment or performance (or payment of damages in
the event of non-performance) of such Person of any part or all of such debt.
The amount of any Guaranteed Debt of such Person shall be deemed to be the
maximum amount of the debt guaranteed for which the guarantor could be held
liable under such Guaranteed Debt.
"Guarantor" shall mean FoodService and its Successors and assigns.
"Guarantor Default" shall have the meaning given in Section 5.01 of the
Guaranty Agreement.
"Guaranty" shall mean the first loss guaranty of Liquidation Losses
provided by Guarantor in accordance with the Guaranty Agreement.
"Guaranty Agreement" means the Guaranty Agreement dated as of April 18,
1996, by and between Buyer and Guarantor, as the same may be amended and
supplemented from time to time.
"Guaranty Amount" shall have the meaning given in the Guaranty Agreement.
"Guaranty Payments" shall mean (i) the amounts paid by
6
<PAGE> 10
Guarantor to the Buyer pursuant to the Guaranty and (ii) the amounts transferred
from the Reserve Account to the Buyer in payment of the Guaranty.
"Initial Closing Date" shall mean April 18, 1996.
"Large Loan" shall mean a Loan with an original Principal Balance greater
than $2,000,000 that the Buyer, in its sole discretion, determines satisfies its
credit, underwriting and pricing criteria.
"Leverage Ratio" shall mean, for any Person, for any period, the ratio of
the total liabilities of such Person to the Consolidated Tangible Net Worth of
such Person.
"LIBOR" shall mean, on any date of determination, the reserve-adjusted
London interbank rate for one-month Euro-Dollar deposits, as determined by NCB.
"Liquidated Loan" shall mean any Defaulted Loan as to which the Buyer has
determined that all amounts which it reasonably and in good faith expects to
recover have been recovered from or on account of such Loan; provided, however,
that a Defaulted Loan which has not been determined to have become a Liquidated
Loan within six months after becoming a Defaulted Loan shall be deemed a
Liquidated Loan on the sixth month anniversary date of such Loan becoming a
Defaulted Loan. A Loan which is deemed a Liquidated Loan shall be due and
payable on the date so deemed.
"Liquidation Losses" shall mean, with respect to any Liquidated Loan, on
any date of determination, the amount by which (A) the sum of (i) the Principal
Balance of such Loan, (ii) accrued and unpaid interest thereon at the loan
interest rate applicable to such Loan and (iii) unreimbursed reasonable fees and
expenses incurred by NCB and payable to third parties in connection with
servicing the liquidation of such Defaulted Loan, exceeds (B) the Net
Liquidation Proceeds.
"Liquidation Proceeds" shall mean cash and any other amounts received in
connection with the liquidation of Defaulted Loans and related Collateral,
whether through insurance payments, trustee's sale, foreclosure sale or
otherwise.
"Loan" shall mean each loan (including Eligible Loans and Large Loans)
underwritten, processed and originated, in the name of the Seller, by NCB, and
immediately after origination sold and transferred to the Buyer pursuant to this
Agreement, together with the rights and obligations of a holder thereof,
payments thereon and proceeds therefrom, the Loans subject to this Agreement
being identified on the Loan Report.
"Loan File" means the documents pertaining to a Loan,
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<PAGE> 11
including the related Note and Related Documents assembled by NCB, as agent for
the Seller, in accordance with Section 2.01(d) of this Agreement.
"Loan Guarantor" shall mean any Person who (i) guarantees an Obligor's
payment and/or other obligations under any Loan, (ii) co-signs, or is a co-maker
on, the related Note, or (iii) otherwise supports, either in a primary or
secondary position, an Obligor's obligations with respect to a Loan, the related
Note or other Related Documents.
"Loan Proposal" shall mean the proposal prepared by NCB for each loan being
reviewed for financing, such proposal setting forth the terms and conditions on
which such loan is proposed to be made.
"Loan Report" shall mean the monthly report prepared by the Buyer and
delivered to the Seller, each such report identifying the Loans purchased under
this Agreement by the names of the Obligors and Loan numbers and specifying as
to each such Loan (i) the Principal Balance as of the close of business on the
first day of the month in which such Loan Report is delivered (or, in the case
of the first monthly Loan Report delivered after the Purchase of a Loan, the
applicable Closing Date) and (ii) whether such Loan is a Defaulted Loan or an
Obligor Default exists with respect to such Loan, and if so, a brief description
of the nature of the default and the effort the Buyer is taking to cause such
default to be cured or to make Collections on such Loan.
"MAI" shall mean Member of the American Institute of Real Estate
Appraisers.
"Maximum Purchase Amount" shall mean $20,000,000, or such increased amount
(which shall be in $10,000,000 increments) as the parties hereto may from time
to time agree in writing.
"Multiemployer Plan" shall mean, for any Person, a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA which is or was at any time during the
current year or the immediately preceding five years contributed to by such
Person or any member of a Controlled Group on behalf of its employees and which
is covered by Title V of ERISA.
"NCB" shall mean National Consumer Cooperative Bank, a financial
institution organized under the laws of the United States, and its Successors
and assigns.
"Net Liquidation Proceeds" shall mean Liquidation Proceeds net of (i) any
reimbursements to the Buyer made therefrom for any expenses incurred in
liquidating Loans and (ii) amounts required to be released to the related
Obligor pursuant to applicable law.
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"Non-Recourse Debt" means Debt or that portion of Debt of any Person or a
Subsidiary of such Person as to which (a) the holders of such Debt agree that
they will look solely to the property securing such Debt for payment on or in
respect of such Debt and (b) no default with respect to such Debt would permit
(after notice or passage of time or both) according to the terms thereof, any
holder of any Debt for money borrowed by such Person or a Subsidiary of such
Person to declare a default on such Debt or cause the payment thereof to be
accelerated or payable prior to stated maturity.
"Note" shall mean any promissory note evidencing the indebtedness of an
Obligor under a Loan.
"Obligor" shall mean the Person or Persons primarily obligated to repay the
Loan and the indebtedness evidenced by the related Note including, without
limitation, all Persons executing such Note (regardless of whether they have
also executed all subsequent extension agreements relating to such Note).
"Obligor Default" shall mean (a) the failure by a Obligor to pay when due
(whether as a scheduled monthly payment, at maturity, upon required prepayment,
acceleration, demand or otherwise) the Loan and the indebtedness evidenced by
related Note or any Related Document, or any interest or premium thereon which
failure continues after the applicable grace period, if any, specified in such
Note or Related Document relating to such Loan; or (b) the failure by an Obligor
to perform any material term or covenant on its part to be performed under any
Loan, related Note or Related Document which failure continues after the
applicable grace period, if any, specified in the Note or Related Document, if
the effect of such failure to perform is to accelerate or to permit the
acceleration of the maturity of the indebtedness evidenced by such Note or
Related Document; or (c) the occurrence of an event or condition whereby the
indebtedness related to the Loan of any Obligor shall be declared to be due and
payable or required to be prepaid (other than by regularly scheduled required
prepayment) prior to the stated maturity thereof.
"Obligor Financial Statements" shall mean the balance sheets and related
statements of income and retained earnings prepared in accordance with U.S. GAAP
which shall be prepared by an accounting service or by in-house accounting
personnel acceptable to NCB. For purposes of determining the Cash Flow Ratio,
Collateral Coverage Ratio and Leverage Ratio, the financial statements
reflecting the most recently-available fiscal year's results will be used,
provided that if such financial statements reflect a period ended more than nine
months earlier, an interim statement covering at least two quarters' results
shall be used.
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"Obligor Group" shall include an Obligor and any of its Affiliates and
Subsidiaries.
"Obligor Group Loans" shall mean all Loans purchased by the Buyer from any
member of an Obligor Group.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" means an "employee pension benefit plan" (as such term is
defined in ERISA) from time to time maintained by the Seller or a member of the
Controlled Group.
"Person" means an individual, a corporation, a partnership, an association,
a trust or other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof.
"Plan" shall mean, for any Person, at any time, an employee pension benefit
plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Code and is
either (i) maintained by such Person or any member of a Controlled Group for
employees of such Person or any member of such Controlled Group or (ii)
maintained pursuant to collective bargaining agreement or other arrangement
under which more than one employer makes contributions and to which such Person
or any member of a Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five (5) plan years made
contributions.
"Preferred Loan" shall mean any Loan which is an Eligible Loan and which
satisfies, as of the applicable Closing Date, all of the criteria for a Standard
Loan and at least four of the following criteria: (i) the Loan has a Collateral
Coverage Ratio of at least 1.33%, (ii) the related Obligor has a Cash Flow Ratio
of at least 1.50%, (iii) either (a) the related Obligor has owned quick-service
food franchises which have operated as such for at least six (6) years, (b) the
quick-service food franchise to which such Loan relates has operated as such for
at least six (6) years, or (c) the related Obligor has owned and operated the
quick-service food franchise to which such Loan relates for at least four (4)
years, (iv) the related Obligor has a Leverage Ratio (as shown on the related
Obligor Financial Statement) of less than 5:1 and (v) the related Obligor's
Obligor Financial Statement(s) show (y) a positive EBITDA for the most recent
fiscal year or a positive EBITDA for one of the two most recent fiscal years and
(z) a positive net EBITDA for the three most recent fiscal years.
"Primary Collateral" shall mean that portion of the Collateral in which
Seller had, prior to the sale and assignment
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<PAGE> 14
hereunder, first priority perfected security interests.
"Principal Balance" shall mean, with respect to any Loan, at any date of
determination, the original principal balance of such Loan, minus the portion of
the Collections applied to the repayment or prepayment of the principal of such
Loan.
"Property" shall mean all of the Seller's rights, title and interest in the
Loans and related property and rights conveyed and sold pursuant to Section
2.02(b).
"Purchase" shall have the meaning ascribed to such term in Section 2.02
hereof.
"Purchase Price" for each Loan shall mean the original principal balance of
such Loan.
"Rating Agency" shall mean Standard & Poor's, Moody's Investors Service,
Inc., or any Successor of either, or any other nationally-recognized rating
agency.
"Related Documents" shall mean with respect to each Loan and related Note,
any loan agreement, security agreement, mortgage, assignment of lease and all
other documents, instruments or assignments (including amendments or
modifications thereof) executed by the Obligor or other Person on Obligor's
behalf in respect of such Loan and related Note, including, without limitation,
general or limited guaranties.
"Reserve Account" means account created, funded and maintained as provided
in Section 5.02 hereof.
"Reserve Deposit Date" shall mean the first (1st) day of each February and
July, unless such day is not a Business Day, in which event, "Reserve Deposit
Date" shall mean the next succeeding Business Day.
"Reserve Spread" means (i) for each Standard Loan, 62.5 basis points, (ii)
for each Preferred Loan and each Superior Loan, 12.5 basis points and (iii) for
each Large Loan, 0 basis points.
"Responsible Officer" shall mean when used with respect to the Buyer,
Guarantor or Seller, the chairman of the Board of Directors, any vice chairman
of the Board of Directors, the chairman of the executive committee, any vice
chairman of the executive committee, the president, any vice president (whether
or not designated by numbers or words added before or after the title "vice
president"), the secretary, the treasurer, any assistant treasurer, or any other
officer or assistant officer of the Buyer, Guarantor or Seller customarily
performing functions similar to those performed by the Persons who at the time
shall
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be such officers, respectively.
"Seller" shall mean KFC National Purchasing Cooperative, Inc., d/b/a
FoodService Purchasing Cooperative, a Delaware corporation, and its Successors
and assigns.
"Standard Loan" shall mean any Loan which is an Eligible Loan and which
satisfies, as of the applicable Closing Date, the following criteria: (i) the
Loan has a Collateral Coverage Ratio of at least 1.00%; (ii) the related Obligor
has a Cash Flow Ratio of at least 1.25%; (iii) either (a) the related Obligor
has owned quick-service food franchises which have operated as such for at least
two (2) years or (b) the quick-service food franchise to which such Loan relates
has operated as such for at least two (2) years, (iv) the related Obligor has a
Leverage Ratio (as shown on the related Obligor Financial Statement) of less
than 8:1 and (v) the related Obligor's Obligor Financial Statement(s) show a
positive EBITDA for the most recent fiscal year and/or a positive net EBITDA for
the three most recent fiscal years.
"Subordinated Debt" means, with respect to any Person, Debt of such Person
which by its terms provides that no payments or distributions may be made
thereon or in respect thereto at any time when a default has occurred and is
continuing under any document providing for repayment of Debt of such Person for
borrowed money (other than such Subordinated Debt) or for the payment by such
Person of the purchase price of tangible property.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"Successor" means, for any corporation or banking association, any
successor by merger or consolidation, or by acquisition of substantially all of
the assets of the predecessor.
"Superior Loan" shall mean any Loan which is an Eligible Loan and which
satisfies, as of the applicable Closing Date, all of the criteria for a
Preferred Loan and at least four of the following criteria: (i) the Loan has a
Collateral Coverage Ratio of at least 1.5%, (ii) the related Obligor has a Cash
Flow Ratio of at least 2.0%, (iii) the related Obligor has owned and operated
the quick-service food franchise to which such Loan relates for at least six (6)
years, (iv) the related Obligor has a Leverage Ratio (as shown on the related
Obligor Financial Statement) of less than 2.5:1, and (v) the related Obligor's
Obligor Financial Statements show positive EBITDA for each of the
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three most recent fiscal years.
"Termination Date" shall mean the first date on which all Loans shall have
been paid in full.
"Termination Event" shall have the meaning given in Section 7.01.
"Treasury Rate" shall mean, on any date of determination, the weekly
average yield on United States Treasury Securities, adjusted to a constant
maturity of five (5) years, as published on the last preceding adjustment date
in document H.15 (519) published by the Board of Governors of the Federal
Reserve System and entitled "Federal Reserve Statistical Release," or its
successor publication.
"Unfunded Vested Liability" shall mean, with respect to any Person and any
Plan, at any time, the amount (if any) by which (a) the present value of all
vested nonforfeitable benefits under such Plan exceeds (b) the fair market value
of all Plan assets allocable to such benefits, all determined as of the then
most recent evaluation date for such Plan, but only to the extent that such
excess represents a potential liability of such Person or any member of the
Controlled Group to the PBGC of the Plan under Title IV of ERISA.
"U.S. GAAP" has the meaning specified in Section 1.03.
SECTION 1.02 General Principles Applicable to Definitions. Definitions
given in Section 1.01 shall be equally applicable to both singular and plural
forms of the terms therein defined and references herein to "he" or "it" shall
be applicable to Persons whether masculine, feminine or neuter. References
herein to any document including, without limitation, this Agreement, a Loan, a
Note and a Related Document shall be deemed a reference to such document as it
now exists, and as, from time to time hereafter, the same may be amended.
SECTION 1.03 Accounting Terms. Except as otherwise provided herein,
accounting terms not specifically defined shall be construed, and all accounting
procedures shall be performed, in accordance with generally accepted United
States accounting principles ("U.S. GAAP") consistently applied.
[End of Article I]
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<PAGE> 17
ARTICLE II
THE COMMITMENT
SECTION 2.01 Origination of Loans. Until the Commitment Termination Date,
(a) FoodService agrees to market the Loan origination program provided by
this Agreement to potential obligors and NCB agrees to participate in such
marketing. Any expenses incurred by FoodService or NCB in connection with such
marketing shall be borne by the party incurring such expense.
(b) FoodService shall refer potential obligors to NCB from time to time for
review and a determination of whether to approve loans to such obligors which
will, upon origination, be sold to NCB pursuant to this Agreement. Each referral
by FoodService of a potential obligor shall contain (i) a certification by a
Responsible Officer of FoodService to the effect that to the best of such
Officer's knowledge (A) the potential obligor is a member in good standing of
FoodService and (B) FoodService's previous business dealings with the potential
obligor have been satisfactory and based on the credit history of the potential
obligor and FoodService's current dealings with the potential obligor,
FoodService knows of no reason why a loan should not be made to the potential
obligor and (ii) a recommendation by FoodService to NCB to approve, subject to
NCB's general underwriting standards for loans of such nature, the referred loan
for a specified amount (or an amount which exceeds such specified amount by the
lesser of $100,000 or 10% of the specified amount). NCB shall have full
discretion in determining whether to approve any potential loan and obligor
referred hereunder by FoodService and shall apply its own credit and
underwriting standards in making each such determination.
(c) Prior to sending any Loan Proposal to a potential obligor with respect
to a Large Loan, NCB shall forward a copy of such Loan Proposal to FoodService
for its review. In addition, prior to sending to a potential obligor a Loan
Proposal specifying a loan amount that exceeds the amount recommended by
FoodService in its loan referral, NCB shall forward a copy of such Loan Proposal
to FoodService for its review.
(d) Pursuant to Section 2.04, NCB, as agent for FoodService, will
originate, in the name of FoodService, Loans, provided that the original
aggregate Principal Balance of such Loans (excluding Large Loans) shall not
exceed the Maximum Purchase Amount. NCB agrees to process and prepare each loan
for closing and on the Closing Date for each Loan, execute all Loan
documentation as agent for FoodService. NCB will prepare the documentation for
each Loan on forms substantially similar to the forms of Note and Related
Documents attached hereto as Exhibit A,
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<PAGE> 18
or such other forms as are from time to time provided by NCB to FoodService.
FoodService agrees to cooperate fully in enabling NCB to originate each such
loan in FoodService's name.
(e) FoodService and NCB acknowledge that each Loan approved by NCB and
originated in the name of FoodService pursuant to this Agreement will on the
applicable Closing Date be sold and assigned by FoodService to NCB in a
Purchase. FoodService further agrees to cooperate fully in effectuating the sale
and assignment of Loans to NCB.
SECTION 2.02 Purchases. (a) Subject to the terms and conditions
hereof, until the Commitment Termination Date, the Seller shall from time to
time sell to the Buyer and the Buyer shall purchase at the Purchase Price from
the Seller each Loan originated by NCB in the name of FoodService (each, a
"Purchase"). The aggregate Purchases of Loans other than Large Loans shall not
exceed the Maximum Purchase Amount. The aggregate Purchases of Large Loans shall
have no limitation.
(b) At the time of each Purchase, Seller does hereby assign, sell,
set-over, transfer and otherwise convey to the Buyer, without recourse (but
subject to Seller's covenants, representations and warranties specifically
provided herein), all of Seller's right, title and interest in, to and under (i)
each Loan purchased on the date of such Purchase and any and all moneys of
whatsoever nature payable pursuant to each such Loan, (ii) all rights, powers,
and remedies of Seller under or in connection with each such Loan, whether
arising under the terms of such Loan, by statute, at law or in equity, or
otherwise arising out of any default by the Obligor under such Loan, including
all rights to exercise any election or option or to make any decision or
determination or to give or receive any notice, consent, approval or waiver
thereunder, (iii) all security interests and lien rights of Seller in each item
of Collateral pledged to secure any such Loan, all additions, alterations,
accessions or modifications thereto or replacement of any part thereof, and all
intangibles and other rights associated with the Collateral, (iv) all rights of
Seller under each Related Document, in each case as the same may be modified,
amended, supplemented or restated from time to time, (v) all documents of title,
books and records concerning the foregoing property (including all computer
programs, tapes, disks and related items containing any such information), and
(vi) all proceeds, products, rents or profits of the foregoing of any nature
whatsoever, including all Net Liquidation Proceeds (collectively, the
"Property").
(c) In connection with each transfer, sale and assignment of a Loan, the
Buyer hereby agrees to assemble as of the date of each Purchase the Loan File
with respect to such Loan, which shall include, but not be limited to, the
following:
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(i) the original Note, endorsed by NCB, as agent for Seller, as
follows: "Pay to the order of National Consumer Cooperative Bank, without
recourse" and signed by NCB, as agent for Seller;
(ii) executed original counterparts of the Related Documents;
(iii) With respect to Loans secured by mortgages on real property, (A)
the original mortgage, which shall either be in a form ready for recording
or have evidence of recording thereon; and (B) the original assignment of
mortgage from Seller (executed by NCB, as agent for the Seller) endorsed as
follows: "National Consumer Cooperative Bank," with evidence of recording
thereon; and
(iv) copies of all UCC-1 financing statements (or UCC-3 assignments to
financing statements) identifying each Loan, related Collateral and Related
Documents and naming either (A) the Obligor, as debtor, the Seller, as
secured party, assignor and the Buyer, as assignee, or (B) the Buyer as
secured party and Seller as debtor, to be filed in Kentucky.
(d) It is the intention of the parties to this Agreement that each
conveyance of Seller's right, title and interest in and to the Property pursuant
to this Agreement shall constitute a purchase and sale and not a loan. If,
notwithstanding the foregoing, the conveyance of the Property to the Buyer
hereunder is characterized by any third party as a pledge, the parties intend
that Seller shall be deemed hereunder to have granted to the Buyer a first
priority perfected security interest in all of Seller's right, title and
interest in, to and under the Loans, the Notes, the related Collateral and
Related Documents, and all monies due or to become due with respect thereto
after the applicable Closing Date, and that this Agreement shall constitute a
security agreement under applicable law.
SECTION 2.03 Commitment Termination Date. The Commitment Termination Date
may be extended by mutual agreement of the Seller and the Buyer. Upon written
notice to Buyer, the Seller may terminate the Loan origination and sale program
established by this Agreement.
SECTION 2.04 Authorization and Agency. The Seller hereby appoints and
authorizes NCB to act as the Seller's agent in connection with the processing,
documenting and originating of Loans under this Agreement, and to take such
actions on behalf of the Seller and to exercise such powers as are delegated to
NCB hereby and as are reasonably incidental to accomplishing the agency created
under this Agreement. NCB hereby accepts such appointment and agrees to act as
agent for the Seller in
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processing, documenting and originating Loans for the purpose of selling such
Loans to the Buyer. In acting as agent for the Seller in connection with the
origination of Loans in the name of the Seller, NCB shall use the same diligence
and practices as it uses in processing and originating loans for its own
account.
[End of Article II]
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ARTICLE III
CLOSING PROCEDURE; CONDITIONS TO PURCHASE
SECTION 3.01 Payment. Subject to Section 3.04, on each Closing Date, the
Buyer shall cause to be paid to Seller the Purchase Price of each Loan sold by
the Seller to Buyer on such Closing Date by disbursing the proceeds of such Loan
to the related Obligor's intended payees (which may include the Seller) as
approved by the Buyer.
SECTION 3.02 Effective Date. Each sale made pursuant to Section 2.02 shall
be effective, and all right, title and interest in the Loans and the related
Property so sold shall pass to the Buyer at such time as Buyer shall pay the
Purchase Price in respect thereof.
SECTION 3.03 Buyer's Conditions Precedent to Acceptance. The obligation of
Buyer to cause the Purchase Price to be paid on each Closing Date is subject to
the fulfillment on such Closing Date of each of the following conditions
(relating only to the Loan or Loans purchased on each such Date):
(a) No Termination Event, and no event which with the giving of notice or
passage of time or both would constitute a Termination Event shall have occurred
and be continuing;
(b) Each representation and warranty of the Seller set forth in Section
4.01 shall be true and correct in all material respects;
(c) The Guaranty Agreement shall be in full force and effect and shall not
have been terminated.
(d) Each representation and warranty of Guarantor set forth in Article 3.01
of the Guaranty Agreement hereof shall be true and correct in all material
respects;
(e) The Buyer shall have received, with respect to each Loan and the
related Collateral, (i) either receipt-stamped acknowledgment copies or copies
in proper form for filing of UCC-1 financing statements naming the Obligor, as
debtor, the Seller, as secured party, and the Buyer, as assignee, and (ii) the
original mortgage and assignment to NCB, which has evidence of recording thereon
or is in a proper form for recording, for each jurisdiction in which, in the
Buyer's judgment, filings are necessary or desirable to perfect the Buyer's
interest in the Loans and related Collateral.
(f) The Buyer shall have determined that each Loan and the related
Collateral comply with NCB's general credit and underwriting standards.
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<PAGE> 22
SECTION 3.04 Additional Delivery Requirements for Initial Closing Date. The
obligation of the Buyer to perform any of its obligations under this Agreement
shall be further subject to satisfaction of each of the following delivery
requirements on the Initial Closing Date (or on the date specified below) to the
reasonable satisfaction of Buyer:
(a) Buyer shall have received the Guaranty Agreement duly executed by the
Guarantor;
(b) The Buyer shall have received a receipt-stamped acknowledgment copy of
a Uniform Commercial Code financing statement on Form UCC-l naming Buyer as
"Secured Party" and executed by Seller as "Debtor" covering the Loans sold
pursuant to this Agreement, related Notes, related Collateral, the Related
Documents and the proceeds thereof, from the appropriate offices in the State of
Kentucky;
(c) Buyer shall have received an opinion of counsel for FoodService dated
such date and in a form reasonably acceptable to Buyer, including an opinion to
the effect that this Agreement and the Guaranty Agreement are the legal, valid
and binding obligations of FoodService, enforceable against FoodService under
the laws of the State of Kentucky;
(d) Buyer shall have received in form and substance reasonably satisfactory
to it a certified copy of a resolution adopted by the Board of Directors of
FoodService, authorizing the execution, delivery and performance of this
Agreement and the Guaranty Agreement and the endorsement and sale of the Notes
under this Agreement, together with evidence of the authority and specimen
signatures of the persons who have signed this Agreement and the Guaranty
Agreement and endorse the Notes on behalf of FoodService and such other evidence
of corporate authority as Buyer may reasonably require; and
(e) Buyer shall have received officers' certificates from FoodService in
forms reasonably acceptable to Buyer.
SECTION 3.05 Seller's Conditions Precedent. (a) The obligations of Seller
to cooperate with Buyer in the origination of Loans and to sell Loans to Buyer
on the Initial Closing Date is subject to the following:
(i) The Seller shall have received an opinion of counsel for NCB dated
such date to the effect that this Agreement is the legal, valid and binding
obligation of NCB, enforceable against NCB under the laws of the State of
New York;
(ii) The Seller shall have received an officers' certificate from NCB
in a standard form;
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(iii) The Seller shall have received the Guaranty Agreement duly
executed by the Buyer; and
(iv) The Seller shall have received the Purchase Price or evidence of
payment of the Purchase Price, as appropriate.
(b) The obligations of Seller to cooperate with Buyer in the origination of
Loans and to sell Loans on each Closing Date shall be further subject to receipt
of evidence on such Closing Date to the reasonable satisfaction of Seller that
(i) each representation and warranty of the Buyer set forth in Section 4.02
shall be true and correct in all material respects, and a duly authorized
officer of Buyer shall have so certified to Seller in writing and (ii) the
Purchase Price for each Loan purchased on such Closing Date shall have been
paid.
[End of Article III]
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01 Seller's Corporate Representations and Warranties. Seller
represents and warrants to Buyer as of each Closing Date and as of the date of
execution of this Agreement as follows:
(a) Seller is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, is doing business only under
its given corporate name and the name FoodService Purchasing Cooperative, and is
qualified to do business in each other jurisdiction where the conduct of its
business or the ownership of its properties requires such qualification, and has
full corporate power, authority and legal right to carry on its business as
presently conducted, to own and operate its properties and assets, to execute,
deliver and perform this Agreement and to sell the Loans and related Property.
(b) The execution, delivery and performance by the Seller of this
Agreement, the endorsement of the Notes, the sale and assignment of any Loans,
related Notes and Related Documents and the security interest in the related
Collateral hereunder and the appointment of NCB as agent pursuant to Section
2.04 hereof have been duly authorized by all necessary corporate action of
Seller, do not require any shareholder approval or the approval or consent of
any trustee or the holders of any Debt of Seller, except such as have been
obtained (certified copies thereof having been delivered to Buyer), do not
contravene any law, regulation, rule or order binding on it or its Certificate
of Incorporation or Bylaws and do not contravene the provisions of or constitute
a default under any indenture, mortgage, contract or other agreement or
instrument to which Seller is a party or by which Seller or any of the Loans,
related Notes or Related Documents may be bound or affected.
(c) No Government Approval or filing or registration with any Governmental
Authority is required for the making and performance by Seller of this Agreement
or any assignment or the endorsement of the Notes or in connection with the sale
of the Loans and related Property contemplated hereby, except such as have been
heretofore obtained and are in full force and effect (certified copies thereof
having been delivered to Buyer).
(d) This Agreement has been duly executed and delivered by Seller and
constitutes, and any assignment and any endorsement of a Note when duly executed
and delivered will constitute, the legal, valid and binding obligation of the
Seller enforceable against Seller in accordance with its terms.
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(e) Except as described in Seller's Reports on Form 10-K, 10-Q or 8-K filed
with the Securities and Exchange Commission, there are no actions, proceedings,
investigations, or claims against or affecting Seller now pending before any
court, arbitrator or other Governmental Authority (nor to the knowledge of
Seller has any thereof been threatened nor does any basis exist therefor) which
if determined adversely to the Seller would be likely to have a material adverse
effect on the financial condition or operations of Seller or on Seller's ability
to perform its obligations under this Agreement, or under an endorsement of any
Note.
(f) The consolidated balance sheet of the Seller and its Affiliates and
Subsidiaries at October 31, 1995, and the related statements of income and
retained earnings of Seller and its Affiliates and Subsidiaries for the fiscal
year then ended, copies of which have been furnished to Buyer, fairly present
the financial condition of Seller and its Affiliates and Subsidiaries as at such
date and the results of operations of Seller and its Affiliates and Subsidiaries
for the fiscal year then ended, all in accordance with U.S. GAAP consistently
applied. Since that date, there has been no material adverse change in the
financial condition or operations of Seller or any of its Subsidiaries or
Affiliates.
(g) Neither Seller nor any of its Subsidiaries or Affiliates is in material
breach of or default under any agreement or agreements to which it is a party or
which are binding on it or any of its assets and which provide for the payment
of monies, the delivery of goods or the provision of services in amounts or with
values in the aggregate in excess of Five Hundred Thousand Dollars ($500,000).
(h) Seller's chief executive offices and the offices where such Seller
keeps records concerning the Loans and related Property are located at 950
Breckenridge Lane, Louisville, Kentucky 40232 or such other location to which
such offices are moved pursuant to Section 6.01(i) hereof.
(i) This Agreement, the financial statements referred to in Section 4.01(f)
and all other instruments, documents, certificates and statements furnished to
the Buyer by the Seller, taken as a whole, do not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements contained herein or therein not misleading.
(j) Seller is "eligible" to borrow from NCB under the provisions of the
Bank Act.
(k) Seller owns stock in NCB in an amount at least equal to one percent
(1%) of the aggregate Principal Balance of all Loans (excluding Large Loans)
purchased pursuant to this
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<PAGE> 26
Agreement.
SECTION 4.02 Buyer's Representations and Warranties. Buyer represents and
warrants to Seller as follows:
(a) Buyer is a financial institution duly organized, validly existing and
in good standing under the laws of the United States of America, and has full
corporate power, authority and legal right to execute, deliver and perform this
Agreement and to purchase the Loans and related Property and to accept its
appointment as agent pursuant to Section 2.04 hereof.
(b) Execution, delivery and performance by Buyer of this Agreement and the
purchase of the Loans and related Property hereunder have been duly authorized
by all necessary corporate action of Buyer, do not require any shareholder
approval or the approval or consent of any trustee or the holders of any
indebtedness of Buyer, do not contravene any law, regulation, rule or order
binding on it or its Articles of Association or Bylaws and do not contravene the
provisions of or constitute a default under any indenture, mortgage, contract or
other agreement or instrument to which Buyer is a party or by which Buyer or any
of its properties may be bound or affected.
(c) No Government Approval or filing or registration with any Governmental
Authority is required for the making and performance by Buyer of this Agreement
or in connection with any of the transactions contemplated hereby.
(d) This Agreement has been duly executed and delivered by Buyer and
constitutes the legal, valid and binding obligation of Buyer enforceable against
Buyer in accordance with its terms.
[End of Article IV]
23
<PAGE> 27
ARTICLE V
DOCUMENTATION, SERVICING AND COLLECTION
SECTION 5.01 Documentation, Servicing and Collections. The Buyer will
document and perform all servicing functions with respect to the Loans from the
date of their origination in compliance with all applicable laws. The Buyer
shall retain all Collections other than the amount required to be deposited into
the Reserve Account pursuant to Section 5.02 hereof.
SECTION 5.02 Reserve Account. The Buyer shall establish and maintain a
segregated bank account in the name of the Buyer, for the benefit of the
Guarantor (the "Reserve Account"). Unless and until a Guarantor Default shall
have occurred and be continuing, on each Reserve Deposit Date, the Buyer shall
deposit in the Reserve Account out of Collections previously received by the
Buyer an amount equal to the sum of, for each Loan, the product of (i) the
average outstanding Principal Balance during the period beginning on the last
Reserve Deposit Date and ending on the day before such Reserve Deposit Date,
times (ii) the applicable Reserve Spread, times (iii) a fraction, the
denominator of which is 360 and the numerator of which is the actual number of
days in the period described in clause (i) above. Moneys in the Reserve Account
shall be the functional equivalent of the Guaranty and shall, unless the
Guarantor notifies the Buyer that it will make the Guaranty Payment and the
Guarantor makes such Guaranty Payment when due, be first applied as Guaranty
Payments whenever any demand for payment on the Guaranty is made on the
Guarantor. Moneys in the Reserve Account shall be invested in the reasonable
discretion of the Buyer and investment earnings shall be retained in such
Account. If, at any time, the amount on deposit in the Reserve Account exceeds
the aggregate of the then-current Guaranty Amounts for all Loans, the Buyer
shall promptly distribute such excess to the Guarantor. Any amounts remaining in
the Reserve Account on the earlier of (i) termination of this Agreement or (ii)
the date on which the Guaranty Amount is reduced to zero shall be paid to the
Guarantor.
SECTION 5.03 Documentation and Servicing; Maintenance of System and Lien
Priority.
(a) The Buyer shall use the same diligence and practices in documenting,
servicing and collecting the Loans, the related Collateral and the Related
Documents as it uses in documenting, servicing and collecting all other
indebtedness evidenced by notes and related documents held for its own account
and, in any event, shall endeavor to collect or cause to be collected from each
Obligor the amounts as and when due and owing under such Obligor's Note and
Related Documents. In performing
24
<PAGE> 28
its duties hereunder, the Buyer shall take such actions with respect to the
Loans, Notes and Related Documents as, in its reasonable business judgment, it
may deem advisable to maintain or enhance receipt of timely Collections
thereunder. In addition, the Buyer shall use its best efforts to collect on any
Defaulted Loan so as to maximize Liquidation Proceeds and notwithstanding that a
Guaranty Payment may have been received with respect to a Defaulted Loan, shall
diligently pursue all efforts to collect on such Loan, including by liquidating
Collateral and by seeking to collect any deficiency against the related Obligor.
(b) The Buyer shall arrange and maintain with respect to the Loans, related
Notes and Related Documents, data processing, accounting and related services
adequate for the effective and timely performance of its servicing obligations
hereunder in accordance with good business practices and in compliance with all
applicable federal, state and local laws and regulations.
(c) The Buyer agrees to take all actions, including lien searches and
continuation statement filings, necessary or desirable to ensure that the liens
arising pursuant to the Related Documents and securing repayment of any
Obligor's indebtedness evidenced by a related Note will be maintained as
continuously perfected first priority (except in the case of Collateral which is
not Primary Collateral, in which event the Buyer shall take all actions to
maintain the priority sold and assigned hereunder) security interests (except as
otherwise approved by Buyer) in all applicable jurisdictions.
SECTION 5.04 Loan Reports. On the 10th day of each month (or if such day is
not a Business Day, the next succeeding Business Day), the Buyer shall deliver
to the Seller an updated Loan Report.
SECTION 5.05 Optional Repurchase of Defaulted Loans and after Obligor
Default. Seller will have the option to repurchase any Loan sold by Seller to
Buyer if (i) such Loan is a Defaulted Loan or (ii) an Obligor Default has
occurred and has then been continuing for at least thirty (30) days. Such Loan
shall be repurchased by Seller from Buyer upon at least five (5) Business Days'
notice to Buyer at a repurchase price equal to the Principal Balance of such
Loan plus accrued interest thereon to the date of repurchase.
[End of Article V]
25
<PAGE> 29
ARTICLE VI
SELLER'S COVENANTS
SECTION 6.01 Covenants. At all times prior to the later of (i) the
Termination Date or (ii) the date on which all obligations of the Seller under
this Agreement and of the Guarantor under the Guaranty Agreement have been
performed in full, Seller agrees to do all of the following unless the Buyer
shall otherwise consent in writing.
(a) Preservation of Corporate Existence, Etc. To preserve and maintain its
corporate existence, rights, and privileges in the jurisdiction of its
incorporation and will qualify and remain qualified as a foreign corporation in
each jurisdiction where such qualification is necessary or advisable in view of
the business and operations of Seller or the ownership of its properties.
(b) Compliance with Laws. To comply in all material respects with all laws,
regulations, rules and orders of Governmental Authorities applicable to Seller
or to its operations or property, except any thereof whose validity is being
contested in good faith by appropriate proceedings upon stay of execution of the
enforcement thereof.
(c) Other Obligations. To pay and discharge before the same shall become
delinquent (after giving effect to all applicable grace periods) all Debt, taxes
and other obligations for which Seller is liable or to which its income or
property is subject and all claims for labor and materials or supplies which, if
unpaid, might become by law a lien upon the assets of Seller, except any thereof
whose validity or amount is being contested in good faith by the Seller in
appropriate proceedings, and except other Debt, taxes and other obligations
which, in the aggregate do not exceed Five Hundred Thousand Dollars ($500,000);
provided, however, the covenant included in this Section 6.01(c) shall not
extend to any obligation of Seller identified in Section 6.01(h) or 7.01(f).
(d) Visitation; Records. At any reasonable time and from time to time, upon
48 hours written notice, to permit Buyer to (i) examine and make copies of
Seller's records, (ii) visit the properties of the Seller, and (iii) discuss the
affairs, finances and accounts of the Seller as they relate to the transactions
contemplated by this Agreement with any of its officers. The Seller will keep
adequate records and books of accounts in which complete entries will be made,
in accordance with U.S. GAAP, reflecting all financial transactions of the
Seller as they relate to the transactions contemplated by this Agreement.
26
<PAGE> 30
(e) Financial Information. To deliver to Buyer (i) as soon as available and
in any event within one hundred twenty days of the end of the Seller's fiscal
year, the financial statements of the Seller, together with the balance sheet
and income statements of the Seller, accompanied by the audit report thereon by
independent certified public accountants (which report shall be prepared in
accordance with U.S. GAAP and shall not be qualified by reason of restricted or
limited examination of any material portion of the Seller's records and shall
contain no disclaimer of opinion or adverse opinion); (ii) within 120 days of
the end of each fiscal year for the Seller, an Annual Report on Form 10-K for
such year filed by the Seller with the Securities and Exchange Commission; (iii)
as soon as available and in any event within sixty (60) days after the end of
each fiscal quarter of the Seller, the unaudited balance sheet and statement of
income and retained earnings of the Seller as of the end of such fiscal quarter
(including the fiscal year to the end of such fiscal quarter); (iv) within one
hundred twenty (120) days after the close of each fiscal year of the Seller, a
certificate signed by the chief financial officer of the Seller, stating that as
of the close of such fiscal year no Termination Event or other event which, with
notice or lapse of time or both would have become a Termination Event had
occurred and was continuing; (v) prompt notice of any material borrowings or
material adverse changes in Seller's financial condition; and (v) such other
statements, reports and other information as Buyer may reasonably request
concerning the financial condition.
(f) Notification. Promptly after learning thereof, to notify Buyer of (i)
the details of any action, proceeding, investigation or claim against or
affecting the Seller instituted before any court, arbitrator or Governmental
Authority or, to the Seller's knowledge, threatened to be instituted, which,
after taking into account the likelihood of success, might reasonably result in
a judgment or order against the Seller (in excess of insurance coverage and when
combined with all other pending or threatened claims), of more than Five Hundred
Thousand Dollars ($500,000); (ii) if the Seller or any member of the Controlled
Group gives or is required to give notice to the PBGC of any "reportable event"
(as defined in subsections (b)(1)(2)(5)(6) of Section 403 of ERISA) with respect
to any Plan (or the Internal Revenue Service gives notice to the PBGC of any
"Reportable Event" as defined in subsection (c)(2) of Section 4043 of ERISA and
the Seller attains knowledge thereof) which might constitute grounds for
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (iii) Seller's material breach of its
obligations under this Agreement; (iv) any circumstance or event of which a
Responsible Officer of the Seller has actual knowledge which materially impairs
or might reasonably be expected to impair an Obligor's ability to repay or
perform its obligations under, the
27
<PAGE> 31
related Loan; or (v) the occurrence of any Termination Event or other event
which, with notice or lapse of time or both, would constitute a Termination
Event.
(g) ERISA Compliance. To not and not allow any member of its Controlled
Groups or any Plan of any of them to: (i) engage in any "prohibited transaction"
as such term is defined in Section 4.06 or Section 2003(a) of ERISA; (ii) incur
any "accumulated funding deficiencies" (as such term is defined in Section 3.02
of ERISA) whether or not waived; (iii) terminate any Pension Plan in a manner
which could result in the imposition of a lien on any property of the Seller or
any member of their respective Controlled Groups pursuant to Section 4068 of
ERISA; or (iv) violate state or federal securities laws applicable to any Plan.
(h) No Name Change, Etc. To not change its name, identity or corporate
structure in any manner which could make any financing or continuation statement
filed hereunder seriously misleading within the meaning of Section 9-402(7) of
any applicable enactment of the Uniform Commercial Code without giving Buyer at
last sixty (60) days prior written notice thereof.
(i) Relocation of Offices. To give Buyer at least sixty (60) days prior
written notice of any relocation of its chief executive offices or the offices
where records concerning the Loans and related Property are kept.
(j) Bank Act Eligibility and Stock Ownership. To remain "eligible" to
borrow from NCB pursuant to the provisions of the Bank Act and to own NCB stock
in an amount at least equal to one percent (1%) of the aggregate Principal
Balance of all Loans (excluding Large Loans) purchased pursuant to this
Agreement.
[End of Article VI]
28
<PAGE> 32
ARTICLE VII
TERMINATION EVENTS
SECTION 7.01 Termination Events. The occurrence of any of the following
events shall constitute a "Termination Event" hereunder.
(a) Breach of Covenant. Seller shall fail to perform or observe any
covenant, obligation or term of Articles VI or VIII and such failure shall
remain unremedied for thirty (30) days after written notice thereof shall have
been given to Seller by the Buyer; or
(b) Guarantor Defaults. A Guarantor Default shall have occurred and be
continuing; or
(c) Voluntary Bankruptcy, Etc. Either Seller or any Subsidiary or Affiliate
of Seller shall: (1) file a petition seeking relief for itself under Title 11 of
the United States Code, as now constituted or hereafter amended, or file an
answer consenting to, admitting the material allegations of or otherwise not
controverting, or fail timely to controvert a petition filed against it seeking
relief under Title 11 of the United States Code, as now constituted or hereafter
amended; or (2) file such petition or answer with respect to relief under the
provisions of any other now existing or future applicable bankruptcy,
insolvency, or other similar law of the United States of America or any State
thereof or of any other country or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or an arrangement,
composition, extension or adjustment with creditors; or
(d) Involuntary Bankruptcy, Etc. An order for relief shall be entered
against either Seller or any Subsidiary or Affiliate of Seller under Title 11 of
the United States Code, as now constituted or hereafter amended, which order is
not stayed; or upon the entry of an order, judgment or decree by operation of
law or by a court having jurisdiction in the premises which is not stayed
adjudging it a bankrupt or insolvent under, or ordering relief against it under,
or approving as properly filed a petition seeking relief against it under the
provisions of any other now existing or future applicable bankruptcy, insolvency
or other similar law of the United States of America or any State thereof or of
any other country or jurisdiction providing for the reorganization, winding-up
or liquidation of corporations or any arrangement, composition, extension or
adjustment with creditors, or appointing a receiver, liquidator, assignee,
sequestrator, trustee or custodian of the Seller or any Affiliate or Subsidiary
of Seller, or of any substantial part of the property of Seller, or any
Affiliate or Subsidiary, as the case may be, or ordering the reorganization,
winding-up or liquidation of its affairs, or
29
<PAGE> 33
upon the expiration of one hundred twenty (120) days after the filing of any
involuntary petition against it seeking any of the relief specified in Section
7.01(c) or this Section 7.01(d) without the petition being dismissed prior to
that time; or
(e) Insolvency, Etc. Either Seller or any Affiliate or Subsidiary of the
Seller shall (i) make a general assignment for the benefit of its creditors or
(ii) consent to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, or custodian of all or a substantial part of the
property of Seller, or any Affiliate or Subsidiary, as the case may be, or (iii)
admit its insolvency or liability to pay its debts generally as they become due,
or (iv) fail generally to pay its debts as they become due, or (v) take any
action (or suffer any action to be taken by its directors or shareholders)
looking to the dissolution or liquidation of Seller, or any Affiliate or
Subsidiary, as the case may be; or
(f) ERISA. Either Seller or Guarantor or any member of the Controlled Group
shall fail to pay when due an amount amounts aggregating in excess of Five
Hundred Thousand Dollars ($500,000) which it shall have become liable to pay to
the PBGC or to a Plan under Section 515 of ERISA or Title IV of ERISA; or notice
of intent to terminate a Plan or Plans (other than a multi-employer plan, as
defined in Section 4001(3) or ERISA), having aggregate Unfunded Vested
Liabilities in excess of Five Hundred Thousand Dollars ($500,000) shall be filed
under Title IV of ERISA by Seller or Guarantor, as the case may be, any member
of the Controlled Group, any plan administrator or any combination of the
foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to
terminate any such Plan or Plans.
SECTION 7.02 Consequences of Termination Event. If any Termination Event
shall occur and be continuing, then in any such case and at any time thereafter
so long as any such Termination Event shall be continuing, the Buyer may, at its
option, immediately terminate the Buyer's commitment to originate Loans in the
name of the Seller and to make any Purchases hereunder. In addition, upon the
occurrence of any Termination Event specified in (c), (d), or (e) of Section
7.01 or a Termination Event arising out of Guarantor's insolvency or involvement
in a voluntary or involuntary bankruptcy proceeding, subject to the provisions
of Section 8.13, this Agreement shall automatically and immediately terminate.
In addition, Buyer may pursue all other rights and remedies available herein and
by applicable law.
SECTION 7.03 Remedies of a Secured Party. Following the occurrence of a
Termination Event, the Buyer shall have all remedies provided by law and without
limiting the generality of the foregoing shall have the following remedies: (a)
the remedies of a secured party under the Uniform Commercial Code;
30
<PAGE> 34
(b) the right to make notification and pursue collection or, at Buyer's option,
to sell all or any part of the Loans and related Property; (c) the right to
exercise all of owner's or secured party's rights under the Loans and related
Property; and (d) to the extent that notice shall be required by law to be
given, Seller agrees that a period of twenty (20) days from the time the notice
is sent shall be a reasonable period of notification of a sale or other,
disposition of the Loans and related Property.
[End of Article VII]
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<PAGE> 35
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 Further Assurances. Each party hereto agrees to execute and
deliver to the other party and to perform all such other acts as the other party
may reasonably request to carry out the transactions contemplated by this
Agreement. Without limiting the foregoing, Buyer agrees to endorse without
recourse the Note related to any Loan being resold to Seller pursuant to
Articles II or IV, and to execute assignments and related Uniform Commercial
Code financing statements to evidence the assignment of the Related Documents to
Seller.
SECTION 8.02 No Waiver: Remedies Cumulative. No failure by the Seller or
Buyer to exercise, and no delay in exercising, any right, power or remedy under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or remedy under this Agreement preclude any
other or further exercise thereof or the exercise of any other right, power, or
remedy. The rights and remedies provided herein are cumulative and not exclusive
of any right or remedy provided by law.
SECTION 8.03 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 8.04 Consent to Jurisdiction; Waiver of Immunities. The Buyer and
Seller hereby irrevocably submit to the jurisdiction of any state or federal
court sitting in the District of Columbia in any action or proceeding brought to
enforce or otherwise arising out of or relating to this Agreement and
irrevocably waive to the fullest extent permitted by law any objection which
they may now or hereafter have to the laying of venue in any such action or
proceeding in any such forum, and hereby further irrevocably waive any claim
that any such forum is an inconvenient forum. The parties agree that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in any other jurisdiction by suit on the judgment or in any other
manner provided by law.
SECTION 8.05 Notices. All notices and other communications provided for in
this Agreement shall be in writing or (unless otherwise specified) by telex,
telegram or cable and shall be sent for next Business Day delivery to each party
at the address set forth under its name on the signature page hereof, or at such
other address as shall be designated by such party in a written notice to each
other party. Except as otherwise specified, all such notices and communications
if duly given or made shall be effective upon receipt.
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<PAGE> 36
SECTION 8.06 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective Successors and assigns.
Notwithstanding the foregoing, the Seller may not assign or otherwise transfer
all or any part of its rights or obligations hereunder without the prior written
consent of the Buyer, and any such assignment or transfer purported to be made
without such consent shall be ineffective. Buyer may at any time sell, assign or
transfer its rights hereunder, the Loans and related Property or participations
therein without the consent of the Seller or the Guarantor.
SECTION 8.07 Capital Markets Funding. Seller hereby agrees to cooperate
with Buyer in making such reasonable modifications to this Agreement and the
Related Documents, in executing such other documents and certificates, in
causing to be prepared and delivered such opinions, certificates, financial
reports and letters, and in taking such other actions, including obtaining
interest rate protection agreements and an opinion of counsel relating to New
York law, as are reasonably necessary to achieve capital markets funding of the
Loans and the related Property or to improve the execution of such funding. The
Buyer shall be responsible for all fees and expenses in connection with a
capital markets funding of the Loans except for any fees and expenses incurred
by the Seller or its legal counsel or agents up to $2,500. The Buyer shall be
responsible for any fees and expenses of Seller's counsel in excess of $2,500,
provided that the Seller shall be responsible for the cost of obtaining a New
York law opinion with respect to the enforceability of this Agreement and the
Guaranty Agreement from a law firm of FoodService's choice reasonably acceptable
to NCB.
SECTION 8.08 Confidentiality. (a) The Buyer shall maintain the
confidentiality of any nonpublic information with respect to the Seller and the
Obligors obtained by it in connection with the origination and sale of Loans as
contemplated in this Agreement; provided that Buyer may disclose any such
nonpublic information that becomes public through no violation of this provision
and, provided further that, except as and subject to the provisions set forth
below, Buyer may disclose any such information to any party involved in
providing capital markets funding for the Loans, including, but not limited to,
any actual or prospective party providing such financing, and/or any actual or
prospective provider of credit enhancement, including liquidity support, in
connection with such financing, any rating agency, and to any officers,
directors, employees, outside accountants and lawyers of any of the foregoing,
provided, however, that as a condition of such disclosure, the Buyer shall use
its best efforts to cause such person(s) to agree to be bound by confidential
covenants no less favorable to Seller than those contained in this Section 8.08.
In addition, Buyer may disclose any such nonpublic information pursuant to any
order, subpoena or request of any judicial, administrative or regulatory
authority, provided that the Buyer gives the Seller written notice of such
33
<PAGE> 37
order, subpoena or request prior to disclosure of such nonpublic information.
Unless the Buyer reasonably and in good faith determines that such action
materially adversely affects its interests, Buyer shall give FoodService
sufficient notice to contest such request, order or subpoena in a court of
competent jurisdiction.
(b) The Buyer shall maintain and shall cause each of its employees and
officers to maintain the confidentiality of the confidential information with
respect to the Seller or each Obligor and their respective businesses obtained
by it in connection with the transactions contemplated herein.
SECTION 8.09 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall as to such jurisdiction be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties waive any provision of law which
renders any provision hereof prohibited or unenforceable in any respect.
SECTION 8.10 Attorney's Fees. In the event it is necessary for any party
hereto or its Successors or assigns to institute suit in connection with this
Agreement or the breach thereof, the prevailing party in such suit shall be
entitled to reimbursement for its reasonable costs, expenses and attorney's fees
incurred including fees incurred on any appeal.
SECTION 8.11 Limitation on Third Party Beneficiaries. No provision,
warranty, representation, or agreement herein, whether express or implied, is
intended to or shall be construed as conferring upon any Person not a party
hereto (including, without limitation, any Obligor) any rights or remedies
whatsoever.
SECTION 8.12 Term of Agreement. This Agreement shall terminate upon the
earlier to occur of (i) the reduction of the aggregate Principal Balance of the
Loans (including Liquidated Loans as to which there remain unpaid Liquidation
Losses) to zero and (ii) the date on which this Agreement is automatically
terminated following the occurrence of any of the Termination Events specified
in Section 7.02; provided, however, that (a) the rights and obligations accrued
to, or incurred by, the Buyer or the Seller prior to such termination, and (b)
the obligations of the Guarantor under the Guaranty Agreement, shall continue
until such rights or obligations expire in accordance with their terms or
applicable statutes of limitation.
SECTION 8.13 Entire Agreement; Amendment. This Agreement comprises the
entire agreement of the parties and may not be amended or modified except by
written agreement of the
34
<PAGE> 38
parties hereto. No provision of this Agreement may be waived except in writing
and then only in the specific instance and for the specific purpose for which
given.
SECTION 8.14 Headings. The headings of the various provisions of this
Agreement are for convenience of reference only, do not constitute a part
hereof, and shall not affect the meaning or construction of any provision
hereof.
SECTION 8.15 Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all parties hereto shall be
deemed to constitute a complete, executed original for all purposes.
[End of Article VIII]
35
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Loan Origination
and Purchase Agreement to be executed by their respective officers or agents
thereunto duly authorized as of the date first above written.
KFC NATIONAL PURCHASING COOPERATIVE, INC.,
d/b/a FOODSERVICE PURCHASING COOPERATIVE,
as Seller
By _____________________________________
Its _________________________________
Notice Address:
950 Breckenridge Lane
Louisville, Kentucky 40232
Attention: Chief Financial Officer
NATIONAL CONSUMER COOPERATIVE BANK,
as Buyer
By _____________________________________
Its _________________________________
Notice Address:
1401 Eye Street, N.W.
Suite 700
Washington, D.C. 20005
36
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert P. Peck and Thomas D. Henrion,
with full power to act without the other, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to sign any and all
post-effective amendments to the Registration Statement of KFC National
Purchasing Cooperative, Inc. (the "Cooperative") (File No. 33-56982), and the
Annual Report on Form 10-K of the Cooperative for the fiscal year ended October
31, 1996, and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the U.S. Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents and
each of them, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ William E. Allen Director, 12/11/96
- ---------------------------- Secretary
William E. Allen
/s/ James G. Cocolin Director 12/11/96
- ----------------------------
James G. Cocolin
/s/ Darrell M. Dunafon Director 12/11/96
- ----------------------------
Darrell M. Dunafon
/s/ Benny E. Edwards Director 12/11/96
- ----------------------------
Benny E. Edwards
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
- ---------------------------- Director, --------
Leon W. Harman Vice Chairman
/s/ Thomas D. Henrion Director, 12/11/96
- ---------------------------- President,
Thomas D. Henrion Chief Executive
Officer
/s/ Edward J. Henriquez, Jr. Director 12/11/96
- ----------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President, 12/11/96
- ---------------------------- Chief Financial Officer
William V. Holden (Principal Accounting Officer)
(Principal Financial Officer)
/s/ Paul A. Houston Director 12/11/96
- ----------------------------
Paul A. Houston
/s/ Grover G. Moss Director 12/11/96
- ----------------------------
Grover G. Moss
/s/ David G. Neal Director, 12/11/96
- ---------------------------- Treasurer
David G. Neal
/s/Robert P. Peck Director, 12/11/96
- ---------------------------- Chairman
Robert P. Peck
/s/ Edward W. Rhawn Director 12/11/96
- ----------------------------
Edward W. Rhawn
/s/ Jack M. Richards Director 12/11/96
- ----------------------------
Jack M. Richards
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
/s/ James B. Royster Director 12/11/96
- ----------------------------
James B. Royster
/s/ Dean M. Sorgdrader Director 12/11/96
- ----------------------------
Dean M. Sorgdrader
/s/ Calvin G. White Director 12/11/96
- ----------------------------
Calvin G. White
/s/ Ronald J. Young Director 12/11/96
- ----------------------------
Ronald J. Young
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,876
<SECURITIES> 0
<RECEIVABLES> 38,651
<ALLOWANCES> 1,329
<INVENTORY> 2,478
<CURRENT-ASSETS> 47,484
<PP&E> 3,549
<DEPRECIATION> 2,880
<TOTAL-ASSETS> 49,445
<CURRENT-LIABILITIES> 29,643
<BONDS> 3,000
0
0
<COMMON> 1,652
<OTHER-SE> 15,150
<TOTAL-LIABILITY-AND-EQUITY> 49,445
<SALES> 580,441
<TOTAL-REVENUES> 580,441
<CGS> 564,370
<TOTAL-COSTS> 564,370
<OTHER-EXPENSES> 11,006
<LOSS-PROVISION> 406
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 2,295
<INCOME-TAX> 909
<INCOME-CONTINUING> 1,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,386
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
