<PAGE> 1
As filed with the Securities and Exchange Commission on February 3, 1997
Registration No. 33-56982
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KFC NATIONAL PURCHASING COOPERATIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
5199
(Primary standard industrial classification code number)
61-0946155
(I.R.S. Employer Identification No.)
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950 Breckinridge Lane
Louisville, Kentucky 40207
(502) 896-5900
(Address, including zip code and telephone number, including area
code, of registrant's principal executive offices)
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Thomas D. Henrion, President
KFC NATIONAL PURCHASING COOPERATIVE, INC.
P.O. Box 32033
Louisville, Kentucky 40232
(502) 896-5900
(Name, address including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
R. James Straus
James A. Giesel
BROWN, TODD & HEYBURN PLLC
3200 Providian Center
Louisville, Kentucky 40202-3363
(502) 589-5400
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[facing sheet continues]
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Approximate date of commencement of the proposed sale to the public
As soon as practicable after this amendment to the Registration
Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the Securities
Act of 1933, check the following box.
/ X /
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
State ment shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may deter mine.
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KFC NATIONAL PURCHASING COOPERATIVE, INC.
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Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K.
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Form S-1 Item and Caption Heading in Prospectus
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1. Forepart of the Registration Forepart of the Registration State
Statement and Outside Front ment and Outside Front Cover Page of
Cover Page of Prospectus Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus
3. Summary Information, Risk Prospectus Summary
Factors and Ratio of Earnings *
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Capitalization
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Front Cover Page; Prospectus Summary;
Registered Dividend Policy; Patronage Dividend
Program; Capital Stock
10. Interests of Named Experts and *
Counsel
11. Information With Respect to the The Cooperative; History and Operating
Registrant Principle; Capital Stock;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Operations; Management; Dividend
Policy; Patronage Dividend Program;
Legal Proceedings; Financial Statements
12. Disclosure of Commission Indemnification and Limits on
Position on Indemnification for Monetary Liability
Securities Act Liabilities
</TABLE>
*Inapplicable or answer is in the negative
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PROSPECTUS
KFC NATIONAL PURCHASING COOPERATIVE, INC.
950 Breckinridge Lane
P. O. Box 32033
Louisville, Kentucky 40207
(502-896-5900)
598 Shares of Membership Common Stock, no
par value Series A through G, I, J and M through Q
1,559 Shares of Store Common Stock, no par value
(See "Capital Stock")
These shares are being offered only to owners and operators of Kentucky
Fried Chicken ("KFC") and Taco Bell retail outlets ("Operators").
No market for the Common Stock exists nor is any expected to develop.
The Cooperative expects to redeem shares of Membership Common Stock at a
redemption price of $10.00 per share from any holder which fails or ceases to
qualify as a member. The Cooperative has a right of first refusal with respect
to any con veyance of Store Common Stock. With respect to Store Common Stock
related to KFC retail outlets located in Canada, the Cooperative will enter into
an agreement to repurchase any such shares at the original purchase price at any
time after two years from the date of purchase. With respect to Store Common
Stock related to retail outlets located outside of Canada, the Cooperative may,
but is not obligated to, purchase Store Common Stock for not more than the
amount of the book value per share at the end of the preceding fiscal year from
any holder which no longer operates a retail outlet with respect to such Store
Common Stock, subject to certain limitations. If the Cooperative fails to
exercise its right of first refusal, the Store Common Stock may be sold or
otherwise transferred, but only to qualified Operators. Membership and Store
Common Stock should therefore be considered illiquid securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADE QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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PRICE UNDERWRITING DISCOUNTS PROCEEDS
TO OPERATORS AND COMMISSIONS(1) TO COMPANY(2)
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<S> <C> <C> <C>
Membership Common Stock
(Series A through G, I, J
and M through Q)
Per Share .......... $ 10 None $ 10
Total .............. $ 5,980 $ 5,980
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Store Common Stock
Per Share .......... $ 400 None $ 400
Total............... $ 623,600 $ 623,600
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</TABLE>
(1) The offering will be made through officers, directors, employees, and other
affiliates of the Cooperative. No selling commission will be paid by the
Cooperative. The Cooperative will not actively market the Common Stock but will
make a sale, upon the request of an Operator, if such sale may be made in
accordance with applicable state securities laws, if any. See "PLAN OF
DISTRIBUTION."
(2) Before deducting expenses, estimated at $15,000, to be paid by the
Cooperative.
The shares are being offered on a "best efforts" basis. There is no
scheduled termination date for this offering, no minimum required purchase, nor
have any arrangements been made to place the funds received in the offering in
escrow, in trust or to make other similar arrangements.
The date of this Prospectus is _______________, 1997.
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THE STOCK IS OFFERED ONLY IN UNITS CONSISTING OF ONE SHARE OF
MEMBERSHIP COMMON STOCK PER OPERATOR AND ONE SHARE OF STORE COMMON STOCK FOR
EACH RETAIL OUTLET OWNED AND OPERATED, EXCEPT THAT TO RETAIN THE BENEFITS OF
MEMBERSHIP IN THE COOPERATIVE PRESENT MEMBERS ARE, UNDER CERTAIN CIRCUMSTANCES,
REQUIRED TO PURCHASE ADDITIONAL SHARES OF STORE COMMON STOCK SO THAT UPON THE
PURCHASE ANY SUCH MEMBER WILL OWN ONE SHARE OF STORE COMMON STOCK FOR EACH
RETAIL OUTLET OWNED AND OPERATED.
THE COOPERATIVE WILL ACCEPT SUBSCRIPTIONS RECEIVED AND OFFER ITS SHARES
ON A CONTINUING BASIS FOR AS LONG AS, AND ONLY WITHIN THOSE JURISDICTIONS IN
WHICH, THE COMMON STOCK MAY BE LAWFULLY OFFERED.
No person is authorized by the Cooperative to give any information or
to make any representations other than those contained in this Prospectus in
connection with the offering described herein. This Prospectus does not
constitute an offer of any security other than the registered securities to
which it relates, or an offer by any person within any jurisdiction to any
person to whom such offer would be unlawful. The delivery of this Prospectus at
any time does not imply that the information herein is correct as of any time
subsequent to its date.
The Cooperative is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission.
Reports and other information filed by the Cooperative may be inspected
and copied at the Securities and Exchange Commission, Room 1024, 450 Fifth
Street N.W., Washington, D.C. 20549 and at the following regional offices of the
Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511;
7 World Trade Center, Suite 1300, New York, New York 10048; or copies may be
obtained from the Securities and Exchange Commission upon payment of the
applicable charges and a written request addressed to the Public Reference
Section, Securities and Exchange Commission, Room 1024, 450 Fifth Street N.W.,
Washington, D.C. 20549. Copies of such materials may also be obtained from the
website that the Commission maintains at http://www.sec.gov.
The Cooperative will provide annual reports to stockholders which will
contain financial information which has been audited and reported upon, and
opinions expressed by, an independent certified public accountant.
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TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY...............................................................6
SUMMARY FINANCIAL INFORMATION....................................................8
THE COOPERATIVE..................................................................8
PLAN OF DISTRIBUTION.............................................................9
CAPITALIZATION...................................................................9
USE OF PROCEEDS.................................................................10
HISTORY AND OPERATING PRINCIPLE.................................................10
History ..............................................................10
Operating Principle....................................................11
SELECTED FINANCIAL DATA.........................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................12
Analysis and Operations................................................12
Inflation..............................................................14
Capital Expenditures...................................................14
Liquidity and Capital Resources........................................14
OPERATIONS......................................................................15
Pricing Policy.........................................................15
Seasonality............................................................15
Equipment and Supplies.................................................16
Corn Program...........................................................16
Insurance Program......................................................16
Financing Programs.....................................................16
Equipment Staging......................................................17
Distribution...........................................................17
Principal Customers....................................................18
Sources of Supply......................................................19
Competition............................................................19
PepsiCo ..............................................................19
Expansion of Services..................................................20
Canadian Operations....................................................21
Trade Regulation Matters...............................................22
Properties.............................................................23
Employees..............................................................23
DIVIDEND POLICY.................................................................23
PATRONAGE DIVIDEND PROGRAM......................................................24
Introduction...........................................................24
Bylaw Provision........................................................24
Features of Program....................................................27
United States Tax Aspects of the Patronage Dividend Program............28
Patronage Dividend Program for Canadian Stockholders...................28
FEDERAL TAX CONSIDERATIONS......................................................29
MANAGEMENT......................................................................29
Directors and Officers.................................................29
Standing Committees....................................................33
Personnel Committee Interlocks and Insider Participation...............34
</TABLE>
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<TABLE>
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Compensation of Directors..............................................35
Transactions With Stockholders, Directors and Officers.................35
MEMBERSHIP......................................................................36
CAPITAL STOCK...................................................................36
Membership Common Stock................................................36
Store Common Stock.....................................................40
Reports to Stockholders................................................41
INDEMNIFICATION AND LIMITS ON MONETARY LIABILITY................................41
LEGAL PROCEEDINGS...............................................................42
LEGAL MATTERS...................................................................42
EXPERTS .......................................................................42
</TABLE>
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere
in this Prospectus and is qualified in its entirety by the detailed information
and financial statements appearing herein.
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SECURITIES OFFERED Membership Common Stock (Series A through G, I, J
and M through Q) and Store Common Stock
(collectively referred to as the "Common Stock").
See "CAPITAL STOCK."
STOCKHOLDER MEMBERS; Each Operator which is eligible to be a stockholder
ADDITIONAL SHARE in the Cooperative shall be a stockholder member in the
PURCHASE REQUIREMENTS Cooperative when and if that Oper ator (a) purchases
one share of the Cooperative's Membership Common Stock
and (b) purchases that number of shares of the Cooperative's
Store Common Stock which either (i) equals the total number
of KFC retail outlets located in the United States owned
and operated by that Operator, (ii) equals the total number
of KFC retail outlets located in any one country other than
the United States or Canada (a "Foreign Territory") owned
and operated by that Operator, (iii) equals the total number
of KFC retail outlets in Canada owned and operated by that
Operator, or (iv) equals the total number of Taco Bell
retail outlets wherever located, owned and operated by that
Operator. If a stockholder member at any time becomes an
owner and operator of additional KFC retail outlets within
the United States, Canada or a Foreign Territory, or of
additional Taco Bell outlets wherever located, as the case
may be, he shall purchase one additional share of Store
Common Stock for each such additional out let. The term
"member" or "stockholder member" when used in this
prospectus means Operators who have satisfied these
requirements. See "MEMBERSHIP."
PLAN OF DISTRIBUTION Securities will be offered through officers, directors,
employees, and other affiliates of the Cooperative. The
shares are being offered only to owners and operators of KFC
and Taco Bell retail outlets. Sales will be made only in
units consisting of one share of Membership Common Stock per
Operator and one share of Store Common Stock for each retail
outlet operated, except that to retain the benefits of
membership in the Cooperative present members are, under
certain circumstances, required to purchase additional
shares of Store Common Stock so that upon the purchase any
such member will own one share of Store Common Stock for
each retail outlet owned and operated. See "PLAN OF
DISTRIBUTION." For information concerning the offering of
shares in Canada pursuant to exemptions from Canadian
registration requirements, see "Operations-Canadian
Operations."
USE OF PROCEEDS Any net proceeds of the offering will be used to provide
working capital for the operations of the Cooperative.
The Cooperative is also offering Common Stock for certain
reasons other than to increase working capital.
The Cooperative has
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determined that offering shares to nonmember
Operators is in the Cooperative's best interests
notwithstanding the possibility that the costs of
the offering may equal or exceed the proceeds
from the sale of shares pursuant thereto. See
"USE OF PROCEEDS."
TRANSFER RESTRICTIONS Transfer of Common Stock is restricted. No market for it
exists, nor is any expected to develop. The Cooperative
expects to redeem shares of Membership Common Stock at a
redemption price of $10.00 per share from any holder which
fails or ceases to qualify as a member. With respect to
Store Common Stock related to KFC retail outlets located in
Canada, the Cooperative will enter into an agreement to
repurchase any such shares at the original purchase price at
any time after two years from the date of purchase. With
respect to Store Common Stock related to retail outlets
located outside of Canada, the Cooperative may, but is not
obligated to, purchase Store Common Stock for not more than
the amount of the book value per share at the end of the
preceding fiscal year from any holder which no longer
operates a retail outlet with respect to such Store Common
Stock, subject to certain limitations. If the Cooperative
fails to exercise its right, the Store Common Stock may be
sold or otherwise transferred, but only to qualified
Operators. 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. See
"CAPITAL STOCK."
PEPSICO In October 1986, PepsiCo acquired KFCC and KFC Management.
In October 1989, KFCC began with drawing its support
for the purchasing programs of the Cooperative and began
direct purchasing from suppliers and distributing to
KFCC-owned retail outlets through PepsiCo Food Systems, Inc.
("PFS"), a wholly owned subsidiary of PepsiCo. This decision
has had a significant effect on the operations of the
Cooperative. 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. PFS is now distributing to
substantially all of the KFCC-owned outlets in the United
States. See "OPERATIONS - PEPSICO."
</TABLE>
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SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended October 31,
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1996 1995 1994
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<S> <C> <C> <C>
Consolidated Statements of
Income:
Net Sales $580,441,000 $537,116,000 $528,010,000
Net Income 1,386,000 909,000 461,000
Consolidated Balance Sheets
(at end of period):
Working Capital 17,841,000 16,436,000 15,811,000
Total assets 49,445,000 42,831,000 42,767,000
Members' equity 16,802,000 15,349,000 14,398,000
</TABLE>
THE COOPERATIVE
KFC National Purchasing Cooperative, Inc. (the "Cooperative"), was
formed to serve as a national purchasing cooperative on behalf, and for the
benefit, of 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.
This offering is made to Operators which have not yet purchased
Membership Common Stock and/or which have not yet purchased Store Common Stock
with respect to each retail outlet they own and operate. The term "Operator"
when used in this prospectus 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
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<PAGE> 11
enhance the system of independent distributors available to retail outlet
operators.
The Cooperative, through its wholly-owned subsidiary, KFC Franchisee
Insurance Program, Inc. (the "Insurance Subsidiary"), sponsors programs of
property, casualty and workers' compensation insurance, and employee benefits,
including life, health, long-term disability and dental coverages for owners and
operators of fast food retail outlets. These programs are marketed through the
Cooperative's indirect subsidiary, Kenco Insurance Agency, Inc. (the "Insurance
Agency"). See "OPERATIONS - INSURANCE PROGRAM."
The Cooperative has an equipment staging operation with warehousing
facilities in Louisville, Kentucky.
The Cooperative has provided equipment financing from time to time
under certain circumstances for KFC franchisee members. In 1987, the Cooperative
initiated an equipment financing program to finance for franchisee members their
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.
PLAN OF DISTRIBUTION
The Common Stock offered hereby will be sold directly to Operators by
certain officers, directors, employees, and other affiliates of the Cooperative.
No such person will receive any commission or fee in connection with the sale.
The Cooperative will not actively market the Common Stock, and will make a sale
upon the request of an Operator, if such sale may be made in accordance with
applicable state securities laws, if any. The Common Stock is being offered on a
continuing basis, subject to applicable legal requirements.
As of October 31, 1996, 624 shares of Membership Common Stock and 5,946
of Store Common Stock were outstanding and held of record by 586 stockholders.
CAPITALIZATION
The following table shows the capitalization of the Cooperative as of
October 31, 1996, and as adjusted assuming all shares of Membership and Store
Common Stock offered hereby are sold:
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<TABLE>
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ADJUSTED
ASSUMING
ALL SHARES
OUTSTANDING OFFERED
OCTOBER 31, 1996 ARE SOLD
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Short-Term Indebtedness *............ $1,438,000 $1,438,000
Capital Stock:
Membership Common Stock,
(2,000 shares authorized),
598 shares offered,
no par value............... 624 shares 1,222 shares
Store Common Stock,
(10,000 shares authorized),
1,559 shares offered,
no par value............... 5,946 shares 7,505 shares
</TABLE>
* For information concerning the Cooperative's borrowing arrangements,
see Note 3 of "Notes to Consolidated Financial Statements."
The Membership Common Stock price of $10 per share was determined
arbitrarily and bears no relation to a stockholder member's equity, income or
other recognized criteria of value. The price of Store Common Stock was raised
on July 1, 1982, from $250 per share to $350 per share to limit dilution of
existing stockholder members' equity. On July 1, 1983, the price of Store Common
Stock was increased to $400 per share to reflect a further increase in
stockholder members' equity. On October 31, 1996, stockholder members' equity
was approximately $2,826 per share of Store Common Stock. The Cooperative
intends to keep the price of Store Common Stock at $400 per share through at
least October 31, 1997, in order to encourage new memberships in the
Cooperative.
USE OF PROCEEDS
After payment of expenses as set forth on the cover page of this
Prospectus, the net proceeds of the offering if all Common Stock offered hereby
is sold would be $614,580. THE COOPERATIVE DOES NOT EXPECT THAT ALL SHARES
OFFERED HEREBY WILL BE SOLD IN THE OFFERING. The cost of the offering may equal
or exceed the proceeds from the sale of Common Stock resulting therefrom. Any
net proceeds from the sale of Common Stock offered hereby will be used to
provide working capital. The Cooperative has undertaken the current offering for
four principal reasons: (i) to afford nonmember Operators a further opportunity
to join the Cooperative; (ii) to avoid any implication that nonmember Operators
are restrained in any way from becoming members and thereby participating in the
Cooperative and benefiting from all of the services and programs it provides;
(iii) to encourage all Operators, by virtue of membership, to utilize the volume
purchasing services of the Cooperative, thereby enhancing the possibility of the
Cooperative achieving economies of scale in its purchasing activities; and (iv)
to inform nonmembers of the developments in the Cooperative's structure and
operations that have occurred.
HISTORY AND OPERATING PRINCIPLE
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.
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<PAGE> 13
A primary premise upon which the Cooperative was founded was that
greater cost savings for Operators in the purchase of Equipment and Supplies
could be realized through one central procurement organization that made firm
purchase commitments, took title to goods, and made sales to Operators and
distributors, thereby relieving suppliers of certain costs of doing business
with numerous, small volume purchasers. These costs include credit, sales,
marketing, and billing expenses which would otherwise be expected to be
reflected ultimately in higher prices charged by the suppliers. Purchase
commitments made by the Cooperative also allow suppliers to plan production,
purchase raw materials, and control inventory levels, thereby further providing
suppliers with reduced costs.
In determining to organize the Cooperative, KFCC and the NFAC concluded
that, notwithstanding the inherent administrative complexity of a
member-controlled cooperative, the Cooperative better than any alternative,
could meet five important criteria:
- Provide potential for lowest delivered cost of Equipment and
Supplies;
- Promote confidence among Operators and KFCC that the best
interests of the entire KFC system would be served;
- Minimize complexity of legal issues;
- Support high product quality and consistency and maintain service
reliability; and
- Support competition among distributors and suppliers and allow for
free selection of distributors and suppliers outside the central
procurement system.
In August 1989, KFCC announced its intention to withdraw its support
for the purchasing programs of the Cooperative and to begin in October 1989
direct purchasing from suppliers and distributing to KFCC-owned retail outlets
through a wholly owned subsidiary of PepsiCo. The Cooperative's Board of
Directors has 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.
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SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended October 31,
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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 0 0 0
</TABLE>
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
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Cooperative's Canadian subsidiary were down by 8% as a result of the withdrawal
of KFC corporate stores in Canada that had previously combined their purchasing
with the Canadian franchisees. Taco Bell also showed a 10% decrease in sales
volume 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
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the allocation formula, all expenses, including provisions for losses, are
allocated 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.
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
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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.
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 "PATRONAGE DIVIDEND
PROGRAM."
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.
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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 totalling 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 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 $7.7 million and for the Life and Health Program was
$2.1 million.
FINANCING PROGRAMS
The Cooperative has provided or facilitated financing from time to time
under certain circumstances for its stockholder members. In April 1996, the
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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 "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
distribu tors who in turn, deliver the merchandise to Operators. Suppliers bill
the Cooperative, which, in turn, bills Operators and/or distributors for the
merchandise as shipped. The Cooperative takes title to the merchandise and
assumes the risks related to taking title. Except with respect to the
Cooperative's cob corn program and equipment staging program, the Cooperative
does not now take physical delivery of the merchandise, but is nevertheless
responsible for payment to the supplier.
Except when staged into equipment packages, certain restaurant
equipment sold by the Cooperative is generally shipped directly from the
manufacturer or the dealer to Operators rather than to local distributors.
Because the Cooperative extends short-term trade credit to its
customers, it bears the risk that accounts receivable may become uncollectible
or may not be paid in accordance with usual terms if the customer experiences
financial difficulty. The Cooperative has established a reserve for losses on
trade accounts receivable. See Note 2 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS."
KFCC has implemented a decision to have PepsiCo Food Systems, Inc.
("PFS"), a distributor which like KFCC and Taco Bell Corp. is a wholly owned
subsidiary
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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.
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
Management Corporation ("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 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
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$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.
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.
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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.
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 "CAPITAL STOCK--
MEMBERSHIP COMMON STOCK."
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
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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.
During fiscal 1995, the Cooperative reorganized a portion of its
business with concepts other than KFC and Taco Bell into the "Horizon Group."
The Horizon Group consolidates the Cooperative's business with smaller-volume
concepts, such as Long John Silver's, 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
- 21 -
<PAGE> 24
resources, supplemented by a small support staff in Canada. The Canadian
operations contributed approximately $50,613,000 in sales in fiscal 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--ANALYSIS OF OPERATIONS."
The Common Stock is offered in Canada pursuant to statutory exemptions
and rulings of the securities regulatory authorities of the provinces in which
Operators are located; the Common Stock is thus exempt from the applicable
provincial registration requirements. As a consequence of these statutory
exemptions and rulings, certain protections, rights and remedies provided by
applicable provincial securities legislation and regulation, including statutory
rights of rescission or damages provided thereunder, will not be available to
the Canadian stockholder members. However, upon execution and delivery by the
Operator of a subscription agreement and the issuance of the Common Stock, the
Cooperative agrees that the stockholder member shall have those rights of action
against the Cooperative for rescission and/or damages for a misrepresentation in
the prospectus as would be available to a U.S. purchaser of shares of the
Cooperative's Common Stock under the Securities Act of 1933, as amended, subject
to all restrictions, including applicable statutes of limitations, which a U.S.
purchaser of Common Stock would be subject to under similar circumstances. The
forum for any actions brought in connection with the Common Stock against the
Cooperative shall be in Jefferson County, Kentucky, with the Operator submitting
to the jurisdiction of the courts located in Kentucky.
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 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
- 22 -
<PAGE> 25
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.
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.
EMPLOYEES
The Cooperative presently has approximately 153 employees, including
temporaries. The Cooperative believes that its employee relations are generally
satisfactory.
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.
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<PAGE> 26
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 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
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<PAGE> 27
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 par ticipation agreements
with the Cooperative in such form as the President shall
prescribe from time to time. The Cooperative may operate on a
for-profit basis with respect to non-members.
9.2 Patronage Dividend Distributions.
(a) The Board of Directors is authorized, after
considering the Cooperative's need for capital and reserves,
to distribute as patronage dividends directly to each
stockholder member of the Cooperative amounts determined as
set forth below. Solely for the purpose of determining the
amount of patronage dividends distributable to a particular
stockholder member of the Cooperative, the Cooperative's
business with its stock holder 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
stockholder members and the value of business done by the
Cooperative with participating distributors resulting in
resales by such distributors to such stockholder members for
such use.
The amount distributable by the Cooperative as
patronage dividends directly to each stockholder member of the
Cooperative shall be based on
(A) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in KFC retail outlets
owned or operated by the stockholder member and the
value of business done by the Cooperative with
participating distributors resulting in resales by
such distributors to such stockholder member for such
use, to
(ii) the net earnings of the Cooperative
in the KFC Pool, plus
(B) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in Taco Bell retail
outlets owned or operated by the stockholder member
and the value of business done by the Cooperative
with participating distributors
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<PAGE> 28
resulting in resale by such distributors to such
stockholder member for such use, to
(ii) the net earnings of the Cooperative
in the Taco Bell Pool.
(b) The distribution described in subparagraph (a),
is among all stockholder members, shall be directly
proportional for each taxable year of the Cooperative to the
purchases by each stockholder member, whether such purchases
are direct or through a participating distributor.
9.3 Timing of Payment of Patronage Dividends. Each
distribution of patronage dividends shall be made within the
payment period beginning with the first day of a taxable year
for which the Cooperative claims a deduction for patronage
dividends paid in the form of such distributions and ending
with the 15th day of the 9th month following the close of such
taxable year.
9.4 Character of Distributions. Twenty percent or
more of the amount of each distribution shall be paid in cash
or by a "qualified check" as defined in Section 1388(c)(4) of
the Internal Revenue Code of 1986, as amended. All amounts of
such distributions not paid in money or by "qualified check"
shall be paid a "qualified written notice of allocation" as
defined in Section 1388(c)(1) of the Internal Revenue Code of
1986, as amended.
9.5 Consent to Stockholder Members. Membership in the
Cooperative by stockholder members shall constitute a consent
of each such member to include in its gross income the amount
of any patronage dividend which is paid with respect to direct
sales from the Cooperative, and indirect sales through
participating distributors in money, "qualified checks,"
"qualified written notices of allocation" or other property
(except "non-qualified written notices of allocation" as
defined in Section 1388(d) of the Internal Revenue Code of
1986, as amended) and which is received by it during the
taxable year from the Cooperative. Each stockholder member of
the Cooperative, through initiating or retaining its
membership after adoption of this Article IX of these Bylaws,
as amended from time to time, consents to be bound hereby. The
provisions of this Article IX, as amended from time to time,
shall be a contract between the Cooperative and each
stockholder member as fully as though each stockholder member
had signed a specific separate instrument in which the
stockholder member agreed to be bound by all of the terms and
provisions of this Article IX, as amended from time to time.
9.6 Application of Patronage Dividends to Amounts Due
the Cooperative. Notwithstanding any of the foregoing
provisions of this Article IX, the portion of any patronage
dividends which would otherwise be payable in cash under any
provision of this Article IX to a stockholder member may be
applied by the Cooperative to the payment of any indebtedness,
the repayment of which is in default, owed to the Cooperative
by any such stockholder member to the extent of such
indebtedness instead of being distributed in cash, provided,
however, that an amount equal to twenty percent (20%) (or, in
the
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<PAGE> 29
case of a stockholder member located in a jurisdiction to
which the special withholding requirements of Sections 1441
or 1442 of the Internal Revenue Code of 1986, as amended,
apply, thirty percent (30%)) of the total annual patronage
dividends distributable for the applicable year to any such
stockholder member shall nevertheless be paid in cash within
the period set forth in Section 9.3 if any such stockholder
member so requests in a writing received by the Cooperative
within thirty (30) days of the first day of the Cooperative's
fiscal year as established under Section 6.3.
FEATURES OF PROGRAM
The patronage dividend program implemented pursuant to the Bylaw
provision has the following, among other, features:
1. Members who are United States residents must consent to report any
patronage dividends received as gross income for federal income tax
purposes. The Cooperative will file with the Internal Revenue
Service a report, currently on Form 1099-PATR, of the amount of
patronage dividends paid to each member. Members resident of
countries other than the United States generally are subject to a
flat United States tax of 30% on the amount of patronage dividends
paid by the Cooperative. The Cooperative is required to withhold
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.
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<PAGE> 30
5. KFC Management and Harman are eligible as are all other members to
receive patronage dividends on the same basis as other members.
6. Distributions of patronage dividends are based solely on
patronage with the Cooperative and not on the basis of the
number of shares of Store Common Stock owned by a member. The
payment of dividends based on patronage with the Cooperative
necessarily reduces or eliminates funds available for
dividends based on the number of shares of Store Common Stock
owned.
7. Non-member Operators are ineligible to receive patronage dividends,
just as they are ineligible to receive dividends on Store Common
Stock.
8. The treatment of the Cooperative's payment of patronage
dividends under the federal income tax laws of the United
States is not free from uncertainty. See "UNITED STATES TAX
ASPECTS OF THE PATRONAGE DIVIDEND PROGRAM." If favorable tax
treatment of patronage dividends becomes unavailable, the
Cooperative will reevaluate the patronage dividend program and
may discontinue or modify it.
9. If the Cooperative is liquidated, any funds available after
redemption of Membership Common Stock will be distributed on
the basis of past patronage with the Cooperative rather than
number of shares of Store Common Stock owned.
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
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<PAGE> 31
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.
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.
FEDERAL TAX CONSIDERATIONS
Although the Cooperative expects to utilize net income, if any, for the
benefit of its members, the Cooperative will not be exempt from federal income
taxation as are certain other corporations operated as cooperatives.
The 70% dividends-received deduction is not available to corporate
recipients with respect to patronage dividends. Anticipated tax consequences
are described in "Patronage Dividend Program." Any dividends paid to United
States resident members on the basis of number of shares of Store Common Stock
owned would be taxed to the recipients as ordinary income, except that members
which are corporations would be entitled to the 70% dividends-received
deduction. Dividends paid to non-resident individuals, corporations,
partnerships, and all other types of entities would be subject to a flat 30%
United States tax.
MANAGEMENT
DIRECTORS AND OFFICERS
The Cooperative's Bylaws provide for a Board of Directors consisting of
up to twenty voting members (with sixteen voting members currently serving) plus
the Cooperative's President, who is a non-voting member. Up to nineteen
directors are 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. See "CAPITAL STOCK-MEMBERSHIP COMMON STOCK-VOTING RIGHTS." 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 owner or operator of a KFC or Taco Bell retail outlet ("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.
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<PAGE> 32
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 1997 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
Edward W. Rhawn 58 Director 1992 1999 Independent Chairman -- --
of Rhawn
Enterprises, Inc.
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
Positions Year First
and Offices Became
Currently Director or Term as Present Store Percent
held with Executive Director Series Principal Common Stock of Store
Name Age Cooperative Officer Expires Represented(*) Occupation Ownership Outstanding
- ---- --- ----------- ------- ------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- -----------------------
All directors and executive officers as a group (22 persons)++
* KFC Management has purchased one share of Series K Membership Common Stock. On
November 16, 1989, both directors representing KFC Management resigned as
members of the Board of Directors. KFC Management has not taken any action to
fill the two vacancies and has not indicated whether it will take any action in
the future to fill the vacancies. The total number of shares of Store Common
Stock listed as owned by directors and officers does not include the 2,028
shares of Store Common Stock believed by the Cooperative to be owned by KFC
Management or affiliates, representing approximately 34.0% of the Store Common
Stock outstanding.
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<PAGE> 34
** 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.
- 32 -
<PAGE> 35
During the last five years, Messrs. Allen, Cocolin, Dunafon, Edwards,
Harman, Henriquez, Houston, Marsella, 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.
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.
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.
- 33 -
<PAGE> 36
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 and met once during
fiscal 1995. 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.
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
- 34 -
<PAGE> 37
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.
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board of Directors, except the
Independent Director, are Operators or represent Operators and have purchased or
may purchase Equipment and Supplies from the Cooperative or from distributors
who
- 35 -
<PAGE> 38
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
"HISTORY AND OPERATING PRINCIPLE," "OPERATIONS--PRINCIPAL CUSTOMERS," "PEPSICO"
and Note 7 of the "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
MEMBERSHIP
Membership in the Cooperative is open to all Operators on a
nondiscriminatory basis. Each Operator desiring membership in the Cooperative is
required to purchase one share of Membership Common Stock regardless of the
number of retail outlets operated and to purchase that number of KFC shares of
Store Common Stock which equals either (i) the total number of KFC retail
outlets located in the United States owned and operated by that Operator, (ii)
the total number of retail outlets located in a Foreign Territory owned and
operated by that Operator, (iii) the total number of KFC retail outlets located
in Canada owned and operated by that Operator or (iv) the total number of Taco
Bell retail outlets wherever located owned and operated by that Operator. See
"CAPITAL STOCK--STORE COMMON STOCK--LIMITATIONS ON OWNERSHIP AND TRANSFER;
REDEMPTION. If a stockholder member at any time becomes an owner and operator of
additional KFC retail outlets within the United States, within a Foreign
Territory, or within Canada, or of additional Taco Bell retail outlets wherever
located, as the case may be, he shall purchase one additional share of Store
Common Stock for each such additional outlet. To assist the Cooperative in
negotiating purchase contracts, members are asked from time to time for a good
faith best estimate of purchasing intentions, but responses are not required as
a condition of membership. No purchase commitment is required as a condition of
membership or, except with respect to advance purchase commitments for certain
commodities, as a condition to purchasing from or through the Cooperative. As of
October 31, 1996, there were 624 stockholder members 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
</TABLE>
- 36 -
<PAGE> 39
<TABLE>
<S> <C> <C>
C - Connecticut, Delaware, District of Columbia, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont
D - Alaska, Hawaii, Idaho, Montana, Oregon, Washington and
Wyoming
E - Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and
Virginia
F - Illinois, Iowa, Minnesota, Nebraska, North Dakota, South
Dakota and Wisconsin
G - Arizona, California, Nevada and Utah
</TABLE>
Harman has purchased one share of Series H Membership Common Stock.
Scott's has purchased one share of Series I Membership Common Stock. Operators
of KFC retail outlets in Foreign Territories are entitled to purchase one share
of Series J Membership Common Stock. KFC Management has purchased one share of
Series K Membership Common Stock and the NFAC has purchased one share of Series
L Membership Common Stock. Operators of KFC retail outlets in Canada, including
Pepsi-Cola Canada Ltd., are entitled to purchase one share of Series M
Membership Common Stock.
The Series H and Series I Membership Common Stock held by Harman and
Scott's, respectively, 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.
- 37 -
<PAGE> 40
The various Series, number of shares of Store Common Stock required to
trigger a conversion into a new Series and the various Taco Bell regions are set
forth below:
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
-------- -------- --------
SERIES TACO BELL REGIONS NUMBER OF TACO BELL STORE SHARES
-------- ----------------- --------------------------------
<S> <C> <C>
N 1 through 6 Less than 400
- --------------------------------------------------------------------------------
O 1 through 6 Less than 650, but
400 or more
- --------------------------------------------------------------------------------
O 1, 2 and 3 Less than 900, but
650 or more
P 4, 5 and 6
- --------------------------------------------------------------------------------
O 1 and 2
P 3 and 4 900 or more
Q 5 and 6
</TABLE>
The Taco Bell regions listed in Column 1 below include the areas set
forth in the corresponding line(s) of Column 2 below.
<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
- 38 -
<PAGE> 41
Board of Directors, and Series K and Series L stockholders are entitled to elect
two members of the Board of Directors; provided, however, that until and unless
the holders of Series J and Series M Membership Common Stock hold 100 or more
shares of Store Common Stock purchased or held with respect to retail outlets
located in the specified region, the Series J or Series M member of the Board of
Directors shall be nominated by a holder of Series J or Series M Membership
Common Stock, as the case may be, but shall be elected by a plurality vote of
all the shares of Membership Common Stock entitled to vote at the annual meeting
of stockholders. In addition, when only Series N of the various Series N through
Series Q of Membership Common Stock established for Taco Bell Operators is
issued and outstand ing, 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
share, and any interest which Pepsi-Cola Canada Ltd. may have in KFC
Management's Series
- 39 -
<PAGE> 42
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. There is
no current intention to pay any dividends on Store Common Stock on a per share
basis. 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 Store Common
Stock. Store Common Stock may be transferred to persons, firms or entities who
qualify for membership in the Cooperative only if the
- 40 -
<PAGE> 43
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.
INDEMNIFICATION AND LIMITS ON MONETARY LIABILITY
Article VIII of the Cooperative's Certificate of Incorporation provides
that a director shall not be personally liable to the Cooperative or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Cooperative or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. Only
directors, not officers, may benefit from the provisions of Article VIII. The
limitations of liability extend only to the elimination of a recovery of a
monetary remedy. Shareholders may still seek equitable relief, such as an
injunction, against any action by a director that is inappropriate.
Article VII of the Cooperative's Bylaws provides for the
indemnification of officers or directors party to or threatened to be made a
party to any threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative or investigative against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred, if the
- 41 -
<PAGE> 44
officer or director acted in good faith and reasonably believed his actions were
not opposed to the best interests of the Cooperative. Officers and directors are
not indemnified for criminal actions where they have reason to believe their
conduct is unlawful, or in connection with any matter where the officer or
director is adjudged to have been liable for negligence or misconduct in the
performance of his duty, unless a court deems such officer or director to be
fairly and reasonably entitled to indemnity.
The Cooperative has obtained a policy of insurance under which the
Cooperative and its directors and officers are insured subject to specific
exclusions and deductible and maximum amounts against loss deriving from any
claim which may be made against the Cooperative or any director or officer of
the Cooperative by reason of any act done or alleged to have been done while
acting in their respec tive capacities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Cooperative pursuant to the foregoing provisions, or otherwise,
the Cooperative has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and therefore unenforceable.
LEGAL PROCEEDINGS
The Cooperative is named as a defendant in various actions in the
ordinary course of its business. The Cooperative believes these proceedings are
incidental to its business and are not likely to result in materially adverse
judgments.
LEGAL MATTERS
Brown, Todd & Heyburn PLLC, 3200 Providian Center, Louisville,
Kentucky, has passed upon the legality of the securities offered hereby.
EXPERTS
The consolidated financial statements and schedule of the Cooperative
as of October 31, 1996 and 1995, and for each of the years in the three-year
period ended October 31, 1996, have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
- 42 -
<PAGE> 45
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> 46
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> 47
Independent Auditors' Report
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.:
We have audited the consolidated balance sheets of KFC National Purchasing
Cooperative, Inc. (d/b/a FoodService Purchasing Cooperative, Inc.) and
subsidiaries as of October 31, 1996 and 1995, and the related consolidated
statements of income, members' equity, and cash flows for each of the years in
the three-year period ended October 31, 1996. These consolidated financial
statements 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.
KPMG Peat Marwick LLP
Louisville, Kentucky
December 5, 1996
F-1
<PAGE> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Registrant in connection with the
registration of the interests offered hereby, other than underwriting discounts
and commissions (of which there are none), are as follows:
<TABLE>
<S> <C>
Registration fee $ 0
NASD filing fee 0
"Blue Sky" filing fee and expenses
(including legal expenses) 2,000.00
Printing expenses 2,000.00
Legal fees and expenses 7,000.00
Accounting fees and expenses 3,500.00
Miscellaneous expenses 500.00
----------
Total $15,000.00
==========
</TABLE>
- -------------------
Item 14. Indemnification of Officers and Directors.
Article VIII of the Certificate of Incorporation of the Reg istrant
provides as follows:
Article VIII
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. Any repeal or modification of this paragraph by the
stockholders of the corporation shall be prospective only, and shall not
adversely affect any limitation on
<PAGE> 63
the personal liability of a director of the corporation existing at the time of
such repeal or modification.
Article VII of the Bylaws of the Registrant provides as follows:
7.1 Indemnification.
(a) The Cooperative shall indemnify any person who was or is a
party or is threatened to be made a party to any threat ened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Cooperative) by
reason of the fact that he is or was a director, officer, employee or agent of
the Cooperative, or is or was serving at the request of the Cooperative as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in con nection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Cooperative, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Cooperative, and, with respect to any criminal action or
proceeding, had reasonable cause to be lieve that his conduct was unlawful.
(b) The Cooperative shall indemnify any person who was or is a
party or is threatened to be made a party to any threat ened, pending or
completed action or suit by or in the right of the Cooperative to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Cooperative, or is or was serving at the
request of the Cooperative as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and rea sonably incurred by him in
connection with the defense or set tlement of such action or suit if he acted in
good faith and in a
- 2 -
<PAGE> 64
manner he reasonably believed to be in or not opposed to the best interests of
the Cooperative and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the Cooper ative unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent
of the Cooperative has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of this
Section 7.1, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
Section 7.1 (unless ordered by a court) shall be made by the Cooperative only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in subsections (a) and (b).
Such determination shall be made (1) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested Directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholder members.
(e) Expenses incurred by an officer or director in defending a
civil or criminal action, suit or proceeding may be paid by the Cooperative in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Cooperative as authorized in this Section 7.1. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
- 3 -
<PAGE> 65
(f) The indemnification and advancement of expenses provided
by, or granted pursuant to this Section 7.1 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) The Cooperative shall have power to purchase and maintain
insurance on behalf of any person who is or was a direc tor, officer, employee
or agent of the Cooperative, or is or was serving at the request of the
Cooperative as a director, officer, employee or agent of another corporation,
partnership, joint ven ture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Cooperative would have the power to
indemnify him against such liability hereunder.
(h) For purposes of this Section 7.1, references to the
Cooperative shall include, in addition to the resulting cor poration, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Section 7.1 with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this Section 7.1 references to "other
enterprises" shall include employee benefit plans; refer ences to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Cooperative"
shall include any service as a director, officer, employee or agent of the
Coopera tive which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in
- 4 -
<PAGE> 66
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Cooperative" as referred to in this Section 7.1.
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to this Section 7.1 shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) If so provided in the Cooperative's Certificate of
Incorporation, a director of the Cooperative shall not be person ally liable to
the Cooperative or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Cooperative or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
Item 15. Recent Sales of Unregistered Securities.
(a) Securities Sold. On December 8, 1992, the Cooperative sold one
share of its Series N Membership Common Stock (the "Share") for $10.00 to the
International Association of Taco Bell Franchisees, Inc. (the "IATBF").
(b) Underwriters and Other Purchasers. The Cooperative offered the
Share solely to the IATBF in a private offering.
(c) Consideration. The total consideration for the Share was $10.00.
No person received any commission or other such fee in connection with the sale.
(d) Exemption from Registration Claimed. The Cooperative relied upon
the exemption from registration contained in ss.4(2) of the Securities Act of
1933 with respect to the sale of the Share. The stock certificate representing
the Share is restricted as to transfer and legend. The Cooperative believes that
the IATBF has sufficient knowledge and experience to evaluate the merits of, and
is able to bear the economic risk of, the $10.00 investment.
- 5 -
<PAGE> 67
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
*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 Reg istrant, as
amended.
+4.2 Articles II, III, IV and IX of Bylaws of Registrant, as amended.
+5 Opinion of Brown, Todd & Heyburn as to the legality of the
securities registered.
+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 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/Breckin ridge, Ltd.
d/b/a The Springs and the Registrant.
***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.
- 6 -
<PAGE> 68
+10.8 Purchasing Affiliation Agreement dated as of June 15, 1994,
between the International Franchisee Advisory Council, Inc., and the Registrant.
+10.9 Supplemental Benefits/Consulting Agreement between Thomas D.
Henrion and the Registrant effective as of January 1, 1994.
****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.
+23.1 Consent of Brown, Todd & Heyburn is contained in their opinion
filed as Exhibit 5 hereto.
23.2 Report on Financial Statement Schedule and Consent of
Independent Auditors filed as part of Item 16(b).
24 Power of Attorney.
- -----------------------
+ Previously filed in Registration Statement (File No.
33-56982).
*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].
**Previously filed in Registration Statement (File No. 33-33801) with
the Securities and Exchange Commission on March 9, 1990.
***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].
- 7 -
<PAGE> 69
****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].
*****Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1996 [File No. 2-63640].
(b) Financial Statement Schedules.
Report on Financial Statement Schedule and Consent of
Independent Auditors
Schedule II-Valuation and Qualifying Accounts
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amend ment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
- 8 -
<PAGE> 70
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
- 9 -
<PAGE> 71
Report on Financial Statement Schedule
and Consent of Independent Auditors
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.:
The audits referred to in our report dated December 5, 1996, included the
related financial statement schedule for each of the years in the three-year
period ended October 31, 1996, included in the Registration Statement. This
financial statement schedule is the responsibility of the Cooperative's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such 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.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Louisville, Kentucky
January 31, 1997
S-1
<PAGE> 72
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-2
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Louisville, Commonwealth of Kentucky, on February 3, 1997.
KFC NATIONAL PURCHASING
COOPERATIVE, INC.
By /s/ Thomas D. Henrion
--------------------------------
Thomas D. Henrion, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
* Director/Secretary February 3, 1997
- ------------------------
William E. Allen
* Director February 3, 1997
- ------------------------
James G. Cocolin
* Director February 3, 1997
- ------------------------
Darrell M. Dunafon
* Director February 3, 1997
- ------------------------
Ben E. Edwards
Director, Vice February 3, 1997
- ------------------------ Chairman of the Board
Leon W. Harman
/s/ Thomas D. Henrion President and Chief February 3, 1997
- ------------------------ Executive Officer,
Thomas D. Henrion Director
</TABLE>
<PAGE> 74
<TABLE>
<S> <C> <C>
* Director February 3, 1997
- ------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President and February 3, 1997
- ------------------------ Chief Financial Officer
William V. Holden (Principal Accounting
Officer) (Principal
Financial Officer
* Director February 3, 1997
- ------------------------
Paul A. Houston
* Director February 3, 1997
- ------------------------
Grover G. Moss
* Director/Treasurer February 3, 1997
- ------------------------
David G. Neal
* Director, Chairman February 3, 1997
- ------------------------ of the Board
Robert P. Peck
* Director February 3, 1997
- ------------------------
Edward W. Rhawn
* Director February 3, 1997
- ------------------------
Jack M. Richards
* Director February 3, 1997
- ------------------------
James B. Royster
* Director February 3, 1997
- ------------------------
Dean M. Sorgdrager
* Director February 3, 1997
- ------------------------
Calvin G. White
</TABLE>
<PAGE> 75
<TABLE>
<S> <C> <C>
* Director February 3, 1997
- ------------------------
Ronald J. Young
By /s/ Thomas D. Henrion February 3, 1997
----------------------
Thomas D. Henrion
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Registration
Statement.
</TABLE>
<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>
