-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qh00UilnM3u/DVNpAxPQRtQ5BJAj0Sjy3rofhCc/0ZmBT0APVcU9jqr9yAvq3fO3 R8vTsdtwxKqtJNFMuHIxqw== 0000092344-96-000004.txt : 19960401 0000092344-96-000004.hdr.sgml : 19960401 ACCESSION NUMBER: 0000092344-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHLAND CORP CENTRAL INDEX KEY: 0000092344 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CONVENIENCE STORES [5412] IRS NUMBER: 751085131 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16626 FILM NUMBER: 96541082 BUSINESS ADDRESS: STREET 1: 2711 N HASKELL AVE CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2148287011 MAIL ADDRESS: STREET 1: 2711 NORTH HASKELL AVE CITY: DALLAS STATE: TX ZIP: 75204 10-K 1 10-K ____________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED] For the transition period from _______ to _______ Commission File Numbers 0-676 and 0-16626 __________________ THE SOUTHLAND CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-1085131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2711 North Haskell Ave., Dallas, Texas 75204-2906 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code, 214-828-7011 __________________ Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered None N/A Securities Registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 Par Value Warrants to Purchase Common Stock at $1.75 per share (expired on February 23, 1996) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $457,709,132 at March 8, 1996, based upon 140,833,579 shares held by persons other than officers, directors and 5% owners. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No __ 409,922,935 shares of Common Stock, $.0001 par value (the registrant's only class of Common Stock), were outstanding as of March 8, 1996. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the listed Parts and Items of Form 10-K: Definitive Proxy Statement for April 24, 1996 Annual Meeting of Shareholders: Part III, a portion of Item 10 and Items 11, 12 and 13. ___________________________________________________________________________ ANNUAL REPORT ON FORM 10-K For the year ended December 31, 1995 TABLE OF CONTENTS PAGE REFERENCE FORM 10-K PART I Item 1. Business 1 Executive Officers of the Registrant 19 Item 2. Properties 23 Item 3. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 29 PART II Item 5. Market for the Registrant's Common Equity and 29 Related Stockholder Matters Item 6. Selected Financial Data 31 Item 7. Management's Discussion and Analysis of Financial Condition 32 and Results of Operation Item 8. Financial Statements and Supplementary Data 42 Independent Auditors' Report of Coopers & Lybrand L.L. P. 69 on The Southland Corporationand Subsidiaries' Financial Statements for each of the three years in the period ended December 31, 1995 Item 9. Changesin and Disagreements with Accountants 70 on Accounting and Financial Disclosures PART III Item 10. Directors and Executive Officers of the * Registrant and see Part I, Item 1, above Item 11. Executive Compensation * Item 12. Security Ownership of Certain Beneficial * Owners and Management Item 13. Certain Relationships and Related Transactions * PART IV Item 14. Exhibits, Financial Statement Schedules, and 71 Reports on Form 8-K Signatures 78 ___________________________ *Included in Form 10-K by incorporation by reference to the Registrant's Proxy Statement, dated March 21, 1996, for the April 24, 1996 Annual Meeting of Shareholders. PART I ITEM 1. BUSINESS. GENERAL The Southland Corporation ("Southland," the "Company" or "Registrant"), conducting business principally under the name 7ELEVEN, is the largest convenience store chain in the world, with almost 15,400 Company-operated, franchised and licensed locations worldwide, and is among the nation's largest retailers.The 7-ELEVEN trademark has been registered since 1961 and is well known throughout the United States and in many other parts of the world.The Company believes that 7-ELEVEN is the leading name in the convenience store industry. Notwithstanding its divestitures of stores and other businesses since 1987, the Company remains geographically diversified. The Company has, over the past several years, implemented its strategic plan to divest all its non- convenience store operations, and has trimmed its store operations by consolidating its efforts in certain market areas and by closing less profitable stores. Convenience retailing is now the Company's only business focus. The Company, with executive offices at 2711 North Haskell Avenue, Dallas, Texas 75204 (telephone 214/828-7011), was incorporated in Texas in 1961 as the successor to an ice business organized in 1927. Unless the context otherwise requires, the terms "Company," "Southland" and "Registrant" as used herein include The Southland Corporation and its subsidiaries and predecessors. In 1995, Southland's operations (for financial reporting purposes) were conducted in one business segment: the Operating and Franchising of Convenience Food Stores. At December 31, 1995, the Company's operations included 5,361 7- ELEVEN convenience stores in the United States and Canada, 19 High's Dairy Stores, and 44 Quik Mart and SUPER-7 high-volume gasoline outlets with mini-convenience stores. The Company also has an equity interest in 220 convenience stores in Mexico (almost all of which are now using the 7ELEVEN name). Area licensees, or their franchisees, operate additional 7ELEVEN stores in certain areas of the United States, in 18 foreign countries and the U.S. territories of Guam and Puerto Rico. As of the end of 1995, the Company has an equity interest in three of the licensees whose area licenses cover six foreign countries and Puerto Rico. During 1995, the Company continued to focus on its business concept of providing superior service to its customers through better merchandising, with item-by-item control of inventory at each store, emphasizing the importance of ordering the right products, on an individual store level, to remain in stock, at all times, on each particular store's best-selling items. Through proper ordering and successful implementation of other store functions, the Company continues to work toward providing convenience-oriented customers with the SPEED, QUALITY, SELECTION, PRICE and shopping ENVIRONMENT that will give the Company a sustainable competitive advantage. THE RESTRUCTURINGS. In 1987 the Company was financially restructured through a leveraged buyout (the "LBO") and in October 1990 filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. In March 1991, the Company emerged from 1 bankruptcy with a $430 million infusion of capital from its new majority owner,IYG Holding Company, which is jointly owned by Ito- Yokado Co., Ltd. ("ItoYokado") and Seven-Eleven Japan Co., Ltd. ("Seven- Eleven Japan"), both Japanese corporations. Seven-Eleven Japan is the Company's largest area licensee, operating over 6,200 7-ELEVEN stores in Japan and, through its whollyowned subsidiary Seven-Eleven (Hawaii), Inc., 46 7-ELEVEN stores in Hawaii. On February 21, 1991, the U.S. Bankruptcy Court for the Northern District of Texas issued an order (the "Confirmation Order") confirming the Company's Plan of Reorganization (the "Plan") and on March 4, 1991, the Confirmation Order became final and non- appealable. (See "Legal Proceedings," below.) The Plan provided for holders of the Company's then outstanding debt and equity securities (the "Old Securities") to receive new debt securities, common stock and, in certain cases, cash, in exchange for their Old Securities and, pursuant to a Stock Purchase Agreement, for Ito Yokado and Seven-Eleven Japan to acquire approximately 70% of the Company for $430 million in cash. In addition, among other things, the Plan provided for the amendment and restatement of the Company's Credit Agreement with its Senior Lenders (the"Credit Agreement") and for the Company to effect a one-for-ten reverse stock split of its common stock (the "Stock Split"). The closing (the "Closing") under the Stock Purchase Agreement (the "Stock Purchase Agreement"), occurred on March 5, 1991, and the Company issued 286,634,619 shares of common stock, $.0001 par value (the "Common Stock"), to IYG Holding Company, a Delaware corporation, jointly owned by Ito Yokado and Seven-Eleven Japan, and received $430 million in cash. In connection with the Closing, the Company entered into a Shareholders Agreement, a Warrant Agreement and Employment Agreements with the Thompsons (described below, see "Other Information About the Company"). Pursuant to the Plan, holders of the Company's Old Securities were entitled to exchange, until March 5, 1993, their Old Securities for new debt, equity and, in some cases, cash, and newly issued warrants (the "Thompson Warrants"), exercisable at $1.75 per share (until February 23, 1996) to acquire certain shares of common stock owned by the Thompsons and certain other holders of the old common stock (the "Warrant Shareholders"), pursuant to a Warrant Agreement with Wilmington Trust Company as Warrant Agent (the "Warrant Agreement"). THE PURCHASER. IYG Holding Company, a Delaware corporation (the "Purchaser" or "IYG"), is a jointly owned subsidiary of Ito Yokado and Seven-Eleven Japan, formed for the specific purpose of purchasing the Common Stock of the Company pursuant to the Stock Purchase Agreement. Ito-Yokado owns 51% and Seven-Eleven Japan owns 49%, respectively, of IYG. ITO-YOKADO. Ito-Yokado is among the largest retailing companies in Japan. Its principal business consists of the operation of 155 superstores that sell a broad range of food, clothing and household goods. In addition, its activities include operating two restaurant chains doing business under the names "Denny's" and "Famil" and a chain of supermarkets. All of Ito-Yokado's operations are located in Japan except for some limited purchasing activities. Prior to 1990, Ito Yokado had no affiliation with the Company, other than through its majorityowned subsidiary, Seven-Eleven Japan (see below) which is the Company's area licensee in Japan. In 1990, in addition to entering into the Stock Purchase Agreement, Ito-Yokado provided the Company with much-needed 2 interim liquidity through a $25 million term loan agreement. This term loan, plus interest, was repaid on March 5, 1991. In addition, in 1992 Ito-Yokado guaranteed the Company's $400 million commercial paper facility and in November 1995, Ito-Yokado purchased $153 million of 4.5% Convertible Quarterly Income Debt Securities due 2010 (see "Refinancing of Certain Debt Securities" below) issued by the Company. SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is the largest convenience store chain in Japan. Seven-Eleven Japan is a 50.3%-owned subsidiary of Ito-Yokado.Seven-Eleven Japan is the largest area licensee of the Company with approximately 6,269 stores in Japan and owns SevenEleven (Hawaii), Inc., which, as of year-end 1995, operated an additional 46 7- ELEVEN stores in Hawaii under a separate area license agreement covering that state. In November 1995, Seven-Eleven Japan purchased $147 million of 4.5% Convertible Quarterly Income Debt Securities (see "Refinancing of Certain Debt Securities" below) issued by the Company. REFINANCING OF BANK DEBT. On December 21, 1994, the Company refinanced all of its remaining debt under the Credit Agreement, originally entered into in 1987. The bank group, led by Citicorp North America, Inc., as Agent, and The Sakura Bank, Limited, as Co-Agent, is comprised of six Japanese banks, four American banks and one Canadian bank. The amended Credit Agreement, which will mature at the end of 1999, provides for a $300 million term loan, $150 million letter of credit facility and a $150 million revolving credit facility. The term loans and any revolver borrowings carry a floating interest rate of either the Citibank, N.A. base rate or a reserve-adjusted Eurodollarrate plus .975%. REFINANCING OF CERTAIN DEBT SECURITIES. On November 22, 1995, the Company issued $300 million aggregate principal amount of 4.5% Convertible Quarterly Income Debt Securities due 2010 (the "Convertible Debt Securities") to Ito-Yokado and Seven-Eleven Japan. The Convertible Debt Securities are subordinated to all existing debt and pay interest quarterly; however, the Company has the right todefer interestpayments thereon for up to 20 consecutive quarters. The Convertible Debt Securities are convertible into shares of the Company's common stock at a price of $4.1602 per share, subject to adjustment in certain cases. In addition, on November 21, 1995, the Company successfully concluded its "Dutch auction" tender offer for 40 percent of both its 5% First Priority Senior Subordinated Debentures due December 15, 2003 ("5% Debentures") and 4 1/2% Second Priority Senior Subordinated Debentures (Series A) due June 15, 2004 ("4 1/2% Debentures," together with the 5% Debentures, the "Debentures"). Under the terms of the tender offer, approximately $180,621,000 million face amount was purchased at the final clearing price of $840.00 per $1,000 principal amounts for the 5% Debentures and approximately $82,719,000 million face amount was purchased at the final clearing price of $786.00 per $1,000 principal amount for the 4 1/2% Debentures. All Debentures tendered below the final clearing price were purchased at the final clearing price. Debentures tendered at the final clearing price were prorated, and those tendered at prices above the final clearing price were returned. The 5% Debentures acquired by the Company through the tender offer have been used to satisfy the Company's sinking fund obligations for several years under the terms of the Indenture governing the 5% Debentures. 3 The Company received total proceeds from the issuance of the Convertible Debt Securities of $300 million, of which approximately $217 million was used to purchase the tendered Debentures. Additional open market purchases of the Debentures may be made in the future. The remaining proceeds will be used for general corporate purposes including, initially, the repayment of currently outstanding commercial paper and revolving debt, if any. OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES 7-ELEVEN STORES. On December 31, 1995, there were 5,361 7-ELEVEN convenience stores included in the Company's operations and 625 stores (in the United States) operated by area licensees. Such stores are operated principally under the name 7-ELEVEN and are located in 41 states, the District of Columbia, and five provinces of Canada. During 1995, the Company opened 22 convenience stores (of which 11 were rebuilds or relocations of existing stores) and closed 228 convenience stores, due to changing market patterns, lease expirations and the closing of selected stores that were not profitable. The Company's convenience stores are extended-hour retail stores, emphasizing convenience to the customer and providing fresh take-out foods, groceries and beverages, gasoline (at about 2,000 stores), dairy products, non-food merchandise, specialty items, certain financial services, lottery tickets, and incidental services. Generally, the Company's stores are open every day of the year and are located in neighborhood areas, on main thoroughfares, in shopping centers, or on other sites where they are easily accessible and have ample parking facilities for quick in- and-out shopping. Stores are generally from 2,400 to 3,100 square feet in size and carry 2,300 to 2,600 items. The vast majority of the stores operate 24 hours a day. The stores attract early and late shoppers, lunch-time customers, weekend and holiday shoppers and customers who may need only a few items at any one time and desire rapid service. The Company has been emphasizing its new product mix and expanding its selection of higher quality fresh foods and is experimenting with other merchandising innovations to encourage existing customers to increase their shopping frequency and to enhance the stores' appeal to new customers. The Company has also taken a new approach to providing fresh food merchandise to the stores, through the introduction of daily delivery of freshly made sandwiches and bakery products from commissaries and newly opened baking facilities operated to serve only the needs of 7-ELEVEN stores, with such products, as well as many others, now being distributed in several markets from local area combined distribution centers that serve only 7-ELEVEN stores. In addition, there has been an increased focus on novelty and seasonal items to spur impulse buying and stores are being further encouraged to introduce items that are new to the market, or new to convenience stores, in order to encourage customers to shop in 7-ELEVEN stores frequently to see the constantly updated array of new items in the stores, which are designed to appeal to a broader mix of customers. Substantially all convenience store sales are for cash (including sales for which checks are accepted), although major credit cards, along with the "Citgo Plus" credit card, are accepted in most markets, for purchases of both merchandise and gasoline. Credit card sales currently account for approximately 6.8% of sales, including gasoline. REMODELING OF STORES. During 1995, the Company continued the most extensive remodeling in its history. By the end of 1995, approximately 4,100 stores had been remodeled to conform to the new store image. The Company anticipates that approximately 1,100 additional stores will be remodeled in 1996. The remodeled stores have increased interior and exterior lighting, wider aisles, shopper-friendly aisle markers, lower 4 shelf heights to help shoppers locate items faster, less cluttered aisles and counters, upgraded gasoline island equipment, and a new tri- striped exterior store facade that replaces the mansard roofs of many existing stores. In addition, closed circuit TV cameras have been added at the remodeled stores as a further security upgrade. The remodeling process has been greatly streamlined to be less disruptive of the store's business and to focus on the changes that customers notice and appreciate most, such as brighter lighting and more user-friendly store layouts. MERCHANDISING. During 1995, the Company further intensified its focus on better order forecasting to avoid lost sales opportunities caused by out-of-stock conditions. Through case studies and other examples, the entire field organization has been kept informed on ways to identify and track each store's best-selling items in each product category. Store employees are responsible for placing orders with a view toward forecasting the demand for the highest selling items in the store, based on specific local conditions. Each store's merchandise includes a selection of core items as well as optional items selected by the individual store operators to meet their customers' local needs and preferences. During 1995, the Company continued to expand its selection of seasonal and novelty items, taking advantage of each holiday or other identifiable event (such as graduation time, start of the football or baseball season, etc.)with a preplanned mix of merchandise made available to the stores on attractive end cap merchandisers in anticipation of possible impulse or last-minute shopping at such times as Valentine's Day, Easter, Mother's Day, Halloween and Christmas. In addition, the Company developed promotions that were tied to both the NFL football season and the NHL hockey season using novelty items in the stores, supported by radio and print media advertising. During 1995, as part of the Company's new merchandising focus, between 20 and 25 new items were made available to the stores each week. Store operators were encouraged to try new items and, through case-study experiments, store operators were able to see the incremental benefits derived by offering the new items in the stores. In addition, during 1995 the Company continued toimplement its everyday-fair-price strategy, which minimizes discounting, but lowers prices on some items to provide consistent, competitive prices throughout the store. The Company is applying a more flexible approach to pricing on different products in different markets, while working with suppliers to find ways to lower costs to the Company, so that any savings can be reflected in the price to the customer. NEW PRODUCTS. FRESH FOODS AND FOOD PRODUCTS. During 1995, the Company continued its initiative to introduce more fresh food products of a higher quality into the stores. Daily deliveries are being made of sandwiches, salads, breakfast items and fresh-made pastries -- all items marketed under 7-ELEVEN's proprietary DELI CENTRAL and WORLD OVENS brand names. Under this initiative, 7-ELEVEN aligns itself with local bakeries and "kitchens" or commissaries. These companies prepare food to 7ELEVEN's specifications exclusively for the stores and have the product delivered in the exact quantities ordered by the stores through the combined distribution center program (see "Distribution, Fresh Products," below). 5 By the end of 1995, there were four commissary facilities providing fresh-made foods to the stores. One commissary, operated by Prime Deli Corporation in Dallas, Texas, provides a wide range of freshly prepared food to approximately 228 stores. In late 1994, with the help of The Pillsbury Company , WORLD OVENS fresh bakery products were developed and introduced to 7-ELEVEN stores in Texas. These high- quality products are proprietary to 7-ELEVEN and are manufactured in a new bakery facility just outside Dallas, specifically opened and operated to serve 7-ELEVEN's needs. The commissary in Austin, Texas, which has been operating since 1992, has begun testing new proprietary sandwiches and breakfast sandwiches in the Austin area. In addition, during 1994, food production began from a newly built commissary facility (Fresh to Go Foods) in the Philadelphia/New Jersey market area that produces fresh food items for approximately 400 franchised stores in that market area. The area served by this facility will be expanded to include the Baltimore area during 1996. Another commissary is also servicing approximately 160 franchised stores in the Long Island, New York market area. In addition, WORLD OVENS products are also being supplied to stores in the Philadelphia/New Jersey market area from a bakery facility in Baltimore. In late 1995, the Company signed a commissary agreement for parts of Denver and surrounding areas. The Company is also in the process of finalizing arrangements for additional commissaries and bakeries in 1996 covering markets in parts of California, Virginia, Baltimore, Washington, D.C., Chicago, Denver, Colorado Springs, Tampa and Orlando. The Company plans to have the DELI CENTRAL and WORLD OVENS products in almost all of its stores within a few years. Through the use of the commissaries and other suppliers, several new categories of fresh food products were added to the cold sandwich food offerings in 1995 in selected areas of the country including ethnic products, such as Mexican items, unique hot sandwich offerings, new salads, fresh bagels and prepared fruit and vegetable products, as well as afternoon pastry products, such as cookies and brownies. Over 200 new fresh food items were introduced across the country and these new products accounted for a significant portion of the growth in the fresh food category in 1995. In addition, several new lines of signature products are being tested in various areas, including Teriyaki Rice Bowls and unique signature sandwiches such as Chicken Focaccia and Chicken Caesar Pita. Proprietary products were a big part of the Company's initiative to offer higher quality food and beverage selections, with the Company continuing to expand its corporate brand QUALITYCLASSIC SELECTION spring water and soft drinks with the addition of flavored teas, new packages like a one-liter sports bottle for the spring water and sparkling waters in some markets. QUALITY CLASSIC SELECTION was launched in Canada in 1995. In the hot beverage area, as a complement to promoting its everpopular 7-ELEVEN coffee, the Company continued to emphasize its own proprietary regular and sugar-free CAFE SELECT line of gourmet- flavored coffees, hot chocolates and cappuccinos, which added hot beverages that had appeal throughout the day, in addition to the traditional peak morning coffee hours. Approximately 95% of 7-ELEVEN stores offer the new hot chocolate and cappuccino products. NON-FOOD ITEMS. 7-ELEVEN also continued its emphasis onstaying ahead of its competitors by providing a selection of non-food services, such as the continued 6 aggressive marketing of branded prepaid telephone cards for long distance service. The prepaid telephone cards, which were originally introduced in November 1994, now include collectors' series and 90- minute varieties. During 1995, the Company became the largest retailer of prepaid long distance telephone cards in the U.S., using extensive advertising and promotions like its 7-ELEVEN NFL Quarterback Collectible Phone Card. By year end, over 5,000 stores were selling the 7-ELEVEN PHONE CARDS for prepaid long distance calling in 15-, 30-,60 and 90-minute increments. In 1995, 7-ELEVEN sold over 3 million cards. The Company expects to introduce the 180-minute card, and two collector series cards, in 1996, and to continue to seek expanded sales in the burgeoning phone card market. The Company also continued to install more automatic teller machines under its 1993 agreement with Electronic Data Systems Corporation ("EDS") and continued its ATM program with other vendors, as well. By year-end there were approximately 4,600 ATMs in 7-ELEVEN stores around the U.S. as well as 350 machines in its Canadian stores. EDS pays the Company a flat fee per month per ATM as well as transaction- based fees dependent upon the number of transactions per month. During 1995, a surcharge (a fee charged by the ATM owner/operator) added to each ATM transaction was tested in markets in California and Nevada, as well as other areas. A portion of the surcharge is shared with 7-ELEVEN,resulting in significant growth in income from this category. EDS plans to continue the surcharge rollout in 1996. The Company is one of the nation's leading retailers of money orders and, in 1995, began upgrading the money order processing equipment in the stores in an effort to make this product even more appealing to customers and to make it easier for store operators to provide a more efficient and faster transaction, satisfying the needs of the convenience shopper. The Company continued to focus on adding new and popular seasonal merchandise and in May introduced a new selection of 36 styles of sunglasses with the sophisticated look of certain very expensive brands but at extremely reasonable prices. Eighty percent of the stores participated and ordered the new display which holds 18 pairs of sunglasses. As a result of this new program, sunglass sales were up 94% in 1995 over 1994. GASOLINE. In 1995, the Company sold over 1.4 billion gallons of gasoline at retail at approximately 2,000 7-ELEVEN stores and other Southland self-serve outlets. The Company monitors gasoline sales to maintain a steady supply of petroleum products to the Company's stores, to determine competitive retail pricing, to provide the appropriate product mix at each location and to manage inventory levels, based on market conditions. During 1995, the Company continued its program to upgrade the gasoline pump area of the stores, by adding canopies and new equipment. Approximately 900 stores are now equipped to accept credit cards for the purchase of gasoline at the pump, which makes gasoline shopping at 7-ELEVEN stores even more convenient for the credit customer. Almost all of the Company's stores offer CITGO-branded gasoline. During 1995, the Company discontinued the sale of gasoline at approximately 56locations (due, in many cases, to the closing or divestiture of the entire store, with the others eliminated due to the strategic decision to discontinue the sale of gasoline at the particular location), and may discontinue gasoline sales at 7 about 30 additional loccations in 1996. In 1995, the Company assumed responsibility for gasoline operations at 45 locations where the gasoline facilities had previously been operated by third parties. The Company has a long-term product purchase agreement with CITGO Petroleum Corporation ("Citgo") under which Southland purchases substantially all its U.S. gasoline requirements from Citgo at marketrelated prices through the year 2006. Holders of the "Citgo Plus" credit card can use the card to finance purchases of gasoline, as well as other merchandise, at 7-ELEVEN stores. At year-end, there were more than 1.3 million active "Citgo Plus" credit card accounts. DISTRIBUTION. FRESH PRODUCTS. To further facilitate the sale of fresh products in the stores, the Company continued to roll-out its combined distribution program through the strategic alliance with companies that specialize in distribution. These third-party distribution companies provide distribution and cross-dock facilities where the products of multiple vendors, many of whom formerly delivered directly to 7-ELEVEN stores themselves, are combined to make one delivery to the store. This enables the stores to receive daily shipments of products where freshness is paramount and avoids the inconvenience of multiple daily deliveries to the stores by several vendors. By the end of 1995, 825 stores in Texas, Long Island, Philadelphia and New Jersey were receiving daily deliveries of the freshest dairy products, produce, packaged baked goods, bread products and even products like fresh-cut flowers, through 7-ELEVEN's combined distribution center ("CDC") program. In 1994, the Company entered into a five-year agreement with E.A. Sween Company for E.A. Sween to provide distribution services through operation of (i) a CDC facility in the Dallas/Fort Worth area to service approximately 250 stores in that area and (ii) a CDC facility in the Austin market area to service approximately 50 stores in that area. Included in the products distributed through the CDCs are those produced by Prime Deli Corporation from its commissary and the WORLD OVENS products from Southbury Bakery, both in the Dallas area, and products from the commissary facility in Austin, which has now been open and serving 7-ELEVENs since 1992. As of year-end 1995, there were CDCs operating in Dallas and Austin, Texas, in New Jersey (serving the Philadelphia/New Jersey market area) and on Long Island, New York. The Company plans to furtheralign itself with additional CDC facility operators in 1996 in Tampa and Orlando, Florida; Long Island, New York; Denver and Colorado Springs, Colorado; the southern Maryland/northern Virginia market, including Washington, D.C. and in San Jose, California, and is in various stages of finalizing agreements with several operators who will provide the distribution services covering each of these new areas. In addition, the Company experimented in 1995 with utilizing the delivery capabilities of the Dallas CDC for perishable items other than food. Fresh-cut flowers, including roses, are now being distributed by the Dallas CDC. WAREHOUSE PRODUCTS - The Company continued to utilize the distribution services of McLane Company, Inc., pursuant to a ten-year contract entered into in 1992, for delivery of warehouse products to all of the Company's corporate stores and those franchise stores that utilize McLane for distribution services. McLane serves Southland using two former Southland distribution centers and eight additional distribution centers throughout the country. The Company has worked with McLane to minimize out-of-stock conditions and to assist McLane to be increasingly responsive to individual store's needs. 8 Most franchisees are required only to carry merchandise of a type, quality, quantity and variety consistent with the 7-ELEVEN image. Except for consigned merchandise and certain proprietary items, franchisees are not required to purchase merchandise from the Company or vendors it recommends, or to sell their merchandise at prices suggested by the Company. SUPPLY AGREEMENTS. In connection with the sale of the Company's Reddy Ice and Dairies Group divisions, both in 1988, the Company entered into long-term contracts to purchase the products historically supplied to the Company's stores by such divested operations. Although the Reddy Ice contract expired by its terms in May 1995, the Company has continued to buy ice from Reddy Ice. PRODUCT CATEGORIES. The Company does not record sales on the basis of product categories. However, based upon the total dollar volume of store purchases, management estimates that the percentages of its 7-ELEVEN convenience store sales in the United States by principal product categories for the last five years were as follows:
YEARS ENDED DECEMBER 31 PRODUCT CATEGORIES 1995 1994 1993 1992 1991 - ------------------ ----- ----- ----- ----- ----- Gasoline 24.9% 24.2% 23.5% 22.5% 21.5% Tobacco Products 16.6 17.2 18.0 19.2 19.1 Groceries 9.8 9.6 9.2 8.5 8.1 Beer/Wine 9.0 9.4 9.5 10.0 10.7 Soft Drinks 8.7 8.8 9.7 10.0 10.3 Food Service 8.7 8.5 8.5 8.4 8.4 Non-Foods 6.1 6.2 5.8 5.8 5.8 Dairy Products 4.4 4.6 4.8 4.9 5.0 Candy 3.6 3.8 3.7 3.8 3.9 Baked Goods 3.4 3.6 3.5 3.4 3.4 Customer Services 3.1 2.4 2.1 1.9 1.8 Health/Beauty Aids 1.7 1.7 1.7 1.6 2.0 ----- ----- ----- ------ ------ Total 100.0% 100.0% 100.0% 100.0% 100.0%
LOCAL REGULATIONS. In certain areas where stores are located, state or local laws limit the hours of operation or sale of certain products, most significantly alcoholic beverages, tobacco products, possible inhalants and lottery tickets. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of these products or to seek other remedies. In most states, such agencies have discretion to determine if a licensee is qualified to be licensed, and denials may be based on past noncompliance with applicable statutes and regulations as well as on the involvement of the licensee in criminal proceedings or activities which in such agencies' discretion are determined to adversely reflect on the licensee's qualifications. Such regulation is subject to legislative and administrative change from time to time. Since 1984, the Company has had in place an extensive program entitled COME OF AGE, to train store personnel in the laws relating to the proper handling and sale of age-restricted products. This training program is provided to all sales associates in corporate stores and is made available to all franchisees and licensees. 9 FRANCHISES. At December 31, 1995, 2,896 7-ELEVEN stores were operated by independent franchisees under the Company's franchise program for individual 7-ELEVEN stores. Sales by stores operated by franchisees (which are included in the Company's net sales) were approximately $2,832,131,000 for the year ended December 31, 1995. In its franchise program for individual 7-ELEVEN stores, the Company selects qualified applicants and trains the individuals who will participate personally in operating the store. The franchisee pays the Company an initial fee, which varies by store, and is generally calculated based upon gross profit experience for the store or market area, to cover certain costs including: training; an allowance for travel; meals and lodging for the trainees; and other costs relating to the franchising of the store. Under the standard form of franchise agreement, the Company leases or subleases, to the franchisee, a ready-to operate 7-ELEVEN store that has been fully equipped and stocked. The Company bears the costs of acquiring the land, building and equipment, as well as most utility costs and property taxes. Under the standard franchise arrangement, which typically has an initial term of 10 years, the franchisee pays for all business licenses and permits, as well as all in-store selling expenses, including: payroll; inventory and cash variations; supplies; inventory, payroll and other business taxes; certain repairs and maintenance; and other controllable in-store expenses, and is required to invest an amount equal to the cost of the store's inventory and cash register fund. The Company finances a portion of the cost of business licenses and permits and of the investment in inventory, as well as the ongoing operating expenses and purchases of inventory. Under the standard franchise agreements currently in effect, the Company shares in the gross profit of the store (ranging from 50% to 58%, depending on the hours of store operation, adjusted if necessary to assure the franchisee a specified gross income before selling expenses), based on all sales of merchandise and services except those on which the Company pays the franchisee a commission (such as consigned gasoline). The Company's share of gross profit, called the "7-ELEVEN Charge," is its continuing royalty charge to the franchisee for the license to use the 7- ELEVEN operating system and trademarks, for the lease and use of the store premises and equipment and for continuing services provided by the Company. These services include merchandising, advertising, recordkeeping, store audits, contractual indemnification, business counseling services and preparation of financial statements. Other optional services are available from or through the Company for additional fees. During 1995, the Company continued testing a new franchise agreement that provided a three-tiered structure for calculating the 7-ELEVEN Charge. This test, which is limited to Washington, Idaho and Oregon, will continue, in those states only, during 1996. The Company has been working on the development of a new franchise agreement with the help of a committee of franchisees from the National Advisory Council. The Company anticipates that there will be an ongoing process to revise the franchise agreement, on a periodic basis, to ensure it stays in step with the Company's business concept. In addition, during the first part of 1996, the Company increased the training program being offered for franchisees. The program now consists of 7 weeks of intensified instruction in the new strategies that are being implemented by the Company. 10 The Company is also encouraging existing successful franchisees to franchise multiple locations. This will provide growth opportunities for current franchisees within the 7-ELEVEN system by encouraging them to pursue additional stores which also will result in increased income for the franchisee, partly by creating opportunities for lower per unit operating expenses for the franchisee and the Company. To stimulate this multiple growth, the Company has offered certain incentives during the first quarter of 1996 to qualified franchisees (and corporate store managers in a franchise area), by recalculating and reducing the franchise fee in such situations. Under Southland's standard franchise agreement, the franchise may be terminated by the franchisee at any time or by the Company for the causes, and upon the notices, as specified in the franchise agreement and as provided by applicable law. In the event of expiration or termination of the franchise, the Company has the right to (i) acquire the franchisee's interest in inventory of a type, quantity, quality and variety consistent with the 7-ELEVEN image and the other tangible assets in the franchise business; and, (ii) take possession of the real property on which the store is located, and, in such event, the franchisee has no continuing lease obligations. Certain franchisees have contractual rights to sign new franchise agreements upon expiration of their existing agreements, so long as they meet certain specified conditions. Many states in which the Company franchises individual 7-ELEVEN stores have enacted legislation governing the offer, sale, termination and/or renewal of franchises, and the Federal Trade Commission has a trade regulation rule regarding required disclosures to prospective franchisees. AREA LICENSES. As of December 31, 1995, the Company had granted domestic area licenses to eight companies which were operating 625 convenience stores using the 7-ELEVEN system and name in certain areas of Alaska, Arkansas, Hawaii, Indiana (using the name Super-7 in Indianapolis), Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, West Virginia and Wyoming. Although parts of both Nevada and Virginia are also covered by area licenses, there are no stores currently operated under the area licenses in those states. The 46 stores in Hawaii are operated under an area license agreement with Seven-Eleven (Hawaii), Inc. (a subsidiary of Seven Eleven Japan). During the first quarter of 1995, Southguard Corporation and the Company agreed to terminate Southguard's two area licenses, covering parts of Texas and Oklahoma, in exchange for the payment of a one-time termination fee from Southguard to the Company. As of the end of 1995, foreign area license agreements covered the operation of 6,269 7-ELEVEN stores in Japan, 1,158 in Taiwan, 554 in Thailand, 328 in Hong Kong, 153 in Australia, 110 in South Korea, 93 in Malaysia, 83 in the Philippines, 80 in Spain, 77 in Singapore, 53 in the United Kingdom, 39 in Norway, 31 in Sweden, 22 in China, 14 in Brazil, 12 in Puerto Rico, 11 in Denmark, 10 in Guam and nine in Turkey. In connection with the granting of area licenses in Brazil, Norway (which license now also includes Denmark, Finland and Sweden), the Philippines and Puerto Rico, the Company acquired an equity interest in those area licensees. Nine "12+12" stores in Spain, not included in the 80 stores mentioned above, are also under license agreement. 11 Stores operating under area licenses are not included in the number of Company operating units, and their sales are not included in the Company's revenue. Revenues from initial fees paid for area licenses and continuing royalties based on the sales volume of the stores are included in Other Income. INTERNATIONAL AFFILIATES. The Company also has an equity interest in 220 convenience stores in Mexico operated by 7-Eleven Mexico, and one store in Mexico is operating under a license agreement with 7-Eleven Mexico. These stores, which feature merchandise and services essentially the same as 7-ELEVEN stores, had been operating under the name SUPER SIETE until 1991; however, now almost all stores are using the 7-ELEVEN name. Sales from the stores in Mexico are not included in Southland's revenues, but Southland's equity in their operating results is included in Other Income and has not been material. HIGH'S DAIRY STORES. As of December 31, 1995, the Company operated 19 High's Dairy Stores located in Maryland, Pennsylvania, Virginia and West Virginia, which are similar in size and location to 7-ELEVEN stores and feature a product mix that emphasizes a variety of dairy products. QUIK MART AND SUPER-7 GASOLINE UNITS. At December 31, 1995, 44 Quik Mart and SUPER-7 gasoline units were in operation in nine states. A typical Quik Mart is a high-volume gasoline outlet combined with a mini convenience store ranging in size from 300 to 1,600 square feet of sales space stocked primarily with snack food, candy, cold drinks and other immediately consumable items, while a Super-7 gasoline unit is a high volume, multi-pump, self-service gasoline-dispensing operation. CORPORATE CITYPLACE. The Company's headquarters are located in "Cityplace Center East," its 42-story office tower located on the east side of Dallas' Central Expressway north of Dallas' central business district. The Company currently occupies approximately 525,000 square feet, about 39% of Cityplace Center East. During 1995, leases covering approximately 60,000 additional square feet were signed, both with new tenants and with current tenants. The building is now virtually completely leased or reserved for expansion under current leases. The Company is in the process of a further consolidation of its offices, which would make additional space available for subleasing. DIVESTITURES During 1995, the Company sold its former food center in Salt Lake City, Utah to McLane (the lessee). This property consisted of a 21.5 acre tract on which a 77,000 square foot food processing plant is located, including 6,930 square feet of office space. OTHER INFORMATION ABOUT THE COMPANY CREDIT AGREEMENT AND DEBT COVENANTS. The Company's amended Credit Agreement contains a number of financial and operating covenants requiring, among other things, the maintenance of certain financial ratios, including interest coverage, fixed-charge coverage, and senior 12 indebtedness to EBITDA (defined in the Credit Agreement as earnings before interest, income taxes, depreciation and amortization, with adjustments for certain extraordinary and unusual gains and losses). The covenant levels established by the Credit Agreement generally require a continuing improvement in the Company's financial condition. The Credit Agreement also contains various covenants which, among other things, (a) limit the Company's ability to incur or guarantee indebtedness or other liabilities other than under the Credit Agreement, (b) restrict the Company's ability to engage in asset sales and sale/leaseback transactions, (c) restrict the types of investments the Company can make and (d) restrict the Company's ability to pay cash dividends, redeem or prepay principal and interest on any subordinated debt and certain senior debt. These covenants contain exceptions that are customary in credit agreements associated with financings of companies having creditworthiness similar to Southland's, as well as exceptions consistent with the specific nature of the business and financial operations of the Company. The Company's outstanding Debt Securities contain certain covenants which, among other things, (i) limit the payment of dividends and certain other restricted payments by both the Company and its subsidiaries, (ii) require the purchase by the Company of the Debt Securities at the option of the holder upon a change of control (as defined in the indentures governing the Debt Securities), (iii) limit additional indebtedness, (iv) limit future exchange offers, (v) limit the repayment of subordinated indebtedness, (vi) require board approval of certain asset sales, (vii) limit transactions with certain stockholders and affiliates and (viii) limit consolidations, mergers and the conveyance of all or substantially all of the Company's assets. The Company's outstanding Convertible Debt Securities, which were issued in November, 1995, to Ito-Yokado and Seven-Eleven Japan, are subordinated to all existing debt, convertible into the Company's Common Stock at a premium and carry certain registration rights that require the Company to register the Convertible Debt Securities (or Common Stock issued upon conversion) under the Securities Act of 1933. The holders may elect to convert the Convertible Debt Securities in denominations of $1,000 principal amount or integral multiples thereof, into shares of the Company's Common Stock. The number of shares obtained is determined by dividing the principal amount of the Convertible Debt Securities being converted by $4.1602 which represents an average of Southland's share price at the time the Convertible Debt Securities were issued, plus a premium. The $300 million Convertible Debt Securities are convertible into approximately 72 million shares of the Company's Common Stock. SHAREHOLDERS AGREEMENT. Upon the Closing, the Company, the Purchaser, Ito-Yokado and various holders of the Company's Common Stock who held the common stock prior to the Closing (the "Existing Shareholders") entered into a shareholders agreement (the "Shareholders Agreement") pursuant to which the parties were not permitted to offer, sell, assign, transfer, grant a participation in, pledge or otherwise dispose of any shares of Common Stock except in compliance with the Shareholders Agreement. The Shareholders Agreement, which terminated on March 5, 1996, provided each of the Existing Shareholders (and any persons who hold employee options or employee convertible debentures to purchase shares of Common Stock as a result of employment with the Company) with the right and option to require the Purchaser to purchase up to all of the shares of Common Stock held by such person on the fifth anniversary of the date of the Shareholders Agreement at the fair market value (to be determined in accordance with the terms of the Shareholders Agreement) of such shares on such date. In addition, the Shareholders Agreement, as amended on December 30, 1992, provided that the parties to the agreement shall 13 cause Southland's Board of Directors to consist of, and would vote their shares as to the election of directors so that the Board shall consist of, (i) two individuals designated by Existing Shareholders holding a majority of shares held by the Existing Shareholders, (ii) ten individuals selected by the Purchaser, (iii) two individuals initially designated by the Official Committee of Bondholders appointed by the Bankruptcy Court and, from and after the next annual or special meeting of the Company's shareholders at which the election of directors occurs, designated by the holders (the "Other Shareholders") of shares of Common Stock other than the Purchaser and the Existing Shareholders (the "Other Shareholder Nominees") and (iv) although no such obligation then existed, two independent directors if, and to the extent, required to meet the listing or quotation requirements of any exchange or quotation system upon which the Common Stock is or shall be listed or traded (and only if, and to the extent that, the Other Shareholder Nominees fail to qualify as such independent directors). Because the Shareholders Agreement terminated on March 5, 1996, (except for certain continuing registration rights) the holders of shares that were subject to the Shareholders Agreement are no longer restricted by the terms of the agreement as to voting, transfer, or sale of such shares. Moreover, under the Shareholders Agreement, Ito-Yokado provided the Thompsons and certain of the parties to the Shareholders Agreement (other than participants in the Company's Grant Stock Plan with respect to shares acquired pursuant to participation in such Grant Stock Plan) with certain loans (the "Loans") based on the pledge of shares of Common Stock as collateral for the Loans (the "Collateral Shares"). Such Loans are nonrecourse obligations of the borrower except to the extent of the Collateral Shares. Such Collateral Shares may not be sold unless the Loan secured by such Shares is repaid simultaneously with such sales. Certain of these loans have been extended and refinanced. In addition, under the terms of the Shareholders Agreement, IYG has the obligation to purchase, if requested to do so, certain shares (including those pledged as collateral) from the Thompsons and other signatories to the Shareholders Agreement. The Shareholders Agreement was amended in February 1996, so that the price to be paid for any shares purchased would be determined by the average of the closing price for the Common Stock on February 27, 1996 through March 12, 1996. Any purchase of such shares is now scheduled to occur on April 22, 1996. THE WARRANT AGREEMENT. As part of the Plan and the Closing on March 5, 1991, Thompson Brothers, L.P., The Hayden Company, The Philp Co., The Williamsburg Corporation and Thompson Capital Partners, L.P.(collectively, the "Warrant Shareholders") entered into a Warrant Agreement with Wilmington Trust Company as Warrant Agent, the Company and Ito-Yokado. Pursuant to the Plan, the Company agreed to issue, on behalf of the Warrant Shareholders, the Thompson Warrants exercisable by the holders thereof to purchase up to an aggregate of 10,214,842 shares of Common Stock owned by the Warrant Shareholders. Under the Warrant Agreement, each Thompson Warrant entitled the holder to purchase, at the exercise price (the "Exercise Price") of $1.75 per Thompson Warrant, one of the underlying common shares, subject to adjustment as provided in the Warrant Agreement, during the period beginning three months after the date of the Warrant Agreement and ending on February 23, 1996. As of February 23, 1996, the expiration date of the Thompson Warrants, a total of 10,098,089 Thompson Warrants had been exercised. 14 THE EMPLOYMENT AGREEMENTS. As a condition to the Closing, the Company entered into five-year Employment Agreements with Messrs. John P. Thompson, Jere W. Thompson and Joe C. (Jodie) Thompson, Jr. As of December 30, 1992, the Employment Agreement with Joe C. Thompson, Jr. was terminated and Mr. Thompson was paid the present discounted value of the remaining balance payable to him under the Employment Agreement. The Employment Agreements were effective upon the Closing and provided for an annual base salary of $600,000 and an annual bonus equal to $360,000 under each agreement, as well as providing for vacation, holidays and expense reimbursement in accordance with current Company policy. The Employment Agreements terminated on March 5, 1996, according to their terms and John and Jere Thompson are not standing for re-election to the Company's Board of Directors. RESEARCH AND DEVELOPMENT The Company did not incur any significant expenses for product testing or traditional research and development activities in 1994 or 1995. During 1995, the Company's Strategic Planning Department conducted certain market research studies, which include concept tests, consumer preference tests, and tracking of changes in image and store usage patterns. In addition, the Company's test kitchen spent approximately $60,000 for new product development and taste testings and to test equipment used for cooking and displaying food products. RETAIL AUTOMATION In 1993, the Company began development of its own proprietary retail automation system, which it plans to implement in phases, over a multi year period. The system is being designed to build efficiencies into ordering, distribution and merchandising processes and to provide timely and accurate information on an item by item basis. The system is being designed to provide information about every important detail of the store's operations and to facilitate inventory tracking. The first phase implementation which began at the end of 1993 and is expected to be completed in early 1996, will automate basic in-store accounting processes. The second phase will consist of an ordering and distribution system, that will provide the foundation for the future phases that will include retail scanning. The Pre-POS system, which provides new cash registers in each store and builds the foundation for item-level scanning, will begin in a pilot program in the summer of 1996 with a complete roll-out thereafter. TRADEMARKS The Company's 7-ELEVEN trademark has been registered since 1961 and is well known throughout the United States and in many other parts of the world. Other trademarks and service marks owned by the Company include SUPER-7, SLURPEE, BIG GULP and BIG BITE, as well as many additional trade names, marks and slogans relating to other individual types of food and beverage items. In connection with the Company's emphasis on the introduction of more fresh food items, the DELI CENTRAL and WORLD OVENS trademarks are being introduced in stores nationwide, along with the QUALITY CLASSIC SELECTION trademark, covering the Company's proprietary brand spring water, soft drinks, and other beverage products, and CAFE SELECT, covering the Company's gourmet coffees, cappuccino and hot 15 chocolate products. As part of the collateral securing the Credit Agreement, the Company granted the lenders a security interest in its various trademarks. ADVERTISING During 1995, the Company continued its very successful "Comedians" campaign, which first aired in December 1993 and will be continued into 1996. This campaign delivered the message of "So many changes it's not even funny" and emphasized the store remodeling program, daily distribution of fresh food items and the Company's everyday fair pricing strategy. The Company also introduced several new promotional and seasonal advertising campaigns such as the BRAIN FREEZE television commercials in connection with SLURPEE drinks during the summer selling season and a very successful tie-in promotion with the MTV Beachhouse. Also featured in various advertisements in 1995 was the collectible Quarterback series of 7-ELEVEN PHONE CARDS featuring five different members of the NFL Quarterback Club, which enhanced the promotion of the NFL licensed coffee mugs sold at the stores - - each featuring one of the 30 NFL teams. During the year, the Company used several promotions on radio to highlight specific products, such as ATMs, fountain soft drinks, gasoline pay-at-the-pump convenience, hot dogs and the 7-ELEVEN PHONE CARD, and, beginning in early 1996, a tie-in promotion with the National Hockey League. In addition, during the year, the Company offered free or discounted pastries or DELI-CENTRAL items, with the frequent purchase of coffee or soft drinks, and distributed coupons for price discounts or free items, to encourage customers in neighborhoods close to 7-ELEVEN stores to sample some of the new fresh food items that were introduced during 1995. COMPETITION During the past few years the Company, like other traditional convenience retailers, has experienced increased competitive pressures from supermarkets and drug stores offering extended hours and services, as well as from an increasing number of convenience-type stores built by the oil companies. The convenience retailing industry is also being negatively impacted by demographic factors (such as an aging population) and an erosion of demand for certain of its traditional core products, including cigarettes, soft drinks and beer. Although 7-ELEVEN is the most widely recognized name in the convenience retailing industry, the Company's convenience retailing operations represent only a very small percentage of the highly competitive food retailing industry. Independent industry sources estimate that in the United States annual sales in 1994 (the most recent data available) for the convenience store industry were approximately $132.2 billion (including $67.8 billion of gasoline) and that over 93,200 store units were in operation. The industry traditionally has narrow net profit margins. In addition, the Company's stores compete with a number of national, regional, local and independent retailers, including grocery and supermarket chains, grocery wholesalers and buying clubs, other convenience store chains, oil company gasoline/mini-convenience "g stores," independent food stores, and fast food chains as well as variety, drug and candy stores. In sales of gasoline, the Company's stores compete with other food stores and service stations and generate only a very small percentage of the gasoline sales in the United States. Each store's ability to compete is dependent on its location, accessibility and individual service. Growing competitive pressures from new participants in the convenience retailing industry and the rapid 16 growth in numbers of convenience-type stores opened by oil companies over the past few years have intensified competitive pressures for the Company. Cityplace Center East, the Company's headquarters office building in Dallas, Texas, is occupied by the Company and other third party tenants, with the Company having the right to sublease the remaining space (see "Cityplace," above). During 1995, the Company entered into subleases with new tenants and expansions with existing tenants covering about 60,000 additional square feet. The building is now virtually completely leased or reserved for expansion under current leases; however, the Company is currently in the process of consolidating its offices to create additional space that will be available for lease. In seeking tenants, this project competes with other downtown, Oak Lawn, North Dallas and North Central Expressway luxury office space developments. It is anticipated that competition for tenants will remain strong in the Dallas commercial real estate market. ENVIRONMENTAL MATTERS The operations of the Company are subject to various federal, state and local laws and regulations relating to the environment. Certain of the more significant federal laws are described below. The implementation of these laws by the United States Environmental Protection Agency ("EPA") and the states will continue to affect the Company's operations by imposing increased operating and maintenance costs and capital expenditures required for compliance. Additionally, the procedural provisions of these laws can result in increased lead times and costs for new facilities. The Resource Conservation and Recovery Act of 1976, as amended, affects the Company through its substantial reporting, recordkeeping and waste management requirements. In addition, standards for underground fuel storage tanks and associated equipment may increase operating expenses and the costs of marketing petroleum products. In response to this legislation, and various state and local regulations, the Company established a comprehensive program to manage underground storage tanks and associated equipment that established procedures for tank testing, repair and corrective action. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), as amended, creates the potential for substantial liability for the costs of study and clean-up of waste disposal sites and includes various reporting requirements. This Act may result in joint and several liability even for parties not primarily responsible for hazardous waste disposal sites. As a consequence of past waste disposal, the Company may be potentially liable for cleanup costs at several sites which are being considered or which may be considered for federal cleanup action under CERCLA. Additional requirements imposed by the Superfund Amendments and Reauthorization Act of 1986 also have resulted in additional reporting duties. The Clean Air Act, as amended, and similar regulations at the state and local levels, impose significant responsibilities on the Company through certain requirements pertaining to vapor recovery, sales of reformulated gasoline and related recordkeeping. Violation of any federal environmental statutes or regulations or orders issued thereunder, as well as relevant state and local laws and regulations, could result in civil or criminal enforcement actions. 17 CURRENT ENVIRONMENTAL PROJECTS AND PROCEEDINGS. As previously reported, in December 1988, the Company closed its chemical manufacturing facility in Great Meadows, New Jersey ("Great Meadows"). The Company had previously been issued an Administrative Consent Order relating to groundwater conditions at this facility by the New Jersey Department of Environmental Protection ("NJDEP"). The Administrative Consent Order required the Company to pay a civil penalty of $50,000, to conduct a remedial investigation/feasibility study ("RI/FS") and to provide financial assurance for the ultimate clean-up. The Company has submitted a proposed clean-up plan to the NJDEP, which provides for remediation at the site for an approximate three- to five year period as well as continued groundwater treatment for a projected 20 year period. While the Company has received initial comments from the NJDEP, a final clean-up plan has not been finalized. At December 31, 1995, the Company's recorded liability is $37.8 million, which represents its best estimate of the clean-up and treatment costs to be incurred. Some remedial actions have commenced. As previously reported, the Company filed suit in the United States District Court for the District of New Jersey against a large chemical company that formerly owned the Great Meadows property. In 1991, the parties executed a final settlement agreement pursuant to which the former owner agreed to pay a substantial portion of the cleanup costs escribed above. The Company has recorded a receivable of $22.0 million, at ear-end 1995, representing the former owner's portion of the accrued clean- up costs. As of December 31, 1995, the Company had approximately 2,000 operating retail outlets involved in the sale of gasoline and other motor fuels. In the ordinary course of business, the Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations primarily relating to underground storage tank ("UST") systems. The Company has established a comprehensive program to manage USTs and associated equipment and to ensure compliance with applicable laws. The Company anticipates that it will spend approximately $12 million in 1996 on capital improvements required to comply with environmental regulations relating to USTs as well as above-ground vapor recovery equipment at store locations and approximately an additional $21 million on such capital improvements from 1997 through 1999. Additionally, the Company accrues for the anticipated future costs of environmental clean-up activities (consisting of environmental assessment and remediation) relating to detected releases of regulated substances at its existing and previously owned or operated sites at which gasoline has been sold (including store sites and other facilities that have been sold by the Company). At December 31, 1995, the Company has an accrued liability of $63.7 million for such activities and anticipates that substantially all such expenditures will be incurred within the next five years. This estimate is based on the Company's prior experience with gasoline sites and its consideration of such factors as the age of the tanks, location of tank sites and experience with contractors who perform environmental assessment and remedial work. 18 Under state reimbursement programs the Company is eligible to receive reimbursement for a portion of future costs, as well as a portion of costs previously paid. At December 31, 1995, the Company has recorded a gross receivable of $73.4 million (a net receivable of $59.7 million after an allowance of $13.7 million) for the estimated probable state reimbursement. There is no assurance of the timing of the receipt of state reimbursement funds; however, based on its experience, the Company expects to receive the majority of state reimbursement funds within one to four years after payment of eligible assessment and remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The estimated future assessment and remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. In general, the Company's capital expenditures for environmental matters will continue to be affected by federal, state and local environmental laws and regulations. It is possible that future environmental requirements may be more stringent than current requirements, thereby requiring additional expenditures. As described above, the Company also anticipates future maintenance expenditures in connection with environmental requirements relating to continuing upkeep of USTs at store locations. See also "Legal Proceedings," below, at pages 26 through 29, for a discussion of other pending legal proceedings relating to environmental matters. EMPLOYEES At December 31, 1995, the Company had 30,523 employees, of whom approximately 31 percent were considered to be either temporary or part time employees. None of the Company's employees were subject to collective bargaining agreements at year-end. The Company has in the past been able to satisfy substantially all of its requirements for managerial personnel from within its organization. The Company's store managers and supervisory staff personnel are compensated on some form of incentive basis. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, positions and offices with the registrant of all current executive officers, as well as the Chairman of the Board and the Vice Chairman of the Board, of the Company are shown in the following chart. The term of office of each executive officer is at the pleasure of the board of directors. The business experience of each such executive officer for at least the last five years, and the period during which he or she served in office, as well as the date each was employed by the Company, are reflected in the applicable footnotes to the chart. All executive officers of Southland named herein, were officers or employees of the Company at the time Southland filed its voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as described above. Mr. Ito and Mr. Suzuki became Chairman and Vice Chairman, respectively, on March 5, 1991, after Southland emerged from bankruptcy. 19
Age at Name 3/01/96 Current Positions and Offices with Registrant - ---------------------- ------- --------------------------------------------------------------- Masatoshi Ito 71 Chairman of the Board and Director (1) Toshifumi Suzuki 63 Vice Chairman of the Board and Director (2) Clark J. Matthews, II 59 President, Chief Executive Officer; Secretary and Director (3) Stephen B. Krumholz 46 Executive Vice President and Chief Operating Officer (4) Rodney A. Brehm 48 Senior Vice President, Distribution and Foodservice (5) James W. Keyes 40 Senior Vice President, Finance (6) Stephen B. LeRoy 43 Senior Vice President, International and Real Estate (7) Bryan F. Smith, Jr. 43 Senior Vice President and General Counsel (8) Robert E. Bailey 53 Vice President, Northwest Division (9) Terry L. Blocher 51 Vice President, Southwest Division (10) Paul L. Bureau 54 Vice President, Corporate Tax (11) Kathleen Callahan-Guion 44 Vice President, Chesapeake Division (12) Michael R. Cutter 44 Vice President, Merchandising (13) Adrian O. Evans 59 Vice President, Construction and Maintenance (14) James Notarnicola 44 Vice President, Communications (15) Gary R. Rose 50 Vice President, Gasoline and Environmental Services (16) David A. Urbel 54 Vice President, Planning and Treasurer (17) Donald E. Thomas 37 Controller (18)
________________________ (1) Chairman of the Board and Director of the Company since March 5, 1991. Director and Honorary Chairman of Ito-Yokado Group, which includes Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and Denny's Japan Co., Ltd., as well as other companies. Ito-Yokado Co., Ltd. is one of Japan's leading diversified retailing companies which, together with its subsidiaries and affiliates, operates superstores, convenience stores, department stores, supermarkets, specialty shops and discount stores. President of Ito-Yokado Co., Ltd. from 1958 to 1992. Chairman of Seven-Eleven Japan Co., Ltd. from 1978 to 1992, and President from 1973 to 1978. Chairman of Denny's Japan Co., Ltd. from 1981 to 1992, and President from 1973 to 1981. Chairman of Famile Co., Ltd. since 1986. Chairman of York Mart Co., Ltd. since 1979. Chairman of Robinson's Japan Co., Ltd. since 1995. Chairman of Maryann Co., Ltd. since 1977. President of Oshman's Japan Co., Ltd. since 1984. Statutory Auditor of Steps Co., Ltd. since 1992. Chairman of York-Keibi Co., Ltd. since 1989. President of Union Lease Co., Ltd. since 1985. Statutory Auditor of Daikuma Co., Ltd. since 1982. Chairman of Marudai Co., Ltd. since 1989. Director of Seven-Eleven (Hawaii), Inc. since 1989. Chairman of Umeya Co., Ltd. since 1981. Director of Shop America Limited since 1990.Director and Chairman of the Board of IYG Holding Company since 1990. (2) Vice Chairman of the Board and Director of the Company since March 5, 1991. President and Chief Executive Officer of Ito-Yokado Co., Ltd., one of Japan's leading diversified retailing companies which, together with its subsidiaries and affiliates, operates superstores, convenience stores, department stores, supermarkets, specialty shops and discount stores, since October 1992 and Director since 1971; Executive Vice President from 1985 to 1992; Senior Managing Director from 1983 to 1985; Managing Director from 1977 to 1983; employee since 1963. Chairman of the Board and Chief Executive Officer of Seven-Eleven Japan Co., Ltd. since October 1992 and Director since 1973; President from 1975 to 1992; Senior Managing Director from 1973 to 1975. Statutory Auditor of Robinson's Japan Co., Ltd. since 1984. Chairman of Daikuma Co., Ltd. since 1985. President of Seven-Eleven (Hawaii), Inc. since 1989. President of Shop America Limited since 1990. President and Director of IYG Holding Company since 1990. 20 (3) Director since March 5, 1991, and from 1981 until December 15, 1987; President and Chief Executive Officer since March 5, 1991 and Secretary since April 26, 1995; Executive Vice President (or Senior Executive Vice President) and Chief Financial Officer from 1979 to 1991; Vice President and General Counsel from 1973 to 1979; employee of the Company since 1965. (4) Executive Vice President and Chief Operating Officer since June 1993; Senior Vice President, Operations, from August 1992 to June 1993; Senior Vice President, 7-ELEVEN Stores Operations, from 1990 to August 1992; Vice President, Marketing, from 1989 to 1990; Vice President, Northern Region, 7-ELEVEN Stores, from January 1989 to October 1989; Vice President, Northwest Region, 7-ELEVEN Stores, from 1987 to 1988; Division Manager, Mountain Division, 7-ELEVEN Stores, from 1986 to 1987; Regional Marketing Manager from 1981 to 1986; employee of the Company since 1972. (5) Senior Vice President, Distribution and Foodservice, since June 1993; Vice President, Merchandising, from February 1992 to June 1993; Vice President, Marketing, from 1990 to 1992; Vice President, Northwest Region, 7-ELEVEN Stores, from 1989 to 1990; National Marketing Manager from 1986 to 1989; Division Manager, Central Pacific Division, 7-ELEVEN Stores, from 1979 to 1986; employee of the Company since 1972. (6) Senior Vice President, Finance, since June 1993; Vice President, Planning and Finance, from August 1992 to June 1, 1993; Vice President and/or Vice President, National Gasoline, from August 1991 to August 1992; General Manager, National Gasoline, from 1986 to 1991; employee of the Company since 1985. (7) Senior Vice President since May 1, 1995; Vice President, International and Real Estate, May 1, 1994 to April 30, 1995; Vice President Real Estate and Licensed Operations, from August 1992 until May 1994; Vice President, Atlantic Region, 7-ELEVEN Stores, from 1990 to 1992; Vice President, Chesapeake Region, 7-ELEVEN Stores, from 1987 to 1990; Regional Manager, Chesapeake Stores Region, in 1987; Division Manager, Capitol Stores Division, from 1986 to 1987; Division Manager, Great Lakes Stores Division, from 1984 to 1986; Operations Manager, Great Lakes Stores Division, from 1981 to 1984; employee of the Company since 1975. (8) Senior Vice President and General Counsel since May 1, 1995; Vice President and General Counsel from August 1992 to April 30, 1995; Assistant General Counsel from January 1990 to July 1992; Associate General Counsel from January 1987 to December 1989; employee of the Company since 1980. (9) Vice President, Northwest Division since May 1, 1995; Division Manager from November, 1990 to April, 1995; Regional Vice President from May 7, 1986 to October 31, 1990; employee of the Company since 1970. (10) Vice President, Southwest Division since May 1, 1995; Division Manager from February, 1985 to April, 1995; employee of the Company since 1971. (11) Vice President, Corporate Tax, since May 1993; Corporate Tax Manager from March 1983 to May 1993; Partner, Touche Ross & Co., from 1978 to 1983; employee of the Company since 1983. 21 (12) Vice President, Chesapeake Division since May 1, 1995; Division Manager from November, 1986 to April, 1995; employee of the Company since 1979. (13) Vice President, Merchandising since April 15, 1995; National Field Merchandising Manager from July, 1994 to April, 1995; Regional Merchandising Manager from January, 1990 to July, 1994; Division Merchandising Manager from July, 1986 to December, 1989; employee of the Company since 1975. (14) Vice President, Construction and Maintenance, since August 1992; Vice President, Stores Development, from January 1989 to August 1992; Vice President, Mid-America Region, 7-ELEVEN Stores, from 1987 to 1988; Vice President, Central Stores Region, from 1980 to 1987; Central Stores Regional Manager from 1978 to 1980; Division Manager, Canada, from 1976 to 1978; employee of the Company from 1962 to 1972 and since 1975. (15) Vice President, Communications since May 1, 1995; Manager, Advertising and Promotions from July, 1992 to April, 1995; National Sales Manager from November, 1990 to July, 1992; Regional Marketing Manager from August, 1989 to October, 1990; employee of the Company since 1978. (16) Vice President, Gasoline and Environmental Services since May 1, 1995; National Gasoline Manager from January, 1991 to April, 1995; Manager, East/West Gasoline from November, 1987 to January, 1991; employee of the Company since 1968. (17) Vice President, Planning and Treasurer since August, 1992; Vice President since April, 1992 and Treasurer since December 16, 1987; Deputy Treasurer from 1984 to 1987; Assistant Treasurer from 1983 to 1984; employee of the Company since 1970. (18) Controller since August 1, 1995; Assistant Controller from January, 1993 to July, 1995; employee of the Company since 1993. Financial Manager, The Trane Company, from April 1992 to December 1992; Senior Manager, Audit Department, Deloitte & Touche, from January 1990 to March 1992; Audit Department, Deloitte & Touche, from June 1981 to March 1992. Deloitte & Touche was formed in 1989 from the merger of Touche Ross & Co. and Deloitte, Haskins, and Sells. FORMER OFFICERS. The names, ages, positions and offices formerly held with the registrant and the business experience for at least the five years preceding their departure from Southland of all persons who served as officers of the Company during 1995 but who no longer serve as such are shown below. Also shown for each such person is the period during which he served in his office, as reflected in the footnotes to the following chart. NAME AGE AT 3/01/96 David M. Finley (1) 55 Vernon P. Lotman (2) 56 John H. Rodgers (3) 52 Michael Roemer (4) 47 22 (1) Vice President, Human Resources, from December 1987 to May 1995; Manager, Stores Human Resources, January 1987 to December 1987; Manager, Organizational Research & Development, from 1985 to 1987; Department Manager, Organizational Research and Development, from 1984 to 1985; Manager, Organizational Research and Development, from 1982 to 1984; employee of the Company from 1977 to 1995. (2) Vice President from April 1992, and Controller from December 1987, to July 1995; Assistant Corporate Controller from 1977 to 1982; employee of the Company from 1973 to 1995. (3) Executive Vice President from June 1993, Chief Administrative Officer from 1991 and Secretary of the Company from 1987 until February 1995; Senior Vice President from 1987 to June 1993; General Counsel from 1979 to 1992; Vice President from 1980 to 1987; employee of the Company from 1973 to 1995. (4) Senior Vice President, Merchandising, from June 1993 until February 1995; Vice President, Line Management, from August 1992 to June 1993. Vice President, Central Region, 7-Eleven Stores, from October 1990 to August 1992; Vice President, Northeast Region or Eastern Region, 7 Eleven Stores, from 1987 to 1990; Division Manager, Northeast Stores Region, from 1984 to 1987; Vice President, Retail Marketing, of Citgo Petroleum Corporation from 1983 to 1984; Marketing Manager, Eastern Stores Region, 7-Eleven Stores, from 1981 to 1983; employee of the Company from 1966 to 1995. ITEM 2. PROPERTIES Under the Credit Agreement, virtually all the Company's assets, not previously subject to liens, are encumbered, including both tangible and intangible property rights, as well as stock in the Company's non-foreign subsidiaries, where such encumbrance is not otherwise prohibited. As of December 31, 1995, there were approximately 3,581 operating stores, 168 non-operating stores and 12 other properties throughout the United States subject to mortgages (including both owned and leased properties). The lien against the Company's ownership or leasehold interest in any property will be released, with the consent of the Company's Senior Lenders, if the Company sells the property, the lease to the Company terminates or upon payment by the Company of the amounts due under the Credit Agreement. 23 OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES 7-ELEVEN. At the end of 1995, the 7-ELEVEN stores group was using 85 offices in 21 states and Canada. The following table shows the location and number of the Company's 7-ELEVEN convenience stores (excluding stores under area licenses and of certain affiliates) in operation on December 31, 1995.
STATE/PROVINCE OPERATING 7-ELEVEN CONVENIENCE STORES OWNED LEASED(A) TOTAL U.S. - ---- Arizona 39 57 96 California 224 949 1,173 Colorado 61 180 241 Connecticut 7 31 38 Delaware 10 17 27 District of Columbia 4 14 18 Florida 227 184 411 Idaho 6 8 14 Illinois 51 86 137 Indiana 6 10 16 Kansas 7 10 17 Maryland 86 224 310 Massachusetts 10 24 34 Michigan 51 47 98 Missouri 32 50 82 Nevada 86 101 187 New Hampshire 1 7 8 New Jersey 74 129 203 New York(b) 43 176 219 North Carolina 2 5 7 Ohio 10 5 15 Oregon 37 97 134 Pennsylvania 59 105 164 Rhode Island 0 8 8 Texas 104 182 286 Utah 37 76 113 Virginia 190 411 601 Washington 59 172 231 West Virginia 10 12 22 Canada (b) - ------ Alberta 19 98 117 Manitoba 13 37 50 Ontario 30 81 111 British Columbia 21 115 136 Saskatchewan 14 23 37 ----- ----- ----- Total 1,630 3,731 5,361 ===== ===== =====
________________ (a) Of the 7-ELEVEN convenience stores set forth in the foregoing table, 769 are leased by the Company from The Southland Corporation Employees' Savings and Profit Sharing Plan (the "Savings and Profit Sharing Plan"). As of year-end 1995, the Company also leased 62 closed convenience stores or office locations from the Savings and Profit Sharing Plan. (b) The above numbers include 17 stores in Canada (that operate under a management contract) and two stores in New York (operating under a special franchise agreement ("Genesis")), on which the Company has no interest in the real property. 24 OTHER RETAIL. As shown in the following table, at year-end 1995, the Company operated 44 Quik Mart and SUPER-7 stores in California, Illinois, Indiana, Massachusetts, Missouri, New Hampshire, Texas, Virginia and Wisconsin and 19 High's Dairy Stores located in Maryland, Virginia, Pennsylvania and West Virginia. The following table shows the location and number of the Company's Quik Mart, High's and SUPER-7 locations in operation on December 31, 1995.
OTHER OPERATING RETAIL LOCATIONS STATE OWNED LEASED TOTAL California 3 0 3 Illinois 9 0 9 Indiana 3 1 4 Maryland 1 10 11 Massachusetts 2 0 2 Missouri 2 0 2 New Hampshire 2 1 3 Pennsylvania 0 3 3 Texas 2 0 2 Virginia 4 4 8 West Virginia 0 1 1 Wisconsin 15 0 15 -- -- -- Total 43 20 63 == == ==
OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1995, there were eight 7-ELEVEN stores in various stages of construction, all but one on property leased by the Company. The Company owned 21, and had leases on 17, undeveloped convenience store sites. In addition, the Company held 157 7-ELEVEN, High's and Quik Mart properties available for sale consisting of 78 unimproved parcels of land, 64 closed store locations and 15 parcels of excess property adjoining store locations. At December 31, 1995, 35 of these properties were under contract for sale. On December 31, 1995, the Company held leases on 457 closed store or other non-operating facilities, 62 of which were leased from the Savings and Profit Sharing Plan. Of these, 344 were subleased to outside parties. Generally, the Company's store leases are for primary terms of from 14 to 20 years, with options to renew for additional periods. Many leases contain provisions granting the Company a right of first refusal in the event the lessor decides to sell the property. Many of the Company's store leases, in addition to minimum annual rentals, provide for percentage rentals based upon gross sales in excess of a specified amount and for payment of taxes, insurance and maintenance. 25 ACQUISITIONS. On March 7, 1996, the Company acquired from The Store 24 Companies, Inc. of Boston, Massachusetts 13 stores located in Queens, the Bronx and Brooklyn, New York, all of which are leased. The Company plans to add these stores to its franchised locations. OTHER PROPERTIES. The Company leases a 10,700-square-foot satellite commissary constructed in 1991 in Austin, Texas, for fresh deli-style food preparation and distribution. The Company also leases 64,447-square feet of office/warehouse space and an additional 43,600-square-feet of land in Denver, Colorado, for a regional equipment warehouse and service center. The Company plans to dispose of a five-acre tract of land in Delanco, New Jersey, on which a 19,000-square-foot branch distribution facility is located. This is residual property from the Company's distribution and food processing operations that were divested in late 1992. The Company also owns a 287-acre tract in Great Meadows, New Jersey, with a closed chemical plant, a part of which is currently involved in environmental clean-up. (See "Current Environmental Projects and Proceedings," pages 18 through 19, above.) CORPORATE The Company's corporate office headquarters is in Dallas, Texas in a 42- story office building, known as Cityplace Center East. The Company's lease covers the entire Cityplace Tower, but gives the Company the right to sublease to other parties. As of early 1996, subleases had been signed with third parties so that (including the space leased by Southland) the building is virtually completely leased or reserved for expansion under current leases. The Company currently utilizes other office space in and around Dallas (although most corporate office space is consolidated in Cityplace Center East). During 1995, the Company sold a 22-acre tract of land ouside Dallas and now holds tracts in Dallas, Texas, not included in Cityplace, totaling about 6.5 acres. ITEM 3. LEGAL PROCEEDINGS As previously reported, on October 24, 1990, the Company filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, Case No. 390-37119-HCA-11. The Company's Plan of Reorganization was confirmed by the Court on February 21, 1991. Subsequent to the Company's bankruptcy filing, the Company's senior lenders under the Credit Agreement ("Old Senior Lenders") filed a proof of claim demanding, among other things, default interest, as a result of the Company's failure to make an interest payment due June 15, 1990. The Bankruptcy Court issued its opinion, on March 17, 1992, awarding approximately $12.2 million in additional interest to the Credit Agreement Banks. The Company has appealed this decision but recognized the approximately $12.2 million of additional interest expense in its financial statements for 1991. During 1994, a letter of credit was issued for the account of the Company to provide to the Old Senior Lenders assurance of payment of such additional interest expense if the Old Senior Lenders are successful in the appeal. There were no material developments in this matter in 1995. 26 As previously reported, on September 23, 1993, the Company was served with a Summons and Complaint in a purported class action lawsuit entitled 7-ELEVEN OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION, ET AL., Case No. 722272-6, in the Superior Court for Alameda County, California. Also named as defendants in the Complaint are Southland's majority owners and various vendors who supply goods to 7 ELEVEN franchisees in the State of California. The named plaintiffs purportedly represent all persons who have owned 7-ELEVEN franchises in California at any time since August 1987. The Complaint alleges a variety of violations of California state antitrust laws, breaches of contract and other claims relating to discounts and allowances, vendor supplied equipment, Southland's accelerated inventory management program and the 24-hour operation of 7-ELEVEN stores. Discovery in this matter is proceeding. The Company intends to contest the certification of a class in this litigation and to defend vigorously against all of the plaintiffs' allegations. In addition, on March 15, 1996, the Company was advised that a similar suit, brought by the same attorneys representing the plaintiffs in the 7-Eleven OFFF case, had been filed in federal court in the northern district of California, on behalf of a purported class consisting of all persons who owned 7-Eleven franchises during the last six years, except those located in California. The Company has not yet formally received service of process in this action. On August 17, 1990, the Superior Court for Alameda County, California approved the settlement of a class action suit filed against the Company. The suit was consolidated under the title Market Franchise Cases (Jud. Council Dkt. No. 387). The plaintiff class consisted of all persons who owned 7-ELEVEN franchises in California at any time from May 24, 1973, to June 15, 1990. The Company has made settlement payments and credits (including attorneys' fees and litigation expenses awarded to class counsel) totalling approximately $16.5 million. Class members' claims totalling less than $50,000 remain to be resolved. The case was dismissed with prejudice in 1995 under the terms of the settlement. As previously reported, the Company filed a lawsuit in the U.S. District Court for the Northern District of Texas against Occidental Petroleum Corporation and OXY Oil & Gas USA, Inc., ("OXY") to enforce certain contractual indemnification provisions relating to environmental clean-up expenses incurred by the Company at locations acquired in 1983 from OXY. During the second quarter of 1995, the Company and OXY agreed to submit the matter to binding arbitration, and, pursuant to the agreement, the Company received $4.7 million (net of expenses) from OXY. Arbitration concluded in January of 1996 and the Company received a favorable ruling from the arbitrator. As previously reported, a lawsuit entitled EMIL V. SPARANO, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. was filed against the Company in the United States District Court for the Northern District of Illinois, in March 1994. Plaintiffs are several franchisees of 7-ELEVEN stores in Illinois, Pennsylvania, New Jersey and Nevada; they purport to represent a nationwide class of all persons who have owned 7-ELEVEN franchises anywhere in the United States at any time since 1987. In addition to the Company, several of the Company's current or former officers and directors (John P. Thompson, Jere W. Thompson, Joe C. Thompson, Jr. (collectively, the "Thompsons"), Clark J. Matthews, II, Walton Grayson, III, John H. Rodgers and Frank Gangi) collectively, the "Individual Defendants")) and Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company (collectively, the "Foreign Companies") were named as defendants in this case. 27 The third amended complaint alleges: (1) that, starting with Southland's leveraged buyout in 1987, and continuing until the present time, Southland has breached its contractual obligations to 7-ELEVEN franchisees under the 7-Eleven Franchise Agreements by failing to spend adequate sums of money for advertising and other services and for maintaining and remodeling 7-ELEVEN stores and the equipment therein, and (2) fraudulent misrepresentations relating to the LBO. Additional claims were asserted against the Foreign Companies and the Thompsons for alleged tortious interference with, and conspiracy to tortiously interfere with, the franchise agreements by completing Southland's Plan of Reorganization in 1991; the court dismissed all of these claims in November 1995. Additional claims were asserted against the Thompsons alleging fraudulent misrepresentations and fraudulent conveyance relating to the LBO, against all Individual Defendants other than the Thompsons for alleged fraudulent conveyance tortious interference with, and conspiracy to tortiously interfere with, the franchisees' agreements by authorizing Southland's completion of the LBO and execution of its Credit Agreement in 1987. The third amended complaint requests damages, interest, costs and attorneys' fees "in excess of $1 billion." Southland filed a motion to dismiss all claims asserted against it, except the breach of contract claim. The Individual Defendants and the Foreign Companies filed motions to dismiss, motions for reconsideration or motions for summary judgment. As noted above, the court dismissed all claims against the Foreign Companies and the Thompsons involving the tortious interference and conspiracy to tortiously interfere claims. As a result, there are no claims pending against the Foreign Companies. The court has not ruled on the other motions. The court has also not yet decided whether the case will be permitted to proceed as a class action. Southland intends to contest plaintiffs' effort to prosecute the lawsuit as a class action, and it also intends to vigorously defend all of the claims on the merits. Southland believes that it has meritorious defenses to each of the claims. At this time, however, the litigation is still at an early stage of development and the ultimate outcome cannot be predicted. As previously reported, on June 21, 1995, a lawsuit was filed against the Company by T&L Property Service, an affiliate of Tal-Tex, Inc. ("Tal Tex"). Tal-Tex is a water supply company located near Round Rock, Texas. The complaint was subsequently amended to include claims by Tal-Tex, its principals and certain individuals who reside in or near Round Rock on behalf of themselves and a purported class of similarly-situated residents, alleging personal injuries and property damage as a result of the release of petroleum from underground storage tanks at a 7-ELEVEN store in Round Rock. In March, 1996, the individual claims of the Tal Tex entities were severed from the class action. The Company strongly contests and is vigorously defending against both lawsuits. At this stage in the litigation, the Company is unable to predict the ultimate outcome of these cases. On or about August 31, 1995, Southland was named as a defendant in a class action filed in the 361st District Court in Brazos County, Texas. The case is styled ARTURO M. VASQUEZ ET AL. V. THE SOUTHLAND CORPORATION, ET AL. and asserts certain claims on behalf of a purported class of property owners whose properties have allegedly been damaged by petroleum releases from underground storage tanks at approximately 150 former or current Southland locations in Texas. Southland's motion to transfer 28 venue to Dallas County, Texas, was approved but the plaintiffs have filed a motion for rehearing and the hearing on that motion is scheduled for April 15, 1996. Southland strongly contests and is vigorously defending against the claims in the lawsuit. At this early stage in the litigation, it is impossible to predict Southland's exposure, if any, to liability. Information concerning other legal proceedings is incorporated herein from "Environmental Matters," pages 17 through 19, above. In the ordinary course of business, the Company is also involved in various other legal proceedings which, in the Company's opinion, are not material, either individually or in the aggregate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.0001 par value per share, is the only class of common equity of the Company and represents the only voting securities of the Company. There are 409,922,935 shares of Common Stock issued and outstanding and, as of March 8, 1996, there were 3,097 record holders of the Common Stock. The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol "SLCM". The following information has been provided to the Company by the Nasdaq Stock Market.
PRICE RANGE QUARTERS HIGH LOW CLOSE - ------------- ------------------------------------------------- 1995 FIRST $ 4 23/32 $ 3 7/16 $ 3 3/4 SECOND 4 3/8 3 7/16 3 7/16 THIRD 4 1/8 2 7/8 3 FOURTH 4 1/4 2 15/16 3 5/16 1994 FIRST $ 6 3/4 $ 3 13/16 $ 3 7/8 SECOND 6 1/4 3 7/8 6 1/4 THIRD 6 3/8 4 1/2 5 3/4 FOURTH 5 13/16 4 1/4 4 1/2
(a) These quotations reflect inter-dealer prices without retail mark- up, mark-down or commission and may not necessarily represent transactions. 29 The indentures governing the Company's outstanding debt securities do not permit the payment of cash dividends except in limited circumstances. The Credit Agreement also restricts the Company's ability to pay cash dividends on the Common Stock. Under Texas law, cash dividends may only be paid (a) out of the surplus of a corporation, which is defined as the excess of the total value of the corporation's assets over the sum of its debt, the par value of its stock and the consideration fixed by the corporation's board of directors for stock without par value, and (b) only if, after giving effect thereto, the corporation would not be insolvent, which is defined to mean the inability of a corporation to pay its debts as they become due in the usual course. Surplus may be determined by a corporation's board of directors by, among other things, the corporation's financial statements or by a fair valuation or information from any other method that is reasonable in the circumstances. No assurances can be given that the Company will have sufficient surplus to pay any cash dividends even if the payment thereof is not otherwise restricted. 30 Item 6. SELECTED FINANCIAL DATA
S E L E C T E D F I N A N C I A L D A T A THE SOUTHLAND CORPORATION AND SUBSIDIARIES Years Ended December 31 --------------------------------------------------- 1995 1994 1993 1992 1991 --------- -------- -------- -------- ------ (Dollars in Millions, Except Per-Share Data) Net sales. . . . . . . . . . . . . . $6,745.8 $6,684.5 $6,744.3 $7,425.8 $8,009.5 Other income (a) . . . . . . . . . . 71.0 66.4 61.6 57.9 54.4 Total revenues (a) . . . . . . . . . 6,816.8 6,750.9 6,805.9 7,483.7 8,063.9 LIFO charge (credit) . . . . . . . . 2.6 3.0 (8.7) 1.5 (7.2) Depreciation and amortization . . . 166.4 162.7 154.4 180.3 200.1 Interest expense, net (a)(b) . . . . 85.6 95.0 81.8 97.4 153.8 Earnings (loss) before income taxes, extraordinary items and cumulative effect of accounting changes . . . 101.5 73.5 (2.6) (119.9)(c) (66.3) Income taxes (benefit) . . . . . . . (66.1)(d) (18.5)(e) 8.7 11.5 8.0 Earnings (loss) before extraordinary items and cumulative effect of accounting changes . . . . . . . . 167.6 92.0 (11.3) (131.4) (74.3) Net earnings (loss). . . . . . . . . 270.8(f) 92.0 71.2 (g) (131.4) 82.5 (h) Earnings (loss) per common share (primary and fully diluted): Before extraordinary items and cumulative effect of accounting changes. . . . . . 0.40 0.22 (0.03) (0.32) (0.22) Net earnings (loss) . . . . . . 0.65 0.22 0.17 (0.32) 0.24 Total assets . . . . . . . . . . . . 2,081.1 2,000.6 1,990.0 2,039.7 2,607.7 Long-term debt, including current. . 1,850.6 2,351.2 2,419.9 2,560.4 3,037.1 portion (b)
- -------------------------- (a) Prior-year amounts have been reclassified to conform to current-year presentation. (b) The Company's 1991 public debt issuances are accounted for in accordance with SFAS No. 15 as explained in Note 8 to the Consolidated Financial statements. (c) Loss before income taxes, extraordinary items and cumulative effect of accounting changes include a $45,000,000 loss on the sale and closing of the Company's distribution and food processing facilities. (d) Income taxes (benefit) includes an $84,269,000 tax benefit from recognition of the remaining portion of the Company's net deferred tax assets as explained in Note 14 to the Consolidated Financial Statements. (e) Income taxes (benefit) includes a $30,000,000 tax benefit from recognition of a portion of the Company's net deferred tax assets as explained in Note 14 to the Consolidated Financial Statements. (f) Net earnings include an extraordinary gain of $103,169,000 on debt redemption as explained in Note 8 to the Consolidated Financial Statements. (g) Net earnings include an extraordinary gain of $98,968,000 on debt redemption and a charge for the cumulative effect of an accounting change for postemployment benefits of $16,537,000 as explained in Notes 8 and 12 to the Consolidated Financial Statements, respectively. (h) Net earnings include an extraordinary gain on debt restructuring of $156,824,000. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY OF RESULTS OF OPERATIONS The Company's net earnings for 1995 were $270.8 million, compared to net earnings of $92.0 million in 1994 and $71.2 million in 1993. Continued improvement in the Company's operating performance resulted in a 38% increase in 1995 earnings before income taxes.
Years Ended December 31 - ------------------------ (DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1995 1994 1993 --------- --------- ------- Earnings (loss) before income taxes, extraordinary gain and cumulative effect of accounting change $ 101.5 $ 73.5 $ (2.6) Income tax benefit (expense) 66.1 18.5 (8.7) Extraordinary gain from partial redemption of the Company's 4 1/2 and 5% debentures in November 1995 103.2 Extraordinary gain from redemption of the Company's 12% Senior Notes (refinanced in August 1993) 99.0 Cumulative effect of accounting change for postemployment benefits (16.5) -------- -------- ------- Net earnings $ 270.8 $ 92.0 $ 71.2 ======== ======== ======== Net earnings per common share (primary and fully diluted) $ .65 $ .22 $ .17 ======== ======== ========
Each years' results included the following special or unusual items, in addition to the items noted above:
Years Ended December 31 - ------------------------ (DOLLARS IN MILLIONS) 1995 1994 1993 --------- --------- ------ Severance and related costs $ (13.4) $ (7.4) $ (7.2) Deferred income tax benefit 84.3 30.0 Loss for store closings and dispositions of properties (3.7) (48.2) Disposition of Citijet, a fixed-base operation at Dallas Love Field Airport (10.8)
The Company's operating improvement in 1995 was primarily due to savings in "Operating, Selling, General and Administrative" (OSG&A) expenses. Although store closings (173 average) resulted in a decline in total merchandise gross profit compared to 1994, average per store merchandise sales and gross profits improved in each quarter in 1995 over 1994. (EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL STORES RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR) 32 FINANCIAL STATEMENT CHANGES The Company has made the following changes to its financial statements for all years presented, and has restated such items in the comparisons provided to maintain consistency: i) Total Revenues - interest income was reclassified from "Other Income" to "Interest Expense, Net". (See Note 1 of "Notes to Consolidated Financial Statements") ii) Cost of Goods Sold (COGS) - Buying and occupancy expenses were reclassified to OSG&A expenses. Although these changes were made for financial statement purposes during the fourth quarter of 1995, prior Management's Discussion and Analysis had been excluding buying and occupancy expenses, as well as certain merchandise and gasoline inventory-related expenses, from per store gross profit and margin results. iii) Profit Sharing Contribution - this expense is now included in OSG&A expenses. MANAGEMENT STRATEGIES Since 1992, the Company has been committed to several key strategies that it believes, over the long term, will further differentiate it from its competitors and allow 7-Eleven to maintain its position as the premier convenience store chain in the industry. These strategies include: an upgraded store base; a customer-driven approach to product selection; an everyday-fair-pricing policy on all items; daily delivery of fresh perishable items; introduction of high-quality, ready-to-eat fresh foods; and the implementation of a retail automation system. The Company plans to upgrade its store base by remodeling existing stores, closing underperforming stores and developing new sites. Over the last few years, the Company has devoted the majority of its capital resources toward the most extensive remodeling of its store base ever undertaken. In conjunction with the remodeling program, the Company has been pruning its store base by closing or disposing of those stores that are not expected to achieve an acceptable level of profitability in the future. As a result, the Company closed 228 stores in 1995, 184 in 1994 and 401 in 1993. The Company expects to complete its remodeling program by the end of this year; however, it will continue to refurbish its store base as necessary. The planning process for new store sites is well under way. The Company's capital investment focus will shift to store development (see Liquidity and Capital Resources - Capital Expenditures). Initial plans are to strengthen its position by expanding the store base in existing markets, with store openings in 1996 expected to offset store closings/dispositions. However, by 1997 the Company expects new store openings to significantly outpace closures each year. The customer-driven approach to merchandising, which was adopted by the Company in 1992, continues to focus on providing the customer an expanded selection of quality products at a good value. This is being accomplished by emphasizing the importance of ordering at the store level, removing slow-moving items and aggressively introducing new products in the early stages of their life cycle. This process, which has contributed to improved sales and profits, will be an ongoing part of managing our business in a continual effort to satisfy the everchanging preferences of our customers. 33 The Company's everyday-fair-pricing strategy, which was introduced in 1992, has provided consistent prices on all items by reducing its reliance on discounting. As a result, some product prices were increased, while others were lowered to achieve more consistent pricing on all products. Going forward, the Company plans to migrate toward lower retail prices as lower product costs are achieved through contract negotiations or strategic alliances with suppliers and distributors. Daily delivery of fresh perishable items and high-quality ready-to-eat foods is another key management strategy. Implementation of this strategy includes third-party development and operation of combined distribution centers ("CDC"), fresh-food commissaries and bakery facilities in most of the Company's markets around the country. The commissary and bakery ready-to-eat items, like fresh sandwiches and pastries, along with goods from multiple vendors such as dairy products, produce and other perishable goods, are "combined" at a distribution center and delivered daily to each store. In addition to providing fresher products and improving in-stock conditions from daily deliveries, the combined distribution is also intended to provide lower product costs, in part from vendors' savings, through this approach. The Company expects the improved freshness and lower cost of the products from these operations to improve sales and gross profits. At the end of 1995, over 800 stores were serviced by the CDC's and carried fresh food products manufactured by the commissaries. Further expansion of these programs is anticipated in 1996 in the following markets: Denver/Colorado Springs, Baltimore, Richmond/Norfolk, San Jose, Orlando/Tampa,and Chicago. When operational, CDC's in these markets will make daily-delivered fresh food available to nearly one-half of the Company's stores. The development of a retail automation system began in 1994. The initial phase, which will be completed in early 1996, involves installing in-store processors ("ISP") in each store that will automate accounting and other store-level tasks. The second phase involves installing cash registers which, among other things, will feed data directly to the ISP. After future phases are complete, the system will provide each store and its suppliers and distributors with on-line information to make better decisions in anticipating customer needs. SALES The Company recorded net sales of $6.75 billion for the year ended December 31, 1995, compared to sales of $6.68 billion in 1994 and $6.74 billion in 1993. To strengthen its store base (see Management Strategies), the Company has closed more than 800 underachieving stores over the last three years. Same store merchandise sales increases since 1993 have minimized the lost sales from store closings, resulting in total sales remaining flat during this time period. In addition, 1994 and 1993 merchandise sales results were adversely impacted by the deflationary effect of cigarette price reductions (on certain premium brands) associated with manufacturers' cost reductions starting in August, 1993. The total sales increase in 1995 was primarily due to higher gasoline gallons and retail sales price per gallon. 34 U.S. same-store merchandise sales increases or (decreases) as compared to the prior year and inflation information is presented below:
YEARS ENDED DECEMBER 31 ----------------------- INCREASE/(DECREASE) FROM PRIOR YEAR 1995 1994 1993 ----- ----- ---- Same-store sales 2.0% 2.1% (2.7)% Same-store real growth; excluding inflation - 2.8% (4.7)% 7-Eleven inflation (deflation) 2.1% (.7)% 2.2%
Overall, domestic same-store merchandise sales growth continued its positive trend in 1995, however, results varied by geographic region. The largest increases occurred in those areas with the highest percentage of completed remodels (Florida 4.8%, Texas/Colorado 4.1%). Conversely, the Southern California area, which includes 18% of the Company's domestic stores, experienced a decline of almost 1.5% due to a sluggish economy. In addition, this is the area where the lowest percentage of remodels has been completed. Gasoline sales dollars per store increased 4.0%, 8.7% and 9.1% in 1995, 1994 and 1993, respectively. This improvement is primarily due to per store gallonage improvement of 1.0% in 1995, 7.8% in 1994 and 11.1% in 1993, reflecting the impact of several successful business strategies. Gallon volumes in 1995 did not sustain the high growth levels experienced in 1993 and 1994 as a result of market factors which affect the way the Company manages its gasoline business. OTHER INCOME Other income of $71.0 million for 1995 was $4.6 million higher than 1994 and $9.4 million higher than 1993. The improvement is primarily the result of increased royalty income from licensed operations. GROSS PROFITS
MERCHANDISE GROSS PROFIT DATA YEARS ENDED DECEMBER 31 ------------------------------ 1995 1994 1993 --------- --------- ------- Merchandise gross profit - DOLLARS IN MILLIONS $ 1,790.2 $ 1,791.1 $ 1,847.9 INCREASE/(DECREASE) FROM PRIOR YEAR Average per store gross profit dollar change 3.1% 1.7% 2.4% Margin percentage point change (.01) (.50) 1.21 Average per store merchandise sales 3.1% 3.2% (1.1)%
Even though total merchandise gross profits have declined primarily from fewer stores, merchandise gross profit per store has consistently improved over prior year results for each of the last twelve quarters. Merchandise gross profit margins in 1993 increased as a result of the Company's implementation of its everyday-fair-pricing strategy, which reduced discounting and promotional activities (see Management Strategies). Margins have also been favorably affected by lower 35 cigarette costs (beginning in August 1993) and lower product costs under the Company's supply agreement with McLane. In 1994, with the reduction of discounting in place, the Company tested lower prices in certain parts of the country as part of a more aggressive everyday-fair-pricing strategy. These lower prices, combined with increased costs for disposal of slow moving merchandise, was primarily responsible for the decrease in 1994 merchandise margins. During 1995, merchandise margin declined slightly compared to 1994. While some higher margin categories, such as services, showed good growth throughout the year, overall merchandise margin declined in the fourth quarter almost .5 percent compared to the same period last year. This decline was the result of several factors including rising costs that were not entirely passed on to the consumer, initial introductory costs associated with new fresh-food products and increased focus on deleting slower-moving items. Management is actively working to maintain a merchandise margin level consistent with last year.
GASOLINE GROSS PROFIT DATA YEARS ENDED DECEMBER 31 ------------------------ 1995 1994 1993 -------- -------- -------- Gasoline gross profit - DOLLARS IN MILLIONS $ 192.9 $ 199.6 $ 195.6 INCREASE/(DECREASE) FROM PRIOR YEAR Average per store gross profit dollar change (3.3)% 8.2% 33.4% Margin point change (in cents per gallon) (.60) .06 2.37 Average per store gas gallonage 1.0% 7.8% 11.1%
In 1995, gasoline gross profits declined $6.7 million from the levels achieved in 1994 due to lower margins (in cents per gallon), which were affected by market conditions that kept wholesale costs high for much of the year while competitive pressures kept retail prices soft. Gasoline gross profit dollars and margin were unusually high in the fourth quarter of 1994 as a result of favorable market conditions created by the federally mandated fuel reformulation program. Contributing factors to the strong results in 1993, 1994 and the first three quarters of 1995, were the Company's business strategies which closed low-volume locations, enhanced the appeal and convenience of its gas facilities and placed increased emphasis on bystore management of gasoline merchandising. OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEARS ENDED DECEMBER 31 -------------------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 ---------- ---------- -------- Total operating, selling, general and administrative expenses $ 1,867.0 $ 1,888.6 $ 2,030.4 Ratio of reported OSG&A to sales 27.7% 28.3% 30.1% Decrease in reported OSG&A compared to prior year $ (21.6) $ (141.8) $ (93.7) Decrease in adjusted OSG&A compared to prior year * $ (23.9) $ (86.7) $ (98.1)
* ADJUSTED TO EXCLUDE SEVERANCE AND RELATED COSTS AND THE LOSS FOR STORE CLOSINGS AND DISPOSITIONS OF PROPERTIES, INCLUDING CITIJET (SEE SUMMARY OF RESULTS OF OPERATIONS). The majority of the decrease in OSG&A expenses, as adjusted, resulted from cost savings realized from reductions in force that 36 began late in 1992 and continued through 1995, combined with the effect of having fewer stores (see Management Strategies). The Company continues to review the functions necessary to enable its stores to respond faster and more cost efficiently to rapidly changing customer needs and preferences. In conjunction with this review, the Company continues to realign and reduce personnel and office facilities, in order to eliminate non-essential costs. In December 1995, the Company's plans resulted in a $13.4 million accrual, of which $5.0 million was for severance benefits and $8.4 million for reduction of office space. Reductions of more than 400 employees throughout the Company will result in annualized savings of approximately $20 million. The office closings and consolidations involve field operating and staff locations, as well as the Company's headquarters facilities ("Cityplace"). While the execution of the office plans will take most of the year, future years' annualized savings from these initiatives will be approximately $5 million, including potential income from additional Cityplace leases. In December 1994, the Company accrued $7.4 million for severance costs and office reductions. The employee terminations were completed in 1995, while the office realignments will be completed in 1996 along with those previously discussed. Changes from the estimates for 1994's original $7.4 million accrual did not have a material impact on 1995 earnings. INTEREST EXPENSE, NET The Company's net interest expense in 1995 decreased $9.4 million compared to 1994. Most of the savings related to non-cash interest which declined due to the refinancing of the term loans under the senior bank debt credit agreement ("Credit Agreement") in December 1994 and the extension of the repayment of the debt relating to its headquarters facilities (Cityplace) at a lower interest rate in February 1995 (see Liquidity and Capital Resources - Financing Activities). The adverse impact of the 1.1% rise in the weighted average interest rate on the Company's floating rate debt during 1995 increased interest expense approximately $8 million. However, the 1.5% reduction in the margin that the Company negotiated with its bank lenders in the refinancing in late 1994 offset a portion ($5 million) of this increase. In November 1995, the Company consummated a $216.7 million tender offer to purchase a portion ($263.3 million face value) of its public ebt securities (see Liquidity and Capital Resources - Financing Activities). The purchase was financed by the issuance of $300 million of 4.5% Convertible Quarterly Income Debt Securities due 2010 ("Convertible Debt"). The annual interest expense of $13.7 million from issuing the Convertible Debt will not be offset by a corresponding reduction in interest expense for the retired debentures, since the retired debentures are subject to Statement of Financial Accounting Standards No. 15 ("SFAS No. 15") treatment. Despite the incremental interest expense from the Convertible Debt, the Company expects total interest expense to remain flat in 1996, due to the expectation of lower floating rates and debt balances coupled with lower short-term borrowings from use of the convertible debt proceeds not used in the tender offer. Net interest expense in 1994 increased $13.2 million over 1993, primarily due to the refinancing of the 12% Senior Notes with working capital and bank debt in August 1993. Unlike the interest on the bank debt, interest on the 12% Senior Notes was subject to SFAS No. 15 treatment with interest payments recorded as a reduction of principal rather than interest expense (see Note 8 of "Notes to Consolidated Financial Statements"). Net interest expense in 1993 was $15.6 million 37 lower than in 1992 primarily due to lower interest rates on floating rate debt, combined with greater use of commercial paper, which has lower interest rates than other debt instruments. Partially offsetting the decline in interest expense was lower interest income resulting from the receipt in 1992 of $5.8 million in interest on tax refunds. Approximately 35% of the Company's debt contains floating rates, which had a weighted average interest rate of 6.62% for 1995 versus 5.51% and 4.52% for 1994 and 1993, respectively. In the first quarter of 1996, the Company reduced its exposure to short-term fluctuations in rates on a substantial portion of its floating rate bank debt by selecting one year LIBOR maturities at current favorable rates rather than the shorter terms it has selected in the past. INCOME TAXES The Company recorded tax benefits in 1995 and 1994 of $66.1 million and $18.5 million respectively, compared to a tax expense of $8.7 million in 1993. During the fourth quarter of 1994, as a result of the Company's anticipated 1995 taxable earnings, the valuation allowance for deferred taxes was reduced $30 million. During the fourth quarter of 1995, due to the Company's demonstrated ability to produce higher levels of taxable income, the remaining portion of the valuation allowance was reversed producing an $84.3 million benefit. LIQUIDITY AND CAPITAL RESOURCES The majority of the Company's working capital is provided from three sources: i) cash flows generated from its operating activities; ii) a $400 million commercial paper facility (guaranteed by Ito-Yokado Co., Ltd.); and iii) short-term seasonal borrowings of up to $150 million under its revolving credit facility. The Company believes that operating activities coupled with available short-term working capital facilities will provide sufficient liquidity to fund current operating and capital expenditure programs, as well as to service debt requirements. FINANCING ACTIVITIES On November 22, 1995, the Company completed a tender offer for 40% of the face value of both its 5% First Priority Senior Subordinated Debentures due December 15, 2003 ($180.6 million) and 4 1/2% Second Priority Senior Subordinated Debentures-Series A ($82.7 million) due June 15, 2004 (collectively, the "Debentures"). Under the terms of the offer the final clearing prices were $840.00 and $786.00 for the 5% and 4 1/2% Debentures, respectively, per $1,000 face amount, resulting in a cash outlay by the Company of $216.7 million. To finance the purchase of the Debentures, the Company issued $300 million in Convertible Debt to Ito-Yokado Co., Ltd., and Seven- Eleven Japan Co., Ltd., the joint owners of IYG Holding Company, which is the Company's majority shareholder. The remaining proceeds of $83.3 million were made available for general corporate purposes. The Convertible Debt is subordinated to all existing debt, has a 15 year term with no amortization and is convertible into the Company's common shares at $4.16 per share. The Company recognized a $103.2 million after tax extraordinary gain on the purchase of the Debentures in the fourth quarter of 1995. 38 The gain results from purchasing the Debentures below their face value and from retiring the future undiscounted interest payments on that portion of the Debentures being purchased. As a result of the Company's financial restructuring in 1991, SFAS No. 15 required the Company to include its future undiscounted interest payments on the Debentures in the carrying value of the debt on the balance sheet. The Company's Credit Agreement contains a $300 million term loan and a revolving credit facility. The term loan has scheduled quarterly repayments of $18.75 million commencing March 31, 1996, through December 31, 1999. The revolving credit facility contains both a revolving loan ("Revolver") and letter of credit subfacility, each having a maximum limit of $150 million and expiring on December 31, 1999. Interest on the Revolver and Term Loan is generally based on a variable rate equal to the administrative agent bank's base rate or, at the Company's option, at a rate equal to the Eurodollar rate plus .975% per year. The Credit Agreement contains certain financial and operating covenants requiring, among other things, the maintenance of certain financial ratios, including interest coverage, fixed charge coverage and senior indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The covenant levels established by the Credit Agreement generally require continuing improvement in the Company's financial condition. For the period ended December 31, 1995, the Company was in compliance with all of the covenants required under the Credit Agreement, including compliance with the principal financial and operating covenants (calculated over the latest 12-month period) as follows:
COVENANTS REQUIREMENTS: - --------- --------------------------------------- ACTUALS MINIMUM MAXIMUM ----------- ----------- ---------- Interest coverage * 2.82 to 1.0 2.70 to 1.0 Fixed charge coverage 1.10 to 1.0 1.00 to 1.0 Senior indebtedness to EBITDA 3.56 to 1.0 4.10 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS. The issuance of the Convertible Debt and the tender offer for the Debentures did not require the approval of the Company's lenders under the Credit Agreement. However, during the fourth quarter, the Company obtained an amendment to the Credit Agreement that allows greater flexibility on uses of the proceeds from the issuance of the Convertible Debt and how the refinancing is treated under certain financial covenants. The amendment allows the Company, among other things, to make subsequent purchases of subordinated debt with any remaining proceeds and to exclude payments for such purchases from the Company's fixed charge coverage ratio. In 1995, the Company repaid $289.4 million of debt, of which $216.7 million related to the tender offer for the Debentures. Other principal reductions during the year were $72.7 million of which $34.6 million was for SFAS No. 15 interest and $23.9 million was for principal payments on the Company's Yen denominated loan (secured by the royalty income stream from its area licensee in Japan). Outstanding balances at December 31, 1995, for the commercial paper, the Term Loan and the Revolver were $350.2 million, $300.0 million and zero, respectively. As of December 31, 1995, outstanding letters of credit issued pursuant to the Credit Agreement totaled $80.4 million. 39 As a result of an agreement reached in conjunction with the Company's bankruptcy proceedings in 1990, on February 15, 1995, the 7 7/8% Cityplace notes, issued by Cityplace Center East Corporation ("CCEC"), a wholly owned subsidiary of the Company, were repaid under a drawing of a letter of credit issued by The Sanwa Bank, Ltd. Under such agreement, the term of maturity of the indebtedness of CCEC resulting from such draw has been extended by ten years to March 1, 2005. New terms include monthly payments of principal and interest over the ten-year period, based upon a 25-year amortization at 7 1/2%, with the remaining principal due upon maturity. CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $236.2 million for 1995, compared to $271.6 million in 1994 and $232.1 million in 1993 (see "Results of Operations" section). In 1995, other items affecting operating cash flows included a $13.4 million payment related to an IRS examination of the Company's filings for 1990 and 1991. Such payment had no material effect on 1995 earnings. CAPITAL EXPENDITURES During 1995, net cash used in investing activities consisted primarily of payments of $192.2 million for property and equipment, the majority of which was used for remodeling stores, upgrading retail gasoline facilities, replacing equipment and complying with environmental regulations. Through December 31, 1995, approximately 4,100 stores have been remodeled. The remodels are focusing on the features that are most noticeable to customers and have the most immediate and positive impact on store performance, such as lighting and security, food service equipment, necessary maintenance and consistent image. The Company expects 1996 capital expenditures to be approximately $210 million (excluding lease commitments), primarily to complete remodels started in 1995 and to remodel about 1,100 additional stores. The remaining capital will be used for development of new store sites, to replace equipment, to upgrade gasoline facilities and to comply with environmental regulations. While the Company will look at the economics of each new site, it anticipates that it will finance new store construction primarily through leases containing initial terms of 15-20 years with typical option renewal periods. CAPITAL EXPENDITURES - GASOLINE EQUIPMENT The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations primarily relating to underground storage tank ("UST") systems. The Company anticipates it will spend approximately $12 million in 1996 on capital improvements required to comply with environmental regulations relating to USTs, as well as above-ground vapor recovery equipment at store locations and approximately an additional $21 million on such capital improvements from 1997 through 1999. ENVIRONMENTAL COMPLIANCE - STORES The Company accrues for the anticipated future costs of environmental clean-up activities (consisting of environmental assessment and remediation) relating to detected releases of regulated 40 substances at its existing and previously owned or operated sites at which gasoline has been sold (including store sites and other facilities that have been sold by the Company). At December 31, 1995, the Company has an accrued liability of $63.7 million for such activities and anticipates that substantially all such expenditures will be incurred within the next five years. This estimate is based on the Company's prior experience with gasoline sites and its consideration of such factors as the age of the tanks, location of tank sites and experience with contractors who perform environmental assessment and remedial work. Under state reimbursement programs the Company is eligible to receive reimbursement for a portion of future costs, as well as costs previously paid. At December 31, 1995, the Company has recorded a gross receivable of $73.4 million (a net receivable of $59.7 million after an allowance of $13.7 million) for the estimated probable state reimbursement. There is no assurance of the timing of the receipt of state reimbursement funds; however, based on its experience, the Company expects to receive the majority of state reimbursement funds within one to four years after payment of eligible assessment and remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The estimated future assessment and remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. ENVIRONMENTAL COMPLIANCE - CHEMICAL PLANT In December 1988, the Company closed its chemical manufacturing facility in New Jersey. As a result, the Company is required to conduct environmental remediation at the facility and has accrued a liability for this purpose. As required, the Company has submitted a clean-up plan to the New Jersey Department of Environmental Protection (the "State"), which provides for remediation of the site for approximately a three to five year period, as well as continued groundwater treatment for a projected 20 year period. While the Company has received initial comments from the State, the clean-up plan has not been finalized. The Company has recorded liabilities representing its best estimates of the clean-up costs of $37.8 million at December 31, 1995. Of this amount, $31.7 million was included in deferred credits and other liabilities and the remainder in accrued expenses and other liabilities. In 1991, the Company entered into a settlement agreement with a large chemical company that formerly owned the facility. Under the settlement agreement, the former owner agreed to pay a substantial portion of the clean-up costs described above. The Company has recorded a receivable of $22.0 million at December 31, 1995, representing the former owner's portion of the clean-up costs. None of the amounts related to environmental liabilities have been discounted. 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. THE SOUTHLAND CORPORATION AND SUBSIDIARIES Consolidated Financial Statements for the Years Ended December 31, 1995, 1994 and 1993 42 THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (Dollars in Thousands, Except Per-Share Data)
ASSETS 1995 1994 ------------- --------- CURRENT ASSETS: Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 43,047 $ 59,288 Accounts and notes receivable. . . . . . . . . . . . . . . 107,224 102,230 Inventories. . . . . . . . . . . . . . . . . . . . . . . . 102,020 101,468 Other current assets . . . . . . . . . . . . . . . . . . . 103,816 40,411 ------------- ---------- Total current assets . . . . . . . . . . . . . . . . 356,107 303,397 PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . . 1,335,783 1,314,499 OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 389,227 382,698 ------------- ---------- $ 2,081,117 $2,000,594 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable . . . . . . . . . . . . . . . . . . $ 195,154 $203,315 Accrued expenses and other liabilities . . . . . . . . . . 329,429 316,183 Commercial paper . . . . . . . . . . . . . . . . . . . . . 50,198 41,322 Long-term debt due within one year . . . . . . . . . . . . 145,346 123,989 ------------- ---------- Total current liabilities . . . . . . . . . . . . . 720,127 684,809 DEFERRED CREDITS AND OTHER LIABILITIES. . . . . . . . . . . . . 236,545 245,807 LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . 1,705,237 2,227,209 CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES. . . . . . . . . . 300,000 - COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Common stock, $.0001 par value; 1,000,000,000 shares authorized; 409,922,935 shares issued and outstanding. . 41 41 Additional capital . . . . . . . . . . . . . . . . . . . . 625,574 625,574 Accumulated deficit. . . . . . . . . . . . . . . . . . . . (1,506,407) 1,782,846) ------------- ---------- Total shareholders' equity (deficit). . . . . . . . . (880,792) (1,157,231) ------------- ---------- $ 2,081,117 $2,000,594 ============= =========== See notes to consolidated financial statements. 43
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per-Share Data)
1995 1994 1993 ------------- ------------- ----------- REVENUES: Net sales (including $991,788, $992,970 and $962,955 in excise taxes). . . . . . . . . . . . . . . . . . . $ 6,745,820 $ 6,684,495 $ 6,744,333 Other income . . . . . . . . . . . . . . . . . . . . . . . 70,969 66,407 61,592 ------------- ------------- ----------- 6,816,789 6,750,902 6,805,925 COSTS AND EXPENSES: Cost of goods sold . . . . . . . . . . . . . . . . . . . . 4,762,707 4,693,826 4,696,309 Operating, selling, general and administrative expenses. . 1,866,971 1,888,610 2,030,382 Interest expense, net. . . . . . . . . . . . . . . . . . . 85,582 94,970 81,814 ------------- ------------- ----------- 6,715,260 6,677,406 6,808,505 ------------- ------------- ----------- EARNINGS (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE. . . . . . . . . . . . . . . . 101,529 73,496 (2,580) INCOME TAXES (BENEFIT). . . . . . . . . . . . . . . . . . . . . (66,065) (18,500) 8,700 ------------- ------------- ----------- EARNINGS (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE. . . . . . . . . . . . . . . . . . . . . 167,594 91,996 (11,280) EXTRAORDINARY GAIN ON DEBT REDEMPTION (net of tax effect of $8,603 in 1995 and $0 in 1993). . . . . . 103,169 - 98,968 CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR POSTEMPLOYMENT BENEFITS. . . . . . . . . . . . . . . . - - (16,537) ------------- ------------- ------------ NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 270,763 $ 91,996 $ 71,151 ============= ============= ============= EARNINGS (LOSS) PER COMMON SHARE (Primary and fully diluted): Before extraordinary gain and cumulative effect of accounting change $ .40 $ .22 $(.03) Extraordinary gain .25 - .24 Cumulative effect of accounting change - - (.04) ------ ------ ------ Net earnings $ .65 $ .22 $ .17 ====== ====== ====== See notes to consolidated financial statements. 44
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Share Amounts)
COMMON STOCK TOTAL -------------------- ADDITIONAL ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT) ------------ ------ ---------- ------------- ------------- BALANCE, JANUARY 1, 1993 410,022,481 $ 41 $ 625,724 $ (1,944,524) $ (1,318,759) Net earnings. . . . . . . . . . - - - 71,151 71,151 Cancellation of shares. . . . . (99,546) - (150) 112 (38) Foreign currency translation adjustments. . . . . . . . - - - (704) (704) ------------ ---- ---------- ------------- ------------- BALANCE, DECEMBER 31, 1993 409,922,935 41 625,574 (1,873,965) (1,248,350) Net earnings. . . . . . . . . . - - - 91,996 91,996 Foreign currency translation adjustments. . . . . . . . - - - (877) (877) ------------ ---- ---------- ------------- ------------- BALANCE, DECEMBER 31, 1994 409,922,935 41 625,574 (1,782,846) (1,157,231) Net earnings. . . . . . . . . . - - - 270,763 270,763 Foreign currency translation adjustments. . . . . . . . - - - (2,470) (2,470) Other . . . . . . . . . . . . . - - - 8,146 8,146 ------------ ---- ---------- ------------- ------------- BALANCE, DECEMBER 31, 1995 409,922,935 $ 41 $ 625,574 $ (1,506,407) $ (880,792) ============ ==== ========== ============= ============= See notes to consolidated financial statements. 45
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands)
1995 1994 1993 ------------- ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 270,763 $ 91,996 $ 71,151 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary gain on debt redemption . . . . . . . . . . . . . . . . (103,169) - (98,968) Cumulative effect of accounting change for postemployment benefits. . - - 16,537 Depreciation and amortization of property and equipment . . . . . . . 147,423 143,670 134,920 Other amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 19,026 19,026 19,430 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . (84,269) (30,000) - Noncash interest expense. . . . . . . . . . . . . . . . . . . . . . . 1,974 11,384 8,497 Other noncash (income) expense. . . . . . . . . . . . . . . . . . . . (409) 614 3,393 Net loss on property and equipment. . . . . . . . . . . . . . . . . . 7,274 7,504 36,226 (Increase) decrease in accounts and notes receivable. . . . . . . . . (2,708) (3,066) 24,937 (Increase) decrease in inventories. . . . . . . . . . . . . . . . . . (552) 7,895 16,347 (Increase) decrease in other assets . . . . . . . . . . . . . . . . . (1,053) 24,273 3,344 Decrease in trade accounts payable and other liabilities. . . . . . . (18,083) (1,729) (3,737) ------------- ------------- ----------- Net cash provided by operating activities. . . . . . . . . . . . 236,217 271,567 232,077 ------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of property and equipment. . . . . . . . . . . . . . (192,221) (171,636) (195,146) Proceeds from sale of property and equipment . . . . . . . . . . . . . . . 15,720 15,867 22,809 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,770 2,371 4,982 Net currency exchange principal transactions . . . . . . . . . . . . . . . - (5,133) (8,894) Cash utilized by distribution and food center assets . . . . . . . . . . . - (2,790) (17,739) Proceeds from sale of distribution and food center assets. . . . . . . . . - 6,305 44,889 ------------- ------------- ----------- Net cash used in investing activities. . . . . . . . . . . . . . . . . . (173,731) (155,016) (149,099) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from commercial paper and revolving credit facilities . . . . . . 4,171,927 4,451,774 4,111,500 Payments under commercial paper and revolving credit facilities. . . . . . (4,256,918) (4,418,693) (3,927,234) Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . - 300,000 150,000 Principal payments under long-term debt agreements . . . . . . . . . . . . (289,372) (400,580) (403,125) Proceeds from issuance of convertible quarterly income debt securities . . 300,000 - - Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,364) (3,250) (2,437) ------------- ------------- ------------ Net cash used in financing activities. . . . . . . . . . . . . . (78,727) (70,749) (71,296) ------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . (16,241) 45,802 11,682 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . 59,288 13,486 1,804 ------------- ------------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR. . . . . . . . . . . . . . . . . . . . $ 43,047 $ 59,288 $ 13,486 ============= ============= ============= RELATED DISCLOSURES FOR CASH FLOW REPORTING: Interest paid, excluding SFAS No.15 Interest . . . . . . . . . . . . . . . $ (97,945) $ (98,157) $ (87,631) ============= ============= ============= Net income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (34,674) $ (7,810) $ (7,969) ============= ============= ============= See notes to consolidated financial statements. 46
THE SOUTHLAND CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The Southland Corporation and subsidiaries ("the Company") is owned approximately 64% by IYG Holding Company, which is jointly owned by Ito-Yokado Co., Ltd. ("IY") and Seven-Eleven Japan Co., Ltd.("SEJ"). The consolidated financial statements include the accounts of The Southland Corporation and its subsidiaries. Intercompany transactions and account balances are eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Prior-year and quarterly amounts have been reclassified to conform to the current-year presentation. Buying and occupancy expense of $492,499,000 and $513,393,000 for the years ended December 31, 1994 and 1993, respectively, was reclassified from cost of goods sold to operating, selling, general and administrative expenses ("OSG&A"). The Company operates more than 5,400 7-Eleven and other convenience stores in the United States and Canada. Area licensees, or their franchisees, and affiliates operate approximately 10,000 additional 7Eleven convenience stores in certain areas of the United States, in 18 foreign countries and in the U. S. territories of Guam and Puerto Rico. The Company's net sales are comprised of sales of groceries, take-out foods and beverages, gasoline (at certain locations), dairy products, non-food merchandise, specialty items and services. Net sales and cost of goods sold of stores operated by franchisees are consolidated with the results of Companyoperated stores. Net sales of stores operated by franchisees are $2,832,131,000, $2,820,685,000 and $2,810,270,000 from 2,896, 2,962 and 2,998 stores for the years ended December 31, 1995, 1994 and 1993,respectively. Under the present franchise agreements,initial franchise fees are recognized in income currently and are generally calculated based upon gross profit experience for the store or market area. These fees cover certain costs including training, an allowance for travel, meals and lodging for the trainees and other costs relating to the franchising of the store. The gross profit of the franchise stores is split between the Company and its franchisees. The Company's share of the gross profit of franchise stores is its continuing franchise fee, generally ranging from 50% to 58% of the gross profit of the store, which is charged to the franchisee for the license to use the 7Eleven operating system and trademarks, for the lease and use of the store premises and equipment, and for continuing services provided by the Company. These services include merchandising, advertising, recordkeeping, store audits, contractualindemnification, business counseling services and preparation of financial statements. The gross profit earned by the Company's franchisees of $515,610,000, $517,955,000 and $530,436,000 for the 47 years ended December 31, 1995, 1994 and 1993, respectively, is included in the Consolidated Statements of Earnings as OSG&A. Sales by stores operated under domestic and foreign area license agreements are not included in consolidated revenues. All fees or royalties arising from such agreements are included in other income. Initial fees, which have been immaterial, are recognized when the services required under the agreements are performed. OTHER INCOME - Other income is primarily area license royalties and franchise fee income. The area license royalties include amounts from area license agreements with SEJ of approximately $44,000,000, $42,000,000 and $39,000,000 for the years ended December 31, 1995, 1994 and 1993, respectively. OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Buying and occupancy expenses are included in OSG&A. INTEREST EXPENSE - Interest expense is net of interest income of $16,975,000, $13,618,000 and $12,745,000 for the years ended December 31, 1995, 1994 and 1993, respectively. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include temporary cash investments of $8,787,000 and $3,028,000 at December 31, 1995 and 1994, respectively, stated at cost, which approximates market. The Company considers all highly liquid investment instruments purchased with maturities of three months or less to be cash equivalents. INVENTORIES - Inventories are stated at the lower of cost or market. Cost is generally determined by the LIFO method for stores in the United States and by the FIFO method for stores in Canada. DEPRECIATION AND AMORTIZATION - Depreciation of buildings and equipment is based upon the estimated useful lives of these assets using the straight-line method. Amortization of capital leases, improvements to leased properties and favorable leaseholds is based upon the remaining terms of the leases or the estimated useful lives, whichever is shorter. Foreign and domestic area license royalty intangibles were recorded in 1987 at the fair value of future royalty payments and are being amortized over 20 years using the straight-line method. The 20 year life is less than the estimated lives of the various royalty agreements, the majority of which are perpetual. STORE CLOSINGS - Provision is made on a current basis for the write down of identified owned-store closings to their net realizable value. For identified leased-store closings, leasehold improvements are written down to their net realizable value and a provision is made on a current basis if anticipated expenses are in excess of expected sublease rental income. BUSINESS SEGMENT - The Company operates in a single business segment - - the operating, franchising and licensing of convenience food stores, primarily under the 7-Eleven name. 48 2. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31 -------------------- 1995 1994 ---------- -------- (Dollars in Thousands) Notes receivable (net of long-term portion of $14,606 and $15,309) $ 2,273 $ 5,773 Trade accounts receivable 48,599 42,856 Franchisee accounts receivable 43,556 47,682 Environmental cost reimbursements (net of long-term portion of $64,034 and $67,546) - see Note 13 17,654 12,709 ---------- --------- 112,082 109,020 Allowance for doubtful accounts (4,858) (6,790) ---------- ---------- $ 107,224 $ 102,230 ========== ==========
3. INVENTORIES Inventories stated on the LIFO basis that are included in inventories in the accompanying Consolidated Balance Sheets were $62,705,000 and $63,340,000 at December 31, 1995 and 1994, respectively, which is less than replacement cost by $30,907,000 and $28,286,000, respectively. At December 31, 1993, inventories were reduced resulting in a liquidation of LIFO inventory layers recorded at costs that were lower than the costs of current purchases. The effect of this reduction was to decrease cost of goods sold by approximately $3,900,000 in 1993. 4. OTHER CURRENT ASSETS
DECEMBER 31 ---------------------- 1995 1994 ---------- ---------- (Dollars in Thousands) Prepaid expenses $ 17,775 $ 18,474 Deferred tax assets (net of allowance of $77,218 in 1994) 78,665 13,861 Other 7,376 8,076 ---------- --------- $ 103,816 $ 40,411 ========== ==========
49 5. PROPERTY AND EQUIPMENT
DECEMBER 31 --------------------------- 1995 1994 ------------- ----------- (Dollars in Thousands) Cost: Land $ 461,585 $ 475,611 Buildings and leaseholds 1,274,651 1,223,128 Equipment 697,673 623,755 Construction in process 32,725 35,634 ------------- ----------- 2,466,634 2,358,128 Accumulated depreciation and amortization (1,130,851) (1,043,629) ------------- ------------ $ 1,335,783 $ 1,314,499 ============= =============
During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets." The statement establishes accounting standards for the impairment of long-lived assets to be held and used and for long-lived assets to be disposed of, and must be adopted no later than 1996. The impact on the Company's earnings is not expected to be material when the Company adopts the statement in 1996. 6. OTHER ASSETS
DECEMBER 31 --------------------------- 1995 1994 ------------- ----------- (Dollars in Thousands) Japanese license royalty intangible (net of accumulated amortization of $132,988 and $116,972) $ 185,513 $ 201,528 Other license royalty intangibles (net of accumulated amortization of $23,750 and $20,914) 32,854 35,690 Environmental cost reimbursements (net of allowance of $13,705 and $18,890) - see Note 13 64,034 67,546 Deferred tax assets (net of allowance of $97,371 in 1994) 30,396 16,139 Other (net of accumulated amortization of $5,023 and $7,281) 76,430 61,795 ------------ ----------- $ 389,227 $ 382,698 ============ ============
50 7. ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31 ----------------------- 1995 1994 ---------- --------- (Dollars in Thousands) Accrued insurance $ 83,068 $ 95,372 Accrued payroll 43,025 51,024 Accrued taxes, other than income 40,710 40,372 Accrued environmental costs (see Note 13) 40,659 35,574 Other 121,967 93,841 ---------- --------- $ 329,429 $ 316,183 ========== ==========
Other includes accounts payable to The Southland Corporation Employees' Savings and Profit Sharing Plan (see Note 12) for contributions and contingent rent payables of $13,635,000 and $13,186,000 as of December 31, 1995 and 1994, respectively. The Company continues to review the functions necessary to enable its stores to respond faster, more creatively and more cost efficiently to rapidly changing customer needs and preferences. To accomplish this goal, the Company continues to realign and reduce personnel and office facilities. In December 1995, the Company accrued $13,415,000 for severance benefits for employees to be terminated and for reduction in office space. The cost of the reorganization plan was recorded in OSG&A and is comprised of $4,979,000 for severance benefits and $8,436,000 for reductions in office facilities. In December 1994, the Company accrued $7,405,000 for severance benefits for employees terminated and for changes in office facilities. The employee terminations were substantially completed in 1995, and the office realignments are scheduled for completion in 1996. Changes in estimates from the original $7,405,000 accrual did not have a material impact on 1995 earnings. 51 8. DEBT
DECEMBER 31 ------------------------- 1995 1994 ------------ ---------- (Dollars in Thousands) Bank Debt Term Loans $ 300,000 $ 300,000 Bank Debt revolving credit facility - 50,000 Commercial paper 300,000 350,000 5% First Priority Senior Subordinated Debentures due 2003 377,558 615,539 4-1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004 170,952 294,597 4% Second Priority Senior Subordinated Debentures (Series B) due 2004 25,146 25,897 12% Second Priority Senior Subordinated Debentures (Series C) due 2009 57,082 59,696 6-1/4% Yen Loan 229,243 253,114 7-1/2% Cityplace Term Loan due 2005 286,949 289,698 Canadian revolving credit facility 11,179 5,678 Capital lease obligations 90,852 105,159 Other 1,622 1,820 ------------ ---------- 1,850,583 2,351,198 Less long-term debt due within one year 145,346 123,989 ------------ ----------- $ 1,705,237 $ 2,227,209 ============ ============
BANK DEBT - The Company is obligated to a group of lenders under a credit agreement ("Credit Agreement") that includes term loans and a revolving credit facility (collectively "Bank Debt"). In December 1994, the Credit Agreement was amended to extend its maturity through December 31, 1999, and to change various financial and operating covenants to reduce certain restrictions. The financial and operating covenants require, among other things, the maintenance of certain financial ratios including interest coverage, fixed-charge coverage and senior indebtedness to earnings before interest, income taxes, depreciation and amortization. The Credit Agreement also contains various covenants which, among other things, (a) limit the Company's ability to incur or guarantee indebtedness or other liabilities other than under the Credit Agreement, (b) restrict the Company's ability to engage in asset sales and sale/leaseback transactions, (c) restrict the types of investments the Company can make and (d) restrict the Company's ability to pay cash dividends, redeem or prepay principal and interest on any subordinated debt and certain senior debt. Under the Credit Agreement, all of the assets of the Company, with the exception of certain specified property, serve as collateral. The amendment to the Credit Agreement refinanced the existing term loans and revolving credit facility with a new term loan and a new revolving credit facility. The new term loan provided proceeds of $300 million, which were primarily used to retire the existing term loans. The new term loan is to be repaid in 16 quarterly installments of $18,750,000 commencing March 31, 1996. The new revolving credit facility makes available borrowings and letters of credit totaling a maximum of $300 million. Maximum borrowings and 52 letters of credit under the revolving credit facility are set at $150 million each. Upon expiration of the facility, all the then outstanding letters of credit must expire and may need to be replaced, and all other amounts then outstanding will be due and payable in full. At December 31, 1995, outstanding letters of credit related to the Credit Agreement totaled $80,409,000. Interest on the Bank Debt is generally payable quarterly and is based on a variable rate equal to the administrative agent bank's base rate or, at the Company's option, at a rate equal to a reserve adjusted Eurodollar rate plus .975% per year. The weighted-average interest rate on the term loan outstanding at December 31, 1995 and 1994 was 6.9% and 7.1%, respectively. The weighted-average interest rate on revolving credit facility borrowings outstanding at December 31, 1994, was 8.5%. A fee of .925% per year on the outstanding amount of letters of credit is required to be paid quarterly. A .5% per year commitment fee on unadvanced funds, which for purposes of this calculation includes unissued letters of credit, is payable quarterly. COMMERCIAL PAPER - The Company has a facility that provides for the issuance of up to $400 million in commercial paper. At December 31, 1995, $300 million of the $350,198,000 outstanding principal, net of discount, was classified as long-term debt since the Company intends to maintain at least this amount outstanding during the next year. Such debt is unsecured and is fully and unconditionally guaranteed by IY. IY has agreed to continue its guarantee of all commercial paper issued through 1996. While it is not anticipated that IY would be required to perform under its commercial paper guarantee, in the event IY makes any payments under the guarantee, the Company and IY have entered into an agreement by which the Company is required to reimburse IY subject to restrictions in the Credit Agreement. The weighted-average interest rate on commercial paper borrowings outstanding at December 31, 1995 and 1994, respectively, was 5.8% and 6.0%. NOTES AND DEBENTURES - The Notes and Debentures are accounted for in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring," and were initially recorded at an amount equal to the future undiscounted cash payments, both principal and interest ("SFAS No. 15 Interest"). Accordingly, no interest expense will be recognized over the life of these securities, and cash interest payments will be charged against the recorded amount of such securities. Interest on all of the Notes and Debentures is payable in cash semiannually on June 15 and December 15 of each year. The 5% First Priority Senior Subordinated Debentures, due December 15, 2003, had an outstanding principal amount of $269,993,000 at December 31, 1995, and are redeemable at any time at the Company's option at 100% of the principal amount. The Second Priority Senior Subordinated Debentures were issued in three series, and each series is redeemable at any time at the Company's option at 100% of the principal amount and are described as follows: - 4-1/2% Series A Debentures, due June 15, 2004, with an outstanding principal amount of $123,654,000 at December 31, 1995. 53 - 4% Series B Debentures, due June 15, 2004, with an outstanding principal amount of $18,766,000 at December 31, 1995. - 12% Series C Debentures, due June 15, 2009, with an outstanding principal amount of $21,787,000 at December 31, 1995. In November 1995, the Company purchased $180,621,000 of the principal amount of its First Priority Senior Subordinated Debentures due 2003 ("5% Debentures") and $82,719,000 of the principal amount of its 4-1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004 ("4-1/2% Debentures") (collectively, "Refinanced Debentures") with a portion of the proceeds from the issuance of $300 million principal amount of Convertible Quarterly Income Debt Securities (see Note 9). The purchase of the Refinanced Debentures resulted in an extraordinary gain of $103,169,000 (net of current tax effect of $8,603,000) as a result of the discounted purchase price and the inclusion of SFAS No. 15 Interest in the carrying amount of the debt. Prior to the refinancing, the 5% Debentures were subject to annual sinking fund requirements of $27,037,000 due each December 15, commencing 1996 through 2002. The Company used its purchase of the 5% Debentures to satisfy such sinking fund requirements in direct order of maturity until December 15, 2002, at which time a sinking fund payment of $8,638,000 will be due. The Debentures contain certain covenants that, among other things, (a) limit the payment of dividends and certain other restricted payments by both the Company and its subsidiaries, (b) require the purchase by the Company of the Debentures at the option of the holder upon a change of control, (c) limit additional indebtedness, (d) limit future exchange offers, (e) limit the repayment of subordinated indebtedness, (f) require board approval of certain asset sales, (g) limit transactions with certain stockholders and affiliates, and (h) limit consolidations, mergers and the conveyance of all or substantially all of the Company's assets. The First and Second Priority Senior Subordinated Debentures are subordinate to the outstanding Bank Debt and to previously outstanding mortgages and notes that are either backed by specific collateral or are general unsecured, unsubordinated obligations. The Second Priority Debentures are subordinate to the First Priority Debentures. The Company had an issuance of 12% Senior Notes, which were redeemed in 1993 resulting in an extraordinary gain of $98,968,000, which had no tax effect. YEN LOAN - In March 1988, the Company monetized its future royalty payments from SEJ, its area licensee in Japan, through a loan that is nonrecourse to the Company as to principal and interest. The original amount of the yen-denominated debt was 41 billion yen (approximately $327,000,000 at the exchange rate in March 1988) and is collateralized by the Japanese trademarks and a pledge of the future royalty payments. By designating its future royalty receipts during the term of the loan to service the monthly interest and principal payments, the Company has hedged the impact of future exchange rate fluctuations. Payment of the debt is required no later than March 2006 through future royalties from the Japanese licensee, and the Company believes it is a remote possibility that there will be any principal balance remaining at 54 that date. Upon the later of February 28, 2000, or the date which is one year following the final repayment of the loan, royalty payments from the area licensee in Japan will be substantially reduced in accordance with the terms of the license agreement. The current interest rate of 6- 1/4% will be reset after March 1998. CITYPLACE DEBT - Cityplace Center East Corporation ("CCEC"), a subsidiary of the Company, issued $290 million of notes in 1987 to finance the construction of the headquarters tower, a parking garage and related facilities of the Cityplace Center development. The interest rate on these notes was 7-7/8%, payable semiannually on February 15 and August 15, and the principal amount was due on February 15, 1995. Because of the application of purchase accounting in 1987, the effective interest rate was 9.0%. The principal amount was paid to noteholders on February 15, 1995, by drawings under letters of credit issued by The Sanwa Bank, Limited, Dallas Agency ("Sanwa"), which has a lien on the property financed. At that time, the Company deferred the maturity of the debt by exercising its option of extending the term of maturity ten years to March 1, 2005, with monthly payments of principal and interest to Sanwa based on a 25-year amortization at 7-1/2%, with the remaining principal due upon maturity (the "Cityplace Term Loan"). The Company is occupying part of the building as its corporate headquarters and the balance is subleased. As additional consideration through the extended term of the debt, CCEC will pay to Sanwa an amount that it receives from the Company which is equal to the net sublease income that the Company receives on the property and 60% of the proceeds, less $275 million and permitted costs, upon a sale or refinancing of the building. SOUTHLAND CANADA DEBT - In November 1995, Southland Canada, Inc., entered into a revolving credit facility with a Canadian chartered bank, which replaces a similar facility established in 1988. The facility provides bank financing of up to Canadian $15 million (approximately U.S. $10,994,000 at December 31, 1995) until December 31, 1999, when the facility will expire, and all amounts outstanding will be due and payable in full. At December 31, 1995, the Company was fully drawn under this facility. Interest on such facility is generally payable monthly and is based upon the Canadian Prime rate (7.5% at December 31, 1995) plus .25% per year or a bankers' acceptance rate plus 1.25% per year. The weighted average interest rate on revolving credit facility borrowings outstanding at December 31, 1995 and 1994, respectively, was 7.5% and 7.3%. The previous revolving credit facility with the same Canadian chartered bank provided financing in which the maximum amount available declined each year until the facility was scheduled to expire on June 30, 1998. At such time, all amounts outstanding were then due and payable in full. Interest payment terms on this facility were similar to those of the new facility, but interest rates were slightly less favorable. 55 MATURITIES - Long-term debt maturities assume the continuance of the commercial paper program. The maturities, which include capital lease obligations and sinking fund requirements, as well as SFAS No. 15 Interest accounted for in the recorded amount of the Debentures, are as follows (dollars in thousands): 1996 $ 145,346 1997 144,164 1998 147,855 1999 158,238 2000 81,654 Thereafter 1,173,326 ------------ $ 1,850,583 ============ 9. CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES DUE 2010 In November 1995, the Company issued $300 million principal amount of Convertible Quarterly Income Debt Securities due 2010 ("Convertible Debt") to IY and SEJ. The Company used $216,739,000 of the proceeds to purchase the Refinanced Debentures (see Note 8), and the remaining proceeds were designated for general corporate purposes. The Convertible Debt has an interest rate of 4-1/2% and gives the Company the right to defer interest payments thereon for up to 20 consecutive quarters. The holder of the Convertible Debt can convert it into a maximum of 72,112,000 shares of the Company's common shares. The conversion rate represents a premium to the market value of Southland's common stock at the time of issuance of the Convertible Debt. As of December 31, 1995, no shares had been issued as a result of debt conversion. The Convertible Debt is subordinate to all existing debt. In addition to the principal amount of the Convertible Debt, the 1995 financial statements include interest payable of $638,000 and interest expense of $1,313,000 related to the Convertible Debt. 10. PREFERRED STOCK The Company has 5,000,000 shares of preferred stock authorized for issuance. Any preferred stock issued will have such rights, powers and preferences as determined by the Company's Board of Directors. 56 11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The disclosure of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies as indicated below. The carrying amounts of cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses and other liabilities are reasonable estimates of their fair values. Letters of credit are included in the estimated fair value of accrued expenses and other liabilities. The carrying amounts and estimated fair values of other financial instruments at December 31, 1995, are listed in the following table: ESTIMATED CARRYING FAIR AMOUNT VALUE ---------- -------- (Dollars in Thousands) Bank Debt $ 300,000 $ 300,000 Commercial Paper 350,198 350,198 Debentures 630,738 358,267 Yen Loan 229,243 294,565 Cityplace Term Loan 286,949 304,504 Convertible Debt 300,000 301,530 The methods and assumptions used in estimating the fair value for each of the classes of financial instruments presented in the table above are as follows: - The carrying amount of the Bank Debt approximates fair value because the interest rates are variable. - - Commercial paper borrowings are sold at market interest rates and have an average remaining maturity of less than 40 days. Therefore, the carrying amount of commercial paper is a reasonable estimate of its fair value. The guarantee of the commercial paper by IY is an integral part of the estimated fair value of the commercial paper borrowings. - - The fair value of the Debentures is estimated based on December 31, 1995, bid prices obtained from investment banking firms where traders regularly make a market for these financial instruments. The carrying amount of the Debentures includes $196,538,000 of SFAS No. 15 Interest. - - The fair value of the Yen Loan is estimated by calculating the present value of the future yen cash flows at current interest and exchange rates. - - The fair value of the Cityplace Term Loan is estimated by calculating the present value of the future cash flows at current interest rates. - - The fair value of the Convertible Debt at December 31, 1995, is estimated by an investment banking firm and includes both an interest rate and an equity component. 57 12. EMPLOYEE BENEFIT PLANS PROFIT SHARING PLANS - The Company maintains profit sharing plans for its U.S. and Canadian employees. In 1949, the Company excluding its Canadian subsidiary ("Southland") adopted The Southland Corporation Employees' Savings and Profit Sharing Plan (the "Savings and Profit Sharing Plan") and, in 1970, the Company's Canadian subsidiary adopted the Southland Canada, Inc. Profit Sharing Pension Plan. These plans provide retirement benefits to eligible employees. Contributions to the Savings and Profit Sharing Plan, a 401(k) defined contribution plan, are made by both the participants and Southland. Southland contributes the greater of approximately 10% of its net earnings or an amount determined by Southland's president. Net earnings as amended during 1995 is calculated without regard to the contribution to the Savings and Profit Sharing Plan, federal income taxes, gains from debt repurchases and refinancings and, at the discretion of Southland's president, income from accounting changes. The contribution by Southland is generally allocated to the participants on the basis of their individual contribution, years of participation in the Savings and Profit Sharing Plan and age. The provisions of the Southland Canada, Inc. Profit Sharing Pension Plan are similar to those of the Savings and Profit Sharing Plan. Total contributions to these plans for the years ended December 31, 1995, 1994 and 1993 were $11,318,000, $10,513,000 and $11,956,000 (including amounts allocated to the distribution and food centers in 1994 and 1993), respectively, and are included in OSG&A. POSTRETIREMENT BENEFITS - The Company's group insurance plan (the "Insurance Plan") provides postretirement medical and dental benefits for all retirees that meet certain criteria. Such criteria include continuous participation in the Insurance Plan ranging from 10 to 15 years depending on hire date, and the sum of age plus years of continuous service equal to at least 70. The Company contributes toward the cost of the Insurance Plan a fixed dollar amount per retiree based on age and number of dependents covered, as adjusted for actual claims experience. All other future costs and cost increases will be paid by the retirees. The Company continues to fund its cost on a cash basis; therefore, no plan assets have been accumulated. Net periodic postretirement benefit costs for 1995, 1994 and 1993 include the following components: 1995 1994 1993 -------- -------- ------ (Dollars in Thousands) Service cost $ 585 $ 752 $ 824 Interest cost 1,678 1,732 2,048 Amortization of unrecognized gain (583) (61) - -------- -------- ------- $ 1,680 $ 2,423 $ 2,872 ======== ======== ======== 58 The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7% and 8% at December 31, 1995 and 1994, respectively. Components of the accrual recorded in the Company's consolidated balance sheets are as follows:
DECEMBER 31 ------------------------ 1995 1994 ------------ ---------- (Dollars in Thousands) Accumulated Postretirement Benefit Obligation: Retirees $ 11,960 $ 11,197 Active employees eligible to retire 5,234 4,716 Other active employees 6,328 5,354 --------- --------- 23,522 21,267 Unrecognized gains 5,198 7,953 --------- --------- $ 28,720 $ 29,220 ========= =========
POSTEMPLOYMENT BENEFITS - The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," in 1993 and recorded an accumulated postemployment benefit obligation of $16,537,000. The obligation primarily represents future medical costs relating to short-term and long-term disability. The accumulated postemployment benefit obligation, which had no tax effect, was recorded as the cumulative effect of an accounting change. As of December 31, 1995 and 1994, the amount of the obligation was $19,390,000 and $18,460,000, respectively. EQUITY PARTICIPATION PLAN - In 1988, the Company adopted The Southland Corporation Equity Participation Plan (the "Participation Plan"), which provides for the granting of both incentive options and nonstatutory options and the sale of convertible debentures to certain key employees and officers of the Company. In the aggregate, not more than 3,529,412 shares of common stock of the Company can be issued pursuant to the Participation Plan; however, the Company has no present intent to grant additional options or debentures under this plan. The shares available for issuance under the Participation Plan are reduced by the number of shares issued under the Grant Stock Plan, which is described in a following paragraph. Options were granted in 1988 at the fair market value on the date of grant, which is the same as the conversion price provided in the debentures. All options and convertible debentures that were vested became exercisable as of December 31, 1994, pursuant to the terms of the Participation Plan. At December 31, 1995, there were vested options outstanding to acquire 948,499 shares, of which 909,999 were at $7.50 per share and 38,500 were at $7.70 per share, and vested debentures outstanding that were convertible at $7.50 per share into 5,000 shares. During 1995, options to acquire 812,304 shares and debentures convertible into 12,833 shares expired for those participants who are no longer with the Company. All options expire, and the debentures mature, no later than December 31, 1997. GRANT STOCK PLAN - In 1988, the Company adopted The Southland Corporation Grant Stock Plan (the "Stock Plan"). Under the provisions of the Stock Plan, up to 750,000 shares of common stock are authorized to be issued to certain key employees and officers of the Company. Shares issued under the Stock Plan decrease the number of 59 shares that can be issued pursuant to the Participation Plan. The stock is fully vested upon the date of issuance. As of December 31, 1995, 480,844 shares had been issued pursuant to the Stock Plan. No shares have been issued since 1988, and the Company has no present intent to grant additional shares. STOCK INCENTIVE PLAN - The Company adopted The Southland Corporation 1995 Stock Incentive Plan (the "Stock Incentive Plan") in October 1995, subject to shareholder approval, which is being sought at the annual meeting of shareholders to be held in April 1996. The Stock Incentive Plan provides for the granting of stock options, stock appreciation rights, performance shares, restricted stock, restricted stock units, bonus stock and other forms of stock based awards and authorizes the issuance of up to 41 million shares over a ten-year period. In October 1995, 3,863,600 options were granted, which remain outstanding at December 31, 1995, at the fair market value of $3.1875 per share on the date of grant to certain key employees and officers of the Company. The options granted in 1995 are exercisable in five equal installments beginning one year after grant date with possible acceleration thereafter based upon certain improvements in the stock price of a share of Southland's common stock. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." The statement must be adopted no later than 1996. The Company intends to adopt the disclosure- only requirements of SFAS No. 123 and will therefore continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 13. LEASES, COMMITMENTS AND CONTINGENCIES LEASES - Certain property and equipment used in the Company's business is leased. Generally, real estate leases are for primary terms from 14 to 20 years with options to renew for additional periods, and equipment leases are for terms from one to ten years. The leases do not contain restrictions that have a material effect on the Company's operations. The composition of capital leases reflected as property and equipment in the consolidated balance sheets is as follows:
DECEMBER 31 --------------------------- 1995 1994 ------------ ----------- (Dollars in Thousands) Buildings $ 116,412 $ 125,600 Equipment 225 225 ----------- ----------- 116,637 125,825 Accumulated amortization (77,428) (78,103) ------------- ----------- $ 39,209 $ 47,722 ============ ===========
60 The present value of future minimum lease payments for capital lease obligations is reflected in the consolidated balance sheets as long-term debt. The amount representing imputed interest necessary to reduce net minimum lease payments to present value has been calculated generally at the Company's incremental borrowing rate at the inception of each lease. Future minimum lease payments for years ending December 31 are as follows: CAPITAL OPERATING LEASES LEASES --------- ---------- (Dollars in Thousands) 1996 $ 21,965 $ 116,621 1997 20,424 105,284 1998 18,793 85,471 1999 17,449 64,869 2000 15,485 48,704 Thereafter 60,405 185,645 ---------- ---------- Future minimum lease payments 154,521 $ 606,594 =========== Estimated executory costs (399) Amount representing imputed interest (63,270) ---------- Present value of future minimum lease payments $ 90,852 ========== Minimum noncancelable sublease rental income to be received in the future, which is not included above as an offset to future payments, totals $23,126,000 for capital leases and $21,695,000 for operating leases. Rent expense on operating leases for the years ended December 31, 1995, 1994 and 1993, totaled $125,456,000, $120,850,000 and $124,402,000, respectively, including contingent rent expense of $8,508,000, $8,576,000 and $8,214,000, but reduced by sublease rent income of $7,296,000, $7,858,000 and $8,545,000. Contingent rent expense on capital leases for the years ended December 31, 1995, 1994 and 1993, was $2,399,000, $2,822,000 and $3,084,000, respectively. Contingent rent expense is generally based on sales levels or changes in the Consumer Price Index. 61 LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31, 1995, the Savings and Profit Sharing Plan owned 197 stores leased to the Company under capital leases and 634 stores leased to the Company under operating leases at rentals which, in the opinion of management, approximated market rates at the date of lease. In addition, 67, 43 and 62 properties were sold by the Savings and Profit Sharing Plan to third parties in 1995, 1994 and 1993, respectively, and at the same time, the related leases with the Company were either cancelled or assigned to the new owner. Included in the consolidated financial statements are the following amounts related to leases with the Savings and Profit Sharing Plan:
DECEMBER 31 ----------------------- 1995 1994 --------- --------- (Dollars in Thousands) Buildings (net of accumulated amortization of $8,853 and $9,619) $ 2,041 $ 3,191 ========= ========= Capital lease obligations (net of current portion of $1,664 and $1,945) $ 2,310 $ 4,109 ========= =========
YEARS ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 --------- --------- --------- (Dollars in Thousands) Rent expense under operating leases and amortization of capital lease assets $ 26,850 $ 28,195 $ 30,028 ========= ========= ========= Imputed interest expense on capital lease obligations $ 483 $ 696 $ 948 ========= ========== ========= Capital lease principal payments included in principal payments under long-term debt agreements $ 1,818 $ 2,075 $ 2,200 ========= ========== =========
COMMITMENTS MCLANE COMPANY, INC. - In connection with the 1992 sale of distribution and food center assets to McLane, the Company and McLane entered into a ten-year service agreement under which McLane is making its distribution services available to 7-Eleven stores in the United States. If the Company does not fulfill its obligation to McLane during this time period, the Company must reimburse McLane on a pro-rata basis for the transitional payment received at the time of the transaction. The original payment received of $9,450,000 in 1992 is being amortized to cost of goods sold over the life of the agreement. The Company has exceeded the minimum annual purchases each year and expects to exceed the minimum required purchase levels in future years. CITGO PETROLEUM CORPORATION - In 1986, the Company entered into a 20-year product purchase agreement with Citgo to buy specified quantities of gasoline at market prices. These prices are determined pursuant to a formula based on the prices posted by gasoline wholesalers in the various market areas where the Company purchases gasoline from Citgo. Minimum required annual purchases under this agreement are generally the lesser of 750 million gallons or 35% of gasoline purchased by the Company for retail sale. The Company has exceeded the minimum required annual purchases each year and expects to exceed the minimum required annual purchase levels in future years. 62 CONTINGENCIES GASOLINE STORE SITES - The Company accrues future costs, as well as records the related probable state reimbursement amounts, for remediation of gasoline store sites where releases of regulated substances have been detected. At December 31, 1995 and 1994, respectively, the Company's estimated liability for sites where releases have been detected was $63,669,000 and $63,424,000, of which $29,174,000 and $32,924,000 are included in deferred credits and other liabilities and the remainder in accrued expenses and other liabilities. The Company has recorded receivables of $59,652,000 and $57,246,000 (net of allowances of $13,705,000 and $18,890,000) for the estimated probable state reimbursements, of which $45,653,000 and $47,746,000 are included in other assets and the remainder in accounts and notes receivable. The Company reduced the estimated net environmental cost reimbursements at the end of 1994 by approximately $6,000,000 as a result of completing a review of state reimbursement programs. The estimated future remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. The Company anticipates that substantially all of the future remediation costs for sites with detected releases of regulated substances at December 31, 1995, will be incurred within the next five years. There is no assurance of the timing of the receipt of state reimbursement funds. However, based on the Company's experience, the Company expects to receive the majority of state reimbursement funds within one to four years after payment of eligible remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. CHEMICAL MANUFACTURING FACILITY - In December 1988, the Company closed its chemical manufacturing facility in New Jersey. As a result, the Company is required to conduct environmental remediation at the facility and has accrued a liability for this purpose. As required, the Company has submitted a clean-up plan to the New Jersey Department of Environmental Protection (the "State"), which provides for remediation of the site for approximately a three-to-five-year period as well as continued groundwater treatment for a projected 20-year period. While the Company has received initial comments from the State, the clean-up plan has not been finalized. The Company has recorded liabilities representing its best estimates of the clean-up costs of $37,824,000 and $39,254,000 at December 31, 1995 and 1994, respectively. Of this amount, $31,660,000 and $34,180,000 are included in deferred credits and other liabilities and the remainder in accrued expenses and other liabilities for the respective years. The closed chemical manufacturing facility was previously owned by a large chemical company. In 1991, the Company and the former owner executed a final settlement agreement pursuant to which the former owner agreed to pay a substantial portion of the clean-up costs. The Company has recorded receivables of $22,035,000 and $23,009,000 at December 31, 1995 and 1994, respectively, representing the former owner's portion of the clean-up costs. Of this amount, $18,381,000 and $19,800,000 are included in other assets and the remainder in accounts and notes receivable for 1995 and 1994, respectively. 63 14. INCOME TAXES As of January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." There was no cumulative effect adjustment upon adoption, and there was no effect on net earnings for the year ended December 31, 1993. SFAS No. 109 requires the use of the liability method, in which deferred tax assets and liabilities are recognized for differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets include tax carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The components of earnings (loss) before income taxes, extraordinary gain and cumulative effect of accounting change are as follows:
YEARS ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 ---------- ---------- -------- (Dollars in Thousands) Domestic $ 98,775 $ 70,615 $ 3,795 Foreign 2,754 2,881 (6,375) ---------- ---------- -------- $ 101,529 $ 73,496 $ (2,580) ========== ========== ========
64 The provision for income taxes in the accompanying Consolidated Statements of Earnings consists of the following:
YEARS ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 ---------- ---------- ------- (Dollars in Thousands) Current: Federal $ 8,251 $ 6,799 $ 2,759 Foreign 8,968 8,515 5,941 State 985 350 - Tax benefit of operating loss carryforward - (4,164) - ---------- ---------- -------- Subtotal 18,204 11,500 8,700 Deferred: Provision 60,709 - - Beginning of year valuation allowance adjustment (144,978) (30,000) - ---------- ---------- -------- Subtotal (84,269) (30,000) - ---------- ---------- -------- Income taxes before extraordinary gain and cumulative effect of accounting change $ (66,065) $ (18,500) $ 8,700 ========== ========== ==========
Included in Shareholders' Equity at December 31, 1995, is $5,208,000 of income taxes provided in 1995 on an unrealized gain on marketable securities. Reconciliations of income taxes before extraordinary gain and cumulative effect of accounting change at the federal statutory rate to the Company's actual income taxes provided are as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1995 1994 1993 ---------- ---------- -------- (Dollars in Thousands) Taxes (benefit) at federal statutory rate $ 35,535 $ 25,724 $ (903) State income taxes, net of federal income tax benefit 640 228 - Foreign tax rate difference 886 1,212 2,232 Net change in valuation allowance excluding the tax effect of extraordinary items and the cumulative effect of accounting changes (108,632) (47,943) 4,112 Other 5,506 2,279 3,259 ---------- ---------- --------- $ (66,065) $ (18,500) $ 8,700 ========== ========== ==========
65 The valuation allowance for deferred tax assets decreased in 1995 by $174,589,000. The decrease consisted of a $90,320,000 decrease resulting from changes in the Company's gross deferred tax assets and liabilities and an $84,269,000 decrease resulting from a change in estimate regarding the realizability of the Company's deferred tax assets. Based on the Company's trend of positive earnings during the past three years and future expectations, the Company determined that it is more likely than not that its deferred tax assets will be fully realized. In 1994, the valuation allowance decreased by $42,078,000 due to changes in the Company's gross deferred tax assets and liabilities and the realization of $30,000,000 of the Company's net deferred tax asset. Significant components of the Company's deferred tax assets and liabilities at December 31, 1995 and 1994, are as follows:
YEARS ENDED DECEMBER 31 ---------------------- 1995 1994 ---------- ---------- (Dollars in Thousands) Deferred tax assets: SFAS No. 15 interest $ 81,038 $ 125,694 Accrued insurance 55,497 58,514 Accrued liabilities 39,665 43,890 Compensation and benefits 32,365 34,029 Tax credit carryforwards 14,833 48,765 Debt issuance costs 6,820 15,445 Other 5,561 6,172 ---------- --------- Subtotal 235,779 332,509 Deferred tax liabilities: Area license agreements (85,164) (92,515) Property and equipment (32,853) (29,192) Other (8,701) (6,213) ---------- ---------- Subtotal (126,718) (127,920) Valuation allowance - (174,589) ---------- ---------- Net deferred taxes $ 109,061 $ 30,000 ========== ==========
The Company's net deferred tax asset is recorded in other current assets and other assets (see Notes 4 and 6). At December 31, 1995, the Company had approximately $2,849,000 of general business credit carryforwards and $11,984,000 of alternative minimum tax ("AMT") credit carryforwards. The AMT credits have no expiration date. The general business credits expire during the period from 2007 to 2010. 66 15. EARNINGS (LOSS) PER COMMON SHARE Primary earnings (loss) per common share is computed by dividing net earnings, plus Convertible Debt interest (see Note 9) net of tax benefits, by the weighted average number of common shares and common share equivalents outstanding during each year. The exercise of outstanding stock options would not result in a dilution of earnings per share. 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1995 and 1994 as adjusted for reclassifications to conform to the current-year presentation (see Note 1) is as follows:
YEAR ENDED DECEMBER 31, 1995: FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- ------- (Dollars in Millions, Except Per-Share Data) Net sales $ 1,545 $ 1,750 $ 1,826 $ 1,625 $ 6,746 Gross profit 449 512 554 468 1,983 Income taxes (benefit) 2 9 12 (89) (66) Earnings (loss) before extraordinary gain (1) 37 50 82 168 Net earnings (loss) (1) 37 50 185 271 Primary and fully diluted earnings (loss) per common share before extraordinary gain - .09 .12 .19 .40
The second quarter includes a $4,679,000 environmental reimbursement related to outstanding litigation. The fourth quarter includes a $103,169,000 extraordinary gain on redemption of debt related to the refinancing of certain debt securities (see Note 8), $84,269,000 from realization of a deferred tax asset (see Note 14) and $13,415,000 of expenses accrued for severance and related costs (see Note 7). 67
YEAR ENDED DECEMBER 31, 1994: FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- -------- (Dollars in Millions, Except Per-Share Data) Net sales $ 1,512 $ 1,720 $ 1,811 $ 1,641 $ 6,684 Gross profit 442 513 544 492 1,991 Income taxes (benefit) 1 6 6 (32) (19) Net earnings (loss) (8) 32 43 25 92 Primary and fully diluted earnings (loss) per common share (.02) .08 .10 .06 .22
The second quarter includes a $4,500,000 recovery on a 1992insurance claim. The fourth quarter includes $30 million from realization of a deferred tax asset (see Note 14), $7,405,000 of expenses accrued for severance and related costs (see Note 7), $7,696,000 of expense related to store closings and dispositions of properties, and approximately $6,000,000 in expense relating to the reduction of estimated net environmental cost reimbursements (see Note 13). 68 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The Southland Corporation We have audited the accompanying consolidated balance sheets of The Southland Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Southland Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 12 and 14 to the financial statements, in 1993 the Company changed its method of accounting for postemployment benefits and for income taxes to conform with Statements of Financial Accounting Standards No. 112 and No. 109, respectively. COOPERS & LYBRAND L.L.P. Dallas, Texas February 14, 1996 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required in response to this Item is incorporated by reference from the Registrant's Definitive Proxy Statement for the April 24, 1996 Annual Meeting of Shareholders. See also "Executive Officers of the Registrant" beginning on page 19, herein. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the April 24, 1996 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the April 24, 1996 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item is incorporated herein by reference to the Registrant's Definitive Proxy Statement for the April 24, 1996 Annual Meeting of Shareholders. 70 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. The Southland Corporation and Subsidiaries' Financial Statements for the three years in the period ended December 31, 1995 are included herein: PAGE Consolidated Balance Sheets - December 31,1995 and 1994 43 Consolidated Statements of Earnings - Years Ended December 44 31, 1995, 1994 and 1993 Consolidated Statements of Shareholders' Equity (Deficit) 45 - - Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years Ended 46 December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements 47 Independent Auditors' Report of Coopers & Lybrand L.L.P. 69 2. The Southland Corporation and Subsidiaries' Financial Statement Schedule, included herein. PAGE Independent Auditors' Report of Coopers & Lybrand L.L.P. 76 on Financial Statement Schedule II - Valuation and Qualifying Accounts 77 All other schedules have been omitted because they are not applicable, are not required, or the required information is shown in the financial statements or notes thereto. 3. The following is a list of the Exhibits required to be filed by Item 601 of Regulation S-K. EXHIBIT NO. 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.(1) Debtor's Plan of Reorganization, dated October 24, 1990, as filed in the United States Bankruptcy Court, Northern District of Texas, Dallas Division, and Addendum to Debtor's Plan of Reorganization dated January 23, 1991, incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated January 23, 1991, File Numbers 0-676 and 0-16626, Exhibits 2.1 and 2.2. 2.(2) Stock Purchase Agreement, dated as of January 25, 1991, by and among The Southland Corporation, Ito-Yokado Co., Ltd. and Seven Eleven Japan Co., Ltd., incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated January 23, 1991, File Numbers 0-676 and 0-16626, Exhibit 2.3. 2.(3) Confirmation Order issued on February 21, 1991 by the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated March 4, 1991, File Numbers 0-676 and 0-16626, Exhibit 2.1. 3. ARTICLES OF INCORPORATION AND BYLAWS. 3.(1) Second Restated Articles of Incorporation of 71 The Southland Corporation, as amended through March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3.(1). 3.(2) Bylaws of The Southland Corporation, restated as amended through March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3.(2). 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (SEE EXHIBITS 3.(1) AND 3.(2), ABOVE). 4.(i)(1) Specimen Certificate for Common Stock, $.0001 par value, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(i)(2). 4.(i)(2) Form of Voting Agreement and Stock Transfer Restriction and Buy-Back Agreement relating to shares of common stock, $.01 par value, issued pursuant to Grant Stock Plan, incorporated by reference to Registration Statement on Form S8, Reg. No. 33-25327, Exhibits 4.5 and 4.4. 4.(i)(3) Shareholders Agreement dated as of November 1, 1988, by and among The Southland Corporation, Thompson Brothers, L.P., Thompson Capital Partners, L.P., The Hayden Company, The Williamsburg Corporation, Four J Investment, L.P., each Limited Partner of Thompson Capital Partners, L.P. as of the date thereof, and The Philp Co., incorporated by reference to File No. 0-676, Annual Report on Form 10-K for year ended December 31, 1988, Exhibit 4(i)(7), Tab 2. 4.(i)(4) Shareholders Agreement dated as of March 5, 1991, among The Southland Corporation, Ito-Yokado Co., Ltd., IYG Holding Company, Thompson Brothers, L.P., Thompson Capital Partners, L.P., The Hayden Company, The Williamsburg Corporation, Four J Investment, L.P., The Philp Co., participants in the Company's Grant Stock Plan who are signatories thereto and certain limited partners of Thompson Capital Partners, L.P. who are signatories thereto, incorporated by reference to Schedule 13D filed by Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company, Exhibit A. 4.(i)(5) First Amendment, dated December 30, 1992, to Shareholders Agreement, dated as of March 5, 1991, incorporated by reference to File Nos. 0676 and 0-16626, Annual Report on Form 10-K for year ended December 31, 1992, Exhibit 4.(i)(5), Tab 1. 4.(i)(6) Second Amendment, dated February 28, 1996, to Tab 1 Shareholders Agreement, dated as of March 5, 1991.* 4.(i)(7) Warrant Agreement dated as of March 5, 1991, among certain Holders of Common Shares of The Southland Corporation named therein, Wilmington Trust Company, as Warrant Agent, The Southland Corporation and Ito- Yokado Co., Ltd., incorporated by reference to Schedule 13D filed by Ito- Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company, Exhibit B. 4.(i)(8) Specimen Warrant Certificates to Purchase 72 Common Shares of The Southland Corporation pursuant to Warrant Agreement dated as of March 5, 1991, with Wilmington Trust Company as Warrant Agent, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(i)(7). 4.(ii)(1) Indenture, including Debenture, with Ameritrust Company National Association, as trustee, providing for 5% First Priority Senior Subordinated Debentures due December 15, 2003, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(ii)(2). 4.(ii)(2) Indenture, including Debentures, with The Riggs National Bank of Washington, D.C., as trustee providing for 4 1/2% Second Priority Senior Subordinated Debentures (Series A) due June 15, 2004, 4% Second Priority Senior Subordinated Debentures (Series B) due June 15, 2004, and 12% Second Priority Senior Subordinated Debentures (Series C) due June 15, 2009, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(ii)(3). 4.(ii)(3) Indenture among Cityplace Center East Corporation, Security Pacific National Bank, as Trustee, and The Sanwa Bank Limited, Dallas Agency, dated as of February 15,1987, providing for 7 7/8% Notes due February 15, 1995, incorporated by reference to File No. 0 676, Annual Report on Form 10-K for the year ended December 31, 1986, Exhibit 4(ii)(8). 4.(ii)(4) Specimen 7 7/8% Note due February 15, 1995, issued by Cityplace Center East Corporation, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1986, Exhibit 4(ii)(9). 4.(ii)(5) Form of 4 1/2% Convertible Quarterly Income Debt Securities due 2010, incorporated by reference to File Nos. 0-676 and 0-16626, Form 8-K, dated November 21, 1995, Exhibit 4(v)-1. 9. VOTING TRUST AGREEMENT. NONE. (EXCEPT SEE EXHIBITS 4.(I)(2) AND 4.(I)(4), ABOVE.) 10. MATERIAL CONTRACTS. 10.(i)(1) Stock Purchase Agreement among The Southland Corporation, Ito-Yokado Co., Ltd. and Seven Eleven Japan Co., Ltd., dated as of January 25, 1991. See Exhibit 2.(2), above. 10.(i)(2) Credit Agreement, dated as of July 31, 1987, amended and restated as of December 16, 1994, among The Southland Corporation, the financial institutions party thereto as Senior Lenders, the financial institutions party thereto as Issuing Banks, Citicorp North America, Inc., as Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-Agent, incorporated by reference to File Nos. 0-676 and 0- 16626, Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10(i)(2). 10.(i)(3) Second Amendment, dated as of November 28, 1995, to Third Amended and Restated Credit Agreement, dated as of July 31, 1987, as subsequently amended and restated (See Exhibit 73 10(i)(2) above), incorporated by reference to File Nos. 0-676 and 0-16626, Form 8-K, dated November 21, 1995, Exhibit 10(i)-1. 10.(i)(4) Credit and Reimbursement Agreement by and between Cityplace Center East Corporation, an indirect wholly owned subsidiary of Southland, and The Sanwa Bank Limited, Dallas Agency, dated February 15, 1987, relating to $290 million of 7 7/8% Notes due February 15, 1995, issued by Cityplace Center East Corporation (to which Southland is not a party and which is non recourse to Southland), incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1986, Exhibit 10(i)(6). 10.(i)(5) Third Amendment to Credit and Reimbursement Agreement, dated as of February 10, 1995, by and between The Sanwa Bank, Limited, Dallas Agency and Cityplace Center East Corporation, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10(i)(4). 10.(i)(6) Amended and Restated Lease Agreement between Cityplace Center East Corporation and The Southland Corporation relating to The Southland Tower, Cityplace Center, Dallas, Texas, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.(i)(7). 10.(i)(7) Limited Recourse Financing for The Southland Corporation relating to royalties from Seven-Eleven (Japan) Company, Ltd. in the amount of Japanese Yen 41,000,000,000, dated March 21, 1988, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for year ended December 31, 1988, Exhibit 10.(i)(6). 10.(i)(8) Issuing and Paying Agency Agreement, dated as Tab 2 of August 17, 1992, relating to commercial paper facility, Form of Note, Indemnity and Reimbursement Agreement and amendment thereto and Guarantee.* 10.(ii)(B)(1) Standard Form of 7-Eleven Store Franchise Tab 3 Agreement.* 10.(iii)(A)(1) John P. Thompson Employment Agreement dated as of March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.(iii)(A)(1). 10.(iii)(A)(2) Jere W. Thompson Employment Agreement dated as of March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.(iii)(A)(2). 10.(iii)(A)(3) The Southland Corporation Executive Protection Plan Summary, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.(iii)(A)(3). 10.(iii)(A)(4) The Southland Corporation Officers' Deferred Compensation Plan, sample agreement, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.(iii)(A)(4). 10.(iii)(A)(5) Executive Interest Differential Reimbursement Program, incorporated by reference to File No. 0676, Annual Report on Form 10-K for the year ended December 31, 1982, Exhibit 10(iii)(A)(9), Tab 4. 10.(iii)(A)(6) Bonus Deferral Agreement relating to deferral of Bonus Payment, incorporated by reference to 74 File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1988, Exhibit 10(iii)(A)(9), Tab 7. 10.(iii)(A)(7) Form of documents relating to Collateral Assignment of Insurance Program, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1989, Exhibit 10.(iii)(A)(10), Tab 4. 10.(iii)(A)(8) 1995 Performance Plan, as amended July 1995.* Tab 4 10.(iii)(A)(9) 1995 Stock Incentive Plan, incorporated by reference to Registration No. 33-63617, Exhibit 4.10. 10.(iii)(A)(10) Form of Award Agreement granting options to Tab 5 purchase Common Stock, dated October 23, 1995, under the 1995 Stock Incentive Plan.* 10.(iii)(A)(11) Consultant's Agreement between The Southland Corporation and Timothy N. Ashida, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10(iii)(A)(10), Tab 4. 11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS. Tab 6 CALCULATION OF EARNINGS PER SHARE.* 21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH Tab 7 1996.* 23. CONSENTS OF EXPERTS AND COUNSEL. Tab 8 CONSENT OF COOPERS & LYBRAND L.L.P., INDEPENDENT AUDITORS.* 27. FINANCIAL DATA SCHEDULE. FILED ELECTRONICALLY ONLY, NOT ATTACHED TO PRINTED REPORTS. ________________________ *Filed or furnished herewith (b) Reports on Form 8-K. During the fourth quarter of 1995, the Company filed one report on Form 8-K reporting the issuance of $300 million of 4 1/2% Convertible Quarterly Income Debt Securities to Ito-Yokado Co., Ltd. ($153 million) and Seven-Eleven Japan Co., Ltd. ($147 million) and the successful completion of the Company's tender offer to purchase 40% of both its outstanding 5% First Priority Senior Subordinated Debentures due 2003 and its outstanding 4 1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004. (c) The exhibits required by Item 601 of Regulation S-K are attached hereto or incorporated by reference herein. (d)(3) The financial statement schedule for The Southland Corporation and Subsidiaries is included herein, as follows: Schedule II - The Southland Corporation and Subsidiaries Valuation and Qualifying Accounts (for the Years Ended December 31, 1995; 1994 and 1993). 75 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The Southland Corporation Our report on the consolidated financial statements of The Southland Corporation and Subsidiaries, which includes an explanatory paragraph describing the changes in methods of accounting for postemployment benefits and income taxes in 1993, is included on page 69 of this Form 10K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 71 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Dallas, Texas February 14, 1996 76
SCHEDULE II THE SOUTHLAND CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1995, 1994 and 1993 (Dollars in Thousands) Additions ---------------------- Balance at Charged to Charged to Balance at beginning costs and other end of period expenses accounts Deductions of period ---------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 1995.................... $ 6,790 $ 931 $ - $ (2,863) (1) $ 4,858 Year ended December 31, 1994.................... 7,822 307 153 (2) (1,492) (1) 6,790 Year ended December 31, 1993.................... 11,925 6,021 1,209 (2) (11,333) (1) 7,822 Allowance for environmental cost reimbursements: Year ended December 31, 1995.................... 18,890 - - (5,185) (3) 13,705 Year ended December 31, 1994.................... 12,529 6,361 - - 18,890 Year ended December 31, 1993.................... - - 12,529 (4) - 12,529
(1) Uncollectible accounts written off, net of recoveries. (2) Represents amounts charged to the reserve for the sale and closing of the distribution and food centers. (3) Includes an adjustment due to the reassessment of the estimated reimbursement collectibility. (4) Prior to year ended December 31, 1993, the allowance and related receivables were netted with the environmental liability. 77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SOUTHLAND CORPORATION (Registrant) March 27, 1996 /s/ Clark J. Matthews, II ------------------------ Clark J. Matthews, II President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TITLE DATE /s/ Masatoshi Ito Chairman of the Board and Director March 27, 1996 - ------------------------- Masatoshi Ito /s/ Toshifumi Suzuki Vice Chairman of the Board and Director March 27, 1996 - ------------------------- Toshifumi Suzuki /s/ Clark J. Matthews, II President and Chief Executive Officer and March 27, 1996 - ------------------------- Director (Principal Executive Officer) Clark J. Matthews, II /s/ James W. Keyes Senior Vice President, Finance March 27, 1996 - ------------------------- (Principal Financial Officer) James W. Keyes /s/ Donald E. Thomas Controller March 27, 1996 - ------------------------- (Principal Accounting Officer) Donald E. Thomas /s/ Yoshitami Arai Director March 27, 1996 - ------------------------- Yoshitami Arai /s/ Timothy N. Ashida Director March 27, 1996 - ------------------------- Timothy N. Ashida /s/ Jay W. Chai Director March 27, 1996 - ------------------------- Jay W. Chai /s/ Gary J. Fernandes Director March 27, 1996 - ------------------------- Gary J. Fernandes /s/ Masaaki Kamata Director March 27, 1996 - ------------------------- Masaaki Kamata /s/ Kazuo Otsuka Director March 27, 1996 - ------------------------- Kazuo Otsuka /s/ Asher O. Pacholder Director March 27, 1996 - ------------------------- Asher O. Pacholder /s/ Nobutake Sato Director March 27, 1996 - ------------------------- Nobutake Sato /s/ Tatsuhiro Sekine Director March 27, 1996 - ------------------------- Tatsuhiro Sekine /s/ John P. Thompson Director March 27, 1996 - ------------------------- John P. Thompson /s/ Jere W. Thompson Director March 27, 1996 - ------------------------- Jere W. Thompson
78 EX-4.(I)(6) 2 ISSUING AND PAYING AGENCY AGREEMENT Exhibit 4.(i)(6) SECOND AMENDMENT TO SHAREHOLDERS AGREEMENT SECOND AMENDMENT (the "Second Amendment") dated as of February 28, 1996, to the Shareholders Agreement dated as of March 5, 1991, by and among The Southland Corporation, a Texas corporation (the "Company"), ItoYokado Co., Ltd., a Japanese corporation, IYG Holding Company, a Delaware corporation, and the following shareholders of the Company: Thompson Brothers, L.P., a Texas limited partnership, Thompson Capital Partners, L.P., a Delaware limited partnership, The Hayden Company, a Texas corporation, The Williamsburg Corporation, a Texas corporation, Four J Investment, L.P., a Texas limited partnership, The Philp Co., a Texas corporation, participants in the Company's Grant Stock Plan who are signatories thereto, and the Limited Partners of Thompson Capital who are signatories thereto (the "Shareholders Agreement"). 1. DEFINITIONS. Terms defined in the Shareholders Agreement and not otherwise defined herein are used herein with the meaning so defined. 2. EFFECTIVE DATE OF AMENDMENT TO THE SHAREHOLDERS AGREEMENT. Upon receipt by the Company of counterparts hereof executed by the Company, the Purchaser, Philp, Hayden, Williamsburg and Thompson Brothers, the Shareholders Agreement is hereby amended, effective as of the date first written above (the "Effective Date"): 3. AMENDMENT TO SECTION 2.5(c). 3.1 Section 2.5(c) of the Shareholders Agreement is hereby amended by adding the following words at the end of the first paragraph of Section 2.5(c): "provided, however, that if the Common Stock is publicly traded on a nationally recognized securities market or exchange, then the Fair Market Value shall be determined by taking the average of the closing price of the Common Stock on such market or exchange on March 5, 1996 and the five trading days preceding, and the five trading days following, March 5, 1996, with the resulting amount being the Fair Market Value for purposes of this Section 2.5, and, in such event, it shall not be necessary to use the services of a Referee." 3.2 Section 2.5(c) of the Shareholders Agreement shall now read, in its entirety, as follows: "(c) FAIR MARKET VALUE. For purposes of this Section 2.5, the Fair Market Value of shares of Common Stock shall mean the fair market value of shares as of the fifth anniversary of the date hereof as determined by a Referee selected by Put Holders owning a majority of the shares of Common Stock which are entitled to be put to Ito-Yokado pursuant to this Section 2.5 from a list of 3 proposed Referees prepared by Ito-Yokado at least 60 days prior to the fifth anniversary of the date hereof. The Company shall bear 50% of all of the costs and expenses of the Referee, and the Put Holders who exercise the Put Option 1 shall bear 50% of all the costs and expenses of the Referee on a pro rata basis based on the number of shares of Common Stock sold by each such Put Holder pursuant to the Put Option. Such Referee will determine the fair market value of such property within 30 days following its selection as such. The Referee shall use one or more valuation methods that it, in its best professional judgment, determines to be most appropriate to value the Company as an entirety, without giving effect to any discount for the lack of liquidity of the Common Stock or the fact that the shares being sold represent a minority interest; provided, however, that if the Common Stock is publicly traded on a nationally recognized securities market or exchange, then the Fair Market Value shall be determined by taking the average of the closing price of the Common Stock on such market or exchange on March 5, 1996 and the five trading days preceding, and the five trading days following, March 5, 1996, with the resulting amount being the Fair Market Value for purposes of this Section 2.5, and, in such event, it shall not be necessary to use the services of a Referee. The Company shall provide to such Referee such information and data relevant to the valuation as the Referee shall reasonably request." 4. MISCELLANEOUS. The headings herein are for the 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 Shareholders Agreement shall not be amended, modified, impaired or otherwise affected hereby, and the Shareholders Agreement is hereby confirmed in full force and effect. 5. COUNTERPARTS. This Second Amendment may be executed in any number of counterparts which together shall constitute one instrument. 6. GOVERNING LAW. THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THE SECOND AMENDMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW. IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of the Effective Date first above written. THE SOUTHLAND CORPORATION By: /s/ Clark J. Matthews, II -------------------------- Clark J. Matthews, II President and Chief Executive Officer IYG HOLDING COMPANY By: /s/ T. Suzuki --------------------------- Toshifumi Suzuki President 2 THOMPSON BROTHERS, L.P. /s/ John P. Thompson - --------------------- John P. Thompson General Partner of the John P. Thompson Family Partnership THE HAYDEN COMPANY /s/ John P. Thompson - --------------------- John P. Thompson President THE WILLIAMSBURG CORPORATION /s/ John P. Thompson - --------------------- John P. Thompson Vice President THE PHILP CO. /s/ John P. Thompson - -------------------- John P. Thompson President 3 Tab 1 EX-10.(I)(8) 3 ISSUING AND PAYING AGENCY AGREEMENT Exhibit 10.(i)(8) - 1 ISSUING AND PAYING AGENCY AGREEMENT Dated as of August 17, 1992 Sakura Trust Company 350 Park Avenue New York, New York 10022 Re: Issuance of Commercial Paper for THE SOUTHLAND CORPORATION (THE "COMPANY") Gentlemen: You are hereby requested to act as issuing and paying agent on behalf of the Company in connection with the sale from time to time of unsecured short-term promissory notes known as commercial paper (the "Commercial Paper Notes") of the Company and to act as issuing and paying agent on behalf of ItoYokado Co., Ltd. (the "Guarantor") in connection with the issuance of one or more guarantees (the "guarantees") to be affixed to the Commercial Paper Notes. The Commercial Paper Notes may be issued in either book-entry or certificated form. As such issuing and paying agent, you shall be governed by the terms and conditions of this Issuing and Paying Agency Agreement (this "Agreement"). The Company proposes to incur indebtedness by issuing Commercial Paper Notes to be offered in the commercial paper market. The Company has requested you to act as its agent for the issuance and delivery of the Commercial Paper Notes. The Guarantor has requested you to act as its agent for the issuance and delivery of the Guarantees. Promptly after each issuance by you of a Commercial Paper Note with a Guarantee affixed thereto, you shall notify the Company and the Guarantor of the Principal amount, the amount of discount from the principal amount, the issue date and the maturity date of the Commercial Paper Note to which it relates. Upon presentment of such Commercial Paper Note to you on or after the maturity date of the Commercial Paper Note, you shall make payment to the holder of such Commercial Paper Note of the principal amount thereof as provided herein. During the period that this Agreement is in effect, the Company will from time to time, deliver to you Commercial Paper Notes in certificated form ("Certificated Notes") or a master note registered in the name of Cede & Co. as nominee for The Depository Trust Company ("DTC"), or a successor or nominee thereof (the "Master Note") which will represent Commercial Paper Notes issued in book-entry from (the "Book-Entry Notes") (said Cerificated Notes, Master Note and Book-Entry Notes individually referred to as a "Note" and collectively referred to as the "Notes"). Each Note and each Guarantee will be executed by manual or facsimile signature of a duly authorized officer of the Company or the Guarantor, as the case may be. Each Certificated Note (together with the related Guarantee) will be in substantially the form attached hereto as Exhibit A and will be in bearer form, but with the principal amount , issue date and maturity date left blank. Each Note and Guarantee will bear the signature of an Authorized Company Signatory (as hereinafter defined) or an Authorized Guarantor Signatory ( as hereinafter defined), as the case may be. Any Note or Guarantee bearing the signature of any person authorized to execute the same on the date such signature is affixed thereto shall bind the Company or the Guarantor, as the case may be, after the completion and authentication thereof by you notwithstanding that any such person shall have died or shall have otherwise ceased to hold his office on the date such Note or Guarantee is countersigned or delivered by you. You agree to make available, upon request of any holder of a Book-Entry Note, a copy 1 of the Master Note ( and any attachments thereto) representing such Book-Entry Note. You will be furnished with an Incumbency Certificate on the date hereof with respect to each officer of the Company whose signature appears on the Notes, together with specimen signatures of such officers (each such officer being herein referred to as an "Authorized Company Signatory"). You will also be furnished with an Incumbency Certificate on the date hereof with respect to each office of the Guarantor whose signature appears on the Guarantees, together with specimen signatures of such officers (each such officer being herein referred to as an "Authorized Guarantor Signatory"). Until you receive a subsequent Incumbency Certificate, you shall be entitled to rely on the last Incumbency Certificate delivered to you. The Notes will be numbered consecutively and may bear such other identification as the Company may deem appropriate. When any Notes together with the related Guarantees are delivered to you, you will acknowledge receipt by returning a receipt to the Company and the Guarantor. All Notes and Guarantees delivered to you shall be held by you for the account of the Company and the Guarantor, in safekeeping in accordance with your customary practice. You will immediately advise the Company and the Guarantor of the loss, disappearance or theft of any blank Notes and Guarantees held by you in safekeeping. By an appropriate certificate of designation, you shall advise the Company and the Guarantor, form time to time, of the names of your officers and employees and the officers and employees of your agents ("Designated Persons") who are authorized to receive instructions in respect of the Notes and the Guarantees and to receipt for, complete, authenticated and deliver the Notes and the Guarantees. You are hereby authorized to act with respect to the Certificated Notes upon written instructions received by you from any one of the Company's authorized representatives ("Authorized Company Officers") (whose names shall be specified by delivery to you of appropriate certificates of designation and incumbency certificates) or from any employee of the Company designated to give such instructions by writing executed by one of the Authorized Company Officers ("Designated Company Individuals"). Provided that you have received instructions given pursuant to this paragraph prior to 1:00 p.m., New York City time, a Designated Person will withdraw the necessary number of Certificated Notes from safekeeping and, in accordance with such instructions, a Designated Person shall: (a) Complete each Certificated Note as to the principal amount, issue and maturity date, which in no event shall be later than 270 days form the issue date; (b) If so directed, insert the name of the payee and strike-out the word "BEARER" on the Certificated Note; (c) Authenticate each Certificated Note by countersigning the same; (d) Deliver each Certificated Note, at an address in the Borough of Manhattan in The City of New York, to the Company's dealer(the "dealer") of such Certicated Note or to the consignee thereof, as designated in such instructions, by 2:30 p.m., New York City time, against payment of the Purchase Price (as defined below) therefor as herein provided; and 2 (e) Send a copy of each Certificated Note to the Company. Instructions from the Company for the countersignature and delivery by you of the Certificated Notes shall include the following information: with respect to each Certicated Note, its issued date, maturity date, principal amount (which will be in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof), and amount of discount form the principal amount, the party to whom delivery of such Certificated Notes (the "Purchase Price") in collected funds, and if the Certicated Note is not to be issued in bearer form, the name of the payee and instructions to strike-out the word "BEARER" on the Certificated Note. Each delivery of Certificated Notes shall be subject to the rules of the New York Clearing House in effect at the time of delivery. You are hereby authorized to act with respect to the Guarantees upon written instructions received by you from any one of the Guarantor's authorized representatives ("authorized Guarantor Officers")(whose names shall be specified by delivery to you of appropriate certificates of designation and incumbency certificates) or from any employee of the Guarantor designated to give such instructions by writing executed by one of the Authorized Guarantor Officers (Designated Guarantor Individuals"). The maximum aggregate principal amount of Notes which are authenticated (and not canceled) by you at any one time pursuant to this Agreement shall in no event exceed U.S. $400,000,000. In no even shall Guarantees be affixed to Notes (or shall Notes be authenticated) if greater than U.S. $400,000,.000 aggregate principal amount (or such lesser aggregate principal amount as is notified by the Guarantor to you) of authenticated Notes (which are not canceled) would be outstanding at anyone time or if the Guarantor instructs you to no longer affix Guarantees to Notes. Notwithstanding any contrary instructions received from the Company or an Authorized Company Officer or Designated Company Individual, you shall not complete, authenticate, issue or deliver any Notes, if the issuance of such Notes would cause the aggregate principal amount of outstanding Notes at any one time to exceed the authorized maximum aggregate principal amount of U.S. $400,000,000 (or such lesser maximum aggregate principal amount as is notified by the Guarantor to you) or if the Guarantor instructs you to cease affixing Guarantees to Notes. All notices and instructions from the Guarantor to you shall be in writing (which may be by telex or facsimile transmission) and will be signed by an Authorized Guarantor Officer or Designated Guarantor Individual. In connection with the issuance of Book-Entry Notes, (I) you have previously entered into a commercial paper certificate agreement (the "Certificate Agreement") with DTC and (ii) you and the Company have jointly executed a letter of representations (the "Representations Letter") with DTC. The Company understands and acknowledges that a the execution of the Certificate Agreement by you is a necessary prerequisite to the provision of book-entry services under this Agreement and as such, the Company agrees, (x) to be bound by the provisions of the Certificate Agreement and (y) that the Certificate Agreement shall supplement the provisions of this Agreement and (y) that the Certicate Agreement shall supplement the provisions of this Agreement. A copy of the Certificate Agreement and the Representations Letter are attached hereto as Exhibit B and Exhibit C, respectively. On each date that the Company desires to issue a Book Entry Note, an Authorized Company Officer or Designated Company Individual shall provide you with issuance instructions (the "Issuance Instructions") specifying the issue date, maturity date, the principal amount, the amount of discount form the principal amount, and the payee and the payee's settlement bank which is a participant in the DTC book-entry commercial paper program. Each 3 Book-Entry Note shall have a principal amount of not less than $100,000 and will mature no later than 270 days from the original issue date thereof. If you receive the Issuance Instructions prior to 2:00 p.m., New York City time, you will process, and if you receive the Issuance Instructions after 2:00 p.m., New York City time, you will use your best efforts to process, such Issuance Instructions on the date of receipt of such Issuance Instructions in accordance with and subject to (I) this Agreement, (ii) the procedures set forth in the DTC Commercial Paper Issuing/Paying Agent Manual (the "Manual"), (iii)the Rules of The Depository Trust Company, including, without limitation, the DTC Same-Day Funds Settlement System Rules (collectively, the "rules") and (iv) the terms and conditions of the Certificate Agreement. Unless otherwise instructed by an Authorized Company Officer or Designated Company Individual, each Book-Entry Note delivery under this Agreement shall be made against payment as more fully set forth in this Agreement. In the event of a conflict between the terms of this Agreements and the terms of the Manual, the Certificate Agreement or the Rules, the provisions of the Manual, the Certificate Agreement or the Rules shall control. No Note shall be delivered by you except against payment of the Purchase Price therefor as provided in this paragraph. A Certificated Note shall be deemed delivered against payment of the Purchase Price therefor if, at the time you deliver such Certicated Note to the Dealer or to the consignee thereof, you receive the receipt of the Dealer or the same day, you will actually receive the Purchase Price of such Certificated Note from the Purchase Price therefor upon credit to your account at DTC in accordance with the provisions of the Manual and the Rules. Should the delivery of Notes and the actual receipt by you of the Purchase Price therefor not be completed simultaneously, you shall incur no liability for the nonpayment of the Notes. In the event that you shall not receive payment of the Purchase Price of any Note at the times and in the manner specified above, you shall notify the Company and the Guarantor promptly of such nonpayment and cancel such Note and the Guarantee affixed thereto. All proceeds of the sale of Notes issued by you as issuing and paying agent hereunder shall be transferred by you promptly in immediately available U.S. Dollar funds to an account of the Company maintained at a bank in the continental United States of America or may be applied by you to satisfy the payment of Notes at maturity, in either case as shall be directed by an Authorized Company Officer or Designated Company Individual form time to time by written notice. You agree to provide the Company the means by which to electronically access daily settlement information including the maturity date of each Note and the aggregate principal amount of all Notes maturing on any date on which Notes mature. Information transmitted by you to the Company and by the Company to you by or through computer terminals or similar devices shall be considered to be in writing for all purposes of this Agreement. The Company will cause to be transferred to you by wire, prior to 1:00 p.m. on such maturity date, an amount of immediately available U.S. Dollar funds equal to the aggregate principal amount of all Notes outstanding under which there may be made a demand for payment on such maturity date in accordance with the terms thereof. In the event that the Company fails to make such payment to you at such time, you shall promptly demand such payment from each of the Company and the Guarantor, specifying the issue date, maturity date and principal amount of each such Note. The Guarantor will cause to be transferred to you by wire, on demand, 4 an amount in immediately available U.S. Dollar funds equal to the lesser of the amount demanded by you and the amount then available form payment under the terms of the Guarantees. In the event that you shall receive payment under the Guarantees form the Guarantor, all amount received from the Guarantor shall be deposited into a non-interest bearing trust account (the "Trust Account") maintained by you for the benefit of the holders of the Notes. Moneys on deposit in the Trust Account shall be paid to the holders of the Notes in accordance with the terms of this Agreement. Neither the Company nor the Guarantor shall have any right to withdraw any moneys from the Trust Account' provided, however, that if all Notes shall have been paid in full, any amounts then remaining in the Trust Account shall be available for withdrawal by the Guarantor. You shall make payments of amounts received in accordance with the terms of the Agreement from the Company or the Guarantor to the holders of the Notes. You shall not have any obligation to make any payment on any Note unless you shall have received and collected payment in immediately available U.S. Dollar funds form or on behalf of the Company or the Guarantor in an amount which is sufficient to make such payment in full. Each Cerificated Note properly presented to you for payment on or after the maturity date thereof shall be deemed a request by the holder of such Certicated Note that you pay such funds to such holder. You shall pay the principal amount of the Certificated Note, provided that you shall have received from or on behalf of the Company, or the Guarantor immediately available U.S. Dollar funds in an amount which is sufficient to make such payment in full to the holder of such Certificated Note. Upon such payment, you will mark such Certificated Note "paid" and cancel such Certificated Note and the Guarantee affixed thereto. Within ten Business Days after such payment, you will send by mail to the Company each such canceled Certificated Note with such Canceled Guarantee. The Company hereby warrants and represents to you, which shall be a continuing warranty and representation, that (i) the Company's entering into this Agreement, and your appointment as issuing and paying agent by the Company, have been duly authorized by all necessary corporate action on the part of the Company, (ii) all Notes delivered to you pursuant to this Agreement, the Manual or the Rules are duly authorized, executed and delivered by it to you, and (iii) the foregoing will not violate, breach or contravene any law, rule, regulation, order, material contract or agreement binding upon the Company. The Guarantor hereby warrants and represents to you, which shall be a continuing warranty and representation, that (i) the Guarantor's entering into this Agreement has been duly authorized by all necessary corporate action on the part of the Guarantor, (ii) the Guarantees have been duly authorized, executed and delivered by the Guarantor, and (iii) the foregoing will not violate, breach or contravene any lows, rule, regulation, order, material contract or agreement binding upon the Guarantor. The Company agrees that you shall not be responsible for (i) the validity, sufficiency or genuineness of any Note, (ii) the truth or accuracy of any statement contained in any Note, whether or not the same is in fact subsequently proven to be in any respect invalid, insufficient fraudulent or forged or any statement contained therein shall prove in fact to be untrue or inaccurate or (iii) the payment of the Purchase Price of any Note. You shall notincur any liability to the Company or to any person as a consequence of the inaccuracy of any information obtained by the Company from you, electronically or otherwise, unless the furnishing of such inaccurate information is directly attributable to your gross negligence or willful misconduct. The Company shall idemnify and hold you 5 and your respective officers, directors, employees and agents harmless against and from all costs, expenses, losses, claims, damages and liabilities (including reasonable attorney's fees and expenses) directly or indirectly relating to, arising out of or in connection with, and you shall not be liable for, (i) any action taken, omitted or suffered in good faith in connection with this Agreement, and the Notes, including but not limited to the safekeeping, completion, authentication, delivery and payment of the Notes; (ii) compliance with any facsimile, telegraphic, telex, or written instructions reasonably believed by you to have been received from Authorized Company Officers or Designated Company Individuals or (iii) any reliance on any Note. In the case of a Note payable to bearer, you may treat the bearer of any such Note as the absolute owner of such note. You may accept Notes which appear on their face to be in order without responsibility for further investigation. The obligations of the Company hereunder shall survive the termination of this Agreement and the payment in full of all Notes. The Guarantor agrees that you shall not be responsible for (i) the validity, sufficiency or genuineness of any Guarantee or (ii) the truth or accuracy of any statement contained in any Guarantee, whether or not the same is in fact subsequently proven to be in any respect invalid, insufficient, fraudulent or forged or any statement contained therein shall prove in fact to be untrue or inaccurate. You shall not incur any liability to the Guarantor or to any other person as a consequence of the inaccuracy of any information obtained by the Guarantor from you, electronically or otherwise, unless the furnishing of such inaccurate information is directly attributable to your gross negligence or willful misconduct. The Guarantor shall indemnify and hold you and your respective officers, directors, employees and agents harmless against and from all costs, expenses, losses, claims, damages and liabilities (including reasonable attorney's fees and expenses) directly or indirectly relating to, arising out of or in connection with, and you shall not be liable for, (i) any action taken, omitted or suffered in good faith in connection with this Agreement and the Guarantees, including but not limited to the safekeeping, completion, authentication, delivery and payment of the Guarantees, (ii) compliance with any facsimile, telegraphic, telex, or written instructions reasonably believed by you to have been received from Authorized Guarantor Officers or Designated Guarantor Individuals or (iii) any reliance on any Guarantee. In the case of a Note and Guarantee payable to bearer, you may treat the bearer of any such Note and Guarantee as the absolute owner of such Note and Guarantee. You may accept Notes and Guarantees which appear on their face to be in order without responsibility for further investigation. The obligations of the Guarantor hereunder shall survive the termination of this Agreement and the payment in full of all Notes and Guarantees. Your duties shall be limited to (i) completing the Certificated Notes, authenticating the Certificated Notes, delivering the Cerificated Notes with the Guarantee affixed thereto and sending a copy of the Certified Notes to the Company, (ii) transmitting to DTC the issuance of Book-Entry Notes, (iii) making payment for any Notes duly presented to you for payment, (iv) making demand for payment from the Company and the Guarantor for such Notes, and (v) applying funds received by you, all in accordance with and subject to the terms and conditions of this Agreement and, with respect to Book-Entry Notes, the Manual and the Rules. You shall have no fiduciary or any other duties whatsoever to the holders of Notes, except for your obligations to pay amounts on deposit in the Trust Account to holders of the Notes as set forth in this Agreement. No implied covenants, warranties, dutiesor obligations shall be read into this Agreement against you. Without limiting your rights, duties and obligations under this Agreement, you may act through one or more agents when performing your duties and obligations under this Agreement. 6 No failure or delay on your part in exercising any right or remedy hereunder shall operate as a waiver thereof. Your rights and remedies hereunder are not exclusive of any rights or remedies provided by law or in any other agreement between you and the Company or you and the Guarantor. The fees for your services hereunder shall be as mutually agreed upon between the Company and you. The Company will pay your counsel's reasonable fees and expenses. This Agreement may be supplemented, modified or amended if such supplement, modification or amendment is in writing, signed by both parties hereto. No supplement, modification or amendment shall adversely affect the rights of holders of the theretofore issued Notes which are unpaid at the time. You may at any time resign by giving written notice to the Company and the Guarantor and the Guarantor of such intention, specifying the date on which your desired resignation shall become effective; provided, however, that such date shall not be less than the earlier of three months after receipt of such notice by the Company and the Guarantor or such time as a successor issuing and paying agent is appointed by the Company. You may be removed for any reason or for no reason at any time by the filing with you of an instrument in writing signed by the Company or the Guarantor (with a copy to the Guarantor or the Company, as the case may be) and specifying such removal and the date when such removal is intended to become effective. Such removal shall take effect upon such date provided above. All notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by registered or certified mail (or registered or certified airmail if international), postage prepaid, return receipt requested, or by Federal Express or other courier, with confirmed delivery, or by prepaid telex, or by telecopier, and shall be deemed to be given for purposes of this Agreement on the day that such writing is delivered to or otherwise specified in a notice sent or delivered in accordance with the foregoing provisions, notices, demands, instructions and other communications shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective telex or telecopier) indicated below: If to you: Sakura Trust Company 350 Park Avenue New York, New York 10022 Telephone: (212) 756-6650 Telex: 255945 Answerback STC UR Telecopier: (212) 756-6699 7 If to the Company: The Southland Corporation Cityplace Center East 2711 North Haskell Avenue Dallas, Texas 75204-2906 Attention: Treasurer and Legal Department Telephone: (214) 828-7011 Telex: 1561717 Telecopier: (214) 841-6571 If to the Guarantor: Ito-Yokado Co., Ltd. 1-4, Shibakoen 4-Chome Minato-ku Tokyo 105 Telephone: 81-3-3459-2100 Telex: 23841 Telecopier: 81-3-3459-6873 If any day on which any notice, demand, instruction or other communication is given by any party hereto is not a day (a "Business Day") other that a Saturday, Sunday or other day on which banks in The City of New York and Tokyo are authorized to remain closed, such notice, demand, instruction or other communication shall be deemed to have been given on the Business Day next succeeding such day which is not a Business Day. You shall incur no liability to the Company or the Guarantor in acting hereunder upon instructions contemplated hereby which you believed in good faith to have been given by an Authorized Designated Guarantor Individual. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no party hereto may assign any of its rights or obligations hereunder except with the prior written consent of the other parties hereto. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same Agreement. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Each of the Company and the Guarantor agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at your option, be litigated in any of the New York State Supreme Court, New York County, the New York State Supreme Court Appellate 8 Division, First Department, and the Federal District Court of the Southern District of New York, and that each such court is a convenient forum, and each service of process upon the Company at the Company's address appearing on your records, and services so made shall be deemed completed on the date of certified receipt. Service of process upon the Company may also be sent by Federal Express or any other public or private form of express delivery service that can certify actual delivery, and in such event shall be deemed to have been given on the date of certified receipt. Each of you, the Company and the Guarantor waives any right to trial by jury in any action or proceeding relating directly or indirectly to this Agreement. Each of you, the Company and the Guarantor waives the right to assert in any action or proceeding relating directly or indirectly to this Agreement. Each of you, the Company and the Guarantor waives the right to assert in any action or proceeding relating directly or indirectly to this Agreement any offsets or counterclaims (other than counterclaims directly relating to this Agreement) which you the Company or the Guarantor, as the case may be, may have. if the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between you and us in accordance with its terms. Very truly yours, THE SOUTHLAND CORPORATION By: __________________________ Name: Title: ITO-YOKADO CO., LTD. By: __________________________ Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written SAKURA TRUST COMPANY By:/s/ Name: Norio Kato Title: President 9 EXHIBIT 10.(i)(8) - 2 THE SOUTHLAND CORPORATION Note Number ______________________ $________________ On ___________________________, for value received, The Southland Corporation Promises To Pay To The Order Of ________________________________________________ The Sum of __________________________________________________________DOLLARS Payable At _____________________________________________________________________________ NOT VALID UNLESS COUNTERSIGNED BY THE SOUTHLAND CORPORATION New York, New York as This Note is issued in By:______________________ Issuing Agent New York, New York and this Note shall be governed by and construed in accordance with the laws of the State of New York without reference to the principles of conflict of By:__________________ laws thereof. Countersignature By:______________________ EXHIBIT 10.(i)(8) - 3 GUARANTEE FOR VALUE RECEIVED Ito-Yokado Co., Ltd. (the "Guarantor"),hereby unconditionally and irrevocably guarantees payment of theface amount of the note (the "Note") of The Southland Corporation on the face hereof, when, where and as the same shall become due and payable without any requirement that the holder first proceed against The Southland Corporation. The Guarantor waives notice of acceptance of this Guarantee and notice of non-payment of the Note. The unconditional obligation of the Guarantor hereunder will not be affected, impaired or released by any extension of time for payment of the Note or by any other matter or thing whatsoever which would release a guarantor. The Guarantee shall be governed by and construed in accordance with the laws of the State of New York,without reference to the principles of conflict of laws thereof. The date of this Guarantee is the date of the Note. IN WITNESS WHEREOF, Ito-Yokado Co., Ltd. has caused this Guarantee to be executed by its President and Chief Executive Officer either manually or by facsimile signature. Ito-Yokado Co., Ltd. By:/s/ --------------------------Masatoshi Ito President and Chief Executive Officer EXHIBIT 10.(i)(8) - 4 INDEMNITY AND REIMBURSEMENT AGREEMENT This Indemnity and Reimbursement Agreement (the "Agreement") made as of this 17th day of August, 1992 by and between The Southland Corporation, a corporation organized and existing under the laws of Texas (the "Company"), and Ito-Yokado Co., Ltd., a Japanese corporation organized and existing under the laws of Japan (the "Guarantor"). WHEREAS, the Company intends from time to time to issue unsecured short-term promissory notes known as commercial paper notes (the "Notes") of the Company pursuant to a program (the "Commercial Paper Program") that includes a Commercial Paper Dealer Agreement dated as of even date herewith between Goldman Sachs Money Markets, L.P. ("GSMM LP") and Merrill Lynch Money Markets Inc. ("MLMMI") (each such firm a "Dealer" and together the "Dealers"), on the one hand, and the Company and the Guarantor, on the other hand (the "Dealer Agreement"); WHEREAS, in accordance with the Commercial Paper Program, the Company has requested the Guarantor to, and the Guarantor is willing to, guarantee the payment obligations of the Company under the Notes (the "Obligations") pursuant to certain guarantees (the "Guarantees") to be endorsed on the Master Note and the Book-Entry Notes, as such terms are defined in the Issuing and Paying Agency Agreement dated as of even date herewith between the Company and the Guarantor, on the one hand, and the Sakura Trust Company, on the other hand (the "Issuing and Paying Agency Agreement"); WHEREAS, the Guarantor is willing to execute the Guarantee pursuant to the terms and subject to the conditions hereof. NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, it is hereby agreed as follows: 1. GUARANTEE. The Company hereby requests and the Guarantor, at the request of Company, agrees to execute the Guarantees as guarantor of the Obligations; provided, however, that the obligations of the - -1- Guarantor thereunder shall not extend to any indebtedness of the Company in excess of U.S. $400,000,000, in the aggregate; that the Guarantor's obligation to provide any Guarantee shall expire and terminate three (3) years from the date hereof; and that such execution is subject to the additional terms and conditions contained herein. 2. INDEMNITY. (a) The Company shall reimburse any and all disbursements made by the Guarantor in connection with, and shall at all times indemnify and hold harmless the Guarantor from and against, all liability, loss and expense, including fees and expenses of counsel, that the Guarantor may incur (i) by reason of entering into, performing, making any payment pursuant to or being held liable under any Guarantee or otherwise in connection with any Guarantee or the Obligations, including without limitation any funding and other costs incurred by the Guarantor (in an amount determined by the Guarantor in its reasonable judgment) in connection with performance of its payment and other obligations thereunder; (ii) in connection with any payment required to be made by the Guarantor in connection with a U.S. $60,000,000 committed line of credit extended by Sakura Bank, Limited, New York Branch ("Sakura Bank"), in favor of the Guarantor as support for the Notes (the "Backup Line of Credit") as evidenced by an agreement dated of even date herewith from Sakura Bank to the Guarantor (the "Backup Line Letter Agreement"), including without limitation any commitment fees thereunder, any interest or any drawdowns made thereunder, and any funding costs incurred by the Guarantor (in an amount determined by the Guarantor in its reasonable judgment) in connection with performance of its repayment and other obligations thereunder to the extent not paid directly by the Company pursuant to paragraph 7(b) below; (iii) in connection with the Dealer Agreement, including without limitation reimbursement for any joint or several liability of the Guarantor pursuant to section 11 thereof to the extent not paid directly by the Company pursuant to paragraph 7(b) below; (iv) in connection with the Issuing and Paying Agency Agreement to the extent not paid directly by the Company pursuant to paragraph 7(b) below; (v) otherwise in connection with the Commercial Paper Program to the extent not paid directly by the Company pursuant to paragraph 7(b) below; or (vi) in defending or prosecuting any suit, action or other proceeding brought in connection with any of the foregoing, or in obtaining or attempting to obtain a release from liability in respect thereof to the extent not paid directly by the Company pursuant to paragraph 7(b) below. - -2- The Company covenants that it will reimburse the Guarantor for, or pay over to the Guarantor, all sums of money which the Guarantor shall pay or become liable to pay by reason of any of the foregoing (collectively the "Indemnified Losses" and each an "Indemnified Loss"), and will make such payments to the Guarantor as soon as the Guarantor shall become liable therefor, whether or not the Guarantor shall have paid out such sums or any part thereof and whether or not any request, demand or notice to the Company shall have been made with respect to the payment of such sum, all of which are hereby expressly waived. The indemnity provisions hereof shall survive any termination, cancellation or expiration of this Agreement. Notwithstanding the foregoing, the Guarantor hereby acknowledges and agrees that the indemnity obligations set forth in this paragraph 2(a) are subject to the provisions of the Credit Agreement dated as of November 5, 1987, as amended and restated through the 21st Amendment to the Credit Agreement (the "Credit Agreement"), between the Company and the financial institutions named therein (the "Banks"), pursuant to which the Company has agreed with the Banks that any such indemnity obligations shall not be required or permitted to be paid to the Guarantor until one year after the payment in full to the Banks of the term loans and revolving credit loans under the Credit Agreement, except principal payments under (i) above to the extent that the amount of Notes outstanding exceeds U.S. $375,000,000. (b) If any event shall have occurred or if any action shall have been taken which will or may discharge or exonerate or in any manner whatsoever affect the Obligations of the Company,including, without limitation, the payment of any obligation under the Notes, or any obligation of the Company under the Dealer Agreement, the Company shall forthwith give notice to the Guarantor specifying such event, act or thing in reasonable detail. 3. COMPROMISES. The Guarantor shall have the right in its sole discretion to adjust, settle or compromise any claim, suit or judgment in respect of any Indemnified Loss, after notice to the Company, unless the Company desires to litigate such claim, defend such suit or appeal such judgment and simultaneously therewith deposits with the Guarantor collateral security sufficient to pay any judgment rendered, with interest, costs and expenses; and the right of the Guarantor to indemnification under this Agreement shall extend to any money paid by the Guarantor in settlement or compromise of any such claims, suits and judgments in good faith, after notice to the Company. 4. LEGAL ACTIONS. If any suit, action or other proceeding is brought by or against a creditor, or any assignee of a creditor, of the Company in connection with any Obligation guaranteed by the Guarantor, the Guarantor shall have the right, at the expense of the Company, to participate in or, at its election, assume the defense or prosecution of such suit, action or proceeding, and in the latter event the Company may employ counsel and participate therein at no cost or expense to the Guarantor.If any suit, action or other proceeding is brought by the Guarantor -3- against the Company for breach of its covenant of indemnity herein contained, separate suits may be brought as causes of action accrue without prejudice or bar to the bringing of subsequent suits on any other cause or causes of action, whether theretofore or thereafter accruing. 5. LIABILITY BETWEEN PARTIES. As between the Company and the Guarantor, the former shall be primarily liable for the payment of all of the Obligations guaranteed by the Guarantor, and nothing contained in this agreement shall be construed to waive, abridge or diminish any right or remedy which the Guarantor might otherwise have against the Company. 6. EVIDENCE OF LIABILITY. In the event of payment by the Guarantor of any sums of money by reason of the Guarantee or in connection with any Indemnified Loss or any reimbursement pursuant to section 7(b) hereof, the vouchers or other evidence showing such payment shall be prima facie evidence against the Company of the fact and amount of the liability of the Company to the Guarantor hereunder. 7. FEES, CHARGES AND REIMBURSEMENT. (a) The Company shall pay annually in arrears on each anniversary date hereof to the Guarantor a guarantee fee (accruing on a daily basis) at the rate of ONE HALF OF ONE PER CENTUM PER ANNUM (0.5% p.a.) on the amount daily outstanding of the face value of the Notes guaranteed by the Guarantor. The guarantee fee shall be computed on the basis of a year of three hundred and sixty (360) days and for the actual number of days elapsed. The guarantee fee shall be paid in arrears in the currency in which the Obligations are paid. The rate of the guarantee fee accruing after each successive anniversary date hereof may be varied if agreed by the parties hereto. (b) The Company shall pay all of the costs and expenses related to the issuance of the Notes, including any costs for which the Company and the Guarantor are jointly liable, including, but not limited to, amounts owing under the Dealer Agreement and the Issuing and Paying Agency Agreement, printing fees, legal fees and expenses of Shearman & Sterling, fees and expenses of any rating agencies and Depository Trust Company and fees and expenses (including commitment fees) of Sakura Bank under the Backup Line Letter Agreement. The Company will also reimburse the Guarantor on demand for all actual expenses (including fees and expenses of counsel) reasonably incurred by the Guarantor and not paid directly by the Company pursuant to the preceding sentence in connection with negotiation with the Company; preparation, execution, issuance, delivery, implementation and performance of this Agreement, the Notes, the Guarantees, the Dealer Agreement, the Issuing and Paying Agency Agreement, the Backup Line Letter Agreement and any other documents or instruments contemplated in connection herewith or therewith; and the investigation, preservation, exercise and enforcement of any of its rights or remedies hereunder or thereunder. - -4- 8. PAYMENT. Except as the context otherwise requires or as otherwise expressly provided herein, all payments to be made by the Company hereunder shall be made to the Guarantor in such currency or currencies in which the Guarantor shall have made or will make payments under or in connection with any Guarantee, the Issuing and Paying Agency Agreement, the Dealer Agreement, the Backup Line of Credit, the Backup Line Letter Agreement or this Agreement to the account of the Guarantor, and about which the Guarantor shall have notified the Company. All sums payable by the Company hereunder shall be paid in full without set-off or counterclaim and without deduction for any taxes, deductions, withholdings or charges of any nature now or hereafter imposed by any taxing or other authority whatsoever. If the Company shall at any time be compelled by law to withhold or deduct such taxes, deductions, withholdings or charges from any amounts payable to the Guarantor, the Company shall pay such additional amount as shall be necessary to ensure that the Guarantor (after payment of all such taxes, deductions, withholdings and charges) receives a net amount equal to the full amount which the Guarantor would have received had payment of any sums due and payable hereunder not been subject to such taxes, deductions, withholdings or charges. The Company shall promptly send to the Guarantor such documentary evidence with respect to such payments as may be required from time to time by the Guarantor. 9. FORBEARANCE OF NOTE ISSUANCE. In the event that the Guarantor in its sole discretion requests the Company to no longer issue Notes or to no longer affix the Guarantor's endorsement to the Notes, the Company shall immediately comply with such request until such time as the Guarantor may inform the Company that it may resume such issuance or affixing. The Company shall not issue any Notes, and shall cause Sakura Trust Company and any other issuing agents not to complete, authenticate, issue or deliver any Notes, including any Certificated Notes (as such term is defined in the Issuing and Paying Agency Agreement), or process any Issuance Instructions with respect to any Book-Entry Notes (as such terms are defined in the Issuing and Paying Agency Agreement), and shall not sell any Notes to any Dealer, if the issuance of such Notes (including such Certificated Notes or Book-Entry Notes, as the case may be) would cause the aggregate principal amount of Notes then outstanding to exceed the amount of U.S. $400,000,000 less the amount of liability of the Company then owed to the Guarantor under this Agreement. 10. RESORT TO BACKUP LINE OF CREDIT. The Company acknowledges that it understands that the Guarantor intends that the Backup Line of Credit is to be utilized solely as a source of funding of final resort. Accordingly, the Company shall not request resort to the Backup Line of Credit unless and until, in its reasonable judgment exercised in good faith, the Company has used its best efforts to secure funding in the marketplace to repay outstanding Obligations, including efforts to issue additional commercial - -5- paper to repay such Obligations, and such efforts have not succeeded to secure all necessary funding. 11. BENEFIT. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective legal representatives and successors. Each party hereto may assign or delegate any of its rights or obligations hereunder only with the prior written consent of the other party. 12. MISCELLANEOUS. (a) This Agreement constitutes a continuous undertaking of the Company valid and in force and effect in respect of all its obligations hereunder until the later of (i) payment in full by the Company of all of the Obligations or (ii) full and complete discharge and satisfaction of all of the Company's obligations hereunder. (b) This Agreement shall be governed by and construed in accordance with the laws of Japan. Each party agrees that any legal action or proceeding with respect to this Agreement may be brought in the Tokyo District Court and hereby accepts and consents to the non-exclusive jurisdiction of such Court. (c) All notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by registered or certified air mail, postage prepaid, return receipt requested, or by Federal Express or other courier, with confirmed delivery, or by prepaid telex, or by telecopier, and shall be deemed to be given for purposes of this Agreement on the day that such writing is delivered to or received by the intended recipient thereof in accordance with the provisions hereof. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provision, notices, demands, instructions and other communications shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective telex or telecopier) indicated below: If to the Company: The Southland Corporation Cityplace Center East 2711 North Haskell Avenue Dallas, Texas 75204-2906 Attention: Treasurer and Legal Department Telephone: (214)828-7327 Telex: 240859 Telecopier: (214)828-6571 -6- If to the Guarantor: Ito-Yokado Co., Ltd. 1-4, Shibakoen 4 chome Minatoku, Tokyo 105 Telephone: 03-459-2111 Telex: 23841 Telecopier: 03-434-8375 (d) The headings and captions herein are inserted for convenience only and shall not affect the interpretation of this Agreement. (e) This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which taken together shall constitute a single instrument. This Agreement constitutes the entire agreement and understanding between the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. In witness whereof the parties have caused this agreement to be executed by their duly authorized representatives as of the date first above written. THE SOUTHLAND CORPORATION ---------------------- By: John H. Rodgers Title: Sr. Vice President ITO-YOKADO CO., LTD. ------------------ By: Title: -7- EXHIBIT 10.(i)(8) - 5 ITO-YOKADO CO., LTD. 1-4, SHIBAKOEN 4 CHOME MINATOKU, TOKYO 105 December 16, 1994 The Southland Corporation Cityplace Center East 2711 North Haskell Avenue Dallas, TX 75204-2906 Re: INDEMNITY AND REIMBURSEMENT AGREEMENT Gentlemen: Reference is made to the Indemnity and Reimbursement Agreement between Ito-Yokado Co., Ltd. and The Southland Corporation dated as of August 17, 1992 (the "Agreement"). We have agreed that paragraph 2(a) of the Agreement is hereby amended by deleting the last sentence thereof and replacing it with the following sentence: "Notwithstanding the foregoing, the Guarantor, hereby acknowledgesand agrees that the indemnity or reimbursement obligations set forth in this paragraph 2(a) are subject to the provisions of the Credit Agreement dated as of July 31, 1987, as amended and restated as of November 5, 1987, as further amended and restated as of February 17, 1993, as further amended and restated as of December 16, 1994 (as so amended and restated and as further amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Company, the financial institutions from time to time party thereto at Senior Lenders and Issuing Banks, Citicorp North America, Inc., as Administrative Agent for the Senior Lenders and the Issuing Banks and The Sakura Bank, Limited, New York Branch, as Co-Agent (such Senior Lenders, Issuing Banks, Administrative Agent and Co-Agent being referred to herein as the "Banks"), pursuant to which the Company has agreed with the Banks that any such indemnity or reimbursement obligations shall not be required or permitted to be paid to the Guarantor other than (x) payments after the date which is one year after payment in full in cash of the "Obligations" and termination of the "Commitments" (in each case as such terms are defined in the Credit Agreement) and (y) so long as there does not exist an "Event of Default" or "Potential Event of Default" and the "Revolving Loan Subfacility" (in each case as such terms are defined in the Credit Agreement) does not then equal zero, principal payments under clause (i) above made solely with proceeds of subsequent issuances of Notes by the Company." The Southland Corporation December 16, 1994 Page 2 If the foregoing is in accordance with your understanding of our Agreement, please sign and return to us a counterpart hereof. Very truly yours, ITO-YOKADO CO., LTD. By:____________________________________ Name:__________________________________ Title:_________________________________ CONFIRMED & ACCEPTED as of the date first above written THE SOUTHLAND CORPORATION By:___________________________________ Name:_________________________________ Title:________________________________ Tab 2 EX-10.(II)(B) 4 STORE FRANCHISE AGREEMENT EXHIBIT 10.(ii)(B)(1) STORE FRANCHISE AGREEMENT FRANCHISEE recognizes the advantages of the 7-Eleven System and desires to obtain a franchise for a 7-Eleven Store. In connection therewith, FRANCHISEE wants to lease the Store and Equipment designated in Exhibits A and B and operate the Store in a manner which will enhance the 7- Eleven Image and pursuant to the 7-Eleven System, as from time to time determined by 7-ELEVEN, in its sole discretion (whether or not any changes therein are within the present contemplation of the parties). 7-ELEVEN, in reliance on the representations made by FRANCHISEE, is willing to provide certain training and continuing services and grant a License and Lease, but only on the terms of this Agreement, which terms are acceptable to FRANCHISEE and are acknowledged by the parties to be material and reasonable. Therefore, in consideration of this Agreement, the parties agree as follows: 1. DEFINITIONS. Defined words in this Agreement and in the Exhibits have the meanings set forth in Exhibit E or, if not defined in Exhibit E, the meanings set forth in context. 2. FRANCHISE FEE AND DOWN PAYMENT. FRANCHISEE has paid 7-ELEVEN a Franchise Fee. FRANCHISEE shall be obligated to pay 7-ELEVEN the amount of the unpaid balance in the Open Account and has made a Down Payment. The amounts paid are set forth in Exhibit D. 3. TRAINING AND QUALIFICATION. 7-ELEVEN shall provide its then current training program for operating a franchised 7-Eleven Store, including the then current Foodservice training program, (if any), to FRANCHISEE. If FRANCHISEE is only one individual, the training program will be provided to FRANCHISEE and one individual that FRANCHISEE has designated in Exhibit D. 7ELEVEN shall reimburse or pay the training expenses set forth in Exhibit D. 7ELEVEN at any time may discontinue training, may decline to certify, or may revoke the certification of any participant who fails to evidence an understanding of the training satisfactory to 7-ELEVEN, or otherwise by acts or omissions, at any time prior to the Effective Date, is, in any way unsatisfactory to 7-ELEVEN. If participation of a FRANCHISEE or any participant is discontinued by 7-ELEVEN or 7-ELEVEN does not certify or revokes the certification of a FRANCHISEE or any participant: (i) the business relationship, if any, between FRANCHISEE and 7-ELEVEN shall immediately terminate; (ii) this Agreement shall not become effective and shall be null and void; and (iii) 7-ELEVEN shall refund without interest an amount equal to the Down Payment (less any amount due 7-ELEVEN) and the Franchise Fee. Notwithstanding the foregoing, in the event that any participant discontinues training upon FRANCHISEE's initiative, 7-ELEVEN may deduct from the amounts refunded to FRANCHISEE those training expenses set forth in Exhibit D which have been reimbursed or paid by 7- ELEVEN. Any expenses 1 incurred or reliance by FRANCHISEE in connection with FRANCHISEE's efforts to obtain a franchise for a 7-Eleven store, including, but not limited to, out-ofpocket expenses, other than those which may be reimbursed to FRANCHISEE pursuant to the terms of this Paragraph, shall be solely at FRANCHISEE's own risk, upon FRANCHISEE's own judgment, and not in reliance upon any statements or representations whatsoever. 4. CONDITIONS PRECEDENT. 7-ELEVEN shall use its best efforts to make the Store available within a reasonable time. As of the date the Store is available, the following are conditions precedent to the Effective Date: (i) satisfactory completion of all training by FRANCHISEE and continued certification of FRANCHISEE until and including the Effective Date; (ii) availability (and, where possible, the obtaining) of all licenses, permits, and bonds that are required by any regulation or law or 7-ELEVEN for the operation of the Store or any portion thereof; and (iii) the absence of any security interest other than 7-ELEVEN's Security Interest, any misrepresentation, and any action that would be or is a breach of this Agreement. If such conditions have not been met, or the Store is not available within 60 days after satisfactory completion of training, or if the Effective Date is not within 90 days from the date of this Agreement (or, if the Store is under construction, 30 days after construction is completed if such date is later), 7-ELEVEN may, or upon written request shall, refund without interest the Down Payment (less any amount due 7-ELEVEN), and the Franchise Fee, and this Agreement shall be null and void. 5. LICENSE. 7-ELEVEN licenses the Service Mark, the 7-Eleven System, and the Trade Secrets, and the Proprietary Products to FRANCHISEE for use only in connection with operation of the Store pursuant to this Agreement. 7-ELEVEN shall defend claims arising from FRANCHISEE's use of the Service Mark pursuant to this Agreement. FRANCHISEE acknowledges that: (i) the License is only for the Store; (ii) FRANCHISEE is not obtaining any exclusive territory whatsoever; (iii) 7-ELEVEN may locate other stores or businesses, which may be operated by 7-ELEVEN or by franchisees, wherever it determines, including in near proximity to the Store; and (iv) FRANCHISEE will promptly notify 7ELEVEN of any uses of the Service Mark, the Related Trademarks and/or Trade Secrets which appear to be improper and which come to FRANCHISEE's attention. 6. LEASE. 7-ELEVEN leases the Store and Equipment to FRANCHISEE for use only in connection with operation of the Store pursuant to this Agreement. Neither party shall cause a breach of any master lease referred to in Exhibits A or B. FRANCHISEE shall take all of the premises leased hereunder subject to all documents of record on the property and 7-ELEVEN makes no warranty, express or implied, of non- disturbance. With respect to the Lease, it is the intention of the parties to create only a landlord-tenant relationship. In the event of a breach of this Agreement by FRANCHISEE, 7-ELEVEN shall be entitled, in addition to any other rights under this Agreement: to invoke all rights and remedies, judicial and otherwise, available to a landlord, including summary proceedings for possession of leased property, the right to appointment of a receiver or similar remedies; 2 and/or (ii) to terminate, cancel, or declare a forfeiture of the Lease. On any holding over, after notice of breach or non-renewal and effective date of termination as given in the notice, FRANCHISEE shall be only a tenant at sufferance or a trespasser and shall not be entitled to any notice to quit or vacate. 7. TERM. The License, Lease, and continuing obligations of the parties shall begin on the Effective Date and continue for a term expiring upon the date l0 years following the Effective Date, unless earlier terminated pursuant to the terms of Paragraph 28 hereof. 8. 7-ELEVEN CHARGE. FRANCHISEE shall pay 7-ELEVEN the 7-Eleven Charge for the License, Lease, and continuing services. The 7-Eleven Charge shall be due and payable each Collection Period with respect to the Receipts from that Collection Period at the time the deposit of such Receipts is due, and that portion of the Receipts from each Collection Period allocable to the 7-Eleven Charge shall be deemed to be paid to 7- Eleven at the time of the deposit of such Receipts; provided that, in the event that the Receipts deposited for any given Collection Period are insufficient to discharge the 7-Eleven Charge for that Collection Period, subsequent Receipts shall be applied first to discharge any such deficiency and then to the current 7-Eleven Charge. In the event that any such deficiency remains at the end of an Accounting Period, the deficiency shall be charged to FRANCHISEE's Open Account. Failure to discharge the 7-Eleven Charge allocable to a given Collection Period from the Receipts for that Collection Period shall not be a Material Breach so long as FRANCHISEE properly accounts for, expends, and deposits the Receipts from such Collection Period in accordance with the terms of this Agreement. The 7-Eleven Charge account reflected in the Financial Summaries may be reconciled on a monthly or other periodic basis at which time appropriate adjustments may be made for Assured Gross Income, changes in hours of operation, or other items necessitating an adjustment to the total 7- Eleven Charge for the Accounting Period. 9. FRANCHISEE'S DRAW. If FRANCHISEE is not in breach of this Agreement, 7-ELEVEN shall: (i) weekly remit to FRANCHISEE the amount provided in Exhibit D; (ii) within l0 business days (Monday through Friday) after the end of each Accounting Period, inform FRANCHISEE of the available Monthly Draw and Excess Investment Draw for the Accounting Period; and (iii) remit to FRANCHISEE, upon FRANCHISEE's written request, within l0 days after receipt of such request, that amount of Monthly Draw or Excess Investment Draw, or both, specified by the FRANCHISEE in such request, provided that the total amount so requested by FRANCHISEE shall not exceed the greater of the available Monthly Draw or Excess Investment Draw. 10. DAILY DEPOSITS, BOOKKEEPING RECORDS AND FINANCIAL SUMMARIES. 7- ELEVEN shall have the right, under the terms hereof, to maintain, as part of its records and in accordance with this Agreement, Bookkeeping Records on FRANCHISEE's operation of the Store. FRANCHISEE may perform or obtain any additional bookkeeping FRANCHISEE desires. Either party may inspect records pertaining to the operation of the Store prepared or obtained by the other, where maintained, and during normal business hours. FRANCHISEE shall: (i) 3 properly date and timely submit the Cash Report; (ii) deposit the Receipts for each Collection Period within 24 hours after the end of the Collection Period, in the Bank or night depository designated by 7-ELEVEN, except cash expended by FRANCHISEE from that day's Receipts for Purchases or Operating Expenses, which Purchases and/or Operating Expenses shall be properly reported and accompanied by invoices reflecting such payment; and (iii) deliver to 7ELEVEN, at those times specified by 7-ELEVEN, written verification by the Bank of such deposit which verification must be dated as of the business date next following the end of the Collection Period. If requested by 7-ELEVEN, FRANCHISEE shall deliver the Receipts (net of cash expenditures for authorized Purchases and Operating Expenses) to 7-ELEVEN rather than depositing such Receipts in the Bank. Amounts deposited by FRANCHISEE or delivered by FRANCHISEE to 7-ELEVEN may be withdrawn from the Bank by or otherwise used for the benefit of 7-ELEVEN at any time, without payment by 7-ELEVEN of interest or other compensation to FRANCHISEE. FRANCHISEE shall prepare and furnish to 7-ELEVEN, on forms and at times acceptable to and as requested by 7-ELEVEN: (i) daily summaries of Purchases; (ii) daily reports of Receipts; (iii) weekly time and wage authorizations for FRANCHISEE's Store employees; (iv) all information requested by 7-ELEVEN regarding the vendors from which FRANCHISEE makes purchases; and (v) all such additional reports as 7-ELEVEN may require from time to time. FRANCHISEE also shall deliver or furnish to 7-ELEVEN copies of bank drafts, vendor and other receipts, invoices for Purchases, and receipts and bills for Operating Expenses, and keep 7-ELEVEN currently advised in writing of all of FRANCHISEE's actual retail selling prices (which FRANCHISEE shall solely select) and of all discounts, allowances, and/or premiums received by FRANCHISEE. FRANCHISEE shall retain and make available to 7-ELEVEN any records or other documents relating to the operation of the Store that 7ELEVEN requests that FRANCHISEE retain and/or make available. If FRANCHISEE is not in breach of this Agreement, 7-ELEVEN shall: (i) provide Financial Summaries for FRANCHISEE for the Store prepared from the Bookkeeping Records in the form of an income statement and a balance sheet for each Accounting Period or any portion thereof as 7- ELEVEN may deem necessary and for each calendar year, payroll checks for FRANCHISEE's Store employees, draw checks, and merchandise reports; (ii) timely pay on behalf of FRANCHISEE, upon approval and submission to 7- ELEVEN, bank drafts and invoices for Purchases (as verified by vendor statements), bills for Operating Expenses, and the payroll for FRANCHISEE's Store employees; and (iii) assist FRANCHISEE in the preparation and filing of business tax reports and returns (except FRANCHISEE's income tax and related returns) to the extent the information is available from the Bookkeeping Records. FRANCHISEE authorizes 7-ELEVEN to collect discounts and allowances, not deducted from the face of invoices, and to charge FRANCHISEE for the market value of any premiums FRANCHISEE receives based upon purchases. 4 11. OPEN ACCOUNT AND FINANCING. As part of the Bookkeeping Records, 7-ELEVEN shall establish and maintain an Open Account for FRANCHISEE. FRANCHISEE's draw, Purchases, Operating Expenses, and amounts owed by FRANCHISEE to 7-ELEVEN which relate directly or indirectly to operation of the Store, shall be charged to the Open Account. All Receipts deposited or delivered to 7-ELEVEN shall be credited to the Open Account, and any amounts due from 7-ELEVEN to FRANCHISEE may be credited to the Open Account. The balance in the Open Account shall be computed on a monthly basis or at any time during an Accounting Period as 7-ELEVEN may deem necessary, shall be computed in a manner 7-ELEVEN may determine to be appropriate, and shall be reflected in the Financial Summaries prepared by 7-ELEVEN for each Accounting Period or any portion thereof as 7-ELEVEN may deem necessary. All Receipts shall be credited to the Open Account for the Accounting Period during which the Cash Report relating to those Receipts is dated (provided such Receipts are properly deposited in the Bank or delivered to 7-ELEVEN as provided herein); and all Purchases, Operating Expenses and amounts owed by FRANCHISEE to 7-ELEVEN shall be charged to the Open Account for the Accounting Period during which invoices, reports or information thereon is received by 7-ELEVEN (regardless of when paid by 7-ELEVEN on behalf of FRANCHISEE). If FRANCHISEE is not in breach of this Agreement, and so long as 7- ELEVEN has a first lien on the Inventory and the Security Interest, 7- ELEVEN will finance (as a loan) any unpaid balance in the Open Account. FRANCHISEE shall execute a security agreement and financing statement(s) and such renewal or continuation financing statements or other documents relating to the Security Interest as are requested by and acceptable to 7- ELEVEN. If, at any time, in 7-ELEVEN's sole opinion, there has been a Material Breach by FRANCHISEE or 7ELEVEN believes its Security Interest is threatened 7-ELEVEN may discontinue the financing described above and the unpaid balance in the Open Account shall be immediately due and payable. FRANCHISEE may obtain financing other than from 7-ELEVEN. The unpaid balance in the Open Account at the beginning of each Accounting Period (the amount financed by 7-ELEVEN) shall bear interest for that Accounting Period at the rate specified in Exhibit D. A credit balance reflected in the Open Account at the end of an Accounting Period shall bear interest for the number of days in the current Accounting Period, at the rate specified in Exhibit D, which interest will be credited to the Open Account; provided, however, 7- ELEVEN may, at its option, limit the credit balance amount upon which 7- ELEVEN will pay interest upon notice to FRANCHISEE. 12. AUDITS. 7-ELEVEN shall cause at least one Audit to be made each calendar or other designated quarter and, upon FRANCHISEE's request, shall provide additional Audits for a fee of an amount equal to .5% of the Retail Book Inventory. 7-ELEVEN shall have the right, in 7-ELEVEN's discretion, to enter the Store and cause Audits to be made: (i) upon 72 hours notice during normal business hours; (ii) without notice, within 24 hours after 7-ELEVEN learns of a Robbery, Burglary, theft, or mysterious 5 disappearance of Inventory, Receipts, and/or cash register fund, or casualty; or (iii) without notice if Net Worth is less than the minimum determined pursuant to Paragraph 13 hereof, or if the last audit provided by 7-ELEVEN reflected an Inventory Overage or Inventory Shortage of more than an amount equal to 1% of the Retail Book Inventory. FRANCHISEE may cause Audits to be made by a reputable company upon 24 hours notice to 7-ELEVEN. Both parties shall receive copies of the report on each Audit. Audits shall be binding 24 hours after receipt of such report unless either party gives notice that such party believes the Audit to be incorrect. If such notice is given, either party may cause a re-audit to be made within 24 hours. If any such re-audit for FRANCHISEE becomes binding and results in an adjustment in any Inventory Shortage or Inventory Overage reflected by the last 7- ELEVEN Audit of more than 1% of the Retail Book Inventory reflected by such last Audit, the reasonable cost of such Audit shall be borne by 7-ELEVEN. The parties acknowledge that accurate Audits may be made while the Store is open for business. 13. LOAN REPAYMENT REQUIREMENT. FRANCHISEE shall repay the financing provided by 7-ELEVEN pursuant to this Agreement. If FRANCHISEE (i) is not a Previous Franchisee; (ii) is a Previous Franchisee who is executing this Agreement as the result of a request by 7- ELEVEN that FRANCHISEE change locations; (iii) is a Previous Franchisee and is paying 100% of the current Franchisee Fee (or, in the case of a Previous Franchisee taking by assignment and paying less than 100% of the then current Franchise Fee pursuant to certain rights granted to the assignor); or (iv) is a Transferring Franchisee; then FRANCHISEE's minimum Net Worth shall be that amount determined in accordance with the following schedule:
LOAN REPAYMENT SCHEDULE---TIME PERIOD MINIMUM NET WORTH ----------- ----------------- From the first day through the last $10,000 day of the first Year of Operation From the first day through the last An amount equal to thirty day of the second Year of Operation percent (30%) of Total Assets From the first day through the last An amount equal to thirty-five day of the third Year of Operation percent (35%) of Total Assets From the first day through the last An amount equal to forty day of the fourth Year of Operation percent (40%) of Total Assets From the first day through the last An amount equal to forty-five day of the fifth Year of Operation percent (45%) of Total Assets From the first day through the last An amount equal to fifty day of the sixth Year of Operation percent(50%) of Total Assets
6
From the first day through the last An amount equal to fifty-five day of the seventh Year of Operation percent (55%) of Total Assets From the first day through the last An amount equal to sixty day of the eighth Year of Operation percent(60%) of Total Assets From the first day through the last An amount equal to sixty-five day of the ninth Year of Operation percent (65%) of Total Assets From the first day through the last An amount equal to seventy day of the tenth Year of Operation percent(70%) of Total Assets. and thereafter, so long as FRANCHISEE operates the Store.
FRANCHISEE acknowledges that the term of this Agreement shall be determined in accordance with the provisions of Paragraph 7 hereof, and may be less than ten years. If FRANCHISEE is (i) a Renewing Franchisee; or (ii) a Previous Franchisee paying less than 100% of the current Franchise Fee (except as otherwise provided in this paragraph); and, in either case, FRANCHISEE's previous Agreement included a Loan Repayment Schedule, that Loan Repayment Schedule is deemed incorporated into this Agreement by reference as if set out verbatim herein, and FRANCHISEE's minimum Net Worth shall be determined by reference to that schedule, beginning at the same level on such schedule as was applicable upon the last effective day of FRANCHISEE's previous Agreement. If FRANCHISEE is (i) a Renewing Franchisee; or (ii) a Previous Franchisee paying less than 100% of the current Franchise Fee (except as otherwise provided in this paragraph); and, in either case, FRANCHISEE's previous Agreement did not include a Loan Repayment Schedule, FRANCHISEE's minimum Net Worth from the first day until the last day of the first Year of Operation, shall be an amount equal to 70% of Total Assets as of the last effective day of FRANCHISEE's previous Agreement, and thereafter through the remaining term of the Agreement, shall be an amount equal to 70% of Total Assets, determined and adjusted annually as herein set out. Notwithstanding the foregoing, in no event shall FRANCHISEE be required, at any time during the first Year of Operation, to maintain a Minimum Net Worth greater than 85% of total assets (as reflected on the Bookkeeping Records-Balance Sheet prepared for each Accounting Period by 7-ELEVEN for the Store) for the immediately preceding Accounting Period. 7 14. MERCHANDISING AND INVENTORY. On or before the Effective Date, 7-ELEVEN shall: (i) procure an initial Inventory (which, except for consigned merchandise, FRANCHISEE shall purchase for an amount equal to the Cost Value of the initial Inventory); (ii) debit FRANCHISEE's Open Account for any prepaid Operating Expenses; (iii) assist FRANCHISEE in cleaning and stocking the Store; and (iv) provide such other services as are required to make the Store ready to open for business. Thereafter, FRANCHISEE shall select, purchase from Bona Fide Suppliers, and stock merchandise that is adequate to provide customers with a type, quantity, quality, and variety consistent with the 7-Eleven Image, and shall carry in the store at all times the Proprietary Products listed on Exhibit G to this Agreement (the importance of which to the 7-Eleven System FRANCHISEE hereby acknowledges). The items listed on Exhibit G may be changed by 7-ELEVEN from time to time, but no more than twice each calendar year, effective on the first day of the Accounting Period beginning 30 days after notice to FRANCHISEE. Any items for which specifications are set forth in Exhibit G or the Foodservice Operations Manual shall meet or exceed those specifications. As to items (such as frozen carbonated beverages, prepared coffee, fountain beverages, deli products, etc.) which are customarily sold in standardized containers, FRANCHISEE shall use only standardized containers which conform to the type, style, and quality, and, where deemed appropriate by 7-ELEVEN, bear the distinctive identification designated by 7-ELEVEN and which are properly accounted for pursuant to the Agreement. 7-ELEVEN shall recommend vendors, merchandise, and supplies, and suggest retail selling prices. FRANCHISEE is not required to purchase merchandise or supplies from 7-ELEVEN or vendors it recommends (provided that Proprietary Products and items bearing the Service Mark shall be purchased by FRANCHISEE only from sources authorized by 7-ELEVEN to produce or deal in such items), to purchase merchandise recommended by 7-ELEVEN (except for FRANCHISEE's obligation to carry at all times the Proprietary Products listed on Exhibit G to this Agreement), or to sell merchandise at retail selling prices suggested by 7-ELEVEN. 15. 7-ELEVEN'S INDEMNITY. Except as otherwise provided herein, 7-ELEVEN shall be responsible for all fire and casualty loss or damage to the Store building and Equipment (specified in Exhibit B) unless caused by the intentional acts of FRANCHISEE or FRANCHISEE's agents or employees, and shall indemnify FRANCHISEE to the extent and from those losses specified in Exhibit C. This indemnification may be cancelled, and it and any related definition may be changed by 7-ELEVEN once during each calendar year, effective on the first day of the Accounting Period beginning 30 days after notice to FRANCHISEE. 16. FRANCHISEE'S INDEMNITY AND INSURANCE. FRANCHISEE shall be responsible for and indemnify 7-ELEVEN from all losses, except those specifically the responsibility of or indemnified by 7-ELEVEN. FRANCHISEE may obtain insurance in addition to the contractual indemnification described in Exhibit C. FRANCHISEE shall notify 7-ELEVEN if FRANCHISEE obtains any such insurance policy, and such policy shall name 7-ELEVEN as an additional insured. 7-ELEVEN shall have no obligation to process claims for FRANCHISEE. If FRANCHISEE has obtained such insurance, it shall be primary, and 7-ELEVEN's 8 indemnity shall be secondary to that insurance except for insurance coverage specifically endorsed to cover losses over and above the contractual indemnification. FRANCHISEE shall maintain worker's compensation insurance, including employer's liability coverage, with a reputable insurer or with a state agency, satisfactory to 7-ELEVEN, evidence of which (if with an insurer, reflecting that the premium has been paid and that 30 days prior notice to 7ELEVEN is required for any cancellation or change) shall be deposited with 7ELEVEN. FRANCHISEE shall promptly report to 7-ELEVEN all casualty losses and other events covered by indemnification or FRANCHISEE's insurance. 17. FRANCHISEE'S ADDITIONAL COVENANTS. FRANCHISEE shall: (i) devote his best efforts to the business of the Store and maximization of the Store's sales and gross profit, and shall make himself or herself available to meet with 7-ELEVEN at reasonable times, upon request by 7- ELEVEN; (ii) cause the Store to be designated only (and open for business for at least the hours) as specified in Exhibit D, identified only by the Service Mark, and operated only pursuant to the 7-ELEVEN System and, where applicable, in accordance with those standards set forth in the Foodservice Operations Manual, in a manner that will enhance the 7-ELEVEN Image; (iii) maintain at all times the minimum Net Worth specified in Paragraph 13 hereof; (iv) permit 7-ELEVEN access to all of the Store, Equipment, Inventory, Receipts, cash register fund, cash register readings, amusement machine, banking and other equipment readings, money order blanks, bank drafts, and Store supplies at any time and for any continuous time during Normal Operating Hours; (v) cause all sales of Inventory to be properly recorded at the time of sale at the retail prices set by FRANCHISEE and generally offered by FRANCHISEE to customers of the Store; (vi) wear, and cause Store employees to wear, apparel approved by 7ELEVEN while working in the Store; (vii) comply with those minimum standards of operation for the Foodservice Facility as are set forth in the Foodservice Operations Manual; and (viii) cause all Store employees to be certified by 7ELEVEN as qualified to work in the Foodservice Facility prior to beginning work therein and prominently display the certificates evidencing each employee's certification. FRANCHISEE shall not at any time: (i) use, or claim any right to (except pursuant to the terms of this Agreement) the Service Mark or any other trade indicia, including the Related Trademarks, or the goodwill represented by any of them or the 7-Eleven System, the Trade Secrets, or any copyright, copyrighted material or advertising owned or licensed by 7- Eleven; (ii) challenge or contest the validity or enforceability of any trade indicia, or rights therein, or any copyright, or copyrighted work, owned, used or licensed by 7-ELEVEN; (iii) make any unauthorized disclosure of any of the Trade Secrets; (iv) use any work which is substantially similar to a work subject to a copyright owned or licensed by 7-ELEVEN; or (v) use any name, mark, trade dress or other visual or audible material which is likely to cause confusion with or dilute the distinctiveness of trade indicia owned or licensed by 7- ELEVEN or commit any other act which may adversely affect or be detrimental to 7-ELEVEN, other FRANCHISEES, or any rights of 7-ELEVEN in or to the Service Mark, such trade indicia, including the Related Trademarks, the 7 Eleven Image, the 7-Eleven System, the Trade Secrets or any copyrights or advertising. FRANCHISEE acknowledges that any breach of any of the terms of 9 the covenants contained in the preceding sentence will result in irreparable injury to 7-ELEVEN and that 7-ELEVEN is entitled to injunctive relief to prevent any such breach. In the event that FRANCHISEE fails to comply with the quality or other reasonable operating standards as from time to time established by 7-ELEVEN and set out in the Foodservice Operations Manual, 7-ELEVEN shall give notice of such breach to FRANCHISEE. If FRANCHISEE fails to cure any such breach after notice by 7-ELEVEN and a reasonable opportunity to cure, 7-ELEVEN may perform or cause to be performed any necessary action to remedy such failure and charge FRANCHISEE's Open Account for the cost of such curative action. If, after having received two previous notices and opportunities to cure, FRANCHISEE receives a third notice of breach, 7-ELEVEN may, in its sole discretion (i) remove such portions, or all, of the Foodservice Facility as 7-ELEVEN deems appropriate, and charge FRANCHISEE's Open Account for the cost of such removal and of restoring the Store to its previous condition, or (ii) pursue all other remedies available to it under this Agreement. Notwithstanding the foregoing or anything in this Agreement to the contrary, in the event that FRANCHISEE's breach involves a grievous failure to comply with any of the standards set forth in the Foodservice Operations Manual intended to protect the health of persons consuming items prepared in the Foodservice Facility, or with federal, state, or local health regulations, 7-ELEVEN may, in its sole discretion, cause FRANCHISEE to immediately cease the service of any or all items from the Foodservice Facility, and FRANCHISEE shall not resume such service until such time as that breach has been cured to the sole satisfaction of 7-ELEVEN. 7-ELEVEN may enter upon the premises and take possession of the Store, Equipment, Inventory, Receipts, cash register fund, money order blanks, bank drafts, and Store supplies and continue the operation of the Store for the benefit and account of FRANCHISEE (or applicable heirs or legal representatives) pending the expiration or termination of this Agreement, or resolution of any dispute if: (i) the Store is not open for operation as provided in Exhibit D; (ii) a FRANCHISEE dies or becomes incapacitated (except as otherwise provided in Exhibit F -- "Survivorship"); or (iii) in the opinion of 7-ELEVEN, a divorce, dissolution of marriage, or felony proceeding involving a FRANCHISEE jeopardizes the operation of the Store or the 7-Eleven Image. FRANCHISEE, on behalf of himself, his heirs, and his legal representatives, consents to such operation of the Store by 7-ELEVEN, and releases and indemnifies 7-ELEVEN from any liability arising in connection with its operation of the Store pursuant to the terms of this Paragraph 17. 18. MAINTENANCE AND UTILITIES. Except to the extent otherwise assumed by 7-ELEVEN, FRANCHISEE shall be responsible for all maintenance, repairs, replacements, janitorial services, and expenses relating to the Store and Equipment, including: (i) maintenance of the Store, Equipment, other property in the Store, and landscaped areas in a clean, attractive, orderly, safe, and sanitary condition (and, where applicable, in accordance with those minimum standards set forth in the Foodservice Operations Manual) and in good repair and operating condition, reasonable wear and tear excepted; (ii) 10 replacement of light bulbs, ballasts, vault doors, glass, and door closers on the Store and Equipment; and (iii) cleaning of the parking lot and walk areas (including snow and ice removal), and interior of the Store. Except to the extent otherwise assumed by 7-ELEVEN or provided pursuant to the terms of any master lease of the Store, FRANCHISEE shall have contracts with reputable firms for maintenance of the Store and Equipment, and, if determined by 7-ELEVEN to be appropriate or necessary, for the landscaped areas outside the Store. Contracts for maintenance of the Store and Equipment shall either be those available through 7-ELEVEN, or shall cover services comparable to those provided under contracts available through 7-ELEVEN. Contracts for maintenance of the Store and Equipment must not include any maintenance services on the HVAC Equipment. Contracts for maintenance of the Store and Equipment, other than those available through 7-ELEVEN, shall provide for the performance of services, including preventative maintenance services, comparable to those services available from 7-ELEVEN at the time such contract is entered, and be with reputable, financially responsible firms, which (i) maintain adequate insurance and bonding; (ii) have personnel who are factory trained to service equipment of the type in the Store; and (iii) maintain an adequate supply of parts for the Equipment and tools. Contracts for landscape maintenance shall be with reputable, financially responsible firms. FRANCHISEE shall provide 7ELEVEN with a copy of any contract for maintenance which it enters with any outside maintenance firm. If the Store, the Equipment, or the landscape is not so maintained, and such condition continues 72 hours after notice or exists upon expiration or termination, 7-ELEVEN may cause such maintenance to be performed at FRANCHISEE's expense and/or may obtain maintenance contracts for the Store and Equipment and charge the FRANCHISEE for same. 7-ELEVEN shall, when it deems necessary: (i) repaint and repair the interior and exterior of the Store; (ii) replace Equipment, including, but not limited to, cash registers and point-ofsale computers; (iii) replace plate glass in front windows and front doors; (iv) repair the floor covering, exterior walls, roof, foundation, and parking lot; (v) maintain the structural soundness of the Store; (vi) pay for sewer, water, gas, heating oil, and electricity for operation of the Store; and (vii) maintain the HVAC Equipment; and FRANCHISEE hereby consents to such actions by 7- ELEVEN. 7-ELEVEN may charge the FRANCHISEE for any of the foregoing repairs, if, in 7-ELEVEN's opinion, such repairs are occasioned by FRANCHISEE's abuse or neglect. FRANCHISEE shall not modify, alter, or add to the Store or Equipment or discontinue use pursuant to the 7-Eleven System of any of the Equipment without the prior written consent of 7- ELEVEN. 19. TAXES. 7-ELEVEN shall pay all real and personal property taxes on the Store and Equipment (specified in Exhibits A and B). FRANCHISEE shall be solely responsible for and pay all other taxes, including, but not limited to, sales, inventory, payroll, business, and income taxes. 11 20. ADVERTISING. 7-ELEVEN shall provide FRANCHISEE with advertising materials included in the 7-Eleven System and may arrange such advertising of the Service Mark, the Related Trademarks, merchandise sold by 7Eleven Stores, or the 7-Eleven System as 7-ELEVEN in its sole opinion desires. FRANCHISEE shall properly utilize the Foodservice point-of-sale support and layouts designated by 7-ELEVEN in accordance with the design of the Foodservice Facility. 7-ELEVEN may, at its cost and in its discretion, at any time add to or change the signage in the Foodservice Facility. FRANCHISEE may be requested to participate in the costs of certain programs. FRANCHISEE may engage in such advertising as FRANCHISEE desires if that advertising accurately portrays any use of the Service Mark or the 7-Eleven System, does not jeopardize the 7-Eleven Image, pertains only to operation of the Store, is in compliance with all applicable laws, and does not breach any agreement binding on either party. Any advertising or display of the Service Mark by FRANCHISEE must have the prior approval of 7-ELEVEN. 21. INDEPENDENT CONTRACTOR. FRANCHISEE shall be an independent contractor and shall control the manner and means of the operation of the Store and exercise complete control over and responsibility for all labor relations and the conduct of FRANCHISEE's agents and employees, including, but not limited to, the day-to-day operations of the Store and all Store employees. FRANCHISEE and FRANCHISEE's agents and employees shall not (i) be considered or held out to be agents or employees of 7-ELEVEN or (ii) negotiate or enter any agreement or incur any liability in the name or on behalf of, or that purports to bind, 7-ELEVEN. No actions taken by FRANCHISEE or FRANCHISEE's agents or employees shall be deemed to be actions obligating 7ELEVEN. FRANCHISEE acknowledges that nothing herein shall create a fiduciary or similar relationship with 7-ELEVEN. 22. NONWAIVER. No act or omission by either party shall waive any right under or breach by the other of this Agreement unless such party executes and delivers a written waiver. The waiver by either party of any right under or breach of this Agreement shall not be a waiver of any subsequent or continuing right or breach. Specifically, but not by way of limitation, the acceptance of the 7-Eleven Charge shall not be a waiver of any pre-existing breach of the Lease provisions of this Agreement, regardless of 7ELEVEN's knowledge of such pre-existing breach at the time of acceptance of such payment. 23. DISCLOSURE. FRANCHISEE consents to disclosure by 7-ELEVEN to anyone of any information relating to this Agreement or contained in the Bookkeeping Records or Financial Summaries. 24. FORCE MAJEURE. Neither party shall be liable in damages to the other for any failure or delay in performance due to any governmental act or regulation, war, civil commotion, earthquake, fire, flood, or other disaster, or similar event, or for any other event beyond such party's control, if such party shall take all reasonable steps to mitigate damages caused by such failure or delay. 12 25. NOTICES. Notices shall be in writing and (i) delivered in person; (ii) mailed return receipt requested and postage paid; or (iii) delivered to FRANCHISEE's designee, as set forth in a written notice to 7-ELEVEN thereof or, if FRANCHISEE's designee cannot be promptly located, to an employee of FRANCHISEE at the Store, followed by mailing of such notice to FRANCHISEE, return receipt requested and postage paid. All notices by mail shall be addressed as follows: if to FRANCHISEE, to the address of the Store or the address shown on the signature page; and if to 7-ELEVEN, to the address shown on the signature page. Addresses may be changed by notice. Notices delivered to FRANCHISEE's designee or to an employee of FRANCHISEE shall be deemed received 24 hours after such delivery. Notices by mail shall be deemed received 3 days after mailing. Notwithstanding the foregoing, in the event of the death of FRANCHISEE, if (i) there is no surviving FRANCHISEE, (ii) the FRANCHISEE has not properly given notice to 7-ELEVEN of a person whom the FRANCHISEE believes is qualified and wishes to have the opportunity to franchise the Store after the death of FRANCHISEE, and (iii) there is no heir of FRANCHISEE known to 7-ELEVEN, notices may be given by publication of such notices in a newspaper of general circulation in the county where the Store is located, for a period of five days, to be published not less than five nor more than twenty days after 7-ELEVEN learns of the death of FRANCHISEE. 26. RENEWAL OF FRANCHISE. Upon the Expiration Date of the Agreement, other than termination by FRANCHISEE or by mutual agreement of FRANCHISEE and 7-ELEVEN, 7-ELEVEN will renew the franchise, provided the following conditions have been met: (i) 7- ELEVEN, in its sole discretion unilaterally elects to keep the Store open as a 7-Eleven Store; (ii) renewal and continued operation of the Store is permitted by law; (iii) the FRANCHISEE has met the Current Standards, described below, current at the time of notice (given approximately two years in advance of the Expiration Date), as determined by 7-ELEVEN, utilizing the then current Operational Review; (iv) the FRANCHISEE is not in Material Breach of the Agreement on the Expiration Date; (v) the FRANCHISEE has had a Net Worth in an amount equal to that required by Paragraph l3 hereof, for the one (l) year immediately prior to the Expiration Date; (vi) the FRANCHISEE executes and delivers to 7-ELEVEN the then current class of Agreement available for renewal of franchises, but with no franchise or renewal fee, and a mutual termination and release of this Agreement; (vii) the FRANCHISEE has not been served with three or more notices of Material Breach of the Agreement within the two (2) years prior to the Expiration Date; and (viii) the FRANCHISEE has completed any additional training requested by 7-ELEVEN, provided that, 7-ELEVEN shall bear those same types of costs for such training as are set forth in Exhibit D, and in reasonable amounts. Approximately two (2) years prior to the Expiration Date, the FRANCHISEE will be notified in writing of these renewal conditions, and FRANCHISEE shall participate in an Operational Review, which will be performed to determine whether FRANCHISEE's operation meets the Current Standards. The FRANCHISEE will then be informed in writing of those areas of FRANCHISEE's operation which do not meet the Current Standards. Thereafter, FRANCHISEE shall continue to participate in the Operational Review process, and 7-ELEVEN will provide FRANCHISEE with quarterly status reports on whether or not FRANCHISEE 13 is meeting Current Standards. In the event that a FRANCHISEE's operation is determined not to be in compliance with the Current Standards, the FRANCHISEE will be so advised approximately six (6) months (or such longer period as may be required by applicable law) prior to the Expiration Date and the FRANCHISEE will have the opportunity to sell his or her interest in the franchise for a premium in accordance with the provisions contained in the Agreement, within that six (6) month period (or such longer period as may be required). In the event that 7-ELEVEN is not, at the time of such renewal, offering a current form of Store Franchise Agreement, and is not at that time attempting to effect a registration of a current form of Store Franchise Agreement, then, if permitted by applicable law, 7- ELEVEN will renew the franchise on the same terms and conditions as set forth herein. 27. ASSIGNMENT. FRANCHISEE's interest under this Agreement shall not be encumbered, transferred, or assigned in any way, partially or completely, unless, as conditions precedent: (i) FRANCHISEE authorizes 7ELEVEN to provide the transferee with, and the transferee executes, a disclosure form containing a waiver and a release by the transferee of any claim against 7-ELEVEN for any amount paid to, or representation made by, FRANCHISEE; (ii) the transferee is offered, and executes, at 7-ELEVEN's option, the then current form of the "7-Eleven Store Franchise Agreement" or an assumption of this Agreement (in either event providing for the then current initial investment, 7-Eleven Charge, Franchise Fee and all other current terms), completes the then required training, and is otherwise determined to be qualified in 7-Eleven's sole opinion; (iii) FRANCHISEE executes, at 7-ELEVEN's option, a mutual termination and release of this Agreement, or an assignment of this Agreement and release, and an indemnity for any claim by the transferee; (iv) any amount due 7-ELEVEN is paid in full and arrangements satisfactory to 7- ELEVEN are made for the payment of any amount which may become due upon delivery of final Financial Summaries, including, at 7-ELEVEN's option, the payment of all premium monies, to be received by FRANCHISEE for the franchise, into the Open Account; (v) the Agreement has not been terminated and no termination is pending; and (vi) 7-ELEVEN shall have been given at least 5 business days (Monday through Friday) written right of first refusal by FRANCHISEE, upon the same terms. All documents must be acceptable to the parties. Subsequent to the assignment of FRANCHISEE's interest under this Agreement, FRANCHISEE shall have no further right, claim or interest in or to the franchise, the Store, or any assets used or acquired in conjunction therewith. 28. TERMINATION. This Agreement may be terminated by 7- ELEVEN (subject to FRANCHISEE's right to cure as set forth below) for the occurrence of any one or more of the following events (each of which FRANCHISEE acknowledges is a Material Breach and constitutes good cause for termination): a. Upon 45 calendar days notice to FRANCHISEE, and subject to FRANCHISEE's right to cure as set forth herein, in the event that: (i) 14 FRANCHISEE fails to operate the Store at least the hours set forth in Exhibit D or otherwise agreed to, in writing, prior to said reduction, unless said reduction in hours of operation: (A) is the result of governmental regulation, (B) does not result in less than the hours of operation required for a Minimum Hour Operation, and (C) is not directly or indirectly caused by FRANCHISEE's acts or failure to act; (ii) FRANCHISEE fails to use standardized trademarked containers; (iii) FRANCHISEE fails to comply with any agreement (including a master lease pertaining to the Store or Equipment) to which 7-ELEVEN is a party and a copy of the pertinent provisions of which has been provided to FRANCHISEE prior to the execution of this Agreement, or with the usual and normal terms of any lease transaction 7-ELEVEN may enter into regarding the Store or Equipment; (iv) FRANCHISEE fails to use the Store or Equipment solely in connection with FRANCHISEE's operation of the store; (v) FRANCHISEE fails properly to maintain the Store and Equipment; (vi) FRANCHISEE fails to obtain the prior written consent of 7-ELEVEN to make additions to the Store or Equipment or discontinue use pursuant to the 7 Eleven System of any of the Equipment; (vii) FRANCHISEE fails to remit insurance proceeds to 7-ELEVEN, which proceeds are due and owing to 7 ELEVEN pursuant to the terms of this Agreement; (viii) FRANCHISEE fails to indemnify 7-ELEVEN as required under the terms and conditions of Paragraph 16 of this Agreement; (ix) FRANCHISEE fails to provide any records or reports required by 7-ELEVEN or fails to cooperate in obtaining information from FRANCHISEE's vendors; (x) FRANCHISEE fails to comply with any provisions of Paragraph 33 hereof; or (xi) FRANCHISEE fails to comply with the quality or other reasonable operating standards as from time to time established and set forth in the Foodservice Operations Manual, where applicable. b. Upon 30 calendar days notice to FRANCHISEE, and subject to FRANCHISEE's right to cure as set forth herein, in the event that: (i) Net Worth is less than the minimum determined pursuant to Paragraph 13 of this Agreement, but more than an amount equal to one-half of the dollar amount of FRANCHISEE's minimum Net Worth or $l0,000, whichever is greater;(ii) FRANCHISEE improperly uses, through advertising or otherwise, or jeopardizes the Service Mark, the Related Trademarks, or the goodwill represented by any of them, or copyrights or advertising owned or licensed by 7-ELEVEN, the Store, the 7-Eleven System, or the 7 Eleven Image; (iii) FRANCHISEE purchases or sells any Proprietary Product or other product bearing the Service Mark which has been obtained from a source not authorized to produce or deal in such goods, the purchase of which by FRANCHISEE has been duly reported to 7-ELEVEN; (iv) FRANCHISEE fails to pay timely any taxes or debts connected with the Store which FRANCHISEE is obligated to pay or a tax lien is imposed upon the FRANCHISEE which affects the Store; (v) FRANCHISEE fails to maintain worker's compensation coverage; (vi) FRANCHISEE fails to maintain an Inventory of a type, quantity, quality and variety consistent with the 7 Eleven Image or fails to carry in the Store at any time any of the Proprietary Products listed on Exhibit G to this Agreement, as may be amended from time to time; (vii) FRANCHISEE fails to notify 7-ELEVEN in 15 an accurate and timely manner of discounts, allowances or premiums received by FRANCHISEE, or FRANCHISEE's retail selling prices; (viii) FRANCHISEE fails to obtain or continue any license, permit, or bond necessary, in 7-ELEVEN's opinion, for FRANCHISEE's operation of the Store; (ix) FRANCHISEE violates or fails to comply with any governmental law, rule, regulation, ordinance or order relating to the operation of the Store (specifically including, but not limited to, those relating to the sale of alcoholic beverages); (x) FRANCHISEE fails to repay the loan from 7-ELEVEN in accordance with this Agreement in the event the unpaid balance in the Open Account becomes immediately due and payable; (xi) FRANCHISEE fails to pay the 7-Eleven Charge when due. c. Upon 30 calendar days notice to FRANCHISEE, and with no right to cure, in the event that: (i) a voluntary or involuntary petition in bankruptcy is filed by or against FRANCHISEE, FRANCHISEE makes an assignment for the benefit of creditors, or a receiver or trustee is appointed; (ii) FRANCHISEE attempts to encumber, transfer, or assign, in part or in whole, any interest under the Agreement in breach of the terms and conditions set forth in Paragraph 27 of this Agreement; (iii) FRANCHISEE is convicted of, or pleads "Nolo Contendere" to, a felony not involving moral turpitude; (iv) FRANCHISEE fails to maintain an independent contractor relationship with 7-ELEVEN; (v) FRANCHISEE purchases or sells any Proprietary Product or other product bearing the Service Mark which has been obtained from a source not authorized to produce or deal in such goods, the purchase of which by FRANCHISEE has not been duly reported to 7-ELEVEN; or (vi) FRANCHISEE misrepresents, misstates, or fails or omits to provide material information required as a part of the qualification process. d. Upon 3 Business Days (excluding weekends and legal holidays) notice to FRANCHISEE, and subject to FRANCHISEE's right to cure as set forth herein, in the event that: (i) FRANCHISEE's Net Worth is less than the minimum determined pursuant to Paragraph 13 of this Agreement and less than an amount equal to one-half of the dollar amount of FRANCHISEE's minimum Net Worth or $10,000, whichever is greater; (ii) FRANCHISEE fails to properly record, deposit, deliver, or expend and report Receipts or to deliver deposit slips, cash reports and all supporting documents, receipts for cash purchases, and invoices or other reports of Purchases; (iii) FRANCHISEE, at any time during Normal Operating Hours, fails to permit any Audit provided for in Paragraph 12 of this Agreement or denies access to any part of the Store, Equipment, Inventory, Receipts, cash register fund, cash register receipts or readings, amusement machine, banking and other equipment readings, money order blanks, bank drafts, or Store supplies. e. Upon 3 Business Days notice to FRANCHISEE, and with no right to cure, in the event that: (i) FRANCHISEE vacates, deserts or otherwise abandons the Store, provided that immediately upon 7-ELEVEN's determination that the Store has been abandoned, 7-ELEVEN may take possession of the Store pursuant to the provisions of Paragraph 17 hereof 16 and operate the Store for FRANCHISEE's benefit during such notice period; or (ii) a FRANCHISEE is convicted of, or pleads "Nolo Contendere" to any charge which involves moral turpitude. Unless otherwise specified, and if FRANCHISEE has not previously been served with two notices of termination for any Material Breach within the three (3) years prior to the occurrence of a third Material Breach, FRANCHISEE shall have the right to cure any Material Breach set forth above prior to the expiration of the notice period for termination due to that Material Breach (or such shorter period as may be imposed by law or by any agreement to which 7-ELEVEN is a party), by taking such actions as 7-ELEVEN may reasonably determine to be necessary to restore 7-ELEVEN to substantially the same condition it would have held but for FRANCHISEE's breach. Notwithstanding the three Business Days notice provision above, FRANCHISEE shall have the right to an extended 30-day notice of termination, commencing on the date the termination notice is served upon FRANCHISEE, for any Material Breach if, prior thereto, FRANCHISEE has obtained Security Certification from 7-ELEVEN. If FRANCHISEE has failed to obtain Security Certification prior to notice of termination, FRANCHISEE may nevertheless obtain Security Certification by increasing Net Worth to 85% of FRANCHISEE's Security Asset Level, prior to the expiration of the notice period, at which time the termination date shall be extended to 30 days from the date of the original notice; provided however, that all other provisions of the notice of termination shall remain binding and effective. If FRANCHISEE fails to maintain all necessary requirements for Security Certification, 7-ELEVEN shall have the right to revoke same. If the revocation occurs while an extended 30-day notice of termination is in effect, FRANCHISEE shall be served written notice specifying the new date for termination, which date shall be not less than three Business Days from the date of such notice. FRANCHISEE shall thereafter have one opportunity prior to termination to regain Security Certification and have the termination date resetto the date which was in effect immediately prior to the time that theSecurity Certification was revoked, by increasing Net Worth through paid-in capital to an amount equal to at least 85% of FRANCHISEE's Security Asset Level as calculated immediately prior to the date that the notice of termination was received. This Agreement also may be terminated by: (i) agreement between the parties, (ii) by FRANCHISEE upon at least 72 hours (or shorter, if accepted by 7-ELEVEN) notice, or (iii) as provided in Paragraph 27. This Agreement may also be terminated by 7-ELEVEN upon at least 30 calendar days notice (or longer if required by law) in the event a FRANCHISEE dies or becomes incapacitated (except, if there is more than one FRANCHISEE and only one dies or becomes incapacitated, 7-Eleven may continue this Agreement with the survivor or person not so incapacitated, or upon written 17 request by 7-ELEVEN, 7-ELEVEN may execute with same a new "Store Franchise Agreement" for the Store in the then current form, but not differing in any financial terms from this Agreement, for the remainder of the existing term of this Agreement). This Agreement will terminate prior to the Expiration Date (i) 30 days prior to the loss of 7-ELEVEN's Leasehold Rights, (ii) upon a condemnation or transfer in lieu of condemnation which results in 7-ELEVEN's determination not to continue the Store as a 7-Eleven Store, (iii) upon casualty damage to the Store building or Equipment which cannot reasonably be repaired or replaced within 30 calendar days, or (iv) upon closing of the Store required by law (if such closing was not the result of a violation by 7ELEVEN). In the event that this Agreement is so terminated, FRANCHISEE may, for a period of 180 days following such termination, elect either to transfer to another 7-Eleven Store available for franchise (a "Transfer") or to receive a refund of a portion of the Franchise Fee paid by FRANCHISEE (a "Refund"), on the terms and conditions set forth below. If at the end of such 180 day period FRANCHISEE has not expressly elected otherwise, FRANCHISEE shall be deemed to have elected the Refund provision. In order to elect the Transfer, FRANCHISEE shall either sign a Store Franchise Agreement or the Transfer Election Form. Once the election is made, the transfer shall be completed, after reasonable prior notice, within a reasonable time. The following shall be conditions precedent to FRANCHISEE's ability, if eligible, to elect a Transfer: (i) FRANCHISEE may not be selling or assigning FRANCHISEE's interest in the Store for a premium, or transferring such interest to a third party pursuant to any available transfer mechanisms; (ii) the FRANCHISEE must not be in Material Breach of this Agreement at the time of such election; (iii) the FRANCHISEE must have had a Net Worth in an amount equal to that required by this Agreement, for the one (l) year immediately prior to the time of such election; (iv) the FRANCHISEE must execute and deliver to 7-ELEVEN the then current class of Agreement available for 7-Eleven franchises in the area in which the store to which FRANCHISEE wishes to transfer is located, but with no franchise fee, and a mutual termination and release of this Agreement; (v) the FRANCHISEE must not have been served with three or more notices of Material Breach of this Agreement within the two (2) years prior to the time of such election; and (vi) the FRANCHISEE must complete any additional training requested by 7-ELEVEN, provided that 7-ELEVEN shall bear those same types of costs for such training as are set forth in Exhibit D. Provided that these conditions have been satisfied, if FRANCHISEE elects a Transfer, said Transfer may be to any 7Eleven Store which is available for franchise, and for which FRANCHISEE is qualified. 7-ELEVEN shall not be responsible for any moving or relocation expenses of FRANCHISEE or for the payment of any premium amount, broker's fee, or any other payment to a third party arising in connection with such Transfer. No damages shall be payable by 7-ELEVEN to FRANCHISEE if one of the events giving FRANCHISEE the right to elect a Transfer or Refund occurs prior to the expiration of ten (10) years following the Effective Date of this Agreement, and the Transfer, or the Refund described in the immediately succeeding paragraph in lieu of the Transfer, shall be FRANCHISEE's sole remedy in such event. In the event 7-ELEVEN's Leasehold Rights expire or are 18 terminated (and are not renewed or otherwise extended) as a result of the acts or omissions of FRANCHISEE or FRANCHISEE's employees, the Term shall expire at the expiration or termination of 7-ELEVEN's Leasehold Rights, and FRANCHISEE shall have no right to a Transfer or Refund. If FRANCHISEE is eligible for and elects a Refund, the amount of said refund shall be computed by deducting from the Franchise Fee paid by FRANCHISEE upon the execution of this Agreement a Base Fee of $20,000. The remainder after such deduction shall be divided by 120. The resulting amount multiplied by the number of calendar months from the first day of the month next following the time FRANCHISEE elects to receive the refund through the month of the scheduled Expiration Date shall be refunded to FRANCHISEE. The following shall be conditions precedent toFRANCHISEE's ability, if eligible, to elect a Refund: (i) FRANCHISEE may not be selling or assigning FRANCHISEE's interest in the Store for a premium, or transferring such interest to a third party pursuant to any available transfer mechanisms; (ii) the FRANCHISEE must not be in Material Breach of this Agreement at the time of such election; (iii) the FRANCHISEE must have had a Net Worth in an amount equal to that required by the Agreement, for the one (l) year immediately prior to the time of such election; (iv) the FRANCHISEE must execute a mutual termination and release of this Agreement; and (v) the FRANCHISEE must not have been served with three or more notices of Material Breach of this Agreement within the two (2) years prior to the time of such election. No Transfer or Refund shall be available in the event that the Agreement is terminated by 7-ELEVEN for cause, or in the event FRANCHISEE voluntarily terminates the Agreement. If eligible, the FRANCHISEE may select either a Refund or a Transfer, and in no event shall FRANCHISEE have the right to both a Refund and a Transfer. 29. REFUND OF FRANCHISE FEE. If FRANCHISEE's interest under this Agreement is not being transferred to a third party, then upon l0 days notice given to 7-ELEVEN, within l70 days from the Effective Date, FRANCHISEE may terminate this Agreement and, upon FRANCHISEE's execution of a mutual termination and release (acceptable to 7-ELEVEN) and compliance with all other terms of this Agreement, 7-ELEVEN shall refund without interest an amount equal to the Franchise Fee less the training expenses set forth in Exhibit D which have been reimbursed or paid by 7-ELEVEN and less the costs set forth in Paragraph 30 upon a termination; provided, however, that if FRANCHISEE is a Previous Franchisee or a Renewing Franchisee, an amount equal to l0% of the Franchise Fee shall be deducted from such refund. This right to a refund is in no way related to the Refund right described in Paragraph 28. 30. CLOSE OUT PROCEDURE. Upon any expiration or termination of this Agreement, FRANCHISEE shall: (i) peaceably surrender the Store and Equipment (without additional notice, except as required by law and not waivable, all other notices to quit or vacate being expressly waived by FRANCHISEE) in as good condition as when received by FRANCHISEE, normal wear and tear excepted; 19 (ii) transfer the final Inventory (for the Cost Value of the final Inventory), of a type, quantity, quality, and variety consistent with the 7-Eleven Image, to 7-ELEVEN, or, at 7-ELEVEN's option, to the transferee (but only if any amount due 7-ELEVEN is paid in full and arrangements satisfactory to 7-ELEVEN are made for the payment of any amount which may become due 7-ELEVEN upon delivery of final Financial Summaries); (iii) transfer to 7-ELEVEN the Receipts, cash register fund, pre-paid Operating Expenses, money order blanks, bank drafts, and Store supplies; (iv) cease using the Service Mark, the Related Trademarks, and the 7-Eleven System, including the Trade Secrets; (v) return FRANCHISEE's copy of the Franchise Systems Manual and of the Foodservice Operations Manual; and (vi) return all Trade Secrets and other 7-Eleven System material. Within l0 days after such surrender and transfer, 7-ELEVEN shall: (i) credit FRANCHISEE for such Receipts, cash register fund, prepaid Operating Expenses, usual and reasonable amounts of Store supplies, the amount received by or due from 7-ELEVEN for transfer of the final Inventory, and $100 if FRANCHISEE's copy of the Franchise Systems Manual and of the Foodservice Operations Manual is returned; (ii) charge FRANCHISEE a $200 closing fee; and (iii) remit to FRANCHISEE any amount by which 7-ELEVEN estimates the Net Worth (excluding any amount due FRANCHISEE under Paragraph 29) will exceed the greater of $l0,000 or twenty-five percent (25%) of FRANCHISEE's Total Assets. Within 75 days after the last day of the month in which such surrender and transfer occurs, 7-ELEVEN shall deliver to FRANCHISEE final Financial Summaries together with any credit balance in the Open Account. Upon delivery of the final Financial Summaries, any unpaid balance in the Open Account shall be due and payable in full and FRANCHISEE shall immediately pay same to 7-ELEVEN. Any property belonging to FRANCHISEE and left in the Store after such surrender and transfer shall belong to 7-ELEVEN. 3l. ARBITRATION. The parties may, by mutual agreement, provide that any controversy relating to this Agreement shall be settled by individual arbitration. Unless the parties expressly agree otherwise, such arbitration shall be conducted in accordance with the rules of the American Arbitration Association; provided that, if such rules are contrary to this Agreement, this Agreement shall control. The parties shall bear their own expenses and shall share equally all expenses of the arbitrator(s) and the American Arbitration Association. If the parties do not mutually agree to arbitration, each party may pursue any rights and remedies available at law or in equity. 32. GOVERNING LAWS AND SEVERABILITY. This Agreement shall be governed by and construed according to the laws of the state where the Store is located. If, however, any provision, or portion hereof in any way contravenes the laws of any state or jurisdiction where this Agreement is to be performed, such provision, or portion thereof, shall be deemed to be modified to the extent necessary to conform to such laws, and still be consistent with the parties' intent as evidenced herein, or if such modification is impossible, to be deleted here from. If any part of this Agreement for any reason shall be declared invalid such decision shall not affect the validity of any remaining portion, which shall remain in full force 20 and effect. In the event that any material provision of this Agreement shall be stricken or declared invalid, 7-ELEVEN reserves the right to terminate this Agreement. 33. PERSONAL QUALIFICATION. This Agreement is being entered into by 7ELEVEN with the person(s) named on the signature page, upon the personal qualifications of, and upon the representation and agreement that the following person(s) will be the FRANCHISEE(S) of and will actively and substantially participate in the operation of the Store and will have full managerial authority and responsibility for the operation of the Store. No changes in the ownership and/or control of the franchise shall be made without the prior written approval of 7- ELEVEN. 34. COMPLETE AGREEMENT. THIS AGREEMENT, ANY OTHER AGREEMENTS SPECIFIED IN EXHIBIT D, AND THE EXHIBITS, AMENDMENTS, AND ADDENDA (WHICH ARE INCORPORATED HEREIN BY THIS REFERENCE AND MADE A PART OF THIS AGREEMENT) CONTAIN ALL AGREEMENTS BETWEEN FRANCHISEE AND 7- ELEVEN AND COVER THEIR ENTIRE RELATIONSHIP CONCERNING THE STORE, ALL PRIOR OR CONTEMPORANEOUS PROMISES, REPRESENTATIONS, AGREEMENTS, OR UNDERSTANDINGS BEING EXPRESSLY MERGED AND SUPERSEDED. NO AGENT OR EMPLOYEE OF 7-ELEVEN IS AUTHORIZED TO MAKE ANY MODIFICATION, ADDITION, OR AMENDMENT TO OR WAIVER OF THIS AGREEMENT UNLESS IN WRITING AND EXECUTED BY AN ASSISTANT SECRETARY OF 7-ELEVEN. FRANCHISEE REPRESENTS AND WARRANTS THAT ALL INFORMATION PROPERLY REQUESTED HAS BEEN SUPPLIED AND THAT NO REPRESENTATIONS HAVE BEEN MADE BY 7-ELEVEN (OR ANY AGENT OR EMPLOYEE) OR RELIED UPON BY FRANCHISEE AS TO THE FUTURE OR PAST INCOME, EXPENSES, SALES VOLUME OR POTENTIAL PROFITABILITY, EARNINGS OR INCOME OF THE STORE OR ANY OTHER LOCATION, OTHER THAN THE INFORMATION PROVIDED IN ITEM XIX OF 7-ELEVEN'S UNIFORM FRANCHISE OFFERING CIRCULAR AND SITE SPECIFIC INFORMATION PROVIDED IN 7-ELEVEN'S "HERE ARE THE FACTS" SUPPLEMENTAL DISCLOSURE. 35. SAVINGS CLAUSE. All obligations imposed by Paragraphs 16, 18,30, and 31 hereof which are not discharged prior to termination or expiration of this Agreement shall remain binding and effective until fully discharged, to the sole satisfaction of 7-ELEVEN. 21 IN WITNESS WHEREOF, FRANCHISEE and 7-ELEVEN have executed this Agreement this ________________ day of ___________________________________, 19________. 7-ELEVEN: THE SOUTHLAND CORPORATION _______________________________ ____________________________________ Signature Signature _______________________________ ____________________________________ Market Manager Assistant Secretary Full Name (Typed) Full Name (Typed) 7-Eleven Office/Store No.__________________________________________________ ________________________________________________________________________ ___ Address of Office Street ________________________________________________________________________ ___ City State Zip FRANCHISEE(S) ______________________________ ____________________________________ Signature Signature ______________________________ ____________________________________ Full Name (Typed) Full Name (Typed) Witness:_______________________ Witness: ___________________________ Witness of Above Signature Witness of Above Signature ________________________________________________________________________ ___ Address of Franchisee's Residence Street ________________________________________________________________________ ___ City State Zip 22 EXHIBIT 10.(ii)B(1) - A EXHIBIT A STORE FRANCHISEE ACCEPTS THE STORE AS IS IN ITS CONDITION ON THE DATE HEREOF, EXCEPT AS SPECIFICALLY NOTED HEREON. This Exhibit is based on information available or furnished to 7 ELEVEN on the date hereof. It is accurate to the best of 7-ELEVEN's knowledge and belief. A complete copy of any master lease is available on request. If there are any questions concerning this Exhibit or if a more complete explanation of any item is desired, please contact the Market Manager. If now owned by 7-ELEVEN, the Store may be sold and leased back. If leased by 7-ELEVEN, the Lease to FRANCHISEE is (or then will be) a sublease and the pertinent provisions of the master lease are included on Exhibit A (or will be on a revision). 7-ELEVEN reserves the right to designate the area in which amusement type machines will be located. 7-ELEVEN reserves from the Lease and/or Common Area such portions as it designates for: installation of banking or other similar equipment, attended or self service gasoline, a photo kiosk, or signs or bill boards, and such additional areas as 7-ELEVEN deems necessary for the installation, maintenance, repair, and operation of appurtenant equipment and 7 ELEVEN shall have unobstructed non-exclusive ingress and egress in connection therewith. FRANCHISEE agrees that 7-ELEVEN may at any time remodel the Store in accordance with one of 7-ELEVEN's remodel programs. 7-Eleven Store No.____________ Street________________________________ ______________________________________________________________________ City State Zip [ ] Plot Plan Attached [ ] Owned by 7-ELEVEN: Legal description of the property (attach copy from deed). Special Provisions; Use/Merchandise Restrictions: Other: [ ] All or any portion leased by 7-ELEVEN: Legal description of property (attach copy from master lease). The present term of the master lease expires on the ______ day of _______________________, ________. 7-ELEVEN has no obligation to renew or exercise any option to extend the master lease. If the 1 master lease is not renewed, the term of this Agreement shall expire 30 days prior to the expiration of the master lease. Special Charges: Maintenance: Co-operative Advertising: Common Area (including landscaped areas): Other: Special Provisions: Hours: Signs: Parking: Use/Merchandise Restrictions: Exclusives: Condemnation: Rules and Regulations: Other: [ ] State and Local Ordinances Zoning: Signs: Hours: Parking: Alcoholic Beverages: Gasoline: Other: 2 FRANCHISEE: _______________________ (Signature) FRANCHISEE: _______________________ (Signature) 7-ELEVEN: __________________________ (Signature) DATE: _______________________________ 3 EXHIBIT 10.(ii)B(1)-B EXHIBIT B EQUIPMENT FRANCHISEE ACCEPTS THE EQUIPMENT AS IS IN ITS CONDITION ON THE DATE HEREOF, EXCEPT AS SPECIFICALLY NOTED HEREON. This Exhibit is based on information available or furnished to 7- ELEVEN on the date hereof. It is accurate to the best of 7-ELEVEN's knowledge and belief. A complete copy of any master lease is available on request. If there are any questions concerning this Exhibit or if a more complete explanation of any item is desired, please contact the Market Manager. If now owned by 7-ELEVEN, the Equipment may be sold and leased back. If leased by 7-ELEVEN, the Lease to FRANCHISEE is (or then will be) a sublease and the pertinent provisions of the master lease are (or will be) applicable. 7-ELEVEN may, at its discretion, replace any of the Equipment, including, but not limited to, cash registers and point of sale computers. Any of the Equipment may be removed, or new Equipment (of a type or category other than currently exists) added, by 7-ELEVEN. New or additional 7- ELEVEN Equipment shall be added to this list. 7-Eleven Store No.___________________________ 7-ELEVEN -------- Description Make Model Serial No. 7-E ID Owned Leased - ----------- ---- ----- ---------- ------ ----- ---- - -- 1 7-ELEVEN -------- Description Make Model Serial No. 7-E ID Owned Leased - ----------- ---- ----- ---------- ------ ----- ---- - -- The following Gasoline and other specified equipment, and any and all replacements or additions thereto, are excluded from the Lease of Equipment under this Agreement. 7-ELEVEN -------- Description Make Model Serial No. 7-E ID Owned Leased - ----------- ---- ----- ---------- ------ ----- ---- - -- FRANCHISEE: ______________________ Signature) FRANCHISEE: ______________________ (Signature) 7-ELEVEN: ______________________ Signature) DATE: ______________________ 2 EXHIBIT 10.(ii)B(1) - C EXHIBIT C 7-ELEVEN'S INDEMNIFICATION THIS IS NOT AN INSURANCE BINDER, CERTIFICATE,OR POLICY 7- ELEVEN CONTRACTUAL INDEMNIFICATION 7-Eleven Store No.______________________ LIABILITY. Subject to the limitations, exclusions and conditions set forth herein, the Franchisee shall be provided with contractual indemnification for losses up to a maximum of $500,000 per occurrence, which arise out of or as a result of bodily injury, personal injury or property damage incurred by any third party, excluding an employee acting within the course and scope of his employment or any other agent of the Franchisee, in connection with the Franchisee's lawful operation of the Store. For purposes of this Exhibit C, an occurrence shall be defined as that term is ordinarily used in a standard Commercial General Liability policy. Bodily injury, personal injury and property damage shall be defined as those terms are ordinarily used in a standard Commercial General Liability policy. The contractual indemnification provided to the Franchisee pursuant to this Exhibit C is that which would normally be provided under those portions of a standard Commercial General Liability policy relating to coverages regarding bodily injury and property damage liability and personal injury liability, specially endorsed to include coverage for liquor liability, but otherwise subject to the exclusions set forth in a standard Commercial General Liability policy, except to the extent otherwise limited or excluded by this Exhibit C. The contractual indemnification provided to the Franchisee under this Exhibit C shall not be construed to constitute an insurance binder, certificate or policy nor shall the Franchisee be considered to be an insured of 7-Eleven nor have the protections or rights normally associated with an insured vis-a-vis an insurer. Accordingly, this Exhibit C is to be construed as a contractual indemnity. FIRE AND OTHER PERILS: Up to full replacement cost of the Inventory and Store supplies for direct losses as a result of fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicle, smoke, vandalism, and malicious mischief. ROBBERY: (i) For a single loss of Receipts and cash register fund as the result of a Robbery, an amount equal to $50 for each cash register in operation at the time of the Robbery, and one-half of the full replacement cost for a single loss of Inventory and Store supplies, as 1 a result of a Robbery, with a maximum aggregate coverage for any single loss of $200. (ii) Up to the full replacement amount of the Current Deposit for a single loss of Receipts as a result of a Robbery, less $l00; provided Receipts were being properly prepared for deposit or transported to the Bank or between more than one 7-Eleven Store franchised by FRANCHISEE while en route to the Bank, and where, in 7-ELEVEN's opinion, all receipts are properly accounted for in accordance with this Agreement and appropriate security measures were taken. (iii) Up to the full replacement amount equal to the sum of the Current Deposit, and the Receipts from the current Collection Period, for a single loss of Receipts as a result of a Safe Robbery, less $l00; provided that all Receipts are properly accounted for in accordance with this Agreement and where, in 7- ELEVEN's opinion, appropriate security measures were taken. (iv) Up to the lesser of $2,500 or the amount shown in account l0 (or such appropriate account) on the Financial Summaries for a single loss of the cash register fund (1) as the result of a Safe Robbery or (2) while the cash register fund is being prepared for deposit or transported to or from the Bank or (3) while the cash register fund is being transported between more than one 7-Eleven Store franchised by FRANCHISEE while en route to or from the Bank; and provided the amount taken to the Bank is noted in the Cash Report and a receipt is obtained from the Bank showing the correct amount of money obtained. BURGLARY: (i) Up to full replacement cost for a single loss of Inventory (other than tobacco products) as a result of a Burglary, less $l00. (ii) Up to the lesser of the actual cost of tobacco products taken or the equivalent of the total reasonable purchases, at cost, of tobacco products for the Store for the prior 12 weeks, divided by 6 (with a limit of an amount equal to twice the average weekly purchases, at cost, minus $100 until the Store has been open 12 weeks), for a single loss of tobacco products in the Inventory as a result of a Burglary, less $l00. (iii) An amount equal to the sum of the Receipts from the immediately previous Collection Period plus the cash register fund for a single loss of Receipts as a result of a Safe Burglary, less $l00, provided all receipts are properly accounted for in accordance with this Agreement. (iv) The maximum aggregate exclusion for a single loss as the result of a Burglary and/or Safe Burglary shall be $l00. 2 CONDITIONS AND EXCLUSIONS. Notwithstanding anything to the contrary stated herein, the Franchisee's contractual right to be indemnified for losses under this Exhibit C shall be expressly subject to the limitations, exclusions and conditions set forth in this Paragraph. Neither employees nor agents of the Franchisee shall be considered indemnities or thirdparty beneficiaries of this Exhibit C. Further, this Exhibit C does not provide indemnification to the Franchisee for losses arising from the assumption of liability by the Franchisee pursuant to any contract or agreement. The Franchisee's contractual right to be indemnified and 7- Eleven's contractual obligation to indemnify the Franchisee for losses under this Exhibit C shall be expressly contingent upon and subject to the Franchisee's cooperation, to 7-Eleven's satisfaction, in any investigation, prosecution or defense of any claim or lawsuit conducted by 7-Eleven, 7-Eleven's insurance company or any representative or law firm designated by 7-Eleven. The failure of the Franchisee to cooperate in any such investigation, claim or suit, to 7-Eleven's satisfaction, shall immediately release 7-Eleven of its contractual obligation to indemnify the Franchisee in connection with such loss. The Franchisee shall not be entitled to be indemnified for any loss associated with a robbery or burglary, unless the Franchisee, within twenty-four (24) hours of such loss, files a report with the appropriate law agency and furnishes a representative of 7-Eleven with a notice and proof of loss report (acceptable to 7-Eleven), a copy of the report filed with the law agency and any report required to be filed with the insurance company. In addition, the Franchisee shall be indemnified for Receipts only if the Receipts have been properly handled in accordance with the terms of the Agreement and the Franchisee has properly completed a Cash Report for the Receipts and timely submitted same to a representative of 7Eleven. Notwithstanding the above, 7-Eleven's contractual obligation to indemnify the Franchisee shall not extend to any loss suffered by the Franchisee which is otherwise deemed under the Agreement to be the responsibility of the Franchisee, nor shall the Franchisee be indemnified for the loss of any Inventory and/or Store supplies located outside of the Store building at the time of such loss. In addition, the Franchisee shall have the duty to use its best efforts to promptly mitigate any loss for which it may be entitled to be indemnified. The Franchisee's failure to mitigate such loss shall relieve 7-Eleven of its contractual obligation to indemnify the Franchisee for same. The Franchisee will not be indemnified for any cash register fund loss if the Franchisee has refused to allow an audit of that fund by 7-Eleven within twelve (12) months prior to such loss. The Franchisee shall not be entitled to be indemnified for punitive or exemplary damages or fines. The Franchisee shall not be entitled to be indemnified for and 7-Eleven shall be released of its contractual obligation to indemnify the Franchisee for any loss suffered if (i) the Franchisee is in breach of the Agreement and such breach causes, creates or contributes to the occurrence of such loss; or (ii) such loss is caused by, results from or occurs in connection with an intentional act committed 3 by the Franchisee or by an agent or employee of the Franchisee. FRANCHISEE: ______________________ (Signature) FRANCHISEE: ______________________ (Signature) 7-ELEVEN: ______________________ (Signature) DATE: ______________________ 4 EXHIBIT 10.(ii)(B)(1) - D EXHIBIT D Complete All Blanks. (a)FRANCHISEE's operation of the Store shall be designated only as"________________________________________________________, doing business as 7-Eleven Store No. _______________________________" and, so long as permitted by law, the Store shall be open for business (except, at FRANCHISEE's option, Christmas day) _____________ hours per week. (For a 24- Hour Operation, use 168 hours per week; if the store is to be operated less than 24 hours per day, use the actual number of hours per week the store is to be operated.) (b) The Franchise Fee was $_______________. The Down Payment on the initial unpaid balance in the Open Account was $_______________. The Down Payment also includes a $_______________ contribution toward the estimated Cost Value of the initial Inventory, a $_______________ payment toward the estimated initial governmental fees for necessary licenses, permits, and bonds (an Operating Expense), and a $_______________ payment for the initial cash register fund. (c) The initial annual interest rate charged by 7-ELEVEN to the FRANCHISEE on the unpaid balance in the Open Account shall be _______%. The annual interest rate charged by 7-ELEVEN to FRANCHISEE on the unpaid balance in the Open Account shall be adjusted, effective each March 1, and continuing in effect through the last day of February of the succeeding year, to equal the rate which is two percent in excess of the prime rate charged by NationsBank (or any successor) as of the first working day of each calendar year during which such adjustment becomes effective. In the event that the interest charged hereunder exceeds the maximum amount permitted by applicable law, the excess amount so charged shall be deemed automatically credited to the principal balance of the loan, it being the intent of 7-ELEVEN not to charge an amount of interest that would be in violation of any applicable law. (d) The annual interest rate paid by 7-ELEVEN to FRANCHISEE on a credit balance in the Open Account pursuant to Paragraph 11 shall be equal to the prime rate at NationsBank (or any successor), as of the first working day of each calendar year minus two percentage points, effective each subsequent March 1. (e) Each FRANCHISEE must attend both store and classroom training. If FRANCHISEE is only one individual, FRANCHISEE designates ________________________________________ to receive training. Each participant must successfully complete each phase of training in order to continue the training process. (f) The training expenses to be reimbursed or paid by 7-ELEVEN are: for transportation, and accommodations if applicable as arranged by 7ELEVEN, (up to) $____________ for store training and $_____________ for classroom training (airline tickets will be provided by 7-ELEVEN); for 1 food, $_____________ daily for each participant; for lodging, where and as deemed necessary by 7-ELEVEN, at 7-ELEVEN's cost. All other expenses deemed necessary by trainee will be borne by FRANCHISEE. (g) The percentage used to adjust retail to cost for determining Cost Value and Inventory Variation shall be computed by dividing the prior twelve (12) months' Purchases at cost (including delivery charges, cost equalization, and adjustment for discounts and allowances received) by the prior twelve (12) months' Purchases at retail. Purchases of Vending Supplies, container deposits, consigned merchandise and product markdowns are excluded from Purchases at cost as well as Purchases at retail. Until the Store has been in operation three months, the average percentage for all 7-Eleven Stores in the market based on the prior twelve (12) months will be used; thereafter, the percentage will be computed for the Store based on the prior twelve (12) months (or lesser available period) operation of the Store. (h) Checks from 7-ELEVEN to FRANCHISEE shall be payable to _____________________________. (i) FRANCHISEE's draw to be remitted weekly shall be $_______________, unless changed by mutual agreement of FRANCHISEE and 7-ELEVEN. (j) 7-Eleven Charge: (i) For a 24-Hour Operation: The 7-Eleven Charge for the Store is 52% of the Gross Profit, except as may be increased pursuant to subsections (ii) or (iii) of this Paragraph (j). (ii) Reduced Hours of Operation: In the event that the hours of operation of the Store are restricted to less than a 24-Hour Operation as the result of governmental regulation not caused, directly or indirectly, by FRANCHISEE's acts or failure to act, or if 7-ELEVEN agrees to operation of the Store on less than a 24-Hour basis, the 7-Eleven Charge shall be increased on a pro-rata basis, rounded to the nearest 0.1% (rounded up at .05% and above) of the Gross Profit, by adding to 52% the product resulting from multiplying the Hourly Factor times the difference between 168 and the Weekly Hours of Operation; provided that, in no event shall the hours of operation of the Store be less than from 7:00 a.m. to 11:00 p.m. daily, 7 days per week (except, at FRANCHISEE's option, Christmas Day). In the event the hours of operation of the Store are reduced other than as provided in this Paragraph (j)(ii), the 7-Eleven Charge for the Store may be calculated pursuant to Paragraph (j)(iii) below. 2 (iii) Increase of 7-Eleven Charge: If during any Accounting Period the Store is not open for business the number of hours per week specified in this Exhibit D, 7-Eleven may, at its sole discretion, increase the FRANCHISEE's 7-Eleven Charge for any such Accounting Period by adding to 52% an amount equal to (i) 4% of the Store's Gross Profit if the Store is operated as a Limited-Hour Operation or (ii) 6% of the Store's Gross Profit if the Store is operated as a Minimum-Hour Operation. This increase in the 7-Eleven Charge is not 7-ELEVEN's sole remedy, but is in addition to any other remedies available to 7ELEVEN in the event of a reduction in the hours of operation of the Store by the FRANCHISEE. (k) The Gross Income for an Accounting Period (where the Store is open for business throughout the full period) shall be at least equal to: (i) for a 24-Hour Operation, $60,000 per calendar year, prorated to $164.39 per day multiplied by the number of days in such Accounting Period; (ii) for a Limited-Hour Operation, $40,000 per calendar year prorated to $109.59 per day multiplied by the number of days in such Accounting Period; or (iii) for a Minimum-Hour Operation, $30,000 per calendar year prorated to $82.20 per day multiplied by the number of days in such Accounting Period; provided however, that all of the FRANCHISEE's separate income out of the Store, including, but not limited to, Gross Profit from alcoholic beverage sales and gasoline commissions or income, shall be included to determine Gross Income. (l) Other special provisions (specify): FRANCHISEE: ______________________ (Signature) FRANCHISEE: ______________________ (Signature) 7-ELEVEN: ______________________ (Signature) DATE: ______________________ 3 EXHIBIT 10.(ii)(B)(1) - E EXHIBIT E DEFINITIONS 7-ELEVEN STORE No.____________________ "Accounting Period" means a calendar month of FRANCHISEE's operation of the Store, except that if the Effective Date, expiration, or termination or surrender of the Store and Equipment occurs during any calendar month, that portion of said month which follows the Effective Date or precedes such other events shall be an Accounting Period. "Audit" means a physical count of the Inventory (priced at retail value determined as provided in the Agreement), Receipts, cash register fund, cash, money order blanks, and bank drafts, pursuant to 7-ELEVEN's normal procedures. "Bank" means the bank or similar institution designated by 7-ELEVEN for the Store and, specifically, the account established therein for the Store. "Bona Fide Suppliers" means persons or entities regularly conducting the business of supplying merchandise, supplies or services to retail businesses and performing all of the functions normally associated with such activities. "Bond" means a financial guarantee payment bond in favor of 7-ELEVEN, in a form and from a reputable company satisfactory to 7-ELEVEN and in a principal amount at least equal to the greater of FRANCHISEE's Total Assets (at cost) as reflected on the then current Bookkeeping Records, or $50,000.00. "Bookkeeping Records" means financial summaries in the form of income statements, balance sheets, reports reflecting credits and charges to FRANCHISEE's Open Account, inventory records and such other records and reports relating to FRANCHISEE's income, expenses, profits and losses, assets and liabilities as 7-ELEVEN elects to prepare. 7-ELEVEN may, in its discretion, change the format, manner or timing of the records it prepares and the procedures for collecting or compiling data for such reports. The inventory records and reports derived from such records shall be maintained by 7-ELEVEN by using the retail inventory method (see definition of "Retail Book Inventory"), and the retail value will be adjusted to cost as described in Exhibit D. The Bookkeeping Records shall be based upon information supplied to 7-ELEVEN by FRANCHISEE, information obtained by 7ELEVEN from Audits, Store inspections and vendors, and, where necessary or appropriate, information based upon estimates or factors concerning Store transactions. "Burglary" means the stealing of Inventory from within the Store when the Store is closed, all doors are duly closed and locked, and entry is by actual force evidenced by visible marks made by tools, explosives, electricity, or chemicals. 1 "Cash Report" means that form or other method of reporting FRANCHISEE's Receipts as designated by 7-ELEVEN from time to time. FRANCHISEE must complete a Cash Report for each Collection Period. Each Cash Report must indicate the time and date at which the Collection Period ended. "Cash Variation" means the difference between (i) Receipts reflected on the applicable cash register tapes, less Receipts expended by FRANCHISEE for Purchases or Operating Expenses (and reported to and verified by 7-ELEVEN), coupons, over-rings, and refunds to customers and (ii) Receipts deposited or delivered to 7-ELEVEN pursuant to the Agreement. "Collection Period" means each period of time for which FRANCHISEE reports Receipts. FRANCHISEE's initial Collection Period shall commence at the time FRANCHISEE begins the operation of the Store, and may end, at FRANCHISEE's discretion, at any time within FRANCHISEE's first 24 hours of operation. Each subsequent Collection Period shall begin immediately upon the ending of the immediately preceding Collection Period, and must be 24 hours (unless otherwise agreed by 7-ELEVEN). "Cost of Goods Sold" means the Cost Value of Inventory at the beginning of the Accounting Period (not including the value of consigned gasoline), plus the cost of Purchases during the Accounting Period (including delivery charges, cost equalization, and adjustment for discounts and allowances received), and minus the Cost Value of the Inventory at the end of the Accounting Period. Adjustment will be made so that any Inventory Variation and bad merchandise (due to FRANCHISEE causes) will not be included in Cost of Goods Sold. Retailer discounts and allowances (including promotional and display allowances) paid to 7- ELEVEN and allocated or reasonably traceable to Purchases shall be credited to Cost of Goods Sold, except that 7-ELEVEN shall retain reimbursements for its expenditures pursuant to vendors' co-operative advertising or other similar programs where 7-ELEVEN is partially or wholly reimbursed (or where costs are shared) for advertising expenditure programs. Those not allocated or reasonably traceable to Purchases shall be credited to Cost of Goods Sold on the basis of sales of the Store compared with sales of all stores affected. Discounts, allowances, and the value of premiums received by FRANCHISEE shall be credited to Cost of Goods Sold. 7-ELEVEN shall not be obligated to credit to Cost of Goods Sold any discounts or allowances not collected. For purposes of determining the 7-Eleven Charge allocable to a given Collection Period, Cost of Goods Sold for that Collection Period shall be determined on a pro rata basis by the number of Collection Periods in the Accounting Period in which that Collection Period falls. "Cost Value" means the cost value of the Inventory at any time determined by: deducting from the Retail Book Inventory the included retail value of all consigned merchandise, deposit bottles, and Vending Supplies; adjusting from retail value to cost as specified in Exhibit D; and adding the wholesale cost of all deposit bottles and Vending Supplies. 2 "Current Deposit" means all Receipts obtained during the immediately preceding Collection Period and accounted for by the proper completion of the most recent 7-ELEVEN Cash Report relating to those Receipts. "Current Standards" _ See Paragraph 26 of the Agreement. "Down Payment" means the initial amount actually paid by FRANCHISEE to 7ELEVEN on the unpaid balance in the Open Account, if any, as set out in Paragraph (b) of Exhibit D. "Effective Date" means the date FRANCHISEE first opens the Store for business under the Agreement. "Excess Investment Draw" means an amount equal to the amount by which FRANCHISEE's Net Worth exceeds FRANCHISEE's total assets (as reflected on the Bookkeeping Records-- Balance Sheet prepared for each Accounting Period by 7-ELEVEN for the Store). "Expiration Date" means the date this Agreement expires and terminates by its own terms, other than termination because of a breach of this Agreement by FRANCHISEE. "Financial Summaries"_ See Paragraph 10 of the Agreement. "Foodservice" means the unique, comprehensive system for retailing a limited menu of uniform, quality, freshly prepared food products and related items for take-out purposes, developed by 7-ELEVEN, with those changes approved and adopted by 7-ELEVEN from time to time. "Foodservice Facility" means that area or those areas of the Store and concomitant Equipment from time to time used for the Foodservice operation. "FRANCHISEE" means the individual(s) (jointly and severally if more than one) signing the Agreement as FRANCHISEE. "Gross Income" means Gross Profit less the 7-Eleven Charge. "Gross Profit" means Net Sales less Cost of Goods Sold. "Hourly Factor" means .l07. "HVAC Equipment" means the heating, ventilation and air conditioning unit and related equipment, duct work, filters and refrigerant gas for the air conditioning unit, but does not include water heaters, equipment and refrigerant gases for refrigerated vaults and cases, and other equipment used in connection with the sale of Inventory from the Store. 3 "Inventory" means all merchandise for sale from the Store, including deposit bottles, Vending Supplies, and consigned merchandise (other than consigned gasoline). "Inventory Overage" means any difference at retail value remaining after (i) the Retail Book Inventory is deducted from (ii) the retail value of the Inventory as reflected by a binding Audit. "Inventory Shortage" means any difference at retail value remaining after (i) the retail value of the Inventory as reflected by a binding Audit is deducted from (ii) the Retail Book Inventory. "Inventory Variation" means any Inventory Overage or Inventory Shortage, adjusted from retail value to cost as specified in Exhibit D. Inventory Variation is charged or credited, as applicable, to Operating Expenses. "Lease" _ See Paragraph 6 of the Agreement. Except as otherwise provided herein, in the event that an allocation of the 7-Eleven Charge to the lease of Equipment is required by law or ordinance, or for taxation purposes, the amount of the 7-Eleven Charge allocable to the lease of the Equipment shall be equal to the monthly straight line depreciation of the Equipment. "Leasehold Rights" means 7-ELEVEN's rights to possession of the Store under any pre-existing or subsequent lease of the Store, whether pursuant to the current term of a lease, an option thereto which is exercised by 7-ELEVEN, or a renegotiation of the lease by 7-ELEVEN. 7- ELEVEN has no obligation to exercise any options or other contractual rights, or otherwise enter into any agreement for the purpose of retaining Leasehold Rights. "Limited-Hour Operation" means FRANCHISEE's operation of the Store for less than a 24-Hour Operation, but not less than 136 hours a week, including from 7 a.m. to 11 p.m. daily, 7 days a week (except, at FRANCHISEE's option, Christmas day). "Loan Repayment Schedule" _ See Paragraph 13 of the Agreement. "Material Breach" _ See Paragraph 28 of the Agreement. "Minimum-Hour Operation" means FRANCHISEE's operation of the Store less than a Limited-Hour Operation but not less than from 7 a.m. to 11 p.m. daily, 7 days a week (except, at FRANCHISEE's option, Christmas day). "Monthly Draw" means an amount equal to 70% of the total increase in Net Worth over the three Accounting Periods immediately prior to the date upon which Monthly Draw is calculated, divided by three, less any amounts reflected on FRANCHISEE's most recent Bookkeeping Records as distributions to FRANCHISEE of additional draw, unauthorized draw, or Excess Investment Draw; but, in no event, greater than an amount which would reduce Net Worth to the minimum determined pursuant to Paragraph l3 of the Agreement. 4 "Net Income" means Gross Income less Operating Expenses. "Net Sales" means (i) Receipts reflected on the applicable cash register tapes (plus any additional receipts of the Store) less (ii) over-rings, refunds to customers, taxes collected incidental to sales, and the face value of money orders (not including the value or sales of consigned gasoline). "Net Worth" means the cash register fund, the Cost Value of the Inventory, Store supplies, receivables, prepaids, refundable deposits, and any portion of the initial cost of an alcoholic beverage license employed in FRANCHISEE's operation of the Store which is charged to the Open Account and carried on the Bookkeeping Records (except nominal governmental fees which are an Operating Expense); less FRANCHISEE's payables and accruals from FRANCHISEE's operation of the Store, as reflected on the Financial Summaries. "Normal Operating Hours" means the hours the Store is continually obligated to remain open, as set out in Exhibit D or the hours the Store is actually staying open, if more. "Open Account" _ See Paragraph 11 of the Agreement. "Operating Expenses" means the expenses (or credits) incurred by FRANCHISEE in the operation of the Store for: (i) payroll; (ii) payroll taxes (including unemployment, worker's compensation, payroll insurance, and social security contributions); (iii) Inventory Variation; (iv) Cash Variation; (v) maintenance, repairs, replacements, laundry expense, and janitorial services; (vi) telephone; (vii) Store supplies, including grocery bags and other Store-use items; (viii) nominal governmental fees of licenses, permits, and bonds; (ix) interest; (x) returned checks; (xi) inventory and business taxes; (xii) bad merchandise due to FRANCHISEE neglect; (xiii) advertising and other miscellaneous expenditures which 7ELEVEN (in its discretion and regardless of the classification by FRANCHISEE or the Internal Revenue Service) determines to be Operating Expenses. "Previous Franchisee" means a FRANCHISEE, other than a Renewing Franchisee or a Transferring Franchisee, who has, at any previous time, been a FRANCHISEE of 7-ELEVEN. For purposes of Paragraph 13 of the Agreement, a Previous Franchisee shall include, but not be limited to, a FRANCHISEE taking by way of a contractual right of survivorship from a Previous Franchisee, a FRANCHISEE taking by way of a son/daughter transfer from a Previous Franchisee, or a FRANCHISEE corporation in which a FRANCHISEE or Previous Franchisee has or had an interest. "Proprietary Products" means certain products developed by 7-ELEVEN which are unique to 7-ELEVEN by virtue of either their ingredients, formulas, manufacturing or distribution processes, or the manner in which they are 5 presented to consumers and which 7-Eleven supports through the use of trademarks, copyrights, quality control, advertising, promotions, trademarked packaging, and other activities as listed on Exhibit G to the Agreement. "Purchases" means all of FRANCHISEE's purchases of merchandise for sale from the Store. "Receipts" means all sales proceeds (whether cash, check, vendor draft, credit instrument, or other evidence of receipt), money order revenues, discounts or allowances received by FRANCHISEE, and miscellaneous income (including rentals, royalties, fees, commissions and amounts received by FRANCHISEE from on-site currency operated machines) and the value of premiums received from FRANCHISEE's operation of the Store. (Receipts from on-site currency operated machines are deemed received at the time the proceeds are collected from the machine). "Related Trademarks" means the trademarks, service marks, trade names, trade dress and other trade indicia, excluding the Service Mark, which 7ELEVEN may authorize the FRANCHISEE to use from time to time as part of the 7-Eleven System and all other combinations of the word or numeral "7" and the word or numeral "Eleven," in any language, other than those comprising the Service Mark. By way of example, Related Trademarks include the trademarks BIG GULP and BIG BITE, as well as the distinctive trade dress of 7-Eleven Stores. "Renewing Franchisee" means a FRANCHISEE who is executing this Agreement as a renewal of a previous Agreement, for the same store as was franchised under that previous Agreement. "Retail Book Inventory" means that book inventory maintained as part of the Bookkeeping Records which reflects the retail value of the Inventory. The Retail Book Inventory initially shall be determined by an Audit by 7- ELEVEN of the initial Inventory. The Retail Book Inventory thereafter shall be adjusted by: adding the retail value (based on FRANCHISEE's then current retail selling prices) of subsequent Purchases (other than gasoline); subtracting Net Sales of items reflected in the Retail Book Inventory; adding or subtracting the retail value of all retail selling price increases or decreases of items reflected in the Retail Book Inventory, as reported by FRANCHISEE to or determined from surveys of the Inventory by 7ELEVEN; subtracting the included retail value of any merchandise used as Store supplies and out-of-date date-coded merchandise or merchandise which is damaged or deteriorated as reported by FRANCHISEE to and verified by 7ELEVEN; and adding any Inventory Overage or subtracting any Inventory Shortage. The Retail Book Inventory at expiration or termination shall be determined by an Audit by 7-ELEVEN. The Retail Book Inventory shall be appropriately adjusted to reflect the results of each binding Audit. The retail value of the Inventory for purposes of an Audit shall be determined: for the initial Audit and the Audit on expiration or termination, at 7ELEVEN's then current suggested retail selling prices; and for any other Audit, at FRANCHISEE's then current retail selling prices. 6 "Robbery" means the stealing of Receipts (other than a Safe Robbery), Inventory, or Store supplies from FRANCHISEE or FRANCHISEE's agents or employees by acts or threat of violence in the Store or while Receipts are being transported directly from the Store to the Bank designated by 7ELEVEN or between more than one 7-ELEVEN Store franchised by FRANCHISEE while en route to the Bank, or while the cash register fund is being transported directly from the Bank to the Store or between more than one 7Eleven Store franchised by FRANCHISEE while en route from the Bank, and in the presence of FRANCHISEE or FRANCHISEE's agents or employees, if not committed by FRANCHISEE or FRANCHISEE's agents or employees. "Safe Burglary" means the stealing of Receipts or cash register fund from a vault, safe, or security drop box in the Store and approved by 7- ELEVEN when the Store is closed and all doors of the Store and of such vault, safe, or security drop box are closed and locked and entry thereto is by actual force evidenced by visible marks made by tools, explosives, electricity, or chemicals. "Safe Robbery" means the stealing of Receipts from a vault, safe, security drop box, or vending tubes in a safe in the Store and approved by 7-ELEVEN by acts or threat of violence committed in the presence of FRANCHISEE or FRANCHISEE's agents or employees, if not committed by FRANCHISEE or FRANCHISEE's agents or employees. "Security Asset Level" means FRANCHISEE's total assets (as reflected on the Bookkeeping Records-- Balance Sheet prepared for each Accounting Period by 7-ELEVEN for the Store) for the immediately preceding twelve (12) full Accounting Periods (or the number of full Accounting Periods following the Effective Date of the Agreement, if less), divided by twelve (or the number of full Accounting Periods following the Effective Date of the Agreement, if less). "Security Certification" means 7-ELEVEN's written acknowledgement that FRANCHISEE has complied with the Security Certification requirements by providing 7-ELEVEN with security equal to at least 85% of FRANCHISEE's Security Asset Level, in the form of any one or a combination of the following: (i) Net Worth; (ii) a bond in a form and with a company satisfactory to 7-ELEVEN; or (iii) any other security approved in writing by 7-ELEVEN in its sole discretion. "Security Interest" means FRANCHISEE's right and interest in the Inventory, Receipts and premium and going concern value, if any, all of which have been assigned to 7-ELEVEN as security for the repayment of any unpaid balance in the Open Account. "Service Mark" means the service mark logo and design registered in the United States Patent and Trademark Office (Registration No. 920,897) and the 7-Eleven service mark registered in the United States Patent and Trademark Office (Registration No. 798,036). "7-ELEVEN" means The Southland Corporation, a Texas corporation. 7 "7-Eleven Charge" means an amount equal to the percent of Gross Profit specified in Exhibit D, reduced if necessary (where the Store is open for business) so that Gross Income for each Accounting Period shall be at least equal to the amount specified in Exhibit D. "7-Eleven Image" means the public acceptance, favorable reputation, and extensive goodwill achieved by 7-ELEVEN and its Franchisees in the U.S. and elsewhere for the Service Mark, the Related Trademarks and for 7-Eleven Stores operated pursuant to the 7-Eleven System. "7-Eleven System" means the system for the fixturization, layout, merchandising, promotion (sometimes through products or services consisting of or identified by trademarks, service marks, trade names, trade dress symbols, other trade indicia, copyrights, or advertising owned or licensed by 7-ELEVEN), and operation of extended-hour retail stores operated by 7ELEVEN or its Franchisees in the U.S. and elsewhere and identified by the Service Mark, which system provides groceries, take-out foods and beverages, dairy products, non-food merchandise, specialty items, and various services, emphasizes convenience to the customer, and has been developed and is being continually refined, modified and updated by 7ELEVEN based on experience and new marketing developments to meet and serve the changing preferences of the customer. "Total Assets" means the total assets, (as reflected on the Bookkeeping Records _ Balance Sheet prepared for each Accounting Period by 7-ELEVEN for the Store) for the 12 Accounting Periods prior to the first day of each Year of Operation, divided by 12. "Trade Secrets" means the "Franchise Systems Manual," the "Foodservice Operations Manual," and all other manuals, forms, and materials included in the 7-Eleven System. The Trade Secrets are restricted proprietary information belonging to and exclusively for the benefit of 7-ELEVEN and its FRANCHISEES. "Transferring Franchisee" means a FRANCHISEE who is executing this Agreement as a result of electing a Transfer (as defined in Paragraph 28 hereof) pursuant to the provisions of a 7-Eleven Store Franchise Agreement or an amendment thereto. "24-Hour Operation" means FRANCHISEE's operation of the Store 24 hours a day, 7 days a week (except, at FRANCHISEE's option, Christmas day). "Vending Supplies" means those containers, ingredients, condiments, and other items used or furnished in connection with the preparation or sale of a specific product and so designated by 7-ELEVEN. "Weekly Hours of Operation" means the number of hours of operation per week established by agreement of FRANCHISEE and 7-ELEVEN and/or as required by governmental regulation, provided the restriction does not reduce the operation past a Minimum Hour Operation. 8 "Year of Operation" means the period from the Effective Date, or, as appropriate, the first day of an Accounting Period on or after the anniversary date of the Effective Date, until the first day of the Accounting Period on or following the next anniversary date of the Effective Date. FRANCHISEE: ______________________ (Signature) FRANCHISEE: ______________________ (Signature) 7-ELEVEN: ________________________ (Signature) DATE: ____________________________ 9 EXHIBIT 10(ii)B(i) - F EXHIBIT F SURVIVORSHIP 7-ELEVEN STORE NO.__________________ Notwithstanding anything in this Agreement or the Exhibits hereto to the contrary: l. In the event of the death of a FRANCHISEE, 7-ELEVEN will operate the Store for the benefit of FRANCHISEE's estate from the period beginning on the death of FRANCHISEE and ending on the earliest of the following events: (l) sale of the franchise by the estate and mutual termination of the Agreement, all in accordance with the terms hereinbelow and in the Agreement; (2) the Effective Date of a new 7-Eleven Store Franchise Agreement with a designated individual as provided herein; or (3) the expiration of 30 days, or such longer notice period provided in the Agreement. "Death of the Franchisee" shall be defined as the death of the individual or simultaneous death of the individuals who executed the Agreement. The period beginning with the death of the FRANCHISEE and ending upon the occurrence of one of the above referenced events is referred to hereinafter as the "Notice Period". Upon occurrence of any of the events specified above, the Agreement shall terminate as provided herein. "Simultaneous death," as used herein, is defined as meaning the death of all of the FRANCHISEES within a 72 consecutive hour period, whether or not the deaths arise from the same casualty or occurrence. For any Accounting Period during the Notice Period the Open Account will not be charged an amount for Inventory Variation or for payroll and payroll taxes (including FRANCHISEE's draw amount) in excess of the average experience of the Store for the three calendar months prior to the death of FRANCHISEE, or such shorter period as the Agreement was in effect, and 7-ELEVEN will indemnify FRANCHISEE's estate from any claims which arise during such operation. Any balance due FRANCHISEE from 7-ELEVEN will be paid to the estate in accordance with the Agreement. 2. FRANCHISEE may designate in writing, and notify 7-ELEVEN pursuant to the notice provision in the Agreement, up to three (3) individuals, listed alternatively and in order of preference, who FRANCHISEE believes are qualified and each of whom individually wishes to have the opportunity to franchise the Store after the death of FRANCHISEE. FRANCHISEE acknowledges and agrees that the opportunity to franchise the Store will be offered to one individual (and his or her spouse) only, and will be offered to one individual at a time in accordance with the order in which the individuals are designated on the notice provided to 7-ELEVEN. To be effective, the notice of designation must be either personally delivered or postmarked not later than one (l) day prior to FRANCHISEE's death. Such designation may be changed by FRANCHISEE in writing to 7- ELEVEN, effective upon 1 receipt. If there are designated individuals, 7-ELEVEN, after the death of FRANCHISEE, will promptly attempt to locate and arrange an interview with the designated individual and will advise the estate whether or not that designated individual has been located and is qualified in accordance with 7-ELEVEN's then current qualification procedures. If more than one individual is designated and the first designated individual cannot be reasonably located, is not qualified under 7-ELEVEN's then current qualification procedures, or is not interested in obtaining a franchise for the Store, 7-ELEVEN will attempt to locate and determine the qualifications and interest of the second designated individual, and likewise for the third individual, if necessary, and the estate will be advised accordingly. If, before the expiration of the Notice Period, one of the designated individuals qualifies and desires to franchise the Store, and the estate mutually terminates the Agreement, waives, in form satisfactory to 7-ELEVEN, any claim it may have to sell the franchise, and pays or makes arrangements satisfactory to 7ELEVEN for payment of any amount due 7-ELEVEN under the Agreement, and in the case of an Incorporated Franchisee, if the designated individual acquires ownership or control of all of the authorized, issued, and outstanding shares of the Incorporated Franchisee, 7-ELEVEN will sign a new 7-Eleven Store Franchise Agreement for the Store in the then current form with said designated individual (if qualified). In addition, in the case of an Incorporated Franchisee, after the designated individual has acquired ownership or control of all of the authorized, issued, and outstanding shares of the Incorporated Franchisee and signed a new 7-Eleven Store Franchise Agreement for the Store in the then current form, 7-ELEVEN will effectuate the assignment of the new 7-Eleven Store Franchise Agreement to the former Incorporated Franchisee or other corporation, provided that all then current conditions required by 7-Eleven in its sole discretion for assignment have been satisfied. No franchise fee will be charged, there will be no change in the financial terms from those in the Agreement until such time as the term of the Agreement would have expired if not earlier terminated, at which time the financial terms set forth in the new 7-Eleven Store Franchise Agreement executed by said designated individual shall become effective for the remainder of the term thereof. 3. If during the Notice Period neither of the first two events specified in Paragraph 1 above occurs, and the estate delivers to 7-ELEVEN a written request indicating that it desires to arrange a sale of the franchise and has and will continue to make good faith efforts to find a qualified purchaser, and the estate pays or makes arrangements satisfactory to 7-ELEVEN for the payment of any amount due 7-ELEVEN under the Agreement, 7- ELEVEN will extend to the estate the opportunity to arrange a sale of the franchise for a total of 120 days from the death of FRANCHISEE (including the Notice Period) and will not refranchise the Store during that time unless the estate waives in writing any claim it may have to sell the franchise (even though the Agreement previously has terminated); however, from the 31st through the 120th day, the Store shall be operated by and for the benefit of 7-ELEVEN. 2 4. An officer of 7-ELEVEN shall review any arrangement between 7- ELEVEN and the estate, including application of the terms hereof, before implementation of that arrangement. 5. For and in consideration of 7-ELEVEN allowing FRANCHISEE to designate a successor to FRANCHISEE's interest, and as a condition precedent to 7-ELEVEN being bound by the terms hereof, FRANCHISEE does hereby agree and covenant with 7-ELEVEN: a. That notwithstanding any probate or estate administration proceedings involving FRANCHISEE or FRANCHISEE's estate, or disputes by, among, or between the FRANCHISEE's designees, heirs, legatees, beneficiaries, successors in interest or the like, the time limits established by the terms hereof shall control and govern any obligations of 7-ELEVEN or rights of any party arising from the terms hereof; and b. That in the event a dispute arises concerning the disposition of the franchise pursuant to the Agreement, and such dispute involves 7-ELEVEN or its rights or obligations, any expenses reasonably incurred by 7-ELEVEN in that dispute, to include attorneys' fees and court costs, shall be borne either by the Open Account or FRANCHISEE's estate, or both, as determined by 7- ELEVEN. The terms used herein shall have the meanings defined in the Agreement. FRANCHISEE: ______________________ (Signature) FRANCHISEE: ______________________ (Signature) 7-ELEVEN: ________________________ (Signature) DATE:____________________________ 3 EXHIBIT 10(ii)B(i) - G EXHIBIT G REQUIRED PROPRIETARY PRODUCTS Following is a list of the Proprietary Products that FRANCHISEE is required to carry in the Store at all times. Any of these items may be deleted, or new items may be added, by 7-ELEVEN at any time but no more than twice each calendar year. PRODUCT DESCRIPTION AND PRESENTATION Slurpee-R- Frozen carbonated beverage, prepared with a variety of high- quality syrups, properly brixed, and served in standardized,trademarked Slurpee-R- cups. Big Gulp-R- Post-mix fountain beverage, prepared with a variety of high- quality syrups, properly brixed, and served in standardized, trademarked 32 ounce Big Gulp-R- cups. Super Big Gulp-R- Post-mix fountain beverage, prepared with a variety of high- quality syrups, properly brixed, and served in standardized, trademarked 44 ounce Super Big Gulp- R- cups. 7-Eleven-R- Coffee Fresh brewed coffee, prepared with the regionally approved 7-Eleven- R- coffee blend, and served in standardized, trademarked 7-Eleven-R- coffee cups. Big Bites-R- High quality, all-beef hot dog, prepared using the 7-Eleven-R- approved spice mix, offered in both 8:1 lb. and 1/4 lb. sizes, and served in standardized, trademarked Big Bites-R- hot dog containers. 1 FRANCHISEE:_____________________________ (Signature) FRANCHISEE:_____________________________ (Signature) 7-ELEVEN:_______________________________ (Signature) DATE:____________________________________ 2 Tab 3 EX-10.(III)(A)(8) 5 1995 PERFORMANCE PLAN Exhibit 10(iii)(A)(8) [SOUTHLAND LOGO] THE SOUTHLAND CORPORATION 1995 PERFORMANCE PLAN (As Adopted January 1995) (Amended July 1995) THE SOUTHLAND CORPORATION 1995 PERFORMANCE PLAN SECTION 1: PURPOSE The purpose of this Plan is to (a) provide incentives and rewards to eligible Employees of the Corporation by allowing Participants to earn Awards based upon the Corporation's performance; (b) assist the Corporation in attracting, retaining, and motivating employees of high ability and experience; (c) direct the focus of management on maximizing the value of the Corporation as a going concern over a multi-year period; and (d) promote the long-term interests of the Corporation and its shareholders. SECTION 2: DEFINITIONS 2.1 ACTUAL OPERATING EARNINGS, shall mean Operating Earnings in a particular Plan Year, as set forth on the Corporation's internal financial statements for such Plan Year, calculated in accordance with GAAP; both the calculation of Operating Earnings and the internal financial statements being certified by the Corporation's Chief Accounting Officer (1) as accurate and (2) that such Operating Earnings were calculated, and such financial statements were prepared, in a manner consistent with the accounting principles utilized in preparation of the Corporation's annual budget. 2.2 ANNUAL AWARD shall mean the amount payable to a Participant pursuant to Section 5.5 if the Annual Threshold Operating Earnings set forth on Exhibit 1 are achieved. 2.3 ANNUAL AWARD POOL shall mean the amount available for payment of Annual Awards as a result of the achievement of Actual Operating Earnings in excess of Threshold Operating Earnings in any Plan Year as described in Section 5.4. 2.4 AWARD shall mean the amount payable, either as an Annual Award or Cumulative Award, to Participants in this Plan. 2.5 BENEFICIARY shall mean a Participant's beneficiary designated in accordance with Section 7. 2.6 BOARD shall mean the Board of Directors of the Corporation. 2.7 BONUS AMOUNT shall mean the annual amount payable, as of the Determination Date (at 100% of normal bonus) under the Corporation's Annual Performance Incentive Plan, in each Plan Year for Employees in Grade Levels 50-58 and 41-44 or such equivalent Grade Levels as may be established. 2.8 BUDGETED OPERATING EARNINGS shall mean the amount of Operating Earnings included in the Corporation's annual budget for a particular year, as determined during the budgeting process, generally in the fourth quarter of the preceding year. 2.9 CAUSE shall mean acts constituting insubordination, theft, dishonesty, fraud, embezzlement or other acts detrimental 1 to the interests of the Corporation, or any breach of any employment, nondisclosure, noncompetition or other contract with the Corporation, all as determined in good faith by the Committee. 2.10 COMMITTEE shall mean the Compensation and Benefits Committee of the Board or, if such committee has not been designated, shall mean the Board. 2.11 CORPORATION shall mean The Southland Corporation, a Texas corporation, and any of its wholly owned subsidiaries, and any successor or assignee of The Southland Corporation, by merger, consolidation, acquisition or otherwise, of all or substantially all of the assets thereof. 2.12 CUMULATIVE AWARD shall mean an amount payable to participants based on the achievement of Excess Actual Operating Earnings in either, or both, Plan Years. 2.13 CUMULATIVE AWARD POOL shall mean the amount available to pay Cumulative Awards as a result of the achievement of Excess Actual Operating Earnings. 2.14 DEPARTMENT shall mean the Corporation's Compensation and Benefits Department. 2.15 DETERMINATION DATE shall mean the date designated by the Committee each Plan Year, or, if no date is so designated, May 1 of each Plan Year, for certain specified purposes under the Plan. 2.16 DISABILITY shall mean the mental or physical disability, either occupational or non-occupational in cause, which, in the opinion of the Committee, on the basis of medical evidence satisfactory to it, prevents the employee from engaging in any occupation or employment for wage or profit, which has continued for at least 12 months and is likely to be permanent. 2.17 DIVESTITURE shall mean the sale of, or closing by, the Corporation of the business operations in which the Participant was employed. 2.18 EMPLOYEE shall mean any person employed by the Corporation. 2.19 EXCESS ACTUAL OPERATING EARNINGS shall mean Actual Operating Earnings in a Plan Year that are in excess of the Actual Operating Earnings required to pay 100% of the Annual Awards under this Plan for the particular Plan Year. Excess Actual Operating Earnings shall be used to fund the Cumulative Award Pool. 2.20 GAAP shall mean generally accepted accounting principles in the United States as in effect from time to time. 2.21 GRADE LEVEL shall mean a Participant's grade level classification (as such grade levels are specified in the Corporation's exempt salary administration and/or job evaluation programs) as of the Determination Date in the Plan Year for which his or her Grade Level is to be determined. 2.22 OPERATING EARNINGS shall mean the earnings of the Corporation before non-operating income and expense items, interest expense, taxes2 and extraordinary items, as set forth on the Corporation's internal financial statements for such Plan Year, calculated in accordance with GAAP and in a manner consistent with the accounting principles utilized in preparation of the Corporation's annual budget for such Plan Year; both the calculation of Operating Earnings and the internal financial statements being certified by the Corporation's Chief Accounting Officer (1) as accurate and (2) that such Operating Earnings were calculated, and such financial statements were prepared, in a manner consistent with the accounting principles utilized in preparation of the Corporation's annual budget. 2.23 PARTICIPANT shall mean any Employee who is selected to participate in the Plan as of the Determination Date. 2.24 PERFORMANCE UNIT shall mean a unit of measurement for purposes of determining a Participant's Award under the Plan, as more fully described in Section 5.2. 2.25 PLAN shall mean The Southland Corporation 19935 Performance Plan, as it may be amended from time to time. 2.26 PLAN PERIOD shall mean the two-year period commencing on January 1, 19935, and ending on December 31, 19946. 2.27 PLAN YEAR shall mean a calendar year occurring during the Plan Period. 2.28 RETIREMENT shall mean, in the case of any Participant, the date established by the Corporation as his or her normal retirement date, generally when the Participant reaches age 65 (or earlier if approved by the President of the Corporation). 2.29 THRESHOLD OPERATING EARNINGS for a Plan Year shall equal (a) Budgeted Operating Earnings for such Plan Year, or, if the Committee so determines, a different amount that is based on Budgeted Operating Earnings, with the number as determined for each year to beless (b) the Bonus Amount payable to eligible Participants for such Plan Year divided by 35% and shallor, if the Committee so determines, a different amount that is based on Budgeted Operating Earnings, with the number, as determined for each year to be as set forth in Exhibit 1. SECTION 3: ADMINISTRATION 3.1 COMMITTEE. This Plan shall be administered by the Committee. 3.2 COMMITTEE'S POWERS. Subject to the express provisions hereof and in addition to the other powers set forth in this Plan, the Committee shall have the authority, in its sole and absolute discretion, to (i) determine criteria for eligibility for inclusion in this Plan; (ii) adopt, amend, and rescind administrative and interpretive rules and regulations relating to this Plan; (iii) construe this Plan or any agreements contemplated hereunder; and (iv) make all other determinations and perform all other acts necessary or advisable for administering this Plan, including the delegation of such ministerial acts and responsibilities as the Committee deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any agreement contemplated hereunder in the manner and to the extent it shall deem expedient to carry it into effect and it shall be the sole and final judge of the necessity of such action. The determination of the Committee on the matters referred to in this Section 3.2 shall be final and conclusive. 3.3 ADMINISTRATION. The Department shall (i) prepare and distribute designation of beneficiary forms to Participants; (ii) 3 maintain records of designations of Beneficiaries; (iii) prepare communications to Participants; (iv) prepare reports and data required by the Corporation, the Committee and government agencies; (v) obtain data requested by the Committee; and (vi) take such other actions requested by the Committee as are necessary for the effective implementation of the Plan. SECTION 4: PARTICIPATION 4.1 ELIGIBILITY. Eligibility for participation in the Plan shall be limited to those Employees who, as of the Determination Date, are in Grade Levels 50-58 or 41-44 or such equivalent Grade Levels as may be established, and who, in the judgment of the Committee or the President of the Corporation, have the ability and opportunity to influence significantly the Corporation's performance over a multi-year period. Employees shall be selected for participation in the Plan as of the Determination Date each year, as approved by the President of the Corporation. SECTION 5: AWARDS 5.1 GENERAL. A Participant shall be entitled to an Annual Award or Cumulative Award out of the applicable Award Pool with respect to any Plan Year or the Plan Period, if the performance level described in Section 5.3 is achieved. 5.2 PERFORMANCE UNITS. (a) Based on the Grade Level of each Participant as of the Determination Date in a Plan Year, the Committee shall grant to each Participant for such Plan Year a specified number of Performance Units as determined under subsection (b) below. Performance Units shall be solely units of account, shall imply no ownership interest in the Corporation, and shall carry no value outside the context of the Plan. (b) The number of Performance Units to be granted to each Participant for each Plan Year shall equal the Bonus Amount payable to a person earning the mid-point of such Participant's Grade Level (as determined as of the Determination Date) for such Plan Year. 5.3 Performance Level. If, at the end of the Plan Period, Cumulative Actual Operatingare greater than Cumulative Threshold Operating Earnings 5.3 PERFORMANCE LEVEL. The performance level under the Plan can be satisfied either on an annual or a cumulative basis. If at the end of any year in the Plan Period, Actual Operating Earnings exceed Threshold Operating Earnings, Earnings, then the performance level under the Plan is satisfied for that year and the Annual Award Pool shall be determined in accordance with Section 5.4. 5.4 CALCULATION OF AWARD POOL. After giving effect to the exclusions provided in Section 5.8, tThe amount to be credited to the Annual Award Pool for 1995 shall be determined as follows: if 1995 Actual Operating Earnings exceed 1995 Threshold Operating Earnings, as defined in Section 2.29, then $.15 of every excess 4 dollar of 1995 Actual Operating Earnings shall be contributed to the Annual Award Pool for 1995. In addition, if Actual Operating Earnings are sufficient to pay 150% of the annual performance incentive ("API") payable to all covered employees in theCorporation's 1995 Annual Performance Incentive Plan, then $.35 of every dollar of 1995 Actual Operating Earnings earned in excess of the amount necessary to pay 150% of the API payable pursuant to the Annual Performance Incentive Plan, shall be contributed to the Annual Award Pool, up to the maximum Annual Awards payable for 1995 under this Plan, as described in Section 5.6. If there are Excess Actual Operating Earnings in any Plan Year, then until 200% of the API payable to all covered employees pursuant to the Annual Performance Incentive Plan has been paid pursuant to the Annual Performance Incentive Plan, $.15 of every dollar of Excess Actual Operating Earnings shall fund theCumulative Award Pool for this Plan and, after 200% of the API has been paid to all covered employees pursuant to the Annual Performance Incentive Plan, then $.35 of every additional dollar of Excess Actual Operating Earnings shall be designated to fund the Cumulative Award Pool for this Plan, up to the maximum Awards payable for the Plan Period, as described in Section 5.6. The 1996 Annual Award Pool shall be determined according to the same formula as 1995, unless a different formula is approved by the Committee. An Annual Award that is based on achievement of only the 1995 performance level shall be based on the Performance Units granted for that year only; an Annual Award that is based on the achievement of the 1996 performance level shall be based on the Performance Units granted for that year only; and any Cumulative Awards that are based on the achievement of Excess Actual Operating Earnings in either Plan Year shall be based upon the total Performance Units granted for both years in the Plan Period. 5.5 AWARDS. Subject to the limitations under Section 5.6, a Participant shall be entitled to an Annual Award equal to (a) the Annual Award Pool determined under Section 5.4 multiplied by (b) a fraction, the numerator of which is the number of such Participant's Performance Units granted for that Plan Year, and the denominator of which is the total Performance Units for that Plan Year granted and outstanding under the Plan to persons who are to participate in the Annual Awards for that Plan Year. If the Award is a Cumulative Award based on Excess Actual Operating Earnings from either Plan Year, then a Participant shall be entitled to a Cumulative Award equal to (a) the Cumulative Award Pool determined under Section 5.4 multiplied by (b) a fraction, the numerator of which is the number of such Participant's Performance Units granted for the Plan Period, and the denominator of which is the total Performance Units granted and outstanding under the Plan to persons who are to participate in the Cumulative Awards for the Plan Period. A Cumulative Award shall not be paid if the maximum Annual Awards have been paid for each Plan Year in the Plan Period. 5.6 LIMITATIONS ON AWARDS. Awards under the Plan shall be subject to the limitations described in subsections (a), (b)and(c) below. (a) The Awards payable to all Participants under the Plan shall not exceed the sum of the Bonus Amounts to all eligible Participants for (i) each Plan Year for an Annual Award and (b) the Plan Period, less any amounts paid as Annual Awards, for any Cumulative Awards. (b) The amount of Annual and Cumulative Awards payable under the Plan shall be subject to the condition that the Corporation has sufficient liquidity as determined by the President of the Corporation, either from available cash or from borrowings to make the payments under this Plan at the time provided in Section 5.7. (c) Except as provided in Section 6.1 and Section 6.3, to be eligible for an Award, a Participant must be actively 5 employed by the Corporation at the end of the applicable Plan Year for any Annual Award and at the end of the Plan Period to be eligible for a Cumulative Award based on Excess Actual Operating Earnings in either Plan Year. 5.7 PAYMENT. Except as set forth in Section 9.1, Awards will be paid to Participants within one hundred twenty (120) days after the end of the Plan Year for which an Annual Award is earned or within one hundred twenty (120) days after the end of the Plan Period for a Cumulative Award. As determined by the Committee, Awards may be paid in cash or stock of the Corporation, or a combination of cash and stock, and may be paid in different forms to different Participants. SECTION 6: TERMINATION OF EMPLOYMENT; CHANGE IN GRADE LEVEL 6.1 TERMINATION WITHOUT FORFEITURE. If a Participant ceases to be employed by the Corporation prior to the end of the applicable Plan Year or Plan Period because of (i) Disability, (ii) death, (iii) Retirement, (iv) a Divestiture, or (v) other termination by the Corporation for any reason other than Cause, then such Participant shall be entitled to an Award as provided in Section 6.3 below. 6.2 CHANGE IN GRADE LEVEL. If a Participant ceases participation in this Plan prior to the end of the applicable Plan Year or Plan Period because of a change in Grade Level, then such Participant shall be entitled to a partial Award as provided in Section 6.3. 6.3 PARTIAL AWARD. A Participant who ceases to be employed by the Corporation in accordance with any of the applicable conditions set forth in Section 6.1 or who ceases participation in the Plan for the reason set forth in Section 6.2, will be entitled to receive an Annual Award under Section 5.5 only for a Plan Year during which the Participant was employed and granted Performance Units and the Participant's Annual Award for that Plan Year shall be determined by multiplying the number of Performance Units granted to such Participant for that Plan Year by a fraction, the numerator of which is the number of days in the Plan Year prior to such cessation of employment or participation, and the denominator of which is the number of days in the particular Plan Year. If a Cumulative Award based on Excess Actual Operating Earnings is earned under the Plan for any Plan Year, then a Participant who is described in the first sentence of this section shall be entitled to a Cumulative Award based on (i) the Participant's Performance Units for each full Plan Year occurring prior to such Participant's cessation of employment or participation in the Plan, plus (ii) the number of Performance Units granted to such Participant for the Plan Year in which the Participant's employment or participation terminated multiplied by a fraction, the numerator of which is the number of days in the Plan Year prior to such cessation of employment or participation, and the denominator of which is the number of days in the particular Plan Year. Such resulting number of eligible Performance Units shall then share pro rata in the Cumulative Award Pool by multiplying the Cumulative Award Pool by a fraction, the numerator of which is the eligible number of such Participant's Performance Units, and the denominator is the total number of Performance Units granted and outstanding for the Plan Period. Awards paid in accordance with this Section 6.3 shall be paid at the same time and in the same manner as described in Section 5.7. 6.4 TERMINATION RESULTING IN FORFEITURE. If a Participant ceases to be employed by the Corporation for any reason other than those specified in Section 6.1 above, including, without limitation, voluntary termination of 6 employment, then such Participant shall only be entitled to an Annual Award under the Plan if the Participant was actively employed on December 31 of the Plan Year for which the Annual Award was earned and shall not be entitled to share in any Cumulative Award, regardless of the Plan Year in which the Excess Actual Operating Earnings were achieved. SECTION 7: DESIGNATION OF BENEFICIARIES 7.1 DESIGNATION AND CHANGE OF DESIGNATION. Each Participant shall file with the Department a written designation of the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his or her death. A Participant may, from time to time, revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Department. The last such designation received by the Department shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Department prior to the Participant's death, and in no event shall it be effective as of a date prior to the date of such receipt. 7.2 ABSENCE OF VALID DESIGNATION. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with law, the Participant's estate shall be deemed to have been designated his or her Beneficiary and shall receive the payment of the amount, if any, payable under the Plan upon his or her death. If the Committee is in doubt as to the right of any party to receive such amount, the Corporation may retain such amount, or the Corporation may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Corporation therefor. SECTION 8: GENERAL PROVISIONS 8.1 NO ASSIGNMENT. A Participant may not assign an Award without the Committee's prior written consent. Any attempted assignment without such consent shall be null and void; provided, however, that an assignment to the Corporation to collateralize indebtedness of the Participant to the Corporation does not need the consent of the Committee. For purposes of this paragraph, any designation of, or payment to, a Beneficiary shall not be deemed an assignment. 8.2 UNFUNDED INCENTIVE COMPENSATION ARRANGEMENT. The Plan is intended to constitute an unfunded incentive compensation arrangement covering a select group of management or highly compensated employees. Nothing contained in the Plan, and no action taken pursuant to the Plan, shall create or be construed to create a trust of any kind. A Participant's right to receive an Award shall be no greater than the right of an unsecured general creditor of the Corporation. All Awards shall be paid from the general funds of the Corporation, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such Awards. 8.3 NO RIGHT TO EMPLOYMENT. Nothing contained in the Plan shall give any Participant the right to continue in the employment of the Corporation or affect the right of the Corporation to discharge a Participant. 8.4 GOVERNING LAW. The Plan shall be construed and governed in accordance with the laws of the State of Texas except to the extent Texas law is preempted by federal law. 7 8.5 NO RIGHT TO SPECIFIC ASSETS. There shall not vest in any Participant or Beneficiary any right, title, or interest in and to any specific assets of the Corporation. 8.6 NO EFFECT ON OTHER BENEFIT PLANS. Benefits under the Plan shall not increase, decrease, modify or otherwise be taken into account for purposes of determining benefits under any other employee benefit plan unless such other plan expressly provides, by referring to this Plan, that benefits under the Plan are to be so taken into account. 8.7 WITHHOLDING. The Corporation shall have the right to deduct from all payments made to any Participant pursuant to this Plan any federal, state or local taxes required by law to be withheld with respect to such payments, as well as any amount then owed by the Participant to the Corporation. 8.8 EFFECTIVE DATE. This Plan is effective as of January 1, 1995. Subject to Section 9.1, the Plan shall expire December 31, 1996. 8.9 HEADINGS. The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof. 8.10 WORD USAGE. Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Plan dictates, the plural shall be read as the singular and the singular as the plural. SECTION 9: AMENDMENT, SUSPENSION OR TERMINATION 9.1 The Board may amend, terminateor the Committee may amend, terminate, extend or suspend the Plan at any time. If the Plan is terminated within the Plan Period, (i) Awards, if any, shall be determined as of the date of termination, (ii) Annual Awards for 1995 will be paid to Participants within one hundred twenty (120) days after December 31, 1995, and Annual Awards for 1996 and/or Cumulative Awards based on Excess Actual Operating Earnings shall be paid within one hundred twenty (120) days after December 31, 1996; (iii) for all other purposes under the Plan, the date of such termination shall be deemed the last day of the Plan Period. 8 EXHIBIT 1 THRESHOLD OPERATING EARNINGS 1995 Annual Threshold ______million (determined in accordance Operating Earnings with Section 2.29, as amended based on 1995 Budgets) 1996 Annual Threshold $______million (determined in accordance Operating Earnings with Section 2.29, based on 1996 Budgets) Tab 4 EX-10.(III)(A)(10) 6 1995 STOCK INCENTIVE PLAN Exhibit 10(iii)(A)(10) THE SOUTHLAND CORPORATION 1995 Stock Incentive Plan Award Agreement GRANT OF NONQUALIFIED STOCK OPTION (NQSO) The Southland Corporation (the "Company") hereby grants to ______________________ ) (Social Security Number ______________) (the "Participant") on October 23, 1995 (the "Date of Grant"), subject to the approval by Company shareholders of 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 Incentive Compensation Committee of the Board of Directors (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 $ ____ 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 Nonqualified 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 3.PERFORMANCE ACCELERATED VESTING After the first anniversary of the Date of Grant, an additional onefifth (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 Participant's 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 Participant's voluntary termination of employment. (c) Upon termination of the Participant's 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 Participant's 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 Participant's 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. (f) In the event of death of the Participant, regardless whether the Participant has had previously retired (either Early Retirement or Normal Retirement) or is was disabled at the time of death, the Option shall 2 become immediately one hundred percent (100%) vested and the Participant's Designated Beneficiary shall have twelve (12) months following the Participant's death during which to exercise the Option. (g) A transfer of the Participant's employment between the Company and any Subsidiary of the Company, shall not be deemed to be a termination of the Participant's 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 covenant not to compete, or employment contract with the Company or any Subsidiary of the Company, or (iii) engage in conduct that would warrant the Participant's discharge for cause (excluding general dissatisfaction with the performance of the Participant's 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 Manager of the Company's Compensation and Benefits Department 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 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, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (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 Participant's right to purchase such Option Shares may be terminated by the Committee. 3 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 Tthe NASDAQ Nasdaq national Stock mMarket, 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 Participant's 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 Participant's 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. (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 Participant's 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 paragraph 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 4 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 appropriate 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 (hg) 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. 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 Company's Compensation and Benefits Department, and any notice to the Participant shall be in writing and addressed to the Participant at the Participant's current address shown on the records of the Company or such other address as the Participant 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 Department's facsimile machine at such telephone number as may be published in the Company's published telephone directory. 5 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 Participant 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 Participant's Social Security Number: _____________ Tab 5 EXHIBIT 11 THE SOUTHLAND CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS (In thousands, except per-share data) CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE
YEAR ENDED DECEMBER 31 -------------------------------- 1995 1994 1993 ---------- ---------- ---------- Earnings (loss) before extraordinary gain and cumulative effect of accounting change ............................. $ 167,594 $ 91,996 $ (11,280) Add interest on Convertible Debt, net of tax .............. 1,093 - - ---------- ---------- ---------- Earnings (loss) before extraordinary gain and cumulative effect of accounting change applicable to common stock and equivalents outstanding.............................. 168,687 91,996 (11,280) Extraordinary gain ........................................ 103,169 - 98,968 Cumulative effect of accounting change for postemployment benefits ................................................ - - (16,537) ---------- ---------- ---------- Net earnings applicable to common stock and equivalents outstanding.............................................. $ 271,856 $ 91,996 $ 71,151 ========== ========== ========== Weighted average number of common shares outstanding....... 409,923 409,923 409,938 Weighted average number of common shares issuable upon conversion of Convertible Debt .......................... 6,811 - - ---------- ---------- --------- Weighted average number of common shares and equivalents outstanding.................................. 416,734 409,923 409,938 ========== ========== ========= Earnings (loss) per common share and equivalents (Primary and Fully Diluted): Before extraordinary gain and cumulative effect of accounting change .................................... $ .40 $ .22 $(.03) Extraordinary gain ..................................... .25 - .24 Cumulative effect of accounting change ................. - - (.04) -------- ------ ------ Net earnings ........................................... $ .65 $ .22 $ .17 ======== ====== ====== Tab 6
EX-21 7 EX-21
EXHIBIT 21 SUBSIDIARIES OF THE SOUTHLAND CORPORATION (Wholly owned unless indicated otherwise) NAME JURISDICTION OF INCORPORATION ACTIVE: 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 Small Shops Holding A/S (i) Norway Subsidiaries of Small Shops Holding A/S: - Naroppet AB * (inactive) (j) Sweden - Small Shops Danmark A/S (active) (j) Denmark - Small Shops Norge A/S (active) (j) Norway - Small Shops Sverige AB (active) (j) Sweden Southland Canada, Inc. (k) Canada Southland International, Inc. Nevada Southland International Investment Corporation N.V. (k) Netherlands Antilles Southland Sales Corporation Texas TSC Lending Group, Inc. Texas Valso, S.A. (l) 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. (m) Australia 7-Eleven Stores (NZ) Limited (n) New Zealand SLC Financial Services, Inc. Texas Superior 7-11 Stores, Inc.** Wisconsin The Seven Eleven Limited (o) Hong Kong PERMIT HOLDING COMPANY: 7-Eleven Beverage Company, Inc. (Texas beer license) Texas TITLE HOLDING COMPANY: The Southland Corporation Employees' Savings and Profit Sharing Plan Title Holding Corporation (p) Texas
* This company was merged into Small Shops Holding A/S during 1995. ** This company was merged into Southland during 1995. 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 (an inactive, 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) as of 6-30-95, 2.38% owned by The Southland Corporation, 97.47% owned by Super Trade, Ltd., and remaining .15% owned by other investors; Southland has options to purchase up to 49% of this affiliate until 1-97 (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) 7.62% owned by The Southland Corporation, and remaining 92.38% owned by various investors (based on Class A common shares only) (j) owned by Small Shops Holding A/S (k) 100% owned by Southland International, Inc. (a wholly owned subsidiary of The Southland Corporation) (l) 49% owned by The Southland Corporation, and remaining 51% owned by Valores Corporativos, S.A. (m) 99% owned by The Southland Corporation, and remaining 1% owned jointly by Southland's local counsel, Bruce Nelson Davidson and Bruce Eynon Tunnicliffe (n) 50% owned by David Anthony Walsh, and remaining 50% owned by Anthony Peter John Kelly, for the benefit of Southland (o) 99.9% owned by The Southland Corporation, and remaining .1% owned by Wilgrist Nominees Limited, Southland's agent in Hong Kong. (p) This company was established by The Southland Corporation Employees' Savings and Profit Sharing Plan to hold title to properties under tax code Section 501(c)(25). As of November 15, 1991, U.S. Trust Company of California, N.A. was appointed as trustee for The Southland Employees' Trust and The Southland Corporation Employees' Savings and Profit Sharing Plan and assumed all responsibility for this company. Tab 7 EX-23 8 EX-23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the registration statements listed below of our reports, which include an explanatory paragraph describing the changes in methods of accounting for postemployment benefits and income taxes in 1993, dated February 14, 1996, on our audits of the consolidated financial statements and financial statement schedule of The Southland Corporation and Subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which reports are included in this Annual Report on Form 10-K. Registration No. On Form S-8 for: Post-Effective Amendment No. 3 to The Southland 33-23312 Corporation Equity Participation Plan Post-Effective Amendment No. 1 to The Southland 33-25327 Corporation Grant Stock Plan The Southland Corporation 1995 Stock Incentive Plan 33-63617 Coopers & Lybrand L.L.P. Dallas, Texas March 28, 1996 Tab 8 EX-27 9 EXHIBIT 27 (FDS) FILED WITH FORM 10-K
5 1,000 12-MOS DEC-31-1995 DEC-31-1995 43,047 0 112,082 4,858 102,020 356,107 2,466,634 1,130,851 2,081,117 720,127 2,005,237 41 0 0 (880,833) 2,081,117 6,745,850 6,816,789 4,762,707 4,762,707 1,866,971 0 85,582 101,529 (66,065) 167,594 0 103,169 0 270,763 0.65 0.65
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