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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1997
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 0-23496
KFC NATIONAL PURCHASING COOPERATIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0946155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Breckinridge Lane, Louisville, Kentucky 40207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 896-5900.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Membership Common Stock, no par value
Store Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in
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definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].
State the aggregate market value of the voting and non-voting common
stock (1) held by nonaffiliates of the registrant as of December 31, 1997.
Membership Common Stock $6,490
Store Common Stock $2,115,200
Number of shares outstanding of each of the issuer's classes of common
stock as of December 31, 1997.
<TABLE>
<CAPTION>
Title of each class Number of Shares
------------------- ----------------
<S> <C>
Membership Common stock 666
Store Common Stock 6,140
</TABLE>
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(1) The aggregate market value stated above is the product of the
current per share offering price of Membership Common Stock ($10) and Store
Common Stock ($400) multiplied by the number of shares of Membership Common
Stock and Store Common Stock, respectively, outstanding held by nonaffiliates on
December 31, 1997. For purposes of these calculations, directors and executive
officers of the Registrant are assumed to be the only affiliates.
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PART I
ITEM 1. Business.
Summary
KFC National Purchasing Cooperative, Inc. (the "Cooperative"), was
formed to serve as a national purchasing cooperative on behalf, and for the
benefit, of Kentucky Fried Chicken ("KFC") retail outlet owners and operators,
including KFC National Management Company ("KFC Management"), a subsidiary of
KFC Corporation ("KFCC"). The Cooperative was incorporated under the General
Corporation Law of the State of Delaware in September 1978. Effective in the
first calendar quarter of 1992, through a newly formed subsidiary, the
Cooperative commenced purchasing and distribution for owners and operators of
KFC franchised retail outlets in Canada. The Cooperative sells primarily to
independent KFCC-approved distributors in Canada similar to the way it does
business in the United States. In November 1992, the Cooperative's members
adopted amendments to its Certificate of Incorporation and Bylaws to provide for
membership in the Cooperative by owners and operators of Taco Bell retail
outlets. In addition, the Cooperative is actively developing business
opportunities with retail outlet operators of other fast food concepts,
including Long John Silver's, Dairy Queen, and Fazoli's. The Cooperative
currently does business under the name of FoodService Purchasing Cooperative,
Inc. The term "Operator" when used in this document includes (i) owners and
operators of Taco Bell retail outlets, (ii) KFC Management and 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.
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
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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 financing from time to time under certain
circumstances for its stockholder members. In 1987, the Cooperative initiated an
equipment financing program to finance for franchisee members their purchases
from the Cooperative of equipment required for Operators to participate in KFC's
introduction of two new menu items. In 1992, the Cooperative reactivated on a
limited basis an equipment financing program to finance equipment purchases for
KFC franchisee members participating in the KFC buffet bar, rotisserie chicken,
and KFC signage rollouts. Although the Cooperative has now terminated its
equipment financing program, it does actively help Operators obtain information
concerning alternative financing options.
"Dairy Queen," "Domino's Pizza," "Long John Silver's," "Taco Bell,"
"Fazoli's," and "KFC" are registered trademarks of American Dairy Queen
Corporation, Domino's Pizza, Inc., Long John Silver's, Inc., Taco Bell
Corporation, Seed Restaurant Group Inc., and KFCC, respectively, and are used in
these materials for identification purposes only. The Cooperative is an
independent provider of products and is not affiliated with American Dairy Queen
Corporation, Domino's Pizza, Inc., Long John Silver's Inc., Taco Bell
Corporation, Seed Restaurant Group Inc., or KFCC, except that KFCC is a
stockholder member of the Cooperative.
HISTORY
The Cooperative was organized by KFCC and the National Franchisee
Advisory Council (the "NFAC") with the objectives of: (i) obtaining Equipment
and Supplies at the lowest prices; and (ii) having the procurement function on
behalf of Operators of KFC retail outlets handled on an arm's-length basis
rather than through KFCC. The organization of the Cooperative was an outgrowth
of a feasibility study conducted by a consulting firm, engaged by KFCC in
conjunction with the Equipment and Supply Committee of the NFAC. The consulting
firm made recommendations about possible procurement alternatives to the then
current KFC Master Supply Agreement mechanism.
A primary premise upon which the Cooperative was founded was that
greater cost savings for Operators in the purchase of Equipment and Supplies
could be realized through one central procurement organization that made firm
purchase commitments, took title to goods, and made sales to Operators and
distributors, thereby relieving suppliers of certain costs of doing business
with numerous, small volume purchasers. These costs include credit, sales,
marketing, and billing expenses which would otherwise be expected to be
reflected ultimately in higher prices charged by the suppliers. Purchase
commitments made by the Cooperative also allow suppliers to plan production,
purchase raw materials, and control inventory levels, thereby further providing
suppliers with reduced costs.
In determining to organize the Cooperative, KFCC and the NFAC
concluded that, notwithstanding the inherent administrative complexity of a
member-con-
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trolled 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.
The Cooperative provides the convenience of "one-stop" shopping for
distributors and Operators which otherwise might be required to deal with a
number
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of suppliers. The operation of the Cooperative also allows Operators to benefit
from the Cooperative's full-time professional purchasing staff working solely
for the benefit of Operators.
OPERATIONS
The following is a description of the Cooperative's United States
operations, primarily with respect to KFC and Taco Bell related activities. As
the Cooperative expands its operations into territories outside of the United
States and with other fast food concepts, the Cooperative intends to review
these operations and offer programs substantially similar to those described
below wherever feasible.
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 Item 5. "MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
SEASONALITY
The Cooperative's sales reflect the somewhat seasonal nature of the
volume of business done by Operators. Thus, the Cooperative's sales are
generally expected to be at their relatively lowest levels during the winter
months and are generally expected to be at their relatively highest levels in
the summer months. However, because of the growth in the Cooperative's sales
volume since it commenced operations as of March 1, 1980, no pattern of
absolute, rather than relative, seasonal changes has emerged.
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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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 totaling 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
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warehouse space in Louisville, Kentucky, for its equipment staging operation.
See Item 2. "PROPERTIES."
During fiscal 1997, the Cooperative shipped equipment packages for an
aggregate sales price of approximately $11,292,784. 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.
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.
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The Cooperative maintains an information bank which provides members,
upon request, with the following:
- information concerning prices being paid by distributors for
merchandise purchased from the Cooperative so that members can
compare store-delivered cost with the distributors' cost for
the merchandise;
- industry data to assist them in analyzing cash discounts,
earned weight discounts and other elements of the
distributors' cost;
- industry data on average industry distributor markups, order
size discounts, cash discounts, distributor service levels and
other distributor performance guidelines; and
- information on expected supply levels (especially possible
shortages) and on expected changes in prices of Equipment and
Supplies.
The Cooperative also provides its members with assistance in resolving
a wide variety of procurement problems including "out-of-stock" conditions,
shipping problems and returned goods disputes.
PRINCIPAL CUSTOMERS
Although the Cooperative sells primarily to distributors, the ultimate
customers for the goods sold by the Cooperative are Operators. 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
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of goods sold by the Cooperative is provided by "approved suppliers." The
Cooperative does not itself approve suppliers, but may be asked to provide
information to a restaurant franchisor in its approval process. In addition, the
Cooperative may, from time to time, suggest to members that potential suppliers
seek "approved" status for their products. The Cooperative's ability to obtain
low prices for Equipment and Supplies subject to a franchisor's approval is
dependent upon the franchisor's approval of enough suppliers for any particular
product to create price competition among "approved suppliers." For any item for
which such approval is not required, the Cooperative purchases products from a
wide variety of sources ranging from local suppliers to large multinational
corporations. The Cooperative attempts to obtain the lowest possible prices by
making firm commitments to purchase in volume based on its best estimates of
resales to Operators or their distributors and by assuming other procurement
functions and risks that reduce the suppliers' costs. Approved suppliers have
established varying minimum order quantities. The Cooperative occasionally, in
conjunction with a restaurant franchisor, monitors product quality and services
of suppliers.
The Cooperative is not dependent on any single supplier for the
Equipment and Supplies it sells. Many suppliers are generally available with
respect to any given item sold by the Cooperative. However, KFC proprietary
original recipe seasoning products and certain Taco Bell proprietary products
are available only through one or a limited number of suppliers in conjunction
with the franchisor.
COMPETITION
The Cooperative and independent distributors to which the Cooperative
sells are in substantial competition with 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,
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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. The impact of Tricon's formation and AmeriServe's acquisition of PFS
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 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 Item 5. "MARKET FOR REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." 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
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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 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
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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 Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--ANALYSIS OF OPERATIONS."
TRADE REGULATION MATTERS
The following features of the Cooperative reflect the mutual concerns
of the Cooperative and its customers that the operations of the Cooperative be
consistent with the objective of fostering competition at both the supply and
distribution stages in the provision of Equipment and Supplies to Operators.
(1) Stock ownership and attendant rights in the Cooperative are
available to all Operators on a nondiscriminatory basis, and the purchase of
Common Stock is completely voluntary. Operators need not own Common Stock to
purchase goods from the Cooperative directly or through a distributor.
(2) The Cooperative does not impose any requirement that members or
their distributors purchase any goods from the Cooperative. The success of the
Cooperative depends on it being able to purchase and resell goods at prices that
attract the business of Operators and/or their distributors in a free and
competitive market environment.
(3) The Cooperative does not control or restrict the distributors with
which Operators may deal. The choice of a distributor and the terms of the
distribution arrangement remain in the sole control of the Operator, and all
distributors are free to purchase from the Cooperative subject to uniform and
reasonable credit standards.
(4) The Cooperative does not control or restrict the manufacturers who
supply goods to Operators. All "approved suppliers" have the opportunity to
compete for the business of the Cooperative, and all such suppliers, whether or
not they sell to the Cooperative, are free to sell directly to Operators and/or
their distributors.
(5) The Cooperative does not finance its operations through brokerage
fees or rebates from suppliers with which it deals. The operation of the
Cooperative is financed by the capital contributions of its members, by the
mark-ups charged by it on goods it sells to cover the costs of its services, and
by borrowings from commercial lenders.
(6) The Cooperative does not solicit or induce unlawful price
discriminations from its suppliers. The cost prices paid by the Cooperative are
negotiated with, or competitively bid by, suppliers based on the Cooperative's
- 13 -
<PAGE> 14
volume commitments to purchase and the cost savings realized by suppliers from
dealing with the Cooperative. The cost savings realized by certain suppliers are
reflected in sales and service allowances which operate to reduce the
Cooperative's cost prices.
(7) The Cooperative does not dictate or in any way control delivered
prices charged by distributors for goods purchased from the Cooperative. The
Cooperative does provide to its members information on the Cooperative's prices,
industry data on distribution costs and service levels, and does monitor
distributor prices to enable franchisees to negotiate more effectively with
distributors. See "DISTRIBUTION."
(8) The Cooperative does not disclose information that is identified or
identifiable as pertaining to the business of any particular Operator (other
than information relating to past due accounts owed to the Cooperative) to any
other Operator or representative thereof or to any other person who is not
employed by the Cooperative.
EMPLOYEES
The Cooperative presently has approximately 169 employees, including
temporaries. The Cooperative believes that its employee relations are generally
satisfactory.
ITEM 2. Properties.
The Cooperative does not own any real property or warehousing
facilities. The Cooperative currently leases approximately 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.
ITEM 3. Legal Proceedings.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
No market for the Cooperative's capital stock exists nor is any
expected to develop. Described below are the Cooperative's dividend policy,
patronage dividend program, and Membership Common Stock and Store Common Stock.
- 14 -
<PAGE> 15
DIVIDEND POLICY
Although the Cooperative does not engage in business to generate
profits, if in any year the revenues from Equipment and Supplies sales exceed
expenses, the amortization of debt, and reasonable reserves, the Cooperative may
distribute all or a portion of the excess to the holders of Store Common Stock
as dividends or use the excess revenues to provide additional procurement-
related services. While the Cooperative is not precluded from paying dividends,
the principal purpose of the Cooperative is not to produce profits to be
distributed. Prior to the implementation of the Cooperative's patronage dividend
program, the Cooperative's Board of Directors declared a dividend of $25.00 per
share of Store Common Stock which was paid on March 31, 1982. There is no
current intention to pay any dividends in the future on Store Common Stock on a
per share basis. The Cooperative will not pay dividends at any time on
Membership Common Stock.
The Cooperative has established a patronage dividend program. See
"PATRONAGE DIVIDEND Program." The payment of dividends based upon patronage
tends, of course, to reduce or eliminate funds available for dividends based
upon the number of shares of Store Common Stock owned.
PATRONAGE DIVIDEND PROGRAM
INTRODUCTION
Although the Cooperative does not engage in business to generate
profits, it may nonetheless, in any fiscal year, generate revenues in excess of
amounts needed to cover expenses, amortize indebtedness, and provide for
reasonable reserves. Thus, even though the Cooperative endeavors to minimize
markups on Equipment and Supplies to the least amount required to cover its
anticipated costs of operations, the Cooperative may have funds available for
distribution to members.
In 1982, the Cooperative implemented a program for the payment of
patronage dividends to members on the basis of the value of business done by the
Cooperative with regard to each member, respectively. Beginning with fiscal
1995, through an amendment to Section 9.2 of its Bylaws set forth in its
entirety herein, the Board of Directors is authorized to distribute as patronage
dividends amounts determined in accordance with Section 9.2. Under the revised
program, solely for purposes of determining the amount of patronage dividends
distributable to a particular stockholder member, the Cooperative has
established two separate pools of allocated net earnings for purposes of making
patronage dividend determinations, the "KFC Pool" and the "Taco Bell Pool," as
defined in 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
- 15 -
<PAGE> 16
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 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
- 16 -
<PAGE> 17
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 stockholder members
and the value of business done by the Cooperative with
participating distributors resulting in resales by such
distributors to such stockholder members for such use.
The amount distributable by the Cooperative as
patronage dividends directly to each stockholder member of the
Cooperative shall be based on
(A) The ratio of
(i) the value of business done by the Cooperative
directly with such stockholder member for use by the
stockholder member in KFC retail outlets owned or
operated by the stockholder member and the value of
business done by the Cooperative with participating
distributors resulting in resales by such distributors
to such stockholder member for such use, to
(ii) the net earnings of the Cooperative in the KFC
Pool, plus
(B) The ratio of
(i) the value of business done by the Cooperative
directly with such stockholder member for use by the
stockholder member in Taco Bell retail outlets owned or
operated by the stockholder member and the value of
business done by the Cooperative with participating
distributors resulting in resale by such distributors to
such stockholder member for such use, to
(ii) the net earnings of the Cooperative in the
Taco Bell Pool.
(b) The distribution described in subparagraph (a), is
among all stockholder members, shall be directly
proportional for each taxable year of the Cooperative to the
purchases by each stockholder member, whether such purchases
are direct or through a participating distributor.
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<PAGE> 18
9.3 Timing of Payment of Patronage Dividends. Each
distribution of patronage dividends shall be made within the
payment period beginning with the first day of a taxable year
for which the Cooperative claims a deduction for patronage
dividends paid in the form of such distributions and ending
with the 15th day of the 9th month following the close of such
taxable year.
9.4 Character of Distributions. Twenty percent or
more of the amount of each distribution shall be paid in cash
or by a "qualified check" as defined in Section 1388(c)(4) of
the Internal Revenue Code of 1986, as amended. All amounts of
such distributions not paid in money or by "qualified check"
shall be paid a "qualified written notice of allocation" as
defined in Section 1388(c)(1) of the Internal Revenue Code of
1986, as amended.
9.5 Consent to Stockholder Members. Membership in the
Cooperative by stockholder members shall constitute a consent
of each such member to include in its gross income the amount
of any patronage dividend which is paid with respect to direct
sales from the Cooperative, and indirect sales through
participating distributors in money, "qualified checks,"
"qualified written notices of allocation" or other property
(except "non-qualified written notices of allocation" as
defined in Section 1388(d) of the Internal Revenue Code of
1986, as amended) and which is received by it during the
taxable year from the Cooperative. Each stockholder member of
the Cooperative, through initiating or retaining its
membership after adoption of this Article IX of these Bylaws,
as amended from time to time, consents to be bound hereby. The
provisions of this Article IX, as amended from time to time,
shall be a contract between the Cooperative and each
stockholder member as fully as though each stockholder member
had signed a specific separate instrument in which the
stockholder member agreed to be bound by all of the terms and
provisions of this Article IX, as amended from time to time.
9.6 Application of Patronage Dividends to Amounts Due
the Cooperative. Notwithstanding any of the foregoing
provisions of this Article IX, the portion of any patronage
dividends which would otherwise be payable in cash under any
provision of this Article IX to a stockholder member may be
applied by the Cooperative to the payment of any indebtedness,
the repayment of which is in default, owed to the Cooperative
by any such stockholder member to the extent of such
indebtedness instead of being distributed in cash, provided,
however, that an amount equal to twenty percent (20%) (or, in
the case of a stockholder member located in a jurisdiction to
which the special withholding requirements of Sec-
- 18 -
<PAGE> 19
tions 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,
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<PAGE> 20
the repayment of which is in default. As a matter of policy,
the Cooperative currently notifies any franchisee against
whose patronage dividend the Cooperative intends to offset
against an obligation of its intention by certified mail
return receipt requested, and the Cooperative will require
any member requesting that 20% of any patronage dividend to
be offset nevertheless be paid to the member in cash make
the request by certified mail return receipt requested.
5. KFC Management and Harman are eligible as are all other
members to receive patronage dividends on the same basis as
other members.
6. Distributions of patronage dividends are based solely on
patronage with the Cooperative and not on the basis of the
number of shares of Store Common Stock owned by a member. The
payment of dividends based on patronage with the Cooperative
necessarily reduces or eliminates funds available for
dividends based on the number of shares of Store Common Stock
owned.
7. Non-member Operators are ineligible to receive patronage
dividends, just as they are ineligible to receive dividends on
Store Common Stock.
8. The treatment of the Cooperative's payment of patronage
dividends under the federal income tax laws of the United
States is not free from uncertainty. See "UNITED STATES TAX
ASPECTS OF THE PATRONAGE DIVIDEND PROGRAM." If favorable tax
treatment of patronage dividends becomes unavailable, the
Cooperative will reevaluate the patronage dividend program and
may discontinue or modify it.
9. If the Cooperative is liquidated, any funds available after
redemption of Membership Common Stock will be distributed on
the basis of past patronage with the Cooperative rather than
number of shares of Store Common Stock owned.
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
Coopera-
- 20 -
<PAGE> 21
tive's proposed exclusion from its taxable income of amounts paid as patronage
dividends. Accordingly, there can be no assurance that the Cooperative's
treatment will not be challenged on audit of the Cooperative's federal income
tax returns. If such a challenge were successful, the Cooperative would be
liable for taxes and interest for any amounts disallowed as exclusions from its
taxable income.
PATRONAGE DIVIDEND PROGRAM FOR CANADIAN STOCKHOLDERS
The payment of patronage dividends to members is based on the value of
business done by the Cooperative with regard to each member. Because
substantially all of the Cooperative's Canadian sales to Operators will be with
the Canadian Subsidiary, and not with the Cooperative itself, the value of
business done by Canadian stockholder members with the Cooperative will be
minimal. The amount of the patronage dividend paid to Canadian stockholder
members will be correspondingly minimal. The Cooperative, therefore, has
determined to provide a sales allowance to Canadian stockholder members based on
patronage with the Canadian Subsidiary. This allowance is intended to provide
the Canadian stockholder members with a program based on Canadian sales similar
to the current patronage dividend program. For fiscal 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.
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<PAGE> 22
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
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, each provides for the election of one director and the
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<PAGE> 23
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.
The various Series, number of shares of Store Common Stock required to
trigger a conversion into a new Series and the various Taco Bell regions are set
forth below:
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<PAGE> 24
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
-------- -------- --------
SERIES TACO BELL REGIONS NUMBER OF TACO BELL STORE SHARES
------ ----------------- --------------------------------
<S> <C> <C>
N 1 through 6 Less than 400
- ----------------------------------------------------------------------------------
O 1 through 6 Less than 650, but
400 or more
- ----------------------------------------------------------------------------------
O 1, 2 and 3 Less than 900, but
650 or more
P 4, 5 and 6
- ----------------------------------------------------------------------------------
O 1 and 2
P 3 and 4 900 or more
Q 5 and 6
</TABLE>
The Taco Bell regions listed in Column 1 below include the areas set
forth in the corresponding line(s) of Column 2 below.
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2
-------- --------
REGION NUMBER REGION
------------- ------
<S> <C>
1 (Northeast): Connecticut, Delaware, District of Columbia,
Maine, Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island, Vermont, Virginia
and West Virginia.
2 (Southeast): Alabama, Florida, Georgia, Kentucky,
Mississippi, North Carolina, South Carolina and Tennessee.
3 (Midwest): Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota and Wisconsin.
4 (Southwest): Arkansas, Arizona, Louisiana, New Mexico,
Oklahoma and Texas.
5 (Northwest): Alaska, Colorado, Idaho, Montana, Oregon,
Utah, Washington, Wyoming and Northern California (all of
California except the counties of San Luis Obispo,
Santa Barbara, Kern, Ventura, Los Angeles, San Bernardino,
Orange, Riverside, San Diego and Imperial).
6 (Far West): Hawaii, Guam, Nevada and the California
counties of San Luis Obispo, Santa Barbara, Kern, Ventura,
</TABLE>
- 24 -
<PAGE> 25
Los Angeles, San Bernardino, Orange, Riverside, San Diego
and Imperial.
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
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
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<PAGE> 26
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 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. See
"DIVIDEND POLICY" and "PATRONAGE DIVIDEND PROGRAM."
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<PAGE> 27
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 purchase
said stock. If the Cooperative declines its right of first refusal or does not
respond to the offer within 90 days, the member, within 60 days thereafter, may
sell, assign or otherwise transfer the shares to the person, firm or entity
making the offer to purchase the shares, provided such person, firm or entity
qualifies for membership in the Cooperative. If the shares are not sold or
otherwise transferred within the 60 day period referred to above, the shares may
not be sold or transferred without the member again offering the shares to the
Cooperative.
Pursuant to a policy adopted by the Cooperative's Board of Directors,
the Cooperative is authorized to purchase, for not more than the amount of the
member's equity per share at the end of the Cooperative's fiscal year next
preceding the date of purchase, a certain number of shares of Store Common Stock
in each of the Cooperative's fiscal quarters. The Cooperative therefor may, but
generally has no obligation to, repurchase shares of Store Common Stock from a
member which owns shares in excess of the number required for membership. In any
event, the Cooperative has no intention of repurchasing substantial numbers of
shares of Store Common Stock. For a discussion of a commitment by the
Cooperative to repurchase from Canadian stockholders shares of Store Common
Stock at the original purchase price, see "Patronage Dividend Program -
Patronage Dividend Program for Canadian Stockholders."
Liquidation Rights. In the event of any liquidation of the Cooperative
or other disposition of its assets, the holders of Store Common Stock shall be
entitled to receive the net assets of the Cooperative remaining after payment of
all debts and liabilities of the Cooperative and payment of $10.00 per share to
the holders of Membership Common Stock. Liquidating distributions will be made
on the basis of past patronage with the Cooperative rather than number of shares
of Store Common Stock owned. See "PATRONAGE DIVIDEND PROGRAM."
General. Store Common Stock has no preemptive or conversion rights.
The shares of Store Common Stock are, when issued, duly authorized, validly
issued and fully paid and nonassessable and the holders thereof will not be
liable for any payment of the Cooperative's debts.
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<PAGE> 28
Reports to Stockholders
The Cooperative intends to send to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited financial statements.
ITEM 6. Selected Financial Data.
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>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
ANALYSIS AND OPERATIONS
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.
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<PAGE> 29
Net sales for fiscal 1996 were $580,441,000 compared to $537,116,000
for fiscal 1995, an increase of 8.1%. Approximately 88% of fiscal 1996 sales
were attributable to food and packaging, with substantially all of the remainder
to equipment. The fiscal 1996 increase is primarily attributable to KFC
Operators located in the United States. KFC-U.S. equipment sales increased by
approximately 49% in fiscal 1996, while food and packaging sales for KFC-U.S.
increased approximately 6%. Sales related to the Cooperative's Canadian
subsidiary increased approximately 2%, primarily driven by increased equipment
sales. Dairy Queen sales increased approximately 16% for fiscal 1996 compared to
fiscal 1995, attributable primarily to an increase in food and packaging sales.
Taco Bell sales decreased approximately 4% for fiscal 1996 compared to fiscal
1995. This decrease was primarily the result of lower store sales and improved
purchasing prices on certain items. Sales related to Fazoli's in fiscal 1996
were approximately $14,381,000, primarily equipment sales. The Fazoli's sales
reflected an increase of approximately $10,115,000 compared to fiscal 1995.
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. The impact of Tricon's formation and AmeriServe's acquisition
of PFS 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.
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<PAGE> 30
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 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
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<PAGE> 31
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.
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,
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<PAGE> 32
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.
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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
ITEM 8. Financial Statements and Supplementary Data.
See accompanying Index to Consolidated Financial Statements and
Schedule.
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<PAGE> 33
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the Registrant's last two fiscal years and any subsequent
interim period, the Registrant has not had a principal accountant resign,
decline to stand for re-election or be dismissed.
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<PAGE> 34
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
MANAGEMENT
DIRECTORS AND OFFICERS
The Cooperative's Bylaws provide for a Board of Directors consisting of
up to twenty voting members plus the Cooperative's President, who is a
non-voting member. Up to nineteen directors will be elected by the holders of
various series of Membership Common Stock. Each series of Membership Common
Stock is generally entitled to elect one director, except that the 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.
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.
For a description of the Cooperative's directors and executive officers
and certain related information, see Item 12. "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
During the last five years, Messrs. Allen, 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
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<PAGE> 35
Financial Officer in 1991. Mr. Holden also serves the Cooperative as Assistant
Treasurer.
Judith L. Hollis has served in the Cooperative's sales division since
1991 and currently serves as Vice President/General Manager of KFC Concept. Ms.
Hollis has resigned from all positions with the Cooperative effective February
13, 1998. From 1990 until 1991, Ms. Hollis was Vice President of Marketing
Resources Plus, a division of US West.
W. Thomas Hutcherson has served as the Cooperative's Vice President of
Purchasing since 1994. He served as Vice President-Equipment Purchasing and
Sales from 1982 until 1994.
John W. Inwright has served as Vice President of Operations,
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
the Insurance Subsidiary and, in conjunction with the Executive Committee, makes
recommendations to the Board of Directors concerning the insurance programs.
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<PAGE> 36
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"1934 Act") requires the Cooperative's directors, executive officers and certain
persons to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission (the "SEC"). Based solely upon a
review of forms filed by the appropriate persons and written representations
from such persons, the Cooperative believes that all such filing requirements
were complied with in fiscal 1997 except that one director filed untimely
reports on transactions in the Company's stock as follows: Paul Houston, one
report regarding the disposition of 38 shares of Store Common Stock and one
report regarding the disposition of 3 shares of Store Common Stock.
ITEM 11. 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
</TABLE>
- 36 -
<PAGE> 37
<TABLE>
<CAPTION>
Annual Compensation
--------------------
Name and Principal Fiscal All Other
Position Year Salary Bonus(1) Compensation(2)
- ------------------- ---- ------ -------- ---------------
<S> <C> <C> <C> <C>
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 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 Cooperative's payments
with respect to the insurance policy described below.
In addition, Mr. Henrion and the Cooperative have executed a
Supplemental Benefits/Consulting Agreement (the "Supplemental Agreement"),
effective January 1, 1994, whereby Mr. Henrion will receive deferred
compensation upon either his retirement or his voluntary or involuntary
termination not for cause, as defined. The Cooperative's determination to enter
into the Supplemental Agreement was primarily based on the Board of Directors'
subjective sense of the value of Mr. Henrion's continued loyalty and service to
the Cooperative, the Cooperative's desire to assist Mr. Henrion in providing for
his retirement, as well as the contingencies of death and disability, and to
provide Mr. Henrion with an incentive to provide advisory services to the
Cooperative in a consulting capacity upon his eventual retirement.
Pursuant to the Supplemental Agreement, commencing upon his departure
from the Cooperative (so long as his departure is not the result of a
termination for cause) and for the duration of the "Period" as defined below,
Mr. Henrion will receive monthly compensation equivalent at least to one-twelfth
of 18% of his annual base compensation averaged over a three-year period
("Averaged Annual Compensation"). The Period will be a number of months equal to
the number of months Mr. Henrion has worked for the Cooperative after January 1,
1994. In addition, for one year following the expiration of the Period, Mr.
Henrion will receive, in equal monthly installments, an amount equal to his
Averaged Annual Compensation. As of October 31, 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
- 37-
<PAGE> 38
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.
- 38 -
<PAGE> 39
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 STORE
CURRENTLY DIRECTOR OR TERM AS PRESENT COMMON PERCENT
HELD WITH EXECUTIVE DIRECTOR SERIES REPRESENTED PRINCIPAL STOCK OF STORE
NAME AGE COOPERATIVE OFFICER EXPIRES (*) Occupation OWNERSHIP OUTSTANDING
- ---- --- ----------- ------- ------- ------------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Allen 58 Director, 1988 2000 F Operator 11 **
Secretary
Anthony Basile 56 Director 1997 1998 Taco Bell Operator 26 **
At Large
James G. Cocolin 48 Director 1996 1999 C Operator 13 **
Lois G. Foust 53 Director 1997 1998 L Operator 2 **
Edward J. Henriquez, Jr. 60 Director 1994 1999 J Operator 12 **
Paul A. Houston 48 Director 1995 2000 I President of 367 6.0
Scott's
Restaurants,
Inc.
Grover G. Moss 53 Director 1994 1998 O Operator 10 **
David G. Neal 51 Director, 1991+ 2000 E Operator 94 1.5
Vice
Chairman of
the Board,
Treasurer
James D. Olson 47 Director 1997 1998 H President of 266 4.3
Harman
Management
Corporation
</TABLE>
- 39 -
<PAGE> 40
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME STORE
CURRENTLY DIRECTOR OR TERM AS PRESENT COMMON PERCENT
HELD WITH EXECUTIVE DIRECTOR SERIES REPRESENTED PRINCIPAL STOCK OF STORE
NAME AGE COOPERATIVE OFFICER EXPIRES (*) OCCUPATION OWNERSHIP OUTSTANDING
- ---- --- ----------- ------- ------- ------------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert P. Peck 63 Director, 1990 1999 B Operator 10 **
Chairman of
the Board
Darlene L. Pfeiffer 60 Director 1997 1998 L Operator 4 **
Edward W. Rhawn 59 Director 1992 1999 Independent Chairman of -- --
Rhawn
Enterprises,
Inc.
Jack M. Richards 69 Director 1991 2000 A Operator 3 **
Dean M. Sorgdrager 35 Director 1996 1999 G Operator 1 **
Calvin G. White 43 Director 1992 1999 D Operator 12 **
Ronald J. Young 39 Director 1993 2000 M Operator 12 **
David Paradise 47 Non-Voting 1997 -- -- Operator 9 **
Director++
Thomas D. Henrion 55 Director, 1980 -- -- President & -- --
President, Chief
Chief Executive
Executive Officer,
Officer Cooperative
William V. Holden 48 Vice 1985 -- -- VIce -- --
President, President
Chief Chief
Financial Financial
Officer Officer,
Cooperative
Judith L. Hollis 49 Vice 1991 -- -- Vice -- --
President, President
General Cooperative
Manager KFC
Concept
W. Thomas Hutcherson 51 Vice 1982 -- -- Vice -- --
President, President
Purchasing Cooperative
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME STORE
CURRENTLY DIRECTOR OR TERM AS PRESENT COMMON PERCENT
HELD WITH EXECUTIVE DIRECTOR SERIES REPRESENTED PRINCIPAL STOCK OF STORE
NAME AGE COOPERATIVE OFFICER EXPIRES (*) OCCUPATION OWNERSHIP OUTSTANDING
- ---- --- ----------- ------- ------- ------------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth L. Hartung 50 Vice 1993 -- -- Vice -- --
President President,
Cooperative
John W. Inwright 41 Vice 1991 -- -- Vice -- --
President President,
Operations Cooperative
Carol L. Mudd 43 Vice 1997 -- -- Vice -- --
President, President,
Human Cooperative
Resources
All directors and officers as a group (24 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 previouslyserved 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 (24 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.
- 41 -
<PAGE> 42
ITEM 13. Certain Relationships and Related Transactions.
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board of Directors, except the
Independent Director, are Operators or represent Operators and have purchased or
may purchase Equipment and Supplies from the Cooperative or from distributors
who purchase from the Cooperative. All purchases by directors or their
affiliates from the Cooperative are made on the same terms and conditions as
purchases by any other Operator. Several Operators, including KFC Management,
are also in the business of purchasing Equipment and Supplies for sale and
distribution to other Operators and may purchase such Equipment and Supplies
from the Cooperative. See Item 1 "BUSINESS-" "HISTORY," "OPERATING PRINCIPLE,"
"OPERATIONS--PRINCIPAL CUSTOMERS," "PEPSICO/TRICON" and Note 6 of the "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS."
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements. See accompanying Index to Consolidated
Financial Statements and Schedule.
(a)(2) Financial Statement Schedules. See accompanying Schedule II --
Valuation and Qualifying Accounts.
(a)(3) Exhibits. Following is a list of Exhibits to this Form 10-K:
3.1 Certificate of Incorporation of Registrant, as amended.
3.2 Bylaws of Registrant, as amended.
4.1 Article IV of Certificate of Incorporation of Registrant, as
amended, filed as Exhibit 3.1 to this Form 10-K.
4.2 Articles II, III, IV and IX of Bylaws of Registrant, as
amended, filed as Exhibit 3.2 to this Form 10-K.
*10.1 Loan and Security Agreement, dated May 6, 1994, between
Registrant and Bank One, Kentucky, NA.
**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 as of June 21, 1983, between Registrant, as
Lessee, and General Electric Corporation, as Lessor, and amended on June 20,
1988.
**10.4 Form of Distributor Participation Agreement between Registrant
and various distributors.
**10.5 Lease, dated April 8, 1988, between NTS/Breckinridge, Ltd.
d/b/a The Springs, as Lessor, and the Registrant, as Lessee.
- 42 -
<PAGE> 43
*10.6 Purchasing Affiliation Agreement dated as of June 15, 1994,
between the International Franchisee Advisory Council, Inc., and the Registrant.
*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 Loan Origination and Purchase Agreement dated as of April 18,
1996 between the Registrant and National Cooperative Bank.
****10.10 Guaranty Agreement dated as of April 18, 1996 between the
Registrant and National Consumer Cooperative Bank.
21 Subsidiaries of the Registrant.
24 Powers of Attorney.
27 Financial Data Schedule.
- ---------------
* Incorporated by reference to the Post-Effective Amendment No. 2 to
the Registration Statement on Form S-1 of the Registrant [File No. 33-56982]
** Incorporated by reference to the Registration Statement on Form
S-1 of the Registrant [File No. 33-33801]
*** Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995 [File No. 2-63640].
**** Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year end October 31, 1996 [File No. 2-63640].
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The exhibits listed in response to Item 14(a)(3) are filed as a part of
this report.
(d) Financial Statement Schedules.
The financial statement schedule listed in response to Item 14(a)(2) is
filed as a part of this report.
- 43 -
<PAGE> 44
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> 45
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Index to Consolidated Financial Statements & Schedules
<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
Financial statement schedule for the years ended October 31, 1997, 1996
and 1995 is included herein:
II - Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.
<PAGE> 46
Independent Auditors' Report
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.:
We have audited the consolidated financial statements of KFC National Purchasing
Cooperative, Inc. (d/b/a FoodService Purchasing Cooperative, Inc.) and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Cooperative's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KFC National
Purchasing Cooperative, Inc. and subsidiaries as of October 31, 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. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
KPMG Peat Marwick LLP
Louisville, Kentucky
December 8, 1997
F-1
<PAGE> 47
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 1,700 1,646
Retained earnings 15,930 15,182
Currency translation adjustment (51) (32)
------- --------
17,586 16,802
------- --------
$49,800 49,445
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 48
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>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 49
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>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
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> 51
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.
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> 52
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> 53
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Notes to Consolidated Financial Statements
(1) Basis of Presentation (Continued)
(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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(d/b/a FoodService Purchasing Cooperative, Inc.)
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance Charged Charged
at to Costs to Other Balance
Beginning and Accounts Deductions at End
Description of Period Expenses Describe Describe of Period
- ----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for losses
on receivables:
Year ended:
October 31:
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-1
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KFC NATIONAL PURCHASING
COOPERATIVE, INC.
January 29, 1998 By /s/ Thomas D. Henrion
----------------------
Thomas D. Henrion, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
* Director/Secretary January 29, 1998
- -------------------------
William E. Allen
* Director January 29, 1998
- -------------------------
Anthony Basile
* Director January 29, 1998
- -------------------------
James G. Cocolin
* Director January 29, 1998
- -------------------------
Lois G. Foust
/s/ Thomas D. Henrion President and Chief January 29, 1998
- ------------------------- Executive Officer,
Thomas D. Henrion Director
* Director January 29, 1998
- -------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President and January 29, 1998
- ------------------------- Chief Financial Officer
William V. Holden (Principal Accounting
Officer) (Principal
Financial Officer)
* Director January 29, 1998
- -------------------------
Paul A. Houston
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
<S> <C> <C>
* Director January 29, 1998
- -------------------------
Grover G. Moss
* Director, Vice Chairman, January 29, 1998
- ------------------------- Treasurer
David G. Neal
* Director January 29, 1998
- -------------------------
James D. Olson
* Director, Chairman January 29, 1998
- ------------------------- of the Board
Robert P. Peck
* Director January 29, 1998
- -------------------------
Darlene L. Pfeifer
* Director January 29, 1998
- -------------------------
Edward W. Rhawn
* Director January 29, 1998
- -------------------------
Jack M. Richards
* Director January 29, 1998
- -------------------------
Dean M. Sorgdrager
* Director January 29, 1998
- -------------------------
Calvin G. White
* Director January 29, 1998
- -------------------------
Ronald J. Young
By /s/ Thomas D. Henrion January 29, 1998
---------------------------
Thomas D. Henrion
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Form
10-K.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
ARTICLE I
The name of the corporation is "KFC National Purchasing
Cooperative, Inc."
ARTICLE II
The address of the corporation's registered office in the State of
Delaware is No. 100 West Tenth Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted by the
corporation is as follows:
(a) To operate a national purchasing cooperative on behalf of
and for the benefit of Kentucky Fried Chicken retail operators with the
corporation purchasing, from manufacturers and vendors various food,
packaging, equipment and other consumable or disposable supplies
(hereinafter called "Equipment and Supplies") for resale to Kentucky
Fried Chicken retail operators and distributors who supply Kentucky
Fried Chicken retail outlets.
(b) To operate solely for the benefit of Kentucky Fried
Chicken retail outlets and operators.
(c) To carry on such other business as may be necessary,
convenient or desirable to accomplish the above stated purposes, and to
do all things incidental thereto which are not forbidden by law or
these Articles of Incorporation.
<PAGE> 2
ARTICLE IV
The authorized capital stock of the corporation shall be 12,000 shares
of capital stock consisting of 2,000 shares of Membership Common Stock, no par
value and 10,000 shares of Store Common Stock, no par value.
(a) Membership Common Stock shall be subject to the
following preferences, privileges, and restrictions:
(i) Membership Common Stock shall be divided into
twelve Series, designated Series A through L. Except for
Series H through L, inclusive, which shall consist of one (1)
share each, the Board of Directors of the Corporation shall
have the right, power and authority to establish and to
increase or decrease the number of shares of each series of
Membership Common Stock consistent with and in order to
effectuate the terms of the Bylaws of the corporation, except
that in no event shall the aggregate number of authorized
shares of Series A through G Membership Common Stock exceed
1995 shares. Each stockholder member of each of Series A
through J shall be entitled to case one (1) vote to elect one
(1) member of the Board of Directors to represent its Series.
Each stockholder member of each of Series K and Series L shall
be entitled to case one (1) vote to elect each of two (2)
members of the Board of Directors to represent its Series.
(ii) As to all matters on which each stockholder is
entitled to vote, except the election of the Board of
Directors, each share of Membership Common Stock shall be
entitled to one (1) vote on each matter.
(iii) Membership Common Stock shall not be entitled
to receive dividends.
- 2 -
<PAGE> 3
(iv) In the event of any liquidation of the
corporation, or other disposition of its assets, after payment
of all debts and liabilities of the corporation, the holders
of the Membership Common Stock shall be entitled only to
receive Ten Dollars ($10.00) per share for each share of
Membership Common Stock held, prior to any distribution being
made to holders of the Store Common Stock.
(v) Membership Common Stock may only be issued to
persons, firms or entities who qualify for membership as
provided in the Bylaws. Membership Common Stock is not
transferable and shall be redeemed by the corporation in the
manner provided in the Bylaws at Ten Dollars ($10.00) per
share if a stockholder ceases to qualify as a member.
(b) Store Common Stock shall be subject to the following
preferences, privileges and restrictions:
(i) Store Common Stock shall have no voting rights
except as otherwise required by Delaware law.
(ii) Except as provided in paragraph (a)(iv) of this
Article, Store Common Stock shall be the only class of capital
stock entitled to receive dividends or other distributions on
capital stock.
(iii) In the event of any liquidation of the
corporation, or other disposition of its assets, the holders
of the Store Common Stock shall be entitled to receive the net
assets of the corporation remaining after payment of all debts
and liabilities of the corporation and payment of Ten Dollars
($10.00) per share to holders of Membership Common Stock.
- 3 -
<PAGE> 4
(iv) Store Common Stock may be issued only to
persons, firms or entities who qualify for membership in the
corporation as provided in the Bylaws. Shares of Store Common
Stock may be transferred to persons, firms or entities who
qualify for membership in the corporation if the corporation
does not exercise its right of first refusal to purchase such
shares under the terms and conditions provided in the Bylaws.
ARTICLE V
The names and mailing addresses of the incorporators are as follows:
M. A. Ferrucci, P.O. Box 631, Wilmington, Delaware 19899
F. J. Obara, Jr., P.O. Box 631, Wilmington, Delaware 19899
R. F. Andrews, P.O. Box 631, Wilmington, Delaware 19899
The incorporators shall have the power to designate the members of the
corporation's initiated Board of Directors.
ARTICLE VI
Subject to the provisions of Article IV hereof, the property and
affairs of the corporation shall be managed by a governing body to be known as
the Board of Directors whose number shall be set in the Bylaws and who shall be
nominated and elected as set forth in the Bylaws.
ARTICLE VII
Except as otherwise required by law, this Certificate of Incorporation
may be altered, amended, or repealed by a two-thirds (2/3) vote of stockholder
members, at any regular or special meeting of the stockholder members if notice
of such alteration, amendment, or repeal of this Certificate of Incorporation is
contained in the notice of such meeting.
- 4 -
<PAGE> 5
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, do make this Certificate, hereby
declaring and certifying that this is our act and deed and the facts herein
stated are true, and accordingly have hereunto set our hands this 5th day of
September, 1978.
/s/ M. A. Ferrucci
-----------------------------------
M. A. Ferrucci
/s/ F. J. Obara, Jr.
-----------------------------------
F. J. Obara, Jr.
/s/ R. F. Andrews
-----------------------------------
R. F. Andrews
- 5 -
<PAGE> 6
AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
CERTIFICATE OF AMENDMENT
The undersigned hereby certify that
1. They are respectively the duly elected and acting President and
Assistant Secretary of KFC National Purchasing Cooperative, Inc. (the
"Cooperative"), a Delaware corporation.
2. The following amendment to the Cooperative's Certificate of
Incorporation was duly adopted on March 9, 1982 in accordance with the
provisions of Section 242 of the Delaware Corporation Law, so that, effective
November 1, 1981, paragraph (b)(iii) of Article IV of the Cooperative's
Certificate of Incorporation shall read as amended in its entirety as follows:
"(iii) In the event of any liquidation of the
corporation, or other disposition of its assets, after payment
of all debts and liabilities of the corporation and payment of
Ten Dollars ($10.00) per share to holders of Membership Common
Stock, the remaining assets of the corporation shall be
distributed to the holders of Store Common Stock on a
cooperative basis, that is, the corporation shall return to
such stockholders the face amount of outstanding patronage
equities and distribute the remaining assets to such
stockholders on the basis of their past patronage insofar as
such distribution is practicable."
IN WITNESS WHEREOF, the undersigned have signed this certificate on
April 9, 1982.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
/s/ R. James Straus
-----------------------------------
R. James Straus, Assistant Secretary
<PAGE> 7
STATE OF KENTUCKY
COUNTY OF JEFFERSON
On April 9, 1982, before me, a notary public for the state and county
aforesaid, personally came Thomas D. Henrion, President of KFC National
Purchasing Cooperative, Inc., a Delaware corporation, known to me as such, and
in his capacity as President acknowledged the foregoing certificate to be his
act and deed, and, being first duly sworn, stated that the facts stated in the
foregoing certificate are true.
/s/ M. Ray Fryrear
-----------------------------------
Notary Public
Commission expires: Oct. 2, 1982
------------
(SEAL)
- 2 -
<PAGE> 8
AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
CERTIFICATE OF AMENDMENT
The undersigned hereby certify that
1. They are respectively the duly elected and acting President and
Assistant Secretary of KFC National Purchasing Cooperative, Inc. (the
"Cooperative"), a Delaware corporation.
2. The following amendment to the Cooperative's Certificate of
Incorporation was duly adopted on May 17, 1987 in accordance with the provisions
of Section 242 of the Delaware Corporation law, so that, the following Article
VIII is added to the Cooperative's Certificate of Incorporation to read in its
entirety as follows:
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 the 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.
IN WITNESS WHEREOF, the undersigned have signed this certificate on
May 27, 1987.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
/s/ R. James Straus
------------------------------------
R. James Straus, Assistant Secretary
<PAGE> 9
STATE OF KENTUCKY
COUNTY OF JEFFERSON
On May 27, 1987, before me, a notary public for the state and county
aforesaid, personally came Thomas D. Henrion, President of KFC National
Purchasing Cooperative, Inc., a Delaware corporation, known to me as such, and
in his capacity as President acknowledged the foregoing certificate to be his
act and deed, and, being first duly sworn, stated that the facts stated in the
foregoing certificate are true.
/s/ M. Ray Fryrear
-----------------------------------
Notary Public
Commission expires: 9/29/90
------------
(SEAL)
- 2 -
<PAGE> 10
AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
CERTIFICATE OF AMENDMENT
The undersigned hereby certify that
1. They are respectively the duly elected and acting President and
Assistant Secretary of KFC National Purchasing Cooperative, Inc. (the
"Cooperative"), a Delaware corporation.
2. The Board of Directors of the Cooperative, by a Unanimous Written
Consent of Directors, dated March 9, 1990, duly adopted a resolution setting
forth the following amendment (the "Amendment") to the Cooperative's Certificate
of Incorporation, declaring the Amendment's advisability and directing that the
Amendment be considered by the Cooperative's stockholders at the Cooperative's
1990 Annual Meeting of Stockholders, all in accordance with Section 242 of the
General Corporation Law of Delaware. The Amendment amends Article III of the
Cooperative's Certificate of Incorporation to read in its entirety as follows:
Article III
The nature of the business or purposes to be conducted by the
corporation is as follows:
(a) To operate a purchasing cooperative on behalf of and for
the benefit of Kentucky Fried Chicken retail operators with
the corporation purchasing from manufacturers and vendors
various food, packaging, equipment, materials, supplies and
services for resale to Kentucky Fried Chicken retail operators
and others and to distributors who supply and serve Kentucky
Fried Chicken and other retail outlets;
(b) To sponsor, create, assist and support programs, services
and entities for the benefit of Kentucky Fried Chicken retail
operators and outlets and others;
(c) To carry on such other business as may be necessary,
convenient or desirable to accomplish the above stated
purposes, and to do all things incidental thereto; and
<PAGE> 11
(d) Except for acts and activities which the corporation's
board of directors shall specifically determine are not
consistent with the best interests of Kentucky Fried Chicken
retail operators and outlets, to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of Delaware.
3. The Cooperative's stockholders duly adopted the Amendment on April
11, 1990, at the Cooperative's 1990 Annual Meeting of Stockholders, in
accordance with Section 242 of the General Corporation Law of Delaware.
IN WITNESS WHEREOF, the undersigned have signed this certificate on
May 16, 1990.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
/s/ R. James Straus
------------------------------------
R. James Straus, Assistant Secretary
STATE OF KENTUCKY )
)
COUNTY OF JEFFERSON )
On May 16, 1990, before me, a notary public for the state and county
aforesaid, personally came Thomas D. Henrion, President of KFC National
Purchasing Cooperative, Inc., a Delaware corporation, known to me as such, and
in his capacity as President acknowledged the foregoing certificate to be his
act and deed, and, being first duly sworn, stated that the facts stated in the
foregoing certificate are true.
/s/ Deborah Jennemann
-----------------------------------
Notary Public
Commission expires: 10/12/92
-------------
(SEAL)
- 2 -
<PAGE> 12
AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
CERTIFICATE OF AMENDMENT
The undersigned hereby certify that
1. They are respectively the duly elected and acting President and
Assistant Secretary of KFC National Purchasing Cooperative, Inc. (the
"Cooperative"), a Delaware corporation.
2. The Board of Directors of the Cooperative, at a meeting held on
December 4, 1990, duly adopted a resolution setting forth the following
amendment (the "Amendment") to the Cooperative's Certificate of Incorporation,
declaring the Amendment's advisability and directing that the Amendment be
submitted to a vote of the Cooperative's stockholders at the Cooperative's 1991
Annual Meeting of Stockholders, all in accordance with Section 242 of the
General Corporation Law of Delaware. The Amendment amends Article IV(a)(i) of
the Cooperative's Certificate of Incorporation to read in its entirety as
follows:
Article IV(a)
(i) Membership Common Stock shall be divided into nineteen
Series, designated A through S. Except for Series H, I, K
and L, which shall consist of one (1) share each, the Board
of Directors of the Corporation shall have the right, power
of authority to establish and to increase or decrease the
number of shares of each series of Membership Common Stock
consistent with and in order to effectuate the terms of the
Bylaws of the Corporation, except that in no event shall the
aggregate number of authorized shares of Series A through G,
inclusive, J, and Series M through S, inclusive, of
Membership Common Stock exceed 1,996 shares. Each
stockholder member of each of Series A through J, and of
Series M through S shall be entitled to cast one (1) vote to
elect one (1) member of the Board of Directors to represent
its Series. Each stockholder member shall also be entitled
to cast one (1) vote to elect the member of the Board of
Directors representing Series J or Series M through S,
inclusive, to the extent and in the manner provided in the
Bylaws of the Corporation. Each stockholder member of each
of Series K and Series L shall be entitled to cast one (1)
vote to elect each
<PAGE> 13
of two (2) members of the Board of Directors to represent
its Series.
3. The Cooperative's stockholders duly adopted the Amendment on
February 14, 1991, at the Cooperative's 1991 Annual Meeting of Stockholders, in
accordance with Section 242 of the General Corporation Law of Delaware.
IN WITNESS WHEREOF, the undersigned have signed this certificate on
March 19, 1991.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
/s/ R. James Straus
------------------------------------
R. James Straus, Assistant Secretary
STATE OF KENTUCKY )
)
COUNTY OF JEFFERSON )
On March 19, 1991, before me, a notary public for the state and county
aforesaid, personally came Thomas D. Henrion, President of KFC National
Purchasing Cooperative, Inc., a Delaware corporation, known to me as such, and
in his capacity as President acknowledged the foregoing certificate to be his
act and deed, and, being first duly sworn, stated that the facts stated in the
foregoing certificate are true.
/s/ D. Jennemann
------------------------------------
Notary Public
Commission Expires: 10/12/92
-------------
- 2 -
<PAGE> 14
CERTIFICATE OF DESIGNATIONS
OF
MEMBERSHIP COMMON STOCK
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
- --------------------------------------------------------------------------------
Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
KFC NATIONAL PURCHASING COOPERATIVE, INC. (the "Corporation"),
a corporation organized and existing under the General Corporation Law of the
State of Delaware, Hereby Certifies That:
1. The name of the Corporation is KFC National Purchasing Cooperative,
Inc.
2. The Certificate of Incorporation of the Corporation, as filed on
September 6, 1978 and as amended April 22, 1982, June 5, 1987 and March 22,
1991, provides for a class of stock known as Membership Common Stock, consisting
of 1,996 shares, without par value, which are divided into nineteen series
designated A-S. The Certificate of Incorporation expressly authorizes the Board
of Directors of the Corporation to allocate the number of authorized shares of
Membership Common Stock among the various series of stock, except with respect
to Series H, I, K and L.
3. Pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation, and in accordance with Section 151(g) of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Cooperative at a regular meeting held on May 20, 1991, adopted the following
resolution:
RESOLVED THAT, as contemplated by Article IV(a) of the Cooperative's
Certificate of Incorporation and by Section 2.4 of the Cooperative's Bylaws, the
Board of Directors hereby allocates, and ratifies its allocation of, 1,600 of
the Cooperative's 1,996 authorized shares of Membership Common among Series A-G
and J Membership Common Stock, as set forth below:
<TABLE>
<CAPTION>
For Stockholder Members Who Own
or Operate a Kentucky Fried Chicken
Shares Retail Outlet in Following Areas No. Of Shares
------ ----------------------------------- -------------
<S> <C> <C>
A Indiana, Michigan, Ohio and West Virginia 200
B Arkansas, Colorado, Kansas, Missouri, New 200
Mexico, Oklahoma and Texas
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
For Stockholder Members Who Own
or Operate a Kentucky Fried Chicken
Shares Retail Outlet in Following Areas No. Of Shares
------ ----------------------------------- -------------
<S> <C> <C>
C Connecticut, Delaware, District of 200
Columbia, Maine, Maryland,
Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode
Island and Vermont
D Alaska, Hawaii, Idaho, Montana, Oregon, 200
Washington and Wyoming
E Alabama, Florida, Georgia, Kentucky, 200
Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia
F Illinois, Iowa, Minnesota, Nebraska, North 200
Dakota, South Dakota and Wisconsin
G Arizona, California, Nevada and Utah 200
J Foreign Territories 200
</TABLE>
4. The resolution set forth in this Certificate of Designations was
duly adopted in accordance with the provisions of the Corporation's Certificate
of Incorporation, the Corporation's Bylaws and the General Corporation Law of
the State of Delaware, has not been amended or revoked and remains in full force
and effect.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by its President, attested by its Assistant Secretary,
and acknowledged by a notary public as of this 24th day of June, 1991.
KFC NATIONAL PURCHASING COOPERATIVE,
INC.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
Attest:
/s/ R. James Straus
- ------------------------------------
R. James Straus, Assistant Secretary
- 2 -
<PAGE> 16
ACKNOWLEDGMENT
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF JEFFERSON )
I, THOMAS D. HENRION, being duly sworn, depose and state that I am the
President of KFC NATIONAL PURCHASING COOPERATIVE, INC., a Delaware corporation
("Corporation"), that I have read the foregoing instrument and know the contents
thereof to be true, and that signing the foregoing instrument is the act and
deed of the Corporation.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
Sworn to before me this 24th day of June, 1991.
-------- -----------
My commission expires 10/12/92 .
----------
/s/ Deborah Jennemann
------------------------------------
Notary Public
I hereby certify that I
prepared the foregoing
document:
/s/ Cynthia L. Stewart
- --------------------------
Cynthia L. Stewart
BROWN, TODD & HEYBURN
1600 Citizens Plaza
Louisville, Kentucky 40202
- 3 -
<PAGE> 17
CERTIFICATE OF DESIGNATIONS
OF
MEMBERSHIP COMMON STOCK
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
- --------------------------------------------------------------------------------
Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
KFC NATIONAL PURCHASING COOPERATIVE, INC. (the "Corporation"),
a corporation organized and existing under the General Corporation Law of the
State of Delaware, Hereby Certifies That:
1. The name of the Corporation is KFC National Purchasing Cooperative,
Inc.
2. The Certificate of Incorporation of the Corporation, as filed on
September 6, 1978 and as amended April 22, 1982, June 5, 1987, May 18, 1990 and
March 22, 1991, provides for a class of stock known as Membership Common Stock,
no par value, with respect to which 2,000 shares are authorized. Membership
Common Stock is divided into nineteen series designated A-S. The Certificate of
Incorporation expressly authorizes the Board of Directors of the Corporation to
allocate 1,996 of the 2,000 authorized shares of Membership Common Stock among
the various series of stock, excluding Series H, I, K and L.
3. Pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation, and in accordance with Section 151(g) of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Cooperative at a regular meeting held on December 3, 1991, adopted the following
resolution:
RESOLVED THAT, as contemplated by Article IV(a) of the Cooperative's
Certificate of Incorporation and by Section 2.4 of the Cooperative's Bylaws, the
Board of Directors hereby allocates, and ratifies its allocation of, 1,700 of
the Cooperative's 1,996 authorized shares of Membership Common among Series A-G,
J and M Membership Common Stock, as set forth below:
<PAGE> 18
<TABLE>
<CAPTION>
For Stockholder Members Who Own
or Operate a Kentucky Fried Chicken
Shares Retail Outlet in Following Areas No. Of Shares
------ ------------------------------------ -------------
<S> <C> <C>
A Indiana, Michigan, Ohio and West Virginia 200
B Arkansas, Colorado, Kansas, Missouri, New 200
Mexico, Oklahoma and Texas
C Connecticut, Delaware, District of 200
Columbia, Maine, Maryland,
Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode
Island and Vermont
D Alaska, Hawaii, Idaho, Montana, Oregon, 200
Washington and Wyoming
E Alabama, Florida, Georgia, Kentucky, 200
Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia
F Illinois, Iowa, Minnesota, Nebraska, North 200
Dakota, South Dakota and Wisconsin
G Arizona, California, Nevada and Utah 200
J Foreign Territories other than Canada 200
M Canada 100
</TABLE>
4. The resolution set forth in this Certificate of Designations was
duly adopted in accordance with the provisions of the Corporation's Certificate
of Incorporation, the Corporation's Bylaws and the General Corporation Law of
the State of Delaware, has not been amended or revoked and remains in full force
and effect.
- 2 -
<PAGE> 19
AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
CERTIFICATE OF AMENDMENT
The undersigned hereby certifies that
1. He is the duly elected and acting President of KFC National
Purchasing Cooperative, Inc. (the "Cooperative"), a Delaware corporation.
2. The Board of Directors of the Cooperative, at a meeting held on
August 16, 1992, duly adopted a resolution setting forth the following
amendments (the "Amendments") to the Cooperative's Certificate of Incorporation,
declaring the Amendments' advisability and directing that the Amendments be
submitted to a vote of the Cooperative's stockholders at the Cooperative's
Special Meeting of Stockholder Members held on November 6, 1992, all in
accordance with Section 242 of the General Corporation Law of Delaware. The
Amendments amend Articles IV(a)(i), add a subsection (vi) to Article IV(a), and
add a new Article IX of the Cooperative's Certificate of Incorporation as
follows:
Article IV(a)
(i) Membership Common Stock shall be divided into twenty-six
series, designated A through Z. Except for Series H, I, K
and L, which shall consist of one (1) share each, the Board
of Directors of the corporation shall have the right, power
and authority to establish and to increase or decrease the
number of shares of each series of Membership Common Stock
consistent with and in order to effectuate the terms of the
bylaws of the corporation, except that in no event shall the
aggregate number of authorized shares of Series A through G,
inclusive, J, and Series M through Z, inclusive, of Member-
ship Common Stock exceed 1,996 shares. Each stockholder
member of each of Series A through J, and of Series M
through Z, shall be entitled to cast one (1) vote to elect
one (1) member of the Board of Directors to represent its
Series. Each stockholder member shall also be entitled to
cast one (1) vote to elect the member of the Board of
Directors representing Series J or Series M through Z,
inclusive, to the extent and in the manner provided in the
bylaws of the corporation. Each stockholder member of each
of Series K and Series L
<PAGE> 20
shall be entitled to cast one (1) vote to elect each of the
two (2) members of the Board of Directors to represent its
Series.
(vi) The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article IV, by
filing a certificate pursuant to the applicable laws of the
State of Delaware, to fix whether the shares of each series
shall have conversion privileges, and, if so, the terms and
conditions of each conversion, including provision for
adjustment of the conversion rate in such events as the
Board of Directors shall determine.
Article IX
The Board of Directors shall have the power to make, adopt, amend
or repeal from time to time bylaws of the corporation, subject to
the right of the Stockholder Members to adopt, amend or repeal
the bylaws.
3. The Cooperative's stockholders duly adopted the Amendments on
November 6, 1992, at a Special Meeting of Stockholder Members held the same day,
in accordance with Section 242 of the General Corporation Law of Delaware.
IN WITNESS WHEREOF, the undersigned has signed this certificate on
November 18, 1992.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
Attest:
/s/ R. James Straus
- ------------------------------------
R. James Straus, Assistant Secretary
- 2 -
<PAGE> 21
STATE OF KENTUCKY
COUNTY OF JEFFERSON
On November __, 1992, before me, a notary public for the state and
county aforesaid, personally came Thomas D. Henrion, President of KFC National
Purchasing Cooperative, Inc., a Delaware corporation, known to me as such, and
in his capacity as President acknowledged the foregoing certificate to be his
act and deed, and, being first duly sworn, stated that the facts stated in the
foregoing certificate are true.
/s/ Terri L. Burks
------------------------------------
Notary Public
Commission Expires: 9/19/95
---------------
I hereby certify that I
prepared the foregoing document:
/s/ Cynthia L. Stewart
- -------------------------------
Cynthia L. Stewart
Brown, Todd & Heyburn
1600 Citizens Plaza
Louisville, Kentucky 40202
- 3 -
<PAGE> 22
CERTIFICATE OF DESIGNATIONS
OF
MEMBERSHIP COMMON STOCK
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
- --------------------------------------------------------------------------------
Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
KFC NATIONAL PURCHASING COOPERATIVE, INC. (the "Corporation"),
a corporation organized and existing under the General Corporation Law of the
State of Delaware, Hereby Certifies That:
I. The name of the Corporation is KFC National Purchasing Cooperative,
Inc.
II. The Certificate of Incorporation of the Corporation, as filed on
September 6, 1978 and as amended April 22, 1982, June 5, 1987, May 18, 1990,
March 22, 1991, April 2, 1992 and November 19, 1992, provides for a class of
stock known as Membership Common Stock, no par value, with respect to which
2,000 shares are authorized. Effective upon the filing with the Delaware
Secretary of State of amendments to Article IV of the Corporation's Certificate
of Incorporation (the "Certificate Amendments") on November 19, 1992, Membership
Common Stock is divided into twenty-six series designated A-Z. The Certificate
of Incorporation expressly authorizes the Board of Directors of the Corporation
to allocate 1,996 of the 2,000 authorized shares of Membership Common Stock
among the various series of stock, excluding Series H, I, K and L. Certain
related amendments to the Corporation's Bylaws (the "Bylaw Amendments") were
adopted by the Board of Directors on August 16, 1992, and ratified by the
stockholder members on November 6, 1992.
III. Pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation, and in accordance with Section 151(g) of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Cooperative at a regular meeting held on August 16, 1992, adopted the following
resolutions:
"RESOLVED, that effective upon the effectiveness of the
related Certificate Amendments and Bylaw Amendments, as contemplated by
Article IV(a) of the Certificate of Incorporation of the KFC National
Purchasing Cooperative, Inc. (the "Cooperative") and by Section 2.4 of
the Cooperative's Bylaws, the Board of Directors hereby reduces to
1,350 from 1,700 the number of the Cooperative's
<PAGE> 23
authorized shares of Membership Common Stock among Series A-G, J and M
Membership Common Stock so that each Series has the number of
authorized shares as set forth below:
<TABLE>
<CAPTION>
For Stockholder Members Who Own
or Operate a Kentucky Fried Chicken
Series Retail Outlet in Following Areas No. Of Shares
------ ----------------------------------- -------------
<S> <C> <C>
A Indiana, Michigan, Ohio and West Virginia 150
B Arkansas, Colorado, Kansas, Missouri, New 150
Mexico, Oklahoma and Texas
C Connecticut, Delaware, District of 150
Columbia, Maine, Maryland,
Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode
Island and Vermont
D Alaska, Hawaii, Idaho, Montana, Oregon, 150
Washington and Wyoming
E Alabama, Florida, Georgia, Kentucky, 150
Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia
F Illinois, Iowa, Minnesota, Nebraska, North 150
Dakota, South Dakota and Wisconsin
G Arizona, California, Nevada and Utah 150
J Foreign Territories other than Canada 150
M Canada 150
</TABLE>
"FURTHER, RESOLVED that it is acknowledged that the number of
authorized shares for each Series has not been reduced to a number
below the number of shares of such Series issued and outstanding."
"RESOLVED, that effective upon the effectiveness of the related
Certificate Amendments and Bylaw Amendments, as contemplated by Article
IV(a) of the Certificate of Incorporation of the KFC National
Purchasing Cooperative, Inc. (the "Cooperative") and by Section 2.4 of
the Cooperative's Bylaws, the Board of Directors hereby allocates 600
of the Cooperative's authorized shares of Membership Common Stock among
Series N through Q and, except for the share of Series N Membership
Common Stock owned by the International Association of Taco Bell
- 2 -
<PAGE> 24
Franchisees, Inc. (the "IATBF"), establishes the terms and conditions
upon which each share of Series N through Q Membership Common Stock
shall be converted automatically from time to time into a share of the
various series of Series N through Q as set forth below. For purposes
of this resolution, a Taco Bell Franchisee is defined as each sole
proprietor, partnership, corporation or other entity who is or becomes
a direct or indirect Taco Bell franchisee of Taco Bell Corp., a
California corporation, or its successors, assigns, affiliates, or
related companies; the term Taco Bell Franchisee does not include the
IATBF.
Section 1. Allocation of Series. The number of shares constituting
each of Series N through Series Q shall be as follows:
<TABLE>
<CAPTION>
Series No. Of Shares
------ -------------
<S> <C>
N 150
O 150
P 150
Q 150
</TABLE>
Section 2. Designation of Series. Each Taco Bell Franchisee shall be
entitled to purchase one share of Membership Common Stock of one of the
following series set forth in Column 1 below (a "Taco Bell Membership Share"),
but only if such franchisee owns or operates, or pursuant to Section 2.3 of the
Cooperative's Bylaws, is deemed to own or operate, a Taco Bell retail outlet in
one or more of the areas ("Taco Bell Areas") set forth in the corresponding line
of Column 2 below, and only if the number of shares of Store Common Stock
indicated in the corresponding line(s) of Column 3 below have in the aggregate
been purchased by stockholder members with respect to Taco Bell retail outlet
("Taco Bell Store Shares"). The IATBF shall be entitled to purchase one share of
Series N Membership Common Stock.
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
-------- --------------- -------------------
Series Taco Bell Areas Number of Taco Bell
Store Shares
-------- --------------- -------------------
<S> <C> <C> <C>
I N 1 through 6 Less than 400
II O 1 through 6 Less than 650, but 400 or
more
III O 1, 2, and 3
Less than 900, but 650 or
more
P 4, 5, and 6
</TABLE>
- 3 -
<PAGE> 25
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
-------- --------------- -------------------
Series Taco Bell Areas Number of Taco Bell
Store Shares
-------- --------------- -------------------
<S> <C> <C> <C>
IV O 1 and 2
P 3 and 4 900 or more
Q 5 and 6
</TABLE>
The Taco Bell Areas 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
-------- --------
Area Number Area
-----------
<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 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>
Section 3. Conversion of Series. If Taco Bell Franchisees shall at any
time own less than 400 Taco Bell Store Shares, then all Taco Bell Membership
Shares shall automatically be Series N
- 4 -
<PAGE> 26
Shares. If Taco Bell Franchisees shall at any time own 400 or more but less than
650 Taco Bell Store Shares, then all Taco Bell Membership Shares owned by Taco
Bell Franchisees shall automatically be Series O shares. If Taco Bell
Franchisees shall at any time own 650 or more but less than 900 Taco Bell Store
Shares, then all Taco Bell Membership Shares owned by Taco Bell Franchisees
shall automatically be Series O or Series P shares depending on the franchisee's
Taco Bell Area as determined above. If Taco Bell Franchisees shall at any time
own 900 or more Taco Bell Store Shares, then all Taco Bell Membership Shares
owned by Taco Bell Franchisees shall automatically be Series O, Series P or
Series Q shares depending on the franchisee's Taco Bell Area as determined
above."
IV. The resolutions set forth in this Certificate of Designations were
duly adopted in accordance with the provisions of the Corporation's Certificate
of Incorporation, the Corporation's Bylaws and the General Corporation Law of
the State of Delaware, have not been amended or revoked and remain in full force
and effect.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by its President and attested to by its Assistant
Secretary as of this 4th day of December, 1992.
KFC NATIONAL PURCHASING COOPERATIVE,
INC.
/s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
Attest:
/s/ R. James Straus
- ------------------------------------
R. James Straus, Assistant Secretary
- 5 -
<PAGE> 27
ACKNOWLEDGEMENT
COMMONWEALTH OF KENTUCKY )
) ss:
COUNTY OF JEFFERSON )
I, THOMAS D. HENRION, being duly sworn, depose and state that I am the
President of KFC NATIONAL PURCHASING COOPERATIVE, INC., a Delaware corporation
(the "Corporation"), that I have read the foregoing instrument and know the
contents thereof to be true, and that signing the foregoing instrument is the
act and deed of the Corporation.
SEAL /s/ Thomas D. Henrion
------------------------------------
Thomas D. Henrion, President
Sworn to before me this 4th day of December, 1992.
My Commission expires: 7-27-96.
---------
/s/ Carol Mudd
- ---------------------------
Notary Public
I hereby certify that I
prepared the foregoing
document:
/s/ James A. Giesel
- ---------------------------
James A. Giesel
BROWN, TODD & HEYBURN
1600 Citizens Plaza
Louisville, Kentucky 40202
- 6 -
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
KFC NATIONAL PURCHASING COOPERATIVE, INC.
ARTICLE I
Offices
1.1 Registered Office. The address of the registered office of
KFC National Purchasing Cooperative, Inc. (the "Cooperative") shall be No. 100
West Tenth Street, Wilmington, Delaware, until altered as provided by law.
1.2 Principal Office. The principal office of the Cooperative
shall be in Louisville, Kentucky until altered by the Board of Directors.
1.3 Other Offices. The Cooperative may maintain other offices
within or without the state where its registered and principal offices are
located, as the Board of Directors may from time to time establish.
ARTICLE II
Stockholder Members
2.1 Stockholder Eligibility. The following persons, firms or
entities shall be eligible to be stockholders in the Cooperative:
(a) Each sole proprietor, partnership, corporation or other
entity who is or becomes a direct or indirect Kentucky Fried Chicken franchisee
or licensee of KFC Corporation, a Delaware corporation, or its successors,
assigns, affiliates, or related companies.
(b) Each of KFC National Management Company, a Delaware
Corporation ("KFC Management"), and Pepsi-Cola Canada Ltd. ("KFC Canada"), and
their respective successors as operators of KFC outlets.
(c) The KFC National Council and Advertising Cooperative,
Inc., a Delaware non-stock corporation ("NCAC").
(d) Each sole proprietor, partnership, corporation or other
entity who is or becomes a direct or indirect Kentucky Fried Chicken franchisee
or licensee of Kentucky Fried
<PAGE> 2
Chicken International Holdings, Inc., a Delaware corporation, or its successors,
assigns, affiliates, or related companies.
(e) Each sole proprietor, partnership, corporation or other
entity who is or becomes a direct or indirect Taco Bell franchisee or licensee
of Taco Bell Corp., a California corporation, or its successors, assigns,
affiliates, or related companies.
Only persons, firms or entities which own of record a share of the
Cooperative's Membership Common Stock shall be eligible to purchase shares of
the Cooperative's Store Common Stock. As used in these Bylaws, the term
"franchise" includes licenses where appropriate in the context.
2.2 Stockholder Membership Requirements. Each person, firm or entity
which is eligible to be a stockholder member in the Cooperative shall be a
stockholder member in the Cooperative when and if that person, firm or entity
(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
equals (i) the total number of Kentucky Fried Chicken retail outlets located in
all states of the United States and the District of Columbia (collectively, the
"United States") owned and operated by such person, firm or entity, (ii) the
total number of Kentucky Fried Chicken retail outlets located in any one country
other than the United States and Canada in any one international territory (a
"Foreign Territory") owned and operated by such person, firm or entity, (iii)
the total number of Kentucky Fried Chicken retail outlets located in all
provinces of Canada owned and operated by such person, firm or entity, or (iv)
the total number of Taco Bell retail outlets wherever located owned and operated
by such person, firm or entity. For purposes of this Section 2.2, (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. If a stockholder
member at any time becomes an owner and operator of additional Kentucky Fried
Chicken retail outlets within the United States, Canada or within a Foreign
Territory, 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 traditional retail outlet or for each additional two
non-traditional retail outlets as the case may be.
2.3 Multiple Franchises. No person, firm or entity shall be entitled to
own, directly or indirectly, beneficially or of record, an interest in more than
one (1) share of the Cooperative's Membership Common Stock (the "Base Share")
regardless of the number of Kentucky Fried Chicken or Taco Bell retail outlets
owned and operated by such person, firm or entity, excluding (a) any interest
which any franchisee may have in the share of the Cooperative's Series L
Membership
- 2 -
<PAGE> 3
Common Stock held by the NCAC, (b) any interest which any 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 which any
franchisee may have in one (but only one) share of the Cooperative's 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 which any
franchisee may have in one (but only one) share of the Cooperative's Series M
Membership Common Stock, (e) any interest which KFC Management may have in KFC
Canada's Series M share, and any interest which KFC Canada may have in KFC
Management's Series K share by reason of KFC Management and KFC Canada each
being subsidiaries or divisions of PepsiCo Inc., and (f) any interest which any
franchisee may have in a share of the Cooperative's Membership Common Stock (i)
held by a person, firm or entity in which the franchisee owns 50% or less in the
aggregate of the outstanding ownership interests, and (ii) with respect to which
the franchisee refrains from voting or participating in the voting of the share
of Membership Common Stock. Where more than one (1) person, firm or entity are
designated as franchisees of one (1) or more retail outlets, such persons, firms
or entities shall be considered as a single person, firm or entity for
stockholder purposes. The person, firm or entity who owns more than 50% in the
aggregate of the outstanding ownership interest of the person, firm or entities
owning and operating a Kentucky Fried Chicken or Taco Bell retail outlet shall
be, unless such person designates otherwise, the person, firm or entity entitled
to own the share of Membership Common Stock representing such franchise
operation. Where no person, firm or entity owns more than 50% in the aggregate
of the outstanding ownership interests of the person, firm or entity owning and
operating a Kentucky Fried Chicken or Taco Bell retail outlet and none of such
persons, firms or entities own, directly or indirectly, an interest in a share
of Membership Common Stock of the Cooperative, such persons, firms or entities
shall be entitled to designate the person, firm or entity from among themselves
who shall be entitled to own the share of Membership Common Stock.
2.4 Divisions of Membership Common Stock into Series. (a) Each Kentucky
Fried Chicken stockholder member other than KFC National Management Company,
Harman Management Corporation ("Harman"), Scott's Restaurants Inc. ("Scotts"),
and NCAC shall be entitled to purchase one share of Membership Common Stock of
one of the following series set forth in Column 1 below, but only if such
stockholder member owns or operates, or pursuant to Section 2.3 hereof, is
deemed to own or operate, a Kentucky Fried Chicken retail outlet in one or more
of the areas set forth in the corresponding line(s) of Column 2 below:
<TABLE>
COLUMN 1 COLUMN 2
SERIES AREA
-------- --------
<S> <C>
A Indiana, Michigan, Ohio and West Virginia.
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<S> <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.
J Foreign Territories other than Canada.
M Canada.
</TABLE>
The Series of Membership Common Stock to be issued shall be designated
by the stockholder member, or in the absence of such designation, by the
Cooperative.
(b) Each Taco Bell stockholder member shall be entitled to
purchase one share of Membership Common Stock of one of the following series set
forth in Column 1 below (a "Taco Bell Membership Share"), but only if such
stockholder member owns or operates, or pursuant to Section 2.3 hereof, is
deemed to own or operate, a Taco Bell retail outlet in one or more of the areas
("Taco Bell Areas") set forth in the corresponding line of Column 2 below, and
only if the number of shares of Store Common Stock indicated in the
corresponding line(s) of Column 3 below have in the aggregate been purchased by
stockholder members with respect to Taco Bell retail outlets ("Taco Bell Store
Shares").
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
-------- -------- --------
NUMBER OF TACO
SERIES TACO BELL AREAS BELL STORE SHARES
-------- --------------- -----------------
<S> <C> <C> <C>
I N 1 through 6 Less than 400
II O 1 through 6 Less than 650, but 400 or more
III O 1, 2 and 3 Less than 900, but 650 or more
P 4, 5 and 6
</TABLE>
- 4 -
<PAGE> 5
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
-------- -------- --------
NUMBER OF TACO
SERIES TACO BELL AREAS BELL STORE SHARES
-------- --------------- -----------------
<S> <C> <C> <C>
IV O 1 and 2
P 3 and 4 900 or more
Q 5 and 6
</TABLE>
The Taco Bell Areas 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
-------- --------
SERIES AREA
-------- --------
<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 Counties of San Luis Obispo, Santa Barbara, Kern, Ventura,
Los Angeles, San Bernadino, 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
Bernadino, Orange, Riverside, San Diego and Imperial.
</TABLE>
(c) If Taco Bell franchisees shall at any time own less than
400 Taco Bell Store Shares, then all Taco Bell Membership Shares shall
automatically be Series N Shares. If Taco Bell franchisees shall at any time own
400 or more Taco Bell Store Shares, then there shall be no Series N Shares
issued or outstanding. If Taco Bell franchisees shall at any time own 400 or
more but less
- 5 -
<PAGE> 6
than 650 Taco Bell Store Shares, then all Taco Bell Membership Shares owned by
Taco Bell franchisees shall automatically be Series O shares. If Taco Bell
franchisees shall at any time own 650 or more but less than 900 Taco Bell Store
Shares, then all Taco Bell Membership Shares owned by Taco Bell franchisees
shall automatically be Series O or Series P shares depending on the franchisee's
Taco Bell Area as determined pursuant to Section 2.4(b) hereof. If Taco Bell
franchisees shall at any time own 900 or more Taco Bell Store Shares, then all
Taco Bell Membership Shares owned by Taco Bell franchisees shall automatically
be Series O, Series P or Series Q shares depending on the franchisee's Taco Bell
Area as determined pursuant to Section 2.4(b) hereof. Certificates representing
all Taco Bell Membership Shares, Series N through Q, shall set forth the
following legend:
Pursuant to Section 2.4 of the Cooperative's Bylaws, the Share
of Membership Common Stock represented by this certificate is
automatically either a Series N, O, P or Q share depending on
the number of the Cooperative's shares of Store Common Stock
sold with respect to Taco Bell retail outlets and depending on
the geographic location of the Taco Bell retail outlets owned
and operated by the holder hereof. The holder's rights with
respect to the election of members of the Cooperative's Board
of Directors vary depending on the Series represented hereby.
The Series represented hereby may be confirmed or determined
by contacting the Cooperative's Secretary at the Cooperative's
registered office.
The Series of Membership Common Stock to be issued shall be
designated by the stockholder member, or in the absence of such designation, by
the Cooperative.
(d) Harman, Scotts, KFC National Management Company, and the
NCAC shall be entitled to purchase one (1) share of one of the Series of
Membership Common Stock set forth below opposite its name:
<TABLE>
<CAPTION>
STOCKHOLDER MEMBER SERIES
------------------ ------
<S> <C>
Harman H
Scotts I
KFC National Management Company K
NCAC L
</TABLE>
(e) If Harman shall at any time own or operate less than 100
Kentucky Fried Chicken outlets in the United States, or if Scotts shall at any
time own or operate less than 100 Kentucky Fried Chicken outlets in Canada or if
KFC National Management Company shall own or
- 6 -
<PAGE> 7
operate less than 200 Kentucky Fried Chicken outlets in the United States, then
the share of the Membership Common Stock owned by Harman, Scotts, or KFC
National Management Company, as the case may be, shall be exchanged for one
share of Membership Common Stock of such other Series as such person is eligible
to purchase as provided in Section 2.4 hereof. The Series of Membership Common
Stock to be issued in such exchange shall be designated by such person, or in
the absence of such designation, by the Cooperative.
(f) No person, firm or entity shall be entitled to purchase
any of the Series R through Series Z shares of Membership Common Stock.
2.5 Mandatory Redemptions; Restrictions on Transfers.
(a) Unless otherwise prohibited by law, the Cooperative shall
promptly redeem shares of Membership Common Stock held by persons, firms or
entities who no longer qualify as members. The redemption price for each share
of Membership Stock shall be Ten Dollars ($10.00), which shall be payable in
cash, except that, if the Cooperative shall be prohibited by law from redeeming
such share in cash because such payment would impair the capital of the
Cooperative or otherwise, the Cooperative shall in lieu thereof issue to the
holder of such share a non-interest bearing promissory note payable whenever the
Cooperative shall no longer be prohibited by law from making such payment.
(b) In the event the holder of any one or more shares of Store
Common Stock receives a bona fide offer ("Bona Fide Offer") to purchase such
share(s) of Store Common Stock and such holder shall desire to sell, assign,
transfer or otherwise convey such share(s) in accordance with the terms of such
Bona Fide Offer, such holder shall first offer in writing to sell such share(s)
to the Cooperative upon the terms set forth in the Bona Fide Offer. The
Cooperative shall have ninety (90) days from its receipt of such offer in which
it may either accept or reject such offer. The Cooperative may accept such
offer by tendering to the holder of such share(s) the purchase price therefor,
subject to the tender by such holder of the certificates to be purchased by the
Cooperative duly endorsed for transfer to the Cooperative. If the Cooperative
fails to respond to such offer within said ninety (90) day period, such offer
shall be deemed to have been rejected. Within sixty (60) days after such offer
is rejected or deemed rejected, the holder of such share(s) may sell, assign, or
other wise transfer such share(s) to the person named in the Bona Fide Offer
upon terms no less favorable than those set forth therein; provided that no such
transfer shall be made to any person, firm or entity which does not at the time
of such transfer qualify as a stockholder member. If such share(s) are not sold,
assigned, transferred or otherwise conveyed within said sixty (60) day period,
then they may not be sold, assigned or transferred without the holder thereof
again offering such share(s) to the Cooperative in accordance with the
provisions of this Section 2.5. Each purchaser, assignee or transferee of Store
Common Stock shall be bound by the terms of these Bylaws. The Cooperative may
from time to time purchase shares of its Store Common Stock at the request of
holders who no longer own or operate KFC or Taco Bell retail outlets with
respect to the offered share, all in accordance with such specific policies and
guidelines and upon such specific terms and conditions as the Board of Directors
may from time to time adopt and from time to time deem advisable.
- 7 -
<PAGE> 8
ARTICLE III
Meetings of Stockholder Members of the Cooperative
3.1 Annual Meeting of Stockholder Members. An annual meeting of
stockholder members of the Cooperative shall be held each year at a time and
place selected by the Board of Directors.
3.2 Notice of Annual Meeting. Written notice of the time and place of
the annual meeting shall be mailed to stockholder members entitled to vote as
shown by the records of the Cooperative not less than twenty (20) nor more than
sixty (60) days prior to the meeting which notice shall state the place, date
and hour of the meeting.
3.3 Delayed Annual Meeting. If, for any reason, the annual meeting of
the stockholder members shall not be held on the day designated, such meeting
may be called and held as a special meeting, and the same proceedings may be had
at such meeting as at an annual meeting and the notice of such meeting shall be
the same as required for the annual meeting.
3.4 Special Meetings of Stockholder Members. Special meetings of the
stockholder members may be called at any time by the Chairman of the Board of
Directors, President or by one-third (1/3) of the voting members of the Board of
Directors, upon not less than twenty (20) nor more than sixty (60) days written
notice which shall state the place, date, hour and purpose or purposes of the
meeting.
3.5 Waiver of Notice by Attendance. Attendance at a meeting, whether
annual or special, shall be a waiver of notice, unless attendance is expressly
for the purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
3.6 Quorum. Presence in person or by proxy of stockholder members
representing a majority of the stockholder members entitled to vote at such
meeting shall constitute a quorum at such meeting. A quorum shall not be lost by
the departure of stockholder members before adjournment.
3.7 Who Entitled to Vote; Proxies. Each stockholder member owning a
share of the Cooperative's Membership Common Stock shall be entitled to one (1)
vote in person or by proxy upon each matter on which such stockholder member is
entitled to vote. Proxies shall be valid only if signed by the stockholder
member, dated and filed with the Secretary of the Cooperative prior to or at the
meeting in which it is given. No proxy shall be irrevocable and any proxy may be
revoked at any time in writing or in person at the meeting for which it was
given. No Proxy shall be voted or acted upon after one (1) year from its date.
- 8 -
<PAGE> 9
3.8 Necessity of Two-Thirds Vote. Except as otherwise provided in these
Bylaws or required by law, the affirmative vote of two-thirds (2/3) of the
stockholder members present in person or by proxy at a meeting at which a quorum
is in attendance shall be necessary to decide in favor of any matter properly
submitted to the meeting.
3.9 Disputes. Any dispute as to the voting rights of stockholder
members shall be submitted to the Secretary of the Cooperative to be decided
upon by the Chairman of the Board of Directors, or, in his absence, the
Vice-Chairman with the stockholder member whose voting rights are in issue
having the right to appeal this decision to the Board of Directors.
3.10 Organization of Meetings. The Chairman of the Board of Directors,
or the Vice-Chairman, if the Chairman is not present, and the Secretary of the
Cooperative shall act as chairman and secretary, respectively, at all meetings
of stockholder members of the Cooperative.
ARTICLE IV
Board of Directors
4.1 General.
(a) The property and affairs of the Cooperative shall be
managed by a governing body to be known as the Board of Directors. The Board of
Directors shall be composed of up to twenty-one (21) persons who shall be
nominated and elected and shall serve for terms as hereinafter provided.
(b) The Secretary of the Cooperative shall notify stockholder
members in writing no later than seventy-five (75) days prior to the annual
meeting of stockholder members of the date of such meeting. Such notice shall
advise them that nominations for members of the Board of Directors whose terms
will expire at such meeting must be submitted to the Secretary in writing not
later than sixty (60) days prior to the meeting date. Such notice shall also
specify the names of directors whose terms are expiring and the names of
directors who have resigned, died, or otherwise been removed from office since
the last annual meeting of stockholder members, and shall identify the Series of
Membership Common Stock entitled to elect successors to such directors. Each
nomination submitted to the Secretary shall be accompanied by a statement signed
by the nominee that he will serve in such capacity if elected. Each stockholder
member (other than the NCAC and KFC National Management Company) may nominate
not more than one person to serve as the director who may be elected by the
Series of Membership Common Stock held by such stockholder member. NCAC and KFC
National Management Company may each nominate two persons to serve as the
directors who may be elected by the series of Membership Common Stock held by
them. The Taco Bell franchisees, collectively holding Series O, or Series O and
Series P, or Series Q, Series P and Series Q, as the case may be, when shares of
such series have been issued and exist pursuant to Section 2.4(b) and (c)
hereof, may nominate one person to serve as a director (the "Taco Bell at large
director") who may be elected by Series O, Series P and Series Q as the case may
be.
- 9 -
<PAGE> 10
(c) Each of Series A through Series J, Series M and Series N
shall be entitled to elect, as a series, one member of the Board of Directors,
and of Series K and Series L shall be entitled to elect, as a series, two
members of the Board of Directors; provided, however, that until and unless the
holders of Series J Membership Common Stock and the holders of Series M
Membership Common Stock hold one hundred (100) or more shares of Store Common
Stock purchased or held with respect to Kentucky Fried Chicken outlets located
in Foreign Territories or in Canada, respectively, the Series J member and the
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 the stockholder members. Series O,
Series P and Series Q when shares of such series have been issued and exist
pursuant to Section 2.4(b) and (c) hereof, (i) shall each be entitled to elect,
as a series, one member of the Board of Directors, and (ii) shall collectively
be entitled to elect the Taco Bell at large director.
(d) In addition to the members of the Board of Directors
elected by the holders of Membership Common Stock, there shall be one (1)
independent member of the Board of Directors (the "Independent Director") who
shall not in any way be associated or affiliated with KFC Corporation, KFC
National Management Company, Kentucky Fried Chicken International Holdings,
Inc., Taco Bell Corp., or any franchisee of KFC Corporation or Taco Bell Corp.
The Independent Director shall be nominated by the Board of Directors and
elected by a plurality vote of the shares of Membership Common Stock entitled to
vote at the annual meeting of the stockholder members.
(e) The President of the Cooperative shall serve as a
non-voting ex-officio member of the Board of Directors.
(f) With the exception of the Independent Director and the
President, all directors of the Cooperative must be stockholder members of the
Cooperative or an officer, shareholder, employee or partner of an entity which
is a stockholder member of the Cooperative. Each director must be a member or an
officer, director, shareholder, employee or partner of the organization which is
entitled to vote for (or in certain circumstances concerning Series J, nominate)
such director.
(g) All voting directors of the Cooperative shall be divided
into three classes, designated Class I, Class II and Class III. Such classes
shall be as nearly equal in number as the then total number of voting directors
permits, with the term of office of one class expiring each year. Should the
number of voting directors not be equally divisible by three, the excess of
directors over a number divisible by three shall be classified in Class III if
there is an excess of one and in Class II and III if there is an excess of two.
The Board of Directors shall by majority vote designate which series of
membership shall elect directors within Class I, II and III, respectively, but
by such designations may not shorten the term of any director.
(h) No person shall hold more than one (1) seat on the Board
of Directors at any one time. Except for the holders of the Series K and Series
L Membership Common Stock who are
- 10 -
<PAGE> 11
entitled, as a Series, to elect two (2) members of the Board of Directors, not
more than one (1) person affiliated with any stockholder member may hold a seat
on the Board of Directors.
(i) The initial Class I directors shall hold office for a term
commencing with the adoption of these Bylaws and expiring at the annual meeting
next ensuing and until their successors are elected and take office. The initial
Class II directors shall hold office for a term commencing with the adoption of
these Bylaws and expiring at the second annual meeting thereafter and until
their successors are elected and take office. The initial Class III directors
shall hold office for a term commencing with the adoption of these Bylaws and
expiring at the third annual meeting thereafter and until their successors are
elected and take office. The successors to the initial Class I, Class II and
Class III directors shall each be elected for terms commencing as of the date of
their election and continuing until the third annual meeting of stockholder
members thereafter and until their respective successors are duly elected and
qualified.
(j) Whenever any member of the Board of Directors ceases to
fulfill the eligibility requirements of this Section 4.1, his membership on the
Board of Directors shall automatically terminate and the vacancy so created
shall be filled in the manner prescribed in Section 4.2.
(k) Notwithstanding any limitation on the number of persons
who may serve as members of the Board of Directors provided for in Section
4.1(a) hereof, the Board of Directors may, from time to time, by resolution
provide for 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 by
resolution provide.
4.2 Vacancies. Except as herein provided, all vacancies on the Board of
Directors shall be filled by the Board of Directors. In filling any vacancy, the
Board of Directors shall seek the advice and counsel of the holder or holders of
the Series of stock who are entitled, as a Series, to elect the director whose
position became vacant. All vacancies shall be filled as soon as practicable;
however, the Board need not fill a vacancy if the holder or holders of the
Series of Membership Common Stock who are entitled, as a Series, to elect the
director whose position became vacant decline (a) to provide the Board with
advice and counsel concerning the filling of the vacancy, or (b) to nominate a
person to fill a vacancy, however created, at any annual or special meeting of
the stockholders at which an election of directors occurs. For purposes of this
Article IV, the number of voting members of the Board shall not include from
time to time the number of vacancies on the Board.
Directors elected as hereinabove provided in this Section 4.2 shall
serve until the next annual meeting of stockholder members, at which time the
holders of the Series of Membership Common Stock who elected the director whose
position became vacant shall be entitled to elect a successor who shall serve
for the remainder, if any, of the term of the director who shall have resigned,
died or otherwise been removed from office.
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<PAGE> 12
The person elected to fill a vacancy must fulfill the eligibility
requirements for the position of the director whose position became vacant.
4.3 Quorum. Two-thirds (2/3) of the voting members of the Board of
Directors shall constitute a quorum.
4.4 Annual Meeting. The Board of Directors shall hold its annual
meeting in each calendar year at such time and place as the Board shall
designate to elect its Chairman and Vice-Chairman, to elect the officers of the
Cooperative for the ensuing year and to transact any other business.
4.5 Other Meetings. Other meetings of the Board of Directors may be
called by the Chairman, President or one-third (1/3) of the voting members of
the Board of Directors at any time by means of written notice by mail of the
time, place and purpose thereof to each member of the Board of Directors, as the
Chairman, the President or one-third (1/3) of the voting members of the Board of
Directors shall deem sufficient, but action taken at any such meeting shall not
be invalidated for want of notice if such notice shall be waived as hereinafter
provided.
4.6 Waiver of Notice. Notice of the time, place and purpose of any
meeting of the Board of Directors may be waived by telegram, radiogram,
cablegram, or other writing either before or after such meeting has been held.
Attendance at a meeting shall constitute a waiver of notice, unless attendance
is expressly for the purpose of objecting, at the beginning of the meeting, to
the transaction of any business because the meeting is not lawfully called or
convened.
4.7 Removal of Members of the Board of Directors. The Board of
Directors may, upon the affirmative vote of at least two-thirds (2/3) of all
stockholder members at any time determine that any member of the Board of
Directors shall be removed from the Board of Directors for cause. Upon such a
vote of stockholder members, the Board of Directors shall give such director
written notice of removal for cause.
4.8 Voting. The affirmative vote of three-fifths (3/5) of all voting
members of the Board of Directors shall, except as otherwise specifically
provided in these Bylaws, be the act of the Board of Directors on any matter
properly submitted to the Board of Directors. Members of the Board of Directors
may participate in a meeting of the Board of Directors by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation in a
meeting shall constitute presence in person at such meeting. Upon the demand of
a majority of the voting members of the Board of Directors participating in a
meeting, the voting upon any question before the meeting shall be by secret
ballot. The President shall not be entitled to vote on matters brought before
the Board of Directors.
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<PAGE> 13
4.9 Chairman and Vice-Chairman.
(a) The Board of Directors shall at each annual meeting elect
by the affirmative vote of three-fifths (3/5) of the entire Board of Directors a
Chairman and a Vice-Chairman, each of whom shall serve until the next annual
meeting of the Board of Directors and until his successor is duly elected and
qualified.
(b) The duties of the Chairman shall be to preside at all
meetings of the Board of Directors and stockholder members. The Chairman shall
oversee the President in his assigned duties as established and authorized by
the Board of Directors. The Chairman shall have the power to execute in the name
of the Cooperative any authorized corporate obligation or other instrument and
shall perform all acts incident to the Office of Chairman or Directors. In the
absence of the Chairman or his inability to perform, the Vice-Chairman shall
assume his duties.
4.10 Meetings: Chairman and Secretary. At all meetings of the Board of
Directors, the Chairman, or in his absence, the Vice-Chairman, shall act as
chairman of the meeting and the Secretary of the Cooperative shall act as
secretary, except that if any one of them shall be absent, a chairman or
secretary, or both, may be chosen at the meeting.
4.11 Compensation and Expenses. The Independent Director shall be
entitled to such compensation as may be determined by the Board of Directors.
Except for the Independent Director, all members of the Board of Directors shall
serve without compensation. Reasonable expenses of members of the Board of
Directors attending regular and called meetings shall be reimbursed by the
Cooperative, provided, that such expenses are not in excess of the actual cost
of traveling from and returning to the member's home city, lodging, meals and
other reasonable and necessary expenses. The Board of Directors shall also
reimburse members of the Board of Directors and others for their reasonable
expenses of attending seminars or other events at the direction of the Board of
Directors.
ARTICLE V
Officers
5.1 Executive Officers. The Board of Directors shall elect a President,
a Secretary and a Treasurer, and may elect one or more Vice-Presidents and such
other officers and assistant officers, as the Board of Directors may, from time
to time, determine are necessary to manage the affairs of the Cooperative. Any
one person, except as forbidden by law, may be elected to more than one office.
Any person elected to office shall hold his office as such for a one (1) year
period and until his successor shall have been elected and shall have accepted
office, unless prior thereto such person resigns or is removed from office. The
President shall at all times be subject to dismissal by the Board of Directors
by the affirmative vote of two-thirds (2/3) of all voting members of the Board
of Directors. Any meeting of the Board of Directors for the purpose of
considering the dismissal of the President may be called upon not less than
twenty (20) days nor more than sixty (60) days prior
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<PAGE> 14
written notice which notice shall state the place, date, hour and purpose of the
meeting. The other officers shall at all times be subject to dismissal by the
President or the Board of Directors.
5.2 Vacancies. Any vacancy in any office shall be filled by the Board
of Directors.
5.3 Powers and Duties of the President. The President shall be the
President and Chief Executive Officer of the Cooperative and, subject to the
control of the Board of Directors, shall have general charge of its business and
supervision of its affairs. He shall keep the Board of Directors fully informed
and freely consult with it in regard to the business of the Cooperative, and
make due reports to it and to the stockholder members. The President shall have
the power to execute in the name of the Cooperative any authorized corporate
obligation or other instruments. The President shall also have such other powers
and duties as are incident to his office and not inconsistent with these Bylaws,
or as may at any time be assigned to him by the Board of Directors.
5.4 Powers and Duties of Vice-Presidents. The Board of Directors may
elect one (1) or more Vice-Presidents who shall have the powers and duties
incident to their office and shall perform such duties as may at any time be
assigned to them by the Board of Directors or the President.
5.5 Powers and Duties of the Treasurer. The Treasurer, subject to the
control of the Board of Directors and together with the President, shall have
general supervision of the finances of the Cooperative. He shall have the care
of, and be responsible for, all monies, securities, evidences of value and
corporate instruments of the Cooperative, and shall supervise the officers and
other persons authorized to bank, handle and disburse its funds, informing
himself as to whether all deposits are or have been duly made and all
expenditures duly authorized and evidenced by proper receipts and vouchers. He
shall cause full and accurate books to be kept, showing the transactions of the
Cooperative, its accounts, assets, liabilities and financial condition, which
shall at all reasonable times be open to the inspection of any member of the
Board of Directors, and he shall make due reports to the Board of Directors and
the stockholder members, and such statements and reports as are required of him
by law. The Treasurer shall have such other powers and duties incident to his
office and not inconsistent with these Bylaws, or as may at any time be assigned
to him by the Board of Directors.
5.6 Powers and Duties of the Secretary. The Secretary shall cause to be
entered in the minute books the minutes of all meetings of the Board of
Directors and annual and other meetings of the stockholder members; shall have
charge of the seal of the Cooperative and all other books and papers pertaining
to his office, and shall be responsible for giving of all notices, and the
making of all statements and reports required of the Cooperative or of the
Secretary by law. The Secretary shall affix the corporate seal, attested by his
signature, to all instruments duly authorized and requiring the same. The
Secretary shall have such other powers and duties incident to his office and not
inconsistent with these Bylaws, or as may at any time be assigned to him by the
Board of Directors.
5.7 Assistant Treasurers and Assistant Secretaries. Any Assistant
Treasurers and Assistant Secretaries elected shall perform such duties as may
properly be assigned to them by the
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<PAGE> 15
executive officers of the Cooperative, and shall have such powers and duties,
including all the powers and duties of their principals in the event of the
absence of such principals from any place in which the business in hand is to be
done, and as may at any time be assigned to them by the Board of Directors.
5.8 Other Officers. The Board of Directors shall prescribe the powers
and duties of any other officer or officers of the Cooperative.
5.9 Salaries. The salary of the President of the Cooperative shall be
fixed by the Board of Directors. Subject to such limitations as may be fixed by
the Board of Directors from time to time, the salaries of all other employees
and officers of the Cooperative shall be fixed by the President who shall report
annually to the Board of Directors on all salary changes.
ARTICLE VI
Finance, Audit and Fiscal Year
6.1 Banking. All funds and money of the Cooperative shall be banked,
handled and disbursed, and all bills, notes, checks and like obligations, and
endorsements (for deposit or collection) shall be signed by such officers and
other persons as the Board of Directors shall from time to time designate, who
shall account therefor to the Treasurer as and when he may require. All money,
funds, bills, notes, checks and other negotiable instruments coming to the
Cooperative shall be collected and promptly deposited in the name of the
Cooperative in such depositories as the Board of Directors shall select.
6.2 Annual Audit. An audit by certified public accountants of the
books and records of the Cooperative shall be conducted annually by a firm
engaged by the Board of Directors.
6.3 Fiscal Year. The fiscal year of the Cooperative shall be set from
time to time by the Board of Directors.
ARTICLE VII
Indemnification
7.1 Indemnification of Officers and Directors.
(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 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
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<PAGE> 16
(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 contender 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.
(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
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<PAGE> 17
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 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.
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<PAGE> 18
(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.
The foregoing Article 7 is derived from Section 145 of the General
Corporation Law of the State of Delaware.
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.
ARTICLE VIII
Capital Stock
8.1 Certificate of Stock. Every holder of capital stock in the
Cooperative shall be entitled to have a certificate, signed by, or in the name
of the Cooperative by, the President or a Vice-President and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Cooperative, certifying the number of shares owned by him in the Cooperative.
The certificates of stock of the Cooperative shall be numbered and shall be
entered in the books of the Cooperative as they are issued.
8.2 Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Cooperative alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Cooperative a bond in such sum as it may
direct as indemnity against any claim that may be made against the Cooperative
with respect to the certificate alleged to have been lost, stolen or destroyed.
8.3 Transfers of Capital Stock. Subject to the provisions of Article
II hereof, upon surrender to the Cooperative of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Cooperative to
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issue a new certificate to the person entitled thereto, cancel the old
certificates and record the transaction upon its books.
8.4 Fixing Record Date. In order that the Cooperative may determine the
stockholder members entitled to notice of or to vote at any meeting of
stockholder members or any adjournment thereof, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
twenty (20) days prior to any other action. A determination of stockholder
members of record entitled to notice of or to vote at a meeting of stockholder
members shall apply to any adjournment of the meeting; provided, however, that
the Board of Directors may fix a new record date for the adjourned meeting.
8.5 Registered Stockholders. The Cooperative shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share of shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
Patronage Dividends
9.1 Cooperative Basis. The Cooperative shall at all times be operated
on a cooperative basis for the benefit of its stockholder members. The
Cooperative shall always do more than fifty percent (50%) in value of its
business with its stockholder members either directly or through distributors
("participating distributors") which shall have agreed to participate in the
Cooperative's patronage dividend program for its stockholder members by entering
into distributor participation agreements with the Cooperative in such form as
the President shall prescribe from time to time. The Cooperative may operate on
a for-profit basis with respect to nonmembers.
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
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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
stockholder members and the value of business done by the Cooperative with
participating distributors resulting in resales by such distributors to such
stockholder members for such use.
The amount distributable by the Cooperative as patronage dividends
directly to each stockholder member of the Cooperative shall be based on
(A) The ratio of
(i) the value of business done by the Cooperative directly
with such stockholder member for use by the stockholder member in KFC
retail outlets owned or operated by the stockholder member and the
value of business done by the Cooperative with participating
distributors resulting in resales by such distributors to such
stockholder member for such use, to
(ii) the net earnings of the Cooperative in the KFC Pool, plus
(B) The ratio of
(i) the value of business done by the Cooperative directly
with such stockholder member for use by the stockholder member in Taco
Bell retail outlets owned or operated by the stockholder member and the
value of business done by the Cooperative with participating
distributors resulting in resale by such distributors to such
stockholder member for such use, to
(ii) the net earnings of the Cooperative in the Taco Bell Pool.
(b) The distribution described in subparagraph (a), is among
all stockholder members, shall be directly proportional for each taxable year of
the Cooperative to the purchases by each stockholder member, whether such
purchases are direct or through a participating distributor.
9.3 Timing of Payment of Patronage Dividends. Each distribution of
patronage dividends shall be made within the payment period beginning with the
first day of a taxable year for which the Cooperative claims a deduction for
patronage dividends paid in the form of such distributions and ending with the
15th day of the 9th month following the close of such taxable year.
9.4 Character of Distributions. Twenty percent or more of the amount
of each distribution shall be paid in cash or by a "qualified check" as defined
in Section 1388(c)(4) of the
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<PAGE> 21
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 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.
ARTICLE X
Amendments
10.1 Amendments to Bylaws. The voting members of the Board of Directors
shall have the power to adopt, amend or repeal from time to time the Bylaws of
the Cooperative at any regular meeting of the Board of Directors or at any
special meeting of the Board of Directors if notice of such adoption, amendment
or repeal of the Bylaws be contained in the notice of such special meeting,
subject to the right of the stockholder members to adopt, amend or repeal the
Bylaws, at any regular meeting of the stockholder members or at any special
meeting of the stockholder members if notice of such adoption, amendment or
repeal of the Bylaws be contained in the notice of such special meeting.
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<PAGE> 1
EXHIBIT 21
Domestic Subsidiaries of the Registrant *
KFC Franchisee Insurance Program, Inc.
(the "Insurance Subsidiary")
KFC Franchisee Finance Company, Inc.
FoodService Purchasing Cooperative International, Inc.
Domestic Subsidiary of the Insurance Subsidiary *
Kenco Insurance Agency, Inc.
* The domestic subsidiaries of the Registrant and the domestic subsidiary
of the Insurance Subsidiary were organized and incorporated in Kentucky
and do business under the names listed above.
Canadian Subsidiary of the Registrant **
KFC Franchisee Purchasing of Canada, Inc.
** The Canadian subsidiary of the Registrant was organized and
incorporated in Ontario and does business under the name listed above.
<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
</TABLE>
- 2 -
<PAGE> 3
<TABLE>
<S> <C> <C>
/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>
- 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 160
<SECURITIES> 0
<RECEIVABLES> 42,449
<ALLOWANCES> 1,409
<INVENTORY> 5,515
<CURRENT-ASSETS> 47,519
<PP&E> 3,699
<DEPRECIATION> 3,039
<TOTAL-ASSETS> 49,800
<CURRENT-LIABILITIES> 29,214
<BONDS> 3,000
0
0
<COMMON> 1,707
<OTHER-SE> 15,879
<TOTAL-LIABILITY-AND-EQUITY> 49,800
<SALES> 600,132
<TOTAL-REVENUES> 600,132
<CGS> 583,891
<TOTAL-COSTS> 583,891
<OTHER-EXPENSES> 12,266
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 1,263
<INCOME-TAX> 515
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
