<PAGE> 1
As filed with the Securities and Exchange Commission on March 6, 1998
Registration No. 33-56982
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
POST-EFFECTIVE
AMENDMENT NO. 5 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
400 West Market Street
32nd Floor
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
Statement 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 determine.
<PAGE> 3
KFC NATIONAL PURCHASING COOPERATIVE, INC.
--------------
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K.
<TABLE>
<CAPTION>
Form S-1 Item and Caption Heading in Prospectus
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<S> <C> <C>
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 Operat
Registrant ing 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 State ments
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
<PAGE> 4
PROSPECTUS
KFC NATIONAL PURCHASING COOPERATIVE, INC.
950 Breckinridge Lane
P. O. Box 32033
Louisville, Kentucky 40207
(502-896-5900)
529 Shares of Membership Common Stock, no
par value Series A through G, I, J and M through Q
1,190 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 conveyance 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 ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING DISCOUNTS PROCEEDS
TO OPERATORS AND COMMISSIONS(1) TO COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Membership Common Stock
(Series A through G, I, J
and M through Q)
Per Share .......... $ 10 None $ 10
Total .............. $ 5,290 $ 5,290
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Store Common Stock
Per Share .......... $ 400 None $ 400
Total............... $ 476,600 $ 476,600
- ---------------------------------------------------------------------------------------------------------------
</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 _______________, 1998.
<PAGE> 5
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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<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PROSPECTUS SUMMARY................................................................................................5
SUMMARY FINANCIAL INFORMATION.....................................................................................7
THE COOPERATIVE...................................................................................................7
PLAN OF DISTRIBUTION..............................................................................................8
CAPITALIZATION....................................................................................................8
USE OF PROCEEDS...................................................................................................9
HISTORY AND OPERATING PRINCIPLE...................................................................................9
History ................................................................................................9
Operating Principle.....................................................................................10
SELECTED FINANCIAL DATA..........................................................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................................................12
Analysis and Operations.................................................................................12
OPERATIONS.......................................................................................................16
Pricing Policy..........................................................................................16
Seasonality.............................................................................................16
Corn Program............................................................................................16
Insurance Program.......................................................................................17
Financing Programs......................................................................................17
Equipment Staging.......................................................................................17
Distribution............................................................................................18
Co-op Bucks.............................................................................................19
Principal Customers.....................................................................................19
Sources of Supply.......................................................................................19
Competition.............................................................................................20
PepsiCo/Tricon..........................................................................................20
Expansion of Services...................................................................................21
Canadian Operations.....................................................................................22
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
Compensation Committee Interlocks and Insider Participation.............................................34
Executive Compensation..................................................................................34
Compensation of Directors...............................................................................35
Transactions With Stockholders, Directors and Officers..................................................36
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
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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<PAGE> 8
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.
<TABLE>
<S> <C>
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
PURCHASE REQUIREMENTS the Cooperative when and if that Operator (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
outlet. 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
</TABLE>
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<PAGE> 9
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/TRICON In October 1997, PepsiCo spun off its three primary
restaurant divisions, KFC, Taco Bell and Pizza Hut,
into a new public company, Tricon Global Restaurants,
Inc. ("Tricon"). Also during fiscal 1997, PepsiCo
sold its distribution subsidiary, PepsiCo Food
Systems, Inc. ("PFS"), to AmeriServe Food
Distribution, Inc. ("AmeriServe"). AmeriServe has
been and continues to be the second largest
Cooperative customer, purchasing supplies for
distribution to KFC franchisees. On January 29, 1998,
AmeriServe announced that it had signed a definitive
merger agreement under which AmeriServe will acquire
ProSource, Inc. ("ProSource"), the Cooperative's
sixth largest distributor customer during fiscal
1997. The merger is expected to close in the second
quarter of 1998. The impact of Tricon's formation,
AmeriServe's acquisition of PFS and merger with
ProSource on the business of the Cooperative remains
uncertain. See "OPERATIONS - PEPSICO/TRICON."
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SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended October 31,
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1997 1996 1995
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<S> <C> <C> <C>
Consolidated Statements of
Income:
Net Sales $600,132,000 $580,441,000 $537,116,000
Net Income 748,000 1,386,000 909,000
Consolidated Balance Sheets
(at end of period):
Working Capital 18,305,000 17,841,000 16,436,000
Total assets 49,800,000 49,445,000 42,831,000
Members' equity 17,586,000 16,802,000 15,349,000
</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 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 Tricon Global Restaurants (Canada),
Inc., and (iii) owners and operators of KFC franchised retail outlets.
The Cooperative makes volume purchases of various equipment, food,
packaging, and other consumable or disposable supplies ("Equipment and
Supplies") from manufacturers and suppliers for sale to Operators whether or not
they are members of the Cooperative, as well as to independent distributors who
supply Operators. The Cooperative endeavors to obtain low purchase prices by
making volume purchase commitments at fixed prices and by assuming other
procurement functions and risks that reduce the suppliers' costs. Cost savings
will be dependent upon a number of factors, including the volume of purchases
and resales to Operators and distributors, negotiation of favorable purchase
agreements, competitive conditions and the amount of overhead expenses. In an
effort to achieve additional cost savings, the Cooperative is actively working
with its suppliers and distributor customers with electronic data interchange.
The Cooperative hopes to achieve cost savings for its members; however, there
can be no assurance that it will be able to do so on a sustained basis.
The Cooperative provides its members with advisory services related to
the distribution of Equipment and Supplies, including industry data on
distribution costs and service levels to enable the members to negotiate more
effectively with distributors. The Cooperative also sponsors a Distributor
Monitoring Program to enhance the system of independent distributors available
to retail outlet operators.
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<PAGE> 11
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. See "OPERATIONS -
CO-OP BUCKS."
As of October 31, 1997, 665 shares of Membership Common Stock and 6,091
of Store Common Stock were outstanding and held of record by 656 stockholders.
CAPITALIZATION
The following table shows the capitalization of the Cooperative as of
October 31, 1997, and as adjusted assuming all shares of Membership and Store
Common Stock offered hereby are sold:
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<TABLE>
<CAPTION>
ADJUSTED
ASSUMING
ALL SHARES
OUTSTANDING OFFERED
OCTOBER 31, 1997 ARE SOLD
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<S> <C> <C>
Short-Term Indebtedness *....... $ 572,000 $ 572,000
Capital Stock:
Membership Common Stock,
(2,000 shares authorized),
529 shares offered,
no par value............... 665 shares 1,194 shares
Store Common Stock,
(10,000 shares authorized),
1,190 shares offered,
no par value............... 6,091 shares 7,281 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, 1997, stockholder members' equity
was approximately $2,887 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, 1998, 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 $466,290. 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 benefitting 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. In response to KFCC's action, the
Cooperative's Board of Directors approved sales by the Cooperative through
distributors and directly of equipment to certain other restaurant systems
including Taco Bell. See "OPERATIONS -PEPSICO/TRICON" 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." In fiscal 1997, the Cooperative established a new
subsidiary to develop the Cooperative's sales of equipment to quick service
restaurant operators located outside of the United States and Canada. See
"OPERATIONS -- EXPANSION OF SERVICES."
In 1997, the NFAC was merged with the KFC National Council and
Advertising Cooperative, Inc. (the "NCAC"). The NCAC has replaced the NFAC as a
stockholder member of the Cooperative.
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.
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<PAGE> 14
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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Income:
Net sales $600,132 $580,441 $537,116 $528,010 $501,487
Income before
patronage dividend
and income taxes 4,153 5,057 2,771 1,343 2,055
Patronage dividend 2,890 2,762 1,246 569 888
Net income 748 1,386 909 461 749
Consolidated Balance Sheets
(at end of period):
Total assets $49,800 $49,445 $42,831 $42,767 $43,364
Long-term obligation 3,000 3,000 3,000 3,000 0
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS AND OPERATIONS
Fiscal Years Ended October 31, 1997, 1996, and 1995
The Cooperative offers supplies and most major equipment used
principally by KFC and Taco Bell Operators. The Cooperative's increases in net
sales 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 1997 were $600,132,000 compared to $580,441,000
for fiscal 1996, an increase of 3.4%. The fiscal 1997 increase is primarily
attributable to sales related to the Taco Bell, Dairy Queen and Fazoli's
concepts and sales to KFC Operators located in the United States. The
Cooperative's food and packaging sales increased 2.2% in fiscal 1997 from fiscal
1996, with significant percentage increases from the Fazoli's and Long John
Silver's concepts. The Cooperative's equipment sales increased by 12.2% in
fiscal 1997 from fiscal 1996. Overall sales to KFC-U.S. increased approximately
2.5% in fiscal 1997 from fiscal 1996. KFC-U.S. equipment sales increased by
approximately 19.2% in fiscal 1997. Sales related to the Cooperative's Canadian
subsidiary increased approximately 1.5% in fiscal 1997 from fiscal 1996,
primarily driven by increased equipment sales. Dairy Queen sales increased
approximately 3.3% for fiscal 1997 compared to fiscal 1996, attributable
primarily to an increase in food and packaging sales. Taco Bell sales increased
approximately 9.7% for fiscal 1997 compared to fiscal 1996, following a decrease
in sales during fiscal 1996 compared to fiscal 1995. Sales related to Fazoli's
increased 5.4% in fiscal 1997 compared to fiscal 1996.
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
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<PAGE> 16
approximately $14,381,000, primarily equipment sales. The Fazoli's sales
reflected an increase of approximately $10,115,000 compared to fiscal 1995.
In October 1997, PepsiCo spun off its three primary restaurant
divisions -- KFC, Taco Bell and Pizza Hut -- into a new public company, Tricon
Global Restaurants, Inc. ("Tricon"). Also during fiscal 1997, PepsiCo sold its
restaurant distribution subsidiary, Pepsi Food Systems ("PFS") to AmeriServe
Food Distribution, Inc. ("AmeriServe"). AmeriServe has been and continues to be
the second largest Cooperative customer, purchasing goods for distribution to
primarily KFC franchisees. When AmeriServe purchased PFS, it acquired rights
under a five-year distribution agreement. This agreement binds Tricon to use
AmeriServe distribution services for Tricon-owned KFC, Taco Bell, and Pizza Hut
outlets. The agreement also extends to Taco Bell and Pizza Hut restaurants sold
as part of Tricon's announced program of refranchising certain Tricon-owned
restaurants to existing and new franchisees. The Cooperative and its members
continue to monitor their relationship with AmeriServe. AmeriServe does not
purchase goods through the Cooperative for distribution under its five-year
Tricon agreement. On January 29, 1998, AmeriServe announced that it had signed a
definitive merger agreement under which AmeriServe will acquire ProSource, Inc.
("ProSource"), the Cooperative's sixth largest distributor customer during
fiscal 1997. The merger is expected to close in the second quarter of 1998. The
impact of Tricon's formation and AmeriServe's acquisition of PFS and merger with
ProSource on the business of the Cooperative remains uncertain.
The operations of the Canadian subsidiary (in U.S. dollars) contributed
approximately $51,397,000, $50,600,000 and $49,700,000 in sales in fiscal 1997,
1996, and 1995, respectively. The Canadian subsidiary contributed net income of
approximately $62,000 in 1997 and 1996 and $41,000 in 1995. As of October 31,
1997, 1996 and 1995 the Canadian subsidiary had identifiable assets (in U.S.
dollars) of approximately $3,829,000, $4,300,000 and $3,800,000, respectively,
consisting of accounts receivable, property and equipment, and amortizable
costs. The operations of the Canadian subsidiary are substantially dependent on
its business connected with Scott's Restaurants Inc. ("Scott's"), which operates
approximately 370 KFC outlets in Canada. On October 10, 1997, following a court
ruling favorable to KFC (Canada), KFC (Canada) delivered a notice terminating
Scott's license to operate KFC outlets. Scott's has obtained a stay of the
termination pending judicial appeal. The loss by the Canadian subsidiary of
Scott's KFC business would have a material negative impact on the Canadian
subsidiary.
Income before patronage dividend and income taxes for fiscal 1997 was
$4,153,000, a decrease of $904,000 over fiscal 1996. The decrease is
attributable to an increase in selling, general and administrative expenses,
primarily associated with additional staff positions to support expanded
involvement with the customer base, including services relative to distribution
and project teams, and the related expanded travel costs. The development of the
international division, including new staff positions and startup cost, accounts
for approximately one-third of the total increase in expenses.
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 margin to 2.8%, compared to 2.5% in fiscal 1995,
and only a slight increase in expenses coupled with the increase in sales
volume.
Other income (expense) for fiscal 1997 decreased by $45,000 compared to
fiscal 1996. Service charge income doubled in fiscal 1997, primarily as a result
of the payment practice of one distributor customer who chose to make late
payments on a significant number of invoices for which service charges were
collected. Interest income was lower in fiscal 1997 reflecting the effect of the
increased equipment volume on the Cooperative's cash flow needs. Customer
payment terms for equipment generally extend beyond that of food and packaging
while supplier terms are comparable.
Other income (expense) for fiscal 1996 increased by $110,000 compared
to fiscal 1995. Interest income accounted for this increase, reflecting the
improved
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<PAGE> 17
cash flow attributable to a significant reduction in past due receivables and
the resulting improvement in cash flow.
Selling, general and administrative expenses for fiscal 1997 increased
by approximately 11.5% compared to fiscal 1996. As a percentage of sales, the
expenses went from 1.9% in fiscal 1996 to 2.0% in fiscal 1997. Four factors
contributed to the increase in expenses for fiscal 1997. First, in response to
employees leaving the Cooperative for other jobs in the headquarters' community,
a wage and salary survey was conducted and, based on the results, a significant
number of employees received upward adjustments in compensation to be
competitive in the Louisville market for comparable positions. Second,
additional staff was added to focus more directly on the franchisee customers.
Field representatives were added to all concepts to work directly with the
franchisees and the franchisor on project teams. Third, five new positions were
added in fiscal 1997 to form the international division. The growth in our
equipment business is the fourth contributing factor. Expenses associated with
equipment are significantly higher than expenses associated with food and
packaging.
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 the Cooperative's
ability to deliver on its objectives. The Cooperative's restructuring of its
customer service groups into a single unit, along with the creation of field
representatives should provide the opportunity to significantly improve the
Cooperative's overall service to its customers.
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; the board of directors approved
that a greater percentage of patronage earnings be paid as patronage dividends
for fiscal 1997 compared to fiscal 1996. For fiscal 1997, the dividend to be
paid is $2,890,000 compared to $2,762,000 in fiscal 1996. The patronage dividend
is currently calculated and allocated through separate pools based on a
percentage of the patronage earnings derived from the participating concepts,
KFC and Taco Bell. Under 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 1997 was $748,000, a decrease of $638,000
compared to fiscal 1996. The decrease is primarily attributable to the increase
in selling, general and administrative expenses in fiscal 1997 and the board of
directors' decision to pay out a greater percentage of patronage earnings as
patronage dividends for fiscal 1997 compared to fiscal 1996.
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.
Total assets as of October 31, 1997 were $49,800,000, an increase of
$355,000 compared to fiscal 1996. The increase in accounts receivable of
$3,718,000 and the increase in inventories of $3,037,000 were offset by the
decrease in cash of $6,716,000. The change in assets was primarily attributable
to the increase in other assets, which is reflective of the goodwill associated
with the purchase in fiscal 1997 of the assets of a small international sales
broker that became the foundation for the new international division.
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<PAGE> 18
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
receivable increased by $2,584,000, the improvement in the past due balances
helped the cash position increase by $4,433,000.
During fiscal 1997, the Cooperative completed the conversion of its
software to address the "Year 2000" compliance problem. Management believes the
conversion was completed with a minimal interruption to regular operations and
has been adequately tested. The total cost of the conversion and testing was
approximately $80,000.
INFLATION
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 does not take delivery, except for certain items, such as cob
corn, salsa, and equipment for staging), 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 1997, the Cooperative invested approximately $322,000 in
office furniture and equipment. Approximately $261,000 was expended to upgrade
hardware and software for the mainframe computer. The balance was office
equipment, including PCs and other 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 $748,000 in fiscal 1997, which increased the retained earnings of the
Cooperative, and (ii) combined bank financing, of which $3,572,000 was
outstanding on October 31, 1997. 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
Cooperative's $8,000,000 line of credit expires on May 2, 1998. The
Cooperative's line of credit with the National Cooperative Bank is currently
$3,000,000 and expires on May 1, 1998. On October 31, 1997, 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 on May 16, 1998. 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 these financing arrangements are being amortized
over the term of the loan.
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<PAGE> 19
The Cooperative's net working capital at October 31, 1997 was
$18,305,000, an increase of $464,000 since October 31, 1996. The primary changes
in working capital for fiscal 1997 include (i) a decrease in cash of $6,716,000,
(ii) an increase in accounts receivable and inventories of $3,718,000 and
$3,037,000, respectively, (iii) a decrease in short-term borrowings and accounts
payable of $866,000 and $953,000, respectively, and (iv) an increase in accrued
expenses of $1,272,000.
The Cooperative expects to be able to fund its business in fiscal 1998
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.
The Cooperative organizes 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 associated with their
particular concept.
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.
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.
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
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<PAGE> 20
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 1997, the Cooperative purchased or
committed to purchase approximately 895,000 cases of cob corn for purchase
prices totalling approximately $6,067,000.
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 1997, the premium volume from the fully insured Property
and Casualty Program was $7.5 million and for the Life and Health Program was
$1.7 million.
FINANCING PROGRAMS
The Cooperative has provided or facilitated equipment financing from
time to time under certain circumstances for franchisee members. In April 1996,
the Cooperative established a finance program for stockholder members
co-sponsored by the National Cooperative Bank (the "Bank"). The program provided
up to $20,000,000 in loans to Cooperative members. The Cooperative 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 program was
terminated in 1997, although the Cooperative's guarantee of certain loans under
the program continues. The Bank is currently reviewing the possibility of
introducing a new loan program in 1998. See Note 8 of "NOTES TO CONSOLIDATED
FINANCIAL STATEMENT."
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 1997, the Cooperative shipped equipment packages for an
aggregate sales price of approximately $11,293,000. On October 31, 1997, the
Cooperative had equipment inventory associated with the equipment staging
operation of approximately $2,321,000, which was financed through the
Cooperative's working capital.
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<PAGE> 21
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 1997, approximately 87% of the dollar volume of
goods sold by the Cooperative was sold to Operators through distributors. See
"PRINCIPAL CUSTOMERS."
Distributors purchasing from the Cooperative may consolidate orders
from individual Operators and may place bulk orders with the Cooperative. The
Cooperative consolidates orders from all distributors and Operators for a given
item and issues shipping instructions to the supplier. The supplier then ships
the merchandise (usually in truckload quantities) to Operators and/or local
distributors who in turn, deliver the merchandise to Operators. Suppliers bill
the Cooperative, which, in turn, bills Operators and/or distributors for the
merchandise as shipped. The Cooperative takes title to the merchandise and
assumes the risks related to taking title. Except with respect to the
Cooperative's cob corn program and equipment staging program, the Cooperative
does not now take physical delivery of the merchandise, but is nevertheless
responsible for payment to the supplier.
Except when staged into equipment packages, certain restaurant
equipment sold by the Cooperative is generally shipped directly from the
manufacturer or the dealer to Operators rather than to local distributors.
Because the Cooperative extends short-term trade credit to its
customers, it bears the risk that accounts receivable may become uncollectible
or may not be paid in accordance with usual terms if the customer experiences
financial difficulty. The Cooperative has established a reserve for losses on
trade accounts receivable. See Note 2 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS."
The Cooperative operates 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; independent distributors
continue in competition with each other.
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.
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<PAGE> 22
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.
CO-OP BUCKS
The Cooperative, consistent with its mission of the lowest possible
store delivered cost of goods for its customers, and in recognition of the
savings available to the Cooperative and its stockholders when the Cooperative's
purchases and purchase commitments are based on consistent and predictable
volume, has established a program of incentive equipment credits ("Co-op Bucks")
for Taco Bell Operators entering into long-term distribution agreements with
certain distributors. The Cooperative will generally make available to these
Operators an incentive credit of $500 per year per store for equipment purchased
from the Cooperative for use in any of the Operator's retail outlets for each of
the first three full years of the term of such distribution agreements. The
Cooperative reserves the right to accept Co-op Bucks in payment of the purchase
price for Common Stock.
PRINCIPAL CUSTOMERS
Although the Cooperative sells primarily to distributors, the ultimate
customers for the goods sold by the Cooperative are Operators. The Cooperative
believes that it has substantial sales to Harman Management Corporation
("Harman") and Scott's Restaurants, Inc. See "CANADIAN 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. 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 had sales to certain distributors in fiscal 1997 in
excess of 10% of the Cooperative's net sales. McLane Foodservice Group sales for
fiscal 1997 were $104,100,000, primarily in support of the Taco Bell system. In
fiscal 1997, sales to AmeriServe Food Distribution, Inc. ("AmeriServe") were
approximately $100,000,000. See "PEPSICO/TRICON." In fiscal 1997, sales to
Sysco Corporation were approximately $86,800,000.
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
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<PAGE> 23
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 AmeriServe in the purchasing and
distribution of Equipment and Supplies to KFC and Taco Bell franchise Operators.
See "PEPSICO/TRICON."
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/TRICON
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 "HISTORY." In October
1989, KFCC implemented a decision to have PepsiCo Food Systems, Inc. ("PFS")
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. PFS, like KFCC and Taco Bell Corp., was at the time a
wholly owned subsidiary of PepsiCo.
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.
In October 1997, PepsiCo spun off its three primary restaurant
divisions, KFC, Taco Bell and Pizza Hut, into a new public company, Tricon
Global Restaurants, Inc. ("Tricon"). Also during fiscal 1997, PepsiCo sold PFS
to AmeriServe. AmeriServe has been and continues to be the second largest
Cooperative customer, purchasing supplies for distribution to KFC franchisees.
When AmeriServe purchased PFS, it acquired rights under a five year distribution
agreement which now binds Tricon to use AmeriServe's distribution services for
Tricon-owned KFC, Taco Bell and Pizza Hut outlets, and which binds the
purchasers of Taco Bell and Pizza Hut outlets sold as part of Tricon's announced
program for refranchising certain Tricon-owned restaurants to existing and new
franchisees. The Cooperative and its members continue to monitor their
relationship with AmeriServe. AmeriServe does not purchase Equipment and
Supplies through the Cooperative for distribution under its five-year Tricon
agreement. On January 29, 1998, AmeriServe announced that it had signed a
definitive merger agreement under which AmeriServe will acquire ProSource, the
Cooperative's sixth largest distributor customer during fiscal 1997 with total
sales by the Cooperative of approximately $19,000,000. The merger is expected to
close in the second quarter of 1998. The impact of Tricon's formation and
AmeriServe's acquisition of PFS and merger with ProSource on the business of the
Cooperative remains uncertain.
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, the
Cooperative has developed business opportunities with retail outlet operators
of other
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fast food concepts, including Taco Bell, Long John Silver's, Dairy Queen, 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. In 1992, the
Cooperative's stockholder members approved amendments to the Cooperative's
Certificate of Incorporation to provide that Taco Bell Operators may become
stockholder members of the Cooperative. See "CAPITAL STOCK -- MEMBERSHIP COMMON
STOCK." The Cooperative consults with FRANMAC, a corporation affiliated with
Taco Bell Operators and Taco Bell Corp., with respect to its activities related
to the Taco Bell concept.
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 providing similar services to KFC
franchisees in Canada.
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"). The Cooperative originally anticipated a
roll-out of the Domino's Pizza Purchasing Program during the 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 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. The Cooperative
had limited sales to Domino's Pizza Franchisees in fiscal 1997 and the
Affiliation Agreement was terminated in June 1997.
During fiscal 1996, the Cooperative reorganized a portion of its
business with concepts other than KFC and Taco Bell into the "Horizon Group."
The Horizon Group consolidates the Cooperative's business with smaller-volume
concepts, such as Long John Silver's, Dairy Queen, and Fazoli's, under one
management team.
In 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
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<PAGE> 25
international equipment business of a small international sales broker on
December 31, 1996.
During fiscal 1997, sales to operators of retail outlets of quick
service restaurant systems other than KFC and Taco Bell Operators in the United
States were approximately 24% of sales.
CANADIAN OPERATIONS
In fiscal 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 approximately 574 retail
outlets, while Pepsi-Cola Canada Ltd. owns approximately 242 retail outlets.
Scott's Restaurants, Inc. ("Scott's") is the largest franchisee in Canada, with
approximately 369 retail outlets. The operations of the Canadian subsidiary are
substantially dependant on its business connected with Scott's. On October 10,
1997, following a court ruling favorable to KFC (Canada), KFC (Canada) delivered
a notice terminating Scott's franchise license agreement to operate KFC outlets.
Scott's has obtained a stay of the termination pending judicial appeal. The loss
by the Canadian subsidiary of Scott's KFC business would have a materially
adverse effect on the Cooperative's Canadian operations.
The Canadian Subsidiary's headquarters are located in Mississauga,
Ontario. The Canadian operations are supported with existing Cooperative
personnel and resources, supplemented by a small support staff in Canada. The
Canadian operations contributed approximately $51,397,000 (U.S.) in sales in
fiscal 1997. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--ANALYSIS OF OPERATIONS."
TRADE REGULATION MATTERS
The following features of the Cooperative reflect the mutual concerns
of the Cooperative and its customers that the operations of the Cooperative be
consistent with the objective of fostering competition at both the supply and
distribution stages in the provision of Equipment and Supplies to Operators.
(1) Stock ownership and attendant rights in the Cooperative are
available to all Operators on a nondiscriminatory basis, and the purchase of
Common Stock is completely voluntary. Operators need not own Common Stock to
purchase goods from the Cooperative directly or through a distributor.
(2) The Cooperative does not impose any requirement that members or
their distributors purchase any goods from the Cooperative. The success of the
Cooperative depends on it being able to purchase and resell goods at prices
that 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
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<PAGE> 26
not they sell to the Cooperative, are free to sell directly to Operators and/or
their distributors.
(5) The Cooperative does not finance its operations through brokerage
fees or rebates from suppliers with which it deals. The operation of the
Cooperative is financed by the capital contributions of its members, by the
mark-ups charged by it on goods it sells to cover the costs of its services, and
by borrowings from commercial lenders.
(6) The Cooperative does not solicit or induce unlawful price
discriminations from its suppliers. The cost prices paid by the Cooperative are
negotiated with, or competitively bid by, suppliers based on the Cooperative's
volume commitments to purchase and the cost savings realized by suppliers from
dealing with the Cooperative. The cost savings realized by certain suppliers are
reflected in sales and service allowances which operate to reduce the
Cooperative's cost prices.
(7) The Cooperative does not dictate or in any way control delivered
prices charged by distributors for goods purchased from the Cooperative. The
Cooperative does provide to its members information on the Cooperative's prices,
industry data on distribution costs and service levels, and does monitor
distributor prices to enable franchisees to negotiate more effectively with
distributors. See "DISTRIBUTION."
(8) The Cooperative does not disclose information that is identified or
identifiable as pertaining to the business of any particular Operator (other
than information relating to past due accounts owed to the Cooperative) to any
other Operator or representative thereof or to any other person who is not
employed by the Cooperative.
PROPERTIES
The Cooperative does not own any real property or warehousing
facilities. The Cooperative currently leases approximately 51,474 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 169 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
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<PAGE> 27
tends, of course, to reduce or eliminate funds available for dividends based
upon the number of shares of Store Common Stock owned.
PATRONAGE DIVIDEND PROGRAM
INTRODUCTION
Although the Cooperative does not engage in business to generate
profits, it may nonetheless, in any fiscal year, generate revenues in excess of
amounts needed to cover expenses, amortize indebtedness, and provide for
reasonable reserves. Thus, even though the Cooperative endeavors to minimize
markups on Equipment and Supplies to the least amount required to cover its
anticipated costs of operations, the Cooperative may have funds available for
distribution to members.
In 1982, the Cooperative implemented a program for the payment of
patronage dividends to members on the basis of the value of business done by the
Cooperative with regard to each member, respectively. Beginning with fiscal
1995, through an amendment to Section 9.2 of its Bylaws set forth in its
entirety herein, the Board of Directors is authorized to distribute as patronage
dividends amounts determined in accordance with Section 9.2. Under the revised
program, solely for purposes of determining the amount of patronage dividends
distributable to a particular stockholder member, the Cooperative has
established two separate pools of allocated net earnings for purposes of making
patronage dividend determinations, the "KFC Pool" and the "Taco Bell Pool," as
defined in 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 1995, 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, 1995, through October 31, 1996, in an aggregate amount equal to the
lesser of (a) 60% of the Cooperative's total "pre-tax income," as defined in the
Cooperative's 1996 fiscal year budget, or (b) the amount of the Cooperative's
total "pre-tax income" for fiscal 1996 reasonably allocable to sales with
respect to which a patronage dividend is payable. 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," rather than 60%. In August
1997, the Board of Directors determined that a patronage dividend for fiscal
1998 would be paid on a formula similar to that adopted for fiscal 1997, except
that the patronage dividend would be based upon 80% of pre-tax income.
The Cooperative paid a patronage dividend totaling $1,246,000 in March
1996 for patronage in fiscal 1995. The Cooperative paid $2,762,000 in March 1997
for patronage in fiscal 1996. For patronage during fiscal 1997, a dividend
totaling $2,890,000 is payable in March 1998. KFC-related sales volumes and net
income have historically been higher than Taco Bell sales volumes and net
income. For fiscal 1997, patronage dividends for KFC Operator members will
average approximately $900 per store, while patronage dividends for Taco Bell
Operator members will average approximately $400 per store.
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
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<PAGE> 28
of its business with its stockholder members either directly
or through distributors ("participating distributors") which
shall have agreed to participate in the Cooperative's
patronage dividend program for its stockholder members by
entering into distributor participation agreements with the
Cooperative in such form as the President shall prescribe from
time to time. The Cooperative may operate on a for-profit
basis with respect to non-members.
9.2 Patronage Dividend Distributions.
(a) The Board of Directors is authorized, after
considering the Cooperative's need for capital and reserves,
to distribute as patronage dividends directly to each
stockholder member of the Cooperative amounts determined as
set forth below. Solely for the purpose of determining the
amount of patronage dividends distributable to a particular
stockholder member of the Cooperative, the Cooperative's
business with its stockholder members shall be segregated
into two distinct pools: (i) the "KFC Pool," under which shall
be determined the net earnings of the Cooperative from
business done by the Cooperative directly with stockholder
members for use by the stockholder members in KFC retail
outlets owned or operated by the stockholder members and the
value of business done by the Cooperative with participating
distributors resulting in resales by such distributors to such
stockholder members for such use; and (ii) the "Taco Bell
Pool," under which shall be determined the net earnings of the
Cooperative from business done by the Cooperative directly
with stockholder members for use by the stockholder members
in Taco Bell retail outlets owned or operated by the stock
holder members and the value of business done by the
Cooperative with participating distributors resulting in
resales by such distributors to such stockholder members for
such use.
The amount distributable by the Cooperative as
patronage dividends directly to each stockholder member of the
Cooperative shall be based on
(A) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in KFC retail outlets
owned or operated by the stockholder member and the
value of business done by the Cooperative with
participating distributors resulting in resales by
such distributors to such stockholder member for such
use, to
(ii) the net earnings of the Cooperative
in the KFC Pool, plus
(B) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in Taco Bell retail
outlets owned or operated by the stockholder member
and the value of business done by the Cooperative
with participating distributors
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<PAGE> 29
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 "nonqualified 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> 30
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
patron age 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> 31
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> 32
patronage dividend program. For fiscal 1998, the sales allowance will be based
on 80% 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 plus the Cooperative's President, who is a
non-voting member. Up to nineteen directors will be elected by the holders of
various series of Membership Common Stock. Each series of Membership Common
Stock is generally entitled to elect one director, except that the NCAC and KFC
Management are each entitled to elect two directors. In addition, when and if
shares of Series O, P and/or Q are issued and outstanding, holders of those
series are also collectively entitled to elect the Taco Bell at large director.
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 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. Pursuant to this provision, the Board of
Directors has established a non-voting membership for a Taco Bell stockholder
member after consultation with the Taco Bell Operators serving as directors and
the Franchise Management Advisory Council ("FRANMAC"); David Paradise currently
serves in this position.
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MANAGEMENT OF THE COOPERATIVE
Directors and Executive Officers
The following table lists, in addition to other information, the
directors and certain executive officers of the Cooperative at December 31,
1997, 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, 1997.
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME
CURRENTLY DIRECTOR OR TERM AS SERIES REPRESENTED
HELD WITH EXECUTIVE DIRECTOR ------------------
NAME AGE COOPERATIVE OFFICER EXPIRES (*)
- ---- --- ----------- ------- ------- ---
<S> <C> <C> <C> <C> <C>
William E. Allen 58 Director, 1988 2000 F
Secretary
Anthony Basile 56 Director 1997 1998 Taco Bell
At Large
James G. Cocolin 48 Director 1996 1999 C
Lois G. Foust 53 Director 1997 1998 L
Edward J. Henriquez, 60 Director 1994 1999 J
Jr.
Paul A. Houston 48 Director 1995 2000 I
Grover G. Moss 53 Director 1994 1998 O
David G. Neal 51 Director, 1991 2000 E
Vice
Chairman of
the Board,
Treasurer
James D. Olson 47 Director 1997 1998 H
<CAPTION>
STORE
PRESENT COMMON PERCENT
PRINCIPAL STOCK OF STORE
NAME OCCUPATION OWNERSHIP OUTSTANDING
- ---- ---------- --------- -----------
<S> <C> <C> <C>
William E. Allen Operator 11 **
Anthony Basile Operator 26 **
James G. Cocolin Operator 13 **
Lois G. Foust Operator 2 **
Edward J. Henriquez, Operator 12 **
Jr.
Paul A. Houston President of 367 6.0
Scott's
Restaurants,
Inc.
Grover G. Moss Operator 10 **
David G. Neal Operator 94 1.5
James D. Olson President of 266 4.3
Harman
</TABLE>
- 30 -
<PAGE> 34
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME
CURRENTLY DIRECTOR OR TERM AS SERIES REPRESENTED
HELD WITH EXECUTIVE DIRECTOR ------------------
NAME AGE COOPERATIVE OFFICER EXPIRES (*)
- ---- --- ----------- ----------- -------- ---
<S> <C> <C> <C> <C> <C>
Robert P. Peck 63 Director, 1990 1999 B
Chairman of
the Board
Darlene L. Pfeiffer 60 Director 1997 1998 L
Edward W. Rhawn 59 Director 1992 1999 Independent
Jack M. Richards 69 Director 1991 2000 A
Dean M. Sorgdrager 35 Director 1996 1999 G
Calvin G. White 43 Director 1992 1999 D
Ronald J. Young 39 Director 1993 2000 M
David Paradise 47 Non-Voting 1997 -- --
Director ++
Thomas D. Henrion 55 Director, 1980 -- --
President,
Chief
Executive
Officer
William V. Holden 48 Vice 1985 -- --
President,
Chief
Financial
Officer
W. Thomas Hutcherson 51 Vice 1982 -- --
President,
Purchasing
Kenneth L. Hartung 50 Vice 1993 -- --
President
<CAPTION>
STORE
PRESENT COMMON PERCENT
PRINCIPAL STOCK OF STORE
NAME OCCUPATION OWNERSHIP OUTSTANDING
- ---- ---------- --------- -----------
<S> <C> <C> <C>
Robert P. Peck Operator 10 **
Darlene L. Pfeiffer Operator 4 **
Edward W. Rhawn Chairman of -- --
Rhawn
Enterprises,
Inc.
Jack M. Richards Operator 3 **
Dean M. Sorgdrager Operator 1 **
Calvin G. White Operator 12 **
Ronald J. Young Operator 12 **
David Paradise Operator 9 **
Thomas D. Henrion President & -- --
Chief
Executive
Officer,
Cooperative
William V. Holden Vice -- --
President,
Chief
Financial
Officer,
Cooperative
W. Thomas Hutcherson Vice -- --
President
Cooperative
Kenneth L. Hartung Vice -- --
President
Cooperative
</TABLE>
- 31 -
<PAGE> 35
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME
CURRENTLY DIRECTOR OR TERM AS SERIES REPRESENTED
HELD WITH EXECUTIVE DIRECTOR ------------------
NAME AGE COOPERATIVE OFFICER EXPIRES (*)
- ---- --- ----------- ------- ------- ---
<S> <C> <C> <C> <C> <C>
John W. Inwright 41 Vice 1991 -- --
President,
Operations
Carol L. Mudd 43 Vice 1997 -- --
President,
Human
Resources
<CAPTION>
STORE
PRESENT COMMON PERCENT
PRINCIPAL STOCK OF STORE
NAME OCCUPATION OWNERSHIP OUTSTANDING
- ---- ---------- --------- -----------
<S> <C> <C> <C>
John W. Inwright Vice -- --
President,
Cooperative
Carol L. Mudd Vice -- --
President,
Cooperative
All directors and officers as a group (23 persons)+++ 852 13.9
</TABLE>
* KFC Management has purchased one share of Series K Membership Common
Stock. In 1989, both directors representing KFC Management resigned as members
of the Board of Directors. KFC Management has not taken any action to fill the
vacancies and has not indicated whether it will take 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 33.0% of the Store Common Stock
outstanding.
** Less than one-half of one percent.
+ Mr. Neal has previously served on the Board of Directors of the
Cooperative as one of the two directors representing the National Franchise
Advisory Council, the former 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.
++ Mr. Paradise is a Taco Bell Operator chosen to serve at the pleasure of
the Board of Directors as a non-voting member of the Board of Directors after
consultation with the Taco Bell Operators serving as directors and FRANMAC.
+++ 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; Mr. Peck is affiliated with a member which is the owner of two shares of
Membership Common Stock. All directors and officers as a group (23 persons) own
17 shares of Membership Common Stock, 2.6 percent of the total number of Shares
of Membership Common Stock outstanding. The Store Common Stock ownership
reflects the number of shares which each director, other than Messrs. Henrion
and Rhawn, owns or which is owned by the member with which the director is
affiliated. Except as required by law, Store Common Stock has no voting rights.
Messrs. Henrion and Rhawn are neither the owners, nor affiliates of owners, of
any Membership or Store Common Stock.
- 32 -
<PAGE> 36
During the last five years, Messrs. Allen, Basile, Cocolin, Foust,
Henriquez, Houston, Moss, Neal, Olson, Paradise, Peck, Pfeifer, Richards,
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.
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.
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,
responsible for purchasing and customer service for both Equipment and Supplies
since 1996. From 1991 to 1996, he served as Vice President of Purchasing. Mr.
Inwright has served the Cooperative in its purchasing operations since 1984.
Carol L. Mudd joined the staff of the Cooperative in 1986 in
Administration. She became manager of administration and communications in 1991
and director of human resources, administration and communications in 1994. In
December 1997, Ms. Mudd was appointed Vice President of Human Resources.
Except for Mr. Henrion, all officers of the Cooperative who are also
directors serve in such offices on a limited, part-time basis without
remuneration.
STANDING COMMITTEES
The Board of Directors of the Cooperative had four regular meetings in
fiscal 1997 and no special meetings. The Board of Directors has five standing
committees: Executive, Personnel, Audit and Budget, Insurance, and Nominating.
The Executive Committee is comprised of Messrs. Peck, Neal, Houston,
and Allen. 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. Neal, Young,
Cocolin, Henriquez, Pfeiffer, Basile, and Foust and met 5 times during fiscal
1997. 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, Richards,
Sorgdrager, White, and Moss. The Insurance Committee monitors the operations of
- 33 -
<PAGE> 37
the Insurance Subsidiary and, in conjunction with the Executive Committee, makes
recommendations to the Board of Directors concerning the insurance programs.
The Nominating Committee is comprised of Messrs. Rhawn, Houston,
Allen and Paradise. The Nominating Committee makes recommendations to the Board
of Directors concerning officer positions for the Cooperative and met once
during fiscal 1997. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Personnel Committee is comprised of Messrs. Peck, Houston,
Olson, Paradise and Rhawn and met 4 times during fiscal 1997. 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.
EXECUTIVE COMPENSATION
The following table shows all cash compensation paid by the
Cooperative for the years ended October 31, 1997, 1996 and 1995 to the most
highly compensated executive officers as to whom the total cash and
cash-equivalent remuneration exceeded $100,000 during fiscal 1997.
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 1997 $208,460 $49,940 $20,583
President and Chief 1996 191,798 58,466 22,578
Executive Officer 1995 181,498 51,480 21,046
William V. Holden 1997 103,665 16,500 12,010
Vice President and 1996 95,421 16,432 12,444
Chief Financial 1995 92,067 14,406 10,531
Officer
John W. Inwright 1997 103,178 18,150 12,317
Vice President 1996 88,656 20,000 11,929
1995 77,702 16,625 9,016
Kenneth L. Hartung 1997 102,733 16,838 11,802
Vice President 1996 93,896 15,288 12,662
1995 87,099 17,861 10,457
Judith L. Hollis (3) 1997 100,963 16,830 11,949
Vice President 1996 91,133 18,520 12,404
1995 86,800 18,346 10,230
</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.
(2) Includes employer contribution to the Cooperative's Thrift
Plan and Money Purchase Pension Plan in fiscal 1997 as follows: Mr.
Henrion $4,500 and $11,083, respectively; Mr. Holden $3,603 and
$8,407, respectively; Mr. Inwright $3,695 and $8,622, respectively;
Mr. Hartung $3,541 and $8,261, respectively; and Ms. Hollis $3,585
and $8,364, respectively. For Mr. Henrion, the fiscal 1997 amount
includes $5,000, representing the value to Mr. Henrion of the
- 34 -
<PAGE> 38
Cooperative's payments with respect to the insurance policy described
below.
(3) Ms. Hollis resigned from all positions with the Cooperative
effective February 6, 1998.
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, 1997, Mr. Henrion's Averaged
Annual Compensation for purposes of the Supplemental Agreement was $195,107 with
one-twelfth of 18% of this amount equal to $2,927.
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.
- 35 -
<PAGE> 39
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board of Directors, except the
Independent Director, are Operators or represent Operators and have purchased or
may purchase Equipment and Supplies from the Cooperative or from distributors
who purchase from the Cooperative. All purchases by directors or their
affiliates from the Cooperative are made on the same terms and conditions as
purchases by any other Operator. Several Operators, including KFC Management,
are also in the business of purchasing Equipment and Supplies for sale and
distribution to other Operators and may purchase such Equipment and Supplies
from the Cooperative. See "HISTORY AND OPERATING PRINCIPLE,"
"OPERATIONS--PRINCIPAL CUSTOMERS," "PEPSICO/ TRICON" and Note 6 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 665 shares were issued and outstanding on
October 31, 1997. 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 NCAC, 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
</TABLE>
- 36 -
<PAGE> 40
<TABLE>
<S> <C> <C>
B - Arkansas, Colorado, Kansas, Missouri, New Mexico,
Oklahoma and Texas
C - Connecticut, Delaware, District of Columbia, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont
D - Alaska, Hawaii, Idaho, Montana, Oregon, Washington
and Wyoming
E - Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina,
Tennessee and Virginia
F - Illinois, Iowa, Minnesota, Nebraska, North Dakota,
South Dakota and Wisconsin
G - Arizona, California, Nevada and Utah
</TABLE>
Harman has purchased one share of Series H Membership Common Stock.
Scott's has purchased one share of Series I Membership Common Stock. Operators
of KFC retail outlets in Foreign Territories are entitled to purchase one share
of Series J Membership Common Stock. KFC Management has purchased one share of
Series K Membership Common Stock and the NCAC has purchased one share of Series
L Membership Common Stock. Operators of KFC retail outlets in Canada, including
Tricon Global Restaurants (Canada), Inc., 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 NCAC 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. 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 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, all Taco Bell
Operators will hold Series O 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). 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).
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> 41
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
-------- -------- --------
<S> <C> <C>
SERIES TACO BELL REGIONS NUMBER OF TACO BELL STORE SHARES
------ ----------------- --------------------------------
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 and
Series N Membership Common Stock is entitled to elect one member of the Board of
- 38 -
<PAGE> 42
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. When and if shares of Series O, P and/or Q are issued and
outstanding, holders of those series (i) will nominate and elect a director to
represent their respective series and (ii) will collectively be entitled to
elect the Taco Bell at large director. 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 NCAC, (b) 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, (c) 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, (d) 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, (e) any interest which KFC
Management may have in Tricon Global Restaurants (Canada), Inc.'s Series M
share, and any interest which Tricon Global Restaurants (Canada), Inc. may have
in KFC Management's Series K share by reason of KFC Management and Tricon Global
Restaurants (Canada), Inc., and (f) 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
- 39 -
<PAGE> 43
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 6,091 shares were issued and outstanding on
October 31, 1997. 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 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 pur-
- 40 -
<PAGE> 44
chase 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 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
- 41 -
<PAGE> 45
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 respective 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, 400 West Market Street, 32nd Floor,
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, 1997 and 1996, and for each of the years in the three-year
period ended October 31, 1997, 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> 46
KFC NATIONAL PURCHASING COOPERATIVE, INC.
AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Financial Statements
October 31, 1997 and 1996
With Independent Auditors' Report Thereon
<PAGE> 47
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - October 31, 1997 and 1996 F-2
Consolidated Statements of Income - Years ended
October 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Members' Equity - Years ended
October 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows - Years ended
October 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE> 48
Independent Auditors' Report
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.:
We have audited the accompanying consolidated balance sheets of KFC National
Purchasing Cooperative, Inc. (d/b/a FoodService Purchasing Cooperative, Inc.)
and subsidiaries as of October 31, 1997 and 1996, 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, 1997. These consolidated financial
statements are the responsibility of the Cooperative's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended October 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Louisville, Kentucky
December 8, 1997
F-1
<PAGE> 49
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Balance Sheets
October 31, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 160 6,876
Accounts and note receivable, less allowance for losses
of $1,409 in 1997 and $1,329 in 1996 41,040 37,322
Inventories:
Food 1,662 1,498
Equipment and promotional items 3,853 980
-------- --------
5,515 2,478
Refundable income taxes -- 32
Current note receivable from related party 60 60
Prepaid expenses 130 133
Deferred income taxes 614 583
-------- --------
Total current assets 47,519 47,484
-------- --------
Office equipment, at cost, less accumulated depreciation
of $3,039 in 1997 and $2,880 in 1996 660 669
Note receivable from related party, excluding current portion 118 174
Note receivable 832 832
Deferred income taxes 108 116
Other assets 563 170
-------- --------
$ 49,800 49,445
======== ========
Liabilities and Members' Equity
-------------------------------
Current liabilities:
Short-term borrowings $ 572 1,438
Accounts payable 21,124 22,077
Accrued expenses 4,299 3,027
Premium deposits 329 339
Patronage dividend 2,890 2,762
-------- --------
Total current liabilities 29,214 29,643
Long-term note payable 3,000 3,000
-------- --------
Total liabilities 32,214 32,643
Commitments and contingencies
Members' equity:
Membership common stock, voting, no par value; authorized 2,000 shares;
issued and outstanding, 665 shares in 1997 and 624 shares in 1996 7 6
Store common stock, no par value; authorized 10,000 shares; issued and
outstanding, 6,091 shares in 1997 and 5,946 shares in 1996 1700 1,646
Retained earnings 15,930 15,182
Currency translation adjustment (51) (32)
-------- --------
17,586 16,802
-------- --------
$ 49,800 49,445
======== ========
</TABLE>
F-2
<PAGE> 50
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Income
Years ended October 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 600,132 580,441 537,116
Cost of goods sold 583,891 564,370 523,724
--------- --------- ---------
Gross profit 16,241 16,071 13,392
Selling, general and administrative expenses 12,266 11,006 10,645
Provision for losses on receivables 175 406 264
Other income (expense):
Service charges 187 90 112
Interest income 339 508 352
Interest expense (285) (270) (267)
Miscellaneous 112 70 91
--------- --------- ---------
353 398 288
--------- --------- ---------
Income before patronage
dividend and income taxes 4,153 5,057 2,771
Patronage dividend 2,890 2,762 1,246
--------- --------- ---------
Income before income taxes 1,263 2,295 1,525
Provision for income taxes 515 909 616
--------- --------- ---------
Net income $ 748 1,386 909
========= ========= =========
</TABLE>
F-3
<PAGE> 51
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Members' Equity
Years ended October 31, 1997, 1996 and 1995
(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, 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)
Proceeds from sale of common stock:
Membership, at $10 share 77 1
Store, at $400 per share 331 132
Retirement of common stock:
Membership, at $10 per share (36)
Store, at $400 per share (186) (75)
Costs in connection with sales of
common stock (3)
Net income for the year ended
October 31, 1997 748
Currency translation adjustment (19)
---- ------ ------ ---
Balances, October 31, 1997 $ 7 1,700 15,930 (51)
==== ====== ====== ===
</TABLE>
F-4
<PAGE> 52
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Consolidated Statements of Cash Flows
Years ended October 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 748 1,386 909
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation and amortization 377 418 487
Provision for losses on receivables 175 406 264
(Gain) loss on disposals 7 (1) 2
Deferred income tax expense (benefit) (23) 44 (37)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (3,893) (3,207) (216)
(Increase) decrease in inventories (3,037) 462 1,261
Decrease in refundable income taxes 32 6 5
(Increase) decrease in prepaid expenses 3 (52) 36
Increase (decrease) in accounts payable (953) 2,318 133
Increase (decrease) in accrued expenses 1,272 789 (2,027)
Decrease in premium deposits (10) (23) (13)
Increase in patronage dividend 128 1,516 677
------- ------ ------
Net cash provided by (used in)
operating activities (5,174) 4,062 1,481
------- ------ ------
Cash flows from investing activities:
Repayments of loan from related party 56 79 66
Repayments of note receivable -- 12 139
Increase in other assets (446) (74) --
Additions to office equipment (322) (291) (242)
Proceeds from sale of office equipment -- 17 --
------- ------ ------
Net cash used in investing activities (712) (257) (37)
------- ------ ------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net (866) 561 343
Proceeds from sale of stock, net of costs 130 86 57
Retirement of stock (75) (22) (18)
------- ------ ------
Net cash provided by (used in) financing
activities (811) 625 382
------- ------ ------
Effect of change in exchange rates on cash and cash
equivalents (19) 3 3
------- ------ ------
Net increase (decrease) in cash and cash
equivalents (6,716) 4,433 1,829
Cash and cash equivalents - beginning of year 6,876 2,443 614
------- ------ ------
Cash and cash equivalents - end of year $ 160 6,876 2,443
======= ====== ======
Supplemental information:
Income taxes paid $ 468 937 470
======= ====== ======
Interest paid $ 285 270 267
======= ====== ======
Account receivable exchanged for note receivable $ -- -- 934
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<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
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. FoodService Purchasing Cooperative
International, Inc., a wholly-owned subsidiary, was formed in 1997 to
provide similar services to international franchisees, other than
Canada. 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., FoodService Purchasing
Cooperative International, Inc. and KFC Franchisee Finance
Company, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation. The
operation of KFC Franchisee Purchasing of Canada, Inc. and
FoodService Purchasing Cooperative International, Inc. represent
less than 10% of net sales and total assets of the Cooperative.
(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. For accounting purposes, the Cooperative
recognizes revenues and the related costs upon receipt of
notification of shipment, primarily an invoice, from the
supplier. Management believes the consistent application of this
accounting method does not have a significant impact upon the
consolidated financial statements.
(Continued)
F-6
<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)
(c) Inventories
Inventories are stated at the lower of cost or market. At October
31, 1997 and 1996, 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 $19,000 and $59,000 higher at October
31, 1997 and 1996, respectively.
During 1996 and 1995, 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 and $166,000 in 1996 and
1995, respectively, below the amount that would have resulted
from replacing the liquidated inventory at end of year prices.
(d) Checks Drawn in Excess of Book Balance
Included in accounts payable are checks drawn in excess of book
balance. Such amounts were approximately $2,406,000 and $424,000
at October 31, 1997 and 1996, respectively.
(e) Depreciation and Amortization Expense
Provision for depreciation and amortization is made on the basis of
the estimated useful lives of the assets. Principally, the
double declining-balance method is used for depreciation of
office equipment and the straight-line method is used for
amortization of other assets.
Other assets principally consist of the unamortized portion of
non-competition agreements, goodwill and loan origination fees.
The non-competition agreements are being amortized over 13 and 5
years. The loan origination fees are being amortized over 5 and
3 years. Goodwill is being amortized over 15 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> 55
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".
FoodService Purchasing Cooperative International, Inc. operates
in U.S. funds. Foreign currency transaction gains and losses
were not significant in 1997, 1996 and 1995.
(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 1996 amounts have been made to conform
to the 1997 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> 56
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, 1997 and 1996, 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 proscribed 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, 1997. 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
(6.74% as of October 31, 1997). This line of credit expires on May 2,
1998.
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, 1997. Equipment accounts receivable and equipment
inventory are pledged as collateral for borrowings under the line.
Borrowings on this line of credit bear interest at LIBOR plus 140
basis points (7.056% as of October 31, 1997). This line of credit
expires May 1, 1998. The President of the Cooperative served as a
director of the Bank from May 1991 to May 1997.
The Cooperative has a $4,000,000 (Canadian dollars) line of credit with a
Canadian bank, of which approximately $3,194,000 (Canadian dollars) is
available at October 31, 1997. 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 (5.25% as
of October 31, 1997). This line of credit expires on May 16, 1998.
(Continued)
F-9
<PAGE> 57
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(4) Income Taxes
Income tax expense for the years ended October 31, 1997, 1996 and 1995
consists of:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Currently payable:
Federal $ 414,000 663,000 551,000
State and local 124,000 202,000 102,000
Deferred - all taxing jurisdictions (23,000) 44,000 (37,000)
--------- ------- --------
$ 515,000 909,000 616,000
========= ======= ========
</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>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Computed "expected" tax expense $ 429,000 780,000 519,000
Increase (reduction) in income taxes
resulting from:
State and local income taxes,
net of federal income tax
benefit 83,000 133,000 67,000
Other, net 3,000 (4,000) 30,000
--------- ------- --------
$ 515,000 909,000 616,000
========= ======= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at October 31 are presented below:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Accounts receivable, principally due to
allowance for doubtful accounts $575,000 545,000
Lease recognition 55,000 85,000
Accounting reserves not currently deductible
for income tax purposes 64,000 61,000
Other 28,000 8,000
-------- -------
Net deferred tax asset $722,000 699,000
======== =======
</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, 1997 and 1996.
(Continued)
F-10
<PAGE> 58
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(4) Income Taxes (Continued)
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 1997 is based upon shareholder members'
retaining membership in the Cooperative through October 31, 1997 and
the value of any purchase of equipment and supplies made from the
Cooperative, or through participating distributors from November 1,
1996 through October 31, 1997. The patronage dividends for 1996 and
1995 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. The Cooperative
would be liable for taxes associated with the disallowance of any
patronage dividend deduction.
(5) 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> 59
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(6) Major Customers
The Cooperative had sales to certain distributors in excess of 10% of net
sales. One customer accounted for sales of approximately $104,000,000,
$120,000,000, and $127,000,000 for the years ended October 31, 1997,
1996 and 1995, respectively. This customer's outstanding accounts
receivable balances were approximately $6,659,000 and $7,094,000 at
October 31, 1997 and 1996, respectively. A second customer accounted
for sales of approximately $99,874,000, $84,000,000 and $70,000,000
for the years ended October 31, 1997, 1996 and 1995, respectively.
This customer's outstanding accounts receivable balances were
approximately $6,306,000 and $6,104,000 at October 31, 1997 and 1996,
respectively. A third customer accounted for sales of approximately
$86,773,000 and $80,300,000 for the years ended October 31, 1997 and
1996, respectively. This customer's outstanding accounts receivable
balances were approximately $5,552,000 and $4,758,000 at October 31,
1997 and 1996, respectively.
In October 1997, PepsiCo, Inc. spun off its three primary restaurant
divisions, KFC, Taco Bell and Pizza Hut, into a new public company,
Tricon Global Restaurants, Inc. (Tricon). Also during fiscal 1997,
PepsiCo sold its restaurant distribution subsidiary, Pepsi Food
Systems ("PFS") to AmeriServe Food Distribution, Inc. (AmeriServe).
AmeriServe has been and continues to be the second largest Cooperative
customer, purchasing goods for distribution to primarily KFC
franchisees. When AmeriServe purchased PFS, it acquired rights under a
five year distribution agreement which now binds Tricon to use
AmeriServe's distribution services for Tricon owned KFC, Taco Bell and
Pizza Hut outlets, and which binds the purchasers of Taco Bell and
Pizza Hut outlets sold as part of Tricon's announced program for
refranchising certain Tricon owned restaurants to existing and new
franchisees. The Cooperative and its members continue to monitor their
relationship with AmeriServe. AmeriServe does not purchase goods
through the Cooperative for distribution under its five year Tricon
agreement. The impact of Tricon's formation and AmeriServe's
acquisition of PFS on the business of the Cooperative remains
uncertain.
(Continued)
F-12
<PAGE> 60
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(7) 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 $556,000, $498,000 and $416,000 for 1997, 1996 and 1995,
respectively.
(8) Commitments and Contingencies
The Cooperative leasing arrangements include office space and equipment
leased under customary leasing arrangements which include in some
instance options to renew or purchase the leased items. All such
leases are considered operating leases.
The following is a schedule of future lease obligations:
<TABLE>
<CAPTION>
Year ending October 31:
-----------------------
<S> <C>
1998 $ 937,000
1999 925,000
2000 363,000
2001 57,000
----------
$2,282,000
==========
</TABLE>
Rental expense was approximately $774,000, $719,000 and $664,000 in 1997,
1996 and 1995, 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.
(Continued)
F-13
<PAGE> 61
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(8) Commitments and Contingencies (Continued)
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 initially
provided 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. The Bank's commitment to provide such loans
terminated in June 1997. As of October 31, 1997, the Bank has funded
approximately $7 million of borrowings outstanding under this program.
The Cooperative evaluates the credit risk associated with their
guarantees through credit and monitoring procedures associated with
their approval and periodic payments and reporting from the primary
lender, the Bank. Currently, no losses are expected by the Cooperative
under this program.
(9) 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.
(Continued)
F-14
<PAGE> 62
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(9) Financial Instruments (Continued)
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.
(10) Impact of New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". Management believes that the adoption of SFAS
130 in fiscal 1999 will not have a material adverse affect on the
Cooperative's consolidated financial statements.
F-15
<PAGE> 63
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 Registrant
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 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 threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an
II-1
<PAGE> 64
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 connection
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 believe 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 threatened, 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 reasonably incurred by him in
connection with the defense or settlement of such action or suit 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 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 Cooperative 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.
II-2
<PAGE> 65
(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.
(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 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 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 corporation, 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
II-3
<PAGE> 66
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; references 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
Cooperative 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 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 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.
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.
II-4
<PAGE> 67
(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.
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 Registrant,
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 (management contract required to be filed pursuant to Item 601(10) of
Regulation S-K).
**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/Breckinridge,
Ltd. d/b/a The Springs and the Registrant.
+10.6 Purchasing Affiliation Agreement dated as of June 15,
1994, between the International Franchisee Advisory Council, Inc., and the
Registrant.
II-5
<PAGE> 68
+10.7 Supplemental Benefits/Consulting Agreement between
Thomas D. Henrion and the Registrant effective as of January 1, 1994 (management
contract required to be filed pursuant to Item 601(10) of Regulation S-K).
***10.8 Amendment No. 1 to Supplemental Benefits/Consulting
Agreement between Thomas D. Henrion and the Registrant effective January 1996
(management contract required to be filed pursuant to Item 601(10) of Regulation
S-K).
****10.9 Guaranty Agreement dated as of April 18, 1996 between
the Registrant and National Consumer Cooperative Bank.
****10.10 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, 1997 [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, 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].
II-6
<PAGE> 69
(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 amendment 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
(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,
II-7
<PAGE> 70
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.
II-8
<PAGE> 71
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 March 6, 1998.
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 March 6, 1998
- ------------------------
William E. Allen
* Director March 6, 1998
- ------------------------
Anthony Basile
* Director March 6, 1998
- ------------------------
James G. Cocolin
* Director March 6, 1998
- ------------------------
Lois G. Foust
/s/ Thomas D. Henrion President and Chief March 6, 1998
- ------------------------ Executive Officer,
Thomas D. Henrion Director
* Director March 6, 1998
- ------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President and March 6, 1998
- ------------------------ Chief Financial Officer
William V. Holden (Principal Accounting
Officer) (Principal
Financial Officer
</TABLE>
<PAGE> 72
<TABLE>
<S> <C> <C>
* Director March 6, 1998
- ------------------------
Paul A. Houston
* Director March 6, 1998
- ------------------------
Grover G. Moss
* Director, Vice Chair- March 6, 1998
- ------------------------ man, Treasurer
David G. Neal
* Director March 6, 1998
- ------------------------
James D. Olson
* Director, Chairman March 6, 1998
- ------------------------ of the Board
Robert P. Peck
* Director March 6, 1998
- ------------------------
Darlene L. Pfeifer
* Director March 6, 1998
- ------------------------
Edward W. Rhawn
* Director March 6, 1998
- ------------------------
Jack M. Richards
* Director March 6, 1998
- ------------------------
Dean M. Sorgdrager
* Director March 6, 1998
- ------------------------
Calvin G. White
* Director March 6, 1998
- ------------------------
Ronald J. Young
By /s/ Thomas D. Henrion March 6, 1998
----------------------
Thomas D. Henrion
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Registration
Statement.
</TABLE>
<PAGE> 73
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 8, 1997, included the
related financial statement schedule for each of the years in the three-year
period ended October 31, 1997, 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
March 6, 1998
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<PAGE> 74
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:
1997 $1,328,869 $175,310 -0- $ 95,452(A) $1,408,727
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
</TABLE>
(A) Uncollectible accounts and notes written off
S-2
<PAGE> 1
EXHIBIT 24
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 (i) any and all
post-effective amendments to the Registration Statement of KFC National
Purchasing Cooperative, Inc. (the "Cooperative") (File No. 33-56982), (ii) any
other Registration Statement, and all amendments thereto, relating to a class or
classes of the Cooperative's securities to which the Power of Attorney is filed
as an exhibit, and (iii) the Annual Report on Form 10-K of the Cooperative for
the fiscal year ended October 31, 1997, 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, 12/9/97
- -------------------------- Secretary
William E. Allen
/s/ Anthony Basile Director 12/9/97
- --------------------------
Anthony Basile
/s/ James G. Cocolin Director 12/10/97
- --------------------------
James G. Cocolin
/s/ Lois G. Foust Director 12/10/97
- --------------------------
Lois G. Foust
/s/ Thomas D. Henrion Director, 12/10/97
- -------------------------- President,
Thomas D. Henrion Chief Executive
Officer
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
/s/ Edward J. Henriquez, Jr. Director 12/9/97
- ------------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President, 12/9/97
- ------------------------------ Chief Financial Officer
William V. Holden (Principal Accounting Officer)
(Principal Financial Officer)
/s/ Paul A. Houston Director 12/9/97
- ------------------------------
Paul A. Houston
/s/Grover G. Moss Director 12/9/97
- ------------------------------
Grover G. Moss
/s/ David G. Neal Director, 12/9/97
- ------------------------------ Vice Chairman,
David G. Neal Treasurer
/s/ James D. Olson Director 12/10/97
- ------------------------------
James D. Olson
/s/ Robert P. Peck Director, 12/10/97
- ------------------------------ Chairman
Robert P. Peck
/s/ Darlene L. Pfeiffer Director 12/9/97
- ------------------------------
Darlene L. Pfeiffer
/s/ Edward W. Rhawn Director 12/9/97
- ------------------------------
Edward W. Rhawn
/s/ Jack M. Richards Director 12/9/97
- ------------------------------
Jack M. Richards
/s/ Dean M. Sorgdrager Director 12/9/97
- ------------------------------
Dean M. Sorgdrager
/s/ Calvin G. White Director 12/10/97
- ------------------------------
Calvin G. White
/s/ Ronald J. Young Director 12/9/97
- ------------------------------
Ronald J. Young
</TABLE>
