FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
_________________
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 __
APPLICABLE ONLY TO ISSUERS 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 Sections 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 __
APPLICABLE ONLY TO CORPORATE ISSUERS:
409,922,935 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of June 30, 1996.
THE SOUTHLAND CORPORATION
INDEX
PAGE
NO.
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 ............................ 1
Condensed Consolidated Statements of Earnings -
Three Months and Six Months Ended June 30, 1996 and 1995 ....... 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 .......................... 3
Notes to Condensed Consolidated Financial Statements ............... 4
Report of Independent Accountants................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..................................... 6
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 14
SIGNATURES ......................................................... 15
Exhibit (11) - Statement re Computation of Per-Share Earnings .... Tab 1
Exhibit (15) - Letter re Unaudited Interim Financial Information . Tab 2
Exhibit (27) - Financial Data Schedule.............................. *
*Submitted in electronic format only
(I)
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . $ 69,457 $ 43,047
Accounts and notes receivable . . . . . . . . 105,262 107,224
Inventories . . . . . . . . . . . . . . 106,241 102,020
Other current assets . . . . . . . . . . . 106,687 103,816
------------- -------------
TOTAL CURRENT ASSETS . . . . . . . . . . 387,647 356,107
PROPERTY AND EQUIPMENT. . . . . . . . . . . . 1,342,457 1,335,783
OTHER ASSETS . . . . . . . . . . . . . . . 364,351 389,227
------------- -------------
$ 2,094,455 $ 2,081,117
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable. . . . . . . . . . . $ 212,433 $ 195,154
Accrued expenses and other liabilities . . . . . 337,635 329,429
Commercial paper. . . . . . . . . . . . . 96,097 50,198
Long-term debt due within one year. . . . . . . 132,769 145,346
------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . 778,934 720,127
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . 223,336 236,545
LONG-TERM DEBT . . . . . . . . . . . . . . 1,635,549 1,705,237
CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES . . . . 300,000 300,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value . . . . . . . . 41 41
Additional capital . . . . . . . . . . . . 625,574 625,574
Accumulated deficit . . . . . . . . . . . (1,468,979) (1,506,407)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) . . . . (843,364) (880,792)
------------- -------------
$ 2,094,455 $ 2,081,117
============= =============
See notes to condensed consolidated financial statements.
1
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
REVENUES:
Net sales (Including $246,432, $253,836,
$478,913 and $487,818 in excise taxes) $ 1,791,736 $ 1,750,265 $ 3,354,350 $ 3,295,044
Other income . . . . . . . . . . 20,485 17,904 37,506 34,653
------------ ------------ ------------ ------------
1,812,221 1,768,169 3,391,856 3,329,697
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . 1,266,440 1,237,967 2,387,008 2,333,509
Operating, selling, general and
administrative expenses . . . . . 472,008 464,065 898,859 906,066
Interest expense, net . . . . . . . 23,128 20,350 46,196 43,247
------------ ------------ ------------ ------------
1,761,576 1,722,382 3,332,063 3,282,822
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES . . . . . . 50,645 45,787 59,793 46,875
INCOME TAXES. . . . . . . . . . . . 20,258 9,029 23,917 11,079
------------ ------------ ------------ ------------
NET EARNINGS. . . . . . . . . . . . $ 30,387 $ 36,758 $ 35,876 $ 35,796
============ ============ ============ ============
NET EARNINGS PER COMMON SHARE
(Primary and Fully Diluted) . . . . . $.07 $.09 $.08 $.09
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
---------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 35,876 $ 35,796
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment . . . . . 80,807 71,001
Other amortization. . . . . . . . . . . . . . . . . . 9,513 9,366
Deferred income taxes. . . . . . . . . . . . . . . . . 7,941 272
Noncash interest expense. . . . . . . . . . . . . . . . 904 1,117
Other noncash expense (income). . . . . . . . . . . . . . 474 (747)
Net loss on property and equipment . . . . . . . . . . . . 569 613
Decrease (increase) in accounts and notes receivable . . . . . . 8,476 (3,691)
Increase in inventories . . . . . . . . . . . . . . . . (4,221) (7,415)
(Increase) decrease in other assets . . . . . . . . . . . . (1,973) 1,810
Increase (decrease) in trade accounts payable and other . . . . . 13,091 (26,599)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . 151,457 81,523
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment . . . . . . . . . (94,687) (87,517)
Proceeds from sale of property and equipment . . . . . . . . . . 7,433 7,003
Other . . . . . . . . . . . . . . . . . . . . . . . 376 828
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . (86,878) (79,686)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . . . . 1,762,600 1,989,926
Payments under commercial paper and revolving credit facilities . . . . (1,712,949) (1,992,775)
Principal payments under long-term debt agreements . . . . . . . . (87,820) (35,150)
Other . . . . . . . . . . . . . . . . . . . . . . . - (787)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . (38,169) (38,786)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . 26,410 (36,949)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . . 43,047 59,288
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . $ 69,457 $ 22,339
============ ============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . . . . $ (51,692) $ (47,256)
============ ============
Net income taxes paid . . . . . . . . . . . . . . . . . . $ (5,881) $ (20,155)
============ ============
See notes to condensed consolidated financial statements.
3
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of June 30, 1996, and
the condensed consolidated statements of earnings for the three-month and
six-month periods ended June 30, 1996 and 1995, and the condensed
consolidated statements of cash flows for the six-month periods ended June
30, 1996 and 1995, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which included only normal,
recurring adjustments) necessary to present fairly the financial position
at June 30, 1996, and the results of operations and cash flows for all
periods presented have been made. The results of operations for the
interim periods are not necessarily indicative of the operating results
for the full year.
The condensed consolidated balance sheet as of December 31, 1995,
is derived from the audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
notes accompanying the consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
include accounting policies and additional information pertinent to an
understanding of both the December 31, 1995, balance sheet and the
interim financial statements. The information has not changed except as a
result of normal transactions in the six months ended June 30, 1996.
2. IMPAIRMENT OF LONG-LIVED ASSETS:
As of January 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets." SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets to be held and used and for long-lived
assets to be disposed of. The adoption of SFAS No. 121 did not have a
material effect on the Company's earnings.
4
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
To the Board of Directors and Shareholders of
The Southland Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
The Southland Corporation and Subsidiaries as of June 30, 1996, the related
condensed consolidated statements of earnings for the three-month and six-
month periods ended June 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1996 and
1995. These financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements of The Southland
Corporation and Subsidiaries for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of earnings, shareholders' equity
(deficit), and cash flows for the year then ended (not presented herein);
and in our report dated February 14, 1996, which included an explanatory
paragraph describing the change in method of accounting for postemployment
benefits and for income taxes in 1993, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1995, is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been
derived.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
July 31, 1996
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996
SUMMARY OF RESULTS OF OPERATIONS
- --------------------------------
The Company's net earnings for the second quarter and first six
months of 1996 were $30.4 million ($.07 per share) and $35.9 million ($.08
per share), respectively, compared to net earnings of $36.8 million ($.09
per share) and $35.8 million ($.09 per share) for the same periods in 1995.
Pre-tax earnings of $50.6 million for the second quarter of 1996 were $4.9
million higher than the same period in 1995, and after excluding one-time
income of $4.7 million received during the second quarter of 1995 relating
to an environmental litigation settlement, the Company's pre-tax earnings
improvement exceeded 23%.
MANAGEMENT STRATEGIES
- ---------------------
Since 1992, the Company has been committed to several key
strategies that it believes, over the long term, will provide further
differentiation and allow 7-Eleven to maintain its position as the premier
convenience retailer. These strategies include:
Continued upgrades to the Company's store base by remodeling
existing stores, closing underperforming stores and developing new
sites.
A customer-driven approach to merchandising which focuses on
providing the customer an expanded selection of quality products
at a good value.
Everyday-fair-pricing strategy which provides consistent,
reasonable prices on all items.
Daily delivery of fresh perishable items and high-quality, ready-
to-eat foods providing fresher products, improved in-stock
conditions and lower product costs.
Implementation of a retail information system which has initially
automated accounting and other store-level tasks. When fully
complete, the system will provide each store, as well as suppliers
and distributors, with on-line information to make improved
ordering decisions.
The Company has made considerable progress toward implementation
of these strategies and believes they have contributed to improved results.
Through the second quarter, the Company has now experienced ten consecutive
quarters of same-store (stores open more than one year) merchandise sales
growth and fourteen consecutive quarters of increased merchandise gross
profits per store.
(EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL STORES
RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR)
SALES
- -----
The Company recorded net sales of $1.79 billion for the second
quarter and $3.35 billion in the first six months of 1996, compared to net
sales of $1.75 billion and $3.30 billion during the same periods last year.
Second quarter sales growth was achieved even though the Company operated
an average of 123 fewer stores than during the same period in 1995, due to
store closings (see Management Strategies). Merchandise sales growth per
store was as follows:
PERIODS ENDING JUNE 30,1996
---------------------------
INCREASE FROM PRIOR YEAR THREE MONTHS SIX MONTHS
- ------------------------ ------------ ----------
U.S. same-store sales 2.4% 2.6%
U.S. same-store real growth; excluding inflation .1% .4%
7-Eleven inflation 2.3% 2.2%
6
Gasoline sales dollars per store increased 7.4% for the second
quarter and 5.6% for the first six months of 1996 in comparison to the same
periods in 1995, due to an average increase in sales price of 11.3 and 6.5
cents per gallon for the quarter and the six months, respectively. Sales
in gallons per store declined 1.6% during the second quarter and were flat
for the first six months, as a result of market factors which affect the
way the Company manages its gasoline business.
GROSS PROFITS PERIODS ENDING JUNE 30, 1996
- ------------- ----------------------------
THREE MONTHS SIX MONTHS
------------ ----------
MERCHANDISE GASOLINE MERCHANDISE GASOLINE
----------- -------- ----------- --------
Gross Profit - DOLLARS IN MILLIONS $ 472.3 $ 53.0 $ 873.8 $ 93.5
INCREASE/(DECREASE) FROM PRIOR YEAR
- -----------------------------------
Average per-store gross profit
dollar change 3.3% 20.1% 3.2% 3.3%
Margin point change
(gasoline in cents per gallon) (.06) 2.75 (.19) .41
Average per-store sales
(gasoline in gallons) 3.5% (1.6)% 3.8% .1%
Merchandise gross profit increased by $4.8 million in the second
quarter and $4.2 million for the six months, when compared to the same
periods in 1995. Per-store sales growth during the second quarter offset
the effects of fewer stores and a slightly lower margin.
The lower merchandise margin during the second quarter was the
result of several factors, including rising product costs that were not
entirely passed on to the consumer and initial introductory costs
associated with new, fresh-food products. Management is actively working
to reduce product costs in an effort to maintain a merchandise margin level
consistent with last year.
During the second quarter and first six months of 1996, gasoline
gross profits increased $8.2 million and $1.6 million, respectively, over
the same periods in 1995. Margins in the second quarter improved as
wholesale costs trended-down and the markets' volatile inventory conditions
began to show more stability.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
- -----------------------------------------------------------------
PERIODS ENDING JUNE 30, 1996
------------------------------
THREE MONTHS SIX MONTHS
------------ ------------
1996 1995 1996 1995
----- ----- ---- ----
Total OSG&A expenses $472.0 $464.1 $898.9 $906.1
Ratio of OSG&A to sales 26.3% 26.5% 26.8% 27.5%
During the second quarter, OSG&A expenses increased $7.9 million,
compared to the same period in 1995. The main items impacting the second
quarter comparison were: I) the receipt of $4.7 million relating to an
environmental litigation settlement in 1995, ii) higher depreciation
attributable to the Company's extensive remodeling program, and iii)
increased costs associated with the implementation of a retail information
system (see Management Strategies). For the six month comparison, OSG&A
expenses declined $7.2 million due to reductions in force, lower insurance
and benefit costs, and the effect of having fewer stores. In managing its
existing base of expenses, the Company will continue to drive out
unnecessary costs, while at the same time devoting resources to the
implementation of its retail information system and other strategic
initiatives.
7
INTEREST EXPENSE, NET
- ---------------------
In November 1995, the Company consummated a $216.7 million tender
offer to purchase a portion ($263.3 million face value) of its public debt
securities (see Liquidity and Capital Resources). The purchase was
financed by the issuance of $300 million 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,
because the retired debentures were accounted for pursuant to Statement of
Financial Accounting Standards No. 15 ("SFAS No. 15"). SFAS No. 15
provides that future interest payments on the Company's currently
outstanding public debt securities be recorded as debt on the balance sheet
and charged against such balances when paid rather than being recorded as
interest expense in the income statement.
Net interest expense increased $2.8 million and $2.9 million over
1995, during the second quarter and first six months of 1996, respectively.
Several factors caused the change in net interest expense during the second
quarter including increases from the Convertible Debt interest (explained
in paragraph above) and lower interest income, offset by declines from
lower principal balances and lower rates on floating rate debt. The lower
interest income was primarily the result of a new money order agreement.
The new agreement eliminates interest income from the funding arrangement;
however, it provides lower cost of goods and operating costs, which will
more than offset the impact of the lost interest. While the Company
expects interest expense to remain relatively flat for 1996, interest
income is expected to decline approximately $5 million.
Approximately 35% of the Company's debt contains floating rates,
which had a weighted average interest rate of 5.74% for the second quarter
and 5.91% for the first six months of 1996 versus 6.83% and 6.80% for the
same time periods in 1995. In early 1996, the Company reduced its exposure
to short-term fluctuations in rates on a substantial portion of its
floating rate bank debt by selecting six month and one year LIBOR
maturities at favorable rates rather than the shorter terms it has selected
in the past.
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.
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 and $786 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.
8
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 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 June 30, 1996, 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:
REQUIREMENTS:
--------------------------
COVENANTS ACTUALS MINIMUM MAXIMUM
- --------- ----------- ----------- -----------
Interest coverage * 3.16 to 1.0 2.70 to 1.0
Fixed charge coverage 1.01 to 1.0 1.00 to 1.0
Senior indebtedness to EBITDA 3.26 to 1.0 4.10 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
During the first six months of 1996, the Company has repaid $87.8
million of debt, which included $56.2 million representing three of the
four quarterly installments due in 1996 under the Credit Agreement, $12.8
million for principal payments on the Company's yen-denominated loan
(secured by the royalty income stream from its area licensee in Japan) and
$11.2 million for SFAS No. 15 interest. Outstanding balances at June 30,
1996, for the commercial paper, the Term Loan and the Revolver were $396.1
million, $243.8 million and $10.0 million, respectively. As of June 30,
1996, outstanding letters of credit issued pursuant to the Credit Agreement
totaled $79.9 million.
CASH FROM OPERATING ACTIVITIES
- ------------------------------
Net cash provided by operating activities was $95.3 million for
the second quarter and $151.5 million for the first six months of 1996, an
increase of $17.6 million and $69.9 million over the same periods,
respectively, in 1995. The increased operating cash flow resulted primarily
from improved operating performance (previously discussed in the Results of
Operations section), combined with the timing of payments of trade payables
and other liabilities.
CAPITAL EXPENDITURES
- --------------------
In the first six months, net cash used in investing activities
consisted primarily of payments of $94.7 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.
9
The Company expects to spend approximately $200 million on capital
improvements in 1996, excluding lease commitments. Current year capital
expenditures funding will depend upon the level of EBITDA generated
relative to fixed charge coverage requirements. Capital expenditures will
be used to complete remodels started in 1995; to remodel about 1,100
additional stores; for development or acquisition of new stores; 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 $10 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 $26 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 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 June 30, 1996, the Company has an accrued liability of
$54.9 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 a portion
of costs previously paid. At June 30, 1996, the Company has recorded a
gross receivable of $63.8 million (a net receivable of $52.0 million after
an allowance of $11.8 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 in the future as
governmental requirements and state reimbursement programs continue to be
implemented or revised.
10
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 $37.4
million at June 30, 1996. Of this amount, $30.8 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 $21.8 million at June 30, 1996, representing the
former owner's portion of the clean-up costs.
None of the amounts related to environmental liabilities have been
discounted.
11
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
VALENTE, et al. v. THE SOUTHLAND CORPORATION, et al.
As previously reported, a suit was filed against the Company and other
defendants on March 15, 1996, in the U.S. District Court for the Northern
District of California, entitled VALENTE, et al. v. THE SOUTHLAND
CORPORATION, et al., Case No. 3:96-CV-1786-P ("Valente"). This suit was
filed by the same attorneys who represent the plaintiffs IN 7-ELEVEN OWNERS
FOR FAIR FRANCHISING v. THE SOUTHLAND CORPORATION, Case No. 722272-6 ("7-
Eleven OFFF"), which, as previously reported, is pending in state court in
California. The Valente case, which alleges essentially the same issues as
the 7-Eleven OFFF case, was filed 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's motion to transfer the
case to federal court in Dallas was granted on June 24, 1996, and the case
is now pending in the U.S. District Court for the Northern District of
Texas. The Company intends to contest the certification of a class in this
litigation and to defend vigorously against all of the plaintiffs'
allegations. The litigation is still at an early stage of development, and
the ultimate outcome cannot be predicted.
EMIL V. SPARANO, et al. v. THE SOUTHLAND CORPORATION, et al.
As previously reported, a suit entitled EMIL V. SPARANO, et al. v. THE
SOUTHLAND CORPORATION, et al. was filed in 1994 in the U.S. District Court
for the Northern District of Illinois against the Company, its majority
owners and certain individual defendants who were officers and/or directors
of the Company from 1987 to 1991. The Third Amended Complaint contained
seven counts as follows: (I) breach of contract, relating to advertising
and equipment; (II) tortious interference with franchise agreements; (III)
conspiracy to tortiously interfere with franchise agreements; (IV)
fraudulent conveyance; (V) fraudulent misrepresentation; (VI) tortious
interference with franchise agreements in connection with the Company's
reorganization plan; and (VII) conspiracy to tortiously interfere with
franchise agreements in connection with the Company's reorganization plan.
Southland and certain of the other defendants filed motions to dismiss
and for summary judgment on the claims against them and, as of May 17,
1996, the court has dismissed all the individual defendants except John
Thompson, Jere Thompson and Clark Matthews and has dismissed the Company's
majority owners. In addition, all the counts in the case have been
dismissed except: (1) the breach of contract claim stated in Count I which
is against Southland only; and (2) the fraudulent misrepresentation claim
stated in Count V which is against Southland, John Thompson, Jere Thompson
and Clark Matthews.
The Company intends to contest the certification of a class in this
matter, and to continue its defense against all of the claims. Southland
believes that it has meritorious defenses to each of the claims; however,
the litigation is still at an early stage of development, and the ultimate
outcome cannot be predicted.
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ARTURO M. VASQUEZ, et al. v. THE SOUTHLAND CORPORATION, et al.
As previously reported, a suit was filed against the Company entitled
ARTURO M. VASQUEZ, et al. v. THE SOUTHLAND CORPORATION, et al., which
asserts certain claims on behalf of a purported class of property owners
alleging damage from petroleum releases from underground storage tanks at
approximately 150 former or current Southland locations in Texas. The
Company's motion to transfer venue in this matter to Dallas County, Texas
was granted, and upon reconsideration the judge upheld the transfer. The
case is now pending in the 162nd Judicial District Court of Dallas County,
Texas. Southland strongly contests the plaintiff's effort to obtain
certification of a class in this matter and is vigorously defending against
the claims in the lawsuit. The litigation is still at an early stage of
development, and the ultimate outcome cannot be predicted.
There are no other reportable suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company,
other than as previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 24, 1996, the Company held its annual meeting of
shareholders. Each of the twelve nominated directors were elected without
contest. In addition, the shareholders approved the adoption of the
Company's 1995 Stock Incentive Plan and 1995 Performance Plan, and ratified
the approval of Coopers & Lybrand L.L.P. to be the Company's independent
auditors for 1996.
(a) The votes for and the votes withheld for each of the nominees for
director were as follows:
NOMINEE FOR WITHHELD
Masatoshi Ito 322,136,763 747,168
Toshifumi Suzuki 322,136,763 747,168
Clark J. Matthews, II 322,117,440 766,491
Yoshitami Arai 322,136,928 747,003
Timothy N. Ashida 322,147,013 736,918
Jay W. Chai 322,140,243 743,688
Gary J. Fernandes 322,147,013 736,918
Masaaki Kamata 322,136,763 747,168
Kazuo Otsuka 322,137,013 746,918
Asher O. Pacholder 322,138,871 745,060
Nobutake Sato 322,137,013 746,918
Tatsuhiro Sekine 322,128,871 755,060
(b) The votes for, against, abstaining and broker non-votes in
connection with the approval of the adoption of the Company's 1995 Stock
Incentive Plan were as follows:
303,473,240 shares were voted for; 5,460,931 shares were voted
against; 144,567 shares abstained from voting; and 13,805,193 broker non-
votes were received.
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(c) The votes for, against, abstaining and broker non-votes in
connection with the approval of the Company's 1995 Performance Plan were as
follows:
307,093,199 shares were voted for; 817,597 shares were voted against;
105,331 shares abstained from voting; and 14,867,804 broker non-votes were
received.
(d) The votes for, against, abstaining and broker non-votes in
connection with the ratification of the appointment of Coopers & Lybrand
L.L.P. to be the independent auditors of the Company for 1996 were as
follows:
322,746,183 shares were voted for; 90,925 shares were voted against;
46,823 shares abstained from voting; and no broker non-votes were received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Exhibit (11) -- Statement re Computation of Per-Share
Earnings.
2. Exhibit (15) -- Letter re Unaudited Interim Financial
Information.
Letter of Coopers & Lybrand L.L.P.,
Independent Accountants.
3. Exhibit (27) -- Financial Data Schedule.
Submitted in electronic format only.
(b) 8-K Reports:
During the second quarter of 1996, the Company filed no reports on Form 8-K.
14
SIGNATURES
Pursuant to the requirements 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)
Date: August 2, 1996 /s/ Clark J. Matthews, II
------------------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive Officer
Date: August 2, 1996 /s/ Donald E. Thomas
------------------------------------
(Principal Accounting Officer)
Donald E. Thomas
Controller
15