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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
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $475,110,200 at March 7, 1997, based upon
139,328,504 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 [ ] No [ ]
409,922,935 shares of Common Stock, $.0001 par value (the registrant's
only class of Common Stock), were outstanding as of March 7, 1997.
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 23, 1997 Annual Meeting of Shareholders: Part III, a portion of Item 10
and Items 11, 12 and 13.
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ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 1996
TABLE OF CONTENTS
Page
Reference
Form 10-K
PART I
Item 1. Business 1
Executive Officers of the Registrant 19
Item 2. Properties 22
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 31
Item 8. Financial Statements and Supplementary Data 41
Independent Auditors' Report of Coopers & Lybrand L.L.P. on The Southland 70
Corporation and Subsidiaries' Financial Statements for each of the three years in the
period ended December 31, 1996
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 71
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 Reports on Form 8-K 72
Signatures 78
___________________________
*Included in Form 10-K by incorporation by reference to the Registrant's Proxy Statement,
dated March 19, 1997, for the April 23, 1997 Annual Meeting of Shareholders.
SOME OF THE MATTERS DISCUSSED IN THIS FORM 10-K CONTAIN FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S
FUTURE BUSINESS PROSPECTS WHICH ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING COMPETITIVE
PRESSURES, ADVERSE ECONOMIC CONDITIONS AND GOVERNMENT REGULATIONS. THESE ISSUES, AND OTHER FACTORS WHICH
MAY BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING
STATEMENTS.
PART I
ITEM 1. BUSINESS.
GENERAL
The Southland Corporation ("Southland," the "Company" or "Registrant"),
conducting business principally under the name 7-ELEVEN-R-, is the largest
convenience store chain in the world, with over 16,300 Company-operated,
franchised and licensed locations worldwide, and is among the nation's
largest retailers.
The 7-ELEVEN-R- 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-R- 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. During 1996, the Company achieved two
important goals: (i) completion of the four-year project to upgrade and
remodel the more-than-5,000 7-ELEVEN-R- stores in the U.S. and Canada and
(ii) after a decade of dramatic reductions in the number of 7-ELEVEN-R-
stores, a total of 36 new stores were opened by the Company in 1996.
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 1996, Southland's operations (for financial reporting
purposes) were conducted in one business segment -- the Operating and
Franchising of Convenience Food Stores.
At December 31, 1996, the Company's operations included 5,394 7-ELEVEN-
R- convenience stores in the United States and Canada, and 28 other retail
locations, including HIGH'S-TM- Dairy Stores, Quik Marts and SUPER-7-R-
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 7-ELEVEN-R- name). Area licensees, or their
franchisees, operate additional 7-ELEVEN-R- 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 1996, the Company has an equity interest in
three of the licensees whose area licenses cover six foreign countries and
Puerto Rico.
During 1996, the Company continued to focus on the implementation of its
business plan 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, introduction of
new products and remaining in stock, at all times, on each particular store's
best-selling items. During 1996, the Company devoted significant time and
resources to the planning and development, as well as initial phases of
implementation, of a proprietary retail information system that will assist
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the stores in proper forecasting so as to better serve 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 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. ("Ito-Yokado") and Seven-Eleven Japan Co., Ltd.
("Seven-Eleven Japan"), both Japanese corporations. Seven-Eleven Japan is
the Company's largest area licensee, operating over 6,700 7-ELEVEN-R- stores
in Japan and, through its wholly-owned subsidiary Seven-Eleven (Hawaii),
Inc., 47 7-ELEVEN-R- 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 "Prior 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.
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 158 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 majority-owned 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 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 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.
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Seven-Eleven Japan is the largest area licensee of the Company with
approximately 6,765 stores in Japan and owns Seven-Eleven (Hawaii), Inc.,
which, as of year-end 1996, operated an additional 47 7-ELEVEN-R- 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 due 2010 issued by the Company.
REFINANCING OF BANK DEBT. On February 27, 1997, the Company refinanced all
of its remaining debt under the Prior Credit Agreement (originally entered
into in 1987, which had been restated and amended several times), with a new
Credit Agreement (the "Credit Agreement"). The bank group, led by Citibank,
N.A., as Administrative Agent, and The Sakura Bank, Limited, New York Branch,
as Co-Agent, is comprised of six Japanese banks, three American banks and one
Canadian bank. The Credit Agreement, which will mature at the beginning of
2002, provides for a $225 million amortizing term loan and a $400 million
revolving credit facility with a $150 million letter of credit sublimit
within the revolving credit facility. The term loan has scheduled quarterly
repayments of $14.1 million, commencing March 31, 1998. The term loans and
any revolver borrowings carry a floating interest rate of either the
Citibank, N.A. base rate or a reserve-adjusted Eurodollar rate plus .225% for
drawn amounts. Letter of credit fees are to be paid quarterly at .325% per
year on the outstanding amount. In addition, a facility fee of .15% per year
is payable on the total amount of funds available under the Credit Agreement
from time to time. As in the Prior Credit Agreement, the Credit Agreement
requires Ito-Yokado and Seven-Eleven Japan to maintain fifty percent or more
direct or indirect ownership of the Company.
In conjunction with the execution of the Credit Agreement on
February 27, 1997, the Company expects to enter into a $115 million Master
Lease Facility (the "MLF") in early April, 1997 with Citicorp Bankers Leasing
Corporation ("CBLC"). Funding for the six and one-half year MLF is being
provided by CBLC and the same bank group providing financing under the Credit
Agreement. The purpose of the MLF is to finance the rollout of the second
phase of the Company's retail information system, consisting of the
installation of point-of-sale cash registers with scanning capabilities, as
well as cabinets, batteries, processors, printers, display screens, cash
drawers, scanners, PAM controllers, hand-held terminals and other equipment,
as well as customized associated software developed specifically for the
Company. (See "Retail Information System," below.)
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN-R- STORES. On December 31, 1996, the Company's operations
included 5,422 stores in the United States and Canada, operated principally
under the name 7-ELEVEN-R-. An additional 620 stores (in the United States)
are operated by area licensees. These stores are located in 41 states, the
District of Columbia, and five provinces of Canada. During 1996, the Company
added 44 convenience stores, five of which were rebuilds or relocations of
existing stores, three of which were seasonal openings and 36 of which were
new stores. In addition, 46 convenience stores were closed during the year
(including relocations, rebuilds, and seasonal activity), mostly due to
changing market patterns, lease expirations and the closing of selected
stores that were not profitable. During 1996, the Company also completed its
four-year store remodeling program, the most extensive updating of the
Company's stores ever undertaken in the Company's history (see "Remodeling of
Stores," below).
3
The Company's convenience stores are extended-hour retail stores,
emphasizing convenience to the customer and providing fresh take-out foods,
groceries and beverages, self-serve 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's sales are also affected by
seasonality and weather. Many of the Company's traditional products attract
more shoppers during warm and dry weather and during the longer daylight
hours of the summer months, when leisure-time activities are more prevalent.
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 8.5% of sales, including gasoline.
REMODELING OF STORES. By the end of 1996, the Company had virtually
completed its four-year project to remodel the more-than-5,000 7-ELEVEN-R-
stores in the U.S. and Canada, with approximately 1,000 remodels being
completed during the year. Approximately 50 stores, at which permitting or
other delays slowed the remodel process, are scheduled to be completed in
1997. The remodeled stores have increased interior and exterior lighting,
wider aisles, shopper-friendly aisle markers, lower 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
replaced the mansard roof that had been a standard of the prior design. In
addition, closed circuit TV cameras and alarm devices have been added at the
remodeled stores as a further security upgrade. The remodeling process
focused on the changes that customers notice and appreciate most, such as the
brighter lighting and more user-friendly store layouts. In addition, during
1997, the Company anticipates that approximately 3,000 stores will be further
updated as part of the Company's commitment to continually upgrade stores and
equipment. These stores are scheduled to get counter modifications to
accommodate the new point-of-sale ("POS") equipment that will be installed as
part of the Company's proprietary new retail information system. Stores will
also be reviewed for possible layout changes that are currently being tested.
MERCHANDISING. 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 1996, the Company
continued to focus on proper ordering techniques, and on remaining in-stock
on high-demand items, as well as on the introduction of new items, on a
weekly basis. The emphasis has been on maintaining a product mix with an
expanded selection of higher quality fresh foods that, through the use of
commissaries, bakeries and combined distribution centers ("CDC's"), with
daily deliveries of freshly made sandwiches and bakery products from the
commissaries and bakeries, are now available in many parts of the country.
4
The Company is continuing to experiment with other merchandising
innovations to encourage existing customers to increase their shopping
frequency and to enhance the stores' appeal to new customers. There has also
been an increased focus on novelty and seasonal items to spur impulse buying.
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-R- stores more frequently.
During 1996, the Company continued to focus on maintaining the proper
store image to attractively display new merchandise. In addition, the store
operator is expected to be aware of every facet of the store's merchandising,
including the user-friendly appearance of both the exterior and interior
facility.
In an effort to focus consumer attention on selected merchandise, the
Company increased its tie-ins with major league sports, utilizing trading
cards, phone cards, fresh food and beverage promotions to support the theme
(see "Advertising," below).
During 1996, 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 in their first week of
availability and new-item acceptance has been closely monitored. New item
introduction will remain a key marketing strategy for the Company in 1997,
with plans to identify and introduce more items each week, with focus on both
food items and non-food items, in categories that offer meaningful potential
for sales growth.
The Company continued to utilize an everyday-fair-price strategy, which
minimizes discounting, and is designed to provide consistent, competitive
prices throughout the store. The Company is working with suppliers to find
ways to lower costs to the Company, so that savings can be reflected in the
price to the customer.
During 1996, 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.
NEW PRODUCTS. FRESH FOODS AND FOOD PRODUCTS. During 1996, the Company
continued its initiative to introduce more fresh food products of a higher
quality into the stores, utilizing daily deliveries from local commissaries
and bakeries, operated by companies with expertise in foodservice. These
companies prepare food to 7-ELEVEN-R- specifications exclusively for the
stores and have the product delivered in the exact quantities ordered by the
stores through the CDC program (see "Distribution, Fresh Products," below).
By the end of 1996, there were seven commissary facilities and five
bakeries providing fresh-made foods to over 2,000 stores. By year-end,
commissaries were serving stores in California, Colorado, Delaware, Florida,
Maryland, New Jersey, New York, Pennsylvania, Texas, Virginia, West Virginia
and Washington, D.C., with additional commissaries planned to serve stores in
Illinois and Wisconsin in early 1997. Bakeries preparing "WORLD OVENS-R-"
products now operate in Dallas, San Jose, Baltimore, Orlando and Denver.
5
In addition, during 1996 the Company worked to further enhance its image
as an alternative to other fast-food restaurants by diversifying its product
mix of ready-to-eat items by adding fresh and healthy food items, including
salads, healthy and low-fat sandwiches and entrees (which in Dallas were
introduced utilizing the endorsement of a local fitness expert, to highlight
the "health-conscious" focus), and healthy snacks, in addition to expanding
the "DELI CENTRAL-R-" array of other prepared meals that are available. Many
new entree items, as well as "personal" pizzas, were introduced in selected
markets. The Company plans to have the DELI CENTRAL-R- and WORLD OVENS-R-
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 stores' food offerings in
1996 on a test basis in selected areas of the country, including home-meal
replacement products such as Teriyaki Rice Bowls, BBQ Pork Fried Rice,
Italian Ziti, Sweet and Sour Pork, unique grilled sandwiches and pizza. The
Company also introduced a new breakfast product -- the Cinnamon Swirl French
Toast with Sausage -- and offered tastings of this new product to promote
customer awareness. The Company has also developed a new burger product (the
1/4 LB. BURGER BIG BITE-TM-) that can be freshly cooked on the in-store
roller grill, and served on a hot dog bun.
During 1996, the Company continued to expand its corporate brand QUALITY
CLASSIC SELECTION-R- spring water and sparkling water, offering four flavors
during the year. The 1- and 2-liter size of sparkling water enjoyed much
popularity and, to continue growth in this area, two new flavors of sparkling
water are planned for introduction in 1997. In addition a new tea product is
being tested in certain markets, to replace the brewed teas that were
introduced during the year, but were not as popular as had been hoped.
QUALITY CLASSIC SELECTION-R- was launched in Canada in 1996. In addition,
the Company continues to adjust the product selection of its juices, drinks,
waters and isotonics, to meet seasonal and demographic demands. The Company
has also focused on adding to its offering of higher quality wine, as well as
expanding the variety of wine coolers that are sold in the stores.
In the hot beverage area, as a complement to promoting its ever-popular
7-ELEVEN-R- coffee, the Company continued to emphasize its own proprietary
regular and decaffeinated CAFE SELECT-R- line of gourmet-flavored coffees,
hot chocolates and cappuccinos, introducing the "Summer Blend" and Vanilla
Nut flavors during 1996, as well as a new seasonal flavor, "Spiced Rum."
Approximately 95% of 7-ELEVEN-R- stores offer the new hot chocolate and
cappuccino products. The Company plans to install a cappuccino maker in
virtually all stores that do not currently have such a machine and is also in
the process of upgrading the coffee bar area of the store, not only by adding
cappuccino machines, but also by standardizing the coffee island to be larger
(10-11 feet long), cleaner and more uniformly equipped (with 2-product
grinders and two 5-burner machines).
The snack category saw growth in 1996 by emphasizing low-fat products
and the "better for you" items -- including "Baked Lays" from Frito Lay, low-
fat pretzels, and new individually wrapped "SnackWells" products from
Nabisco. The CDC distribution method benefited this category by allowing
stores access to locally popular snack items which could not be made
available through direct distribution, and by providing daily delivery to
areas where the number of stores or sales volume did not justify the
manufacturer's direct distribution. Some of the locally popular brands that
6
can now be included, which complement our traditional mix, are "Snyder's of
Hanover" pretzels and "On the Border" chips and hot sauce.
During 1996, the Company introduced several new flavors of SLURPEE-R-
drinks which were developed and produced by Coca-Cola. These new flavors
represented 22% of the total gallons of SLURPEE-R- drinks sold. In 1997, the
Company plans to introduce four or five more new flavors of SLURPEE-R-
drinks. In 1996 SLURPEE-R- drinkers were offered a chance to win a trip to
the World Series (see "Advertising," below), tying in with the Company's
popular Major League Baseball promotions.
NON-FOOD ITEMS. 7-ELEVEN-R- also continued its emphasis on growing
its selection of non-food services, such as the continued aggressive
marketing of branded prepaid telephone cards for long distance service. The
prepaid telephone cards, which were originally introduced in November 1994,
now include annual collectors' series for several major league sports and, in
April, 1996, a 180-minute card was introduced. After the successful
introduction of the National Football League ("NFL") Collectors' Series 7-
ELEVEN PHONE CARD-TM-, the Company added the Major League Baseball
Collectors' Cards and the National Basketball Association Collectors' Series
7-ELEVEN PHONE CARDS-TM-. National Hockey League cards were added in Canada
in 1996. The Company sold approximately 4.5 million 7-ELEVEN PHONE CARDS-TM-
, in 15-, 30-, 60-, 90- and 180-minute increments in 1996 and will continue
to seek expanded sales in the phone card market.
By year-end there were approximately 4,600 ATMs in 7-ELEVEN-R- stores
around the U.S. constituting the largest ATM network of any retailer.
Southland Canada, Inc., the Company's Canadian subsidiary, now has ATMs in
approximately 350 Canadian stores, with plans to have ATMs installed in
virtually all Canadian stores under the terms of a new agreement entered into
in 1996. In addition, the Company is testing the delivery of other services
through the ATM, such as offering postage stamps for sale.
The Company is one of the nation's leading retailers of money orders
and, in 1996, the Company completed the installation of new money order
processing equipment in substantially all stores. The new equipment is
designed to provide a more efficient and faster transaction. The Company has
now increased the per-money-order maximum limit available for purchase from
$300 to $500, satisfying the needs of the convenience shopper, and
potentially increasing the Company's market share of money order business.
The Company continued to focus on adding new and popular seasonal
merchandise, including its line of sunglasses with the sophisticated look of
certain very expensive brands - but at extremely reasonable prices. Sunglass
sales have increased dramatically during the two years this program has been
in effect. Another very successful program that began in 1995, but increased
dramatically in 1996, was the 7-ELEVEN-R- collectible truck model, made
available during the holiday season. Over 28,000 of the trucks were sold in
1996.
Enjoying the resurgence in the popularity of cigars, 7-ELEVEN-R- stores
in the United States and Canada have installed humidors offering high-quality
cigar products on the sales counters. In some stores "Fine Cut" or pouch
tobacco is also sold.
In addition, the Canadian stores have also increased their customers'
demand for magazines and newspapers by offering a wide variety of titles, and
special-order capabilities, so as to fit demands according to consumer
7
demographics. This new approach along with improvements to the display area,
has resulted in a marked increase in this category over the past three
years.
GASOLINE. In 1996, the Company sold over 1.4 billion gallons of
gasoline at retail at approximately 2,000 7-ELEVEN-R- 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 1996, the Company continued its program to upgrade the gasoline pump
area of the stores, by adding canopies and new equipment. Approximately
1,000 stores are now equipped to accept credit cards for the purchase of
gasoline at the pump, which makes gasoline shopping at 7-ELEVEN-R- stores
even more convenient for the credit customer. During 1996, the Company
discontinued the sale of gasoline at only 6 locations, while adding gasoline
at 4 new locations. Almost all of the Company's stores that sell gasoline
offer CITGO-branded gasoline.
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 market-related 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-R- stores.
At year-end, there were approximately 1.25 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 CDC program
through the strategic alliance with companies that specialize in
distribution. By the end of 1996, over 2,200 stores in Texas, Long Island,
New Jersey, Philadelphia, Denver, Tampa, Orlando, Maryland, Virginia, the
District of Columbia and northern California were receiving daily deliveries
from eleven CDCs, bringing 7-ELEVEN-R- the freshest dairy products, produce,
packaged baked goods, bread products, sandwiches and even products like
fresh-cut flowers and magazines. The distribution companies provide cross-
dock facilities where the products of multiple vendors, many of whom formerly
delivered directly to 7-ELEVEN-R- stores themselves, are combined to make one
delivery to the store. The distribution is then accomplished by the third-
party CDC operator. 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. The products
available through the CDCs vary from market to market. Included in the
products distributed through the CDCs are those produced by the commissaries
and bakeries that service the Company's stores. The Company plans to
continue to expand the use of the CDC concept and is in various stages of
finalizing agreements with several operators who will provide the
distribution services covering new areas.
WAREHOUSE PRODUCTS. The Company continued to utilize the distribution
services of McLane Company, Inc. ("McLane"), 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. In 1996, there was a marked increase in the number of stores
receiving deliveries twice a week from McLane.
8
Franchisees are required to carry merchandise of a type, quality,
quantity and variety consistent with the 7-ELEVEN-R- image, as well as
certain proprietary products. Except for the proprietary items, franchisees
are not required to purchase merchandise from vendors the Company recommends.
Except for consigned gasoline, franchisees are not required to sell
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-R-
convenience store sales in the United States by principal product categories
for the last three years were as follows:
YEARS ENDED DECEMBER 31
Product Categories 1996 1995 1994
---- ---- ----
Gasoline 26.0% 24.9% 24.2%
Tobacco Products 16.5 16.6 17.2
Groceries 9.7 9.8 9.6
Beer/Wine 9.1 9.0 9.4
Food Service 8.5 8.7 8.5
Soft Drinks 8.4 8.7 8.8
Non-Foods 5.9 6.1 6.2
Dairy Products 4.3 4.4 4.6
Candy 3.5 3.6 3.8
Baked Goods 3.3 3.4 3.6
Customer Services 3.2 3.1 2.4
Health/Beauty Aids 1.6 1.7 1.7
----- ----- -----
Total 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.
A new federal law went into effect, as of February 28, 1997, requiring
retailers to have new procedures in place to determine the age of persons
wanting to purchase tobacco products. The Company has diligently worked to
prepare sales associates to be certain that each store will be in compliance
with the new requirements. This type of age-sensitive statutory compliance
program is similar to the Company's very successful COME OF AGE program,
which the Company has used since 1984 to train store personnel about the laws
9
relating to the proper handling and sale of age-restricted products,
particularly alcoholic beverages. This training program is provided to
corporate and franchise stores and is made available to franchisees' and
licensees' sales associates.
The Company has also instituted other neighborhood and community
cooperative programs, such as working with local police offices through
programs like "Operation Chill," designed for law enforcement officers to
reward young people's positive behavior with free SLURPEE-R- coupons, the "We
Card" program, the installation of Police Community Network Centers in some
stores and other similar efforts.
FRANCHISES. At December 31, 1996, 2,927 7-ELEVEN-R- stores were
operated by independent franchisees under the Company's franchise program for
individual 7-ELEVEN-R- stores. Sales by stores operated by franchisees
(which are included in the Company's net sales) were approximately
$2,860,768,000 for the year ended December 31, 1996.
In its franchise program for individual 7-ELEVEN-R- 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 and may
provide a profit. Under the standard form of franchise agreement, the
Company leases or subleases, to the franchisee, a ready-to-operate 7-ELEVEN-
R- 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. In certain
circumstances, up to 100% of the full franchise fee will be financed for
qualified applicants.
Under the standard franchise agreements currently in effect, the Company
receives a share 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-R- Charge," is its continuing
royalty charge to the franchisee for the license to use the 7-ELEVEN-R-
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 can include merchandising, advertising, recordkeeping, store audits,
contractual indemnification, business counseling services and preparation of
financial statements. Other optional services may be available from or
through the Company for additional fees.
10
During 1996, the Company continued testing a franchise agreement that
provided a three-tiered structure for calculating the 7-ELEVEN-R- Charge.
This test, which is limited to Washington, Idaho and Oregon, will continue,
in those states only.
The Company's current training program for new franchisees now consists
of seven weeks of intensified instruction in the new strategies that are
being implemented by the Company.
The Company is also encouraging existing successful franchisees to
franchise multiple locations. This will provide growth opportunities for
current franchisees within the 7-ELEVEN-R- system by encouraging them to
pursue additional stores and may result in increased income for the
franchisee, partly by creating opportunities for lower per unit operating
expenses for the franchisee and the Company.
Under Southland's standard franchise agreement, the franchise may be
terminated by the franchisee at any time or by the Company only 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-R- 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-R-
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, 1996, the Company had granted
domestic area licenses to eight companies which were operating 620
convenience stores using the 7-ELEVEN-R- system and name in certain areas of
Alaska, Arkansas, Hawaii, Indiana (using the name SUPER-7-R- 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 47 stores in
Hawaii are operated under an area license agreement with Seven-Eleven
(Hawaii), Inc. (a subsidiary of Seven-Eleven Japan).
As of the end of 1996, foreign area license agreements covered the
operation of 6,765 7-ELEVEN-R- stores in Japan, 1,346 in Taiwan, 714 in
Thailand, 331 in Hong Kong, 162 in Australia, 125 in South Korea, 105 in the
Philippines, 101 in Malaysia, 83 in Spain, 81 in Singapore, 55 in the United
Kingdom, 41 in Norway, 37 in Sweden, 30 in China, 22 in Denmark, 14 in
Brazil, 12 in Puerto Rico, 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. The Company is
in the process of selling its equity interest in the Norwegian licensee.
Nine "12+12" stores in Spain, not included in the 83 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 218
convenience stores in Mexico operated by 7-ELEVEN Mexico, and two stores in
Mexico are operating under a license agreement with 7-ELEVEN Mexico. These
stores feature merchandise and services essentially the same as 7-ELEVEN-R-
stores in the U.S. 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-TM- DAIRY STORES. As of December 31, 1996, the Company operated
5 HIGH'S-TM- Dairy Stores located in Maryland and Virginia, which are similar
in size and location to 7-ELEVEN-R- stores and feature a product mix that
emphasizes a variety of dairy products.
QUIK MART AND SUPER-7-R- GASOLINE UNITS. At December 31, 1996, 22 Quik
Mart and SUPER-7-R- gasoline units were in operation in eight 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-R- gasoline unit is a high-
volume, multi-pump, self-service gasoline-dispensing operation.
The Company plans to either close or convert these units to 7-ELEVEN-R-
stores over the next few years.
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 520,000 square feet, about 39% of Cityplace Center
East. During 1996, leases covering approximately 125,000 additional square
feet were signed, both with new tenants and with current tenants who
increased their leased space. The building is now virtually completely
leased or reserved for expansion under current leases.
OTHER INFORMATION ABOUT THE COMPANY
CREDIT AGREEMENT AND DEBT COVENANTS. The Company's new Credit Agreement
(see "Refinancing of Bank Debt," above) contains a number of financial and
operating covenants requiring, among other things, the maintenance of certain
financial ratios, including interest and rent coverage, fixed-charge
coverage, and senior 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)
12
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. As in the Prior Credit Agreement, the
new Credit Agreement requires that Ito-Yokado and Seven-Eleven Japan maintain
fifty percent or more direct or indirect ownership 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
(as described below) 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 $4.16 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 terminated on March 5, 1996, except for certain demand registration
rights.
Under the Shareholders Agreement, IYG had the obligation to purchase, if
requested to do so, certain shares (including those pledged as collateral)
from certain signatories to the Shareholders Agreement. As a result of that
obligation, IYG acquired 1,903,966 shares of Common Stock in March 1996 and
1,391,474 shares of Common Stock in April 1996, bringing the total shares
owned by IYG to 266,937,933.
13
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. entered into a
Warrant Agreement with Wilmington Trust Company as Warrant Agent, the Company
and Ito-Yokado. Under the Warrant Agreement, each Warrant entitled the
holder to purchase, at the exercise price (the "Exercise Price") of $1.75 per
Warrant, one of the underlying shares of Common Stock. As of February 23,
1996, the expiration date of the Warrants, a total of 10,098,089 Warrants had
been exercised.
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. (Jodie) Thompson, Jr. was terminated and
the Employment Agreements with John P. Thompson and Jere W. Thompson
terminated on March 5, 1996, according to their terms.
RESEARCH AND DEVELOPMENT
The Company did not incur any significant expenses for product testing
or traditional research and development activities in 1996. During 1996, 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 $69,000 for new product development and
taste testings and to test equipment used for cooking and displaying food
products, which includes quality assurance testing.
RETAIL INFORMATION SYSTEM
In 1993, the Company began development of its own proprietary retail
information system, which is being implemented in phases, over a multi-year
period. The system is designed to build efficiencies into ordering,
distribution and merchandising processes and to provide timely and accurate
store information on an item-by-item basis. The system is designed to
provide information about every important aspect of the store's operation and
to facilitate inventory tracking. Implementation of the first phase began in
1994 and was completed in early 1996. It automated basic in-store accounting
processes. The Pre-POS system, which provided new cash registers in 336
stores was implemented in the fourth quarter of 1996. The second phase, now
underway, consists of an ordering and distribution system and retail
scanning. This system will provide a sophisticated ordering system linking
stores to vendors with full POS scanning capability including new registers
for all stores. Rollout of the system will begin in the third quarter of
1997 and is expected to provide the foundation for future phases.
TRADEMARKS
The Company's 7-ELEVEN-R- 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-R-, SLURPEE-R-, BIG GULP-R- and BIG BITE-R-, 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-R- and WORLD OVENS-R-
trademarks are being introduced in stores nationwide, along with the QUALITY
CLASSIC SELECTION-R- trademark, covering the Company's proprietary brand of
14
spring and sparkling waters, as well as other beverage products. New marks
introduced during the year include BETTER CHOICES-SM- which consist of
healthy snack and meal items that have been recognized by Larry North,
fitness celebrity, as low-fat, healthy products, and 7-ELEVEN SERVICE CENTER-
SM-, which refers to the work station that has been added in some stores to
offer faxing and mailing services for customers, among other things. CAFE
SELECT-R-, continues to be used, covering the Company's gourmet coffees,
cappuccino and hot chocolate products.
ADVERTISING
During 1996, the Company continued its very successful "Comedians"
campaign, which first aired in December, 1993. The Company also introduced
several new promotional and seasonal advertising campaigns such as new
versions of the BRAINFREEZE-R- television commercials, featuring the famous
soccer player Alexi Lalas, to promote the "SLURPEE-R- World Series" game.
Also featured in various advertisements in 1996 were the 7-ELEVEN- PHONE
CARD-TM- Major League Baseball Classic Collector Series, featuring 12
different Major League baseball players. In addition, the 7-ELEVEN PHONE
CARD-TM- NFL Collector Series, which featured 12 different NFL players, was
used to enhance the promotion of the NFL-licensed coffee mugs being sold at
the stores, each featuring one of the 30 NFL teams.
The popularity of the National Hockey League ("NHL") has been growing at
a tremendous rate. 7-ELEVEN-R- focused on this increased consumer interest
by offering a limited edition NHL coffee mug in 1996. In addition, the
Company sponsored NHL programming and was a major sponsor of the NHL All-Star
game, as well as sponsoring FOX TV's Major League Baseball and NFL football
games.
During the year, the Company used several television promotions to
target special products. To highlight hot dogs, a TV spot featuring the
famous baseball broadcaster Harry Caray was used; a TV spot for fountain soft
drinks tied-in with the movie "Cable Guy" starring Jim Carrey; the 7-ELEVEN
PHONE CARD-TM- Major League Baseball Classic Collector Series TV spot
featured Cal Ripken (from the Baltimore Orioles); and the 7-ELEVEN- PHONE
CARD-TM- NFL Collector Series spot featured Detroit Lions player Barry
Sanders.
During the year radio advertising was used to highlight specific
products such as ATMs, fountain soft drinks, 7-ELEVEN-R- PHONE CARDS and
SLURPEE-R- drinks.
In addition, during the year, the Company offered free or discounted
pastries or DELI CENTRAL-R- items, with the frequent purchase of coffee or
soft drinks, and distributed coupons for price discounts or free items, to
encourage customers to sample some of the new fresh food items that were
introduced during 1996. The Company also produced seasonal advertising and
point of purchase materials to tie-in with the Arnold Schwarzenegger holiday
movie "Jingle All the Way."
COMPETITION
During the past few years the Company, like other traditional
convenience retailers, has experienced increased competitive pressures from
15
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-R- 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 1995 (the most recent data available) for the
convenience store industry were approximately $144.1 billion (including $74.4
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 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 1996, the Company entered into subleases with
new tenants and expansions with existing tenants covering about 125,000
additional square feet. The building is now virtually completely leased or
reserved for expansion under current leases. 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
16
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 clean-up 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.
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"). As a result, the Company is
required to conduct environmental remediation at the facility and has
submitted a clean-up plan to the New Jersey Department of Environmental
Protection ("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 recently
received conditional approval of its clean-up plan, the Company must supply
additional information to the NJDEP before the plan can be finalized. At
December 31, 1996, the Company has recorded an undiscounted liability of
$30.9 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 Company
and the former owner of the facility executed a final settlement agreement
pursuant to which the former owner agreed to pay a substantial portion of the
cleanup costs described above. Based on the terms of the settlement
agreement and the financial resources of the former owner, the Company has
recorded a receivable of $18.2 million, at year-end 1996, representing the
former owner's portion of the accrued clean-up costs.
As of December 31, 1996, 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.
17
The Company anticipates that it will spend approximately $15 million in
1997 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 $20 million on such
capital improvements from 1998 through 2000.
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, 1996, the Company has an accrued liability of
$46.5 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 remediation costs, as well as
remediation costs previously paid. At December 31, 1996, the Company has
recorded a net receivable of $50.0 million for the estimated probable state
reimbursements. The Company increased the estimated net environmental cost
reimbursements at the end of 1996 by approximately $7.5 million as a result
of completing a review of state reimbursement programs. In assessing the
probability of state reimbursements, the Company takes into consideration
each state's fund balance, revenue sources, existing claim backlog, status of
clean-up activity and claim ranking systems. As a result of these
assessments, the recorded receivable amount is net of an allowance of $9.5
million. 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, except from California,
within one to three years after payment of eligible assessment and
remediation expenses, assuming that the state administrative procedures for
processing such reimbursements have been fully developed. The Company
estimates that it may take from one to eight years to receive reimbursement
funds from California. Therefore, the portion of the recorded receivable
amounts that relate to sites where remediation activities have been completed
have been discounted at 7 percent to reflect their present value. The 1996
recorded receivable amount is also net of a discount of $6.4 million.
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 25 through 28, for a
discussion of other pending legal proceedings relating to environmental
matters.
18
EMPLOYEES
At December 31, 1996, the Company had 29,532 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 above
the field consultant level 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 of the Board and Vice Chairman of the Board, respectively, on March
5, 1991, after Southland emerged from bankruptcy, and are officers of the
Board and are not administrative executive officers.
AGE AT
NAME 3-01-97 POSITIONS AND OFFICES WITH REGISTRANT AT 12/31/96
- ---- ------- -------------------------------------------------
Masatoshi Ito 72 Chairman of the Board and Director (1)
Toshifumi Suzuki 64 Vice Chairman of the Board and Director (2)
Clark J. Matthews, II 60 President, Chief Executive Officer; Secretary and Director
(3)
Stephen B. Krumholz 47 Executive Vice President and Chief Operating Officer (4)
James W. Keyes 41 Executive Vice President and Chief Financial Officer (5)
Rodney A. Brehm 49 Senior Vice President, Distribution (6)
Michael R. Cutter 45 Senior Vice President, Merchandising (7)
Adrian O. Evans 60 Senior Vice President, Construction and Maintenance (8)
Stephen B. LeRoy 44 Senior Vice President, International and Real Estate (9)
Bryan F. Smith, Jr. 44 Senior Vice President and General Counsel (10)
Robert E. Bailey 54 Vice President, Northwest Division (11)
Terry L. Blocher 52 Vice President, Southwest Division (12)
Paul L. Bureau, Jr. 55 Vice President, Corporate Tax (13)
Kathleen Callahan-Guion 45 Vice President, Chesapeake Division (14)
Frank Crivello 43 Vice President, Northeast Division (15)
Joseph Gomes 57 Vice President, Central Division (16)
John Harris 50 Vice President, Florida Division (17)
James Notarnicola 45 Vice President, Communications (18)
Gary R. Rose 51 Vice President, Gasoline and Environmental Services (19)
Jeffrey Schenck 46 Vice President, Greater Midwest Division (20)
David A. Urbel 55 Vice President, Planning and Treasurer (21)
Donald E. Thomas 38 Controller (22)
- -------------------
19
(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
Famil 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.
(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-R- Stores Operations, from 1990 to August
1992; Vice President, Marketing, from 1989 to 1990; Vice President, Northern
Region, 7-ELEVEN-R- Stores, from January 1989 to October 1989;
Vice President, Northwest Region, 7-ELEVEN-R- Stores, from 1987 to 1988;
Division Manager, Mountain Division, 7-ELEVEN-R- Stores, from 1986 to 1987;
Regional Marketing Manager from 1981 to 1986; employee of the Company since
1972.
(5) Executive Vice President and Chief Financial Officer since May
1, 1996; Senior Vice President, Finance, from June 1993 to April 1996; Vice
President, Planning and Finance, from August 1992 to June 1, 1993; Vice
President, National Gasoline, from August 1991 to August 1992; General
Manager, National Gasoline, from 1986 to 1991; employee of the Company since
1985.
20
(6) Senior Vice President, Distribution since May 1, 1996; Senior
Vice President, Distribution and Foodservice, from June 1993 to April 1996;
Vice President, Merchandising, from February 1992 to June 1993; Vice
President, Marketing, from 1990 to 1992; Vice President, Northwest Region, 7-
ELEVEN-R- Stores, from 1989 to 1990; National Marketing Manager from 1986 to
1989; Division Manager, Central Pacific Division, 7-ELEVEN-R- Stores, from
1979 to 1986; employee of the Company since 1972.
(7) Senior Vice President, Merchandising from May 1, 1996 to March
31, 1997; Vice President, Merchandising from May 1995 to April 1996; 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.
(8) Senior Vice President, Construction and Maintenance from May 1,
1996 to June 30, 1997; Vice President, Construction and Maintenance, from
August 1992 to April 1996; Vice President, Stores Development, from January
1989 to August 1992; Vice President, Mid-America Region, 7-ELEVEN-R- 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.
(9) Senior Vice President, International and Real Estate since May
1, 1995; Vice President, International and Real Estate, May, 1994 to April,
1995; Vice President Real Estate and Licensed Operations, from August 1992
until May 1994; Vice President, Atlantic Region, 7-ELEVEN-R- Stores, from
1990 to 1992; Vice President, Chesapeake Region, 7-ELEVEN-R- 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.
(10) 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.
(11) Vice President, Northwest Division since May 1, 1995; Division
Manager from November 1990 to April 1995; Regional Vice President from May
1986 to October 1990; employee of the Company since 1970.
(12) Vice President, Southwest Division since May 1, 1995; Division
Manager from February 1, 1985 to April 30, 1995; employee of the Company
since 1971.
(13) 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
(14) Vice President, Chesapeake Division from May 1, 1995 to March
14, 1997; Division Manager from November 1, 1986 to April 30, 1995; employee
of the Company since 1979.
(15) Vice President, Northeast Division since May 1, 1996; Division
Manager from October 1987 to April 1996; employee of the Company since 1981.
(16) Vice President, Central Division since May 1, 1996; Division
Manager from June 1989 to April 1996; employee of the Company since 1978.
(17) Vice President, Florida Division since May 1, 1996; Division
Manager from October 1987 to April 1996; employee of the Company since 1979.
(18) Vice President, Communications from May 1, 1995 to March 31,
1997; 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.
(19) 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.
(20) Vice President, Greater Midwest Division since May 1, 1996;
Division Manager from October 1987 to April 1996; employee of the Company
since 1976.
(21) 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.
(22) 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.
ITEM 2. PROPERTIES
Under the Prior Credit Agreement, virtually all the Company's assets,
not previously subject to liens, were encumbered with mortgages and other
liens, including both tangible and intangible property rights, as well as
stock in the Company's non-foreign subsidiaries, where such encumbrance was
not otherwise prohibited. Upon refinancing of the Prior Credit Agreement and
the payment of all amounts due thereunder, such encumbrances were released.
22
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN-R- At the end of 1996, the 7-ELEVEN-R- stores group was using
62 offices in 19 states and Canada. The following table shows the location
and number of the Company's 7-ELEVEN-R- convenience stores (excluding stores
under area licenses and of certain affiliates) in operation on December 31,
1996.
STATE/PROVINCE OPERATING 7-ELEVEN-R- CONVENIENCE STORES
OWNED LEASED(A) TOTAL
U.S.
---
Arizona 39 57 96
California 227 941 1,168
Colorado 61 179 240
Connecticut 7 31 38
Delaware 10 17 27
District of Columbia 4 14 18
Florida 227 190 417
Idaho 6 8 14
Illinois 53 85 138
Indiana 6 10 16
Kansas 7 10 17
Maryland 87 228 315
Massachusetts 11 24 35
Michigan 51 48 99
Missouri 32 49 81
Nevada 88 100 188
New Hampshire 2 7 9
New Jersey 74 129 203
New York 43 186 229
North Carolina 2 5 7
Ohio 10 5 15
Oregon 37 96 133
Pennsylvania 60 106 166
Rhode Island 0 8 8
Texas 105 181 286
Utah 37 75 112
Virginia 191 407 598
Washington 59 169 228
West Virginia 10 13 23
Wisconsin 15 0 15
CANADA (B)
------
Alberta 19 97 116
Manitoba 13 37 50
Ontario 30 80 110
British Columbia 21 120 141
Saskatchewan 14 24 38
----- ----- -----
Total 1,658 3,736 5,394
===== ===== =====
- -----------------
(A) Of the 7-ELEVEN-R- convenience stores set forth in the foregoing table, 743 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 1996, the Company also leased
50 closed convenience stores or office locations from the Savings and Profit Sharing Plan.
(B) The above numbers include 17 stores in Canada that have been operated under a
management contract. The Company is in the process of acquiring the assets of these stores,
which are all on leased property.
23
OTHER RETAIL. As shown in the following table, at year-end 1996, the
Company operated 22 Quik Mart and SUPER-7-R- stores in California, Illinois,
Indiana, Massachusetts, Missouri, New Hampshire, Texas and Virginia, 5
HIGH'S-TM- Dairy Stores located in Maryland and Virginia, and one other
retail location in Illinois.
The following table shows the location and number of the Company's Quik
Mart, HIGH'S-TM- and SUPER-7-R- locations in operation on December 31, 1996.
OTHER OPERATING RETAIL LOCATIONS
STATE OWNED LEASED TOTAL
California 3 0 3
Illinois 6 0 6
Indiana 3 1 4
Maryland 0 2 2
Massachusetts 1 0 1
Missouri 2 0 2
New Hampshire 1 1 2
Texas 2 0 2
Virginia 3 3 6
--- -- --
Total 21 7 28
The Company plans to either close or convert these units to 7-ELEVEN-R-
stores over the next few years.
OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1996,
there were six 7-ELEVEN-R- stores in various stages of construction, all but
one on property leased by the Company. The Company owned 16, and had leases
on 57, undeveloped convenience store sites. In addition, the Company held
110 7-ELEVEN-R-, HIGH'S-T.M.- and Quik Mart properties available for sale
consisting of 66 unimproved parcels of land, 31 closed store locations and 13
parcels of excess property adjoining store locations. At December 31, 1996,
22 of these properties were under contract for sale.
On December 31, 1996, the Company held leases on 373 closed store or
other non-operating facilities, 50 of which were leased from the Savings and
Profit Sharing Plan. Of these, 293 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.
ACQUISITIONS. During 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 also
acquired two stores in the Oakland, California area, from The Customer
Company, both of which are owned.
24
OTHER PROPERTIES. The Company also leases 53,580-square-feet of
office/warehouse space in Denver, Colorado, for an equipment warehouse and
service center.
The Company has contracted to sell 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.
The chemical plant that was located on this property has now been demolished
and a part of the property is currently involved in environmental clean-up.
(See "Current Environmental Projects and Proceedings," pages 17 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). The Company holds tracts in Dallas, Texas, not included in
Cityplace, totaling about 5.0 acres which are available for sale.
Item 3. LEGAL PROCEEDINGS
THE FOLLOWING INFORMATION UPDATES THE STATUS OF CERTAIN PREVIOUSLY REPORTED
PENDING LITIGATION INVOLVING THE COMPANY.
7-ELEVEN-R- OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION,
ET AL.
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-R- Owners for FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION,
ET AL., Case No. 722272-6, in the Superior Court for Alameda County,
California ("7-ELEVEN-R- OFFF"). Also named as defendants in the Complaint
are Southland's majority owners and various vendors who supply goods to 7-
ELEVEN-R-franchisees in the State of California. The named plaintiffs
purportedly represent all persons who have owned 7-ELEVEN-R-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-R- stores.
Although the case was filed as a class action on behalf of California
franchisees, the judge has not yet ruled on whether or not to certify a
class.
The Company's majority owners filed a motion challenging the court's
jurisdiction over them and asking to be dismissed from the case, which the
Court granted on March 12, 1997. In addition, Southland and several of the
25
vendor defendants filed motions requesting summary judgment as to most of the
antitrust claims in the case. Those motions were heard on January 24, 1997,
and on March 12, 1997, the judge granted summary judgment and dismissed all
of the claims that alleged a price-fixing conspiracy between Southland and
the vendor defendants, as well as dismissing the breach of fiduciary duty and
accounting claims against McLane. As a result of this decision, Coca Cola,
Pepsi Cola, Hansen's Juices and Oscar Mayer have been dismissed from the
case, leaving only Southland, Citgo and McLane as defendants.
There are no other hearings set in this case; however, the judge has
scheduled the trial to begin on January 12, 1998, and discovery in this
matter is proceeding.
VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
VALENTE I: As previously reported, the same lawyers representing the
plaintiffs in the 7-ELEVEN-R-OFFF case, which, as previously reported, is
pending in state court in California, filed another lawsuit against the
Company and other defendants on March 15, 1996, in the U.S. District Court
for the Northern District of California, entitled VALENTE, ET AL. V. THE
SOUTHLAND CORPORATION, ET AL., Case No. 3:96-CV-1786-P ("Valente I").
Valente I, which alleges essentially the same issues as the 7-ELEVEN-R- OFFF
case, was filed on behalf of a purported class consisting of all persons who
owned 7-ELEVEN-R- franchises during the last six years, except those located
in California.
The Company's motion to transfer the case to federal court in Dallas was
granted on June 24, 1996, and the case is now pending in the U.S. District
Court for the Northern District of Texas. The plaintiffs, however, have filed
a motion to dismiss VALENTE I; the court has not yet ruled on that motion.
VALENTE II: On November 14, 1996, the same group of lawyers
representing the franchisees filed a third purported class action lawsuit
(VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, District Court of Dallas
County Texas, 14th Judicial District, Case No. 96-11972-A, "Valente II") in
state court in Dallas. Southland is the only defendant named in this case,
which alleges breach of contract relating to the manner in which the Company
accounted for discounts and allowances from merchandise vendors. The
plaintiffs have amended their complaint to assert that the class consists of
all persons who signed a franchise agreement with Southland, on or after
January 1, 1967, with respect to a 7-ELEVEN-R- store in any state, except
California.
The Company intends to contest the certification of classes in these
cases and to defend vigorously against all of the plaintiffs' allegations.
The Company believes it has meritorious defenses to all of the claims
asserted by the plaintiffs in both the California action and the Texas cases.
The ultimate outcome, however, cannot be predicted.
EMIL V. SPARANO, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
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 April 1994.
Plaintiffs are several franchisees of 7-ELEVEN-R- stores in Illinois,
26
Pennsylvania, New Jersey and Nevada; and they purport to represent a
nationwide class of all persons who have owned 7-ELEVEN-R- 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., 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. The lawsuit originally included 11 causes
of action.
During 1996, as previously reported, Southland and the Foreign Companies
received favorable rulings on several motions. As a result, all claims
against the Foreign Companies were dismissed, and the only Individual
Defendants remaining in the case are John Thompson, Jere Thompson and Clark
Matthews. In addition, of the 11 original causes of action, only the claim
alleging that fraudulent statements about the Company's financial condition
were made, during and after the Company's LBO and Chapter 11 bankruptcy
proceedings, has been certified to proceed as a class action against the
three remaining Individual Defendants and Southland. The plaintiffs are not
pursuing any of the other claims that were originally alleged.
The class has now been defined to include those persons who owned 7-
ELEVEN-R- franchises at any time from December 1, 1987 to March 4, 1991. The
parties are currently attempting to agree on the form of notice that will be
sent to class members.
The Company has aggressively attacked the merits of this suit from its
inception and believes that it has meritorious defenses to the remaining
claim. At this time, however, the litigation is still at an early stage of
development and the ultimate outcome cannot be predicted.
DEFAULT INTEREST CLAIM
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
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
and received a favorable ruling from the Bankruptcy Court. The Company has
appealed this decision but recognized the approximately $12.2 million of
additional interest expense in its financial statements for 1991. There were
no material developments in this matter in 1996.
T&L PROPERTY SERVICE (TAL-TEX)
As previously reported, on June 21, 1995, a lawsuit was filed in Dallas
County, Texas against the Company by T&L Property Service, an affiliate of
Tax-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 and its principals and claims by certain individuals who reside in
or near Round Rock on behalf of themselves and a purported class of similarly
situated residents, alleging personal injuries
27
and property damages as a result of a release of petroleum from underground
storage tanks at a 7-ELEVEN-R- store in Round Rock, Texas. In March, 1996,
the claims of the Tal-Tex entities were severed from the purported class
action. In December, 1996, the Court denied the motion to certify the class,
and in January, 1997, the individual plaintiffs voluntarily dismissed both
the individual claims and the class claims leaving only the lawsuit pending
in Dallas County, Texas, involving the Tal-Tex entities. The individual
plaintiffs subsequently filed a new lawsuit in Georgetown, Texas, (TONKAWA
SPRINGS HOMEOWNERS ASSOCIATION ET AL. V. THE SOUTHLAND CORPORATION, Cause No.
97-021-C277, in the 277th Judicial District Court for Williamson County,
Texas) on behalf of themselves individually, and as representatives of a
purported class of property owners in the subdivision near Round Rock, Texas,
whose properties have been allegedly damaged as a result of the original
release of petroleum from the 7-ELEVEN-R- store in Round Rock, Texas. The
Company strongly contests, and is vigorously defending against, both
lawsuits.
ARTURO M. VASQUEZ, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
As previously reported, a suit was filed in 1995 against the Company
entitled ARTURO M. VASQUEZ, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.,
which 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. The Company's motion to transfer venue in this
matter to Dallas County, Texas was granted, and upon reconsideration the
judge upheld the transfer. Immediately prior to the class certification
hearing, the plaintiffs withdrew all allegations involving the purported
class, thereby resulting in a lawsuit involving only a few individual
plaintiffs. Southland strongly contests, and is vigorously defending
against, the claims in this lawsuit.
In addition, the Company is also occasionally sued by persons who allege
that they have incurred property damage and personal injuries as a result of
releases of motor fuels from underground storage tanks operated by the
Company at its retail outlets. It is the Company's policy to vigorously
defend against such claims. Except as specifically disclosed in this section
on "Legal Proceedings" or in the section on "Environmental Matters", above,
the Company does not believe that its exposure from such claims, either
individually or in the aggregate, is material to its business or financial
condition.
Information concerning other legal proceedings is incorporated herein
from "Environmental Matters," pages 16 through 18, 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 1996.
28
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 7, 1997, there were 2,834 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
- ------------- ----------------------------------------------------------
1996
FIRST $ 4 1/16 $ 2 15/16 $ 3 5/16
SECOND 4 15/16 3 3 1/32
THIRD 3 5/8 3 3 1/32
FOURTH 3 5/32 2 7/16 2 31/32
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
(a) These quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
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.
29
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
Net sales . . . . . . . . . . . . . . . . . $ 6,868.9 $ 6,745.8 $ 6,684.5 $ 6,744.3 $ 7,425.8
Other income (a). . . . . . . . . . . . . . 86.4 78.5 74.6 71.3 67.4
Total revenues (a). . . . . . . . . . . . . 6,955.3 6,824.3 6,759.1 6,815.6 7,493.2
LIFO charge (credit). . . . . . . . . . . . 4.7 2.6 3.0 (8.7) 1.5
Depreciation and amortization . . . . . . . 185.4 166.4 162.7 154.4 180.3
Interest expense, net . . . . . . . . . . . 90.2 85.6 95.0 81.8 97.4
Earnings (loss) before income taxes,
extraordinary items and cumulative effect
of accounting changes . . . . . . . . . . 130.8 101.5 73.5 (2.6)
(119.9)(b)
Income taxes (benefit). . . . . . . . . . . 41.3 (66.1)(c) (18.5)(d) 8.7 11.5
Earnings (loss) before extraordinary items
and cumulative effect of accounting changes 89.5 167.6 92.0 (11.3) (131.4)
Net earnings (loss) . . . . . . . . . . . . 89.5 270.8 (e) 92.0 71.2 (f) (131.4)
Earnings (loss) per common share
(primary and fully diluted):
Before extraordinary items and
cumulative effect of accounting
changes . . . . . . . . . . . . . . 0.20 0.40 0.22 (0.03) (0.32)
Net earnings (loss). . . . . . . . . . 0.20 0.65 0.22 0.17 (0.32)
Total assets. . . . . . . . . . . . . . . . 2,039.1 2,081.1 2,000.6 1,990.0 2,039.7
Long-term debt, including current portion . 1,707.4 1,850.6 2,351.2 2,419.9 2,560.4
- -------------------------
(a) Prior-year amounts have been reclassified to conform to current-year
presentation.
(b) Loss before income taxes, extraordinary items and cumulative effect of
accounting changes include a $45 million loss on the sale and closing of
the Company's distribution and food processing facilities.
(c) Income taxes (benefit) includes an $84.3 million tax benefit from
recognition of the remaining portion of the Company's net deferred tax
assets as explained in Note 15 to the Consolidated Financial Statements.
(d) Income taxes (benefit) includes a $30 million tax benefit from recog-
nition of a portion of the Company's net deferred tax assets as
explained in Note 15 to the Consolidated Financial Statements.
(e) Net earnings include an extraordinary gain of $103.2 million on debt
redemption as explained in Note 8 to the Consolidated FInancial
Statements.
(f) Net earnings include an extraordinary gain of $99 million on debt
redemption and a charge for the cumulative effect of an accounting
change for postemployment benefits of $16.5 million.
30
Some of the matters discussed in this annual report contain forward-looking
statements regarding the Company's future business which are subject to certain
risks and uncertainties, including competitive pressures, adverse economic
conditions and government regulations. These issues, and other factors
which may be identified from time to time in the Company's reports filed with
the SEC, could cause actual results to differ materially from those indicated
in the forward-looking statements.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings for 1996 were $89.5 million, compared to net
earnings of $270.8 million in 1995 and $92.0 million in 1994. The Company's
operating performance continued to improve, resulting in a 29% increase in 1996
earnings before income taxes and extraordinary gain (see chart below).
YEARS ENDED DECEMBER 31
------------------------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1996 1995 1994
---- ---- ----
Earnings before income taxes
and extraordinary gain $130.8 $101.5 $ 73.5
Income tax (expense) benefit (41.3) 66.1 18.5
Extraordinary gain from partial
redemption of the Company's
41/2 and 5% debentures
in November 1995 - 103.2 -
------- ------- -------
Net earnings $ 89.5 $270.8 $ 92.0
======= ======= =======
Net earnings per common share
(primary and fully diluted) $ .20 $ .65 $ .22
======= ======= ======
The Company's operating improvement in 1996 was primarily due to savings
in operating, selling, general and administrative expenses. Although store
closings (121 average) resulted in a decline in total merchandise gross
profit compared to 1995, average per store merchandise sales and gross
profits improved in each quarter in 1996 over 1995.
MANAGEMENT STRATEGIES
Since 1992, the Company hasbeen committed to several key strategies that
it believes, over the long term, will provide further differentiation from
competitors and allow 7-Eleven to maintain its position as the premier
convenience retailer. 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
For the past four years, the Company has focused on upgrading its store
base, both through remodeling existing stores and closing underachieving stores.
More recently, this strategy has been expanded through the opening or
31
acquiring of new stores. During 1996, the Company completed the most
extensive remodeling program in its history. With its store base now
completely remodeled, future upgrade programs will focus on retail
information systems, food service and other merchandising programs. Also in
1996, the Company slowed its ten-year decline in operating properties by
ending the year with only two fewer stores. Beginning in 1997, new store
openings are expected to outpace closings each year, with future expansion
initially occurring in existing markets to support the Company's fresh food
and combined-distribution initiatives. In recent years, the Company has
pruned its store base, closing or disposing of those stores that either could
not support its strategies or were not expected to achieve an acceptable
level of profitability in the future. As a result, store closings during the
past three years totaled 39, 214 and 182 in 1996, 1995 and 1994,
respectively.
The customer-driven approach to merchandising focuses 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 will be an ongoing part
of managing our business in a continual effort to satisfy the ever-changing
preferences of our customers.
The Company's everyday-fair-pricing strategy is designed to provide
consistent prices on all items by reducing its reliance on discounting.
Following a complete evaluation of product pricing in 1992, the everyday-
fair-pricing strategy was introduced, which in turn, allowed some product
prices to be lowered, while others were increased to achieve more
consistency. 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 many 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, improved in-stock conditions from
daily deliveries and quicker response time on new items, the combined
distribution is also intended to provide lower product costs, in part from
vendors' savings, through this approach. At the end of 1996, over 2,000
stores were serviced by the CDCs and carried fresh-food products manufactured
by the commissaries. Further expansion of these programs is anticipated in
1997 in the following markets: Miami/Fort Lauderdale, Chicago and Long
Island. When CDCs in these markets are operational, daily-delivered fresh
food will be available to nearly one-half of the Company's stores.
The development of a retail information system ("RIS") began in 1994.
The initial phase, completed in early 1996, involved installing in-store
processors ("ISP") in each store to automate accounting and other store-level
tasks. The current phase involves the installation of point-of-sale registers
with scanning capabilities, as well as tools on the ISP to assist with
ordering and product assortment, and a hand-held unit for ordering product
from the sales floor. After completion of this phase in 1998, the system will
provide each store and its suppliers and distributors with on-line
information to make better decisions in anticipating customer needs.
Management feels that the effective utilization of daily sales data gathered
by the system will improve sales through reducing out-of-stock incidents and
enhancing each individual store's product mix to better match customers'
needs. In addition, the system will assist with monitoring inventories to
32
better control shortage and product write-offs. While implementation costs
during the roll-out phase are expected to exceed the short-term benefits, the
anticipated long-term benefits of this system, coupled with further
reductions in costs resulting from automation, are expected to help the
Company reach its goal of sustained profitable growth over the long term.
(EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL STORES
RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR.)
SALES
The Company recorded net sales of $6.87 billion for the year ended
December 31, 1996, compared to sales of $6.75 billion in 1995 and $6.68
billion in 1994. Over the past three years, sales increases have primarily
come from same-store merchandise sales growth, combined with higher gasoline
prices. During this time period, growth in total sales was suppressed by the
closing of more than 430 underachieving stores (see Management Strategies).
MERCHANDISE SALES GROWTH DATA (PER-STORE)
YEARS ENDED DECEMBER 31
-----------------------
Increase (Decrease) from prior year 1996 1995 1994
- ----------------------------------- ---- ---- ----
U.S. same-store sales 1.4% 2.0% 2.1%
U.S. same-store real growth; excluding inflation (1.0)% - 2.8%
7-Eleven inflation (deflation) 2.4% 2.1% (.7)%
While average per-store merchandise sales results in 1996 were fairly
consistent among the various geographical areas, category results were mixed.
Categories with significant sales improvement included pre-paid phone cards
and services, while traditional convenience store products such as
cigarettes, non-alcoholic beverages and candy, which account for almost 40%
of merchandise sales, had below average growth. Competition continues to
intensify as other retailers rely on price promotions to drive their sales of
these products. Additionally, management feels that the Company's ongoing
challenge of balancing short-term performance with its long-term objectives
contributed to the less-than-desired sales results for the year.
During 1995 average per-store merchandise sales 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 included 18% of the Company's
domestic stores, experienced a decline of almost 1.5% due to a sluggish
economy.
Merchandise sales results experienced deflation during 1994 as a result
of cigarette price reductions (on certain premium brands) associated with
manufacturers' cost reductions.
Gasoline sales dollars per store increased 7.3%, 4.0% and 8.7% in 1996,
1995 and 1994, respectively. In 1996 and 1995 this increase was mostly due to
the average sales price per gallon increasing 12 cents over the two-year
period. The increase in gasoline sales dollars per store in 1994 was
primarily due to per-store gallonage improvement of 7.8%. Gallon volumes in
both 1996 and 1995 did not sustain the high growth levels experienced in 1994
as a result of market factors which affected the way the Company managed its
gasoline business.
33
OTHER INCOME
Other income of $86.4 million for 1996 was $7.9 million higher than 1995
and $11.7 million higher than 1994. The improvement is primarily the result
of increased royalty income from licensed operations, combined with increased
franchising activities which generated more fees.
GROSS PROFITS
MERCHANDISE GROSS PROFIT DATA
YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
---- ---- ----
Merchandise Gross Profit - (DOLLARS IN MILLIONS) $ 1,787.7 $ 1,790.2 $ 1,791.1
Increase/(decrease) from prior year - all stores
- -------------------------------------------------
Average per-store gross
profit dollar change 2.1% 3.1% 1.7%
Margin percentage point change (.19) (.01) (.50)
Average per-store merchandise sales 2.7% 3.1% 3.2%
Total merchandise gross profit dollars have declined slightly in each of
the last three years primarily from store closings and a slightly lower
margin. However, as a result of per-store sales growth, gross profit dollars
per store have consistently improved compared to prior-year results in each
quarter over the same period.
During 1996, merchandise margin declined slightly due to three main
factors: rising product costs, lower-than-average sales growth of high-margin
items and higher product write-offs. Rising product costs and more aggressive
retail pricing continue to present a challenge in today's increasingly more
competitive environment. Initial costs associated with new, fresh-food
products from the further roll-out of the Company's fresh-food program have
affected margin. Management is actively working to improve merchandise margin
while providing fair and consistent prices.
In 1995, sales of higher-margin categories like pre-paid phone cards and
services performed well enough to offset cost increases that could not be
passed on to the consumer for competitive reasons. The decline in margin
during 1994 was primarily due to increased costs for disposal of slow-moving
merchandise, combined with a pricing test in which the Company tested lower
prices in certain parts of the country as part of a more aggressive everyday-
fair-pricing strategy.
GASOLINE GROSS PROFIT DATA
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
---- ---- ----
Gasoline Gross Profit - (DOLLARS IN MILLIONS) $ 188.1 $ 192.9 $ 199.6
Increase/(decrease) from prior year
- -----------------------------------
Average per-store gross profit dollar change (1.4)% (3.3)% 8.2%
Margin point change (in cents per gallon) (.17) (.60) .06
Average per-store gas gallonage (.1)% 1.0% 7.8%
34
In 1996, gasoline gross profits declined $4.8 million from the levels
achieved in 1995. Lower margins (in cents per gallon) and gasoline gallonage,
during 1996, were the result of market conditions that kept wholesale costs
high for much of the year while competitive pressures kept retail prices in
check. The strong 1994 results were aided by favorable market conditions
created by the federally mandated fuel reformulation program which kept the
margins unusually high in the fourth quarter of 1994.
OPERATING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ("OSG&A")
YEARS ENDED DECEMBER 31
------------------------------
(DOLLARS IN MILLIONS) 1996 1995 1994
---- ---- ----
Total operating, selling, general and administrative
expenses $ 1,841.2 $ 1,874.5 $ 1,896.8
Ratio of OSG&A to sales 26.8% 27.8% 28.4%
Decrease in OSG&A compared to prior year* $ (33.3) $ (22.3) $ (143.3)
*1993 INCLUDED $48.2 MILLION LOSS FOR STORE CLOSINGS AND DISPOSITIONS OF PROPERTIES AND A
$10.8 MILLION LOSS FOR DISPOSITION OF CITIJET, A FIXED-BASE OPERATION AT DALLAS LOVE FIELD
AIRPORT. EXCLUDING THESE UNUSUAL ITEMS, THE DECREASE IN 1994 WOULD HAVE BEEN $84.3 MILLION.
OSG&A expenses, and the ratio to sales, have declined in each of the
last three years. In 1996, despite the incremental costs of the retail
information system initiatives which exceeded $7 million, OSG&A expenses
declined over $33 million. The largest item contributing to the improvement
was lower insurance costs. Based upon favorable claims experience, the
Company lowered its store insurance and employee benefit reserves. Other
factors aiding the comparison included the absence of a significant
restructuring charge compared to a charge of $13.4 million in 1995, declines
in environmental remediation expenses, savings from reductions in force and
lower expenses from having fewer stores. Management expects future periods'
expenses and the ratio to sales to increase with the continued roll-out of
the retail information system.
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, management
continues to realign and reduce personnel and office facilities, in order to
eliminate non-essential costs, while devoting resources to the implementation
of its retail information system and other strategic initiatives (see
Management Strategies).
The majority of the decrease in OSG&A expenses in 1995 and 1994 resulted
from cost savings realized from reductions in force, combined with the effect
of having fewer stores (see Management Strategies). In December 1995, the
Company accrued $13.4 million for severance costs and realignment of office
space. These reductions were substantially complete in 1996, and changes in
estimates from the original accrual did not have a material impact on 1996
earnings. 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 were completed in 1996. Changes from
1994's original accrual did not have a material impact on 1995 earnings.
35
INTEREST EXPENSE, NET
Net interest expense increased $4.6 million in 1996 compared to 1995 due
to lower interest income, combined with higher interest expense from the
Convertible Quarterly Income Debt Securities ("Convertible Debt") due 2010
which were issued in November 1995. The lower interest income was primarily
the result of a new money order agreement that eliminated interest income
from the funding arrangement; however, it provided lower cost of goods and
operating costs, which more than offset the impact of the lost interest.
Interest on the Convertible Debt was almost entirely offset by reduced
principal balances and lower rates on floating rate debt. As discussed
further in Note 8 to the Consolidated Financial Statements, in accordance
with SFAS No. 15, no interest expense is recognized on the Company's public
debt securities, as the cash interest payments are charged against the
recorded principal balance of such securities.
Approximately 35% of the Company's debt contains floating rates that
will be unfavorably impacted by rising interest rates. The weighted average
interest rate for such debt was 5.83% for 1996 versus 6.62% and 5.51% for
1995 and 1994, respectively. The Company expects net interest expense in 1997
to remain relatively flat due to higher borrowings to finance new store
development, offset by increased capitalized interest and a .6% reduction in
the cost of borrowing that the Company negotiated with the lenders in its
new, unsecured bank debt credit agreement ("New Credit Agreement") (see
Liquidity and Capital Resources).
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 secured senior
bank debt credit agreement ("Old Credit Agreement") in December 1994 and the
extension of the repayment of the debt relating to the Company's headquarters
facilities (Cityplace) at a lower interest rate in February 1995. 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.
INCOME TAXES
The Company recorded tax expense in 1996 of $41.3 million, compared to
tax benefits in 1995 and 1994 of $66.1 million and $18.5 million,
respectively. Higher income taxes were the result of the rise in earnings
before income taxes and extraordinary items, which have increased by 29% and
38% for the year-to-year comparisons of 1996 vs. 1995 and 1995 vs. 1994. Tax
benefits in 1995 and 1994 were the result of recognition of deferred tax
assets. 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 for deferred taxes was reversed, producing an $84.3
million benefit. During the fourth quarter of 1994, as a result of the
Company's anticipated 1995 taxable earnings, the valuation allowance was
reduced $30 million.
EXTRAORDINARY GAIN
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
36
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 Company recognized a $103.2
million after-tax extraordinary gain on the purchase of the Debentures in the
fourth quarter of 1995. The gain resulted from purchasing the Debentures
below their face value and from retiring the future undiscounted interest
payments on that portion of the Debentures that were 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.
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 $400 million (reduced by
outstanding letters of credit) 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.
In February 1997, the Company entered into a New Credit Agreement,
refinancing its old term loan ($225 million), revolving credit facility and
letters of credit ($150 million each), all of which were scheduled to mature
on December 31, 1999, with a new term loan facility ("Term Loan") and
revolving credit facility. The Term Loan ($225 million) has scheduled
quarterly repayments of $14.1 million commencing March 31, 1998 through
December 31, 2001. The new revolving credit facility ($400 million) expires
February 2002 and allows for revolving borrowings ("Revolver"), and for
issuance of letters of credit not to exceed $150 million. Interest on the
Term Loan and Revolver is based on a variable rate equal to the
administrative agent bank's base rate or, at the Company's option, a rate
equal to a reserve-adjusted Eurodollar rate plus .225% per year for drawn
amounts. The new agreement requires letter of credit fees to be paid
quarterly at .325% per year on the outstanding amount. In addition, a
facility fee of .15% per year is payable quarterly on the total amount
available under the New Credit Agreement, as such amount is reduced from time
to time. The cost of borrowings and letters of credit under the New Credit
Agreement represents a decrease of .6% and .45% per year, respectively, from
the Old Credit Agreement.
The Company has received commitments subject to final documentation, for
a Master Lease Facility ("MLF") in an amount not to exceed $115 million. The
MLF is expected to close in April of 1997 and is intended to finance a
complete integrated point-of-sale system which is scheduled to be rolled out
over the subsequent six quarters (see Management Strategies). The lease
payment on the MLF will be based on a variable rate equal to the Eurodollar
rate plus a blended all-inclusive spread of .46% per year. The MLF is
expected to have a two-year noncancellable term with semiannual options to
renew for up to an additional three years. Based upon current roll-out
37
schedules, it is anticipated that the commitment under the MLF will be fully
utilized by the end of 1998.
The New Credit Agreement contains certain financial and operating
covenants requiring, among other things, the maintenance of certain financial
ratios, including interest and rent coverage, fixed-charge coverage and
senior indebtedness to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The covenant levels established by the New Credit
Agreement generally require continuing improvement in the Company's financial
condition. The covenants in the New Credit Agreement, when compared to the
Old Credit Agreement, allow the Company more flexibility in its borrowing
levels and capital expenditures.
For the period ended December 31, 1996, the Company was in compliance
with all of the covenants required under the Old Credit Agreement, including
compliance with the principal financial and operating covenants (calculated
over the latest 12-month period) as follows:
REQUIREMENTS
------------------------
Covenants Actuals Minimum Maximum
- --------- ------- ------- -------
Interest coverage* 3.44 to 1.0 3.00 to 1.0 -
Fixed charge coverage 1.11 to 1.0 0.90 to 1.0 -
Senior indebtedness to EBITDA 3.07 to 1.0 - 3.50 to 1.0
*INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
In 1996, the Company repaid $140.4 million of debt, which included $75.0
million representing the quarterly installments due in 1996 under the Old
Credit Agreement, $27.8 million for principal payments on the Company's yen-
denominated loan (secured by the royalty income stream from its area licensee
in Japan) and $22.4 million for SFAS No. 15 interest. Outstanding balances at
December 31, 1996, for the commercial paper, the Term Loan and the Revolver,
were $398.1 million, $225.0 million and zero, respectively. As of December
31, 1996, outstanding letters of credit issued pursuant to the Old Credit
Agreement totaled $79.2 million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $261.0 million for 1996,
compared to $236.2 million in 1995 and $271.6 million in 1994 (see Results of
Operations section).
CAPITAL EXPENDITURES
During 1996, net cash used in investing activities consisted primarily
of payments of $194.4 million for property and equipment, the majority of
which was used for remodeling stores, the continued implementation of a
retail information system, upgrading retail gasoline facilities, replacing
equipment and complying with environmental regulations.
The Company expects 1997 capital expenditures, excluding lease
commitments, to be approximately $325 million. Capital expenditures are being
used to develop or acquire new stores, upgrade store facilities, further
38
implement a retail information system, replace equipment, upgrade gasoline
facilities and comply with environmental regulations. The amount of
expenditures during the year will be materially impacted by the proportion of
new store development funded through working capital versus leases. Most
leases related to new store construction would contain 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 $15
million in 1997 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 $20 million on
such capital improvements from 1998 through 2000.
ENVIRONMENTAL
In December 1996, the Company adopted the American Institute of
Certified Public Accountants' recently issued Statement of Position ("SOP")
No. 96-1, "Environmental Remediation Liabilities." SOP No. 96-1 provides
guidance on specific accounting issues that are present in the recognition,
measurement and disclosure of environmental remediation liabilities and is
required for fiscal years beginning after December 15, 1996.
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 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 recently received conditional approval of its clean-up
plan, the Company must supply additional information to the State before the
plan can be finalized. The Company has recorded undiscounted liabilities
representing its best estimates of the clean-up costs of $30.9 million at
December 31, 1996. In 1991, the Company and the former owner of the facility
executed a final settlement pursuant to which the former owner agreed to pay
a substantial portion of the clean-up costs. Based on the terms of the
settlement agreement and the financial resources of the former owner, the
Company has recorded a receivable of $18.2 million at December 31, 1996.
Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At December 31, 1996, the Company's
estimated undiscounted liability for these sites was $46.5 million. 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 remediation work. The Company anticipates that substantially all of the
future remediation costs for detected releases at these sites as of December
31, 1996, will be incurred within the next five years.
Under state reimbursement programs, the Company is eligible to receive
reimbursement for a portion of future remediation costs, as well as
remediation costs previously paid. Accordingly, at December 31, 1996, the
39
Company has recorded a net receivable of $50.0 million for the estimated
probable state reimbursements. The Company increased the estimated net
environmental cost reimbursements at the end of 1996 by approximately $7.5
million as a result of completing a review of state reimbursement programs.
In assessing the probability of state reimbursements, the Company takes into
consideration each state's fund balance, revenue sources, existing claim
backlog, status of clean-up activity and claim ranking systems. As a result
of these assessments, the recorded receivable amount is net of an allowance
of $9.5 million. While there is no assurance of the timing of the receipt of
state reimbursement funds, based on its experience, the Company expects to
receive the majority of state reimbursement funds, except from California,
within one to three years after payment of eligible remediation expenses,
assuming that the state administrative procedures for processing such
reimbursements have been fully developed. The Company estimates that it may
take one to eight years to receive reimbursement funds from California.
Therefore, the portion of the recorded receivable amounts that relate to
sites where remediation activities have been completed have been discounted
at 7% to reflect their present value. As a result of the adoption of SOP No.
96-1, the 1996 recorded receivable amount is also net of a discount of $6.4
million.
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.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1996, 1995 and 1994
41
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
ASSETS
1996 1995
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 36,494 $ 43,047
Accounts receivable 109,413 107,224
Inventories 109,050 102,020
Other current assets 95,943 103,816
------------- -------------
TOTAL CURRENT ASSETS 350,900 356,107
PROPERTY AND EQUIPMENT 1,349,839 1,335,783
OTHER ASSETS 338,409 389,227
------------- -------------
$ 2,039,148 $ 2,081,117
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 211,060 $ 195,154
Accrued expenses and other liabilities 297,246 329,429
Commercial paper 98,055 50,198
Long-term debt due within one year 68,571 145,346
------------- -------------
TOTAL CURRENT LIABILITIES 674,932 720,127
DEFERRED CREDITS AND OTHER LIABILITIES 214,343 236,545
LONG-TERM DEBT 1,638,828 1,705,237
CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES 300,000 300,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value; 1,000,000,000
shares authorized; 409,922,935 shares issued 41 41
Additional capital 625,574 625,574
Accumulated deficit (1,414,570) (1,506,407)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (788,955) (880,792)
------------- -------------
$ 2,039,148 $ 2,081,117
============= =============
See notes to consolidated financial statements.
42
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
1996 1995 1994
------------- ------------- -------------
REVENUES:
Net sales (including $961,987, $977,828 and $972,030
in excise taxes) $ 6,868,912 $ 6,745,820 $ 6,684,495
Other income 86,351 78,458 74,624
------------- ------------- -------------
6,955,263 6,824,278 6,759,119
COSTS AND EXPENSES:
Cost of goods sold 4,893,061 4,762,707 4,693,826
Operating, selling, general and administrative expenses 1,841,174 1,874,460 1,896,827
Interest expense, net 90,204 85,582 94,970
------------- ------------- -------------
6,824,439 6,722,749 6,685,623
------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 130,824 101,529 73,496
INCOME TAXES (BENEFIT) 41,348 (66,065) (18,500)
------------- ------------- -------------
EARNINGS BEFORE EXTRAORDINARY GAIN 89,476 167,594 91,996
EXTRAORDINARY GAIN ON DEBT REDEMPTION (NET
OF TAX EFFECT OF $8,603 in 1995) - 103,169 -
------------- ------------- -------------
NET EARNINGS $ 89,476 $ 270,763 $ 91,996
============= ============= =============
EARNINGS PER COMMON SHARE
(PRIMARY AND FULLY DILUTED):
Before extraordinary gain $ .20 $ .40 $ .22
Extraordinary gain - .25 -
------ ------ ------
Net earnings $ .20 $ .65 $ .22
====== ====== ======
See notes to consolidated financial statements.
43
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
------------------------ ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
- ------------------------------ ----------- ------ ----------- ------------- ---------------
BALANCE, JANUARY 1, 1994 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)
Net earnings - - - 89,476 89,476
Foreign currency translation
adjustments - - - (258) (258)
Other - - - 2,619 2,619
- ------------------------------ ----------- ------ ----------- ------------- ---------------
BALANCE, DECEMBER 31, 1996 409,922,935 $ 41 $ 625,574 $ (1,414,570) $ (788,955)
=========== ====== =========== ============= ===============
See notes to consolidated financial statements.
44
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 89,476 $ 270,763 $ 91,996
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary gain on debt redemption - (103,169) -
Depreciation and amortization of property and equipment 166,347 147,423 143,670
Other amortization 19,026 19,026 19,026
Deferred income taxes 23,790 (84,269) (30,000)
Noncash interest expense 1,746 1,974 11,384
Other noncash expense (income) 182 (409) 614
Net loss on property and equipment 1,714 7,274 7,504
Decrease (increase) in accounts receivable 4,824 (2,708) (3,066)
(Increase) decrease in inventories (7,030) (552) 7,895
Decrease (increase) in other assets 386 (1,053) 24,273
Decrease in trade accounts payable and other liabilities (39,421) (18,083) (1,729)
------------- ------------- -------------
Net cash provided by operating activities 261,040 236,217 271,567
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (194,373) (192,221) (171,636)
Proceeds from sale of property and equipment 14,499 15,720 15,867
Other 9,588 2,770 (5,552)
Proceeds from sale of distribution and food center assets - - 6,305
------------- ------------- -------------
Net cash used in investing activities (170,286) (173,731) (155,016)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities 4,292,215 4,171,927 4,451,774
Payments under commercial paper and revolving credit facilities (4,249,134) (4,256,918) (4,418,693)
Proceeds from issuance of long-term debt - - 300,000
Principal payments under long-term debt agreements (140,388) (289,372) (400,580)
Proceeds from issuance of convertible quarterly income debt securities - 300,000 -
Debt issuance costs - (4,364) (3,250)
------------- ------------- -------------
Net cash used in financing activities (97,307) (78,727) (70,749)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,553) (16,241) 45,802
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,047 59,288 13,486
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36,494 $ 43,047 $ 59,288
============= ============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest $ (100,777) $ (97,945) $ (98,157)
============= ============= =============
Net income taxes paid $ (18,918) $ (34,674) $ (7,810)
============= ============= =============
See notes to consolidated financial statements.
45
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The Southland Corporation and
subsidiaries ("the Company") is owned approximately 65% 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. Prior-year and
quarterly amounts are reclassified to conform to the current-year
presentation.
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 10,800 additional
7-Eleven 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 Company-operated stores. Net
sales of stores operated by franchisees are $2,860,768,000,
$2,832,131,000 and $2,820,685,000 from 2,927, 2,896 and 2,962 stores
for the years ended December 31, 1996, 1995 and 1994, 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 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. The
gross profit earned by the Company's franchisees of $516,884,000,
$515,610,000 and $517,955,000 for the years ended December 31, 1996,
1995 and 1994, respectively, is included in the Consolidated
Statements of Earnings as operating, selling, general and
administrative expenses ("OSG&A").
46
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 $47,000,000,
$44,000,000 and $42,000,000 for the years ended December 31, 1996,
1995 and 1994, 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
$10,649,000, $16,975,000 and $13,618,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
INCOME TAXES - Income taxes are determined using the liability
method, where deferred tax assets and liabilities are recognized for
temporary 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.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investment instruments purchased with maturities of three months or
less to be cash equivalents. Cash and cash equivalents include
temporary cash investments of $12,252,000 and $8,787,000 at December
31, 1996 and 1995, respectively, stated at cost, which approximates
market. In addition, at December 31, 1996, cash and cash
equivalents include $8,045,000 of restricted cash related to
unremitted money order collections.
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.
47
STOCK-BASED COMPENSATION - As of January 1996, the Company adopted
the disclosure-only requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and will therefore continue to apply the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees."
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.
USE OF ESTIMATES - 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.
2. ACCOUNTS RECEIVABLE
December 31
--------------------------
1996 1995
---- ----
(Dollars in Thousands)
Trade accounts receivable $ 37,690 $ 40,647
Franchisee accounts receivable 46,345 43,556
Environmental cost reimbursements
(net of long-term portion of
$53,886 and $64,034) - see Note 14 14,366 17,654
Other accounts receivable 16,021 10,225
----------- -----------
114,422 112,082
Allowance for doubtful accounts (5,009) (4,858)
----------- -----------
$ 109,413 $ 107,224
=========== ===========
3. INVENTORIES
Inventories stated on the LIFO basis that are included in
inventories in the accompanying Consolidated Balance Sheets were
$66,272,000 and $62,705,000 at December 31, 1996 and 1995,
respectively, which is less than replacement cost by $31,418,000 and
$30,907,000, respectively.
48
4. OTHER CURRENT ASSETS
December 31
-------------------------
1996 1995
--------- -----------
(Dollars in Thousands)
Prepaid expenses $ 20,298 $ 17,775
Deferred tax assets 70,438 78,665
Other 5,207 7,376
---------- ----------
$ 95,943 $ 103,816
========== ==========
5. PROPERTY AND EQUIPMENT
December 31
----------------------------
1996 1995
------------ ------------
(Dollars in Thousands)
Cost:
Land $ 453,233 $ 461,585
Buildings and leaseholds 1,310,927 1,274,651
Equipment 790,718 697,673
Construction in process 32,614 32,725
------------- -------------
2,587,492 2,466,634
Accumulated depreciation and amortization (1,237,653) (1,130,851)
------------- -------------
$ 1,349,839 $ 1,335,783
============= =============
In January 1996, the Company adopted 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. The
adoption of SFAS No. 121 did not have a material effect on the
Company's earnings.
49
6. OTHER ASSETS
December 31
--------------------------
1996 1995
---- ----
(Dollars in Thousands)
Japanese license royalty intangible
(net of accumulated amortization of
$149,004 and $132,988) $ 169,497 $ 185,513
Other license royalty intangibles
(net of accumulated amortization of
$26,586 and $23,750) 30,018 32,854
Environmental cost reimbursements -
see Note 14 53,886 64,034
Deferred tax assets 13,158 30,396
Other (net of accumulated amortization
of $6,694 and $5,023) 71,850 76,430
---------- ----------
$ 338,409 $ 389,227
========== ==========
7. ACCRUED EXPENSES AND OTHER LIABILITIES
December 31
-------------------------
1996 1995
---- ----
(Dollars in Thousands)
Accrued insurance $ 79,253 $ 83,068
Accrued payroll 45,256 43,025
Accrued taxes, other than income 37,967 40,710
Accrued environmental costs - see Note 14 23,654 40,659
Other 111,116 121,967
--------- ---------
$ 297,246 $ 329,429
========= =========
Other includes accounts payable to The Southland Corporation
Employees' Savings and Profit Sharing Plan (see Note 12) for
contributions and contingent rent payables of $15,641,000 and
$13,635,000 as of December 31, 1996 and 1995, 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.
50
In December 1995 and 1994, the Company accrued $13,415,000 and
$7,405,000, respectively, for severance benefits for employees
terminated and for changes in office facilities. The 1995 employee
terminations and office realignments were substantially completed in
1996, and changes in estimates from the original accruals did not
have a material impact on 1996 or 1995 earnings.
8. DEBT
December 31
----------------------------
1996 1995
---- ----
(Dollars in Thousands)
Bank Debt Term Loans $ 225,000 $ 300,000
Commercial paper 300,000 300,000
5% First Priority Senior Subordinated
Debentures due 2003 364,056 377,558
4-1/2% Second Priority Senior Subordinated
Debentures (Series A) due 2004 165,387 170,952
4% Second Priority Senior Subordinated
Debentures (Series B) due 2004 24,396 25,146
12% Second Priority Senior Subordinated
Debentures (Series C) due 2009 54,468 57,082
6-1/4% Yen Loan 201,447 229,243
7-1/2% Cityplace Term Loan due 2005 282,606 286,949
Capital lease obligations 82,833 90,852
Other 7,206 12,801
----------- -----------
1,707,399 1,850,583
Less long-term debt due within one year 68,571 145,346
----------- -----------
$ 1,638,828 $ 1,705,237
=========== ============
BANK DEBT - At December 31, 1996, the Company was obligated to a
group of lenders under a credit agreement that included term loans
and a revolving credit facility. In February 1997, the Company
repaid all amounts due under that credit agreement with proceeds
from a group of lenders under a new, unsecured credit agreement
("Credit Agreement"). The new Credit Agreement includes a $225
million term loan, which replaced the previous term loan of equal
amount, and a $400 million revolving credit facility. A sublimit of
$150 million for letters of credit is included in the revolving
credit facility. The amount of borrowing availability represents an
increase of $100 million over the previous facility. In addition,
to the extent outstanding letters of credit are less than the $150
million maximum, the excess availability can be used for additional
borrowings under the revolving credit facility.
51
The Company has also obtained commitments from the same group of
lenders for up to $115 million of lease financing that will be used
primarily for electronic point-of-sale equipment associated with the
Company's retail information system. The master lease arrangement
is expected to close in April 1997.
The term loan matures on December 31, 2001, and has no payments due
in 1997. Thereafter, the loans will be repaid in 16 quarterly
installments of $14,062,500 commencing March 31, 1998. Upon
expiration of the new revolving credit facility in February 2002,
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, 1996, outstanding letters of
credit under the previous facility totaled $79,207,000, and no
revolving loans were outstanding.
Interest on the new term loan and borrowings under the revolving
credit facility 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 .225% per year. A fee of .325% per year on the
outstanding amount of letters of credit is required to be paid
quarterly. In addition, a facility fee of .15% per year is charged
on the aggregate amount of the credit agreement facility, as such
amount is reduced from time to time, and is payable quarterly. The
cost of borrowings and letters of credit under the new Credit
Agreement represents a decrease of .6% and .45% per year,
respectively, from the previous credit agreement. The weighted-
average interest rate on the term loan outstanding under the
previous credit agreement at December 31, 1996 and 1995 was 6.3% and
6.9%, respectively.
The Credit Agreement contains various financial and operating
covenants which require, among other things, the maintenance of
certain financial ratios including interest and rent 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.
COMMERCIAL PAPER - The Company has a facility that provides for the
issuance of up to $400 million in commercial paper. At both
December 31, 1996 and 1995, $300 million of the respective
$398,055,000 and $350,198,000 outstanding principal amounts, 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 1998. 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, 1996 and 1995, respectively,
was 5.4% and 5.8%.
52
DEBENTURES - The 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 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, 1996, 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, 1996.
4% Series B Debentures, due June 15, 2004, with an outstanding
principal amount of $18,766,000 at December 31, 1996.
12% Series C Debentures, due June 15, 2009, with an outstanding
principal amount of $21,787,000 at December 31, 1996.
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 $27,045,000 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 $8,696,000 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.
53
The First and Second Priority Senior Subordinated Debentures are
subordinate to the borrowings outstanding under the Credit Agreement
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.
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 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.
54
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):
1997 $ 68,571
1998 131,594
1999 141,594
2000 139,102
2001 139,971
Thereafter 1,086,567
------------
$ 1,707,399
============
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, 1996, 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
1996 and 1995 financial statements include interest payable of
$563,000 and $638,000 and interest expense of $13,658,000 and
$1,332,000, respectively, 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.
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.
55
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, 1996, are listed in the following table:
Carrying Estimated
Amount Fair Value
---------- ----------
(Dollars in Thousands)
Bank Debt $ 225,000 $ 225,000
Commercial Paper 398,055 398,055
Debentures 608,307 355,911
Yen Loan 201,447 226,071
Cityplace Term Loan 282,606 289,015
Convertible Debt
- not practicable to estimate fair value 300,000 -
- 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 26 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, 1996,
bid prices obtained from investment banking firms where traders regularly
make a market for these financial instruments. The carrying amount of the
Debentures includes $174,106,000 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.
- It is not practicable, without incurring excessive costs, to estimate the
fair value of the Convertible Debt at December 31, 1996. The fair value
would be the sum of the fair values assigned to both an interest rate and
an equity component of the debt by a valuation firm.
56
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 are 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 and
years of participation in the Savings and Profit Sharing Plan. 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,
1996, 1995 and 1994 were $14,069,000, $11,318,000 and $10,513,000,
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 1996, 1995 and 1994
include the following components:
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
Service cost $ 595 $ 585 $ 752
Interest cost 1,496 1,678 1,732
Amortization of unrecognized gain (498) (583) (61)
--------- --------- ---------
$ 1,593 $ 1,680 $ 2,423
========= ========= =========
57
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 7% at
December 31, 1996 and 1995, respectively. Components of the accrual
recorded in the Company's consolidated balance sheets are as
follows:
December 31
--------------------------
1996 1995
---- ----
(Dollars in Thousands)
Accumulated Postretirement
Benefit Obligation:
Retirees $ 11,174 $ 11,960
Active employees eligible to retire 4,772 5,234
Other active employees 5,251 6,328
----------- -----------
21,197 23,522
Unrecognized gains 7,627 5,198
----------- -----------
$ 28,824 $ 28,720
=========== ===========
STOCK INCENTIVE PLAN - The Southland Corporation 1995 Stock
Incentive Plan (the "Stock Incentive Plan") was adopted by the
Company in October 1995 and approved by the shareholders 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 1996 and 1995, respectively,
3,977,640 and 3,863,600 options were granted with an exercise price
of $3.00 and $3.1875 per share, which was equal to the fair market
value on the date of grant, to certain key employees and officers of
the Company. The options granted in both 1996 and 1995 are
exercisable in five equal installments beginning one year after
grant date with possible acceleration thereafter based upon certain
improvements in the price of a share of Southland's common stock.
58
The Company is accounting for the Stock Incentive Plan under the
provisions of APB No. 25 (see Note 1) and, accordingly, no
compensation cost has been recognized. If compensation cost had
been determined based on the fair value at the grant date for awards
under this plan consistent with the method prescribed by SFAS No.
123, the Company's net earnings and earnings per share for the years
ended December 31, 1996 and 1995, would have been reduced to the pro
forma amounts indicated in the table below:
1996 1995
-------- ----------
(Dollars in Thousands,
Except Per-Share Data)
Net earnings As reported $89,476 $270,763
Pro forma 88,520 270,610
Primary and fully diluted earnings
per common share As reported $.20 $.65
Pro forma .20 .65
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for the options granted: for both 1996 and 1995, expected
volatility of 55.49%, expected life of five years and no dividend yields,
combined with risk-free interest rates of 6.39% in 1996 and 5.89% in 1995.
A summary of the status of the Stock Incentive Plan as of December 31, 1996 and
1995, and changes during the years ending on those dates, is presented below:
1996 1995
------------------------- -------------------------
Shares Weighted-Average Shares Weighted-Average
Fixed Options (000's) Exercise Price (000's) Exercise Price
--------------------------------- ------- ---------------- ------- ----------------
Outstanding at beginning of year 3,864 $3.1875 - -
Granted 3,978 3.0000 3,864 $3.1875
Exercised - - - -
Forfeited (224) 3.1875 - -
-------- -------
Outstanding at end of year 7,618 $3.0895 3,864 $3.1875
======== =======
Options exercisable at year-end 728 $3.1875 - -
Weighted-average fair value of
options granted during the year $1.6413 $1.7243
59
Options Outstanding Options Exercisable
------------------------------------------------------------ -----------------------------
Weighted
Options Average Weighted Options Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- ------------ ---------------
$3.0000 3,977,640 9.75 $3.0000 - -
3.1875 3,640,000 8.81 3.1875 728,000 $3.1875
----------- -----------
3.0000 - 3.1875 7,617,640 9.30 3.0895 728,000 3.1875
=========== ===========
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, 1996, there were vested
options outstanding to acquire 923,500 shares, of which 885,000 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 1996, options to acquire 25,000 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 shares that can be issued pursuant to the Participation Plan.
The stock is fully vested upon the date of issuance. As of
December 31, 1996, 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.
13.LEASES
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.
60
The composition of capital leases reflected as property and
equipment in the consolidated balance sheets is as follows:
December 31
--------------------------
1996 1995
---- ----
(Dollars in Thousands)
Buildings $ 106,358 $ 116,412
Equipment 142 225
----------- -----------
106,500 116,637
Accumulated amortization (71,019) (77,428)
----------- -----------
$ 35,481 $ 39,209
=========== ===========
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)
1997 $ 20,593 $ 124,246
1998 19,042 105,101
1999 17,717 83,095
2000 15,816 64,790
2001 13,677 49,413
Thereafter 52,548 164,390
---------- ----------
Future minimum lease payments 139,393 $ 591,035
===========
Estimated executory costs (288)
Amount representing imputed interest (56,272)
----------
Present value of future minimum lease payment $ 82,833
==========
61
Minimum noncancelable sublease rental income to be received in the
future, which is not included above as an offset to future payments,
totals $19,676,000 for capital leases and $17,381,000 for operating
leases.
Rent expense on operating leases for the years ended December 31,
1996, 1995 and 1994, totaled $132,760,000, $125,456,000 and
$120,850,000, respectively, including contingent rent expense of
$9,438,000, $8,508,000 and $8,576,000, but reduced by sublease rent
income of $7,175,000, $7,296,000 and $7,858,000. Contingent rent
expense on capital leases for the years ended December 31, 1996,
1995 and 1994, was $2,088,000, $2,399,000 and $2,822,000,
respectively. Contingent rent expense is generally based on sales
levels or changes in the Consumer Price Index.
LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31,
1996, the Savings and Profit Sharing Plan owned 152 stores leased to
the Company under capital leases and 641 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, 38, 67 and 43 properties were sold by the Savings and
Profit Sharing Plan to third parties in 1996, 1995 and 1994,
respectively, and at the same time, any 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
------------------------
1996 1995
---- ----
(Dollars in Thousands)
Buildings (net of accumulated amortization
of $6,718 and $8,853) $ 1,144 $ 2,041
========= ==========
Capital lease obligations (net of current
portion of $1,200 and $1,664) $ 1,055 $ 2,310
========= =========
Years Ended December 31
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Rent expense under operating leases and
amortization of capital lease assets $25,670 $26,850 $28,195
======= ======= =======
Imputed interest expense on capital
lease obligations $ 299 $ 483 $ 696
======= ======= =======
Capital lease principal payments included
in principal payments under long-term
debt agreements $ 1,580 $ 1,818 $ 2,075
======= ======= =======
62
14. COMMITMENTS AND CONTINGENCIES
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.
ENVIRONMENTAL - In December 1996, the Company adopted the American
Institute of Certified Public Accountants' recently issued Statement
of Position ("SOP") No. 96-1, "Environmental Remediation
Liabilities," which is required for fiscal years beginning after
December 15, 1996. SOP No. 96-1 provides guidance on specific
accounting issues that are present in the recognition, measurement
and disclosure of environmental remediation liabilities.
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 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 recently received conditional approval of its clean-up
plan, the Company must supply additional information to the State
before the plan can be finalized. The Company has recorded
undiscounted liabilities representing its best estimates of the
clean-up costs of $30,900,000 and $37,824,000 at December 31, 1996
and 1995, respectively. Of this amount, $25,246,000 and $31,660,000
are included in deferred credits and other liabilities and the
remainder in accrued expenses and other liabilities for the
respective years.
In 1991, the Company and the former owner of the facility executed
a final settlement pursuant to which the former owner agreed to pay
a substantial portion of the clean-up costs. Based on the terms of
the settlement agreement and the financial resources of the former
owner, the Company has recorded receivable amounts of $18,227,000
and $22,035,000 at December 31, 1996 and 1995, respectively. Of
this amount, $14,861,000 and $18,381,000 are included in other
assets and the remainder in accounts receivable for 1996 and 1995,
respectively.
63
Additionally, the Company accrues for the anticipated future costs
and the related probable state reimbursement amounts for remediation
activities at its existing and previously operated gasoline store
sites where releases of regulated substances have been detected. At
December 31, 1996 and 1995, respectively, the Company's estimated
undiscounted liability for these sites was $46,508,000 and
$63,669,000, of which $28,508,000 and $29,174,000 are included in
deferred credits and other liabilities and the remainder is included
in accrued expenses and other liabilities. These estimates were
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 remediation work. The Company anticipates that
substantially all of the future remediation costs for detected
releases at these sites as of December 31, 1996, will be incurred
within the next five years.
Under state reimbursement programs, the Company is eligible to
receive reimbursement for a portion of future remediation costs, as
well as remediation costs previously paid. Accordingly, the Company
has recorded net receivable amounts of $50,025,000 and $59,652,000
for the estimated probable state reimbursements, of which
$39,025,000 and $45,653,000 are included in other assets and the
remainder in accounts receivable for 1996 and 1995, respectively.
The Company increased the estimated net environmental cost
reimbursements at the end of 1996 by approximately $7,500,000 as a
result of completing a review of state reimbursement programs. In
assessing the probability of state reimbursements, the Company takes
into consideration each state's fund balance, revenue sources,
existing claim backlog, status of clean-up activity and claim
ranking systems. As a result of these assessments, the recorded
receivable amounts are net of allowances of $9,459,000 and
$13,705,000 for 1996 and 1995, respectively. While there is no
assurance of the timing of the receipt of state reimbursement funds,
based on the Company's experience, the Company expects to receive
the majority of state reimbursement funds, except from California,
within one to three years after payment of eligible remediation
expenses, assuming that the state administrative procedures for
processing such reimbursements have been fully developed. The
Company estimates that it may take one to eight years to receive
reimbursement funds from California. Therefore, the portion of the
recorded receivable amounts that relate to sites where remediation
activities have been completed have been discounted at 7% to reflect
their present value. As a result of the adoption of SOP No. 96-1,
the 1996 recorded receivable amount is also net of a discount of
$6,398,000.
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.
64
15. INCOME TAXES
The components of earnings before income taxes and extraordinary gain are as
follows:
Years Ended December 31
------------------------------------
1996 1995 1994
--------- --------- --------
(Dollars in Thousands)
Domestic (including royalties of
$63,536, $59,044 and $54,917
from area license agreements
in foreign countries) $ 124,316 $ 98,775 $ 70,615
Foreign 6,508 2,754 2,881
--------- --------- ---------
$ 130,824 $ 101,529 $ 73,496
========== ========== ==========
The provision for income taxes in the accompanying Consolidated Statements of
Earnings consists of the following:
Years Ended December 31
-------------------------------
1996 1995 1994
-------- -------- ---------
(Dollars in Thousands)
Current:
Federal $ 5,054 $ 8,251 $ 6,799
Foreign 10,704 8,968 8,515
State 1,800 985 350
Tax benefit of operating loss
carryforward - - (4,164)
-------- -------- ---------
Subtotal 17,558 18,204 11,500
Deferred:
Provision 23,790 60,709 -
Beginning of year valuation
allowance adjustment - (144,978) (30,000)
-------- --------- ---------
Subtotal 23,790 (84,269) (30,000)
-------- --------- ---------
Income taxes before extraordinary gain $ 41,348 $(66,065) $(18,500)
======== ========= =========
Included in Shareholders' Equity at December 31, 1996 and 1995, respectively,
are $6,882,000 and $5,208,000 of income taxes provided on unrealized gains on
marketable securities.
65
Reconciliations of income taxes before extraordinary gain at the
federal statutory rate to the Company's actual income taxes provided
are as follows:
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- ---------
(Dollars in Thousands)
Taxes at federal statutory rate $ 45,788 $ 35,535 $ 25,724
State income taxes, net of federal
income tax benefit 1,170 640 228
Foreign tax rate difference 1,077 886 1,212
Net change in valuation allowance
excluding the tax effect of the 1995
extraordinary item - (108,632) (47,943)
Settlement of IRS examination (7,261) - -
Other 574 5,506 2,279
--------- --------- ---------
$ 41,348 $(66,065) $(18,500)
========= ========= =========
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.
66
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31
------------------------
1996 1995
---------- ----------
(Dollars in Thousands)
Deferred tax assets:
SFAS No. 15 interest $ 75,037 $ 81,038
Compensation and benefits 42,573 44,592
Accrued insurance 39,494 43,270
Accrued liabilities 35,677 39,665
Tax credit carryforwards 8,924 14,834
Debt issuance costs 8,059 6,820
Other 5,056 5,560
---------- ---------
Subtotal 214,820 235,779
Deferred tax liabilities:
Area license agreements (77,811) (85,164)
Property and equipment (41,636) (32,853)
Other (11,777) (8,701)
---------- - --------
Subtotal (131,224) (126,718)
---------- ----------
Net deferred taxes $ 83,596 $ 109,061
========== ==========
The Company's net deferred tax asset is recorded in other current
assets and other assets (see Notes 4 and 6).
At December 31, 1996, the Company had approximately $8,924,000 of
alternative minimum tax ("AMT") credit carryforwards. The AMT
credits have no expiration date.
67
16. EARNINGS PER COMMON SHARE
Primary earnings 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.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 is as follows:
YEAR ENDED DECEMBER 31, 1996:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
Net sales $1,563 $1,792 $1,840 $1,674 $6,869
Gross profit 442 525 541 468 1,976
Income taxes (benefit) 4 20 25 (8) 41
Net earnings 5 30 38 16 89
Primary and fully
diluted earnings
per common share .02 .07 .08 .04 .20
68
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 per common
share before
extraordinary gain - .09 .12 .19 .40
The second quarter of 1995 includes a $4,679,000 environmental
reimbursement related to outstanding litigation. The fourth quarter
of 1995 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 15) and $13,415,000 of expenses accrued for severance and
related costs (see Note 7).
69
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
February 18, 1997
70
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 23, 1997 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
23, 1997 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 23,
1997 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 23, 1997
Annual Meeting of Shareholders.
71
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, 1996 are included herein:
Page
Consolidated Balance Sheets - December 31,1996 and 1995 42
Consolidated Statements of Earnings - Years Ended December 31, 1996, 1995 and 1994 43
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31, 1996, 1995
and 1994 44
Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 45
Notes to Consolidated Financial Statements 46
Independent Auditors' Report of Coopers & Lybrand L.L.P. 70
2. The Southland Corporation and Subsidiaries' Financial Statement
Schedule, included herein.
Page
Independent Auditors' Report of Coopers & Lybrand L.L.P. on Financial Statement Schedule 76
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.
72
3. ARTICLES OF INCORPORATION AND BYLAWS.
3.(1) Second Restated Articles of Incorporation of 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 April 24, 1996,
incorporated by reference to File Nos. 0-676 and 0-16626, The Southland Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Exhibit 3.
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.* Tab 1
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 S-8, Reg. No. 33 25327,
Exhibits 4.5 and 4.4.
4.(i)(3) 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)(4) First Amendment, dated December 30, 1992, to Shareholders Agreement, dated as of March 5,
1991, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K
for year ended December 31, 1992, Exhibit 4.(i)(5), Tab 1.
4.(i)(5) Second Amendment, dated February 28, 1996, to Shareholders Agreement, dated as of March 5,
1991, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on
Form 10-K for the year ended December 31, 1995, Exhibit 4.(I)(6), Tab 1.
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) 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)(3), ABOVE.)
73
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 February 27, 1997, among The Southland Corporation, the
financial institutions party thereto as Senior Lenders, the financial institutions party
thereto as Issuing Banks, Citibank, N.A., as Administrative Agent, and The Sakura Bank,
Limited, New York Branch, as Co-Agent.* Tab 2
10.(i)(3) 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)(4) 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)(5) 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)(6) 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)(7) Issuing and Paying Agency Agreement, dated as 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 Agreement, incorporated by reference to
File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31,
1996, Exhibit 10(ii)(B)(1), Tab 3.
10.(iii)(A)(1) 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)(2) 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)(3) Bonus Deferral Agreement relating to deferral of Bonus Payment, incorporated by reference
to 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)(4) 1997 Performance Plan.* Tab 3
74
10.(iii)(A)(5) 1995 Stock Incentive Plan, incorporated by reference to Registration No. 33-63617, Exhibit
4.10.
10.(iii)(A)(6) Form of Award Agreement granting options to purchase Common Stock, dated October 23, 1995,
under the 1995 Stock Incentive Plan incorporated by reference to File Nos. 0-676 and
0-16626, Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit
10(iii)(A)(10), Tab 4.
10.(iii)(A)(7) Form of Award Agreement granting options to purchase Common Stock, dated October 1, 1996,
under the 1995 Stock Incentive Plan.* Tab 4
10.(iii)(A)(8) 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.
10.(iii)(A)(9) First Amendment to Consultant's Agreement between The Southland Corporation and Timothy
N. Ashida, effective as of May 1, 1995.* Tab 5
11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS.CALCULATION OF EARNINGS PER SHARE.* Tab 6
21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 1997.* Tab 7
23. CONSENTS OF EXPERTS AND COUNSEL.Consent of Coopers & Lybrand L.L.P., Independent Auditors.* Tab 8
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 1996, the Company filed no reports on
Form 8-K.
(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 Page
Valuation and Qualifying Accounts(for the
Years Ended December 31, 1996; 1995 and 1994). 77
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 is included on page 70 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 72 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 18, 1997
76
SCHEDULE II
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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, 1996.................... $ 4,858 $ 2,153 $ - $ (2,002)(1) $ 5,009
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
Allowance for environmental cost reimbursements:
Year ended December 31, 1996.................... 13,705 - - (4,246) 9,459
Year ended December 31, 1995.................... 18,890 - - (5,185)(3) 13,705
Year ended December 31, 1994.................... 12,529 6,361 - - 18,890
(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.
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 25, 1997 /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 25, 1997
- --------------------------
Masatoshi Ito
/s/ Toshifumi Suzuki Vice Chairman of the Board and Director March 25, 1997
- --------------------------
Toshifumi Suzuki
/s/ Clark J. Matthews, II President and Chief Executive Officer and Director) March 25, 1997
- -------------------------- (Principal Executive Officer)
Clark J. Matthews, II
/s/ James W. Keyes Executive Vice President and Chief Financial Officer March 25, 1997
- -------------------------- (Principal Financial Officer)
James W. Keyes
/s/ Donald E. Thomas Controller March 25, 1997
- -------------------------- (Principal Accounting Officer)
Donald E. Thomas
/s/ Yoshitami Arai Director March 25, 1997
- --------------------------
Yoshitami Arai
/s/ Timothy N. Ashida Director March 25, 1997
- --------------------------
Timothy N. Ashida
/s/ Jay W. Chai Director March 25, 1997
- --------------------------
Jay W. Chai
/s/ Gary J. Fernandes Director March 25, 1997
- --------------------------
Gary J. Fernandes
/s/ Masaaki Kamata Director March 25, 1997
- --------------------------
Masaaki Kamata
/s/ Kazuo Otsuka Director March 25, 1997
- --------------------------
Kazuo Otsuka
/s/ Asher O. Pacholder Director March 25, 1997
- --------------------------
Asher O. Pacholder
/S/Nobutake Sato Director March 25, 1997
- --------------------------
Nobutake Sato
78