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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File No. 0-23496
KFC NATIONAL PURCHASING COOPERATIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0946155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Breckinridge Lane, Louisville, Kentucky 40207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 896-5900.
Securities registered pursuant to Section 12(b) of the Act:
<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 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, 1999.
Membership Common Stock $5,400
Store Common Stock $2,079,200
Number of shares outstanding of each of the issuer's classes of common
stock as of December 31, 1999.
<TABLE>
<CAPTION>
Title of each class Number of Shares
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<S> <C>
Membership Common stock 552
Store Common Stock 5,621
</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,
1999. For purposes of these calculations, directors and executive officers of
the Registrant are assumed to be the only affiliates.
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ITEM 1. Business
WHO ARE WE?
The KFC National Purchasing Cooperative, Inc. (the "KFC Co-op") is a
purchasing cooperative that operates a purchasing program through the Unified
Foodservice Purchasing Co-op, LLC ("UFPC") in order to provide its members with
the lowest possible store delivered costs for goods and equipment used in their
outlets. Our stockholder members are operators of KFC outlets, including Tricon
Global Restaurants, Inc. ("Tricon"), and the KFC National Council and
Advertising Cooperative, Inc. ("NCAC"). Until March 1, 1999, we administered
purchasing programs for multiple restaurant concepts, but now we only operate
and only plan to operate purchasing programs for KFC operators.
History
The KFC Co-op was incorporated in 1978 on the premise that one central
procurement organization for KFC operators could decrease the costs of goods and
equipment for KFC operators. Beginning in 1992, the KFC Co-op expanded its
purchasing programs to include KFC franchisees in Canada, Taco Bell franchisees
in the United States and franchisees of non-Tricon related restaurant concepts.
In March, 1999, pursuant to a corporate reorganization, the KFC Co-op
stopped operating its KFC-Canada, Taco Bell and non-Tricon related purchasing
programs. On March 1, 1999, the KFC Co-op split off its Taco Bell purchasing
program business into the newly organized Taco Bell National Purchasing Coop,
Inc. To effect this split off, the KFC Co-op (1) transferred certain assets,
liabilities and members' equity that related specifically to its Taco Bell
operations to the Taco Bell Co-op, and (2) offered KFC Co-op stockholders who
were Taco Bell operators the opportunity to exchange their shares of KFC Co-op
stock for shares of Taco Bell Co-op stock, pursuant to a tender offer. As of
March 23, 1999, the KFC Co-op's Canada subsidiary transferred all of its
purchasing contracts, equipment, and other assets to the Unified Purchasing
Group of Canada, Inc. and no longer operates a purchasing program. As of the
date of this annual report, the KFC Co-op only operates a purchasing program
through UFPC for goods and equipment used by operators of KFC outlets. Our
Bylaws require us to always do more than 50% of the value of our business with
KFC Co-op members.
On March 1, 1999, UFPC was organized with the three concept co-ops as
its initial members: the KFC Co-op, the Taco Bell Co-op and the Pizza Hut
National Purchasing Coop, Inc. UFPC provides the support and operational
services for each concept co-op through combined administrative and purchasing
functions. Tricon is a member of each concept co-op.
Operations
Through UFPC, the KFC Co-op makes volume purchases and arranges for the
purchases of goods and equipment from manufacturers and suppliers for sale to
KFC operators and distributors who supply KFC operators. We work to obtain low
prices by making or arranging volume purchase commitments and by assuming other
purchasing functions and risks on behalf
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of KFC operators, distributors and suppliers. We also reduce the cost to the KFC
system by assuming many credit, sales, marketing and billing functions, which
would otherwise be performed by multiple suppliers. Our volume purchase
commitments allow suppliers to reduce their costs since they can more
effectively plan their production, purchasing, and inventory levels.
We also provide our members with advisory services relating to the
distribution of goods and equipment, including industry data on distribution
costs and service levels, which enable our members to negotiate more effectively
with distributors and we sponsor a Distributor Monitor Program to enhance the
system of independent distributors available to KFC operators.
In sum, the KFC Co-op provides the convenience of "one-stop" shopping
for suppliers, distributors and operators that otherwise might be required to
deal with a number of third parties.
Through the ongoing membership subscription of KFC operators, we seek
to maximize our number of members to enhance our ability to achieve economies of
scale in our purchasing activities.
WHAT IS UFPC?
The mission of UFPC is to enhance its members' long term growth and
profit opportunities by assuring the supply, distribution, and competitive
pricing of specified products, superior program management, and world class
customer service.
In addition to reducing the store delivered costs of goods and
equipment, the goals of the organizers of UFPC were to:
- Allow the KFC, Taco Bell and Pizza Hut franchisees to work
together to identify common interests as Tricon franchisees.
Historically, the KFC, Taco Bell and Pizza Hut systems were
administered separately in most respects and each system's
franchisees had their own franchisee organizations. Now, concept
co-ops for each system are the members of UFPC which is governed
by a board of directors with franchisees from each system;
- Allow Tricon and its franchisees to work together. There are
often tensions between a franchisor and franchisees concerning a
myriad of issues such as the terms of franchisee agreements, the
expenditure of marketing funds, the advisability of product
promotions and changes, and the franchisor's role in the
procurement and distribution of goods and equipment. UFPC should
substantially align the interests of Tricon as operator and
franchisor and of Tricon's franchisees in the procurement of
goods and equipment at the lowest possible sustainable store
delivered price;
- Increase the purchasing power and leverage of the operators'
purchasing cooperative by allowing the purchasing cooperative to
make larger volume purchase commitments and to speak with one
consistent voice with suppliers;
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- Facilitate taking advantage of both title and non-title
transactions. Historically, the KFC Co-op took title to goods and
equipment purchased from vendors and resold them to operators and
their distributors. By taking title, the KFC Co-op assumed the
administrative burden of obtaining payment from operators and
their distributors. Historically, Tricon's Supply Chain
Management negotiated terms with suppliers pursuant to which
suppliers would sell goods and equipment directly to Tricon and
other franchisee operators and their distributors, without
assuming any credit risks. For instance, prior to the
organization of UFPC, suppliers of goods to AmeriServe Food
Distribution, Inc. for resale by AmeriServe to Tricon took the
credit risk of payment for those goods, while suppliers that sold
to distributors through the KFC Co-op looked to the KFC Co-op
rather than to the distributor for payment. UFPC combined the KFC
Co-op's expertise with respect to title transactions and Supply
Chain Management's expertise with respect to non-title
transactions, allowing UFPC to evaluate on an item by item,
program by program and distributor by distributor basis which
kind of transaction will result in the lowest possible
sustainable store delivered prices;
- Allow a higher level of sophistication in purchasing programs and
partnerships with suppliers by combining the expertise in each
purchasing program and by allowing more specialized purchasing
supported by a larger organization;
- Eliminate most sheltered income, which includes rebates, volume
discounts, and promotional allowances, that does not benefit all
operators equally. Tricon has agreed to forego the collection of
most sheltered income from suppliers and distributors which
franchisees believe will allow suppliers and distributors to
charge lower prices; and
- End confusion for valued suppliers and distributors which was
caused by uncoordinated, separate communication to suppliers and
distributors from Tricon's Supply Chain Management division and a
separate franchisee purchasing organization such as the KFC Co-op
concerning such matters as requirements and purchase commitments
and over who "speaks" for the restaurant system.
In conjunction with our membership in UFPC, we operate a KFC purchasing
cooperative business. Although this business is outsourced to and administered
by UFPC, the KFC purchasing program is subject to significant control, advice
and counsel of the KFC Co-op. The KFC Co-op Board of Directors exercises policy
making decisions and administers the patronage dividend program. Although the
KFC Co-op is an independent corporation, its success is, in large part, linked
to the success of UFPC and the ability of UFPC to administer purchasing programs
which utilize economies of scale to reduce the store delivered costs of goods
and equipment to operators.
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ORGANIZATIONAL STRUCTURE
The KFC Co-op, the Taco Bell Co-op, and the Pizza Hut Co-op are the
parties to the Operating Agreement for UFPC dated as of March 1, 1999. UFPC is a
Kentucky limited liability company. Tricon is a recognized third party
beneficiary of the Operating Agreement. The Operating Agreement describes the
business of UFPC. UFPC combines the purchasing volume for goods and equipment
within and across Tricon's KFC, Taco Bell and Pizza Hut concepts in order to
achieve the lowest possible store delivered costs for outlet operators. UFPC
manages and operates purchasing programs for each of the concept co-ops
consistent with the terms of management agreements between UFPC and each concept
co-op. See "Purchasing Programs."
Separate Capital Accounts. Each concept co-op has a capital account
balance, representing that concept co-op's property interest in UFPC. The
capital accounts were initially credited with the fair market value of the
assets contributed to UFPC by each concept co-op, plus that concept co-op's
share of UFPC's liabilities, minus the amount of the concept co-op's liabilities
assumed by UFPC. A concept co-op's capital account balance increases by an
amount equal to any profits allocated to the concept co-op and decreases by an
amount equal to any allocations of losses or distributions of net cash flow.
Increases or decreases in a concept co-op's share of UFPC's liabilities will
also increase or decrease the concept co-op's capital account balance.
Except as expressly provided in the Operating Agreement, no concept
co-op is entitled to withdraw any part of its capital contributions or capital
account, or to receive any distribution from UFPC.
Distributions to Members. UFPC's net cash flow (defined generally to
mean revenues minus expenses and reserves) is retained by UFPC for reinvestment
in UFPC's business. However, such net cash flow is distributed annually to the
concept co-ops in an amount equal to the federal and state income taxes due with
respect to UFPC's profits for a given year, assuming that UFPC's profits are
taxed at the highest applicable marginal rates. UFPC may also determine to
distribute additional net cash flow over and above the amount necessary to cover
the concept co-ops' taxes. UFPC's net cash flow arising out of its profits in a
given taxable year is distributed among the concept co-ops in accordance with
their relative annual patronage for such year. Any distributions of net cash
flow in a given tax year in excess of that amount is distributed among the
concept co-ops in accordance with their relative capital account balances
(calculated by excluding each concept co-op's initial capital account balance).
No member of a concept co-op is entitled to receive patronage dividends from
UFPC. Members of a concept co-op are entitled to patronage dividends only as
provided by the certificate of incorporation and bylaws of their concept co-op.
See Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters - Dividend Policy.
Additional Members. UFPC may admit additional members from time to time
at the election of UFPC Board of Directors, upon the terms and conditions
determined by the UFPC Board. A prerequisite to admission to membership in UFPC
is the written agreement by the additional member to be bound by the terms of
the Operating Agreement.
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UFPC Board of Directors. The business and affairs of UFPC is managed by
the UFPC Board. The UFPC Board constitutes the "manager" of UFPC.
The number of full voting directors is eight. Unless otherwise provided
in each concept co-op's bylaws, the UFPC Board consists of (i) the chairperson
of the board of each of the concept co-ops, (ii) one additional representative
selected by each of the concept co-ops, and (iii) two representatives selected
by Tricon. Directors are appointed annually by each of the concept co-ops and
Tricon. No director of UFPC who is appointed by a concept co-op may be
affiliated with Tricon in any manner other than as a KFC, Taco Bell or Pizza Hut
franchisee. Each franchisee member of UFPC Board must also be a voting member of
the board of directors of a concept co-op.
Canadian Operations. On March 23, 1999, the Unified Purchasing Group of
Canada, Inc. began its operations as a new unified purchasing cooperative for
KFC, Taco Bell, and Pizza Hut operators in Canada. The Canada Co-op is a party
to the Operating Agreement for UFPC, but is not a member of UFPC. The Canada
Co-op is represented on the UFPC Board by a director who has no vote, except on
Canada matters, as defined in the Operating Agreement. The Canada Co-op also
entered into a purchasing cooperative agreement with Tricon, on terms similar to
the Tricon Purchasing Coop Agreement discussed below, that describes Tricon's
commitment to the Canada Co-op and its purchasing programs.
PURCHASING PROGRAMS
UFPC and each concept co-op entered into a Purchasing Program
Management Agreement. These Management Agreements set forth the terms pursuant
to which UFPC administers purchasing programs on behalf of each concept co-op.
The initial term of each Management Agreement extends through December 31, 2003
and may be terminated then or on any December 31 thereafter upon one year's
notice of termination.
In general, the management services provided by UFPC include:
- Negotiating the lowest possible sustainable prices for goods and
equipment from suppliers approved by Tricon for sale through UFPC
or directly by the supplier to Tricon-approved distributors
selected by the concept co-ops and the outlet operators;
- Assisting the concept co-ops and outlet operators in negotiating
and monitoring freight and distribution arrangements;
- Administering related insurance and other service programs; and
- Negotiating arrangements such as master beverage agreements and
regional poultry contracts.
Examples of some specific programs UFPC administers for the KFC Co-op
and its operators are:
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- Corn Program: UFPC makes large purchase commitments for frozen
cob corn at the beginning of each crop year and takes physical
possession of this corn shortly thereafter. The corn is stored by
UFPC in freezer equipped storage facilities until it is resold to
distributors or franchisees.
- Insurance Program: Through its subsidiary, Kenco Insurance
Agency, Inc., UFPC sponsors property, casualty and workers'
compensation insurance programs and employee benefits programs,
including life, health, dental and long-term disability coverage
for KFC operators. UFPC monitors and maintains these insurance
programs and distributes general information about these programs
to KFC operators.
- Equipment Staging: UFPC performs equipment staging services for
KFC operators by purchasing and warehousing equipment while it is
consolidated into packages for timely and convenient shipment to
an operator. UFPC currently leases warehouse space in Louisville,
Kentucky for its equipment staging operation. See Item 2 -
Properties.
Payment to UFPC. To provide these services, the concept co-ops agreed
in the Management Agreements that UFPC purchasing programs must be appropriately
capitalized, financially self-sustaining, and operated on a cooperative basis.
Thus, in exchange for administering these services, UFPC may retain 10% of the
net income generated by each purchasing program. UFPC distributes the remaining
net income to the concept co-ops on a quarterly and annual basis. However, each
concept co-op is required to reimburse UFPC for any net losses. See
"Distributions to Members."
Margins and Distributor Fees. To maintain prudent working capital
reserves and provide a sound operational basis for its purchasing programs, UFPC
also generates income by charging distributors (a) mark-ups, or margins, on
goods and equipment for which UFPC takes title or (b) service fees on goods and
equipment for which UFPC does not take title.
Federal Income Tax Consequences of Patronage Income. Under the
Management Agreements, income generated through the management services provided
by UFPC is retained in part as consideration for UFPC's services, with the
balance paid to each concept co-op. We believe, based on applicable authorities,
that such payments qualify for patronage dividend characterization under Section
1381 through 1388 of the Internal Revenue Code of 1986, as amended, so long as
such amounts that are not retained by the KFC Co-op for capital and reserves are
distributed to our shareholders in accordance with our Certificate of
Incorporation and Bylaws. The KFC Co-op, however, has not and does not intend to
apply for a ruling from the IRS with respect to the characterization of the
payments for federal income tax purposes. If the IRS challenged the
characterization of the payments and was successful, then we would be liable for
taxes and interest for any amounts disallowed as exclusions from its taxable
income. See Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters - Dividend Policy.
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DISTRIBUTION
Notwithstanding UFPC's coordination of the distribution of many goods
and equipment to operators, each operator may individually choose their own
Tricon-approved distributors. Furthermore, operators may buy goods and equipment
directly from UFPC, directly from distributors (whether or not the distributor
purchases from or through UFPC), or directly from suppliers. See "Principal
Customers." All Tricon-approved distributors may buy goods and equipment from or
through UFPC for sale or resale to operators, subject to their agreement to
enter into a Distributor Participation Agreement with UFPC. Pursuant to the
Distributor Participation Agreement, a distributor agrees to, among other
things, remain in compliance with UFPC's credit standards and policies, provide
information to UFPC regarding its sales to operators, forego most sheltered
income, and pay UFPC a service fee for its purchasing services.
Distributors purchasing from or through UFPC usually consolidate orders
received from individual operators and place bulk orders with UFPC and
suppliers. UFPC consolidates such orders from all distributors and operators for
a given item and issues shipping and sales instruction to suppliers. The
supplier then ships the goods or equipment directly to the operators or to local
distributors who, in turn, deliver the merchandise to operators.
Title Transactions. For transactions in which UFPC takes title,
suppliers bill UFPC which, in turn, bills the distributor or operator for any
goods or equipment shipped. In title transactions, UFPC takes title to the goods
or equipment and assumes the risks related to taking title, even though UFPC
does not take physical delivery of most merchandise. Also in title transactions,
UFPC extends short-term trade credit to its customers; therefore, it bears the
risk that accounts receivable may become uncollectible or may not be paid in
accordance with usual terms if an operator experiences financial difficulties.
Non-Title Transactions. In transactions in which UFPC does not take
title, suppliers bill the distributors directly for the goods or equipment
purchased pursuant to UFPC's orders.
Other Programs. UFPC operates a Distributor Monitoring Program which
monitors prices and provides reports to franchisees and franchisee committees to
assist them in negotiating with and selecting among distribution alternatives in
order to receive the best pricing and service. On occasion, UFPC may provide
certain clerical and administrative assistance to such franchisee committees.
UFPC believes that the monitoring program and the formation of purchasing
committees strengthens the system of independent distributors since it fosters
competition among such distributors.
UFPC also maintains an information bank which provides members, upon
request, with the following:
- information concerning prices being paid by distributors for
merchandise purchased from or through UFPC so that members can
compare store-delivered cost with the distributors' cost for the
goods or equipment;
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- industry data to assist them in analyzing cash discounts, earned
weight discounts and other elements of the distributors' costs;
- industry data on average distributor markups, order size
discounts, cash discounts, distributor service levels and other
distributor performance guidelines; and
- information on expected supply levels (especially possible
shortages) and on expected changes in prices of goods and
equipment.
UFPC also provides it members with assistance in resolving a wide variety of
procurement problems including "out-of-stock" conditions, shipping problems and
returned goods disputes.
THE TRICON PURCHASING AGREEMENT
UFPC and Tricon entered into the Tricon Purchasing Coop Agreement and
the SCM Transfer Agreement, both dated as of March 1, 1999. The Tricon
Purchasing Coop Agreement sets forth Tricon's commitment to the purchasing
programs of UFPC and the concept co-ops, Tricon's supplier and distributor
processes, aspects of the relationships between Tricon and suppliers and
distributors, and coordination of UFPC's purchasing activities with the
marketing, promotion, and other programs and projects of Tricon. The SCM
Transfer Agreement sets forth provisions concerning UFPC's employment of former
Tricon SCM personnel and the assumption by UFPC of certain SCM purchasing
arrangements for goods and equipment.
Tricon's Commitment. Tricon designated UFPC as the exclusive
administrator of purchasing programs, operated on behalf of the concept co-ops,
for all Tricon owned and operated concept outlets. Tricon also entered into an
expense sharing arrangement under which Tricon provided $400,000 to UFPC to
assist UFPC with specific expenses incurred in its organization and in
establishing its purchasing programs. Tricon is a member of each concept co-op
in accordance with their respective policies and requirements.
Pursuant to the terms of the Tricon Agreements, Tricon purchases
through UFPC virtually all of the goods and equipment needed for the Tricon
operated outlets. Furthermore, Tricon transferred to UFPC, and UFPC assumed,
certain Tricon contracts and commitments involving the purchase or sale of goods
and equipment. UFPC also made offers of employment to all of the employees of
Tricon who were engaged primarily in the purchase or sale of goods and equipment
for use or consumption by outlet operators.
Tricon has the exclusive right and obligation with respect to the
purchase and distribution of goods and equipment used by outlet operators to (i)
designate and terminate approved suppliers and approved distributors, with
significant franchisee involvement, (ii) designate approved goods and equipment,
and (iii) develop, designate, modify and update specifications for goods and
equipment.
Sheltered Income. As used in the Tricon Purchasing Coop Agreement,
"sheltered income" means so called earned income, rebates, kickbacks, volume
discounts, tier pricing, purchase commitment discounts, sales and service
allowances, marketing allowances, advertising
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allowances, promotional allowances, label allowances, back-door income,
application fees, inspection fees, quality assurance fees, etc. Sheltered income
includes, among other items:
- fees charged suppliers and distributors in the supplier and
distributor approval process;
- fees charged suppliers and distributors for quality inspections
and "hot line" inquiries and complaints;
- license or trademark fees or rebates charged or expected as a
condition of supplier or distributor approval or use, typically
paid as a percentage of system-wide volume;
- higher prices permitted suppliers to amortize research and
development expenses undertaken by suppliers at the request of
Tricon or otherwise;
- higher prices permitted suppliers to amortize the cost of excess
inventory;
- higher prices permitted suppliers to amortize the cost of
graphics and other product changes;
- special or atypical payment terms;
- payments and allowances to distributors from suppliers based on
distributor volume which are not reflected as a reduction in
distributor cost or prices; and
- special favors, gifts and entertainment.
Tricon will abide by the terms of the sheltered income provisions of
the Tricon Purchasing Coop Agreement which provide that neither Tricon nor UFPC
will receive or benefit from any sheltered income in connection with goods or
equipment purchased or used by any outlets. Additionally, neither Tricon nor
UFPC will authorize any approved supplier, approved distributor, or concept
co-op to receive or benefit from sheltered income, subject to a few exceptions,
including an exception for certain disclosed sheltered income permissible for
AmeriServe to receive and retain under its distributor agreement with Tricon.
The Tricon Purchasing Coop Agreement does not, however, limit or prohibit the
right of UFPC or any concept co-op to benefit from any sheltered income,
provided that UFPC shares, and causes each concept co-op to share, such
sheltered income among each applicable operator (including Tricon) based on the
dollar volume of the purchases of such operator that gave rise to the receipt or
benefit of such sheltered income.
PRINCIPAL CUSTOMERS
Although UFPC sells food and packaging primarily to distributors, the
ultimate customers for the goods sold by UFPC are operators, including Tricon.
There can be no assurance that operators will continue to make substantial
purchases through UFPC even if
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UFPC'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, promotional items and certain equipment used by
certain operators, no member of the KFC Co-op, other than Tricon, has any
contractual or other obligation to purchase from or through UFPC. See "The
Tricon Purchasing Agreement."
On behalf of the KFC Co-op, UFPC sells or arranges for the sale of
goods to approximately 30 independent distributors on a regular basis. Since
March 1, 1999, the KFC Co-op has had no major customers. Prior to March 1, 1999,
the KFC Co-op had sales to certain distributors in fiscal 1998 in excess of 10%
of the KFC Co-op'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 Sysco Corporation were approximately $94,800,000. See Note 9 to
Consolidated Financial Statements.
In fiscal 1998, the KFC Co-op's sales to AmeriServe were approximately
$94,700,000. In October 1997, PepsiCo spun off its three primary restaurant
divisions, KFC, Taco Bell and Pizza Hut, into Tricon. Also during fiscal 1997,
PepsiCo sold PepsiCo Food Systems, Inc., to AmeriServe. Through PFS, PepsiCo had
previously purchased equipment and supplies for distribution to corporate-owned
and franchisee-owned KFC and Taco Bell retail outlets. AmeriServe continues to
be a principal customer of UFPC, purchasing goods and equipment for distribution
to KFC franchisees. See Note 9 to Consolidated Financial Statements.
SOURCES OF SUPPLY
UFPC purchases or arranges for the purchase of goods and equipment from
Tricon-approved suppliers for those items which operators require, giving all
approved suppliers an opportunity to compete for UFPC's business. UFPC does not
approve suppliers itself, but is involved in the approval process. See "The
Tricon Purchasing Agreement." UFPC may also from time to time suggest to
potential suppliers that they seek approval for their products or facilities.
UFPC's ability to obtain low prices for goods and equipment, subject to Tricon's
approval is, in part, dependent upon Tricon approving enough suppliers for any
particular product so that there is price competition among approved suppliers.
Generally, many suppliers are available to sell any given item purchased or
contracted for by UFPC. However, KFC proprietary original recipe seasoning
products are available only through one or a limited number of suppliers. For
any item sold by or through UFPC for which approval is not required, UFPC
purchases products from a wide variety of sources, ranging from local suppliers
to large multinational corporations. Approved suppliers generally establish
minimum order quantities. UFPC, in conjunction with Tricon, frequently monitors
the products and services of approved suppliers.
COMPETITION
UFPC faces competition from manufacturers who sell goods and equipment
directly to distributors and operators. Since UFPC does not provide warehousing
and local transportation services, it generally does not compete with
distributors for sales to operators which require the
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distributor to provide such services. However, UFPC does compete with
distributors such as AmeriServe whose functions and services overlap with those
of UFPC in direct sales of equipment.
SEASONALITY
The KFC Co-op's past sales reflect the somewhat seasonal nature of the
volume of business done by operators. The sales of UFPC are expected to continue
this seasonal nature. The 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.
ITEM 2. Properties.
The KFC Co-op does not own or lease any real property or warehousing
facilities. As assigned from the KFC Co-op, UFPC 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.
As assigned from the KFC Co-op, UFPC leases commercial frozen food warehouse
facilities on a short-term basis in various locations in connection with its
frozen cob corn purchase program. As assigned from the KFC Co-op, UFPC currently
leases approximately 19,650 square feet of warehouse space in Louisville,
Kentucky, for its equipment staging operation.
ITEM 3. Legal Proceedings.
On July 31, 1998, the KFC Co-op filed a complaint against Fred Jeffrey,
a former consultant to the KFC Co-op, and his wife, Julianna Jeffrey
(collectively, the "Jeffreys"), alleging breach of contract, conversion and
unjust enrichment. The KFC Co-op alleges in its complaint that the Jeffreys
breached certain contracts with the KFC Co-op by not fully repaying a $600,000
loan from the KFC Co-op 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 KFC Co-op, alleging that the KFC Co-op fraudulently
induced him into selling his business and becoming a consultant to the KFC
Co-op. He has also alleged fraud and deceit, unjust enrichment and quantum
meruit, wrongful discharge/breach of contract, and breach of contract and
tortious interference with a known contractual relationship. He has asked for
more than $3.7 million in compensatory damages and an unspecified amount in
punitive damages. Julianna Jeffrey also filed a counterclaim, alleging fraud and
deceit. She has asked for more than $1.4 million in damages. The matter is set
for trial in early 2000. The KFC Co-op, after consultation with legal counsel,
believes that the claims by the Jeffreys 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.
- 13 -
<PAGE> 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
No market for the KFC Co-op's capital stock exists nor is any expected
to develop. Described below are the KFC Co-op's dividend policy, patronage
dividend program, and Membership Common Stock and Store Common Stock.
DIVIDEND POLICY
INTRODUCTION
Although the KFC Co-op does not engage in business to generate profits,
it may nonetheless, in any fiscal year, generate revenues in excess of amounts
needed to cover expenses, amortize indebtedness, and provide for reasonable
reserves. Thus, even though the KFC Co-op endeavors to minimize purchasing fees
and mark-ups on goods and equipment to the least amount required to cover its
anticipated cost of operations, the KFC Co-op may have funds available for
distribution to members as patronage dividends.
Dividends may not be declared or paid with respect to Membership Common
Stock. There is no current intention to pay any dividends in the future on Store
Common Stock on a per share basis.
PATRONAGE DIVIDEND PROGRAM
When, in the judgment of the KFC Co-op Board of Directors, we should
distribute patronage dividends to our members, it will be done in accordance
with Article 9 of the Bylaws. (Article 9 of the Bylaws is included in Exhibit
3.2 to this Form 10-K.) Following is a brief description of some of the features
of the patronage dividend program:
- Only stockholder members of the KFC Co-op are eligible to receive
patronage dividends.
- Patronage dividends are distributed to members on the basis of
the value of business done by the KFC Co-op or through UFPC with
each member, respectively.
- For the year 2000, the KFC Co-op Board has approved the
establishment of six patronage pools: (1) the Food and Packaging
Title Pool; (2) the Food and Packaging Non-Title Pool; (3) the
Poultry Program Pool; (4) the Equipment Title Pool; (5) the
Equipment Non-Title Pool; and (6) the International Pool. Subject
to the conditions and circumstances more specifically described
in the KFC Co-op's Bylaws, patronage dividends for the year 2000
will be in an amount equal to 90 percent of pre-tax income for
the Food and Packaging Title Pool, the Food and Packaging
Non-Title Pool, the Poultry Program Pool, the Equipment Title
Pool, and the Equipment Non-Title Pool, and zero percent of
pre-tax income for the International Pool.
- 14 -
<PAGE> 15
- Members who are United States residents must consent to report
any patronage dividends received as gross income for federal
income tax purposes. The KFC Co-op will file a report with the
IRS 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 KFC Co-op. The KFC
Co-op 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.
- Revenues generated from our purchasing programs administered by
UFPC will be the primary source of funds for any patronage
dividends distributed. After UFPC makes tax distributions to the
concept co-ops, UFPC may distribute additional net cash flow,
whether resulting from patronage or non-patronage sources, to the
concept co-ops in accordance with their relative annual patronage
for such year. No concept co-op is itself entitled to patronage,
but rather may pass such distributions on to its members in
accordance with the provisions of its respective patronage
dividend program. See Item 1 - Business - Organizational
Structure - Distributions to Members.
- The KFC Co-op is authorized to make patronage dividend
distributions, in part, in a form other than cash. Subject only
to the payment of at least 20% of each member's patronage
dividend payment, if any, in cash, we may pay each stockholder
member all or any portion of any annual patronage dividend in
promissory notes. These notes may be subordinated to any
liabilities or obligations of a member to the KFC Co-op.
Additionally, the portion of any patronage dividends which would
otherwise be payable in cash to a member may be applied to the
payment of any indebtedness, the repayment of which is in
default, owed to us by any such member to the extent of such
indebtedness; provided, however, that an amount equal to 20% (or,
in some cases, 30%) of the total annual patronage dividends
distributable for the applicable year to any such member must
nevertheless be paid in cash if any such member so requests in
writing.
- The KFC Co-op paid a cash patronage dividend totaling $2,890,000
in March 1998 for patronage in fiscal 1997. The KFC Co-op paid a
patronage dividend totaling $2,619,000 in March 1999 for
patronage in fiscal 1998.
CAPITAL STOCK
LACK OF MARKET FOR KFC CO-OP STOCK
No class of the KFC Co-op's capital stock is or will be listed on an
exchange or traded in any other public trading market. All KFC Co-op stock is
and will be issued only to operators of KFC concept outlets, including Tricon,
and the NCAC. Operators should purchase KFC Co-op stock solely to participate in
the programs we offer for members, including the patronage
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<PAGE> 16
dividend program and purchasing programs, and to participate in management
through the election of directors. Operators should not purchase KFC Co-op stock
with any expectation of a return on their investment through stock appreciation
or per share dividends. Transfers of KFC Co-op stock to third parties are
restricted. Consequently, no market exists, nor is expected to develop for these
membership interests.
DESCRIPTION OF KFC CO-OP STOCK
Introduction
Each qualified operator desiring membership in the KFC Co-op is
required to purchase one share of Membership Common Stock and that number of
shares of Store Common Stock which equals the total number of KFC outlets
located in the United States owned and operated by such person, firm or entity.
For purposes of calculating the number of shares of Store Common Stock required
to be purchased by a KFC operator, the total number of retail outlets equals the
total number of traditional retail outlets plus one-half, rounded up to the
nearest even number, of the total number of non-traditional retail outlets. A
non-traditional retail outlet means a retail outlet with more than one of the
following characteristics: (1) a five year or shorter license, (2) a limited
menu, (3) sales from a kiosk or other transportable unit, (4) 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, (5) anticipated sales
volume less than anticipated sales volume for a traditional retail unit, (6)
sales in conjunction with sales of another food concept, or (7) such other
characteristics as the KFC Co-op Board of Directors may determine are indicative
of a non-traditional retail outlet. If a member at any time becomes an operator
of additional KFC outlets, he or she is required to purchase one additional
share of Store Common Stock for each such additional traditional retail outlet
or for each two additional non-traditional retail outlets, as the case may be.
KFC Co-op Membership Common Stock
The KFC Co-op is authorized to issue 2,000 shares of Membership Common
Stock, no par value. The following description of Membership Common Stock is
qualified in all respects by the KFC Co-op certificate of incorporation and
bylaws.
Issuance in Series. Membership Common Stock may be offered and issued
in 26 series, designated A-Z. Except for Series H, K and L, which consist of one
share each, the KFC Co-op Board of Directors has the right, power and authority
to establish and increase or decrease the number of shares of each series,
except that in no event will the aggregate number of authorized shares of Series
A- J and M-Z, inclusive, exceed 1,997 shares.
Operators of KFC outlets, except for Tricon, Harman Management
Corporation, and the NCAC are 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 is deemed to own or
operate, a KFC retail outlet in one or more of the areas set forth in the
corresponding line(s) of Column 2 below:
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<PAGE> 17
<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
</TABLE>
Harman, Tricon and the NCAC shall be entitled to purchase one share of one of
the Series of Membership Common Stock set forth below opposite its name:
<TABLE>
<CAPTION>
STOCKHOLDER MEMBER SERIES
------------------ ------
<C> <C>
Harman H
KFC National Management Company K
NCAC L
</TABLE>
However, if Harman shall at any time own or operate less than 100 KFC
outlets in the United States, then the share of Membership Common Stock owned by
Harman shall be exchanged for one share of Membership Common Stock of such other
Series as it is eligible to purchase.
Voting Rights. Each KFC Co-op member who holds a share in Series A-H, J
and M is entitled to cast one vote to elect one member of the KFC Co-op Board of
Directors to represent its series. As the sole holder of Series K and L,
respectively, KFC National Management Company and NCAC are entitled to cast one
vote to elect two members of the KFC Co-op Board
- 17 -
<PAGE> 18
of Directors to represent its series. As to all other matters on which each KFC
Co-op member is entitled to vote, each share of Membership Common Stock is
entitled to one vote on each matter.
Limitations on Ownership and Transfer; Redemption. Membership Common
Stock may be issued only to persons who satisfy the membership requirements, as
set forth above. In general, no more than one share of Membership Common Stock
will be issued to any one KFC operator. The KFC Co-op Bylaws reflect our one
franchisee, one vote principle. When a corporation, partnership or other entity
is a franchisee operator, the owner of more than fifty percent of the
corporation, partnership or other entity is deemed to be the owner of the shares
of Membership Common Stock. Where no person, corporation, partnership or other
entity owns more than fifty percent of the outstanding ownership interest of a
franchisee operator, the owners of the corporation, partnership or other entity
must designate among themselves who is to be deemed to own the share of
Membership Common Stock.
The KFC Co-op Bylaws set forth 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. In general, the KFC Co-op
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.
Unless otherwise prohibited by law, the KFC Co-op will promptly redeem
shares of Membership Common Stock held by persons, firms or entities who no
longer qualify as KFC Co-op members. The redemption price for each share of
Membership Common Stock is $10.00 which will be payable in cash, except that, if
the KFC Co-op is prohibited by law from redeeming such share in cash because the
payment would impair the capital of the KFC Co-op, the KFC Co-op will issue a
non-interest bearing promissory note payable whenever the KFC Co-op is no longer
prohibited by law from making such payment. Membership Common Stock is not
transferable and may only be redeemed by the KFC Co-op, as discussed above.
Liquidation Rights. In the event of any dissolution, liquidation, or
other disposition of our assets, after the KFC Co-op pays all of its debts and
liabilities, the holders of Membership Common Stock will be entitled to receive
$10.00 per share. The remaining assets of the KFC Co-op will be distributed to
the holders of Store Common Stock, as described below.
KFC Co-op Store Common Stock
The KFC Co-op is authorized to issue 10,000 shares of Store Common
Stock, no par value. The following description of Store Common Stock provisions
is qualified in all respects by the KFC Co-op certificate of incorporation and
bylaws.
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<PAGE> 19
Voting Rights. The holders of Store Common Stock are not entitled by
virtue of their ownership of Store Common Stock to vote for directors, to
participate in meetings or management of the KFC Co-op or to vote in any
proceedings, except as required by law.
Limitations on Ownership and Transfer; Redemption. Only holders of
record of Membership Common Stock are permitted to purchase shares of Store
Common Stock.
In the event that a holder of Store Common Stock receives a bona fide
offer to purchase its shares of Store Common Stock and such holder desires to
sell or otherwise convey such shares, such shareholder must first offer to sell
the shares to the KFC Co-op on the same terms as stated in the offer. The KFC
Co-op may repurchase the shares on the terms set forth in the offer. However, if
the KFC Co-op rejects the offer or fails to respond to the offer within 90 days,
the holder of the shares of Store Common Stock may sell or otherwise transfer
such shares to the person named in the bona fide offer on terms no less
favorable than those set forth in the bona fide offer. However, such a transfer
may only be made to a person, firm or entity which qualifies as a member of the
KFC Coop. The KFC Co-op may also, from time to time, purchase shares of Store
Common Stock at the request of holders who no longer operate KFC outlets, with
respect to the offered shares.
Distribution and Liquidation Rights. In the event of any distributions
by the KFC Co-op to our members, liquidation, or other disposition of our
assets, after the payment of all of our debts and liabilities and the payment of
$10.00 per share to holders of Membership Common Stock, our remaining assets
will be distributed to the holders of Store Common Stock on the basis of each
member's past patronage insofar as such distribution is practicable.
Reports to Stockholders
The KFC Co-op intends to send to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited financial statements.
- 19 -
<PAGE> 20
ITEM 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Year Ended October 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Income:
Net sales $247,839 $664,792 $600,132 $580,441 $537,116
Income before
patronage dividend
and income taxed 5,259 2,757 4,153 5,057 2,771
Patronage dividend 4,113 2,619 2,890 2,762 1,246
Net income 706 60 748 1,386 909
Consolidated Balance Sheets
(at end of period):
Total assets $ 23,428 $ 61,338 $ 49,800 $ 49,445 $ 42,831
Long-term obligation -- -- 3,000 3,000 3,000
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CORPORATE REORGANIZATION
On March 1, 1999, KFC National Purchasing Cooperative, Inc. (the "KFC
Co-op") joined with Tricon Global Restaurants, Inc. ("Tricon") and franchisee
owners and operators of KFC, Taco Bell and Pizza Hut restaurants to form Unified
Foodservice Purchasing Co-op, LLC, ("UFPC"), as a new purchasing cooperative
focusing on the purchase of the food, packaging, supplies, equipment, and
related services used by such owners and operators (the "Corporate
Reorganization"). The KFC Co-op believes that UFPC will enable KFC, Taco Bell
and Pizza Hut restaurant owners and operators to reduce their store delivered
costs of goods and equipment. In addition to the KFC Co-op, the other two
members of UFPC are Taco Bell National Purchasing Coop, Inc. (the "Taco Bell
Co-op") and Pizza Hut National Purchasing Coop, Inc. (the "Pizza Hut Co-op"),
both newly organized Delaware corporations with shareholder members who are
operators of Taco Bell and Pizza Hut retail outlets, respectively.
To facilitate the Corporate Reorganization, the KFC Co-op (i) executed
agreements which, among other things, facilitated (a) the KFC Co-op's membership
in UFPC (the "Asset Contribution and Liability Assumption Agreement") and (b)
the spin-off of the KFC Co-op's Taco Bell business (the "Agreement and Plan of
Corporate Separation") and (ii) amended its bylaws to conform its patronage
dividend program to the operations of UFPC and to make other changes which
reflect the spin-off of its Taco Bell business.
In exchange for its membership interest in UFPC, the KFC Co-op
contributed certain operating assets and cash to UFPC. Pursuant to the Asset
Contribution and Liability Assumption
- 20 -
<PAGE> 21
Agreement, the KFC Co-op assigned, transferred, delivered, and generally set
over to UFPC, and UFPC accepted and assumed, certain "Assets," which means
certain of the KFC Co-op's Contracts, Leases, Equipment, and Prepaid Assets
(other than any of the same which were transferred to the Taco Bell Co-op
pursuant to the Agreement and Plan of Corporate Separation), as defined in the
Asset Contribution and Liability Assumption Agreement. The Assets did not
include any other assets of the KFC Co-op, including, without limitation, any
accounts receivable, cash or cash equivalents, or goodwill. In return, UFPC
assumed and agreed to perform and discharge in full any and all of the KFC
Co-op's obligations and liabilities under its Contracts and Leases. UFPC also
made offers of employment to all of the employees of the KFC Co-op on terms and
conditions substantially similar in the aggregate to those in effect before the
Corporate Reorganization, except for the KFC Co-op's then president and chief
executive officer. The KFC Co-op and UFPC entered into a Separation and
Consulting Agreement with that individual.
Before the Corporate Reorganization, the KFC Co-op organized the Taco
Bell Co-op, as a wholly owned subsidiary. On March 1, 1999, the Agreement and
Plan of Corporate Separation effected a division of the KFC Co-op's business by
transferring all of the KFC Co-op's Taco Bell related assets and liabilities to
the Taco Bell Co-op (the "Taco Bell Assets and Liabilities") and spinning off
the Taco Bell Co-op as an independent entity to the Taco Bell operators who were
stockholder members of the KFC Co-op and who tendered their shares of the KFC
Co-op's membership common stock and store common stock pursuant to a Tender
Offer dated January 28, 1999 (the "Tendering Members"). The nature and amount of
consideration given and received, and the principle followed in determining the
amount of such consideration in the Agreement and Plan of Corporate Separation,
were determined through negotiations among the KFC Co-op, the Taco Bell Co-op,
and Taco Bell franchisees and their representatives.
The Taco Bell Assets and Liabilities included 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 KFC Co-op (the "Intercompany
Liability"), and members' equity related to the KFC Co-op's Taco Bell operations
including retained earnings from prior years of $518,347. In exchange for and in
consideration for the transfer of the Taco Bell Assets and Liabilities to the
Taco Bell Co-op, the Taco Bell Co-op transferred to the KFC Co-op the original
issue of one share of Taco Bell Co-op membership common stock for each Tendering
Member's share of the KFC Co-op's membership common stock and one share of Taco
Bell Co-op store common stock for each share of the KFC Co-op's store common
stock owned by each Tendering Member.
The Taco Bell Co-op's obligation to reimburse the KFC Co-op for the
Intercompany Liability was reflected in a Promissory Note at 7.75% for a maximum
six-month period. As of October 31, 1999, the promissory note has been paid in
full.
The KFC Co-op and Taco Bell Co-op entered into the Agreement and Plan
of Corporate Separation, in part, so that Taco Bell operators could become
members of a concept purchasing cooperative in which only Tricon and Taco Bell
franchisees are members, and the members of the KFC Co-op would be members of a
concept purchasing cooperative in which only Tricon and KFC franchisees are
members.
Following completion of the Corporate Reorganization, the KFC Co-op
will continue to operate and will concentrate on its KFC purchasing cooperative
business. Although this business is now outsourced and administered by UFPC, the
KFC purchasing program will be subject to
- 21 -
<PAGE> 22
significant control, advice and counsel of the KFC Co-op. The KFC Co-op's Board
will continue to exercise policy-making decisions and administer the patronage
dividend program in accordance with past practices.
Also in connection with the Corporate Reorganization, UFPC and each of
the KFC Co-op, Taco Bell Co-op, and Pizza Hut Co-op (the "Concept Co-ops")
entered into a Purchasing Program Management Agreement. The Purchasing Program
Management Agreement sets forth the terms pursuant to which UFPC administers a
purchasing program on behalf of each Concept Co-op.
Each Concept Co-op's Purchasing Program Management Agreement provides
that UFPC will (i) purchase, inventory and stage and/or arrange for the
purchase, inventory and staging of goods and equipment for sale or resale to
operators and/or their distributors, (ii) negotiate purchase arrangements with
suppliers of goods and equipment who sell directly to distributors and/or
operators, (iii) assist the Concept Co-ops in negotiating with distributors of
goods and equipment, (iv) monitor distribution performance, (v) work with
regional purchasing groups of operators, and (vi) make available to the Concept
Co-ops and operators other programs such as health and property insurance
programs.
Each Purchasing Program Management Agreement also provides that within
60 days after the end of each fiscal quarter, UFPC will pay each Concept Co-op
an amount equal to 70% of the income generated by UFPC from each respective
purchasing program, net of all expenses allocable to the purchasing program for
such quarter. Within 60 days of the end of each fiscal year, UFPC will pay each
Concept Co-op an amount equal to 90% of any net income generated by its
purchasing program, less any quarterly payments described above. Although these
funds will be transferred to the Concept Co-ops, the proceeds may be contributed
directly back to UFPC in the form of working capital loans. If a purchasing
program generates a net loss for a fiscal quarter or fiscal year, the Concept
Co-op will reimburse UFPC for any and all of such net loss.
RESULTS OF OPERATIONS
Fiscal Years Ended October 31, 1999, 1998 and 1997
The KFC Co-op's Corporate Reorganization has materially affected the
presentation of its results of operations. As a result of the Corporate
Reorganization, the KFC Co-op's primary source of revenues effective March 1,
1999 has been its share of earnings pursuant to the KFC Co-op's Purchasing
Program Management Agreement with UFPC. Because net sales previously recorded by
the KFC Co-op became net sales of UFPC effective March 1, 1999, the KFC Co-op's
net sales for the year ended October 31, 1999, decreased significantly from the
same period ended October 31, 1998. Set forth below is comparative information
concerning net sales of the KFC Co-op and UFPC for the relevant periods.
<TABLE>
<CAPTION>
Sales ($000)
Year Ended 10/31/99 Year Ended 10/31/98 Year Ended 0/31/97
----------------------------------------------------------------
<S> <C> <C> <C>
KFC Co-op $ 247,839 $ 664,792 $ 600,132
UFPC 429,530 N/A N/A
--------- --------- ---------
$ 677,369 $ 664,792 $ 600,132
========= ========= =========
</TABLE>
Aggregate sales of the KFC Co-op and UFPC increased by $12,577,000 for
the year ended October 31, 1999 compared to fiscal year 1998. Of the aggregate
amount, food and
- 22 -
<PAGE> 23
packaging sales decreased by approximately $11,552,000. Combined food and
packaging sales for KFC-Canada, Dairy Queen, Long John Silver's and Fazoli's
decreased by $75,114,000. The decrease is a result of the termination of the
Long John Silver's and Fazoli's programs in fiscal year 1998 and the termination
of the Dairy Queen program at the time of the formation of UFPC, as well as the
focus shifting solely to the three Tricon brands (KFC, Taco Bell and Pizza Hut).
KFC-U.S. and Pizza Hut food and packaging sales increased by $8,291,000 and
$77,244,000, respectively for the year ended October 31, 1999, compared to the
same period in 1998. Taco Bell food and packaging sales decreased by $21,973,000
for the same period. Aggregate equipment sales for fiscal year 1999 increased
$24,950,000 over 1998. KFC-U.S., Taco Bell and Pizza Hut equipment sales
increased by $22,462,000, $9,128,000 and $4,830,000, respectively. International
equipment sales for the fiscal year 1999 increased by $488,000. These increases
were mitigated by the decrease in volumes totaling approximately $11,958,000 as
a result of the termination of purchasing programs related to the non-Tricon
brands, similar to food and packaging, as discussed previously. Kenco Insurance
Agency, a subsidiary of KFC Co-op, was transferred to UFPC as part of the
reorganization. Kenco sales decreased by $821,000 in 1999 compared to fiscal
year 1998.
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 KFC Co-op's overall food and packaging sales increased 13.1%
in fiscal 1998 from fiscal 1997. Overall sales to KFC -U.S. increased 7% in
fiscal 1998. The termination of the Fazoli's program and the bankruptcy of Long
John Silver's lowered sales during fiscal 1998.
The operations of the Canadian subsidiary (in U.S. dollars) contributed
approximately $15,804,000, $48,219,000, and $51,397,000 in sales in fiscal 1999,
1998, and 1997, respectively. The Canadian subsidiary broke even in 1999 and
contributed net income of approximately $14,000 in 1998 and $62,000 in 1997. At
approximately the same time the three groups, KFC Co-op, Taco Bell Co-op, and
Pizza Hut Co-op, were forming UFPC in the U.S., the Canadian franchisees along
with the Tricon-owned stores in Canada were forming their own Unified Purchasing
Group of Canada. Subsequent to this formation, on March 23, 1999, the business
of the Canadian subsidiary was transferred to the new Canadian Co-op. The
Canadian subsidiary is currently winding down operations with the collection of
certain receivables and the payment of the 1999 sales allowance, the only
transaction remaining. As of October 31, 1999 and 1998, the Canadian subsidiary
had identifiable assets (in U.S. dollars) of approximately $417,442 and
$2,721,000, respectively.
A comparison of selling, general and administrative expenses for the
years ended October 31, 1999 and 1998 reflects a significant decrease. Fiscal
year 1999 reflects expense through February, 28, 1999. On March 1, 1999, with
the formation of UFPC, the employees of the KFC Co-op and Tricon's Supply Chain
Management became employees of UFPC. UFPC now provides purchasing services for
the KFC Co-op through the Purchasing Program Management Agreement.
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.
Other income (expense) for fiscal 1999 increased $136,000 compared to
fiscal 1998. Service charge income increased $27,000 in fiscal 1999, primarily
as a result of the payment
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<PAGE> 24
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 1999 reflecting the effect of the increased
equipment volume on the KFC Co-op's cash flow needs. Interest expense decreased
$68,000 due to the decrease in borrowings on the line of credit. Miscellaneous
income increased primarily due to the patronage dividend received from the
National Cooperative Bank of approximately $62,000.
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 a $1,554,000 increase
in inventory, and an $800,000 write-off associated with Long John Silver's, and
(ii) a $29,000 decline in service charge income.
Income before patronage dividend and income taxes for fiscal 1999 was
$5,259,000, an increase of $2,502,000 from fiscal 1998. The increase was
primarily due to higher sales volumes for KFC-U.S., as a result of the
participation of all KFC restaurants, franchisees and corporate members in
UFPC's program and the assumption by UFPC of certain expenses as previously
discussed. Prior to March 1, 1999, the Tricon-owned stores owned by the
franchiser of KFC restaurants had not participated significantly in the purchase
of goods and equipment from the KFC Co-op since approximately 1989.
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 bad debt reserve. The cost associated with the
inclusion of the KFC Co-op's international subsidiary for an entire year in
1998, along with increased travel associated with the KFC Co-op's efforts to
focus on working more closely with our 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 KFC Co-op pays its member stockholders a patronage dividend based
on a formula approved by the board of directors. The patronage dividend prior to
March 1, 1999, the formation of UFPC, was 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, were allocated to each participating
concept and the patronage dividend for each concept's stockholder members are
directly related to these results. After March 1, 1999 there was, in essence,
one pool (KFC) since the spin-off of Taco Bell. For fiscal year 1999, the
provision for patronage dividend was $4,113,000, an increase of 57% or
$1,494,000 over fiscal year 1998. The KFC increase is primarily associated with
the earnings from UFPC based on the allocation to the KFC Co-op.
The percentage of patronage earnings paid as patronage dividends
remained constant for fiscal 1998 compared to 1997. For fiscal 1998, the
dividend paid was $2,619,000 compared to $2,890,000 in fiscal 1997.
Net income for fiscal 1999 was $646,000, an increase of $586,000
compared to fiscal 1998. The increase is associated with the participation of
all KFC restaurants, franchisees and corporate members in UFPC's program offset
by the reduction in expenses associated with the formation of UFPC and the
assumption thereof of certain expenses as previously discussed.
- 24 -
<PAGE> 25
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 reserve for losses in fiscal 1998.
The current balance sheet is indicative of the transactions associated
with the formation of UFPC. The KFC Co-op, on March 1, 1999, contributed certain
assets, primarily office equipment, to UFPC as part of the capital contribution.
In addition, as of October 31, 1999, the KFC Co-op had invested $2,000,000 in
UFPC. The other two members also contributed capital of equal amounts which
provided UFPC capital in the amount of $6,000,000 to fund its operations and
start-up. Based on the formulas to determine working capital requirements by
concept (KFC, Taco Bell, and Pizza Hut), each member of UFPC is required to
provide individually their funds. Each Concept Co-op has its own line of credit
and borrows or funds out of its own working capital the needs required to
support its own programs with UFPC. As of October 31, 1999, KFC Co-op had
provided UFPC with $12,176,000 in working capital loans in addition to its
capital contribution.
Net working capital at October 31, 1999, was $1,357,000, which was a
decrease of $14,989,000 since October 31, 1998. Working capital as of October
31, 1999 is primarily used to fund the KFC operations within UFPC either through
investments or loans to fund programs. The investment in UFPC is the primary use
of this working capital. Short-term borrowings, notes payable, accounts payable,
accrued expenses and premium deposits decreased by $443,000, $3,000,000,
$32,688,000, $2,668,000, and $329,000, respectively. These working capital items
were offset by decreases in accounts receivable, inventories, prepaid expenses
and deferred income taxes of $50,631,000, $7,069,000, $158,000 and $132,000,
respectively. All of these changes reflect the transfer of day-to-day operations
to UFPC. Patronage dividend payable increased by $1,494,000.
Since UFPC provides the operational support for the Concept Co-ops, the
balance sheet of the KFC Co-op has substantially changed. After March 1, 1999
receivables and inventory are assets of UFPC, so the KFC Co-op is winding down
the collection of its receivables and has transferred substantially all
inventories to UFPC. Once this is accomplished, the balance sheet of the KFC
Co-op will primarily consist of cash, investments in and loans to UFPC, and
members' equity.
Beginning in August, 1999, various distribution centers, which
currently place their orders directly with UFPC and generate sales dollars,
began transitioning to a "non-title" status in which they purchase directly from
suppliers under terms arranged by UFPC. The KFC business for Tricon-owned
restaurants is currently non-title business. The collection of the sourcing fee
will be the revenue recognized from non-title distributors in the future. Sales
volumes for succeeding years will be affected by this transition. The sourcing
fee collected has replaced a portion of the current margin structure and
principally provided the funds to fund the operations of UFPC.
The KFC Co-op'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 (iiii) decreases in accrued expenses and accrued patronage
dividend of $803,000 and $271,000, respectively.
- 25 -
<PAGE> 26
YEAR 2000
As of December 8, 1999, the date of the report of the independent
accountants, the Year 2000 project is substantially complete. Effective March 1,
1999, responsibility for systems support to the KFC Co-op was transferred to
UFPC. The project addressed the ability of computer programs and embedded
computer chips to distinguish the 20th century date from the 21st century date,
and considered our trading partners, application systems, central & distributed
computing infrastructure, telephone communications, and physical systems. UFPC
contracted with EDS to review the results of our Year 2000 testing and has
certified that all actions, detailed below, are complete in minimizing risk.
UFPC is jointly working with Tricon to address certification for our suppliers
and distributors. Contingency plans are nearing completion for suppliers and
distributors which are considered to be "high and medium risk" to our business
operations.
UFPC's core business operations, provided on behalf of the KFC Co-op,
are run on a third-party software that was purchased from American Software, Inc
(ASI) in 1989. The purchased software has been heavily enhanced in-house and
comprises UFPC's accounting systems, supply chain systems, and Electronic Data
Interchange (EDI). In 1996, the KFC Co-op contracted with a consulting firm to
modify all accounting applications, which was completed in March 1997. The KFC
Co-op's supply chain systems have been modified to be Year 2000 compliant by the
KFC Co-op internal programming staff. Changes to EDI communications have been
upgraded to support either Y2K compliant or non-compliant EDI document
specifications, and UFPC is working closely with our EDI partners as they are
upgrading to compliant EDI to insure continued uninterrupted operations.
Subsequent to the transfer of these systems to UFPC, these systems were reviewed
by EDS services, a third-party consulting firm, and were found to be Year 2000
compliant. UFPC is utilizing third-party vendors for payroll processing through
ADP, which has provided documentation as year 2000 compliant. Non-title business
information is supported by a third-party arrangement with Tricon, which has
provided written documentation as to this system's Y2K compliance.
UFPC's core business operations are supported on an IBM AS/400 which
has been verified through independent testing as Year 2000 compliant, both for
hardware and operating systems. UFPC's NT based LAN environment has been
upgraded to the latest Microsoft Y2K compliant software, and UFPC has researched
its routers and the network equipment of our vendors, and has been provided with
certification of Y2K compliance. UFPC's desktop PC's and the telephone systems'
hardware and software have been upgraded to make them Year 2000 compliant. Other
hardware devices have been confirmed to be Y2K compliant by their respective
vendors. Kenco, a division of UFPC, operates on a separate system to support its
billing and accounting functions. Kenco has upgraded its server and is also Y2K
compliant.
Management believes that the external total cost incurred in connection
with the Year 2000 project was approximately $80,000. The KFC Co-op does not
expect any subsequent costs to have a material effect on its results of
operations or financial conditions. Any additional cost will be borne by UFPC.
Based on the progress UFPC has made in addressing its Year 2000 issues,
management does not foresee interruption in its normal business activities or
operations associated with its Year 2000 compliance at this time. However, UFPC
is developing contingency plans as part of its compliance management to further
mitigate risk. 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.
- 26 -
<PAGE> 27
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 customer and 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 is based on management's best estimates
of future events. Risks related to completing the KFC Co-op's and UFPC's Year
2000 plan include the availability of resources, UFPC's ability to timely
discover and correct the potential Year 2000 sensitive problems which could have
a serious impact on the KFC Co-op's and UFPC's operations, the ability of
suppliers to bring their systems into Year 2000 compliance, and UFPC's ability
to identify and implement effective contingency plans to address Year 2000
failures.
INFLATION
The prices paid by the KFC Co-op members for equipment and supplies are
subject to the effects of inflation. In an effort to mitigate the effects of
inflation on both the Co-op and its customers, UFPC makes advance purchase
commitments (but does not take delivery, except for certain items, such as cob
corn and equipment for staging) at fixed prices for the volume of equipment and
supplies it anticipates selling within a reasonable period of time. UFPC has
provided its customers with the benefit of forward purchase commitments on
price-volatile commodities. By virtue of the KFC Co-op's pricing policy, which
is to minimize the margin between UFPC's advance purchase costs and sales
prices, and UFPC's purchase program, the effects of inflation on the KFC Co-op
members' financial condition may be less than on other businesses.
CAPITAL EXPENDITURES
Prior to March 1, 1999, at which time all office equipment was
contributed to UFPC, the KFC Co-op had invested approximately $80,000 during the
current fiscal year to upgrade hardware and software for its mainframe computer
and purchase additional personal computers.
LIQUIDITY AND CAPITAL RESOURCES
The working capital needs of the KFC Co-op have been met through a
combination of (i) net income of $706,000 in fiscal 1999, which increased the
retained earnings of the KFC Co-op, and (ii) bank financing, of which $1,000 was
outstanding on October 31, 1999. 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 KFC Co-op's line of credit with its primary bank is currently
$15,000,000 and is available to meet short-term working capital needs. This line
of credit expires on April 1, 2001. KFC Co-op's line of credit with the National
Cooperative Bank of $3,000,000 expired on March 1, 1999. The KFC Co-op opted not
to renew this line of credit. On October 31, 1999, the KFC Co-op had a total of
$14,999,000 remaining credit available under its line of credit. The Canadian
subsidiary line of credit expired in May, 1999.
- 27 -
<PAGE> 28
The KFC Co-op expects to be able to fund its business in fiscal 2000
with the capital resources available from its equity and the earnings of UFPC as
discussed above. Management believes that its current banking relationships will
be able to provide for any working capital needs.
SAFE-HARBOR
This report contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although the KFC Co-op 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 KFC Co-op and its members operate);
competition for the KFC Co-op's customers from other distributors; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the KFC Co-op's members; material unforeseen complications related
to addressing the Year 2000 Problem experienced by UFPC, its suppliers,
customers and governmental agencies; and other risks detailed in the KFC Co-op's
filings with the Securities and Exchange Commission, all of which are difficult
to predict and any of which are beyond the control of the KFC Co-op. The KFC
Co-op 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
Financial Statement Schedule.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The KFC Co-op's Bylaws provide for a board of directors consisting of
up to 21 members, plus the Chief Executive Officer of the KFC Co-op who is a
non-voting ex-officio member of the board. The directors representing each
series are nominated by the stockholder members of each series. Each of Series A
- - H, J, M and N is entitled to elect, as a series, one member of the Board of
Directors, and each of Series K and L is entitled to elect, as a series, two
members of the Board of Directors. A vacancy currently exists with respect to
the Series M and N directors, which vacancy the KFC Co-op does not expect to be
filled.
- 28 -
<PAGE> 29
In addition, the Board of Directors nominates an independent director,
who is elected by a plurality vote of the outstanding shares of Membership
Common Stock at the annual meeting of members.
The Board of Directors may also from time to time appoint non-voting
members of the Board of Directors who serve unspecified terms at the pleasure of
the Board and upon terms and conditions set by the Board. There are currently
two non-voting members of the Board. William Hecht, President of Hecht
Management Company, was appointed a non-voting director with the advice and
counsel of the Association of Kentucky Fried Chicken Franchisees, Inc. ("AKFCF")
in order to facilitate communication between the AKFCF and the KFC Co-op. Don
Parkinson, Senior Vice President of Franchising for KFC Corporation, was
appointed a non-voting director in order to further facilitate communication
between KFC Corporation and the KFC Co-op.
The affirmative vote of three-fifths of all voting members of the Board
of Directors is, except as otherwise specifically provided for in the Bylaws,
the act of the Board of Directors on any matter properly submitted to the Board
of Directors. The Chairman of the Board is elected at each annual meeting by the
affirmative vote of three-fifths of the entire board of directors. The
independent director may receive compensation as determined by the board of
directors. All other members of the Board of Directors serve without
compensation, but are reimbursed for reasonable expenses incurred by virtue of
their duties as directors.
With the exception of the independent director and the president, all
directors of the KFC Co-op are stockholder members of the KFC Co-op or an
officer, shareholder, employee or partner of an entity which is a stockholder
member of the KFC Co-op. All purchases of goods and equipment made by directors
or their affiliates from or through the KFC Co-op are made on the same terms and
conditions as purchases made by any other KFC operator.
For a description of the KFC Co-op'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, Directors Allen, Carle, Cocolin, Edwards,
Foust, Hecht, Henriquez, Neal, Olson, Pfeiffer, Royster and Sorgdrager have been
principally engaged in business as Operators, and Mr. Carden has been the owner
and President of The Carden Group, a management and financial consulting
company.
Charles E. Rawley, III is President and Chief Operating Officer of KFC
U.S.A. Mr. Rawley joined KFC in 1985 as a Director of Operations. He served as
Vice President of Operations for the Southwest, West, Northeast, and
Mid-Atlantic Divisions from 1988 to 1994, when he became Senior Vice President,
Concept Development for KFC. Mr. Rawley assumed his position of Chief Operating
Officer in 1995 and President in 1998. Christian L. Campbell is Senior Vice
President, General Counsel and Secretary of Tricon. He has served in this
position since September 1997. From 1995 to September 1997, Mr. Campbell served
as Senior Vice President, General Counsel and Secretary of Owens Corning, a
building products company. Before joining Owens Corning, Mr. Campbell served as
Vice President, General Counsel and Secretary of Nalco Chemical Company in
Naperville, Illinois, from 1990 through 1994. Don E. Parkinson is Senior Vice
President, Franchising of KFC, a position he has held since 1990.
- 29 -
<PAGE> 30
Since March 1, 1999, Daniel E. Woodside has served as the President and
Chief Executive Officer of the KFC Co-op and UFPC. From September 1997 through
February 1999, Mr. Woodside served as Chief Operating Officer of UniPro
Foodservice, Inc. UniPro was formed by the merger of EMCO Food Service Systems,
Inc. and ComSource Independent Food Distribution in September 1997. Mr. Woodside
served as President of EMCO from 1991 to September 1997. Before his service with
EMCO, Mr. Woodside served in various positions with General Foods Corporation
for 21 years.
William L. Bickley is Vice President and Chief Financial Officer of the
KFC Co-op. He is also Sr. Vice President and Chief Financial Officer of UFPC.
Before joining the KFC Co-op and UFPC in March 1999, Mr. Bickley had served
PepsiCo, Inc./Tricon Global Restaurants, Inc. Since 1983, his positions with
PepsiCo/Tricon included Vice President, Acquisitions and Divestitures - Kentucky
Fried Chicken (1996 - 1999); Vice President, North American
SmartSourcing-PepsiCo Restaurant Services (1995 - 1996); and Senior Director,
Business Planning - Kentucky Fried Chicken (1992 - 1995).
Alice LeBlanc is Vice President of the KFC Co-op and Vice President -
KFC Operations for UFPC. Ms. LeBlanc previously served as the KFC Co-op's Vice
President and General Manager - KFC Domestic & Canada and Vice President and
General Manager of Canadian Operations. From 1992 to 1996, Ms. LeBlanc was the
Director of Purchasing for Cara Operations Limited. From 1985 to 1992, she was
Director of Purchasing and Technical Services for PepsiCo Food Service
International.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"1934 Act") requires the KFC Co-op'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 KFC Co-op believes that all such filing requirements were
complied with in fiscal 1999.
Item 11. Executive Compensation.
The following table shows all cash compensation paid by the KFC Co-op
to its Chief Executive Officer for the years ended October 31, 1999, 1998, and
1997 (1).
<TABLE>
<CAPTION>
Summary of Annual Compensation
------------------------------
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Thomas D. Henrion 1999 $ 98,873 $ - 0 - $ - 0 -
President and Chief 1998 212,127 90,640 16,200
Executive Officer 1997 208,460 49,940 20,583
</TABLE>
- 30 -
<PAGE> 31
<TABLE>
<CAPTION>
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Daniel E. Woodside
President and Chief
Executive Officer 1999 $ - 0 - $ - 0 - $ - 0 -
</TABLE>
(1) As of March 1, 1999, Daniel E. Woodside became President and Chief
Executive Officer. Mr. Woodside receives no compensation directly from
the KFC Co-op. See Item 13 - Certain Relationships and Related
Transactions.
COMPENSATION OF DIRECTORS
No director, other than the Independent Director, receives any
remuneration from the KFC Co-op 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.
- 31 -
<PAGE> 32
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
MANAGEMENT OF THE KFC CO-OP
Directors and Executive Officers
The following table lists, in addition to other information, the
current directors and executive officers of the KFC Co-op as of January 28,
2000, their position with the KFC Co-op, and their present principal
occupations.
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME STORE
CURRENTLY DIRECTOR TERM AS PRESENT COMMON PERCENT OF
HELD WITH THE OR DIRECTOR SERIES PRINCIPAL STOCK STORE STOCK
NAME AND ADDRESS AGE KFC CO-OP OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
---------------- --- --------- ------- ------- ----------- ---------- --------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Allen 60 Director, 1988 2000 F Operator 6 **
1624 Lloyd Lane Secretary
Cedar Falls, Iowa 50613
- -----------------------------------------------------------------------------------------------------------------------------------
Christian L. Campbell 49 Director 1999 2001 K Sr. Vice -- --
Tricon Global Restaurants, Inc. President,
P.O. Box 32070 Tricon Global
Louisville, Kentucky 40232 Restaurants, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
William R. Carden 63 Director 1999 2000 Independent President, The -- --
4800 Lakewood, Suite 2 Carden Group
Waco, TX 76702-3222
- -----------------------------------------------------------------------------------------------------------------------------------
Robert C. Carle 43 Director 1998 2002 D Operator 7 **
6921 Brayton Drive, Suite 105
Anchorage, Alaska 99507
- -----------------------------------------------------------------------------------------------------------------------------------
James G. Cocolin 50 Director 1996 2002 C Operator 10 **
17 James Street
Kingston, Pennsylvania 18704
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 32 -
<PAGE> 33
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME STORE
CURRENTLY DIRECTOR TERM AS PRESENT COMMON PERCENT OF
HELD WITH THE OR DIRECTOR SERIES PRINCIPAL STOCK STORE STOCK
NAME AND ADDRESS AGE KFC CO-OP OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
---------------- --- --------- ------- ------- ----------- ---------- --------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ben E. Edwards 57 Director 1998 ++ 2002 B Operator 10 **
West Texas Foods, Inc.
P.O. Box 64490
Lubbock, Texas 79464
- -----------------------------------------------------------------------------------------------------------------------------------
Lois G. Foust 55 Director 1997 2001 L Operator 2 **
4000 Chestnut Avenue
Long Beach, California 90807
- -----------------------------------------------------------------------------------------------------------------------------------
William B. Hecht 59 Non-Voting 1999 -- -- Operator 5 **
P. O. Box 1031 Director
St. Charles, MO 63302
- -----------------------------------------------------------------------------------------------------------------------------------
Edward J. Henriquez, Jr. 62 Director 1994 2002 J Operator 12 **
610 Valencia Avenue #503
Coral Gables, Florida 33134
- -----------------------------------------------------------------------------------------------------------------------------------
David G. Neal 53 Director, 1991 + 2000 E Operator 95 1.4
JRN, Inc. Chairman of
P.O. Box 1257 the Board
Columbia, Tennessee 38402
- -----------------------------------------------------------------------------------------------------------------------------------
James D. Olson 49 Director 1997 2000 H President, 266 4.0
Harman Management Corp. Harman
199 First Street, Suite 212 Management
Los Altos, California 94022 Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
Don Parkinson 56 Non-Voting 1999 -- -- Sr. Vice -- --
P. O. Box 32070 Director President,
Louisville, Kentucky 40232 KFC
Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
Darlene Pfeiffer 62 Director 1997 2001 L Operator 4 **
P.O. Box 1185
Port Ewen, New York 12466
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 33 -
<PAGE> 34
<TABLE>
<CAPTION>
POSITIONS YEAR FIRST
AND OFFICES BECAME STORE
CURRENTLY DIRECTOR TERM AS PRESENT COMMON PERCENT OF
HELD WITH THE OR DIRECTOR SERIES PRINCIPAL STOCK STORE STOCK
NAME AND ADDRESS AGE KFC CO-OP OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
---------------- --- --------- ------- ------- ----------- ---------- --------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles E. Rawley, III 49 Director 1999 2001 K President and -- --
Tricon Global Restaurants, Inc. Chief Operating
P.O. Box 32070 Officer, KFC
Louisville, Kentucky 40232 U.S.A.
- -----------------------------------------------------------------------------------------------------------------------------------
James B. Royster 61 Director, 1998 ++ 2000 A Operator 5 **
1110 West Michigan Avenue Vice
Jackson, Michigan 49202 Chairman
- -----------------------------------------------------------------------------------------------------------------------------------
Dean M. Sorgdrager 37 Director 1996 2002 G Operator 1 **
6851 Beach Boulevard
Buena Park, California 90620
- -----------------------------------------------------------------------------------------------------------------------------------
Daniel E. Woodside 53 Director, 1999 -- -- President and -- --
Unified Foodservice Purchasing President, Chief Executive
Co-op, LLC ("UFPC") Chief Executive Officer, UFPC
950 Breckinridge Lane Officer
Louisville, Kentucky 40207
- -----------------------------------------------------------------------------------------------------------------------------------
William L. Bickley 47 Chief Financial 1999 -- -- Chief Financial -- --
UFPC Officer Officer, UFPC
950 Breckinridge Lane
Louisville, Kentucky 40207
- -----------------------------------------------------------------------------------------------------------------------------------
Alice LeBlanc 42 Vice President 1998 -- -- Vice President, -- --
UFPC UFPC
950 Breckinridge Lane
Louisville, Kentucky 40207
- -----------------------------------------------------------------------------------------------------------------------------------
All directors and officers as a group (19 persons) +++ 423 7.5%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Less than one-half of one percent.
- 34 -
<PAGE> 35
+ Mr. Neal has previously served on the Board as one of the two
directors representing the National Franchisee 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.
+++ Each director, other than Messrs. Woodside and Carden, 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
(19 persons) own 12 shares of Membership Common Stock, 2% 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. Woodside and
Carden, beneficially owns. Except as required by law, Store
Common Stock has no voting rights. Messrs. Woodside and Carden
are neither the owners, nor affiliates of the owners, of any
Membership or Store Common Stock.
- 35 -
<PAGE> 36
ITEM 13. Certain Relationships and Related Transactions.
All present voting members of the Board of Directors, except the
Independent Director, are Operators or represent Operators and have purchased or
may purchase equipment and supplies from the KFC Co-op or UFPC or from
distributors who purchase from the KFC Co-op or UFPC. All purchases by directors
and nominees or their affiliates from the KFC Co-op or UFPC are made on the same
terms and conditions as purchases by any other Operator. Several Operators 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 KFC Co-op or UFPC.
The UFPC and the KFC Co-op entered into a Purchasing Program Management
Agreement on March 1, 1999 which sets forth the terms pursuant to which UFPC
administers the KFC Co-op's purchasing programs. The initial term of this
Management Agreement extends through December 31, 2003 and may be terminated
then or on any December 31 thereafter upon one year's notice of termination. In
general, the management services provided by UFPC include: (i) negotiating the
lowest possible sustainable prices for goods and equipment from suppliers
approved by Tricon for sale through UFPC or directly by the supplier to
Tricon-approved distributors selected by the KFC Co-op and the outlet operators;
(ii) assisting the KFC Co-op and outlet operators in negotiating and monitoring
freight and distribution arrangements; (iii) administering related insurance and
other service programs; and (iv) negotiating arrangements such as master
beverage agreements and regional poultry contracts.
In exchange for administering these services, UFPC may retain 10% of
the net income generated by the KFC Co-op purchasing program. UFPC distributes
the remaining net income to the KFC Co-op on a quarterly and annual basis.
However, the KFC Co-op is required to reimburse UFPC for any net losses. In
determining the net income attributable to the KFC Co-op, the UFPC allocates a
portion of the compensation expenses of its officers, including Messrs. Woodside
and Bickley and Ms. LeBlanc, to each of the UFPC's member cooperatives. In
fiscal 1999, the UFPC allocated to the KFC Coop $209,611, $82,401 and $162,240
with respect to these officers respectively. In addition, as part of the KFC's
Coop's corporate reorganization in March 1999, Thomas D. Henrion, the KFC Co-op,
and the UFPC executed a Separation and Consulting Agreement. The Separation and
Consulting Agreement provided for Mr. Henrion to resign his employment on March
1, 1999 and, thereafter, to provide consulting services to the UFPC and KFC
Co-op for two years. Mr. Henrion also agreed 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 was paid $500,000 by the UFPC on March 1, 1999 and was
paid $456,300 on the first business day of January 2000 along with health
insurance coverage for 10 years.
- 36 -
<PAGE> 37
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements. See accompanying Index to Consolidated
Financial Statements and Schedule.
(a)(2) Financial Statement Schedules. See accompanying Schedule II --
Valuation and Qualifying Accounts.
(a)(3) Exhibits. Following is a list of Exhibits to this Form 10-K:
*3.1 Certificate of Incorporation of KFC Co-op, as amended.
3.2 Bylaws of KFC Co-op, as amended.
*4.1 Article IV of Certificate of Incorporation of KFC Co-op, as
amended.
4.2 Articles II, III, IV and IX of Bylaws of KFC Co-op, as amended.
(Included as part of Exhibit 3.2 attached hereto.)
**10.1 Employment Agreement between Thomas D. Henrion and the KFC
Co-op (Management contract required to be filed pursuant to Item 601(10) of
Regulation S-K).
+10.2 Supplemental Benefits/Consulting Agreement between Thomas D.
Henrion and the KFC Co-op effective as of January 1, 1994 (management contract
required to be filed pursuant to Item 601(10) of Regulation S-K).
***10.3 Amendment No. 1 to Supplemental Benefits/Consulting Agreement
between Thomas D. Henrion and the KFC Co-op effective January 1996 (management
contract required to be filed pursuant to Item 601(10) of Regulation S-K).
****10.4 Guaranty Agreement dated as of April 18, 1996 between the KFC
Co-op and National Consumer Cooperative Bank.
*****10.5 Separation and Consulting Agreement between Thomas D.
Henrion, KFC Co-op and the Unified Foodservice Purchasing Co-op, LLC (management
contract required to be filed pursuant to Item 601(10) of Regulation S-K).
******10.6 Loan Agreement between Fifth Third Bank and the KFC Co-op and
related documents.
24 Power of Attorney.
27 Financial Data Schedule (for SEC use only).
*******99.1 Operating Agreement for Unified Foodservice Purchasing
Co-op, LLC.
- 37 -
<PAGE> 38
*******99.2 Form of Purchasing Program Management Agreement.
+ Previously filed in Registration Statement (File No. 33-56982).
*Incorporated by reference to the KFC Co-op's Annual Report on Form 10-K for
the fiscal year ended October 31, 1997 [File No. 2-63640].
**Previously filed in Registration Statement (File No. 33-33801) with the
Securities and Exchange Commission on March 9, 1990.
***Incorporated by reference to the KFC Co-op's Annual Report on Form 10-K
for the fiscal year ended October 31, 1995 [File No. 2-63640].
****Incorporated by reference to the KFC Co-op's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996 [File No. 2-63640].
*****Incorporated by reference to the Amendment No. 2 to the Tender Offer of
the KFC Co-op on Schedule 14A [File No. 005-54907].
******Incorporated by reference to the KFC Co-op's Amendment No. 6 on Form
S-1 filed on July 23, 1999 [File No. 33-56982].
*******Incorporated by reference to the Amendment No. 2 to the Proxy
Statement of the KFC Co-op on Schedule 14A [File No. 000-23496].
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K dated December 8,
1999 reporting an Item 8 change in fiscal year end from October 31 to December
31. No financial statements were filed with this Form 8-K.
(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. In accordance with Rule 3-09(b) of Regulation
S-X, the audited financial statements for the year ended December 31, 1999 of
the Unified Foodservice Purchasing Co-op, LLC shall be filed in an amendment to
this Form 10-K within 90 days of the fiscal year end of the Unified Foodservice
Purchasing Co-op, LLC.
- 38 -
<PAGE> 39
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 Auditor's Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets, October 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended
October 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Members' Equity for the years
ended October 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
Financial statement schedule for the years ended
October 31, 1999, 1998 and 1997 is included herein:
II-Valuation and Qualifying Accounts S-1
</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> 40
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, members' equity and cash flows 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
October 31, 1999 in conformity with accounting principles generally accepted in
the United States. In addition, in our opinion, the financial statement schedule
for the years ended October 31, 1999 and 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 Cooperative's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
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 audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
December 8, 1999
F-1
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.
We have audited the accompanying consolidated statements of income, members'
equity, and cash flows of KFC National Purchasing Cooperative, Inc. (d/b/a
FoodService Purchasing Cooperative, Inc.) and Subsidiaries for the year ended
October 31, 1997. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule for the year
ended October 31, 1997 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
KFC National Purchasing Cooperative, Inc. and Subsidiaries for the year 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
Louisville, Kentucky
December 8, 1997
F-2
<PAGE> 42
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,589 $ 272
Accounts and note receivable, less allowance
for losses of $742 in 1999 and $1,393 in 1998 1,023 51,654
Inventories -- 7,069
Current note receivable from related party 50 --
Prepaid expenses -- 158
Deferred income taxes 503 635
-------- --------
Total current assets 7,165 59,788
Note receivable from UFPC 12,176 --
Investment in UFPC 3,345 --
Office equipment, at cost, less accumulated
depreciation of $3,275 in 1998 -- 832
Note receivable from related parties, excluding current portion 578 178
Deferred income taxes -- 225
Other assets 164 315
-------- --------
Total assets $ 23,428 $ 61,338
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Short-term borrowings $ 1 $ 444
Note payable -- 3,000
Accounts payable 866 33,554
Accrued expenses 828 3,496
Premium deposits -- 329
Patronage dividend payable 4,113 2,619
-------- --------
Total current liabilities 5,808 43,442
-------- --------
Commitments and contingencies
Members' equity:
Membership common stock, voting, no par value; authorized, 2,000 shares;
issued and outstanding, 584 shares in 1999 and 707 shares in 1998 6 7
Store common stock, no par value; authorized, 10,000 shares; issued and
outstanding, 5,621 shares in 1999 and 6,730 in 1998 1,505 1,951
Retained earnings 16,178 15,990
Accumulated other comprehensive loss (69) (52)
-------- --------
Total members' equity 17,620 17,896
-------- --------
Total liabilities and members' equity $ 23,428 $ 61,338
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE> 43
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 247,839 $ 664,792 $ 600,132
Cost of goods sold 241,354 648,046 583,891
--------- --------- ---------
Gross profit 6,485 16,746 16,241
Share in earnings of UFPC 3,087 -- --
Selling, general and administrative expenses 4,864 13,602 12,266
Provision for losses on receivables (102) 700 175
Other income (expense):
Service charges 188 158 187
Interest income 241 247 339
Interest expense (204) (272) (285)
Other 224 180 112
--------- --------- ---------
449 313 353
--------- --------- ---------
Income before patronage dividend
and income taxes 5,259 2,757 4,153
Patronage dividend 4,113 2,619 2,890
--------- --------- ---------
Income before income taxes 1,146 138 1,263
Provision for income taxes 440 78 515
--------- --------- ---------
Net income $ 706 $ 60 $ 748
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE> 44
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, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------- ACCUMULATED
AMOUNT OTHER TOTAL
----------------------- RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES MEMBERSHIP STORE EARNINGS INCOME/(LOSS) EQUITY
------ ---------- ------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 $ 6 $ 1,646 $ 15,182 $ (32) $ 16,802
Comprehensive income:
Net income 748 748
Other comprehensive loss:
Currency translation adjustment (19) (19)
Comprehensive income 729
Proceeds from sales of common stock:
Membership, at $10 per share 77 1 1
Store, at $400 per share 331 132 132
Retirement of common stock:
Membership, at $10 per share (36)
Store, at $400 per share (186) (75) (75)
Cost in connection with sales of stock (3) (3)
------- ------- -------- ----- --------
Balance, October 31, 1997 7 1,700 15,930 (51) 17,586
Comprehensive income:
Net income 60 60
Other comprehensive loss:
Currency translation adjustment (34) (34)
Change in unrealized gain on
marketable equity security 33 33
--------
Comprehensive income 59
Proceeds from sales of common stock:
Membership, at $10 per share 64 --
Store, at $400 per share 800 320 320
Retirement of common stock:
Membership, at $10 per share (22) --
Store, at $400 per share (161) (64) (64)
Cost in connection with sales of stock (5) (5)
------- ------- -------- ----- --------
Balance, October 31, 1998 7 1,951 15,990 (52) 17,896
Comprehensive income:
Net income 706 706
Other comprehensive loss:
Currency translation adjustment 16 16
Change in unrealized gain on
marketable equity security (33) (33)
--------
Comprehensive income 689
Transfer to Taco Bell Co-op (518) (518)
Proceeds from sales of common stock:
Membership, at $10 per share 25 -- --
Store, at $400 per share 292 117 117
Retirement of common stock:
Membership, at $10 per share (148) (1) (1)
Store, at $400 per share (1,401) (560) (560)
Cost in connection with sales of stock (3) (3)
------- ------- -------- ----- --------
Balance, October 31, 1999 $ 6 $ 1,505 $ 16,178 $ (69) $ 17,620
======= ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
<PAGE> 45
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, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 706 $ 60 $ 748
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Undistributed share of earnings in UFPC (1,345) -- --
Depreciation and amortization 140 376 377
Provision for losses on receivables (102) 700 175
Impairment of goodwill -- 303 --
(Gain) loss on disposals of office equipment -- 4 7
Gain on sale of investment (65) -- --
Deferred income tax (benefit) provision 223 (138) (23)
Changes in operating assets and liabilities:
Accounts receivable 33,505 (11,314) (3,893)
Inventories 5,904 (1,554) (3,037)
Refundable income taxes -- -- 32
Prepaid expenses 34 (28) 3
Other assets 47 -- --
Accounts payable (19,374) 12,430 (953)
Accrued expenses (2,098) (803) 1,272
Premium deposits -- -- (10)
Patronage dividend payable 1,494 (271) 128
-------- -------- -------
Net cash provided by (used in) operating activities 19,069 (235) (5,174)
-------- -------- -------
Cash flows from investing activities:
Investment in UFPC (1,000) -- --
Increase in notes receivable from UFPC (9,006) -- --
Decrease in note receivable from Taco Bell Co-op 8,946 -- --
Increase in note receivable from related party 50 -- 56
Decrease in note receivable -- 832 --
Increase in other assets -- (11) (446)
Additions to office equipment, net (76) (508) (322)
Sale (purchase) of marketable equity security 120 (55) --
-------- -------- -------
Net cash provided by (used in) investing activities (966) 258 (712)
-------- -------- -------
Cash flows from financing activities:
Decrease in short-term borrowings, net (443) (128) (866)
Decrease in book overdraft (8,870) -- --
Proceeds from sale of stock, net of costs 114 315 130
Retirement of stock (226) (64) (75)
Distribution to Taco Bell Co-op (334) -- --
Repayment of note payable to related party (43) -- --
Repayment of note payable (3,000) -- --
-------- -------- -------
Net cash provided by (used in) financing activities (12,802) 123 (811)
-------- -------- -------
Effect of change in exchange rates on cash and cash equivalents 16 (34) (19)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 5,317 112 (6,716)
Cash and cash equivalents - beginning of year 272 160 6,876
-------- -------- -------
Cash and cash equivalents - end of year $ 5,589 $ 272 $ 160
======== ======== =======
Supplemental information:
Income taxes paid $ 58 $ 237 $ 468
======== ======== =======
Interest paid $ 204 $ 273 $ 285
======== ======== =======
</TABLE>
During 1999, the KFC Co-op converted a $1,000 note receivable from UFPC into an
investment in UFPC.
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
<PAGE> 46
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
Prior to March 1, 1999, the primary purpose of KFC National Purchasing
Cooperative, Inc. (d/b/a FoodService Purchasing Cooperative, Inc.) and
Subsidiaries (the Cooperative or KFC Co-op) was 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. On
March 1, 1999, the Cooperative joined with Tricon Global Restaurants,
Inc. (Tricon) and franchisee owners and operators of KFC, Taco Bell and
Pizza Hut restaurants to form Unified Foodservice Purchasing Co-op, LLC
(UFPC) as a new purchasing cooperative focusing on the purchase of the
food, packaging, supplies, equipment, and related services used by such
owners and operators (the Corporate Reorganization - see Note 3). In
addition to the Cooperative, the other two members of the UFPC are the
Taco Bell National Purchasing Coop, Inc. (the Taco Bell Co-op), and the
Pizza Hut National Purchasing Coop, Inc. (the Pizza Hut Co-op), both
newly organized corporations with shareholder members who are operators
of Taco Bell and Pizza Hut retail outlets, respectively.
In connection with the Corporate Reorganization, UFPC and each of the
KFC Co-op, Taco Bell Co-op, and Pizza Hut Co-op (the Concept Co-ops)
entered into a Purchasing Program Management Agreement. The Purchasing
Program Management Agreement sets forth the terms pursuant to which
UFPC administers a purchasing program on behalf of each Concept Co-op.
Each Concept Co-ops' Purchasing Program Management Agreement provides
that UFPC will (i) purchase, inventory and stage and/or arrange for the
purchase, inventory and staging of goods and equipment for sale or
resale to operators and/or their distributors, (ii) negotiate purchase
arrangements with suppliers of goods and equipment who sell directly to
distributors and/or operators, (iii) assist the Concept Co-ops in
negotiating with distributors of goods and equipment, and (iv) make
available to the Concept Co-ops and operators other programs such as
health and property insurance programs. The Concept Co-ops are
obligated to fund UFPC for purchasing program activities performed on
their behalf. Amounts loaned from the Concept Co-ops to UFPC carry a
zero interest rate, as each Concept Co-op only funds activities related
to the respective Concept Co-op.
F-7
<PAGE> 47
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:
Each Purchasing Program Management Agreement also provides that within
60 days after the end of each fiscal quarter, UFPC will pay each
Concept Co-op an amount equal to 70% of the income generated by UFPC
from each respective purchasing program, net of all expenses allocable
to the purchasing program for such quarter. Within 60 days of the end
of each fiscal year, UFPC will pay each Concept Co-op an amount equal
to 90% of any net income generated by its purchasing program, less any
quarterly payments described above. If a purchasing program generates a
net loss for a fiscal quarter or fiscal year, the Concept Co-op will
reimburse UFPC for any and all of such net loss. Although those funds
will be transferred to the Concept Co-ops, the proceeds may be
contributed directly back to UFPC in the form of working capital loans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Cooperative operates in a single segment. The more significant
accounting policies of the Cooperative are as follows:
A. CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Cooperative and its
wholly-owned subsidiaries, KFC Franchisee Purchasing of
Canada, Inc., FoodService Purchasing Cooperative
International, Inc. and KFC Franchisee Finance Company, Inc.
KFC Franchisee Insurance Program, Inc. and its wholly-owned
subsidiary, Kenco Insurance Agency, Inc. (Kenco), are included
in the accompanying consolidated financial statements as of
and for the years ended October 31, 1998 and 1997. Kenco
sponsors and helps administer insurance programs primarily for
KFC franchisees. KFC Franchisee Finance Company, Inc. has
provided financing for equipment purchases of KFC franchisees.
Kenco was transferred to UFPC on March 1, 1999 in connection
with the Corporate Reorganization. The accompanying
consolidated financial statements include Kenco's results of
operations prior to March 1, 1999 in connection with the
Corporate Reorganization. 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.
F-8
<PAGE> 48
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
A. CONSOLIDATION, CONTINUED: KFC Franchisee Purchasing of Canada,
Inc. was a procurement organization for the benefit of
Canadian KFC retail operators and their distributors until
March 23, 1999. On March 23, 1999, the Canadian operators of
KFC, Taco Bell, and Pizza Hut formed the Unified Purchasing
Group of Canada to function similarly to UFPC. KFC Franchisee
Purchasing of Canada, Inc. is currently winding down
operations through the collection of certain receivables.
B. REVENUE RECOGNITION: Prior to the Corporate Reorganization,
the Cooperative purchased a majority of merchandise for its
customers from suppliers without taking physical possession of
the products. The suppliers shipped directly to the customers.
The Cooperative took title to the merchandise and assumed the
risk related to taking title upon shipment to the customer
based on purchase order terms. For accounting purposes, the
Cooperative recognized revenues and the related costs upon
receipt of notification of shipment, primarily an invoice,
from the supplier. The consistent application of this
accounting method did not have a significant impact upon the
consolidated financial statements.
C. INVENTORIES: Inventories at October 31, 1998 were 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 higher at October 31, 1998.
D. CHECKS DRAWN IN EXCESS OF BOOK BALANCES: Included in accounts
payable as of October 31, 1998 were approximately $8,870,000
of checks drawn in excess of book balance.
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
straight-line method is used for amortization of other assets.
Due to the Corporate Reorganization, all office equipment was
transferred to UFPC. Prior to transfer, the double
declining-balance method was used for depreciation of office
equipment.
F-9
<PAGE> 49
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
E. DEPRECIATION AND AMORTIZATION EXPENSE, CONTINUED: 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 were being amortized
over 5 and 3 years. Loan origination fees were written off to
interest expense during the year ended October 31, 1999.
Goodwill was being amortized over 15 years. The carrying
values of the 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 1999, 1998 and 1997.
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.
F-10
<PAGE> 50
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
J. COMPREHENSIVE INCOME: Effective November 1, 1998, the
Cooperative adopted Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards
as components of comprehensive earnings be reported in a
financial statement. This statement also requires that an
entity classify items of other comprehensive earnings by their
nature in a financial statement. The consolidated balance
sheet and consolidated statements of members' equity for prior
periods have been reclassified, as required.
3. CORPORATE REORGANIZATION:
To facilitate the Corporate Reorganization, the KFC Co-op executed
agreements which, among other things, facilitated (a) the KFC Co-op's
membership in UFPC (the Asset Contribution and Liability Assumption
Agreement) and (b) the spinoff of the KFC Co-op's Taco Bell business
(the Agreement and Plan of Corporate Separation) and amended its bylaws
to conform its patronage dividend program to the operations of UFPC and
to make other changes which reflect the spinoff of its Taco Bell
business.
In exchange for its membership interest in UFPC, the KFC Co-op
contributed certain operating assets and cash to UFPC. The book value
of these assets approximates their fair value. Pursuant to the Asset
Contribution and Liability Assumption Agreement, the KFC Co-op
assigned, transferred, delivered, and generally set over to UFPC, and
UFPC accepted and assumed certain "Assets," which means certain of the
KFC Co-op's contracts, leases, equipment, and prepaid assets (other
than any of the same which were transferred to the Taco Bell Co-op
pursuant to the Agreement and Plan of Corporate Separation), as defined
in the Asset Contribution and Liability Assumption Agreement. The
Assets did not include any other assets of the KFC Co-op, including,
without limitation, any accounts receivable, cash or cash equivalents,
or goodwill. In return, UFPC assumed and agreed to perform and
discharge in full any and all of the KFC Co-op's obligations and
liabilities under its contracts and leases. UFPC also made offers of
employment to all of the employees of the KFC Co-op on terms and
conditions substantially similar in the aggregate to those in effect
before the Corporate Reorganization, except for the KFC Co-op's then
president and chief executive officer. The KFC Co-op and UFPC entered
into a Separation and Consulting Agreement with that individual.
F-11
<PAGE> 51
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
3. CORPORATE REORGANIZATION, CONTINUED:
Before the Corporate Reorganization, the KFC Co-op organized the Taco
Bell Co-op as a wholly-owned subsidiary. On March 1, 1999, the
Agreement and Plan of Corporate Separation effected a division of the
KFC Co-op's business by transferring all of the KFC Co-op's Taco Bell
related assets and liabilities to the Taco Bell Co-op (the Taco Bell
Assets and Liabilities) and spinning off the Taco Bell Co-op as an
independent entity to the Taco Bell operators who were stockholder
members of the KFC Co-op and who tendered their shares of the KFC
Co-op's membership common stock and store common stock pursuant to a
Tender Offer dated January 28, 1999 (the Tendering Members). The nature
and amount of consideration given and received and the principle
followed in determining the amount of such consideration in the
Agreement and Plan of Corporate Separation were determined through
negotiations among the KFC Co-op, the Taco Bell Co-op, and Taco Bell
franchisees and their representatives.
The Taco Bell Assets and Liabilities included 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 KFC
Co-op (the intercompany liability), and members' equity related to the
KFC Co-op's Taco Bell operations including retained earnings from prior
years of $518,347. The Taco Bell Assets and Liabilities were
transferred at fair value which approximated book value. In exchange
for and in consideration of the transfer of the Taco Bell Assets and
Liabilities to the Taco Bell Co-op, the Taco Bell Co-op transferred to
the KFC Co-op the original issue of one share of Taco Bell Co-op
membership common stock for each Tendering Member's share of the KFC
Co-op's common stock and one share of Taco Bell Co-op store common
stock for each share of the KFC Co-op's store common stock owned by
each Tendering Member.
The Taco Bell Co-op's obligation to reimburse the KFC Co-op for the
Intercompany Liability was reflected in a Promissory Note with interest
at 7.75% for a maximum six-month period. As of October 31, 1999, the
promissory note has been paid in full.
The KFC Co-op and Taco Bell Co-op entered into the Agreement and Plan
of Corporate Separation, in part so that Taco Bell operators could
become members of a concept purchasing cooperative in which only Tricon
and Taco Bell franchisees are members and the members of the KFC Co-op
would be members of a concept purchasing cooperative in which only
Tricon and KFC franchisees are members.
F-12
<PAGE> 52
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
3. CORPORATE REORGANIZATION, CONTINUED:
The following table reflects the corporate reorganization adjustment
which took place on March 1, 1999 (dollars in thousands).
<TABLE>
<CAPTION>
KFC CORPORATE REORGANIZATION ADJUSTMENTS AS ADJUSTED
------------------------------------
ASSETS CO-OP TACO BELL CO-OP UFPC KFC CO-OP
-------- --------------- ------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents (5,910) $(5,910)
Accounts and notes receivable, net 52,959 12,159 24 40,776
Inventories 4,621 1,165 3,456
Note receivable - affiliate (8,609) 279 8,330
Prepaid expenses and other current assets 125 3 112 10
-------- -------- ------- -------
Total current assets 51,795 4,718 415 46,662
Investment in UFPC 50 (950) 1,000
Deferred income taxes, excluding
current portion 907 81 826
Other assets 1,289 706 583
-------- -------- ------- -------
Total assets $ 54,041 $ 4,799 $ 171 $49,071
======== ======== ======= =======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 6,162 6,162
Accounts payable 22,978 $ 3,760 19,218
Accrued expenses 3,123 183 171 2,769
Patronage dividend 3,772 3,772
-------- -------- ------- -------
Total current liabilities 36,035 3,943 171 31,921
-------- -------- ------- -------
Members' equity:
Membership common stock 7 1 6
Store common stock 1,995 337 1,658
Accumulated other comprehensive loss (11) (11)
Retained earnings 16,015 518 15,497
-------- -------- ------- -------
Total members' equity 18,006 856 -- 17,150
-------- -------- ------- -------
Total liabilities and members'
equity $ 54,041 $ 4,799 $ 171 $49,071
======== ======== ======= =======
</TABLE>
F-13
<PAGE> 53
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
4. INVESTMENT IN UNIFIED FOODSERVICE PURCHASING CO-OP, LLC (UFPC):
The Cooperative accounts for its investment in UFPC based on the
Cooperative's share of earnings net of distributions of UFPC in
accordance with the Purchasing Program Management Agreement. Earnings
of UFPC are divided between the Concept Co-ops primarily on the basis
of patronage. During 1999, the KFC Co-op received cash distributions
from UFPC of $1,742,300.
UNIFIED FOODSERVICE PURCHASING CO-OP, LLC
CONDENSED INCOME STATEMENT INFORMATION
FOR THE PERIOD MARCH 1, 1999 THROUGH OCTOBER 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
KFC TACO BELL PIZZA HUT TOTAL
CO-OP CO-OP CO-OP KENCO UFPC
-------- --------- --------- ----- --------
<S> <C> <C> <C> <C> <C>
Sales $279,520 $88,500 $60,999 $511 $429,530
Sourcing Fee 3,971 8,752 5,087 -- 17,810
Gross profit 6,464 1,554 912 512 9,442
Net income 3,087 4,295 1,496 53 8,931
</TABLE>
UNIFIED FOODSERVICE PURCHASING CO-OP, LLC
CONDENSED BALANCE SHEET INFORMATION
OCTOBER 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
TOTAL
UFPC
-------
<S> <C>
Current assets $70,931
Noncurrent assets 863
Current liabilities 47,194
Noncurrent liabilities 12,176
Members' equity 12,424
</TABLE>
F-14
<PAGE> 54
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. ACCOUNTS RECEIVABLE AND SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK:
As of October 31, 1999 and 1998, 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.
6. BORROWING ARRANGEMENTS:
The Cooperative has a $15,000,000 line of credit with its primary bank.
The Cooperative's portion of accounts receivable and inventory held by
UFPC is pledged as collateral for borrowings under the line. Borrowings
on this line of credit bear interest at LIBOR plus 80 basis points
(6.21% as of October 31, 1999). This line of credit was established on
March 1, 1999, expires on April 1, 2001, and requires a $1,000 minimum
balance. In addition, for every $1 million of authorized borrowings,
the Cooperative is required to maintain a $35,000 compensating balance
with its primary bank.
The Cooperative had a $3,000,000 term note with its former bank.
Accounts receivable and other property were pledged as collateral. This
note was repaid during the year ended October 31, 1999.
The Cooperative had a line of credit of $8,000,000 with its former
bank. Certain accounts receivable and other property were pledged as
collateral for borrowings under the line. This line of credit was
terminated on March 1, 1999.
The Cooperative had a $3,000,000 line of credit with National
Cooperative Bank (NCB). Equipment, accounts receivable and equipment
inventory were pledged as collateral for borrowings under the line.
This line of credit was terminated on March 1, 1999.
The Cooperative had a $4,000,000 (Canadian dollars) line of credit with
a Canadian bank. Accounts receivable of the Cooperative's Canadian
subsidiary were pledged as collateral for borrowings under this line.
This line of credit expired in May 1999 and was not renewed.
F-15
<PAGE> 55
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
7. INCOME TAXES:
Income tax expense for the years ended October 31, 1999, 1998 and 1997
consists of (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Currently payable:
Federal $ 266 $ 175 $ 414
State and local 54 41 124
Deferred - all taxing jurisdictions 120 (138) (23)
----- ----- -----
$ 440 $ 78 $ 515
===== ===== =====
</TABLE>
Because UFPC is a limited liability corporation (LLC), earnings of UFPC
are taxed when distributed to the Concept Co-ops. Each Concept Co-op is
responsible for the tax liability related to its respective earnings in
UFPC. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the difference between the financial
statement carrying amounts of the Cooperative's investment in and the
Cooperative's tax basis UFPC. A reconciliation of the difference
between income tax expense computed at the federal statutory rate of
34% and income tax expense follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Computed "expected" tax expense $ 390 $ 47 $ 429
Increase in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 36 27 83
Other, net 14 4 3
----- ----- -----
$ 440 $ 78 $ 515
===== ===== =====
</TABLE>
F-16
<PAGE> 56
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
7. INCOME TAXES, CONTINUED:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1999 and 1998 are
presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accounts receivable, principally due to allowance
for doubtful accounts
KFC Co-op $297 $558
UFPC 159 --
Lease recognition -- 25
Accounting reserves not currently deductible for income
tax purposes 47 127
Impaired goodwill written off, not currently deductible
for income tax purposes -- 118
Other -- 32
---- ----
Net deferred tax asset $503 $860
==== ====
</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, 1999 or 1998.
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 1999 is based upon
shareholder members' retained membership in the Cooperative through
October 31, 1999 and the value of any purchase of equipment and
supplies made from the Cooperative, UFPC or through participating
distributors from November 1, 1998 through October 31, 1999. Other than
from UFPC, the patronage dividends for 1998 and 1997 were based upon
similar facts as described in the preceding sentence.
The Internal Revenue Code of 1986, as amended, provides that
corporations "operating on the cooperative basis" generally may exclude
from their taxable income amounts paid as patronage dividends. The
Cooperative would be liable for taxes associated with the disallowance
of any patronage dividend deduction.
F-17
<PAGE> 57
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
8. 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 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.
9. MAJOR CUSTOMERS:
The Cooperative has had no major customers since the Corporate
Reorganization on March 1, 1999. Prior to the Corporate Reorganization,
the Cooperative had sales to certain distributors in excess of 10% of
net sales. One customer accounted for sales of approximately
$134,000,000 and $104,000,000 for the years ended October 31, 1998 and
1997, respectively. This customer's outstanding accounts receivable
balances were approximately $12,003,000 at October 31, 1998. Sales from
November 1, 1998 to February 28, 1999 for this customer were
approximately $41,646,000. A second customer accounted for sales of
approximately $94,700,000 and $99,874,000 for the years ended October
31, 1998 and 1997, respectively. This customer's outstanding accounts
receivable balances were approximately $4,880,000 at October 31, 1998.
Sales from November 1, 1998 to February 28, 1999 were approximately
$26,556,000. A third customer accounted for sales of approximately
$94,754,000 and $86,773,000 for the years ended October 31, 1998 and
1997, respectively. This customer's outstanding accounts receivable
balances were approximately $5,633,000 at October 31, 1998. Sales from
November 1, 1998 to February 28, 1999 were approximately $18,622,000.
F-18
<PAGE> 58
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
9. 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). Prior to the
Corporate Reorganization, AmeriServe was 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. This 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. Until the formation of UFPC, AmeriServe
did not purchase goods through the KFC Co-op 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.
AmiServe continues to be a major supplier of products to the Tricon
system and currently provides distribution services to over 75% of all
KFC, Taco Bell and Pizza Hut restaurant outlets in the United States.
AmeriServe is responsible for a significant portion of the fees
collected by UFPC (see Corporate Reorganization). Fees remitted by
AmeriServe to UFPC on behalf of the KFC Concept for the period March 1,
1999 through October 31, 1999 were approximately $3,600,000. AmeriServe
has stated in its public filings that AmeriServe is and will continue
to be highly leveraged as a result of the indebtedness incurred in
connection with acquisitions and subsequent restructuring plan. The KFC
Co-op, UFPC and their members continue to monitor their relationship
with AmeriServe.
10. RETIREMENT PLAN:
Prior to the Corporate Reorganization, the Cooperative had a thrift and
profit-sharing plan and a money purchase pension plan which covered all
employees who met certain requirements as to age and length of service.
The thrift and profit-sharing plan was funded under two allocation
methods. The first was funded through a thrift plan agreement under
Section 401(k) of the Internal Revenue Code whereby contributions made
by those employees who elected to participate were matched, in
accordance with plan guidelines and limitations, by the
F-19
<PAGE> 59
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
10. RETIREMENT PLAN, CONTINUED:
Cooperative. The second allocation, which covered all employees and was
introduced in 1986, was funded by the Cooperative as determined by the
Board of Directors, subject to certain limitations. The money purchase
pension plan, established November 1, 1991, provided for an employee
matching contribution of 2% to 7% of eligible compensation. These plans
were transferred to UFPC on March 1, 1999.
The Cooperative's combined contributions relating to these plans were
approximately $78,000, $609,000 and $556,000 for 1999, 1998 and 1997,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
Prior to the Corporate Reorganization, the Cooperative's leasing
arrangements included office space and equipment leased under customary
leasing arrangements which included, in some instances, options to
renew or purchase the leased items. All such leases were operating
leases. These commitments were assumed by UFPC.
Rental expense was approximately $247,000, $839,000 and $774,000 in
1999, 1998 and 1997, 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.
Prior to the Corporate Reorganization, the Cooperative's purchasing
program endeavored 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 supplier's cost. These
commitments were made throughout the year based on anticipated demands
of the restaurant operators, with terms usually of less than one year
and conditions varying from product to product. Commitments made in the
past have resulted in minimal losses. As of October 31, 1999 there were
no existing commitments.
In April 1996, the Cooperative entered into a finance program for
stockholder members co-sponsored by NCB. The program initially provided
up to $20,000,000 in loans to Cooperative members which range from
$110,000 to an individual maximum of $2,000,000. The
F-20
<PAGE> 60
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Cooperative also guaranteed from 10% to 25% of the declining balance
based on each loan's classification. NCB 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. NCB's commitment to provide such loans
terminated in June 1997. As of October 31, 1999, NCB has funded
approximately $8.4 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, NCB. Currently, no losses are expected by the
Cooperative under this program.
12. 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. 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.
13. IMPACT OF NEW ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
and was amended by SFAS No. 137. This amended statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No. 133, as amended in
fiscal 2000, will not have a material affect on the Cooperative's
consolidated financial statements.
F-21
<PAGE> 61
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
14. CHANGE IN YEAR-END:
On December 8, 1999 the Cooperative's board of directors approved a
change in the Cooperative's year-end to December 31.
F-22
<PAGE> 62
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:
1999 $1,392,579 $(101,555) -- $ 548,576 (A) $ 742,448
1998 1,408,727 699,601 -- 715,749 (A) 1,392,579
1997 1,328,869 175,310 -- 95,452 (A) 1,408,727
</TABLE>
(A) Uncollectible accounts and notes written off.
S-1
<PAGE> 63
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 28, 2000 By /s/ Daniel E. Woodside
-------------------------------------
Daniel E. Woodside, 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 28, 2000
- -----------------------------
William E. Allen
/s/ William Bickley Vice President and January 28, 2000
- ----------------------------- Chief Financial Officer
William Bickley (Principal Accounting Officer)
(Principal Financial Officer)
Director
- -----------------------------
Christian L. Campbell
Director
- -----------------------------
William R. Carden
* Director January 28, 2000
- -----------------------------
Robert C. Carle
* Director January 28, 2000
- -----------------------------
James G. Cocolin
* Director January 28, 2000
- -----------------------------
Ben E. Edwards
</TABLE>
<PAGE> 64
<TABLE>
<S> <C> <C>
Director
- -----------------------------
Lois G. Foust
* Director January 28, 2000
- -----------------------------
Edward J. Henriquez, Jr.
* Director, Chairman January 28, 2000
- -----------------------------
David G. Neal
* Director January 28, 2000
- -----------------------------
James D. Olson
* Director January 28, 2000
- -----------------------------
Darlene L. Pfeiffer
* Director January 28, 2000
- -----------------------------
Charles E. Rawley
* Director, Vice January 28, 2000
- ----------------------------- Chairman
James B. Royster
* Director January 28, 2000
- -----------------------------
Dean M. Sorgdrager
/s/ Daniel E. Woodside President and Chief January 28, 2000
- ----------------------------- Executive Officer,
Daniel E. Woodside Director
* By /s/ Daniel E. Woodside January 28, 2000
--------------------------
Daniel E. Woodside
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 CO-OP, INC.
ARTICLE I
Offices and Business Purpose
1.1 Registered Office. The address of the registered office of KFC
National Purchasing Co-op, Inc. (the "Co-op") shall be 1209 Orange Street,
Wilmington, Delaware, until altered as provided by law.
1.2 Principal Office. The principal office of the Co-op shall be in
Louisville, Kentucky until altered by the Board of Directors.
1.3 Other Offices. The Co-op 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.
1.4 Business. The Co-op shall conduct a purchasing program for its
members through the Unified Foodservice Purchasing Co-op, LLC, a Kentucky
limited liability company, (the "UFPC") and otherwise in order to provide its
members and KFC operators with the lowest possible store delivered costs for
food, packaging and supplies, and related services ("Goods") and equipment and
related services ("Equipment").
ARTICLE II
Stockholder Members
2.1 Stockholder Eligibility.
(a) As used in these Bylaws,
(i) the term "non-traditional retail outlet" means an outlet
with more than one of the following characteristics: (A) a ten year or shorter
license, (B) a limited menu, (C) sales from a kiosk or other transportable unit,
(D) 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, (E)
anticipated sales volume less than anticipated sales volume for a traditional
unit, (F) sales in conjunction with sales of another food concept, or (G) such
other characteristics as the Board of Directors may determine are indicative of
a non-traditional retail outlet;
(ii) "traditional retail outlet" means all retail outlets
other than "non-traditional retail outlets";
(iii) "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
(iv) the term "franchise" includes licenses where appropriate
in the context.
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(b) The following persons, firms or entities shall be eligible to
be stockholders in the Co-op: (i) each sole proprietor, partnership, corporation
or other entity who is or becomes a direct or indirect KFC franchisee or
licensee of KFC Corporation, a Delaware corporation, or its successors, assigns,
affiliates, or related companies, (ii) KFC National Management Company, a
Delaware Corporation, and its respective successors as operators of KFC outlets,
and (iii) the KFC National Council and Advertising Cooperative, Inc., a Delaware
non-stock corporation ("NCAC"); (iv) 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; provided, however, that no sole proprietor, partnership,
corporation or other entity who owns or operates a Kentucky Fried Chicken outlet
in Canada may be a stockholder member of the Co-op with respect to an outlet in
Canada, unless that sole proprietor, partnership, corporation or other entity
was a stockholder member of the KFC National Purchasing Cooperative, Inc. with
respect to an outlet in Canada as of March 23, 1999; and (v) Each sole
proprietor, partnership, corporation or other entity who as of March 1, 1999 was
a stockholder of the KFC National Purchasing Cooperative, Inc. and who is a
direct or indirect Taco Bell franchisee or licensee of Taco Bell Corp., a
California corporation, or its successors, assigns, affiliates, or related
companies.
(c) Only persons, firms or entities which own of record a share of
the Co-op's Membership Common Stock shall be eligible to purchase shares of the
Co-op's Store Common Stock.
2.2 Stockholder Membership Requirements. Each person, firm or entity
which is eligible to be a stockholder member in the Co-op shall be a stockholder
member in the Co-op when and if that person, firm or entity (a) purchases one
share of the Co-op's Membership Common Stock, (b) purchases that number of
shares of the Co-op's Store Common Stock which equals (i) the total number of
KFC 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 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 KFC retail outlets wherever located
owned and operated by such person, firm or entity; and (c) agrees to abide by
the terms and commitments set forth in these Bylaws as amended from time to
time. If a person, firm or entity which is eligible to be a stockholder member
in the Co-op does not (a)(i) purchase that number of shares of the Co-op's Store
Common Stock which equals the total number of KFC or Taco Bell retail outlets
located in the United States, Canada or a Foreign Territory owned and operated
by such person, firm, or entity, and (ii) pay any fees or assessments which are
established from time to time by the Board of Directors pursuant to Section 2.7
hereof, (b) then such person, firm, or entity shall not be entitled to vote on
any matters submitted to stockholder members nor receive patronage dividends
from the Co-op as provided in Article IX. If a stockholder member at any time
becomes an owner and operator of additional KFC or Taco Bell retail outlets
within the United States, Canada or a Foreign Territory, 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.
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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 Co-op'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 Co-op'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 Co-op's Series A through H Membership
Common Stock if a franchisee's Base Share is a share of the Co-op's Series N
Membership Common Stock or (ii) one (but only one) share of the Co-op's Series N
Membership Common Stock if a franchisee's Base Share is a share of the Co-op's
Series A through H Membership Common Stock, (c) if a franchisee's Base Share is
not a share of the Co-op's Series J Membership Common Stock, any interest which
any franchisee may have in one (but only one) share of the Co-op's Series J
Membership Common Stock, (d) if a franchisee's Base Share is not a share of the
Co-op's Series M Membership Common Stock, any interest which any franchisee may
have in one (but only one) share of the Co-op's Series M Membership Common
Stock, and (e) any interest which any franchisee may have in a share of the
Co-op's Membership Common Stock (i) held by a person, firm or entity in which
the franchisee owns 50% or less in the aggregate of the outstanding ownership
interests, and (ii) with respect to which the franchisee refrains from voting or
participating in the voting of the share of Membership Common Stock. Where more
than one (1) person, firm or entity are designated as franchisees of one (1) or
more retail outlets, such persons, firms or entities shall be considered as a
single person, firm or entity for stockholder purposes. The person, firm or
entity who owns more than 50% in the aggregate of the outstanding ownership
interest of the person, firm or entities owning and operating a Kentucky Fried
Chicken or Taco Bell retail outlet shall be, unless such person designates
otherwise, the person, firm or entity entitled to own the share of Membership
Common Stock representing such franchise operation. Where no person, firm or
entity owns more than 50% in the aggregate of the outstanding ownership
interests of the person, firm or entity owning and operating a Kentucky Fried
Chicken or Taco Bell retail outlet and none of such persons, firms or entities
own, directly or indirectly, an interest in a share of Membership Common Stock
of the Co-op, 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"), 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
-------- --------
<S> <C>
SERIES AREA
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.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
G Arizona, California, Nevada and Utah.
J Foreign Territories other than Canada.
M Canada.
</TABLE>
The Series of Membership Common Stock to be issued shall be designated
by the stockholder member, or in the absence of such designation, by the Co-op.
(b) Each Taco Bell stockholder member shall be entitled to purchase
one share of Series N Membership Common Stock (a "Taco Bell Membership Share"),
but only if such stockholder member owns or operates, or pursuant to Section 2.3
hereof, is deemed to own or operate, a Taco Bell retail outlet in the United
States.
(c) Harman, 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
KFC National Management Company K
NCAC L
</TABLE>
(d) If Harman shall at any time own or operate less than 100
Kentucky Fried Chicken outlets in the United States 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 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 Co-op.
(e) No person, firm or entity shall be entitled to purchase or own
any of the Series I or Series O through Series Z shares of Membership Common
Stock.
2.5 Mandatory Redemptions; Restrictions on Transfers; Prohibition of
Dividends.
(a) Unless otherwise prohibited by law, the Co-op 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 Co-op shall be prohibited by law from redeeming such share in cash
because such payment would impair the capital of the Co-op or otherwise, the
Co-op shall in lieu thereof issue to the holder of such share a non-interest
bearing promissory note payable whenever the Co-op shall no longer be prohibited
by law from making such payment. The Membership Common Stock may not be sold,
transferred, pledged, mortgaged, gifted, or hypothecated to any third party,
either voluntarily or by operation of law, and such restrictions shall be noted
on all Membership Common Stock certificates.
(b) The Store Common Stock may not be sold, transferred, pledged,
mortgaged, gifted, or hypothecated to any third party, either voluntarily or by
operation of law, and such restrictions will be noted on all Store Common Stock
certificates. The Co-op may from time to time purchase shares of its Store
Common Stock if the stockholder does not or no longer owns or operates KFC
retail outlets with respect to the share to be purchased by the Co-op. If the
Co-op purchases shares of its Store Common Stock as provided in this Section
2.5(b), the purchase price paid by the Co-op for a share of Store Common
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Stock shall be the same as the price the stockholder member paid to acquire the
share of Store Common Stock.
(c) No dividends, other than "patronage dividends" as provided in
Section 9 of the Bylaws, shall be declared, accrued, or paid on any class of
stock of the Co-op.
2.6 Sourcing Fees. By virtue of membership in the Co-op, each
stockholder member (a) agrees that the Co-op and UFPC may from time to time
collect from the stockholder member a fee (a "Sourcing Fee") in consideration of
and to fund the Co-op and UFPC's purchasing programs and services, and (b)
authorizes the Co-op and UFPC from time to time to cause suppliers and
distributors of Goods and Equipment to collect Sourcing Fees from the
stockholder member for the account of the Co-op or UFPC.
2.7 Liquidation Rights. In the event of any dissolution or liquidation
of the Co-op or other disposition of its assets, after payment of all debts and
liabilities of the Co-op and payment of Ten Dollars ($10.00) per share to
holders of Membership Common Stock, the remaining assets of the Co-op shall be
distributed to the holders of Store Common Stock on a Co-operative basis, that
is, the Co-op shall return to such stockholder members the face amount of
outstanding patronage equities and distribute the remaining assets to such
stockholder members on the basis of their past Patronage insofar as such
distribution is practicable.
ARTICLE III
Meetings of Stockholder Members of the Co-op
3.1 Annual Meeting of Stockholder Members. An annual meeting of
stockholder members of the Co-op 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 Co-op 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 Co-op's Membership Common Stock shall be entitled to one (1) vote
in person or by proxy upon each matter on which such stockholder member is
entitled to vote. Proxies shall be valid only if signed by the stockholder
member, dated and filed with the Secretary of the Co-op prior to or at the
meeting in which it is given. No proxy shall be irrevocable and any proxy may be
revoked at any time in writing or in person at the meeting for which it was
given. No Proxy shall be voted or acted upon after one (1) year from its date.
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3.8 Majority Vote. Except as otherwise provided in these Bylaws or
required by law, the affirmative vote of two-thirds 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 Co-op 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
Co-op shall act as chairman and secretary, respectively, at all meetings of
stockholder members of the Co-op.
ARTICLE IV
Board of Directors
4.1 General.
(a) The property and affairs of the Co-op 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 Co-op 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, K and L Membership
Common Stock, that he or she (i) will serve and is eligible to serve in such
capacity if elected, (ii) will participate in a director orientation program in
accordance with the Board's current orientation policies, and (iii) will enter
into a director confidentiality agreement in such form as the Board may adopt
from time to time. Each stockholder member (other than the NCAC and KFC National
Management Company) may nominate not more than one person to serve as the
director who may be elected by the Series of Membership Common Stock held by
such stockholder member. NCAC and KFC National Management Company may each
nominate two persons to serve as the directors who may be elected by the series
of Membership Common Stock held by them.
(c) Each of Series A through Series H, 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.
(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
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"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 Co-op and UFPC shall serve as a non-voting
ex-officio member of the Board of Directors.
(f) With the exception of the Independent Director and President
of UFPC and Co-op, all directors of the Co-op must be stockholder members of the
Co-op or an officer, shareholder, employee or partner of an entity which is a
stockholder member of the Co-op. 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 and M, nominate)
such director.
(g) All voting directors of the Co-op 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 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 Co-op, except for directors elected
by the Series H 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.
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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. The Board of Directors shall
not fill a vacancy with respect to the Series H, K or L share of Membership
Common Stock without specific direction and the consent respectively of Harman,
Tricon or NCAC.
Directors elected as hereinabove provided in this Section 4.2 shall
serve until the next annual meeting of stockholder members, at which time the
holders of the Series of Membership Common Stock who elected the director whose
position became vacant shall be entitled to elect a successor who shall serve
for the remainder, if any, of the term of the director who shall have resigned,
died or otherwise been removed from office.
The person elected to fill a vacancy must fulfill the eligibility
requirements for the position of the director whose position became vacant.
4.3 Quorum. Two-thirds (2/3) of the voting members of the Board of
Directors shall constitute a quorum.
4.4 Annual Meeting. The Board of Directors shall hold its annual
meeting in each calendar year at such time and place as the Board shall
designate to elect its Chairman and Vice-Chairman, to elect the officers of the
Co-op 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 (including the vote of Tricon or NCAC with respect to the
director representing the Series K or L share of Membership Common Stock,
respectively) 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.
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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. The Chairman and Vice Chairman shall each serve
until the next annual meeting of the Board of Directors and until his or her
successor is duly elected and qualified. Neither the Chairman nor the
Vice-Chairman may be a Director elected by the Series K share of Membership
Common Stock.
(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
Co-op 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 Co-op 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
Co-op, 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.
4.12 UFPC. The Co-op shall appoint the Chairman and one other member of
the Board of Directors as members of UFPC's Board of Directors. The Co-op shall
not appoint a member to UFPC's Board of Directors who is a designee, employee,
or agent of Tricon Global Restaurants, Inc. ("Tricon"), a Tricon controlled
affiliate, or a Tricon subsidiary.
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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 Co-op. Any one
person, except as forbidden by law, may be elected to more than one office. Any
person elected to office shall hold his office as such for a one (1) year period
and until his successor shall have been elected and shall have accepted office,
unless prior thereto such person resigns or is removed from office. The
President shall at all times be subject to dismissal by the Board of Directors
by the affirmative vote of two-thirds (2/3) of all voting members of the Board
of Directors. Any meeting of the Board of Directors for the purpose of
considering the dismissal of the President may be called upon not less than
twenty (20) days nor more than sixty (60) days prior written notice which notice
shall state the place, date, hour and purpose of the meeting. The other officers
shall at all times be subject to dismissal by the President or the Board of
Directors.
5.2 Vacancies. Any vacancy in any office shall be filled by the Board
of Directors.
5.3 Powers and Duties of the President. The President shall be the
President and Chief Executive Officer of the Co-op 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 Co-op, and make due
reports to it and to the stockholder members. The President shall have the power
to execute in the name of the Co-op 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 Co-op. He shall have the care of, and
be responsible for, all monies, securities, evidences of value and corporate
instruments of the Co-op, 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 Co-op, 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 Co-op 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 Co-op 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 Co-op, 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.
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5.8 Other Officers. The Board of Directors shall prescribe the powers
and duties of any other officer or officers of the Co-op.
5.9 Salaries. The salary, if any, of the President of the Co-op shall
be fixed by the Board of Directors. Subject to such limitations as may be fixed
by the Board of Directors from time to time, the salaries, if any, of all other
employees and officers of the Co-op 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 Co-op 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 Co-op
shall be collected and promptly deposited in the name of the Co-op 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 Co-op shall be conducted annually by a firm engaged by the
Board of Directors.
6.3 Fiscal Year. The fiscal year of the Co-op shall be the fiscal year
of UFPC unless set otherwise by the Board of Directors.
ARTICLE VII
Indemnification
7.1 Indemnification of Officers and Directors.
(a) The Co-op 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 Co-op) by reason of the fact
that he is or was a director, officer, employee or agent of the Co-op, or is or
was serving at the request of the Co-op 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
Co-op, and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Co-op, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
(b) The Co-op 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 Co-op 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 Co-op, or is or was serving at the request of the Co-op as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Co-op
and except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Co-op unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall
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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 Co-op 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 Co-op 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 Co-op 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 Co-op
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 Co-op 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 Co-op, or is or was serving at the request of the Co-op as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Co-op 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 Co-op 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 Co-op" shall
include any service as a director, officer, employee or agent of the Co-op which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its
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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 Co-op" 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
Co-op's obligation to advance expenses (including attorneys' fees).
(l) If so provided in the Co-op's Certificate of Incorporation,
a director of the Co-op shall not be personally liable to the Co-op 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
Co-op 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 Co-op has obtained a policy of insurance under which the Co-op and
its directors and officers are insured subject to specific exclusions and
deductible and maximum amounts against loss deriving from any claim which may be
made against the Co-op or any director or officer of the Co-op 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 Co-op
shall be entitled to have a certificate, signed by, or in the name of the Co-op
by, the President or a Vice-President and the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Co-op, certifying
the number of shares owned by him in the Co-op. The certificates of stock of the
Co-op shall be numbered and shall be entered in the books of the Co-op 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 Co-op 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 Co-op a bond in such sum as it may direct
as indemnity against any claim that may be made against the Co-op with respect
to the certificate alleged to have been lost, stolen or destroyed.
8.3 Transfers of Capital Stock. Any attempted transfer, sale, pledge,
mortgage, gift, or hypothecation of shares of Membership Common Stock or Store
Common Stock other than a transfer of the shares to the Co-op shall be null,
void, and without effect, and the Co-op shall not make or recognize any such
transfer, sale, pledge, mortgage, gift, or hypothecation upon its books.
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8.4 Fixing Record Date. In order that the Co-op 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 Co-op shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends and to vote, and to hold liable for calls and assessments a
person registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share of shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
Patronage Dividends
9.1 Patronage. The term "patronage" shall refer to the value of the
Co-op's business with its stockholder members. Business with the Co-op's
stockholder members shall include the following: (1) the Co-op's direct business
with its stockholder members; (2) the Co-op's business with its stockholder
members through distributors ("participating distributors") which shall have
agreed to participate in the Co-op's patronage dividend program for its
stockholder members by entering into distributor participation agreements with
the Co-op or UFPC in such form as the President shall prescribe or approve from
time to time; (3) the Co-op's business with its stockholder members through
suppliers ("participating suppliers") which shall have agreed to participate in
the Co-op's patronage dividend program by entering into supplier participation
agreements with the Co-op or UFPC in such form as the President shall prescribe
or approve from time to time; and (4) the Co-op's business with its stockholder
members pursuant to arrangements set forth in a management agreement approved by
the Board of Directors with UFPC, whereby the stockholder members purchase goods
directly from UFPC or through participating distributors and participating
suppliers. The term "patronage" includes the Co-op's business with its
stockholder members both when the Co-op or UFPC purchases (takes "Title") and
resells goods to the Co-op's stockholder members and participating distributors,
and when participating suppliers sell goods directly to stockholder members and
participating distributors.
9.2 Cooperative Basis. The Co-op shall at all times be operated on a
Co-operative basis for the benefit of its stockholder members. The Co-op shall
always do more than ninety percent (90%) in value of its business with its
stockholder members.
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9.3 Patronage Dividend Distributions.
(a) The Board of Directors shall, after considering the Co-op's
anticipated expenses and need for capital and reserves, (i) obligate the Co-op
to distribute patronage dividends as provided in section 1388(a)(2) of the
Internal Revenue Code of 1986, as amended (hereinafter referred to as the
"IRC"), and (ii) distribute as patronage dividends, directly to the stockholder
members of the Co-op, the net income of the Co-op from patronage done with or
for stockholder members computed in accordance with sections 1381-1388 of the
IRC and in accordance with the principles applied in preparation of the Co-op's
federal income tax return. Specifically, the Co-op shall distribute patronage
dividends to stockholder members annually on the basis of each stockholder
member's patronage. In determining the portion of the Co-op's patronage dividend
obligations to be paid in cash, the Board of Directors shall consider: (1)
Expenses directly or indirectly related to the Co-op's business; (2) Such
reasonable reserves for necessary corporate purposes as may from time to time be
provided by the Board of Directors for depreciation and obsolescence, state and
federal taxes, bad debts, casualty losses, insurance and other corporate and
operating charges and expenses, all established and computed in accordance with
generally accepted accounting principles; (3) Such reasonable reserves for
working capital necessary for the operation of the Co-op and for deficits
arising from such operation, (including deficits from business other than
business done with or for stockholder members).
The amounts set aside for reserves in any year from gross margins
of the Co-op from business other than with or for the stockholder members shall
be allocated to the extent possible, to stockholder members, on the books of the
Co-op on a patronage basis for that year, or, in lieu thereof, the books or
records of the Co-op shall afford a means of doing so, so that in the event of a
distribution of amounts formerly carried in reserves, each stockholder member
may receive to the extent possible, that stockholder member's pro rata share
thereof.
(b) Solely for the purpose of determining the amount of patronage
dividends distributable to a particular stockholder member of the Co-op, the
Board of Directors may, by resolution, segregate the Co-op's business with its
stockholder members into two distinct pools: (i) the "Title Pool," under which
shall be determined the net earnings of the Co-op from business with the Co-op's
stockholder members in which the Co-op takes Title to goods; and (ii) the
"Non-Title Pool," under which shall be determined the net earnings of the Co-op
from business with the Co-op's stockholder members in which the Co-op does not
take Title to goods.
The amount distributable by the Co-op as patronage dividends
directly to each stockholder member of the Co-op shall be based on
(A) the ratio of
(i) the value of business done by the Co-op with each
stockholder member in which the Co-op takes Title to goods, to
(ii) the net earnings of the Co-op in the Title Pool
attributable to business done with or for its stockholder members, plus
(B) the ratio of
(i) the value of business done by the Co-op with each
stockholder member in which the Co-op does not take Title to goods, to
(ii) the net earnings of the Co-op in the Non-Title Pool
attributable to business done with or for its stockholder members.
(c) Solely for the purpose of determining the amount of patronage
dividends distributable to a particular member of the Co-op, the Board of
Directors may from time to time, when appropriate, by resolution segregate the
Co-op's business with its stockholders members into other distinct
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pools, such as by way of example, an equipment business pool, a food and
packaging business pool, or an international business pool. The net earnings of
the Co-op from business with the Co-op's stockholder members related to any such
pool shall be attributable to a stockholder member patron of the pool in
proportion to the quantity or value of business done by the stockholder member
with the pool. The resolution establishing such distinct business pools shall
also specify the basis for determining the amount distributable by the Co-op as
patronage dividends to each shareholders member.
(d) The patronage dividend distributions shall be paid to each
stockholder member on the basis of the quantity or value of business done with
or for each stockholder member, and the patronage dividend distributions shall
be determined by reference to the net earnings of the Co-op from business done
with or for its stockholder members. The patronage dividend distributions shall
be among all stockholder members, shall be directly proportional for each
taxable year of the Co-op to the purchases by each stockholder member, and so
shall be based upon each stockholder member's patronage.
9.4 Timing of Payment of Patronage Dividends. Each distribution of
patronage dividends shall be made within the payment period beginning with the
first day of a taxable year for which the Co-op 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.
9.5 Method and Character of Payment. The Board of Directors may, in its
discretion, determine to pay patronage dividends either all in a form that will
be treated as a deductible qualified written notice of allocation within the
meaning of section 1388(c) of the IRC, all in a form that will be treated as a
nonqualified written notice of allocation within the meaning of section 1388(d)
of the IRC, or part in qualified form and part in nonqualified form. At least
twenty percent (20%) of any qualified payment of patronage dividends shall be
paid in cash or by a "qualified check" as defined in Section 1388(c)(4) of the
IRC. Subject to this limitation with respect to qualified distributions, the
Board of Directors may decide that the balance of any patronage dividend be
paid, in whole or in part, in cash, property, promissory notes or other evidence
of indebtedness, or in any other form of written notice of allocation (within
the meaning of section 1388(b) of the IRC).
9.6 Consent to Stockholder Members. Membership in the Co-op 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 Co-op, 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 Co-op.
Each stockholder member of the Co-op, 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 Co-op and each
stockholder member as fully as though each stockholder member had signed a
specific separate instrument in which the stockholder member agreed to be bound
by all of the terms and provisions of this Article IX, as amended from time to
time.
This consent, however, shall not extend to written notices of
allocation received by the stockholder member as part of a nonqualified payment
of patronage which clearly indicate on their face that they are nonqualified. By
way of illustration, the term "written notice of allocation" shall include such
items as the promissory notes, a notice or statement that such securities have
been deposited with a bank or other qualified agent on behalf of the stockholder
member, a notice of credit to the account of the stockholder member on the books
of the Co-op (against stock subscription or any other indebtedness as the Co-op
may elect) and such other forms of notice as the Board of Directors may
determine, distributed by the Co-op in payment, or part payment of the patronage
dividends. The stated dollar amount of the promissory notes is the principal
amount thereof.
9.7 Promissory Notes. Subject only to the payment of at least twenty
percent (20%) of each stockholder member's annual patronage dividend in cash,
the Co-op may pay each stockholder member all or any portion of the annual
patronage dividend in promissory notes which shall bear interest at the rate
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from time to time fixed by the Board of Directors and shall mature at the time
fixed by the Board of Directors not later than five (5) years from the date of
issuance, and may be subordinated to any liabilities or obligations of the
Co-op, existing, contingent or created after the date of issuance. The Co-op
shall have a lien upon and a right of set off against any said promissory notes
issued to a stockholder member to secure payment of any indebtedness due the
Co-op or any of its subsidiaries by the stockholder member.
9.8 Application of Patronage Dividends to Amounts Due the Co-op.
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 Co-op
to the payment of any indebtedness, the repayment of which is in default, owed
to the Co-op by any such stockholder member to the extent of such indebtedness
instead of being distributed in cash, provided, however, that an amount equal to
twenty percent (20%) (or, in the case of a stockholder member located in a
jurisdiction to which the special withholding requirements of Sections 1441 or
1442 of the Internal Revenue Code of 1986, as amended, apply, thirty percent
(30%)) of the total annual patronage dividends distributable for the applicable
year to any such stockholder member shall nevertheless be paid in cash within
the period set forth in Section 9.4 if any such stockholder member so requests
in a writing received by the Co-op within thirty (30) days of the first day of
the Co-op's fiscal year as established under Section 6.3.
ARTICLE X
Amendments
10.1 Amendments to Bylaws. The Board of Directors shall have the power
to adopt, amend or repeal from time to time the Bylaws of the Co-op at any
regular meeting of the Board of Directors or at any special meeting of the Board
of Directors if notice of such adoption, amendment or repeal of the Bylaws be
contained in the notice of such special meeting, subject to the right of the
stockholder members to adopt, amend or repeal the Bylaws, at any regular meeting
of the stockholder members or at any special meeting of the stockholder members
if notice of such adoption, amendment or repeal of the Bylaws be contained in
the notice of such special meeting.
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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 Daniel E. Woodside, 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, 1999, 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 8, 1999
- ------------------------------------ Secretary
William E. Allen
/s/ William L. Bickley Vice President, December 8, 1999
- ------------------------------------ Chief Financial Officer
William L. Bickley (Principal Accounting Officer)
(Principal Financial Officer)
Director
- ------------------------------------
Christian L. Campbell
Director
- ------------------------------------
William R. Carden
/s/ Robert C. Carle Director December 8, 1999
- ------------------------------------
Robert C. Carle
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ James G. Cocolin Director, December 8, 1999
- ------------------------------------ Treasurer
James G. Cocolin
/s/ Ben E. Edwards Director December 8, 1999
- ------------------------------------
Ben E. Edwards
Director
- ------------------------------------
Lois G. Foust
/s/ William B. Hecht Director December 8, 1999
- ------------------------------------
William B. Hecht
/s/ Edward J. Henriquez, Jr. Director December 8, 1999
- ------------------------------------
Edward J. Henriquez, Jr.
/s/ David G. Neal Director, December 8, 1999
- ------------------------------------ Chairman
David G. Neal
/s/ James D. Olson Director December 8, 1999
- ------------------------------------
James D. Olson
/s/ Donald Parkinson Director December 8, 1999
- ------------------------------------
Donald Parkinson
/s/ Darlene L. Pfeiffer Director December 8, 1999
- ------------------------------------
Darlene L. Pfeiffer
/s/ Charles E. Rawley, III Director December 8, 1999
- ------------------------------------
Charles E. Rawley, III
/s/ James B. Royster Director, December 8, 1999
- ------------------------------------ Vice Chairman
James B. Royster
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
/s/ Dean M. Sorgdrager Director December 8, 1999
- ------------------------------------
Dean M. Sorgdrager
/s/ Daniel E. Woodside Director, December 8, 1999
- ------------------------------------ President,
Daniel E. Woodside Chief Executive
Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 5,588,746
<SECURITIES> 0
<RECEIVABLES> 1,766,519
<ALLOWANCES> 742,446
<INVENTORY> 0
<CURRENT-ASSETS> 7,165,825
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,428,091
<CURRENT-LIABILITIES> 5,807,853
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,620,238
<TOTAL-LIABILITY-AND-EQUITY> 23,428,091
<SALES> 247,839,206
<TOTAL-REVENUES> 247,839,206
<CGS> 241,354,493
<TOTAL-COSTS> 241,354,493
<OTHER-EXPENSES> 4,863,976
<LOSS-PROVISION> (101,555)
<INTEREST-EXPENSE> 203,899
<INCOME-PRETAX> 1,145,559
<INCOME-TAX> 439,542
<INCOME-CONTINUING> 706,017
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 706,017
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
