<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended January 31, 1999 Commission file number 0-23496
---------------- -------------------
KFC National Purchasing Cooperative, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 61-0946155
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
950 Breckenridge Lane, Louisville, KY 40207
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(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (502) 896-5900
---------------------------
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Former name, former address and former fiscal year, if changed since last
report.
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 .
----- ----
Number of shares of common stock outstanding as of February 28, 1999
-----------------
Membership Common Stock 708
Store Common Stock 6842
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KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
d/b/a FoodService Purchasing Cooperative, Inc.
INDEX TO QUARTERLY REPORT FORM 10-Q
Part 1 - Financial Information
- ------------------------------
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Income
Three months ended January 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets
January 31, 1999 and October 31, 1998 4
Consolidated Statements of Cash Flows
Three months ended January 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II - Other Information
- ---------------------------
Item 4 Submission of Matters to a Vote of Security - Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
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Part I - Financial Information
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Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
d/b/a FoodService Purchasing Cooperative, Inc.
Condensed Consolidated Statements of Income
For the three months ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 178,537,676 $ 149,579,650
Cost of goods sold 174,064,241 145,424,241
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Gross profit 4,473,435 4,155,409
Selling, general and administrative expenses 3,388,904 3,213,314
Provision for losses on receivables 44,887 42,506
Other income (expenses):
Service charges 79,136 44,740
Interest income 8,390 72,264
Interest expense (155,509) (64,734)
Miscellaneous 30,552 28,717
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(37,431) 80,987
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Income before patronage
dividend and income taxes 1,002,213 980,576
Patronage dividend 819,129 878,410
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Income before income taxes 183,084 102,166
Provision for income taxes 63,819 36,340
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Net income $ 119,265 $ 65,826
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
d/b/a FoodService Purchasing Cooperative, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Derived from audited
financial statements
Assets January 31, October 31,
------ 1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,714 $ 271,853
Accounts receivable, less allowance for
losses of $1,437,760 at January 31, 1999 51,422,880 51,653,630
and $1,392,579 at October 31, 1998
Inventories:
Food 3,602,621 3,305,941
Equipment and promotional items 3,207,947 3,762,547
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6,810,568 7,068,488
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Prepaid expenses and other current assets 91,871 158,299
Current portion of deferred income taxes 692,322 635,505
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Total Current Assets 59,019,355 59,787,775
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Office equipment, net 797,801 832,286
Investment in marketable equity security available for sale 106,746 87,000
Note receivable from related party, excluding current portion 177,948 177,948
Deferred income taxes, excluding current portion 180,245 225,216
Other assets 236,152 227,777
------------ ------------
Total Assets $ 60,518,247 $ 61,338,002
============ ============
Liabilities and Members' Equity
-------------------------------
Current Liabilities:
Short-term borrowings $ 6,607,748 $ 444,302
Notes payable 3,000,000 3,000,000
Accounts payable 26,033,467 33,554,224
Accrued expenses 3,032,071 3,496,045
Premium deposits 328,549 328,807
Patronage dividend 3,437,955 2,618,914
------------ ------------
Total Current Liabilities 42,439,790 43,442,292
------------ ------------
Commitments and Contingencies
Members' Equity:
Membership common stock 7,060 7,070
Store common stock 1,986,937 1,950,708
Accumulated other comprehensive income (25,060) (52,323)
Retained earnings 16,109,520 15,990,255
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18,078,457 17,895,710
------------ ------------
Total Liabilities & Members' Equity $ 60,518,247 $ 61,338,002
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
d/b/a FoodService Purchasing Cooperative, Inc.
Condensed Consolidated Statements of Cash Flows
For the three months ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 119,265 $ 65,826
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 91,856 104,570
Provision for losses on receivables 44,887 42,506
Deferred income tax benefit (11,845) (6,898)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 185,863 (3,904,172)
(Increase) decrease in inventories 257,920 (547,625)
Decrease in prepaid expenses and other current assets 66,428 23,229
Increase (decrease) in accounts payable (7,520,757) 4,700,699
Decrease in accrued expenses (463,974) (57,497)
Decrease in premium deposits (258) 0
Increase in patronage dividend 819,041 878,410
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Net cash provided by (used in) operating activities (6,411,574) 1,299,048
----------- -----------
Cash Flows from Investing Activities:
(Increase) decrease in other assets (11,039) 28,748
Increase in notes receivable 0 (8,475)
Purchase of marketable equity security 0 (54,375)
Additions to office equipment (54,707) (123,465)
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Net cash used in investing activities (65,746) (157,567)
----------- -----------
Cash Flows from Financing Activities:
Increase in short-term borrowings 6,163,446 488,302
Proceeds from sale of stock, net of costs 48,778 37,220
Retirement of stock (12,560) (14,800)
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Net cash provided by financing activities 6,199,664 510,722
Effect of exchange rate changes on cash and cash equivalents 7,517 (11,472)
----------- -----------
Net increase (decrease) in cash and cash equivalents (270,139) 1,640,731
Cash and cash equivalents - beginning of period 271,853 160,065
----------- -----------
Cash and cash equivalents - end of period $ 1,714 $ 1,800,796
=========== ===========
Supplemental information:
Income taxes paid $ 0 $ 0
=========== ===========
Interest paid $ 155,509 $ 64,734
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------------------------------------------
1. Basis of Presentation
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by generally accepted accounting principles or those normally
made in the registrant's annual Form 10-K filing. Accordingly, the reader of
this Form 10-Q should refer to the registrant's Form 10-K for the year ended
October 31, 1998, for further information in this regard.
The accompanying financial statements for comparative purposes have been made to
conform to the format of the registrant's Form 10-K for the year ended October
31, 1998, and have been prepared in accordance with the registrant's customary
accounting practices and have not been audited. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) necessary for
fair presentation of this information have been made.
2. Other Comprehensive Income
Effective November 1, 1998 the company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, Reporting comprehensive Income. This statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in a financial statement. This statement also
requires that an entity classify items of other comprehensive earnings by their
nature in a financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments, minimum pension liability
adjustments and unrealized gains and losses on certain marketable securities.
Financial statements for prior periods have been reclassified, as required.
Comprehensive earnings consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------------
1999 1998
------------------------
<S> <C> <C>
Net income 119,265 65,826
Other comprehensive income (loss):
Foreign currency translation adjustment (net of related tax benefit
of $0 in 1998 and 1997) 7,517 (12,355)
Unrealized gain on marketable equity securities 19,746 245
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Comprehensive income 146,528 53,716
======= ======
</TABLE>
3. Subsequent Events
In conjunction with Tricon and franchisee owners and operators of KFC, Taco Bell
and Pizza Hut restaurants, on October 21, 1998, the Cooperative publicly
announced the proposed formation of a "unified" purchasing cooperative focusing
on the purchase of food, packaging, supplies, equipment, and related services
used in these restaurants. To achieve several objectives, including reducing the
store delivered costs of goods and equipment, the newly organized Unified
FoodService Purchasing Coop, LLC, (the "Unified Coop") began purchasing
operations effective on March 1, 1999. In connection with the formation of the
Unified Coop, the Cooperative transferred certain operating assets and
liabilities and its employees to the Unified Coop in
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exchange for its membership interest therein. In connection with forming the new
unified cooperative, the Cooperative split-off to a newly organized Taco Bell
purchasing cooperative the portion of its business which operated purchasing
programs for its Taco Bell members. Through this new entity, owners and
operators of Taco Bell restaurants, including Tricon and former stockholder
members of the Cooperative who are Taco Bell operators, will participate with
the Cooperative and a newly organized Pizza Hut purchasing cooperative in the
purchasing programs of the Unified Coop. Although administered by the new
Unified Coop, the KFC purchasing program will be subject to significant control,
advice and counsel of the Cooperative. The Cooperative will continue to exercise
policy-making decisions and expects to administer the patronage dividend program
in accordance with past practices. For more information concerning the
transaction, see the Cooperative's Current Report on Form 8-K dated March 12,
1999, as filed with the Securities and Exchange Commission.
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operation.
The following discussion and analysis of financial condition and the condensed
consolidated results of operations should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations in the company's October 31, 1998, Form 10-K. The results of
operations for the three months ended January 31, 1999, are not necessarily
indicative of the operating results for the entire year.
Results of Operations
First Three Months of Fiscal 1999 Compared to the First Three Months of
Fiscal 1998.
A comparison of material changes between the three months ended January 31,
1998, and the comparable period for the previous year shows:
The Cooperative set record first quarter sales for the second consecutive year.
Sales for the first quarter of 1999 were $178,538,000. The old record was
$149,580,000 set in 1998. When compared to the same quarter of 1998 the first
quarter of 1999 increased by 19.4%. The Cooperative decided to focus its efforts
on the three major concepts; KFC, Taco Bell, and Pizza Hut. Total equipment
sales for the first quarter 1999 increased by 17.9%. The equipment growth was
primarily attributable to a 145.5% increase in Taco Bell volume. KFC-U.S. also
posted an increase of 21.8% in equipment sales for that same period. Food and
packaging sales for the first quarter 1999 increased by 19.6%. The increased
sales were primarily associated with Taco Bell up 35.0% and KFC-U.S. up 4.2%. In
addition Pizza Hut generated sales of $16,484,000 for the period. There were no
Pizza Hut sales in the first quarter of 1998.
Gross profit as a percentage of sales for the first three months of 1999
decreased to 2.51% from 2.78% in 1998. The small decrease between the two
periods demonstrates the continuity of pricing strategies from 1999 to 1998.
Gross profit margins are constantly being evaluated to provide competitive
prices to our customers while maintaining the level of service required to
fulfill the Cooperative's mission.
Selling, general and administrative expenses increased to $3,388,904 a 5.46%
increase from 1998 to 1999. The increase is primarily affected by the cost
associated with the formation of the "unified" purchasing cooperative with
Tricon and franchisee owners and operators of KFC, Taco Bell and Pizza Hut
restaurants. Management is constantly monitoring costs to provide the required
service to the stockholder members and other customers.
Management believes the current provision for losses on uncollectible accounts
to be adequate.
The provision for patronage dividend for 1999 has been calculated and accrued on
a formula approved by the Board of Directors. Patronage dividends for fiscal
1999 will be apportioned based on stockholder concepts and their relative
contribution to income before patronage dividend and taxes.
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Net income for the quarter was $119,000 compared to $66,000 for 1998. The
increase is primarily the result of the operations of the International
subsidiary. For the first quarter of 1999, International reflected an increase
of $29,000 in gross profit and a reduction of expenses of $58,000 for a combined
effect net of taxes of $67,000.
In conjunction with Tricon and franchisee owners and operators of KFC, Taco Bell
and Pizza Hut restaurants, on October 21, 1998, the Cooperative publicly
announced the proposed formation of a "unified" purchasing cooperative focusing
on the purchase of food, packaging, supplies, equipment, and related services
used in these restaurants. To achieve several objectives, including reducing the
store delivered costs of goods and equipment, the newly organized Unified
FoodService Purchasing Coop, LLC, (the "Unified Coop") began purchasing
operations effective on March 1, 1999. In connection with the formation of the
Unified Coop, the Cooperative transferred certain operating assets and
liabilities and its employees to the Unified Coop in exchange for its membership
interest therein. In connection with forming the new unified cooperative, the
Cooperative split-off to a newly organized Taco Bell purchasing cooperative the
portion of its business which operated purchasing programs for its Taco Bell
members. Through this new entity, owners and operators of Taco Bell restaurants,
including Tricon and former stockholder members of the Cooperative who are Taco
Bell operators, will participate with the Cooperative and a newly organized
Pizza Hut purchasing cooperative in the purchasing programs of the Unified Coop.
Although administered by the new Unified Coop, the KFC purchasing program will
be subject to significant control, advice and counsel of the Cooperative. The
Cooperative will continue to exercise policy-making decisions and expects to
administer the patronage dividend program in accordance with past practices. For
more information concerning the transaction, see the Cooperative's Current
Report on Form 8-K dated March 12 1999, as filed with the Securities and
Exchange Commission.
Financial Condition at January 31, 1999 Compared to Financial Condition at
October 31, 1998
Net working capital at January 31, 1999, was $6,591,191, which is a moderate
increase of $245,708 since October 31, 1998. Cash and cash equivalents, net
accounts receivable and inventories decreased by $270,139, $230,750 and
$257,920, respectively. Accounts payable and accrued expenses declined by
$7,532,383 and $463,974, respectively. These working capital items were offset
by an increase in short term borrowings, and patronage dividends of $6,163,446
and $819,041. Prepaid expenses and other current assets decreased by $66,428.
The Cooperative's Year 2000 project is substantially complete. The project
addressed the ability of computer programs and embedded computer chips to
distinguish the 20th century date from the 21st century date. The Cooperative is
currently surveying, and will continue to survey through 1999, all of its
trading partners with respect to year 2000 compliance. The Cooperative has
received certification or representations from the vendors of its personal
computer hardware and software, including desktops, servers and third party
software, that they are Year 2000 compliant. (By January 1, 2000, the
Cooperative expects to replace 12 desktop PC's that are not year 2000
compliant.) The Cooperative leased its IBM model 510 AS400 in January, 1997. IBM
has verified the system as year 2000 compliant, both for hardware and operating
systems, and the Cooperative has tested this verification. The Cooperative is
currently using Version 3 Release 7 of IBM's OS400 software, which is compliant.
Plans are to implement Version 4 Release 3 of the operating software before
January 1, 2000.
The Cooperative's core business operations are run on a third party software
that was purchased form American Software, Inc. (ASI) in 1989; the Cooperative,
however, has not received any maintenance updates for this software since
mid-1990. The Cooperative's in-house programmers have maintained this software
since its implementation. In early 1996, the Cooperative contracted with a
consulting firm to modify all accounting ASI applications to make them Year 2000
compliant. This project was completed and tested during January, 1997. The
system date was set to 01/01/00 and all account processing was completed,
including but not limited to, daily billing functions, accounts receivable
functions, accounts payable functions, general ledger closing and financial
statement preparation. The remaining ASI applications (order entry, purchasing,
master files, etc.) have been
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modified to be Year 2000 compliant by the internal programming staff. The
Cooperative's Electronic Data Interchange (EDI) system is currently capable of
sending and receiving all required electronic documents in both non-compliant
and compliant format. The Cooperative uses third party software for its EDI
operations. During August 1998, the Cooperative upgraded its telephone system's
hardware and software to be Year 2000 compliant.
Management believes that external total cost incurred in connection with the
Year 2000 project was approximately $80,000. The Cooperative does not expect any
subsequent costs to have a material effect on its results of operations or
financial conditions.
Based on the progress of the Cooperative has made in addressing its Year 2000
issues, management does not foresee interruption in normal business activities
or operations associated with its Year 2000 compliance at this time. However, if
the Cooperative identifies significant risks related to its compliance
management, then it will develop a contingency plan to address those risks. Even
given best efforts and execution of the aforementioned planning and testing,
disruptions and unexpected business problems may occur as a result of the Year
2000 issue.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, including
utility companies and customers, the company is unable to conclude that the
consequences of Year 2000 failures will not have a material impact on the
company's results of operations, liquidity or financial position.
The discussion and analysis of the Year 2000 issue included herein contains
forward-looking statements and are based on management's best estimates of
future events. Risks related to completing the Cooperative's Year 2000 plan
include the availability of resources, the Cooperative's ability to timely
discover and correct the potential Year 2000 sensitive problems which could have
a serious impact on the Cooperative's operations, the ability of suppliers to
bring their systems into Year 2000 compliance, and the Cooperative's ability to
identify and implement effective contingency plans to address Year 2000
failures.
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although the
Cooperative believes that the forward-looking statements are based upon
reasonable assumptions, there can be no assurance that the forward-looking
statements will prove to be accurate. Factors that could cause actual results to
differ from the results anticipated in the forward-looking statements include,
but are not limited to: economic conditions (both generally and more
specifically in the markets in which the Cooperative and its customers operate);
competition for the Cooperative's customers from other distributors; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Cooperative's customers; material unforeseen complications
related to addressing the Year 2000 Problem experienced by the cooperative, its
suppliers, customers and governmental agencies; and other risks detailed in the
Cooperative's filings with the Securities and Exchange Commission, all of which
are difficult to predict and any of which are beyond the control of the
Cooperative. The Cooperative undertakes no obligation to republish
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Trademarks
"Fazoli's," "Long John Silver's," "Dairy Queen," "Taco Bell," and "KFC," are
registered trademarks of Seed Restaurant Group Inc., Long John Silver's Inc.,
American Dairy Queen Corporation, Taco Bell Corporation and KFC Corporation,
respectively, and are used in these materials for identification purposes only.
KFC National Purchasing Cooperative, Inc. is an independent provider of products
and is not affiliated with the Seed Restaurant Group Inc., Long John Silver's
Inc., American Dairy Queen Corporation, Taco Bell Corporation or KFC
Corporation, except that KFC Corporation is a stockholder member of the
Cooperative.
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Part II - Other Information
Item 4. Submission of Matters to a Vote of Security - Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.2
(b) Exhibit 27 Financial Data Schedule (for SEC use only)
(c) Reports on Form 8-K - March 12, 1999
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Signatures
Pursuant to the requirements 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.
Date: March 16, 1999 KFC National Purchasing Cooperative, Inc.
--------------
By: /s/ Daniel Woodside
------------------------------------------
Daniel Woodside, President
Date: March 16, 1999 By: /s/ William Bickley
-------------- ------------------------------------------
William Bickley,
Vice President/Chief Financial Officer
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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 KFCC/PepsiCo Holdings, Inc. ("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 as of March 1, 1999 is a stockholder of the Cooperative and who is 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
ten-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 Membership Common Stock or (ii) one (but only one) share
of the Cooperative's Series N 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:
COLUMN 1 COLUMN 2
-------- --------
SERIES AREA
------ ----
A Indiana, Michigan, Ohio and West Virginia.
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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.
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 Series N Membership Common Stock (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
the United States.
(c) 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>
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<PAGE> 5
(d) 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 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.
(e) No person, firm or entity shall be entitled to purchase or
own any of the Series O 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
otherwise 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 do not or no longer own or operate KFC or Taco Bell retail outlets
with respect to the offered share, all in accordance with
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<PAGE> 6
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.
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.
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<PAGE> 7
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 written
statement signed by the nominee, including nominees to represent the Series H,
I, K and L Membership Common Stock, that he or she (i) will serve and is
eligible to serve in such capacity if elected, (ii) will participate in a
director orientation program in accordance with the Board's current orientation
policies, and (iii) will enter into a director confidentiality agreement in such
form as the Board may adopt from time to time. 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,
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<PAGE> 8
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.
(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.
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<PAGE> 9
(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 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.
(l) No voting director of the Cooperative, except for
directors elected by the Series H, I or K Membership Common Stock, may serve
more than two consecutive three years terms (whether representing the same or a
different Series) without having not served as a voting director for an entire
period between two consecutive annual meetings of the stockholder members (a
"meeting period") before reelection. For purposes of this Section 4.1(l), (i)
service for a term which equals or exceeds two meeting periods shall be deemed
to be a three year term and a term which does not exceed two meeting periods
shall not be deemed to be a three year term, and (ii) no term which commenced
prior to the annual meeting of the stockholder members held in 1999 shall count
as a consecutive term or otherwise shorten the eligibility of any director.
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
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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.
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
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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.
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.
(c) No Chairman may serve more than two consecutive full one
year terms as Chairman without having not served as Chairman for an entire one
year term before reelection as Chairman.
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,
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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 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
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<PAGE> 13
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 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.
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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 (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Cooperative, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonable 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 matters 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 present and former director or
officer 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.
- 14 -
<PAGE> 15
(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
present or former 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, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in written opinion, or (4) by the stockholder
members.
(e) Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative or
investigative 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 such director or officer to repay such
amount 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
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation 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 enterprises 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 under the provisions of this Section 7.1.
(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 the provisions of 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.
- 15 -
<PAGE> 16
(i) For purposes of this Section 7.1, references to "other
enterprises" shall include employee benefit plans, references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan, and references to "serving at the request of the Cooperative"
shall include any service as a director, officer, employee or agent of the
Cooperative which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Cooperative" as referred to in
this Section 7.1.
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Section 7.1 shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery of the State of Delaware is hereby
vested with exclusive jurisdiction to hear and determine all actions for
advancement of expenses or indemnification brought under this Section 7.1 or
under any bylaw, agreement, vote of stockholder members or disinterested
directors, or otherwise. The Court of Chancery may summarily determine the
Cooperative's obligation to advance expenses (including attorneys' fees).
(l) 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 Sections 145 and 102 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
- 16 -
<PAGE> 17
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 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 Patronage. The term "patronage" shall refer to the value of the
Cooperative's business with its stockholder members. Business with the
Cooperative's stockholder members shall include
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<PAGE> 18
the following: (1) the Cooperative's direct business with its stockholder
members; (2) the Cooperative's business with its stockholder members 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 or the Unified Cooperative in such form as the President shall
prescribe or approve from time to time; (3) the Cooperative's business with its
stockholder members through suppliers ("participating suppliers") which shall
have agreed to participate in the Cooperative's patronage dividend program by
entering into supplier participation agreements with the Cooperative or the
Unified Cooperative in such form as the President shall prescribe or approve
from time to time; and (4) the Cooperative's business with its stockholder
members pursuant to arrangements set forth in a management agreement approved by
the Board of Directors with the Unified Cooperative, whereby the stockholder
members purchase goods directly from the Unified Cooperative or through
participating distributors and participating suppliers. The term "patronage"
includes the Cooperative's business with its stockholder members both when the
Cooperative or the Unified Cooperative purchases (takes "Title") and resells
goods to the Cooperative's stockholder members and participating distributors,
and when participating suppliers sell goods directly to stockholder members and
participating distributors.
9.2 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.
9.3 Patronage Dividend Distributions.
(a) The Board of Directors shall, after considering the
Cooperative's anticipated expenses and need for capital and reserves, (i)
obligate the Cooperative to distribute patronage dividends as provided in
section 1388(a)(2) of the Internal Revenue Code of 1986, as amended (hereinafter
referred to as the "IRC"), and (ii) distribute as patronage dividends, directly
to the stockholder members of the Cooperative, the net income of the Cooperative
from patronage done with or for stockholder members computed in accordance with
sections 1381-1388 of the IRC and in accordance with the principles applied in
preparation of the Cooperative's federal income tax return. Specifically, the
Cooperative shall distribute patronage dividends to stockholder members annually
on the basis of each stockholder member's patronage. In determining the portion
of the Cooperative's patronage dividend obligations to be paid in cash, the
Board of Directors shall consider: (1) Expenses directly or indirectly related
to the Cooperative's business; (2) Such reasonable reserves for necessary
corporate purposes as may from time to time be provided by the Board of
Directors for depreciation and obsolescence, state and federal taxes, bad debts,
casualty losses, insurance and other corporate and operating charges and
expenses, all established and computed in accordance with generally accepted
accounting principles; (3) Such reasonable reserves for working capital
necessary for the operation of the Cooperative and for deficits arising from
such operation, (including deficits from business other than business done with
or for stockholder members).
The amounts set aside for reserves in any year from gross margins of
the Cooperative from business other than with or for the stockholder members
shall be allocated to the extent possible, to stockholder members, on the books
of the Cooperative on a patronage basis for that year, or, in lieu
- 18 -
<PAGE> 19
thereof, the books or records of the Cooperative shall afford a means of doing
so, so that in the event of a distribution of amounts formerly carried in
reserves, each stockholder member may receive to the extent possible, that
stockholder member's pro rata share thereof.
(b) Solely for the purpose of determining the amount of
patronage dividends distributable to a particular stockholder member of the
Cooperative, the Board of directors may, by resolution, segregate the
Cooperative's business with its stockholder members into two distinct pools: (i)
the "Title Pool," under which shall be determined the net earnings of the
Cooperative from business with the Cooperative's stockholder members in which
the Cooperative takes Title to goods; and (ii) the "Non-Title Pool," under which
shall be determined the net earnings of the Cooperative from business with the
Cooperative's stockholder members in which the Cooperative does not take Title
to goods.
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 with
each stockholder member in which the Cooperative takes Title to goods, to
(ii) the net earnings of the Cooperative in the Title Pool
attributable to business done with or for its stockholder members, plus
(B) the ratio of
(i) the value of business done by the Cooperative with
each stockholder member in which the Cooperative does not take Title to goods,
to
(ii) the net earnings of the Cooperative in the Non-Title
Pool attributable to business done with or for its stockholder members.
(c) The patronage dividend distributions shall be paid to each
stockholder member on the basis of the quantity or value of business done with
or for each stockholder member, and the patronage dividend distributions shall
be determined by reference to the net earnings of the Cooperative from business
done with or for its stockholder members. The patronage dividend distributions
shall be among all stockholder members, shall be directly proportional for each
taxable year of the Cooperative to the purchases by each stockholder member, and
so shall be based upon each stockholder member's patronage.
9.4 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.
- 19 -
<PAGE> 20
9.5 Method and Character of Payment. The Board of Directors may, in its
discretion, determine to pay patronage dividends either all in a form that will
be treated as a deductible qualified written notice of allocation within the
meaning of section 1388(c) of the IRC, all in a form that will be treated as a
nonqualified written notice of allocation within the meaning of section 1388(d)
of the IRC, or part in qualified form and part in nonqualified form. At least
twenty percent (20%) of any qualified payment of patronage dividends shall be
paid in cash or by a "qualified check" as defined in Section 1388(c)(4) of the
IRC. Subject to this limitation with respect to qualified distributions, the
Board of Directors may decide that the balance of any patronage dividend be
paid, in whole or in part, in cash, property, promissory notes or other evidence
of indebtedness, or in any other form of written notice of allocation (within
the meaning of section 1388(b) of the IRC).
9.6 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.
This consent, however, shall not extend to written notices of
allocation received by the stockholder member as part of a nonqualified payment
of patronage which clearly indicate on their face that they are nonqualified. By
way of illustration, the term "written notice of allocation" shall include such
items as the promissory notes, a notice or statement that such securities have
been deposited with a bank or other qualified agent on behalf of the stockholder
member, a notice of credit to the account of the stockholder member on the books
of the Cooperative (against stock subscription or any other indebtedness as the
Cooperative may elect) and such other forms of notice as the Board of Directors
may determine, distributed by the Cooperative in payment, or part payment of the
patronage dividends. The stated dollar amount of the promissory notes is the
principal amount thereof.
9.7 Promissory Notes. Subject only to the payment of at least twenty
percent (20%) of each stockholder member's annual patronage dividend in cash,
the Cooperative may pay each stockholder member all or any portion of the annual
patronage dividend in promissory notes which shall bear interest at the rate
from time to time fixed by the Board of Directors and shall mature at the time
fixed by the Board of Directors not later than five (5) years from the date of
issuance, and may be subordinated to any liabilities or obligations of the
Cooperative, existing, contingent or created after the date of issuance. The
Cooperative shall have a lien upon and a right of set off
- 20 -
<PAGE> 21
against any said promissory notes issued to a stockholder member to secure
payment of any indebtedness due the Cooperative or any of its subsidiaries by
the stockholder member.
9.8 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 9.4 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.
- 21 -
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<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 1,714
<SECURITIES> 106,746
<RECEIVABLES> 52,860,640
<ALLOWANCES> 1,437,760
<INVENTORY> 6,810,568
<CURRENT-ASSETS> 59,019,355
<PP&E> 4,162,308
<DEPRECIATION> 3,364,507
<TOTAL-ASSETS> 60,518,247
<CURRENT-LIABILITIES> 42,439,790
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,078,457
<TOTAL-LIABILITY-AND-EQUITY> 60,518,247
<SALES> 178,537,676
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<CGS> 174,064,241
<TOTAL-COSTS> 174,064,241
<OTHER-EXPENSES> 3,388,904
<LOSS-PROVISION> 44,887
<INTEREST-EXPENSE> 155,509
<INCOME-PRETAX> 183,084
<INCOME-TAX> 63,819
<INCOME-CONTINUING> 119,265
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