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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-23496
KFC NATIONAL PURCHASING COOPERATIVE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 61-0946155
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
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<S> <C>
None None
</TABLE>
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
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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 [X].
State the aggregate market value of the voting and non-voting common
stock(1) held by nonaffiliates of the registrant as of December 31, 1998.
Membership Common Stock $6,720
Store Common Stock $2,329,600
Number of shares outstanding of each of the issuer's classes of common
stock as of December 31, 1998.
<TABLE>
<CAPTION>
Title of each class Number of Shares
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<S> <C>
Membership Common stock 688
Store Common Stock 6,654
</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, 1998. 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. In 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. 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, pack
aging, and other consumable or disposable supplies ("Equipment and Supplies")
from manufacturers and suppliers for sale to Operators whether or not they are
members of the Cooperative, as well as to independent distributors who supply
Operators. The Cooperative endeavors to obtain low purchase prices by making
volume purchase commitments at fixed prices and by assuming other procurement
functions and risks that reduce the suppliers' costs. Cost savings will be
dependent upon a number of factors, including the volume of purchases and
resales to Operators and distributors, negotiation of favorable purchase
agreements, competitive conditions and the amount of overhead expenses. In an
effort to achieve additional cost savings, the Cooperative is actively working
with its suppliers and distributor customers with electronic data interchange.
The Cooperative hopes to achieve cost savings for its members; however, there
can be no assurance that it will be able to do so on a sustained basis.
The Cooperative provides its members with advisory services related to
the distribution of Equipment and Supplies, including industry data on
distribution costs and service levels to enable the members to negotiate more
effectively with distributors. The Cooperative also sponsors a Distributor
Monitoring Program to enhance the system of independent distributors available
to retail outlet operators.
The Cooperative, through its wholly-owned subsidiary, KFC Franchisee
Insurance Program, Inc. (the "Insurance Subsidiary"), sponsors programs of
property, casualty and workers' compensation insurance, and employee benefits,
including life, health, long-term disability and dental coverages for owners and
operators of fast food retail outlets. These programs are marketed through the
Cooperative's indirect subsidiary, Kenco Insurance Agency, Inc. (the "Insurance
Agency"). See "OPERATIONS - INSURANCE PROGRAM."
The Cooperative has an equipment staging operation with warehousing
facilities in Louisville, Kentucky.
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The Cooperative has provided financing from time to time under certain
circumstances for its stockholder members. In 1987, the Cooperative initiated an
equipment financing program to finance for franchisee members their purchases
from the Cooperative of equipment required for Operators to participate in KFC's
introduction of two new menu items. In 1992, the Cooperative reactivated on a
limited basis an equipment financing program to finance equipment purchases for
KFC franchisee members participating in the KFC buffet bar, rotisserie chicken,
and KFC signage rollouts. Although the Cooperative has now terminated its
equipment financing program, it does actively help Operators obtain information
concerning alternative financing options.
The Cooperative's Board of Directors is currently contemplating a
reorganization. For a description of the Cooperative's proposed reorganization,
see "Proposed Corporate Reorganization."
"Dairy Queen," "Domino's Pizza," "Long John Silver's," "Fazoli's,"
"Taco Bell," 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, 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 Sup plies 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
trolled cooperative, the Cooperative better than any alternative, could meet
five important criteria:
- Provide potential for lowest delivered cost of Equipment and
Supplies;
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- 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 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
"Board").
The success of the Cooperative depends on it being able to purchase and
resell goods at prices that will attract the business of Operators and/or their
distributors. The Cooperative attempts to obtain the lowest possible purchase
price by making firm commitments to purchase in large volumes and by assuming
other procurement functions and risks, such as dealing with numerous purchasers,
that should reduce the suppliers' costs.
The Cooperative provides the convenience of "one-stop" shopping for
distributors and Operators which otherwise might be required to deal with a
number of suppliers. The operation of the Cooperative also allows Operators to
benefit from the Cooperative's full-time professional purchasing staff working
solely for the benefit of Operators.
OPERATIONS
The following is a description of the Cooperative's operations,
primarily with respect to KFC and Taco Bell related activities. 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.
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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 pro vide 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 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 1998, the Cooperative purchased or
committed to purchase approximately 770,000 cases of cob corn for purchase
prices totaling approximately $5,029,000.
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 Pro
gram"). 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.
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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 1998, the premium volume from the fully insured Property
and Casualty Program was $6.9 million and for the Life and Health Program was
$1.5 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. As of October 31, 1998, the Bank has funded approximately
$6.5 million of borrowings outstanding under this program. See Note 8 of "NOTES
TO CONSOLIDATED FINANCIAL STATEMENT."
EQUIPMENT STAGING
The Cooperative offers equipment staging services, which involve the
purchasing and warehousing of equipment by the Cooperative in an effort to
consolidate equipment into packages for timely shipment to owners and operators
of KFC, Taco Bell and other fast food retail outlets. The Cooperative has leased
warehouse space in Louisville, Kentucky, for its equipment staging operation.
See Item 2. "PROPERTIES."
During fiscal 1998, the Cooperative shipped equipment packages for an
aggregate sales price of approximately $15,616,000. On October 31, 1998, the
Cooperative had equipment inventory associated with the equipment staging
operation of approximately $804,000, 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 1998, approximately 89% 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
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and issues shipping instructions to the supplier. The supplier then ships the
merchandise (usually in truckload quantities) to Operators and/or local
distributors who in turn, deliver the merchandise to Operators. Suppliers bill
the Cooperative, which, in turn, bills Operators and/or distributors for the
merchandise as shipped. The Cooperative takes title to the merchandise and
assumes the risks related to taking title. Except with respect to the
Cooperative's cob corn program and equipment staging program, the Cooperative
does not now take physical delivery of the merchandise, but is nevertheless
responsible for payment to the supplier.
Except when staged into equipment packages, certain restaurant
equipment sold by the Cooperative is generally shipped directly from the
manufacturer or the dealer to Operators rather than to local distributors.
Because the Cooperative extends short-term trade credit to its
customers, it bears the risk that accounts receivable may become uncollectible
or may not be paid in accordance with usual terms if the customer experiences
financial difficulty. The Cooperative has established a reserve for losses on
trade accounts receivable. See Note 2 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS."
The Cooperative operates a Distributor Monitoring Program (the
"Monitoring Program") at the request of certain franchisees. The Monitoring
Program monitors prices and provides reports to franchisees and committees
organized by franchisees in distribution areas to assist franchisees in
negotiating with, and selecting among, distribution alternatives for the best
pricing and service. The Cooperative may provide certain clerical and
administrative assistance to such franchisee committees. The Cooperative
believes that the Monitoring Program and the formation of purchasing committees
will strengthen the system of independent distribution; independent distributors
continue in competition with each other.
The Cooperative maintains an information bank which provides members,
upon request, with the following:
- information concerning prices being paid by distributors for
merchandise purchased from the Cooperative so that members
can compare store-delivered cost with the distributors' cost
for the merchandise;
- industry data to assist them in analyzing cash discounts,
earned weight discounts and other elements of the
distributors' cost;
- industry data on average industry distributor markups, order
size discounts, cash discounts, distributor service levels and
other distributor performance guidelines; and
- information on expected supply levels (especially possible
short ages) and on expected changes in prices of Equipment and
Supplies.
The Cooperative also provides its members with assistance in resolving
a wide variety of procurement problems including "out-of-stock" conditions,
shipping problems and returned goods disputes.
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PRINCIPAL CUSTOMERS
Although the Cooperative sells primarily to distributors, the ultimate
customers for the goods sold by the Cooperative are Operators. 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 30 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 1998 in
excess of 10% of the Cooperative's net sales. McLane Foodservice Group sales for
fiscal 1998 were $134,000,000, primarily in support of the Taco Bell system. In
fiscal 1998, sales to AmeriServe Food Distribution, Inc. ("AmeriServe") were
approximately $94,700,000. See "PEPSICO/TRICON." In fiscal 1998, sales to Sysco
Corporation were approximately $94,800,000.
SOURCES OF SUPPLY
The Cooperative purchases Equipment and Supplies from "approved
suppliers" for those items for which generally a particular restaurant
franchisor requires approval of suppliers, giving all such suppliers an
opportunity to compete for the Cooperative's business. Substantially in excess
of half of the dollar volume of goods sold by the Cooperative is provided by
"approved suppliers." The Cooperative does not itself approve suppliers, but may
be asked to provide information to a restaurant franchisor in its approval
process. In addition, the Cooperative may, from time to time, suggest to members
that potential suppliers seek "approved" status for their products. The
Cooperative's ability to obtain low prices for Equipment and Supplies subject to
a franchisor's approval is dependent upon the franchisor's approval of enough
suppliers for any particular product to create price competition among "approved
suppliers." For any item for which such approval is not required, the
Cooperative purchases products from a wide variety of sources ranging from local
suppliers to large multinational corporations. The Cooperative attempts to
obtain the lowest possible prices by making firm commitments to purchase in
volume based on its best estimates of resales to Operators or their distributors
and by assuming other procurement functions and risks that reduce the suppliers'
costs. Approved suppliers have 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
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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. 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 meeting, KFCC
submitted the resignations of the two KFCC-elected Board members. KFCC expressed
its intention not to nominate or elect anyone to fill the vacancies, but did
express an interest in keeping lines of communication open with the Cooperative.
In October 1997, PepsiCo spun off its three primary restaurant
divisions, KFC, Taco Bell and Pizza Hut, into a new public company, Tricon
Global Restaurants, Inc. ("Tricon"). Also during fiscal 1997, PepsiCo sold PFS
to AmeriServe. AmeriServe has been and continues to be a principal customer of
the Cooperative, purchasing supplies for distribution to KFC franchisees. When
AmeriServe purchased PFS, it acquired rights under a 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 Tricon agreement.
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 developed business opportunities with retail outlet operators of
other fast
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food concepts, including Taco Bell, Long John Silver's, Domino's, Dairy Queen,
and Fazoli's.
OPERATIONS RELATED TO NON-MEMBER RETAIL CONCEPTS
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.
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 consolidated the Cooperative's business with smaller-volume
concepts, such as Long John Silver's, Dairy Queen, and Fazoli's, under one
management team. The Cooperative also did some purchasing business on behalf of
owners and operators of Domino's Pizza franchised retail outlets. The
Cooperative is in the process of discontinuing all of these purchasing programs
for non-member retail concepts.
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 1998, sales to operators of retail outlets of quick
service restaurant systems other than KFC and Taco Bell Operators in the United
States were approximately 17% 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 534 retail
outlets, while Pepsi-Cola Canada Ltd. owns approximately 201 retail outlets.
Scott's Restaurants, Inc. ("Scott's") is the largest franchisee in Canada, with
approximately 353 retail outlets. The operations of the Canadian subsidiary are
substantially dependant on its business connected with Scott's. On October 30,
1998, Scott's announced that it had signed a definitive agreement with Tricon to
sell selected KFC Retail Outlets to the public by way of an income trust. The
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agreement provides that Scott's will not be obligated to proceed with the
transaction if the net proceeds to Scott's from the public offering are less
than $160 million. The proposed sale is subject to approval by Scott's
shareholders and market conditions at the time of the offering. It is the
intention of Scott's and Tricon that the transaction be completed irrespective
of further litigation between the parties regarding Scott's franchise agreement.
The closing date for the transaction is scheduled for March 1, 1999. Once
closed, Scott's and Tricon will exchange mutual releases with respect to the
litigation. If the transaction is not successfully completed, their agreement
provides that Scott's and Tricon will negotiate alternate strategies for the
disposition of Scott's KFC business. 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 $48,218,000 (U.S.) in sales in
fiscal 1998. See Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--ANALYSIS OF OPERATIONS." For a discussion
of the proposed reorganization of Canadian Operations, see "Proposed Corporate
Reorganization -- Canadian Corporate Reorganization."
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.
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(5) The Cooperative does not finance its operations through brokerage
fees or rebates from suppliers with which it deals. The operation of the
Cooperative is financed by the capital contributions of its members, by the
mark-ups charged by it on goods it sells to cover the costs of its services, and
by borrowings from commercial lenders.
(6) The Cooperative does not solicit or induce unlawful price
discriminations from its suppliers. The cost prices paid by the Cooperative are
negotiated with, or competitively bid by, suppliers based on the Cooperative's
volume commitments to purchase and the cost savings realized by suppliers from
dealing with the Cooperative. The cost savings realized by certain suppliers are
reflected in sales and service allowances which operate to reduce the
Cooperative's cost prices.
(7) The Cooperative does not dictate or in any way control delivered
prices charged by distributors for goods purchased from the Cooperative. The
Cooperative does provide to its members information on the Cooperative's prices,
industry data on distribution costs and service levels, and does monitor
distributor prices to enable franchisees to negotiate more effectively with
distributors. See "DISTRIBUTION."
(8) The Cooperative does not disclose information that is identified or
identifiable as pertaining to the business of any particular Operator (other
than information relating to past due accounts owed to the Cooperative) to any
other Operator or representative thereof or to any other person who is not
employed by the Cooperative.
EMPLOYEES
The Cooperative presently has approximately 181 employees, including
temporaries. The Cooperative believes that its employee relations are generally
satisfactory.
PROPOSED CORPORATE REORGANIZATION
Background and Reasons for the Corporate Reorganization
The Cooperative was organized in 1978 to serve as a national purchasing
cooperative on behalf, and for the benefit, of KFC Operators, including KFC
Management. The Cooperative was organized by KFCC and the KFC franchisees'
National Franchisee Advisory Council 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.
As discussed above, in 1989, KFCC announced its intention to withdraw
its support for the purchasing programs of the Cooperative and to begin direct
pur chasing from suppliers and distributing to KFCC-owned and KFC franchisee
Retail Outlets through PFS which had a long-standing program of purchasing and
distributing to PepsiCo owned and franchised Taco Bell and Pizza Hut Retail
Outlets. In October 1997, PepsiCo spun off Tricon with its three dominant
quick-service restaurant concepts, KFC, Taco Bell and Pizza Hut. In anticipation
of the spin-off, PepsiCo sold its distribution division, PFS, to AmeriServe Food
Distributors, Inc. ("AmeriServe"). With its purchase of PFS, AmeriServe
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acquired a long term distribution commitment from Tricon which may extend until
2007 with respect to all Tricon-operated Retail Outlets and certain Pizza Hut
and Taco Bell Retail Outlets sold by Tricon to franchisees.
Before PepsiCo's sale of PFS to AmeriServe and PepsiCo's spin-off of
Tricon, PepsiCo viewed its purchasing and distribution activities as an
opportunity for profit through the sale and distribution of Equipment and
Supplies to KFC, Taco Bell and Pizza Hut franchisees. Following the Tricon
spin-off, Tricon, which does not own a distribution division like PFS, initiated
a comprehensive review of its domestic Supply Chain Management activities, and a
comparison of those activities with the purchasing activities of the Cooperative
on behalf of KFC and Taco Bell franchisees. Following the Tricon spin-off,
representatives of the Cooperative and Pizza Hut franchisees and their
organization, the IPHFHA, Inc., renewed their occasional conversations
concerning a purchasing program administered by the Cooperative on behalf of
Pizza Hut franchisees. The Cooperative initiated a pilot purchasing program for
Pizza Hut Franchisees in the Fall of 1997. Discussions among the Cooperative and
KFC, Pizza Hut and Taco Bell franchisees concerning the formation of a unified
purchasing cooperative for Equipment and Supplies in the United States and
Canada began in earnest during the Fall of 1997. During the Spring of 1998,
Tricon's internal evaluation of domestic purchasing programs indicated to Tricon
that the best approach would be a combined purchasing organization, including
Tricon and its KFC, Pizza Hut and Taco Bell franchisees. Discussions with Tricon
about the inclusion of Tricon in a three-system purchasing organization began in
earnest in June of 1998 when Tricon agreed in principle to an organizational
structure with a unified coop owned by three different cooperatives representing
the KFC, Taco Bell and Pizza Hut systems (the "Concept Coops"), and a governance
structure for the unified coop and the Concept Coops in which franchisee
representatives would have a majority of votes. By mid-October 1998, agreement
on substantially all material operating and governance issues had been reached.
The Board considered alternatives other than the Corporate
Reorganization, as defined below. The Board considered remaining independent of
Tricon and continuing its historic purchasing programs for KFC franchisees, and,
perhaps, some Taco Bell franchisees. The Board rejected this alternative because
it is unclear that a purchasing organization purchasing essentially for just KFC
franchisees would have the purchasing volume to effectively purchase at the
lowest possible prices. The Board considered a KFC, Taco Bell and Pizza Hut
franchisee only purchasing organization, which it considered inferior to a
purchasing organization which included Tricon (a) because inclusion of Tricon
allows the purchasing organization to purchase for the entire Tricon system
without the confusion of duplicate purchasing organizations, and (b) because
Tricon agreed to a governance structure which insures that franchisees have a
majority of the votes in the governing structure of the Unified Coop and the
Concept Coops.
Summary of the Corporate Reorganization
On October 15, 1998, the Board unanimously approved the Corporate
Reorganization, subject to the Board's final approval of definitive documents
and business plans and arrangements. The "Corporate Reorganization" involves (i)
the execution of the Agreement and Plan of Corporate Separation (the "Agreement
and Plan of Corporate Separation"), the Asset Contribution and Liability
Assumption Agreement (the "Asset Contribution and Liability Assumption
Agreement"), the
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Operating Agreement for the Unified FoodService Purchasing Coop, LLC (the
"Operating Agreement"), and the Purchasing Program Management Agreement (the
"Purchasing Program Management Agreement"), all dated as of the Closing Date,
and the consummation of the transactions contemplated therein (collectively, the
"Corporate Reorganization Agreements"); (ii) the amendment of the Cooperative's
Bylaws to conform the patronage dividend program to the operations of the
Unified FoodService Purchasing Coop, LLC (the "Unified Coop") and to makes other
changes which reflect the split-off of Taco Bell operations, as discussed below;
and, (iii) the authorization of such other action as may be necessary to carry
out the purposes of the Corporate Reorganization. The discussion of the proposed
Corporate Reorganization and the description of the principal terms of the
Corporate Reorganization Agreements is subject to and qualified in their
entirety by (a) reference to the drafts of the Corporate Reorganization
Agreements which are exhibits to this Form 10-K and (b) the approval of the
authorization of the Board and any of its officers to take such other actions as
may in their discretion be necessary or appropriate to carry out the objects,
intents, and purposes of the Corporate Reorganization. As used in this Form
10-K, the term "Closing Date" refers to the date on which the Corporate
Reorganization Agreements are entered into.
To facilitate the success of the Corporate Reorganization, three new
entities will be formed. On the Closing Date, the Unified Coop will be organized
with the Cooperative, the Taco Bell National Purchasing Coop, Inc. (the "Taco
Bell Coop") and the Pizza Hut National Purchasing Coop, Inc. (the "Pizza Hut
Coop") as its initial members. The Unified Coop will provide the support and
operational services for each Concept Coop through combined administrative and
purchasing functions in a manner consistent with the current operation of the
Cooperative.
Taco Bell Split-Off
The Cooperative has organized the Taco Bell Coop as a wholly owned
subsidiary. The Cooperative will transfer certain assets and liabilities that
relate specifically to its Taco Bell operations to the Taco Bell Coop in
exchange for that number of shares of the Taco Bell Coop's stock equal to the
number of shares of Cooperative stock tendered by Taco Bell members pursuant to
a tender offer. These assets and liabilities being transferred to the Taco Bell
Coop include Taco Bell product inventory and equipment, records of Taco Bell
operations, miscellaneous Taco Bell supplies and signs, purchase commitment
liabilities, intercompany liabilities attributable to accounts payable and other
liabilities related to Taco Bell operations paid or assumed by the Cooperative.
The Cooperative will then exchange such shares of Taco Bell Coop stock with
those members of the Cooperative who are Taco Bell Operators and who tender
their shares of Cooperative stock pursuant to the tender offer for their shares
of Cooperative stock.
Unified Coop Contribution
In exchange for its membership interest in the Unified Coop, the
Cooperative will contribute cash and certain operating assets to the Unified
Coop. These assets being transferred to the Unified Coop specifically exclude
those assets being transferred to the Taco Bell Coop, but include other
contracts and other commitments to which the Cooperative is a party or is
otherwise
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obligated; furniture, fixtures, machinery, equipment and other tangible personal
property owned by the Cooperative; real property leases; and, prepaid assets.
Unified Coop Operations
Following the Corporate Reorganization, much of the Cooperative's
organization and its relationship with its members will remain the same.
Pursuant to the Operating Agreement, the Purchasing Program Management Agreement
and the Cooperative Bylaws, it is expected that the patronage dividend program
will continue to be administered in accordance with past practices.
Additionally, the remaining Members will continue to elect the directors of the
Board by series of Cooperative Membership Stock held. The Board will remain
independent and will continue to manage the Cooperative's business affairs, as
well as provide significant control, advice and counsel to the Unified Coop
regarding operations of the KFC purchasing program. The Unified Coop will
provide all of the purchasing functions previously provided by the Cooperative
in a fashion similar to the Cooperative's current operations. While the
Cooperative will terminate all of its employees, the Unified Coop will make
offers of employment to these employees on terms and conditions substantially
similar to those currently in effect between the Cooperative and its employees.
The Cooperative's purchasing programs have involved the Cooperative
historically taking title to Equipment and Supplies purchased from suppliers and
the resale by the Cooperative of those Equipment and Supplies to Operators and
their distributors, with the Cooperative taking the credit risks on sales to
Operators and distributors (such transactions are hereinafter referred to as
"Title Transactions"). The purchasing programs of Tricon Supply Chain Management
("SCM") have historically involved non-title transactions in which SCM
negotiates the price and other terms under which suppliers of Equipment and
Supplies will sell directly to Operators and distributors (such transactions are
hereinafter referred to as "Contract Transactions"). The integration of the
Cooperative's purchasing program and SCM's purchasing programs will give the
Unified Coop flexibility to take advantage of both Title Transactions and
Contract Transactions in order to obtain the lowest possible sustainable
restaurant delivered prices. The advantages of Title Transactions include the
ability to control the entire supply chain and the lower prices which suppliers
are sometimes willing to accept in order to avoid distributor and Operator
credit risks. The advantages of Contract Transactions include avoiding credit
risks and decreasing the need for working capital to provide the funds necessary
to carry accounts receivable from distributors and Operators.
In addition to agreeing to integrate SCM's purchasing programs with
those of the Unified Coop, Tricon has also entered into an expense sharing
arrangement under which Tricon will provide $400,000 to the Unified Coop to
assist the Unified Coop with organizational expenses and to purchase through the
Unified Coop virtually all of the Equipment and Supplies needed for the Tricon
operated Retail Outlets.
The Corporate Reorganization Agreements will be entered into
simultaneously with the effectiveness of the Bylaw amendments. None of these
agreements or amendments will become effective unless all become effective. It
is the Board's belief that Tricon and all other parties are prepared to sign the
Corporate Reorganization Agreements and all other documents necessary to form
the Unified Coop shortly following approval of the Corporate Reorganization by
the
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Cooperative's members. The Corporate Reorganization is subject to the final
approval of the Board.
Canadian Corporate Reorganization
It is anticipated that at the time of or shortly following the
Corporate Reorganization a new unified purchasing cooperative will be organized
for KFC, Taco Bell, and Pizza Hut Operators in Canada (the "Canada Coop"). The
Canada Coop would be a party to the Operating Agreement for the Unified Coop,
but would not be a member of the Unified Coop. The Canada Coop would be
represented on the Unified Coop Board of Directors by a director who has no
vote, except on Canada Matters, as would be defined in the Operating Agreement.
Unlike the Concept Coops, the Canada Coop would directly operate a
purchasing program for goods used by Operators in Canada. The Unified Coop would
likely operate a purchasing program for equipment used by Operators in Canada.
The Canada Coop would enter into a purchasing cooperative agreement with Tricon
that describes Tricon's commitment to the Canada Coop and its purchasing
programs.
If the Canada Coop is organized, there will be no Canadian concept
coops. The Cooperative plans to consider amendments to its bylaws which would
permit KFC Operators in Canada to continue to be represented on the
Cooperative's Board by either voting or non-voting directors. Taco Bell and
Pizza Hut Operators in Canada would be represented on their respective Concept
Coop boards of directors by one non-voting director.
Although the organization and operations of the Canada Coop are
expected to differ from those of the Unified Coop, the goals of the Canada Coop
would be consistent with those of the Unified Coop, including reducing store
delivered costs to Operators in Canada.
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, 2005. 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.
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ITEM 3. Legal Proceedings.
On July 31, 1998, the Cooperative filed a complaint in Jefferson County
Kentucky Circuit Court against Fred Jeffrey, a former consultant to the
Cooperative, and his wife, Julianna Jeffrey (collectively, the "Jeffreys"),
alleging breach of contract, conversion and unjust enrichment. The Cooperative
alleges in its complaint that the Jeffreys breached certain contracts with the
Cooperative by not fully repaying a $600,000 loan from the Cooperative and for
converting certain funds that were to be used to repay that loan. At the time of
filing the complaint, the Jeffreys were in default for approximately $194,036.95
under the loan. The Jeffreys each filed separate answers to the complaint,
denying that they are in default and asserting that the loan was non-recourse in
nature. Fred Jeffrey filed a counterclaim against the Cooperative, alleging that
in 1991 the Cooperative fraudulently induced him into selling his business and
becoming a consultant to the Cooperative, and various other claims including
wrongful termination of his consulting agreement with the Cooperative. The
matter is in the early stages of discovery. Management, after consultation with
legal counsel, believes that these claims by Mr. Jeffrey are without merit.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
No market for the Cooperative's capital stock exists nor is any
expected to develop. Described below are the Cooperative's dividend policy,
patronage dividend program, and Membership Common Stock and Store Common Stock.
DIVIDEND POLICY
Although the Cooperative does not and will 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 working capital and reserves. Thus, even though the Cooperative
will endeavor to minimize purchasing fees and mark-ups on Equipment and Supplies
to the least amount required to cover their anticipated cost of operations, the
Cooperative may have funds available for distribution to members as patronage
dividends. Prior to the implementation of the Cooperative's patronage dividend
program, the Board declared a dividend of $25.00 per share of Store Common Stock
which was paid on March 31, 1982. There is no current intention to pay any
dividends in the future on Store Common Stock on a per share basis. The
Cooperative will not pay dividends at any time on Membership Common Stock.
The Cooperative has established a patronage dividend program. See
"PATRONAGE DIVIDEND PROGRAM." The payment of dividends based upon patronage
tends, of course, to reduce or eliminate funds available for dividends based
upon the number of shares of Store Common Stock owned.
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PATRONAGE DIVIDEND PROGRAM
INTRODUCTION
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 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 1996, the Board 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, 1996, through October
31, 1997, in an aggregate amount equal to the lesser of (a) 70% of the
Cooperative's total "pre-tax income," as defined in the Cooperative's 1997
fiscal year budget, or (b) the amount of the Cooperative's total "pre-tax
income" for fiscal 1997 reasonably allocable to sales with respect to which a
patronage dividend is payable. In August 1997, the Board 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," rather than 70%. In August 1998, the Board determined
that a patronage dividend for fiscal 1999 would be paid on a formula similar to
that adopted for fiscal 1998.
The Cooperative paid a patronage dividend totaling $2,762,000 in March
1997 for patronage in fiscal 1996. The Cooperative paid a patronage dividend
totaling $2,890,000 in March 1998 for patronage in fiscal 1997. For patronage
during fiscal 1998, a dividend totaling $2,619,000 is payable in March 1999.
KFC-related sales volumes and net income have historically been higher than Taco
Bell sales volumes and net income. For fiscal 1998, patronage dividends for KFC
Operator members will average approximately $800 per store, while patronage
dividends for Taco Bell Operator members will average approximately $300 per
store.
BYLAW PROVISION
The Bylaw provision regarding patronage dividends is as follows:
Article IX
Patronage Dividends
9.1 Cooperative Basis. The Cooperative shall at all
times be operated on a cooperative basis for the benefit of
its stockholder members. The Cooperative shall always do more
than fifty percent (50%) in value
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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 stock holder members shall be segregated
into two distinct pools: (i) the "KFC Pool," under which shall
be deter mined the net earnings of the Cooperative from
business done by the Cooperative directly with stockholder
members for use by the stockholder members in KFC retail
outlets owned or operated by the stockholder members and the
value of business done by the Cooperative with participating
distributors resulting in resales by such distributors to such
stockholder members for such use; and (ii) the "Taco Bell
Pool," under which shall be determined the net earnings of the
Cooperative from business done by the Cooperative directly
with stock holder members for use by the stockholder members
in Taco Bell retail outlets owned or operated by the stock
holder members and the value of business done by the
Cooperative with participating distributors resulting in
resales by such distributors to such stockholder members for
such use.
The amount distributable by the Cooperative as
patronage dividends directly to each stockholder member of the
Cooperative shall be based on
(A) The ratio of
(i) the value of business done by the
Cooperative directly with such stockholder member for
use by the stockholder member in KFC retail outlets
owned or operated by the stockholder member and the
value of business done by the Cooperative with
participating distributors resulting in resales by
such distributors to such stockholder member for such
use, to
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(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 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
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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.
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).
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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 Opera tors 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 1993, the Cooperative's Board of Directors adopted
Article 9.6 set forth above providing for a possible offset of
a stockholder member's patronage dividend against the payment
of any indebtedness to the Cooperative, the repayment of which
is in default. As a matter of policy, the Cooperative
currently notifies any franchisee against whose patron age
dividend the Cooperative intends to offset against an
obligation of its intention by certified mail return receipt
requested, and the Cooperative will require any member
requesting that 20% of any patronage dividend to be offset
nevertheless be paid to the member in cash make the request by
certified mail return receipt requested.
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.
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9. If the Cooperative is liquidated, any funds available after
redemption of Membership Common Stock will be distributed on
the basis of past patronage with the Cooperative rather than
number of shares of Store Common Stock owned.
UNITED STATES TAX ASPECTS OF THE PATRONAGE DIVIDEND PROGRAM
The United States Internal Revenue Code of 1986, as amended (the
"Code"), provides that corporations "operating on the cooperative basis"
generally may exclude from their taxable income amounts paid as "patronage
dividends." "Patronage dividends" are amounts paid to patrons (a) on the basis
of the quantity or value of business done with or for such patron, (b) under an
obligation of an organization to pay such amount, which obligation existed
before the organization received the amount so paid, and (c) which is
determined by reference to the net earnings of the organization from business
done with or for its patrons. The patronage dividend program described above
calls for the payment of patronage dividends, (a) to members with respect to
their purchases of Equipment and Supplies from the Cooperative, (b) pursuant to
an obligation to pay in the context of the provisions of the Bylaws set forth
above, and (c) determined on the basis of the net earnings of the Cooperative
from such business done with all of its members in accordance with Article 9.2.
Accordingly, the Cooperative believes that its patronage dividend program meets
the standards of the Code.
The Cooperative has been advised by the U.S. Internal Revenue Service
that the Service will not issue a favorable advance ruling concerning the
Cooperative's proposed exclusion from its taxable income of amounts paid as
patronage dividends. Accordingly, there can be no assurance that the
Cooperative's treatment will not be challenged on audit of the Cooperative's
federal income tax returns. If such a challenge were successful, the Cooperative
would be liable for taxes and interest for any amounts disallowed as exclusions
from its taxable income.
PATRONAGE DIVIDEND PROGRAM FOR CANADIAN STOCKHOLDERS
The payment of patronage dividends to members is based on the value of
business done by the Cooperative with regard to each member. Because
substantially all of the Cooperative's Canadian sales to Operators will be with
the Canadian Subsidiary, and not with the Cooperative itself, the value of
business done by Canadian stockholder members with the Cooperative will be
minimal. The amount of the patronage dividend paid to Canadian stockholder
members will be correspondingly minimal. The Cooperative, therefore, has
determined to provide a sales allowance to Canadian stockholder members based on
patronage with the Canadian Subsidiary. This allowance is intended to provide
the Canadian stock holder members with a program based on Canadian sales similar
to the current patronage dividend program. For fiscal 1999, 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 Coop-
- 24 -
<PAGE> 25
erative will enter into an agreement to repurchase any Canadian stockholder
member's Store Common Stock at its original purchase price at any time after two
years from the date of purchase. Under Delaware law, the Cooperative may not
repurchase any shares of its common stock when the capital of the Cooperative is
impaired or when such repurchase would cause any impairment of the capital of
the Cooperative.
CAPITAL STOCK
Membership Common Stock
The Cooperative is authorized to issue 2,000 shares of Membership
Common Stock, no par value, of which 707 shares were issued and outstanding on
October 31, 1998. 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 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
- 25 -
<PAGE> 26
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
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:
- 26 -
<PAGE> 27
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
-------- -------- --------
SERIES TACO BELL REGIONS NUMBER OF TACO BELL STORE SHARES
------ ----------------- --------------------------------
<S> <C> <C>
N 1 through 6 Less than 400
- -------------------------------------------------------------------------------------------------------
O 1 through 6 Less than 650, but
400 or more
- -------------------------------------------------------------------------------------------------------
O 1, 2 and 3 Less than 900, but
650 or more
P 4, 5 and 6
- -------------------------------------------------------------------------------------------------------
O 1 and 2
P 3 and 4 900 or more
Q 5 and 6
</TABLE>
The Taco Bell regions listed in Column 1 below include the areas set
forth in the corresponding line(s) of Column 2 below.
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2
-------- --------
REGION NUMBER REGION
<S> <C>
1 (Northeast): Connecticut, Delaware, District of Columbia,
Maine, Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island, Vermont, Virginia
and West Virginia.
2 (Southeast): Alabama, Florida, Georgia,
Kentucky, Mississippi, North Carolina, South
Carolina and Tennessee.
3 (Midwest): Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota and Wisconsin.
4 (Southwest): Arkansas, Arizona, Louisiana, New Mexico,
Oklahoma and Texas.
5 (Northwest): Alaska, Colorado, Idaho, Montana, Oregon,
Utah, Washington, Wyoming and Northern California (all of
California except the counties of San Luis Obispo, Santa
Barbara, Kern, Ventura, Los Angeles, San Bernardino,
Orange, Riverside, San Diego and Imperial).
6 (Far West): Hawaii, Guam, Nevada and the California
counties of San Luis Obispo, Santa Barbara, Kern, Ventura,
Los Angeles, San Bernardino, Orange, Riverside, San Diego
and Imperial.
</TABLE>
- 27 -
<PAGE> 28
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,
and Series K and Series L stockholders are entitled to elect two members of the
Board; 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 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
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 from
their respective series. On all matters except the election of the Board, 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
- 28 -
<PAGE> 29
Stock or (ii) one (but only one) share of the Cooperative's Series N through Q
Membership Common Stock if a franchisee's Base Share is a share of the
Cooperative's Series A through I Membership Common Stock, (c) if a franchisee's
Base Share is not a share of the Cooperative's Series J Membership Common Stock,
any interest a franchisee may have in one (but only one) share of the Series J
Membership Common Stock, (d) if a franchisee's Base Share is not a share of the
Cooperative's Series M Membership Common Stock, any interest a franchisee may
have in one (but only one) share of the Series M Membership Common Stock, (e)
any interest which KFC Management may have in Tricon Global Restaurants
(Canada), Inc.'s Series M share, and any interest which Tricon Global
Restaurants (Canada), Inc. may have in KFC Management's Series K share by reason
of KFC Management and Tricon Global Restaurants (Canada), Inc., and (f) any
interest a franchisee may have in a share of Membership Common Stock held by a
firm or entity in which the franchisee owns fifty percent or less and with
respect to which the franchisee 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. Member ship 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 6,730 shares were issued and outstanding on
October 31, 1998. 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. See "DIVIDEND POLICY"
and "PATRONAGE DIVIDEND PROGRAM."
- 29 -
<PAGE> 30
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 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 Board, 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. See "Proposed
Corporate Reorganization --Taco Bell Split-Off." 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.
- 30 -
<PAGE> 31
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.
The selected financial data set forth below for the Cooperative as of
October 31, 1998 and 1997 and for each of the three years in the period ended
October 31, 1998 are derived from audited financial statements included
elsewhere herein. The selected financial data set forth below as of October 31,
1996, 1995 and 1994 and for each of the two years in the period ended October
31, 1995 are derived from financial statements not included elsewhere herein.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Income:
Net sales $664,792 $600,132 $580,441 $537,116 $528,010
Income before
patronage dividend
and income taxes 2,757 4,153 5,057 2,771 1,343
Patronage dividend 2,619 2,890 2,762 1,246 569
Net income 60 748 1,386 909 461
Consolidated Balance Sheets
(at end of period):
Total assets 61,338 $49,800 $49,445 $42,831 $42,767
Long-term obligation 0 3,000 3,000 3,000 3,000
</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 1998 were $664,792,000 compared to $600,132,000
for fiscal 1997, an increase of 10.8%. The fiscal 1998 increase is primarily
attributable to sales related to the Taco Bell concept. Taco Bell food and
packaging sales increased 41.5% while Taco Bell's equipment sales increased 52%
in fiscal 1998. The Cooperative's overall food and packaging sales increased
13.1% in fiscal 1998 from fiscal 1997. Overall sales to KFC Operators located in
the United States increased approximately 7.0% in fiscal 1998 from fiscal 1997.
The termination of sales related to the Fazoli's restaurant concept and the
bankruptcy of Long John Silver's decreased sales during fiscal 1998. The
Cooperative has also determined to terminate sales to Dairy Queen Operators by
not later than March 31, 1999.
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
- 31 -
<PAGE> 32
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. Sales related to
Fazoli's increased 5.4% in fiscal 1997 compared to fiscal 1996.
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 is the third largest
Cooperative customer, purchasing goods for distribution to primarily KFC
franchisees. When AmeriServe purchased PFS, it acquired rights under a
distribution agreement which as amended may extend until 2007. 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. AmeriServe
does not purchase goods through the Cooperative for distribution under its
Tricon agreement. On May 21, 1998, AmeriServe acquired ProSource, Inc.
(ProSource). For the year ended October 31, 1997, ProSource was the
cooperative's sixth largest distributor with total sales of approximately
$19,000,000. AmeriServe has stated in its public filings that AmeriServe is and
will continue to be highly leveraged as a result of the indebtedness incurred
primarily in connection with its acquisition of PFS. The Cooperative and its
members continue to monitor their relationship with AmeriServe. The impact of
Tricon's formation, AmeriServe's acquisition of PFS and the merger with
ProSource on the business of the Cooperative remains uncertain.
The operations of the Canadian subsidiary (in U.S. dollars) contributed
approximately $48,219,000, $51,397,000 and $50,600,000 in sales in fiscal 1998,
1997 and 1996, respectively. The Canadian subsidiary contributed net income of
approximately $14,000 in 1998 and $62,000 in each of 1997 and 1996. As of
October 31, 1998, 1997 and 1996, the Canadian subsidiary had identifiable assets
(in U.S. dollars) of approximately $2,721,000, $3,829,000 and $4,300,000,
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 353 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 obtained a
stay of the termination pending judicial appeal, which resulted in an appealable
ruling favorable to Scott's. On October 30, 1998, Scott's and KFC (Canada)
announced that they had signed an agreement providing for the sale to the public
of the Scott's KFC outlets and selected KFC (Canada) owned outlets throughout
Canada by way of a newly organized income trust. The proposed sale is subject to
approval by the shareholders of Scott's and market conditions at the time of the
public offering of income trust securities. It is the intention of the parties
that the transaction be completed irrespective of further litigation between the
parties regarding Scott's franchise agreement. The closing date for the
transaction is scheduled for March 1, 1999. Once closed, the parties
- 32 -
<PAGE> 33
will exchange mutual releases with respect to the litigation. If the transaction
is not successfully completed, their agreement provides that the parties will
negotiate alternate strategies for the disposition of Scott's KFC business. The
loss by the Canadian subsidiary of Scott's KFC business would have an adverse
effect on the Cooperative's Canadian operations.
Income before patronage dividend and income taxes for fiscal 1998 was
$2,757,000, a decrease of $1,396,000 compared to fiscal 1997. The decrease is
primarily attributable to an increase in selling, general and administrative
expenses and an increase in provisions for bad debt reserve. The cost associated
with the operation of the Cooperative's international subsidiary for an entire
year in 1998, along with increased travel associated with the Cooperative's
efforts to focus on working more closely with its customers and additional board
meetings were the primary contributors to the increase in expenses. The increase
in the provision for losses on receivables was a result of the bankruptcy filing
of Long John Silver's in October 1998. Management believes it has adequately
reserved for the impact of the potential loss. The carrying values of all
intangibles are periodically reviewed by management and impairments are
recognized when the expected undiscounted future operating cash flows derived
from operations associated with such intangible assets are less than their
carrying value. As a result of this review, all remaining goodwill was written
off in the year ended October 31, 1998 resulting in a charge to earnings of
approximately $303,000.
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.
Other income (expenses) for fiscal 1998 decreased by $40,000 compared
to fiscal 1997. The two major components of this change were (i) a net decrease
in interest income (expense) of $79,000, due primarily to lower cash balances
available for investment, and (ii) and a $29,000 decline in service charge
income.
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.
Selling, general and administrative expenses for fiscal 1998 increased
by approximately 10.9% compared to fiscal 1997. As a percentage of sales, the
expenses remained constant at 2.0% in 1998 compared to fiscal 1997. The
Cooperative is constantly monitoring costs to provide the required service at
the lowest cost to the stockholder members. Improvements in the area of
technology have allowed the Cooperative to deliver on this objective.
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
- 33 -
<PAGE> 34
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.
The volume of business added from non-member concepts has created
synergies in purchasing power and economies of scale, and has allowed the
Cooperative to maintain and expand its level of service to all customers. In
fiscal 1998, the Cooperative determined to terminate its business with Operators
of non-member concepts in anticipation of establishing a unified purchasing
cooperative with only Tricon and Operators of KFC, Taco Bell, and Pizza Hut
restaurants. During fiscal 1998, sales to operators of retail outlets of quick
service restaurant systems other than KFC and Taco Bell Operators in the United
States were approximately 17% of sales.
The Cooperative pays its member stockholders a patronage dividend based
on a formula approved by the board of directors. The percentage of patronage
earnings to be paid as patronage dividends increased for fiscal 1998 compared to
1997. For fiscal 1998, the dividend to be paid is $2,619,000 compared to
$2,890,000 in fiscal 1997. The patronage dividend is currently calculated and
allocated through separate pools based on a percentage of the patronage earnings
derived from the participating concepts, KFC and Taco Bell. Under the allocation
formula, all expenses, including provisions for losses, are allocated to each
participating concept and the patronage dividend for each concept's stockholder
members are directly related to these results.
Net income for fiscal 1998 was $60,000, a decrease of $688,000 compared
to fiscal 1997. The decrease is due primarily to the increase in selling,
general and administrative expenses, and the provision for losses in fiscal 1998
and the board of directors' decision to pay out a greater percentage of
patronage earnings as patronage dividends for fiscal 1998 compared to fiscal
1997.
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.
INFLATION
The prices paid by the Cooperative for equipment and supplies are, of
course, subject to the effects of inflation. In an effort to mitigate the
effects of inflation on both the Cooperative and its customers, the Cooperative
makes advance purchase commitments (but 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.
YEAR 2000
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
- 34 -
<PAGE> 35
currently surveying, and will continue to survey through 1999, all of its
trading partners with respect to year 2000 compliance. The Cooperative has
received certifications 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 from 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 accounting 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 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 the 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 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.
PROPOSED CORPORATE REORGANIZATION
In conjunction with Tricon and franchisee owners and operators of KFC,
Taco Bell with 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. The Cooperative would transfer most
operating assets and liabilities and its employees to the unified cooperative in
exchange for its membership interest therein. In connection with forming the new
unified cooperative, the Cooperative expects to split-off to a newly organized
Taco Bell purchasing cooperative the portion of its business which operates
purchasing programs for its Taco Bell members. Through this new entity, owners
and operators of Taco Bell restaurants, including Tricon, would participate with
the Cooperative and a newly organized Pizza Hut purchasing cooperative in the
purchasing programs of the unified cooperative. Although administered by the new
unified cooperative,
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<PAGE> 36
the KFC purchasing program would be subject to significant control, advice and
counsel of the Cooperative. The Cooperative would continue to exercise
policy-making decisions and administer the patronage dividend program in
accordance with past practices. The consummation of this proposed corporate
reorganization is subject to a number of conditions, including approval by the
Cooperative's members.
CAPITAL EXPENDITURES
In fiscal 1998, the Cooperative invested approximately $508,000 in
office furniture and equipment. The Cooperative spent approximately $174,000 to
purchase personal computers. The balance was expended to upgrade the telephone
and voice mail systems, purchase office furniture, and upgrade hardware and
software for the mainframe computer. 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 $60,000 in fiscal 1998, which increased the retained earnings of the
Cooperative, and (ii) combined bank financing, of which $3,444,000 was
outstanding on October 31, 1998. The ability of the Board 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, 1999. The
Cooperative's line of credit with the National Cooperative Bank is currently
$3,000,000 and expires on May 1, 1999. On October 31, 1998, the Cooperative had
a total of $10,900,000 remaining credit available under these lines of credit.
The Canadian subsidiary has established a line of credit for $4,000,000
(Canadian dollars) of which $3,469,000 (Canadian dollars) is available as of
October 31, 1998 to provide working capital in support of that subsidiary. The
Canadian line of credit expires on May 16, 1999. 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, 1998, was
$16,346,000, a decrease of $1,959,000 since October 31, 1997. The primary
changes in working capital for fiscal 1998 include (i) increases in accounts
receivable and inventories of $10,614,000 and $1,554,000, respectively, (ii) a
decrease of $832,000 in notes receivable, (iii) an increase in accounts payable
of $12,430,000, and (iv) decreases in accrued expenses and accrued patronage
dividend of $803,000 and $271,000, respectively.
The Cooperative expects to be able to fund its business in fiscal 1999
with the capital resources available from its continuing operations and lines of
credit
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<PAGE> 37
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.
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 many 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.
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.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Upon recommendation of the Cooperative's Audit Committee, the Board
dismissed KPMG Peat Marwick LLP, now KPMG LLP ("KPMG") as its principal
accountants on May 18, 1998. KPMG's report on the Cooperative's financial
statements for the past two fiscal years did not contain any adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles. Furthermore, during the Cooperative's two
most recent fiscal years and through the date of dismissal, there were no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
Upon recommendation of the Cooperative's Audit Committee, on May 18,
1998, the Board engaged PricewaterhouseCoopers LLP as its principal accountants
to audit the Cooperative's financial statements.
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<PAGE> 38
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
MANAGEMENT
DIRECTORS AND OFFICERS
The Cooperative's Bylaws provide for a Board 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 and elected by a
plurality vote of the shares of all series of Membership Common Stock entitled
to vote. The Independent Direc tor 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 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 may from time to time appoint one or
more non-voting members of the Board to serve at the pleasure and upon such
terms and conditions as the Board may provide. Pursuant to this provision, the
Board 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, Carle, Cocolin,
Edwards, Henriquez, Houston, Moss, Neal, Olson, Paradise, Royster, Sorgdrager
and Young and Ms. Foust and Ms. Pfeiffer 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> 39
Financial Officer in 1991. Mr. Holden also serves the Cooperative as Assistant
Treasurer.
W. Thomas Hutcherson has served as the Cooperative's Vice President of
Purchasing since 1994. He served as Vice President-Equipment Purchasing and
Sales from 1982 until 1994.
John W. Inwright has served as Vice President of Operations,
responsible for purchasing and customer service for both Equipment and Supplies
since 1996. From 1991 to 1996, he served as Vice President of Purchasing. Mr.
Inwright has served the Cooperative in its purchasing operations since 1984.
Alice LeBlanc joined the Cooperative in 1996 as Vice President and
General Manager of the Cooperative's Canadian Operations. In March of 1998, Ms.
LeBlanc became Vice President and General Manager for KFC Operations. Prior to
joining the Cooperative, Ms. LeBlanc was a director of purchasing for Cara
Operations Limited from 1992 to 1996 and Pepsico Food Service International from
1985 to 1992.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Personnel Committee is comprised of Messrs. Houston, Olson,
Paradise and Rhawn and Ms. Pfeiffer and met seven times during fiscal 1998.
Also, during fiscal 1998, Mr. Peck served as a member of the Personnel
Committee. 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 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 1998.
ITEM 11. Executive Compensation.
The following table shows all cash compensation paid by the Cooperative
for the years ended October 31, 1998, 1997 and 1996 to the most highly
compensated executive officers as to whom the total cash and cash-equivalent
remuneration exceeded $100,000 during fiscal 1998.
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<PAGE> 40
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Name and Principal Fiscal All Other
Position Year Salary Bonus(1) Compensation(2)
- ------------------- ---- ------ -------- ---------------
<S> <C> <C> <C> <C>
Thomas D. Henrion 1998 $212,127 $90,640 $16,200
President and Chief 1997 208,460 49,940 20,583
Executive Officer 1996 191,798 58,466 22,578
William V. Holden 1998 111,011 27,126 8,926
Vice President and 1997 103,665 16,500 12,010
Chief Financial 1996 95,421 16,432 12,444
Officer
John W. Inwright 1998 108,937 27,192 8,896
Vice President 1997 103,178 18,150 12,317
1996 88,656 20,000 11,929
Kenneth L. Hartung 1998 108,233 26,512 8,755
Vice President 1997 102,733 16,838 11,802
1996 93,896 15,288 12,662
Alice LeBlanc 1998 87,216 24,720 72,922
Vice President
</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 Money Purchase
Pension Plan in fiscal 1998 as follows: Mr. Henrion $11,200; Mr. Holden
$8,926; Mr. Inwright $8,896; Mr. Hartung $8,755; and Ms. LeBlanc
$6,105. For Mr. Henrion, the fiscal 1998 amount includes $5,000,
representing the value to Mr. Henrion of the Cooperative's payments
with respect to the insurance policy described below. For Ms. LeBlanc,
the fiscal 1998 amount includes $66,817 paid to Ms. LeBlanc in
connection with moving expenses and the sale of her home to relocate
from Toronto to the Cooperative's headquarters in Louisville.
In addition, as part of the proposed Corporate Reorganization discussed
above, Thomas D. Henrion, President of the Cooperative, the Cooperative, and the
Unified Coop have executed a Separation and Consulting Agreement (the
"Separation and Consulting Agreement"). The Separation and Consulting Agreement
provides for Mr. Henrion to resign his employment on the Closing Date and,
thereafter, to provide consulting services for two years. Mr. Henrion also
agrees to non-compete provisions whereby, for two years following the date of
the Separation and Consulting Agreement, Mr. Henrion will not work for companies
that are specifically listed in the Separation and Consulting Agreement. Under
the Separation and Consulting Agreement, Mr. Henrion will be paid $500,000 upon
consummation of the Corporate Reorganization and $456,300 on the first business
day of January 2000 along with health insurance coverage for 10 years. The
Separation and Consulting Agreement replaces the Supplemental
Benefits/Consulting
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<PAGE> 41
Agreement (the "Supplemental Agreement") between Mr. Henrion and the
Cooperative.
Under the Supplemental Agreement, upon Mr. Henrion's retirement or
termination, he would have received (i) monthly compensation equal to
one-twelfth of 18% of his annual base compensation averaged over a three-year
period (his "Averaged Annual Compensation") for the number of months Mr. Henrion
had worked for the Cooperative since January 1, 1994 and (ii) for one year
following the expiration of the above compensation, monthly payments equal to
one-twelfth of his Averaged Annual Compensation. As of the end of fiscal 1998,
Mr. Henrion's Averaged Annual Compensation was approximately $209,000. As of
January 1, 1999, Mr. Henrion would have been entitled to aggregate payments of
approximately $397,000 under the Supplemental Agreement. The Supplemental
Agreement also provided that if Mr. Henrion chose to consult with the
Cooperative following his departure, in lieu of the monthly retirement benefits
discussed in (i) above, he would receive monthly compensation equal to
one-twelfth of 30% of his Averaged Annual Compensation for so long as he
provided consulting services to the Cooperative, but for no longer than the
number of months he was actually employed after January 1, 1994 (aggregate value
of approximately $538,175). Finally, the Supplemental Agreement provided Mr.
Henrion with one-half ownership of a whole life split-dollar insurance policy in
an initial face amount of $147,384, a car allowance and health insurance while
he consulted.
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.
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<PAGE> 42
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
MANAGEMENT OF THE COOPERATIVE
Directors and Executive Officers
The following table lists, in addition to other information, the
directors and certain executive officers of the Cooperative as of December 31,
1998, 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, 1998.
<TABLE>
<CAPTION>
YEAR
FIRST
POSITIONS BECAME
AND OFFICES DIRECTOR KFC
CURRENTLY OR TERM AS PRESENT STORE PERCENT OF
HELD WITH EXECUTIVE DIRECTOR SERIES PRINCIPAL STOCK STORE
NAME AGE COOPERATIVE OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
- ---- --- ----------- --------- ------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Allen 59 Director, 1988 2000 F Operator 6 **
Secretary
Anthony Basile 57 Director, 1997 2001 Taco Bell Operator 26 **
Treasurer at Large
James G. Cocolin 49 Director 1996 1999 C Operator 10 **
Lois G. Foust 54 Director 1997 2001 L Operator 2 **
Edward J. Henriquez, Jr. 61 Director 1994 1999 J Operator 12 **
Paul A. Houston 49 Director 1995 2000 I President 353 5.3
of Scott's
Restaurants
Inc.
Grover G. Moss 54 Director 1994 2001 O Operator 12 **
David G. Neal 52 Director, 1991+ 2000 E Operator 94 1.4
Chairman of
the Board
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
YEAR
FIRST
POSITIONS BECAME
AND OFFICES DIRECTOR KFC
CURRENTLY OR TERM AS PRESENT STORE PERCENT OF
HELD WITH EXECUTIVE DIRECTOR SERIES PRINCIPAL STOCK STORE
NAME AGE COOPERATIVE OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
- ---- --- ----------- --------- -------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James D. Olson 48 Director 1997 2000 H President 266 4.0
of Harman
Management
Corporation
Ben E. Edwards 56 Director 1998++ 1999 B Operator 10 **
Darlene L. Pfeiffer 61 Director 1997 2001 L Operator 4 **
Edward W. Rhawn 60 Director 1992 1999 Independent Chairman of -- --
Rhawn
Enterprises
Inc.
James B. Royster 60 Director, 1998++ 2000 A Operator 4 **
Vice
Chairman
Dean M. Sorgdrager 36 Director 1996 1999 G Operator 1 **
Robert C. Carle 42 Director 1998 1999 D Operator 7 **
Ronald J. Young 40 Director 1993 2000 M Operator 14 **
David Paradise 48 Non-voting 1997 -- -- Operator 9 **
Director+++
Thomas D. Henrion 56 Director, 1980 -- -- President, -- --
President, Chief
Chief Executive
Executive Officer,
Officer Cooperative
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
YEAR
FIRST
POSITIONS BECAME
AND OFFICES DIRECTOR KFC
CURRENTLY OR TERM AS PRESENT STORE PERCENT OF
HELD WITH EXECUTIVE DIRECTOR SERIES PRINCIPAL STOCK STORE
NAME AGE COOPERATIVE OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
- ---- --- ----------- --------- ------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William V. 49 Vice 1985 -- -- Vice -- --
Holden President, President,
Chief Chief
Financial Financial
Officer Officer,
Cooperative
W. Thomas 52 Vice 1982 -- -- Vice -- --
Hutcherson President, President,
Purchasing Cooperative
Kenneth L. 51 Vice 1993 -- -- Vice -- --
Hartung President President,
Cooperative
John W. 42 Vice 1991 -- -- Vice -- --
Inwright President, President,
Operations Cooperative
Alice LeBlanc 41 Vice 1998 -- -- Vice -- --
President, President,
KFC Cooperative
Operations
Carol L. Mudd 44 Vice 1997 -- -- Vice -- --
President, President,
Human Cooperative
Resources
All directors and officers as a group (24 persons) ++++ 830 12.5
</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. KFC Management has not taken any action to fill
the vacancies. The total number of shares of Store Common Stock listed
as owned by directors and officers does not include the 2,028 shares of
Store Common Stock believed by the Cooperative to be owned by KFC
Management or affiliates, representing approximately 33.0% of the Store
Common Stock outstanding.
** Less than one-half of one percent.
+ Mr. Neal has previously served on the Board 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 as a representative of Series E in February 1991.
++ Previously served as a director appointed by the National Franchisee
Advisory Council.
+++ Mr. Paradise is a Taco Bell Operator chosen to serve at the pleasure of
the Board 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; All directors and officers as a group (24 persons) own 16
shares of Membership Common Stock, 2.3 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 the owners, of any Membership or
Store Common Stock.
- 44 -
<PAGE> 45
ITEM 13. Certain Relationships and Related Transactions.
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board, 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
Note 5 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:
*2.1 Agreement and Plan of Corporate Separation
*2.2 Form of Asset Contribution and Liability Assumption Agreement
**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.
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<PAGE> 46
***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.
*******10.11 Separation and Consulting Agreement between Thomas D. Henrion,
Registrant and the Unified FoodService Purchasing Coop, LLC (management contract
required to be filed pursuant to Item 601(10) of Regulation S-K).
10.12 Sixth and Seventh Amendments to Lease between NTS/Springs
Office, Ltd. and the Registrant.
**21 Subsidiaries of the Registrant.
24 Powers of Attorney.
27 Financial Data Schedule.
*99.1 Form of Operating Agreement for Unified FoodService Purchasing
Coop, LLC
*99.2 Form of Purchasing Program Management Agreement
- ---------------------
* Incorporated by reference to the Amendment No. 2 to the Proxy
Statement of the Registrant on Schedule 14A [File No. 000-23496].
** Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1997 [File No. 2-63640].
*** 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].
- 46 -
<PAGE> 47
******* Incorporated by reference to the Amendment No. 2 to the Tender
Offer of the Registrant on Schedule 13E-4 [File No. 5-54907].
(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.
- 47 -
<PAGE> 48
KFC NATIONAL PURCHASING COOPERATIVE, INC.
AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGES
<S> <C>
Report of Independent Accountants F-1
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets, October 31, 1998 and 1997 F-3
Consolidated Statements of Income for the years ended
October 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Members' Equity for the years ended
October 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
Financial statement schedule for the years ended
October 31, 1998, 1997 and 1996 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> 49
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.
In our opinion, the accompanying consolidated balance sheet as of October 31,
1998 and the related consolidated statements of income, members' equity and cash
flows for the year then ended present fairly, in all material respects, the
financial position of KFC National Purchasing Cooperative, Inc. (d/b/a
FoodService Purchasing Cooperative, Inc.) and Subsidiaries at October 31, 1998,
and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule for the year ended October 31,
1998 as listed in the accompanying index, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
January 26, 1999
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.
We have audited the accompanying consolidated balance sheet of KFC National
Purchasing Cooperative, Inc. (d/b/a FoodService Purchasing Cooperative, Inc.)
and Subsidiaries as of October 31, 1997, and the related consolidated statements
of income, members' equity, and cash flows for each of the years in the two-year
period ended October 31, 1997. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule for
the years ended October 31, 1997 and 1996 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 the
results of their operations and their cash flows for each of the years in the
two-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.
/s/ KPMG LLP
KPMG LLP
Louisville, Kentucky
December 8, 1997
F-2
<PAGE> 51
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 272 $ 160
Accounts and note receivable, less allowance for losses of
$1,393 in 1998 and $1,409 in 1997 51,654 41,040
Inventories:
Food 3,306 1,662
Equipment and promotional items 3,763 3,853
-------- --------
7,069 5,515
Current note receivable from related party - 60
Prepaid expenses 158 130
Deferred income taxes 635 614
-------- --------
Total current assets 59,788 47,519
-------- --------
Office equipment, at cost, less accumulated depreciation of
$3,275 in 1998 and $3,039 in 1997 832 660
Note receivable from related party, excluding current portion 178 118
Note receivable - 832
Deferred income taxes 225 108
Other assets 315 563
-------- --------
$ 61,338 $ 49,800
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Short-term borrowings $ 444 $ 572
Note payable 3,000 -
Accounts payable 33,554 21,124
Accrued expenses 3,496 4,299
Premium deposits 329 329
Patronage dividend 2,619 2,890
-------- --------
Total current liabilities 43,442 29,214
Long-term note payable - 3,000
-------- --------
Total liabilities 43,442 32,214
-------- --------
Commitments and contingencies
Members' equity:
Membership common stock, voting, no par value; authorized, 2,000 shares;
issued and outstanding, 707 shares in 1998 and 665 shares in 1997 7 7
Store common stock, no par value; authorized, 10,000 shares; issued and
outstanding, 6,730 shares in 1998 and 6,091 shares in 1997 1,951 1,700
Unrealized gain/loss on marketable equity security 33 -
Retained earnings 15,990 15,930
Currency translation adjustment (85) (51)
-------- --------
17,896 17,586
-------- --------
$ 61,338 $ 49,800
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 52
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED STATEMENTS OF INCOME
for the years ended October 31,1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 664,792 $ 600,132 $ 580,441
Cost of goods sold 648,046 583,891 564,370
--------- --------- ---------
Gross profit 16,746 16,241 16,071
Selling, general and administrative expenses 13,602 12,266 11,006
Provision for losses on receivables 700 175 406
Other income (expense):
Service charges 158 187 90
Interest income 247 339 508
Interest expense (272) (285) (270)
Miscellaneous 180 112 70
--------- --------- ---------
313 353 398
--------- --------- ---------
Income before patronage dividend
and income taxes 2,757 4,153 5,057
Patronage dividend 2,619 2,890 2,762
--------- --------- ---------
Income before income taxes 138 1,263 2,295
Provision for income taxes 78 515 909
--------- --------- ---------
Net income $ 60 $ 748 $ 1,386
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 53
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
for the years ended October 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ UNREALIZED
AMOUNT CURRENCY GAIN/LOSS
---------------------- RETAINED TRANSLATION EQUITY
SHARES MEMBERSHIP STORE EARNINGS ADJUSTMENT SECURITY
-------- ---------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, 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)
Cost in connection with sales of
common stock (4)
Net income for the year ended
October 31, 1996 1,386
Currency translation adjustment 3
---------- --------- ---------- ------------ ----------
Balance, October 31, 1996 6 1,646 15,182 (32) --
Proceeds from sales of common stock:
Membership, at $10 per 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)
Cost in connection with sales of
common stock (3)
Net income for the year ended
October 31, 1997 748
Currency translation adjustment (19)
---------- --------- ---------- ------------ ----------
Balance, October 31, 1997 7 1,700 15,930 (51) --
Proceeds from sales of common stock:
Membership, at $10 per share 64
Store, at $400 per share 800 320
Retirement of common stock:
Membership, at $10 per share (22)
Store, at $400 per share (161) (64)
Cost in connection with sales of
common stock (5)
Net income for the year ended
October 31, 1998 60
Currency translation adjustment (34)
Gain/loss on marketable equity security $ 33
---------- --------- ---------- ------------ ----------
Balance, October 31, 1998 $ 7 $ 1,951 $ 15,990 $ (85) $ 33
========== ========= ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 54
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended October 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 60 $ 748 $ 1,386
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 376 377 418
Provision for losses on receivables 700 175 406
Impairment of goodwill 303 -- --
(Gain) loss on disposals 4 7 (1)
Deferred income tax expense (benefit) (138) (23) 44
Changes in operating assets and liabilities:
Increase in accounts receivable (11,314) (3,893) (3,207)
(Increase) decrease in inventories (1,554) (3,037) 462
Decrease in refundable income taxes -- 32 6
(Increase) decrease in prepaid expenses (28) 3 (52)
Increase (decrease) in accounts payable 12,430 (953) 2,318
Increase (decrease) in accrued expenses (803) 1,272 789
Decrease in premium deposits -- (10) (23)
Increase (decrease) in patronage dividend (271) 128 1,516
-------- ------- -------
Net cash provided by (used in) operating activities (235) (5,174) 4,062
-------- ------- -------
Cash flows from investing activities:
Repayments of loan from related party -- 56 79
Repayments of note receivable 832 -- 12
Increase in other assets (11) (446) (74)
Additions to office equipment, net (508) (322) (291)
Purchase of marketable equity security (55) -- --
Proceeds from sale of office equipment -- -- 17
-------- ------- -------
Net cash provided by (used in) investing activities 258 (712) (257)
-------- ------- -------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net (128) (866) 561
Proceeds from sale of stock, net of costs 315 130 86
Retirement of stock (64) (75) (22)
-------- ------- -------
Net cash provided by (used in) financing activities 123 (811) 625
-------- ------- -------
Effect of change in exchange rates on cash and cash equivalents (34) (19) 3
Net increase (decrease) in cash and cash equivalents 112 (6,716) 4,433
Cash and cash equivalents - beginning of year 160 6,876 2,443
-------- ------- -------
Cash and cash equivalents - end of year $ 272 $ 160 $ 6,876
======== ======= =======
Supplemental information:
Income taxes paid $ 237 $ 468 $ 937
======== ======= =======
Interest paid $ 273 $ 285 $ 270
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 55
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
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 risk 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.
F-7
<PAGE> 56
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. BASIS OF PRESENTATION, CONTINUED:
C. INVENTORIES: Inventories are stated at the lower of cost, primarily
determined on the last-in, first-out (LIFO) method, or market. If
inventories were valued using the first-in, first-out (FIFO) method,
they would have been approximately $41,000 and $19,000 higher at
October 31, 1998 and 1997, respectively.
During 1996, 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, 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 $8,870,000 and $2,406,000 at October 31, 1998 and
1997, 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 was being amortized over 15 years. The carrying values of
all intangibles are periodically reviewed by management and
impairments are recognized when the expected undiscounted future
operating cash flows derived from operations associated with such
intangible assets are less than their carrying value. As a result of
this review, all remaining goodwill was written off in the year
ended October 31, 1998 resulting in a charge to earnings of
approximately $303,000.
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.
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 (SFAS) 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 1998, 1997 and
1996.
F-8
<PAGE> 57
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. BASIS OF PRESENTATION, CONTINUED:
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. 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.
2. ACCOUNTS RECEIVABLE AND SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK:
As of October 31, 1998 and 1997, 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 of approximately $832,000 at October 31, 1997 was due
from a former distributor customer. In 1995, the Cooperative converted an
account receivable from this customer to a note receivable. As of October
31, 1997, the customer had not made timely payments as prescribed by the
note and was in default; however, payment was received by the Cooperative
during 1998 for the full amount of the note.
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%.
F-9
<PAGE> 58
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. BORROWING ARRANGEMENTS, CONTINUED:
The Cooperative has a line of credit of $8,000,000 with its primary bank,
of which $7,900,000 was available on October 31, 1998. 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 (6.07%
as of October 31, 1998). This line of credit expires on May 2, 1999.
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, 1998. Equipment accounts receivable and equipment inventory are
pledged as collateral for borrowings under the line. Borrowings on this
line of credit bear interest at LIBOR plus 140 basis points (6.74% as of
October 31, 1998). This line of credit expires May 1, 1999. 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 $3,469,000 (Canadian dollars) is
available at October 31, 1998. 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 (7.00% as of October 31, 1998). This line
of credit expires on May 16, 1999.
4. INCOME TAXES:
Income tax expense for the years ended October 31, 1998, 1997 and 1996
consists of:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Currently payable:
Federal $ 175,000 $ 414,000 $ 663,000
State and local 41,000 124,000 202,000
Deferred - all taxing jurisdictions (138,000) (23,000) 44,000
---------- ----------- -----------
$ 78,000 $ 515,000 $ 909,000
========== =========== ===========
</TABLE>
F-10
<PAGE> 59
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INCOME TAXES, CONTINUED:
A reconciliation of the difference between income tax expense computed at
the Federal statutory rate of 34% and income tax expense follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 47,000 $ 429,000 $ 780,000
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 27,000 83,000 133,000
Other, net 4,000 3,000 (4,000)
--------- ---------- ----------
$ 78,000 $ 515,000 $ 909,000
========= ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accounts receivable, principally due to allowance
for doubtful accounts $ 558,000 $ 575,000
Lease recognition 25,000 55,000
Accounting reserves not currently deductible for income
tax purposes 127,000 64,000
Impaired goodwill written off, not currently deductible
for income tax purposes 118,000 -
Other 32,000 28,000
--------- ---------
Net deferred tax asset $ 860,000 $ 722,000
========= =========
</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
Cooperative will realize the benefits of these temporary differences.
Accordingly, no valuation allowance for deferred tax assets was recorded
as of October 31, 1998, 1997 and 1996.
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 1998 is based upon shareholder members'
retaining membership in the Cooperative through October 31, 1998 and the
value of any purchase of equipment and supplies made from the
Cooperative, or through participating distributors from November 1, 1997
through October 31, 1998. The patronage dividends for 1997 and 1996 were
based upon similar facts as described in the preceding sentence.
F-11
<PAGE> 60
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INCOME TAXES, CONTINUED:
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 generally 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.
6. MAJOR CUSTOMERS:
The Cooperative had sales to certain distributors in excess of 10% of net
sales. One customer accounted for sales of approximately $134,000,000,
$104,000,000 and $120,000,000 for the years ended October 31, 1998, 1997
and 1996, respectively. This customer's outstanding accounts receivable
balances were approximately $12,003,000, $6,659,000 and $7,094,000 at
October 31, 1998, 1997 and 1996, respectively. A second customer
accounted for sales of approximately $94,700,000, $99,874,000 and
$84,000,000 for the years ended October 31, 1998, 1997 and 1996,
respectively. This customer's outstanding accounts receivable balances
were approximately $4,880,000, $6,306,000 and $6,104,000 at October 31,
1998, 1997 and 1996, respectively. A third customer accounted for sales
of approximately $94,754,000, $86,773,000 and $80,300,000 for the years
ended October 31, 1998, 1997 and 1996, respectively. This customer's
outstanding accounts receivable balances were approximately $5,633,000,
$5,552,000 and $4,758,000 at October 31, 1998, 1997 and 1996,
respectively.
F-12
<PAGE> 61
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. MAJOR CUSTOMERS, CONTINUED:
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 Service
(PFS) to AmeriServe Food Distribution, Inc. (AmeriServe). AmeriServe has
been and continues to be the second largest Cooperative customer,
purchasing goods for distribution primarily to KFC franchisees. When
AmeriServe purchased PFS, it acquired rights under a distribution
agreement which as amended may extend until 2007. 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. AmeriServe does not purchase goods through the Cooperative
for distribution under its Tricon agreement. On May 21, 1998, AmeriServe
acquired ProSource, Inc. (ProSource). For the year ended October 31,
1997, ProSource was the Cooperative's sixth largest distributor with
total sales of approximately $19,000,000. AmeriServe has stated in its
public filings that AmeriServe is and will continue to be highly
leveraged as a result of the indebtedness incurred primarily in
connection with its acquisition of PFS. The Cooperative and its members
continue to monitor their relationship with AmeriServe. The impact of
Tricon's formation, AmeriServe's acquisition of PFS and the merger with
ProSource on the business of the Cooperative remains uncertain.
Scott's Restaurants, Inc. (Scott's) is the largest KFC franchisee in
Canada, with approximately 353 retail outlets. The operations of the
Canadian subsidiary are substantially dependent 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 obtained a
stay of the termination pending judicial appeal which resulted in an
appealable ruling favorable to Scott's. On October 30, 1998, Scott's and
KFC (Canada) announced that they had signed an agreement providing for
the sale to the public of the Scott's KFC outlets and selected KFC
(Canada) owned outlets throughout Canada by way of a newly organized
income trust. The proposed sale is subject to approval by the
shareholders of Scott's and market conditions at the time of the public
offering of income trust securities. It is the intention of the parties
that the transaction be completed irrespective of further litigation
between the parties regarding Scott's franchise agreement. The closing
date for the transaction is scheduled for March 1, 1999. Once closed, the
parties will exchange mutual releases with respect to the litigation. If
the transaction is not successfully completed, their agreement provides
that the parties will negotiate alternate strategies for the disposition
of Scott's KFC business. The Cooperative continues to monitor the Scott's
situation. The loss by the Canadian subsidiary of Scott's KFC business
would have an adverse effect on the Cooperative's Canadian operations.
F-13
<PAGE> 62
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $609,000, $556,000 and $498,000 for 1998, 1997 and 1996,
respectively.
8. COMMITMENTS AND CONTINGENCIES:
The Cooperative's 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>
1999 $ 925,000
2000 806,000
2001 721,000
2002 764,000
---------------
$ 3,216,000
===============
</TABLE>
Rental expense was approximately $839,000, $774,000 and $719,000 in
1998, 1997 and 1996, 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.
F-14
<PAGE> 63
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 cosponsored 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, 1998, the Bank has funded approximately $6.5 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.
F-15
<PAGE> 64
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. IMPACT OF NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." Management believes that the adoption of
SFAS No. 130 in fiscal 1999 will not have a material adverse affect on the
Cooperative's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement is effective for financial statements for fiscal years beginning
after December 15, 1997. Management is continuing to assess the disclosure
impacts of adopting SFAS No. 131 in fiscal 1999.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement is effective for financial statements for fiscal
years beginning after December 15, 1997. Management is continuing to
assess the disclosure impacts of adopting SFAS No. 132 in fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management believes that the adoption of SFAS No. 133
in fiscal 1999 will not have a material adverse affect on the Cooperative's
consolidated financial statements.
11. PROPOSED CORPORATE REORGANIZATION:
In conjunction with Tricon Global Restaurants, Inc. 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 the food,
packaging, supplies, equipment, and related services used in these
restaurants. The Cooperative would transfer most operating assets and
liabilities and its employees to the unified cooperative in exchange for
its membership interest therein. In connection with forming the new unified
cooperative, the Cooperative expects to split-off to a newly organized Taco
Bell purchasing cooperative the portion of its business which operates
purchasing programs for its Taco Bell members. Through this new entity,
owners and operators of Taco Bell restaurants, including Tricon, would
participate with the Cooperative and a newly organized Pizza Hut purchasing
cooperative in the purchasing programs of the unified cooperative. Although
administered by the new unified cooperative, the KFC purchasing program
would be subject to significant control, advice and counsel of the
Cooperative. The Cooperative would continue to exercise policy-making
decisions and administer the patronage dividend program in accordance with
past practices.
F-16
<PAGE> 65
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. PROPOSED CORPORATE REORGANIZATION, CONTINUED:
The process is subject to the approval of the members of the Cooperative,
Proxy statements soliciting such approval will be distributed to holders
of record of the Cooperative's outstanding shares of membership common
stock as of the close of business on January 27, 1999. Concurrently with
the solicitation of proxies, the Cooperative is making a tender offer to
holders of Taco Bell series membership common stock to transfer to the
tendering members all of the shares of the newly organized Toco Bell
cooperative in exchange for the surrender by the tendering members of all
of their shares of the Cooperative membership common stock and store
common stock.
F-17
<PAGE> 66
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED CHARGED
AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ------------------------------------ --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for losses on receivables:
Year ended:
October 31;
1996 $1,408,727 $699,601 -- $715,749(A) $1,392,579
1997 1,328,869 175,310 -- 95,452(A) 1,408,727
1998 1,188,248 406,490 -- 265,869(A) 1,328,869
(A) Uncollectible accounts and notes written off
</TABLE>
S-1
<PAGE> 67
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, 1999 By /s/ Thomas D. Henrion
-----------------------------------------
Thomas D. Henrion, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
* Director, Secretary January 29, 1999
- -------------------------
William E. Allen
Director, Treasurer January , 1999
- -------------------------
Anthony Basile
* Director January 29, 1999
- -------------------------
Robert C. Carle
* Director January 29, 1999
- -------------------------
James G. Cocolin
* Director January 29, 1999
- -------------------------
Ben E. Edwards
* Director January 29, 1999
- -------------------------
Lois G. Foust
/s/ Thomas D. Henrion President and Chief January 29, 1999
- ------------------------- Executive Officer,
Thomas D. Henrion Director
* Director January 29, 1999
- -------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President and January 29, 1999
- ------------------------- Chief Financial Officer
William V. Holden (Principal Accounting
Officer) (Principal
Financial Officer)
</TABLE>
<PAGE> 68
<TABLE>
<S> <C> <C>
* Director January 29, 1999
- -------------------------
Paul A. Houston
* Director January 29, 1999
- -------------------------
Grover G. Moss
* Director, Chairman January 29, 1999
- -------------------------
David G. Neal
* Director January 29, 1999
- -------------------------
James D. Olson
* Director January 29, 1999
- -------------------------
Darlene L. Pfeiffer
* Director January 29, 1999
- -------------------------
Edward W. Rhawn
* Director, Vice January 29, 1999
- ------------------------- Chairman
Burney Royster
* Director January 29, 1999
- -------------------------
Dean M. Sorgdrager
* Director January 29, 1999
- -------------------------
Ronald J. Young
* By /s/ Thomas D. Henrion January 29, 1999
----------------------------
Thomas D. Henrion
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Form
10-K.
</TABLE>
<PAGE> 1
EXHIBIT 3.2
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 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.
<PAGE> 2
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 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
<PAGE> 3
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>
<CAPTION>
COLUMN 1 COLUMN 2
-------- --------
SERIES AREA
<S> <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.
J Foreign Territories other than Canada.
M Canada.
</TABLE>
<PAGE> 4
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
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.
COLUMN 1 COLUMN 2
-------- --------
SERIES AREA
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
<PAGE> 5
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.
(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 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
Scott's I
KFC National Management Company K
NCAC L
</TABLE>
<PAGE> 6
(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 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
otherwise transfer such
<PAGE> 7
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.
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
<PAGE> 8
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.
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
<PAGE> 9
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.
(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
<PAGE> 10
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 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
<PAGE> 11
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 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
<PAGE> 12
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, 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.
<PAGE> 13
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 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,
<PAGE> 14
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 (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
<PAGE> 15
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.
(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
<PAGE> 16
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.
(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
<PAGE> 17
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 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.
<PAGE> 18
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 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
<PAGE> 19
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 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.
<PAGE> 20
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.
<PAGE> 1
EXHIBIT 10.12
SIXTH AMENDMENT TO LEASE
This Sixth Amendment to Lease ("Amendment") is made and entered into as
of the ______day of February, 1998 by and among NTS/SPRINGS OFFICE, LTD., a
Kentucky limited partnership d/b/a THE SPRINGS (successor in interest to
NTS/Breckinridge, Ltd., a Kentucky limited partnership d/b/a the Springs)
("Lessor"), And KFC NATIONAL PURCHASING COOPERATIVE, INC., a Delaware
corporation d/b/a FoodService Purchasing Cooperative, Inc. ("Lessee").
RECITALS
A. NTS/Breckinridge, Ltd. d/b/a The Springs, as Lessor, and KFC
National Purchasing Cooperative, Inc., as Lessee, entered into a certain Lease
dated April 8, 1988, relating to certain space in The Springs Office Building on
Breckenridge Lane in Louisville, Kentucky, as modified by: (i) Addendum to Lease
dated December 29, 1989, (ii) Second Amendment to Lease dated January 15, 1993,
(iii) Third Amendment to Lease dated April 11,1995, (iv) fourth Amendment to
Lease dated April 11,1995 and (v) Fifth Amendment to Lease dated December 15,
1997 (as amended, the "Lease").
B. Lessor and Lessee desire to enter into this Amendment for the
purpose of amending certain of the terms and conditions of the Lease as
set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged the parties agree as
follows:
1. Amendments to Lease. Effective as of March 1, 1999, the Lease is
amended as follows:
1.1 Section 2 of the Lease is amended and restated in its
entirety as follows:
Section 2. GRANT AND THE PREMISES. Lessor does hereby
lease to Lessee and Lessee does hereby lease from
Lessor the following office space (the "Premises") in
the office building (the "Building"), containing
124,771 square feet, forming part of the development
known as "The Springs" (the "Development") and
located at 950 Breckenridge Lane, Louisville,
Kentucky:
Suite 30 (containing approximately 3, 713 sq. feet)
Suite 240 (containing approximately 6,644 sq. feet)
Suite 270
and 280 (containing approximately 4,530 sq. feet)
Suite 295 (containing approximately 3,287 sq. feet)
Suite 300 (comprising the entire third floor and
Containing approximately 33,300 sq. feet)
Total Square Footage: 51,474 sq. feet
Lessee shall have the right (i) in common with Lessor, other
lessees in the Building, their employees, agents, customers
and invitees to use the common areas of the Building and the
legally subdivided tract of real property on which the
Building is situated, including without limitation, entrances
and exits, halls, corridors, stairwells, elevators, restrooms,
sidewalks, driveways, parking areas, landscaped areas and the
conference room, but only for the purposed intended therefor
(the "Common Areas"), and (ii) in common with the foregoing
and other occupants of the Development, their employees,
agents and invitees, to use the access road from Breckenridge
Lane to the Building. The term "Common Areas" shall also
include a picnic area with a gazebo and any other outdoor
amenities which Lessor in its sole discretion may elect to
provide, all of which are to be installed by Lessor at its
expense and maintained by Lessor.
<PAGE> 2
1.2 Section 3 of the Lease is amended and restated in its
entirety as follows:
Section 3. The Term. The term of this Lease shall be
extended for a period of six (6) years commencing on March 1,
1999 and ending on February 28, 2005 (the "Term").
1.3 Section 4 of the Lease is amended and restated in its
entirety as follows:
Section 4. Rent. During the Term, Lessee shall pay to
Lessor as rent, the monthly amounts set forth in this Section
4 for the respective periods indicated (the "Rent"). All
payments of the Rent shall be made payable to Lessor and paid
in advance on the first (1st) business day of each and every
month. The Rent and all sums hereinafter designated as
additional rent shall be mailed to Lessor at the office of NTS
Development Company, 10172 Linn Station Road, Louisville,
Kentucky 40223, all of which Lessee hereby covenants and
agrees to pay without demand or notice and without any right
of offset, set-off or deduction. In the event Lessee shall
fail to pay any of the Rent or other monies due under this
Lease within ten (10) days after the same become due and
payable, then a service charge of one and one-half percent
(1.5%) per month or any portion of a month for which such
payment of the Rent or additional payment is late shall be
charged as follows:
<TABLE>
<S> <C>
03/01/1999 - 02/28/2002 Annual rent in the amount of $720,636.00 payable in
monthly installments of $60,053.00.
03/01/2002 - 02/28/2005 Annual rent in the amount of $784,978.50 payable in
monthly installments of $65,414.88.
</TABLE>
0.4 Section 4.1 of the Lease is amended and Lessee's
Prorata Share is as follows:
In their Lease, the Prorata Share for Lessee is
41.25%.
0.5 Section 4.2, Paragraphs A and B shall be deleted in
their entirety, and the following paragraph shall be
inserted as subsection 4.2 A:
Section 4.2A. The rent shall be adjusted from time to
time in accordance with this Section to reflect
increases in the expense of operating the Building
("Expenses"). The rent, including the adjustments
made pursuant to this Section, is referred to in this
Lease as the "Rent." If the Operating Expenses in any
period during the Term exceed the Operating Expenses
for Calendar Year 1999, Operating Expenses shall be
adjusted to include Lessee's Prorata Share of such
excess. As soon as practicable after the end of each
calendar year (or portion thereof) during the Term,
Lessor will provide Lessee with a written notice
("Statement") setting forth the amount of any
adjustments to Rent together with a statement of
Operating Expenses for the previous calendar year and
copies of supporting documentation comparable to
information supplied to other tenants in the
Building. Within thirty (30) days following receipt
of the Statement and other required information,
Lessee shall pay Lessor: [i] the adjustment to Rent
for the previous calendar year after credit for any
estimated adjustment to Rent for the months which
Lessee has made pursuant to this Section; and [ii] an
estimated adjustment to Rent for the months which
have lapsed in the current calendar year based on the
previous calendar year's increase in Operating
Expenses and Lessor's good faith projection of the
increase in Operating Expenses during the current
calendar year after credit for any estimated payments
made by Lessee pursuant to this Section. Commencing
with the month following the month in which the
Statement is dated and continuing until such time as
Lessee receives
<PAGE> 3
Lessor's next Statement, the Monthly Basic Rent
Installments shall be adjusted to include Lessee's
Proportionate Share of any Operating Expenses in
excess of Operating Expenses in calendar year 1999
based on Operating Expenses for the previous calendar
year and Lessor's good faith projection of the
increase in Operating Expenses for the current
calendar year. The adjusted portion of the payments
of Rent shall be credited against the actual
Operating Expenses as shown in Lessor's next
Statement. If the next Statement shows that Lessee
has overpaid and if Lessee is not then in default,
Lessor shall credit such overpayment against the next
accruing payments of Rent until the overpayment is
reduced to zero. The obligation to pay the
adjustments to Rent shall survive any termination of
the Term with respect to the period prior to such
termination. Notwithstanding any other provision
herein to the contrary, it is agreed that in the
event the Building is not fully occupied during any
partial calendar year or any full calendar year, an
adjustment shall be made by Lessor in computing the
Expenses for such year as though the Building had
been 95% occupied during such calendar year and as
though the entire Building had been provided with
building standard services during such calendar year,
and Rent payable by Lessee shall in no event be less
than the Rent specified in Section 4 hereof.
0.6 The last sentence of Section 4.1 of the Lease is
deleted and the following sentence is substituted
therefor:
Notwithstanding the foregoing, in the event a tax
increase is attributable to an increase in the
assessed value resulting from a transfer of the
Building, Lessee's Prorata Share of such taxes shall
not be increased by more than four percent (4%) in
any given year.
0.7 Section 4.2 of the Lease is amended to add the
following sentence at the end of Paragraph C thereof:
Notwithstanding the foregoing, Operating Expenses
shall not include:
(i) interest and principal payments on
mortgages;
(ii) rent under any ground or underlying leases;
(iii) depreciation of the Building and
improvements and financing costs of the
Building and improvements;
(iv) compensation paid to officers and executives
of Lessor above the level of the Building's
property manager;
(v) any cost paid to a Lessor-related
corporation or entity which cost is in
excess of the amount which would typically
be paid by a building owner in an
arms-length transaction;
(vi) managing agents' fees or commissions in
excess of the rates that are customarily
charges for building management for
buildings of like class and character;
(vii) auditing fees;
<PAGE> 4
(viii) legal and other professional fees and
expenses incurred in preparing, negotiating
and executing leases, amendments,
terminations and extensions or in resolving
any disputes with Lessees and other
occupants or enforcing lease obligations,
including, without limitation, court costs;
(ix) any fines or penalties, including interest
payable by Lessor in connection with its
late payment of any operating costs, taxes
and expenses;
(x) expenses incurred by Lessor in connection
with the transfer or disposition of the
underlying land or the Building or any
ground or underlying lease, including,
without limitation, transfer, deed and
capital gains taxes;
(xi) the cost of any alterations, additions,
changes, replacements, improvements and
repairs and other items, which under
generally accepted accounting principles are
properly classified as capital expenditures;
(xii) payments under equipment leases, the cost of
which would have constituted a capital
expenditure if Lessor had purchased such
equipment;
(xiii) the cost of removing or remediating any
substances or materials which are deemed
hazardous by any law, ordinance or other
governmental regulation or asbestos-
containing materials;
(xiv) the cost of any repair made by Lessor to
remedy damage caused by, or resulting from,
the negligence or willful wrongful act or
willful omission of Lessor, its agents,
contractors or its employees;
(xv) the cost of installing, operating and
maintaining any portion of the Building
operated by Lessor for uses other than
office use and storage including, without
limitation, observatory, broadcasting
facility, luncheon club, theater, rehearsal
hall, art gallery or garage;
(xvi) any cost or expenditure for which Lessor is
reimbursed, whether by lessees pursuant to
such lessees' leases, insurance proceeds,
condemnation proceeds or otherwise,
including any expense for which Lessor would
have been reimbursed had Lessor carried
insurance policies which are required under
this Lease;
(xvii) the cost of any work or service performed
for or made available to any lessee of the
Building (other than Lessee), the scope of
which exceeds the services furnished
generally, without additional expense, to
the lessees and other occupants (including
Lessee) of the Building;
(xviii) the overtime costs of any heating, air
conditioning or electrical current furnished
to other lessees of the Building to the
extent such costs are to be separately
reimbursed by such other lessees;
(xix) costs of lessee alterations or decorations,
including initial lessee improvements;
(xx) advertising, marketing and promotional
expenses and brokerage and leasing
commissions;
<PAGE> 5
(xxi) costs incurred by Lessor to induce
prospective lessees of the Building which
are payable in connection with space located
in other buildings previously occupied by
such prospective lessees;
(xxii) costs of acquiring or leasing art work;
(xxiii) costs of membership in any political,
professional or social organizations or any
political or charitable contributions; or
(xxiv) costs of significant repairs to the roof,
parking lot and other structural components
of the Building or replacement of or
significant repairs to the existing HVAC
zone line units.
24.1 Section 6 of the Lease is amended and restated in its
entirety as follows:
Section 6. Utilities.
Lessor shall, at Lessor's sole cost and
expense, furnish the following utilities to the
Premises:
(a) hot and cold water for lavatory
purposes and cold water for drinking (at all
times);
(b) air-conditioning, heating and
ventilation (during Lessee's ordinary
business hours; Lessee shall pay for any
requested additional services at the
standard utility rates); and
(c) electricity and lighting (at
all times).
Notwithstanding the foregoing, Lessee shall pay for
the services described in items (b) and (c)
immediately preceding to the extent provided to the
computer room. Lessor shall also provide telephone
service and any requested cable service at Lessee's
sole cost and expense.
3.1 The following sentence is added to the end of Paragraph A
of Section 8 of the Lease:
Lessor shall promptly make all necessary repairs and
or replacements to the HVAC, electrical and plumbing systems,
floors, roofs, load bearing walls and columns, common areas,
parking lot and side walks as it reasonably deems necessary.
In addition, Lessor shall periodically refurbish and/or
replace the exercise equipment in the fitness room.
3.2 Section 31 of the Lease entitled "First Option to
Expand the Premises; First Refusal Right." is deleted in its entirety.
3.3 Section 32 of the Lease entitled "Second Option to Expand
the Premises" is deleted in its entirety.
3.4 Section 33 of the Lease entitled "Renewal Options" is
deleted in its entirety.
2. Refurbishment Allowance. Within ten (10) business days of the date
hereof, Lessor shall pay Lessee, in the form of cash or check, a refurbishment
allowance in the amount of $140,000. Said amount shall be used toward tenant
finish improvements to the Premises and for such other purposes as Lessee may
<PAGE> 6
elect. On or about January 1, 2002, Lessor shall pay Lessee an
additional refurbishment allowance in the amount of $25,000, which
amount shall be in the form of cash, check or rent credit, at Lessor's
option.
3. Right of First Offer. Lessee shall have a right of first offer to
lease for the remaining Term up to all of the remaining office space located on
the first and second floors of the Building which is currently vacant or leased
to other tenants as and when such space from time to time becomes available (the
"Offer Space"). Lessor shall not, during the Term, lease any portion of the
Offer Space to another tenant or renew an existing lease for any portion of the
Offer Space with another tenant unless obligated to do so under the terms of
such lease, without (a) providing Lessee a written offer to lease such Offer
Space, and (b) the earlier to occur of Lessee providing Lessor a written
rejection of offer to lease such Offer Space or a period of ten (10) business
days elapsing after Lessee's receipt of such offer. The offer leasing notice
shall contain a description of the available Offer Space, the date on which
Lessor anticipates such space to be available and the rental rate applicable to
such space. Contemporaneously with the actual execution date hereof, Lessor
shall provide Lessee a list of the expiration dates and renewal dates for the
existing second floor leases.
4. Effect of Amendment. After the date hereof, each reference to the
Lease shall mean and be deemed to be a reference to the Lease as modified by
this Amendment. Except as expressly modified by this Amendment, the Lease shall
remain in full force and effect in the same form thereof as it existed
immediately prior to the date of this Amendment.
IN WITNESS WHEREOF, this Amendment has been executed by the parties as
of the date set forth above.
Signed and Acknowledged LESSOR:
In the Presence of:
NTS/SPRINGS OFFICE, LTD., dba THE SPRINGS
By: NTS Capital Corporation, General Partner
By:
Brian F. Lavin
Title: Executive Vice President
Signed and Acknowledged LESSEE:
In the Presence of:
KFC NATIONAL PURCHASING COOPERATIVE, INC., a
Delaware corporation d/b/a FoodService
Purchasing Cooperative, Inc.
By:
Name:
Title:
<PAGE> 7
SEVENTH AMENDMENT TO LEASE
This Seventh Amendment to Lease ("Amendment") is made and
entered into as of the 2nd day of November, 1998 by and among
NTS/SPRINGS OFFICE, LTD., a Kentucky limited partnership d/b/a THE
SPRINGS (successor in interest to NTS/Breckenridge, Ltd., a Kentucky
limited partnership d/b/a the Springs) ("Lessor"), And KFC NATIONAL
PURCHASING COOPERATIVE, INC., a Delaware corporation d/b/a FoodService
Purchasing Cooperative, Inc. ("Lessee").
RECITALS
D. NTS/Breckenridge, Ltd. d/b/a The Springs, as Lessor, and
KFC National Purchasing Cooperative, Inc., as Lessee, entered into a
certain Lease dated April 8, 1988, relating to certain space in The
Springs Office Building on Breckenridge Lane in Louisville, Kentucky,
as modified by: (i) Addendum to Lease dated December 29, 1989, (ii)
Second Amendment to Lease dated January 15, 1993, (iii) Third Amendment
to Lease dated April 11,1995, (iv) Fourth Amendment to Lease dated
April 11,1995, (v) Fifth Amendment to Lease dated December 15, 1997 and
(vi) Sixth Amendment to Lease dated February 9, 1998 (as amended, the
"Lease").
E. Pursuant to a certain sublease dated January 15, 1993,
between Thomas Drury, Inc., as Sublessor and lessee, as Sublesse,
Lessee subleased Suite 295 from Thompson Drury, Inc. Said sublease
expired on September 13, 1996.
F. Lessor and Lessee desire to enter into this Amendment for
the purpose of amending certain of the terms and conditions of the
Lease as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Amendments to Lease. For the period from September 14,
1996 through December 14, 1997, the Lease is hereby
amended as follows:
1.1 Section 2 of the Lease is amended and restated in
its entirety as follows:
Section 2. GRANT AND THE PREMISES. Lessor does hereby
lease to Lessee and Lessee does hereby lease from
Lessor the following office space (the "Premises") in
the office building (the "Building"), containing
124,771 square feet, forming part of the development
known as "The Springs" (the "Development") and located
at 950 Breckenridge Lane, Louisville, Kentucky:
Suite 240 (containing approximately 6,644 sq. feet)
Suite 270
and 280 (containing approximately 4,530 sq. feet)
Suite 295 (containing approximately 3,287 sq. feet)
Suite 300 (comprising the entire third floor and
containing approximately 33,300 sq. feet)
Total Square Footage: 47,761 sq. feet
Lessee shall have the right (i) in common with Lessor, other
lessees in the Building, their employees, agents, customers
and invitees to use the common areas of the Building and the
legally subdivided tract of real property on which the
Building is situated, including without limitation, entrances
and
<PAGE> 8
exits, halls, corridors, stairwells, elevators, restrooms,
sidewalks, driveways, parking areas, landscaped areas and the
conference room, but only for the purposed intended therefor
(the "Common Areas"), and (ii) in common with the foregoing
and other occupants of the Development, their employees,
agents and invitees, to use the access road from Breckenridge
Lane to the Building. The term "Common Areas" shall also
include a picnic area with a gazebo and any other outdoor
amenities which Lessor in its sole discretion may elect to
provide, all of which are to be installed by Lessor at its
expense and maintained by Lessor.
1.2 Section 4 of the Lease is amended and restated in its
entirety as follows:
Section 4. Rent. During the Term, Lessee shall pay to
Lessor as rent, the monthly amounts set forth in this Section
4 for the respective periods indicated (the "Rent"). All
payments of the Rent shall be made payable to Lessor and paid
in advance on the first (1st) business day of each and every
month. The Rent and all sums hereinafter designated as
additional rent shall be mailed to Lessor at the office of NTS
Development Company, 10172 Linn Station Road, Louisville,
Kentucky 40223, all of which Lessee hereby covenants and
agrees to pay without demand or notice and without any right
of offset, set-off or deduction. In the event Lessee shall
fail to pay any of the Rent or other monies due under this
Lease within ten (10) days after the same become due and
payable, then a service charge of one and one-half percent
(1.5%) per month or any portion of a month for which such
payment of the Rent or additional payment is late shall be
charged as follows:
<TABLE>
<S> <C>
09/14/1996 - 12/14/1997: Annual rent in the amount of $782,166.96 payable in
monthly installments of $65,180.58.
</TABLE>
0.3 Section 4.1 of the Lease is amended and Lessee's
Prorata Share is as follows:
In their Lease, the Prorata Share for Lessee is
41.25%.
For the period from December 15, 1997 through February 28, 1999,
the Lease is hereby amended as follows:
1.4 Section 2 of the Lease is amended and restated in its
entirety as follows:
Section 2. GRANT AND THE PREMISES. Lessor does hereby
lease to Lessee and Lessee does hereby lease from
Lessor the following office space (the "Premises") in
the office building (the "Building"), containing
124,771 square feet, forming part of the development
known as "The Springs" (the "Development") and
located at 950 Breckenridge Lane, Louisville,
Kentucky:
Suite 30 (containing approximately 3, 713 sq. feet)
Suite 240 (containing approximately 6,644 sq. feet)
Suite 270
and 280 (containing approximately 4,530 sq. feet)
Suite 295 (containing approximately 3,287 sq. feet)
Suite 300 (comprising the entire third floor and
containing approximately 33,300 sq. feet)
Total Square Footage: 51,474 sq. feet
Lessee shall have the right (i) in common with Lessor, other
lessees in the Building, their employees, agents, customers
and invitees to use the common areas of the Building and the
legally subdivided tract of real property on which the
Building is situated, including without limitation, entrances
and exits, halls, corridors, stairwells, elevators, restrooms,
sidewalks, driveways, parking areas,
<PAGE> 9
landscaped areas and the conference room, but only for the
purposed intended therefor (the "Common Areas"), and (ii) in
common with the foregoing and other occupants of the
Development, their employees, agents and invitees, to use the
access road from Breckenridge Lane to the Building. The term
"Common Areas" shall also include a picnic area with a gazebo
and any other outdoor amenities which Lessor in its sole
discretion may elect to provide, all of which are to be
installed by Lessor at its expense and maintained by Lessor.
1.5 Section 4 of the Lease is amended and restated in its
entirety as follows:
Section 4. Rent. During the Term, Lessee shall pay to
Lessor as rent, the monthly amounts set forth in this Section
4 for the respective periods indicated (the "Rent"). All
payments of the Rent shall be made payable to Lessor and paid
in advance on the first (1st) business day of each and every
month. The Rent and all sums hereinafter designated as
additional rent shall be mailed to Lessor at the office of NTS
Development Company, 10172 Linn Station Road, Louisville,
Kentucky 40223, all of which Lessee hereby covenants and
agrees to pay without demand or notice and without any right
of offset, set-off or deduction. In the event Lessee shall
fail to pay any of the Rent or other monies due under this
Lease within ten (10) days after the same become due and
payable, then a service charge of one and one-half percent
(1.5%) per month or any portion of a month for which such
payment of the Rent or additional payment is late shall be
charged as follows:
<TABLE>
<S> <C>
12/15/1997 - 2/28/1999: Annual rent in the amount of $841,573.80 payable in
monthly installments of$70,131.15.
</TABLE>
1.6 Section 4.1 of the Lease is amended and Lessee's
Prorata Share is as follows:
In their Lease, the Prorata Share for Lessee is
41.25%.
2. Effect of Amendment. After the date hereof, each reference to
the Lease shall mean and be deemed to be a reference to the Lease as modified by
this Amendment. Except as expressly modified by this Amendment, the Lease shall
remain in full force and effect in the same form thereof as it existed
immediately prior to the date of this Amendment.
<PAGE> 10
IN WITNESS WHEREOF, this Amendment has been executed by the parties as
of the date set forth above.
Signed and Acknowledged LESSOR:
In the Presence of:
NTS/SPRINGS OFFICE, LTD., dba THE SPRINGS
By: NTS Capital Corporation, General
Partner
By:
Brian F. Lavin
Title: Executive Vice President
Signed and Acknowledged LESSEE:
In the Presence of:
KFC NATIONAL PURCHASING COOPERATIVE,
INC., a Delaware corporation d/b/a
FoodService Purchasing Cooperative, Inc.
By:
Name:
Title:
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David G. Neal 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, 1998, 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, December 9, 1998
- ---------------------------------------- Secretary -----------------------------------
William E. Allen
Director,
- ---------------------------------------- Treasurer -----------------------------------
Anthony Basile
/s/ Robert C. Carle Director December 9, 1998
- ---------------------------------------- -----------------------------------
Robert C. Carle
/s/ James G. Cocolin Director December 9, 1998
- ---------------------------------------- -----------------------------------
James G. Cocolin
/s/ Ben E. Edwards Director December 9, 1998
- ---------------------------------------- -----------------------------------
Ben E. Edwards
</TABLE>
81
<PAGE> 2
<TABLE>
<S> <C> <C>
/s/ Lois G. Foust Director December 9, 1998
- ---------------------------------------- -----------------------------------
Lois G. Foust
/s/ Thomas D. Henrion Director, December 9, 1998
- ---------------------------------------- President, -----------------------------------
Thomas D. Henrion Chief Executive
Officer
/s/ Edward J. Henriquez, Jr. Director December 9, 1998
- ---------------------------------------- -----------------------------------
Edward J. Henriquez, Jr.
/s/ William V. Holden Vice President, December 9, 1998
- ---------------------------------------- Chief Financial Officer -----------------------------------
William V. Holden (Principal Accounting Officer)
(Principal Financial Officer)
/s/ Paul A. Houston Director December 9, 1998
- --------------------------------------- -----------------------------------
Paul A. Houston
/s/ Grover G. Moss Director December 9, 1998
- --------------------------------------- -----------------------------------
Grover G. Moss
/s/ David G. Neal Director, December 9, 1998
- --------------------------------------- Chairman -----------------------------------
David G. Neal
/s/ James D. Olson Director December 9, 1998
- --------------------------------------- -----------------------------------
James D. Olson
/s/ Darlene L. Pfeiffer Director December 9, 1998
- --------------------------------------- -----------------------------------
Darlene L. Pfeiffer
/s/ Edward W. Rhawn Director December 9, 1998
- --------------------------------------- -----------------------------------
Edward W. Rhawn
/s/ Burney Royster Director, December 9, 1998
- ---------------------------------------- Vice Chairman -----------------------------------
Burney Royster
</TABLE>
82
<PAGE> 3
<TABLE>
<S> <C> <C>
/s/ Dean M. Sorgdrager Director December 9, 1998
- ------------------------------------- ----------------------------------
Dean M. Sorgdrager
/s/ Ronald J. Young Director December 9, 1998
- ---------------------------------------- ----------------------------------
Ronald J. Young
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 272
<SECURITIES> 0
<RECEIVABLES> 51,654
<ALLOWANCES> 1,393
<INVENTORY> 7,069
<CURRENT-ASSETS> 59,788
<PP&E> 4,107
<DEPRECIATION> 3,275
<TOTAL-ASSETS> 61,338
<CURRENT-LIABILITIES> 43,442
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,896
<TOTAL-LIABILITY-AND-EQUITY> 61,338
<SALES> 664,792
<TOTAL-REVENUES> 664,792
<CGS> 648,046
<TOTAL-COSTS> 648,046
<OTHER-EXPENSES> 13,602
<LOSS-PROVISION> 700
<INTEREST-EXPENSE> 272
<INCOME-PRETAX> 138
<INCOME-TAX> 78
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
