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____________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. [FEE REQUIRED] For the
fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED] For the
transition period from _______ to _______
Commission File Numbers 0-676 and 0-16626 __________________
THE SOUTHLAND CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 North Haskell Ave., Dallas, Texas 75204-2906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, 214-828-7011
__________________
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None N/A
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
Warrants to Purchase Common Stock at $1.75 per
share (expired on February 23, 1996)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $457,709,132 at March 8, 1996, based
upon 140,833,579 shares held by persons other than officers, directors and
5% owners.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No __
409,922,935 shares of Common Stock, $.0001 par value (the registrant's
only class of Common Stock), were outstanding as of March 8, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the listed Parts and Items of Form 10-K: Definitive Proxy Statement for
April 24, 1996 Annual Meeting of Shareholders: Part III, a portion of Item
10 and Items 11, 12 and 13.
___________________________________________________________________________
ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 1995
TABLE OF CONTENTS
PAGE
REFERENCE
FORM 10-K
PART I
Item 1. Business 1
Executive Officers of the Registrant 19
Item 2. Properties 23
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 29
PART II
Item 5. Market for the Registrant's Common Equity and 29
Related Stockholder Matters
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition 32
and Results of Operation
Item 8. Financial Statements and Supplementary Data 42
Independent Auditors' Report of Coopers & Lybrand L.L. P. 69
on The Southland Corporationand Subsidiaries' Financial
Statements for each of the three years in the period ended
December 31, 1995
Item 9. Changesin and Disagreements with Accountants 70
on Accounting and Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the *
Registrant and see Part I, Item 1, above
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial *
Owners and Management
Item 13. Certain Relationships and Related Transactions *
PART IV
Item 14. Exhibits, Financial Statement Schedules, and 71
Reports on Form 8-K
Signatures 78
___________________________
*Included in Form 10-K by incorporation by reference to the
Registrant's Proxy Statement,
dated March 21, 1996, for the April 24, 1996 Annual Meeting of
Shareholders.
PART I
ITEM 1. BUSINESS.
GENERAL
The Southland Corporation ("Southland," the "Company" or
"Registrant"), conducting business principally under the name 7ELEVEN,
is the largest convenience store chain in the world, with almost
15,400 Company-operated, franchised and licensed locations worldwide,
and is among the nation's largest retailers.The 7-ELEVEN trademark
has been registered since 1961 and is well known throughout the
United States and in many other parts of the world.The Company
believes that 7-ELEVEN is the leading name in the convenience
store industry. Notwithstanding its divestitures of stores
and other businesses since 1987, the Company remains
geographically diversified. The Company has, over the past several
years, implemented its strategic plan to divest all its non-
convenience store operations, and has trimmed its store operations by
consolidating its efforts in certain market areas and by closing less
profitable stores. Convenience retailing is now the Company's only
business focus.
The Company, with executive offices at 2711 North Haskell Avenue,
Dallas, Texas 75204 (telephone 214/828-7011), was incorporated in
Texas in 1961 as the successor to an ice business organized in 1927.
Unless the context otherwise requires, the terms "Company," "Southland"
and "Registrant" as used herein include The Southland Corporation
and its subsidiaries and predecessors. In 1995, Southland's
operations (for financial reporting purposes) were conducted in one
business segment: the Operating and Franchising of Convenience Food Stores.
At December 31, 1995, the Company's operations included 5,361 7-
ELEVEN convenience stores in the United States and Canada, 19
High's Dairy Stores, and 44 Quik Mart and SUPER-7 high-volume
gasoline outlets with mini-convenience stores. The Company also has an
equity interest in 220 convenience stores in Mexico (almost all of which
are now using the 7ELEVEN name). Area licensees, or their
franchisees, operate additional 7ELEVEN stores in certain areas of
the United States, in 18 foreign countries and the U.S. territories of
Guam and Puerto Rico. As of the end of 1995, the Company has an
equity interest in three of the licensees whose area licenses cover six
foreign countries and Puerto Rico.
During 1995, the Company continued to focus on its business concept of
providing superior service to its customers through better
merchandising, with item-by-item control of inventory at each store,
emphasizing the importance of ordering the right products, on an
individual store level, to remain in stock, at all times, on each
particular store's best-selling items. Through proper ordering and
successful implementation of other store functions, the Company
continues to work toward providing convenience-oriented
customers with the SPEED, QUALITY, SELECTION, PRICE and shopping
ENVIRONMENT that will give the Company a sustainable competitive
advantage.
THE RESTRUCTURINGS. In 1987 the Company was financially restructured
through a leveraged buyout (the "LBO") and in October 1990 filed a
voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy
Code. In March 1991, the Company emerged from
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bankruptcy with a $430 million infusion of capital from its new
majority owner,IYG Holding Company, which is jointly owned by Ito-
Yokado Co., Ltd. ("ItoYokado") and Seven-Eleven Japan Co., Ltd. ("Seven-
Eleven Japan"), both Japanese corporations. Seven-Eleven Japan is the
Company's largest area licensee, operating over 6,200 7-ELEVEN stores in
Japan and, through its whollyowned subsidiary Seven-Eleven (Hawaii),
Inc., 46 7-ELEVEN stores in Hawaii.
On February 21, 1991, the U.S. Bankruptcy Court for the
Northern District of Texas issued an order (the "Confirmation Order")
confirming the Company's Plan of Reorganization (the "Plan") and on
March 4, 1991, the Confirmation Order became final and non-
appealable. (See "Legal Proceedings," below.) The Plan provided for
holders of the Company's then outstanding debt and equity
securities (the "Old Securities") to receive new debt securities,
common stock and, in certain cases, cash, in exchange for their Old
Securities and, pursuant to a Stock Purchase Agreement, for Ito
Yokado and Seven-Eleven Japan to acquire approximately 70% of the
Company for $430 million in cash. In addition, among other things,
the Plan provided for the amendment and restatement of the
Company's Credit Agreement with its Senior Lenders (the"Credit
Agreement") and for the Company to effect a one-for-ten
reverse stock split of its common stock (the "Stock Split").
The closing (the "Closing") under the Stock Purchase Agreement
(the "Stock Purchase Agreement"), occurred on March 5, 1991, and
the Company issued 286,634,619 shares
of common stock, $.0001 par value (the "Common Stock"), to IYG
Holding Company, a Delaware corporation, jointly owned by Ito Yokado and
Seven-Eleven Japan, and received $430 million in cash. In connection
with the Closing, the Company entered into a Shareholders Agreement,
a Warrant Agreement and Employment Agreements with the Thompsons
(described below, see "Other Information About the Company").
Pursuant to the Plan, holders of the Company's Old Securities
were entitled to exchange, until March 5, 1993, their Old Securities
for new debt, equity and, in some cases, cash, and newly issued
warrants (the "Thompson Warrants"), exercisable at $1.75 per share
(until February 23, 1996) to acquire certain shares of common stock
owned by the Thompsons and certain other holders of the old
common stock (the "Warrant Shareholders"), pursuant to a Warrant
Agreement with Wilmington Trust Company as Warrant Agent (the
"Warrant Agreement").
THE PURCHASER. IYG Holding Company, a Delaware corporation
(the "Purchaser" or "IYG"), is a jointly owned subsidiary of Ito
Yokado and Seven-Eleven Japan, formed for the specific purpose of
purchasing the Common Stock of the Company pursuant to the Stock
Purchase Agreement. Ito-Yokado owns 51% and Seven-Eleven Japan owns
49%, respectively, of IYG.
ITO-YOKADO. Ito-Yokado is among the largest retailing companies in
Japan. Its principal business consists of the operation of 155
superstores that sell a broad range of food, clothing and
household goods. In addition, its activities include operating two
restaurant chains doing business under the names "Denny's" and "Famil"
and a chain of supermarkets. All of Ito-Yokado's operations are located
in Japan except for some limited purchasing activities. Prior to 1990, Ito
Yokado had no affiliation with the Company, other than through its
majorityowned subsidiary, Seven-Eleven Japan (see below) which is the
Company's area licensee in Japan. In 1990, in addition to entering into
the Stock Purchase Agreement, Ito-Yokado provided the Company with
much-needed
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interim liquidity through a $25 million term loan agreement. This term
loan, plus interest, was repaid on March 5, 1991. In addition, in 1992
Ito-Yokado guaranteed the Company's $400 million commercial paper
facility and in November 1995, Ito-Yokado purchased $153 million of 4.5%
Convertible Quarterly Income Debt Securities due 2010 (see "Refinancing
of Certain Debt Securities" below) issued by the Company.
SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is the largest
convenience store chain in Japan. Seven-Eleven Japan is a 50.3%-owned
subsidiary of Ito-Yokado.Seven-Eleven Japan is the largest area
licensee of the Company with approximately 6,269 stores in Japan and
owns SevenEleven (Hawaii), Inc., which, as of year-end 1995,
operated an additional 46 7- ELEVEN stores in Hawaii under a
separate area license agreement covering that state. In November
1995, Seven-Eleven Japan purchased $147 million of 4.5%
Convertible Quarterly Income Debt Securities (see "Refinancing of Certain
Debt Securities" below) issued by the Company.
REFINANCING OF BANK DEBT. On December 21, 1994, the
Company refinanced all of its remaining debt under the Credit
Agreement, originally entered into in 1987. The bank group, led by
Citicorp North America, Inc., as Agent, and The Sakura
Bank, Limited, as Co-Agent, is comprised of six Japanese banks, four
American banks and one Canadian bank. The amended Credit Agreement,
which will mature at the end of 1999, provides for a $300 million
term loan, $150 million letter of credit facility and a $150 million
revolving credit facility. The term loans and any revolver borrowings
carry a floating interest rate of either the Citibank, N.A. base rate or
a reserve-adjusted Eurodollarrate plus .975%.
REFINANCING OF CERTAIN DEBT SECURITIES. On November 22,
1995, the Company issued $300 million aggregate principal amount of
4.5% Convertible Quarterly Income Debt Securities due 2010 (the
"Convertible Debt Securities") to Ito-Yokado and Seven-Eleven Japan.
The Convertible Debt Securities are subordinated to all existing debt
and pay interest quarterly; however, the Company has the right todefer
interestpayments thereon for up to 20 consecutive quarters. The
Convertible Debt Securities are convertible into shares of the
Company's common stock at a price of $4.1602 per share, subject to
adjustment in certain cases.
In addition, on November 21, 1995, the Company successfully
concluded its "Dutch auction" tender offer for 40 percent of both its 5%
First Priority Senior Subordinated Debentures due December 15, 2003
("5% Debentures") and 4 1/2% Second Priority Senior
Subordinated Debentures (Series A) due June 15, 2004 ("4 1/2%
Debentures," together with the 5% Debentures, the "Debentures").
Under the terms of the tender offer,
approximately $180,621,000 million face amount was
purchased at the final clearing price of $840.00 per $1,000 principal
amounts for the 5% Debentures and approximately
$82,719,000 million face amount was purchased at the final
clearing price of $786.00 per $1,000 principal amount for the 4 1/2%
Debentures. All Debentures tendered below the final clearing price
were purchased at the final clearing price. Debentures tendered at the
final clearing price were prorated, and those tendered at prices above the
final clearing price were returned. The 5% Debentures acquired by the
Company through the tender offer have been used to satisfy the
Company's sinking fund obligations for several years under the terms of the
Indenture governing the 5% Debentures.
3
The Company received total proceeds from the issuance of the
Convertible Debt Securities of $300 million, of which approximately $217
million was used to purchase the tendered Debentures. Additional
open market purchases of the Debentures may be made in the future.
The remaining proceeds will be used for general corporate purposes
including, initially, the repayment of currently outstanding
commercial paper and revolving debt, if any.
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN STORES. On December 31, 1995, there were 5,361 7-ELEVEN
convenience stores included in the Company's operations and 625 stores
(in the United States) operated by area licensees. Such stores are
operated principally under the name 7-ELEVEN and are located in 41
states, the District of Columbia, and five provinces of Canada.
During 1995, the Company opened 22 convenience stores (of which 11 were
rebuilds or relocations of existing stores) and closed 228 convenience
stores, due to changing market patterns, lease expirations and the
closing of selected stores that were not profitable.
The Company's convenience stores are extended-hour retail
stores, emphasizing convenience to the customer and providing fresh
take-out foods, groceries and beverages, gasoline (at about 2,000
stores), dairy products, non-food merchandise, specialty items, certain
financial services, lottery tickets, and incidental services.
Generally, the Company's stores are open every day of the year
and are located in neighborhood areas, on main thoroughfares, in
shopping centers, or on other sites where they are
easily accessible and have ample parking facilities for quick in-
and-out shopping. Stores are generally from 2,400 to 3,100 square
feet in size and carry 2,300 to 2,600 items. The vast majority of the
stores operate 24 hours a day. The stores attract early and late
shoppers, lunch-time customers, weekend and
holiday shoppers and customers who may need only a few items at any one
time and desire rapid service. The Company has been emphasizing
its new product mix and expanding its selection of higher quality
fresh foods and is
experimenting with other merchandising innovations to encourage
existing customers to increase their shopping frequency and to enhance the
stores' appeal to new customers. The Company has also taken a new
approach to providing fresh food merchandise to the stores,
through the introduction of daily delivery of freshly made sandwiches and
bakery products from commissaries and newly opened baking
facilities operated to serve only the needs of 7-ELEVEN stores,
with such products, as well as many others, now being distributed in
several markets from local area combined distribution centers that
serve only 7-ELEVEN stores. In addition, there has been an increased
focus on novelty and seasonal items to spur impulse buying and stores
are being further encouraged to introduce items that are new
to the market, or new to convenience stores, in order to encourage
customers to shop in 7-ELEVEN stores frequently to see the
constantly updated array of new items in the stores, which are designed
to appeal to a broader mix of customers.
Substantially all convenience store sales are for cash
(including sales for which checks are accepted), although major credit
cards, along with the "Citgo Plus" credit card, are accepted in most
markets, for purchases of both merchandise and gasoline. Credit card
sales currently account for approximately 6.8% of sales, including
gasoline.
REMODELING OF STORES. During 1995, the Company continued the most
extensive remodeling in its history. By the end of 1995,
approximately 4,100 stores had been remodeled to conform to the new
store image. The Company anticipates that approximately 1,100 additional
stores will be remodeled in 1996. The remodeled stores have increased
interior and exterior lighting, wider aisles, shopper-friendly aisle
markers, lower
4
shelf heights to help shoppers locate items faster, less cluttered
aisles and counters, upgraded gasoline island equipment, and a new tri-
striped exterior store facade that replaces the mansard roofs of many
existing stores. In addition, closed circuit TV cameras have been added at
the remodeled stores as a further security upgrade. The remodeling
process has been greatly streamlined to be less disruptive of the
store's business and to focus on the changes that customers notice and
appreciate most, such as brighter lighting and more user-friendly store
layouts.
MERCHANDISING. During 1995, the Company further intensified its
focus on better order forecasting to avoid lost sales opportunities caused
by out-of-stock conditions. Through case studies and other examples,
the entire field organization has been kept informed on ways to identify
and track each store's best-selling items in each product category.
Store employees are responsible for placing orders with a
view toward forecasting the demand for the highest selling items in the
store, based on specific local conditions.
Each store's merchandise includes a selection of core items as well as
optional items selected by the individual store operators to meet their
customers' local needs and preferences. During 1995, the Company
continued to expand its selection of seasonal and novelty items,
taking advantage of each holiday or other identifiable event (such as
graduation time, start of the football or baseball season, etc.)with a
preplanned mix of merchandise made available to the stores on
attractive end cap merchandisers in anticipation of possible
impulse or last-minute shopping at such times as
Valentine's Day, Easter, Mother's Day, Halloween and Christmas. In
addition, the Company developed promotions that were tied to both the
NFL football season and the NHL hockey season using novelty items in the
stores, supported by radio and print media advertising.
During 1995, as part of the Company's new merchandising focus,
between 20 and 25 new items were made available to the stores each week.
Store operators were encouraged to try new items and, through
case-study experiments, store operators were able to see the incremental
benefits derived by offering the new items in the stores. In addition,
during 1995 the Company continued toimplement its everyday-fair-price
strategy, which minimizes discounting, but lowers prices on some items
to provide consistent, competitive prices throughout the store. The
Company is applying a more flexible approach to pricing on different
products in different markets, while working with suppliers to find ways
to lower costs to the Company, so that any savings can be reflected in
the price to the customer.
NEW PRODUCTS. FRESH FOODS AND FOOD PRODUCTS. During 1995, the
Company continued its initiative to introduce more fresh food products
of a higher quality into the stores. Daily deliveries are being made of
sandwiches, salads, breakfast items and fresh-made pastries -- all
items marketed under 7-ELEVEN's proprietary DELI CENTRAL and WORLD
OVENS brand names. Under this initiative, 7-ELEVEN aligns itself with
local bakeries and "kitchens" or commissaries. These companies
prepare food to 7ELEVEN's specifications exclusively for the stores and
have the product delivered in the exact quantities ordered by the
stores through the combined distribution center program (see
"Distribution, Fresh Products," below).
5
By the end of 1995, there were four commissary facilities
providing fresh-made foods to the stores. One commissary, operated by
Prime Deli Corporation in Dallas, Texas, provides a wide range of
freshly prepared food to approximately 228 stores. In late 1994, with
the help of The Pillsbury Company , WORLD OVENS fresh bakery products
were developed and introduced to 7-ELEVEN stores in Texas. These high-
quality products are proprietary to 7-ELEVEN and are manufactured
in a new bakery facility just outside Dallas, specifically
opened and operated to serve 7-ELEVEN's needs. The commissary in
Austin, Texas, which has been operating since 1992, has begun testing
new proprietary sandwiches and breakfast sandwiches
in the Austin area.
In addition, during 1994, food production began from a newly
built commissary facility (Fresh to Go Foods) in the Philadelphia/New
Jersey market area that produces fresh food items for
approximately 400 franchised stores in that market area. The area
served by this facility will be expanded to include the Baltimore
area during 1996. Another commissary is also servicing
approximately 160 franchised stores in the Long
Island, New York market area. In addition, WORLD OVENS products are
also being supplied to stores in the Philadelphia/New Jersey market area
from a bakery facility in Baltimore. In late 1995, the Company signed a
commissary agreement for parts of Denver and surrounding areas. The
Company is also in the process of finalizing arrangements for
additional commissaries and bakeries in 1996 covering markets in
parts of California, Virginia, Baltimore, Washington, D.C.,
Chicago, Denver, Colorado Springs, Tampa and Orlando. The Company
plans to have the DELI CENTRAL and WORLD OVENS products in almost all of
its stores within a few years.
Through the use of the commissaries and other suppliers, several
new categories of fresh food products were added to the cold sandwich
food offerings in 1995 in selected areas of the country including
ethnic products, such as Mexican items, unique hot sandwich
offerings, new salads, fresh bagels and prepared fruit and vegetable
products, as well as afternoon pastry products, such as cookies and
brownies. Over 200 new fresh food items were introduced across the
country and these new products accounted for a significant portion of
the growth in the fresh food category in 1995. In addition, several
new lines of signature products are being tested in various areas,
including Teriyaki Rice Bowls and unique signature sandwiches such as
Chicken Focaccia and Chicken Caesar Pita.
Proprietary products were a big part of the Company's initiative to
offer higher quality food and beverage selections, with the Company
continuing to expand its corporate brand QUALITYCLASSIC SELECTION
spring water and soft drinks with the addition of flavored teas, new
packages like a one-liter sports bottle for the spring water and
sparkling waters in some markets. QUALITY CLASSIC
SELECTION was launched in Canada in 1995.
In the hot beverage area, as a complement to promoting its
everpopular 7-ELEVEN coffee, the Company continued to emphasize its
own proprietary regular and sugar-free CAFE SELECT line of gourmet-
flavored coffees, hot chocolates and cappuccinos, which added hot
beverages that had appeal throughout the day, in addition to the
traditional peak morning coffee hours. Approximately 95% of 7-ELEVEN
stores offer the new hot chocolate and cappuccino products.
NON-FOOD ITEMS. 7-ELEVEN also continued its emphasis onstaying
ahead of its competitors by providing a selection of non-food services,
such as the continued
6
aggressive marketing of branded prepaid telephone cards for long
distance service. The prepaid telephone cards, which were originally
introduced in November 1994, now include collectors' series and 90-
minute varieties. During 1995, the Company became the largest
retailer of prepaid long distance telephone cards in the U.S.,
using extensive advertising and promotions like its 7-ELEVEN NFL
Quarterback Collectible Phone Card. By year end, over 5,000 stores were
selling the 7-ELEVEN PHONE CARDS for prepaid long distance calling in
15-, 30-,60 and 90-minute increments. In 1995, 7-ELEVEN sold over
3 million cards. The Company expects to introduce the 180-minute card,
and two collector series cards, in 1996, and to continue to seek
expanded sales in the burgeoning phone card market.
The Company also continued to install more automatic teller
machines under its 1993 agreement with Electronic Data Systems
Corporation ("EDS") and continued its ATM program with other vendors, as
well. By year-end there were approximately 4,600 ATMs in 7-ELEVEN stores
around the U.S. as well as 350 machines in its Canadian stores. EDS pays
the Company a flat fee per month per ATM as well as transaction-
based fees dependent upon the number of transactions per month. During
1995, a surcharge (a fee charged by the ATM owner/operator) added to
each ATM transaction was tested in markets in California and Nevada,
as well as other areas. A portion of the surcharge is shared
with 7-ELEVEN,resulting in significant growth in income from this
category. EDS plans to continue the surcharge rollout in 1996.
The Company is one of the nation's leading retailers of money
orders and, in 1995, began upgrading the money order processing
equipment in the stores in an effort to make this product even more
appealing to customers and to make it easier for store operators to
provide a more efficient and faster transaction, satisfying the needs of
the convenience shopper.
The Company continued to focus on adding new and popular
seasonal merchandise and in May introduced a new selection of 36
styles of sunglasses with the sophisticated look of certain very
expensive brands but at extremely reasonable prices. Eighty
percent of the stores participated and ordered the new display
which holds 18 pairs of sunglasses. As a result of this new
program, sunglass sales were up 94% in 1995 over 1994.
GASOLINE. In 1995, the Company sold over 1.4 billion gallons of
gasoline at retail at approximately 2,000 7-ELEVEN stores and other
Southland self-serve outlets. The Company monitors gasoline sales to
maintain a steady supply of petroleum products to the Company's
stores, to determine competitive retail pricing, to
provide the appropriate product mix at each location and to manage
inventory levels, based on market conditions. During 1995, the
Company continued its program to upgrade the gasoline pump area of the
stores, by adding canopies and new equipment. Approximately 900
stores are now equipped to accept credit cards for the purchase of
gasoline at the pump, which makes gasoline shopping at 7-ELEVEN
stores even more convenient for the credit customer. Almost all of the
Company's stores offer CITGO-branded gasoline.
During 1995, the Company discontinued the sale of gasoline at
approximately 56locations (due, in many cases, to the closing or
divestiture of the entire store, with the others eliminated due to the
strategic decision to discontinue the sale of gasoline at the particular
location), and may discontinue gasoline sales at
7
about 30 additional loccations in 1996. In 1995, the Company assumed
responsibility for gasoline operations at 45 locations where the gasoline
facilities had previously been operated by third parties.
The Company has a long-term product purchase agreement with CITGO
Petroleum Corporation ("Citgo") under which Southland purchases
substantially all its U.S. gasoline requirements from Citgo at
marketrelated prices through the year 2006.
Holders of the "Citgo Plus" credit card can use the card to
finance purchases of gasoline, as well as other merchandise, at 7-ELEVEN
stores. At year-end, there were more than 1.3 million active "Citgo
Plus" credit card accounts.
DISTRIBUTION. FRESH PRODUCTS. To further facilitate the sale of
fresh products in the stores, the Company continued to roll-out its
combined distribution program through the strategic alliance with
companies that specialize in distribution.
These third-party distribution companies provide distribution and
cross-dock facilities where the products of multiple vendors, many of
whom formerly delivered directly to 7-ELEVEN stores themselves, are
combined to make one delivery to the store. This enables the
stores to receive daily shipments of products where freshness is
paramount and avoids the inconvenience of multiple daily deliveries to
the stores by several vendors. By the end of 1995, 825 stores in
Texas, Long Island, Philadelphia and New Jersey were receiving daily
deliveries of the freshest dairy products, produce, packaged baked
goods, bread products and even products like fresh-cut flowers, through
7-ELEVEN's combined distribution center ("CDC") program. In 1994, the
Company entered into a five-year agreement with E.A. Sween Company for
E.A. Sween to provide distribution services through operation of (i) a
CDC facility in the Dallas/Fort Worth area to service
approximately 250 stores in that area and (ii) a CDC facility in
the Austin market area to service approximately 50 stores in that
area. Included in the products distributed through the CDCs are
those produced by Prime Deli Corporation from its commissary and
the WORLD OVENS products from Southbury Bakery, both in the Dallas
area, and products from the commissary facility in Austin, which has
now been open and serving 7-ELEVENs since 1992. As of year-end
1995, there were CDCs operating in Dallas and Austin, Texas, in
New Jersey (serving the Philadelphia/New Jersey market area) and on
Long Island, New York. The Company plans to furtheralign
itself with additional CDC facility operators in 1996 in Tampa and
Orlando, Florida; Long Island, New York; Denver and Colorado Springs,
Colorado; the southern Maryland/northern Virginia market, including
Washington, D.C. and in San Jose, California, and is in various stages
of finalizing agreements with several operators who will provide the
distribution services covering each of these new areas.
In addition, the Company experimented in 1995 with utilizing the
delivery capabilities of the Dallas CDC for perishable items other
than food. Fresh-cut flowers, including roses, are now being
distributed by the Dallas CDC.
WAREHOUSE PRODUCTS - The Company continued to utilize the
distribution services of McLane Company, Inc., pursuant to a ten-year
contract entered into in 1992, for delivery of warehouse products to
all of the Company's corporate stores and those franchise stores that
utilize McLane for distribution services. McLane serves Southland
using two former Southland distribution centers and eight additional
distribution centers throughout the country. The Company has worked
with McLane to minimize out-of-stock conditions and to assist McLane
to be increasingly responsive to individual store's needs.
8
Most franchisees are required only to carry merchandise of a type,
quality, quantity and variety consistent with the 7-ELEVEN image. Except
for consigned merchandise and certain proprietary items, franchisees are
not required to purchase merchandise from the Company or vendors it
recommends, or to sell their merchandise at prices suggested by the
Company.
SUPPLY AGREEMENTS. In connection with the sale of the Company's Reddy
Ice and Dairies Group divisions, both in 1988, the Company entered into
long-term contracts to purchase the products historically supplied to the
Company's stores by such divested operations. Although the Reddy Ice
contract expired by its terms in May 1995, the Company has continued to
buy ice from Reddy Ice.
PRODUCT CATEGORIES. The Company does not record sales on the basis of
product categories. However, based upon the total dollar volume of store
purchases, management estimates that the percentages of its 7-ELEVEN
convenience store sales in the United States by principal product
categories for the last five years were as follows:
YEARS ENDED DECEMBER 31
PRODUCT CATEGORIES 1995 1994 1993 1992 1991
- ------------------ ----- ----- ----- ----- -----
Gasoline 24.9% 24.2% 23.5% 22.5% 21.5%
Tobacco Products 16.6 17.2 18.0 19.2 19.1
Groceries 9.8 9.6 9.2 8.5 8.1
Beer/Wine 9.0 9.4 9.5 10.0 10.7
Soft Drinks 8.7 8.8 9.7 10.0 10.3
Food Service 8.7 8.5 8.5 8.4 8.4
Non-Foods 6.1 6.2 5.8 5.8 5.8
Dairy Products 4.4 4.6 4.8 4.9 5.0
Candy 3.6 3.8 3.7 3.8 3.9
Baked Goods 3.4 3.6 3.5 3.4 3.4
Customer Services 3.1 2.4 2.1 1.9 1.8
Health/Beauty Aids 1.7 1.7 1.7 1.6 2.0
----- ----- ----- ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
LOCAL REGULATIONS. In certain areas where stores are located, state or
local laws limit the hours of operation or sale of certain products, most
significantly alcoholic beverages, tobacco products, possible inhalants
and lottery tickets. State and local regulatory agencies have the
authority to approve, revoke, suspend or deny applications for and
renewals of permits and licenses relating to the sale of these products
or to seek other remedies. In most states, such agencies have discretion
to determine if a licensee is qualified to be licensed, and denials may
be based on past noncompliance with applicable statutes and regulations
as well as on the involvement of the licensee in criminal proceedings or
activities which in such agencies' discretion are determined to adversely
reflect on the licensee's qualifications. Such regulation is subject to
legislative and administrative change from time to time.
Since 1984, the Company has had in place an extensive program entitled
COME OF AGE, to train store personnel in the laws relating to the proper
handling and sale of age-restricted products. This training program is
provided to all sales associates in corporate stores and is made
available to all franchisees and licensees.
9
FRANCHISES. At December 31, 1995, 2,896 7-ELEVEN stores were operated
by independent franchisees under the Company's franchise program for
individual 7-ELEVEN stores. Sales by stores operated by franchisees
(which are included in the Company's net sales) were approximately
$2,832,131,000 for the year ended December 31, 1995.
In its franchise program for individual 7-ELEVEN stores, the Company
selects qualified applicants and trains the individuals who will
participate personally in operating the store. The franchisee pays the
Company an initial fee, which varies by store, and is generally
calculated based upon gross profit experience for the store or market
area, to cover certain costs including: training; an allowance for
travel; meals and lodging for the trainees; and other costs relating to
the franchising of the store. Under the standard form of franchise
agreement, the Company leases or subleases, to the franchisee, a ready-to
operate 7-ELEVEN store that has been fully equipped and stocked. The
Company bears the costs of acquiring the land, building and equipment, as
well as most utility costs and property taxes.
Under the standard franchise arrangement, which typically has an
initial term of 10 years, the franchisee pays for all business licenses
and permits, as well as all in-store selling expenses, including:
payroll; inventory and cash variations; supplies; inventory, payroll and
other business taxes; certain repairs and maintenance; and other
controllable in-store expenses, and is required to invest an amount equal
to the cost of the store's inventory and cash register fund. The Company
finances a portion of the cost of business licenses and permits and of
the investment in inventory, as well as the ongoing operating expenses
and purchases of inventory.
Under the standard franchise agreements currently in effect, the
Company shares in the gross profit of the store (ranging from 50% to 58%,
depending on the hours of store operation, adjusted if necessary to
assure the franchisee a specified gross income before selling expenses),
based on all sales of merchandise and services except those on which the
Company pays the franchisee a commission (such as consigned gasoline).
The Company's share of gross profit, called the "7-ELEVEN Charge," is its
continuing royalty charge to the franchisee for the license to use the 7-
ELEVEN operating system and trademarks, for the lease and use of the
store premises and equipment and for continuing services provided by the
Company. These services include merchandising, advertising,
recordkeeping, store audits, contractual indemnification, business
counseling services and preparation of financial statements. Other
optional services are available from or through the Company for
additional fees.
During 1995, the Company continued testing a new franchise agreement
that provided a three-tiered structure for calculating the 7-ELEVEN
Charge. This test, which is limited to Washington, Idaho and Oregon,
will continue, in those states only, during 1996. The Company has been
working on the development of a new franchise agreement with the help of a
committee of franchisees from the National Advisory Council. The Company
anticipates that there will be an ongoing process to revise the franchise
agreement, on a periodic basis, to ensure it stays in step with the
Company's business concept.
In addition, during the first part of 1996, the Company increased the
training program being offered for franchisees. The program now consists of
7 weeks of intensified instruction in the new strategies that are being
implemented by the Company.
10
The Company is also encouraging existing successful franchisees to
franchise multiple locations. This will provide growth opportunities for
current franchisees within the 7-ELEVEN system by encouraging them to
pursue additional stores which also will result in increased income for
the franchisee, partly by creating opportunities for lower per unit
operating expenses for the franchisee and the Company. To stimulate this
multiple growth, the Company has offered certain incentives during the
first quarter of 1996 to qualified franchisees (and corporate store
managers in a franchise area), by recalculating and reducing the
franchise fee in such situations.
Under Southland's standard franchise agreement, the franchise may be
terminated by the franchisee at any time or by the Company for the
causes, and upon the notices, as specified in the franchise agreement and as
provided by applicable law. In the event of expiration or termination of
the franchise, the Company has the right to (i) acquire the
franchisee's interest in inventory of a type, quantity, quality and
variety consistent with the 7-ELEVEN image and the other tangible assets in
the franchise business; and, (ii) take possession of the real property on
which the store is located, and, in such event, the franchisee has no
continuing lease obligations. Certain franchisees have contractual
rights to sign new franchise agreements upon expiration of their existing
agreements, so long as they meet certain specified conditions.
Many states in which the Company franchises individual 7-ELEVEN stores
have enacted legislation governing the offer, sale, termination and/or
renewal of franchises, and the Federal Trade Commission has a trade
regulation rule regarding required disclosures to prospective
franchisees.
AREA LICENSES. As of December 31, 1995, the Company had granted
domestic area licenses to eight companies which were operating 625
convenience stores using the 7-ELEVEN system and name in certain areas of
Alaska, Arkansas, Hawaii, Indiana (using the name Super-7 in
Indianapolis), Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri,
Montana, Nebraska, New Mexico, North Dakota, Ohio,
Oklahoma, Pennsylvania, South Dakota, Texas, Utah, West Virginia and
Wyoming. Although parts of both Nevada and Virginia are also covered
by area licenses, there are no stores currently operated under the area
licenses in those states. The 46 stores in Hawaii are operated under
an area license agreement with Seven-Eleven (Hawaii), Inc. (a subsidiary
of Seven Eleven Japan). During the first quarter of 1995, Southguard
Corporation and the Company agreed to terminate Southguard's two area
licenses, covering parts of Texas and Oklahoma, in exchange for the
payment of a one-time termination fee from Southguard to the Company.
As of the end of 1995, foreign area license agreements covered the
operation of 6,269 7-ELEVEN stores in Japan, 1,158 in Taiwan, 554 in
Thailand, 328 in Hong Kong, 153 in Australia, 110 in South Korea, 93 in
Malaysia, 83 in the Philippines, 80 in Spain, 77 in Singapore, 53 in the
United Kingdom, 39 in Norway, 31 in Sweden, 22 in China, 14 in Brazil, 12
in Puerto Rico, 11 in Denmark, 10 in Guam and nine in Turkey. In
connection with the granting of area licenses in Brazil, Norway (which
license now also includes Denmark, Finland and Sweden), the Philippines
and Puerto Rico, the Company acquired an equity interest in those area
licensees. Nine "12+12" stores in Spain, not included in the 80 stores
mentioned above, are also under license agreement.
11
Stores operating under area licenses are not included in the number of
Company operating units, and their sales are not included in the
Company's revenue. Revenues from initial fees paid for area licenses and
continuing royalties based on the sales volume of the stores are included
in Other Income.
INTERNATIONAL AFFILIATES. The Company also has an equity interest in
220 convenience stores in Mexico operated by 7-Eleven Mexico, and one
store in Mexico is operating under a license agreement with 7-Eleven
Mexico. These stores, which feature merchandise and services essentially
the same as 7-ELEVEN stores, had been operating under the name SUPER
SIETE until 1991; however, now almost all stores are using the 7-ELEVEN
name. Sales from the stores in Mexico are not included in Southland's
revenues, but Southland's equity in their operating results is included
in Other Income and has not been material.
HIGH'S DAIRY STORES. As of December 31, 1995, the Company operated 19
High's Dairy Stores located in Maryland, Pennsylvania, Virginia and West
Virginia, which are similar in size and location to 7-ELEVEN stores and
feature a product mix that emphasizes a variety of dairy products.
QUIK MART AND SUPER-7 GASOLINE UNITS. At December 31, 1995, 44 Quik
Mart and SUPER-7 gasoline units were in operation in nine states. A
typical Quik Mart is a high-volume gasoline outlet combined with a mini
convenience store ranging in size from 300 to 1,600 square feet of sales
space stocked primarily with snack food, candy, cold drinks and other
immediately consumable items, while a Super-7 gasoline unit is a high
volume, multi-pump, self-service gasoline-dispensing operation.
CORPORATE CITYPLACE. The Company's headquarters are located in
"Cityplace Center East," its 42-story office tower located on
the east side of Dallas' Central Expressway north of Dallas'
central business district. The Company currently occupies
approximately 525,000 square feet, about 39% of Cityplace Center East.
During 1995, leases covering approximately 60,000 additional square feet
were signed, both with new tenants and with current tenants. The
building is now virtually completely leased or reserved for expansion
under current leases. The Company is in the process of a further
consolidation of its offices, which would make additional space
available for subleasing.
DIVESTITURES During 1995, the Company sold its former food center in
Salt Lake City, Utah to McLane (the lessee). This property consisted of
a 21.5 acre tract on which a 77,000 square foot food processing plant
is located, including 6,930 square feet of office space.
OTHER INFORMATION ABOUT THE COMPANY
CREDIT AGREEMENT AND DEBT COVENANTS. The Company's amended Credit
Agreement contains a number of financial and operating covenants
requiring, among other things, the maintenance of certain financial
ratios, including interest coverage, fixed-charge coverage, and senior
12
indebtedness to EBITDA (defined in the Credit Agreement as earnings
before interest, income taxes, depreciation and amortization, with
adjustments for certain extraordinary and unusual gains and losses). The
covenant levels established by the Credit Agreement generally require a
continuing improvement in the Company's financial condition. The Credit
Agreement also contains various covenants which, among other things, (a)
limit the Company's ability to incur or guarantee indebtedness or other
liabilities other than under the Credit Agreement, (b) restrict the
Company's ability to engage in asset sales and sale/leaseback
transactions, (c) restrict the types of investments the Company can make
and (d) restrict the Company's ability to pay cash dividends, redeem or
prepay principal and interest on any subordinated debt and certain senior
debt. These covenants contain exceptions that are customary in credit
agreements associated with financings of companies having
creditworthiness similar to Southland's, as well as exceptions consistent
with the specific nature of the business and financial operations of the
Company.
The Company's outstanding Debt Securities contain certain covenants
which, among other things, (i) limit the payment of dividends and certain
other restricted payments by both the Company and its subsidiaries, (ii)
require the purchase by the Company of the Debt Securities at the option
of the holder upon a change of control (as defined in the indentures
governing the Debt Securities), (iii) limit additional indebtedness, (iv)
limit future exchange offers, (v) limit the repayment of subordinated
indebtedness, (vi) require board approval of certain asset sales, (vii)
limit transactions with certain stockholders and affiliates and (viii)
limit consolidations, mergers and the conveyance of all or substantially
all of the Company's assets.
The Company's outstanding Convertible Debt Securities, which were
issued in November, 1995, to Ito-Yokado and Seven-Eleven Japan, are
subordinated to all existing debt, convertible into the Company's Common
Stock at a premium and carry certain registration rights that require the
Company to register the Convertible Debt Securities (or Common Stock
issued upon conversion) under the Securities Act of 1933. The holders
may elect to convert the Convertible Debt Securities in denominations of
$1,000 principal amount or integral multiples thereof, into shares of the
Company's Common Stock. The number of shares obtained is determined by
dividing the principal amount of the Convertible Debt Securities being
converted by $4.1602 which represents an average of Southland's share
price at the time the Convertible Debt Securities were issued, plus a
premium. The $300 million Convertible Debt Securities are convertible
into approximately 72 million shares of the Company's Common Stock.
SHAREHOLDERS AGREEMENT. Upon the Closing, the Company, the Purchaser,
Ito-Yokado and various holders of the Company's Common Stock who held the
common stock prior to the Closing (the "Existing Shareholders") entered
into a shareholders agreement (the "Shareholders Agreement") pursuant to
which the parties were not permitted to offer, sell, assign, transfer,
grant a participation in, pledge or otherwise dispose of any shares of
Common Stock except in compliance with the Shareholders Agreement.
The Shareholders Agreement, which terminated on March 5, 1996,
provided each of the Existing Shareholders (and any persons who hold
employee options or employee convertible debentures to purchase shares of
Common Stock as a result of employment with the Company) with the right
and option to require the Purchaser to purchase up to all of the shares
of Common Stock held by such person on the fifth anniversary of the date
of the Shareholders Agreement at the fair market value (to be determined
in accordance with the terms of the Shareholders Agreement) of such
shares on such date. In addition, the Shareholders Agreement, as amended
on December 30, 1992, provided that the parties to the agreement shall
13
cause Southland's Board of Directors to consist of, and would vote their
shares as to the election of directors so that the Board shall consist
of, (i) two individuals designated by Existing Shareholders holding a
majority of shares held by the Existing Shareholders, (ii) ten
individuals selected by the Purchaser, (iii) two individuals initially
designated by the Official Committee of Bondholders appointed by the
Bankruptcy Court and, from and after the next annual or special meeting
of the Company's shareholders at which the election of directors occurs,
designated by the holders (the "Other Shareholders") of shares of Common
Stock other than the Purchaser and the Existing Shareholders (the "Other
Shareholder Nominees") and (iv) although no such obligation then existed,
two independent directors if, and to the extent, required to meet the
listing or quotation requirements of any exchange or quotation system
upon which the Common Stock is or shall be listed or traded (and only if,
and to the extent that, the Other Shareholder Nominees fail to qualify as
such independent directors). Because the Shareholders Agreement
terminated on March 5, 1996, (except for certain continuing registration
rights) the holders of shares that were subject to the Shareholders
Agreement are no longer restricted by the terms of the agreement as to
voting, transfer, or sale of such shares.
Moreover, under the Shareholders Agreement, Ito-Yokado provided the
Thompsons and certain of the parties to the Shareholders Agreement (other
than participants in the Company's Grant Stock Plan with respect to
shares acquired pursuant to participation in such Grant Stock Plan) with
certain loans (the "Loans") based on the pledge of shares of Common Stock
as collateral for the Loans (the "Collateral Shares"). Such Loans are
nonrecourse obligations of the borrower except to the extent of the
Collateral Shares. Such Collateral Shares may not be sold unless the
Loan secured by such Shares is repaid simultaneously with such sales.
Certain of these loans have been extended and refinanced. In addition,
under the terms of the Shareholders Agreement, IYG has the obligation to
purchase, if requested to do so, certain shares (including those pledged
as collateral) from the Thompsons and other signatories to the
Shareholders Agreement. The Shareholders Agreement was amended in
February 1996, so that the price to be paid for any shares purchased
would be determined by the average of the closing price for the Common
Stock on February 27, 1996 through March 12, 1996. Any purchase of such
shares is now scheduled to occur on April 22, 1996.
THE WARRANT AGREEMENT. As part of the Plan and the Closing on March
5, 1991, Thompson Brothers, L.P., The Hayden Company, The Philp Co., The
Williamsburg Corporation and Thompson Capital Partners,
L.P.(collectively, the "Warrant Shareholders") entered into a Warrant
Agreement with Wilmington Trust Company as Warrant Agent, the Company and
Ito-Yokado. Pursuant to the Plan, the Company agreed to issue, on behalf
of the Warrant Shareholders, the Thompson Warrants exercisable by the
holders thereof to purchase up to an aggregate of 10,214,842 shares of
Common Stock owned by the Warrant Shareholders.
Under the Warrant Agreement, each Thompson Warrant entitled the holder
to purchase, at the exercise price (the "Exercise Price") of $1.75 per
Thompson Warrant, one of the underlying common shares, subject to
adjustment as provided in the Warrant Agreement, during the period
beginning three months after the date of the Warrant Agreement and ending
on February 23, 1996. As of February 23, 1996, the expiration date of
the Thompson Warrants, a total of 10,098,089 Thompson Warrants had been
exercised.
14
THE EMPLOYMENT AGREEMENTS. As a condition to the Closing, the Company
entered into five-year Employment Agreements with Messrs. John P.
Thompson, Jere W. Thompson and Joe C. (Jodie) Thompson, Jr. As of
December 30, 1992, the Employment Agreement with Joe C. Thompson, Jr. was
terminated and Mr. Thompson was paid the present discounted value of the
remaining balance payable to him under the Employment Agreement. The
Employment Agreements were effective upon the Closing and provided for an
annual base salary of $600,000 and an annual bonus equal to $360,000
under each agreement, as well as providing for vacation, holidays and
expense reimbursement in accordance with current Company policy. The
Employment Agreements terminated on March 5, 1996, according to their
terms and John and Jere Thompson are not standing for re-election to the
Company's Board of Directors.
RESEARCH AND DEVELOPMENT
The Company did not incur any significant expenses for product testing
or traditional research and development activities in 1994 or 1995.
During 1995, the Company's Strategic Planning Department conducted
certain market research studies, which include concept tests, consumer
preference tests, and tracking of changes in image and store usage
patterns. In addition, the Company's test kitchen spent approximately
$60,000 for new product development and taste testings and to test
equipment used for cooking and displaying food products.
RETAIL AUTOMATION
In 1993, the Company began development of its own proprietary retail
automation system, which it plans to implement in phases, over a multi
year period. The system is being designed to build efficiencies into
ordering, distribution and merchandising processes and to provide timely
and accurate information on an item by item basis. The system is being
designed to provide information about every important detail of the
store's operations and to facilitate inventory tracking. The first phase
implementation which began at the end of 1993 and is expected to be
completed in early 1996, will automate basic in-store accounting
processes. The second phase will consist of an ordering and distribution
system, that will provide the foundation for the future phases that will
include retail scanning. The Pre-POS system, which provides new cash
registers in each store and builds the foundation for item-level
scanning, will begin in a pilot program in the summer of 1996 with a
complete roll-out thereafter.
TRADEMARKS
The Company's 7-ELEVEN trademark has been registered since 1961 and is
well known throughout the United States and in many other parts of the
world. Other trademarks and service marks owned by the Company include
SUPER-7, SLURPEE, BIG GULP and BIG BITE, as well as many additional
trade names, marks and slogans relating to other individual types of food
and beverage items. In connection with the Company's emphasis on the
introduction of more fresh food items, the DELI CENTRAL and WORLD OVENS
trademarks are being introduced in stores nationwide, along with the
QUALITY CLASSIC SELECTION trademark, covering the Company's proprietary
brand spring water, soft drinks, and other beverage products, and
CAFE SELECT, covering the Company's gourmet coffees, cappuccino and hot
15
chocolate products. As part of the collateral securing the Credit
Agreement, the Company granted the lenders a security interest in its
various trademarks.
ADVERTISING
During 1995, the Company continued its very successful "Comedians"
campaign, which first aired in December 1993 and will be continued into
1996. This campaign delivered the message of "So many changes it's not
even funny" and emphasized the store remodeling program, daily
distribution of fresh food items and the Company's everyday fair pricing
strategy. The Company also introduced several new
promotional and seasonal advertising campaigns such as the BRAIN
FREEZE television commercials in connection with SLURPEE drinks during
the summer selling season and a very successful tie-in promotion with
the MTV Beachhouse. Also featured in various advertisements in 1995
was the collectible Quarterback series of 7-ELEVEN PHONE CARDS
featuring five different members of the NFL Quarterback Club, which
enhanced the promotion of the NFL licensed coffee mugs sold at the stores
- - each featuring one of the
30 NFL teams. During the year, the Company used several promotions on
radio to highlight specific products, such as ATMs, fountain soft drinks,
gasoline pay-at-the-pump convenience, hot dogs and the 7-ELEVEN PHONE
CARD, and, beginning in early 1996, a tie-in promotion with the National
Hockey League. In addition, during the year, the Company offered free or
discounted pastries or DELI-CENTRAL items, with the frequent purchase of
coffee or soft drinks, and distributed coupons for price discounts or
free items, to encourage customers in neighborhoods close to 7-ELEVEN
stores to sample some of the new fresh food items that were introduced
during 1995.
COMPETITION
During the past few years the Company, like other traditional
convenience retailers, has experienced increased competitive pressures
from supermarkets and drug stores offering extended hours and services,
as well as from an increasing number of convenience-type stores built by
the oil companies. The convenience retailing industry is also being
negatively impacted by demographic factors (such as an aging population)
and an erosion of demand for certain of its traditional core products,
including cigarettes, soft drinks and beer.
Although 7-ELEVEN is the most widely recognized name in the
convenience retailing industry, the Company's convenience retailing
operations represent only a very small percentage of the highly
competitive food retailing industry. Independent industry sources
estimate that in the United States annual sales in 1994 (the most recent
data available) for the convenience store industry were approximately
$132.2 billion (including $67.8 billion of gasoline) and that over 93,200
store units were in operation. The industry traditionally has narrow net
profit margins. In addition, the Company's stores compete with a number
of national, regional, local and independent retailers, including grocery
and supermarket chains, grocery wholesalers and buying clubs, other
convenience store chains, oil company gasoline/mini-convenience "g
stores," independent food stores, and fast food chains as well as
variety, drug and candy stores. In sales of gasoline, the Company's
stores compete with other food stores and service stations and generate
only a very small percentage of the gasoline sales in the United States.
Each store's ability to compete is dependent on its location,
accessibility and individual service. Growing competitive pressures from
new participants in the convenience retailing industry and the rapid
16
growth in numbers of convenience-type stores opened by oil companies over
the past few years have intensified competitive pressures for the
Company.
Cityplace Center East, the Company's headquarters office building in
Dallas, Texas, is occupied by the Company and other third party tenants,
with the Company having the right to sublease the remaining space (see
"Cityplace," above). During 1995, the Company entered into subleases
with new tenants and expansions with existing tenants covering about
60,000 additional square feet. The building is now virtually completely
leased or reserved for expansion under current leases; however, the
Company is currently in the process of consolidating its offices to
create additional space that will be available for lease. In seeking
tenants, this project competes with other downtown, Oak Lawn, North
Dallas and North Central Expressway luxury office space developments. It
is anticipated that competition for tenants will remain strong in the
Dallas commercial real estate market.
ENVIRONMENTAL MATTERS
The operations of the Company are subject to various federal, state
and local laws and regulations relating to the environment. Certain of
the more significant federal laws are described below. The
implementation of these laws by the United States Environmental
Protection Agency ("EPA") and the states will continue to affect the
Company's operations by imposing increased operating and maintenance
costs and capital expenditures required for compliance. Additionally,
the procedural provisions of these laws can result in increased lead
times and costs for new facilities.
The Resource Conservation and Recovery Act of 1976, as amended,
affects the Company through its substantial reporting, recordkeeping and
waste management requirements. In addition, standards for underground
fuel storage tanks and associated equipment may increase operating
expenses and the costs of marketing petroleum products. In response to
this legislation, and various state and local regulations, the Company
established a comprehensive program to manage underground storage tanks
and associated equipment that established procedures for tank testing,
repair and corrective action.
The Comprehensive Environmental Response Compensation and Liability
Act of 1980 ("CERCLA"), as amended, creates the potential for substantial
liability for the costs of study and clean-up of waste disposal sites and
includes various reporting requirements. This Act may result in joint
and several liability even for parties not primarily responsible for
hazardous waste disposal sites. As a consequence of past waste disposal,
the Company may be potentially liable for cleanup costs at several sites
which are being considered or which may be considered for federal cleanup
action under CERCLA. Additional requirements imposed by the Superfund
Amendments and Reauthorization Act of 1986 also have resulted in
additional reporting duties.
The Clean Air Act, as amended, and similar regulations at the state
and local levels, impose significant responsibilities on the Company
through certain requirements pertaining to vapor recovery, sales of
reformulated gasoline and related recordkeeping.
Violation of any federal environmental statutes or regulations or
orders issued thereunder, as well as relevant state and local laws and
regulations, could result in civil or criminal enforcement actions.
17
CURRENT ENVIRONMENTAL PROJECTS AND PROCEEDINGS. As previously
reported, in December 1988, the Company closed its chemical manufacturing
facility in Great Meadows, New Jersey ("Great Meadows"). The Company had
previously been issued an Administrative Consent Order relating to
groundwater conditions at this facility by the New Jersey Department of
Environmental Protection ("NJDEP"). The Administrative Consent Order
required the Company to pay a civil penalty of $50,000, to conduct a
remedial investigation/feasibility study ("RI/FS") and to provide
financial assurance for the ultimate clean-up.
The Company has submitted a proposed clean-up plan to the NJDEP, which
provides for remediation at the site for an approximate three- to five
year period as well as continued groundwater treatment for a projected 20
year period. While the Company has received initial comments from the
NJDEP, a final clean-up plan has not been finalized. At December 31,
1995, the Company's recorded liability is $37.8 million, which represents
its best estimate of the clean-up and treatment costs to be incurred.
Some remedial actions have commenced.
As previously reported, the Company filed suit in the United States
District Court for the District of New Jersey against a large chemical
company that formerly owned the Great Meadows property. In 1991, the
parties executed a final settlement agreement pursuant to which the
former owner agreed to pay a substantial portion of the cleanup costs
escribed above. The Company has recorded a receivable of $22.0 million, at
ear-end 1995, representing the former owner's portion of the accrued clean-
up costs.
As of December 31, 1995, the Company had approximately 2,000 operating
retail outlets involved in the sale of gasoline and other motor fuels.
In the ordinary course of business, the Company incurs ongoing costs to
comply with federal, state and local environmental laws and regulations
primarily relating to underground storage tank ("UST") systems. The
Company has established a comprehensive program to manage USTs and
associated equipment and to ensure compliance with applicable laws.
The Company anticipates that it will spend approximately $12 million in
1996 on capital improvements required to comply with environmental
regulations relating to USTs as well as above-ground vapor recovery
equipment at store locations and approximately an additional $21 million
on such capital improvements from 1997 through 1999.
Additionally, the Company accrues for the anticipated future costs of
environmental clean-up activities (consisting of environmental assessment
and remediation) relating to detected releases of regulated substances at
its existing and previously owned or operated sites at which gasoline has
been sold (including store sites and other facilities that have been sold
by the Company). At December 31, 1995, the Company has an accrued
liability of $63.7 million for such activities and anticipates that
substantially all such expenditures will be incurred within the next five
years. This estimate is based on the Company's prior experience with
gasoline sites and its consideration of such factors as the age of the
tanks, location of tank sites and experience with contractors who perform
environmental assessment and remedial work.
18
Under state reimbursement programs the Company is eligible to receive
reimbursement for a portion of future costs, as well as a portion of
costs previously paid. At December 31, 1995, the Company has recorded a
gross receivable of $73.4 million (a net receivable of $59.7 million
after an allowance of $13.7 million) for the estimated probable state
reimbursement. There is no assurance of the timing of the receipt of
state reimbursement funds; however, based on its experience, the Company
expects to receive the majority of state reimbursement funds within one
to four years after payment of eligible assessment and remediation
expenses, assuming that the state administrative procedures for
processing such reimbursements have been fully developed.
The estimated future assessment and remediation expenditures and
related state reimbursement amounts could change within the near future
as governmental requirements and state reimbursement programs continue to
be implemented or revised. In general, the Company's capital
expenditures for environmental matters will continue to be affected
by federal, state and local environmental laws and regulations. It
is possible that future environmental requirements may be more
stringent than current requirements, thereby requiring additional
expenditures. As described above, the Company also anticipates future
maintenance expenditures in connection with environmental requirements
relating to continuing upkeep of USTs at store locations.
See also "Legal Proceedings," below, at pages 26 through 29, for a
discussion of other pending legal proceedings relating to environmental
matters.
EMPLOYEES
At December 31, 1995, the Company had 30,523 employees, of whom
approximately 31 percent were considered to be either temporary or part
time employees. None of the Company's employees were subject to
collective bargaining agreements at year-end.
The Company has in the past been able to satisfy substantially all of
its requirements for managerial personnel from within its organization.
The Company's store managers and supervisory staff personnel are
compensated on some form of incentive basis.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and offices with the registrant of all
current executive officers, as well as the Chairman of the Board and the
Vice Chairman of the Board, of the Company are shown in the following
chart. The term of office of each executive officer is at the pleasure
of the board of directors. The business experience of each such
executive officer for at least the last five years, and the period during
which he or she served in office, as well as the date each was employed
by the Company, are reflected in the applicable footnotes to the chart.
All executive officers of Southland named herein, were officers or
employees of the Company at the time Southland filed its voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as
described above. Mr. Ito and Mr. Suzuki became Chairman and Vice
Chairman, respectively, on March 5, 1991, after Southland emerged from
bankruptcy.
19
Age at
Name 3/01/96 Current Positions and Offices with Registrant
- ---------------------- ------- ---------------------------------------------------------------
Masatoshi Ito 71 Chairman of the Board and Director (1)
Toshifumi Suzuki 63 Vice Chairman of the Board and Director (2)
Clark J. Matthews, II 59 President, Chief Executive Officer; Secretary and Director (3)
Stephen B. Krumholz 46 Executive Vice President and Chief Operating Officer (4)
Rodney A. Brehm 48 Senior Vice President, Distribution and Foodservice (5)
James W. Keyes 40 Senior Vice President, Finance (6)
Stephen B. LeRoy 43 Senior Vice President, International and Real Estate (7)
Bryan F. Smith, Jr. 43 Senior Vice President and General Counsel (8)
Robert E. Bailey 53 Vice President, Northwest Division (9)
Terry L. Blocher 51 Vice President, Southwest Division (10)
Paul L. Bureau 54 Vice President, Corporate Tax (11)
Kathleen Callahan-Guion 44 Vice President, Chesapeake Division (12)
Michael R. Cutter 44 Vice President, Merchandising (13)
Adrian O. Evans 59 Vice President, Construction and Maintenance (14)
James Notarnicola 44 Vice President, Communications (15)
Gary R. Rose 50 Vice President, Gasoline and Environmental Services (16)
David A. Urbel 54 Vice President, Planning and Treasurer (17)
Donald E. Thomas 37 Controller (18)
________________________
(1) Chairman of the Board and Director of the Company since March 5,
1991. Director and Honorary Chairman of Ito-Yokado Group, which
includes Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and Denny's
Japan Co., Ltd., as well as other companies. Ito-Yokado Co., Ltd. is one
of Japan's leading diversified retailing companies which, together with
its subsidiaries and affiliates, operates superstores, convenience
stores, department stores, supermarkets, specialty shops and discount
stores. President of Ito-Yokado Co., Ltd. from 1958 to 1992. Chairman
of Seven-Eleven Japan Co., Ltd. from 1978 to 1992, and President from
1973 to 1978. Chairman of Denny's Japan Co., Ltd. from 1981 to 1992, and
President from 1973 to 1981. Chairman of Famile Co., Ltd. since 1986.
Chairman of York Mart Co., Ltd. since 1979. Chairman of Robinson's Japan
Co., Ltd. since 1995. Chairman of Maryann Co., Ltd. since 1977.
President of Oshman's Japan Co., Ltd. since 1984. Statutory Auditor of
Steps Co., Ltd. since 1992. Chairman of York-Keibi Co., Ltd. since 1989.
President of Union Lease Co., Ltd. since 1985. Statutory Auditor of
Daikuma Co., Ltd. since 1982. Chairman of Marudai Co., Ltd. since 1989.
Director of Seven-Eleven (Hawaii), Inc. since 1989. Chairman of Umeya
Co., Ltd. since 1981. Director of Shop America Limited since
1990.Director and Chairman of the Board of IYG Holding Company since 1990.
(2) Vice Chairman of the Board and Director of the Company since
March 5, 1991. President and Chief Executive Officer of Ito-Yokado Co.,
Ltd., one of Japan's leading diversified retailing companies which,
together with its subsidiaries and affiliates, operates superstores,
convenience stores, department stores, supermarkets, specialty shops and
discount stores, since October 1992 and Director since 1971; Executive
Vice President from 1985 to 1992; Senior Managing Director from 1983 to
1985; Managing Director from 1977 to 1983; employee since 1963. Chairman
of the Board and Chief Executive Officer of Seven-Eleven Japan Co., Ltd.
since October 1992 and Director since 1973; President from 1975 to 1992;
Senior Managing Director from 1973 to 1975. Statutory Auditor of
Robinson's Japan Co., Ltd. since 1984. Chairman of Daikuma Co., Ltd.
since 1985. President of Seven-Eleven (Hawaii), Inc. since 1989.
President of Shop America Limited since 1990. President and Director of
IYG Holding Company since 1990.
20
(3) Director since March 5, 1991, and from 1981 until December 15,
1987; President and Chief Executive Officer since March 5, 1991 and
Secretary since April 26, 1995; Executive Vice President (or Senior
Executive Vice President) and Chief Financial Officer from 1979 to 1991;
Vice President and General Counsel from 1973 to 1979; employee of the
Company since 1965.
(4) Executive Vice President and Chief Operating Officer since June
1993; Senior Vice President, Operations, from August 1992 to June 1993;
Senior Vice President, 7-ELEVEN Stores Operations, from 1990 to August
1992; Vice President, Marketing, from 1989 to 1990; Vice President,
Northern Region, 7-ELEVEN Stores, from January 1989 to October 1989;
Vice President, Northwest Region, 7-ELEVEN Stores, from 1987 to 1988;
Division Manager, Mountain Division, 7-ELEVEN Stores, from 1986 to 1987;
Regional Marketing Manager from 1981 to 1986; employee of the Company
since 1972.
(5) Senior Vice President, Distribution and Foodservice, since June
1993; Vice President, Merchandising, from February 1992 to June 1993;
Vice President, Marketing, from 1990 to 1992; Vice President, Northwest
Region, 7-ELEVEN Stores, from 1989 to 1990; National Marketing Manager
from 1986 to 1989; Division Manager, Central Pacific Division, 7-ELEVEN
Stores, from 1979 to 1986; employee of the Company since 1972.
(6) Senior Vice President, Finance, since June 1993; Vice
President, Planning and Finance, from August 1992 to June 1, 1993; Vice
President and/or Vice President, National Gasoline, from August 1991 to
August 1992; General Manager, National Gasoline, from 1986 to 1991;
employee of the Company since 1985.
(7) Senior Vice President since May 1, 1995; Vice President,
International and Real Estate, May 1, 1994 to April 30, 1995; Vice
President Real Estate and Licensed Operations, from August 1992 until May
1994; Vice President, Atlantic Region, 7-ELEVEN Stores, from 1990
to 1992; Vice President, Chesapeake Region, 7-ELEVEN Stores, from 1987
to 1990; Regional Manager, Chesapeake Stores Region, in 1987;
Division
Manager, Capitol Stores Division, from 1986 to 1987; Division Manager,
Great Lakes Stores Division, from 1984 to 1986; Operations Manager, Great
Lakes Stores Division, from 1981 to 1984; employee of the Company since
1975.
(8) Senior Vice President and General Counsel since May 1, 1995; Vice
President and General Counsel from August 1992 to April 30, 1995;
Assistant General Counsel from January 1990 to July 1992; Associate
General Counsel from January 1987 to December 1989; employee of the
Company since 1980.
(9) Vice President, Northwest Division since May 1, 1995; Division
Manager from November, 1990 to April, 1995; Regional Vice President from
May 7, 1986 to October 31, 1990; employee of the Company since 1970.
(10) Vice President, Southwest Division since May 1, 1995; Division
Manager from February, 1985 to April, 1995; employee of the Company since
1971.
(11) Vice President, Corporate Tax, since May 1993; Corporate Tax
Manager from March 1983 to May 1993; Partner, Touche Ross & Co., from
1978 to 1983; employee of the Company since 1983.
21
(12) Vice President, Chesapeake Division since May 1, 1995; Division
Manager from November, 1986 to April, 1995; employee of the Company since
1979.
(13) Vice President, Merchandising since April 15, 1995; National
Field Merchandising Manager from July, 1994 to April, 1995; Regional
Merchandising Manager from January, 1990 to July, 1994; Division
Merchandising Manager from July, 1986 to December, 1989; employee of the
Company since 1975.
(14) Vice President, Construction and Maintenance, since August
1992; Vice President, Stores Development, from January 1989 to August
1992; Vice President, Mid-America Region, 7-ELEVEN Stores, from 1987 to
1988; Vice President, Central Stores Region, from 1980 to 1987; Central
Stores Regional Manager from 1978 to 1980; Division Manager, Canada, from
1976 to 1978; employee of the Company from 1962 to 1972 and since 1975.
(15) Vice President, Communications since May 1, 1995; Manager,
Advertising and Promotions from July, 1992 to April, 1995; National Sales
Manager from November, 1990 to July, 1992; Regional Marketing Manager
from August, 1989 to October, 1990; employee of the Company since 1978.
(16) Vice President, Gasoline and Environmental Services since May 1,
1995; National Gasoline Manager from January, 1991 to April, 1995;
Manager, East/West Gasoline from November, 1987 to January, 1991;
employee of the Company since 1968.
(17) Vice President, Planning and Treasurer since August, 1992; Vice
President since April, 1992 and Treasurer since December 16, 1987; Deputy
Treasurer from 1984 to 1987; Assistant Treasurer from 1983 to 1984;
employee of the Company since 1970.
(18) Controller since August 1, 1995; Assistant Controller from
January, 1993 to July, 1995; employee of the Company since 1993.
Financial Manager, The Trane Company, from April 1992 to December 1992;
Senior Manager, Audit Department, Deloitte & Touche, from January 1990 to
March 1992; Audit Department, Deloitte & Touche, from June 1981 to March
1992. Deloitte & Touche was formed in 1989 from the merger of Touche
Ross & Co. and Deloitte, Haskins, and Sells.
FORMER OFFICERS.
The names, ages, positions and offices formerly held with the
registrant and the business experience for at least the five years
preceding their departure from Southland of all persons who served as
officers of the Company during 1995 but who no longer serve as such are
shown below. Also shown for each such person is the period during which
he served in his office, as reflected in the footnotes to the following
chart.
NAME AGE AT 3/01/96
David M. Finley (1) 55
Vernon P. Lotman (2) 56
John H. Rodgers (3) 52
Michael Roemer (4) 47
22
(1) Vice President, Human Resources, from December 1987 to May 1995;
Manager, Stores Human Resources, January 1987 to December 1987; Manager,
Organizational Research & Development, from 1985 to 1987; Department
Manager, Organizational Research and Development, from 1984 to 1985;
Manager, Organizational Research and Development, from 1982 to 1984;
employee of the Company from 1977 to 1995.
(2) Vice President from April 1992, and Controller from December
1987, to July 1995; Assistant Corporate Controller from 1977 to 1982;
employee of the Company from 1973 to 1995.
(3) Executive Vice President from June 1993, Chief Administrative
Officer from 1991 and Secretary of the Company from 1987 until February
1995; Senior Vice President from 1987 to June 1993; General Counsel from
1979 to 1992; Vice President from 1980 to 1987; employee of the Company
from 1973 to 1995.
(4) Senior Vice President, Merchandising, from June 1993 until
February 1995; Vice President, Line Management, from August 1992 to June
1993. Vice President, Central Region, 7-Eleven Stores, from October 1990
to August 1992; Vice President, Northeast Region or Eastern Region, 7
Eleven Stores, from 1987 to 1990; Division Manager, Northeast Stores
Region, from 1984 to 1987; Vice President, Retail Marketing, of Citgo
Petroleum Corporation from 1983 to 1984; Marketing Manager, Eastern
Stores Region, 7-Eleven Stores, from 1981 to 1983; employee of the
Company from 1966 to 1995.
ITEM 2. PROPERTIES
Under the Credit Agreement, virtually all the Company's assets, not
previously subject to liens, are encumbered, including both tangible and
intangible property rights, as well as stock in the Company's non-foreign
subsidiaries, where such encumbrance is not otherwise prohibited. As of
December 31, 1995, there were approximately 3,581 operating stores, 168
non-operating stores and 12 other properties throughout the United States
subject to mortgages (including both owned and leased properties). The
lien against the Company's ownership or leasehold interest in any
property will be released, with the consent of the Company's Senior
Lenders, if the Company sells the property, the lease to the Company
terminates or upon payment by the Company of the amounts due under the
Credit Agreement.
23
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN. At the end of 1995, the 7-ELEVEN stores group was using 85
offices in 21 states and Canada. The following table shows the location
and number of the Company's 7-ELEVEN convenience stores (excluding stores
under area licenses and of certain affiliates) in operation on December
31, 1995.
STATE/PROVINCE OPERATING 7-ELEVEN CONVENIENCE STORES OWNED
LEASED(A) TOTAL
U.S.
- ----
Arizona 39 57 96
California 224 949 1,173
Colorado 61 180 241
Connecticut 7 31 38
Delaware 10 17 27
District of Columbia 4 14 18
Florida 227 184 411
Idaho 6 8 14
Illinois 51 86 137
Indiana 6 10 16
Kansas 7 10 17
Maryland 86 224 310
Massachusetts 10 24 34
Michigan 51 47 98
Missouri 32 50 82
Nevada 86 101 187
New Hampshire 1 7 8
New Jersey 74 129 203
New York(b) 43 176 219
North Carolina 2 5 7
Ohio 10 5 15
Oregon 37 97 134
Pennsylvania 59 105 164
Rhode Island 0 8 8
Texas 104 182 286
Utah 37 76 113
Virginia 190 411 601
Washington 59 172 231
West Virginia 10 12 22
Canada (b)
- ------
Alberta 19 98 117
Manitoba 13 37 50
Ontario 30 81 111
British Columbia 21 115 136
Saskatchewan 14 23 37
----- ----- -----
Total 1,630 3,731 5,361
===== ===== =====
________________
(a) Of the 7-ELEVEN convenience stores set forth in the foregoing
table, 769 are leased by the Company from The Southland Corporation
Employees' Savings and Profit Sharing Plan (the "Savings and Profit
Sharing Plan"). As of year-end 1995, the Company also leased 62 closed
convenience stores or office locations from the Savings and Profit
Sharing Plan.
(b) The above numbers include 17 stores in Canada (that operate
under a management contract) and two stores in New York (operating under a
special franchise agreement ("Genesis")), on which the Company has no
interest in the real property.
24
OTHER RETAIL. As shown in the following table, at year-end 1995, the
Company operated 44 Quik Mart and SUPER-7 stores in California, Illinois,
Indiana, Massachusetts, Missouri, New Hampshire, Texas, Virginia and
Wisconsin and 19 High's Dairy Stores located in Maryland, Virginia,
Pennsylvania and West Virginia.
The following table shows the location and number of the Company's
Quik Mart, High's and SUPER-7 locations in operation on December 31,
1995.
OTHER OPERATING RETAIL LOCATIONS
STATE OWNED LEASED TOTAL
California 3 0 3
Illinois 9 0 9
Indiana 3 1 4
Maryland 1 10 11
Massachusetts 2 0 2
Missouri 2 0 2
New Hampshire 2 1 3
Pennsylvania 0 3 3
Texas 2 0 2
Virginia 4 4 8
West Virginia 0 1 1
Wisconsin 15 0 15
-- -- --
Total 43 20 63
== == ==
OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1995,
there were eight 7-ELEVEN stores in various stages of construction, all
but one on property leased by the Company. The Company owned 21, and had
leases on 17, undeveloped convenience store sites. In addition, the
Company held 157 7-ELEVEN, High's and Quik Mart properties available for
sale consisting of 78 unimproved parcels of land, 64 closed store
locations and 15 parcels of excess property adjoining store locations.
At December 31, 1995, 35 of these properties were under contract for
sale.
On December 31, 1995, the Company held leases on 457 closed store or
other non-operating facilities, 62 of which were leased from the Savings
and Profit Sharing Plan. Of these, 344 were subleased to outside
parties.
Generally, the Company's store leases are for primary terms of from 14
to 20 years, with options to renew for additional periods. Many leases
contain provisions granting the Company a right of first refusal in the
event the lessor decides to sell the property. Many of the Company's
store leases, in addition to minimum annual rentals, provide for
percentage rentals based upon gross sales in excess of a specified amount
and for payment of taxes, insurance and maintenance.
25
ACQUISITIONS. On March 7, 1996, the Company acquired from The Store
24 Companies, Inc. of Boston, Massachusetts 13 stores located in Queens,
the Bronx and Brooklyn, New York, all of which are leased. The Company
plans to add these stores to its franchised locations.
OTHER PROPERTIES. The Company leases a 10,700-square-foot satellite
commissary constructed in 1991 in Austin, Texas, for fresh deli-style
food preparation and distribution. The Company also leases 64,447-square
feet of office/warehouse space and an additional 43,600-square-feet of
land in Denver, Colorado, for a regional equipment warehouse and service
center.
The Company plans to dispose of a five-acre tract of land in Delanco,
New Jersey, on which a 19,000-square-foot branch distribution facility is
located. This is residual property from the Company's distribution and
food processing operations that were divested in late 1992.
The Company also owns a 287-acre tract in Great Meadows, New Jersey,
with a closed chemical plant, a part of which is currently involved in
environmental clean-up. (See "Current Environmental Projects and
Proceedings," pages 18 through 19, above.)
CORPORATE
The Company's corporate office headquarters is in Dallas, Texas in a 42-
story office building, known as Cityplace Center East. The Company's lease
covers the entire Cityplace Tower, but gives the Company the right to
sublease to other parties. As of early 1996, subleases had been signed
with third parties so that (including the space leased by Southland)
the building is virtually completely leased or reserved for expansion
under current leases. The Company currently utilizes other office space
in and around Dallas (although most corporate office space is consolidated
in Cityplace Center East). During 1995, the Company sold a 22-acre tract
of land ouside Dallas and now holds tracts in Dallas, Texas, not included
in Cityplace, totaling about 6.5 acres.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, on October 24, 1990, the Company filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court for the Northern District of Texas,
Dallas Division, Case No. 390-37119-HCA-11. The Company's Plan of
Reorganization was confirmed by the Court on February 21, 1991.
Subsequent to the Company's bankruptcy filing, the Company's senior
lenders under the Credit Agreement ("Old Senior Lenders") filed a proof of
claim demanding, among other things, default interest, as a result of the
Company's failure to make an interest payment due June 15, 1990. The
Bankruptcy Court issued its opinion, on March 17, 1992, awarding
approximately $12.2 million in additional interest to the Credit
Agreement Banks. The Company has appealed this decision but recognized
the approximately $12.2 million of additional interest expense in its
financial statements for 1991. During 1994, a letter of credit was
issued for the account of the Company to provide to the Old Senior
Lenders assurance of payment of such additional interest expense if the
Old Senior Lenders are successful in the appeal. There were no material
developments in this matter in 1995.
26
As previously reported, on September 23, 1993, the Company was served with a
Summons and Complaint in a purported class action lawsuit entitled 7-ELEVEN
OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION,
ET AL., Case No. 722272-6, in the Superior Court for Alameda County,
California. Also named as defendants in the Complaint are Southland's
majority owners and various vendors who supply goods to 7 ELEVEN
franchisees in the State of California. The named plaintiffs
purportedly represent all persons who have owned 7-ELEVEN franchises in
California at any time since August 1987. The Complaint alleges a
variety of violations of California state antitrust laws, breaches of
contract and other claims relating to discounts and allowances, vendor
supplied equipment, Southland's accelerated inventory management program
and the 24-hour operation of 7-ELEVEN stores. Discovery in this matter is
proceeding. The Company intends to contest the certification of a class
in this litigation and to defend vigorously against all of the
plaintiffs' allegations. In addition, on March 15, 1996, the Company was
advised that a similar suit, brought by the same attorneys representing
the plaintiffs in the 7-Eleven OFFF case, had been filed in federal court in
the northern district of California, on behalf of a purported class
consisting of all persons who owned 7-Eleven franchises during the last
six years, except those located in California. The Company has not yet
formally received service of process in this action.
On August 17, 1990, the Superior Court for Alameda County, California
approved the settlement of a class action suit filed against the Company.
The suit was consolidated under the title Market Franchise Cases (Jud.
Council Dkt. No. 387). The plaintiff class consisted of all persons who
owned 7-ELEVEN franchises in California at any time from May 24, 1973, to
June 15, 1990. The Company has made settlement payments and credits
(including attorneys' fees and litigation expenses awarded to class
counsel) totalling approximately $16.5 million. Class members' claims
totalling less than $50,000 remain to be resolved. The case was
dismissed with prejudice in 1995 under the terms of the settlement.
As previously reported, the Company filed a lawsuit in the U.S.
District Court for the Northern District of Texas against Occidental
Petroleum Corporation and OXY Oil & Gas USA, Inc., ("OXY") to enforce
certain contractual indemnification provisions relating to environmental
clean-up expenses incurred by the Company at locations acquired in 1983
from OXY. During the second quarter of 1995, the Company and OXY agreed
to submit the matter to binding arbitration, and, pursuant to the
agreement, the Company received $4.7 million (net of expenses) from OXY.
Arbitration concluded in January of 1996 and the Company received a
favorable ruling from the arbitrator.
As previously reported, a lawsuit entitled EMIL V. SPARANO, ET AL. V.
THE SOUTHLAND CORPORATION, ET AL. was filed against the Company in the
United States District Court for the Northern District of Illinois, in
March 1994. Plaintiffs are several franchisees of 7-ELEVEN stores in
Illinois, Pennsylvania, New Jersey and Nevada; they purport to represent a
nationwide class of all persons who have owned 7-ELEVEN franchises
anywhere in the United States at any time since 1987. In addition to the
Company, several of the Company's current or former officers and
directors (John P. Thompson, Jere W. Thompson, Joe C. Thompson, Jr.
(collectively, the "Thompsons"), Clark J. Matthews, II, Walton Grayson,
III, John H. Rodgers and Frank Gangi) collectively, the "Individual
Defendants")) and Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and
IYG Holding Company (collectively, the "Foreign Companies") were named as
defendants in this case.
27
The third amended complaint alleges: (1) that, starting with
Southland's leveraged buyout in 1987, and continuing until the present
time, Southland has breached its contractual obligations to 7-ELEVEN
franchisees under the 7-Eleven Franchise Agreements by failing to spend
adequate sums of money for advertising and other services and for
maintaining and remodeling 7-ELEVEN stores and the equipment therein, and
(2) fraudulent misrepresentations relating to the LBO. Additional claims
were asserted against the Foreign Companies and the Thompsons for alleged
tortious interference with, and conspiracy to tortiously interfere with,
the franchise agreements by completing Southland's Plan of Reorganization
in 1991; the court dismissed all of these claims in November 1995.
Additional claims were asserted against the Thompsons alleging fraudulent
misrepresentations and fraudulent conveyance relating to the LBO, against
all Individual Defendants other than the Thompsons for alleged fraudulent
conveyance tortious interference with, and conspiracy to tortiously
interfere with, the franchisees' agreements by authorizing Southland's
completion of the LBO and execution of its Credit Agreement in 1987. The
third amended complaint requests damages, interest, costs and attorneys'
fees "in excess of $1 billion."
Southland filed a motion to dismiss all claims asserted against it,
except the breach of contract claim. The Individual Defendants and the
Foreign Companies filed motions to dismiss, motions for reconsideration
or motions for summary judgment. As noted above, the court dismissed all
claims against the Foreign Companies and the Thompsons involving the
tortious interference and conspiracy to tortiously interfere claims. As a
result, there are no claims pending against the Foreign Companies. The
court has not ruled on the other motions. The court has also not yet
decided whether the case will be permitted to proceed as a class action.
Southland intends to contest plaintiffs' effort to prosecute the
lawsuit as a class action, and it also intends to vigorously defend all
of the claims on the merits. Southland believes that it has meritorious
defenses to each of the claims. At this time, however, the litigation is
still at an early stage of development and the ultimate outcome cannot be
predicted.
As previously reported, on June 21, 1995, a lawsuit was filed against
the Company by T&L Property Service, an affiliate of Tal-Tex, Inc. ("Tal
Tex"). Tal-Tex is a water supply company located near Round Rock, Texas.
The complaint was subsequently amended to include claims by Tal-Tex, its
principals and certain individuals who reside in or near Round Rock on
behalf of themselves and a purported class of similarly-situated
residents, alleging personal injuries and property damage as a result of
the release of petroleum from underground storage tanks at a 7-ELEVEN
store in Round Rock. In March, 1996, the individual claims of the Tal
Tex entities were severed from the class action. The Company strongly
contests and is vigorously defending against both lawsuits. At this
stage in the litigation, the Company is unable to predict the ultimate
outcome of these cases.
On or about August 31, 1995, Southland was named as a defendant in a
class action filed in the 361st District Court in Brazos County, Texas.
The case is styled ARTURO M. VASQUEZ ET AL. V. THE SOUTHLAND CORPORATION,
ET AL. and asserts certain claims on behalf of a purported class of
property owners whose properties have allegedly been damaged by petroleum
releases from underground storage tanks at approximately 150 former or
current Southland locations in Texas. Southland's motion to transfer
28
venue to Dallas County, Texas, was approved but the plaintiffs have filed a
motion for rehearing and the hearing on that motion is scheduled for
April 15, 1996. Southland strongly contests and is vigorously defending
against the claims in the lawsuit. At this early stage in the
litigation, it is impossible to predict Southland's exposure, if any, to
liability.
Information concerning other legal proceedings is incorporated herein
from "Environmental Matters," pages 17 through 19, above.
In the ordinary course of business, the Company is also involved in
various other legal proceedings which, in the Company's opinion, are not
material, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock, $.0001 par value per share, is the only
class of common equity of the Company and represents the only voting
securities of the Company. There are 409,922,935 shares of Common Stock
issued and outstanding and, as of March 8, 1996, there were 3,097 record
holders of the Common Stock. The Company's Common Stock is traded on The
Nasdaq Stock Market under the symbol "SLCM". The following information
has been provided to the Company by the Nasdaq Stock Market.
PRICE RANGE
QUARTERS HIGH LOW CLOSE
- ------------- -------------------------------------------------
1995
FIRST $ 4 23/32 $ 3 7/16 $ 3 3/4
SECOND 4 3/8 3 7/16 3 7/16
THIRD 4 1/8 2 7/8 3
FOURTH 4 1/4 2 15/16 3 5/16
1994
FIRST $ 6 3/4 $ 3 13/16 $ 3 7/8
SECOND 6 1/4 3 7/8 6 1/4
THIRD 6 3/8 4 1/2 5 3/4
FOURTH 5 13/16 4 1/4 4 1/2
(a) These quotations reflect inter-dealer prices without retail mark-
up, mark-down or commission and may not necessarily represent
transactions.
29
The indentures governing the Company's outstanding debt securities do
not permit the payment of cash dividends except in limited circumstances.
The Credit Agreement also restricts the Company's ability to pay cash
dividends on the Common Stock.
Under Texas law, cash dividends may only be paid (a) out of the
surplus of a corporation, which is defined as the excess of the total
value of the corporation's assets over the sum of its debt, the par value
of its stock and the consideration fixed by the corporation's board of
directors for stock without par value, and (b) only if, after giving
effect thereto, the corporation would not be insolvent, which is defined
to mean the inability of a corporation to pay its debts as they become
due in the usual course. Surplus may be determined by a corporation's
board of directors by, among other things, the corporation's financial
statements or by a fair valuation or information from any other method
that is reasonable in the circumstances. No assurances can be given that
the Company will have sufficient surplus to pay any cash dividends even
if the payment thereof is not otherwise restricted.
30
Item 6. SELECTED FINANCIAL DATA
S E L E C T E D F I N A N C I A L D A T A
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
Years Ended December 31
---------------------------------------------------
1995 1994 1993 1992 1991
--------- -------- -------- -------- ------
(Dollars in Millions, Except Per-Share Data)
Net sales. . . . . . . . . . . . . . $6,745.8 $6,684.5 $6,744.3 $7,425.8 $8,009.5
Other income (a) . . . . . . . . . . 71.0 66.4 61.6 57.9 54.4
Total revenues (a) . . . . . . . . . 6,816.8 6,750.9 6,805.9 7,483.7 8,063.9
LIFO charge (credit) . . . . . . . . 2.6 3.0 (8.7) 1.5 (7.2)
Depreciation and amortization . . . 166.4 162.7 154.4 180.3 200.1
Interest expense, net (a)(b) . . . . 85.6 95.0 81.8 97.4 153.8
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of accounting changes . . . 101.5 73.5 (2.6) (119.9)(c) (66.3)
Income taxes (benefit) . . . . . . . (66.1)(d) (18.5)(e) 8.7 11.5 8.0
Earnings (loss) before extraordinary
items and cumulative effect of
accounting changes . . . . . . . . 167.6 92.0 (11.3) (131.4) (74.3)
Net earnings (loss). . . . . . . . . 270.8(f) 92.0 71.2 (g) (131.4) 82.5 (h)
Earnings (loss) per common share
(primary and fully diluted):
Before extraordinary items
and cumulative effect of
accounting changes. . . . . . 0.40 0.22 (0.03) (0.32) (0.22)
Net earnings (loss) . . . . . . 0.65 0.22 0.17 (0.32) 0.24
Total assets . . . . . . . . . . . . 2,081.1 2,000.6 1,990.0 2,039.7 2,607.7
Long-term debt, including current. . 1,850.6 2,351.2 2,419.9 2,560.4 3,037.1
portion (b)
- --------------------------
(a) Prior-year amounts have been reclassified to conform to current-year
presentation.
(b) The Company's 1991 public debt issuances are accounted for in accordance
with SFAS No. 15 as explained in Note 8 to the Consolidated Financial
statements.
(c) Loss before income taxes, extraordinary items and cumulative effect of
accounting changes include a $45,000,000 loss on the sale and closing of
the Company's distribution and food processing facilities.
(d) Income taxes (benefit) includes an $84,269,000 tax benefit from
recognition of the remaining portion of the Company's net deferred tax
assets as explained in Note 14 to the Consolidated Financial Statements.
(e) Income taxes (benefit) includes a $30,000,000 tax benefit from
recognition of a portion of the Company's net deferred tax assets as
explained in Note 14 to the Consolidated Financial Statements.
(f) Net earnings include an extraordinary gain of $103,169,000 on
debt redemption as explained in Note 8 to the Consolidated Financial
Statements.
(g) Net earnings include an extraordinary gain of $98,968,000 on
debt redemption and a charge for the cumulative effect of an accounting
change for postemployment benefits of $16,537,000 as explained in Notes 8
and 12 to the Consolidated Financial Statements, respectively.
(h) Net earnings include an extraordinary gain on debt restructuring
of $156,824,000.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings for 1995 were $270.8 million, compared to
net earnings of $92.0 million in 1994 and $71.2 million in 1993.
Continued improvement in the Company's operating performance resulted in a
38% increase in 1995 earnings before income taxes.
Years Ended December 31
- ------------------------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1995 1994 1993
--------- --------- -------
Earnings (loss) before income taxes,
extraordinary gain and cumulative
effect of accounting change $ 101.5 $ 73.5 $ (2.6)
Income tax benefit (expense) 66.1 18.5 (8.7)
Extraordinary gain from partial redemption
of the Company's 4 1/2 and 5% debentures in
November 1995 103.2
Extraordinary gain from redemption of the
Company's 12% Senior Notes (refinanced in
August 1993) 99.0
Cumulative effect of accounting change for
postemployment benefits (16.5)
-------- -------- -------
Net earnings $ 270.8 $ 92.0 $ 71.2
======== ======== ========
Net earnings per common share (primary
and fully diluted) $ .65 $ .22 $ .17
======== ======== ========
Each years' results included the following special or unusual items,
in addition to the items noted above:
Years Ended December 31
- ------------------------
(DOLLARS IN MILLIONS) 1995 1994 1993
--------- --------- ------
Severance and related costs $ (13.4) $ (7.4) $ (7.2)
Deferred income tax benefit 84.3 30.0
Loss for store closings and dispositions
of properties (3.7) (48.2)
Disposition of Citijet, a fixed-base
operation at Dallas Love Field Airport (10.8)
The Company's operating improvement in 1995 was primarily due to
savings in "Operating, Selling, General and Administrative" (OSG&A)
expenses. Although store closings (173 average) resulted in a decline in
total merchandise gross profit compared to 1994, average per store
merchandise sales and gross profits improved in each quarter in 1995 over
1994.
(EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL
STORES RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR)
32
FINANCIAL STATEMENT CHANGES
The Company has made the following changes to its financial
statements for all years presented, and has restated such items in the
comparisons provided to maintain consistency:
i) Total Revenues - interest income was
reclassified from "Other Income" to "Interest Expense, Net".
(See Note 1 of "Notes to Consolidated Financial
Statements")
ii) Cost of Goods Sold (COGS) - Buying and occupancy expenses were
reclassified to OSG&A expenses. Although these changes were made
for financial statement purposes during the fourth quarter of
1995, prior Management's Discussion and Analysis had been excluding
buying and occupancy expenses, as well as certain merchandise and
gasoline inventory-related expenses, from per store gross profit and
margin results.
iii) Profit Sharing Contribution - this expense is now included in
OSG&A expenses.
MANAGEMENT STRATEGIES
Since 1992, the Company has been committed to several key
strategies that it believes, over the long term, will further
differentiate it from its competitors and allow 7-Eleven to maintain its
position as the premier convenience store chain in the industry. These
strategies include: an upgraded store base; a customer-driven approach to
product selection; an everyday-fair-pricing policy on all items; daily
delivery of fresh perishable items; introduction of high-quality,
ready-to-eat fresh foods; and the implementation of a retail automation
system.
The Company plans to upgrade its store base by remodeling
existing stores, closing underperforming stores and developing new
sites. Over the last few years, the Company has devoted the majority of
its capital resources toward the most extensive remodeling of its store
base ever undertaken. In conjunction with the remodeling program,
the Company has been pruning its store base by closing or disposing of
those stores that are not expected to achieve an acceptable level
of profitability in the future. As a result, the Company closed 228
stores in 1995, 184 in 1994 and 401 in 1993. The Company expects to
complete its remodeling program by the end of this year; however, it
will continue to refurbish its store base as necessary. The planning
process for new store sites is well under way. The Company's capital
investment focus will shift to store development (see Liquidity and
Capital Resources - Capital Expenditures). Initial plans are to strengthen
its position by expanding the store base in existing markets, with store
openings in 1996 expected to offset store closings/dispositions. However,
by 1997 the Company expects new store openings to significantly outpace
closures each year.
The customer-driven approach to merchandising, which was adopted by
the Company in 1992, continues to focus on providing the customer an
expanded selection of quality products at a good value. This is being
accomplished by emphasizing the importance of ordering at the store
level, removing slow-moving items and aggressively introducing new
products in the early stages of their life cycle. This process, which has
contributed to improved sales and profits, will be an ongoing part of
managing our business in a continual effort to satisfy the everchanging
preferences of our customers.
33
The Company's everyday-fair-pricing strategy, which was
introduced in 1992, has provided consistent prices on all items by
reducing its reliance on discounting. As a result, some product prices were
increased, while others were lowered to achieve more consistent pricing
on all products. Going forward, the Company plans to migrate toward lower
retail prices as lower product costs are achieved through contract
negotiations or strategic alliances with suppliers and distributors.
Daily delivery of fresh perishable items and high-quality
ready-to-eat foods is another key management strategy. Implementation of
this strategy includes third-party development and operation of combined
distribution centers ("CDC"), fresh-food commissaries and bakery
facilities in most of the Company's markets around the country. The
commissary and bakery ready-to-eat items, like fresh sandwiches and
pastries, along with goods from multiple vendors such as dairy products,
produce and other perishable goods, are "combined" at a distribution
center and delivered daily to each store. In addition to providing
fresher products and improving in-stock conditions from daily
deliveries, the combined distribution is also intended to provide
lower product costs, in part from vendors' savings, through this
approach. The Company expects the improved freshness and lower cost of
the products from these operations to improve sales and gross profits. At
the end of 1995, over 800 stores were serviced by the CDC's and
carried fresh food products manufactured by the
commissaries. Further expansion of these programs is anticipated in 1996
in the following markets: Denver/Colorado Springs, Baltimore,
Richmond/Norfolk, San Jose, Orlando/Tampa,and Chicago. When
operational, CDC's in these markets will make daily-delivered fresh food
available to nearly one-half of the Company's stores.
The development of a retail automation system began in 1994. The
initial phase, which will be completed in early 1996, involves
installing in-store processors ("ISP") in each store that will
automate accounting and other store-level tasks. The second phase
involves installing cash registers which, among other things, will feed
data directly to the ISP. After future phases are complete, the system
will provide each store and its suppliers and distributors with on-line
information to make better decisions in anticipating customer needs.
SALES
The Company recorded net sales of $6.75 billion for the year
ended December 31, 1995, compared to sales of $6.68 billion in 1994 and
$6.74 billion in 1993. To strengthen its store base (see
Management Strategies), the Company has closed more than 800
underachieving stores over the last three years. Same store
merchandise sales increases since 1993 have minimized the lost sales from
store closings, resulting in total sales remaining flat during this time
period. In addition, 1994 and 1993 merchandise sales results were
adversely impacted by the deflationary effect of cigarette price reductions
(on certain premium brands) associated with manufacturers' cost reductions
starting in August, 1993. The total sales increase in 1995 was primarily
due to higher gasoline gallons and retail sales price per gallon.
34
U.S. same-store merchandise sales increases or (decreases) as
compared to the prior year and inflation information is presented
below:
YEARS ENDED DECEMBER 31
-----------------------
INCREASE/(DECREASE) FROM PRIOR YEAR 1995 1994 1993
----- ----- ----
Same-store sales 2.0% 2.1% (2.7)%
Same-store real growth; excluding inflation - 2.8% (4.7)%
7-Eleven inflation (deflation) 2.1% (.7)% 2.2%
Overall, domestic same-store merchandise sales growth continued its
positive trend in 1995, however, results varied by geographic region.
The largest increases occurred in those areas with the highest percentage
of completed remodels (Florida 4.8%, Texas/Colorado 4.1%). Conversely, the
Southern California area, which includes 18% of the Company's domestic
stores, experienced a decline of almost 1.5% due to a sluggish economy. In
addition, this is the area where the lowest percentage of remodels has
been completed.
Gasoline sales dollars per store increased 4.0%, 8.7% and 9.1% in
1995, 1994 and 1993, respectively. This improvement is primarily due to
per store gallonage improvement of 1.0% in 1995, 7.8% in 1994 and 11.1%
in 1993, reflecting the impact of several successful business strategies.
Gallon volumes in 1995 did not sustain the high growth levels
experienced in 1993 and 1994 as a result of market factors which affect
the way the Company manages its gasoline business.
OTHER INCOME
Other income of $71.0 million for 1995 was $4.6 million higher than
1994 and $9.4 million higher than 1993. The improvement is primarily
the result of increased royalty income from licensed operations.
GROSS PROFITS
MERCHANDISE GROSS PROFIT DATA YEARS ENDED DECEMBER 31
------------------------------
1995 1994 1993
--------- --------- -------
Merchandise gross profit - DOLLARS IN MILLIONS $ 1,790.2 $ 1,791.1 $ 1,847.9
INCREASE/(DECREASE) FROM PRIOR YEAR
Average per store gross profit dollar change 3.1% 1.7% 2.4%
Margin percentage point change (.01) (.50) 1.21
Average per store merchandise sales 3.1% 3.2% (1.1)%
Even though total merchandise gross profits have declined
primarily from fewer stores, merchandise gross profit per store has
consistently improved over prior year results for each of the last
twelve quarters.
Merchandise gross profit margins in 1993 increased as a result of the
Company's implementation of its everyday-fair-pricing strategy, which
reduced discounting and promotional activities (see Management
Strategies). Margins have also been favorably affected by lower
35
cigarette costs (beginning in August 1993) and lower product costs
under the Company's supply agreement with McLane. In 1994, with the
reduction of discounting in place, the Company tested lower prices in
certain parts of the country as part of a more aggressive
everyday-fair-pricing strategy. These lower prices, combined with
increased costs for disposal of slow moving merchandise, was primarily
responsible for the decrease in 1994 merchandise margins.
During 1995, merchandise margin declined slightly compared to
1994. While some higher margin categories, such as services, showed good
growth throughout the year, overall merchandise margin declined in the
fourth quarter almost .5 percent compared to the same period last year.
This decline was the result of several factors including rising costs that
were not entirely passed on to the consumer, initial introductory costs
associated with new fresh-food products and increased focus on
deleting slower-moving items. Management is actively working to
maintain a merchandise margin level consistent with last year.
GASOLINE GROSS PROFIT DATA YEARS ENDED DECEMBER 31
------------------------
1995 1994 1993
-------- -------- --------
Gasoline gross profit - DOLLARS IN MILLIONS $ 192.9 $ 199.6 $ 195.6
INCREASE/(DECREASE) FROM PRIOR YEAR
Average per store gross profit dollar change (3.3)% 8.2% 33.4%
Margin point change (in cents per gallon) (.60) .06 2.37
Average per store gas gallonage 1.0% 7.8% 11.1%
In 1995, gasoline gross profits declined $6.7 million from the levels
achieved in 1994 due to lower margins (in cents per gallon), which were
affected by market conditions that kept wholesale costs high for much of
the year while competitive pressures kept retail prices soft. Gasoline
gross profit dollars and margin were unusually high in the fourth quarter
of 1994 as a result of favorable market conditions created by the
federally mandated fuel reformulation program. Contributing factors to the
strong results in 1993, 1994 and the first three quarters of 1995,
were the Company's business strategies which closed low-volume locations,
enhanced the appeal and convenience of its gas facilities and placed
increased emphasis on bystore management of gasoline merchandising.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEARS ENDED DECEMBER 31
--------------------------------
(DOLLARS IN MILLIONS) 1995 1994 1993
---------- ---------- --------
Total operating, selling, general and
administrative expenses $ 1,867.0 $ 1,888.6 $ 2,030.4
Ratio of reported OSG&A to sales 27.7% 28.3% 30.1%
Decrease in reported OSG&A
compared to prior year $ (21.6) $ (141.8) $ (93.7)
Decrease in adjusted OSG&A compared to
prior year * $ (23.9) $ (86.7) $ (98.1)
* ADJUSTED TO EXCLUDE SEVERANCE AND RELATED COSTS AND THE LOSS FOR
STORE CLOSINGS AND DISPOSITIONS OF PROPERTIES, INCLUDING CITIJET (SEE
SUMMARY OF RESULTS OF OPERATIONS).
The majority of the decrease in OSG&A expenses, as adjusted,
resulted from cost savings realized from reductions in force that
36
began late in 1992 and continued through 1995, combined with the
effect of having fewer stores (see Management Strategies).
The Company continues to review the functions necessary to enable its
stores to respond faster and more cost efficiently to rapidly changing
customer needs and preferences. In conjunction with this review, the
Company continues to realign and reduce personnel and office facilities,
in order to eliminate non-essential costs.
In December 1995, the Company's plans resulted in a $13.4 million
accrual, of which $5.0 million was for severance benefits and $8.4
million for reduction of office space. Reductions of more than 400
employees throughout the Company will result in annualized savings of
approximately $20 million. The office closings and consolidations
involve field operating and staff locations, as well as the Company's
headquarters facilities ("Cityplace"). While the execution of the
office plans will take most of the year, future years' annualized
savings from these initiatives will be approximately $5 million,
including potential income from additional Cityplace leases.
In December 1994, the Company accrued $7.4 million for severance
costs and office reductions. The employee terminations were completed in
1995, while the office realignments will be completed in 1996 along with
those previously discussed. Changes from the estimates for 1994's original
$7.4 million accrual did not have a material impact on 1995 earnings.
INTEREST EXPENSE, NET
The Company's net interest expense in 1995 decreased $9.4 million
compared to 1994. Most of the savings related to non-cash interest
which declined due to the refinancing of the term loans under the
senior bank debt credit agreement ("Credit Agreement") in December 1994
and the extension of the repayment of the debt relating to its
headquarters facilities (Cityplace) at a lower interest rate in
February 1995 (see Liquidity and Capital Resources - Financing
Activities). The adverse impact of the 1.1% rise in the weighted
average interest rate on the Company's floating rate debt during 1995
increased interest expense approximately $8 million. However, the 1.5%
reduction in the margin that the Company negotiated with its bank
lenders in the refinancing in late 1994 offset a portion ($5 million) of
this increase.
In November 1995, the Company consummated a $216.7 million tender
offer to purchase a portion ($263.3 million face value) of its public ebt
securities (see Liquidity and Capital Resources - Financing
Activities). The purchase was financed by the issuance of $300 million of
4.5% Convertible Quarterly Income Debt Securities due 2010
("Convertible Debt"). The annual interest expense of $13.7 million from
issuing the Convertible Debt will not be offset by a
corresponding reduction in interest expense for the retired
debentures, since the retired debentures are subject to Statement of
Financial Accounting Standards No. 15 ("SFAS No. 15") treatment.
Despite the incremental interest expense from the Convertible Debt, the
Company expects total interest expense to remain flat in 1996, due to the
expectation of lower floating rates and debt balances coupled with lower
short-term borrowings from use of the convertible debt proceeds not used
in the tender offer.
Net interest expense in 1994 increased $13.2 million over 1993,
primarily due to the refinancing of the 12% Senior Notes with working
capital and bank debt in August 1993. Unlike the interest on the bank
debt, interest on the 12% Senior Notes was subject to SFAS No. 15
treatment with interest payments recorded as a reduction of principal
rather than interest expense (see Note 8 of "Notes to Consolidated
Financial Statements"). Net interest expense in 1993 was $15.6 million
37
lower than in 1992 primarily due to lower interest rates on floating rate
debt, combined with greater use of commercial paper, which has lower
interest rates than other debt instruments. Partially offsetting the
decline in interest expense was lower interest income resulting from the
receipt in 1992 of $5.8 million in interest on tax refunds.
Approximately 35% of the Company's debt contains floating rates,
which had a weighted average interest rate of 6.62% for 1995 versus
5.51% and 4.52% for 1994 and 1993, respectively. In the first quarter of
1996, the Company reduced its exposure to short-term fluctuations in
rates on a substantial portion of its floating rate bank debt by
selecting one year LIBOR maturities at current favorable rates rather than
the shorter terms it has selected in the past.
INCOME TAXES
The Company recorded tax benefits in 1995 and 1994 of $66.1
million and $18.5 million respectively, compared to a tax expense of $8.7
million in 1993. During the fourth quarter of 1994, as a result of the
Company's anticipated 1995 taxable earnings, the valuation
allowance for deferred taxes was reduced $30 million. During the
fourth quarter of 1995, due to the Company's demonstrated ability to
produce higher levels of taxable income, the remaining portion of the
valuation allowance was reversed producing an $84.3 million benefit.
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's working capital is provided from
three sources: i) cash flows generated from its operating activities; ii) a
$400 million commercial paper facility (guaranteed by Ito-Yokado Co.,
Ltd.); and iii) short-term seasonal borrowings of up to $150 million
under its revolving credit facility. The Company believes that operating
activities coupled with available short-term working capital facilities
will provide sufficient liquidity to fund current operating and capital
expenditure programs, as well as to service debt requirements.
FINANCING ACTIVITIES
On November 22, 1995, the Company completed a tender offer for 40%
of the face value of both its 5% First Priority Senior
Subordinated Debentures due December 15, 2003 ($180.6 million) and 4 1/2%
Second Priority Senior Subordinated Debentures-Series A ($82.7 million)
due June 15, 2004 (collectively, the "Debentures"). Under the terms of the
offer the final clearing prices were $840.00 and $786.00 for the 5% and
4 1/2% Debentures, respectively, per $1,000 face amount, resulting in a
cash outlay by the Company of $216.7 million.
To finance the purchase of the Debentures, the Company issued $300
million in Convertible Debt to Ito-Yokado Co., Ltd., and Seven-
Eleven Japan Co., Ltd., the joint owners of IYG Holding Company, which is
the Company's majority shareholder. The remaining proceeds of $83.3 million
were made available for general corporate purposes. The Convertible Debt
is subordinated to all existing debt, has a 15 year term with no
amortization and is convertible into the Company's common shares at $4.16
per share.
The Company recognized a $103.2 million after tax extraordinary gain
on the purchase of the Debentures in the fourth quarter of 1995.
38
The gain results from purchasing the Debentures below their face value and
from retiring the future undiscounted interest payments on that portion
of the Debentures being purchased. As a result of the Company's
financial restructuring in 1991, SFAS No. 15 required the Company to
include its future undiscounted interest payments on the Debentures in
the carrying value of the debt on the balance sheet.
The Company's Credit Agreement contains a $300 million term loan and
a revolving credit facility. The term loan has scheduled quarterly
repayments of $18.75 million commencing March 31, 1996, through
December 31, 1999. The revolving credit facility contains both a
revolving loan ("Revolver") and letter of credit subfacility, each
having a maximum limit of $150 million and expiring on December 31,
1999. Interest on the Revolver and Term Loan is generally based on a
variable rate equal to the administrative agent bank's base rate or, at
the Company's option, at a rate equal to the Eurodollar rate plus .975%
per year.
The Credit Agreement contains certain financial and operating
covenants requiring, among other things, the maintenance of certain
financial ratios, including interest coverage, fixed charge coverage and
senior indebtedness to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The covenant levels
established by the Credit Agreement generally require continuing
improvement in the Company's financial condition.
For the period ended December 31, 1995, the Company was in
compliance with all of the covenants required under the Credit
Agreement, including compliance with the principal financial and
operating covenants (calculated over the latest 12-month period) as
follows:
COVENANTS REQUIREMENTS:
- --------- ---------------------------------------
ACTUALS MINIMUM MAXIMUM
----------- ----------- ----------
Interest coverage * 2.82 to 1.0 2.70 to 1.0
Fixed charge coverage 1.10 to 1.0 1.00 to 1.0
Senior indebtedness to EBITDA 3.56 to 1.0 4.10 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
The issuance of the Convertible Debt and the tender offer for the
Debentures did not require the approval of the Company's lenders under the
Credit Agreement. However, during the fourth quarter, the Company obtained
an amendment to the Credit Agreement that allows greater flexibility on
uses of the proceeds from the issuance of the Convertible Debt and
how the refinancing is treated under certain financial covenants. The
amendment allows the Company, among other things, to make subsequent
purchases of subordinated debt with any remaining proceeds and to exclude
payments for such purchases from the Company's fixed charge coverage ratio.
In 1995, the Company repaid $289.4 million of debt, of which $216.7
million related to the tender offer for the Debentures. Other principal
reductions during the year were $72.7 million of which $34.6 million
was for SFAS No. 15 interest and $23.9 million was for principal
payments on the Company's Yen denominated loan (secured by the royalty
income stream from its area licensee in Japan). Outstanding
balances at December 31, 1995, for the commercial paper, the Term Loan
and the Revolver were $350.2 million, $300.0 million and zero,
respectively. As of December 31, 1995, outstanding letters of credit
issued pursuant to the Credit Agreement totaled $80.4 million.
39
As a result of an agreement reached in conjunction with the
Company's bankruptcy proceedings in 1990, on February 15, 1995, the 7 7/8%
Cityplace notes, issued by Cityplace Center East Corporation ("CCEC"),
a wholly owned subsidiary of the Company, were repaid under a drawing of
a letter of credit issued by The Sanwa Bank, Ltd. Under such agreement,
the term of maturity of the indebtedness of CCEC resulting from such
draw has been extended by ten years to March 1, 2005. New terms include
monthly payments of principal and interest over the ten-year period,
based upon a 25-year amortization at 7 1/2%, with the remaining principal
due upon maturity.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $236.2 million for
1995, compared to $271.6 million in 1994 and $232.1 million in 1993 (see
"Results of Operations" section). In 1995, other items affecting operating
cash flows included a $13.4 million payment related to an IRS examination
of the Company's filings for 1990 and 1991. Such payment had no material
effect on 1995 earnings.
CAPITAL EXPENDITURES
During 1995, net cash used in investing activities consisted
primarily of payments of $192.2 million for property and equipment, the
majority of which was used for remodeling stores, upgrading retail gasoline
facilities, replacing equipment and complying with environmental
regulations. Through December 31, 1995, approximately 4,100 stores have
been remodeled. The remodels are focusing on the features that are
most noticeable to customers and have the most immediate and positive
impact on store performance, such as lighting and security, food
service equipment, necessary maintenance and consistent image.
The Company expects 1996 capital expenditures to be approximately
$210 million (excluding lease commitments), primarily to complete
remodels started in 1995 and to remodel about 1,100 additional stores. The
remaining capital will be used for development of new store sites, to
replace equipment, to upgrade gasoline facilities and to comply with
environmental regulations. While the Company will look at the economics
of each new site, it anticipates that it will finance new store
construction primarily through leases containing initial terms of 15-20
years with typical option renewal periods.
CAPITAL EXPENDITURES - GASOLINE EQUIPMENT
The Company incurs ongoing costs to comply with federal, state and
local environmental laws and regulations primarily relating to
underground storage tank ("UST") systems. The Company anticipates it will
spend approximately $12 million in 1996 on capital improvements required
to comply with environmental regulations relating to USTs, as well as
above-ground vapor recovery equipment at store locations and approximately
an additional $21 million on such capital improvements from 1997 through
1999.
ENVIRONMENTAL COMPLIANCE - STORES
The Company accrues for the anticipated future costs of
environmental clean-up activities (consisting of environmental
assessment and remediation) relating to detected releases of regulated
40
substances at its existing and previously owned or operated sites at
which gasoline has been sold (including store sites and other
facilities that have been sold by the Company). At December 31, 1995, the
Company has an accrued liability of $63.7 million for such
activities and anticipates that substantially all such expenditures will
be incurred within the next five years. This estimate is based on the
Company's prior experience with gasoline sites and its consideration
of such factors as the age of the tanks, location of tank sites and
experience with contractors who perform environmental assessment and
remedial work.
Under state reimbursement programs the Company is eligible to
receive reimbursement for a portion of future costs, as well as costs
previously paid. At December 31, 1995, the Company has recorded a
gross receivable of $73.4 million (a net receivable of $59.7 million
after an allowance of $13.7 million) for the estimated probable state
reimbursement. There is no assurance of the timing of the receipt of
state reimbursement funds; however, based on its experience, the
Company expects to receive the majority of state reimbursement funds
within one to four years after payment of eligible assessment and
remediation expenses, assuming that the state administrative
procedures for processing such reimbursements have been fully
developed.
The estimated future assessment and remediation expenditures and
related state reimbursement amounts could change within the near
future as governmental requirements and state reimbursement programs
continue to be implemented or revised.
ENVIRONMENTAL COMPLIANCE - CHEMICAL PLANT
In December 1988, the Company closed its chemical manufacturing
facility in New Jersey. As a result, the Company is required to
conduct environmental remediation at the facility and has accrued a
liability for this purpose. As required, the Company has submitted a
clean-up plan to the New Jersey Department of Environmental Protection (the
"State"), which provides for remediation of the site for
approximately a three to five year period, as well as continued
groundwater treatment for a projected 20 year period. While the
Company has received initial comments from the State, the clean-up
plan has not been finalized. The Company has recorded liabilities
representing its best estimates of the clean-up costs of $37.8 million at
December 31, 1995. Of this amount, $31.7 million was included in deferred
credits and other liabilities and the remainder in accrued expenses and
other liabilities. In 1991, the Company entered into a settlement
agreement with a large chemical company that formerly owned the facility.
Under the settlement agreement, the former owner agreed to pay a
substantial portion of the clean-up costs described above. The Company has
recorded a receivable of $22.0 million at December 31, 1995, representing
the former owner's portion of the clean-up costs.
None of the amounts related to environmental liabilities have been
discounted.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements for the Years Ended December 31, 1995,
1994 and 1993
42
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Dollars in Thousands, Except Per-Share Data)
ASSETS
1995 1994
------------- ---------
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 43,047 $ 59,288
Accounts and notes receivable. . . . . . . . . . . . . . . 107,224 102,230
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 102,020 101,468
Other current assets . . . . . . . . . . . . . . . . . . . 103,816 40,411
------------- ----------
Total current assets . . . . . . . . . . . . . . . . 356,107 303,397
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . . 1,335,783 1,314,499
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 389,227 382,698
------------- ----------
$ 2,081,117 $2,000,594
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable . . . . . . . . . . . . . . . . . . $ 195,154 $203,315
Accrued expenses and other liabilities . . . . . . . . . . 329,429 316,183
Commercial paper . . . . . . . . . . . . . . . . . . . . . 50,198 41,322
Long-term debt due within one year . . . . . . . . . . . . 145,346 123,989
------------- ----------
Total current liabilities . . . . . . . . . . . . . 720,127 684,809
DEFERRED CREDITS AND OTHER LIABILITIES. . . . . . . . . . . . . 236,545 245,807
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . 1,705,237 2,227,209
CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES. . . . . . . . . . 300,000 -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value; 1,000,000,000 shares
authorized; 409,922,935 shares issued and outstanding. . 41 41
Additional capital . . . . . . . . . . . . . . . . . . . . 625,574 625,574
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (1,506,407) 1,782,846)
------------- ----------
Total shareholders' equity (deficit). . . . . . . . . (880,792) (1,157,231)
------------- ----------
$ 2,081,117 $2,000,594
============= ===========
See notes to consolidated financial statements.
43
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands, Except Per-Share Data)
1995 1994 1993
------------- ------------- -----------
REVENUES:
Net sales (including $991,788, $992,970 and $962,955
in excise taxes). . . . . . . . . . . . . . . . . . . $ 6,745,820 $ 6,684,495 $ 6,744,333
Other income . . . . . . . . . . . . . . . . . . . . . . . 70,969 66,407 61,592
------------- ------------- -----------
6,816,789 6,750,902 6,805,925
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 4,762,707 4,693,826 4,696,309
Operating, selling, general and administrative expenses. . 1,866,971 1,888,610 2,030,382
Interest expense, net. . . . . . . . . . . . . . . . . . . 85,582 94,970 81,814
------------- ------------- -----------
6,715,260 6,677,406 6,808,505
------------- ------------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY GAIN AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE. . . . . . . . . . . . . . . . 101,529 73,496 (2,580)
INCOME TAXES (BENEFIT). . . . . . . . . . . . . . . . . . . . . (66,065) (18,500) 8,700
------------- ------------- -----------
EARNINGS (LOSS) BEFORE EXTRAORDINARY
GAIN AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE. . . . . . . . . . . . . . . . . . . . . 167,594 91,996 (11,280)
EXTRAORDINARY GAIN ON DEBT REDEMPTION (net
of tax effect of $8,603 in 1995 and $0 in 1993). . . . . . 103,169 - 98,968
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
FOR POSTEMPLOYMENT BENEFITS. . . . . . . . . . . . . . . . - - (16,537)
------------- ------------- ------------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 270,763 $ 91,996 $ 71,151
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE
(Primary and fully diluted):
Before extraordinary gain and cumulative
effect of accounting change $ .40 $ .22 $(.03)
Extraordinary gain .25 - .24
Cumulative effect of accounting change - - (.04)
------ ------ ------
Net earnings $ .65 $ .22 $ .17
====== ====== ======
See notes to consolidated financial statements.
44
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands, Except Share Amounts)
COMMON STOCK TOTAL
-------------------- ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
------------ ------ ---------- ------------- -------------
BALANCE, JANUARY 1, 1993 410,022,481 $ 41 $ 625,724 $ (1,944,524) $ (1,318,759)
Net earnings. . . . . . . . . . - - - 71,151 71,151
Cancellation of shares. . . . . (99,546) - (150) 112 (38)
Foreign currency translation
adjustments. . . . . . . . - - - (704) (704)
------------ ---- ---------- ------------- -------------
BALANCE, DECEMBER 31, 1993 409,922,935 41 625,574 (1,873,965) (1,248,350)
Net earnings. . . . . . . . . . - - - 91,996 91,996
Foreign currency translation
adjustments. . . . . . . . - - - (877) (877)
------------ ---- ---------- ------------- -------------
BALANCE, DECEMBER 31, 1994 409,922,935 41 625,574 (1,782,846) (1,157,231)
Net earnings. . . . . . . . . . - - - 270,763 270,763
Foreign currency translation
adjustments. . . . . . . . - - - (2,470) (2,470)
Other . . . . . . . . . . . . . - - - 8,146 8,146
------------ ---- ---------- ------------- -------------
BALANCE, DECEMBER 31, 1995 409,922,935 $ 41 $ 625,574 $ (1,506,407) $ (880,792)
============ ==== ========== ============= =============
See notes to consolidated financial statements.
45
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
1995 1994 1993
------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 270,763 $ 91,996 $ 71,151
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary gain on debt redemption . . . . . . . . . . . . . . . . (103,169) - (98,968)
Cumulative effect of accounting change for postemployment benefits. . - - 16,537
Depreciation and amortization of property and equipment . . . . . . . 147,423 143,670 134,920
Other amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 19,026 19,026 19,430
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . (84,269) (30,000) -
Noncash interest expense. . . . . . . . . . . . . . . . . . . . . . . 1,974 11,384 8,497
Other noncash (income) expense. . . . . . . . . . . . . . . . . . . . (409) 614 3,393
Net loss on property and equipment. . . . . . . . . . . . . . . . . . 7,274 7,504 36,226
(Increase) decrease in accounts and notes receivable. . . . . . . . . (2,708) (3,066) 24,937
(Increase) decrease in inventories. . . . . . . . . . . . . . . . . . (552) 7,895 16,347
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . (1,053) 24,273 3,344
Decrease in trade accounts payable and other liabilities. . . . . . . (18,083) (1,729) (3,737)
------------- ------------- -----------
Net cash provided by operating activities. . . . . . . . . . . . 236,217 271,567 232,077
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment. . . . . . . . . . . . . . (192,221) (171,636) (195,146)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . 15,720 15,867 22,809
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,770 2,371 4,982
Net currency exchange principal transactions . . . . . . . . . . . . . . . - (5,133) (8,894)
Cash utilized by distribution and food center assets . . . . . . . . . . . - (2,790) (17,739)
Proceeds from sale of distribution and food center assets. . . . . . . . . - 6,305 44,889
------------- ------------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (173,731) (155,016) (149,099)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . . . . . . 4,171,927 4,451,774 4,111,500
Payments under commercial paper and revolving credit facilities. . . . . . (4,256,918) (4,418,693) (3,927,234)
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . - 300,000 150,000
Principal payments under long-term debt agreements . . . . . . . . . . . . (289,372) (400,580) (403,125)
Proceeds from issuance of convertible quarterly income debt securities . . 300,000 - -
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,364) (3,250) (2,437)
------------- ------------- ------------
Net cash used in financing activities. . . . . . . . . . . . . . (78,727) (70,749) (71,296)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . (16,241) 45,802 11,682
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . 59,288 13,486 1,804
------------- ------------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR. . . . . . . . . . . . . . . . . . . . $ 43,047 $ 59,288 $ 13,486
============= ============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . . . . . . . . . $ (97,945) $ (98,157) $ (87,631)
============= ============= =============
Net income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (34,674) $ (7,810) $ (7,969)
============= ============= =============
See notes to consolidated financial statements.
46
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The Southland Corporation and
subsidiaries ("the Company") is owned approximately 64% by IYG
Holding Company, which is jointly owned by Ito-Yokado Co., Ltd.
("IY") and Seven-Eleven Japan Co., Ltd.("SEJ"). The consolidated
financial statements include the accounts of The Southland Corporation and
its subsidiaries. Intercompany transactions and account balances
are eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Prior-year and quarterly amounts
have been reclassified to conform to the current-year
presentation. Buying and occupancy expense of $492,499,000 and
$513,393,000 for the years ended December 31, 1994 and 1993,
respectively, was reclassified from cost of goods sold to operating,
selling, general and administrative expenses ("OSG&A").
The Company operates more than 5,400 7-Eleven and other convenience
stores in the United States and Canada. Area licensees, or their
franchisees, and affiliates operate approximately 10,000 additional 7Eleven
convenience stores in certain areas of the United States, in 18 foreign
countries and in the U. S. territories of Guam and Puerto Rico. The
Company's net sales are comprised of sales of groceries, take-out foods
and beverages, gasoline (at certain locations), dairy products, non-food
merchandise, specialty items and services. Net sales and cost of goods
sold of stores operated by franchisees are consolidated with the
results of Companyoperated stores. Net sales of stores operated by
franchisees are $2,832,131,000, $2,820,685,000
and $2,810,270,000 from 2,896, 2,962 and 2,998 stores for
the years ended December 31, 1995, 1994 and 1993,respectively. Under
the present franchise agreements,initial franchise fees are recognized
in income currently and are generally calculated based upon gross
profit experience for the store or market area. These fees cover
certain costs including training, an allowance for travel, meals and
lodging for the trainees and other costs relating to the franchising of
the store.
The gross profit of the franchise stores is split between the
Company and its franchisees. The Company's share of the gross
profit of franchise stores is its continuing franchise fee,
generally ranging from 50% to 58% of the gross profit of the store,
which is charged to the franchisee for the license to use the 7Eleven
operating system and trademarks, for the lease and use of the store
premises and equipment, and for continuing services provided by the
Company. These services include merchandising, advertising,
recordkeeping, store audits, contractualindemnification, business
counseling services and preparation of financial statements.
The gross profit earned by the Company's franchisees of $515,610,000,
$517,955,000 and $530,436,000 for the
47
years ended December 31, 1995, 1994 and 1993, respectively, is included
in the Consolidated Statements of Earnings as OSG&A.
Sales by stores operated under domestic and foreign area license
agreements are not included in consolidated revenues. All fees or
royalties arising from such agreements are included in other income.
Initial fees, which have been immaterial, are recognized when the
services required under the agreements are performed.
OTHER INCOME - Other income is primarily area license royalties and
franchise fee income. The area license royalties include amounts from
area license agreements with SEJ of approximately $44,000,000, $42,000,000
and $39,000,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Buying and
occupancy expenses are included in OSG&A.
INTEREST EXPENSE - Interest expense is net of interest income of
$16,975,000, $13,618,000 and $12,745,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include
temporary cash investments of $8,787,000 and $3,028,000 at December 31,
1995 and 1994, respectively, stated at cost, which approximates market.
The Company considers all highly liquid investment instruments
purchased with maturities of three months or less to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost is generally determined by the LIFO method for stores in the United
States and by the FIFO method for stores in Canada.
DEPRECIATION AND AMORTIZATION - Depreciation of buildings and
equipment is based upon the estimated useful lives of these assets using
the straight-line method. Amortization of capital leases, improvements
to leased properties and favorable leaseholds is based upon the remaining
terms of the leases or the estimated useful lives, whichever is shorter.
Foreign and domestic area license royalty intangibles were recorded in
1987 at the fair value of future royalty payments and are being amortized
over 20 years using the straight-line method. The 20 year life is less
than the estimated lives of the various royalty agreements, the majority
of which are perpetual.
STORE CLOSINGS - Provision is made on a current basis for the write down
of identified owned-store closings to their net realizable value.
For identified leased-store closings, leasehold improvements are
written down to their net realizable value and a provision is made on a
current basis if anticipated expenses are in excess of expected sublease
rental income.
BUSINESS SEGMENT - The Company operates in a single business segment
- - the operating, franchising and licensing of convenience food stores,
primarily under the 7-Eleven name.
48
2. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31
--------------------
1995 1994
---------- --------
(Dollars in Thousands)
Notes receivable (net of long-term
portion of $14,606 and $15,309) $ 2,273 $ 5,773
Trade accounts receivable 48,599 42,856
Franchisee accounts receivable 43,556 47,682
Environmental cost reimbursements
(net of long-term portion of
$64,034 and $67,546) - see
Note 13 17,654 12,709
---------- ---------
112,082 109,020
Allowance for doubtful accounts (4,858) (6,790)
---------- ----------
$ 107,224 $ 102,230
========== ==========
3. INVENTORIES
Inventories stated on the LIFO basis that are included in
inventories in the accompanying Consolidated Balance Sheets were
$62,705,000 and $63,340,000 at December 31, 1995 and 1994,
respectively, which is less than replacement cost by $30,907,000 and
$28,286,000, respectively. At December 31, 1993, inventories were
reduced resulting in a liquidation of LIFO inventory layers recorded
at costs that were lower than the costs of current purchases.
The effect of this reduction was to decrease cost of goods sold by
approximately $3,900,000 in 1993.
4. OTHER CURRENT ASSETS
DECEMBER 31
----------------------
1995 1994
---------- ----------
(Dollars in Thousands)
Prepaid expenses $ 17,775 $ 18,474
Deferred tax assets (net of allowance
of $77,218 in 1994) 78,665 13,861
Other 7,376 8,076
---------- ---------
$ 103,816 $ 40,411
========== ==========
49
5. PROPERTY AND EQUIPMENT
DECEMBER 31
---------------------------
1995 1994
------------- -----------
(Dollars in Thousands)
Cost:
Land $ 461,585 $ 475,611
Buildings and leaseholds 1,274,651 1,223,128
Equipment 697,673 623,755
Construction in process 32,725 35,634
------------- -----------
2,466,634 2,358,128
Accumulated depreciation and
amortization (1,130,851) (1,043,629)
------------- ------------
$ 1,335,783 $ 1,314,499
============= =============
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets." The statement establishes
accounting standards for the impairment of long-lived assets to be held
and used and for long-lived assets to be disposed of, and must be adopted
no later than 1996. The impact on the Company's earnings is not expected to
be material when the Company adopts the statement in 1996.
6. OTHER ASSETS
DECEMBER 31
---------------------------
1995 1994
------------- -----------
(Dollars in Thousands)
Japanese license royalty intangible
(net of accumulated amortization of
$132,988 and $116,972) $ 185,513 $ 201,528
Other license royalty intangibles (net
of accumulated amortization of
$23,750 and $20,914) 32,854 35,690
Environmental cost reimbursements
(net of allowance of $13,705 and
$18,890) - see Note 13 64,034 67,546
Deferred tax assets (net of allowance
of $97,371 in 1994) 30,396 16,139
Other (net of accumulated amortization
of $5,023 and $7,281) 76,430 61,795
------------ -----------
$ 389,227 $ 382,698
============ ============
50
7. ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31
-----------------------
1995 1994
---------- ---------
(Dollars in Thousands)
Accrued insurance $ 83,068 $ 95,372
Accrued payroll 43,025 51,024
Accrued taxes, other than income 40,710 40,372
Accrued environmental costs (see Note 13) 40,659 35,574
Other 121,967 93,841
---------- ---------
$ 329,429 $ 316,183
========== ==========
Other includes accounts payable to The Southland Corporation
Employees' Savings and Profit Sharing Plan (see Note 12) for
contributions and contingent rent payables of $13,635,000 and
$13,186,000 as of December 31, 1995 and 1994, respectively.
The Company continues to review the functions necessary to enable its
stores to respond faster, more creatively and more cost
efficiently to rapidly changing customer needs and preferences. To
accomplish this goal, the Company continues to realign and reduce
personnel and office facilities.
In December 1995, the Company accrued $13,415,000 for severance
benefits for employees to be terminated and for reduction in office
space. The cost of the reorganization plan was recorded in OSG&A and
is comprised of $4,979,000 for severance benefits and $8,436,000
for reductions in office facilities.
In December 1994, the Company accrued $7,405,000 for severance
benefits for employees terminated and for changes in office
facilities. The employee terminations were substantially completed in
1995, and the office realignments are scheduled for completion in
1996. Changes in estimates from the original $7,405,000 accrual did
not have a material impact on 1995 earnings.
51
8. DEBT
DECEMBER 31
-------------------------
1995 1994
------------ ----------
(Dollars in Thousands)
Bank Debt Term Loans $ 300,000 $ 300,000
Bank Debt revolving credit facility - 50,000
Commercial paper 300,000 350,000
5% First Priority Senior Subordinated
Debentures due 2003 377,558 615,539
4-1/2% Second Priority Senior Subordinated
Debentures (Series A) due 2004 170,952 294,597
4% Second Priority Senior Subordinated
Debentures (Series B) due 2004 25,146 25,897
12% Second Priority Senior Subordinated
Debentures (Series C) due 2009 57,082 59,696
6-1/4% Yen Loan 229,243 253,114
7-1/2% Cityplace Term Loan due 2005 286,949 289,698
Canadian revolving credit facility 11,179 5,678
Capital lease obligations 90,852 105,159
Other 1,622 1,820
------------ ----------
1,850,583 2,351,198
Less long-term debt due within one year 145,346 123,989
------------ -----------
$ 1,705,237 $ 2,227,209
============ ============
BANK DEBT - The Company is obligated to a group of lenders under a credit
agreement ("Credit Agreement") that includes term loans and a revolving
credit facility (collectively "Bank Debt"). In December 1994, the
Credit Agreement was amended to extend its maturity through December 31,
1999, and to change various financial and operating covenants to reduce
certain restrictions. The financial and operating covenants require,
among other things, the maintenance of certain financial ratios
including interest coverage, fixed-charge coverage and senior indebtedness
to earnings before interest, income taxes, depreciation and amortization.
The Credit Agreement also contains various covenants which, among other
things, (a) limit the Company's ability to incur or guarantee
indebtedness or other liabilities other than under the Credit
Agreement, (b) restrict the Company's ability to engage in asset sales
and sale/leaseback transactions, (c) restrict the types of investments
the Company can make and (d) restrict the Company's ability to pay
cash dividends, redeem or prepay principal and interest on any
subordinated debt and certain senior debt. Under the Credit Agreement,
all of the assets of the Company, with the exception of certain specified
property, serve as collateral.
The amendment to the Credit Agreement refinanced the existing term loans
and revolving credit facility with a new term loan and a new revolving
credit facility. The new term loan provided proceeds of $300 million,
which were primarily used to retire the existing term loans. The new
term loan is to be repaid in 16 quarterly installments of
$18,750,000 commencing March 31, 1996. The new revolving credit
facility makes available borrowings and letters of credit totaling a
maximum of $300 million. Maximum borrowings and
52
letters of credit under the revolving credit facility are set at $150
million each. Upon expiration of the facility, all the then outstanding
letters of credit must expire and may need to be replaced, and all
other amounts then outstanding will be due and payable in full. At
December 31, 1995, outstanding letters of credit related to the Credit
Agreement totaled $80,409,000.
Interest on the Bank Debt is generally payable quarterly and is based
on a variable rate equal to the administrative agent bank's base rate or,
at the Company's option, at a rate equal to a reserve adjusted Eurodollar
rate plus .975% per year. The weighted-average interest rate on the term
loan outstanding at December 31, 1995 and 1994 was 6.9% and 7.1%,
respectively. The weighted-average interest rate on revolving credit
facility borrowings outstanding at December 31, 1994, was 8.5%. A fee
of .925% per year on the
outstanding amount of letters of credit is required to be paid
quarterly. A .5% per year commitment fee on unadvanced funds, which for
purposes of this calculation includes unissued letters of credit, is
payable quarterly.
COMMERCIAL PAPER - The Company has a facility that provides for the
issuance of up to $400 million in commercial paper. At December 31,
1995, $300 million of the $350,198,000 outstanding principal, net of
discount, was classified as long-term debt since the Company intends to
maintain at least this amount outstanding during the next year. Such
debt is unsecured and is fully and unconditionally guaranteed by IY.
IY has agreed to continue its guarantee of all commercial paper issued
through 1996. While it is not anticipated that IY would be required to
perform under its commercial paper guarantee, in the event IY makes
any payments under the guarantee, the Company and IY have entered
into an agreement by which the Company is required to reimburse IY
subject to restrictions in the Credit Agreement. The weighted-average
interest rate on commercial paper borrowings outstanding at
December 31, 1995 and 1994, respectively, was 5.8% and 6.0%.
NOTES AND DEBENTURES - The Notes and Debentures are accounted for in
accordance with SFAS No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructuring," and were initially recorded at an
amount equal to the future undiscounted cash payments, both
principal and interest ("SFAS No. 15 Interest"). Accordingly, no interest
expense will be recognized over the life of these securities, and cash
interest payments will be charged against the recorded amount of such
securities. Interest on all of the Notes and Debentures is payable in cash
semiannually on June 15 and December 15 of each year. The 5% First Priority
Senior Subordinated Debentures, due December 15, 2003, had an
outstanding principal amount of $269,993,000 at December 31, 1995, and
are redeemable at any time at the Company's option at 100% of the
principal amount.
The Second Priority Senior Subordinated Debentures were issued in three
series, and each series is redeemable at any time at the Company's
option at 100% of the principal amount and are described as follows:
- 4-1/2% Series A Debentures, due June 15, 2004, with an outstanding
principal amount of $123,654,000 at December 31, 1995.
53
- 4% Series B Debentures, due June 15, 2004, with an outstanding
principal amount of $18,766,000 at December 31, 1995.
- 12% Series C Debentures, due June 15, 2009, with an outstanding
principal amount of $21,787,000 at December 31, 1995.
In November 1995, the Company purchased $180,621,000 of the
principal amount of its First Priority Senior Subordinated
Debentures due 2003 ("5% Debentures") and $82,719,000 of the
principal amount of its 4-1/2% Second Priority Senior Subordinated
Debentures (Series A) due 2004 ("4-1/2% Debentures") (collectively,
"Refinanced Debentures") with a portion of the proceeds from the
issuance of $300 million principal amount of Convertible Quarterly Income
Debt Securities (see Note 9). The purchase of the Refinanced
Debentures resulted in an extraordinary gain of $103,169,000 (net of
current tax effect of $8,603,000) as a result of the discounted purchase
price and the inclusion of SFAS No. 15 Interest in the carrying amount of
the debt.
Prior to the refinancing, the 5% Debentures were subject to annual sinking
fund requirements of $27,037,000 due each December 15, commencing 1996
through 2002. The Company used its purchase of the 5% Debentures to
satisfy such sinking fund requirements in direct order of maturity until
December 15, 2002, at which time a sinking fund payment of $8,638,000 will
be due. The Debentures contain certain covenants that, among other things,
(a) limit the payment of dividends and certain other restricted
payments by both the Company and its subsidiaries, (b) require the
purchase by the Company of the Debentures at the option of the holder
upon a change of control, (c) limit additional indebtedness, (d) limit
future exchange offers, (e) limit the repayment of subordinated
indebtedness, (f) require board approval of certain asset sales, (g)
limit transactions with certain stockholders and affiliates, and (h)
limit consolidations, mergers and the conveyance of all or substantially
all of the Company's assets.
The First and Second Priority Senior Subordinated Debentures are
subordinate to the outstanding Bank Debt and to previously
outstanding mortgages and notes that are either backed by specific
collateral or are general unsecured, unsubordinated obligations. The
Second Priority Debentures are subordinate to the First Priority
Debentures.
The Company had an issuance of 12% Senior Notes, which were
redeemed in 1993 resulting in an extraordinary gain of $98,968,000, which
had no tax effect.
YEN LOAN - In March 1988, the Company monetized its future royalty
payments from SEJ, its area licensee in Japan, through a loan that is
nonrecourse to the Company as to principal and interest. The original
amount of the yen-denominated debt was 41 billion yen (approximately
$327,000,000 at the exchange rate in March 1988) and is collateralized by
the Japanese trademarks and a pledge of the future royalty payments.
By designating its future royalty receipts during the term of the
loan to service the monthly interest and principal payments, the
Company has hedged the impact of future exchange rate fluctuations.
Payment of the debt is required no later than March 2006 through future
royalties from the Japanese licensee, and the Company believes it is
a remote possibility that there will be any principal balance remaining
at
54
that date. Upon the later of February 28, 2000, or the date which is one
year following the final repayment of the loan, royalty payments from
the area licensee in Japan will be substantially reduced in accordance
with the terms of the license agreement. The current interest rate of 6-
1/4% will be reset after March 1998.
CITYPLACE DEBT - Cityplace Center East Corporation ("CCEC"), a
subsidiary of the Company, issued $290 million of notes in 1987 to finance
the construction of the headquarters tower, a parking garage and
related facilities of the Cityplace Center development. The interest rate
on these notes was 7-7/8%, payable semiannually on February 15 and August
15, and the principal amount was due on February 15, 1995. Because
of the application of purchase accounting in 1987, the effective
interest rate was 9.0%. The principal amount was paid to noteholders on
February 15, 1995, by drawings under letters of credit issued by The
Sanwa Bank, Limited, Dallas Agency ("Sanwa"), which has a lien on the
property financed. At that time, the Company deferred the maturity of
the debt by exercising its option of extending the term of maturity ten
years to March 1, 2005, with monthly payments of principal and interest
to Sanwa based on a 25-year amortization at 7-1/2%, with the
remaining principal due upon maturity (the "Cityplace Term Loan").
The Company is occupying part of the building as its corporate
headquarters and the balance is subleased. As additional
consideration through the extended term of the debt, CCEC will pay to
Sanwa an amount that it receives from the Company which is equal to the
net sublease income that the Company receives on the property and
60% of the proceeds, less $275 million and permitted costs, upon a sale or
refinancing of the building.
SOUTHLAND CANADA DEBT - In November 1995, Southland Canada, Inc., entered
into a revolving credit facility with a Canadian chartered bank, which
replaces a similar facility established in 1988. The facility provides
bank financing of up to Canadian $15 million (approximately U.S.
$10,994,000 at December 31, 1995) until December 31, 1999, when the
facility will expire, and all amounts outstanding will be due and payable
in full. At December 31, 1995, the Company was fully drawn under this
facility. Interest on such facility is generally payable monthly and
is based upon the Canadian Prime rate (7.5% at December 31, 1995) plus
.25% per year or a bankers' acceptance rate plus 1.25% per year. The
weighted average interest rate on revolving credit facility borrowings
outstanding at December 31, 1995 and 1994, respectively, was 7.5% and
7.3%.
The previous revolving credit facility with the same Canadian
chartered bank provided financing in which the maximum amount
available declined each year until the facility was scheduled to expire
on June 30, 1998. At such time, all amounts outstanding were then due
and payable in full. Interest payment terms on this facility were similar
to those of the new facility, but interest rates were slightly less
favorable.
55
MATURITIES - Long-term debt maturities assume the continuance of the
commercial paper program. The maturities, which include capital
lease obligations and sinking fund requirements, as well as SFAS No.
15 Interest accounted for in the recorded amount of the Debentures,
are as follows (dollars in thousands):
1996 $ 145,346
1997 144,164
1998 147,855
1999 158,238
2000 81,654
Thereafter 1,173,326
------------
$ 1,850,583
============
9. CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES DUE 2010
In November 1995, the Company issued $300 million principal amount of
Convertible Quarterly Income Debt Securities due 2010
("Convertible Debt") to IY and SEJ. The Company used $216,739,000 of the
proceeds to purchase the Refinanced Debentures (see Note 8), and the
remaining proceeds were designated for general corporate purposes. The
Convertible Debt has an interest rate of 4-1/2% and gives the Company the
right to defer interest payments thereon for up to 20 consecutive
quarters. The holder of the Convertible Debt can convert it into a maximum
of 72,112,000 shares of the Company's common shares. The conversion rate
represents a premium to the market value of Southland's common stock at
the time of issuance of the Convertible Debt. As of December 31, 1995, no
shares had been issued as a result of debt conversion. The Convertible
Debt is subordinate to all existing debt.
In addition to the principal amount of the Convertible Debt, the 1995
financial statements include interest payable of $638,000 and interest
expense of $1,313,000 related to the Convertible Debt.
10. PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for
issuance. Any preferred stock issued will have such rights, powers and
preferences as determined by the Company's Board of Directors.
56
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the estimated fair value of financial instruments has
been determined by the Company using available market information
and appropriate valuation methodologies as indicated below.
The carrying amounts of cash and cash equivalents, trade accounts
receivable, trade accounts payable and accrued expenses and other
liabilities are reasonable estimates of their fair values. Letters of
credit are included in the estimated fair value of accrued expenses
and other liabilities.
The carrying amounts and estimated fair values of other financial
instruments at December 31, 1995, are listed in the following table:
ESTIMATED CARRYING FAIR
AMOUNT VALUE
---------- --------
(Dollars in Thousands)
Bank Debt $ 300,000 $ 300,000
Commercial Paper 350,198 350,198
Debentures 630,738 358,267
Yen Loan 229,243 294,565
Cityplace Term Loan 286,949 304,504
Convertible Debt 300,000 301,530
The methods and assumptions used in estimating the fair value for each of
the classes of financial instruments presented in the table above are as
follows:
- The carrying amount of the Bank Debt approximates fair value
because the interest rates are variable.
- - Commercial paper borrowings are sold at market interest rates and have an
average remaining maturity of less than 40 days. Therefore, the carrying
amount of commercial paper is a reasonable estimate of its fair value. The
guarantee of the commercial paper by IY is an integral part of the
estimated fair value of the commercial paper borrowings.
- - The fair value of the Debentures is estimated based on December 31, 1995,
bid prices obtained from investment banking firms where traders regularly
make a market for these financial instruments. The carrying amount of
the Debentures includes $196,538,000 of SFAS No. 15 Interest.
- - The fair value of the Yen Loan is estimated by calculating the present
value of the future yen cash flows at current interest and exchange rates.
- - The fair value of the Cityplace Term Loan is estimated by calculating the
present value of the future cash flows at current interest rates.
- - The fair value of the Convertible Debt at December 31, 1995, is estimated
by an investment banking firm and includes both an interest rate and an
equity component.
57
12. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLANS - The Company maintains profit sharing plans for
its U.S. and Canadian employees. In 1949, the Company excluding
its Canadian subsidiary ("Southland") adopted The Southland
Corporation Employees' Savings and Profit Sharing Plan (the "Savings and
Profit Sharing Plan") and, in 1970, the Company's Canadian subsidiary
adopted the Southland Canada, Inc. Profit Sharing Pension Plan. These
plans provide retirement benefits to eligible employees. Contributions
to the Savings and Profit Sharing Plan, a 401(k) defined contribution
plan, are made by both the participants and Southland. Southland
contributes the greater of approximately 10% of its net earnings or an
amount determined by Southland's president. Net earnings as amended
during 1995 is calculated without regard to the contribution to the
Savings and Profit Sharing Plan, federal income taxes, gains from debt
repurchases and refinancings and, at the discretion of Southland's
president, income from accounting changes. The contribution by Southland
is generally allocated to the participants on the basis of their
individual contribution, years of participation in the Savings and Profit
Sharing Plan and age. The provisions of the Southland Canada, Inc.
Profit Sharing Pension Plan are similar to those of the Savings and
Profit Sharing Plan. Total contributions to these plans for the years
ended December 31, 1995, 1994 and 1993 were $11,318,000, $10,513,000
and $11,956,000 (including amounts allocated to the distribution and
food centers in 1994 and 1993), respectively, and are included in OSG&A.
POSTRETIREMENT BENEFITS - The Company's group insurance plan (the
"Insurance Plan") provides postretirement medical and dental
benefits for all retirees that meet certain criteria. Such
criteria include continuous participation in the Insurance Plan ranging
from 10 to 15 years depending on hire date, and the sum of age plus
years of continuous service equal to at least 70. The Company
contributes toward the cost of the Insurance Plan a fixed dollar amount
per retiree based on age and number of dependents covered, as adjusted
for actual claims experience. All other future costs and cost increases
will be paid by the retirees. The Company continues to fund its cost on
a cash basis; therefore, no plan assets have been accumulated.
Net periodic postretirement benefit costs for 1995, 1994 and 1993
include the following components:
1995 1994 1993
-------- -------- ------
(Dollars in Thousands)
Service cost $ 585 $ 752 $ 824
Interest cost 1,678 1,732 2,048
Amortization of unrecognized gain (583) (61) -
-------- -------- -------
$ 1,680 $ 2,423 $ 2,872
======== ======== ========
58
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7% and 8% at
December 31, 1995 and 1994, respectively. Components of the accrual
recorded in the Company's consolidated balance sheets are as
follows:
DECEMBER 31
------------------------
1995 1994
------------ ----------
(Dollars in Thousands)
Accumulated Postretirement
Benefit Obligation:
Retirees $ 11,960 $ 11,197
Active employees eligible to retire 5,234 4,716
Other active employees 6,328 5,354
--------- ---------
23,522 21,267
Unrecognized gains 5,198 7,953
--------- ---------
$ 28,720 $ 29,220
========= =========
POSTEMPLOYMENT BENEFITS - The Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," in 1993 and
recorded an accumulated postemployment benefit obligation of
$16,537,000. The obligation primarily represents future medical costs
relating to short-term and long-term disability. The
accumulated postemployment benefit obligation, which had no tax effect,
was recorded as the cumulative effect of an accounting change. As of
December 31, 1995 and 1994, the amount of the obligation was
$19,390,000 and $18,460,000, respectively.
EQUITY PARTICIPATION PLAN - In 1988, the Company adopted The
Southland Corporation Equity Participation Plan (the "Participation Plan"),
which provides for the granting of both incentive options and nonstatutory
options and the sale of convertible debentures to certain key employees
and officers of the Company. In the
aggregate, not more than 3,529,412 shares of common stock of the Company
can be issued pursuant to the Participation Plan; however, the Company has
no present intent to grant additional options or debentures under this
plan. The shares available for issuance under the Participation Plan
are reduced by the number of shares issued under the Grant Stock Plan,
which is described in a following paragraph.
Options were granted in 1988 at the fair market value on the date of
grant, which is the same as the conversion price provided in the
debentures. All options and convertible debentures that were vested became
exercisable as of December 31, 1994, pursuant to the terms of the
Participation Plan. At December 31, 1995, there were vested options
outstanding to acquire 948,499 shares, of which 909,999 were at $7.50
per share and 38,500 were at $7.70 per share, and vested debentures
outstanding that were convertible at $7.50 per share into 5,000 shares.
During 1995, options to acquire 812,304 shares and debentures
convertible into 12,833 shares expired for those participants who are no
longer with the Company. All options expire, and the debentures mature, no
later than December 31, 1997.
GRANT STOCK PLAN - In 1988, the Company adopted The Southland
Corporation Grant Stock Plan (the "Stock Plan"). Under the
provisions of the Stock Plan, up to 750,000 shares of common stock are
authorized to be issued to certain key employees and officers of the
Company. Shares issued under the Stock Plan decrease the number of
59
shares that can be issued pursuant to the Participation Plan. The stock
is fully vested upon the date of issuance. As of December 31, 1995,
480,844 shares had been issued pursuant to the Stock Plan. No shares
have been issued since 1988, and the Company has no present intent to grant
additional shares.
STOCK INCENTIVE PLAN - The Company adopted The
Southland Corporation 1995 Stock Incentive Plan (the "Stock Incentive
Plan") in October 1995, subject to shareholder approval, which is being
sought at the annual meeting of shareholders to be held in April 1996.
The Stock Incentive Plan provides for the granting of stock options, stock
appreciation rights, performance shares, restricted stock, restricted stock
units, bonus stock and other forms of stock based awards and authorizes the
issuance of up to 41 million shares over a ten-year period. In October
1995, 3,863,600 options were granted, which remain outstanding at December
31, 1995, at the fair market value of $3.1875 per share on the date of
grant to certain key employees and officers of the Company. The options
granted in 1995 are exercisable in five equal installments beginning one
year after grant date with possible acceleration thereafter based upon
certain improvements in the stock price of a share of Southland's common
stock.
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The statement must be
adopted no later than 1996. The Company intends to adopt the disclosure-
only requirements of SFAS No. 123 and will therefore continue to apply
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees."
13. LEASES, COMMITMENTS AND CONTINGENCIES
LEASES - Certain property and equipment used in the Company's
business is leased. Generally, real estate leases are for primary terms
from 14 to 20 years with options to renew for additional periods, and
equipment leases are for terms from one to ten years. The leases do not
contain restrictions that have a material effect on the Company's
operations.
The composition of capital leases reflected as property and
equipment in the consolidated balance sheets is as follows:
DECEMBER 31
---------------------------
1995 1994
------------ -----------
(Dollars in Thousands)
Buildings $ 116,412 $ 125,600
Equipment 225 225
----------- -----------
116,637 125,825
Accumulated amortization (77,428) (78,103)
------------- -----------
$ 39,209 $ 47,722
============ ===========
60
The present value of future minimum lease payments for capital lease
obligations is reflected in the consolidated balance sheets as long-term
debt. The amount representing imputed interest necessary to reduce
net minimum lease payments to present value has been calculated generally
at the Company's incremental borrowing rate at the inception of each
lease.
Future minimum lease payments for years ending December 31 are as
follows:
CAPITAL OPERATING
LEASES LEASES
--------- ----------
(Dollars in Thousands)
1996 $ 21,965 $ 116,621
1997 20,424 105,284
1998 18,793 85,471
1999 17,449 64,869
2000 15,485 48,704
Thereafter 60,405 185,645
---------- ----------
Future minimum lease payments 154,521 $ 606,594
===========
Estimated executory costs (399)
Amount representing imputed interest (63,270)
----------
Present value of future minimum
lease payments $ 90,852
==========
Minimum noncancelable sublease rental income to be received in the future,
which is not included above as an offset to future payments, totals
$23,126,000 for capital leases and $21,695,000 for operating leases.
Rent expense on operating leases for the years ended December 31, 1995,
1994 and 1993, totaled $125,456,000, $120,850,000 and $124,402,000,
respectively, including contingent rent expense of $8,508,000, $8,576,000
and $8,214,000, but reduced by sublease rent income of $7,296,000,
$7,858,000 and $8,545,000. Contingent rent expense on capital leases for
the years ended December 31, 1995, 1994 and 1993, was $2,399,000,
$2,822,000 and $3,084,000, respectively. Contingent rent expense is
generally based on sales levels or changes in the Consumer Price Index.
61
LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31, 1995,
the Savings and Profit Sharing Plan owned 197 stores leased to the
Company under capital leases and 634 stores leased to the Company under
operating leases at rentals which, in the opinion of management,
approximated market rates at the date of lease. In addition, 67, 43
and 62 properties were sold by the Savings and Profit Sharing Plan to
third parties in 1995, 1994 and 1993, respectively, and at the same
time, the related leases with the Company were either cancelled or
assigned to the new owner. Included in the consolidated financial
statements are the following amounts related to leases with the Savings and
Profit Sharing Plan:
DECEMBER 31
-----------------------
1995 1994
--------- ---------
(Dollars in Thousands)
Buildings (net of accumulated amortization
of $8,853 and $9,619) $ 2,041 $ 3,191
========= =========
Capital lease obligations (net of current
portion of $1,664 and $1,945) $ 2,310 $ 4,109
========= =========
YEARS ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
--------- --------- ---------
(Dollars in Thousands)
Rent expense under operating leases and
amortization of capital lease assets $ 26,850 $ 28,195 $ 30,028
========= ========= =========
Imputed interest expense on capital
lease obligations $ 483 $ 696 $ 948
========= ========== =========
Capital lease principal payments included
in principal payments under long-term
debt agreements $ 1,818 $ 2,075 $ 2,200
========= ========== =========
COMMITMENTS
MCLANE COMPANY, INC. - In connection with the 1992 sale of
distribution and food center assets to McLane, the Company and McLane
entered into a ten-year service agreement under which McLane is making its
distribution services available to 7-Eleven stores in the United States.
If the Company does not fulfill its obligation to McLane during this
time period, the Company must reimburse McLane on a pro-rata basis for
the transitional payment received at the time of the transaction. The
original payment received of $9,450,000 in 1992 is being amortized to
cost of goods sold over the life of the agreement. The Company has
exceeded the minimum annual purchases each year and expects to exceed
the minimum required purchase levels in future years.
CITGO PETROLEUM CORPORATION - In 1986, the Company entered into a 20-year
product purchase agreement with Citgo to buy specified quantities of
gasoline at market prices. These prices are determined pursuant
to a formula based on the prices posted by gasoline wholesalers in the
various market areas where the Company purchases gasoline from Citgo.
Minimum required annual purchases under this agreement are generally
the lesser of 750 million gallons or 35% of gasoline purchased by
the Company for retail sale. The Company has exceeded the minimum
required annual purchases each year and expects to exceed the minimum
required annual purchase levels in future years.
62
CONTINGENCIES
GASOLINE STORE SITES - The Company accrues future costs, as well as records
the related probable state reimbursement amounts, for remediation of
gasoline store sites where releases of regulated substances have been
detected. At December 31, 1995 and 1994, respectively, the Company's
estimated liability for sites where releases have been detected was
$63,669,000 and $63,424,000, of
which $29,174,000 and $32,924,000 are included in deferred credits and
other liabilities and the remainder in accrued expenses and other
liabilities. The Company has recorded receivables of $59,652,000 and
$57,246,000 (net of allowances of $13,705,000 and $18,890,000) for the
estimated probable state reimbursements, of which $45,653,000 and
$47,746,000 are included in other assets and the remainder in accounts
and notes receivable. The Company reduced the estimated net
environmental cost reimbursements at the end of 1994 by approximately
$6,000,000 as a result of completing a review of state reimbursement
programs. The estimated future remediation expenditures and related
state reimbursement amounts could change within the near future as
governmental requirements and state reimbursement programs continue to
be implemented or revised.
The Company anticipates that substantially all of the future
remediation costs for sites with detected releases of regulated
substances at December 31, 1995, will be incurred within the next five
years. There is no assurance of the timing of the receipt of state
reimbursement funds. However, based on the Company's experience, the
Company expects to receive the majority of state reimbursement funds
within one to four years after payment of eligible remediation
expenses, assuming that the state
administrative procedures for processing such reimbursements have been
fully developed.
CHEMICAL MANUFACTURING FACILITY - In December 1988, the Company closed
its chemical manufacturing facility in New Jersey. As a
result, the Company is required to conduct environmental
remediation at the facility and has accrued a liability for this
purpose. As required, the Company has submitted a clean-up plan to the
New Jersey Department of Environmental Protection (the "State"),
which provides for remediation of the site for approximately a
three-to-five-year period as well as continued groundwater treatment
for a projected 20-year period. While the Company has received initial
comments from the State, the clean-up plan has not been finalized. The
Company has recorded liabilities representing its best estimates of
the clean-up costs of
$37,824,000 and $39,254,000 at December 31, 1995 and 1994,
respectively. Of this amount, $31,660,000 and $34,180,000 are
included in deferred credits and other liabilities and the
remainder in accrued expenses and other liabilities for the
respective years.
The closed chemical manufacturing facility was previously owned by a
large chemical company. In 1991, the Company and the former owner
executed a final settlement agreement pursuant to which the former owner
agreed to pay a substantial portion of the clean-up costs. The Company
has recorded receivables of $22,035,000 and $23,009,000 at December
31, 1995 and 1994, respectively, representing the former owner's
portion of the clean-up costs. Of this amount, $18,381,000 and
$19,800,000 are included in other assets and the remainder in accounts
and notes receivable for 1995 and 1994, respectively.
63
14. INCOME TAXES
As of January 1, 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes." There was no cumulative effect
adjustment upon adoption, and there was no effect on net earnings for the
year ended December 31, 1993. SFAS No. 109 requires the use of the
liability method, in which deferred tax assets and liabilities are
recognized for differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. Deferred tax
assets include tax carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
The components of earnings (loss) before income taxes,
extraordinary gain and cumulative effect of accounting change are as
follows:
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
---------- ---------- --------
(Dollars in Thousands)
Domestic $ 98,775 $ 70,615 $ 3,795
Foreign 2,754 2,881 (6,375)
---------- ---------- --------
$ 101,529 $ 73,496 $ (2,580)
========== ========== ========
64
The provision for income taxes in the accompanying Consolidated
Statements of Earnings consists of the following:
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
---------- ---------- -------
(Dollars in Thousands)
Current:
Federal $ 8,251 $ 6,799 $ 2,759
Foreign 8,968 8,515 5,941
State 985 350 -
Tax benefit of operating loss
carryforward - (4,164) -
---------- ---------- --------
Subtotal 18,204 11,500 8,700
Deferred:
Provision 60,709 - -
Beginning of year valuation
allowance adjustment (144,978) (30,000) -
---------- ---------- --------
Subtotal (84,269) (30,000) -
---------- ---------- --------
Income taxes before extraordinary
gain and cumulative effect of
accounting change $ (66,065) $ (18,500) $ 8,700
========== ========== ==========
Included in Shareholders' Equity at December 31, 1995, is
$5,208,000 of income taxes provided in 1995 on an unrealized gain on
marketable securities.
Reconciliations of income taxes before extraordinary gain and
cumulative effect of accounting change at the federal statutory
rate to the Company's actual income taxes provided are as follows:
YEARS ENDED DECEMBER 31
------------------------------
1995 1994 1993
---------- ---------- --------
(Dollars in Thousands)
Taxes (benefit) at federal statutory
rate $ 35,535 $ 25,724 $ (903)
State income taxes, net of federal
income tax benefit 640 228 -
Foreign tax rate difference 886 1,212 2,232
Net change in valuation allowance
excluding the tax effect of
extraordinary items and the
cumulative effect of accounting
changes (108,632) (47,943) 4,112
Other 5,506 2,279 3,259
---------- ---------- ---------
$ (66,065) $ (18,500) $ 8,700
========== ========== ==========
65
The valuation allowance for deferred tax assets decreased in 1995 by
$174,589,000. The decrease consisted of a $90,320,000 decrease
resulting from changes in the Company's gross deferred tax assets and
liabilities and an $84,269,000 decrease resulting from a change in
estimate regarding the realizability of the Company's deferred tax
assets. Based on the Company's trend of positive earnings during
the past three years and future expectations, the Company determined
that it is more likely than not that its deferred tax assets will
be fully realized. In 1994, the valuation allowance decreased by
$42,078,000 due to changes in the Company's gross deferred tax
assets and liabilities and the realization of $30,000,000 of the
Company's net deferred tax asset.
Significant components of the Company's deferred tax assets and
liabilities at December 31, 1995 and 1994, are as follows:
YEARS ENDED DECEMBER 31
----------------------
1995 1994
---------- ----------
(Dollars in Thousands)
Deferred tax assets:
SFAS No. 15 interest $ 81,038 $ 125,694
Accrued insurance 55,497 58,514
Accrued liabilities 39,665 43,890
Compensation and benefits 32,365 34,029
Tax credit carryforwards 14,833 48,765
Debt issuance costs 6,820 15,445
Other 5,561 6,172
---------- ---------
Subtotal 235,779 332,509
Deferred tax liabilities:
Area license agreements (85,164) (92,515)
Property and equipment (32,853) (29,192)
Other (8,701) (6,213)
---------- ----------
Subtotal (126,718) (127,920)
Valuation allowance - (174,589)
---------- ----------
Net deferred taxes $ 109,061 $ 30,000
========== ==========
The Company's net deferred tax asset is recorded in other current
assets and other assets (see Notes 4 and 6).
At December 31, 1995, the Company had approximately $2,849,000 of
general business credit carryforwards and $11,984,000 of
alternative minimum tax ("AMT") credit carryforwards. The AMT
credits have no expiration date. The general business credits
expire during the period from 2007 to 2010.
66
15. EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share is computed by dividing net
earnings, plus Convertible Debt interest (see Note 9) net of tax
benefits, by the weighted average number of common shares and common
share equivalents outstanding during each year. The
exercise of outstanding stock options would not result in a
dilution of earnings per share.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1994 as adjusted for
reclassifications to conform to the current-year presentation (see Note
1) is as follows:
YEAR ENDED DECEMBER 31, 1995:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- -------
(Dollars in Millions, Except Per-Share Data)
Net sales $ 1,545 $ 1,750 $ 1,826 $ 1,625 $ 6,746
Gross profit 449 512 554 468 1,983
Income taxes (benefit) 2 9 12 (89) (66)
Earnings (loss) before
extraordinary gain (1) 37 50 82 168
Net earnings (loss) (1) 37 50 185 271
Primary and fully diluted
earnings (loss) per
common share before
extraordinary gain - .09 .12 .19 .40
The second quarter includes a $4,679,000 environmental
reimbursement related to outstanding litigation. The fourth
quarter includes a $103,169,000 extraordinary gain on redemption of
debt related to the refinancing of certain debt securities (see
Note 8), $84,269,000 from realization of a deferred tax asset (see
Note 14) and $13,415,000 of expenses accrued for severance and
related costs (see Note 7).
67
YEAR ENDED DECEMBER 31, 1994:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
(Dollars in Millions, Except Per-Share Data)
Net sales $ 1,512 $ 1,720 $ 1,811 $ 1,641 $ 6,684
Gross profit 442 513 544 492 1,991
Income taxes (benefit) 1 6 6 (32) (19)
Net earnings (loss) (8) 32 43 25 92
Primary and fully diluted
earnings (loss) per
common share (.02) .08 .10 .06 .22
The second quarter includes a $4,500,000 recovery on a 1992insurance
claim. The fourth quarter includes $30 million from realization of a
deferred tax asset (see Note 14), $7,405,000 of expenses accrued for
severance and related costs (see Note 7), $7,696,000 of expense
related to store closings and dispositions of properties, and
approximately $6,000,000 in expense relating to the reduction
of estimated net environmental cost reimbursements (see Note 13).
68
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Southland Corporation
We have audited the accompanying consolidated balance sheets of The
Southland Corporation and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of earnings, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
The Southland Corporation and Subsidiaries as of December 31, 1995 and
1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles. As discussed
in Notes 12 and 14 to the financial statements, in 1993 the Company changed
its method of accounting for postemployment benefits and for income
taxes to conform with Statements of Financial Accounting Standards No.
112 and No. 109, respectively.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 14, 1996
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required in response to this Item is
incorporated by reference from the Registrant's Definitive Proxy
Statement for the April 24, 1996 Annual Meeting of Shareholders.
See also "Executive Officers of the Registrant" beginning on page 19,
herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated
herein by reference from the Registrant's Definitive Proxy Statement for
the April 24, 1996 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required in response to this Item is incorporated
herein by reference from the Registrant's Definitive Proxy Statement for
the April 24, 1996 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated
herein by reference to the Registrant's Definitive Proxy Statement for
the April 24, 1996 Annual Meeting of Shareholders.
70
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The Southland Corporation and Subsidiaries' Financial Statements for the
three years in the period ended December 31, 1995 are included herein:
PAGE
Consolidated Balance Sheets - December 31,1995 and 1994 43
Consolidated Statements of Earnings - Years Ended December 44
31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity (Deficit) 45
- - Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows - Years Ended 46
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 47
Independent Auditors' Report of Coopers & Lybrand L.L.P. 69
2. The Southland Corporation and Subsidiaries' Financial Statement
Schedule, included herein.
PAGE
Independent Auditors' Report of Coopers & Lybrand L.L.P. 76
on Financial Statement Schedule
II - Valuation and Qualifying Accounts 77
All other schedules have been omitted because they are not applicable, are
not required, or the required information is shown in the financial
statements or notes thereto.
3. The following is a list of the Exhibits required to be filed by Item 601
of Regulation S-K.
EXHIBIT
NO.
2. PLAN OF ACQUISITION, REORGANIZATION,
ARRANGEMENT, LIQUIDATION OR SUCCESSION.
2.(1) Debtor's Plan of Reorganization, dated October
24, 1990, as filed in the United States Bankruptcy
Court, Northern District of Texas, Dallas Division, and
Addendum to Debtor's Plan
of Reorganization dated January 23, 1991,
incorporated by reference to The Southland
Corporation's Current Report on Form 8-K dated January
23, 1991, File Numbers 0-676 and
0-16626, Exhibits 2.1 and 2.2.
2.(2) Stock Purchase Agreement, dated as of January
25, 1991, by and among The Southland
Corporation, Ito-Yokado Co., Ltd. and Seven Eleven
Japan Co., Ltd., incorporated by reference to The
Southland Corporation's Current Report on Form 8-K dated
January 23, 1991, File Numbers 0-676 and 0-16626,
Exhibit 2.3.
2.(3) Confirmation Order issued on February 21, 1991
by the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division, incorporated by
reference to The Southland Corporation's Current Report
on Form 8-K dated
March 4, 1991, File Numbers 0-676 and 0-16626, Exhibit
2.1.
3. ARTICLES OF INCORPORATION AND BYLAWS.
3.(1) Second Restated Articles of Incorporation of
71
The Southland Corporation, as amended through March 5,
1991, incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 3.(1).
3.(2) Bylaws of The Southland Corporation, restated
as amended through March 5, 1991, incorporated by
reference to The Southland Corporation's Annual Report
on Form 10-K for the year ended December 31, 1990, Exhibit
3.(2).
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY
HOLDERS, INCLUDING INDENTURES (SEE EXHIBITS
3.(1) AND 3.(2), ABOVE).
4.(i)(1) Specimen Certificate for Common Stock, $.0001
par value, incorporated by reference to
The Southland Corporation's Annual Report on Form 10-K
for the year ended December 31, 1990, Exhibit 4.(i)(2).
4.(i)(2) Form of Voting Agreement and Stock Transfer
Restriction and Buy-Back Agreement relating to shares of
common stock, $.01 par value, issued pursuant to Grant
Stock Plan, incorporated by reference to Registration
Statement on Form S8, Reg. No. 33-25327, Exhibits 4.5 and
4.4.
4.(i)(3) Shareholders Agreement dated as of November 1,
1988, by and among The Southland Corporation, Thompson
Brothers, L.P., Thompson Capital
Partners, L.P., The Hayden Company, The
Williamsburg Corporation, Four J Investment, L.P., each
Limited Partner of Thompson Capital Partners, L.P. as of
the date thereof, and The Philp Co., incorporated by
reference to File No. 0-676, Annual Report on Form 10-K
for year ended December 31, 1988, Exhibit 4(i)(7), Tab
2.
4.(i)(4) Shareholders Agreement dated as of March 5,
1991, among The Southland Corporation,
Ito-Yokado Co., Ltd., IYG Holding Company,
Thompson Brothers, L.P., Thompson Capital
Partners, L.P., The Hayden Company, The
Williamsburg Corporation, Four J Investment, L.P., The
Philp Co., participants in the
Company's Grant Stock Plan who are signatories thereto
and certain limited partners of
Thompson Capital Partners, L.P. who are
signatories thereto, incorporated by reference to
Schedule 13D filed by Ito-Yokado Co., Ltd., Seven-Eleven
Japan Co., Ltd. and IYG Holding Company, Exhibit A.
4.(i)(5) First Amendment, dated December 30, 1992, to
Shareholders Agreement, dated as of March 5,
1991, incorporated by reference to File Nos. 0676 and 0-16626,
Annual Report on Form 10-K for year ended December 31, 1992,
Exhibit 4.(i)(5), Tab 1.
4.(i)(6) Second Amendment, dated February 28, 1996, to Tab 1
Shareholders Agreement, dated as of March 5, 1991.*
4.(i)(7) Warrant Agreement dated as of March 5, 1991,
among certain Holders of Common Shares of The Southland
Corporation named therein, Wilmington Trust Company, as
Warrant Agent, The Southland Corporation and Ito-
Yokado Co., Ltd.,
incorporated by reference to Schedule 13D filed by Ito-
Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG
Holding Company, Exhibit B.
4.(i)(8) Specimen Warrant Certificates to Purchase
72
Common Shares of The Southland Corporation pursuant to
Warrant Agreement dated as of March 5, 1991, with
Wilmington Trust Company as Warrant Agent, incorporated
by reference to The Southland Corporation's Annual
Report on Form 10-K for the year ended December 31, 1990,
Exhibit 4.(i)(7).
4.(ii)(1) Indenture, including Debenture, with Ameritrust
Company National Association, as trustee, providing
for 5% First Priority Senior
Subordinated Debentures due December 15, 2003,
incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 4.(ii)(2).
4.(ii)(2) Indenture, including Debentures, with The Riggs
National Bank of Washington, D.C., as trustee providing
for 4 1/2% Second Priority Senior Subordinated
Debentures (Series A) due June 15, 2004, 4% Second
Priority Senior Subordinated Debentures (Series B) due
June 15, 2004, and 12% Second Priority Senior
Subordinated
Debentures (Series C) due June 15, 2009,
incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 4.(ii)(3).
4.(ii)(3) Indenture among Cityplace Center East Corporation,
Security Pacific National Bank, as Trustee, and The
Sanwa Bank Limited, Dallas Agency, dated as of
February 15,1987, providing for 7 7/8% Notes due
February 15, 1995, incorporated by reference to File No.
0 676, Annual Report on Form 10-K for the year ended
December 31, 1986, Exhibit 4(ii)(8).
4.(ii)(4) Specimen 7 7/8% Note due February 15, 1995,
issued by Cityplace Center East Corporation,
incorporated by reference to File No. 0-676, Annual
Report on Form 10-K for the year ended December 31, 1986,
Exhibit 4(ii)(9).
4.(ii)(5) Form of 4 1/2% Convertible Quarterly Income Debt
Securities due 2010, incorporated by reference to File
Nos. 0-676 and 0-16626, Form 8-K, dated November 21, 1995,
Exhibit 4(v)-1.
9. VOTING TRUST AGREEMENT. NONE. (EXCEPT SEE
EXHIBITS 4.(I)(2) AND 4.(I)(4), ABOVE.)
10. MATERIAL CONTRACTS.
10.(i)(1) Stock Purchase Agreement among The Southland
Corporation, Ito-Yokado Co., Ltd. and Seven Eleven Japan
Co., Ltd., dated as of January 25, 1991. See Exhibit
2.(2), above.
10.(i)(2) Credit Agreement, dated as of July 31, 1987,
amended and restated as of December 16, 1994, among The
Southland Corporation, the financial institutions party
thereto as Senior Lenders, the financial institutions
party thereto as Issuing Banks, Citicorp North America,
Inc., as Administrative Agent, and The Sakura Bank,
Limited, New York Branch, as Co-Agent,
incorporated by reference to File Nos. 0-676 and 0-
16626, Annual Report on Form 10-K for the year ended
December 31, 1994, Exhibit 10(i)(2).
10.(i)(3) Second Amendment, dated as of November 28,
1995, to Third Amended and Restated Credit Agreement,
dated as of July 31, 1987,
as
subsequently amended and restated (See Exhibit
73
10(i)(2) above), incorporated by reference to File Nos.
0-676 and 0-16626, Form 8-K, dated November 21, 1995,
Exhibit 10(i)-1.
10.(i)(4) Credit and Reimbursement Agreement by and
between Cityplace Center East Corporation, an indirect
wholly owned subsidiary of Southland, and The Sanwa Bank
Limited, Dallas Agency, dated February 15, 1987,
relating to $290 million of 7 7/8% Notes due February
15, 1995, issued by Cityplace Center East Corporation (to
which Southland is not a party and which is non recourse
to Southland), incorporated by
reference to File No. 0-676, Annual Report on Form 10-K
for the year ended December 31, 1986, Exhibit 10(i)(6).
10.(i)(5) Third Amendment to Credit and Reimbursement
Agreement, dated as of February 10, 1995, by and
between The Sanwa Bank, Limited, Dallas Agency and
Cityplace Center East Corporation, incorporated by
reference to File Nos. 0-676 and 0-16626, Annual Report
on Form 10-K for the year ended December 31, 1994, Exhibit
10(i)(4).
10.(i)(6) Amended and Restated Lease Agreement between
Cityplace Center East Corporation and
The Southland Corporation relating to The Southland
Tower, Cityplace Center, Dallas,
Texas, incorporated by reference to The
Southland Corporation's Annual Report on Form 10-K for
the year ended December 31, 1990, Exhibit 10.(i)(7).
10.(i)(7) Limited Recourse Financing for The Southland
Corporation relating to royalties from
Seven-Eleven (Japan) Company, Ltd. in the amount of
Japanese Yen 41,000,000,000, dated March 21, 1988,
incorporated by reference to File No. 0-676, Annual
Report on Form 10-K for year ended December 31,
1988, Exhibit 10.(i)(6).
10.(i)(8) Issuing and Paying Agency Agreement, dated as Tab 2
of August 17, 1992, relating to commercial
paper facility, Form of Note, Indemnity and
Reimbursement Agreement and amendment thereto and
Guarantee.*
10.(ii)(B)(1) Standard Form of 7-Eleven Store Franchise Tab 3
Agreement.*
10.(iii)(A)(1) John P. Thompson Employment Agreement dated as
of March 5, 1991, incorporated by reference to
The Southland Corporation's Annual Report on Form 10-K
for the year ended December 31, 1990, Exhibit
10.(iii)(A)(1).
10.(iii)(A)(2) Jere W. Thompson Employment Agreement dated as of March
5, 1991, incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 10.(iii)(A)(2).
10.(iii)(A)(3) The Southland Corporation Executive Protection Plan
Summary, incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993, Exhibit 10.(iii)(A)(3).
10.(iii)(A)(4) The Southland Corporation Officers' Deferred
Compensation Plan, sample agreement,
incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993, Exhibit 10.(iii)(A)(4).
10.(iii)(A)(5) Executive Interest Differential Reimbursement Program,
incorporated by reference to File No. 0676, Annual Report
on Form 10-K for the year ended December 31, 1982,
Exhibit 10(iii)(A)(9), Tab 4.
10.(iii)(A)(6) Bonus Deferral Agreement relating to deferral of Bonus
Payment, incorporated by reference to
74
File No. 0-676, Annual Report on Form 10-K for the year
ended December 31, 1988, Exhibit 10(iii)(A)(9), Tab 7.
10.(iii)(A)(7) Form of documents relating to Collateral Assignment
of Insurance Program, incorporated by reference to File
Nos. 0-676 and 0-16626, Annual Report on Form 10-K for
the year ended December 31, 1989, Exhibit 10.(iii)(A)(10),
Tab 4.
10.(iii)(A)(8) 1995 Performance Plan, as amended July 1995.* Tab 4
10.(iii)(A)(9) 1995 Stock Incentive Plan, incorporated by
reference to Registration No. 33-63617, Exhibit
4.10.
10.(iii)(A)(10) Form of Award Agreement granting options to Tab 5
purchase Common Stock, dated October 23, 1995,
under the 1995 Stock Incentive Plan.* 10.(iii)(A)(11)
Consultant's Agreement between The Southland
Corporation and Timothy N. Ashida, incorporated by
reference to File No. 0-676, Annual Report on Form 10-K
for the year ended December 31, 1991, Exhibit
10(iii)(A)(10), Tab 4.
11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS. Tab 6
CALCULATION OF EARNINGS PER SHARE.*
21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH Tab 7
1996.*
23. CONSENTS OF EXPERTS AND COUNSEL. Tab 8
CONSENT OF COOPERS & LYBRAND L.L.P.,
INDEPENDENT AUDITORS.*
27. FINANCIAL DATA SCHEDULE.
FILED ELECTRONICALLY ONLY, NOT ATTACHED TO
PRINTED REPORTS.
________________________
*Filed or furnished herewith
(b) Reports on Form 8-K.
During the fourth quarter of 1995, the Company filed one report on Form
8-K reporting the issuance of $300 million of 4 1/2% Convertible
Quarterly Income Debt Securities to Ito-Yokado Co., Ltd.
($153 million) and Seven-Eleven Japan Co., Ltd. ($147 million) and the
successful completion of the Company's tender offer to purchase 40% of both
its outstanding 5% First Priority Senior Subordinated Debentures due 2003
and its outstanding 4 1/2% Second Priority Senior Subordinated Debentures
(Series A) due 2004.
(c) The exhibits required by Item 601 of Regulation S-K are attached hereto or
incorporated by reference herein.
(d)(3) The financial statement schedule for The Southland Corporation
and Subsidiaries is included herein, as follows:
Schedule II - The Southland Corporation and Subsidiaries Valuation
and Qualifying Accounts
(for the Years Ended December 31, 1995; 1994 and 1993).
75
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Southland Corporation
Our report on the consolidated financial statements of The Southland
Corporation and Subsidiaries, which includes an explanatory paragraph
describing the changes in methods of accounting for postemployment
benefits and income taxes in 1993, is included on page 69 of this Form 10K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 71 of
this Form 10-K.
In our opinion, the financial statement schedule referred to above, 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.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 14, 1996
76
SCHEDULE II
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 and 1993 (Dollars
in Thousands)
Additions
----------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
period expenses accounts Deductions of period
---------- ---------- ---------- ---------- ----------
Allowance for doubtful accounts:
Year ended December 31, 1995.................... $ 6,790 $ 931 $ - $ (2,863) (1) $ 4,858
Year ended December 31, 1994.................... 7,822 307 153 (2) (1,492) (1) 6,790
Year ended December 31, 1993.................... 11,925 6,021 1,209 (2) (11,333) (1) 7,822
Allowance for environmental cost reimbursements:
Year ended December 31, 1995.................... 18,890 - - (5,185) (3) 13,705
Year ended December 31, 1994.................... 12,529 6,361 - - 18,890
Year ended December 31, 1993.................... - - 12,529 (4) - 12,529
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents amounts charged to the reserve for the sale and closing of
the distribution and food centers.
(3) Includes an adjustment due to the reassessment of the estimated
reimbursement collectibility.
(4) Prior to year ended December 31, 1993, the allowance and related
receivables were netted with the environmental liability.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE SOUTHLAND CORPORATION
(Registrant)
March 27, 1996 /s/ Clark J. Matthews, II
------------------------
Clark J. Matthews, II
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
TITLE DATE
/s/ Masatoshi Ito Chairman of the Board and Director March 27,
1996
- -------------------------
Masatoshi Ito
/s/ Toshifumi Suzuki Vice Chairman of the Board and Director March 27,
1996
- -------------------------
Toshifumi Suzuki
/s/ Clark J. Matthews, II President and Chief Executive Officer and March 27,
1996
- ------------------------- Director (Principal Executive Officer)
Clark J. Matthews, II
/s/ James W. Keyes Senior Vice President, Finance March 27,
1996
- ------------------------- (Principal Financial Officer)
James W. Keyes
/s/ Donald E. Thomas Controller March 27,
1996
- ------------------------- (Principal Accounting Officer)
Donald E. Thomas
/s/ Yoshitami Arai Director March 27,
1996
- -------------------------
Yoshitami Arai
/s/ Timothy N. Ashida Director March 27,
1996
- -------------------------
Timothy N. Ashida
/s/ Jay W. Chai Director March 27,
1996
- -------------------------
Jay W. Chai
/s/ Gary J. Fernandes Director March 27,
1996
- -------------------------
Gary J. Fernandes
/s/ Masaaki Kamata Director March 27,
1996
- -------------------------
Masaaki Kamata
/s/ Kazuo Otsuka Director March 27,
1996
- -------------------------
Kazuo Otsuka
/s/ Asher O. Pacholder Director March 27,
1996
- -------------------------
Asher O. Pacholder
/s/ Nobutake Sato Director March 27,
1996
- -------------------------
Nobutake Sato
/s/ Tatsuhiro Sekine Director March 27,
1996
- -------------------------
Tatsuhiro Sekine
/s/ John P. Thompson Director March 27,
1996
- -------------------------
John P. Thompson
/s/ Jere W. Thompson Director March 27,
1996
- -------------------------
Jere W. Thompson
78