FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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THE SOUTHLAND CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVE., DALLAS, TEXAS 75204-2906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, 214/828-7011
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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 CORPORATE ISSUERS:
409,922,935 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of September 30, 1996.
THE SOUTHLAND CORPORATION
INDEX
PAGE
NO.
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31,1995......................... 1
Condensed Consolidated Statements of Earnings -
Three Months and Nine Months Ended September 30, 1996 and 1995.. 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 12
SIGNATURES ............................................................ 13
Exhibit (3) - Bylaws of The Southland Corporation
as Amended April 24, 1996 .......................Tab 1
Exhibit (11) - Statement re Computation of Per-Share Earnings ........Tab 2
Exhibit (15) - Letter re Unaudited Interim Financial Information .....Tab 3
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
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . $ 46,431 $ 43,047
Accounts and notes receivable . . . . . . . . . 95,837 107,224
Inventories . . . . . . . . . . . . . . . 101,419 102,020
Other current assets . . . . . . . . . . . . 107,936 103,816
------------- -------------
TOTAL CURRENT ASSETS. . . . . . . . . . . 351,623 356,107
PROPERTY AND EQUIPMENT . . . . . . . . . . . . 1,339,574 1,335,783
OTHER ASSETS. . . . . . . . . . . . . . . . 345,738 389,227
------------- -------------
$ 2,036,935 $ 2,081,117
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable . . . . . . . . . . . $ 193,460 $ 195,154
Accrued expenses and other liabilities . . . . . . 349,216 329,429
Commercial paper . . . . . . . . . . . . . 61,130 50,198
Long-term debt due within one year . . . . . . . 125,581 145,346
------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . 729,387 720,127
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . 207,215 236,545
LONG-TERM DEBT . . . . . . . . . . . . . . . 1,605,070 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 . . . . . . . . . . . . (1,430,352) (1,506,407)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT ) . . . . . (804,737) (880,792)
------------- -------------
$ 2,036,935 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
REVENUES:
Net sales (Including $256,833, $255,799,
$736,027 and $743,617 in excise taxes). $ 1,839,870 $ 1,825,887 $ 5,194,220 $ 5,120,931
Other income. . . . . . . . . . . 20,178 18,250 57,684 52,903
------------ ------------ ------------ ------------
1,860,048 1,844,137 5,251,904 5,173,834
COSTS AND EXPENSES:
Cost of goods sold. . . . . . . . . 1,298,437 1,271,897 3,685,445 3,605,406
Operating, selling, general and
administrative expenses. . . . . . 476,671 490,322 1,375,530 1,396,388
Interest expense, net. . . . . . . . 22,130 20,624 68,326 63,871
------------ ------------ ------------ ------------
1,797,238 1,782,843 5,129,301 5,065,665
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES . . . . . . . 62,810 61,294 122,603 108,169
INCOME TAXES . . . . . . . . . . . . 25,124 11,647 49,041 22,726
------------ ------------ ------------ ------------
NET EARNINGS . . . . . . . . . . . . $ 37,686 $ 49,647 $ 73,562 $ 85,443
============ ============= ============= =============
NET EARNINGS PER COMMON SHARE
(Primary and Fully Diluted) . . . . . . $.08 $.12 $.17 $.21
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1996 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . $ 73,562 $ 85,443
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment . . 122,870 107,974
Other amortization . . . . . . . . . . . . . . 14,270 14,270
Deferred income taxes . . . . . . . . . . . . . 19,748 272
Noncash interest expense . . . . . . . . . . . . 1,332 1,522
Other noncash expense (income) . . . . . . . . . . 144 (1,854)
Net loss (gain) on property and equipment. . . . . . . 54 (259)
Decrease in accounts and notes receivable. . . . . . . 18,263 13,216
Decrease (increase) in inventories . . . . . . . . . 601 (2,402)
Increase in other assets . . . . . . . . . . . . (3,166) (1,256)
Decrease in trade accounts payable and other liabilities. . (12,353) (19,421)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . 235,325 197,505
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment . . . . . . (137,371) (144,827)
Proceeds from sale of property and equipment . . . . . . . 12,214 11,800
Other . . . . . . . . . . . . . . . . . . . . 2,938 1,255
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES. . . . . (122,219) (131,772)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . 3,012,509 2,981,083
Payments under commercial paper and revolving credit facilities. (3,004,127) (3,039,459)
Principal payments under long-term debt agreements . . . . . (118,104) (45,679)
Other . . . . . . . . . . . . . . . . . . . . - (787)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES. . . . . (109,722) (104,842)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . 3,384 (39,109)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR. . . . . . . . 43,047 59,288
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . $ 46,431 $ 20,179
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . $ (77,622) $ (72,689)
============= =============
Net income taxes paid. . . . . . . . . . . . . . . $ (15,485) $ (23,235)
============= =============
See notes to condensed consolidated financial statements.
3
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of September 30, 1996, and
the condensed consolidated statements of earnings for the three-month and
nine-month periods ended September 30, 1996 and 1995, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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 September 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 nine months ended September 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 September 30, 1996, the
related condensed consolidated statements of earnings for the three-month
and nine-month periods ended September 30, 1996 and 1995, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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
October 24, 1996
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings for the third quarter and first nine months
of 1996 were $37.7 million ($.08 per share) and $73.6 million ($.17 per
share), respectively, compared to net earnings of $49.6 million ($.12 per
share) and $85.4 million ($.21 per share) for the same periods in 1995.
Pre-tax earnings of $62.8 million for the third quarter of 1996 were $1.5
million higher than the same period in 1995.
FINANCIAL STATEMENT CHANGES
Certain expense reclassifications were noted in the Company's December
31, 1995 annual report and 10-K filing, resulting in the restatement of
comparative results. Subsequent quarterly filings on Form 10-Q during 1996
have restated prior period results to maintain consistency. The most
significant change related to reclassifying buying and occupancy costs
(i.e., store rent, depreciation and other store-related occupancy expenses)
out of Cost of Goods Sold and into Operating, Selling, General &
Administrative expenses.
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 made considerable progress toward implementation of these
strategies during the third quarter, accelerating the development of its
retail information system, making the transition to three new combined
6
distribution centers and two new commissaries, and locating new store
opportunities. The Company believes that these strategies have contributed
to its improved results over the past two years, although in the short term
they have resulted in additional costs, and that continuing to implement
these strategies will lead to sustainable, profitable growth over the long-
term.
(EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL
STORES RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR.)
SALES
The Company recorded net sales of $1.84 billion for the third quarter
and $5.19 billion in the first nine months of 1996, compared to net sales
of $1.83 billion and $5.12 billion during the same periods last year.
Growth in total sales was achieved during the third quarter primarily as a
result of gasoline prices, which overcame the decline from store closings
(see Management Strategies) and the slight same-store merchandise sales
decrease. During the third quarter, the Company operated an average of 114
fewer stores than the same period in 1995.
The Company's ongoing challenge to balance short-term performance with
its long-term objectives, along with the unseasonably cool and wet weather
in some of its largest markets (primarily the East Coast), contributed to
the less than desired merchandise sales results during the third quarter.
Merchandise sales growth per store was as follows:
PERIODS ENDING SEPTEMBER 30, 1996
---------------------------------
INCREASE(DECREASE) FROM PRIOR YEAR THREE MONTHS NINE MONTHS
- ---------------------------------- ------------ -----------
U.S. same-store sales (0.3)% 1.5%
U.S. same-store real growth; excluding inflation (2.8)% (0.7)%
7-Eleven inflation 2.5% 2.3%
Gasoline sales dollars per store increased 7.9% for the third quarter
and 6.4% for the first nine months of 1996 in comparison to the same
periods in 1995, due to an average increase in sales price of 8.7 and 7.3
cents per gallon for the quarter and the nine months, respectively. Sales
in gallons per store increased 0.6% during the third quarter and 0.3% for
the first nine months.
GROSS PROFITS
PERIODS ENDING SEPTEMBER 30, 1996
---------------------------------
THREE MONTHS NINE MONTHS
------------ -----------
MERCHANDISE GASOLINE MERCHANDISE GASOLINE
----------- -------- ----------- --------
Gross Profit - DOLLARS IN MILLIONS $488.0 $53.4 $1,361.9 $146.9
INCREASE/(DECREASE) FROM PRIOR YEAR
- -----------------------------------
Average per-store gross profit dollar change 0.0% (3.4)% 2.1% 0.8%
Margin point change (gasoline in cents per gallon) (.33) (.62) (.24) .06
Average per-store sales (gasoline in gallons) 1.0% 0.6% 2.8% 0.3%
Merchandise gross profit decreased by $10.1 million in the third
quarter and $5.9 million for the nine months, when compared to the same
periods in 1995. These decreases are attributable to the Company operating
fewer stores and the decrease in merchandise margin.
7
The lower merchandise margin during the third quarter was the result
of several factors. Rising product costs and more aggressive retail pricing
continue to present a challenge in today's increasingly more competitive
environment. Initial costs associated with new, fresh-food products from
the further roll-out of the Company's fresh-food program have affected
margin as well. In addition, margin was impacted negatively from the cool
and wet weather experienced in some of its largest markets that suppressed
sales of higher-margin products such as non-alcoholic beverages and related
categories.
During the third quarter and first nine months of 1996, gasoline gross
profits decreased $2.5 million and $0.9 million, respectively, versus the
same periods in 1995. Margin in the third quarter also declined compared
to last year due to high wholesale costs.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
- -----------------------------------------------------------------
PERIODS ENDING SEPTEMBER 30, 1996
---------------------------------
THREE MONTHS NINE MONTHS
------------ -----------
1996 1995 1996 1995
---- ---- ---- ----
Total OSG&A expenses $476.7 $490.3 $1,375.5 $1,396.4
Ratio of OSG&A to sales 25.9% 26.9% 26.5% 27.3%
The Company will continue to eliminate unnecessary costs, while
devoting resources to the implementation of its retail information system
and other strategic initiatives (see Management Strategies). Despite the
incremental costs of these initiatives, which exceeded $5 million, OSG&A
expenses during the third quarter declined $13.7 million, compared to the
same period in 1995. The decrease in OSG&A expenses during the third
quarter was primarily due to fewer stores, higher store closing costs in
1995, and lower insurance costs from adjustment to the Company's self-
insurance reserves as a result of favorable claims experience. For the
nine-month comparison, OSG&A expenses declined $20.9 million due to
reductions in force, lower insurance and benefit costs, reduced advertising
and environmental remediation expenses, and the effect of having fewer
stores.
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 has not been 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 $1.5 million and $4.5 million over
1995, during the third quarter and first nine months of 1996, respectively.
Several factors caused the change in net interest expense during the third
quarter including increases from the Convertible Debt interest (explained
8
in the 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 $6 million.
Approximately 33% of the Company's debt contains floating rates, which
had a weighted average interest rate of 5.75% for the third quarter and
5.86% for the first nine months of 1996 versus 6.53% and 6.71% 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.
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 September 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:
9
REQUIREMENTS:
----------------------------
COVENANTS ACTUALS MINIMUM MAXIMUM
- --------- ----------- ----------- -----------
Interest coverage* 3.22 to 1.0 2.70 to 1.0
Fixed-charge coverage 1.11 to 1.0 1.00 to 1.0
Senior indebtedness to EBITDA 3.03 to 1.0 4.10 to 1.0
*INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
During the first nine months of 1996, the Company has repaid $118.1
million of debt, which included $75.0 million representing all of the
quarterly installments due in 1996 under the Credit Agreement, $20.6
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 September
30, 1996, for the commercial paper, the Term Loan and the Revolver, were
$361.1 million, $225.0 million and zero, respectively. As of September 30,
1996, outstanding letters of credit issued pursuant to the Credit Agreement
totaled $79.4 million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $83.9 million for the
third quarter and $235.3 million for the first nine months of 1996, a
decrease of $32.1 million and increase of $37.8 million over the same
periods, respectively, in 1995. The decreased operating cash flow for the
third quarter resulted primarily from the timing of payments of trade
payables and other liabilities. The year-to-date increase in operating
cash flow was mostly due to improved operating performance (previously
discussed in the Results of Operations section).
CAPITAL EXPENDITURES
In the first nine months, net cash used in investing activities
consisted primarily of payments of $137.4 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.
The Company expects to spend approximately $195 million on capital
improvements in 1996, excluding lease commitments. The current capital
expenditure funding will depend upon the level of EBITDA generated relative
to fixed-charge coverage requirements. Capital expenditures are being used
to complete remodels started in 1995; to remodel about 1,050 additional
stores; to further implement a retail information system; 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 $11 million in 1996 on capital improvements required to
10
comply with environmental regulations relating to USTs, as well as above-
ground vapor recovery equipment at store locations, and approximately an
additional $28 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 September 30, 1996, the Company has an accrued liability of
$54.0 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 September 30, 1996, the Company has recorded a gross
receivable of $63.1 million (a net receivable of $51.3 million after an
allowance of $11.8 million) for the estimated probable state
reimbursements. 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.
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 $36.9
million at September 30, 1996. Of this amount, $30.1 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 $21.5 million at September 30, 1996, representing
the former owner's portion of the clean-up costs.
None of the amounts related to environmental liabilities have been
discounted.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no reportable suits or proceedings pending or threatened
against the Company, other than as previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Exhibit (3) -- Bylaws of The Southland Corporation as
Amended April 24, 1996.
2. Exhibit (11) -- Statement re Computation of Per-Share
Earnings.
3. Exhibit (15) -- Letter re Unaudited Interim Financial
Information.
Letter of Coopers & Lybrand L.L.P.,
Independent Accountants.
4. Exhibit (27) -- Financial Data Schedule.
Submitted in electronic format only.
(b) 8-K Reports:
During the third quarter of 1996, the Company filed no reports on Form 8-K.
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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: October 31, 1996 /s/ Clark J. Matthews, II
-----------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive Officer
Date: October 31, 1996 /s/ Don Thomas
-----------------------------
(Principal Accounting Officer)
Donald E. Thomas
Controller
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