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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED]
For the transition period from _____________to ______________
Commission File Numbers 0-676 and 0-16626
________________________________
THE SOUTHLAND CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVE., DALLAS, TEXAS 75204-2906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, 214-828-7011
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None N/A
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
Warrants to Purchase Common Stock at $1.75 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $630,776,788.60 at March 4, 1994, based upon
127,752,261 shares held by persons other than officers, directors and the
parties to the Shareholders Agreement.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
409,922,935 shares of Common Stock, $.0001 par value (the registrant's only
class of Common Stock), were outstanding as of March 4, 1994.
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 27,
1994 Annual Meeting of Shareholders: Part II, Item 9; Part III, a portion of
Item 10 and Items 11, 12 and 13.
ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 1993
TABLE OF CONTENTS
Page
Reference
---------
Form 10-K
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PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 21
Item 3. Legal Proceedings.................................. 24
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 27
Item 6. Selected Financial Data........................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 29
Item 8. Financial Statements and Supplementary Data....... 38
Independent Auditors' Report of Coopers & Lybrand
on The Southland Corporation and Subsidiaries'
Financial Statements for 1993 and 1992 ........... 63
Independent Auditors' Report of Deloitte & Touche
on The Southland Corporation and Subsidiaries'
Financial Statements for 1991 .................... 64
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.............. 65
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................ *
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............................... 66
Signatures.................................................. 80
- ---------------------
* Included in Form 10-K by incorporation by reference to the Registrant's Proxy
Statement, dated March 25, 1994, for the April 27, 1994 Annual Meeting of
Shareholders.
PART I
Item 1. BUSINESS.
GENERAL
The Southland Corporation ("Southland," the "Company" or "Registrant"),
conducting business principally under the name 7-Eleven, is the largest
convenience store chain in the world, with over 14,000 Company-operated,
franchised and licensed locations worldwide, and is among the nation's largest
retailers.
The 7-Eleven trademark has been registered since 1961 and is well known
throughout the United States and in many other parts of the world. The Company
believes that 7-Eleven is the leading name in the convenience store industry.
Notwithstanding its divestitures of stores and other businesses since 1987, the
Company remains geographically diversified. During 1993, the Company continued
its strategic plan to divest all its remaining non-convenience store operations
and, in furtherance of that goal, sold both its Citijet fixed-base general
aviation operation at Dallas' Love Field Airport and its check collection and
verification operation, so that convenience retailing is now the Company's only
business focus.
The Company, with executive offices at 2711 North Haskell Avenue, Dallas,
Texas 75204 (telephone 214/828-7011), was incorporated in Texas in 1961 as the
successor to an ice business organized in 1927. Unless the context otherwise
requires, the terms "Company," "Southland" and "Registrant" as used herein
include The Southland Corporation and its subsidiaries and predecessors. In
1993, Southland's operations (for financial reporting purposes) were conducted
in one business segment: the Operating and Franchising of Convenience Food
Stores.
At December 31, 1993, the Company's operations included 5,679 7-Eleven
convenience stores in the United States and Canada, 63 High's Dairy Stores, and
54 Quik Mart and Super-7 high-volume gasoline outlets with mini-convenience
stores. The Company also has an equity interest in 201 convenience stores in
Mexico (most of which are now using the 7-Eleven name). Area licensees, or
their franchisees, operate additional 7-Eleven 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 1993, the Company has an equity interest in three
of the foreign licensees whose area licenses cover six foreign countries.
During 1993, the Company continued to focus on its business concept of
providing superior service to its customers through better merchandising, with
item-by-item control of inventory at each store and providing
convenience-oriented customers with the SPEED, QUALITY, SELECTION, PRICE and
shopping ENVIRONMENT that will give the Company a sustainable competitive
advantage.
THE RESTRUCTURINGS. During the past seven years, the Company has gone
through two financial restructurings -- a leveraged buyout in 1987 (the "LBO")
and a voluntary bankruptcy reorganization, emerging from a four-month Chapter 11
proceeding in March 1991, with a $430 million infusion of capital
1
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.
On February 21, 1991, the U.S. Bankruptcy Court for the Northern District
of Texas issued an order (the "Confirmation Order") confirming the Company's
Plan of Reorganization (the "Plan") and on March 4, 1991, the Confirmation Order
became final and non-appealable. (See "Legal Proceedings," below.) The Plan
provided for holders of the Company's then outstanding debt and equity
securities (the "Old Securities") to receive new debt securities, common stock
and, in certain cases, cash, in exchange for their Old Securities and, pursuant
to a Stock Purchase Agreement, for Ito-Yokado and Seven-Eleven Japan to acquire
approximately 70% of the Company for $430 million in cash. In addition, among
other things, the Plan provided for the amendment and restatement of the
Company's Credit Agreement with its Senior Lenders (the "Credit Agreement") and
for the Company to effect a one-for-ten reverse stock split of its common stock
(the "Stock Split"). The closing (the "Closing") under the Stock Purchase
Agreement (the "Stock Purchase Agreement"), occurred on March 5, 1991, and the
Company issued 286,634,619 shares of common stock, $.0001 par value (the "Common
Stock"), to IYG Holding Company, a Delaware corporation, jointly owned by
Ito-Yokado and Seven-Eleven Japan, and received $430 million in cash. In
connection with the Closing, the Company entered into a Shareholders Agreement,
a Warrant Agreement and Employment Agreements with the Thompsons (described
below, see "Other Business Information").
Pursuant to the Plan, holders of the Company's Old Securities were entitled
to exchange, until March 5, 1993, their Old Securities for new debt, equity and,
in some cases, cash, and newly issued warrants (the "Thompson Warrants"),
exercisable to acquire certain shares of common stock owned by the Thompsons and
certain other old common stock shareholders of the Company (the "Warrant
Shareholders"), at $1.75 per share pursuant to a Warrant Agreement with
Wilmington Trust Company as Warrant Agent (the "Warrant Agreement").
SECURITIES OUTSTANDING. As of March 5, 1993, the date provided in the Plan
for all distributions to be claimed, the following new securities (as
subsequently adjusted) had been issued: (i) $250,553,000 12% Senior Notes due
December 15, 1996 (the "New Senior Notes"), (ii) $450,614,000 5% First Priority
Senior Subordinated Debentures due December 15, 2003 (the "New First Priority
Debentures"), (iii) $206,373,000 4.5% Second Priority Senior Subordinated
Debentures (Series A) due June 15, 2004 (the "New Second Priority Series A
Debentures"), (iv) $21,787,000 12% Second Priority Senior Subordinated
Debentures (Series C) due June 15, 2009 (the "New Second Priority Series C
Debentures"), (v) $18,766,000 4% Second Priority Senior Subordinated Debentures
(Series B) due June 15, 2004 (the "New Second Priority Series B Debentures", and
together with the New Senior Notes, the New First Priority Debentures, the New
Second Priority Series A Debentures and the New Second Priority Series C
Debentures, the "Restructured Debt Securities"), (vi) 409,922,935 shares of
Common Stock, and (vii) 9,819,917 Thompson Warrants (after subtracting those
that had been previously exercised) exercisable at $1.75 per share of common
stock, from the Warrant Shareholders.
2
On August 30, 1993, the Company redeemed the New Senior Notes at par value
plus accrued interest. The New Senior Notes, which had an outstanding face
value of $250.6 million, were refinanced with working capital and an additional
$150 million term loan under the existing Credit Agreement. The New Bank Debt
has a three-year term with no required principal payments until its maturity,
and has a floating interest rate of LIBOR plus 2.5%. As part of this
refinancing, the Company amended the Credit Agreement to permit the redemption,
and to modify and extend existing financial covenants through August 1996.
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 153 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 the
execution of the March 21, 1990 stock purchase agreement, Ito-Yokado had no
affiliation with the Company, other than through its majority-owned subsidiary,
Seven-Eleven Japan (see below). On July 18, 1990, however, the Company borrowed
$25 million pursuant to a term loan agreement with Ito-Yokado in order to obtain
short-term liquidity. This term loan, plus interest, was repaid on March 5,
1991.
Seven-Eleven Japan. Seven-Eleven Japan is the largest convenience store
chain in Japan. Seven-Eleven Japan is a 50.3%-owned subsidiary of Ito-Yokado.
Seven-Eleven Japan is the largest area licensee of the Company with over 5,400
stores in Japan and owns Seven Eleven (Hawaii), Inc., which, as of year-end
1993, operated an additional 48 7-Eleven stores in Hawaii under a separate area
license agreement covering that state.
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN STORES. On December 31, 1993, there were 5,679 7-Eleven
convenience stores included in the Company's operations and 693 stores (in the
United States) operated by area licensees. Such stores are operated principally
under the name 7-Eleven and are located in 42 states, the District of Columbia,
and five provinces of Canada. During 1993, the Company opened (including
7-Eleven, High's, Quik Mart and Super-7 locations) 30 convenience stores (of
which 16 were rebuilds or relocations of existing stores) and closed 401
convenience stores, due to market area divestitures, changing market patterns,
lease expirations and the closing of selected stores that were not profitable.
The Company may, and currently intends to, sell or close approximately 130
additional stores in 1994.
The Company's convenience stores are extended-hour retail stores,
emphasizing convenience to the customer and providing groceries, take-out foods
and beverages, gasoline (at certain locations), dairy products, non-food
merchandise, specialty items and incidental services. Generally, the Company's
stores are open every day of the year and are located in
3
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 2,400-3,100 square feet in
size and carry 2,300-2,600 items. The vast majority of the stores operate 24
hours a day, with virtually all of the Company's stores open at least from 7
a.m. until 11 p.m. The stores attract lunch-time customers, early and late
shoppers, weekend and holiday shoppers and customers who may need only a few
items at any one time and desire rapid service. The Company is broadening its
product mix to include fresher, higher quality foods and certain other items, to
encourage existing customers to increase their shopping frequency and to appeal
to new customers, who have not traditionally frequented the Company's stores.
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 6% of sales,
including gasoline.
NEW STORE IMAGE. In 1991, the Company began testing a new store design in
Austin, Texas, and Reno, Nevada, and, in 1993, completed the remodeling of 1,430
stores to conform to the new store design. The Company plans, over the next
four to five years, to remodel virtually all its stores,including approximately
an additional 1,000 stores in 1994. Included in the new store image are
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 will replace the mansard roofs of many
existing stores. This represents the first major remodeling program for the
Company since the 1987 LBO. In 1993, the Company also began installing new
security equipment systems in the stores providing both an alarm
device and monitoring system. Nearly all stores, regardless of whether they
have been remodeled, are implementing flexible planograms, which provide
organized direction on how to merchandise stores without making layouts item
specific. Flexible planograms enable store operators to stock and display
merchandise based on what sells in their particular store. The remodeled stores
will also be more adaptable to the Company's new merchandising programs to
highlight new, and ever-changing, merchandise as it comes into the stores.
MERCHANDISING. During 1992, after an intensive review of its merchandising
programs and organization, the Company began implementation of a thoroughly new
merchandising approach, including a process called Accelerated Inventory
Management ("AIM"), in order to better manage, on an item-by-item basis, store
inventory. The AIM process focuses on the importance of ordering as the means
to more effectively merchandise each store based upon its individual customers,
through constant deletion of slower-moving items, aggressive addition of "new"
items that meet the needs of each neighborhood store's customers, and order
forecasting to enable stores to stay in-stock on the fastest selling items.
Each store's merchandise mix includes a selection of "core" items -- staples and
other items that customers expect to find in a 7-Eleven store -- as well as
"optional" items selected by store operators to meet their customers' local
needs and preferences.
4
AIM is designed to revitalize day-to-day store operations, by changing the
focus of store personnel to an awareness of customer buying habits and providing
the tools and information so that stores can respond with new products and
appropriate inventory levels to match flexible customer demands. In 1993,
with centralized merchandising functions, the Company was able to facilitate
the introduction of new products into the stores on an ongoing basis and to do
so earlier in the products' life cycle, at a time when they are less subject
to discounting and enabling the stores to benefit from manufacturers'
introductory advertising campaigns. In 1993, over 1,800 new items were made
available for introduction, in the stores, at a rate of approximately 25-50 new
items each week. In addition, by monitoring and tracking by-item product
movement on an order-cycle or daily basis, stores deleted an average of 200
to 1,900 items in 1993 that were selling slowly or did not move at all.
In addition, during 1993 the Company continued to implement its everyday-
fair-price strategy, which mimimizes discounting, but lowers prices on some
items to provide consistent, competitive prices throughout the store. The
Company is applying a more flexible approach to pricing on different products
in different markets, while working with suppliers to find ways to lower costs
to the Company, so that any savings can be reflected in the price to the
customer.
NEW PRODUCTS. During 1993, the Company increased its assortment of "New
Age" beverages, which include flavored waters, juices and other non-soft drink
items. Other changes to the merchandise mix included more or different product
sizes and flavors, as well as more "light," "fat-free," and other "fitness"
products, popular with many consumers today. In early 1993, the Company
introduced its new "Cafe Select" program, offering gourmet-flavored, specialty
coffees, which has been a tremendous success while also improving the sale of
non-flavored coffee.
The Company continues to update its fast food program and is now moving
toward providing more fresh foodservice items of a consistently high quality.
In addition, the Company has been testing a fresh produce and deli sandwich
program out of its own commissary facility in the Austin, Texas area and is
expanding use of the commissary approach to provide fresh food items to the
stores. In mid-March 1994, deliveries began, to approximately 50 stores in the
Dallas market, from a newly built Dallas commissary, owned and operated by Prime
Deli, Inc. The Company is currently negotiating with other companies to expand
this type of program to other areas of the country. In addition, the Company is
in the process of developing arrangements with product vendors and distributors
to create combined distribution centers (CDCs) where fresh, perishable and other
non-warehouse type products (such as bread, bakery and dairy items), from
multiple vendors, will be delivered for subsequent combined delivery to the
Company's stores. It is expected that this will increase efficiency of store
personnel, eliminate some inconveniences for customers (such as crowded parking
lots caused by the presence of multiple delivery trucks) and ultimately lower
the cost of goods for the Company due to increased efficiencies in the
distribution process.
5
During 1993, the Company entered into a ten-year agreement with Electronic
Data Systems, Inc. (EDS) for the installation and operation of automated teller
machines (ATMs) in 7-Eleven stores, nationwide, in areas not already covered by
other ATM agreements. Pursuant to the terms of the agreement, EDS is to install
at least 900 ATMs per year until all Company-operated and participating
franchisee-operated 7-Eleven stores have an ATM. EDS pays the Company a flat
fee per month per ATM as well as transaction-based fees dependent upon the
number of transactions per month.
GASOLINE. In 1993, the Company sold approximately 1.38 billion gallons of
gasoline at retail at approximately 2,100 7-Eleven stores and other Southland
self-serve outlets. The Company monitors gasoline sales to maintain a steady
supply of petroleum products to the Company's stores, to determine competitive
retail pricing, to provide the appropriate product mix at each location and to
manage inventory levels, based on market conditions. During 1993, the Company
continued its program to upgrade the gasoline pump area of the stores, by adding
canopies and new equipment. Approximately 500 stores are now equipped to accept
credit cards for the purchase of gasoline at the pump, which makes gasoline
shopping at 7-Eleven even more convenient for the credit customer. Almost all
of the Company's stores offer CITGO-branded gasoline.
During 1993, the Company discontinued the sale of gasoline at approximately
230 locations (due, in many cases, to the closing or divestiture of the entire
store, with the others eliminated due to the strategic decision to discontinue
the sale of gasoline at the particular location). The Company sold gasoline at
approximately 2,000 locations at year-end 1993. The Company currently
anticipates that gasoline sales may be discontinued at about 35 additional
locations in 1994.
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 stores. At
year-end, there were over 1.27 million active "Citgo Plus" credit card accounts.
MERCHANDISE SUPPLY. During 1993, the Company completed the first year of
its 10-year supply agreement with McLane Company, Inc. ("McLane") under which
McLane provides distribution services for warehouse products to all of the
Company's corporate stores and makes available such services and products to all
of the Company's franchised stores. McLane services Southland corporate and
franchised retail operations using two former Southland distribution centers (in
San Bernardino, California, and Fredericksburg, Virginia) plus eight additional
distribution centers. It is anticipated that McLane's distribution services
will support the Company's AIM process by providing the Company with frequent
deliveries and added flexibility for ordering new merchandise, as well as
providing increased ordering, purchasing and delivery efficiencies which will
lower the Company's cost-of-goods.
Franchisees are required only to carry merchandise of a type, quality,
quantity and variety consistent with the 7-Eleven image. Except for consigned
merchandise, franchisees are not required to purchase merchandise from the
Company or vendors it recommends, or to sell their merchandise at prices
suggested by the Company.
6
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.
PRODUCT CATEGORIES. The Company does not record sales on the basis of
product categories. However, based upon the total dollar volume of store
purchases, management estimates that the percentages of its 7-Eleven convenience
store sales in the United States by principal product categories for the last
five years were as follows:
Years Ended December 31
------------------------------------
Product Categories 1993 1992 1991 1990 1989
------------------ ---- ---- ---- ---- ----
Gasoline.......................... 23.5% 22.5% 21.5% 22.3% 19.9%
Tobacco Products.................. 18.0 19.2 19.1 18.0 18.2
Beer/Wine......................... 9.5 10.0 10.7 10.4 10.7
Soft Drinks....................... 9.7 10.0 10.3 10.4 10.7
Groceries......................... 9.2 8.5 8.1 8.2 8.6
Food Service...................... 8.5 8.4 8.4 8.7 8.7
Non-Foods......................... 5.8 5.8 5.8 5.7 6.2
Dairy Products.................... 4.8 4.9 5.0 5.2 5.3
Candy............................. 3.7 3.8 3.9 3.7 3.9
Baked Goods....................... 3.5 3.4 3.4 3.5 3.5
Customer Services................. 2.1 1.9 1.8 1.8 1.9
Health/Beauty Aids................ 1.7 1.6 2.0 2.1 2.4
----- ----- ----- ----- -----
Total........................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
LOCAL REGULATIONS. In certain areas where stores are located, state or
local laws limit the hours of operation or the sale of certain products, the
most significant of which limit or govern the sale of alcoholic beverages.
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 alcoholic beverages 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. Product
categories that are affected by these types of regulations are alcoholic
beverages, tobacco, lottery tickets and other similarly state-regulated
products. Such regulation is subject to legislative and administrative change
from time to time. The Company is the largest seller, nationwide, of
state-sponsored lottery tickets.
FRANCHISES. At December 31, 1993, 2,998 7-Eleven stores were operated by
independent franchisees under the Company's franchise program for individual
7-Eleven stores. Sales by stores operated by franchisees (which are included in
the Company's net sales) were approximately $2,810,270,000 for the year ended
December 31, 1993.
In its franchise program for individual 7-Eleven stores, the Company selects
qualified applicants and trains the individuals who will participate personally
in operating the store. The franchisee pays the Company an initial fee, which
is generally calculated based upon gross profit experience for the
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store or market area, to cover certain costs including: training; an allowance
for travel; meals and lodging for the trainees; and other costs relating to the
franchising of the store. Under the standard form of franchise agreement, the
Company leases or subleases, to the franchisee, a ready-to-operate 7-Eleven
store that has been fully equipped and stocked. The Company bears the costs of
acquiring the land, building and equipment, as well as most utility costs and
property taxes.
Under the standard franchise arrangement, the franchisee pays for all
business licenses and permits, as well as all in-store selling expenses,
including: payroll; inventory and cash variations; supplies; inventory, payroll
and other business taxes; certain repairs and maintenance; and other
controllable in-store expenses, and is required to invest an amount equal to the
cost of the store's inventory and cash register fund. The Company finances a
portion of the cost of business licenses and permits and of the investment in
inventory, as well as the ongoing operating expenses and purchases of inventory.
Under the standard franchise agreements currently in effect, the Company
shares in the gross profit of the store (ranging from 50% to 58%, depending on
the hours of store operation, adjusted if necessary to assure the franchisee a
specified gross income before selling expenses), based on all sales of
merchandise and services except those on which the Company pays the franchisee a
commission (such as consigned gasoline). The Company's share of gross profit,
called the "7-Eleven Charge," is its continuing charge to the franchisee for the
license to use the 7-Eleven operating system and trademarks, for the lease and
use of the store premises and equipment and for continuing services provided by
the Company. These services include merchandising, advertising, recordkeeping,
store audits, contractual indemnification, business counseling services,
training seminars and preparation of financial statements. Other optional
services are available from or through the Company for additional fees.
The Company is considering various other methods for calculating the
7-Eleven Charge and is currently offering agreements that provide a three-tiered
structure, in Washington, Idaho and Oregon, under which the 7-Eleven Charge is
based on the particular store's level of gross profit for the preceding 12
months. In March 1993, the Company also announced that it intends to revise its
standard form of franchise agreement and has requested input from both 7-Eleven
franchisees and Southland personnel. The Company's original goal was to offer a
new form of agreement to existing franchisees by the middle of 1994. However,
because of the many issues in controversy in the matter of 7-Eleven Owners for
Fair Franchising, et al. v. The Southland Corporation, et al. (see "Legal
Proceedings," below), the Company has postponed the anticipated roll-out of a
new agreement indefinitely.
The Company has an incentive program under which a franchisee may receive a
monthly payment from the Company equal to a specified percent of the store's
gross profit if the franchisee meets certain criteria established from time to
time by the Company. During 1993, franchisees could qualify for this incentive
by participating in the AIM process and, effective January 1994, the qualifying
criteria for the incentive program were modified to encourage franchisees to
improve their performance of the AIM process by focusing inventory management on
certain key merchandise categories and introduction of new products while also
maintaining an acceptable store image and meeting certain customer service
standards.
8
Under Southland's standard franchise agreement, the franchise may be
terminated by the franchisee at any time or by the Company for the causes, and
on notice, as specified in the franchise agreement and as provided by applicable
law. In the event of expiration or termination of the franchise, the Company
has the right to (i) acquire the franchisee's interest in inventory of a type,
quantity, quality and variety consistent with the 7-Eleven image and the other
tangible assets in the franchise business; and, (ii) take possession of the real
property on which the store is located, and the franchisee has no continuing
lease obligations.
In April 1993, the Company began testing its new "Genesis" form franchise
agreement, with the opening of four stores under that agreement. Under the
Genesis agreement, the franchisee supplies the land, building and equipment.
Southland provides the 7-Eleven name, accounting system, merchandising and
business counseling services which are provided under its standard franchise
arrangement. Under the Genesis agreements in effect, Southland receives 12% of
the Gross Profit as the 7-Eleven Charge. Currently, the Genesis agreement is
only available to existing franchisees under standard form agreements, whom
Southland believes to be superior store operators. The four Genesis stores
opened in 1993 were all conversions of existing, independent convenience store
operations on Long Island, New York. The Company is in the process of expanding
the test of the Genesis concept to include stores in other geographic areas, and
to include new operations as well as conversions of existing operations.
Many states in which the Company franchises individual 7-Eleven stores have
enacted legislation governing the offer, sale, termination and/or renewal of
franchises, and the Federal Trade Commission has a trade regulation rule
regarding required disclosures to prospective franchisees. These requirements
are subject to amendment and similar legislation is pending at the federal level
and in other states.
AREA LICENSES. As of December 31, 1993, the Company had granted domestic
area licenses to nine companies which were operating 693 convenience stores
using the 7-Eleven system and name in certain areas of Alaska, Arkansas, Hawaii,
Indiana (using the name Super-7 in Indianapolis), Iowa, Kansas, Kentucky,
Michigan, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota,
Ohio, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, West Virginia and
Wyoming. Although parts of both Nevada and Virginia are also covered by area
licenses, there are no stores currently operated under the area licenses in
those states. The 48 stores in Hawaii are operated under an area license
agreement with Seven-Eleven (Hawaii), Inc. (a subsidiary of Seven-Eleven Japan).
In September 1991, Retail Marketing Corp. ("RMC"), the area licensee for
Kansas, Missouri, Oklahoma and Arkansas, filed for protection under Chapter 11
of the Bankruptcy Code and the area license has been assigned to Contemporary
Industries Southern, Inc.
In addition, as of the end of 1993, foreign area license agreements covered
the operation of 5,401 7-Eleven stores in Japan, 809 in Taiwan, 296 in Hong
Kong, 271 in Thailand, 162 in Australia, 85 in Malaysia, 75 in Singapore, 73 in
South Korea, 69 in Spain, 50 in the United Kingdom, 46 in the Philippines, 35 in
Norway, 31 in Sweden, 14 in Brazil, 13 in Puerto Rico, 12 in Turkey, 10 in
China, seven in Guam, five in Panama and two in Denmark. In
9
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.
During 1993, the Company sold its equity interest in the area licensees in
Spain and the U.S. Virgin Islands, but the area license covering Spain remains
in effect. The area license covering the U.S. Virgin Islands had been
terminated at the end of 1992. The Company also signed a new area license for
Singapore with Cold Storage (1983) Pte Ltd, to reflect the purchase of the
former area license holder by that company.
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 201
convenience stores in Mexico operated by an affiliate. These stores, which
feature merchandise and services essentially the same as 7-Eleven, had been
operating under the name "Super Siete" until 1991, when a program began to
change their name to 7-Eleven.
Sales from the stores in Mexico are not included in Southland's revenues,
but Southland's equity in their operating results is included in Other Income
and has not been material.
HIGH'S DAIRY STORES. On December 31, 1993, the Company operated 63 High's
Dairy Stores located primarily in Maryland and Virginia, which are similar in
size and location to 7-Eleven stores and feature a product mix that emphasizes a
variety of dairy products.
QUIK MART AND SUPER-7. At December 31, 1993, 54 Quik Mart and Super-7 units
were in operation in ten 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 is a high-volume,
multi-pump, self-service gasoline-dispensing operation.
DISTRIBUTION GROUP. At the end of 1992, the Company sold its distribution
operations to McLane Company, Inc. As part of the divestiture, the Company sold
its regional distribution centers located in San Bernardino, California and
Fredericksburg, Virginia (which included a food processing plant) and its food
processing plant in St. Louis, Missouri. Southland ceased operations at its
distribution and food centers in Orlando, Florida; Tyler, Texas and Champaign,
Illinois. During 1993, the Company sold the distribution center in Orlando,
Florida, leased and will sell at the end of 1994 the distribution center in
Champaign, Illinois and intends to sell the distribution center in Tyler, Texas
in 1994.
10
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 one-half of Cityplace Center East. The remainder of the
building either is subleased or available for sublease to third parties.
The Company is in the process of consolidating its own use of the Cityplace
Tower within approximately 600,000 square feet of the building. During 1993,
leases covering approximately 135,000 square feet were signed with third party
tenants, for occupancy to commence under such leases in 1993 and 1994. As of
March 1994, approximately an additional 205,000 square feet have been leased to
third party tenants for occupancy in 1994 and 1995. Following occupancy under
these leases, the building will be 90% leased or reserved for expansion under
current leases.
On December 31, 1990, the Company sold the approximately 140 acres (the
"Cityplace Land") surrounding Cityplace Center East, with the exception of the
ten-acre Cityplace Center East parcel, to a third party.
DIVESTITURES
In March 1993, the Company sold 10 stores and related properties in
Bryan/College Station, Texas to E-Z Mart Stores, Inc., who had, in 1992,
acquired the Company's East Texas stores. In June 1993, the Company sold or
assigned 150 stores in West Texas and New Mexico and entered into a new area
license agreement with Southwest Convenience Stores, Inc. to continue to operate
those stores using the 7-Eleven name. In September 1993, the Company sold 10
stores and related properties in the southern Utah area to Maverick Country
Stores.
In November 1993, the Company sold its distribution and food center in
Orlando, Florida to Publix Super Markets, Inc. and its check verification and
collection operations (based in Dallas, Texas) to CF Data Corp. In addition, on
November 15, 1993, the Company sold "Citijet" its general aviation fixed-based
operation at Dallas' Love Field Airport to AMR Combs, Inc.
OTHER INFORMATION ABOUT THE COMPANY
CREDIT AGREEMENT AND DEBT COVENANTS. The Company's Credit Agreement with
its Senior Lenders contains a number of financial and operating covenants
requiring, among other things, the maintenance of certain financial ratios,
including cash interest coverage, fixed charge coverage, total debt ratio and
senior indebtedness to subordinated indebtedness. The covenant levels
established by the Credit Agreement generally require a continuing improvement
in the Company's financial condition. In addition, the Credit Agreement
requires the attainment of certain levels of EBITDA (defined in the Credit
Agreement as earnings before interest income and expense, income taxes,
depreciation and amortization, the monetized royalty income from the Company's
area licensee in Japan, certain other unusual income and expense items and
certain other noncash items). There is also a limitation on capital
expenditures by the Company and various other covenants limiting the Company's
ability to incur indebtedness or other liabilities, grant liens, make or
guarantee loans, or make certain investments. The Credit Agreement also
11
requires the Company to comply with various reporting requirements and limits
the Company's ability to enter into certain transactions with shareholders and
affiliates, engage in sale and leaseback transactions, or amend the terms of its
charter or bylaws or the terms of any subordinated debt. These covenants
contain exceptions that are customary in credit agreements associated with
leveraged acquisition financings, as well as exceptions consistent with the
specific nature of the business and financial operations of the Company.
On August 30, 1993, the Company redeemed the New Senior Notes that had been
issued in 1991, at par value plus accrued interest. The Notes, which had an
outstanding face value of $250.6 million, were refinanced with working capital
and an additional $150 million term loan under the Credit Agreement. The
additional loan has a three-year term with no required principal payments until
its maturity, and a floating interest rate of LIBOR plus 2.5%. As part of the
refinancing, the Company amended the Credit Agreement to permit the redemption,
and to modify and extend existing financial covenants through August 1996.
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 Restructured Debt Securities at the option of the
holder upon a change of control (as defined in the indentures governing the
Restructured 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.
In addition, the warrants that were issued by the Company in 1987 in
connection with the LBO (the "Old Warrants"), expired in 1992 without becoming
exercisable. Pursuant to the terms of the Warrant Agreement relating to the Old
Warrants, the Company offered to repurchase such Old Warrants at their
independently determined fair value of $0. The repurchase offer expired, and all
of the Old Warrants were cancelled as of March 15, 1993.
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 may not 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. Although transfers are permitted to certain permitted
transferees or pursuant to Rule 144 under the Securities Act of 1933, other
transfers are subject to the Purchaser's right of first refusal.
The Shareholders Agreement provides each of the Existing Shareholders (and
any persons who hold employee options or employee convertible debentures to
purchase shares of Common Stock as a result of employment with the Company) with
the right and option to require the Purchaser to purchase up to all of the
shares of Common Stock held by such person on the fifth anniversary of the date
of the Shareholders Agreement at the fair market value (to be determined
12
in accordance with the terms of the Shareholders Agreement) of such shares on
such date. In addition, the Shareholders Agreement, as amended on December 30,
1992, provides that the parties to the agreement shall cause Southland's Board
of Directors to consist of, and shall vote their shares as to the election of
directors so that the Board shall consist of, (i) two individuals designated by
Existing Shareholders holding a majority of shares held by the Existing
Shareholders, (ii) ten individuals selected by the Purchaser, (iii) two
individuals initially designated by the Official Committee of Bondholders
appointed by the Bankruptcy Court and, from and after the next annual or special
meeting of the Company's shareholders at which the election of directors occurs,
designated by the holders (the "Other Shareholders") of shares of Common Stock
other than the Purchaser and the Existing Shareholders (the "Other Shareholder
Nominees") and (iv) although no such obligation currently exists, two
independent directors if, and to the extent, required to meet the listing or
quotation requirements of any exchange or quotation system upon which the Common
Stock is or shall be listed or traded (and only if, and to the extent that, the
Other Shareholder Nominees fail to qualify as such independent directors).
In addition, the Shareholders Agreement provides the Existing Shareholders
with certain registration rights (if no exemption from registration is
applicable for their sales), parallel exit rights and preemptive rights in
certain circumstances.
Moreover, under the Shareholders Agreement, Ito-Yokado has provided the
Thompsons and certain of the parties to the Shareholders Agreement (other than
participants in the Company's Grant Stock Plan with respect to shares acquired
pursuant to participation in such Grant Stock Plan) with certain loans (the
"Loans") based on the pledge of shares of Common Stock as collateral for the
Loans (the "Collateral Shares"). Such loans are a nonrecourse obligation of the
borrower except to the extent of the Collateral Shares. Such Collateral Shares
may not be sold unless the Loan secured by such Shares is repaid simultaneously
with such sales.
THE WARRANT AGREEMENT. As part of the Plan and the Closing on March 5,
1991, Thompson Brothers, L.P., The Hayden Company, The Philp Co.,
The Williamsburg Corporation and Thompson Capital Partners, L.P. (collectively,
the "Warrant Shareholders") entered into a Warrant Agreement with Wilmington
Trust Company as Warrant Agent, the Company and Ito-Yokado. Pursuant to the
Plan, the Company agreed to issue, on behalf of the Warrant Shareholders, the
Thompson Warrants exercisable by the holder thereof to purchase up to an
aggregate of 10,214,842 shares of Common Stock owned by the Warrant
Shareholders.
Under the Warrant Agreement, each Thompson Warrant entitles the holder to
purchase, at the exercise price (the "Exercise Price") of $1.75 per Thompson
Warrant, one of the underlying common shares, subject to adjustment as provided
in the Warrant Agreement, during the period beginning three months after the
date of the Warrant Agreement and ending on February 23, 1996. As of March 4,
1994, a total of 5,246,931 Thompson Warrants had been exercised.
Until the termination of the Warrant Agreement, the underlying common shares
will be issued to and held by the Warrant Agent (i) as trustee for the benefit
of the appropriate Warrant Shareholder and the holders of the Thompson Warrants
or (ii) if a secured loan is made pursuant to the terms of the Shareholders
Agreement, as collateral agent solely on behalf of Ito-Yokado.
13
Until the termination or expiration of the Warrant Agreement, neither a
Warrant Shareholder nor the Warrant Agent may, among other things, dispose of or
pledge the underlying common shares except in connection with (i) the exercise
of the Thompson Warrants, (ii) a secured loan to a Warrant Shareholder or (iii)
a sale of any pledged underlying common shares pursuant to, and in accordance
with, a Pledge Agreement (the "Pledge Agreement").
At all times during the term of the Warrant Agreement, all underlying common
shares held by the Warrant Agent as trustee, unless an event of default shall
occur under a Pledge Agreement, shall be voted, on any matters submitted to the
holders of record of Common Stock, in the same manner as a majority of the votes
cast by the holders of record of the Common Stock other than Ito-Yokado and the
Warrant Shareholders. If an event of default occurs under a Pledge Agreement,
all underlying common shares held as security shall be voted, pursuant to the
terms of such pledge agreement, in accordance with the instructions of
Ito-Yokado.
THE EMPLOYMENT AGREEMENTS. As a condition to the Closing, the Company
entered into five-year Employment Agreements with Messrs. John P. Thompson, Jere
W. Thompson and Joe C. (Jodie) Thompson, Jr. As of December 30, 1992, the
Employment Agreement with Joe C. Thompson, Jr. was terminated and Mr. Thompson
was paid the present discounted value of the remaining balance payable to him
under the Employment Agreement. The Employment Agreements were effective upon
the Closing and provide for an annual base salary of $600,000 and an annual
bonus equal to $360,000 under each agreement. In addition, under the Employment
Agreements the Thompsons will have such duties and responsibilities as are
agreed upon from time to time by them and the Board. In addition, John P.
Thompson and Jere W. Thompson will participate in employee benefit plans and
arrangements offered to key management employees of the Company during the term
of the agreement. The Employment Agreements also provide vacation, holidays and
expense reimbursement in accordance with current Company policy.
RESEARCH AND DEVELOPMENT
During 1993, the Company's Merchandising Department conducted certain
concept research studies, which include consumer preference testing and analysis
of competitive and image enhancement factors. The Company did not incur
expenses for product testing or traditional research and development
activities. The Company spent approximately $472,000 and $360,000 on product
testing (in connection with its now-divested food processing operations) in
1991 and 1992, respectively.
RETAIL AUTOMATION
In December 1993, the Company signed agreements with Electronic Data Systems
Corporation, AT&T Global Information Solutions Company (formerly
NCR Corporation) and Canmax Retail Systems, Inc. for the purchase, installation
and maintenance of hardware; the development, license and maintenance of
software; the supply and operation of a data network and the operation of a host
computer. Under these agreements, the Company anticipates that it will automate
certain business functions for both corporate and franchise-operated convenience
stores and provide an automated information link among the stores, Southland's
division and accounting offices and its
14
corporate headquarters. The retail automation project is expected to be
completed in phases over the next four to five years. The first phase,
implementation of which began at the end of 1993, will roll out hardware with
application software to automate certain store accounting functions, such as
payroll and cash accounting.
TRADEMARKS
The Company's 7-Eleven trademark has been registered since 1961 and is well
known throughout the United States and in many other parts of the world. Other
trademarks and service marks owned by the Company include Super-7, Slurpee,
Big Gulp and Big Bite, as well as many additional trade names and marks
relating to other individual types of food items. As part of the collateral
securing the Credit Agreement, the Company granted a security interest in its
various trademarks.
ADVERTISING
At the end of 1993, the Company began testing a new advertising campaign,
using both television and radio media, to emphasize the dramatic and noticeable
changes taking place at 7-Eleven. These advertisements highlight three parts of
the Company's new image: the expanded selection of products, the new store
layout and spacious feel and the everyday fair price strategy. The Company
intends to expand this campaign, which initially has been well received, to
additional markets in 1994.
COMPETITION
During the past few years the Company, like other traditional convenience
retailers, has experienced increased competitive pressures from supermarkets and
drug stores offering extended hours and services, as well as from an increasing
number of convenience-type stores built by the oil companies. During the late
1980s and early 1990s, these competitors invested significant amounts of capital
in their operations while the Company had to restrict its capital spending
activities due to covenant restrictions in the Credit Agreement and cash flow
limitations. In addition, 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.
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 1992 for the
convenience store industry were approximately $79.5 billion (including $38.2
billion of gasoline) and that over 67,900 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
15
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 1993, the Company entered into subleases with new tenants
covering about 135,000 square feet and, in early 1994, additional subleases were
signed covering approximately 205,000 square feet. The building is now
approximately 90% 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. The
Dallas real estate market currently has many office and retail sites available
for lease. 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. In addition to the federal laws
described below, the Company is also subject to the Clean Water Act and the
Clean Air Act and the regulations promulgated thereunder. 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 ("RCRA") of 1976, as amended,
affects the Company through its substantial reporting, recordkeeping and waste
management requirements, thereby increasing the cost of all types of waste
disposal. Regulations under RCRA prohibit certain types of waste disposal,
further increasing Company costs for waste management. In addition, standards
for underground fuel storage tanks and associated equipment may increase
operating expenses and the costs of marketing petroleum products. In response
to this legislation, and various state and local regulations, the Company has
developed a comprehensive tank management program 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 cleanup of waste disposal sites and requires the
reporting of certain releases into the environment. Recent court interpretation
of this Act may result in joint and several liability even for parties not
primarily responsible for hazardous waste disposal sites. As a consequence of
past waste disposal, the Company may be potentially liable for cleanup costs at
several sites which are being considered or which may be considered for Federal
cleanup action under CERCLA. Additional requirements imposed by the Superfund
Amendments and Reauthorization Act of 1986 also have resulted in additional
reporting duties.
16
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"). The Company had previously been issued
an Administrative Consent Order relating to groundwater conditions at this
facility by the New Jersey Department of Environmental Protection (now the New
Jersey Department of Environmental Protection and Energy, "NJDEPE"). The
Administrative Consent Order required the Company to pay a civil penalty of
$50,000, to conduct a remedial investigation/feasibility study ("RI/FS") and to
provide financial assurance for the ultimate clean-up.
The Company has submitted a proposed clean-up plan to the NJDEPE, which
provides for remediation at the site as well as continued groundwater monitoring
for a number of years. While the Company has received initial comments from the
NJDEPE, a final clean-up plan has not been determined. The Company has accrued
$38,879,000 to cover its estimate of the clean-up 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. Effective February 1, 1991, the
parties executed a final settlement agreement pursuant to which the former owner
agreed to pay a substantial portion of the cleanup costs described above. The
Company has recorded a receivable of $22,800,000, at year-end 1993, representing
the former owner's portion of the accrued clean-up costs.
As of December 31, 1993, 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 occasionally discovers and repairs
leaks in the underground storage tanks and piping systems associated with these
retail outlets. The Company has an established program to manage underground
storage tanks and to ensure compliance with applicable laws.
The Company anticipates that it will spend approximately $18 million in 1994
on capital improvements required to comply with environmental regulations
relating to gasoline storage tank systems at store locations and approximately
an additional $17 million on such capital improvements from 1995 through 1997.
Additionally, the Company accrues for the anticipated future costs of
environmental clean-up activities (consisting of contamination assessment and
remediation) relating to detected releases of regulated substances at its
existing and previously operated sites at which gasoline was sold (including
store sites and other facilities that have been sold by the Company). The
Company expects that it will be required to spend approximately $60 million
during the next five years to undertake such activities. This estimate is based
on the Company's prior experience with gasoline sites and its analysis of such
factors as the age of the tanks, location of tank sites and its experience with
contractors who perform contamination assessment and remedial work. However,
the Company is eligible to receive reimbursement for a large portion of these
remediation costs under state reimbursement programs.
17
At December 31, 1993, the Company's accrued liability for sites where
releases have been detected was $59,153,000. The Company has recorded a
receivable of $57,532,000 (net of an allowance of $12,529,000) for the estimated
probable state reimbursements. The estimated future remediation expenditures
and related state reimbursement amounts could change as governmental
requirements and state reimbursement programs change in future years.
The Company anticipates that substantially all of the future remediation
costs for sites with detected releases of regulated substances at December 31,
1993, will be incurred within the next five years. There is no assurance of the
timing of the receipt of state reimbursement funds. However, based on the
Company's experience, the Company expects to receive state reimbursement funds
within one to three years after incurring eligible remediation expenses,
assuming that the state administrative procedures for processing such
reimbursements have been fully developed.
In general, the Company's capital expenditures 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 gasoline storage
tank systems at store locations.
EMPLOYEES
At December 31, 1993, the Company had 32,406 employees, of whom
approximately 29 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, although approximately eight employees in one
store in Canada have joined a union.
The Company has in the past been able to satisfy substantially all of its
requirements for managerial personnel from within its organization. The
Company's store managers and supervisory staff personnel are compensated on some
form of incentive basis.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and offices with the registrant of all current
executive officers 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
and/or the officer to whom such individual reports. 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 (other than Mr. Ito and Mr. Suzuki)
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.
18
Age at Current Positions and
Name 3/01/94 Offices with Registrant
---- ------- -----------------------
Masatoshi Ito 69 Chairman of the Board and Director (1)
Toshifumi Suzuki 61 Vice Chairman of the Board and Director (2)
Clark J. Matthews, II 57 President, Chief Executive Officer
and Director (3)
Stephen B. Krumholz 44 Executive Vice President and Chief Operating
Officer (4)
John H. Rodgers 50 Executive Vice President, Chief Admini-
strative Officer and Secretary (5)
Rodney A. Brehm 46 Senior Vice President, Foodservice and
Distribution (6)
James W. Keyes 38 Senior Vice President, Finance (7)
Michael K. Roemer 45 Senior Vice President, Merchandising (8)
Paul L. Bureau, Jr. 52 Vice President, Corporate Tax (9)
Adrian O. Evans 57 Vice President, Construction and
Maintenance (10)
David M. Finley 53 Vice President, Human Resources (11)
Stephen B. LeRoy 41 Vice President, Real Estate and Licensed
Operations (12)
Vernon P. Lotman 54 Vice President and Controller (13)
Cecilia S. Norwood 40 Vice President, Corporate Communications (14)
Bryan F. Smith, Jr. 41 Vice President and General Counsel (15)
David A. Urbel 52 Vice President, Planning and Treasurer (16)
- -----------------
(1) Chairman of the Board and Director of the Company since March 5,
1991. Founder, Director and Advisor 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 1979. Chairman of York Mart Co., Ltd. since 1979. President of York
Matsuzakaya Co., Ltd. since 1979. President of Robinson's Japan Co., Ltd. since
1984. Chairman of Maryann Co., Ltd. since 1977. President of Oshman's Japan
Co., Ltd. since 1984. Chairman of Steps Co., Ltd. since 1981. Chairman of
York-Keibi Co., Ltd. since 1977. President of Union Lease Co., Ltd. since 1975.
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 1977. 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
19
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 1978. 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; Executive Vice
President (or Senior Executive Vice President) and Chief Financial Officer from
1979 to 1991; Vice President and General Counsel from 1973 to 1979; employee of
the Company since 1965.
(4) Executive Vice President and Chief Operating Officer since June 1993;
Senior Vice President, Operations, from August 1992 to June 1993. Senior Vice
President, 7-Eleven Stores Operations, from 1990 to August 1992; Vice President,
Marketing, from 1989 to 1990; Vice President, Northern Region, 7-Eleven Stores,
from January 1989 to October 1989; Vice President, Northwest Region, 7-Eleven
Stores, from 1987 to 1988; Division Manager, Mountain Division, 7-Eleven Stores,
from 1986 to 1987; Regional Marketing Manager from 1981 to 1986; employee of the
Company since 1972.
(5) Executive Vice President since June 1993, Chief Administrative
Officer since 1991 and Secretary of the Company since 1987; Senior Vice
President from 1987 to June 1993; General Counsel from 1979 to 1992; Vice
President from 1980 to 1987; employee of the Company since 1973.
(6) Senior Vice President, Foodservice and Distribution, since June 1993;
Vice President, Merchandising, from February 1992 to June 1993; Vice President,
Marketing, from 1990 to 1992; Vice President, Northwest Region, 7-Eleven Stores,
from 1989 to 1990; National Marketing Manager from 1986 to 1989; Division
Manager, Central Pacific Division, 7-Eleven Stores, from 1979 to 1986; employee
of the Company since 1972.
(7) Senior Vice President, Finance, since June 1993; Vice President,
Planning and Finance, from August 1992 to June 1, 1993; Vice President and/or
Vice President, National Gasoline, from August 1991 to August 1992; General
Manager, National Gasoline, from 1986 to 1991; employee of the Company since
1985.
(8) Senior Vice President, Merchandising, since June 1993; Vice
President, Line Management, from August 1992 to June 1993. Vice President,
Central Region, 7-Eleven Stores, since October 1990; Vice President, Northeast
Region or Eastern Region, 7-Eleven Stores, from 1987 to 1990; Division Manager,
Northeast Stores Region, from 1984 to 1987; Vice President, Retail Marketing, of
Citgo Petroleum Corporation from 1983 to 1984; Marketing Manager, Eastern Stores
Region, 7-Eleven Stores, from 1981 to 1983; employee of the Company since 1966.
(9) 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.
20
(10) Vice President, Construction and Maintenance, since August 1992.
Vice President, Stores Development, from January 1989 to August 1992; Vice
President, Mid-America Region, 7-Eleven Stores, from 1987 to 1988; Vice
President, Central Stores Region, from 1980 to 1987; Central Stores Regional
Manager from 1978 to 1980; Division Manager, Canada, from 1976 to 1978; employee
of the Company from 1962 to 1972 and since 1975.
(11) Vice President, Human Resources, since December 1987; Manager, Stores
Human Resources, January 1987 to December 1987; Manager, Organizational Research
& Development, from 1985 to 1987; Department Manager, Organizational Research
and Development, from 1984 to 1985; Manager, Organizational Research and
Development, from 1982 to 1984; employee of the Company since 1977.
(12) Vice President, Real Estate and Licensed Operations, since August
1992; Vice President, Atlantic Region, 7-Eleven Stores, from 1990 to 1992; Vice
President, Chesapeake Region, 7-Eleven Stores, from 1987 to 1990; Regional
Manager, Chesapeake Stores Region, in 1987; Division Manager, Capitol Stores
Division, from 1986 to 1987; Division Manager, Great Lakes Stores Division, from
1984 to 1986; Operations Manager, Great Lakes Stores Division, from 1981 to
1984; employee of the Company since 1975.
(13) Vice President since April 1992. Controller since December 1987;
Assistant Corporate Controller from 1977 to 1987; employee of the Company since
1973.
(14) Vice President, Corporate Communications, since August 1991; Manager,
Corporate Communications, from 1989 to 1991; employee of the Company since 1982.
(15) Vice President and General Counsel since August 1992. Assistant
General Counsel from January 1990 to July 1992; Associate General Counsel from
January 1987 to December 1989; employee of the Company since 1980.
(16) 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.
Item 2. PROPERTIES.
Under the Credit Agreement, virtually all the Company's assets, not
previously subject to liens, are encumbered, including both tangible and
intangible property rights, as well as stock in the Company's non-foreign
subsidiaries, where such encumbrance is not otherwise prohibited. As of
December 31, 1993, there were approximately 4,027 operating 7-Eleven stores, 190
non-operating stores and 15 other properties throughout the United States
subject to mortgages (including both owned and leased properties). The lien
against the Company's ownership or leasehold interest in any property will be
released, with the consent of the Company's Senior Lenders, if the Company sells
the property, the lease to the Company terminates or upon payment by the Company
of the amounts due under the Credit Agreement.
21
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN. The 7-Eleven stores group utilizes 116 offices in 21 states and
Canada. The following table shows the location and number of the Company's
7-Eleven convenience stores (excluding stores under area licenses and of certain
affiliates) in operation on December 31, 1993.
State/Province Operating 7-Eleven Convenience Stores
-------------- ------------------------------------------
Owned Leased(a) Total
----- ------ -----
U.S.
- ----
Arizona ......................... 42 60 102
California ...................... 230 982 1,212
Colorado ........................ 57 193 250
Connecticut ..................... 7 32 39
Delaware ........................ 10 17 27
District of Columbia ............ 4 15 19
Florida ......................... 256 231 487
Idaho ........................... 6 8 14
Illinois ........................ 50 100 150
Indiana ......................... 6 10 16
Kansas .......................... 7 11 18
Maryland ........................ 95 230 325
Massachusetts ................... 10 25 35
Michigan ........................ 51 48 99
Missouri ........................ 36 54 90
Nevada .......................... 87 100 187
New Hampshire ................... 1 7 8
New Jersey ...................... 74 129 203
New York (b) .................... 44 177 221
North Carolina .................. 2 6 8
Ohio ............................ 10 5 15
Oregon .......................... 39 100 139
Pennsylvania .................... 58 115 173
Rhode Island .................... 0 9 9
Texas ........................... 110 207 317
Utah ............................ 37 88 125
Virginia ........................ 191 437 628
Washington ...................... 62 204 266
West Virginia ................... 11 15 26
Canada (b):
- -----------
Alberta ....................... 19 108 127
Manitoba ...................... 13 39 52
Ontario ....................... 30 86 116
British Columbia .............. 21 118 139
Saskatchewan .................. 14 23 37
----- ----- -----
Total .................. 1,690 3,989 5,679
----- ----- -----
----- ----- -----
- ---------------
(a) Of the 7-Eleven convenience stores set forth in the foregoing table, 851
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
1993, the Company also leased 102 closed convenience stores or office locations
from the Savings and Profit Sharing Plan.
(b) The above numbers include 17 stores in Canada that operate under a
management contract and four stores in New York operating under a new franchise
agreement ("Genesis"). The Company has no interest in the real property on
which those stores are located.
22
OTHER RETAIL. As shown in the following table, at year-end 1993, the
Company operated 51 Quik Mart stores in Illinois, Indiana, Maryland,
Massachusetts, Missouri, New Hampshire, Texas, Virginia and Wisconsin and 63
High's Dairy Stores located in Maryland, Virginia, Pennsylvania and West
Virginia. As of December 31, 1993, the Company also operated three Super-7
gasoline stations in California, which are all owned by the Company.
The following table shows the location and number of the Company's
Quik Mart, High's and Super-7 locations in operation on December 31, 1993.
Operating Other Retail Locations
-----------------------------------
State Owned Leased Total
----- ----- ------ -----
California ...................... 3 0 3
Illinois ........................ 11 0 11
Indiana ......................... 3 1 4
Maryland ........................ 2 37 39
Massachusetts ................... 2 0 2
Missouri ........................ 2 0 2
New Hampshire ................... 3 1 4
Pennsylvania .................... 0 5 5
Texas ........................... 3 0 3
Virginia ........................ 7 16 23
West Virginia ................... 0 4 4
Wisconsin ....................... 17 0 17
--- --- ---
Total 53 64 117
--- --- ---
--- --- ---
OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1993, there
were five 7-Eleven stores in various stages of construction (two on property
owned by the Company and the others leased), and the Company owned 21, and had
leases on 12, undeveloped convenience store sites. In addition, the Company
held 231 7-Eleven, High's and Quik Mart properties available for sale consisting
of 111 unimproved parcels of land, 94 closed store locations and 26 parcels of
excess property adjoining store locations. At December 31, 1993, 47 of these
properties were under contract for sale.
On December 31, 1993, the Company held leases on 613 closed store or other
non-operating facilities, 99 of which were leased from the Savings and Profit
Sharing Plan. Of these, 379 were subleased to outside parties. In addition,
both Circle K Corporation ("Circle K") and National Convenience Stores
Incorporated ("NCS") sought protection under Chapter 11 of the U.S. Bankruptcy
Code. In connection with both bankruptcy proceedings, certain property leases
assumed from the Company by Circle K and NCS have been rejected. With respect
to some of the rejected leases, the Company has either re-assumed the lease or
negotiated a termination or settlement with the landlord.
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.
23
OTHER PROPERTIES. The Company leases a 10,700-square-foot satellite
commissary constructed in 1991 in Austin, Texas, for fresh deli-style food
preparation and distribution. The Company also leases 102,000-square-feet of
office/warehouse space and an additional 43,600-square-feet of land in Denver,
Colorado, for a regional equipment warehouse and service center.
The Company owns residual property from its distribution and food processing
operations that were divested in late 1992 and plans to dispose of the following
properties: (1) a 48-acre tract of land in Tyler, Texas, on which is located a
490,811-square-foot distribution center which includes 40,034 square feet of
office space, a 40,000-square-foot food processing center and an 11,500-square
foot garage facility, which also includes an additional adjacent 11-acre tract
of unimproved land; (2) an approximately 62-acre tract of land in Champaign,
Illinois, on which is located a leased 543,406-square-foot distribution center
(which includes 54,244 square feet of office space), a 47,000-square-foot food
processing center which contains a 3,300-square-foot batch cooking operation and
a 34,080-square-foot garage facility (this center has been leased to a third
party and is to be sold in 1994); (3) a five-acre tract of land in Delanco, New
Jersey, on which is located a 19,000-square-foot branch distribution facility
and (4) a 21.5-acre tract of land in Salt Lake City, Utah, on which is located a
leased 77,000-square-foot food processing plant (which includes 6,930 square
feet of office space). Both the Delanco, New Jersey, and Salt Lake City, Utah,
locations are currently subleased to McLane on an interim basis.
The Company also owns a 287-acre tract in Great Meadows, New Jersey, with a
closed chemical plant, a part of which is currently involved in environmental
clean-up. (See "Current Environmental Projects and Proceedings," pages 17 and
18.)
CORPORATE
The Company's corporate office is in Dallas, Texas. During 1989, the
Company consolidated its headquarters office space from various buildings to
Cityplace Center East, a 42-story office building. Cityplace Center East is
located within a 160-acre tract which was acquired by the Company for
development as Cityplace, a multi-use development. On December 31, 1990, the
Company sold all of that tract for $24 million, with the exception of the
Cityplace Center East parcel. The Company's lease covers the entire Cityplace
Tower, but gives the Company the right to sublease to other parties. As of
early 1994, subleases had been signed with third parties so that (including the
space leased by Southland) the building is almost 90% 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 also holds tracts in Dallas, Texas, not
included in Cityplace, totaling about 30 acres, and several other smaller tracts
in Dallas.
Item 3. LEGAL PROCEEDINGS.
As previously reported, on October 24, 1990, the Company filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of Texas, Dallas Division, Case No.
390-37119-HCA-11. The Company's Plan of Reorganization was confirmed by the
Court on February 21, 1991. Subsequent to the Company's bankruptcy filing,
24
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. The Bankruptcy Court
issued its opinion, on March 17, 1992, awarding approximately $12.2 million in
additional interest to the Credit Agreement Banks. The Company has appealed
this decision but recognized the approximately $12.2 million of additional
interest expense in its financial statements for 1991. There were no material
developments in this matter in 1993.
As previously reported, on September 23, 1993, the Company was served with a
Summons and Complaint in a purported class action lawsuit entitled 7-ELEVEN
OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION, ET AL., Case
No. 722272-6, in the Superior Court for Alameda County, California. Also named
as defendants in the Complaint are Southland's majority owners and approximately
18 vendors who supply goods to 7-Eleven franchisees in the State of California.
The named plaintiffs purportedly represent all current 7-Eleven franchisees in
the State of California and all former 7-Eleven franchisees in the State of
California for the past six years. The Complaint alleges a variety of
violations of California state antitrust laws, breaches of contract and other
claims relating to discounts and allowances, vendor-supplied equipment,
Southland's accelerated inventory management program and the 24-hour operation
of 7-Eleven stores. The Company filed certain motions, which were decided by
the Court in early March, and, as a result, the plaintiffs amended their
petition to slightly revise some of their causes of action. Discovery in this
matter is in the very early stages. The Company intends to contest the
certification of a class in this litigation and to defend vigorously against all
of the plaintiffs' allegations.
On August 17, 1990, the Superior Court for Alameda County, California
approved the settlement of a class action suit filed against the Company. The
suit was consolidated under the title MARKET FRANCHISE CASES (Jud. Council Dkt.
No. 387). The plaintiff class consisted of all persons who owned 7-Eleven
franchises in California at any time from May 24, 1973, to June 15, 1990. To
date, the Company has made settlement payments and credits (including attorneys'
fees and litigation expenses awarded to class counsel) totalling $16.5 million.
Class members' claims totalling less than $50,000 remain to be resolved. The
Company expects to dispose of this litigation during 1994.
The Company has previously reported the federal criminal investigations into
bidding practices in the dairy industry in Texas, including the Company's former
dairy operations. During 1993, the Company's counsel was notified by the
Antitrust Division of the Department of Justice that, with respect to bidding
practices on school milk contracts in Texas, no action will be taken against the
Company. The Company believes that this concludes all matters related to the
Texas Dairy Grand Jury investigation into the Company's former dairy divisions'
activities.
As previously reported, litigation is pending between the Company and
The Circle K Corporation ("Circle K") relating to the 1988 Asset Purchase
Agreement pursuant to which Circle K acquired certain assets from the Company.
On March 14, 1994, the Company and Circle K entered into a settlement
agreement, which is
25
subject to the entry by the bankruptcy court in Circle K's bankruptcy of a
final non-appealable order approving the settlement, or the satisfactory
resolution of any appeals brought with respect to the settlement.
On June 11, 1993, the Company filed a lawsuit in the United States District
Court for the Northern District of Texas, Dallas Division, against Occidental
Petroleum Corporation and OXY Oil and Gas USA, Inc. ("OXY"), seeking damages
pursuant to contractual indemnification provisions for present and future
expenses that have been incurred (or are anticipated) by the Company associated
with pre-existing environmental conditions at Quik Mart locations which the
Company acquired from OXY in 1983. The lawsuit is in the early stages of
discovery and the Company expects to diligently prosecute its claim.
On November 3, 1993, a jury sitting in the Hammond Division of the United
States District Court of the Northern District of Indiana returned a verdict in
favor of Glen, Janice, Robert and Jeremy Heacock against the Company and Citgo
Petroleum Corporation for $1.5 million based on the plaintiffs' claims of
property damage and personal injury due to environmental conditions at one of
the Company's locations in Griffin, Indiana. The Company has filed a motion
with the trial court to attempt to reduce and/or overturn the verdict and plans
to vigorously appeal the verdict should the lower court deny its motion.
Information concerning other legal proceedings is incorporated herein from
"Environmental Matters," pages 16 through 18 above.
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 1993.
26
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 4, 1994, there were 3,130 record holders of the Common Stock.
The Company's Common Stock is traded on the NASDAQ Small-Cap Market.
PRICE RANGE
--------------------------------------------
QUARTERS BID ASK
------------------ ----------------------
1992 (a) HIGH LOW HIGH LOW
- --------- -------- -------- ------- ---------
FIRST $2 3/8 $1 11/16 $2 1/2 $1 13/16
SECOND 2 1/32 1 1/4 2 3/32 1 5/16
THIRD 4 3/16 1 1/4 4 7/32 1 7/16
FOURTH 3 11/16 2 13/16 3 3/4 2 27/32
PRICE RANGE
--------------------------------------------
QUARTERS BID ASK
------------------ ---------------------
1993 (a) HIGH LOW HIGH LOW
- --------- -------- -------- ------- ---------
FIRST $3 1/2 $2 31/32 $3 9/16 $3 1/16
SECOND 5 1/2 3 1/2 5 19/32 3 9/16
THIRD 6 1/16 4 1/4 6 1/8 4 3/8
FOURTH 7 5/8 5 5/16 7 11/16 5 3/8
(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.
27
Item 6. SELECTED FINANCIAL DATA.
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Years Ended December 31
-------------------------------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
(Dollars in Millions, Except Per-Share Data)
Net sales. . . . . . . . . . . . . . . . . . . .. $6,744.3 $7,425.8 $8,009.5 $8,347.7 $8,274.9
Other income . . . . . . . . . . . . . . . . . . 69.9 73.6 (c) 73.8 (c) 60.1 (c) 43.9 (c)
Total revenues . . . . . . . . . . . . . . . . .. 6,814.2 7,499.4 8,083.3 8,407.8 8,318.8
LIFO charge (credit) . . . . . . . . . . . . . .. (8.7) 1.5 (7.2) 27.9 2.8
Depreciation and amortization. . . . . . . . . . 154.4 180.3 200.1 227.6 276.7
Interest expense . . . . . . . . . . . . . . . .. 94.6 (a) 123.6 (a) 189.3 (a) 459.5 572.2
Loss from continuing operations before
income taxes . . . . . . . . . . . . . . . . .. (2.6) (119.9) (d) (66.3) (430.0) (f) (1,332.3) (h)
Income taxes (benefit) . . . . . . . . . . . . .. 8.7 11.5 8.0 (128.5) (12.0)
Loss from continuing operations. . . . . . . . . (11.3) (131.4) (74.3) (301.5) (1,320.3)
Loss before extraordinary items and
cumulative effect of accounting changes. . . . (11.3) (131.4) (74.3) (301.5) (1,250.9) (i)
Net earnings (loss). . . . . . . . . . . . . . . 71.2 (b) (131.4) 82.5 (e) (276.6) (g) (1,306.9) (j)
Earnings (loss) per common share
(primary and fully diluted):
From continuing operations . . . . . . . . . (0.03) (0.32) (0.22) (15.14) (65.41)
Before extraordinary items and
cumulative effect of accounting
changes . . . . . . . . . . . . . . . . . .. (0.03) (0.32) (0.22) (15.14) (62.02)
Net earnings (loss) applicable to
common shares . . . . . . . . . . . . . . . . 0.17 (0.32) 0.24 (13.93) (64.76)
Total assets . . . . . . . . . . . . . . . . . . 1,998.7 2,044.8 2,607.7 2,813.6 3,445.8
Long-term debt,including current portion . . . . 2,419.9 (a) 2,560.4 (a) 3,037.1 (a) 3,705.2 4,149.5
Redeemable preferred stock . . . . . . . . . . .. - - - 148.5 139.7
- -------------------------------
(a) The Restructured Debt Securities are accounted for in accordance with SFAS
No. 15 as explained in Note 9 to Consolidated Financial Statements.
(b) Net earnings include an extraordinary gain of $98,968,000 on debt
redemption and a charge for the cumulative effect of an accounting change
for postemployment benefits of $16,537,000 as explained in Notes 9 and 13
to Consolidated Financial Statements, respectively.
(c) Gains and losses on the sale of property, plant and equipment are presented
in selling, general and administrative expenses in conformity with the 1993
presentation.
(d) Loss from continuing operations before income taxes includes a $45,000,000
loss on the sale and closing of the distribution and food centers as
explained in Note 6 to Consolidated Financial Statements.
(e) Net earnings include an extraordinary gain on debt restructuring of
$156,824,000 as explained in Note 9 to Consolidated Financial Statements.
(f) Loss from continuing operations before income taxes reflects a loss of
$41,000,000 on Cityplace assets sold.
(g) Net loss includes an extraordinary tax benefit from utilization of net
operating loss carryforwards of $52,040,000 and a charge for the
cumulative effect of an accounting change for postretirement benefits
expense of $27,163,000.
(h) Loss from continuing operations before income taxes reflects the write-off
of $946,974,000 of excess of cost over fair value of net assets acquired.
(i) Loss before extraordinary items and cumulative effect of accounting change
includes earnings from a discontinued operation (Citgo) of $69,410,000.
(j) Net loss includes an extraordinary charge of $56,047,000 resulting from a
debt exchange.
28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The Company's net earnings for 1993 were $71.2 million ($.17 per share)
compared to a net loss of $131.4 million (-$.32 per share) for 1992. Both
years' results included a number of special or unusual gains and losses, and
those items recorded in 1993 include among other things:
- an extraordinary gain of $99.0 million, from redemption of the
Company's 12% Senior Notes ("12% Notes"), which were refinanced in
August 1993;
- a $48.2 million loss for store closings and dispositions of properties;
- a $16.5 million charge for the cumulative effect of an accounting
change for postemployment benefits as required by Statement of
Financial Accounting Standards ("SFAS") No. 112;
- a loss of $10.8 million for the disposition of Citijet, a fixed-base
operation at Dallas Love Field Airport; and
- a $7.2 million charge for severance and related costs.
The Company's net loss in 1992 included:
- a one-time $45 million pretax loss on the sale and closing of the
Company's distribution and food processing centers;
- a $44.3 million loss (determined in accordance with 1993 methodology)
for store closings and dispositions of properties; and
- a $17.5 million charge for severance and related costs.
LIQUIDITY AND CAPITAL RESOURCES
On August 30, 1993, the Company redeemed its 12% Notes due on December 15,
1996, at par value plus accrued interest. The 12% Notes, which had an
outstanding face value of $250.6 million, were refinanced with working capital
and an additional $150 million term loan under the existing senior bank credit
agreement (the "Credit Agreement"). The additional loan has a three-year term
with no required principal payments until its maturity, and a floating interest
rate of LIBOR plus 2.5%. As part of the refinancing, the Company amended the
Credit Agreement to permit the redemption, and to modify and extend existing
financial covenants through August 1996.
The Company recognized a one-time non-cash extraordinary gain of $99.0
million on the redemption of the 12% Notes in the third quarter of 1993.
Because Southland is required to account for its public debt issued in the 1991
restructuring in accordance with SFAS No. 15, the liability recorded on the
balance sheet for that debt includes all future undiscounted cash payments, both
principal and interest. At their redemption, the book value of the 12% Notes
was $355.8 million, of which approximately $99.0 million related to future SFAS
No. 15 interest payments. As a result of the refinancing, at current interest
rates the Company expects to save up to $18 million in annual cash interest
payments. However, since interest on the additional term loan is not subject to
SFAS No. 15 treatment, it will be expensed and, therefore, at current interest
rates the Company's reported interest expense will increase by an estimated $13
million per year.
29
The Company believes that it will have adequate liquidity going forward
from its $400 million commercial paper facility (guaranteed by Ito Yokado Co.,
Ltd.) and from its revolving credit facility under the Credit Agreement ("the
Revolver"), which, respectively, had outstanding balances of $391.2 million and
$15.0 million on December 31, 1993, and from its operating cash flow. The
Company's cash availability from the Revolver is limited to $25 million until
$375 million of commercial paper is outstanding, and thereafter to the lesser of
$150 million or the difference between $275 million and the amount of letters of
credit outstanding. As of December 31, 1993, outstanding letters of credit
totaled $116.7 million.
The Credit Agreement contains numerous financial and operating covenants
requiring, among other things, the maintenance of certain financial ratios,
including cash interest coverage, fixed charge coverage, total debt ratio and
senior indebtedness to subordinated indebtedness. The covenant levels
established by the Credit Agreement generally require a continuing improvement
in the Company's financial condition. In addition, the Credit Agreement
requires the attainment of certain levels of EBITDA (defined in the Credit
Agreement as earnings before interest income and expense, income taxes,
depreciation and amortization, the monetized royalty income from the Company's
area licensee in Japan (see Note 9 of "Notes to Consolidated Financial
Statements"), certain other unusual income and expense items and certain other
noncash items).
For the period ended December 31, 1993, the Company was in compliance with
all of the covenants required under the Credit Agreement. The Company complied
with the principal financial covenants, which are calculated over the latest
12-month period, as follows: cash interest coverage (including the effect of
the SFAS No. 15 interest payments) was 2.08 to 1.00, higher than the
1.65-to-1.00 minimum; fixed charge coverage was 1.34 to 1.00, higher than the
0.99-to-1.00 minimum; total debt ratio was 9.28 to 1.00, lower than the
12.28-to-1.00 maximum; senior indebtedness to subordinated indebtedness was 1.38
to 1.00, lower than the 1.58-to-1.00 maximum; and EBITDA was $264.6 million,
higher than the $240.9 million minimum.
The Credit Agreement also places limitations on the levels of allowable
capital expenditures for the year. For the period ended December 31, 1993, the
Company's capital expenditures (excluding for purposes of the calculation
certain items as permitted under the Credit Agreement) were $192.3 million
compared to the maximum allowed for the year of $247.5 million.
CASH FLOWS FROM OPERATING ACTIVITIES
During 1993, net cash provided by operating activities was $232.1 million.
This amount included cash flow from a $16.3 million reduction in inventories
due principally to fewer operating stores and the reduction in cigarette and
wholesale gasoline costs.
CASH FLOWS FROM INVESTING ACTIVITIES
During 1993, net cash used in investing activities consisted primarily of
payments of $195.1 million for property, plant and equipment, the majority of
which was used for remodeling 1,430 stores, upgrading retail gasoline
facilities, replacing equipment and enhancing underground storage tanks. The
Company expects 1994 capital expenditures to be approximately $185 million,
30
primarily to complete remodels started in 1993 and to remodel approximately
1,000 additional stores. The 1994 average per-store capital expenditures and
associated upfront expenses will be reduced compared to 1993.
The Company anticipates that it will spend approximately $18 million in 1994
on capital improvements required to comply with environmental regulations
relating to gasoline storage tank systems at store locations and approximately
an additional $17 million on such capital improvements from 1995 through 1997.
Additionally, the Company accrues for the anticipated future costs of
environmental clean-up activities (consisting of contamination assessment and
remediation) relating to detected releases of regulated substances at its
existing and previously operated sites at which gasoline was sold (including
store sites and other facilities that have been sold by the Company). The
Company expects that it will be required to spend approximately $60 million
during the next five years to undertake such activities. This estimate is based
on the Company's prior experience with gasoline sites and its analysis of such
factors as the age of the tanks, location of tank sites and its experience with
contractors who perform contamination assessment and remedial work. However,
the Company is eligible to receive reimbursement for a large portion of these
remediation costs under state reimbursement programs.
At December 31, 1993, the Company's accrued liability for sites where
releases have been detected was $59,153,000. The Company has recorded a
receivable of $57,532,000 (net of an allowance of $12,529,000) for the estimated
probable state reimbursements. The estimated future remediation expenditures
and related state reimbursement amounts could change as governmental
requirements and state reimbursement programs change in future years.
The Company anticipates that substantially all of the future remediation
costs for sites with detected releases of regulated substances at December 31,
1993, will be incurred within the next five years. There is no assurance of the
timing of the receipt of state reimbursement funds. However, based on the
Company's experience, the Company expects to receive state reimbursement funds
within one to three years after incurring eligible remediation expenses,
assuming that the state administrative procedures for processing such
reimbursements have been fully developed.
In December 1988, the Company closed its chemical manufacturing facility in
New Jersey. As a result, the Company is required to conduct environmental
remediation at the facility and has accrued a liability for this purpose. The
Company has submitted a clean-up plan to the New Jersey Department of
Environmental Protection and Energy (the "State"), which provides for
remediation at the site as well as continued groundwater monitoring for a number
of years. While the Company has received initial comments from the State, a
final clean-up plan has not been determined. At December 31, 1993, the Company
adjusted its accrued liability to $38,879,000, its best estimate of the clean-up
costs.
In 1991, the Company entered into a settlement agreement with a large
chemical company that formerly owned the chemical manufacturing facility. Under
the settlement agreement, the former owner agreed to pay a substantial portion
of the clean-up costs described above. The Company has recorded a receivable of
$22,800,000 at December 31, 1993, representing the former owner's portion of the
accrued clean-up costs.
31
None of the amounts related to environmental liabilities have been
discounted.
In November 1992, the McLane Company, Inc. ("McLane"), acquired certain of
the Company's distribution and food center assets. In addition, Southland
ceased operations in December 1992 at its distribution and food centers in
Orlando, Florida, and Tyler, Texas, and in April 1993 at Champaign, Illinois.
The Company sold its facility in Orlando in November 1993, and is in the process
of selling its facility in Tyler in 1994. It has sublet and, in December 1994,
will sell its facility in Champaign. These transactions did not have a
material impact on 1993 earnings, since they were included in the $45 million
loss recognized in 1992 resulting from the sale to McLane and related plant
closings. During 1993, the Company benefitted from lower cost of products
purchased under the supply agreement entered into with McLane. In addition to
the $141.8 million in gross proceeds received from the above-mentioned
transactions in 1992, $44.9 million of cash was received in 1993 primarily
from the sale of inventories to McLane.
In 1993, the Company disposed of its last non-convenience-retailing
business, the Citijet fixed-base operation at Dallas Love Field Airport, and
recognized a loss of $10.8 million on the transaction.
CASH FLOWS FROM FINANCING ACTIVITIES
In August, the Company redeemed $250.6 million face amount of its 12% Notes
and paid $6.2 million of SFAS No. 15 interest payable on those Notes from the
prior interest payment date to the date of redemption. The redemption was
financed with working capital and an additional $150 million term loan (see
Liquidity and Capital Resources section). Including the above-mentioned
payment, in 1993 the Company paid $56.5 million of interest on all of its public
debt subject to SFAS No. 15. During 1993, the Company repaid $96.1 million on
certain secured indebtedness, consisting primarily of $58.9 million on the
senior term loan under the Credit Agreement (the "Term Loan").
RESULTS OF OPERATIONS-TWELVE MONTHS ENDED DECEMBER 31, 1993
The Company recorded net sales of $6.74 billion for the year ended December
31, 1993, compared to net sales of $7.43 billion in 1992. The decline is
primarily due to approximately 380 fewer convenience stores in 1993, the
late-1992 disposition of the Company's distribution and food center assets,
which contributed $269 million in outside sales in 1992, and cigarette price
reductions on certain premium brands associated with manufacturers' cost
reductions. Same-store (stores open more than one year) merchandise sales
decreased 2.7% in 1993, compared to a decrease of 3.9% in 1992, before adjusting
for the effects of inflation in both years. Without the estimated deflationary
effect of cigarette price decreases in the second half of 1993, same-store sales
for the twelve months of 1993 would have decreased 1.3%, and for the last six
months of 1993 would have been flat compared to 1992. 7-Eleven experienced an
annualized inflation rate of 2.2% in 1993, compared to 1.9% in 1992.
Merchandise sales adjusted for inflation have declined since early 1989 because
of competitive pressures and the recession, as well as the Company's strategic
decision in 1992 to reduce discounting and promotional activities in favor of an
everyday-fair-price strategy. However, this negative trend began to reverse in
1993 and showed improvement over the course of the year.
32
Gasoline sales per store increased 9.1% in 1993 due to per-store volume
improvement of 11.1%, reflecting favorable market conditions as well as the
impact of several successful business strategies: ongoing remodeling to enhance
the appeal and convenience of the Company's gas facilities; promoting the high
quality of 7-Eleven's CITGO-brand gasoline; managing gasoline prices,
inventories and product mix on a by-store basis; and the closing of low-volume
locations.
Other income of $69.9 million in 1993 consisted primarily of royalties from
area licensees, principally Seven-Eleven Japan Co., Ltd.
Consolidated gross profits were $1.57 billion for 1993, $32.4 million below
1992, reflecting lower merchandise gross profits because of fewer stores, and
lower same-store merchandise sales. However, merchandise gross profit margins
increased 1.16 percentage points over 1992 levels because of the Company's
everyday-fair-price strategy that minimizes discounting and promotional
activities, lower cigarette costs in the second half of the year, and lower cost
of products under its supply agreement with McLane. As a result, merchandise
gross profits per store were up 2.2% in 1993 compared to 1992, since the
increased margins more than offset the per-store sales decline. This was the
highest per-store merchandise gross profit increase in over three years and
represents a consistent trend of increases over the last ten months of the year,
compared to 1992. Gross profit on retail gasoline sales was 13.9 cents per
gallon in 1993, an increase of 2 cents compared to 1992 due to favorable market
conditions and the positive impact of capital expenditure programs. As a result
of the gasoline sales and margin improvement, per-store gasoline gross profits
for 1993 were 29.8% higher than in 1992. (Except where noted, all per-store
numbers above refer to an average of all stores rather than only stores open a
year or more).
Since 1992, the Company has adopted a more customer-driven approach to
merchandising, intended to greatly expand and improve the quality and variety of
7-Eleven's product selection through improved ordering, consistently phasing out
slow-selling items and aggressively introducing new products in the early stages
of their life cycle. The new merchandising process was begun in 1992, its usage
was expanded in 1993, and the Company expects to improve its implementation
further in 1994. Since 1992, this new process has resulted in improved sales
and profits in those stores that are applying it to a significant number of
major product categories. In addition, Southland continued to implement
7-Eleven's new retail pricing strategy to minimize discounting and promotions
and instead charge a competitive everyday fair price on all items. As
anticipated, this pricing strategy, together with fewer and shorter promotions,
initially had a negative impact on those merchandise sales but has enhanced
margins in 1993, which contributed to higher per-store merchandise gross
profits. Going forward, 7-Eleven plans to migrate its everyday-fair-price
strategy toward lower retail prices as the Company achieves lower product costs
through strategic alliances with its suppliers.
The Company is taking several other proactive steps that it believes will
have a positive influence on per-store merchandise sales in 1994. These steps
include continued closure of low-volume stores, a more efficient remodel process
that will limit store downtime, minimize customer inconvenience and increase
sales, especially during the prime selling season, and enhanced application of
7-Eleven merchandising processes. In addition, the usual
33
uncontrollable factors such as weather, actions by competitors and inflation
could affect these potential improvements. The Company's gasoline margins were
at record levels during 1993, and while the Company continues to expect strong
gasoline performance in 1994, it is unable to determine whether 1993 results
will continue at the same levels.
Selling, general and administrative expenses ("SG&A") decreased $77.1
million in 1993 compared to 1992. Most of this decrease in the SG&A expense
amounts resulted primarily from the cost savings realized in 1993 from the
reduction in force that began in the third quarter of 1992 and the effect of
having approximately 380 fewer stores. However, due to the merchandise sales
decline, the ratio of SG&A expenses to sales was 22.8% in 1993, an increase of
1.06 percentage points over 1992 levels. In the fourth quarter of 1993, the
Company incurred a charge of approximately $6.0 million for severance and
related costs, due to an additional reduction in force of general and
administrative personnel. The Company expects that the latest reorganization
will result in approximately $15-20 million of savings beginning in 1994. In
the fourth quarter of 1993, the Company also incurred a $42.8 million loss for
store closings and dispositions of properties, compared to a loss of $30.7
million for those items in the same period last year. Using methodology adopted
in 1993, both the 1993 and 1992 losses include anticipated and actual store
closings, and dispositions of properties for those years.
The Company's total interest expense decreased $29.1 million for the year
compared to 1992, primarily due to favorable rates on the Term Loan and greater
use of commercial paper. Going forward, the Company expects its reported
interest expense to increase due to the refinancing of the 12% Notes (see
Liquidity and Capital Resources section). The weighted average interest rate
on the Company's floating rate debt was 4.52% for 1993.
As a result of the operating and non-operating improvements described above,
the Company recorded net earnings of $71.2 million in 1993 compared to a loss of
$131.4 million during 1992. The comparisons include an extraordinary item and
several special or unusual items (see Introduction section). Earnings per
common share for 1993, both primary and fully diluted, were $.17. Before the
extraordinary gain and cumulative effect of a required accounting change, the
Company had a loss per common share, both primary and fully diluted, of $.03.
The Company believes that continued improvement and implementation of the
7-Eleven business concept, including its more customer-focused merchandising
programs, a more efficient remodel process, lower interest expense and
reductions in cost of goods and overhead expense, is improving its ability to
compete more effectively and will contribute to improved results for 7-Eleven in
1994.
RESULTS OF OPERATIONS - TWELVE MONTHS ENDED DECEMBER 31, 1992*
The Company recorded net sales of $7.43 billion for the year ended December
31, 1992, compared to net sales of $8.01 billion in 1991. The decline was
primarily due to an average of about 260 fewer convenience stores, lower outside
sales by the distribution and food centers (which were included
* Certain items herein have been reclassified to conform to the 1993
presentation.
34
for only eight months in 1992), and lower same-store merchandise sales.
Convenience store sales accounted for 96.3% of net sales in 1992. Same-store
merchandise sales decreased 3.9% in 1992 while 7-Eleven experienced an
annualized inflation rate of 1.9%, resulting in negative real growth of 5.6%.
7-Eleven has experienced negative real growth in merchandise sales since early
1989 because of competitive pressures and the recession, and more recently due
to a strategic decision to reduce discounting and promotional activities in
favor of an everyday-fair-price strategy. Gasoline sales per store increased
6.5% in 1992, due to upgraded gasoline facilities, the continued improvement in
gasoline inventory and price management, and the effect of closing certain
low-volume locations.
Other income of $73.6 million in 1992 consisted primarily of royalties from
area licensees, principally Seven-Eleven Japan Co., Ltd., and interest income.
The Company's consolidated gross margin (gross profit divided by sales) was
21.6%. The convenience stores' merchandise gross margin increased 0.75
percentage points in 1992 compared to 1991, primarily due to a reduction in
discounting and promotional activities, a key part of the Company's
merchandising strategy. For the year, merchandise gross profits per store were
down slightly from 1991 due to the reduction in per-store merchandise sales,
which offset the increased margins. Gross profit on retail gasoline sales was
11.9 cents per gallon in 1992, an increase of 2.0 cents when compared to 1991.
Per-store gallonage increased 6.3% over 1991 levels, due to the effect of
closing certain low-volume locations, capital expenditure programs begun in 1991
and favorable market conditions. (Except where noted, all per-store numbers
above refer to an average of all stores rather than only stores open a year or
more).
SG&A increased $22.7 million in 1992. The ratio of SG&A expenses to sales
was 21.8% for the year, an increase of 1.87 percentage points compared to 1991.
The increase primarily reflects lower sales and higher expenses associated with
implementing the Company's business plan, including a $17.5 million expense for
severance and related costs of a reduction in force, and a $44.3 million loss
for store closings and dispositions of properties. A cost-cutting program,
which began in the third quarter and was designed to control future SG&A
expense, was part of an ongoing company wide effort to centralize and
consolidate various stores' support functions, improve communications and the
Company's ability to respond faster and more creatively to rapidly changing
customer needs and preferences. The reduction in force resulted in
approximately $9.1 million of savings from reduced salaries and wages in 1992,
and the Company anticipated that 1993 cost savings from that action would be
approximately $50 million.
In 1992, the Company adopted a more customer-driven approach to
merchandising, intended to greatly expand and improve the quality and variety of
7-Eleven's product selection by phasing out slow-selling items and aggressively
introducing high-turnover items and new products in the early stages of their
life cycle. The new merchandising process was implemented, to varying extents,
in most 7-Eleven stores by December 31, 1992. During 1992, Southland also
implemented a new retail pricing strategy to reduce certain prices, minimize
discounting and promotions and instead charge an everyday fair price, which was
somewhat higher than supermarket prices, to reflect the
35
value of convenience. As anticipated, this pricing strategy, together with
fewer and shorter promotions, initially had a negative impact on merchandise
sales, but was enhancing margins and expected to improve them further over the
long term.
The upfront cost of introducing new programs, combined with soft economic
conditions, caused the Company's 1992 operating earnings for the year to decline
compared to those experienced in 1991. However, the Company experienced
improved operating results in the fourth quarter compared to the same period in
1991.
The Company's total interest expense decreased $65.6 million in 1992
compared to 1991, primarily due to declining interest rates on the Term Loan and
lower Term Loan balances. In 1992, the weighted average interest rate of the
Company's floating rate debt was 6.56%. Going forward, the Company expected its
interest expense to decline further due to lower average debt balances and the
use of commercial paper at favorable rates. Given the Company's high percentage
of fixed rate debt, in December 1991 the banks eliminated the hedging
requirement from the Credit Agreement, and as of December 31, 1992, the Company
had no interest rate hedges outstanding.
The business plan described above resulted in nonrecurring charges that
obscured gradually improving operating performance. The Company recorded a net
loss of $131.4 million for the year ended December 31, 1992, which included a
$17.5 million provision for severance and related costs, as well as a $44.3
million loss for store closings and dispositions of properties, and a $45
million loss on the sale and closing of the distribution and food centers. This
compared to net earnings of $82.5 million for the same period in 1991, which
included an extraordinary gain on the debt restructuring of $156.8 million.
Losses per common share for 1992, both primary and fully diluted, were $.32.
RESULTS OF OPERATIONS - TWELVE MONTHS ENDED DECEMBER 31, 1991*
The Company recorded net sales of $8.0 billion for the year ended December
31, 1991, versus $8.3 billion in 1990. The decline was primarily due to fewer
convenience stores, lower retail gasoline prices and the phasing out of outside
foodservice business at the distribution centers. Convenience store sales of
$7.5 billion accounted for 94% of net sales. Same-store merchandise sales
increased .26% in 1991 while 7-Eleven experienced an annualized inflation rate
of 2.8% for the same period, resulting in negative real growth of 2.5%.
Gasoline sales per store decreased 3.2% due primarily to lower average retail
prices.
Other income of $73.8 million in 1991 consisted primarily of royalties from
area licensees and interest income.
The Company's consolidated gross margin was 20.68% in 1991. The convenience
stores' merchandise gross margin decreased 0.49 percentage points due to the
recession and competitive pressures. Gross profit on retail gasoline sales
decreased to 9.9 cents per gallon in 1991 from 11.6 cents in 1990 due primarily
to unusually aggressive pricing by integrated oil
* Certain items herein have been reclassified to conform to the 1993
presentation.
36
companies. Gallonage on a per-store basis remained virtually flat, despite an
approximate 4% decline in overall U.S. consumption, mostly as a result of
successful marketing efforts.
Selling, general and administrative expenses decreased $69.2 million in
1991. The decline for the year was primarily attributed to $20.2 million less
in Restructuring expenses and approximately $23 million in ongoing savings
associated with certain cost-reduction measures. As a result, the ratio of
selling, general and administrative expenses to sales was 19.9%, a decrease of
.02 percentage points from the same period in 1990.
In 1991, the Company began some important marketing tests and implementation
of inventory management processes aimed at emphasizing item-by-item tracking of
merchandise at each store to eliminate slow-moving merchandise and introduce
new, faster-moving items.
Although the Company's merchandise sales increased on a per-store basis
during 1991, these increases did not compensate for the decrease in merchandise
margins that resulted from the effects of the recession and competitive
pressures. As a result of the then-current economic outlook, intense
competition, significantly lower-than-anticipated capital expenditures in 1991
and implementation of new programs, the Company expected its operating results
to decline further in 1992.
The Company's total interest expense decreased $270.2 million during 1991,
which included $231.3 million in interest on the Company's public debt
securities that were outstanding prior to the Restructuring (the "Old Debt
Securities"), primarily due to the effects of the Restructuring. The Company
stopped accruing interest on the Old Debt Securities at the time it filed
bankruptcy. In addition, as required by SFAS No. 15, the related interest
payments on the debt securities issued as part of the Restructuring were not
being charged to interest expense, but rather were charged against their
recorded amounts. Additional factors included lower Term Loan balances,
declining interest rates on the Term Loan and the absence of borrowings under
the Credit Agreement's revolving credit facility after consummation of the
Restructuring. As a result of the above factors, the Company's reported
interest expense was expected to be significantly reduced in the future.
At December 31, 1991, approximately 53% of the Company's bank term debt was
hedged against future interest rate increases. In 1991, the weighted average
interest rate of the Company's Term Loan indebtedness under the Credit
Agreement, including the cost of hedging and interest swaps, was 11.5%. The net
cost of hedging was $8.4 million higher than interest expense would have been
without hedging.
In accordance with SFAS No. 15, the Company recognized a gain on the
Restructuring of $156.8 million for the twelve months ended December 31, 1991.
In addition, shareholders' equity increased by $127.8 million due to the
exchange of Redeemable Preferred Stock for Common Stock associated with the
Restructuring.
As a result of the factors described above, and a foreign tax expense of
$8.0 million, the Company's net earnings for the year ended December 31, 1991,
were $82.5 million.
37
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1993, 1992 and 1991
38
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(Dollars in Thousands, Except Per-Share Data)
- -----------------------------------------------------------------------------------------------
1993 1992
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,486 $ 1,804
Accounts and notes receivable 90,934 131,350
Inventories 109,363 125,710
Other current assets 31,954 35,577
Assets held for sale -- 34,309
----------- -----------
Total current assets 245,737 328,750
PROPERTY, PLANT AND EQUIPMENT 1,337,586 1,356,163
OTHER ASSETS 415,422 359,904
----------- -----------
$ 1,998,745 $ 2,044,817
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 196,026 $ 197,631
Other liabilities and accrued expenses 347,563 342,984
Commercial paper 41,220 71,866
Long-term debt due within one year 149,503 152,515
----------- -----------
Total current liabilities 734,312 764,996
DEFERRED CREDITS AND OTHER LIABILITIES 242,426 190,652
LONG-TERM DEBT 2,270,357 2,407,928
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY(DEFICIT):
Common stock, $.0001 par value; 1,000,000,000 shares
authorized; 409,922,935 and 410,022,481 shares issued
and outstanding 41 41
Additional capital 625,574 625,724
Accumulated deficit (1,873,965) (1,944,524)
----------- -----------
Total shareholders' equity (deficit) (1,248,350) (1,318,759)
----------- -----------
$ 1,998,745 $ 2,044,817
----------- -----------
----------- -----------
See notes to consolidated financial statements.
39
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(Dollars in Thousands, Except Per-Share Data)
- --------------------------------------------------------------------------------------------------------------
1993 1992 1991
---- ---- ----
REVENUES:
Net sales (including $962,955, $986,962 and $954,027
in excise taxes) $6,744,333 $7,425,844 $8,009,507
Other income 69,902 73,570 73,808
---------- ---------- ----------
6,814,235 7,499,414 8,083,315
COST OF GOODS SOLD AND EXPENSES:
Cost of goods sold 5,171,806 5,820,817 6,352,855
Selling, general and administrative expenses 1,538,719 1,615,799 1,593,107
Loss on sale and closing of distribution and food centers -- 45,000 --
Interest expense 94,559 123,647 189,290
Contributions to Employees' Savings and Profit Sharing Plan 11,731 14,100 14,411
---------- ---------- ----------
6,816,815 7,619,363 8,149,663
---------- ---------- ----------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (2,580) (119,949) (66,348)
INCOME TAXES 8,700 11,500 8,000
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (11,280) (131,449) (74,348)
EXTRAORDINARY ITEMS:
Gain on debt redemption 98,968 -- --
Gain on debt restructuring -- -- 156,824
---------- ---------- ----------
Total extraordinary items 98,968 -- 156,824
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR
POSTEMPLOYMENT BENEFITS (16,537) -- --
---------- ---------- ----------
NET EARNINGS (LOSS) $71,151 $(131,449) $82,476
---------- ---------- ----------
---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE (PRIMARY AND FULLY DILUTED):
Before extraordinary items and cumulative effect of
accounting change $(.03) $(.32) $(.22)
Extraordinary items .24 -- .46
Cumulative effect of accounting change (.04) -- --
----- ----- -----
Net earnings (loss) $.17 $(.32) $.24
----- ----- -----
See notes to consolidated financial statements.
40
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in Thousands, Except Share Amounts)
COMMON STOCK TOTAL
-------------------------- ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1991 20,480,844 $2 $20,364 $(2,018,926) $(1,998,560)
Net earnings -- -- -- 82,476 82,476
Shares issued related to Restructuring 389,541,637 39 584,474 -- 584,513
Costs associated with issuance of common
stock -- -- (5,250) -- (5,250)
Cancellation of redeemable preferred stock
in Restructuring -- -- -- 127,788 127,788
Foreign currency translation adjustments -- -- -- (1,250) (1,250)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 410,022,481 41 599,588 (1,809,912) (1,210,283)
Net loss -- -- -- (131,449) (131,449)
Adjustment for redeemable common stock purchase
warrants -- -- 26,136 -- 26,136
Foreign currency translation adjustments -- -- -- (3,163) (3,163)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 410,022,481 41 625,724 (1,944,524) (1,318,759)
Net earnings -- -- -- 71,151 71,151
Cancellation of shares (99,546) -- (150) 112 (38)
Foreign currency translation adjustments -- -- -- (704) (704)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 409,922,935 $41 $625,574 $(1,873,965) $(1,248,350)
----------- --- -------- ----------- -----------
----------- --- -------- ----------- -----------
See notes to consolidated financial statements.
41
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 71,151 $ (131,449) $ 82,476
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Extraordinary gain on debt redemption (98,968) -- --
Extraordinary gain on debt restructuring -- -- (156,824)
Cumulative effect of accounting change for postemployment benefits 16,537 -- --
Depreciation and amortization of property, plant and equipment 134,920 160,502 179,855
Other amortization 19,430 19,778 20,289
Noncash interest expense 8,497 12,429 17,508
Other noncash expense 3,393 4,874 8,167
Net loss on property, plant and equipment 48,017 46,064 19,745
Loss on sale and closing of distribution and food centers -- 45,000 --
Decrease in accounts and notes receivable 24,937 5,190 35,112
Decrease in inventories 16,347 12,252 74,541
Decrease (increase) in other assets 3,344 6,052 (36,908)
Decrease in trade accounts payable and other liabilities (15,528) (8,102) (96,796)
----------- ----------- -----------
Net cash provided by operating activities 232,077 172,590 147,165
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment (195,146) (88,575) (69,873)
Proceeds from sale of property, plant and equipment 22,809 15,827 16,015
Net currency exchange principal transactions (8,894) (6,635) (4,353)
Payments on notes from sales of real estate 1,152 1,317 1,174
Cash received from (paid for) other investments 3,830 822 (1,290)
Cash utilized by distribution and food center assets (17,739) (54,020) --
Proceeds from sale of distribution and food center assets 44,889 141,793 --
----------- ----------- -----------
Net cash (used in) provided by investing activities (149,099) 10,529 (58,327)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities 4,111,500 2,007,239 478,955
Payments under commercial paper and revolving credit facilities (3,927,234) (1,785,717) (546,070)
Proceeds from issuance of long-term debt 150,000 -- --
Principal payments under long-term debt agreements (403,125) (624,527) (333,009)
Proceeds from issuance of stock -- -- 430,011
Debt issuance costs (2,437) (5,329) --
----------- ----------- -----------
Net cash (used in) provided by financing activities (71,296) (408,334) 29,887
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,682 (225,215) 118,725
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,804 227,019 108,294
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,486 $ 1,804 $ 227,019
----------- ----------- -----------
----------- ----------- -----------
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS15 Interest $ (87,631) $ (116,931) $ (171,048)
----------- ----------- -----------
----------- ----------- -----------
Net income taxes (paid) refunded $ (2,036) $ 8,368 $ (20,350)
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
42
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The Southland Corporation and subsidiaries
("the Company") is owned approximately 64% by IYG Holding Company, which is
jointly owned by Ito-Yokado Co., Ltd. ("IY") and Seven-Eleven Japan Co.,
Ltd.("SEJ").
The consolidated financial statements include the accounts of The Southland
Corporation and its subsidiaries. Intercompany transactions and account
balances are eliminated. Prior-year amounts have been reclassified to
conform to current-year presentation, except for amounts related to
contingencies, which are discussed in Note 14.
The Company's net sales are comprised of sales of products 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 $2,810,270,000, $2,931,494,000 and
$3,065,542,000 from 2,998, 3,011 and 3,045 stores for the years ended
December 31, 1993, 1992 and 1991, 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, training seminars and preparation of
financial statements. The gross profit earned by the Company's franchisees
of $530,436,000, $539,835,000 and $543,144,000 for the years ended December
31, 1993, 1992 and 1991, respectively, are included in the Consolidated
Statements of Operations as Selling, General and Administrative Expenses.
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 comprised of area license
royalties and interest income. The area license royalties include amounts
from area license agreements with SEJ of approximately $39,000,000,
$37,000,000 and $34,000,000 for the years ended December 31, 1993, 1992 and
1991, respectively.
COST OF GOODS SOLD - Cost of goods sold includes buying and occupancy
expenses.
43
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include temporary
cash investments of $11,345,000 and $5,410,000 at December 31, 1993 and
1992, respectively, stated at cost, which approximates market. The Company
considers all highly liquid investment instruments purchased with
maturities of three months or less to be cash equivalents.
INVENTORIES - Inventories are generally stated at the lower of cost, using
the LIFO method, or market.
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.
INCOME TAXES - In 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see
Note 15).
STORE CLOSINGS - Provision is made on a current basis for the write-down of
identified owned-store closings to their estimated net realizable value.
For identified leased-store closings, provision is made on a current basis
if anticipated expenses are in excess of expected sublease rentals.
BUSINESS SEGMENT - The Company operates in a single business segment - the
operating and franchising of convenience food stores, primarily under the
7-Eleven name.
2. ACCOUNTS AND NOTES RECEIVABLE
December 31
----------------------
1993 1992
---- ----
(Dollars in Thousands)
Notes receivable (net of long-term
portion of $18,310 and $6,910) $ 3,030 $ 3,992
Trade accounts receivable 48,609 89,945
Franchisee accounts receivable 38,823 49,338
Environmental cost reimbursements
(net of long-term portion of
$72,038) - see Note 14 8,294 -
------- -------
98,756 143,275
Allowance for doubtful accounts (7,822) (11,925)
------- -------
$90,934 $131,350
------- -------
------- -------
44
3. INVENTORIES
Inventories stated on the LIFO basis which are included in inventories in
the accompanying Consolidated Balance Sheets approximated $65,607,000 and
$76,944,000 at December 31, 1993 and 1992, respectively, which is less than
replacement cost by approximately $25,292,000 and $33,991,000,
respectively. At December 31, 1993, 1992 and 1991, inventories were
reduced resulting in a liquidation of LIFO inventory layers recorded at
costs that were lower than the costs of current purchases. The effects of
these reductions were to decrease cost of goods sold by approximately
$3,900,000 in 1993, decrease the loss on the sale and closing of the
distribution and food centers by approximately $23,000,000 in 1992 and
decrease cost of goods sold by approximately $13,000,000 in 1991.
4. OTHER CURRENT ASSETS
December 31
------------------------
1993 1992
------ ----
(Dollars in Thousands)
Prepaid expenses $ 19,165 $ 20,718
Deposits 12,789 14,859
---------- ----------
$ 31,954 $ 35,577
---------- ----------
---------- ----------
5. PROPERTY, PLANT AND EQUIPMENT
December 31
-------------------------
1993 1992
---- ----
(Dollars in Thousands)
Cost:
Land $ 495,120 $ 537,406
Buildings and leaseholds 1,183,904 1,186,968
Machinery and equipment 578,289 543,616
Construction in process 35,321 13,704
---------- ----------
2,292,634 2,281,694
Accumulated depreciation and
amortization (955,048) (925,531)
---------- ----------
$1,337,586 $1,356,163
---------- ----------
---------- ----------
45
6. DIVESTED ASSETS
On November 30, 1992, the Company sold two of its five distribution centers
and three of its six food centers, together with substantially all of the
centers' inventories and receivables to McLane Company, Inc. ("McLane").
In addition, two of the remaining distribution centers, in combination with
their related food centers, were closed in December 1992, and the third
combined facility was closed in April 1993. The Company sold one of these
combined facilities in 1993 and is currently subleasing another, which is
under contract to be sold in December 1994. For the years ended December
31, 1993 and 1992, the Company received cash proceeds of approximately
$44,900,000 and $141,800,000, respectively, from the sale of distribution
and food center assets.
Assets held for sale at December 31, 1992, primarily represented
inventories which were sold to McLane in 1993 during the shut-down of the
remaining facilities. The long-term assets remaining to be sold are
recorded in property, plant and equipment at their estimated net realizable
value. Liabilities relating to the assets to be sold in future years
include accruals for operating leases and carrying costs.
The $45,000,000 pre-tax loss on the sale and closing of the distribution
and food centers in 1992 included the loss from the sale of assets to
McLane, the expected loss on future sales of the remaining facilities, and
the expected net cash outflows on all such facilities subsequent to
August 31, 1992 (the measurement date), until the expected dates of
disposition. Operating results for the four-month period ended December 31,
1992, and the year ended December 31, 1993, which were included in the
loss, were not material.
7. OTHER ASSETS
December 31
-----------------------
1993 1992
---- ----
(Dollars in Thousands)
Japanese license royalty (net of accumulated
amortization of $100,957 and $84,941) $ 217,543 $ 233,559
Other license royalties (net of accumulated
amortization of $18,077 and $15,229) 38,692 41,540
Environmental cost reimbursements
(net of allowance of $12,529) -
see Note 14 72,038 -
Deferred debt issuance costs (net of
accumulated amortization of $65,553 and
$63,676) 8,479 9,567
Other (net of accumulated amortization
of $562 and $3,543) 78,670 75,238
--------- -------------
$ 415,422 $ 359,904
--------- -------------
--------- -------------
46
8. OTHER LIABILITIES AND ACCRUED EXPENSES
December 31
------------------------
1993 1992
---- ----
(Dollars in Thousands)
Accrued insurance $ 94,121 $ 87,422
Accrued payroll 47,690 62,100
Accrued taxes, other than income 39,173 42,191
Other 166,579 151,271
-------- ----------
$ 347,563 $ 342,984
-------- ----------
-------- ----------
Other includes accounts payable to The Southland Corporation Employees'
Savings and Profit Sharing Plan (see Note 13) for Company contributions and
contingent rent payables of $14,098,000 and $17,295,000 as of December 31,
1993 and 1992, respectively.
9. DEBT
December 31
------------------------
1993 1992
---- ----
(Dollars in Thousands)
Bank Debt Term Loans due 1996 $ 329,017 $ 237,938
Bank Debt revolving credit facility 15,000 -
Commercial paper 350,000 150,000
12% Senior Notes - 370,890
5% First Priority Senior Subordinated
Debentures due 2003 638,070 660,807
4-1/2% Second Priority Senior Subordinated
Debentures (Series A) due 2004 303,884 313,251
4% Second Priority Senior Subordinated
Debentures (Series B) due 2004 26,648 27,505
12% Second Priority Senior Subordinated
Debentures (Series C) due 2009 62,311 64,925
6-1/4% Yen Loan 273,793 291,162
7-7/8% Cityplace Notes due 1995 287,363 285,238
Canadian revolving credit facility 7,499 7,388
Capital lease obligations 120,398 137,157
Other 5,877 14,182
---------- ----------
2,419,860 2,560,443
Less long-term debt due within one year 149,503 152,515
---------- ----------
$2,270,357 $2,407,928
---------- ----------
---------- ----------
BANK DEBT - In 1987, the Company became obligated under a credit agreement
("Credit Agreement") that presently includes term loans ("Term Loans") and
a revolving credit facility (collectively "Bank Debt"). The Credit
Agreement contains numerous financial and operating covenants requiring,
among other things, the maintenance of certain financial ratios including
interest coverage, fixed-charge coverage and total debt. In addition, the
Credit Agreement requires the attainment of certain levels of 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 indebtedness or other
liabilities other than under the Credit Agreement, (b) restrict the
Company's ability to engage in leasing transactions, (c) limit future
capital expenditures and (d) restrict the Company's ability to pay cash
dividends, redeem or prepay principal and interest on any subordinated debt
and certain senior debt. Under the Credit Agreement, all of the assets of
the Company, with the exception of certain specified property, serve as
collateral.
47
In September 1992, the Company entered into an amendment to the Credit
Agreement that permitted the establishment of a $400 million commercial
paper facility. In connection with this amendment, the Company was
required to make $350 million in prepayments of the Term Loans. In
addition, as a result of the sale of the distribution and food center
assets (see Note 6) and in accordance with an October 1992 amendment to the
Credit Agreement, a $110 million prepayment of the Term Loans was made in
December 1992. The $460 million in prepayments were applied to all
remaining scheduled quarterly installments. Quarterly installments for 1994
are $9.9 million in the first quarter and $18.8 million in the remaining
three quarters, and for 1995 are $42.9 million for the first two quarters
and $27.1 million on September 30, 1995.
In August, the Company completed a refinancing of its 12% Senior Notes due
December 15, 1996, with proceeds from working capital and an additional
$150 million term loan under the existing Credit Agreement (the
"Refinancing"). To complete the Refinancing, an amendment to the Credit
Agreement (the "Refinancing Amendment") was executed to provide for the
additional term loan, which is due and payable on August 30, 1996, to
permit redemption of the 12% Senior Notes and to modify and extend existing
financial covenants through August 1996. The amendment did not affect the
previously scheduled quarterly installments under the October 1992
amendment to the Credit Agreement noted above.
The revolving credit facility makes available borrowings and letters of
credit totaling a maximum of $275 million until its expiration on December
31, 1995. Maximum borrowings under the revolving credit facility, which
are set at $150 million, are limited to $25 million whenever the face
amount of commercial paper outstanding is below $375 million or the ratings
of the commercial paper drop below certain levels. Upon expiration of the
facility, all the then outstanding letters of credit may need to be
replaced, and all other amounts then outstanding will be due and payable in
full. The facility includes an annual requirement for repayment of all
borrowings outstanding for 30 consecutive days; therefore, the balance is
classified as due within one year. At December 31, 1993, $116.7 million in
letters of credit was outstanding. A fee of 2% per year on the outstanding
amount of letters of credit is required to be paid. A 1/2% per year
commitment fee on unadvanced funds, which for purposes of this calculation
include outstanding letters of credit, is payable quarterly.
Interest on the Bank Debt is generally payable quarterly and is based on a
variable rate equal to the administrative agent bank's base rate plus 1.5%
per year or, at the Company's option, at a rate equal to a reserve-adjusted
Eurodollar rate plus 2.5% per year. The weighted-average rate of Bank Debt
outstanding at December 31, 1993, was 5.9%.
COMMERCIAL PAPER - In September 1992, the Company obtained a facility that
provides for the issuance of up to $400 million in commercial paper. At
December 31, 1993, $350 million of the $391.2 million outstanding
principal, net of discount, was classified as long-term debt since the
Company intends to maintain at least this amount outstanding during the
next year. Such debt is unsecured and is fully and unconditionally
guaranteed by IY. In addition, as a condition of the Refinancing, IY has
agreed to continue its guarantee of all commercial paper issued through
1996. While it is not anticipated that IY would be required to perform
under its commercial paper guarantee, in the event IY makes any payments
under the guarantee, the Credit Agreement restricts the Company from
reimbursing IY for the first $375 million of any such payments of principal
made pursuant to the commercial paper guarantee. The Company is, however,
allowed to reimburse IY for the remaining $25 million. The Company has
entered into an agreement with IY under which it would not be required to
reimburse IY for $375 million of such principal payments until one year
after expiration of the Credit Agreement at which time reimbursement shall
be immediately due. The weighted-average interest rate on commercial paper
borrowings outstanding at December 31, 1993, was 3.3%.
48
RESTRUCTURED NOTES & DEBENTURES - On October 24, 1990, The Southland
Corporation filed a Voluntary Petition for Relief under Chapter 11 of Title
11 of the United States Code in the United States Bankruptcy Court (the
"Court"). None of The Southland Corporation's subsidiaries was part of the
Chapter 11 filing. The Southland Corporation also filed the Debtor's Plan
of Reorganization (the "Plan"). The significant features of the Plan,
which occurred concurrently, consisted of a cash infusion of $430,000,000
from the sale of 286,634,619 shares of newly issued common stock,
representing approximately 70% of the Company's outstanding shares, to IYG
Holding Company, renegotiations of the Credit Agreement, an agreement to
refinance the Cityplace notes in 1995, the cancellation of certain classes
of old debt (the "Old Debt Securities") and redeemable preferred stock
(collectively, the "Old Securities") and the issuance of five series of
notes and debentures (the "Restructured Debt Securities"), common stock
warrants ("Thompson Warrants") and/or payment of cash (collectively, the
"Restructuring"). The Thompson Warrants are exercisable from June 5, 1991,
through February 23, 1996, for $1.75 per share against approximately one-
half of the Thompsons' original 5% ownership granted under the Plan. The
Plan was confirmed by the Court, and the Restructuring was consummated on
March 5, 1991.
The Restructured Debt Securities were recorded in accordance with SFAS No.
15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring,"
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 Restructured Debt Securities is payable in cash
semiannually on June 15 and December 15 of each year.
The 12% Senior Notes, due December 15, 1996, were recorded in March 1991,
at $446,070,000 with an aggregate principal amount of $250,601,000. On
August 30, 1993, as part of the Refinancing, the 12% Senior Notes were
redeemed, resulting in an extraordinary gain of $98,968,000, which had no
tax effect.
The 5% First Priority Senior Subordinated Debentures, due December 15,
2003, were recorded in March 1991 at $717,151,000, with an aggregate
principal amount of $450,755,000. They are redeemable at any time at the
Company's option at 100% of principal amount. Annual sinking fund payments
of $27,045,000 are due each December 15, commencing 1996 through 2002.
These payments retire 42% of the debt before maturity.
49
The Second Priority Senior Subordinated Debentures were issued in three
series in March 1991. Each series is redeemable at any time at the
Company's option at 100% of principal amount and are described as follows:
- 4 1/2% Series A Debentures, due June 15, 2004, were recorded at
$336,474,000, with an aggregate principal amount of $206,426,000.
- 4% Series B Debentures, due June 15, 2004, were recorded at $29,389,000,
with an aggregate principal amount of $18,839,000.
- 12% Series C Debentures, due June 15, 2009, were recorded at $70,808,000,
with an aggregate principal amount of $21,787,000.
The Restructured Debt Securities 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 Restructured Debt Securities at the
option of the holder upon a change of control, (c) limit additional
indebtedness, (d) limit future exchange offers, (e) limit the repayment of
subordinated indebtedness, (f) require board approval of certain asset
sales, (g) limit transactions with certain stockholders and affiliates, and
(h) limit consolidations, mergers and the conveyance of all or
substantially all of the Company's assets.
The First and Second Priority Senior Subordinated Debentures are
subordinate to the outstanding Bank Debt and to previously outstanding
mortgages and notes that are either backed by specific collateral or are
general unsecured, unsubordinated obligations. The Second Priority
Debentures are subordinate to the First Priority Debentures.
The cancellation of the Old Debt Securities and the issuance of the
Restructured Debt Securities and common stock to the holders of such Old
Debt Securities resulted in an extraordinary gain in 1991 of $156,824,000,
which had no tax effect. A portion of the gain is attributable to interest
accrued on the Old Debt Securities that was not paid and was partially
offset by the write-off of deferred costs associated with the Old Debt
Securities, the costs incurred to issue the Restructured Debt Securities,
and a cash payment made to the holders of one of the classes of Old Debt
Securities.
For each share of redeemable preferred stock cancelled, the holders of such
stock received one share of common stock, which resulted in a decrease in
the accumulated deficit in 1991 of $127,788,000.
The balance sheet effects of noncash restructuring transactions, which are
not reflected in the Consolidated Statement of Cash Flows for the year
ended December 31, 1991, are as follows (dollars in thousands):
Decrease in other current assets .......................$ 19,186
--------
--------
Decrease in other assets................................$ 50,289
--------
--------
Decrease in other liabilities and accrued expenses......$118,815
--------
--------
Net decrease in long-term debt..........................$280,951
--------
--------
Decrease in redeemable preferred stock..................$148,496
--------
--------
Increase in common stock and additional capital.........$153,752
--------
--------
Decrease in accumulated deficit.........................$325,035
--------
--------
50
YEN LOAN - In March 1988, the Company monetized its future royalty payments
from the area licensee in Japan, Seven-Eleven Japan Co., Ltd., through a
loan that is nonrecourse to the Company as to principal and interest. The
debt, payable in Japanese yen, was in the amount of 41 billion yen, or
approximately $327,000,000 (at the exchange rate in March 1988), and is
collateralized by the Japan trademarks and a pledge of the future royalty
payments. The current interest rate of 6-1/4% will be reset after March
1998. 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. 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.
CITYPLACE NOTES - Cityplace Center East Corporation ("CCEC"), a subsidiary
of the Company, issued $290,000,000 of notes in March 1987 to finance the
construction of the headquarters tower, a parking garage and related
facilities of the Cityplace Center development. These notes bear interest
at 7-7/8%, payable semiannually on February 15 and August 15, with the
principal amount due February 15, 1995. Because of the application of
purchase accounting in 1987, the effective interest rate on the notes for
financial statement purposes is 9.0%. Principal and interest on the notes
are payable by drawings under irrevocable letters of credit issued by The
Sanwa Bank, Limited, Dallas Agency ("Sanwa"), which, along with the
noteholders, has been granted a lien on the property financed. The Company
is occupying part of the building as its corporate headquarters and a
significant portion of the balance is subleased. In December 1990, the
Company and CCEC entered into an amendment to the agreement with Sanwa,
which became effective upon consummation of the Restructuring. It provides
that, upon maturity of the notes in February 1995, the noteholders will
draw on the letter of credit in payment of their principal. At such time,
the Company has the option of either repaying the principal to Sanwa or
extending the term of maturity ten years to March 1, 2005, with monthly
payments of principal and interest based upon a 25-year amortization at 7-
1/2%, with the remaining principal due upon maturity. As additional
consideration through the extended term of the notes, CCEC will pay to the
lender any net sublease income it receives on the property and 60% of the
proceeds, less $275 million and permitted costs, upon a sale or refinancing
of the building.
SOUTHLAND CANADA DEBT - In July 1985, Southland Canada, Inc., an indirect
wholly owned subsidiary of the Company, issued 12% Canadian notes with a
face amount of Canadian $50,000,000. In July 1992, these notes matured and
all principal and interest outstanding was repaid.
During 1988, Southland Canada, Inc. entered into a revolving credit
facility with a Canadian chartered bank. The facility currently provides
bank financing of up to Canadian $17,858,000 (approximately U.S.
$13,490,000 at December 31, 1993), which will be reduced to Canadian
$14,287,000 on June 30, 1994, and will be further reduced each year
thereafter until June 30, 1998, when the facility will expire, and all
amounts outstanding will be due and payable in full. At December 31, 1993,
the Company had borrowings outstanding under this facility of Canadian
$9,926,000 (approximately U.S. $7,499,000). Interest on such facility is
generally payable monthly and is based upon the Canadian Prime rate (5.5%
at December 31, 1993) plus .5% per year.
51
MATURITIES - Long-term debt maturities assume the extension of the
Cityplace Notes and 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 Restructured Debt Securities, are as follows (dollars in
thousands):
1994 $ 149,503
1995 186,830
1996 256,232
1997 110,665
1998 112,983
Thereafter 1,603,647
----------
$2,419,860
----------
----------
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. REDEEMABLE COMMON STOCK PURCHASE WARRANTS
In 1987, the Company issued 26,135,682 redeemable common stock purchase
warrants (the "Warrants"). The Warrants were recorded at $1.00 per
Warrant, which was the amount of proceeds allocated to the Warrants at the
time of issuance. The Warrants were governed by a Warrant Agreement and
were exercisable through December 15, 1992, only upon the occurrence of
certain specified events. None of the specified events occurred on or
before December 15, 1992, and all of the warrants expired on December 16,
1992. Under the provisions of the Warrant Agreement, the Company was
obligated to repurchase the Warrants by March 15, 1995, at the fair market
value of the Warrants as separate securities, as determined by an
independent financial expert. A fair market value of $0 for the Warrants
was determined by an independent financial expert in December 1992. The
$26,135,682 difference between the carrying amount of the Warrants and
their fair value was recorded as an increase in additional capital in 1992.
52
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair-value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies.
The carrying amounts of Cash and Cash Equivalents, Trade Accounts
Receivable, Trade Accounts Payable and Other Liabilities and Accrued
Expenses are reasonable estimates of their fair values. Letters of credit
are included in the estimated fair value of Other Liabilities and Accrued
Expenses. The carrying amounts and estimated fair values of other
financial instruments at December 31, 1993, are listed in the following
table:
Estimated
Carrying Fair
Amount Value
---------- ----------
(Dollars in Thousands)
Bank Debt $ 344,017 $ 344,017
Commercial Paper 391,220 391,220
Restructured Notes and Debentures 1,030,913 508,956
Cityplace Notes 287,363 301,238
Yen Loan 273,793 330,230
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 21 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 values of the Restructured Notes and Debentures and the Cityplace
Notes are estimated based upon December 31, 1993, bid prices obtained from
investment banking firms where traders regularly make a market for these
financial instruments. The carrying amount of the Restructured Debt
includes $333,372,000 of SFAS No. 15 Interest (see Note 9).
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.
53
13. EMPLOYEE BENEFIT PLANS
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN - Effective January 1, 1949,
the Company adopted The Southland Corporation Employees' Savings and Profit
Sharing Plan (the "Savings and Profit Sharing Plan") for the purpose of
providing retirement benefits for eligible employees.
Contributions to the Savings and Profit Sharing Plan are made by both the
participants and the Company. The Company contributes the greater of
approximately 10% of its net earnings before contribution to the Savings
and Profit Sharing Plan and federal income taxes or an amount determined by
the Company's president. The Company contribution is generally allocated
to the participants on the basis of their individual contribution, years of
participation in the Savings and Profit Sharing Plan and age. The Company
contributions for the years ended December 31, 1993, 1992 and 1991 were
$11,956,000, $14,647,000 (including amounts allocated to the distribution
and food centers in 1993 and 1992) and $14,411,000, respectively.
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 recognized in earnings for 1993,
1992 and 1991 include the following components:
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
Service cost $ 824 $ 862 $1,298
Interest cost 2,048 1,998 2,679
Amortization of unrecognized gain - (564) -
------ ------ -------
$2,872 $2,296 $3,977
------ ------ -------
------ ------ -------
The accrual for postretirement medical and dental benefits was reduced by
approximately $3,883,000 during the fourth quarter of 1992, due to the
termination of employees not eligible to retire. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7% and 8% at December 31, 1993 and 1992, respectively.
Components of the accrual recorded in the Company`s consolidated balance
sheets are as follows:
December 31
----------------------
1993 1992
---- ----
(Dollars in Thousands)
Accumulated Postretirement
Benefit Obligation:
Retirees $13,380 $12,757
Active employees eligible to retire 5,117 5,636
Other active employees 6,466 7,377
------- -------
24,963 25,770
Unrecognized gains 3,103 1,693
------- -------
$28,066 $27,463
------- -------
------- -------
54
POSTEMPLOYMENT BENEFITS - In the fourth quarter of 1993, the Company
adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
In accordance with the provisions of SFAS No. 112, the Company has
calculated accumulated postemployment benefit obligations of $16,537,000
as of January 1, 1993. The obligation primarily represents future medical
costs relating to short-term and long-term disability. The accumulated
postemployment benefit obligation of $16,537,000, which has no tax effect,
has been recorded as a cumulative effect of an accounting change in the
consolidated statement of operations for the year ended December 31, 1993.
EQUITY PARTICIPATION PLAN - During 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. The options were granted at the fair market value
on the date of grant, which is the same as the conversion price provided in
the debentures.
All options expire, and the debentures mature, no later than December 31,
1997. Options are not exercisable, and the debentures are not convertible,
until the earlier of December 31, 1994, or until the occurrence of certain
specified events set forth in the Participation Plan. The Participation
Plan was amended to exclude the Restructuring from qualifying as such an
event. 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. At December 31,
1993, there were options outstanding to acquire 1,797,739 shares, of which
1,700,346 were at $7.50 per share and 97,393 were at $7.70 per share, and
debentures outstanding that were convertible into 18,969 shares, none of
which are currently exercisable or convertible.
GRANT STOCK PLAN - During 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. The stock was
fully vested upon the date of issuance. As of December 31, 1993, 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. The shares available for issuance under the
Participation Plan are reduced by the number of shares issued under the
Stock Plan.
14. LEASES, COMMITMENTS AND CONTINGENCIES
LEASES - Certain of the property, plant and equipment used in the Company's
business is leased. Generally, real estate leases are for primary terms
from 14 to 20 years with options to renew for additional periods, and
equipment leases are for terms from one to ten years. The leases do not
contain restrictions that have a material effect on the Company's
operations.
The composition of capital leases reflected as property, plant and
equipment in the consolidated balance sheets is as follows:
December 31
------------------------
1993 1992
---- ----
(Dollars in Thousands)
Buildings $ 125,294 $ 141,452
Equipment 226 482
--------- ---------
125,520 141,934
Accumulated amortization (62,488) (63,880)
--------- ---------
$ 63,032 $ 78,054
--------- ---------
--------- ---------
55
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)
1994 $ 25,728 $ 114,739
1995 24,526 106,197
1996 23,126 97,279
1997 21,403 85,707
1998 19,634 69,867
Thereafter 95,900 280,333
--------- ---------
Future minimum lease payments 210,317 $ 754,122
---------
---------
Estimated executory costs (683)
Amount representing imputed interest (89,236)
---------
Present value of future minimum
lease payments $ 120,398
---------
---------
Minimum noncancelable sublease rentals to be received in the future, which
are not included above as offsets to future payments, total $26,769,000
for capital leases and $27,190,000 for operating leases.
Rent expense on operating leases for the years ended December 31, 1993,
1992 and 1991, totaled $124,402,000, $135,657,000 and $140,294,000,
respectively, including contingent rentals of $8,214,000, $9,037,000 and
$9,738,000, but reduced by sublease rentals of $8,545,000, $8,252,000 and
$8,270,000. Contingent rent expense on capital leases for the years ended
December 31, 1993, 1992 and 1991, was $3,084,000, $3,964,000 and
$5,067,000, respectively. Contingent rentals are generally based upon
sales levels or changes in the Consumer Price Index.
56
LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31, 1993, the
Savings and Profit Sharing Plan owned 302 stores leased to the Company
under capital leases and 651 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, 62, 31 and 15 properties were
sold by the Savings and Profit Sharing Plan to third parties in 1993, 1992
and 1991, respectively, and at the same time, the related leases with the
Company were cancelled. Included in the consolidated financial statements
are the following amounts related to leases with the Savings and Profit
Sharing Plan:
December 31
---------------------
1993 1992
---- ----
(Dollars in Thousands)
Buildings (net of accumulated amortization
of $9,973 and $9,648) $ 4,884 $ 6,550
--------- --------
--------- --------
Capital lease obligations (net of current
portion of $2,307 and $2,302) $ 6,583 $ 9,184
--------- --------
--------- --------
Years Ended December 31
---------------------------
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
Rent expense under operating leases and
amortization of capital lease assets $30,028 $31,291 $31,731
------- ------- -------
------- ------- -------
Imputed interest expense on capital
lease obligations $ 948 $ 1,213 $ 1,440
------- ------- -------
------- ------- -------
Capital lease principal payments included
in principal payments under long-term
debt agreements $ 2,200 $ 2,302 $ 2,457
------- ------- -------
------- ------- -------
COMMITMENTS
MCLANE - In connection with the 1992 sale of 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
income over the life of the agreement. The Company has fulfilled the
minimum purchase requirement in 1993 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
750,000,000 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.
57
CONTINGENCIES
GASOLINE STORE SITES - The Company accrues future costs, as well as
records the related probable state reimbursement amounts, for remediation
of gasoline store sites where releases of regulated substances have been
detected. At December 31, 1993, the Company's estimated liability for
sites where releases have been detected was $59,153,000, of which
$35,333,000 is included in Deferred Credits and Other Liabilities and the
remainder in Other Liabilities and Accrued Expenses. The Company has
recorded a receivable of $57,532,000 (net of an allowance of $12,529,000)
for the estimated probable state reimbursements, of which $52,238,000 is
included in Other Assets and the remainder in Accounts and Notes
Receivable. The estimated future remediation expenditures and related state
reimbursement amounts could change as governmental requirements and state
reimbursement programs change in future years.
The Company anticipates that substantially all of the future remediation
costs for sites with detected releases of regulated substances at December
31, 1993, will be incurred within the next five years. There is no
assurance of the timing of the receipt of state reimbursement funds.
However, based on the Company's experience, the Company expects to receive
state reimbursement funds within one to three years after incurring
eligible remediation expenses, assuming that the state administrative
procedures for processing such reimbursements have been fully developed.
CHEMICAL MANUFACTURING FACILITY - In December 1988, the Company closed
its chemical manufacturing facility in New Jersey. As a result, the
Company is required to conduct environmental remediation at the facility
and has accrued a liability for this purpose. As required, the Company has
submitted a clean-up plan to the New Jersey Department of Environmental
Protection and Energy (the "State"), which provides for remediation of the
site as well as continued groundwater monitoring for a number of years.
While the Company has received initial comments from the State, a final
clean-up plan has not been determined. The Company has adjusted its
accrued liability to its best estimate of the clean-up costs of $38,879,000
at December 31, 1993. Of this amount, $33,795,000 is included in Deferred
Credits and Other Liabilities and the remainder in Other Liabilities and
Accrued Expenses.
The closed chemical manufacturing facility was previously owned by a large
chemical company. In 1991, the Company and the former owner executed a
final settlement agreement pursuant to which the former owner agreed to pay
a substantial portion of the clean-up costs. The Company has recorded a
receivable of $22,800,000 at December 31, 1993, representing the former
owner's portion of the accrued clean-up costs. Of this amount, $19,800,000
is included in Other Assets and the remainder in Accounts and Notes
Receivable.
58
15. INCOME TAXES
As of January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." There was no cumulative effect adjustment upon adoption,
and there was no effect on net earnings for the year ended December 31,
1993. As permitted, the Company has not restated the financial statements
of prior years. Prior to January 1, 1993, income taxes were recorded using
the deferred method specified by Accounting Principles Board Opinion
No. 11, "Accounting for Income Taxes."
SFAS No. 109 requires the use of the liability method, in which deferred
tax assets and liabilities are recognized for differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets include tax carryforwards and are reduced
by a valuation allowance if, based on available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
The components of Earnings (Loss) Before Income Taxes, Extraordinary Items
and Cumulative Effect of Accounting Change are as follows:
Years Ended December 31
------------------------------------
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
Domestic $ 3,795 $(113,940) $ (58,039)
Foreign (6,375) (6,009) (8,309)
-------- --------- ----------
$ (2,580) $(119,949) $ (66,348)
-------- --------- ----------
-------- --------- ----------
The provision for income taxes in the accompanying Consolidated Statements
of Operations consists of the following:
Years Ended December 31
-------------------------------
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
Current:
Federal $ 2,759 $ 4,560 $ -
Foreign 5,941 5,411 7,936
State - 1,529 64
-------- -------- ---------
$ 8,700 $ 11,500 $ 8,000
-------- -------- ---------
-------- -------- ---------
59
Reconciliations of income taxes at the federal statutory rate to the
Company's actual income taxes provided are as follows:
Years Ended December 31
-------------------------------
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
Taxes (benefit) at federal statutory
rate $ (903) $(40,783) $ 30,762
State income taxes, net of federal
income tax benefit - 1,009 42
Foreign taxes 5,941 5,411 7,936
Loss providing no current
benefit - 5,061 200,991
Amortization of cost in excess
of tax basis - 23,286 19,383
Portion of gain on debt restructuring
not recognized for tax - - (261,568)
Difference in LIFO as a result of
purchase accounting - 8,671 5,248
Equity in affiliates 1,907 3,148 3,966
Other 1,755 5,697 1,240
------- -------- ---------
$ 8,700 $ 11,500 $ 8,000
------- -------- ---------
------- -------- ---------
At December 31, 1993, the Company had approximately $16,000,000 of general
business credit carryforwards, $6,000,000 of foreign tax credit
carryforwards, $18,000,000 of alternative minimum tax ("AMT") credit
carryforwards, an AMT net operating loss ("NOL") carryforward of
$15,000,000 and a regular tax NOL carryforward of $9,000,000. The AMT
credits have no expiration date, and the NOLs do not expire for 15 years.
The general business credits expire during the period from 2001 to 2008,
and the foreign tax credits expire in 1998.
At January 1, 1993 and December 31, 1993, the Company had net deferred tax
assets, which were fully offset by a valuation allowance. The valuation
allowance decreased by $21,817,000 in 1993 because the Company's net
deferred tax asset decreased by a similar amount. The change in enacted
tax rates during 1993 increased the Company's net deferred tax asset but
had no effect on income tax expense because the assets are fully reserved
through the valuation allowance.
60
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1993, are as follows (dollars in thousands):
Deferred tax assets:
SFAS No. 15 interest $ 139,831
Accrued liabilities 63,779
Accrued insurance 58,312
Tax credit carryforwards 43,562
Compensation and benefits 31,184
Debt issuance costs 21,658
Other 4,055
---------
Subtotal 362,381
Deferred tax liabilities:
Area license agreements (99,932)
Property, plant and equipment (40,206)
Other ( 5,576)
---------
Subtotal (145,714)
Valuation allowance (216,667)
---------
Net deferred taxes $ 0
---------
---------
16. EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share is based on net earnings (loss)
divided by the average number of shares, including the Warrants (unless the
effect of considering the Warrants is antidilutive), outstanding during
each year.
Earnings (loss) per share assuming full dilution is antidilutive and,
therefore, is computed on the same basis as primary earnings (loss) per
common share.
61
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1993 and 1992 is as follows:
Year Ended December 31, 1993:
-----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
(Dollars in Millions, Except Per-Share Data)
Net sales $1,582 $1,773 $1,780 $1,609 $6,744
Gross profit 350 418 434 371 1,573
Income taxes 2 2 2 3 9
Earnings (loss) before
extraordinary items and
cumulative effect of
accounting change (16) 19 22 (36) (11)
Net earnings (loss) (33) 19 121 (36) 71
Primary and fully diluted
earnings (loss) per
common share before
extraordinary items and
cumulative effect of
accounting change (.04) .05 .05 (.09) (.03)
The first quarter includes $16,537,000 of expense resulting from the
cumulative effect of an accounting change for postemployment benefits (see
Note 13). The third quarter includes a $98,968,000 extraordinary gain on
redemption of debt related to the Refinancing (see Note 9) and a
$10,300,000 loss on disposition of the Company's aviation facility (which
was subsequently adjusted to a total loss of $10,814,000 in the fourth
quarter). The fourth quarter includes a loss of $42,791,000 related to
store closings and dispositions of properties, a LIFO credit of $9,051,000
primarily due to lower cigarette and gasoline prices, and $5,989,000 of
expense resulting from a cost-cutting program associated with the Company's
internal reorganization.
Year Ended December 31, 1992:
-----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
(Dollars in Millions, Except Per-Share Data)
Net sales $1,763 $1,961 $1,988 $1,714 $7,426
Gross profit 352 422 445 386 1,605
Income taxes (benefit) 1 1 12 (2) 12
Net loss (45) (18) (39) (29) (131)
Primary and fully diluted
loss per common share (.11) (.04) (.10) (.07) (.32)
The second quarter includes $17,500,000 of expense resulting from a
cost-cutting program associated with the Company's internal reorganization.
The third and fourth quarters include losses of $41,000,000 and $4,000,000,
respectively, relating to the sale and closing of the distribution and food
centers (see Note 6). In addition, the fourth quarter includes a loss of
$30,720,000 related to store closings and dispositions of properties.
62
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, 1993 and 1992, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended. 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, 1993 and 1992, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, in 1993 the Company changed
its method of accounting for postemployment benefits to conform with Statement
of Financial Accounting Standards No. 112.
Coopers & Lybrand
Dallas, Texas
February 22, 1994
63
INDEPENDENT AUDITORS' REPORT FROM DELOITTE & TOUCHE
To the Board of Directors and Shareholders of
The Southland Corporation
Dallas, Texas
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit) and cash flows of The Southland Corporation and
subsidiaries (the "Company") for the year ended December 31, 1991. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations, the changes in shareholders'
equity and the cash flows of the Company for the year ended December 31, 1991,
in conformity with generally accepted accounting principles.
Deloitte & Touche
Dallas, Texas
March 27, 1992
64
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required in response to this Item has been previously
reported in the Registrant's Current Report on Form 8-K dated September 24, 1991
and is also being provided in the Registrant's Definitive Proxy Statement for
the April 27, 1994 Annual Meeting of Shareholders.
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 27,
1994 Annual Meeting of Shareholders.
See also "Executive Officers of the Registrant" beginning on page 18,
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 27,
1994 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 27,
1994 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 27, 1994
Annual Meeting of Shareholders.
65
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
year ended December 31, 1993 are included herein:
Page
----
Consolidated Balance Sheets -
December 31, 1993 and December 31, 1992......................... 39
Consolidated Statements of Operations -
Years Ended December 31, 1993, 1992 and 1991.................... 40
Consolidated Statements of Shareholders' Equity (Deficit) -
Years Ended December 31, 1993, 1992 and 1991.................... 41
Consolidated Statements of Cash Flows -
Years Ended December 31, 1993, 1992 and 1991.................... 42
Notes to Consolidated Financial Statements........................ 43
Independent Auditors' Report of Coopers & Lybrand on The Southland
Corporation and Subsidiaries' Financial Statements
for 1993 and 1992............................................... 63
Independent Auditors' Report of Deloitte & Touche on
The Southland Corporation and Subsidiaries' Financial
Statements for 1991............................................. 64
2. The Southland Corporation and Subsidiaries' Financial Statement Schedules,
included herein.
Page
----
Independent Auditors' Reports on Financial Statement Schedules:
Report of Coopers & Lybrand on Financial Statement Schedules.... 74
Report of Deloitte & Touche on Financial Statement Schedules.... 75
II -Amounts Receivable from Related Parties and Underwriters,
Promoters, and Employees Other than Related Parties......... 76
V -Property, plant and equipment .............................. 77
VI -Accumulated depreciation and amortization of property,
plant and equipment ........................................ 78
IX -Short-term borrowings ...................................... 79
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.
66
3. The following is a list of the Exhibits required to be filed by
Item 601 of Regulation S-K.
Exhibit No.
-----------
2. Plan of Acquisition, Reorganization,
Arrangement, Liquidation or Succession.
2.(1) Debtor's Plan of Reorganization, dated
October 24, 1990, as filed in the
United States Bankruptcy Court,
Northern District of Texas, Dallas
Division, and Addendum to Debtor's Plan
of Reorganization dated January 23,
1991, incorporated by reference to
The Southland Corporation's Current
Report on Form 8-K dated January 23,
1991, File Numbers 0-676 and 0-16626,
Exhibits 2.1 and 2.2.
2.(2) Stock Purchase Agreement, dated as of
January 25, 1991, by and among
The Southland Corporation, Ito-Yokado
Co., Ltd. and Seven-Eleven Japan Co.,
Ltd., incorporated by reference to
The Southland Corporation's Current
Report on Form 8-K dated January 23,
1991, File Numbers 0-676 and 0-16626,
Exhibit 2.3.
2.(3) Confirmation Order issued on February
21, 1991 by the United States Bankruptcy
Court for the Northern District of
Texas, Dallas Division, incorporated by
reference to The Southland Corporation's
Current Report on Form 8-K dated
March 4, 1991, File Numbers 0-676 and
0-16626, Exhibit 2.1.
3. Articles of Incorporation and Bylaws.
3.(1) Second Restated Articles of
Incorporation of The Southland
Corporation, as amended through March 5,
1991, incorporated by reference to The
Southland Corporation's Annual Report on
Form 10-K for the year ended December
31, 1990, Exhibit 3.(1).
3.(2) Bylaws of The Southland Corporation,
restated as amended through March 5,
1991, incorporated by reference to
The Southland Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 3.(2).
67
4. Instruments defining the rights of
security holders, including indentures
(see Exhibits (3).(1) and (3).(2),
above).
4.(i)(1) Specimen Certificate for Common Stock,
$.0001 par value, incorporated by
reference to The Southland Corporation's
Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit
4.(i)(2).
4.(i)(2) Form of Voting Agreement and Stock
Transfer Restriction and Buy-Back
Agreement relating to shares of common
stock, $.01 par value, issued pursuant
to Grant Stock Plan, incorporated by
reference to Registration Statement on
Form S-8, Reg. No. 33-25327, Exhibits
4.5 and 4.4.
4.(i)(3) Shareholders Agreement dated as of
November 1, 1988, by and among
The Southland Corporation, Thompson
Brothers, L.P., Thompson Capital
Partners, L.P., The Hayden Company,
The Williamsburg Corporation, Four J
Investment, L.P., each Limited Partner
of Thompson Capital Partners, L.P. as of
the date thereof, and The Philp Co.,
incorporated by reference to File No.
0-676, Annual Report on Form 10-K for
year ended December 31, 1988, Exhibit
4(i)(7), Tab 2.
4.(i)(4) Shareholders Agreement dated as of
March 5, 1991, among The Southland
Corporation, Ito-Yokado Co., Ltd.,
IYG Holding Company, Thompson Brothers,
L.P., Thompson Capital Partners, L.P.,
The Hayden Company, The Williamsburg
Corporation, Four J Investment, L.P.,
The Philp Co., participants in the
Company's Grant Stock Plan who are
signatories thereto and certain limited
partners of Thompson Capital Partners,
L.P. who are signatories thereto,
incorporated by reference to Schedule
13D filed by Ito-Yokado Co., Ltd.,
Seven-Eleven Japan Co., Ltd. and
IYG Holding Company, Exhibit A.
68
4.(i)(5) First Amendment to Shareholders
Agreement, dated December 30, 1992,
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)(6) Warrant Agreement dated as of March 5,
1991, among certain Holders of Common
Shares of The Southland Corporation
named therein, Wilmington Trust Company,
as Warrant Agent, The Southland
Corporation and Ito-Yokado Co., Ltd.,
incorporated by reference to Schedule
13D filed by Ito-Yokado Co., Ltd.,
Seven-Eleven Japan Co., Ltd. and
IYG Holding Company, Exhibit B.
4.(i)(7) Specimen Warrant Certificate to Purchase
Common Shares of The Southland
Corporation pursuant to Warrant
Agreement dated as of March 5, 1991,
with Wilmington Trust Company as Warrant
Agent, incorporated by reference to
The Southland Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 4.(i)(7).
4.(ii)(1) Indenture, including Debenture, with
Ameritrust Company National Association,
as trustee, providing for 5% First
Priority Senior Subordinated Debentures
due December 15, 2003, incorporated by
reference to The Southland Corporation's
Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit
4.(ii)(2).
4.(ii)(2) Indenture, including Debentures, with
The Riggs National Bank of Washington,
D.C., as trustee providing for 4 1/2%
Second Priority Senior Subordinated
Debentures (Series A) due June 15, 2004,
4% Second Priority Senior Subordinated
Debentures (Series B) due June 15, 2004,
and 12% Second Priority Senior
Subordinated Debentures (Series C) due
June 15, 2009, incorporated by reference
to The Southland Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 4.(ii)(3).
69
4.(ii)(3) Indenture among Cityplace Center East
Corporation, Security Pacific National
Bank, as trustee, and The Sanwa Bank
Limited, Dallas Agency, dated as of
February 15, 1987, providing for
7 7/8% Notes due February 15, 1995,
incorporated by reference to File No.
0-676, Annual Report on Form 10-K for
the year ended December 31, 1986,
Exhibit 4(ii)(8).
4.(ii)(4) Specimen 7 7/8% Note due February 15,
1995, issued by Cityplace Center East
Corporation, incorporated by reference
to File No. 0-676, Annual Report on Form
10-K for the year ended December 31,
1986, Exhibit 4(ii)(9).
9. Voting Trust Agreement. None.
(Except see Exhibits 4.(i)(2), 4.(i)(4)
and 4.(i)(5), above.)
10. Material Contracts.
10.(i)(1) Stock Purchase Agreement among
The Southland Corporation, Ito-Yokado
Co., Ltd. and Seven-Eleven Japan Co.,
Ltd., dated as of January 25, 1991,
See Exhibit 2.(2), above.
10.(i)(2) Credit Agreement among the Company,
JT Acquisition Corporation and the Banks
dated as of July 31, 1987, Amended and
Restated as of November 5, 1987, and
further Amended and Restated as of
February 17, 1993, incorporated by
reference to File Nos. 0-676 and
0-16626, Annual Report on Form 10-K for
the year ended December 31, 1992,
Exhibit 10(i)(2).
10.(i)(3) First Amendment, dated as of July 30,
1993, to Second Amended and Restated
Credit Agreement, incorporated by
reference to File Nos. 0-676 and
0-16626, Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993,
Exhibit (19), Tab 3.
70
10.(i)(4) Credit and Reimbursement Agreement by
and between Cityplace Center East
Corporation, an indirect wholly owned
subsidiary of Southland, and The Sanwa
Bank Limited, Dallas Agency, dated
February 15, 1987, relating to $290
million of 7 7/8% Notes due February 15,
1995, issued by Cityplace Center East
Corporation (to which Southland is not a
party and which is non-recourse to
Southland), incorporated by reference to
File No. 0-676, Annual Report on Form
10-K for the year ended December 31,
1986, Exhibit 10(i)(6).
10.(i)(5) First Amendment to Credit and
Reimbursement Agreement, dated as of
December 21, 1990, by and between
The Sanwa Bank, Limited, Dallas Agency
and Cityplace Center East Corporation,
incorporated by reference to
The Southland Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 10.(i)(5).
10.(i)(6) Amended and Restated Lease Agreement
between Cityplace Center East
Corporation and The Southland
Corporation relating to The Southland
Tower, Cityplace Center, Dallas, Texas,
incorporated by reference to
The Southland Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1990, Exhibit 10.(i)(7).
10.(i)(7) Limited Recourse Financing for
The Southland Corporation relating to
royalties from Seven-Eleven (Japan)
Company, Ltd. in the amount of Japanese
Yen 41,000,000,000, dated March 21,
1988, incorporated by reference to
File No. 0-676, Annual Report on
Form 10-K for year ended December 31,
1988, Exhibit 10.(i)(6).
10.(ii)(B)(1) Standard Form of 7-Eleven Store
Franchise Agreement, incorporated by
reference to File No. 0-676 and 0-16626,
Annual Report on Form 10-K for year
ended December 31, 1992,
Exhibit 10.(ii)(B)(1).
71
10.(iii)(A)(1) John P. Thompson Employment Agreement
dated as of March 5, 1991, incorporated
by reference to The Southland
Corporation's Annual Report on Form 10-K
for the year ended December 31, 1990,
Exhibit 10.(iii)(A)(1).
10.(iii)(A)(2) Jere W. Thompson Employment Agreement
dated as of March 5, 1991, incorporated
by reference to the Southland
Corporation's Annual Report on Form 10-k
for the year ended December 31, 1890,
Exhibit 10.(iii)(A)(2).
10.(iii)(A)(3) The Southland Corporation Executive
Protection Plan Summary.* Tab 1
10.(iii)(A)(4) The Southland Corporation Officers' 1993
Deferred Compensation Plan, sample
agreement.* Tab 2
10.(iii)(A)(5) Executive Interest Differential
Reimbursement Program, incorporated by
reference to File No. 0-676,
Annual Report on Form 10-K for the
year ended December 31, 1982,
Exhibit 10(iii)(A)(9), Tab 4.
10.(iii)(A)(6) Bonus Deferral Agreement relating to
deferral of Bonus Payment, incorporated
by reference to File No. 0-676,
Annual Report on Form 10-K for the
year ended December 31, 1988,
Exhibit 10(iii)(A)(9), Tab 7.
10.(iii)(A)(7) Form of documents relating to Collateral
Assignment of Insurance Program,
incorporated by reference to File Nos.
0-676 and 0-16626, Annual Report on Form
10-K for the year ended December 31,
1989, Exhibit 10.(iii)(A)(10), Tab 4.
10.(iii)(A)(8) 1993 Performance Plan, as amended Tab 3
January 1994.*
10.(iii)(A)(9) Consultant's Agreement between
The Southland Corporation and Timothy N.
Ashida, incorporated by reference to
File No. 0-676, Annual Report on Form
10-K for the year ended December 31,
1991, Exhibit 10(iii)(A)(10), Tab 4.
11. Statement re computation of per-share Tab 4
earnings.
Calculation of earnings per share.*
72
21. Subsidiaries of the Registrant as of Tab 5
March 1994.*
23. Consents of Experts and Counsel.
23.(i)(1) Consent of Coopers & Lybrand, Tab 6
Independent Auditors.*
23.(i)(2) Consent of Deloitte & Touche, Tab 7
Independent Auditors.*
- ----------------
* Filed or furnished herewith
(b) Reports on Form 8-K.
During the fourth quarter of 1993, 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 schedules for The Southland Corporation and
Subsidiaries are included herein.
73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Southland Corporation
Our report on the consolidated financial statements of The Southland Corporation
and Subsidiaries, which includes an explanatory paragraph describing the change
in method of accounting for postemployment benefits in 1993, is included on
page 63 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedules
listed in the index on page 66 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand
Dallas, Texas
February 22, 1994
74
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULES (Deloitte & Touche)
To the Board of Directors and Shareholders of
The Southland Corporation
Dallas, Texas
We have audited the consolidated statements of operations, shareholders' equity
(deficit) and cash flows of The Southland Corporation and subsidiaries for the
year ended December 31, 1991, and have issued our report thereon dated March 27,
1992. The consolidated financial statements and our report thereon are
included in Item 8 of this Form 10-K. Our audit also included the
consolidated financial statement schedules of The Southland
Corporation and subsidiaries for the year ended December 31, 1991, listed in
Item 14. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Deloitte & Touche
Dallas, Texas
March 27, 1992
75
SCHEDULE II
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
ACTIVITY FOR YEAR ENDED DECEMBER 31, 1991
---------------------------------------------------------------------
DEDUCTIONS BALANCE AT END OF PERIOD
BALANCE AT ----------------------- ------------------------
DECEMBER 31, AMOUNTS AMOUNTS NOT
NAME OF DEBTOR 1990 ADDITIONS COLLECTED WRITTEN OFF CURRENT CURRENT
-------------- ---- --------- --------- ----------- ------- -------
Clark J. Matthews, II 52,973 52,973 105,946
John P. Thompson 165,340 165,340 330,680
Jere W. Thompson 116,658 116,658 233,316
Joe C. Thompson, Jr. 42,861 42,861 85,722
---------- ---------- ---------- ---------- ---------- ----------
$ 377,832 377,832 -- -- -- $ 755,664
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
ACTIVITY FOR YEAR ENDED DECEMBER 31, 1992
---------------------------------------------------------------------
DEDUCTIONS BALANCE AT END OF PERIOD
BALANCE AT ----------------------- ------------------------
DECEMBER 31, AMOUNTS AMOUNTS NOT
NAME OF DEBTOR 1991 ADDITIONS COLLECTED WRITTEN OFF CURRENT CURRENT
-------------- ---- --------- --------- ----------- ------- -------
Clark J. Matthews, II 105,946 52,973 158,919
John P. Thompson 330,680 165,340 496,020
Jere W. Thompson 233,316 116,658 349,974
Joe C. Thompson, Jr. 85,722 42,861 128,583
---------- ---------- ---------- ---------- ---------- ----------
$ 755,664 $ 377,832 -- -- -- $1,133,496
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
ACTIVITY FOR YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------------------------
DEDUCTIONS BALANCE AT END OF PERIOD
BALANCE AT ----------------------- ------------------------
DECEMBER 31, AMOUNTS AMOUNTS NOT
NAME OF DEBTOR 1992 ADDITIONS COLLECTED WRITTEN OFF CURRENT CURRENT
-------------- ---- --------- --------- ----------- ------- -------
Clark J. Matthews, II 158,919 158,919
John P. Thompson 496,020 496,020
Jere W. Thompson 349,974 349,974
Joe C. Thompson, Jr. 128,583 128,583
---------- ---------- ---------- ---------- ---------- ----------
$1,133,496 -- -- -- -- $1,133,496
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
The notes are collateralized with life insurance policies. The principal
associated with each note is due upon the earliest to occur of: i)
completion of a stated number of policy years or ii) the accumulation of a
predetermined policy value. No interest accrues on the notes unless there
is an occurrence of a default.
76
SCHEDULE V
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(DOLLARS IN THOUSANDS)
BUILDINGS MACHINERY
AND AND CONSTRUCTION
LAND LEASEHOLDS EQUIPMENT IN PROCESS TOTAL
------------ ------------ ------------ ------------ ------------
Balance January 1, 1991. . . . . . . . . . . . . . . $ 599,488 $ 1,278,008 $ 600,684 $ 8,828 $ 2,487,008
Additions, at cost. . . . . . . . . . . . . . . . . 2,363 17,622 45,573 4,661 70,219
Retirements or sales. . . . . . . . . . . . . . . . (10,711) (24,199) (32,826) -- (67,736)
Translation adjustment. . . . . . . . . . . . . . . 81 304 251 6 642
----------- ----------- ----------- ----------- -----------
Balance December 31, 1991. . . . . . . . . . . . . . 591,221 1,271,735 613,682 13,495 2,490,133
Additions, at cost. . . . . . . . . . . . . . . . . 1,659 33,309 52,020 1,631 88,619
Retirements or sales. . . . . . . . . . . . . . . . (24,938) (86,573) (111,609) -- (223,120)
Translation adjustment. . . . . . . . . . . . . . . (1,920) (7,411) (6,053) (33) (15,417)
Other transactions(1) . . . . . . . . . . . . . . . (28,616) (24,092) (4,424) (1,389) (58,521)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1992. . . . . . . . . . . . . . 537,406 1,186,968 543,616 13,704 2,281,694
Additions, at cost. . . . . . . . . . . . . . . . . 640 75,058 97,947 21,716 195,361
Retirements or sales. . . . . . . . . . . . . . . . (26,182) (73,120) (60,841) -- (160,143)
Translation adjustment. . . . . . . . . . . . . . . (690) (2,848) (2,433) (99) (6,070)
Other transactions(2) . . . . . . . . . . . . . . . (16,054) (2,154) -- -- (18,208)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1993. . . . . . . . . . . . . . $ 495,120 $ 1,183,904 $ 578,289 $ 35,321 $ 2,292,634
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Depreciation of plant and equipment and amortization of capital leases is
based upon the estimated useful lives of these assets using the straight-line
method. Amortization of improvements to leased properties is based upon the
remaining terms of the leases or the estimated useful lives of such
improvements, whichever is shorter. Annual rates used in computing the
provision for depreciation and amortization were as follows:
Buildings and leaseholds . . . . . . . . . . . . . . .2.5% to 20.0%
Furniture and fixtures . . . . . . . . . . . . . . . .10% to 33.3%
Machinery and equipment. . . . . . . . . . . . . . . .5% to 33.3%
(1) Other transactions consist of reclassifications of previously established
reserves to the applicable property, plant and equipment classifications as
well as writedowns to estimated net realizable value of the remaining
Distribution and Food Centers and store closings.
(2) Other transactions are writedowns associated with store closings and
expected dispositions of properties.
77
SCHEDULE VI
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(DOLLARS IN THOUSANDS)
BUILDINGS MACHINERY
AND AND
LEASEHOLDS EQUIPMENT TOTAL
---------- ---------- ----------
Balance January 1, 1991. . . . . . . . . . . . . . $ 389,559 $ 367,380 $ 756,939
Additions charged to expense. . . . . . . . . . . 110,342 69,513 179,855
Retirements or sales. . . . . . . . . . . . . . . (13,328) (25,838) (39,166)
Translation adjustment. . . . . . . . . . . . . . 93 146 239
---------- ---------- ----------
Balance December 31, 1991. . . . . . . . . . . . . 486,666 411,201 897,867
Additions charged to expense. . . . . . . . . . . 102,319 58,183 160,502
Retirements or sales. . . . . . . . . . . . . . . (40,583) (79,614) (120,197)
Translation adjustment. . . . . . . . . . . . . . (4,081) (4,314) (8,395)
Other transactions (1). . . . . . . . . . . . . . (153) (4,093) (4,246)
---------- ---------- ----------
Balance December 31, 1992. . . . . . . . . . . . . 544,168 381,363 925,531
Additions charged to expense. . . . . . . . . . . 91,312 43,608 134,920
Retirements or sales. . . . . . . . . . . . . . . (48,611) (53,316) (101,927)
Translation adjustment. . . . . . . . . . . . . . (1,723) (1,753) (3,476)
---------- ---------- ----------
Balance December 31, 1993. . . . . . . . . . . . . $ 585,146 $ 369,902 $ 955,048
---------- ---------- ----------
---------- ---------- ----------
(1) Consist of reclassifications of previously established reserves to the
applicable property, plant and equipment classifications.
78
SCHEDULE IX
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
SHORT-TERM BORROWINGS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(DOLLARS IN THOUSANDS)
DURING THE PERIOD
END OF PERIOD -----------------------------------
---------------------------- MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
AVERAGE OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE SHORT-TERM BORROWINGS(1) BALANCE(2) INTEREST RATE(3) (4) (5) RATE(6)
---------------------------------------------- ---------- ---------------- ----------- ----------- ---------
Year ended December 31, 1991:
Commercial paper . . . . . . . . . . . . . . . . -- -- -- -- --
Notes payable to banks . . . . . . . . . . . . . $ 7,833 8.50% $ 119,526 $ 21,651 15.55%
Year ended December 31, 1992:
Commercial paper . . . . . . . . . . . . . . . . $ 71,866 3.77% $ 71,866 $ 56,844 3.39%
Notes payable to banks . . . . . . . . . . . . . 3,534 8.62% 14,724 5,111 8.04%
Year ended December 31, 1993:
Commercial paper . . . . . . . . . . . . . . . . $ 41,220 3.32% $ 78,415 $ 67,153 3.26%
Notes payable to banks . . . . . . . . . . . . . 16,455 5.57% 16,455 4,673 6.14%
(1) Commercial paper began being issued in September 1992, and was outstanding
with remaining maturities of up to three months. Notes payable to banks in
1991 consisted of three revolving credit facilities which included the
Debtor-In-Possession Credit Agreement (which expired upon consummation of
the Restructuring), the revolving credit facility under the Credit
Agreement and the Canadian revolving credit facility. Notes payable to
banks consisted of borrowings under the Canadian revolving credit facility
in 1992, combined with borrowings under the Credit Agreement's revolving
credit facility in 1993. See Note 9 to Consolidated Financial Statements
for details of the commercial paper and the revolving credit facilities.
For years reported, notes payable to banks were outstanding with remaining
maturities of up to three months.
(2) Balance at end of period excludes notes payable amounts classified as long-
term in the amount of $3,854,000 and $6,043,000, respectively, for 1992 and
1993 and commercial paper of $150,000,000 and $350,000,000, respectively,
for 1992 and 1993.
(3) The weighted average interest rate is based on the outstanding borrowings
and their outstanding maturities (excluding amounts classified as long-term
debt) at the end of the period.
(4) Maximum amount outstanding excludes notes payable amounts classified as
long-term debt in the amount of $6,043,000 for 1993 and commercial paper of
$150,000,000 in 1992 and $250,000,000 in 1993.
(5) The average amount outstanding during the period for notes payable was
calculated by determining an average daily balance per month (excluding
amounts classified as long-term debt), adding these average balances
together, and dividing by twelve months. The average amount outstanding
for commercial paper is an average of quarterly amounts outstanding
(excluding amounts classified as long-term debt).
(6) The weighted average interest rate during the period was calculated by
dividing the average daily interest amount by the average daily principal
balance, and multiplying by 360 days. The rate for 1991 includes
approximately $1,100,000 in additional interest for the period from
July 19, 1990, through March 4, 1991, which was awarded by the
Bankruptcy Court in a March 17, 1992 decision as it related to the
revolving credit facility under the Credit Agreement.
79
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)
/s/ Clark J. Matthews, II
----------------------------------
March 28, 1994 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.
Signature Title Date
--------- ----- ----
/s/ Masatoshi Ito
- -------------------------- Chairman of the Board and Director March 28, 1994
Masatoshi Ito
/s/ Toshifumi Suzuki
- -------------------------- Vice Chairman of the Board and Director March 28, 1994
Toshifumi Suzuki
/s/ Clark J. Matthews, II
- ------------------------- President and Chief Executive Officer and Director March 28, 1994
Clark J. Matthews, II (Principal Executive Officer) and Acting Chief
Financial Officer (Principal Financial Officer)
/s/ Vernon P. Lotman
- -------------------------- Vice President and Controller March 28, 1994
Vernon P. Lotman (Principal Accounting Officer)
/s/ Yoshitami Arai
- -------------------------- Director March 28, 1994
Yoshitami Arai
/s/ Timothy N. Ashida
- -------------------------- Director March 28, 1994
Timothy N. Ashida
/s/ Jay W. Chai
- -------------------------- Director March 28, 1994
Jay W. Chai
/s/ Gary J. Fernandes
- -------------------------- Director March 28, 1994
Gary J. Fernandes
/s/ Masaaki Kamata
- -------------------------- Director March 28, 1994
Masaaki Kamata
/s/ Kazuo Otsuka
- -------------------------- Director March 28, 1994
Kazuo Otsuka
/s/ Asher O. Pacholder
- -------------------------- Director March 28, 1994
Asher O. Pacholder
/s/ Nobutake Sato
- -------------------------- Director March 28, 1994
Nobutake Sato
/s/ Tatsuhiro Sekine
- -------------------------- Director March 28, 1994
Tatsuhiro Sekine
/s/ Jere W. Thompson
- -------------------------- Co-Vice Chairman of the Board and Director March 28, 1994
Jere W. Thompson
/s/ John P. Thompson
- -------------------------- Co-Vice Chairman of the Board and Director March 28, 1994
John P. Thompson
80