<PAGE> 1
As filed with the Securities and Exchange Commission on February 11, 2000
Registration No. 33-56982
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 7 TO
FORM S-1 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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KFC NATIONAL PURCHASING COOPERATIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
5199
(Primary standard industrial classification code number)
61-0946155
(I.R.S. Employer Identification No.)
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950 Breckinridge Lane
Louisville, Kentucky 40207
(502) 896-5900
(Address, including zip code and telephone number,
including area code, of registrant's principal
executive offices)
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Daniel E. Woodside, President and Chief Executive Officer
KFC NATIONAL PURCHASING COOPERATIVE, INC.
P.O. Box 32033
Louisville, Kentucky 40232
(502) 896-5900
(Name, address including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
R. James Straus
James A. Giesel
BROWN, TODD & HEYBURN PLLC
400 West Market Street
32nd Floor
Louisville, Kentucky 40202-3363
(502) 589-5400
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[facing sheet continues]
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Approximate date of commencement of the proposed sale to the public
As soon as practicable after this amendment to the Registration
Statement becomes effective.
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If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the Securities
Act of 1933, check the following box.
----
[X]
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
Prospectus
KFC NATIONAL PURCHASING COOPERATIVE, INC.
950 Breckinridge Lane
P. O. Box 32033
Louisville, Kentucky 40207
(502) 896-5900
469 Shares of Membership Common Stock, no par value
Series A through G and J
434 Shares of Store Common Stock, no par value
We are offering these shares only to owners and operators of KFC retail
outlets to provide working capital for the purchasing programs of the KFC
National Purchasing Cooperative, Inc. ("the "KFC Co-op") and, by virtue of
membership, to encourage KFC operators to use the volume purchasing services of
the KFC Co-op. Members must purchase one share of Membership Common Stock and
that number of shares of Store Common Stock which equals the total number of KFC
retail outlets owned or operated by the member. Members are entitled to
patronage dividends, if distributed, on the basis of the value of their annual
business done with the KFC Co-op.
No market for this stock exists nor is any expected to develop. You
should not expect any return on your investment through stock appreciation or
per share dividends.
<TABLE>
<CAPTION>
The Offering
Underwriting Proceeds
Price Discounts to the
to Operators and Commissions KFC Co-op*
------------ --------------- ----------
<S> <C> <C> <C>
Membership Common Stock
(Series A through G and J)
Per Share ................ $ 10 0 $ 10
Total .................... $ 4,690 $ 4,690
Store Common Stock
Per Share ................ $ 400 0 $ 400
Total .................... $173,600 $173,600
</TABLE>
* Before deducting expenses, estimated at $15,000, to be paid by the KFC Co-op.
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We are using our best efforts to sell these shares. There is no minimum
number of shares that must be sold.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OF COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_____________, 2000
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY................................................................................................1
Who are we?..............................................................................................1
Why is this stock being offered?.........................................................................1
Why should I purchase this stock?........................................................................1
How many shares of stock must I purchase to participate in the KFC Co-op's programs?.....................1
May I sell or transfer this stock?.......................................................................1
Will I receive patronage dividends?......................................................................2
How do I become a member?................................................................................2
Who is being offered this stock?.........................................................................2
How is this stock being offered?.........................................................................2
How will these proceeds be used?.........................................................................2
Is Tricon involved?......................................................................................2
SUMMARY FINANCIAL INFORMATION.....................................................................................3
THE OFFERING......................................................................................................3
Why is this stock being offered?.........................................................................3
How is this stock being offered?.........................................................................3
How will these proceeds be used?.........................................................................4
How do I become a member?................................................................................4
RECENT DEVELOPMENTS...............................................................................................5
CAPITALIZATION....................................................................................................5
THE BUSINESS......................................................................................................6
Who are we?..............................................................................................6
What is UFPC?............................................................................................7
Organizational Structure.................................................................................9
Purchasing Programs.....................................................................................10
Distribution............................................................................................12
The Tricon Purchasing Agreement.........................................................................13
Principal Customers.....................................................................................14
Sources of Supply.......................................................................................15
Competition.............................................................................................15
Seasonality.............................................................................................16
Properties..............................................................................................16
SELECTED FINANCIAL DATA..........................................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................17
Corporate Reorganization................................................................................17
Results of Operations...................................................................................19
Year 2000...............................................................................................23
Inflation...............................................................................................24
Capital Expenditures....................................................................................24
Liquidity and Capital Resources.........................................................................25
Forward Looking Statements..............................................................................25
WILL I RECEIVE DIVIDENDS AND PATRONAGE DIVIDENDS?................................................................26
Introduction............................................................................................26
</TABLE>
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<TABLE>
<S> <C>
Patronage Dividend Program..............................................................................26
MANAGEMENT OF THE KFC COOP.......................................................................................27
Executive Compensation..................................................................................33
Compensation of Directors...............................................................................33
Transactions With Stockholders, Directors and Officers..................................................33
KFC CO-OP STOCK..................................................................................................34
Lack of Market for KFC Co-op Stock......................................................................34
Description of KFC Co-op Stock..........................................................................34
MISCELLANEOUS....................................................................................................38
Indemnification and Limits on Monetary Liability........................................................38
Where you can find more information.....................................................................39
Legal Proceedings.......................................................................................39
Legal Matters...........................................................................................40
Experts.................................................................................................40
</TABLE>
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PROSPECTUS SUMMARY
WHO ARE WE?
The KFC National Purchasing Cooperative, Inc. (the "KFC Co-op") is a purchasing
cooperative which focuses on the purchase of the food, packaging, supplies,
equipment and related services used by owners and operators of KFC restaurants,
including Tricon Global Restaurants, Inc. ("Tricon"). Along with cooperatives
representing owners and operators of Taco Bell and Pizza Hut restaurants, we are
a member of the Unified Foodservice Purchasing Co-op, LLC ("UFPC"), which
administers our purchasing program. Tricon, together with its subsidiaries, is
the franchisor and licensor of the KFC, Taco Bell and Pizza Hut concepts, the
developer of products used and sold by the Tricon concepts, and an operator of
many KFC, Taco Bell and Pizza Hut retail outlets.
WHY IS THIS STOCK BEING OFFERED?
The KFC Co-op is offering these membership interests (a) to raise proceeds to
provide working capital for the operation of the KFC Co-op; (b) to encourage all
KFC outlets, by virtue of membership, to use the volume purchasing services of
the KFC Co-op and UFPC, thereby enhancing the ability of the KFC Co-op and UFPC
to achieve economies of scale in purchasing activities; and (c) to maintain a
cooperative in which the only members are Tricon, the KFC National Council and
Advertising Cooperative, Inc., and KFC franchisees and licensees, thereby better
enabling the KFC Co-op to respond to the unique needs and requirements of KFC
operators.
WHY SHOULD I PURCHASE THIS STOCK?
You should purchase KFC Co-op stock to participate in the purchasing programs we
offer for our members, to participate in any patronage dividend program, and to
participate in our management through the election of directors. Together with
UFPC, it is our goal to administer purchasing programs for our members which
should significantly reduce their store delivered costs of goods and equipment.
You should not expect any return on your investment through stock appreciation
or per share dividends.
HOW MANY SHARES OF STOCK MUST I PURCHASE TO PARTICIPATE IN THE KFC CO-OP'S
PROGRAMS?
If you are a KFC franchisee or licensee and wish to become a stockholder member
of the KFC Co-op, you must: (a) purchase one share of Membership Common Stock;
and (b) purchase that number of shares of Store Common Stock which equals the
total number of KFC traditional retail outlets you own and operate plus one
half, rounded up to the nearest whole number, of the total number of
non-traditional retail outlets you own and operate, if any.
MAY I SELL OR TRANSFER THIS STOCK?
Transfers of KFC Co-op stock are restricted. No market for it exists, nor is any
expected to develop. The KFC Co-op expects to redeem shares of Membership Common
Stock for $10.00 per share from any member who no longer qualifies as a member.
The KFC Co-op may, but is not obligated to, purchase Store Common Stock. If the
KFC Co-op does not exercise its right to purchase such Store Common Stock, it
may be sold or otherwise transferred, but only to other qualified KFC operators.
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WILL I RECEIVE PATRONAGE DIVIDENDS?
The holders of Store Common Stock are entitled to receive dividends or other
distributions. However, it is currently anticipated that no dividends, other
than patronage dividends, will be paid to stockholder members in good standing.
See "Will I receive dividends and patronage dividends?"
HOW DO I BECOME A MEMBER?
To become a member of the KFC Co-op you should read this prospectus and send
your payment in the amount of $10 for your one share of Membership Common Stock
plus $400 for each share of Store Common Stock you are required to purchase to
the KFC Co-op at Stockholder Records, KFC National Purchasing Cooperative, Inc.,
950 Breckinridge Lane, Louisville, Kentucky, 40232.
WHO IS BEING OFFERED THIS STOCK?
We are offering Membership Common Stock (Series A-G and J) and Store Common
Stock to (a) persons or entities that are franchisees or licensees of the KFC
Corporation, (b) Tricon and (c) the KFC National Council and Advertising
Cooperative ("NCAC"). The series of Membership Common Stock issued to an
operator is generally based on the subscriber's geographic location. See
"Description of KFC Co-op Stock."
HOW IS THIS STOCK BEING OFFERED?
These shares of stock are being offered through officers, directors and other
affiliates of the KFC Co-op. Sales will be made to KFC outlet operators only in
units consisting of one share of Membership Common Stock and one share of Store
Common Stock for each one traditional outlet or each two non-traditional outlets
owned by such operator.
HOW WILL THESE PROCEEDS BE USED?
Any net proceeds of this offering will be used to provide working capital for
the operation of the KFC Co-op. The working capital needs of the KFC Co-op may
also be met through borrowings.
IS TRICON INVOLVED?
Tricon is a member of the KFC Co-op and has purchased one share of Series K
Membership Common Stock and the required number of shares of Store Common Stock
to be a member in good standing of the KFC Co-op. Tricon, however, is not a
member of UFPC. As franchisor of the Tricon concepts and as an operator of many
outlets, we believe Tricon is strongly committed to the success of the KFC Co-op
and UFPC. Tricon entered into an expense sharing arrangement under which Tricon
provided $400,000 to UFPC to assist UFPC with organizational expenses and Tricon
has agreed to purchase through UFPC virtually all of the goods and equipment
needed for the Tricon operated outlets.
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SUMMARY FINANCIAL INFORMATION
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------
1999* 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Consolidated Statements of
Income:
Net Sales $247,839 $664,792 $600,132
Net Income 706 60 748
Consolidated Balance Sheets (at end of period):
Working Capital 1,357 16,346 18,305
Total assets 23,428 61,338 49,800
Members' equity 17,620 17,896 17,586
</TABLE>
* The KFC Co-op's Corporate Reorganization has materially affected the
presentation of its results of operations. See Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Corporate Reorganization.
THE OFFERING
WHY IS THIS STOCK BEING OFFERED?
The KFC Co-op is offering these securities (1) to raise proceeds to
provide working capital for the operation of the KFC Co-op; (2) to encourage all
KFC operators, by virtue of membership, to use the volume purchasing services of
the KFC Co-op and UFPC, thereby enhancing the ability of the KFC Co-op and UFPC
to achieve economies of scale in purchasing activities; and (3) to maintain a
cooperative in which only Tricon, the KFC National Council and Advertising
Cooperative, and KFC franchisees and licensees are members, thereby better
enabling the KFC Co-op to respond to the unique needs and requirements of KFC
operators.
HOW IS THIS STOCK BEING OFFERED?
This KFC Co-op stock is being offered directly by officers, directors
and other affiliates of the KFC Co-op. None of these people will receive any
commission or fee in connection with these sales. These shares are only being
offered to operators of KFC retail outlets, including Tricon, and the NCAC.
Sales are made only in units consisting of one share of Membership Common Stock
per operator and one share of Store Common Stock for each outlet (or each two
non-traditional outlets) operated by such operator. This KFC Co-op stock is
being offered on a continuing basis, subject to applicable legal requirements.
The KFC Co-op reserves the right in its sole discretion to accept or
reject any membership subscription.
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The shares of KFC Co-op stock are being offered on a "best efforts"
basis. There is no scheduled termination date for this offering, no minimum
required purchase, nor have any arrangements been made to place the funds
received in the offering in escrow, in trust or to make other similar
arrangements.
No person is authorized by the KFC Co-op to give any information or to
make any representations other than those contained in this prospectus in
connection with the offering described herein. This prospectus does not
constitute an offer of any membership interest other than the shares of KFC
Co-op stock to which it relates, or an offer by any person within any
jurisdiction to any person to whom such offer would be unlawful. The delivery of
this prospectus at any time does not imply that the information herein is
correct as of any time subsequent to its date.
As of January 31, 2000, 552 shares of Membership Common Stock and 5,621
shares of Store Common Stock were outstanding.
HOW WILL THESE PROCEEDS BE USED?
The Membership Common Stock price of $10 per share was determined
arbitrarily and bears no relation to a stockholder member's equity, income or
other recognized criteria of value. Since July 1, 1983, the offering price of
Store Common Stock has been $400 per share. The KFC Co-op intends to keep the
price of Store Common Stock at $400 per share through at least December 31,
2000, in order to encourage new memberships in the KFC Co-op.
Any net proceeds of this offering will be used to provide working
capital for the operation of the KFC Co-op. As part of the consideration for its
membership interest in UFPC, the KFC Co-op made an initial capital contribution
of $1,000,000 to UFPC and an initial loan to UFPC of $1,000,000. The working
capital needs of the KFC Co-op may also be met through borrowing. The KFC Co-op
currently has a $15 million revolving line of credit with a commercial bank. See
"Liquidity and Capital Resources."
HOW DO I BECOME A MEMBER?
Membership in the KFC Co-op is open to all KFC operators.
To join the KFC Co-op you should read this prospectus and send your
payment in the amount of $10 for your one share of Membership Common Stock plus
$400 for each share of Store Common Stock you are required to purchase to the
KFC Co-op at Stockholder Records, KFC National Purchasing Cooperative, Inc., 950
Breckinridge Lane, Louisville, Kentucky, 40232.
If a member at any time becomes an operator of additional KFC outlets,
that member must purchase one additional share of Store Common Stock for each
additional traditional outlet or each two additional non-traditional outlets.
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CAPITALIZATION
The following table shows the capitalization of the KFC Co-op as of
January 31, 2000, and as adjusted assuming all shares of Membership and Store
Common Stock offered hereby are sold:
<TABLE>
<CAPTION>
ADJUSTED
ASSUMING
ALL SHARES
OUTSTANDING OFFERED
JANUARY 31, 2000 ARE SOLD
---------------- ------------
<S> <C> <C>
Short-Term Indebtedness * ........... $1,000 $1,000
Capital Stock:
Membership Common Stock,
(2,000 shares authorized),
469 shares offered,
no par value .............. 552 shares 1,021 shares
Store Common Stock,
(10,000 shares authorized),
434 shares offered,
no par value .............. 5,621 shares 6,055 shares
</TABLE>
* For information concerning the KFC Co-op's borrowing arrangements, see
"Liquidity and Capital Resources."
RECENT DEVELOPMENTS
On January 31, 2000, AmeriServe Food Distribution, Inc. filed in
Delaware for protection under Chapter 11 of the U.S. bankruptcy code. AmeriServe
is the primary U.S. food and dry goods distributor for Tricon. The bankruptcy
court in Delaware has approved financing commitments to AmeriServe from Tricon
and Burger King Corp. In addition, to provide its suppliers confidence to
continue shipping to KFC, Taco Bell and Pizza Hut restaurants, Tricon has told
its suppliers that it would be responsible for payment of goods approved by and
purchased by Tricon through AmeriServe for use at any Tricon owned, franchised
or licensed restaurant from January 31, 2000 until further notice by Tricon.
Tricon anticipates that AmeriServe will continue the administrative functions of
ordering and invoicing, in AmeriServe's name, of Tricon purchased goods. The
impact of AmeriServe's bankruptcy on the business of the KFC Co-op remains
uncertain. The KFC Co-op anticipates that its share of earnings from the UFPC
for calendar year 1999 will be reduced by approximately $475,000 arising from
the KFC Co-op's portion of the UFPC's write-off of receivables related to the
bankruptcies of AmeriServe and one of its subsidiaries.
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THE BUSINESS
WHO ARE WE?
The KFC Co-op is a purchasing cooperative that operates a purchasing
program through 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., 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 prospectus, 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 of KFC operators, distributors and
suppliers. We also reduce the cost to the KFC system by
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<PAGE> 12
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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<PAGE> 13
- 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. 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 "Will I receive dividends and patronage dividends?"
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 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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<PAGE> 15
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 the 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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<PAGE> 16
- 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.
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 "Will I receive dividends and patronage dividends?"
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<PAGE> 17
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. 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;
- industry data to assist them in analyzing cash discounts,
earned weight discounts and other elements of the
distributors' costs;
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<PAGE> 18
- 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 allowances, promotional
allowances, label allowances, back-door income, application fees, inspection
fees, quality assurance fees, etc. Sheltered income includes, among other items:
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<PAGE> 19
- 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 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,
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<PAGE> 20
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. 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. ("PFS"), 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 has been and continues to be a principal customer of the KFC Co-op
and UFPC, respectively, purchasing goods and equipment for distribution to KFC
franchisees. See "Recent Developments" and 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
product quality 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 distributor to provide
such services. However, UFPC does compete with distributors whose functions and
services overlap with those of UFPC in direct sales of equipment.
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<PAGE> 21
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.
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.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------
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 taxes 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 0 0 3,000 3,000 3,000
</TABLE>
* The KFC Co-op's Corporate Reorganization has materially affected the
presentation of its results of operations. See Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Corporate Reorganization.
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<PAGE> 22
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 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.
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<PAGE> 23
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 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.
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<PAGE> 24
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. See "Recent
Developments." 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. For a discussion of the effects of
AmeriServe's bankruptcy filing on the KFC Co-op's share of earnings for calendar
1999, see "Recent Developments." 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 Year Ended Year Ended
10/31/99 10/31/98 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 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
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<PAGE> 25
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 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.
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<PAGE> 26
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.
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<PAGE> 27
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,
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<PAGE> 28
respectively, (ii) a decrease of $832,000 in notes receivable, (iii) an increase
in accounts payable of $12,430,000, and (iv) decreases in accrued expenses and
accrued patronage dividend of $803,000 and $271,000, respectively.
YEAR 2000 AND COMPUTER SYSTEMS
The KFC Co-op's Year 2000 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. On March 1, 1999, responsibility for the Year 2000 Project and
other computer systems support efforts were transferred to UFPC. As of the date
of this prospectus, the Year 2000 Project is substantially complete and the KFC
Co-op has had no material problems related to the Year 2000 problem.
As part of the Year 2000 Project, UFPC contracted with EDS to review
the results of our Year 2000 testing. Prior to January 1, 2000, EDS certified
that all actions, detailed below, were complete in minimizing risk. UFPC jointly
worked and is continuing to work with Tricon to address certification for our
suppliers and distributors.
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 was 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.
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<PAGE> 29
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
and because no material problems have occurred to date, management does not
foresee interruption in its normal business activities or operations associated
with its Year 2000 compliance at this time. Even given its best efforts and
execution of the aforementioned planning and testing, disruptions and unexpected
business problems may occur in the future as a direct or indirect result of the
Year 2000 problem.
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 compliance 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 the Year 2000 problem include the
availability of resources, UFPC's ability to timely discover and correct any
further Year 2000 problems which could have a serious impact on the KFC Co-op's
and UFPC's operations, the ability of suppliers to make and keep their systems
Year 2000 compliant, and UFPC's ability to implement effective contingency plans
if there are any Year 2000 failures in the future.
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.
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<PAGE> 30
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 on May 1999.
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.
FORWARD LOOKING STATEMENTS
This prospectus 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 and the UFPC's suppliers and distributors;
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.
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<PAGE> 31
WILL I RECEIVE DIVIDENDS AND PATRONAGE DIVIDENDS?
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. 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.
- 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
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<PAGE> 32
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
"The 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.
MANAGEMENT OF THE KFC CO-OP
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.
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.
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<PAGE> 33
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 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.
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<PAGE> 34
The following table lists, in addition to other information, the
current directors and executive officers of the KFC Co-op as of January 31,
2000, their position with the KFC Co-op, and their present principal
occupations.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POSITIONS AND YEAR FIRST STORE
OFFICES CURRENTLY BECAME TERM AS PRESENT COMMON PERCENT OF
HELD WITH THE DIRECTOR DIRECTOR SERIES PRINCIPAL STOCK STORE STOCK
NAME AND ADDRESS AGE KFC CO-OP OR 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
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POSITIONS AND YEAR FIRST STORE
OFFICES CURRENTLY BECAME TERM AS PRESENT COMMON PERCENT OF
HELD WITH THE DIRECTOR DIRECTOR SERIES PRINCIPAL STOCK STORE STOCK
NAME AND ADDRESS AGE KFC CO-OP OR OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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, Chairman 1991 + 2000 E Operator 95 1.4
JRN, Inc. of the Board
P.O. Box 1257
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
- -----------------------------------------------------------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 36
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POSITIONS AND YEAR FIRST STORE
OFFICES CURRENTLY BECAME TERM AS PRESENT COMMON PERCENT OF
HELD WITH THE DIRECTOR DIRECTOR SERIES PRINCIPAL STOCK STORE STOCK
NAME AND ADDRESS AGE KFC CO-OP OR OFFICER EXPIRES REPRESENTED OCCUPATION OWNERSHIP OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James B. Royster 61 Director, Vice 1998 ++ 2000 A Operator 5 **
1110 West Michigan Avenue Chairman
Jackson, Michigan 49202
- -----------------------------------------------------------------------------------------------------------------------------------
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 Chief Executive
Co-op, LLC ("UFPC") Executive Officer Officer, UFPC
950 Breckinridge Lane
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.
+ 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.
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<PAGE> 37
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.
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.
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<PAGE> 38
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 Executive 1998 212,127 90,640 16,200
Officer 1997 208,460 49,940 20,583
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 Transactions With Stockholders, Directors and
Officers.
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.
TRANSACTIONS WITH STOCKHOLDERS, DIRECTORS AND OFFICERS
All present voting members of the Board of Directors and nominees for
the Board, 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.
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<PAGE> 39
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 Co-op $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 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 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.
KFC CO-OP 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. You should purchase KFC Co-op stock to participate in our programs
we offer for members, including the patronage dividend program and purchasing
programs, and to participate in management through the election of directors.
You should not purchase KFC Co-op stock with any expectation of a return on your
investment through stock appreciation or per share dividends. Membership Common
Stock is priced at $10 per share and Store Common Stock is priced at $400 per
share. 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
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<PAGE> 40
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 stock is available to all KFC operators on a
nondiscriminatory basis and the purchase of our stock is completely voluntary.
While KFC operators do not need to own stock in the KFC Co-op to purchase goods
and equipment from or through us, our bylaws require that more than 50% of the
value of our business be conducted with KFC Co-op members.
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.
-35-
<PAGE> 41
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:
<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:
STOCKHOLDER MEMBER SERIES
------------------ ------
Harman H
KFC National Management Company K
NCAC L
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 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
-36-
<PAGE> 42
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
transferrable 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.
General. Membership Common Stock has no preemptive rights. The shares
of Membership Common Stock issued in accordance with the terms and conditions of
this prospectus are, when issued, duly authorized, validly issued, fully paid
and nonassessable and the holders thereof are not liable for any payment of the
KFC Co-op's debts.
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.
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.
-37-
<PAGE> 43
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 Co-op. 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.
General. Store Common Stock has no preemptive or conversion rights. The
shares of the Store Common Stock issued in accordance with the terms and
conditions of this prospectus are, when issued, duly authorized, validly issued,
fully paid and nonassessable and the holders thereof are liable for any payment
of the KFC Co-op's debts.
MISCELLANEOUS
INDEMNIFICATION AND LIMITS ON MONETARY LIABILITY
Article 8 of our Certificate of Incorporation provides that a director
will not be personally liable to the KFC Co-op or its stockholder members for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to the KFC Co-op
or its members, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) for the payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
Delaware law, or (4) for any transaction from which the director derived an
improper personal benefit. Only directors, not officers, may benefit from the
provisions of Article 8. The limitations of liability extend only to the
elimination of a recovery of a monetary remedy. Members may still seek equitable
relief, such as an injunction, against any action by a director that is
inappropriate. This provision does not affect the directors' responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
Article 7 of our Bylaws provides for the indemnification of officers or
directors who are party to or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding whether civil, criminal,
administrative or investigative. Such indemnification is against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred, if the officer or director acted in good faith
and reasonably believed his or her actions were not opposed to the best
interests of the KFC Co-op. Officers and
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<PAGE> 44
directors are not indemnified for criminal actions where they have reason to
believe their conduct is unlawful, or in connection with any matter where the
officer or director is adjudged to have been liable for negligence or misconduct
in the performance of his or her duty, unless a court deems such officer or
director to be fairly and reasonably entitled to indemnity.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, is permitted for directors and officers of the KFC
Co-op pursuant to the provisions discussed above, the KFC Co-op has been advised
that the opinion of the Securities and Exchange Commission is that such
indemnification is against public policy and, therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION ABOUT OUR COMPANY
This prospectus is part of a registration statement that we have filed
with the SEC to register the shares that we will issue in this offering. This
prospectus does not include all of the information contained in the
registration statement. To obtain further information about our company and the
securities offered in this prospectus, you should review the registration
statement and the exhibits and schedules to it.
You may read our registration statement and its related exhibits and
schedules over the Internet at the SEC's Web site at http://www.sec.gov. You
may also read and copy documents at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Full addresses:
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549;
7 World Trade Center, New York, New York, 10038; Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC
at 1-800-SEC-0030 for further information on the public reference rooms.
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.
-39-
<PAGE> 45
LEGAL MATTERS
Brown, Todd & Heyburn PLLC, 400 West Market Street, 32nd Floor,
Louisville, Kentucky, 40202 has passed upon the legality of the securities we
are offering pursuant to this prospectus.
"Dairy Queen," "Long John Silver's," "Fazoli's," "Taco Bell," "Pizza
Hut" and "KFC" are registered trademarks of American Dairy Queen Corporation,
Long John Silver's Inc., Seed Restaurant Group, Inc., Taco Bell Corp., Pizza
Hut, Inc. and KFC Corporation, respectively and are used in these materials for
identification purposes only. The KFC Co-op is not affiliated with American
Dairy Queen Corporation, Long John Silver's Inc., Seed Restaurant Group, Inc.,
Taco Bell Corp., Pizza Hut, Inc. and KFC Corporation, except that KFC
Corporation is a stockholder member of the KFC Co-op.
EXPERTS
The consolidated financial statements and schedule of the KFC Co-op as
of October 31, 1998 and 1999 and for each of the two years in the period ended
October 31, 1999 included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, appearing
elsewhere herein, given on the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements and schedule of the KFC Co-op for
the year ended October 31, 1997, have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, now KPMG LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
-40-
<PAGE> 46
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> 47
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> 48
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> 49
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> 50
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
(D/B/A FOODSERVICE PURCHASING COOPERATIVE, INC.)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------- ACCUMULATED
AMOUNT OTHER TOTAL
----------------------- RETAINED COMPREHENSIVE MEMBERS'
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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.
On January 31, 2000, AmeriServe Food Distribution, Inc. filed in
Delaware for protection under Chapter 11 of the U.S. bankruptcy code.
AmeriServe is the primary U.S. food and dry goods distributor for
Tricon. The bankruptcy court in Delaware has approved financing
commitments to AmeriServe from Tricon and Burger King Corp. In
addition, to provide its suppliers confidence to continue shipping to
KFC, Taco Bell and Pizza Hut restaurants, Tricon has told its suppliers
that it would be responsible for payment of goods approved by and
purchased by Tricon through AmeriServe for use at any Tricon owned,
franchised or licensed restaurant from January 31, 2000 until further
notice by Tricon. Tricon anticipates that AmeriServe will continue the
administrative functions of ordering and invoicing, in AmeriServe's
name, of Tricon purchased goods. The impact of AmeriServe's bankruptcy
on the business of the KFC Co-op remains uncertain. The KFC Co-op
anticipates that its share of earnings from the UFPC for calendar year
1999 will be reduced by approximately $475,000 arising from the KFC
Co-op's portion of the UFPC's write-off of receivables related to the
bankruptcies of AmeriServe and one of its subsidiaries.
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> 65
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> 66
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> 67
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> 68
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the KFC Co-op in connection with the
registration of the interests offered hereby, other than underwriting discounts
and commissions (of which there are none), are as follows:
<TABLE>
<S> <C>
Registration fee $ 0
NASD filing fee 0
"Blue Sky" filing fee and expenses
(including legal expenses) 2,000.00
Printing expenses 2,000.00
Legal fees and expenses 7,000.00
Accounting fees and expenses 3,500.00
Miscellaneous expenses 500.00
----------
Total $15,000.00
==========
</TABLE>
-------------------
Item 14. Indemnification of Officers and Directors.
Article VIII of the Certificate of Incorporation of the KFC Co-op
provides as follows:
Article VIII
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. Any repeal or modification of this paragraph by the
stockholders of the corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
corporation existing at the time of such repeal or modification.
II-1
<PAGE> 69
Article VII of the Bylaws of the KFC Co-op provides as follows:
7.1 Indemnification.
(a) The Cooperative shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Cooperative) by
reason of the fact that he is or was a director, officer, employee or agent of
the Cooperative, or is or was serving at the request of the Cooperative as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Cooperative, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Cooperative, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Cooperative shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Cooperative to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Cooperative, or is or was serving at the
request of the Cooperative as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Cooperative and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Cooperative unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent
of the Cooperative has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of this
Section 7.1, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
Section 7.1 (unless ordered by a court) shall be made by the Cooperative only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is
II-2
<PAGE> 70
proper in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b). Such determination shall be made
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested Directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholder members.
(e) Expenses incurred by an officer or director in defending a
civil or criminal action, suit or proceeding may be paid by the Cooperative in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Cooperative as authorized in this Section 7.1. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided
by, or granted pursuant to this Section 7.1 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) The Cooperative shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Cooperative, or is or was serving at the request of the Cooperative
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Cooperative would have the power to indemnify him
against such liability hereunder.
(h) For purposes of this Section 7.1, references to the
Cooperative shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Section 7.1 with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this Section 7.1 references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Cooperative"
shall include any service as a director, officer, employee or agent of the
Cooperative which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted
II-3
<PAGE> 71
in good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Cooperative"
as referred to in this Section 7.1.
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to this Section 7.1 shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) If so provided in the Cooperative's Certificate of
Incorporation, a director of the Cooperative shall not be personally liable to
the Cooperative or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Cooperative or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
Item 15. Recent Sales of Unregistered Securities.
All sales of securities by the Cooperative within the past three years
of the date of this Amendment were registered under the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
*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.)
+5 Opinion of Brown, Todd & Heyburn as to the legality of the
securities registered.
***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).
II-4
<PAGE> 72
*****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.
+23.1 Consent of Brown, Todd & Heyburn is contained in their opinion
filed as Exhibit 5 hereto.
23.2 Consent of Independent Accountants - PricewaterhouseCoopers
LLP.
23.3 Consent of Independent Auditors - KPMG LLP.
24 Power of Attorney.
*******99.1 Operating Agreement for Unified Foodservice Purchasing
Co-op, LLC.
*******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].
**Incorporated by reference to the KFC Co-op's Annual Report on Form
10-K for the fiscal year ended October 31, 1999 [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. 000-23496].
*******Incorporated by reference to the Amendment No. 2 to the Proxy
Statement of the KFC Co-op on Schedule 14A [File No. 000-23496].
II-5
<PAGE> 73
(b) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts with accompanying
Reports of Independent Accountants are included in the Prospectus included in
Part I pursuant to Item 11(e).
Item 17. Undertakings.
(a) The undersigned KFC Co-op hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the KFC Co-op pursuant to the foregoing provisions, or otherwise, the KFC Co-op
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the KFC Co-op of expenses incurred
or paid by a director, officer or controlling person of the KFC Co-op in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the KFC Co-op will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the KFC
Co-op has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Louisville, Commonwealth of Kentucky, on February 10, 2000.
KFC NATIONAL PURCHASING
COOPERATIVE, INC.
By /s/ Daniel E. Woodside
---------------------------------------
Daniel E. Woodside, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
* Director, Secretary February 10, 2000
- ----------------------------------------
William E. Allen
/s/ William Bickley Vice President and February 10, 2000
- ---------------------------------------- Chief Financial Officer
William Bickley (Principal Accounting Officer)
(Principal Financial Officer)
Director
- ----------------------------------------
Christian L. Campbell
Director
- ----------------------------------------
William R. Carden
* Director February 10, 2000
- ----------------------------------------
Robert C. Carle
* Director February 10, 2000
- ----------------------------------------
James G. Cocolin
</TABLE>
II-7
<PAGE> 75
<TABLE>
<S> <C> <C>
* Director February 10, 2000
- ----------------------------------------
Ben E. Edwards
Director
- ----------------------------------------
Lois G. Foust
* Director February 10, 2000
- ----------------------------------------
Edward J. Henriquez, Jr.
* Director, Chairman February 10, 2000
- ----------------------------------------
David G. Neal
* Director February 10, 2000
- ----------------------------------------
James D. Olson
* Director February 10, 2000
- ----------------------------------------
Darlene L. Pfeiffer
* Director February 10, 2000
- ----------------------------------------
Charles E. Rawley
* Director, Vice February 10, 2000
- ---------------------------------------- Chairman
James B. Royster
* Director February 10, 2000
- ----------------------------------------
Dean M. Sorgdrager
/s/ Daniel E. Woodside President and Chief February 10, 2000
- ---------------------------------------- Executive Officer,
Daniel E. Woodside Director
* By /s/ Daniel E. Woodside February 10, 2000
-----------------------------------
Daniel E. Woodside
Attorney-in-fact pursuant
to powers of attorney filed
as Exhibit 24 to this Registration
Statement.
</TABLE>
II-8
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of this Registration Statement on Form S-1
of our reports dated December 8, 1999 relating to the financial statements and
financial statement schedule of KFC National Purchasing Cooperative, Inc., which
appears in such Registration Statement. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
February 9, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
KFC National Purchasing Cooperative, Inc.:
We consent to the use of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG LLP
Louisville, Kentucky
February 9, 2000
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David G. Neal and 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>
