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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission File Numbers 0-676 and 0-16626
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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
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None N/A
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. []
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $283,865,109 at March 6, 1998, based
upon 138,680,497 shares held by persons other than officers, directors and
5% owners.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes [ ] No [ ]
409,922,935 shares of Common Stock, $.0001 par value (the registrant's
only class of Common Stock), were outstanding as of March 6, 1998.
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 22, 1998 Annual Meeting of Shareholders: Part III, a portion of Item
10 and Items 11, 12 and 13.
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ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 1997
TABLE OF CONTENTS
Page
Reference
Form 10-K
PART I
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Item 1. Business 1
General 1
Financing Matters 2
Operating and Franchising of Convenience Food Stores 3
Other Information about the Company 13
Environmental Matters 17
Executive Officers of the Registrant 19
Item 2. Properties 24
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 31
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 31
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 44
Item 8. Financial Statements and Supplementary Data 45
Independent Auditors' Report of Coopers & Lybrand L.L.P. on The Southland
Corporation and Subsidiaries' Financial Statements for each of the three years in the
period ended December 31, 1997 77
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 78
Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant and see Part I, Item 1, above *
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
Item 13. Certain Relationships and Related Transactions *
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 79
Signatures 86
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*Included in Form 10-K by incorporation by reference to the Registrant's Proxy Statement,
dated March 20, 1998, for the April 22, 1998 Annual Meeting of Shareholders.
SOME OF THE MATTERS DISCUSSED IN THIS FORM 10-K CONTAIN FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S
FUTURE BUSINESS PROSPECTS WHICH ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING COMPETITIVE
PRESSURES, ADVERSE ECONOMIC CONDITIONS AND GOVERNMENT REGULATIONS. THESE ISSUES, AND OTHER FACTORS WHICH
MAY BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING
STATEMENTS.
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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 approximately 17,100 Company-
operated, franchised and licensed locations worldwide, and is among the
nation's largest retailers. 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 1997, Southland's
operations (for financial reporting purposes) were conducted in one business
segment -- the Operating and Franchising of Convenience Food Stores.
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. The Company has, over the past several years, implemented its
strategic plan to divest all its non-convenience store operations, and has
trimmed its store operations by consolidating its efforts in certain market
areas and by closing less profitable stores. During 1997, the Company
achieved two important goals: (i) the continued development of a point of
sale automated retail information system that reached its initial testing
phase and (ii) after a decade of dramatic reductions in the number of 7-
ELEVEN stores, a total of 61 stores were opened by the Company during the
year.
At December 31, 1997, the Company's operations included 5,403 7-ELEVEN
convenience stores in the United States and Canada, and 20 other retail
locations, including HIGH'S Dairy Stores, Quik Marts and SUPER-7 high-volume
gasoline outlets with mini-convenience stores. The Company also has an
equity interest in over 220 convenience stores in Mexico. 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 1997, the Company has an equity interest
in three of the area licensees.
During 1997, the Company continued to focus on the implementation of
its business plan of providing superior service to its customers through
better merchandising, with item-by-item control of inventory at each store,
emphasizing the importance of ordering the right products, introduction of
new products which are "first, best or only" at 7-ELEVEN, and remaining in
stock, at all times, on each particular store's best-selling items.
THE RESTRUCTURINGS. In 1987 the Company was financially restructured
through a leveraged buyout (the "LBO") and in October 1990 filed a voluntary
bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. 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. The Plan provided for holders of the
Company's then outstanding debt and equity securities (the "Old Securities")
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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 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, to acquire approximately 70% of the
Company's outstanding shares for $430 million in cash. Seven-Eleven Japan
is the Company's largest area licensee, operating approximately 7,200 7-
ELEVEN stores in Japan and, through its wholly-owned subsidiary Seven-Eleven
(Hawaii), Inc., 47 7-ELEVEN stores in Hawaii.
MAJORITY OWNER. 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. Ito-Yokado owns 51% and Seven-Eleven Japan owns 49%,
respectively, of IYG.
ITO-YOKADO. Ito-Yokado is among the largest retailing companies in Japan.
Its principal business consists of the operation of 158 superstores that
sell a broad range of food, clothing and household goods. In addition, its
activities include operating two restaurant chains doing business under the
names "Denny's" and "Famil" and a chain of supermarkets. All of
Ito-Yokado's operations are located in Japan except for some limited
purchasing activities. In 1992, Ito-Yokado guaranteed the Company's $400
million commercial paper facility. In addition, in 1995, Ito-Yokado
purchased $153 million of 4.5% Convertible Quarterly Income Debt Securities
due 2010 issued by the Company and, in February, 1998, purchased
$40.8 million of 4.5% Convertible Quarterly Income Debt Securities due 2013
issued by the Company.
SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is the most profitable retailer in
Japan. Seven-Eleven Japan is a 50.3%-owned subsidiary of Ito-Yokado. Seven-
Eleven Japan is the largest area licensee of the Company with approximately
7,200 7-ELEVEN stores in Japan and owns Seven-Eleven (Hawaii), Inc., which,
as of year-end 1997, operated an additional 47 7-ELEVEN stores in Hawaii
under a separate area license agreement covering that state. In
November 1995, Seven-Eleven Japan purchased $147 million of 4.5% Convertible
Quarterly Income Debt Securities due 2010 issued by the Company and, in
February, 1998, purchased $39.2 million of 4.5% Convertible Quarterly Income
Debt Securities due 2013, issued by the Company.
FINANCING MATTERS. During 1997, the Company entered into a $115 million
Master Lease Facility (the "MLF") with Citicorp Bankers Leasing Corporation.
The purpose of the MLF is to finance the rollout of the second phase of the
Company's retail information system, consisting of the installation of
point-of-sale cash registers with scanning capabilities, cabinets,
batteries, processors, printers, display screens, cash drawers, scanners,
PAM controllers, hand-held terminals and other equipment, as well as
customized associated software developed specifically for the Company. (See
"Retail Information System," below.) On October 1, 1997, the Company
received approximately $41.4 million of the available funding under the
master lease facility and intends to use the remainder of the funding as the
system roll-out continues.
In February, 1998, the Company issued $80 million of 4.5% Convertible
Quarterly Income Debt Securities (the "1998 QUIDS") to Ito-Yokado, Co., Ltd.
(51%) and Seven-Eleven Japan Co., Ltd. (49%) that are mandatorily
convertible into shares of Southland Common Stock at a price of $2.46 per
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share (the "Conversion Price") under certain conditions as described below.
Payment of principal and interest on the 1998 QUIDS will be subordinated in
right of payment to all claims of senior creditors, debt holders and other
subordinated or unsubordinated creditors of Southland which do not rank pari
passu with or junior to the 1998 QUIDS, whether outstanding on the date of
issuance or issued thereafter.
In addition, under the terms of the 1998 QUIDS, Southland has the
option to select an interest payment period or periods longer than one
quarter, provided that such longer payment period shall not exceed five
years. This effectively gives Southland the right to defer interest
payments for up to five years.
In addition, the 1998 QUIDS are not convertible at any time until after
the third anniversary of issuance. Thereafter, the 1998 QUIDS are subject
to mandatory conversion into approximately 32.5 million shares of Southland
common stock (a) during the fourth and fifth years from issuance if the
closing price of Southland common stock is equal to at least 120% of the
Conversion Price for any 20 out of 30 consecutive trading days during the
period; (b) after the fifth anniversary of issuance, if the closing price
of Southland common stock is equal to the Conversion Price for any 20 out of
30 consecutive trading days during this period; and (c) at maturity, if the
closing price of Southland common stock is equal to or higher than the
Conversion Price on that date.
Other than as set forth above, the terms of the 1998 QUIDS are
substantially similar to the terms of the 1995 QUIDS (hereafter defined).
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN STORES
On December 31, 1997, the Company's operations included 5,423 stores in
the United States and Canada, operated principally under the name 7-ELEVEN.
An additional 472 stores (in the United States) are operated by area
licensees. These stores are located in 34 states, the District of Columbia,
and five provinces of Canada. During 1997, the Company opened 61
convenience stores, eight of which were rebuilds or relocations of existing
stores and 53 of which were new locations. In addition, 60 convenience
stores were closed during the year (including relocations and rebuilds),
mostly due to changing market patterns, lease expirations and the closing of
selected stores that were not profitable. During 1997, the Company also
made counter modifications to approximately 3,900 stores to prepare for
installation of the new electronic point-of-sale (POS) equipment, a part of
the Company's proprietary retail information system, which is currently in
the testing phase.
The Company's convenience stores are extended-hour retail stores,
emphasizing convenience to the customer and providing beverages, candy,
fresh take-out foods, groceries tobacco items, self-serve gasoline (at about
2,000 stores), dairy products, non-food merchandise, specialty items,
certain financial services, lottery tickets, and incidental services.
Generally, the Company's stores are open every day of the year and are
located in neighborhood areas, on main thoroughfares, in shopping centers,
or on other sites where they are easily accessible and have ample parking
facilities for quick in-and-out shopping. Stores are generally from 2,400
to 3,100 square feet in size and carry 2,300 to 2,600 items. The vast
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majority of the stores operate 24 hours a day. The stores attract early and
late shoppers, lunch-time customers, weekend and holiday shoppers and
customers who may need only a few items at any one time and desire rapid
service. The Company's sales are affected by seasonality and weather,
because many of the Company's traditional products attract more shoppers
during warm and dry weather and during the longer daylight hours of the
summer months, when leisure-time activities are more prevalent.
Substantially all convenience store sales are for cash (including sales
for which checks are accepted), although major credit cards, along with the
"Citgo Plus" credit card, are accepted in most markets for purchases of both
merchandise and gasoline. Credit card sales currently account for
approximately 9.8% of sales, including gasoline. This percentage has
increased over the past few years with the installation of additional "Pay-
At-The Pump" equipment which has positively affected the volume of credit
card purchases of gasoline.
REMODELING OF STORES. Over the past five years, the Company has implemented
a major program to remodel and update its stores throughout the country. By
the end of 1997, the company had completed the major remodel of virtually
its entire store base and, although some stores had additional major
remodels during the year, the focus was on completing approximately 3,900
counter modifications to accommodate the new point-of-sale ("POS") equipment
that is part of the Company's proprietary new retail information system.
Approximately 2,000 stores also received new shelving, pastry and novelty
cases that are more user friendly, in addition to changing the store layouts
to be more attractive and inviting and provide greatly enhanced display of
new or featured items. In addition, during 1998, the Company anticipates
that the remainder of the stores will receive counter modifications to
accommodate the new POS equipment. Stores will continue to be tested for
possible additional layout and fixture changes.
MERCHANDISING. Each store's merchandise includes a selection of core items
as well as optional items selected by the individual store operators to meet
their customers' local needs and preferences. The store operators are
expected to know what will sell best in their respective stores and
attractively display the items with the highest potential so that they are
easy for customers to find. During 1997, the Company continued to focus on
precise ordering techniques, and on remaining in-stock on high-demand items,
as well as on the introduction of high potential new items, on a weekly
basis. Merchandising has focused on creating and/or identifying items that
are new to the market, or new to convenience stores, in order to encourage
customers to shop in 7-ELEVEN stores more frequently and has implemented a
strategy of communicating to customers that by shopping at 7-ELEVEN they
will find items that are "first, best or only" at 7-ELEVEN, adding interest
and value to their shopping experience.
The emphasis has been on maintaining a product mix with an expanded
selection of higher quality fresh foods through the use of commissaries,
bakeries and combined distribution centers ("CDC's"). As of year end,
daily deliveries of freshly made sandwiches and bakery products were
available to over 2,800 stores. New item introduction continues to be a key
marketing strategy for the Company in 1998, with focus on both food and non-
food items, in categories that offer meaningful potential for sales growth.
The Company has refocused on categories that have traditionally accounted
for a large portion of convenience store sales. The Company is continuing
to experiment with other merchandising innovations to encourage existing
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customers to increase their shopping frequency and to enhance the stores'
appeal to new customers. There has also been an increased focus on novelty,
seasonal and gift items to spur impulse buying, especially around various
holidays or special sporting events.
The Company has been committed over the past several years to an
everyday-fair-price strategy, while also using appropriate price promotions
to encourage shoppers to purchase additional impulse items. The Company has
also continued to work with suppliers to find ways to lower costs to the
Company, so that savings can be reflected in the price to the customer.
During 1997, the Company continued to emphasize order forecasting with
a focus on avoiding lost sales opportunities caused by out-of-stock
conditions. Increased awareness of store level selling techniques was
encouraged, and individual store managers were given more latitude in
determining how they would highlight, feature and sell new products to
customers. This approach has energized the stores as they refocus on being
merchants of the products they carry.
NEW PRODUCTS
FRESH FOODS AND FOOD PRODUCTS. During 1997, the Company continued its
initiative to introduce more fresh food products of a higher quality into
the stores, utilizing daily deliveries from local commissaries and bakeries,
operated by companies with expertise in foodservice. These companies
prepare food to 7-ELEVEN specifications exclusively for the stores and have
the product delivered in the exact quantities ordered by the stores through
the CDC program (see "Distribution, Fresh Products," below).
By the end of 1997, there were eight DELI CENTRAL commissary facilities
and eight WORLD OVENS bakeries providing fresh-made foods to over 2,800
stores. By year-end, commissaries were located in Dallas, Denver, San Jose,
New Jersey, Long Island, Orlando, Chicago and Virginia. Six commissary
facilities operate in Canada, providing fresh foods (sandwiches, salads,
desserts) to stores in Canada, seven (7) days a week. Bakeries preparing
WORLD OVENS products now operate in Dallas, San Jose, Baltimore, Denver,
Orlando, Chicago, Long Island and Virginia.
In 1997, the Company successfully introduced a new line of burger
products which are freshly cooked on the in-store grill and served on a hot
dog bun: the BURGER BIG BITE, the burger that rolls, the 1/4 lb. Bacon
Cheese BURGER BIG BITE and the "Ham and Cheese Bite" which contains Oscar
Mayer ham with Kraft cheese inside. These are proprietary products that
compete with the products available at other quick-serve restaurants, but
are more convenient to eat because of their shape.
During 1997 the company reorganized and enhanced its approach to fresh
food menu planning initiatives by creating a new Fresh Food Development Team.
The team includes representatives from 7-ELEVEN's commissary suppliers, as
well as members of the 7-ELEVEN Merchandising Department. In
addition, a food consultant, and a team of professional chefs with
development expertise, assist the team. These outside food experts along
with the Company's merchandising staff, who know the 7-ELEVEN business
system, have developed a number of new products that are unique, high
quality foods that 7-ELEVEN customers want. Through the use of commissaries
and the suppliers, many new programs and products were tested and introduced
in selected markets around the country. Tests have included fresh-made,
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SUPER BIG SUB sandwiches, wrap sandwiches and a new line of breakfast
sandwiches.
During 1997, the Company continued to expand its corporate brand
QUALITY CLASSIC SELECTION spring water and sparkling water, adding two
flavors of one-liter bottles during the year. In the soft drink category
there were introductions of three mixers for the holidays as well as two new
one-liter flavors which will be carried year-round. In the tea category,
there was a new flavor, Brrr! tea, introduced in the east which will be
expanded to the west early in 1998. In addition, the QUALITY CLASSIC
SELECTION sparkling water line-up will be expanded to include six flavors in
20-ounce bottles. In addition, the Company continues to adjust the product
selection of its juices, drinks, waters and isotonics, to meet seasonal and
demographic demands. The Company has also focused on adding to its offering
of higher quality wine, which proved very popular during the November and
December holiday periods.
In the hot beverage area, as a complement to promoting its ever-popular
7-ELEVEN coffee, the Company continued to emphasize its own proprietary
regular and decaffeinated CAFE SELECT line of gourmet-flavored coffees, hot
chocolates and cappuccinos, introducing the Vermont Maple Nut, Banana Nut
Creme and English Toffee Cappuccino and redesigned the coffee cup graphics
for a more appealing, upscale look. Approximately 95% of 7-ELEVEN stores
offer the new hot chocolate and cappuccino products. In addition, the
Company also added Frappuccino, a bottled cold coffee drink to its line of
beverages.
The snack category experienced growth in 1997 as a result of a
merchandising strategy focused on providing customers with a wide variety of
choices which are changed throughout the year to meet seasonal demands.
Nutritional bars like "Power Bars", "Met-Rx" and "Balance" performed well
during the spring and summer, while larger sizes of holiday cookies, snack
mixes and nuts lifted fourth quarter sales. The CDC distribution method
benefited this category by allowing stores access to locally popular snack
items which could not be made available through direct distribution, and by
providing daily delivery to areas where the number of stores or sales volume
did not justify the manufacturer's direct distribution. Some of the locally
popular brands that can now be included, and which complement 7-ELEVEN's
traditional mix, are "Snyder's of Hanover" pretzels, "On the Border" chips
and hot sauce, Granny Goose chips, Utz chips and Calbee snacks. Through the
use of the CDC's, the formerly regional snack foods company, Snyder's of
Hanover, has been turned into one having national acceptance.
With the addition of over 2,000 new two-sided novelty cases during
1997, coupled with strong new item introductions, the frozen treats category
reversed its many years of sales and profit decline. A couple of new
"first, best and only" items which helped differentiate 7-ELEVEN from its
competitors included the Tropicana Orange Juice and Orange Cream Bars and
the Mrs. Fields Cookie and Ice Cream Sandwich.
During 1997, the Company was very successful in continuing to build and
promote its SLURPEE brand. The Company implemented a national summer
sweepstakes "BRAINFREEZE '97" that included an employee execution incentive,
special print cups, and chances for customers to win trips. The Company
also expanded use of the 44 oz. Super SLURPEE cup nationally and introduced
the "BRAINFREEZE Straw", a special straw sold to enhance the SLURPEE brand,
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available only at 7-ELEVEN. SLURPEE flavor offerings were refined, improved
and narrowed to make the variety more manageable at the store level.
NON-FOOD ITEMS. The Company has continued to aggressively market its
prepaid long distance phone cards, adding a new line of prepaid long
distance cards targeted at key international regions like Mexico/Latin
America, Japan/Asia Pacific and Canada/Europe. In addition, the Company
also entered the prepaid cellular business with a successful test of the
Southwestern Bell "Start Talkin" prepaid cellular program in Dallas-Fort
Worth and plans to expand prepaid cellular to most markets by the end of
1998.
By year-end there were approximately 4,500 ATMs in 7-ELEVEN stores
around the U.S. constituting the largest ATM network of any retailer. In
addition, the Company is also delivering stamps through the ATMs in roughly
2,500 stores. In Canada, an agreement with the Canadian Imperial Bank of
Commerce (CIBC) resulted in ATM's being installed in all stores that did not
have them, with a total of 463 Canadian stores having ATM's at year-end. In
addition, stores that had machines representing other banks were converted
to CIBC machines resulting in one universal ATM offering in 7-ELEVENs across
Canada. Unique promotional programs have been introduced as a result.
7-ELEVEN also added pagers and paging service to its product mix.
Following success in several test markets during 1997, 7-ELEVEN recently
expanded the sale of pagers at its stores nationwide.
The Company is one of the nation's leading retailers of money orders.
In 1997, face value sales exceeded $3 billion, an increase of 19.8% over
1996. This increase can be attributed to the change to a $500 maximum
versus a $300 maximum previously. This change attracted additional
customers whose money order needs were not met by the lower limitations.
The Company continued to focus on adding new and popular seasonal
merchandise, including its line of sunglasses with the sophisticated look of
certain very expensive brands - but at extremely reasonable prices. The 7-
ELEVEN collectible truck model, made available during the holiday season,
was introduced in 1995 and continued to be a good seller in 1997. A new
plastic car carrier, which holds a Citgo race car, was introduced in 1997.
Together, over 34,000 of these collectible toys were sold in 1997.
The Company began a national premium cigar program to deliver imported
hand-rolled cigars from the Dominican Republic, Honduras and Mexico to
approximately 3,000 stores. In addition, the Company provided high-quality
cherry wood humidor counter displays for premium cigars in those stores. In
1997, the Company also expanded its selection of tobacco accessory items
that are enjoying sales growth mostly due to the continual growth of cigar
sales. This is particularly true of lighters and 7-ELEVEN has now added a
"Lighter of the Month" and "Cigar of the Month" feature item.
Aggressive merchandising of seasonally high demand items, such as film
and batteries, attractively displayed on a high visibility fixture, has
captured impulse sales, resulting in a marked sales increase in these
products.
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The Company's holiday merchandising strategy put a major focus on the
key holidays, starting with Halloween, in the fourth quarter. Special
merchandise and displays were provided for the stores. Novelty merchandise
was featured, as were "holiday staples" such as key seasonal baking
ingredients (pumpkin, yams, whipped topping) and non-food items such as
baking pans, film, batteries and holiday paper products. These new
additions, coupled with the focus on avoiding out-of-stock conditions during
the holidays, contributed in a meaningful way to the stores' improvements
during the last four months of the year.
GASOLINE. In 1997, the Company sold over 1.4 billion gallons of gasoline at
retail at approximately 2,020 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 1997, the
Company continued its program to upgrade the gasoline pump area of the
stores, by adding canopies and new equipment. Approximately 1,100 stores
are now equipped to accept credit cards for the purchase of gasoline at the
pump, which makes gasoline shopping at 7-ELEVEN stores even more convenient
for the credit customer. During 1997, the Company opened 39 net additional
gasoline locations (28 in Canada; 11 in the U.S.). Almost all of the
Company's stores that sell gasoline offer CITGO-branded gasoline.
The Company has a long-term product purchase agreement with CITGO
Petroleum Corporation ("Citgo") under which Southland purchases
substantially all its U.S. gasoline requirements from Citgo at market-
related prices through the year 2006.
Holders of the "Citgo Plus" credit card can use the card to finance
purchases of gasoline, as well as other merchandise, at 7-ELEVEN stores. At
year-end, there were approximately 1.25 million active "Citgo Plus" credit
card accounts.
DISTRIBUTION
FRESH PRODUCTS. By the end of 1997, over 2,800 stores in Texas, Long
Island, New Jersey, Philadelphia, Denver, Tampa, Orlando, Maryland,
Virginia, the District of Columbia, northern California, Wisconsin, Indiana,
Southern Florida (Miami, Ft. Lauderdale, Vero Beach), the Bronx and Queens
were receiving daily deliveries from thirteen CDCs, bringing 7-ELEVEN the
freshest dairy products, produce, packaged bread and baked goods, sandwiches
and non-food items, such as ethnic products, fresh-cut flowers, pre-paid
phone cards, paperback books and magazines. Because of the CDC's, 7-ELEVEN
stores are now able to receive magazines more frequently, and earlier than
had been possible through traditional sources.
The Company is now developing business models for the remaining 7-
ELEVEN markets for utilizing the daily delivery concept in order to best
meet the needs of franchisees, store operators and customers in those areas.
In markets that do not have a CDC there are cross dock facilities provided
either by existing CDC operators or by suppliers who are committed to the
program. Utilization of the CDC, or a cross dock facility, results in
efficient delivery of pre-picked products for individual stores. Products
are delivered to the CDC or cross dock by the product's manufacturers, where
the products of multiple vendors are sorted and combined into custom orders
for the particular store. The specific order is delivered by only one
truck, but deliveries can be made as frequently as necessary to meet the
specific needs of each respective store. This enables the stores to receive
daily shipments of products where freshness is paramount and avoids the
inconvenience of multiple daily deliveries to the stores by several vendors.
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The products available through the CDCs vary from market to market.
Included in the products distributed through the CDCs are those produced by
the commissaries and bakeries that service the Company's stores. The Company
plans to continue to expand the use of the CDC concept and is in
various stages of finalizing agreements with several operators who will
provide the distribution services covering new areas.
WAREHOUSE PRODUCTS. The Company continued to utilize the distribution
services of McLane Company, Inc. ("McLane"), pursuant to a ten-year contract
entered into in 1992, for delivery of warehouse products to all of the
Company's corporate stores and those franchise stores that utilize McLane
for distribution services. McLane serves Southland using two former
Southland distribution centers and eight additional distribution centers
throughout the country. In 1997, the Company and McLane worked to achieve
three objectives: (i) meet immediate store needs, (ii) make more frequent
deliveries and (iii) shorten the time from order placement to fulfillment.
FRANCHISEES. Franchisees are required to carry merchandise of a type,
quality, quantity and variety consistent with the 7-ELEVEN image, as well as
certain proprietary products. Except for the proprietary items and
selected other products, franchisees are not required to purchase
merchandise from vendors the Company recommends. Except for consigned
gasoline, franchisees are not required to sell merchandise at prices
suggested by the Company.
SUPPLY AGREEMENTS. In connection with the sale of the Company's Reddy Ice
and Dairies Group divisions, both in 1988, the Company entered into long-
term contracts to purchase the products historically supplied to the
Company's stores by such divested operations. Although the Reddy Ice
contract expired by its terms in May 1995, the Company has continued to buy
ice from Reddy Ice.
PRODUCT CATEGORIES. The Company does not record sales on the basis of
product categories. However, based upon the total dollar volume of store
purchases, management estimates that the percentages of its 7-ELEVEN
convenience store sales in the United States by principal product categories
for the last three years were as follows:
YEARS ENDED DECEMBER 31
Product Categories 1997 1996 1995
---- ---- ----
Gasoline 25.7% 26.0% 24.9%
Beverages 17.2 16.7 17.3
Tobacco Products 16.7 16.5 16.6
Beer/Wine 8.8 9.1 9.0
Candy/Snacks 7.3 7.3 7.4
Non-Foods 5.6 5.6 5.8
Food Services 4.4 4.3 4.4
Dairy Products 4.2 4.3 4.4
Other 3.6 3.7 3.7
Baked Goods 3.3 3.3 3.4
Customer Services 3.2 3.2 3.1
----- ----- -----
Total 100.0% 100.0% 100.0%
====== ====== ======
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LOCAL REGULATIONS
In certain areas where stores are located, state or local laws limit
the hours of operation or sale of certain products, most significantly
alcoholic beverages, tobacco products, possible inhalants and lottery
tickets. State and local regulatory agencies have the authority to approve,
revoke, suspend or deny applications for and renewals of permits and
licenses relating to the sale of these products or to seek other remedies.
In most states, such agencies have discretion to determine if a licensee is
qualified to be licensed, and denials may be based on past noncompliance
with applicable statutes and regulations as well as on the involvement of
the licensee in criminal proceedings or activities which in such agencies'
discretion are determined to adversely reflect on the licensee's
qualifications. Such regulation is subject to legislative and
administrative change from time to time.
A new federal regulation went into effect, as of February 28, 1997,
requiring retailers to have new procedures in place to determine the age of
persons wanting to purchase tobacco products. The Company has diligently
worked to prepare sales associates and franchisees to be certain that each
store will be in compliance with the new requirements. This type of age-
sensitive statutory compliance program is similar to the Company's very
successful COME OF AGE program, which the Company has used since 1984 to
train store personnel and franchisees about the laws relating to the proper
handling and sale of age-restricted products, particularly alcoholic
beverages and tobacco. The Company has developed training materials for
every level of its 7-ELEVEN business with greatest emphasis placed on store
level personnel, franchisees and field management. All of the training
developed for the corporate-operated and franchise stores in the U.S. is
being shared with the Company's domestic licensees.
Automated age-verification equipment is now installed in over 1,100
California 7-ELEVEN stores to assist sales associates in verifying the age of
customers purchasing age-restricted products. The equipment enables sales
associates to swipe California drivers' licenses and receive a message on
display telling them to allow or deny the sale. The Company has also
expanded other neighborhood and community cooperative programs, such as
working with local police offices through programs like OPERATION CHILL,
designed for law enforcement officers to reward young people's positive
behavior with free SLURPEE coupons, the "We Card" program, the installation
of Police Community Network Centers in some stores and other similar
efforts.
FRANCHISES
At December 31, 1997, 2,868 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 $2,880,148,000 for
the year ended December 31, 1997.
In its franchise program for individual 7-ELEVEN stores, the Company
selects qualified applicants and trains the individuals who will participate
personally in operating the store. The franchisee pays the Company an
initial fee, which varies by store, and is generally calculated based upon
gross profit experience for the store or market area, to cover certain costs
including: training, an allowance for lodging for the trainees, and other
costs relating to the franchising of the store, and may provide a profit.
Under the standard form of franchise agreement, the Company leases or
subleases, to the franchisee, a ready-to-operate 7-ELEVEN store that has
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been fully equipped and stocked. The Company bears the costs of acquiring
the land, building and equipment, as well as most utility costs and property
taxes.
Under the standard franchise arrangement, which typically has an
initial term of 10 years, the franchisee pays for all business licenses and
permits, as well as all in-store selling expenses, including: payroll;
inventory and cash variations; supplies; inventory, payroll and other
business taxes; certain repairs and maintenance; and other controllable in-
store expenses, and is required to invest an amount equal to the cost of the
store's inventory and cash register fund. The Company finances a portion of
the cost of business licenses and permits and of the investment in
inventory, as well as the ongoing operating expenses and purchases of
inventory. In certain circumstances, up to 100% of the full franchise fee
will be financed for qualified applicants and other special financing and
assistance programs may be available.
Under the standard franchise agreements currently in effect, the
Company receives a share in the gross profit of the store (ranging from 50%
to 58%, depending on the hours of store operation, adjusted if necessary to
assure the franchisee a specified gross income before selling expenses),
based on all sales of merchandise and services, except those on which the
Company pays the franchisee a commission (such as consigned gasoline). The
Company's share of gross profit, called the "7-ELEVEN Charge," is its
continuing royalty charge to the franchisee for the license to use the 7-
ELEVEN operating system and trademarks, for the lease and use of the store
premises and equipment and for continuing services provided by the Company.
These services can include merchandising, advertising, record keeping, store
audits, contractual indemnification, business counseling services and
preparation of financial summaries. Other optional services may be
available from or through the Company for additional fees. During 1997, the
Company continued its use of a franchise agreement that provided a variable
structure for calculating the 7-ELEVEN Charge in certain areas of the
country.
The Company's training program for new franchisees now consists of up
to seven weeks of intensified instruction in the new strategies that are
being implemented by the Company, although the number of weeks is being
reduced.
The Company continues to encourage existing successful franchisees to
franchise multiple locations. This provides growth opportunities for
current franchisees within the 7-ELEVEN system by encouraging them to pursue
additional stores and may result in increased income for the franchisee,
partly by creating opportunities for lower per unit operating expenses for
the franchisee and the Company.
Under Southland's standard franchise agreement, the franchise may be
terminated by the franchisee at any time or by the Company only for the
causes, and upon the notices, as specified in the franchise agreement and as
provided by applicable law. In the event of expiration or termination of
the franchise, the Company has the right to (i) acquire the franchisee's
interest in inventory of a type, quantity, quality and variety consistent
with the 7-ELEVEN image and the other tangible assets in the franchise
business; and, (ii) take possession of the real property on which the store
is located and, in such event, the franchisee has no continuing lease
obligations. Certain franchisees have contractual rights to sign new
franchise agreements upon expiration of their existing agreements, so long
as they meet certain specified conditions, and may be able to assign their
existing agreement to a new franchisee.
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Many states in which the Company franchises individual 7-ELEVEN stores
have enacted legislation governing the offer, sale, termination and/or
renewal of franchises, and the Federal Trade Commission has a trade
regulation rule regarding required disclosures to prospective franchisees.
AREA LICENSES
As of December 31, 1997, the Company had granted domestic area licenses
to seven companies which were operating 472 convenience stores using the 7-
ELEVEN system and name in certain areas of Alaska, Hawaii, Indiana (using the
name SUPER-7 in Indianapolis), Kentucky, Michigan, New Mexico, Ohio,
Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Although parts of
Nevada and Virginia are also covered by area licenses, there are no stores
currently operated under the area licenses in those states. Forty-seven
stores in Hawaii are operated under an area license agreement with Seven-
Eleven (Hawaii), Inc. (a subsidiary of Seven-Eleven Japan).
As of the end of 1997, foreign area license agreements covered the
operation of 7,192 7-ELEVEN stores in Japan, 1,589 in Taiwan, 901 in
Thailand, 334 in Hong Kong, 165 in South Korea, 161 in Australia, 141 in
Malaysia, 134 in the Philippines, 84 in Singapore, 57 in the United Kingdom,
44 in Sweden, 44 in China, 43 in Norway, 30 in Denmark, 21 in Spain, 13 in
Brazil, 12 in Puerto Rico, 9 in Turkey and 8 in Guam. In connection with
the granting of area licenses in Brazil, the Philippines and Puerto Rico,
the Company acquired an equity interest in those area licensees.
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 222 convenience stores in
Mexico operated by 7-ELEVEN Mexico. There are five additional stores in
Mexico operated under a sublicense. These stores feature merchandise and
services essentially the same as 7-ELEVEN stores in the U.S. Sales from the
stores in Mexico are not included in Southland's revenues, but Southland's
equity in their operating results is included in Other Income and has not
been material.
HIGH'S DAIRY STORES
As of December 31, 1997, the Company operated 2 HIGH'S Dairy Stores
located in Virginia, which are similar in size and location to 7-ELEVEN
stores and feature a product mix that emphasizes a variety of dairy
products.
QUIK MART AND SUPER-7 GASOLINE UNITS
At December 31, 1997, 17 Quik Mart and SUPER-7 gasoline units were in
operation in seven 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,
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cold drinks and oter immediately consumable items, while a SUPER-7 gasoline
unit is a high-volume, multi-pump, self-service gasoline-dispensing
operation. The Company plans to either close or convert these units to 7-
ELEVEN stores over the next few years.
CORPORATE OFFICE
The Company's headquarters are located in "Cityplace Center East," its
42-story office tower located on the east side of Dallas' Central Expressway
north of Dallas' central business district. The Company currently occupies
approximately 520,000 square feet, about 39% of Cityplace Center East. The
building is now virtually completely leased or reserved for expansion under
current leases.
OTHER INFORMATION ABOUT THE COMPANY
CREDIT AGREEMENT AND DEBT COVENANTS
In February, 1997, the Company refinanced all of its remaining debt
under the Prior Credit Agreement (originally entered into in 1987, which had
been restated and amended several times), with a new Credit Agreement (the
"Credit Agreement"). The bank group, led by Citibank, N.A., as
Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-
Agent, is comprised of six Japanese banks, three American banks and one
Canadian bank. The Credit Agreement, which is unsecured and will mature at
the beginning of 2002, provides for a $225 million amortizing term loan and
a $400 million revolving credit facility with a $150 million letter of
credit sublimit within the revolving credit facility. The term loan has
scheduled quarterly repayments of $14.1 million, commencing March 31, 1998.
The term loans and any revolver borrowings carry a floating interest rate of
either the Citibank, N.A. base rate or a reserve-adjusted Eurodollar rate
plus .225% for drawn amounts. Letter of credit fees are to be paid
quarterly at .325% per year on the outstanding amount. In addition, a
facility fee of .15% per year is payable quarterly on the aggregate amount
of the Credit Agreement facility.
The Company's Credit Agreement contains a number of financial and
operating covenants requiring, among other things, the maintenance of certain
financial ratios, including interest and rent coverage, fixed-charge
coverage, and senior indebtedness to EBITDA (defined in the Credit Agreement
as earnings before interest, income taxes, depreciation and amortization,
with adjustments for certain extraordinary and unusual gains and losses).
The covenant levels established by the Credit Agreement generally require a
continuing improvement in the Company's financial condition. The Credit
Agreement also contains various covenants which, among other things, (a)
limit the Company's ability to incur or guarantee indebtedness or other
liabilities other than under the Credit Agreement, (b) restrict the Company's
ability to engage in asset sales and sale/leaseback transactions, (c)
restrict the types of investments the Company can make and (d) restrict the
Company's ability to pay cash dividends, redeem or prepay principal and
interest on any subordinated debt and certain senior debt. These covenants
contain exceptions that are customary in credit agreements associated with
financings of companies having creditworthiness similar to Southland's, as
well as exceptions consistent with the specific nature of the business and
financial operations of the Company. As in the Prior Credit Agreement, the
new Credit Agreement requires that Ito-Yokado and Seven-Eleven Japan
maintain fifty percent or more direct or indirect ownership of the Company.
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The Company's outstanding Debt Securities contain certain covenants
which, among other things, (i) limit the payment of dividends and certain
other restricted payments by both the Company and its subsidiaries, (ii)
require the purchase by the Company of the Debt Securities at the option of
the holder upon a change of control (as defined in the indentures governing
the Debt Securities), (iii) limit additional indebtedness, (iv) limit future
exchange offers, (v) limit the repayment of subordinated indebtedness, (vi)
require board approval of certain asset sales, (vii) limit transactions with
certain stockholders and affiliates and (viii) limit consolidations, mergers
and the conveyance of all or substantially all of the Company's assets.
The Company's outstanding 4.5% Convertible Quarterly Income Debt
Securities due 2010 (the "1995 QUIDS"), which were issued in November, 1995,
to Ito-Yokado and Seven-Eleven Japan, are subordinated to all existing debt
except the 1998 QUIDS (to which they are pari passu), convertible into the
Company's Common Stock at a premium (as described below) and carry certain
registration rights that require the Company to register the 1995 QUIDS (or
Common Stock issued upon conversion) under the Securities Act of 1933. The
holders may elect to convert the 1995 QUIDS in denominations of $1,000
principal amount or integral multiples thereof, into shares of the Company's
Common Stock. The number of shares obtained is determined by dividing the
principal amount of the 1995 QUIDS being converted by $4.16 which represents
an average of Southland's share price at the time the 1995 QUIDS were
issued, plus a premium. The $300 million 1995 QUIDS are convertible into
approximately 72 million shares of the Company's Common Stock. (See
"Financing Matters," above, for a description of the 1998 QUIDS.)
RESEARCH AND DEVELOPMENT
The Company did not incur any significant expenses for product testing
or traditional research and development activities in 1997. During 1997,
the Company's Planning Department conducted certain market research studies,
which include concept tests, consumer preference tests, and tracking of
changes in image and store usage patterns. In addition, the Company's test
kitchen spent approximately $135,000 for new product development and taste
testings and to test equipment used for cooking and displaying food
products, which includes quality assurance testing.
RETAIL INFORMATION SYSTEM
In 1994, the Company began development of its own proprietary retail
information system, which is being implemented in phases, over a multi-year
period. The system is designed to build efficiencies into ordering,
distribution and merchandising processes and to provide timely and accurate
store information on an item-by-item basis. The system is designed to
provide information about every important aspect of the store's operation
and to facilitate inventory tracking. Implementation of the first phase
began in 1994 and was completed in early 1996. It automated basic in-store
accounting processes. The Pre-POS system, which provided new cash registers
in 336 stores, was implemented in the fourth quarter of 1996. The second
phase, now under way, consists of an ordering and distribution system and
retail scanning. This system will provide a sophisticated ordering system
linking stores to vendors with full POS scanning capability including new
registers for all stores. Development and testing of this phase was
completed in 1997 and equipment was installed in initial pilot test stores.
An expanded pilot test of the system will continue through the first quarter
of 1998. Rollout of the system will begin in the second quarter of 1998 and
is expected to provide the foundation for future phases.
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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, BIG BITE, DELI CENTRAL, WORLD OVENS and QUALITY
CLASSIC SELECTION, as well as many additional trade names, marks and slogans
relating to other individual types of food, beverage and other items.
Several new marks were introduced during the year including 1/4 lb. BURGER
BIG BITE which is the new hamburger product shaped like a hot dog and
prepared on the store's roller grill, and SUPER BIG SUB which refers to the
submarine sandwich introduced in the stores nationwide.
ADVERTISING
In 1997, the Company continued its successful tie-ins with the National
Hockey League ("NHL"), Major League Baseball, NFL and NBA. The Company was
an official sponsor of the NHL All-Star game, FOX TV's Major League Baseball
including the All-Star Game and NFL football games. Television advertising
highlighted the 7-ELEVEN NHL coffee mug, NBA phone cards and Major League
Baseball phone cards. 7-ELEVEN coffee was a sponsor of the NFL, with
advertisements featuring the NFL coffee mugs and the availability of other
foods and beverages at 7-ELEVEN. In addition, by phoning in to the 7-ELEVEN
polling site for the Major League Baseball All-Star game, 7-ELEVEN customers
had an opportunity to win a trip to the game in Cleveland through a
sweepstakes sponsored by Budweiser. In addition, the Company sponsored the
"NHL Breakout '97" off-ice hockey tour that visited twenty different North
American cities.
Other advertising highlighted the new SUPER BIG SUB sandwich and
featured the Anheuser Busch freshness character "Gus," who traded jokes with
the 7-ELEVEN sales associate "Russ" as to whether the beer or the sandwich
was the freshest.
During the year, radio advertising was used to highlight specific products
such as fountain soft drinks, 7-ELEVEN PHONE CARDS, SLURPEE drinks, coffee
and gasoline, as well as to promote new food products including the BURGER
BIG BITE and 1/4 lb. Bacon CheeseBURGER BIG BITE and other food item
introductions in CDC markets.
During the month of July, the Company celebrated Southland's 70th
anniversary by offering birthday cards to our customers in many stores. The
birthday cards included four coupons for free items such as a free SLURPEE,
a free WORLD OVENS donut and a free BIG BITE hot dog. Most stores also
offered a 7 cent SLURPEE on 7-11-97. This event and coupon giveaway was
supported by radio advertising.
Southland introduced the "Cool, New Stuff" theme in August and
September and began to highlight new items that were exclusive to 7-ELEVEN
with expanded in-store point-of-purchase. This was supported by radio
advertising.
The Company produced seasonal point of purchase materials and radio
advertising to support our December specific promotional items which
included Candy Cane flavor SLURPEE.
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During 1997, the Company promoted the 22 oz. SLURPEE and 44 oz. BIG
GULP cups with a "phone home for free". Each cup had a free five minute
phone card on the cup in a peel off label that gave the customer five free
minutes of MCI prepaid long distance. A special "phone Santa" phone card
allowed kids to call Santa and leave a message that parents could then call
in and listen to.
COMPETITION
During the past few years the Company, like other traditional
convenience retailers, has experienced increased competitive pressures from
supermarkets and drug stores offering extended hours and services, as well
as from an increasing number of convenience-type stores built by the oil
companies. The convenience retailing industry is also being negatively
impacted by demographic factors (such as an aging population) and an erosion
of demand for certain of its traditional core products, including
cigarettes, soft drinks and beer.
Although 7-ELEVEN is the most widely recognized name in the convenience
retailing industry, the Company's convenience retailing operations represent
only a very small percentage of the highly competitive food retailing
industry. Independent industry sources estimate that in the United States
annual sales in 1996 (the most recent data available) for the convenience
store industry were approximately $151.9 billion (including $81.2 billion of
gasoline) and that over 94,200 store units were in operation. The industry
traditionally has narrow net profit margins. In addition, the Company's
stores compete with a number of national, regional, local and independent
retailers, including grocery and supermarket chains, grocery wholesalers and
buying clubs, other convenience store chains, oil company gasoline/mini-
convenience "g-stores," independent food stores, and fast food chains as
well as variety, drug and candy stores. In sales of gasoline, the Company's
stores compete with other food stores and service stations and generate only
a very small percentage of the gasoline sales in the United States. Each
store's ability to compete is dependent on its location, accessibility and
individual service. Growing competitive pressures from new participants in
the convenience retailing industry and the rapid growth in numbers of
convenience-type stores opened by oil companies over the past few years have
intensified competitive pressures for the Company.
Cityplace Center East, the Company's headquarters office building in
Dallas, Texas, is occupied by the Company and other third party tenants,
with the Company having the right to sublease the remaining space (see
"Cityplace," above). The building is now virtually completely leased or
reserved for expansion under current leases. In seeking tenants, this
project competes with other downtown, Oak Lawn, North Dallas and North
Central Expressway luxury office space developments. It is anticipated that
competition for tenants will remain strong in the Dallas commercial real
estate market.
EMPLOYEES
At December 31, 1997, the Company had 30,323 employees, of whom
approximately 31 percent were considered to be either temporary or part-time
employees. None of the Company's employees were subject to collective
bargaining agreements at year-end. The Company has in the past been able to
satisfy substantially all of its requirements for managerial personnel above
the field consultant level from within its organization. The Company's
store managers and supervisory staff personnel are compensated, in addition
to their base salary, on some form of incentive basis.
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ENVIRONMENTAL MATTERS
GENERAL
The operations of the Company are subject to various federal, state and
local laws and regulations relating to the environment. Certain of the more
significant federal laws are described below. The implementation of these
laws by the United States Environmental Protection Agency ("EPA") and the
states will continue to affect the Company's operations by imposing
increased operating and maintenance costs and capital expenditures required
for compliance. Additionally, the procedural provisions of these laws can
result in increased lead times and costs for new facilities.
The Resource Conservation and Recovery Act of 1976, as amended, affects
the Company through its substantial reporting, record keeping and waste
management requirements. In addition, standards for underground fuel
storage tanks and associated equipment may increase operating expenses and
the costs of marketing petroleum products. In response to this legislation,
and various state and local regulations, the Company established a
comprehensive program to manage underground storage tanks and associated
equipment that established procedures for tank testing, repair and
corrective action.
The Comprehensive Environmental Response Compensation and Liability Act
of 1980 ("CERCLA"), as amended, creates the potential for substantial
liability for the costs of study and clean-up of waste disposal sites and
includes various reporting requirements. This Act may result in joint and
several liability even for parties not primarily responsible for hazardous
waste disposal sites. As a consequence of past waste disposal, the Company
may be potentially liable for cleanup costs at several sites which are being
considered or which may be considered for federal clean-up action under
CERCLA. Additional requirements imposed by the Superfund Amendments and
Reauthorization Act of 1986 also have resulted in additional reporting
duties.
The Clean Air Act, as amended, and similar regulations at the state and
local levels, impose significant responsibilities on the Company through
certain requirements pertaining to vapor recovery, sales of reformulated
gasoline and related record keeping.
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 New Jersey. As a result, the Company is
required to conduct environmental remediation at the facility and has
submitted a clean-up plan to the New Jersey Department of Environmental
Protection (the "State"), which provides for remediation of the site for
approximately a three-to-five-year period, as well as continued groundwater
treatment for a projected 15-year period. The projected 15-year clean-up
period represents a reduction from the previously reported 20-year period
and is a result of revised estimates as determined by an independent
environmental management company in the first quarter of 1997. These revised
estimates, which generally resulted from the conditional approval of the
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complete the project and resulted in decreasing the liability and the
related receivable balance by $16.3 million and $9.7 million, respectively.
While conditional approval was received on its clean-up plan, the Company
must supply additional information to the State before the plan can be
finalized. The Company has recorded undiscounted liabilities representing
its best estimates of the clean-up costs of $10.4 million at December 31,
1997. In 1991, the Company and the former owner of the facility executed a
final settlement pursuant to which the former owner agreed to pay a
substantial portion of the clean-up costs. Based on the terms of the
settlement agreement and the financial resources of the former owner, the
Company has recorded a receivable of $6.1 million at December 31, 1997.
Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At December 31, 1997, the Company's
estimated undiscounted liability for these sites was $40.9 million. This
estimate is based on the Company's prior experience with gasoline sites and
its consideration of such factors as the age of the tanks, location of tank
sites and experience with contractors who perform environmental assessment
and remediation work. The Company anticipates that substantially all of the
future remediation costs for detected releases at these sites as of December
31, 1997, will be incurred within the next five years.
Under state reimbursement programs, the Company is eligible to receive
reimbursement for a portion of future remediation costs, as well as a
portion of remediation costs previously paid. Accordingly, at December 31,
1997, the Company has recorded a net receivable of $44.8 million for the
estimated probable state reimbursements. In assessing the probability of
state reimbursements, the Company takes into consideration each state's fund
balance, revenue sources, existing claim backlog, status of clean-up
activity and claim ranking systems. As a result of these assessments, the
recorded receivable amount is net of an allowance of $9.7 million. While
there is no assurance of the timing of the receipt of state reimbursement
funds, based on its experience, the Company expects to receive the majority
of state reimbursement funds, except from California, within one to three
years after payment of eligible remediation expenses, assuming that the
state administrative procedures for processing such reimbursements have been
fully developed. The Company estimates that it may take one to seven years
to receive reimbursement funds from California. Therefore, the portion of
the recorded receivable amounts that relate to sites where remediation
activities have been conducted have been discounted at 5.7% to reflect their
present value. Thus, the recorded receivable amount is also net of a
discount of $6.0 million.
The estimated future assessment and remediation expenditures and related
state reimbursement amounts could change within the near future as
governmental requirements and state reimbursement programs continue to be
implemented or revised.
As of December 31, 1997, the Company had approximately 2,020 operating
retail outlets involved in the sale of gasoline and other motor fuels. In
the ordinary course of business, the Company incurs ongoing costs to comply
with federal, state and local environmental laws and regulations primarily
relating to underground storage tank ("UST") systems. The Company has
established a comprehensive program to manage USTs and associated equipment
and to ensure compliance with applicable laws.
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In general, the Company's capital expenditures for environmental
matters will continue to be affected by federal, state and local
environmental laws and regulations. It is possible that future
environmental requirements may be more stringent than current requirements,
thereby requiring additional expenditures. As described below, the Company
also anticipates future maintenance expenditures in connection with
environmental requirements relating to continuing upkeep of USTs at store
locations.
CAPITAL EXPENDITURES - GASOLINE EQUIPMENT
The Company incurs ongoing costs to comply with federal, state and
local environmental laws and regulations primarily relating to underground
storage tank ("UST") systems. The Company anticipates it will spend
approximately $10 million in 1998 on capital improvements required to comply
with environmental regulations relating to USTs, as well as above-ground
vapor recovery equipment at store locations, and approximately an additional
$25 million on such capital improvements from 1999 through 2001.
See also "Legal Proceedings," below, at pages 27 through 31, for a
discussion of other pending legal proceedings relating to environmental
matters.
EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AS OF DECEMBER 31, 1997
The names, ages, positions and offices with the registrant of all
current executive officers, as well as the Chairman of the Board and the
Vice Chairman of the Board, of the Company are shown in the following chart.
The term of office of each executive officer is at the pleasure of the board
of directors. The business experience of each such executive officer for at
least the last five years, and the period during which he or she served in
office, as well as the date each was employed by the Company, are reflected
in the applicable footnotes to the chart. Mr. Ito and Mr. Suzuki as
Chairman of the Board and Vice Chairman of the Board, respectively, are
officers of the Board and are not administrative executive officers.
<TABLE>
<CAPTION>
AGE AT
NAME 3-01-98 POSITIONS AND OFFICES WITH REGISTRANT AT 12/31/97
- ---- ------- -------------------------------------------------
<S> <C> <C>
Masatoshi Ito 73 Chairman of the Board and Director (1)
Toshifumi Suzuki 65 Vice Chairman of the Board and Director (2)
Clark J. Matthews, II 61 President, Chief Executive Officer; Secretary and Director (3)
James W. Keyes 42 Executive Vice President and Chief Financial Officer and
Director(5)
Stephen B. Krumholz 48 Executive Vice President and Chief Operating Officer and Director
(resigned effective February 23, 1998) (4)
Rodney A. Brehm 50 Senior Vice President, Southwest Division (6)
Stephen B. LeRoy 45 Senior Vice President, International and Real Estate (7)
Bryan F. Smith, Jr. 45 Senior Vice President and General Counsel (8)
19
<PAGE>
Masaaki Asakura 55 Vice President (9)
Robert E. Bailey 55 Vice President (retired effective March 1, 1998) (10)
Wendy W. Barth 41 Vice President, Sales and Marketing (11)
Terry L. Blocher 53 Vice President, Human Resources (12)
John S. Brune 51 Vice President, Northwest Division (13)
Paul L. Bureau, Jr. 56 Vice President, Corporate Tax (14)
Frank Crivello 44 Vice President, Northeast Division (15)
Cynthia Davis 43 Vice President, Central Division (16)
Krista Fuller 43 Vice President, Construction and Maintenance (17)
Joseph Gomes 58 Vice President, Logistics (18)
John Harris 51 Vice President, Chesapeake Division (19)
Nathan D. Potts 59 Vice President, Foods Merchandising (20)
Sharon R. Powell 46 Vice President, Florida Division (21)
Gary R. Rose 52 Vice President, Non-Foods Merchandising (22)
Jeffrey Schenck 47 Vice President, Greater Midwest Division (23)
Linda Svehlak 52 Vice President, Information Systems (24)
Donald E. Thomas 39 Vice President and Controller (25)
David A. Urbel 56 Vice President and Treasurer (26)
- -------------------
</TABLE>
(1) Chairman of the Board and Director of the Company since March 5,
1991. Director and Honorary Chairman of Ito-Yokado Group, which includes
Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and Denny's Japan Co.,
Ltd., as well as other companies. Ito-Yokado Co., Ltd. is one of Japan's
leading diversified retailing companies which, together with its
subsidiaries and affiliates, operates superstores, convenience stores,
department stores, supermarkets, specialty shops and discount stores.
President of Ito-Yokado Co., Ltd. from 1958 to 1992. Chairman of Seven-
Eleven Japan Co., Ltd. from 1978 to 1992, and President from 1973 to 1978.
Chairman of Denny's Japan Co., Ltd. from 1981 to 1992, and President from
1973 to 1981. Chairman of Famil Co., Ltd. since 1986. Chairman of York
Mart Co., Ltd. since 1979. Chairman of Robinson's Japan Co., Ltd. since
1995. Chairman of Maryann Co., Ltd. since 1977. President of Oshman's
Japan Co., Ltd. since 1984. Statutory Auditor of Steps Co., Ltd. since
1992. Chairman of York-Keibi Co., Ltd. since 1989. President of Union
Lease Co., Ltd. since 1985. Statutory Auditor of Daikuma Co., Ltd. since
1982. Chairman of Marudai Co., Ltd. since 1989. Director of Seven-Eleven
(Hawaii), Inc. since 1989. Chairman of Umeya Co., Ltd. since 1981.
Director of Shop America Limited since 1990. Director and Chairman of the
Board of IYG Holding Company since 1990.
(2) Vice Chairman of the Board and Director of the Company since
March 5, 1991. President and Chief Executive Officer of Ito-Yokado Co.,
Ltd., one of Japan's leading diversified retailing companies which, together
with its subsidiaries and affiliates, operates superstores, convenience
stores, department stores, supermarkets, specialty shops and discount
stores, since October 1992 and Director since 1971; Executive Vice President
from 1985 to 1992; Senior Managing Director from 1983 to 1985; Managing
Director from 1977 to 1983; employee since 1963. Chairman of the Board and
Chief Executive Officer of Seven-Eleven Japan Co., Ltd. since October 1992
and Director since 1973; President from 1975 to 1992; Senior Managing
Director from 1973 to 1975. Statutory Auditor of Robinson's Japan Co., Ltd.
since 1984. Chairman of Daikuma Co., Ltd. since 1985. President of Seven-
Eleven (Hawaii), Inc. since 1989. President of Shop America Limited since
1990. President and Director of IYG Holding Company since 1990.
20
<PAGE>
(3) Director since March 5, 1991, and from 1981 until December 15,
1987; President and Chief Executive Officer since March 5, 1991 and
Secretary since April 26, 1995; Executive Vice President (or Senior
Executive Vice President) and Chief Financial Officer from 1979 to 1991;
Vice President and General Counsel from 1973 to 1979; employee of the
Company since 1965.
(4) Director from April 23, 1997 to February 23, 1998; Executive
Vice President and Chief Operating Officer from June 1993 to February 23,
1998; Senior Vice President, Operations, from August 1992 to June 1993;
Senior Vice President, 7-ELEVEN Stores Operations, from 1990 to August 1992;
employee of the Company since 1972.
(5) Director since April 23, 1997; Executive Vice President and
Chief Financial Officer since May 1, 1996; Senior Vice President, Finance,
from June 1993 to April 1996; Vice President, Planning and Finance, from
August 1992 to June 1993; Vice President, National Gasoline, from August
1991 to August 1992; employee of the Company since 1985.
(6) Senior Vice President, Southwest Division since May 1, 1997;
Senior Vice President, Distribution from May 1, 1996 to April 30, 1997;
Senior Vice President, Distribution and Foodservice, from June 1993 to April
1996; Vice President, Merchandising, from February 1992 to June 1993; Vice
President, Marketing, from 1990 to 1992; employee of the Company since 1972.
(7) Senior Vice President, International and Real Estate since May
1, 1995; Vice President, International and Real Estate, from May 1994 to
April 1995; Vice President Real Estate and Licensed Operations, from August
1992 to May 1994; Vice President, Atlantic Region, 7-ELEVEN Stores, from
1990 to 1992; employee of the Company since 1975.
(8) Senior Vice President and General Counsel since May 1, 1995;
Vice President and General Counsel from August 1992 to April 30, 1995;
Assistant General Counsel from January 1990 to July 1992; Associate General
Counsel from January 1987 to December 1989; employee of the Company since
1980.
(9) Director of the Company since April 23, 1997; Vice President
since May 1, 1997; General Manager and Overseas Liaison, Planning
Department, Seven-Eleven Japan Co., Ltd., from 1995 to 1997; Executive Vice
President and General Manager, Seven-Eleven (Hawaii), Inc., from 1991 to
1994; employee of Seven-Eleven Japan Co., Ltd. since 1976.
(10) Vice President since May, 1997; Vice President, Northwest
Division from May 1, 1995 to April 30, 1997; Division Manager from November
1990 to April 1995; Regional Vice President from May 1986 to October 1990;
employee of the Company since 1970.
(11) Vice President, Sales and Marketing, since May 1, 1997;
Product Director from May 1, 1993 to April 30, 1997; Group Product Manager
from September 1989 to March 1992; employee of the Company since 1989.
21
<PAGE>
(12) Vice President, Human Resources since May 1, 1997; Vice
President, Southwest Division from May 1, 1995 to April 30, 1997; Division
Manager from February 1985 to April 1995; employee of the Company since
1971.
(13) Vice President, Northwest Division since May 1, 1997; Division
Manager from February 21, 1997 to April 30, 1997; Director of Operations from
January, 1994 to February, 1997; Division Manager from September, 1992
to December, 1993; General Manager from November, 1990 to August, 1992;
employee of the Company since 1974.
(14) 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.
(15) Vice President, Northeast Division since May 1, 1996; Division
Manager from October 1987 to April 1996; employee of the Company since 1981.
(16) Vice President, Central Division since May 1, 1997; Division
Manager Central Division from February 1997 to April 1997; Product Director
from January 1995 to February 1997; Category Manager from November 1992 to
January 1995; employee of the Company since 1978.
(17) Vice President, Construction and Maintenance since July 30,
1997; Manager, Corporate Maintenance, from April 1, 1992 to July 29, 1997;
Operations Division Manager from November 1990 to January 1992; Division
Manager from October 1987 to October 1990; employee of the Company since
1981.
(18) Vice President, Logistics since May 1, 1997; Vice President,
Central Division, from May 1, 1996 to April 30, 1997; Division Manager from
August 1993 to April 1996, Operations Manager from January 1992 to August
1993; Operations Division Manager from June 1989 to January 1992; employee
of the Company since 1978.
(19) Vice President, Chesapeake Division since May 1, 1997; Vice
President, Florida Division from May 1, 1996 to April 30, 1997; Division
Manager from October 1987 to April 1996; employee of the Company since 1979.
(20) Vice President, Foods Merchandising, since May 1, 1997;
Product Director from May 1, 1993 to April 30, 1997; General Manager from
November 1990 to March 1992; Division Manager from October 1989 to October
1990; Regional Marketing Manager from February 1985 to September 1989;
employee of the Company since 1971.
(21) Vice President, Florida Division since May 1, 1997; Division
Manager from April 11, 1997 to April 30, 1997; Division Logistics Manager
from March 1997 to April 1997; Fresh Foods Area Operations from March 1995
to February 1997; Market Manager from December 1993 to February 1995;
Director of Operations from September 1992 to November 1993; Operations
Division Manager from April 1992 to August 1992; Market Manager from April
1989 to April 1992; employee of the Company since 1974.
22
<PAGE>
(22) Vice President, Non-Foods Merchandising since May 1, 1997;
Vice President, Gasoline and Environmental Services from May 1, 1995 to
April 30, 1997; National Gasoline Manager from January 1991 to April 1995;
Manager, East/West Gasoline from November 1987 to January 1991; employee of
the Company since 1968.
(23) Vice President, Greater Midwest Division since May 1, 1996;
Division Manager from October 1987 to April 1996; employee of the Company
since 1976.
(24) Vice President, Information Systems since May 1, 1997;
Manager, MIS from May 29, 1992 to April 30, 1997; Systems Manager from
December 1984 to May 1992; employee of the Company since 1970.
(25) Vice President and Controller since May 1, 1997; Controller
from August 1, 1995 to April 30, 1997; Assistant Controller from January
1993 to July 1995; employee of the Company since 1993. Financial Manager,
The Trane Company, from April 1992 to December 1992. Senior Manager, Audit
Department, Deloitte & Touche (formerly Touche Ross & Co.) from 1990 to
1992; employee from 1982 to 1992.
(26) Vice President and Treasurer since May 1, 1997; Vice
President, Planning and Treasurer from August, 1992 to April 30, 1997; Vice
President since April 1992 and Treasurer since December 1987; Deputy
Treasurer from 1984 to 1987; employee of the Company since 1970.
FORMER OFFICERS
The names, ages, positions and offices formerly held with the
registrant and the business experience for at least the five years preceding
their departure from Southland of all persons who served as officers of the
Company during 1997 but who no longer serve as such are shown below. Also
shown for each such person is the period during which he or she served in
his or her office, as reflected in the footnotes to the following chart.
AGE AT
NAME 03-01-98
------ ---------
Kathleen Callahan-Guion (1) 46
Michael R. Cutter (2) 46
Adrian O. Evans (3) 61
James Notarnicola (4) 46
(1) Vice President, Chesapeake Division from May 1, 1995 to March
14, 1997; Division Manager from November 1, 1986 to April 30, 1995; employee
of the Company from 1979 to 1997.
(2) Senior Vice President, Merchandising from May 1, 1996 to March 31,
1997; Vice President, Merchandising from May 1995 to April 1996; National
Field Merchandising Manager from July 1994 to April 1995; Regional
Merchandising Manager from January 1990 to July 1994; Division Merchandising
Manager from July 1986 to December 1989; employee of the Company from 1975
to 1997.
23
<PAGE>
(3) Senior Vice President, Construction and Maintenance from May 1,
1996 to June 30, 1997; Vice President, Construction and Maintenance, from
August 1992 to April 1996; Vice President, Stores Development, from January
1989 to August 1992; Vice President, Mid-America Region, 7-ELEVEN 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 from 1975
to 1997.
(4) Vice President, Communications from May 1, 1995 to March 31,
1997; Manager, Advertising and Promotions from July 1992 to April 1995;
National Sales Manager from November 1990 to July 1992; Regional Marketing
Manager from August 1989 to October 1990; employee of the Company from 1978
to 1997.
ITEM 2. PROPERTIES
In February, 1997, the Company refinanced all of its remaining debt
under the Prior Credit Agreement. The new Credit Agreement is unsecured
and, therefore, upon the completion of this refinancing, the encumbrances on
all the Company's properties were released.
OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES
7-ELEVEN
At the end of 1997, the 7-ELEVEN stores group was using 56 offices in
18 states and Canada.
24
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
STATE/PROVINCE OPERATING 7-ELEVEN CONVENIENCE STORES
-------------- --------------------------------------
OWNED LEASED(a) TOTAL
<S> <C> <C> <C>
U.S.
---
Arizona 39 56 95
California 230 935 1,165
Colorado 59 177 236
Connecticut 7 31 38
Delaware 10 17 27
District of Columbia 4 14 18
Florida 226 199 425
Idaho 6 8 14
Illinois 56 82 138
Indiana 6 10 16
Kansas 7 9 16
Maryland 86 228 314
Massachusetts 11 24 35
Michigan 52 51 103
Missouri 32 49 81
Nevada 90 100 190
New Hampshire 2 7 9
New Jersey 74 129 203
New York 43 192 235
North Carolina 2 5 7
Ohio 10 5 15
Oregon 37 95 132
Pennsylvania 60 106 166
Rhode Island 0 8 8
Texas 107 178 285
Utah 38 74 112
Virginia 192 405 597
Washington 55 163 218
West Virginia 10 13 23
Wisconsin 15 0 15
CANADA
------
Alberta 21 99 120
Manitoba 13 37 50
Ontario 30 80 110
British Columbia 21 125 146
Saskatchewan 15 26 41
----- ----- -----
Total 1,666 3,737 5,403
===== ===== =====
- -----------------
</TABLE>
(a) Of the 7-ELEVEN convenience stores set forth in the foregoing
table, 694 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 1997, the Company also leased 34 closed convenience
stores or office locations from the Savings and Profit Sharing Plan.
25
<PAGE>
OTHER RETAIL
As shown in the following table, at year-end 1997, the Company operated
17 Quik Mart and SUPER-7 stores in California, Illinois, Indiana,
Massachusetts, Missouri, Texas and Virginia, 2 HIGH'S Dairy Stores located
in Virginia, and one other retail location in Illinois.
The following table shows the location and number of the Company's
other operating retail locations including Quik Mart, HIGH'S and SUPER-7
locations in operation on December 31, 1997.
<TABLE>
<CAPTION>
OTHER OPERATING RETAIL LOCATIONS
--------------------------------
STATE OWNED LEASED TOTAL
<S> <C> <C> <C>
California 3 0 3
Illinois 5 0 5
Indiana 1 1 2
Massachusetts 1 0 1
Missouri 2 0 2
Texas 2 0 2
Virginia 3 2 5
--- -- --
Total 17 3 20
</TABLE>
The Company plans to either close or convert these units to 7-ELEVEN
stores over the next few years.
OTHER INFORMATION ABOUT PROPERTIES AND LEASES
At December 31, 1997, there were 41 7-ELEVEN stores in various stages
of construction. The Company owned or was under contract to purchase 60,
and had leases on 76, undeveloped convenience store sites. In addition, the
Company held 85 7-ELEVEN, HIGH'S and Quik Mart properties available for
sale consisting of 50 unimproved parcels of land, 24 closed store locations
and 11 parcels of excess property adjoining store locations. At December
31, 1997, 17 of these properties were under contract for sale.
On December 31, 1997, the Company held leases on 319 closed store or
other non-operating facilities, 34 of which were leased from the Savings and
Profit Sharing Plan. Of these, 257 were subleased to outside parties.
Generally, the Company's store leases are for primary terms of from 14
to 20 years, with options to renew for additional periods. Many leases
contain provisions granting the Company a right of first refusal in the
event the lessor decides to sell the property. Many of the Company's store
leases, in addition to minimum annual rentals, provide for percentage
rentals based upon gross sales in excess of a specified amount and for
payment of taxes, insurance and maintenance.
ACQUISITIONS
On February 19, 1998, the Company announced that it had entered into a
definitive agreement to acquire 23 Red-D-Mart stores from MDK Corporation.
The stores are located in the South Bend, Indiana, area. This acquisition,
26
<PAGE>
increase the Company's presence in the market area around South Bend.
OTHER PROPERTIES
The Company also leases 53,580-square-feet of office/warehouse space in
Denver, Colorado, for an equipment warehouse and service center. In 1997,
the Company sold a five-acre tract of land in Delanco, New Jersey, on which
a 19,000-square-foot branch distribution facility is located. The Company
also owns a 287-acre tract in Great Meadows, New Jersey. The chemical plant
that was located on this property has now been demolished and a part of the
property is currently involved in environmental clean-up. (See "Current
Environmental Projects and Proceedings," pages 17 through 19, above.) The
Company holds tracts in Dallas, Texas, not included in the corporate
headquarters, totaling approximately two acres which are available for sale.
CORPORATE
The Company's corporate office headquarters is in Dallas, Texas in a
42-story office building, known as Cityplace Center East. The Company's
lease covers the entire Cityplace Tower, but gives the Company the right to
sublease to other parties. Since 1996, subleases with third parties had
been in place so that (including the space leased by Southland) the building
is virtually completely leased or reserved for expansion under current
leases. The Company currently utilizes other office space in and around
Dallas (although most corporate office space is consolidated in Cityplace
Center East).
ITEM 3. LEGAL PROCEEDINGS
THE FOLLOWING INFORMATION UPDATES THE STATUS OF CERTAIN PREVIOUSLY REPORTED
PENDING LITIGATION INVOLVING THE COMPANY.
7-ELEVEN OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION,
ET AL.
VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
As previously reported, in August, 1993, an action known as 7-ELEVEN
Owners For Fair Franchising, et al. v. The Southland Corporation, et al.
("OFFF") was filed against Southland and its majority shareholders in the
Superior Court for Alameda County, California. Also named as defendants in
some aspects of the case were McLane Company, Inc.; McLane Foods, Inc.; The
Coca-Cola Company and several bottlers of Coca-Cola products; Pepsi Cola
Company and several of its bottlers; Oscar Mayer Foods Corporation; Hansen's
Juices, Inc.; and CITG0 Petroleum Corporation. The OFFF case was filed as a
class action on behalf of all persons who had operated 7-ELEVEN convenience
stores in California since 1987 pursuant to franchise agreements with
Southland.
In March 1996, an action known as Valente, et al. v. The Southland
Corporation, et al. was filed against Southland, its majority shareholders
and other corporations in the United States District Court for the Northern
District of California. The original Valente case was thereafter dismissed,
and a new Valente case was then filed in state court in Dallas, Texas. The
27
<PAGE>
complaint in this case asserted some, but not all, of the same claims that
were being asserted in the OFFF litigation, and it was filed on behalf of an
alleged class of all persons who are or have been franchisees of 7-ELEVEN
stores in any state or the District of Columbia, except California. The
only defendant in the new Valente case was Southland.
The complaint in the OFFF case asserted numerous claims against
Southland and the other defendants, based on various legal theories. The
substantive claims included the following: (1) claims that Southland
wrongfully failed to credit the franchisees' accounts with the value of
equipment and with various rebates, discounts and allowances that Southland
received from various vendors; (2) claims that Southland wrongfully
required 7-ELEVEN franchisees to operate their stores 24 hours per day, and
wrongfully increased the royalty due under the franchise agreement for
franchisees who operated less than 24 hours per day; (3) claims that
Southland wrongfully marked up and earned a profit on goods sold to 7-ELEVEN
franchisees through the Southland Distribution Centers; (4) claims that
Southland wrongfully received income from the installation and operation of
automated teller machines in franchised 7-ELEVEN stores; (5) claims that
Southland, the Pepsi defendants, the Coke defendants, and Hansen's Juices
unlawfully conspired with one another or with others to fix the retail
prices at which 7-ELEVEN franchisees would sell soft drinks to the public;
(6) claims that Southland conspired with various vendors, including the
McLane companies, the Pepsi defendants, the Coke defendants and Oscar Mayer
to fix the prices at which 7-ELEVEN franchisees would purchase products at
wholesale; (7) claims that Southland received money or other things of
value from CITGO Petroleum Corporation that should have been, but were not,
credited to the cost of gasoline, and that Southland otherwise withheld
money from the sale of gasoline that should have been paid to the
franchisees, and conspired with CITGO to do so; (8) claims that Southland
unlawfully conspired with the McLane companies to divide the geographic
territories within California in which the McLane companies and the
Southland Distribution Centers would sell goods to 7-ELEVEN franchisees;
(9) claims that Southland fraudulently concealed its allegedly wrongful
conduct with respect to the foregoing claims; and (10) claims that the
McLane companies owed fiduciary duties to 7-ELEVEN franchisees and had a
duty to account to the franchisees for discounts and allowances received
from vendors, and that McLane breached those duties.
During the course of the OFFF litigation, the court ruled that it did
not have jurisdiction over Southland's majority shareholders, Ito-Yokado
Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company, and those
companies were dismissed from the litigation. McLane Foods, Inc. was
dismissed by a stipulation of the parties. The court also entered judgments
in favor of Coca-Cola and its California bottlers, Pepsi Cola and its
California bottlers, Oscar Mayer Foods Corporation, and Hansen's Juices,
Inc. The court also entered summary adjudication in favor of McLane
Company, Inc. on three of the four claims that had been asserted against it.
Plaintiffs appealed from these orders.
A nationwide settlement of the litigation has recently been negotiated.
In connection with the settlement, the OFFF and Valente cases have been
combined by filing an amended complaint in the Superior Court for Alameda
County, California in the OFFF case on behalf of a nationwide class of all
persons who operated 7-ELEVEN convenience stores in the continental United
States at any time between January 1, 1987 and July 31, 1997, pursuant to
franchise agreements with Southland. The court preliminarily approved the
settlement on December 22, 1997, and notice has been sent to the class
members, which summarizes the terms of the proposed settlement and explains
how to participate in or opt out of the settlement.
28
<PAGE>
Under the settlement, Southland is agreeing to make certain
modifications to the franchise agreements of 7-ELEVEN franchisees. These
modifications, which will remain in effect through the year 2003, include:
(1) extension of the term until December 31, 2003, for any agreements due to
expire before that date; (2) an opportunity on or about January, 2004, to
sign a Renewal Agreement that will be structured so that it will not have a
net adverse effect on the average net income of franchisees; (3) an option
for the franchisee to request two additional audits of the store inventory
each year, at Southland's expense; (4) Southland's agreement to pay for
supplies for and maintenance of the new retail information system ("RIS")
equipment; (5) a provision clarifying the proper accounting treatment for
advertising allowances received by Southland and for equipment and equipment
reimbursement received by Southland; (6) a provision
requiring Southland and the franchisee to mediate disputes that arise in the
course of the franchise relationship, prior to filing litigation or
arbitration on the claims.
In addition to these modifications to the existing franchise
agreements, the settlement provides that Southland will follow a specified
procedure, and consider various options if a class member makes a request to
reduce the hours of store operation. The settlement also establishes a
seven-member committee of franchisees to review Southland's receipt and
accounting for allowances from 1997 through 2003.
The settlement also sets forth the benefits to be received by former
franchisees. Class members who are former franchisees when the settlement
becomes effective will share in a settlement fund, which includes (i) a $7
million payment by Southland, and (ii) any amounts that are not awarded by
the court from a fund of $4,750,000 that Southland has agreed to pay to
cover plaintiffs' attorneys' fees and expenses.
By entering into the settlements, neither Southland nor any of the
other defendants has admitted that any of the claims in the litigation were
valid. Each of the defendants states that it has entered into the
settlement in order to avoid the costs and disruptions of further
litigation. The terms of the settlement will become effective if and when
it receives final court approval (including the disposition of any appeal
from the trial court's approval), except that some terms of the settlement
may take effect on a provisional basis at an earlier date (i.e., the terms
relating to maintenance of and supplies for the RIS equipment).
Class members have the choice of remaining in the class or electing to
opt out of it. Those who remain in the class have the right to object to
the terms of the settlement. Persons who opt out of the class cannot object
to the terms of the settlement, but will retain such rights as they may have
to file suit on their own behalf. Class members have until March 31, 1998
to opt out of the settlement. Persons who remain in the class have until
April 8, 1998 to file any objections to the settlement. A hearing at which
the court will consider whether to approve the proposed settlement has been
scheduled for April 24, 1998. If the settlement is approved by the court,
all persons who have not opted out of the class will be bound by, and will
receive the benefits of, its terms.
29
<PAGE>
EMIL V. SPARANO, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
As previously reported, a lawsuit entitled Emil V. Sparano, et al. v.
The Southland Corporation, et al., was filed against the Company in the
United States District Court for the Northern District of Illinois, in
March, 1994. Plaintiffs are several franchisees of 7-ELEVEN stores in
Illinois, Pennsylvania, New Jersey and Nevada; they represent a nationwide
class of persons who were 7-ELEVEN franchisees anywhere in the United States
at any time from December 1, 1987 through March 4, 1991. In addition to the
Company, several of the Company's current or former officers and directors
(John P. Thompson, Jere W. Thompson, Joe C. Thompson, Jr., Clark J.
Matthews, II, Walton Grayson, III, John H. Rodgers and Frank Gangi)
(collectively, the "Individual Defendants") and Ito-Yokado Co., Ltd., Seven-
Eleven Japan Co., Ltd. and IYG Holding Company (collectively, the "Foreign
Companies") were named as defendants in the suit.
Of the eleven original causes of action, only one claim against three
of the Individual Defendants and the Company was certified to proceed as a
class action. Notices were sent to all class members, and pretrial
discovery is continuing. The class has now been defined to include those
persons who owned 7-ELEVEN franchises at any time from December 1, 1987 to
March 4, 1991. A notice has been mailed out to all class members. Both
parties are completing their discoveries.
The Company has aggressively attacked the merits of this suit from its
inception and has successfully disposed of ten of the original eleven claims
prior to a trial. The Company believes it has meritorious defenses to the
one remaining claim and will continue its defense vigorously. At this time,
however, the litigation is still at an early stage and the ultimate outcome
cannot be predicted.
DEFAULT INTEREST CLAIM
As previously reported, subsequent to the Company's bankruptcy filing
on October 24, 1990, the Company's senior lenders (the "Banks") under the
Credit Agreement filed a proof of claim demanding, among other things,
default interest, as a result of the Company's having failed to make an
interest payment due June 15, 1990. The amount of default interest in
dispute is $12,186,870, which was calculated under the Credit Agreement on
the average daily outstanding bank debt balance from the date of notice of
default to the confirmation of the Plan of Reorganization. The Company
objected to the claim for default interest. On March 17, 1992, the
Bankruptcy Court ruled in favor of the Banks' claim. The Company recognized
the amount of the Award in its 1991 year-end financial statements.
The Company appealed this decision to the United States District Court
for the Northern District of Texas. On March 27, 1997, after nearly five
years of deliberations, the District Court affirmed. The Company has
appealed this matter to the United States Court of Appeals for the Fifth
Circuit.
30
<PAGE>
GENERAL
In addition, the Company is also occasionally sued by persons who
allege that they have incurred property damage and personal injuries as a
result of releases of motor fuels from underground storage tanks operated by
the Company at its retail outlets. It is the Company's policy to vigorously
defend against such claims. Except as specifically disclosed in this
section on "Legal Proceedings" or in the section on "Environmental Matters",
above, the Company does not believe that its exposure from such claims,
either individually or in the aggregate, is material to its business or
financial condition.
Information concerning other legal proceedings is incorporated herein
from "Environmental Matters," pages 17 through 19, above.
In the ordinary course of business, the Company is also involved in
various other legal proceedings which, in the Company's opinion, are not
material, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
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 6, 1998, there were 2,686 record
holders of the Common Stock. The Company's Common Stock is traded on The
Nasdaq Stock Market under the symbol "SLCM". The following information has
been provided to the Company by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------------------------------------------------
QUARTERS HIGH LOW CLOSE
- ------------- ----------------------------------------------------------
<S> <C> <C> <C>
1997
FIRST $ 3 9/16 $ 2 21/32 $ 3 5/32
SECOND 3 11/16 3 1/8 3 11/32
THIRD 3 13/32 2 1/2 2 9/16
FOURTH 2 7/8 1 23/32 2 1/8
1996
FIRST $ 4 1/16 $ 2 15/16 $ 3 5/16
SECOND 4 15/16 3 3 1/32
THIRD 3 5/8 3 3 1/32
FOURTH 3 5/32 2 7/16 2 31/32
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 6,971.1 $ 6,868.9 $ 6,745.8 $ 6,684.5 $ 6,744.3
Other income. . . . . . . . . . . . . . . . 89.4 86.4 78.5 74.6 71.3
Total revenues. . . . . . . . . . . . . . . 7,060.6 6,955.3 6,824.3 6,759.1 6,815.6
LIFO charge (credit). . . . . . . . . . . . 0.1 4.7 2.6 3.0 (8.7)
Depreciation and amortization . . . . . . . 196.2 185.4 166.4 162.7 154.4
Interest expense, net . . . . . . . . . . . 90.1 90.2 85.6 95.0 81.8
Earnings (loss) before income taxes,
extraordinary items and cumulative effect
of accounting changes . . . . . . . . . . 115.3 130.8 101.5 73.5 (2.6)
Income taxes (benefit). . . . . . . . . . . 45.3 41.3 (66.1)(a) (18.5) (b) 8.7
Earnings (loss) before extraordinary items
and cumulative effect of accounting changes 70.0 89.5 167.6 92.0 (11.3)
Net earnings. . . . . . . . . . . . . . . . 70.0 89.5 270.8 (c) 92.0 71.2 (d)
Earnings (loss) before extraordinary items
and cumulative effect of accounting changes
per common share:
Basic. . . . . . . . . . . . . . . . . .17 .22 .41 .22 (.03)
Diluted. . . . . . . . . . . . . . . . .16 .20 .40 .22 (.03)
Total assets. . . . . . . . . . . . . . . . 2,090.1 2,039.1 2,081.1 2,000.6 1,990.0
Long-term debt, including current portion . 1,803.4 1,707.4 1,850.6 2,351.2 2,419.9
</TABLE>
- -------------------------
(a) Income taxes (benefit) include an $84.3 million tax benefit from
recognition of the remaining portion of the Company's net deferred tax
assets as explained in Note 14 to the Consolidated Financial
Statements.
(b) Income taxes (benefit) include a $30 million tax benefit from recog-
nition of a portion of the Company's net deferred tax assets.
(c) Net earnings include an extraordinary gain of $103.2 million on debt
redemption as explained in Note 8 to the Consolidated Financial
Statements.
(d) Net earnings include an extraordinary gain of $99 million on debt
redemption and a charge for the cumulative effect of an accounting
change for postemployment benefits of $16.5 million.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the matters discussed in this annual report contain forward-
looking statements regarding the Company's future business which are subject
to certain risks and uncertainties, including competitive pressures, adverse
economic conditions and government regulations. These issues, and other
factors which may be identified from time to time in the Company's reports
filed with the SEC, could cause actual results to differ materially from
those indicated in the forward-looking statements.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings for the year ended December 31, 1997 were
$70.0 million, compared to net earnings of $89.5 million in 1996 and $270.8
million in 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings before income taxes
and extraordinary gain $115.3 $130.8 $101.5
Income tax (expense) benefit (45.3) (41.3) 66.1
Extraordinary gain from partial
redemption of the Company's
4 1/2% and 5% debentures - - 103.2
------- ------- -------
Net earnings $ 70.0 $ 89.5 $270.8
======= ====== =======
Net earnings per common share - Basic $ .17 $ .22 $ .66
======= ======= ======
Net earnings per common share - Diluted $ .16 $ .20 $ .65
======= ======= ======
</TABLE>
The decline in the Company's net earnings from the prior year resulted from
start-up costs associated with its strategic initiatives, higher per-store
labor expense, lower gas gross profits and a benefit from an IRS tax
settlement in 1996. Merchandise sales growth over the last half of 1997
offset a portion of these factors.
MANAGEMENT STRATEGIES
Since 1992, the Company has been committed to several key strategies
that it believes, over the long term, will provide further differentiation
from competitors and allow 7-Eleven to maintain its position as the premier
convenience retailer. These strategies include: upgrading the store base; a
customer-driven approach to product selection; an everyday-fair-pricing
policy on all items; daily delivery of fresh perishable items; introduction
of high-quality, ready-to-eat fresh foods; and the implementation of a
state-of-the-art retail information system.
Prior to 1997, the Company focused on upgrading its store base, through
remodeling existing stores and closing underachieving stores. In late 1996,
the Company completed the most extensive remodeling program in its history.
Future upgrade programs will focus on retail information systems, food
service and other merchandising programs. Beginning in late 1996 and
throughout 1997, the Company began to focus its efforts on opening or
acquiring new stores. The Company's ten-year decline in operating properties
was slowed in 1996 and ended in 1997 with net store growth. Store openings
over the last three years totaled 61, 44 and 22 in 1997, 1996 and 1995,
respectively. In addition, there were 41 stores under construction at
December 31, 1997. In 1998, new store openings are expected to outpace
closings, with the expansion occurring in existing markets to support the
Company's fresh food and combined-distribution initiatives. In recent years,
the Company has pruned its store base, closing or disposing of those stores
that either could not support its strategies, were not expected to achieve
an acceptable level of profitability in the future, or had leases which
expired. As a result, store closings during the past three years totaled 60,
46 and 228 in 1997, 1996 and 1995, respectively. The Company expects to
close slightly more stores in 1998 than it has in either of the last two
years, primarily due to a large number of lease expirations. The store
additions and closings discussed above include relocations, rebuilds and
seasonal activity.
The customer-driven approach to merchandising focuses on providing the
customer an expanded selection of quality products at a good value. This is
being accomplished by emphasizing the importance of ordering at the store
level, removing slow-moving items and aggressively introducing new, high-
potential products in the early stages of their life cycle. This process
represents an ongoing effort to satisfy the ever-changing preferences of our
customers.
33
<PAGE>
The Company's everyday-fair-pricing strategy is designed to provide
consistent prices on all items by reducing its reliance on discounting. When
the everyday-fair-pricing strategy was introduced, some product prices were
lowered, while others were increased to achieve more consistency. Going
forward, the Company plans to migrate toward lower retail prices as lower
product costs are achieved through contract negotiations or strategic
alliances with suppliers and distributors.
Daily delivery of time-sensitive or perishable items along with high-
quality, ready-to-eat foods is another key management strategy.
Implementation of this strategy includes third-party development and
operation of combined distribution centers ("CDC"), fresh-food commissaries
and bakery facilities in many of the Company's markets around the country.
The commissary and bakery ready-to-eat items, like fresh sandwiches and
pastries, along with goods from multiple vendors such as dairy products,
bread, produce and other perishable goods, are "combined" at a distribution
center and delivered daily to each store. In addition to providing fresher
products, improved in-stock conditions and quicker response time on new
items, the combined distribution is also intended to provide lower product
costs, in part from vendors' savings, through this approach. At the end of
1997, over 2,800 stores were serviced by daily distribution facilities.
Expansion of these programs to another 800 stores is anticipated in 1998.
The development of a retail information system ("IS") began in 1994 The
initial phase, completed in early 1996, involved installing in-store
processors ("ISP") in each store to automate accounting and other store-
level tasks. The current phase involves the installation of point-of-sale
registers with scanning capabilities, as well as tools on the ISP to assist
with ordering and product assortment, and a hand-held unit for ordering
product from the sales floor. After completion, the system will provide each
store and its suppliers and distributors with on-line information to make
better decisions in anticipating customer needs. Management believes that
the effective utilization of daily sales data gathered by the system will
improve sales through reducing out-of-stock incidents and enhancing each
individual store's product mix to better match customers' needs. In
addition, the system will assist with monitoring inventories to better
control shortage and product write-offs. While implementation costs during
the roll-out phase are expected to exceed the short-term benefits, the
anticipated long-term benefits of this system, coupled with further cost
reductions resulting from automation, are expected to help the Company reach
its goal of sustained profitable growth over the long term. This phase of
the system is currently expected to be fully operational for all stores by
early 2000.
(EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL STORES
RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR.)
SALES
The Company recorded net sales of $6.97 billion for the year ended
December 31, 1997, compared to sales of $6.87 billion in 1996 and $6.75
billion in 1995. The increase in net sales in 1997 over 1996 was a result of
same-store merchandise sales growth, combined with an increase in stores
that sold gasoline. The net sales increase in 1996 when compared to 1995 was
due to same-store merchandise sales growth, combined with an increase in the
sales price of gasoline. The following table illustrates the growth in
merchandise sales:
<TABLE>
<CAPTION>
MERCHANDISE SALES GROWTH DATA (PER-STORE)
YEARS ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Increase/(Decrease) from prior year
U.S. same-store sales growth 1.5% 1.4% 2.0%
U.S. same-store real sales growth,excluding inflation .6% (1.0)% -
7 Eleven inflation .9% 2.4% 2.1%
</TABLE>
The last two quarters of 1997 reflected a favorable merchandise sales
trend, with third quarter U.S. same-store merchandise sales growth of 2.2%,
followed by fourth quarter growth of 2.8%, the highest such increase since
the fourth quarter of 1994. The Company believes that this trend is, in
part, a result of changes made to the merchandising organization and its
processes in the second quarter of 1997.
While average per-store merchandise sales growth in 1997 and 1996 was
fairly consistent among the various geographical areas, category results
were mixed:
Categories driving the 1997 merchandise sales increase were
coffee, Slurpee, non-carbonated beverages, tobacco, services,
fresh bakery and roller grill products. Certain mature categories
like candy and soft drinks were virtually flat, while others such
as fountain drinks and bread had slight declines.
Categories with significant sales improvement in 1996 included
pre-paid cards and services, while traditional convenience store
34
<PAGE>
products such as cigarettes, non-alcoholic beverages and
candy,which account for almost 40% of merchandise sales, had below
average growth.
During 1995 average per-store merchandise sales results varied by
geographic region. The largest sales increases occurred in those areas with
the highest percentage of completed remodels (Florida 4.8%, Texas/Colorado
4.1%). Conversely, the Southern California area, which included 18% of the
Company's domestic stores, experienced a decline of almost 1.5% due to a
sluggish economy.
Gasoline sales dollars per store decreased slightly in 1997 after
increases of 7.3% and 4.0% in 1996 and 1995, respectively. Contributing to
the 1997 decrease was a .7% decline in average per store gallon volume with
the sales price being virtually flat to 1996. In 1996, the increase was
mostly due to the average sales price per gallon increasing almost 9 cents
per gallon over 1995.
OTHER INCOME
Other income of $89.4 million for 1997 was $3.1 million higher than
1996 and $11.0 million higher than 1995. The improvement is primarily the
result of increased royalty income from licensed operations. While some of
the royalty income could be unfavorably impacted by fluctuating exchange
rates, approximately 70% of the royalties are from area license agreements
with SEJ. Though the dollar equivalent of the SEJ royalty income will
fluctuate with exchange rate movements, the Company has effectively hedged
this exposure by using the royalty income to make principal and interest
payments on its yen-denominated loan.
Upon repayment of the yen loan, currently projected for 2001, the
royalty income will not be pledged. Thereafter, the royalties under that
license agreement will again be paid to the Company or may be used to
collateralize other financing arrangements. One year following such
repayment, the yen-denominated royalty payments from SEJ will be reduced by
approximately two-thirds in accordance with terms of the license agreement.
GROSS PROFITS
<TABLE>
<CAPTION>
MERCHANDISE GROSS PROFIT DATA
YEARS ENDED DECEMBER 31
------------------------------
1997 1996 1995
---- ------ ------
<S> <C> <C> <C>
Merchandise Gross Profit - (DOLLARS IN MILLIONS) $ 1,828.4 $ 1,787.7 $ 1,790.2
Increase/(decrease) from prior year - all stores
Average per-store gross
profit dollar change 2.3% 2.1% 3.1%
Margin percentage point change .12 (.19) (.01)
Average per-store merchandise sales 1.9% 2.7% 3.1%
</TABLE>
Total merchandise gross profit dollars increased in 1997 from both
higher average per-store sales and margins. The decline in 1996 was
primarily from store closings and a slightly lower margin.
The increase in merchandise margin in 1997 was primarily due to
improved sales in some higher-margin categories like Slurpee, coffee, non-
carbonated beverages and services. These increases were partially offset by
higher write-offs, as the Company focused on expanding its fresh-food
program, both geographically and with new products. More aggressive retail
pricing continues to present a challenge in today's increasingly more
competitive environment. Management is actively working to improve
merchandise margin while providing fair and consistent prices.
Cigarettes currently contribute approximately 14% of both the Company's
total merchandise gross profit and total sales. With the recent legal
settlements between cigarette manufacturers and several state governments,
the Company anticipates that the cost of cigarettes could rise in the near
future. Additionally, there are numerous examples of pending state and
federal legislation aimed at reducing minors' consumption of tobacco
products which include significant increases in cigarette taxes. It is
impossible to predict the exact impact these potential cost increases would
have on the Company's gross profits, partially due to uncertainties
regarding competitor reaction to the increases.
During 1996, merchandise margin declined slightly due to three main
factors: rising product costs, lower-than-average sales growth of high-
margin items and higher product write-offs.
In 1995, sales of higher-margin categories like pre-paid phone cards
and services performed well enough to offset cost increases in various other
categories that could not be passed on to the consumer for competitive
reasons.
<TABLE>
<CAPTION>
35
<PAGE>
GASOLINE GROSS PROFIT DATA
YEARS ENDED DECEMBER 31
---------------------------
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Gasoline Gross Profit - (DOLLARS IN MILLIONS) $ 183.8 $ 188.1 $ 192.9
Increase/(decrease) from prior year
Average per-store gross profit dollar change (3.5)% (1.4)% (3.3)%
Margin point change (in cents per gallon) (.38) (.17) (.60)
Average per-store gas gallonage (.7)% (.1)% 1.0%
</TABLE>
In 1997, gasoline gross profits declined $4.4 million from the levels
achieved in 1996. Excluding the stores on the west coast, the Company's
gasoline gross profits increased $1.2 million in 1997 compared to 1996. This
increase was comprised of a slight average per-store gallon increase and an
increase in gas store months. The stores on the west coast (24% of the
Company's total gas stores) were impacted by industry product supply
problems and intense competitive conditions, creating a situation where, in
some cases, the Company's cost exceeded other operator's retail price of
gasoline. In general, over the last two years, lower margins (in cents per
gallon) have been created by market conditions that have kept wholesale
costs high, while competitive pressures have kept retail prices in check. In
many of these situations, the Company has chosen to maintain margin levels
at the expense of gallonage growth. Although competitive pressures will
continue, the Company feels there is a chance the industry supply problems
experienced over the last two years may be easing.
<TABLE>
<CAPTION>
OPERATING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ("OSG&A")
YEARS ENDED DECEMBER 31
------------------------------
(DOLLARS IN MILLIONS) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total operating, selling, general and administrative
expenses $ 1,896.2 $ 1,841.2 $ 1,874.5
Ratio of OSG&A to sales 27.2% 26.8% 27.8%
Increase/(decrease)in OSG&A compared to prior year $ 55.0 $ (33.3) $ (22.3)
</TABLE>
The increase in OSG&A expenses, and the ratio to sales, in 1997
compared to 1996, is primarily the result of the following factors:
incremental costs related to the retail information system initiatives;
increase in store labor due to a tight labor market and minimum wage
increases; higher depreciation expense due to the extensive remodeling
program completed in late 1996, completion of new stores and other
initiatives; more environmental remediation; and higher store insurance due
to the comparison with favorable claims experience reflected in 1996.
OSG&A expenses, and the ratio to sales, declined in 1996, when compared
to 1995, despite the incremental costs of the retail information system
initiatives. The largest item contributing to the improvement was lower
insurance costs. Based upon favorable claims experience, the Company lowered
its insurance accruals. Other factors aiding the comparison included the
absence of a significant restructuring charge compared to a charge of $13.4
million in 1995, declines in environmental remediation expenses, savings
from reductions in force and lower expenses from having fewer stores.
The majority of the decrease in OSG&A expenses in 1995 resulted from
cost savings realized from reductions in force, combined with the effect of
having fewer stores (see Management Strategies). In December 1995, the
Company accrued $13.4 million for severance costs and realignment of office
space. These reductions were substantially complete in 1996, and changes in
estimates from the original accrual did not have a material impact on 1996
earnings.
The Company continues to review the functions necessary to enable its
stores to respond faster and more cost efficiently to rapidly changing
customer needs and preferences. In conjunction with this review, management
continues to realign and reduce personnel and office facilities, in order to
eliminate non-essential costs, while devoting resources to the
implementation of its retail information system and other strategic
initiatives. In early 1998, the Company implemented additional changes and
anticipates reflecting a one-time charge for severance benefits of
approximately $6.0 million in the first quarter of 1998. Management expects
future periods' expenses to increase with the continued roll-out of the
retail information system and accordingly, the ratio to sales is anticipated
to increase until the roll-out is substantially complete and more related
benefits are attained (see Management Strategies).
The Company is a defendant in two legal actions, which are referred to
as the 7-Eleven OFFF and Valente cases, filed by franchisees in 1993 and
1996, respectively, asserting various claims against the Company. A
nationwide settlement has recently been negotiated and, in connection with
the settlement, these two cases have been combined on behalf of a class of
all persons who operated 7-Eleven convenience stores in the United States at
36
<PAGE>
any time between January 1, 1987 and July 31, 1997, under franchise
agreements with the Company. Class members have until March 31, 1998 to opt
out of the settlement, and a final hearing to approve the settlement is
currently scheduled on April 24, 1998. The Company's accruals are sufficient
to cover the payment due under the settlement with no material impact upon
1997 earnings, as well as no anticipated impact on 1998 earnings.
INTEREST EXPENSE, NET
Net interest expense decreased slightly in 1997 compared to 1996 due to
lower average borrowing throughout the year, partially offset by lower
interest income due to the 1996 money order agreement.
Approximately 37% of the Company's debt contains floating rates that
would be unfavorably impacted by rising interest rates. The weighted average
interest rate for such debt was 5.80% for 1997 versus 5.83% and 6.62% for
1996 and 1995, respectively. The Company expects net interest expense in
1998 to remain relatively flat, based upon anticipated levels of debt and
interest rate projections, but there will be several offsetting items
impacting interest expense. Factors increasing 1998 interest expense include
higher borrowings/obligations to finance new store development and the
redemption of the Company's 12% Senior Subordinated Debentures ("12%
Debentures") which currently recognize no interest expense in accordance
with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructuring", as discussed further in the Debentures section of Note 8 to
the Consolidated Financial Statements. This redemption is being funded with
4-1/2% Convertible Quarterly Income Debt Securities ("1998 Convertible
Debt") due 2013 (see Liquidity and Capital Resources). Items which will
decrease 1998 interest expense include a lower interest rate on the existing
yen-denominated loan and higher capitalized interest. The interest rate on
the existing yen-denominated loan was reset in March of 1998, resulting in a
rate reduction of 315 basis points.
Net interest expense increased $4.6 million in 1996 compared to 1995
due to lower interest income, combined with higher interest expense from the
Convertible Quarterly Income Debt Securities ("1995 Convertible Debt") due
2010 which were issued in November 1995 and are not accounted for under SFAS
No. 15. The lower interest income was primarily the result of a new money
order agreement that eliminated interest income from the funding
arrangement; however, it provided lower cost of goods and operating costs,
which more than offset the impact of the lost interest. Interest on the 1995
Convertible Debt was almost entirely offset by reduced principal balances
and lower rates on floating rate debt.
37
<Page
In accordance with SFAS No. 15, no interest expense is recognized on
the Company's public debt securities. These securities were recorded at an
amount equal to the future undiscounted cash payments, both principal and
interest, and accordingly, the cash interest payments are charged against
the recorded amount of such securities and are not treated as interest
expense.
INCOME TAXES
The Company recorded tax expense in 1997 of $45.3 million, $41.3
million in 1996 and a tax benefit of $66.1 million in 1995. Higher income
tax expense in 1997, when compared to 1996, was due to a settlement of an
IRS tax examination, resulting in a $7.3 million tax benefit in 1996. The
increase in 1996 taxes versus 1995 resulted from the rise in earnings before
income taxes and extraordinary items, which increased by 29% in 1996
compared to 1995. The tax benefit in 1995 was the result of reversing a
valuation allowance, based on the Company's demonstrated ability to produce
higher levels of taxable income, resulting in the recognition of an $84.3
million deferred tax asset.
EXTRAORDINARY GAIN
On November 22, 1995, the Company completed a tender offer for 40% of
the face value of both its 5% First Priority Senior Subordinated Debentures
due December 15, 2003 ($180.6 million) and 4-1/2% Second Priority Senior
Subordinated Debentures-Series A ($82.7 million) due June 15, 2004
(collectively, the "Debentures"). Under the terms of the offer the final
clearing prices were $840.00 and $786.00 for the 5% and 4-1/2% Debentures,
respectively, per $1,000 face amount, resulting in a cash outlay by the
Company of $216.7 million. To finance the purchase of the Debentures, the
Company issued $300 million in 1995 Convertible Debt to Ito-Yokado Co.,
Ltd., and Seven-Eleven Japan Co., Ltd., the joint owners of IYG Holding
Company, which is the Company's majority shareholder. The Company recognized
a $103.2 million after-tax extraordinary gain on the purchase of the
Debentures in the fourth quarter of 1995. The gain resulted from purchasing
the Debentures below their face value and from retiring the future
undiscounted interest payments on that portion of the Debentures that were
purchased (see Interest Expense, Net section).
38
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's working capital is provided from three
sources: i) cash flows generated from its operating activities; ii) a $400
million commercial paper facility (guaranteed by Ito-Yokado Co., Ltd.); and
iii) short-term seasonal borrowings of up to $400 million (reduced by
outstanding letters of credit) under its revolving credit facility. The
Company believes that operating activities, coupled with available short-
term working capital facilities, will provide sufficient liquidity to fund
current operating and capital expenditure programs, as well as to service
debt requirements.
In February 1998, the Company issued $80 million of 1998 Convertible
Debt to Ito-Yokado Co., Ltd., and Seven-Eleven Japan Co., Ltd. The 1998
Convertible Debt is subordinated to all existing debt except the 1995
Convertible Debt which has the same priority ranking. The debt has a 15 year
life, no amortization and an interest rate of 4.5%. The instrument gives the
Company the right to defer interest payments thereon for up to 20
consecutive quarters. The debt mandatorily converts into 32,508,432 shares
of the Company's common stock if the Company's stock achieves certain levels
after the third anniversary of issuance. The proceeds from the 1998
Convertible Debt will be used to redeem the Company's 12% Debentures at par
with the remainder to be used for general corporate purposes. Redemption of
the 12% Debentures will result in a gain of nearly $30 million from the
retirement of future undiscounted interest payments as recorded under SFAS
No. 15.
39
<PAGE>
In February 1997, the Company entered into a new unsecured bank debt
credit agreement ("New Credit Agreement"), refinancing its old term loan
($225 million), revolving credit facility and letters of credit ($150
million each), collectively secured under the senior bank debt credit
agreement ("Old Credit Agreement"), all of which were scheduled to mature on
December 31, 1999, with a new term loan facility ("Term Loan") and revolving
credit facility. The Term Loan ($225 million) has scheduled quarterly
repayments of $14.1 million commencing March 31, 1998 through December 31,
2001. The new revolving credit facility ($400 million) expires February 2002
and allows for revolving borrowings ("Revolver"), and for issuance of
letters of credit not to exceed $150 million. Interest on the Term Loan and
Revolver is based on a variable rate equal to the administrative agent
bank's base rate or, at the Company's option, a rate equal to a reserve-
adjusted Eurodollar rate plus .225% per year for drawn amounts. The new
agreement requires letter of credit fees to be paid quarterly at .325% per
year on the outstanding amount. In addition, a facility fee of .15% per year
is charged on the aggregate amount of the New Credit Agreement facility and
is payable quarterly. The cost of borrowings and letters of credit under the
New Credit Agreement represents a decrease of .6% and .45% per year,
respectively, from the Old Credit Agreement.
In April 1997, the Company entered into a $115 million Master Lease
Facility ("MLF"), which will be the primary financing for a complete
integrated point-of-sale system (see Management Strategies). The lease
payment on the MLF will be based on a variable rate equal to the LIBOR rate
plus a blended all-inclusive spread of .46% per year. The six and one-half
year MLF has a three-year noncancellable term with semi-annual renewal
options. The commitment period for this lease expires in early 1999, and
based upon current roll-out schedules, the Company does not expect the MLF
to be fully funded at that time. As a result, the Company intends to seek an
extension of the MLF or find other financing, by the end of 1998, to fully
fund the roll-out of the point-of-sale system.
41
<PAGE>
The New Credit Agreement contains certain financial and operating
covenants requiring, among other things, the maintenance of certain
financial ratios, including interest and rent coverage, fixed-charge
coverage and senior indebtedness to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The covenant levels established by
the New Credit Agreement generally require continuing improvement in the
Company's financial condition. The covenants in the New Credit Agreement,
when compared to the Old Credit Agreement, allow the Company more
flexibility in its borrowing levels and capital expenditures.
For the period ended December 31, 1997, the Company was in compliance
with all of the covenants required under the New Credit Agreement, including
compliance with the principal financial and operating covenants (calculated
over the latest 12-month period) as follows:
<TABLE>
<CAPTION>
REQUIREMENTS
------------------------
Covenants Actuals Minimum Maximum
- --------- ------- ------- -------
<S> <C> <C> <C>
Interest coverage* 2.13 to 1.0 2.00 to 1.0 -
Fixed charge coverage 1.04 to 1.0 0.65 to 1.0 -
Senior indebtedness to EBITDA 3.20 to 1.0 - 3.40 to 1.0
*INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
</TABLE>
In 1997, the Company repaid $74.0 million of debt, which included
$33.2 million for principal payments on the Company's yen-denominated loan
(hedged by the royalty income stream from its area licensee in Japan) and
$22.4 million for SFAS No. 15 interest. Outstanding balances at December 31,
1997, for the commercial paper, the Term Loan and the Revolver, were $398.7
million, $225.0 million and $62.0 million, respectively. As of December 31,
1997, outstanding letters of credit issued pursuant to the New Credit
Agreement totaled $63.8 million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $197.9 million for 1997,
compared to $261.0 million in 1996 and $236.2 million in 1995. Contributing
to the decrease in net cash from operating activities was an increase in
inventories, caused by a December 1997 cigarette buy-in and generally higher
per-store inventory levels, combined with the timing of payments and
receipts (see Results of Operations section).
CAPITAL EXPENDITURES
During 1997, net cash used in investing activities consisted primarily
of payments of $232.5 million for property and equipment. The majority of
this capital was used for new store development, continued implementation of
the Company's retail information system, remodeling stores, new equipment to
support merchandising initiatives, upgrading retail gasoline facilities,
replacing equipment and complying with environmental regulations.
The proceeds from sale of property and equipment primarily consists of
the sale/leaseback funding of the master lease facility (see Note 12 of
Notes to Consolidated Financial Statements).
42
<PAGE>
The Company expects 1998 capital expenditures, excluding lease
commitments, to exceed $300 million. Capital expenditures are being used to
develop or acquire new stores, upgrade store facilities, further implement a
retail information system, replace equipment, upgrade gasoline facilities
and comply with environmental regulations. The amount of expenditures during
the year will be materially impacted by the proportion of new store
development funded through working capital versus leases and the speed at
which new sites/acquisitions can be located, negotiated, permitted and
constructed.
In February 1998, the Company announced the signing of a definitive
agreement with MDK Corporation of Goshen, Indiana, to acquire 23 'red D
mart' convenience stores in the South Bend, Indiana, area. The transaction
is scheduled to be completed in mid-1998.
CAPITAL EXPENDITURES - GASOLINE EQUIPMENT
The Company incurs ongoing costs to comply with federal, state and
local environmental laws and regulations primarily relating to underground
storage tank ("UST") systems. The Company anticipates it will spend
approximately $10 million in 1998 on capital improvements required to comply
with environmental regulations relating to USTs, as well as above-ground
vapor recovery equipment at store locations, and approximately an additional
$25 million on such capital improvements from 1999 through 2001.
ENVIRONMENTAL
In December 1988, the Company closed its chemical manufacturing
facility in New Jersey. As a result, the Company is required to conduct
environmental remediation at the facility and has submitted a clean-up plan
to the New Jersey Department of Environmental Protection (the "State"),
which provides for active remediation of the site for approximately a three-
to-five-year period, as well as continued groundwater monitoring and
treatment for a projected 15-year planning period. The projected 15-year
clean-up period represents a reduction from the previously reported 20-year
period and is a result of revised estimates as determined by an independent
environmental management company in the first quarter of 1997. These revised
estimates, which generally resulted from the conditional approval of the
Company's plan, reduced both the estimated time and the estimated costs to
complete the project and resulted in decreasing the liability and the
related receivable balances by $16.3 million and $9.7 million, respectively.
While conditional approval was received on its clean-up plan, the Company
must supply additional information to the State before the plan can be
finalized. The Company has recorded undiscounted liabilities representing
its best estimates of the clean-up costs of $10.4 million at December 31,
1997. In 1991, the Company and the former owner of the facility executed a
final settlement pursuant to which the former owner agreed to pay a
substantial portion of the clean-up costs. Based on the terms of the
settlement agreement and the financial resources of the former owner, the
Company has recorded a receivable of $6.1 million at December 31, 1997.
Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At December 31, 1997, the Company's
estimated undiscounted liability for these sites was $40.9 million. This
estimate is based on the Company's prior experience with gasoline sites and
its consideration of such factors as the age of the tanks, location of tank
sites and experience with contractors who perform environmental assessment
and remediation work. The Company anticipates that substantially all of the
future remediation costs for detected releases at these sites as of December
31, 1997, will be incurred within the next five years.
Under state reimbursement programs, the Company is eligible to receive
reimbursement for a portion of future remediation costs, as well as a
portion of remediation costs previously paid. Accordingly, at December 31,
1997, the Company has recorded a net receivable of $44.8 million for the
estimated probable state reimbursements. In assessing the probability of
state reimbursements, the Company takes into consideration each state's fund
balance, revenue sources, existing claim backlog, status of clean-up
activity and claim ranking systems. As a result of these assessments, the
recorded receivable amount is net of an allowance of $9.7 million. While
there is no assurance of the timing of the receipt of state reimbursement
funds, based on its experience, the Company expects to receive the majority
of state reimbursement funds, except from California, within one to three
years after payment of eligible remediation expenses, assuming that the
state administrative procedures for processing such reimbursements have been
fully developed. The Company estimates that it may take one to seven years
to receive reimbursement funds from California. Therefore, the portion of
the recorded receivable amounts that relates to sites where remediation
activities has been conducted has been discounted at 5.7% to reflect their
present value. Thus, the recorded receivable amount is also net of a
discount of $6.0 million.
The estimated future assessment and remediation expenditures and
related state reimbursement amounts could change within the near future as
governmental requirements and state reimbursement programs continue to be
implemented or revised.
43
<PAGE>
YEAR 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Some of the
Company's older computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations, causing disruptions of
operations.
The Company has replaced, over the last couple of years, or has plans
to replace significant portions of its existing systems with third-party-
provided software which properly interprets dates beyond December 31, 1999.
In addition, the Company has contracted resources to modify the remainder of
its existing software to make it year 2000 compliant. Based on a recent
assessment, the Company believes all system modifications and related
testing should be completed by early 1999.
The Company has initiated formal communications with its significant
suppliers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own year 2000 issue. At this
time, based on presently available information, the Company does not foresee
any material effects related to outside-company compliance.
The Company does not believe the costs related to the year 2000
compliance project will be material to its financial position or results of
operations. However, the costs of the project and the date on which the
Company plans to complete the year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. As a result,
there can be no assurance that these estimates will be achieved and the
actual costs and vendor compliance could differ materially from those plans,
resulting in a material financial risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1997, 1996 and 1995
45
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
ASSETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 38,605 $ 36,494
Accounts receivable 126,495 109,413
Inventories 125,396 109,050
Other current assets 96,145 95,943
----------- -----------
TOTAL CURRENT ASSETS 386,641 350,900
PROPERTY AND EQUIPMENT 1,416,687 1,349,839
OTHER ASSETS 286,753 338,409
----------- -----------
$ 2,090,081 $ 2,039,148
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 196,799 $ 211,060
Accrued expenses and other liabilities 275,267 297,246
Commercial paper 48,744 98,055
Long-term debt due within one year 208,839 68,571
----------- -----------
TOTAL CURRENT LIABILITIES 729,649 674,932
DEFERRED CREDITS AND OTHER LIABILITIES 187,414 214,343
LONG-TERM DEBT 1,594,545 1,638,828
CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES 300,000 300,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value; 1,000,000,000 shares
authorized; 409,922,935 shares issued and outstanding 41 41
Additional capital 625,574 625,574
Accumulated deficit (1,347,142) (1,414,570)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (721,527) (788,955)
------------ ------------
$ 2,090,081 $ 2,039,148
=========== ===========
</TABLE>
See notes to consolidated financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Net sales (including $971,124, $961,987 and $977,828
in excise taxes) $ 6,971,145 $ 6,868,912 $ 6,745,820
Other income 89,412 86,351 78,458
------------- ------------- -------------
7,060,557 6,955,263 6,824,278
COSTS AND EXPENSES:
Cost of goods sold 4,958,926 4,893,061 4,762,707
Operating, selling, general and administrative expenses 1,896,206 1,841,174 1,874,460
Interest expense, net 90,130 90,204 85,582
------------- ------------- -------------
6,945,262 6,824,439 6,722,749
------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 115,295 130,824 101,529
INCOME TAXES (BENEFIT) 45,253 41,348 (66,065)
------------- ------------- -------------
EARNINGS BEFORE EXTRAORDINARY GAIN 70,042 89,476 167,594
EXTRAORDINARY GAIN ON DEBT REDEMPTION (net
of tax effect of $8,603) - - 103,169
------------- ------------- -------------
NET EARNINGS $ 70,042 $ 89,476 $ 270,763
============= ============= =============
EARNINGS BEFORE EXTRAORDINARY GAIN PER COMMON SHARE:
Basic $ .17 $ .22 $ .41
Diluted $ .16 $ .20 $ .40
EXTRAORDINARY GAIN ON DEBT REDEMPTION PER COMMON SHARE:
Basic - - $ .25
Diluted - - $ .25
NET EARNINGS PER COMMON SHARE:
Basic $ .17 $ .22 $ .66
Diluted $ .16 $ .20 $ .65
See notes to consolidated financial statements.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
------------------------ ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
- ------------------------------ ----------- ------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 409,922,935 $ 41 $ 625,574 $ (1,782,846) $ (1,157,231)
Net earnings - - - 270,763 270,763
Foreign currency translation
adjustments - - - (2,470) (2,470)
Unrealized gains on equity
securities, net of tax - - - 8,146 8,146
- ------------------------------ ----------- ------ ----------- ------------- ---------------
BALANCE, DECEMBER 31, 1995 409,922,935 41 625,574 (1,506,407) (880,792)
Net earnings - - - 89,476 89,476
Foreign currency translation
adjustments - - - (258) (258)
Unrealized gains on equity
securities, net of tax - - - 2,619 2,619
- ------------------------------ ----------- ------ ----------- ------------- ---------------
BALANCE, DECEMBER 31, 1996 409,922,935 41 625,574 (1,414,570) (788,955)
Net earnings - - - 70,042 70,042
Foreign currency translation
adjustments - - - (1,040) (1,040)
Unrealized gains on equity
securities, net of tax - - - (1,574) (1,574)
- ------------------------------ ----------- ------ ----------- ------------- ---------------
BALANCE, DECEMBER 31, 1997 409,922,935 $ 41 $ 625,574 $ (1,347,142) $ (721,527)
=========== ====== =========== ============= ===============
See notes to consolidated financial statements.
48
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 70,042 $ 89,476 $ 270,763
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary gain on debt redemption - - (103,169)
Depreciation and amortization of property and equipment 177,174 166,347 147,423
Other amortization 19,026 19,026 19,026
Deferred income taxes (benefit) 31,812 23,790 (84,269)
Noncash interest expense 2,342 1,746 1,974
Other noncash expense (income) 96 182 (409)
Net loss on property and equipment 2,391 1,714 7,274
(Increase) decrease in accounts receivable (6,560) 4,824 (2,708)
Increase in inventories (16,346) (7,030) (552)
(Increase) decrease in other assets (5,781) 386 (1,053)
Decrease in trade accounts payable and other liabilities (76,250) (39,421) (18,083)
------------- ------------- -------------
Net cash provided by operating activities 197,946 261,040 236,217
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (232,539) (194,373) (192,221)
Proceeds from sale of property and equipment 39,648 14,499 15,720
Other 6,908 9,588 2,770
------------- ------------- -------------
Net cash used in investing activities (185,983) (170,286) (173,731)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities 5,907,243 4,292,215 4,171,927
Payments under commercial paper and revolving credit facilities (5,842,539) (4,249,134) (4,256,918)
Proceeds from issuance of long-term debt 225,000 - -
Principal payments under long-term debt agreements (299,005) (140,388) (289,372)
Proceeds from issuance of convertible quarterly income debt securities - - 300,000
Debt issuance costs (551) - (4,364)
------------- ------------- -------------
Net cash used in financing activities (9,852) (97,307) (78,727)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,111 (6,553) (16,241)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36,494 43,047 59,288
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 38,605 $ 36,494 $ 43,047
============= ============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest $ (97,568) $ (100,777) $ (97,945)
============= ============= =============
Net income taxes paid $ (10,482) $ (18,918) $ (34,674)
============= ============= =============
Assets obtained by entering into capital leases $ 56,745 $ 3,761 $ 71
============= ============= =============
See notes to consolidated financial statements.
49
</TABLE>
<PAGE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The Southland Corporation and
subsidiaries ("the Company") is owned approximately 65% by IYG
Holding Company, which is jointly owned by Ito-Yokado Co., Ltd.
("IY") and Seven-Eleven Japan Co., Ltd. ("SEJ").
The consolidated financial statements include the accounts of The
Southland Corporation and its subsidiaries. Intercompany
transactions and account balances are eliminated. Prior-year and
quarterly amounts have been reclassified to conform to the current-
year presentation.
The Company operates more than 5,400 7-Eleven and other convenience
stores in the United States and Canada. Area licensees, or their
franchisees, and affiliates operate approximately 11,700 additional
7-Eleven convenience stores in certain areas of the United States, in
18 foreign countries and in the U. S. territories of Guam and Puerto
Rico. The Company's net sales are comprised of sales of groceries,
take-out foods and beverages, gasoline (at certain locations), dairy
products, non-food merchandise, specialty items and services.
Net sales and cost of goods sold of stores operated by franchisees
are consolidated with the results of Company-operated stores. Net
sales of stores operated by franchisees are $2,880,148,000,
$2,860,768,000 and $2,832,131,000 from 2,868, 2,927 and 2,896 stores
for the years ended December 31, 1997, 1996 and 1995, respectively.
Under the present franchise agreements, initial franchise fees are
recognized in income currently and are generally calculated based
upon gross profit experience for the store or market area. These
fees cover certain costs including training, an allowance for travel,
meals and lodging for the trainees and other costs relating to the
franchising of the store.
The gross profit of the franchise stores is split between the Company
and its franchisees. The Company's share of the gross profit of
franchise stores is its continuing franchise fee, generally ranging
from 50% to 58% of the gross profit of the store, which is charged to
the franchisee for the license to use the 7-Eleven operating system
and trademarks, for the lease and use of the store premises and
equipment, and for continuing services provided by the Company.
These services include merchandising, advertising, recordkeeping,
store audits, contractual indemnification, business counseling
services and preparation of financial summaries. The gross profit
earned by the Company's franchisees of $524,941,000, $520,216,000 and
$518,777,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, is included in the Consolidated Statements of Earnings
as operating, selling, general and administrative expenses ("OSG&A").
50
<PAGE>
Sales by stores operated under domestic and foreign area license
agreements are not included in consolidated revenues. All fees or
royalties arising from such agreements are included in other income.
Initial fees, which have been immaterial, are recognized when the
services required under the agreements are performed.
OTHER INCOME - Other income is primarily area license royalties and
franchise fee income. The area license royalties include amounts
from area license agreements with SEJ of approximately $50,000,000,
$47,000,000 and $44,000,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
COMPREHENSIVE INCOME - The Company intends to adopt Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," in 1998. The statement establishes standards
for reporting comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is
the change in equity of a business enterprise during a period from
net income and other events, except activity resulting from
investments by owners and distributions to owners. SFAS No. 130
becomes effective for fiscal years beginning after December 15,
1997.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Buying and
occupancy expenses are included in OSG&A. Advertising costs, also
included in OSG&A, generally are charged to expense as incurred and
were $35,111,000, $34,707,000 and $39,569,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
INTEREST EXPENSE - Interest expense is net of interest income of
$8,788,000, $10,649,000 and $16,975,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
INCOME TAXES - Income taxes are determined using the liability
method, where deferred tax assets and liabilities are recognized for
temporary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. Deferred tax
assets include tax carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be
realized.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investment instruments purchased with maturities of three months or
less to be cash equivalents. Cash and cash equivalents include
temporary cash investments of $5,240,000 and $12,252,000 at December
31, 1997 and 1996, respectively, stated at cost, which approximates
market.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost is generally determined by the LIFO method for stores in the
United States and by the FIFO method for stores in Canada.
DEPRECIATION AND AMORTIZATION - Depreciation of buildings and
equipment is based on the estimated useful lives of these assets
using the straight-line method. Acquisition and development costs
for significant business systems and related software for internal
use are capitalized and are depreciated on a straight-line basis over
a three-to-seven-year period based on their estimated useful lives.
51
<PAGE>
Amortization of capital leases, improvements to leased properties
and favorable leaseholds is based on the remaining terms of the
leases or the estimated useful lives, whichever is shorter.
Foreign and domestic area license royalty intangibles were recorded
in 1987 at the fair value of future royalty payments and are being
amortized over 20 years using the straight-line method. The 20-year
life is less than the estimated lives of the various royalty
agreements, the majority of which are perpetual.
STORE CLOSINGS / ASSET IMPAIRMENT - Provision is made on a current
basis for the write-down of identified owned-store closings to their
net realizable value. For identified leased-store closings,
leasehold improvements are written down to their net realizable value
and a provision is made on a current basis if anticipated expenses
are in excess of expected sublease rental income. The Company's
long-lived assets are reviewed for impairment and written down to
fair value whenever events or changes in circumstances indicate that
the carrying value may not be recoverable.
STOCK-BASED COMPENSATION - The Company has adopted the disclosure-
only requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," and therefore continues to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its stock-based
compensation plans. Pursuant to the requirements of SFAS No. 123,
which defines a fair-value-based method of accounting for employee
stock options, the Company provides pro forma net earnings and
earnings-per-share disclosures as if it were using that statement to
account for its employee stock option plans.
ENVIRONMENTAL - Environmental expenditures related to existing
conditions resulting from past or current operations and from which
no current or future benefit is discernible are expensed by the
Company. Expenditures that extend the life of the related property
or prevent future environmental contamination are capitalized. The
Company determines its liability on a site-by-site basis and records
a liability when it is probable and can be reasonably estimated.
The estimated liability of the Company is not discounted.
A portion of the environmental expenditures incurred for gasoline
sites is eligible for refund under state reimbursement programs. A
related receivable is recorded for estimated probable refunds. The
receivable is discounted if the amount relates to sites where
remediation activities have been conducted. A receivable is also
recorded to reflect estimated probable reimbursement from other
parties.
INSURANCE - The Company has established insurance programs to cover
certain insurable risks consisting primarily of physical loss to
property, business interruptions resulting from such loss, workers'
compensation, employee healthcare, comprehensive general and auto
liability. Third-party insurance coverage is obtained for property
and casualty exposures above predetermined deductibles as well as
those risks required to be insured by law or contract. Provisions
for losses expected under the insurance programs are recorded based
on independent actuarial estimates of the aggregate liabilities for
claims incurred.
52
<PAGE>
BUSINESS SEGMENT - The Company operates in a single business segment
- - the operating, franchising and licensing of convenience food
stores, primarily under the 7-Eleven name. SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," was recently issued and the Company is reviewing its
requirements to determine the effect on future disclosures. SFAS
No. 131 becomes effective for fiscal years beginning after December
15, 1997.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
---- ----
<S> <C> <C>
(Dollars in Thousands)
Trade accounts receivable $ 50,235 $ 37,690
Franchisee accounts receivable 55,449 46,345
Environmental cost reimbursements
(net of long-term portion of
$38,716 and $53,886) - see Note 13 12,219 14,366
Other accounts receivable 15,388 16,021
----------- -----------
133,291 114,422
Allowance for doubtful accounts (6,796) (5,009)
----------- -----------
$ 126,495 $ 109,413
=========== ===========
</TABLE>
3. INVENTORIES
Inventories stated on the LIFO basis that are included in inventories
in the accompanying Consolidated Balance Sheets were $81,360,000 and
$66,272,000 at December 31, 1997 and 1996, respectively, which is
less than replacement cost by $31,525,000 and $31,418,000,
respectively.
53
<PAGE>
4. OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
--------- -----------
<S> <C> <C>
(Dollars in Thousands)
Prepaid expenses $ 22,640 $ 20,298
Deferred tax assets - see Note 14 65,640 70,438
Other 7,865 5,207
---------- ----------
$ 96,145 $ 95,943
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Cost:
Land $ 461,568 $ 453,233
Buildings and leaseholds 1,356,856 1,310,927
Equipment 911,598 790,718
Construction in process 38,152 32,614
------------- -------------
2,768,174 2,587,492
Accumulated depreciation and amortization (1,351,487) (1,237,653)
------------- -------------
$ 1,416,687 $ 1,349,839
============= =============
</TABLE>
54
<PAGE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Japanese license royalty intangible
(net of accumulated amortization of
$165,019 and $149,004) $ 153,482 $ 169,497
Other license royalty intangibles
(net of accumulated amortization of
$29,423 and $26,586) 27,181 30,018
Environmental cost reimbursements -
see Note 13 38,716 53,886
Deferred tax assets - see Note 14 - 13,158
Other (net of accumulated amortization
of $5,827 and $6,694) 67,374 71,850
---------- ----------
$ 286,753 $ 338,409
========== ==========
</TABLE>
7. ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Insurance $ 69,412 $ 78,681
Compensation 42,931 45,256
Taxes 52,400 52,802
Environmental costs - see Note 13 19,818 23,654
Profit sharing - see Note 11 14,780 15,641
Interest 17,173 18,517
Other 58,753 62,695
--------- ---------
$ 275,267 $ 297,246
========= =========
</TABLE>
55
<PAGE>
8. DEBT
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
---- ----
<S> <C> <C>
(Dollars in Thousands)
Bank Debt Term Loans $ 225,000 $ 225,000
Bank Debt revolving credit facility 62,000 -
Commercial paper 350,000 300,000
5% First Priority Senior Subordinated
Debentures due 2003 350,556 364,056
4-1/2% Second Priority Senior Subordinated
Debentures (Series A) due 2004 159,823 165,387
4% Second Priority Senior Subordinated
Debentures (Series B) due 2004 23,645 24,396
12% Second Priority Senior Subordinated
Debentures (Series C) due 2009 51,853 54,468
6-1/4% Yen Loan 168,198 201,447
7-1/2% Cityplace Term Loan due 2005 277,926 282,606
Capital lease obligations 125,777 82,833
Other 8,606 7,206
----------- -----------
1,803,384 1,707,399
Less long-term debt due within one year 208,839 68,571
----------- -----------
$ 1,594,545 $ 1,638,828
=========== ============
</TABLE>
BANK DEBT - At December 31, 1996, the Company was obligated to a
group of lenders under a credit agreement that included term loans
and a revolving credit facility. In February 1997, the Company
repaid all amounts due under that credit agreement with proceeds from
a group of lenders under a new, unsecured credit agreement ("Credit
Agreement"). The new Credit Agreement includes a $225 million term
loan, which replaced the previous term loan of equal amount, and a
$400 million revolving credit facility. A sublimit of $150 million
for letters of credit is included in the revolving credit facility.
In addition, to the extent outstanding letters of credit are less
than the $150 million maximum, the excess availability can be used
for additional borrowings under the revolving credit facility.
The term loan, which matures on December 31, 2001, had no payments
due in 1997. Commencing March 31, 1998, the loans will be repaid in
16 quarterly installments of $14,062,500. Upon expiration of the
revolving credit facility in February 2002, all the then-outstanding
letters of credit must expire and may need to be replaced, and all
other amounts then outstanding will be due and payable in full. At
December 31, 1997, outstanding letters of credit under the facility
totaled $63,757,000.
Interest on the new term loan and borrowings under the revolving
credit facility is generally payable quarterly and is based on a
variable rate equal to the administrative agent bank's base rate
56
<PAGE>
or, at the Company's option, at a rate equal to a reserve-adjusted
Eurodollar rate plus .225% per year. A fee of .325% per year on the
outstanding amount of letters of credit is required to be paid
quarterly. In addition, a facility fee of .15% per year is charged
on the aggregate amount of the credit agreement facility and is
payable quarterly. The weighted-average interest rate on the term
loan outstanding at December 31, 1997 and 1996, respectively, was
6.1% and 6.3%. The weighted-average interest rate on the revolving
credit facility borrowings outstanding at December 31, 1997, was
8.5%. Year-end revolving credit borrowings were made under the base
rate (prime rate) option and were converted to lower Eurodollar-based
and competitive bid borrowings in early January 1998.
The Credit Agreement contains various financial and operating
covenants which require, among other things, the maintenance of
certain financial ratios including interest and rent coverage, fixed-
charge coverage and senior indebtedness to earnings before interest,
income taxes, depreciation and amortization. The Credit Agreement
also contains various covenants which, among other things, (a) limit
the Company's ability to incur or guarantee indebtedness or other
liabilities other than under the Credit Agreement, (b) restrict the
Company's ability to engage in asset sales and sale/leaseback
transactions, (c) restrict the types of investments the Company can
make and (d) restrict the Company's ability to pay cash dividends,
redeem or prepay principal and interest on any subordinated debt and
certain senior debt.
COMMERCIAL PAPER - The Company has a facility that provides for the
issuance of up to $400 million in commercial paper. At December 31,
1997 and 1996, $350 million and $300 million of the respective
$398,744,000 and $398,055,000 outstanding principal amounts, net of
discount, was classified as long-term debt since the Company intends
to maintain at least this amount outstanding during the next year.
Such debt is unsecured and is fully and unconditionally guaranteed by
IY. IY has agreed to continue its guarantee of all commercial paper
issued through 1999. While it is not anticipated that IY would be
required to perform under its commercial paper guarantee, in the
event IY makes any payments under the guarantee, the Company and IY
have entered into an agreement by which the Company is required to
reimburse IY subject to restrictions in the Credit Agreement. The
weighted-average interest rate on commercial paper borrowings
outstanding at December 31, 1997 and 1996, respectively, was 5.8% and
5.4%.
DEBENTURES - The Debentures are accounted for in accordance with SFAS
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructuring," and were recorded at an amount equal to the future
undiscounted cash payments, both principal and interest ("SFAS No. 15
Interest"). Accordingly, no interest expense will be recognized over
the life of these securities, and cash interest payments will be
charged against the recorded amount of such securities. Interest on
all of the Debentures is payable in cash semiannually on June 15 and
December 15 of each year.
The 5% First Priority Senior Subordinated Debentures, due
December 15, 2003, had an outstanding principal amount of
$269,993,000 at December 31, 1997, and are redeemable at any time at
the Company's option at 100% of the principal amount.
57
<PAGE>
The Second Priority Senior Subordinated Debentures were issued in
three series, and each series is redeemable at any time at the
Company's option at 100% of the principal amount and are described as
follows:
- 4-1/2% Series A Debentures, due June 15, 2004, with an
outstanding principal amount of $123,654,000 at December 31,
1997.
- 4% Series B Debentures, due June 15, 2004, with an outstanding
principal amount of $18,766,000 at December 31, 1997.
- 12% Series C Debentures, due June 15, 2009 ("12% Debentures"),
with an outstanding principal amount of $21,787,000 at
December 31, 1997.
In November 1995, the Company purchased $180,621,000 of the principal
amount of its First Priority Senior Subordinated Debentures due 2003
("5% Debentures") and $82,719,000 of the principal amount of its
4-1/2% Second Priority Senior Subordinated Debentures (Series A) due
2004 ("4-1/2% Debentures") (collectively, "Refinanced Debentures")
with a portion of the proceeds from the issuance of $300 million
principal amount of Convertible Quarterly Income Debt Securities (see
Note 9). The purchase of the Refinanced Debentures resulted in an
extraordinary gain of $103,169,000 (net of tax effect of $8,603,000)
as a result of the discounted purchase price and the inclusion of
SFAS No. 15 Interest in the carrying amount of the debt.
Prior to the refinancing, the 5% Debentures were subject to annual
sinking fund requirements of $27,045,000 due each December 15,
commencing 1996 through 2002. The Company used its purchase of the 5%
Debentures to satisfy such sinking fund requirements in direct order
of maturity until December 15, 2002, at which time a sinking fund
payment of $8,696,000 will be due.
The Debentures contain certain covenants that, among other things,
(a) limit the payment of dividends and certain other restricted
payments by both the Company and its subsidiaries, (b) require the
purchase by the Company of the Debentures at the option of the holder
upon a change of control, (c) limit additional indebtedness, (d)
limit future exchange offers, (e) limit the repayment of subordinated
indebtedness, (f) require board approval of certain asset sales, (g)
limit transactions with certain stockholders and affiliates and (h)
limit consolidations, mergers and the conveyance of all or
substantially all of the Company's assets.
The First and Second Priority Senior Subordinated Debentures are
subordinate to the borrowings outstanding under the Credit Agreement
and to previously outstanding mortgages and notes that are either
backed by specific collateral or are general unsecured,
unsubordinated obligations. The Second Priority Debentures are
subordinate to the First Priority Debentures.
YEN LOAN - In March 1988, the Company monetized its future royalty
payments from SEJ, its area licensee in Japan, through a loan that
is nonrecourse to the Company as to principal and interest. The
original amount of the yen-denominated debt was 41 billion yen
(approximately $327,000,000 at the exchange rate in March 1988) and
is collateralized by the Japanese trademarks and a pledge of the
future royalty payments. By designating its future royalty
58
<PAGE>
receipts during the term of the loan to service the monthly interest
and principal payments, the Company has hedged the impact of future
exchange rate fluctuations. Payment of the debt is required no later
than March 2006 through future royalties from the Japanese licensee.
The Company believes it is a remote possibility that there will be
any principal balance remaining at that date because current royalty
projections suggest the Yen Loan could be repaid as early as 2001.
Upon the later of February 28, 2000, or the date which is one year
following the final repayment of the loan, royalty payments from the
area licensee in Japan will be reduced by approximately two-thirds in
accordance with the terms of the license agreement. The current
interest rate of 6-1/4% will be reset before the end of March 1998 to
a rate that is .5% in excess of the Japanese long-term lending rate,
which was 2.3% as of December 31, 1997. The Company anticipates that
the new rate will be lower than the current rate.
CITYPLACE DEBT - Cityplace Center East Corporation ("CCEC"), a
subsidiary of the Company, constructed the headquarters tower,
parking garages and related facilities of the Cityplace Center
development and is currently obligated to The Sanwa Bank, Limited,
Dallas Agency ("Sanwa"), which has a lien on the property financed.
The debt with Sanwa has monthly payments of principal and interest
based on a 25-year amortization at 7-1/2%, with the remaining
principal due on March 1, 2005 (the "Cityplace Term Loan").
The Company is occupying part of the building as its corporate
headquarters and the balance is subleased. As additional
consideration through the extended term of the debt, CCEC will pay to
Sanwa an amount that it receives from the Company which is equal to
the net sublease income that the Company receives on the property and
60% of the proceeds, less $275 million and permitted costs, upon a
sale or refinancing of the building.
MATURITIES - Long-term debt maturities assume the continuance of the
commercial paper program. The maturities, which include capital
lease obligations and sinking fund requirements, as well as SFAS No.
15 Interest accounted for in the recorded amount of the Debentures,
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 208,839
1999 155,629
2000 152,659
2001 132,600
2002 51,625
Thereafter 1,102,032
------------
$ 1,803,384
============
</TABLE>
59
<PAGE>
9. CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES DUE 2010
In November 1995, the Company issued $300 million principal amount of
Convertible Quarterly Income Debt Securities due 2010 ("Convertible
Debt") to IY and SEJ. The Company used $216,739,000 of the proceeds
to purchase the Refinanced Debentures (see Note 8), and the remaining
proceeds were designated for general corporate purposes. The
Convertible Debt has an interest rate of 4-1/2% and gives the Company
the right to defer interest payments thereon for up to 20 consecutive
quarters. The holder of the Convertible Debt can convert it into a
maximum of 72,112,000 shares of the Company's common shares. The
conversion rate represents a premium to the market value of the
Company's common stock at the time of issuance of the Convertible
Debt. As of December 31, 1997, no shares had been issued as a result
of debt conversion. The Convertible Debt is subordinate to all
existing debt.
In addition to the principal amount of the Convertible Debt, the
financial statements include interest payable of $563,000 in both
1997 and 1996 and interest expense of $13,733,000, $13,658,000 and
$1,332,000 in 1997, 1996 and 1995, respectively, related to the
Convertible Debt.
10. FINANCIAL INSTRUMENTS
FAIR VALUE - The disclosure of the estimated fair value of financial
instruments has been determined by the Company using available
market information and appropriate valuation methodologies as
indicated below.
The carrying amounts of cash and cash equivalents, trade accounts
receivable, trade accounts payable and accrued expenses and other
liabilities are reasonable estimates of their fair values. Letters
of credit are included in the estimated fair value of accrued
expenses and other liabilities.
The carrying amounts and estimated fair values of other financial
instruments at December 31, 1997, are listed in the following table:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
---------- ----------
<S> <C> <C>
(Dollars in Thousands)
Bank Debt $ 287,000 $ 287,000
Commercial Paper 398,744 398,744
Debentures 585,877 371,138
Yen Loan 168,198 162,973
Cityplace Term Loan 277,926 292,686
Convertible Debt
- not practicable to estimate fair value 300,000 -
</TABLE>
60
<PAGE>
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 15 days.
Therefore, the carrying amount of commercial paper is a reasonable
estimate of its fair value. The guarantee of the commercial paper
by IY is an integral part of the estimated fair value of the
commercial paper borrowings.
- The fair value of the Debentures is estimated based on
December 31, 1997, bid prices obtained from investment banking
firms where traders regularly make a market for these financial
instruments. The carrying amount of the Debentures includes
$151,677,000 of SFAS No. 15 Interest.
- The fair value of the Yen Loan is estimated by calculating the
present value of the future yen cash flows at current interest and
exchange rates.
- The fair value of the Cityplace Term Loan is estimated by
calculating the present value of the future cash flows at current
interest rates.
- It is not practicable, without incurring excessive costs, to
estimate the fair value of the Convertible Debt (see Note 9) at
December 31, 1997. The fair value would be the sum of the fair
values assigned to both an interest rate and an equity component
of the debt by a valuation firm.
DERIVATIVES - The Company is using derivative financial instruments
to reduce its exposure to market risk resulting from fluctuations
in both foreign exchange rates and interest rates (see Note 17).
On December 10, 1997, the Company hedged an anticipated yen-
denominated loan to be closed in the second quarter of 1998 by
purchasing a put option for 12.5 billion yen from a major financial
institution at a strike price of 129.53 yen per dollar. The cost
of the put option of $2,131,000 has been treated as deferred loan
costs and is recorded in other assets at December 31, 1997. If the
anticipated transaction does not close and the exchange rate is
below 129.53 yen per dollar, the Company will recognize the
$2,131,000 as expense. If the anticipated transaction does not
close and the exchange rate is above 129.53 yen per dollar, the
Company will receive value for the put, which could offset some or
all of the cost of the put and could result in additional income to
the Company.
In addition, as part of the transaction, the Company financed the
purchase of the put option by selling a call option at a strike
price of 125.08 yen per dollar with the same yen amount and
maturity as the put option, thereby committing the Company to
exchange at a rate of 125.08. The call option is marked to market
and had a balance of $1,614,000 included in accrued expenses and
other liabilities at December 31, 1997. If the exchange rate
appreciates below 125.08, the Company will lose proceeds from the
call. If the exchange rate appreciates below 123.09, the Company
will recognize expense in 1998.
61
<PAGE>
11. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLANS - The Company maintains profit sharing plans for
its U.S. and Canadian employees. In 1949, the Company excluding its
Canadian subsidiary ("Southland") adopted The Southland Corporation
Employees' Savings and Profit Sharing Plan (the "Savings and Profit
Sharing Plan") and, in 1970, the Company's Canadian subsidiary
adopted the Southland Canada, Inc., Profit Sharing Pension Plan. In
1997, the name of the Canadian plan was changed to the Southland
Canada, Inc., Pension Plan. These plans provide retirement benefits
to eligible employees.
Contributions to the Savings and Profit Sharing Plan, a 401(k)
defined contribution plan, are made by both the participants and
Southland. Southland contributes the greater of approximately 10% of
its net earnings or an amount determined by Southland's president.
Net earnings are calculated without regard to the contribution to the
Savings and Profit Sharing Plan, federal income taxes, gains from
debt repurchases and refinancings and, at the discretion of
Southland's president, income from accounting changes. The
contribution by Southland is generally allocated to the participants
on the basis of their individual contribution and years of
participation in the Savings and Profit Sharing Plan. The provisions
of the Southland Canada, Inc., Pension Plan are similar to those of
the Savings and Profit Sharing Plan. Total contributions to these
plans for the years ended December 31, 1997, 1996 and 1995 were
$12,977,000, $14,069,000 and $11,318,000, respectively, and are
included in OSG&A.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Effective January 1,
1998, the Company established The Southland Corporation Supplemental
Executive Retirement Plan for Eligible Employees (the "Supplemental
Executive Retirement Plan"), which is an unfunded employee pension
benefit plan maintained primarily to allow compensation to be
deferred by highly compensated employees as defined by the Internal
Revenue Service. Benefits under this plan constitute general
obligations of the Company, subject to the claims of general
creditors of the Company, and participants have no security or other
interest in such funds.
Contributions to the Supplemental Executive Retirement Plan, a
deferred compensation plan, are made by the participant and may be
made by the Company. A participant may elect to defer a maximum of
twelve percent of eligible compensation. The Company may make a
matching contribution, if so authorized each plan year, up to a
maximum of six percent of the participant's eligible compensation
minus the amount of the participant's deferral to the Savings and
Profit Sharing Plan. Matching contributions, if any, will be
credited to the participant's account at the same rate that
Southland matches under the Savings and Profit Sharing Plan, but
using years of service with the Company, minus one, rather than
years of participation in the Savings and Profit Sharing Plan to
determine a participant's group.
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
62
<PAGE>
for actual claims experience. All other future costs and cost
increases will be paid by the retirees. The Company continues to
fund its cost on a cash basis; therefore, no plan assets have been
accumulated.
Net periodic postretirement benefit costs for 1997, 1996 and 1995
include the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Dollars in Thousands)
Service cost $ 521 $ 595 $ 585
Interest cost 1,535 1,496 1,678
Amortization of unrecognized gain (603) (498) (583)
--------- --------- ---------
$ 1,453 $ 1,593 $ 1,680
========= ========= =========
</TABLE>
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.25% and 7.5% at
December 31, 1997 and 1996, respectively. Components of the accrual
recorded in the Consolidated Balance Sheets are as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
---- ----
<S> <C> <C>
(Dollars in Thousands)
Accumulated Postretirement
Benefit Obligation:
Retirees $ 10,158 $ 11,174
Active employees eligible to retire 5,866 4,772
Other active employees 5,214 5,251
----------- -----------
21,238 21,197
Unrecognized gains 7,724 7,623
----------- -----------
$ 28,962 $ 28,820
=========== ===========
</TABLE>
STOCK INCENTIVE PLAN - The Southland Corporation 1995 Stock Incentive
Plan (the "Stock Incentive Plan") was adopted by the Company in
October 1995 and approved by the shareholders in April 1996. The
Stock Incentive Plan provides for the granting of stock options,
stock appreciation rights, performance shares, restricted stock,
restricted stock units, bonus stock and other forms of stock-based
awards and authorizes the issuance of up to 41 million shares over a
ten-year period to certain key employees and officers of the Company.
All options granted in 1997, 1996 and 1995 were granted at an
exercise price that was equal to the fair market value on the date of
grant. The options granted are exercisable in five equal
installments beginning one year after grant date with possible
63
<PAGE>
acceleration thereafter based upon certain improvements in the price
of the Company's common stock.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the options granted: for each
year presented, expected life of five years and no dividend yields,
combined with risk-free interest rates of 5.81%, 6.39% and 5.89% in
1997, 1996 and 1995, respectively, and expected volatility of 51.37%
in 1997 and 55.49% in both 1996 and 1995.
A summary of the status of the Stock Incentive Plan as of December
31, 1997, 1996 and 1995, and changes during the years ending on those
dates, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- ------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Fixed Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- -------------------------------- -------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,618 $3.0895 3,864 $3.1875 - -
Granted 3,390 2.4690 3,978 3.0000 3,864 $3.1875
Exercised - - - - - -
Forfeited (508) 3.0679 (224) 3.1875 - -
-------- -------- -------
Outstanding at end of year 10,500 $2.8903 7,618 $3.0895 3,864 $3.1875
======== ======== =======
Options exercisable at year-end 2,126 $3.1231 728 $3.1875 - -
Weighted-average fair value of
options granted during the year $1.2691 $1.6413 $1.7243
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ -----------------------------
Weighted
Options Average Weighted Options Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
--------------- ----------- ---------------- -------------- ------------ ---------------
<C> <C> <C> <C> <C> <C>
$2.4690 3,389,500 9.87 $2.4690 - -
3.0000 3,653,940 8.75 3.0000 730,788 $3.0000
3.1875 3,456,360 7.81 3.1875 1,395,420 3.1875
----------- -----------
2.4690 - 3.1875 10,499,800 8.80 2.8903 2,126,208 3.1231
=========== ===========
</TABLE>
64
<PAGE>
The Company is accounting for the Stock Incentive Plan under the
provisions of APB No. 25 (see Note 1) and, accordingly, no
compensation cost has been recognized. If compensation cost had been
determined based on the fair value at the grant date for awards under
this plan consistent with the method prescribed by SFAS No. 123, the
Company's net earnings and earnings per share for the years ended
December 31, 1997, 1996 and 1995, would have been reduced to the pro
forma amounts indicated in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ----------
<S> <C> <C> <C>
(Dollars in Thousands,
Except Per-Share Data)
Net earnings:
As reported $70,042 $89,476 $270,763
Pro forma 68,542 88,520 270,610
Earnings per common share:
As reported
Basic $ .17 $ .22 $ .66
Diluted .16 .20 .65
Pro forma
Basic $ .17 $ .22 $ .66
Diluted .16 .20 .65
</TABLE>
EQUITY PARTICIPATION PLAN - In 1988, the Company adopted The
Southland Corporation Equity Participation Plan (the "Participation
Plan"), which provided for the granting of both incentive options and
nonstatutory options and the sale of convertible debentures to
certain key employees and officers of the Company. In the aggregate,
not more than 3,529,412 shares of common stock of the Company were
authorized for issuance pursuant to the Participation Plan.
Options were granted at the fair market value on the date of grant,
which was the same as the conversion price provided in the
debentures. All options and convertible debentures that were vested
became exercisable as of December 31, 1994. As of December 31, 1997,
no shares had been issued, and the right to exercise all outstanding
options and convertible debentures expired. Pursuant to its terms,
the Participation Plan terminated on that date.
GRANT STOCK PLAN - In 1988, the Company adopted The Southland
Corporation Grant Stock Plan (the "Stock Plan"). Under the
provisions of the Stock Plan, up to 750,000 shares of common stock
are authorized to be issued to certain key employees and officers
of the Company. The stock is fully vested upon the date of
issuance. As of December 31, 1997, 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.
65
<PAGE>
12. LEASES
LEASES - Certain property and equipment used in the Company's
business is leased. Generally, real estate leases are for primary
terms from 14 to 20 years with options to renew for additional
periods, and equipment leases are for terms from one to ten years.
The leases do not contain restrictions that have a material effect on
the Company's operations.
In April 1997, the Company obtained commitments from the same group
of lenders that participated in the Credit Agreement (see Note 8) for
up to $115 million of lease financing to be used primarily for
electronic point-of-sale equipment associated with the Company's
retail information system. On October 1, 1997, the Company received
$41,406,000 of the available funding under the lease facility and
intends to use the remainder of the funding as the system rollout
continues. Lease payments are variable based on changes in LIBOR.
Individual leases under this master lease facility have initial terms
that expire on June 30, 2000, at which time the Company has an option
to cancel all leases under this facility by purchasing the equipment
or arranging its sale to a third party. The Company also has the
option to renew the leases semiannually until five years after the
beginning of the individual leases. At each semiannual renewal date,
the Company has the option to purchase the equipment and end the
lease. Individual leases may be extended beyond five years through
an extended rental agreement.
The composition of capital leases reflected as property and equipment
in the Consolidated Balance Sheets is as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
---- -----
<S> <C> <C>
(Dollars in Thousands)
Buildings $ 111,946 $ 106,358
Equipment 43,115 142
----------- -----------
155,061 106,500
Accumulated amortization (72,059) (71,019)
----------- -----------
$ 83,002 $ 35,481
=========== ===========
</TABLE>
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.
66
<PAGE>
Future minimum lease payments for years ending December 31 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
(Dollars in Thousands)
1998 $ 31,890 $ 117,568
1999 29,976 95,955
2000 27,332 77,962
2001 24,618 63,157
2002 14,894 47,257
Thereafter 57,629 160,496
---------- ----------
Future minimum lease payments 186,339 $ 562,395
===========
Estimated executory costs (136)
Amount representing imputed interest (60,426)
----------
Present value of future minimum lease payments $ 125,777
==========
</TABLE>
Minimum noncancelable sublease rental income to be received in the
future, which is not included above as an offset to future payments,
totals $16,265,000 for capital leases and $13,427,000 for operating
leases.
Rent expense on operating leases for the years ended December 31,
1997, 1996 and 1995, totaled $136,516,000, $132,760,000 and
$125,456,000, respectively, including contingent rent expense of
$9,360,000, $9,438,000 and $8,508,000, but reduced by sublease rent
income of $6,620,000, $7,175,000 and $7,296,000. Contingent rent
expense on capital leases for the years ended December 31, 1997, 1996
and 1995, was $1,987,000, $2,088,000 and $2,399,000, respectively.
Contingent rent expense is generally based on sales levels or changes
in the Consumer Price Index.
67
<PAGE>
LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31,
1997, the Savings and Profit Sharing Plan owned 99 stores leased to
the Company under capital leases and 629 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, in 1997, 1996 and 1995, there were 64, 38 and 67 leases,
respectively, that either expired or, as a result of properties that
were sold by the Savings and Profit Sharing Plan to third parties,
were cancelled or assigned to the new owner. Also, one property was
sold to the Company by the Savings and Profit Sharing Plan in 1997.
Included in the consolidated financial statements are the following
amounts related to leases with the Savings and Profit Sharing Plan:
<TABLE>
<CAPTION>
December 31
------------------------
1997 1996
---- ----
<S> <C> <C>
(Dollars in Thousands)
Buildings (net of accumulated amortization
of $4,830 and $6,718) $ 513 $ 1,144
========= ==========
Capital lease obligations (net of current
portion of $709 and $1,200) $ 321 $ 1,055
========= =========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Dollars in Thousands)
Rent expense under operating leases and
amortization of capital lease assets $23,961 $25,670 $26,850
======= ======= =======
Imputed interest expense on capital
lease obligations $ 159 $ 299 $ 483
======= ======= =======
Capital lease principal payments included
in principal payments under long-term
debt agreements $ 1,183 $ 1,580 $ 1,818
======= ======= =======
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
MCLANE COMPANY, INC. - In connection with the 1992 sale of
distribution and food center assets to McLane, the Company and McLane
entered into a ten-year service agreement under which McLane is
making its distribution services available to 7-Eleven stores in the
United States. If the Company does not fulfill its obligation to
McLane during this time period, the Company must reimburse McLane on
a pro-rata basis for the transitional payment received at the time of
the transaction. The original payment received of $9,450,000 in 1992
is being amortized to cost of goods sold over the life of the
agreement. The Company has exceeded the minimum annual purchases
each year and expects to exceed the minimum required purchase levels
in future years.
68
<PAGE>
CITGO PETROLEUM CORPORATION - In 1986, the Company entered into a 20-
year product purchase agreement with Citgo to buy specified
quantities of gasoline at market prices. These prices are determined
pursuant to a formula based on the prices posted by gasoline
wholesalers in the various market areas where the Company purchases
gasoline from Citgo. Minimum required annual purchases under this
agreement are generally the lesser of 750 million gallons or 35% of
gasoline purchased by the Company for retail sale. The Company has
exceeded the minimum required annual purchases each year and expects
to exceed the minimum required annual purchase levels in future
years.
ENVIRONMENTAL - In December 1988, the Company closed its chemical
manufacturing facility in New Jersey. As a result, the Company is
required to conduct environmental remediation at the facility and
has submitted a clean-up plan to the New Jersey Department of
Environmental Protection (the "State"), which provides for active
remediation of the site for approximately a three-to-five-year
period, as well as continued groundwater monitoring and treatment
for a projected 15-year period approved by the State. The Company
has received conditional approval of its clean-up plan. The
projected 15-year clean-up period represents a reduction from the
previously reported 20-year period and is a result of revised
estimates as determined by an independent environmental management
company in the first quarter of 1997. These revised estimates,
which generally resulted from the conditional approval of the
Company's plan, reduced both the estimated time and the estimated
costs to complete the project and resulted in decreasing the
liability and the related receivable balances by $16.3 million and
$9.7 million, respectively. The Company has recorded undiscounted
liabilities representing its best estimates of the clean-up costs of
$10,442,000 and $30,900,000 at December 31, 1997 and 1996,
respectively. Of this amount, $8,624,000 and $25,246,000 are
included in deferred credits and other liabilities and the remainder
in accrued expenses and other liabilities for the respective years.
In 1991, the Company and the former owner of the facility executed
a final settlement pursuant to which the former owner agreed to pay
a substantial portion of the clean-up costs. Based on the terms of
the settlement agreement and the financial resources of the former
owner, the Company has recorded receivable amounts of $6,126,000 and
$18,227,000 at December 31, 1997 and 1996, respectively. Of this
amount, $4,907,000 and $14,861,000 are included in other assets and
the remainder in accounts receivable for 1997 and 1996,
respectively.
Additionally, the Company accrues for the anticipated future
costs and the related probable state reimbursement amounts for
remediation activities at its existing and previously operated
gasoline store sites where releases of regulated substances have
been detected. At December 31, 1997 and 1996, respectively, the
Company's estimated undiscounted liability for these sites was
$40,880,000 and $46,508,000, of which $22,880,000 and $28,508,000
are included in deferred credits and other liabilities and the
remainder is included in accrued expenses and other liabilities.
These estimates were based on the Company's prior experience with
gasoline sites and its consideration of such factors as the age of
the tanks, location of tank sites and experience with contractors
who perform environmental assessment and remediation work. The
Company anticipates that substantially all of the future remediation
costs for detected releases at these sites as of December 31, 1997,
will be incurred within the next five years.
69
<PAGE>
Under state reimbursement programs, the Company is eligible to
receive reimbursement for a portion of future remediation costs, as
well as a portion of remediation costs previously paid.
Accordingly, the Company has recorded net receivable amounts of
$44,809,000 and $50,025,000 for the estimated probable state
reimbursements, of which $33,809,000 and $39,025,000 are included in
other assets and the remainder in accounts receivable for 1997 and
1996, respectively. The Company increased the estimated net
environmental cost reimbursements at the end of 1996 by
approximately $7,500,000 as a result of completing a review of state
reimbursement programs. In assessing the probability of state
reimbursements, the Company takes into consideration each state's
fund balance, revenue sources, existing claim backlog, status of
clean-up activity and claim ranking systems. As a result of these
assessments, the recorded receivable amounts in other assets are net
of allowances of $9,704,000 and $9,459,000 for 1997 and 1996,
respectively. While there is no assurance of the timing of the
receipt of state reimbursement funds, based on the Company's
experience, the Company expects to receive the majority of state
reimbursement funds, except from California, within one to three
years after payment of eligible remediation expenses, assuming that
the state administrative procedures for processing such
reimbursements have been fully developed. The Company estimates
that it may take one to seven years to receive reimbursement funds
from California. Therefore, the portion of the recorded receivable
amounts that relates to sites where remediation activities have been
conducted has been discounted at 5.7% and 7% in 1997 and 1996,
respectively, to reflect its present value. The 1997 and 1996
recorded receivable amounts are net of discounts of $6,048,000 and
$6,398,000, respectively.
The estimated future remediation expenditures and related state
reimbursement amounts could change within the near future as
governmental requirements and state reimbursement programs continue
to be implemented or revised.
14. INCOME TAXES
The components of earnings before income taxes and extraordinary gain
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1997 1996 1995
------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Domestic (including royalties of
$67,259, $63,536 and $59,044
from area license agreements
in foreign countries) $ 109,982 $ 124,316 $ 98,775
Foreign 5,313 6,508 2,754
--------- --------- ---------
$ 115,295 $ 130,824 $ 101,529
========== ========== ==========
</TABLE>
70
<PAGE>
The provision for income taxes in the accompanying Consolidated
Statements of Earnings consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1997 1996 1995
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Current:
Federal $ 1,182 $ 5,054 $ 8,251
Foreign 11,559 10,704 8,968
State 700 1,800 985
-------- -------- ---------
Subtotal 13,441 17,558 18,204
Deferred:
Provision 31,812 23,790 60,709
Beginning of year valuation
allowance adjustment - - (144,978)
-------- --------- ---------
Subtotal 31,812 23,790 (84,269)
-------- --------- ---------
Income taxes (benefit) before
extraordinary gain $ 45,253 $ 41,348 $(66,065)
======== ========= =========
</TABLE>
Included in the accompanying Consolidated Statements of Shareholders'
Equity (Deficit) at December 31, 1997 and 1996, respectively, are
$5,870,000 and $6,882,000 of income taxes provided on unrealized
gains on marketable securities.
71
<PAGE>
Reconciliations of income taxes (benefit) before extraordinary gain
at the federal statutory rate to the Company's actual income taxes
provided are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1997 1996 1995
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Taxes at federal statutory rate $ 40,353 $ 45,788 $ 35,535
State income taxes, net of federal
income tax benefit 455 1,170 640
Foreign tax rate difference 2,095 1,077 886
Net change in valuation allowance
excluding the tax effect of the 1995
extraordinary item - - (108,632)
Settlement of IRS examination - (7,261) -
Other 2,350 574 5,506
--------- --------- ---------
$ 45,253 $ 41,348 $(66,065)
========= ========= =========
</TABLE>
The valuation allowance for deferred tax assets decreased in 1995 by
$174,589,000. The decrease consisted of a $90,320,000 decrease
resulting from changes in the Company's gross deferred tax assets and
liabilities and an $84,269,000 decrease resulting from a change in
estimate regarding the realizability of the Company's deferred tax
assets. Based on the Company's trend of positive earnings from 1993
through 1995 and future expectations, the Company determined that it
was more likely than not that its deferred tax assets would be fully
realized.
72
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1997 1996
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
SFAS No. 15 interest $ 65,559 $ 75,037
Compensation and benefits 40,729 42,573
Accrued insurance 33,838 39,494
Accrued liabilities 25,980 35,677
Tax credit carryforwards 13,981 8,924
Debt issuance costs 6,777 8,059
Other 6,312 5,056
---------- ---------
Subtotal 193,176 214,820
Deferred tax liabilities:
Area license agreements (70,459) (77,811)
Property and equipment (61,687) (41,636)
Other (10,791) (11,777)
---------- - --------
Subtotal (142,937) (131,224)
---------- ----------
Net deferred taxes $ 50,239 $ 83,596
========== ==========
</TABLE>
At December 31, 1997, the Company's net deferred tax asset is
recorded in other current assets (see Note 4) and deferred credits
and other liabilities. At December 31, 1996, the Company's net
deferred tax asset is recorded in other current assets and other
assets (see Notes 4 and 6).
At December 31, 1997, the Company had approximately $12,200,000 of
alternative minimum tax ("AMT") credit carryforwards and $1,700,000
of foreign tax credit carryforwards. The AMT credits have no
expiration date and the foreign tax credits expire in 2002.
73
<PAGE>
15. EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share," in December
1997. This statement, which replaces APB Opinion No. 15, "Earnings
per Share," establishes simplified accounting standards for computing
earnings per share ("EPS") and makes them comparable to international
EPS standards.
Basic EPS is computed by dividing net earnings by the weighted-
average number of common shares outstanding during each year.
Diluted EPS is computed by dividing net earnings, plus interest on
Convertible Debt (see Note 9) net of tax benefits, by the sum of the
weighted-average number of common shares outstanding, the weighted-
average number of common shares associated with the Convertible Debt
and the dilutive effects of the stock options outstanding (see Note
11) during each year. All prior-period EPS amounts presented have
been restated to conform to the provisions of SFAS No. 128.
A reconciliation of the numerators and the denominators of the basic
and diluted per-share computations for net earnings , as required by
SFAS No. 128, is presented below:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1997 1996 1995
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
BASIC EPS COMPUTATION:
EARNINGS (NUMERATOR)
Net earnings $ 70,042 $ 89,476 $270,763
-------- -------- --------
Earnings available to common shareholders 70,042 89,476 270,763
SHARES (DENOMINATOR)
Weighted-average number of common
shares outstanding 409,923 409,923 409,923
BASIC EPS $ .17 $ .22 $ .66
====== ===== =====
DILUTED EPS COMPUTATION:
EARNINGS (NUMERATOR)
Earnings available to common shareholders $ 70,042 $ 89,476 $270,763
Add interest on Convertible Debt, net of tax 8,343 8,297 1,093
------ ------ -------
Earnings available to common shareholders
plus assumed conversions 78,385 97,773 271,856
SHARES (DENOMINATOR)
Weighted-average number of common
shares outstanding 409,923 409,923 409,923
Add effects of assumed conversions:
Exercise of stock options 170 167 45
Conversion of Convertible Debt 72,112 72,112 6,811
------- ------- -------
Weighted-average number of common
shares outstanding plus shares from
assumed conversions 482,205 482,202 416,779
DILUTED EPS $ .16 $ .20 $ .65
====== ====== ======
</TABLE>
74
<PAGE>
16. 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.
17. SUBSEQUENT EVENTS
LEGAL SETTLEMENT - The Company is a defendant in two legal actions,
which are referred to as the 7-Eleven OFFF and Valente cases, filed
by franchisees in 1993 and 1996, respectively, asserting various
claims against the Company. A nationwide settlement has recently
been negotiated and, in connection with the settlement, these two
cases have been combined on behalf of a class of all persons who
operated 7-Eleven convenience stores in the continental United
States at any time between January 1, 1987 and July 31, 1997, under
franchise agreements with the Company. In January 1998, a notice
was mailed to the class members summarizing the terms of the
proposed settlement. Class members have until March 31, 1998, to
opt out of the settlement. A final hearing to approve the
settlement is scheduled for April 24, 1998. The Company's accruals
are sufficient to cover the $11,750,000 payment due under the
settlement, and there was no material impact in 1997.
FINANCING / CALL OF DEBENTURES - On February 26, 1998, the Company
issued $80 million principal amount of Convertible Quarterly Income
Debt Securities due 2013 ("1998 QUIDS") to IY and SEJ. The Company
intends to use the proceeds primarily to repurchase a portion of its
outstanding Debentures, and on February 27, 1998, the Company issued
a 30-day call for the redemption of the remaining $21,787,000
principal amount of its 12% Debentures at 100% of the principal
amount together with the related accrued interest.
The 1998 QUIDS have an interest rate of 4-1/2%, and the Company has
the right to defer interest payments for up to 20 consecutive
quarters. After three years, the 1998 QUIDS have a mandatory
conversion feature when certain conditions are met with regard to
the Company's closing common stock price. If such conditions are
met, the 1998 QUIDS are convertible into 32,508,000 shares of the
Company's common shares, which was derived by dividing $80 million
by the Company's closing common stock price on the date prior to
their issuance plus a conversion premium of 25%. The 1998 QUIDS are
subordinate to all existing debt, except they are equivalent to the
Convertible Debt (see Note 9).
INTEREST RATE SWAP - On March 12, 1998, the Company entered into a
forward starting interest rate swap hedge agreement that fixes the
interest rate at 2.325% on an anticipated 12.5 billion yen floating
rate loan, which is expected to be funded around the end of April
1998. The Company would be at risk of loss if the anticipated
transaction does not close and Japanese interest rates decline. If
the loan does not close, the hedge will unwind by the end of June
1998.
75
<PAGE>
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
<S> <C> <C> <C> <C> <C>
Net sales $1,604 $1,782 $1,874 $1,711 $6,971
Gross profit 450 522 552 488 2,012
Income taxes 4 17 22 2 45
Net earnings 6 26 33 5 70
Earnings per common share:
Basic .01 .06 .08 .01 .17
Diluted .01 .06 .07 .01 .16
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
<S> <C> <C> <C> <C> <C>
Net sales $1,563 $1,792 $1,840 $1,674 $6,869
Gross profit 442 525 541 468 1,976
Income taxes (benefit) 4 20 25 (8) 41
Net earnings 5 30 38 16 89
Earnings per common share:
Basic .01 .07 .09 .04 .22
Diluted .01 .07 .08 .04 .20
</TABLE>
76
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. 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
mis-statement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant est-
imates made by management, as well as evaluating the overall financial state-
ment 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
February 5, 1998, except as to items 2 and 3 in Note 17,
for which the date is March 12, 1998
77
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required in response to this Item is
incorporated by reference from the Registrant's Definitive Proxy Statement for
the April 22, 1998 Annual Meeting of Shareholders.
See also "Executive Officers of the Registrant" beginning on page 20,
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 22,
1998 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 22,
1998 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 22, 1998
Annual Meeting of Shareholders.
78
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The Southland Corporation and Subsidiaries Financial Statements for the
three years in the period ended December 31, 1997 are included herein:
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Balance Sheets - December 31,1997 and 1996 46
Consolidated Statements of Earnings - Years Ended December 31, 1997, 1996 and 1995 47
Consolidated Statements of Shareholders Equity (Deficit) - Years Ended December 31, 1997, 1996
and 1995 48
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 49
Notes to Consolidated Financial Statements 50
Independent Auditors Report of Coopers & Lybrand L.L.P. 77
</TABLE>
2. The Southland Corporation and Subsidiaries Financial Statement
Schedule, included herein.
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors Report of Coopers & Lybrand L.L.P. on Financial Statement Schedule 84
II - Valuation and Qualifying Accounts 85
</TABLE>
All other schedules have been omitted because they are not applicable, are not
required, or the required information is shown in the financial statements or
notes thereto.
3. The following is a list of the Exhibits required to be filed by Item 601
of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.
2.(1) Debtors Plan of Reorganization, dated October 24, 1990, as filed in the United States
Bankruptcy Court, Northern District of Texas, Dallas Division, and Addendum to Debtors
Plan of Reorganization dated January 23, 1991, incorporated by reference to The Southland
Corporations 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 Corporations 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 Corporations Current Report on Form 8-K dated March 4, 1991, File Numbers
0-676 and 0-16626, Exhibit 2.1.
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Corporations Annual Report on
Form 10-K for the year ended December 31, 1990, Exhibit 3.(1).
3.(2) Bylaws of The Southland Corporation, restated as amended through April 24, 1996,
incorporated by reference to File Nos. 0-676 and 0-16626, The Southland Corporations
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Exhibit 3.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (SEE EXHIBITS
(3).(1) AND (3).(2), ABOVE).
4.(i)(1) Specimen Certificate for Common Stock, $.0001 par value, incorporated by reference
to the Southland Corporation's Annual report on Form 10-K for the year ended
December 31, 1996, Exhibit 4,(i)(1).
4.(i)(2) Form of Voting Agreement and Stock Transfer Restriction and Buy-Back Agreement relating
to shares of common stock, $.01 par value, issued pursuant to Grant Stock Plan,
incorporated by reference to Registration Statement on Form S-8, Reg. No. 33-25327,
Exhibits 4.5 and 4.4.
4.(i)(3) Shareholders Agreement dated as of March 5, 1991, among The Southland Corporation, Ito
Yokado Co., Ltd., IYG Holding Company, Thompson Brothers, L.P., Thompson Capital Partners,
L.P., The Hayden Company, The Williamsburg Corporation, Four J Investment, L.P., The Philp
Co., participants in the Companys Grant Stock Plan who are signatories thereto and
certain limited partners of Thompson Capital Partners, L.P. who are signatories thereto,
incorporated by reference to Schedule 13D filed by Ito-Yokado Co., Ltd., Seven-Eleven
Japan Co., Ltd. and IYG Holding Company, Exhibit A.
4.(i)(4) First Amendment, dated December 30, 1992, to Shareholders Agreement, dated as of March 5,
1991, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K
for year ended December 31, 1992, Exhibit 4.(i)(5), Tab 1.
4.(i)(5) Second Amendment, dated February 28, 1996, to Shareholders Agreement, dated as of March 5,
1991, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on
Form 10-K for the year ended December 31, 1995, Exhibit 4.(i)(6), Tab 1.
4.(ii)(1) Indenture, including Debenture, with Ameritrust Company National Association, as trustee,
providing for 5% First Priority Senior Subordinated Debentures due December 15, 2003,
incorporated by reference to The Southland Corporations 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 Corporations Annual Report
on Form 10-K for the year ended December 31, 1990, Exhibit 4.(ii)(3).
4.(ii)(3) Form of 4 1/2% Convertible Quarterly Income Debt Securities due 2010, incorporated by
reference to File Nos. 0-676 and 0-16626, Form 8-K, dated November 21, 1995, Exhibit 4(v)-1.
4.(ii)(4) Form of 4 1/2% Convertible Quarterly Income Debt Securities due 2013.* Tab 1
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
9. VOTING TRUST AGREEMENT. NONE. (EXCEPT SEE EXHIBITS 4.(i)(2) AND 4.(i)(3), ABOVE.)
10. MATERIAL CONTRACTS.
10.(i)(1) Stock Purchase Agreement among The Southland Corporation, Ito-Yokado Co., Ltd. and
Seven-Eleven Japan Co., Ltd., dated as of January 25, 1991. See Exhibit 2.(2), above.
10.(i)(2) Credit Agreement, dated as of February 27, 1997, among The Southland Corporation, the
financial institutions party thereto as Senior Lenders, the financial institutions party
thereto as Issuing Banks, Citibank, N.A., as Administrative Agent, and The Sakura Bank,
Limited, New York Branch, as Co-Agent, incorporated by reference to File Nos. 0-676 and
0-16626, Annual report on form 10-K for the year ended December 31, 1996, Exhibit 10(i)(2).
10.(i)(3) First Amendment dated as of February 9, 1998 to the Credit Agreement dated as of Tab 2
February 27, 1997, among The Southland Corporation, the financial institutions party
thereto as Senior Lenders, the financial institutions party thereto as issuing Banks,
Citibank, N.A., as Administrative Agent, and The Sakura Bank, Limited, New York
Branch, as Co-Agent.*
10.(i)(4) Credit and Reimbursement Agreement by and between Cityplace Center East Corporation, an
indirect wholly owned subsidiary of Southland, and The Sanwa Bank Limited, Dallas Agency,
dated February 15, 1987, relating to $290 million of 7 7/8% Notes due February 15, 1995,
issued by Cityplace Center East Corporation (to which Southland is not a party and which
is non-recourse to Southland), incorporated by reference to File No. 0-676, Annual Report
on Form 10-K for the year ended December 31, 1986, Exhibit 10(i)(6).
10.(i)(5) Third Amendment to Credit and Reimbursement Agreement, dated as of February 10, 1995,
by and between The Sanwa Bank, Limited, Dallas Agency and Cityplace Center East
Corporation, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on
Form 10-K for the year ended December 31, 1994, Exhibit 10(i)(4).
10.(i)(6) Amended and Restated Lease Agreement between Cityplace Center East Corporation and The
Southland Corporation relating to The Southland Tower, Cityplace Center, Dallas, Texas,
incorporated by reference to The Southland Corporations Annual Report on Form 10-K for
the year ended December 31, 1990, Exhibit 10.(i)(7).
10.(i)(7) Limited Recourse Financing for The Southland Corporation relating to royalties from Seven
Eleven (Japan) Company, Ltd. in the amount of Japanese Yen 41,000,000,000, dated March 21,
1988, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for year
ended December 31, 1988, Exhibit 10.(i)(6).
10.(i)(8) Issuing and Paying Agency Agreement, dated as of August 17, 1992, relating to commercial
paper facility, Form of Note, Indemnity and Reimbursement Agreement and amendment thereto
and Guarantee, incorporated by reference to File Nos. 0-676 and 0-16626, Annual report on Form 10-K
for the year ended December 31, 1995, Exhibit 10(i)(8).
10.(ii)(B)(1) Standard Form of 7-Eleven Store Franchise Agreement, incorporated by reference to
File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31,
1996, Exhibit 10(ii)(B)(1), Tab 3.
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.(ii)(D)(1) Master Leasing Agreement dated as of April 15, 1997, among the financial
institutions party thereto as Lessor Parties, CBL Capital Corporation, as Agent for the
Lessor parties and The Southland Corporation, as Lessee, incorporated by reference
to File Nos. 0-676 and 0-16626, Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, Exhibit 10(ii)(D)(1).
10.(iii)(A)(1) The Southland Corporation Executive Protection Plan Summary, incorporated by reference
to The Southland Corporations Annual Report on Form 10-K for the year ended December 31,
1993, Exhibit 10.(iii)(A)(3).
10.(iii)(A)(2) The Southland Corporation Officers Deferred Compensation Plan, sample agreement,
incorporated by reference to The Southland Corporations Annual Report on Form 10 K for
the year ended December 31, 1993, Exhibit 10.(iii)(A)(4).
10.(iii)(A)(3) Form of Bonus Deferral Agreement relating to deferral of Annual Performance Tab 3.
Incentive Payment.*
10.(iii)(A)(4) 1997 Performance Plan, incorporated by reference to File Nos. 0-676 and 0-16626,
Annual report on Form 10-K for the year ended December 31, 1996, Exhibit
10(iii)(A)(4).
10.(iii)(A)(5) 1995 Stock Incentive Plan, incorporated by reference to Registration Statement on
Form S-8, Reg. 33-63617, Exhibit 4.10.
10.(iii)(A)(6) The Southland Corporation Supplemental Executive Retirement Plan for Eligible
Employees incorporated by reference to Registration Statement on Form S-8, Reg.
No. 333-42731, exhibit 4(i)(3).
10.(iii)(A)(7) Form of Deferral Election Form for the Southland Corporation Supplemental Tab 4
Executive Retirement Plan for Eligible Employees.*
10.(iii)(A)(8) Form of Award Agreement granting options to purchase Common Stock, dated
October 23, 1995, under the 1995 Stock Incentive Plan incorporated by reference to
File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended
December 31, 1995, Exhibit 10(iii)(A)(10), Tab 4.
10.(iii)(A)(9) Form of Award Agreement granting options to purchase Common Stock, dated
October 1, 1996, under the 1995 Stock Incentive Plan incorporated by reference to
File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended
December 31, 1996, Exhibit 10(iii)(A)(6).
10.(iii)(A)(10) Form of Award Agreement granting options to purchase Common Stock, dated Tab 5
November 12, 1997, under the 1995 Stock Incentive Plan.*
10.(iii)(A)(11) Consultant's Agreement betweeen The Souhland Corporation and Timothy N. Ashida,
incorported by reference to File No. 0-676, Annual Report on Form 10-K for the year
ended December 31, 1991, Exhibit 10(iii)(A)(10), Tab 4.
10.(iii)(A)(12) First Amendment to Consultant's Agreement between The Southland Corporation
and Timothy N. Ashida, effective as of May 1, 1995, incorporated by refernce to File
No. 0-676, Annual report on Form 10-K for the year ended December 31, 1996,
Exhibit 10(iii)(A)(9).
11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS.
CALCULATION OF EARNINGS PER SHARE.
Not required
21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 1998.* Tab 6
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23. CONSENTS OF EXPERTS AND COUNSEL
Consent of Coopers & Lybrand L.L.P., Independent Auditors.* Tab 7
27. FINANCIAL DATA SCHEDULE.FILED ELECTRONICALLY ONLY, NOT ATTACHED TO PRINTED REPORTS.
</TABLE>
- -----------------------
*Filed or furnished herewith
(b) Reports on Form 8-K.
During the fourth quarter of 1997, the Company filed no reports on Form
8-K.
(c) The exhibits required by Item 601 of Regulation S-K are attached
hereto or incorporated by reference herein.
(d)(3) The financial statement schedule for The Southland Corporation and
Subsidiaries is included herein, as follows:
Schedule II - The Southland Corporation and Subsidiaries
Page
Valuation and Qualifying Accounts
(for the Years Ended December 31, 1997, 1996 and 1995).
85
83
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of
The Southland Corporation
Our report on the consolidated financial statements of The Southland Corp-
oration and Subsidiaries is included on page 77 of this Form 10-K. In con-
nection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 79 of
this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
February 5, 1998
84
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
Additions
-----------------------
Balance at Charged to Charged to Balance at
beginning costs and other end
of period expenses accounts Deductions of period
--------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997.................... $ 5,009 $ 2,459 $ - $ (672)(1) $ 6,796
Year ended December 31, 1996.................... 4,858 2,153 - (2,002)(1) 5,009
Year ended December 31, 1995.................... 6,790 931 - (2,863)(1) 4,858
Allowance for environmental cost reimbursements:
Year ended December 31, 1997.................... 9,459 - - 245 9,704
Year ended December 31, 1996.................... 13,705 - - (4,246) 9,459
Year ended December 31, 1995.................... 18,890 - - (5,185)(2) 13,705
(1) Uncollectible accounts written off, net of recoveries.
(2) Includes an adjustment due to the reassessment of the estimated
reimbursement collectibility.
</TABLE>
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOUTHLAND CORPORATION
(Registrant)
March 23, 1998 /s/ Clark J. Matthews, II
-------------------------
Clark J. Matthews, II
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
TITLE DATE
<S> <C> <C>
Chairman of the Board and Director
- --------------------------
Masatoshi Ito
/s/ Toshifumi Suzuki Vice Chairman of the Board and Director March 23, 1998
- --------------------------
Toshifumi Suzuki
/s/ Clark J. Matthews, II President and Chief Executive Officer and Director March 23, 1998
- -------------------------- (Principal Executive Officer)
Clark J. Matthews, II
/s/ James W. Keyes Executive Vice President and Chief Financial Officer March 23, 1998
- -------------------------- and Director(Principal Financial Officer)
James W. Keyes
/s/ Donald E. Thomas Vice President and Controller March 23, 1998
- -------------------------- (Principal Accounting Officer)
Donald E. Thomas
/s/ Yoshitami Arai Director March 23, 1998
- --------------------------
Yoshitami Arai
/s/ Masaaki Asakura Vice President and Director March 23, 1998
- --------------------------
Masaaki Asakura
/s/ Timothy N. Ashida Director March 23, 1998
- --------------------------
Timothy N. Ashida
/s/ Jay W. Chai Director March 23, 1998
- --------------------------
Jay W. Chai
/s/ Gary J. Fernandes Director March 23, 1998
- --------------------------
Gary J. Fernandes
/s/ Masaaki Kamata Director March 23, 1998
- --------------------------
Masaaki Kamata
/s/ Kazuo Otsuka Director March 23, 1998
- --------------------------
Kazuo Otsuka
/s/ Asher O. Pacholder Director March 23, 1998
- --------------------------
Asher O. Pacholder
/S/Nobutake Sato Director March 23, 1998
- --------------------------
Nobutake Sato
86
</TABLE>
<PAGE>
THE SOUTHLAND CORPORATION
Quarterly Income Debt Security Due 2013
$40,800,000
No. 1
THE SOUTHLAND CORPORATION, a corporation duly organized and
existing under the laws of Texas (herein called the "Company"), for value
received, hereby promises to pay to Ito-Yokado Co., Ltd., or registered
assigns, the principal sum of $40,800,000 on February 25, 2013, and to pay
interest thereon from February 26, 1998 or from the most recent interest
payment date to which interest has been paid or duly provided for,
quarterly on March 15, June 15, September 15 and December 15 in each year,
commencing March 15, 1998, (each an "Interest Payment Date") at the rate of
4 1/2% per annum, net of applicable withholding taxes, if any, until the
principal hereof is paid or made available for payment. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment
Date will be paid to the person in whose name this Security (or one or more
predecessor Securities) is registered at the close of business on the
regular record date for such interest, which shall be the business day next
preceding such Interest Payment Date (a "Regular Record Date"). Any such
interest not so punctually paid or duly provided for (including a failure
to pay or duly provide for such interest pursuant to an Extension Period,
as defined below) will forthwith cease to be payable to the holder on such
Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more predecessor Securities) is registered at the close
of business on a special record date for the payment of such defaulted
Interest to be fixed by the Company, notice whereof shall be given to
holder of this Security not less than 10 days prior to such special record
date, or be paid at any time in any other lawful manner.
Payment of the principal of (and premium, if any) and interest on
this Security will be made at the office or agency of the Company
maintained for that purpose in Dallas, Texas, in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts; such payments shall be made by wire
transfer to the holder of this Security, to the account specified by such
holder to the Company in writing.
The Company shall have the right at any time during the term of
this Security to extend the interest payment period of (and thereby
postpone the payment of interest otherwise payable on) this Security from
time to time to a period not exceeding 20 consecutive quarters (the
"Extension Period"), at the end of which Extension Period the Company shall
pay all interest then accrued and unpaid (together with interest thereon at
the rate specified herein to the extent permitted by applicable law);
PROVIDED that, during any such Extension Period, the Company shall not
declare or pay any dividend on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock or
1
<PAGE>
make any guarantee payments with respect to the foregoing. Prior to the
termination of any such Extension Period, the Company may further extend
the interest payment period and thereby defer the payment of interest,
PROVIDED that such Extension Period, together with all such previous and
further extensions thereof, may not exceed 20 consecutive quarters or
extend beyond the maturity of the Securities. Subject to the requirements
that each Extension Period may not be in effect for more than 20
consecutive quarters and may not extend beyond February 25, 2013, and that
the Company pay interest at the conclusion of each Extension Period, the
Company may declare any number of Extension Periods. The Company shall
give the holder of this Security at least 30 days' prior notice of the
initiation or extension of any Extension Period. Upon the termination of
any Extension Period and the payment of all amounts then due, the Company
may select a new Extension Period.
This Security is subject to restrictions on transfer set forth on
the reverse hereof.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall
for all purposes have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated: February 26, 1998
2
<PAGE>
THE SOUTHLAND CORPORATION
By: /s/ David A. Urbel
Name: David A. Urbel
Title: Vice President and Treasurer
Attest: /s/ Ezra Shasoua
Name: Ezra Shasoua
Title:. Assistant Secretary
3
<PAGE>
[Reverse of Security]
1. GENERAL. This Security is one of a duly authorized issue
of securities of the Company (herein called the "Securities") designated on
the face hereof, limited in aggregate principal amount to $80,000,000.
This Security will be converted into Common Stock of the Company
upon the occurrence of any of the conditions set forth in Section 4.1(a),
(b) or (c), as provided below in Section 4, and is subject to redemption at
the election of the Company in the event of certain changes affecting the
tax treatment of the Security, as provided below in Section 5.
When this Security is presented to the Company with a request to
register the transfer or to exchange it for an equal principal amount at
maturity of Securities of other authorized denominations, the Company shall
register the transfer or make the exchange as requested. To permit
registrations of transfers and exchanges in accordance herewith, the
Company shall execute a new Security or Securities; PROVIDED that
Securities will only be issued in denominations of $15,000,000 or greater
except in the event that all or a portion of this Security is transferred
to a Person that holds it pursuant to an Indenture (as defined in Section
6.2) under which securities having an aggregate principal amount of at
least $60,000,000 are outstanding. No service charge shall be made to the
Holder for any registration of transfer or exchange or redemption of this
Security, but the Company may require payment by the Holder of a sum
sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith.
The indebtedness evidenced by this Security is, to the extent
provided below, subordinated and subject in right of payment to the prior
payment in full of all Senior Indebtedness. Each holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions,
(b) authorizes and directs the Company on his behalf to take such action as
may be necessary or appropriate to acknowledge or effectuate the
subordination so provided and (c) appoints the Company his attorney-in-fact
for any and all such purposes. Each holder hereof, by his acceptance
hereof, hereby waives all notice of the acceptance of the subordination
provisions contained herein by each holder of Senior Indebtedness, whether
now outstanding or hereafter incurred, and waives reliance by each such
holder upon said provisions.
2. EVENTS OF DEFAULT. (a) Event of Default, wherever used
herein with respect to this Security, means any one of the following events
(whatever the reason for such Event of Default and whether it shall be
occasioned by the provisions of Section 3 or be voluntary or involuntary or
be effected by operation of law or pursuant to any judgment, decree or
order of any court or any order, rule or regulation of any administrative
or governmental body):
4
<PAGE>
(1) default in the payment of any interest upon this Security when
it becomes due and payable (as determined after giving effect to any
Extension Period), and continuance of such default for a period of 30 days
whether or not such payment is prohibited by the provisions of Section 3
below; or
(2) default in the payment of the principal of or any premium on
this Security at its final maturity; whether or not such payment is
prohibited by the provisions of Section 3 below; or
(3) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or (B) a decree
or order adjudging the Company bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company under any applicable Federal
or State law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or of any
substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree or order for relief
or any such other decree or order unstayed and in effect for a period of 60
consecutive days; or
(4) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to
be adjudicated a bankrupt or insolvent, or the consent by it to the entry
of a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or to the commencement of
any bankruptcy or insolvency case or proceeding against it, or the filing
by it of a petition or answer or consent seeking reorganization or relief
under any applicable Federal or State law, or the consent by it to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property,
or the making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Company in
furtherance of any such action.
(b) Subject to Section 3, if an Event of Default occurs with
respect to this Security and is continuing, then the holder of this
Security may after giving 10 days prior written notice to the Agent under
the Credit Agreement as provided in Section 3.3(d) declare the principal
amount of this security to be due and payable immediately, by a notice in
5
<PAGE>
writing to the Company, and upon any such declaration the principal amount
(of this Security) shall become immediately due and payable.
(c) After any such acceleration, but before a judgment or
decree based on acceleration, the Holder of this Security may rescind and
annul such acceleration if all Events of Default, other than the non-
payment of accelerated principal (or other specified amount), have been
cured.
Section 3. SECURITY SUBORDINATE TO SENIOR INDEBTEDNESS.
Section 3.1 GENERAL. The provisions of this Section 3 apply
notwithstanding anything to the contrary contained in this Security. The
Company covenants and agrees, and each holder of this Security, by such
holder's acceptance hereof, likewise covenants and agrees, that, to the
extent and in the manner hereinafter set forth in this Section 3, the
indebtedness represented by this Security and the payment of the principal
of and the interest on all of this Security are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of
all Senior Indebtedness. This Section 3 constitutes a continuing offer to
all persons who become holders of, or continue to hold, Senior
Indebtedness, each of whom is an obligee hereunder and is entitled to
enforce such holder's rights hereunder, subject to the provisions hereof,
without any act or notice of acceptance hereof or reliance hereon.
3.2. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
(a) In the event of any Insolvency or Liquidation Proceeding,
(1) all Senior Indebtedness under or with respect to the Credit Agreement
and (2) all amounts payable in respect of any other Senior Indebtedness
shall first be paid in full before the holder of this Security is entitled
to receive any direct or indirect payment or distribution of any cash,
property or securities (excluding Reorganization Securities) on account of
principal of or interest on this Security.
(b) The holders of Senior Indebtedness or their respective
Representatives shall be entitled to receive directly, for application to
the payment thereof (to the extent necessary to pay all such Senior
Indebtedness in full after giving effect to any substantially concurrent
payment or distribution to the holders of such Senior Indebtedness), in the
following order of priority, any payment or distribution of any kind or
character, whether in cash, property or securities (excluding
Reorganization Securities but including any payment or distribution, except
Reorganization Securities, which may be payable or deliverable by reason of
the payment of any other indebtedness of the Company being subordinated to
the payment of the Securities) which may be payable or deliverable in
respect of the Securities in any such Insolvency or Liquidation Proceeding:
first, so long as any Senior Indebtedness under or with respect to the
Credit Agreement is outstanding, to the holders of such Senior
6
<PAGE>
Indebtedness (pro rata on the basis of the respective amounts of such
Senior Indebtedness held by them) or their Representatives; and, second, if
and only if all Senior Indebtedness under or with respect to the Credit
Agreement is paid in full, to the holders of any other Senior Indebtedness
(pro rata on the basis of the respective amounts of such other Senior
Indebtedness held by them) or their respective Representatives.
(c) In the event that, notwithstanding the foregoing
provisions of this Section 3.2, the holder of any Security shall have
received any payment from or distribution of assets of the Company or the
estate created by the commencement of any such Insolvency or Liquidation
Proceeding, of any kind or character in respect of this Security, whether
in cash, property or securities (excluding Reorganization Securities but
including any payment or distribution, except Reorganization Securities,
which may be payable or deliverable by reason of the payment of any other
indebtedness of the Company being subordinated to the payment of the
Securities) before all Senior Indebtedness is paid in full, then and in
such event such payment or distribution shall be received and held in trust
for and shall be paid over, in the following order of priority, to the
holders of the Senior Indebtedness remaining unpaid or their respective
Representatives, to the extent necessary to pay all such Senior
Indebtedness in full after giving effect to any substantially concurrent
payment or distribution to the holders of such Senior Indebtedness, for
application to the payment in full of such Senior Indebtedness: first, so
long as any Senior Indebtedness under or with respect to the Credit
Agreement is outstanding, to the holders of such Senior Indebtedness (pro
rata on the basis of the respective amounts of such Senior Indebtedness
held by them) (or their respective Representatives) and, second, if and
only if all Senior Indebtedness under or with respect to the Credit
Agreement is paid in full, to the holders of any other Senior Indebtedness
(pro rata on the basis of the respective amounts of such other Senior
Indebtedness held by them) or their respective Representatives.
Section 3.3. DEFAULT OF SENIOR INDEBTEDNESS.
(a) If there exists a default in the payment when due
(whether at maturity or upon acceleration or mandatory prepayment, or on
any principal installment payment date or interest payment date, or
otherwise) of any Senior Indebtedness and such default shall not have been
cured, or such default, or the benefits of this sentence, shall not have
been waived in writing by or on behalf of the holders of such Senior
Indebtedness (or their Representative, if any), then any payment on account
of principal of, or interest on this Security which the holder of this
Security would then be entitled to receive, but for the provisions of this
subsection 3.3(a), shall instead be paid over, in the following order of
priority, to the holders of such Senior Indebtedness (or their
Representative, if any) until all amounts of Senior Indebtedness then due
and payable have been paid in full, prior to any direct or indirect payment
by the Company or such holders of any principal of or interest on the
Security: first, so long as any Senior Indebtedness then due and payable
under or with respect to the Credit Agreement is outstanding, to the
holders of such Senior Indebtedness (pro rata on the
7
<PAGE>
basis of the respective amount of such Senior Indebtedness held by them)
(or their respective Representatives) and, second, if and only if all
Senior Indebtedness then due and payable under or with respect to the
Credit Agreement is paid in full, to the holders of any other Senior
Indebtedness then due and payable (pro rata on the basis of the respective
amounts of such other Senior Indebtedness held by them) or their respective
Representatives.
(b) The Company may not, directly or indirectly, make any
payment on account of the principal of or interest on this Security during
the period (a "Deferral Period") from the date the Company receives (1)
from the Agent under the Credit Agreement, (2) from a Representative or (3)
from a holder of Senior Indebtedness that has no Representative, an
effective notice (a "Deferral Notice") of:
(i) the existence of a default in the payment when due (whether at
maturity or upon acceleration or mandatory prepayment or on any principal
installment payment date or interest payment date, or otherwise) of any
Senior Indebtedness (a "Payment Default"); or
(ii) the existence of any event of default (other than a Payment
Default) of the general type referred to in, or resulting from the
Company's failure to perform obligations of the general type referred to in
Sections 6.01(iii), 6.01(iv)(B), 7.01 (except the last sentence thereof),
7.02, 8.01 through 8.05, 8.07 through 8.12, 8.14, 8.15, 9.01 through 9.03,
10.01(e) through 10.01(o) of the Credit Agreement as originally executed,
whether such event of default arises under the Credit Agreement or under
any other agreement or instrument pursuant to which any other Senior
Indebtedness is issued, in each instance as now in effect or as hereafter
from time to time modified or amended, without necessity of consent by or
notice or the holder of this Security (a "Specified Covenant Default"),
until the earlier of (i) the date such Payment Default or Specified
Covenant Default is cured (if capable of being cured), waived in writing or
otherwise ceases to exist, (ii) the date application of this subsection
3.3(b) has been waived in writing by the Agent under the Credit Agreement
in accordance with the terms of the Credit Agreement (or if all Senior
Indebtedness under or with respect to the Credit Agreement has been paid in
full, the holders of not less than 50% in aggregate principal amount of all
other Senior Indebtedness or their respective Representatives waive in
writing the application of this subsection 3.3(b)), and (iii) the 180th day
after receipt by the Company of such Deferral Notice; PROVIDED, HOWEVER,
that (x) only one Deferral Notice relating to the same Payment Default or
Specified Covenant Default may be given, (y) no subsequent Deferral Notice
may be given with respect to any Payment Default or Specified Covenant
Default existing at the time an effective Deferral Notice is given and (z)
if any such Deferral Notice has been given, no subsequent Deferral Notice
with respect to any number of different Payment Defaults or Specified
Covenant Defaults shall be effective until the later of (X) the date such
subsequent Deferral Notice is
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received by the Company or (Y) the 365th day after receipt of the then most
recent prior effective Deferral Notice. So long as any Senior Indebtedness
is outstanding under the Credit Agreement, only the Agent under the Credit
Agreement may deliver an effective Deferral Notice under this subsection
3.3(b).
(c) Upon termination of any Deferral Period the Company shall
resume payments on account of principal of and interest on this Security
subject to the obligation of the Company and the holder of this Security
(or his Representatives) to pay over to the holders of Senior Indebtedness
amounts otherwise payable on account of the principal of or interest on
this Security pursuant to the provisions of, and in the circumstances
specified in, this Section 3.
(d) So long as any Senior Indebtedness is outstanding under
or with respect to the Credit Agreement, the holder of this Security shall
give the Agent under the Credit Agreement ten days' prior notice of any
proposed acceleration with respect to the Securities.
(e) In the event that, notwithstanding the foregoing
provisions of subsection 3.3(a), any payment shall be made by or on behalf
of the Company from assets of the Company and received by the holder of
this Security at a time when such payment was prohibited by the provisions
of subsection 3.3(a), then such payment shall be held in trust for the
benefit of and shall be immediately paid over, in the following order of
priority, to the holders of Senior Indebtedness then due and payable or
their respective Representatives, for application to the payment in full of
all Senior Indebtedness then due and payable in accordance with its terms
(after giving effect to any prior or substantially concurrent payment to
the holders of such Senior Indebtedness): first, so long as any Senior
Indebtedness then due and payable under or with respect to the Credit
Agreement is outstanding, to the holders of such Senior Indebtedness (pro
rata, on the basis of the respective amount of any such Senior Indebtedness
held by them) or their respective Representatives; and, second, if and only
if all Senior Indebtedness then due and payable under or with respect to
the Credit Agreement is paid in full, to the holders of any other Senior
Indebtedness then due and payable (pro rata, on the basis of the respective
amount of such other Senior Indebtedness held by them) or their respective
Representatives.
In the event that, notwithstanding the foregoing provisions of
subsection 3.3(b), any payment shall be made by or on behalf of the Company
from assets of the Company and received by the holder of this Security at a
time when such payment was prohibited by the provisions of subsection
3.3(b) then such payment shall be held in trust for the benefit of and
shall be immediately paid over, in the following order of priority, to the
holders of Senior Indebtedness remaining unpaid or their respective
Representatives, for application to the payment of all Senior Indebtedness
in full in accordance with its terms (after giving effect to any prior or
substantially concurrent payment to the holders of such Senior
Indebtedness): first, so long as any Senior Indebtedness under or with
respect to the Credit Agreement is
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outstanding, to the holders of such Senior Indebtedness (pro rata, on the
basis of the respective amount of such Senior Indebtedness held by them) or
their respective Representatives; and second, if and only if all Senior
Indebtedness under or with respect to the Credit Agreement is paid in full,
to the holders of any other Senior Indebtedness (pro rata, on the basis of
the respective amount of such other Senior Indebtedness held by them) or
their respective Representatives.
(f) The provisions of this Section 3.3 shall not modify or
limit in any way the application of Section 3.2. The provisions of
Sections 3.3(b) and (c) shall not modify or limit in any way the
application of Section 3.3(a).
3.4. SUBROGATION OF RIGHTS TO HOLDERS OF SENIOR
INDEBTEDNESS.
After all amounts payable under or in respect of Senior
Indebtedness are paid in full, the holder of this Security shall be
subrogated to the extent of the payments or distributions made to the
holders of, or otherwise applied to payment of, such Senior Indebtedness
pursuant to the provisions of this Section 3 (equally and ratably with the
holders of all indebtedness of the Company (i) which by its express terms
is subordinate and subject in right of payment to Senior Indebtedness to
substantially the same extent as this Security is so subordinate and
subject in right of payment and (ii) which is entitled to like rights and
subrogation), to the rights of the holders of such Senior Indebtedness or
their respective Representatives to receive payments and distributions of
cash, property and securities applicable to the Senior Indebtedness until
the principal of and interest on this Security shall be paid in full. For
purposes of such subrogation, no payments or distributions to the holders
of the Senior Indebtedness or their respective Representatives of any cash,
property or securities to which the holder of this Security would be
entitled except for the provisions of this Section 3, and no payments over
pursuant to the provisions of this Section 3 to the holders of Senior
Indebtedness or their respective Representatives by the Company or the
holder of this Security, shall, as among the Company and its creditors
(other than holders of Senior Indebtedness and the holder of this
Security), be deemed to be a payment or distribution by the Company to or
on account of the Senior Indebtedness, it being understood that the
provisions of this Section 3 are solely for the purpose of defining the
relative rights of the holders of Senior Indebtedness on the one hand and
the holders of this Security on the other hand.
If any payment or distribution to which the holder of this
Security would otherwise have been entitled but for the provisions of this
Section 3 shall have been applied, pursuant to the provisions of this
Section 3, to the payment of all amounts payable under the Senior
Indebtedness, then and in such case, the holder of this Security shall be
entitled to receive (equally and ratably with the holders of all
indebtedness of the Company (i) which by its express terms is subordinate
and subject in right of payment to Senior Indebtedness to substantially the
same extent as the Security is subordinate and subject in right of payment
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and (ii) which is entitled to like rights) from the holders of such Senior
Indebtedness or their respective Representatives any substantially
contemporaneous or distributions received by such holders of Senior
Indebtedness or their respective Representatives in excess of the amount
sufficient to pay in full all obligations payable under or in respect of
such Senior Indebtedness.
3.5. RIGHTS OF HOLDERS NOT TO BE IMPAIRED.
Nothing contained in this Section 3 or elsewhere in this Security
is intended to or shall:
(a) impair, as among the Company, its creditors other than holders
of Senior Indebtedness, and the holder of this Security, the obligation of
the Company, which is absolute and unconditional, to pay to the holder of
this Security the principal of and interest on this Security as and when
the same shall become due and payable in accordance with its terms; or
(b) affect the relative rights against the Company of the holder
of this Security and creditors of the Company other than the holders of
Senior Indebtedness; or
(c) prevent the holder of this Security from exercising all
remedies otherwise permitted by applicable law upon default under this
Security, subject to the rights, if any, under this Section 3 of the
holders of Senior Indebtedness to receive payments or distributions
otherwise payable or deliverable to, or received by, the holder upon the
exercise of any such remedy and subject to the restriction on acceleration
set forth in Section 3.3(d) hereof.
3.6. NO WAIVER OF SUBORDINATION PROVISIONS.
No right of any present or future Agent under the Credit
Agreement, holder of any Senior Indebtedness, or Representative thereof, to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the
Company or by any act or failure to act by any such Agent under the Credit
Agreement, holder or Representative thereof, or by any noncompliance by the
Company with the terms, provisions and covenants of this Security
regardless of any knowledge thereof which any such Agent under the Credit
Agreement, holder or Representative thereof may have or be otherwise
charged with.
Without in any way limiting the generality of the foregoing
paragraph, the Agent under the Credit Agreement and the holders of Senior
Indebtedness or their Representatives, if applicable, may, at any time and
from time to time without the consent of
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or notice to the holder of this Security, without incurring responsibility
to any holders of this Security and without impairing or releasing the
subordination and other benefits provided in this Section 3 or the
obligations hereunder of the holder of this Security to the holders of
Senior Indebtedness, do any one or more of the following, all without
notice to the holder of this Security and even if any right of
reimbursement or subrogation or other right or remedy of the holder of this
Security is affected, impaired or extinguished thereby:
(1) change the manner, place or terms of payment or change or
extend the time of payment of, or renew, exchange, amend or alter, the
terms of any Senior Indebtedness, any security therefor or guaranty thereof
or any liability of the Company or any guarantor to such holder, or any
liability incurred directly or indirectly in respect thereof, or otherwise
amend, renew, exchange, modify or supplement in any manner Senior
Indebtedness or any instrument evidencing or guaranteeing or securing the
same or any agreement under which Senior Indebtedness is outstanding;
(2) sell, exchange, release, surrender, realize upon, enforce or
otherwise deal with in any manner and any order any property pledged,
mortgaged or otherwise securing Senior Indebtedness or any liability of the
Company or any guarantor to such holder, or any liability incurred directly
or indirectly in respect thereof;
(3) settle or compromise any Senior Indebtedness or any other
liability of the Company or any guarantor of the Senior Indebtedness to
such holder or any security therefor or any liability incurred directly or
indirectly in respect thereof and apply any sums by whomsoever paid and
however realized to any liability (including, without limitation, Senior
Indebtedness) in any manner or order; and
(4) fail to take or to record or otherwise perfect, for any reason
or for no reason, any lien or security interest securing Senior
Indebtedness by whomsoever granted, exercise or delay in or refrain from
exercising any right or remedy against the Company or any security or any
guarantor or any other person, elect any remedy and otherwise deal freely
with the Company and any security and any guarantor of the Senior
Indebtedness or any liability of the Company or any guarantor to such
holder or any liability incurred directly or indirectly in respect thereof.
3.7. RELIANCE ON COURT ORDERS; EVIDENCE OF STATUS.
Upon any payment or distribution of assets of the Company
referred to in Section 3.2, the holder of this Security shall be entitled
to rely upon a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making such payment or
distribution delivered to the holder of this Security for the purpose of
ascertaining the persons entitled to participate in such payment or
distribution, the holders of Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon,
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the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Section 3.
3.8. PAYMENT.
A payment with respect to this Security or with respect to
principal of or interest on this Security shall include, without
limitation, payment of principal of and interest on this Security, any
payment on account of optional redemption provisions and any payment or
recovery on any claim (whether for rescission or damages and whether based
on contract or tort) relating to or arising out of the offer, sale or
purchase of this Security, PROVIDED that any such payment, depositing,
other payment or recovery not prohibited pursuant to this Section 3 at the
time actually made shall not be subject to any recovery by any holder of
Senior Indebtedness or Representative therefor or other person pursuant to
this Section 3 at any time thereafter.
The failure to make a payment on account of principal of or
interest on this Security by reason of any provision of this Section 3
shall not be construed as preventing the occurrence of an Event of Default.
Except as expressly provided in Section 3.3(d), nothing in this Section 3
shall affect the rights of the holders to accelerate the maturity of this
Security in accordance with their terms.
3.9 CERTAIN OTHER MATTERS. (a) Notwithstanding any
provision in this Security to the contrary, only the Company, the Agent
under the Credit Agreement or other Representative, or a holder of Senior
Indebtedness that has no Representative, may give notice to the Company
that a payment on account of principal of or interest on this Security
would violate the provisions of Sections 3.1 through 3.11 hereof. Nothing
in this Section 3.9 is intended to or shall relieve any Holder of this
Security from the obligations imposed under Sections 3.2 and 3.3 with
respect to moneys or other distributions received in violation of the
provisions hereof.
(b) If the holder hereof does not file a proper claim or
proof of debt in the form required in any Insolvency or Liquidation
Proceeding prior to 30 days before the expiration of the time to file such
claims or proofs, then, so long as any Senior Indebtedness under or with
respect to the Credit Agreement is outstanding, the Agent under the Credit
Agreement is hereby authorized, and upon payment in full of all Senior
Indebtedness outstanding under the Credit Agreement, the holders of the
other Senior Indebtedness, or their Representatives, are hereby authorized,
and shall have the right (without any duty), to file an appropriate claim
for and on behalf of the holder of this Security.
3.10 CERTAIN DEFINITIONS.
As used in this Section 3, the following terms have the following
meanings:
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"AGENT UNDER THE CREDIT AGREEMENT" means the then acting
Administrative Agent (as defined therein) under the Credit Agreement or any
successor thereto exercising substantially the same rights and powers and,
if there is then no acting Agent under the Credit Agreement, or there is
then no such successor, holders of indebtedness under or with respect to
the Credit Agreement holding a majority of the principal amount of
indebtedness outstanding thereunder.
"CREDIT AGREEMENT" means (i) the Credit Agreement dated as of
February 27, 1997 among The Southland Corporation, the financial
institutions party thereto as "Senior Lenders" or "Issuing Banks," Citibank
N.A., as Administrative Agent for the Senior Lenders and the Issuing Banks
(in such capacity, the "Administrative Agent") and The Sakura Bank Limited,
New York Branch, as Co-Agent (in such capacity, the "Co-Agent"), as the
same may from time to time be amended, renewed, supplemented or otherwise
modified, and any other agreement pursuant to which any of the
indebtedness, commitments, obligations, costs, expenses, fees,
reimbursements and other indemnities payable or owing thereunder may be
refinanced, restructured, renewed or refunded, as any such other agreement
may from time to time be amended, supplemented, renewed or otherwise
modified; and (ii) after the Administrative Agent under the Credit
Agreement referred to in clause (i) hereof has acknowledged in writing that
such Credit Agreement has been terminated and all outstanding indebtedness
and obligations thereunder or with respect thereto have been repaid in full
in cash and discharged, any successor to or replacement of such Credit
Agreement (as designated by the Board of Directors of the Company, in its
sole judgment, and evidenced by a resolution), as such successor or
replacement may from time to time be amended, renewed, supplemented or
otherwise modified.
"CURRENCY AGREEMENT" of any person means any foreign exchange
contract, currency swap agreement, option or futures contract or other
similar agreement or arrangement entered into to hedge payments owed to or
by such person or any of its Subsidiaries against fluctuations in currency
values.
"DEBT" means, with respect to any person, (i) any indebtedness,
contingent or otherwise, in respect of borrowed money including, without
limitation, all interest, fees and expenses owed with respect thereto
(whether or not the recourse of the lender is to the whole of the assets of
such person or only to a portion thereof), or evidenced by bonds, notes,
debentures or similar instruments, or representing the deferred and unpaid
balance of the purchase price of any property or interest therein, except
any such balance that constitutes a trade payable if and to the extent such
indebtedness would appear as a liability upon a balance sheet of such
person prepared on a consolidated basis in accordance with generally
accepted accounting principles, (ii) all obligations and other liabilities
(contingent or otherwise) of such person in respect of letters of credit or
other similar instruments (and reimbursement obligations with respect
thereto) and (iii) all capitalized lease obligations of such person.
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"INSOLVENCY OR LIQUIDATION PROCEEDING" means (i) any insolvency
or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding, relative to the Company
or to its creditors, as such, or to its assets, or (ii) any liquidation,
dissolution, reorganization or winding up of the Company, whether voluntary
or involuntary and whether or not involving insolvency or bankruptcy, or
(iii) any assignment for the benefit of creditors or any other marshaling
of assets and liabilities of the Company.
"INTEREST HEDGING OBLIGATION" means any obligation of any person
pursuant to any arrangement with any other person whereby, directly or
indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either a fixed or floating rate of interest
on a stated notional amount in exchange for periodic payments made by such
person calculated by applying a fixed or floating rate of interest on the
same notional amount; PROVIDED that the term "Interest Hedging Obligation"
shall also include interest rate exchange, collar, cap, swap, options or
similar agreements providing interest rate protection.
"REORGANIZATION SECURITIES" means shares of stock of the Company,
or its successor, as reorganized, or other securities of the of the Company
or any other person provided for by a plan of reorganization, the payment
of which is subordinated, at least to the same extent as this Security, to
the payment of all Senior Indebtedness which may at the time be outstanding
and the principal of which is due no earlier than the principal of this
Security, PROVIDED that the rights of the holders of the Senior
Indebtedness are not impaired thereby or such holders as a class shall have
approved such plan of reorganization.
"REPRESENTATIVE" means the trustee, agent or other representative
for holders of all or any of the Senior Indebtedness, if any, designated in
the indenture, agreement or other document creating, evidencing or
governing such Senior Indebtedness or pursuant to which it was issued, or
otherwise duly designated by the holders of such Senior Indebtedness and
with respect to the holders of Senior Indebtedness under the Credit
Agreement shall include the Agent under the Credit Agreement.
"SENIOR INDEBTEDNESS" means all Debt and other obligations
specified below payable directly or indirectly by the Company, whether
outstanding on the date of this Security or thereafter created, incurred or
assumed by the Company: (1) the principal of and interest on all loans,
letters of credit and other extensions of credit under the Credit
Agreement, and all expenses, fees, reimbursements, indemnities and other
amounts owing by the Company pursuant to the Credit Agreement; (2) other
Debt of the Company that is not expressly subordinated to this Security
(except to the extent excluded below) and (3) amounts payable in respect of
Currency Agreements and Interest Hedging Obligations, in each case, of the
Company. Senior Indebtedness does not include (a) any amounts or other
obligations under or relating to any operating lease; (b) any accounts
payable or other obligations owing to trade creditors created or assumed by
the Company in connection with the obtaining of materials or services; (c)
any tort liability and any liability for Federal, state, local or other
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taxes, or other governmental charges or claims of whatever nature
(including, but not limited to, environmental charges or claims), owed or
owing by the Company; (d) any Debt to a Subsidiary or any affiliate of the
Company; (e) any Debt or other obligations (A) owing, directly or
indirectly, to any person under or in respect of any employee benefit plan,
whether pursuant to the ERISA or otherwise; or (B) owing, directly or
indirectly, to employees; and (f) any Debt with respect to which recourse
to the Company or its assets is limited in any manner but only to the
extent that such Debt is limited in recourse and, to the extent such Debt
which otherwise would constitute Senior Indebtedness is not limited in
recourse, such Debt shall be Senior Indebtedness, if not otherwise
expressly subordinated. Exclusions from this definition of Senior
Indebtedness, do not include any Debt or other obligations permitted under
clauses (1) or (3) above.
All interest accrued on any Senior Indebtedness, in accordance
with and at the contract rate specified in the agreement or instrument
creating, evidencing or governing such Senior Indebtedness, shall
constitute Senior Indebtedness both for periods before and for periods
after the commencement of any Insolvency or Liquidation Proceeding, even if
the claim for such interest is not allowed pursuant to applicable law;
PROVIDED that no increase in the rate of interest applicable by reason of a
default or event of default under or in respect of Senior Indebtedness
shall constitute Senior Indebtedness after the commencement of such
Insolvency or Liquidation Proceeding if and to the extent the increase
exceeds 2% per annum and the claim for such excess increased interest is
not allowed.
To the extent any payment of Senior Indebtedness (whether by or
on behalf of the Company, as proceeds of security or enforcement of any
right of setoff or otherwise) is declared to be fraudulent or preferential,
set aside or required to be paid to a trustee, receiver or other similar
party under any bankruptcy, insolvency, receivership or similar law, then,
if such payment is recovered by, or paid over to, such trustee, receiver or
other similar party, the Senior Indebtedness or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding
as if such payment had not occurred. All Senior Indebtedness shall be and
remain Senior Indebtedness for all purposes of this Security (including,
without limitation, Section 3 hereof) if allowed as a claim, whether or not
subordinated, in a bankruptcy, receivership, insolvency or similar
proceeding, except that interest shall constitute Senior Indebtedness
(subject to the exception in the preceding paragraph) whether or not so
allowed as a claim.
Senior Indebtedness shall not include the $300,000,000 aggregate
principal amount of Convertible Quarterly Income Debt Securities due 2010
of the Company, which shall be PARI PASSU to the Securities.
3.11. LIMITATIONS ON AMENDMENTS. Notwithstanding any other
provisions in this Security to the contrary, so long as any Senior
Indebtedness under or with respect to the Credit Agreement is outstanding,
no amendment, supplement or modification of any provision
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of this Security relating to any provision of Sections 3.1 through 3.11
hereof, shortening the tenor, advancing the time or schedule for payments
(by increasing the payment amount or otherwise) in respect of redemptions,
principal, interest or other payments, or adding sinking fund payments,
mandatory redemption obligations, covenants, breaches, defaults, or events
of default or cure periods or loosening the requirements for acceleration
or which would result in the benefits to the Company or the holders of
Senior Indebtedness provided by this Security being limited or in any way
restricted or diminished, shall be effective unless expressly agreed to in
writing by the specified percentage of holders of Senior Indebtedness under
or with respect to the Credit Agreement required to consent thereto
pursuant to the terms of the Credit Agreement.
Section 4. CONVERSION.
4.1. MANDATORY CONVERSION; NOTICE TO TRUSTEE. Subject to the
provisions of Section 1 hereof, commencing February 26, 2001, this Security
shall be converted into that number of fully paid and nonassessable whole
shares (the "Conversion Shares") of Common Stock of the Company ("Common
Stock") obtained by dividing (i) $80 million by (ii) $2.4609 (the
"Conversion Price"), subject to adjustment as provided in this Section 4
(such ratio being the "Conversion Ratio"), if:
(a) the Closing Price of the Common Stock exceeds 120% of the
Conversion Price for 20 Trading Days in any consecutive 30 day Trading Day
period, commencing with the first such period beginning after the third
anniversary of the original issuance of this Security and concluding with
the period ending on the fifth anniversary of the original issuance of this
Security;
(b) the Closing Price of the Common Stock is equal to or exceeds
the Conversion Price for 20 Trading Days in any consecutive 30 day Trading
Day period, commencing with the first such period beginning after the fifth
anniversary of the original issuance of this Security and concluding with
the period ending on the second Trading Day preceding February 25, 2013; or
(c) the Closing Price of the Common Stock on the Trading Day
preceding February 25, 2013 is at least equal to the Conversion Price,
then this Security shall be converted into Conversion Shares on the
Conversion Date (hereafter defined).
This Security shall be converted into Conversion Shares ten
business days after the date upon which any of the conditions specified in
subsection (a), (b) or (c) of this Section 4.1 occurs (the "Conversion
Date").
Except as provided herein, no payment or adjustment shall be made
upon conversion of this Security for interest accrued hereon or for
dividends paid on Common
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Stock of the Company prior to the close of business on the record date for
the determination of stockholders entitled to such dividends. Upon the
Conversion Date, the Company shall pay to the holder of this Security
accrued and unpaid interest, if any, to the Interest Payment Date next
preceding such conversion; PROVIDED, HOWEVER, that, with respect to any
conversion during any Extension Period, the holder of this Security shall
not be entitled to receive accrued and unpaid interest which is payable on
any Interest Payment Date preceding such conversion if such Interest
Payment Date occurred during such Extension Period (a "Special Interest
Payment Date"), but shall be entitled to receive, in lieu thereof, at the
election of the Company, either: (A) such number of shares of Common Stock
as shall be equal to (x) the amount of such accrued and unpaid interest,
DIVIDED BY (y) the Closing Price per share of the Common Stock on the
Trading Day (as defined below) during which any of the conditions set forth
in Section 4.1(a), (b) or (c) occurred; or (B) a newly issued debt security
of the Company (a "PIK Note") having an aggregate principal amount equal to
the amount of such accrued and unpaid interest and having provisions
substantially similar to those of this Security and a like tenor, except
that interest shall be paid on such newly issued debt security at a rate
per annum of 6% and such newly issued debt security shall be non-
convertible; and PROVIDED, FURTHER, that the holder of this Security shall
be entitled to receive accrued and unpaid interest payable on the Security
on a Special Interest Payment Date if the Company has given the holder
notice of its election to redeem the Security pursuant to Section 5. Any
provision of this Security notwithstanding, PIK Notes will not be issued,
and may not be transferred, to any Person that, after giving effect to such
issuance or transfer, does not hold PIK Notes having a principal amount of
at least $5 million.
The Conversion Shares, upon conversion of this Security, when the
same shall be issued in accordance with the terms hereof, shall be fully
paid and nonassessable shares of Common Stock of the Company in the hands
of the holders thereof.
Upon conversion of this Security, notice of conversion shall be
given by first-class mail, postage prepaid, mailed not less than five days
prior to the Conversion Date, to each holder of Securities.
"TRADING DAY" means, with respect to any Security, if the Common
Stock of the Company is listed or admitted to trading on the NYSE, a day on
which the NYSE is open for the transaction of business, or, if the Common
Stock of the Company is not listed or admitted to trading on the NYSE, a
day on which the principal national securities exchange on which the Common
Stock of the Company is listed or admitted to trading is open for the
transaction of business, or, if the Common Stock of the Company is not so
listed or admitted to trading on any national securities exchange, a day on
which the Nasdaq National Market System (or any successor thereto) or such
other system then in use is open for the transaction of business, of, if
the Common Stock of the Company is not quoted by any such organization, any
day other than a Saturday, Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law or executive order
to close.
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"NYSE" means the New York Stock Exchange and any successor
thereto.
4.2. MECHANICS OF CONVERSION. In order to effect the
conversion of this Security into Conversion Shares, the holder of this
Security shall surrender to the Company the Security to be converted,
together with a statement of the name or names in which such holder wishes
the Conversion Shares to be issued.
In case such notice shall specify a name or names other than that
of such holder, such notice shall be accompanied by payment of all transfer
taxes payable upon the issuance of Conversion Shares in such name or names.
Other than such taxes, the Company will pay any and all issue and other
taxes (other than taxes based on income) that may be payable in respect of
any issue or delivery of Conversion Shares upon conversion of this
Security.
As promptly as practicable but no sooner than (i) the Conversion
Date and (ii) if applicable, payment of all transfer taxes (or the
demonstration to the satisfaction of the Company that any such taxes have
been paid), the Company will deliver promptly to, or upon the written order
of, the holder of this Security certificates representing the number of
validly issued, fully paid and nonassessable whole Conversion Shares or
other consideration to which the holder of this Security shall be entitled.
Such conversion shall be deemed to have been made immediately prior to the
close of business on the date of such surrender of this Security and the
making of any such required payment. Upon such conversion, the rights of
the holder hereof as to this Security being converted shall cease except
for the right to receive Conversion Shares (or such other consideration as
provided herein) in accordance herewith, and the person entitled to receive
the Conversion Shares shall be treated for all purposes as having become
the record holder of such Conversion Shares at such time.
The Company shall not be required to convert this Security, and
no surrender of this Security shall be effective for that purpose, while
the stock transfer books of the Company for the Common Stock are closed for
any purposes (but not for any period in excess of 15 days), but the
surrender of this Security for conversion during any period while such
books are so closed shall become effective for conversion immediately upon
the reopening of such books, as if the conversion had been made on the date
such Security was surrendered, and with the application of the Conversion
Ratio in effect at the date of such surrender.
The holder of the Security is not entitled, as such, to receive
dividends or other distributions, receive notice of any meeting of the
stockholders, consent to any action of the stockholders, receive notice of
any other stockholder proceedings, or to any other rights as stockholders
of the Company.
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4.3. ADJUSTMENT TO CONVERSION RATIO. The denominator of the
Conversion Ratio shall be adjusted from time to time as follows:
(a) In case the Company shall hereafter pay a dividend or make a
distribution in Common Stock of the Company to all holders of the
outstanding Common Stock of the Company, the denominator of the Conversion
Ratio in effect at the opening of business on the date following the date
fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such
denominator of the Conversion Ratio by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to become
effective immediately after the opening of business on the day following
the date fixed for such determination. The Company will not pay any
dividend or make any distribution on Common Stock held in the treasury of
the Company.
(b) In case the Company shall hereafter issue rights or warrants
to all holders of its outstanding Common Stock entitling them (for a period
expiring within 45 days after the date fixed for determination of
stockholders entitled to receive such rights or warrants) to subscribe for
or purchase Common Stock at a price per share less than the Current Market
Price (as defined below) on the date fixed for determination of
stockholders entitled to receive such rights or warrants, the denominator
of the Conversion Ratio shall be adjusted so that the same shall equal the
number determined by multiplying the denominator of the Conversion Ratio in
effect immediately prior to the date fixed for determination of
stockholders entitled to receive such rights or warrants by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for determination of
stockholders entitled to receive such rights or warrants plus the number of
shares which the aggregate offering price of the total number of shares so
offered would purchase at such Current Market Price, and of which the
denominator shall be the number of shares of Common Stock outstanding on
the date fixed for determination of stockholders entitled to receive such
rights or warrants plus the total number of additional Common Stock offered
for subscription or purchase. Such adjustment shall become effective
immediately after the opening of business on the day following the date
fixed for determination of stockholders entitled to receive such rights or
warrants. To the extent that Common Stock is not delivered after the
expiration of such rights or warrants, the denominator shall be readjusted
to the denominator which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made on the basis of
delivery of only the number of shares of Common Stock actually delivered.
In the event that such rights or warrants are not so issued, the
denominator shall again be adjusted to be the
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<PAGE>
denominator which would then be in effect if such date fixed for the
determination of stockholders entitled to receive such rights or warrants
had not been fixed.
(c) In case outstanding Common Stock shall be subdivided into a
greater number of shares of Common Stock, the denominator of the Conversion
Ratio in effect at the opening of business on the day following the day
upon which such subdivision becomes effective shall be proportionately
reduced, and conversely, in case outstanding Common Stock shall be combined
into a smaller number of shares of Common Stock, the denominator of the
Conversion Ratio in effect at the opening of business on the day following
the day upon which such combination becomes effective shall be
proportionately increased, such reduction or increase, as the case may be,
to become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes
effective.
(d) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock shares of any class of
capital stock (other than a dividend or distribution to which subparagraph
(a) of this Section 4.3 applies) or evidences of its indebtedness or assets
(including securities, but excluding any rights or warrants referred to in
subparagraph (b) of this Section 4.3, and excluding any dividend or
distribution (x) in connection with the liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, (y) paid exclusively
in cash or (z) referred to in subparagraph (a) of this Section 4.3) (any of
the foregoing being hereinafter in this subparagraph (d) referred to as the
"DISTRIBUTION SECURITIES"), then, in each such case, unless the Company
elects to reserve such Distribution Securities for distribution to the
holder of this Security upon the conversion of this Security so that the
holder, when converting the Security will receive upon such conversion, in
addition to the Conversion Shares to which the holder is entitled, the
amount and kind of such Distribution Securities which the holder would have
received if the holder had, immediately prior to the Record Date for such
distribution of the Distribution Securities, converted its Security into
Conversion Shares, the denominator of the Conversion Ratio shall be reduced
so that the same shall equal the number determined by multiplying the
denominator of the Conversion Ratio in effect on the Record Date by a
fraction of which the numerator shall be the Current Market Price per share
of Common Stock on the Record Date less the fair market value (as
determined by the Board of Directors or, to the extent permitted by
applicable law, a duly authorized committee thereof, whose determination
shall be conclusive, and described in a resolution of the Board of
Directors or such duly authorized committee thereof, as the case may be),
on the Record Date, of the portion of the Distribution Securities so
distributed applicable to one share of Common Stock and the denominator
shall be such Current Market Price per share of the Common Stock, such
reduction to become effective immediately prior to the opening of business
on the day following the Record Date; PROVIDED, HOWEVER, that in the event
the then fair market value (as so
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<PAGE>
determined) of the portion of the Distribution Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Current Market Price of the Common Stock on the Record Date, in lieu of the
foregoing adjustment, adequate provision shall be made so that the holder
of the Security shall have the right to receive upon conversion the amount
and kind of Distribution Securities the holder would have received had the
holder converted this Security on the Record Date. In the event that such
dividend or distribution is not so paid or made, the denominator of the
Conversion Ratio shall again be adjusted to be the denominator of the
Conversion Ratio which would then be in effect if such dividend or
distribution had not been declared. If the Board of Directors (or, to the
extent permitted by applicable law, a duly authorized committee thereof)
determines the fair market value of any distribution for purposes of this
subparagraph (d) by reference to the actual or when issued trading market
for any securities comprising such distribution, it must in doing so
consider the prices in such market over the same period used in computing
the Current Market Price of the Common Stock.
For purposes of this subparagraph (d) and subparagraphs (a) and (b) of
this Section 4.3, any dividend or distribution that includes Common Stock,
or rights or warrants to subscribe for or purchase Common Stock, shall be
deemed instead to be (i) a dividend or distribution of the evidences of
indebtedness, assets or shares of capital stock other than such Common
Stock or rights or warrants (and any reduction in the denominator of the
Conversion Ratio required by this subparagraph (d) with respect to such
dividend or distribution shall then be made) immediately followed by (ii) a
dividend or distribution of such Common Stock or such rights or warrants
(and any further reduction in the denominator of the Conversion Ratio
required by subparagraph (a) or (b) of this Section 4.3 with respect to
such dividend or distribution shall then be made, except (A) the Record
Date of such dividend or distribution as defined in this subparagraph (d)
shall be substituted as "the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution" and
"the date fixed for such determination" within the meaning of subparagraphs
(a) and (b) of this Section 4.3 and (B) any Common Stock included in such
dividend or distribution shall not be deemed "outstanding at the close of
business on the date fixed for such determination" within the meaning of
subparagraph (a) of this Section 4.3.
(e) In case the Company shall, by dividend or otherwise, at any
time distribute to all holders of its Common Stock cash (excluding (x) any
quarterly cash dividend on the Common Stock to the extent the aggregate
cash dividend per share of Common Stock in any fiscal quarter does not
exceed the greater of (i) the amount per share of Common Stock of the next
preceding quarterly cash dividend on the Common Stock to the extent not
requiring any adjustment of the denominator of the Conversion Ratio
pursuant to this subparagraph (e) (as adjusted to reflect subdivisions or
combinations of the Common Stock), and (ii) 3.75% of the Current Market
Price of
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the Common Stock on the Trading Day next preceding the date of declaration
of such dividend and (y) any dividend or distribution in connection with
the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary), then, in such case, unless the Company elects to
reserve such cash for distribution to the holder of this Security upon the
conversion of this Security so that the holder converting the Security will
receive upon such conversion, in addition to the Conversion Shares to which
the holder is entitled, the amount of cash which the holder would have
received if the holder had, immediately prior to the Record Date for such
distribution of cash, converted its Security into Conversion Shares, the
denominator of the Conversion Ratio shall be reduced so that the same shall
equal the number determined by multiplying the denominator of the
Conversion Ratio in effect immediately prior to the Record Date by a
fraction of which the numerator shall be the Current Market Price of the
Common Stock on the Record Date less the amount of cash so distributed (and
not excluded as provided above) applicable to one share of Common Stock and
the denominator shall be such Current Market Price of the Common Stock,
such reduction to become effective immediately prior to the opening of
business on the day following the Record Date; PROVIDED, HOWEVER, that in
the event the portion of the cash so distributed applicable to one share of
Common Stock is equal to or greater than the Current Market Price of the
Common Stock on the Record Date, in lieu of the foregoing adjustment,
adequate provision shall be made so that the holder of the Security shall
thereafter have the right to receive upon conversion the amount of cash
such holder would have received had he converted each Security on the
Record Date. In the event that such dividend or distribution is not so
paid or made, the denominator of the Conversion Ratio shall again be
adjusted to be the denominator of the Conversion Ratio which would then be
in effect if such dividend or distribution had not been declared.
(f) In case a tender or exchange offer made by the Company or any
subsidiary of the Company for all or any portion of the Common Stock shall
expire and such tender or exchange offer shall involve the payment by the
Company or such subsidiary of consideration per share of Common Stock
having a fair market value (as determined by the Board of Directors or, to
the extent permitted by applicable law, a duly authorized committee
thereof, whose determination shall be conclusive, and described in a
resolution of the Board of Directors or such duly authorized committee
thereof, as the case may be) at the last time (the "Expiration Time")
tenders or exchanges may be made by holders of Common Stock pursuant to
such offer (as it shall have been amended) that exceeds the Current Market
Price of the Common Stock on the Trading Day next succeeding the Expiration
Time, the denominator of the Conversion Ratio shall be reduced so that such
denominator shall equal the number determined by multiplying the
denominator of the Conversion Ratio in effect immediately prior to the
Expiration Time by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding (including any tendered or
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<PAGE>
exchanged shares) on the Expiration Time multiplied by the Current Market
Price of the Common Stock on the Trading Day next succeeding the Expiration
Time and the denominator shall be the sum of (x) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on the Expiration Time and the
Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time, such reduction to become effective immediately prior
to the opening of business on the day following the Expiration Time. In
the event that the Company is obligated to purchase shares pursuant to any
such tender or exchange offer, but the Company is permanently prevented by
applicable law from effecting any such purchases or all such purchases are
rescinded, the denominator of the Conversion Ratio shall again be adjusted
to be the denominator of the Conversion Ratio which would then be in effect
if such tender or exchange offer had not been made.
(g) The Company may make such reductions in the denominator of
the Conversion Ratio, in addition to those required by subparagraphs (a),
(b), (c), (d), (e) and (f) of this Section 4.3, as the Board of Directors
considers to be advisable to avoid or diminish any income tax to holders of
Common Stock or rights to purchase Common Stock resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. To the extent permitted by
applicable law, the Company from time to time may reduce the denominator of
the Conversion Ratio by any amount for any period of time if the period is
at least 20 days, the reduction is irrevocable during such period, and the
Board of Directors (or, to the extent permitted by applicable law, a duly
authorized committee thereof) shall have made a determination that such
reduction would be in the best interests of the Company, which
determination shall be conclusive. Whenever the denominator of the
Conversion Ratio is reduced pursuant to the preceding sentence, the Company
shall mail to the holder of record of this Security a notice of the
reduction at least 15 days prior to the date the reduced denominator of the
Conversion Ratio takes effect, and such notice shall state the reduced
denominator of the Conversion Ratio and the period it will be in effect.
(h) No adjustment in the denominator of the Conversion Ratio shall
be required unless such adjustment would require an increase or decrease of
at least 1% in the denominator of the Conversion Ratio then in effect;
PROVIDED, HOWEVER, that any adjustments which by reason of this
subparagraph (h) are not required to be made shall be carried forward and
taken into account in determining whether any subsequent adjustment shall
be required. Except as provided in this Section 4.3, the denominator
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<PAGE>
of the Conversion Ratio will not be adjusted for the issuance of Common
Stock or any securities convertible into or exchangeable for Common Stock
or carrying the right to purchase any of the foregoing.
(i) Notwithstanding any other provision of this Section 4.3, no
adjustment to the denominator of the Conversion Ratio shall reduce the
denominator of the Conversion Ratio below the then par value per share of
the Common Stock, and any such purported adjustment shall instead reduce
the denominator of the Conversion Ratio to such par value. The Company
hereby covenants not to take any action (i) to increase the par value per
share of the Common Stock or (ii) that would or does result in any
adjustment in the denominator of the Conversion Ratio that, if made without
giving effect to the previous sentence, would cause the denominator of the
Conversion Ratio to be less than the then par value per share of the Common
Stock, PROVIDED, HOWEVER, that the covenant in this sentence shall be
suspended if within ten days of determining in good faith that such action
would result in such adjustment (but not later than the business day next
following the effectiveness of such adjustment), the Company gives notice
of redemption of all outstanding shares of this Security, and effects the
redemption referred to in such notice on the redemption date referred to
therein, but the covenant in this sentence shall be retroactively
reinstated if such notice is not given or such redemption does not occur.
(j) Whenever the denominator of the Conversion Ratio is adjusted
as herein provided:
(i) the Company shall compute the adjusted denominator of the
Conversion Ratio and shall prepare a certificate signed by the Treasurer of
the Company setting forth such adjusted denominator and showing in
reasonable detail the facts upon which such adjustment is based; and
(ii) a notice stating that the denominator of the Conversion
Ratio has been adjusted and setting forth such adjusted denominator shall
as soon as practicable be mailed by the Company to the record holder of
this Security at his last addresses as it shall appear upon the security
register.
(k) Whenever the denominator of the Conversion Ratio is adjusted
as herein provided, the Company shall promptly file with the holder hereof
an officers' certificate setting forth the denominator after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. Promptly after delivery of such certificate, the Company shall
prepare a notice of such adjustment of the denominator of the Conversion
Ratio setting forth such adjusted denominator and the date on which each
adjustment becomes effective and shall mail such notice of such adjustment
of the denominator of the Conversion Ratio to the holder of this Security
at his last address
25
<PAGE>
appearing on the security register, within 20 days, after execution
thereof. Failure to deliver such notice shall not effect the legality or
validity of any such supplement indenture.
(l) In any case in which this Section 4.3 provides that an
adjustment shall become effective immediately after a record date for an
event, the Company may defer, until the occurrence of such event, issuing
to the holder of this Security converted after such record date and before
the occurrence of such event the additional Conversion Shares issuable upon
such conversion by reason of the adjustment required by such event over and
above the Conversion Shares issuable upon such conversion before giving
effect to such adjustment.
(m) For purposes of this Section 4.3, the following terms shall
have the meaning indicated:
(i) "Closing Price" with respect to any securities on any day
means the closing sale price regular way on such day or, in case no such
sale takes place on such day, the average of the reported closing bid and
asked prices, regular way, in each case on the Nasdaq National Market, or,
if such security is not listed or admitted to trading on such exchange, on
the principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or
listed or admitted to trading on any national securities exchange or
quotation system, the average of the closing bid and asked prices of such
security on the over-the-counter market on the day in question as reported
by the National Quotation Bureau Incorporated, or a similar generally
accepted reporting service, or if not so available, in such manner as
furnished by any Nasdaq National Market member firm selected from time to
time by the Board of Directors for that purpose, or a price determined in
good faith by the Board of Directors or, to the extent permitted by
applicable law, a duly authorized committee thereof, whose determination
shall be conclusive.
(ii) "Current Market Price" means the average of the daily
Closing Prices per share of Common Stock for the ten consecutive Trading
Days immediately prior to the date in question; PROVIDED, HOWEVER, that (A)
if the "ex" date (as defined below) for any event (other than the issuance
or distribution requiring such computation) that requires an adjustment to
the denomination of the Conversion Ratio pursuant to paragraph (a), (b),
(c), (d), (e) or (f) of this Section 4.3 occurs during such ten consecutive
Trading Days, the Closing Price for each Trading Day prior to the "ex" date
for such other event shall be adjusted by multiplying such Closing Price by
the same fraction by which the denominator of the Conversion Ratio is so
required to be adjusted
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<PAGE>
as a result of such other event, (B) if the "ex" date for any event (other
than the issuance or distribution requiring such computation) that requires
an adjustment to the denominator of the Conversion Ratio pursuant to
paragraph (a), (b), (c), (d), (e) or (f) of this Section 4.3 occurs on or
after the "ex" date for the issuance or distribution requiring such
computation and prior to the day in question, the Closing Price for each
Trading Day on and after the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the reciprocal of the
fraction by which the denominator of the Conversion Ratio is so required to
be adjusted as a result of such other event, and (C) if the "ex" date for
the issuance or distribution requiring such computation is prior to the day
in question, after taking into account any adjustment required pursuant to
clause (A) or (B) of this proviso, the Closing Price for each Trading Day
on or after such "ex" date shall be adjusted by adding thereto the amount
of any cash and the fair market value (as determined by the Board of
Directors or, to the extent permitted by applicable law, a duly authorized
committee thereof in a manner consistent with any determination of such
value for purposes of paragraph (d) or (f) of Section 4.3, whose
determination shall be conclusive and described in a resolution of the
Board of Directors or such duly authorized committee thereof, as the case
may be) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close
of business on the day before such "ex" date. For purposes of any
computation under Section 4.3(f), the Current Market Price of the Common
Stock on any date shall be deemed to be the average of the daily Closing
Prices per share of Common Stock for such day and the next two succeeding
Trading Days; PROVIDED, HOWEVER, that if the "ex" date for any event (other
than the tender or exchange offer requiring such computation) that requires
as adjustment to the denominator of the Conversion Ratio pursuant to
paragraphs (a), (b), (c), (d), (e) or (f) of this Section 4.3 occurs on or
after the Expiration Time for the tender or exchange offer requiring such
computation and prior to the day in question, the Closing Price for each
Trading Day on and after the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the reciprocal of the
fraction by which the denominator of the Conversion Ratio is so required to
be adjusted as a result of such other event. For purposes of this
paragraph, the term "ex" date, (1) when used with respect to any issuance
or distribution, means the first date on which the Common Stock trades
regular way on the relevant exchange or in the relevant market from which
the Closing Price was obtained without the right to receive such issuance
or distribution, (2) when used with respect to any subdivision or
combination of shares of Common Stock, means the first date on which the
Common Stock trades regular way on such exchange or in such market after
the time at which such subdivision or combination becomes effective, and
(3) when used with respect to any tender or exchange offer means the first
date on
27
<PAGE>
which the Common Stock trades regular way on such exchange or in
such market after the Expiration Time of such offer.
(iii) "fair market value" for purposes of this Section 4
shall mean the amount which a willing buyer under no compulsion to buy
would pay a willing seller under no compulsion to sell in an arm's length
transaction.
(iv) "Record Date" shall mean, with respect to any
dividend, distribution or other transaction or event in which the holders
of Common Stock have the right to receive any cash, securities or other
property or in which the Common Stock (or other applicable security) is
exchanged for or converted into any combination of cash, securities or
other property, the date fixed for determination of shareholders entitled
to receive such cash, securities or other property (whether such date is
fixed by the Board of Directors or by statute, contract or otherwise).
4.4. NO FRACTIONAL SHARES. No fractional Conversion Shares
or scrip representing fractional Conversion Shares shall be issued upon
conversion of this Security or in payment of accrued interest pursuant to
Section 4.1. Any right to fractional shares that may otherwise exist by
application of the provisions of this Security shall be null and void and
of no force and effect.
4.5. RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE OF
ASSETS. In the case of (a) any reclassification or change of the Common
Stock of the Company, (b) a consolidation, merger or combination involving
the Company or (c) a sale or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, in each case as a result of which holders of Common Stock shall
be entitled to receive stock, other securities, other property or assets
(including cash) with respect to or in exchange for such Common Stock, the
holder of this Security will be entitled thereafter to convert such
Securities into the kind and amount of shares of stock, other securities or
other property or assets which they would have owned or been entitled to
receive upon such reclassification, change, consolidation, merger,
combination, sale or conveyance had the Security been converted into
Conversion Shares immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance assuming that the
holder of Securities would not have exercised any rights of election as to
the stock, other securities or other property or assets receivable in
connection therewith.
5. REDEMPTION.
Except as described in this Section 5, the Securities may not be
redeemed prior to February 25, 2013.
28
<PAGE>
The Company shall have the right to redeem this Security upon not
less than 30 days' written notice to the holder hereof, as a whole but not
in part, at a redemption price equal to 100% of the aggregate principal
amount hereof, together with accrued interest to the date of redemption
(but interest installments whose Interest Payment Date is on or prior to
such date of redemption will be payable to the holder of this Security of
record at the close of business on the relevant Regular Record Dates
referred to on the face hereof) if, as a result of any change in, or
amendment to, the Internal Revenue Code of 1986, as amended (the "Code"),
revenue rulings, judicial decisions and exiting and proposed Treasury
regulations, or any change in the application or official interpretation of
the Code or such rulings, decisions or regulations, which change or
amendment becomes effective on or after the date of the issuance of the
Securities that adversely affects the tax treatment of the Securities of
the Company.
Prior to the giving of any notice of redemption of the Securities
pursuant to the preceding paragraph, the Company will deliver to each
Holder an Opinion of Counsel that a change in tax law or regulations has
adversely affected the tax treatment of the Securities.
Nothing contained in this Section 5 shall affect any mandatory
conversion of this Security into Common Stock pursuant to Section 4 hereof
prior to the date of redemption.
6 EXECUTION OF INDENTURE.
6.1 GENERAL. The Company agrees to execute the Indenture
with respect to the Registrable Securities that are Securities,
substantially in the form attached hereto as Exhibit A, with such changes
as the Company may reasonably determine are desirable to sell such
Registrable Securities. Such Indenture shall be executed by the Company
and the Trustee prior to, or contemporaneously with, the first sale of such
Registrable Securities pursuant to a Registration Statement. Such
Indenture will cover all Securities sold by the Holders, but no Securities
held or beneficially owned by the Holders.
6.2 CERTAIN DEFINITIONS. As used in this Section 6,
capitalized terms not otherwise defined in this Note have the meanings
ascribed thereto in the Registration Rights Agreement between the Company,
Ito-Yokado Co., Ltd. and Seven-Eleven Japan Co., Ltd., dated as of February
26, 1998.
7. MISCELLANEOUS. Interest on the Security shall be computed
on the basis of a 360-day year of twelve 30-day months.
Prior to due presentment of this Security for registration of
transfer, the Company, and any agent of the Company may treat the person in
whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company
nor any such agent shall be affected by notice to the contrary.
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<PAGE>
This Security, and all issues relating to this Security,
including the validity, enforceability, interpretation or construction of
this Security or any provision of this Security, shall be governed by and
construed in accordance with the laws of the State of New York excluding
(to the greatest extent permissible by law) any rule of law that would
cause the application of the laws of any jurisdiction other than the State
of New York.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3)
OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER
THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) INSIDE
THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT
OR (D) AFTER REGISTRATION UNDER THE SECURITIES ACT AND (3) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
30
Tab 1
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "First Amendment")
dated as of February 9, 1998 relates to that certain Credit Agreement dated
as of February 27, 1997 (the "Credit Agreement") among The Southland
Corporation, a Texas corporation ("Southland"), the financial institutions
party thereto as "Senior Lenders" or "Issuing Banks", Citibank, N.A., as
administrative agent for the Senior Lenders and Issuing Banks (in such
capacity, together with any successor administrative agent appointed
pursuant to SECTION 11.07 of the Credit Agreement, the "Administrative
Agent") and The Sakura Bank, Limited, New York Branch, as Co-Agent.
1. DEFINITIONS. Capitalized terms defined in the Credit
Agreement and not otherwise defined or redefined herein have the meanings
assigned to them in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. Upon the "First Amendment
Effective Date" (as defined in Section 4 below), the Credit Agreement is
hereby amended as follows:
2.1 AMENDMENTS TO SECTION 1.01. Section 1.01 of the Credit
Agreement is hereby amended as follows:
(a) The definitions of "QUIDS SUBORDINATED NOTES" and "SENIOR
SUBORDINATED DEBENTURE REPURCHASE" are hereby amended and restated in their
entirety to read as follows:
"QUIDS SUBORDINATED NOTES" shall mean (i) the Quarterly Income Debt
Security Due 2010 dated November 22, 1995 issued by Southland to Ito-Yokado
in the principal amount of $153,000,000, (ii) the Quarterly Income Debt
Security Due 2010 dated November 22, 1995 issued by Southland to Seven-
Eleven Japan Co., Ltd., in the principal amount of $147,000,000 (and
together with the promissory note described in CLAUSE (i) above, the
"Original QUIDS Subordinated Notes"), (iii) Quarterly Income Debt
Securities Due 2013 in an aggregate principal amount not to exceed
$80,000,000 issued to Ito-Yokado and Seven-Eleven Japan Co., Ltd.. the terms
and provisions of which shall be no less favorable to the Senior Lenders
than the terms and provisions of the Original QUIDS Subordinated
1
<PAGE>
Notes, PROVIDED that prior to the issuance thereof, the Administrative Agent
shall have received such legal opinions as the Administrative Agent shall
reasonably request, each of which shall be in form and substance
satisfactory to the Administrative Agent, and (iii) any promissory notes
issued pursuant to an indenture, in substantially the form of the indenture
attached as Exhibit A to each of the Original QUIDS Subordinated Notes (the
terms and provisions of which are no less favorable to the Senior Lenders
than the terms and provisions of the Original QUIDS Subordinated Notes),
upon the exercise by any holder of QUIDS Subordinated Notes of its rights
under that certain Registration Rights Agreement dated as of November 22,
1995 among Southland, Ito-Yokado and Seven-Eleven Japan Co., Ltd. or under
any subsequent registration rights agreement entered into in connection with
the QUIDS Subordinated Notes described in CLAUSE (iii) above
"SENIOR SUBORDINATED DEBENTURE REPURCHASE" shall mean (i) the issuance
by Southland to Ito-Yokado and Seven-Eleven Japan Co., Ltd., of QUIDS
Subordinated Notes described in CLAUSE (iii) of the definition of "QUIDS
Subordinated Notes", (ii) the redemption on or before July 1, 1998 with the
proceeds of such QUIDS Subordinated Notes of the outstanding 12% Second
Priority Senior Subordinated Debentures (Series C) of Southland and (iii)
the repurchase and cancellation on or before March 31, 1999 with the
proceeds of such QUIDS Subordinated Notes of an aggregate principal amount
of Senior Subordinated Debentures which, taken together with the aggregate
principal amount of Senior Subordinated Debentures redeemed pursuant to
CLAUSE (ii) above, is at least $65,000,000; PROVIDED that until the proceeds
of such QUIDS Subordinated Notes are applied to the redemption or repurchase
of the minimum amount of Senior Subordinated Debentures specified in this
definition, at least $65,000,000 of such proceeds (LESS any amounts applied
by Southland to repurchase or redeem Senior Subordinated Debentures) shall
be deposited and held by Southland in a separate deposit account and not
commingled with any other cash or other assets.
(b) The definitions of "YEN ROYALTY FINANCING AGREEMENT", "YEN
ROYALTY FINANCING COLLATERAL", "YEN ROYALTY FINANCING INDEBTEDNESS" and "YEN
ROYALTY LENDER" are hereby amended and restated in their entirety to read as
follows:
"YEN ROYALTY FINANCING AGREEMENT" shall mean, collectively, (a) the
Credit Agreement dated as of March 21, 1988 among Southland, the Yen Royalty
Lender and Citicorp International Limited, and (b) a credit agreement among
Southland, the Yen Royalty Lender and Citibank, N.A. as Administrative
Agent, which credit agreement, together with all other documents,
instruments and certificates delivered pursuant thereto or entered into in
connection therewith (including without
2
<PAGE>
limitation legal opinions reasonably requested by, and addressed to, the
Administrative Agent, the Senior Lenders and the Issuing Banks), shall be no
less favorable in form and substance to the Senior Lenders than the terms
and provisions of the credit agreement described in CLAUSE (a) above and the
documents, instruments and certificates entered into in connection
therewith, in each case as any Yen Royalty Financing Agreement may be
amended, supplemented or otherwise modified from time to time, PROVIDED that
no amendment, supplement or other modification to any Yen Royalty Financing
Agreement pertaining to the Yen Royalty Financing Collateral or the recourse
of the Yen Royalty Lender (or any other creditor under a Yen Royalty
Financing Agreement) thereto shall adversely affect the Administrative
Agent, the Senior Lenders or the Issuing Banks without the prior written
consent of the Requisite Senior Lenders.
"YEN ROYALTY FINANCING COLLATERAL" shall mean, as applicable, the
"Collateral" as defined in (a) the Assignment and Security Agreement dated
as of March 21, 1988 between Southland and the Yen Royalty Lender entered
into in connection the credit agreement described in CLAUSE (a) of the
definition of "Yen Royalty Financing Agreement" and (b) the Assignment and
Security Agreement between Southland and the Yen Royalty Lender entered into
in connection with the credit agreement described in CLAUSE (b) of the
definition of "Yen Royalty Financing Agreement".
"YEN ROYALTY FINANCING INDEBTEDNESS" shall mean Indebtedness of
Southland to the Yen Royalty Lender under the Yen Royalty Financing
Agreement in an aggregate principal amount which shall not exceed Japanese
Yen 35,000,000,000 PLUS the amount of all interest and yield protection
costs capitalized in connection therewith pursuant to the terms of the Yen
Royalty Financing Agreement.
"YEN ROYALTY LENDER" shall mean, as applicable, (i) with respect to
CLAUSE (a) of the definition of Yen Financing Agreement, Citibank (Channel
Islands) Limited and (ii) with respect to CLAUSE (b) of the definition of
Yen Financing Agreement, the financial institutions from time to time party
to the agreement described in such CLAUSE (b).
2.2 AMENDMENT TO SECTION 2.03(d). Section 2.03(d) of the
Credit Agreement is hereby amended by amending and restating the first
sentence thereof in its entirety to read as follows:
Southland shall execute and deliver to each Senior Lender on or before the
Funding Date for each Borrowing of Competitive Bid Loans a promissory note,
in substantially
3
<PAGE>
the form of EXHIBIT 8 and otherwise in form and substance reasonably
satisfactory to each Senior Lender making such Competitive Bid Loans, in the
principal amount of the Competitive Bid Loan advanced by such Senior Lender
in connection with such Borrowing and executed on behalf of Southland by an
officer of Southland (each individually, a "Competitive Bid Note" and
collectively, the "Competitive Bid Notes").
2.3 AMENDMENT TO SECTION 8.01. Section 8.01 of the Credit
Agreement is hereby amended by amending and restating CLAUSE (iii) thereof
in its entirety to read as follows:
(iii) Subordinated Indebtedness and extensions, renewals,
replacements and refinancings thereof which satisfy the criteria set forth
in the definition of "Subordinated Indebtedness", the aggregate principal
amount of which shall not exceed $750,000,000 (together with, in the case of
a refinancing, interest accrued thereon and reasonable costs incurred in
connection with the refinancing) PLUS any temporary increase in Subordinated
Indebtedness directly relating to the Senior Subordinated Debenture
Repurchase;
2.4 AMENDMENT TO SECTION 8.02(b). Section 8.02(b) of the
Credit Agreement is hereby amended by amending and restating CLAUSE (x)
thereof in its entirety to read as follows:
(x) Liens on the Yen Royalty Financing Collateral securing the Yen
Royalty Financing Indebtedness and Interest Rate Contracts related thereto;
2.5 AMENDMENT TO SECTION 8.16. Section 8.16 of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:
8.16. INTEREST RATE CONTRACTS. Southland shall not, and shall
not permit any of its Subsidiaries to, enter into any Interest Rate Contract
(or amend any Interest Rate Contract to increase the notional amount of
Indebtedness subject thereto) if, after giving effect to the Interest Rate
Contract (or amendment, as the case may be), the aggregate notional amount
of Indebtedness subject to Interest Rate Contracts then in effect is in
excess of the then aggregate outstanding principal amount of obligations of
Southland which are either (a) bearing interest at a variable rate or (b)
incurred or to be incurred pursuant to the credit agreement described in
CLAUSE (b) of the definition of "Yen Royalty Financing Agreement".
3. REPRESENTATION AND WARRANTIES. Southland hereby represents
and warrants to each Senior Lender, each Issuing Bank, the Administrative
Agent and the Co-Agent that (a) each of the statements set forth in Section
5.01 of the Credit Agreement are true, correct and complete on and as of the
First Amendment Effective Date as
4
<PAGE>
though made to each Senior Lender, each Issuing Bank, the Administrative
Agent and the Co-Agent on and as of such date and (b) as of the First
Amendment Effective Date, no Event of Default or Potential Event of Default
has occurred and is continuing.
4. FIRST AMENDMENT EFFECTIVE DATE. This First Amendment shall
become effective as of the date first above written (the "First Amendment
Effective Date") upon receipt by the Administrative Agent (with sufficient
copies for each Senior Lender) of counterparts hereof, executed by
Southland, the Administrative Agent and the Requisite Senior Lenders.
5. CONDITION SUBSEQUENT. The amendments described in SECTIONS
2.1(a) AND 2.3 of this First Amendment shall cease to be effective on March
31, 1998 unless, on or before that date, Southland has received gross
proceeds of at least $65,000,000 from the issuance of QUIDS Subordinated
Notes described in CLAUSE (iii) of the definition of "QUIDS Subordinated
Notes".
6. MISCELLANEOUS. This First Amendment is a Loan Document.
The headings herein are for convenience of reference only and shall not
alter or otherwise affect the meaning hereof. Except to the extent
specifically amended or modified hereby, the provisions of the Credit
Agreement shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of any Senior Lender or Issuing Bank
under any of the Loan Documents, nor constitute a waiver of any provision of
any of the Loan Documents.
7. COUNTERPARTS. This First Amendment may be executed in any
number of counterparts which together shall constitute one instrument.
8. GOVERNING LAW. THIS FIRST AMENDMENT, AND ALL ISSUES
RELATING TO THIS FIRST AMENDMENT, INCLUDING THE VALIDITY, ENFORCEABILITY,
INTERPRETATION OR CONSTRUCTION OF THIS FIRST AMENDMENT OR ANY PROVISION
HEREOF, SHALL BE GOVERNED BY, AND SHALL BE DETERMINED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
5
<PAGE>
IN WITNESS WHEREOF, the Administrative Agent, the Requisite Senior
Lenders and Southland have caused this First Amendment to be executed by
their respective officers thereunto duly authorized as of the date first
above written.
BORROWER: THE SOUTHLAND CORPORATION
By: /s/ David A. Urbel
------------------
David A. Urbel
Vice President and Treasurer
ADMINISTRATIVE AGENT: CITIBANK, N.A., as the Administrative Agent
By: /s/ Allen Fisher
-----------------
Allen Fisher
Vice President
SENIOR LENDERS: CITIBANK, N.A.
By: /s/ Allen Fisher
----------------
Allen Fisher
Vice President
6
<PAGE>
THE SAKURA BANK, LIMITED, NEW YORK BRANCH
By: /s/ Yoshimi Miura
-----------------
Yoshimi Miura
Senior Vice President
THE ASAHI BANK, LTD., NEW YORK BRANCH
By: /s/ Douglas E. Price
--------------------
Douglas E. Price
Senior Vice President
BANK OF TOKYO -- MITSUBISHI TRUST COMPANY
By: /s/ Ryohei Takashima
--------------------
Ryohei Takashima
Senior Vice President
THE FUJI BANK, LIMITED, HOUSTON AGENCY
By: /s/ Philip C. Lauinger III
--------------------------
Philip C. Lauinger III
Vice President & Manager
7
<PAGE>
THE MITSUI TRUST AND BANKING COMPANY, LIMITED, NEW
YORK BRANCH
By: /s/ Eiichi Akama
------------------
Eiichi Akama
Vice President Corporate Finance
THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY
By: THE INDUSTRIAL BANK OF JAPAN, LIMITED
HOUSTON OFFICE, Authorized Representative
By: ----------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.
By: /s/ Bianca Hemmen
--------------------
Bianca Hemmen
Senior Vice President
BANKERS TRUST COMPANY
By: /s/ David J. Bell
-----------------
David J. Bell
Vice President
8
<PAGE>
CIBC Inc.
By: /s/ Elizabeth Fischer
---------------------
Elizabeth Fischer
Executive Director
9
Tab 2
<PAGE>
PLEASE PRINT
REQUEST TO DEFER PAYMENT OF 1998
ANNUAL PERFORMANCE INCENTIVE
This Agreement is made this day of December, 1997 by and between
-----
, Social Security Number
- ----------------------- -------------------
("Employee") and The Southland Corporation, a Texas corporation
("Southland"), 2711 North Haskell, Dallas, Texas 75204.
In consideration of the mutual promises set forth below, the parties hereto
agree as follows:
1. Employee is a participant in Southland's Annual Performance
Incentive plan pursuant to which Employee may earn an Annual
Performance Incentive in 1998.
2. Employee hereby requests that Southland not pay Employee any
1998 Annual Performance Incentive earned by Employee until
February 1999, pursuant to Corporate Policy 02-29, 5.4.2.1, or
such other Corporate Policy as may be adopted to supersede such
policy.
3. Nothing contained herein shall be construed as a guarantee that
any Annual Performance Incentive will be earned or paid to
Employee, except if such Annual Performance Incentive is earned
by Employee pursuant to all the terms and conditions of the
applicable Southland 1998 Annual Performance Incentive Plan.
4. Nothing contained herein shall be construed as conferring upon
Employee the right to continue as an Employee of Southland.
Employee
----------------------
(signature)
Location
-----------------------
THE SOUTHLAND CORPORATION
BY:
---------------------------
Vice President
PLEASE RETURN TO COMPENSATION AND BENEFITS, LOCATION #0224
BY DECEMBER 31, 1997
Tab 3
<PAGE>
THE SOUTHLAND CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR ELIGIBLE EMPLOYEES
1998 DEFERRAL ELECTION AGREEMENT
This Deferral Election Agreement is made between The Southland
Corporation ("Southland") and ("Participant"),
--------------
SS#
----------------------
PART A - DEFERRAL ELECTION
I elect to defer eligible compensation in the percentage indicated
below pursuant to the terms of The Southland Corporation
Supplemental Executive Retirement Plan for Eligible Employees:
% of Eligible Compensation
--------
(must be in whole percents from 1% to 12%)
PART B - DISTRIBUTION OF PLAN BENEFITS
1. Southland shall pay the deferred income to the Participant on
the earliest to occur of the following Triggering Events:
(a) Retirement, (b) Death, (c) Disability, (d) Separation from
employment,
or
(e) On , 19 (must be at least three years
------------------- --
after year in which income is
deferred)
2. If payment is made due to (a) Retirement, (b) Death, (c)
Disability or (d) Separation from employment, I request that
Southland pay the deferred income to me in payments as follows:
SELECT EITHER A OR B:
A. In one lump sum;
----
ON THE 15TH OF THE MONTH FOLLOWING THE TRIGGERING
----- EVENT
ON THE 15TH OF JANUARY OF THE YEAR FOLLOWING
----- THE TRIGGERING EVENT
or
B. In annual installments until the entire deferred
----- income has been paid.
Number of installments (select up to a maximum
----- of 10 annual installments).
THE FIRST INSTALLMENT TO BE PAID
ON THE 15TH OF THE MONTH FOLLOWING THE
---- TRIGGERING EVENT
ON THE 15TH OF JANUARY OF THE YEAR
---- FOLLOWING THE TRIGGERING EVENT
(All subsequent installments shall be paid on the
15th of January each year)
The rate of interest on the deferred income will be set at 120% of
the applicable federal long-term rate, for compounding annually,
published by the Internal Revenue Service. The rate will be set each
December 1st for the following year.
The Participant may select a beneficiary by completing the attached
Designation of Beneficiary form.
Nothing contained herein shall be construed as conferring upon the
Participant the right to continue in the employ of Southland in any
capacity.
Any amount described in Part A shall be treated as compensation in
the year it is earned for the purpose of computing other Southland
benefits, group life, disability and other insurance coverages.
1
<PAGE>
The Participant and his/her beneficiary shall not have any property
interest whatsoever in any specific assets of Southland. Nothing
contained in this Deferral Election Agreement and no action taken
pursuant to the provisions of this Agreement shall create or be
construed to create a trust of any kind, or a fiduciary relationship
between Southland and the Participant, his/her beneficiary, or any other
person.
By signing this Deferral Election Agreement, the undersigned
Participant acknowledges the following:
I have read the Memorandum containing a description of the SERP.
I understand my deferral election continues as long as I am
employed by Southland, unless I stop or change my deferral election
prior to the beginning of any Plan year (within the limitations of the
Plan.)
I understand that my deferrals will remain general assets of The
Southland Corporation until they are later paid to me. My right to
payment is the same as any general, unsecured creditor of Southland.
A portion of my deferrals will be eligible for the Southland
matching contribution, if any, but there is no assurance that a matching
contribution will be made.
I have received a copy of the plan document which is also available
for review in the Compensation and Benefits Department. I understand
that the plan may be amended or terminated at any time by Southlands
President and Chief Executive Officer or by the Board of Directors.
By signing this form I agree to the election on this form and the
terms of The Southland Corporation Supplemental Executive Retirement
Plan for Eligible Employees. These elections will continue to be in
effect unless I submit a new form for future Plan years, showing either
a new election percentage or that I want to cease deferrals.
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed effective as of this day of December, 1997/or day of
----- ----
January, 1998.
PARTICIPANT:
---------------------------------------
WITNESS: (Signature)
Social Security #
----------------------
- ---------------------------
ATTEST: THE SOUTHLAND CORPORATION
BY
- --------------------------- -----------------------------------
Name:
----------------------------------
TITLE:
---------------------------------
Please complete Designation of Beneficiary Form enclosed with this
Deferral Election Agreement.
2
Tab 4
<PAGE>
AWARD NUMBER
------
THE SOUTHLAND CORPORATION
1995 Stock Incentive Plan
1997 Award Agreement
GRANT OF NONQUALIFIED STOCK OPTION (NQSO)
The Southland Corporation (the "Company") hereby grants to ,
---------------
SSN # (the "Participant") on November 12, 1997 (the "Date of
--------------
Grant"), pursuant to the 1995 Stock Incentive Plan (the "Plan"), a stock option
subject to the Plan and upon the terms and conditions set forth below.
Capitalized terms used and not otherwise defined herein have the meanings
given to them in the Plan.
1. GRANT OF OPTION
Subject to the terms and conditions hereinafter set forth, the Company, with
the approval and direction of the Committee, grants to the Participant, as of
the Date of Grant, an option to purchase up to shares of Common
-----
Stock at a price of $2.469 per share, the Fair Market Value of the Common
Stock on the Date of Grant. Such option is hereinafter referred to as the
"Option" and the shares of stock purchasable upon exercise of the Option are
hereinafter referred to as the "Option Shares." This Option is a Non-
qualified Stock Option, and as such is not intended by the parties hereto to
be an Incentive Stock Option (as such term is defined under the Code).
2. EXERCISABILITY OF OPTIONS
Subject to such further limitations as are provided herein, the Option shall
become exercisable in five (5) installments, the Participant having the right
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option, on and after the following dates, in cumulative
fashion:
(a) on and after the first anniversary of the Date of Grant, up to one-fifth
(ignoring fractional shares) of the total number of Option Shares;
(b) on and after the second anniversary of the Date of Grant, up to an
additional one-fifth (ignoring fractional shares) of the total number of Option
Shares;
(c) on and after the third anniversary of the Date of Grant, up to an
additional one-fifth (ignoring fractional shares) of the total number of Option
Shares;
(d) on and after the fourth anniversary of the Date of Grant, up to an
additional one-fifth (ignoring fractional shares) of the total number of Option
Shares; and
(e) on and after the fifth anniversary of the Date of Grant, the remaining
Option Shares.
1
<PAGE>
3. PERFORMANCE ACCELERATED VESTING
After the first anniversary of the Date of Grant, an additional one-fifth
(ignoring fractional shares) of the total number of Option Shares shall become
exercisable on and after each of the following events:
(a) on and after the twentieth consecutive trading day that the Closing Price
is equal to or greater than $4.00;
(b) on and after the twentieth consecutive trading day that the Closing Price
is equal to or greater than $5.00;
(c) on and after the twentieth consecutive trading day that the Closing Price
is equal to or greater than $6.50; and
(d) on and after the twentieth consecutive trading day that the Closing Price
is equal to or greater than $8.00.
4. TERMINATION OF OPTION
(a) The Option and all rights hereunder with respect thereto, to the extent
such rights shall not have been exercised, shall terminate and become null and
void after the expiration of ten (10) years from the Date of Grant (the
"Option Term").
(b) If the Participant has an exercisable Option (in whole or in part) as of
the date of the Participants voluntary termination of employment with the
Company, then the exercisable portion of such Option shall remain exercisable
for a period equal to the lesser of (1) the remainder of the Option Term or (2)
the date which is 60 days after the date of Participants voluntary
termination of employment.
(c) Upon termination of the Participants employment with the Company by reason
of Normal Retirement, the Option shall become immediately one hundred percent
(100%) vested, and the Participant shall have until the expiration of the Option
Term to exercise the Option.
(d) Upon termination of the Participants employment with the Company by reason
of Early Retirement or Disability, any portion of the Option that is not yet
vested shall continue to vest and to be exercisable in accordance with the
provisions of Sections 2 and 3 of this Award Agreement and, once vested, the
Option shall remain exercisable until the expiration of the Option Term
unless, prior thereto, the Participant reaches age 65, at which time all
remaining Options shall vest.
(e) Upon termination of the Participants employment with the Company by reason
of Divestiture, any portion of the Option that as of the date of termination is
not yet exercisable shall become null and void as of the date of termination and
the portion, if any, of the Option that is exercisable as of the date of
termination shall remain exercisable for a period equal to the lesser of (1) the
remainder of the Option Term or (2) the date which is one year after the date
of termination.
2
<PAGE>
(f) In the event of death of the Participant, regardless whether the
Participant had previously retired (either Early Retirement or Normal Re-
tirement) or was Disabled at the time of death, the Option shall become
immediately one hundred percent (100%) vested and the Participants Designated
Beneficiary shall have twelve (12) months following the Participants death
during which to exercise the Option.
(g) A transfer of the Participants employment between the Company and any
Subsidiary of the Company, shall not be deemed to be a termination of the
Participants employment.
(h) Notwithstanding any other provisions set forth herein or in the Plan,
if the Participant shall (i) commit any act of malfeasance or wrongdoing
affecting the Company or any Subsidiary of the Company, (ii) breach any cov-
enant not to compete, or employment contract with the Company or any Sub-
sidiary of the Company, or (iii) engage in conduct that would warrant the
Participants discharge for cause (excluding general dissatisfaction with the
performance of the Participants duties, but including any act of disloyalty
or any conduct clearly discrediting the Company or any Subsidiary or
Affiliate of the Company), any unexercised portion of the Option shall
immediately terminate and be void.
5. EXERCISE OF OPTIONS
(a) The Participant may exercise the Option from time to time with respect to
all or any part of the number of Option Shares then exercisable hereunder by
giving the Companys National Human Resources Manager written notice of the
intent to exercise. The notice of exercise shall specify the number of
Option Shares as to which the Option is to be exercised, the Award Number (as
indicated on the first page of the applicable Award Agreement), and the date
of the exercise thereof (the "Exercise Date"), which date shall be within
five days after the giving of such notice.
(b) On or before the Exercise Date, the Participant shall pay the full amount
of the purchase price for the Option Shares in cash (U.S. dollars) or through
the surrender of previously acquired shares of Stock valued at their Fair
Market Value on the Exercise Date. In addition, to the extent permitted by
applicable law, the Participant may arrange with a brokerage firm for that
brokerage firm, on behalf of the Participant, to pay the Company the Exercise
Price of the Option being exercised (either as a loan to the Participant or
from the proceeds of the sale of Stock issued pursuant to that exercise of
the Option), and the Company shall promptly cause the exercised shares to be
delivered to the brokerage firm. Such transactions shall be effected in
accordance with such further procedures as the Committee may establish from
time to time.
On the Exercise Date or as soon thereafter as is practicable, the Company
shall cause to be delivered to the Participant, a certificate or certificates
for the Option Shares then being purchased (out of theretofore unissued Stock
or reacquired Stock, as the Company may elect) upon full payment for such
Option Shares. The obligation of the Company to deliver Option Shares shall,
however, be subject to the condition that if at any time the Committee shall
determine in its discretion that the listing, registration or qualification
of the Option or the Option Shares upon any securities exchange or such other
securities trading system or market or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the Option or the
issuance or purchase of the Option Shares thereunder, the Option may not be
exercised in whole or in part unless such listing, registration, qualifi-
cation, consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Committee.
3
<PAGE>
(c) If the Participant fails to pay for any of the Option Shares specified in
such notice or to pay any applicable withholding tax relating thereto or fails
to accept delivery of the Option Shares, the Participants right to purchase
such Option Shares may be terminated by the Committee.
6. FAIR MARKET VALUE
As used herein, the "fair market value" of a share of Stock shall be the
Closing Price per share of Stock on The Nasdaq Stock Market, or such other
securities trading system or exchange which is the primary market on which the
Stock may then be listed or traded on the date in question, or if the Stock has
not been traded on such date, the Closing Price on the first day prior thereto
on which the Stock was so traded.
7. NO RIGHTS OF SHAREHOLDERS
Neither the Participant nor any personal representative shall be, or shall have
any of the rights and privileges of, a shareholder of the Company with respect
to any shares of Stock purchasable or issuable upon the exercise of the Option,
in whole or in part, prior to the date of exercise of the Option.
8. NON-TRANSFERABILITY OF OPTION
During the Participants lifetime, the Option shall be exercisable only by the
Participant or any guardian or legal representative of the Participant, and the
Option shall not be transferable except, in case of the death of the Participant
, by will or the laws of descent and distribution, nor shall the Option be
subject to attachment, execution or other similar process. In the event of
(a) any attempt by the Participant to alienate, assign, pledge, hypothecate
or otherwise dispose of the Option, except as provided for herein, or (b) the
levy of any attachment, execution or similar process upon the rights or
interest hereby conferred, the Company may terminate the Option by notice to
the Participant and it shall thereupon become null and void. Notwithstanding
the above, in the discretion of the Committee, Options may be transferable
pursuant to a QDRO.
9. RESTRICTIONS ON TRANSFER FOLLOWING EXERCISE
(a) Thirty percent (30%) of the Option Shares (the "Restricted Option Shares")
acquired upon exercise of the Option shall be delivered to Participant via a
stock certificate bearing a legend restricting the transfer or sale of such
Option Shares for a period of 24 months following the Exercise Date. Seventy
percent (70%) of the Option Shares acquired upon exercise of the Option shall
not be subject to any restriction against the transfer or sale of such Option
Shares by the Participant.
(b) If the Participants employment with the Company is voluntarily terminated
within the 24-month period following the Exercise Date (other than due to Early
Retirement or Normal Retirement) or is terminated due to cause, the Company may
repurchase the Restricted Option Shares at the Exercise Price paid by the
Participant. If the Company elects not to purchase such Restricted Option
Shares, the Participant shall continue to hold such Shares subject to the
restrictions thereon.
4
<PAGE>
(c) Upon a termination of employment as a result of death, Disability,
Divestiture, Early Retirement or Normal Retirement, any Restricted Option Shares
then held by a Participant or a Participants Designated Beneficiary shall be
released from, and no Option Shares acquired after the date of termination
shall be subject to, the restrictions on transfer or sale set forth in par-
agraph 9(a) above. Promptly after the date of any such termination, upon
receipt of certificates representing any Restricted Option Shares, the
Company shall exchange any such certificates for certificates representing
such Shares free of any restrictive legend relating to the lapsed restrictions.
10. WITHHOLDING TAX REQUIREMENTS
Following receipt of each notice of exercise of the Option, the Company
shall deliver to Participant a notice specifying the amount that Participant
is required to pay to satisfy applicable tax withholding requirements.
Participant hereby agrees to either (i) deliver to the Company by the due
date specified in such notice from the Company a check payable to the Company
and equal to the amount set forth in such notice or (ii) make other appro-
priate arrangements acceptable to the Company to satisfy such tax withholding
requirements.
11. NO RIGHT TO EMPLOYMENT
Neither the granting of the Option nor its exercise shall be construed as
granting to the Participant any right with respect to continued employment with
the Company.
12. CHANGE IN CONTROL
The Committee shall, in its sole discretion, have the right to accelerate the
vesting of any Option and to release any restrictions on the Restricted Option
Shares, in the event of a Change in Control.
13. ADJUSTMENT OF AWARDS
The terms of this Option and the number of Option Shares purchasable hereunder
shall be subject to adjustment pursuant to Sections 5(c) through (h) of the
Plan.
14. AMENDMENT OF OPTION
The Option may be amended by the Committee at any time (i) if the Committee
determines, in its sole discretion, that amendment is necessary or advisable in
the light of any additions to or changes in the Code or in the regulations
issued thereunder, or any federal or state securities law or other law or
regulation, which change occurs after the Date of Grant and by its terms
applies to the Option; or (ii) other than in the circumstances described in
clause (i), with the consent of the Participant.
5
<PAGE>
15. NOTICE
Any notice to the Company provided for in this Award Agreement shall be in
writing and addressed to the Company in care of the Manager of the Companys
Compensation and Benefits Department, and any notice to the Participant shall be
in writing and addressed to the Participant at the Participants current add-
ress shown on the records of the Company or such other address as the Part-
icipant may submit to the Company in writing. Any notice shall be deemed to
be duly given if and when properly addressed with postage prepaid, or if
personally delivered to the addressee or, in the case of notice to the
Company, if sent via telecopy to the Compensation and Benefits Departments
facsimile machine at such telephone number as may be published in the
Companys published telephone directory.
16. INCORPORATION OF PLAN BY REFERENCE
The Option is granted pursuant to the terms of the Plan, which terms are
incorporated herein by reference, and the Option shall in all respects be
interpreted in accordance with the Plan. The Committee shall interpret and
construe the Plan and this Award Agreement, and its interpretations and
determinations shall be conclusive and binding on the parties hereto and any
other person claiming an interest hereunder, with respect to any issue
arising hereunder or thereunder. In the event of a conflict between the
terms of this Award Agreement and the Plan, the terms of the Plan shall
control.
17. GOVERNING LAW
The validity, construction, interpretation and effect of this Award Agreement
shall exclusively be governed by and determined in accordance with the law of
the State of Texas, except to the extent preempted by federal law, which
shall to that extent govern.
IN WITNESS WHEREOF, The Southland Corporation has caused its duly authorized
officer to execute this Grant of Nonqualified Stock Option, and the Part-
icipant has placed his or her signature hereon, effective as of the Date of
Grant.
THE SOUTHLAND CORPORATION
By:
-------------------------------------------------------------------
President and Chief Executive Officer
ACCEPTED AND AGREED TO:
By:
-------------------------------------------------------------------
Participant
Participants Social Security Number: SSN
6
Tab 5
<PAGE>
SUBSIDIARIES OF THE SOUTHLAND CORPORATION
(Wholly owned unless indicated otherwise)
JURISDICTION OF
ACTIVE: INCORPORATION
Bawco Corporation-------------------------------------------------------Ohio
Brazos Comercial E Empreendimentos Ltda. (a)--------------------------Brazil
Cityplace Center East Corporation--------------------------------------Texas
HDS Sales Corporation (b)----------------------------------------------Texas
Melin Enterprises, Inc. (c)-----------------------------------------Colorado
Phil-Seven Properties Corporation (d)----------------------------Philippines
Puerto Rico - 7, Inc. (e)----------------------------------------Puerto Rico
Sao Paulo-Seven Comercial, S.A. (f)-----------------------------------Brazil
7-Eleven Beverage Company, Inc.----------------------------------------Texas
7-Eleven Comercial Ltda. (g)------------------------------------------Brazil
7-Eleven Mexico, S.A. de C.V. (h)-------------------------------------Mexico
7-Eleven of Idaho, Inc. (b)--------------------------------------------Idaho
7-Eleven of Massachusetts, Inc. (b)----------------------------Massachusetts
7-Eleven of Nevada, Inc.--------------------------------------------Delaware
7-Eleven of Virginia, Inc.------------------------------------------Virginia
7-Eleven Sales Corporation (b)-----------------------------------------Texas
Southland Canada, Inc. (i)--------------------------------------------Canada
Southland International, Inc.-----------------------------------------Nevada
Southland International Investment Corporation N.V. (i)-Netherlands Antilles
Southland Sales Corporation--------------------------------------------Texas
TSC Lending Group, Inc.------------------------------------------------Texas
Valso, S.A. (j)-------------------------------------------------------Mexico
Subsidiary (active) of Valso, S.A.: 7-Eleven Mexico, S.A. de C.V. (h)----
- -------------------------------------------------------------------Mexico
INACTIVE:
Lavicio's, Inc.---------------------------------------------------California
MTA CAL, Inc.-----------------------------------------------------California
7-Eleven, Inc.---------------------------------------------------------Texas
7-Eleven Limited----------------------------------------------United Kingdom
7-Eleven Pty. Ltd. (k)---------------------------------------------Australia
7-Eleven Stores (NZ) Limited (l)---------------------------------New Zealand
SLC Financial Services, Inc.-------------------------------------------Texas
The Seven Eleven Limited (m)---------------------------------------Hong Kong
1
<PAGE>
FOOTNOTES:
(a) 2,248,800 quotas (almost 100%) owned by Southland International
Investment Corporation N.V. (a wholly owned subsidiary of
Southland International, Inc., a wholly owned subsidiary of The
Southland Corporation), and remaining 10 quotas owned by The
Southland Corporation
(b) 100% owned by Southland Sales Corporation (a wholly owned
subsidiary of The Southland Corporation)
(c) 100% owned by Bawco Corporation (a wholly owned subsidiary of
The Southland Corporation)
(d) 4.63% owned by The Southland Corporation, and remaining 95.37%
owned by various investors
(e) 59.07% owned by The Southland Corporation, and remaining 40.93%
owned by group of investors in Puerto Rico
(f) 1.69% owned by The Southland Corporation, 98.25% owned by Super
Trade, Ltd., and remaining .06% owned by other investors.
(g) 15,999 quotas (almost 100%) owned by The Southland Corporation,
and remaining 1 quota owned by 7-Eleven of Nevada, Inc. (a
wholly owned subsidiary of The Southland Corporation)
(h) 99.965% of Series A shares owned by Valso, S.A., and
remaining.035% owned by Casa Chapa, S.A.; 100% of Series B
shares owned by Valso, S.A.
(i) 100% owned by Southland International, Inc. (a wholly owned
subsidiary of The Southland Corporation)
(j) 49% owned by The Southland Corporation, and remaining 51% owned
by Valores Corporativos, S.A.
(k) 50% owned by David Anthony Walsh, and remaining 50% owned by
Anthony Peter John Kelly, for the benefit of Southland
(l) 99% owned by The Southland Corporation, and remaining 1% owned
jointly by Southland's local counsel, Bruce Nelson Davidson and
Anthony Francis Segedin
(m) 99.9% owned by The Southland Corporation, and remaining .1%
owned by Wilgrist Nominees Limited, Southland's agent in Hong
Kong
2
Tab 6
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in the registration statements
listed below of our reports dated February 5, 1998, on our audits of the
consolidated financial statements and financial statement schedule of The
Southland Corporation and Subsidiaries as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, which
reports are included in this Annual Report on Form 10-K.
REGISTRATION NO.
On Form S-8 For:
Post-Effective Amendment No. 1 to the Southland 33-25327
Corporation Grant Stock Plan
The Southland Corporation 1995 Stock Incentive 33-63617
Plan
The Southland Corporation Supplemental 333-42731
Executive Retirement Plan for Eligible Employees
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 24, 1998
Tab 7
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 38,605
<SECURITIES> 0
<RECEIVABLES> 133,291
<ALLOWANCES> 6,796
<INVENTORY> 125,396
<CURRENT-ASSETS> 386,641
<PP&E> 2,768,174
<DEPRECIATION> 1,351,487
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<BONDS> 1,894,545
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0
0
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<INCOME-TAX> 45,253
<INCOME-CONTINUING> 70,042
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