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, 1997
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
--------------
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 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, 1997.
THE SOUTHLAND CORPORATION
INDEX
Page
No.
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996........................... 1
Condensed Consolidated Statements of Earnings -
Three Months and Six Months Ended June 30, 1997 and 1996...... 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996....................... 3
Notes to Condensed Consolidated Financial Statements ........... 4
Report of Independent Accountants............................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 7
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .......................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 16
SIGNATURES........................................................... 17
Exhibit 10(ii)(D)- Master Leasing Agreement dated as of April 15,1997,
among the financial institutions party thereto as
Lessor Parties, CBL Capital Corporation, as Agent
for the Lessor Parties and The Southland
Corporation,as Lessee............................. 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
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . $ 47,023 $ 36,494
Accounts and notes receivable . . . . . . . . . . . 104,452 109,413
Inventories . . . . . . . . . . . . . . . . . 107,745 109,050
Other current assets . . . . . . . . . . . . . . 107,258 95,943
----------- -----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . 366,478 350,900
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . 1,352,922 1,349,839
OTHER ASSETS . . . . . . . . . . . . . . . . . . 296,297 338,409
----------- -----------
$ 2,015,697 $ 2,039,148
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable. . . . . . . . . . . . . . $ 209,369 $ 211,060
Accrued expenses and other liabilities . . . . . . . . 269,352 297,246
Commercial paper. . . . . . . . . . . . . . . . 48,693 98,055
Long-term debt due within one year. . . . . . . . . . 130,026 68,571
----------- -----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 657,440 674,932
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . 190,365 214,343
LONG-TERM DEBT . . . . . . . . . . . . . . . . . 1,627,381 1,638,828
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. . . . . . . . . . . . . . . (1,385,104) (1,414,570)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT ) . . . . . . . . (759,489) (788,955)
------------ ------------
$ 2,015,697 $ 2,039,148
=========== ===========
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,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
REVENUES:
Net sales (Including $246,359, $242,640,
$469,124 and $472,064 in excise taxes) $ 1,781,983 $ 1,791,736 $ 3,386,383 $ 3,354,350
Other income . . . . . . . . . . 22,105 22,182 43,728 41,219
------------ ------------ ------------ ------------
1,804,088 1,813,918 3,430,111 3,395,569
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . 1,259,650 1,266,440 2,414,283 2,387,008
Operating, selling, general and
administrative expenses . . . . . 480,130 473,705 918,418 902,572
Interest expense, net . . . . . . . 21,815 23,128 45,714 46,196
------------ ------------ ------------ ------------
1,761,595 1,763,273 3,378,415 3,335,776
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES . . . . . . 42,493 50,645 51,696 59,793
INCOME TAXES. . . . . . . . . . . . 16,863 20,258 20,544 23,917
------------ ------------ ------------ ------------
NET EARNINGS. . . . . . . . . . . . $ 25,630 $ 30,387 $ 31,152 $ 35,876
============ ============ ============ ============
NET EARNINGS PER COMMON SHARE
(Primary and Fully Diluted) . . . . . $.06 $.07 $.07 $.08
===== ===== ===== =====
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,
------------------------------
- -
1997 1996
------------- -------------
- -
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . $ 31,152 $ 35,876
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment . . . . 88,648 80,807
Other amortization. . . . . . . . . . . . . . . . . 9,513 9,513
Deferred income taxes. . . . . . . . . . . . . . . . 22,025 7,941
Noncash interest expense. . . . . . . . . . . . . . . 1,964 904
Other noncash (income) expense. . . . . . . . . . . . . (299) 474
Net (gain) loss on property and equipment . . . . . . . . . (433) 569
Decrease in accounts and notes receivable . . . . . . . . . 16,319 8,476
Decrease (increase) in inventories . . . . . . . . . . . 1,305 (4,221)
Increase in other assets. . . . . . . . . . . . . . . (11,732) (1,973)
(Decrease) increase in trade accounts payable and other liabilities (58,036) 13,091
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . 100,426 151,457
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment . . . . . . . . (94,518) (94,687)
Proceeds from sale of property and equipment . . . . . . . . . 10,728 7,433
Other . . . . . . . . . . . . . . . . . . . . . . 2,220 376
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . (81,570) (86,878)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . . . 2,856,548 1,762,600
Payments under commercial paper and revolving credit facilities . . . (2,829,800) (1,712,949)
Principal payments under long-term debt agreements . . . . . . . (34,555) (87,820)
Other . . . . . . . . . . . . . . . . . . . . . . (520) -
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . (8,327) (38,169)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . 10,529 26,410
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . 36,494 43,047
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . $ 47,023 $ 69,457
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . . . $ (48,122) $ (51,692)
============= =============
Net income taxes paid . . . . . . . . . . . . . . . . . $ (3,042) $ (5,881)
============= =============
See notes to condensed consolidated financial statements.
3
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of June 30, 1997, and the
condensed consolidated statements of earnings for the three-month and six-
month periods ended June 30, 1997 and 1996, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1997 and
1996, 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,
1997, 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, 1996, 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, 1996, include accounting
policies and additional information pertinent to an understanding of both the
December 31, 1996, 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, 1997.
2. EARNINGS PER SHARE:
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No.128, "Earnings per Share," in December 1997. SFAS No. 128
establishes simplified accounting standards for computing earnings per share
and makes them comparable to international earnings per share standards. The
table below reflects both the current earnings per share amount and the pro
forma earnings per share amount assuming adoption of SFAS No. 128.
Three Months Six Months
Ended June 30, Ended June 30,
--------------- --------------
1997 1996 1997 1996
------ ------ ------ -----
Per Statement of Earnings:
Primary and Fully Diluted $.06 $.07 $.07 $.08
Pro Forma:
Basic $.06 $.07 $.08 $.09
Diluted $.06 $.07 $.07 $.08
3. COMPREHENSIVE INCOME:
The Company is currently reviewing Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," but has not yet
determined when it will adopt the provisions of this statement. SFAS No. 130
establishes standards for reporting comprehensive income and its components
in a full set of general-purpose financial statements.
5
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, 1997, the related
condensed consolidated statements of earnings for the three-month and six-
month periods ended June 30, 1997 and 1996, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1997 and
1996. 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, 1996, 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 18, 1997, 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,
1996, 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
August 4, 1997
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the matters discussed in this quarterly report contain forward-
looking statements regarding the Company's future business which are subject
to certain risks and uncertainties, including competitive pressures, adverse
economic conditions and government regulations. These issues, and other
factors which may be identified from time to time in the Company's reports
filed with the SEC, could cause actual results to differ materially from
those indicated in the forward-looking statements.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings for the second quarter and first six months
of 1997 were $25.6 million ($.06 per share) and $31.2 million ($.07 per
share), respectively, compared to net earnings of $30.4 million ($.07 per
share) and $35.9 million ($.08 per share) for the same periods in 1996. The
results for the second quarter of 1997 declined, when compared to the prior
year, due to favorable gasoline market conditions in 1996, combined with the
incremental costs associated with the further implementation of several
strategic initiatives in 1997.
MANAGEMENT STRATEGIES
Since 1992, the Company has been committed to several key strategies
that it believes, over the long term, will provide further differentiation
from competitors and allow 7-Eleven to maintain its position as the premier
convenience retailer. These strategies include:
* Upgrading the Company's store base through developing or acquiring new
stores, continuing the upgrading of existing stores and closing
underachieving stores. During 1997, the Company expects to have net store
growth for the first time in ten years. During the first six months of 1997,
16 new stores opened, with a much greater number of stores expected to be
opened in the third and fourth quarters.
* A customer-driven approach to merchandising, which focuses on providing
the customer an expanded selection of quality products at a good value.
* An 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 through the use of combined distribution centers, fresh-food
commissaries and bakery facilities. These facilities, which are generally
third-party operated, are designed to provide fresher products, improve in-
stock conditions and lower product costs. Since June, 1996, the Company has
expanded into six new areas in support of this initiative, with additional
areas planned for the remainder of 1997 and 1998.
* The development of a retail information system that has helped to
automate accounting and other store-level tasks. The current phase, with
implementation beginning this year, involves the installation of point-of-
sale registers with scanning and a proprietary ordering system.
7
(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 $1.78 billion for the second quarter
and $3.39 billion in the first six months of 1997, compared to net sales of
$1.79 billion and $3.35 billion during the same periods last year. The
decrease in sales for the second quarter of 1997, when compared to the same
period in 1996, is due to a decrease in gasoline sales resulting from lower
retail prices in 1997. Merchandise sales growth per store was as follows:
Periods Ending June 30, 1997
----------------------------
INCREASE (DECREASE) FROM PRIOR YEAR Three Months Six Months
- ----------------------------------- ------------ ----------
U.S. same-store sales 0.4% 0.4% *
U.S. same-store real growth; excluding inflation (0.5)% (0.9)% *
7-Eleven inflation 0.9% 1.3%
* THE FACT THAT 1996 WAS A LEAP YEAR NEGATIVELY IMPACTS THE CURRENT
YEAR-TO-DATE GROWTH RESULTS BY APPROXIMATELY 50 BASIS POINTS. THE
YEAR-TO-DATE INCREASE IN U.S. SAME-STORES SALES, EXCLUDING THE LEAP
YEAR IMPACT WOULD BE 0.9%, WITH THE U.S. SAME-STORE REAL GROWTH
BEING -0.4%.
Gasoline sales dollars per store decreased 5.1% for the second quarter
due to a 7.0 cents per gallon decline in average retail sales price, as per-
store gasoline gallons sold increased only slightly during the second
quarter.
GROSS PROFITS
Periods Ending June 30, 1997
----------------------------
Three Months Six Months
------------ ----------
Merchandise Gasoline Merchandise Gasoline
----------- -------- ----------- --------
Gross Profit - dollars in millions $ 475.9 $ 46.4 $ 886.8 $ 85.3
INCREASE/(DECREASE) FROM PRIOR YEAR - ALL STORES
- ------------------------------------------------
Average per-store gross profit dollar change 1.1% (13.2)% 1.6% (9.7)%
Margin point change (gasoline in cents per gallon) (.01) (2.01) .19 (1.07)
Average per-store sales (gasoline in gallons) 1.1% 0.1% 1.0% (1.9)%
Total merchandise gross profit dollars were $3.6 million higher in the
second quarter and $13.0 million for the six months, when compared to the
same periods in 1996. The increase was due to modest average per-store sales
growth for both the second quarter and first six months, combined with
favorable merchandise margins for year-to-date 1997. The flat merchandise
margin during the second quarter, compared to last year, was due to
improvements in product costs from contract negotiations late in 1996 being
offset by introductory costs associated with the expansion of the fresh food
initiatives (see Management Strategies).
During the second quarter and first six months of 1997, gasoline gross
profits decreased $6.6 million and $8.2 million, respectively, over the same
periods in 1996. The second quarter decline was due to lower margin, as last
year's margin was aided by higher retail prices during a cycle in which
wholesale costs were dropping.
8
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
Periods Ending June 30, 1997
----------------------------
Three Months Six Months
------------ ----------
1997 1996 1997 1996
---- ---- ---- ----
Total OSG&A expenses $480.1 $473.7 $918.4 $902.6
Ratio of OSG&A to sales 26.9% 26.4% 27.1% 26.9%
Operating, selling, general and administrative expenses increased $6.4
million during the second quarter of 1997, compared to the same period in
1996 and $15.8 million for the first six months of 1997 compared to 1996. A
portion of the increase in OSG&A expenses resulted from costs associated with
the Company's implementation of its retail information system (approximately
$5 million more in the first six months of 1997) and other strategic
initiatives (see Management Strategies). The incremental cost of these
initiatives, combined with lower gasoline prices in the second quarter of
this year, pushed up the ratio of OSG&A expenses to sales for both the
quarter and the year. While this ratio will vary on a quarterly basis,
management believes it will continue to be slightly less favorable during the
roll-out phase of the retail information system.
The Company continues to review the functions necessary to enable its
stores to respond faster and more cost efficiently to rapidly changing
customer needs and preferences. In conjunction with this review, management
continues to realign and reduce personnel and office facilities, in order to
eliminate non-essential costs, while devoting resources to the implementation
of its retail information system and other strategic initiatives (see
Management Strategies).
INTEREST EXPENSE, NET
Net interest expense decreased $1.3 million and $0.5 million from 1996
during the second quarter and first six months of 1997, respectively. The
decrease was primarily due to lower levels of borrowing. Approximately 36%
of the Company's debt contains floating rates that would be unfavorably
impacted by rising interest rates. The weighted average interest rate for
such debt was 5.7% for the second quarter and 5.8% for the first six months
of 1997 versus 5.7% and 5.9% for the same time periods in 1996. The Company
expects net interest expense in 1997 to remain relatively flat due to higher
borrowings to finance new store development, offset by increased capitalized
interest and a .6% reduction in the cost of borrowing that the Company
negotiated with the lenders in its new, unsecured bank debt credit agreement
("New Credit Agreement") (see Liquidity and Capital Resources).
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's working capital is provided from three
sources: i) cash flows generated from its operating activities; ii) a $400
million commercial paper facility (guaranteed by Ito-Yokado Co., Ltd.); and
iii) short-term seasonal borrowings of up to $400 million (reduced by
outstanding letters of credit) under its revolving credit facility. The
Company believes that operating activities, coupled with available short-term
working capital facilities, will provide sufficient liquidity to fund current
operating and capital expenditure programs, as well as to service debt
requirements.
In February 1997, the Company entered into a New Credit Agreement,
refinancing its old term loan ($225 million), revolving credit facility and
letters of credit ($150 million each), all of which were scheduled to mature
on December 31, 1999, with a new term loan facility ("Term Loan") and
revolving credit facility. The Term Loan ($225 million) has scheduled
quarterly repayments of $14.1 million commencing March 31, 1998 through
December 31, 2001. The new revolving credit facility ($400 million) expires
February 2002 and allows for revolving borrowings ("Revolver"), and for
issuance of letters of credit not to exceed $150 million. Interest on the
Term Loan and Revolver is based on a variable rate equal to the
administrative agent bank's base rate or, at the Company's option, a rate
equal to a reserve-adjusted Eurodollar rate plus .225% for drawn amounts. The
new agreement requires letter of credit fees to be paid quarterly at .325% on
the outstanding amount. In addition, a facility fee of .15% is payable
quarterly on the total amount available under the New Credit Agreement, as
such amount is reduced from time to time. The cost of borrowings and letters
of credit under the New Credit Agreement represents a decrease of .6% and
.45%, respectively, from the prior secured senior bank debt credit agreement.
All rates and fees quoted are on a per annum basis.
In April 1997, the Company entered into a Master Lease Facility ("MLF")
of $115 million, which will be the primary financing for a complete
integrated point-of-sale system that is scheduled to be rolled out over the
subsequent six quarters (see Management Strategies). The lease payment on
the MLF will be based on a variable rate equal to the Eurodollar rate plus a
blended all-inclusive spread of .46% per year. The MLF has a three-year
noncancellable term with semiannual options to renew for up to an additional
two years. Based upon current roll-out schedules, it is anticipated that the
commitment under the MLF will be fully utilized by the end of 1998.
The New Credit Agreement and the MLF contain certain financial and
operating covenants requiring, among other things, the maintenance of certain
financial ratios, including interest and rent coverage, fixed-charge coverage
and senior indebtedness to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The covenant levels established by the New Credit
Agreement and the MLF generally require continuing improvement in the
Company's financial condition.
For the period ended June 30, 1997, the Company was in compliance with
all of the covenants required under the New Credit Agreement, including
compliance with the principal financial and operating covenants (calculated
over the latest 12-month period) as follows:
Requirements:
--------------------
Covenants Actuals Minimum Maximum
--------- ------- ------- -------
Interest and rent coverage * 2.15 to 1.0 2.00 to 1.0
Fixed charge coverage 1.19 to 1.0 0.65 to 1.0
Senior indebtedness to EBITDA 3.12 to 1.0 3.40 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
During the first six months of 1997, the Company repaid $34.6 million of
debt, which included $15.6 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 June 30 1997, for the commercial paper, the Term Loan and the
Revolver, were $398.7 million, $225.0 million and $25.5 million,
1
respectively. As of June 30, 1997, outstanding letters of credit issued
pursuant to the New Credit Agreement totaled $68.3 million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $73.3 million for the
second quarter and $100.4 million for the first six months of 1997, a
decrease of $22.0 million and $51.0 million compared to the same periods in
1996. The majority of the decrease was due to the timing of payments related
to trade payables. (See Results of Operations section)
CAPITAL EXPENDITURES
In the first six months of 1997, net cash used in investing activities
consisted primarily of payments of $94.5 million for property and equipment.
The majority of this capital was used for implementation of the Company's
retail information system, new store development, remodeling stores,
upgrading retail gasoline facilities, replacing equipment and complying with
environmental regulations.
The Company expects 1997 capital expenditures, excluding lease
commitments, to be approximately $265 million. Capital expenditures are
being used to develop or acquire new stores, upgrade store facilities,
further implement the retail information system, replace equipment, upgrade
gasoline facilities and comply with environmental regulations. The amount of
expenditures during the year will be materially impacted by the Company's
ability to find and acquire new stores that fit its growth strategy and the
portion of new store development that is funded through working capital
versus leases. Most leases for newly constructed stores will contain
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
$15 million in 1997 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 $20
million on such capital improvements from 1998 through 2000.
ENVIRONMENTAL
In December 1988, the Company closed its chemical manufacturing facility
in New Jersey. As a result, the Company is required to conduct environmental
remediation at the facility and has submitted a clean-up plan to the New
Jersey Department of Environmental Protection (the "State"), which provides
for remediation of the site for approximately a three-to-five-year period, as
well as continued groundwater treatment for a projected 20-year period. The
Company has recently received conditional approval of its clean-up plan. The
Company has recorded undiscounted liabilities representing its best estimates
of the clean-up costs of $13.9 million at June 30, 1997. In 1991, the
Company and the former owner of the facility executed a final settlement
pursuant to which the former owner agreed to pay a substantial portion of the
clean-up costs. Based on the terms of the settlement agreement and the
financial resources of the former owner, the Company has recorded a
receivable of $8.1 million at June 30, 1997.
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Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At June 30, 1997, the Company's
estimated undiscounted liability for these sites was $36.1 million. This
estimate is based on the Company's prior experience with gasoline sites and
its consideration of such factors as the age of the tanks, location of tank
sites and experience with contractors who perform environmental assessment
and remediation work. The Company anticipates that substantially all of the
future remediation costs for detected releases at these sites as of June 30,
1997, will be incurred within the next five years.
Under state reimbursement programs, the Company is eligible to receive
reimbursement for a portion of future remediation costs, as well as a portion
of remediation costs previously paid. Accordingly, as of June 30, 1997, the
Company has a net receivable of $45.3 million recorded for the estimated
probable state reimbursements. In assessing the probability of state
reimbursements, the Company takes into consideration each state's fund
balance, revenue sources, existing claim backlog, status of clean-up activity
and claim ranking systems. As a result of these assessments, the recorded
receivable amount is net of an allowance of $8.5 million. While there is no
assurance of the timing of the receipt of state reimbursement funds, based on
its experience, the Company expects to receive the majority of state
reimbursement funds, except from California, within one to three years after
payment of eligible remediation expenses, assuming that the state
administrative procedures for processing such reimbursements have been fully
developed. The Company estimates that it may take one to eight years to
receive reimbursement funds from California. Therefore, the portion of the
recorded receivable amounts that relate to sites where remediation activities
have been completed have been discounted at 6.2% to reflect their present
value. Thus, the recorded receivable amount is also net of a discount of
$6.6 million.
The estimated future assessment and remediation expenditures and related
state reimbursement amounts could change within the near future as
governmental requirements and state reimbursement programs continue to be
implemented or revised.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
7-ELEVEN OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND
CORPORATION, ET AL.
As previously reported, in 1993 a purported class action lawsuit
entitled 7-ELEVEN OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND
CORPORATION, ET AL., Case No. 722272-6, was filed against Southland in the
Superior Court for Alameda County, California ("7-Eleven OFFF"). The
Company's majority owners and approximately 18 of its vendors were also named
as defendants in this litigation.
The Company's majority owners have been dismissed from the case, along
with most of the vendor defendants, including Coca Cola, Pepsi Cola, Hansen's
Juices and Oscar Mayer. The only defendants remaining in the case are
Southland, Citgo Petroleum Corporation and McLane Company, Inc.
The Complaint filed by the plaintiffs alleged a variety of violations of
California state antitrust laws, the California Business and Professions
Code, breaches of the 7-Eleven Franchise Agreement and other claims relating
to the business relationship between the Company and its 7-Eleven
franchisees.
On June 13, 1997, the Court heard argument on the plaintiffs' motion to
certify a class in the case. On July 23, 1997, the Court entered an Order on
the plaintiff's motion that contained the following rulings:
(a) the motion to certify a class on the following claims was denied,
and plaintiffs have now elected to abandon these claims: (1) the claim
relating to automated teller machines; (2) the claim relating to proprietary
cups; (3) the claim relating to Southland's accelerated inventory management
program; and (4) the claim that Southland required franchisees to incur
certain expenses as a condition of having their stores remodeled;
(b) the motion to certify a class on the following claims was denied,
but without prejudice to plaintiffs' right to renew their motion: (1) the
claim against Southland and Citgo relating to the manner in which franchisees
are compensated for the sale of gasoline; and (2) the claim that Southland
conspired with certain vendors to fix wholesale prices of 7-Eleven
proprietary items that were purchased by the franchisees;
(c) the motion to certify a class on the following claims was granted:
(1) the claim asserting that Southland should have credited the franchisees'
cost of goods sold with the value of equipment furnished by merchandise
suppliers; (2) the claim asserting that Southland wrongfully failed to credit
the franchisees' cost of goods sold with certain rebates, discounts, and
allowances; (3) the claim relating to advertising allowances that Southland
received from merchandise suppliers; (4) the claim that Southland wrongfully
profited from its sale of goods to the franchisees; (5) the claim requesting
that Southland be enjoined from requiring franchisees to operate 24 hours per
day pursuant to the provisions of their franchise agreements; and (6) the
claim that Southland and McLane conspired to divide wholesale markets and/or
customers within California in violation of California's antitrust statute;
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(d) only the individual franchisees who are named plaintiffs in the case
will be permitted to serve as class representatives, and the association
known as 7-Eleven Owners for Fair Franchising will not be permitted to serve
as a class representative; and
(e) the time period for which the plaintiffs may seek damages on the
claims certified for class action treatment shall not extend back more than
four years from the filing of the Complaint in the case (i.e., to August 20,
1989).
Finally, during the June 13 hearing, the Court ruled that the claim
against Southland and McLane regarding the alleged division of wholesale
markets should be tried separately from the other remaining claims in the
case. The separate trial on this antitrust claim is scheduled to begin on
January 12, 1998. The trial on all other remaining claims is now scheduled
to commence on April 6, 1998. It is anticipated that the notice to potential
class members will be mailed in September or October.
The Company continues to believe that it has meritorious defenses to all
of the claims asserted by the plaintiffs in this case and intends to defend
vigorously against all such claims. The ultimate outcome of a complicated
case of this nature cannot be predicted, because such litigation is
inherently uncertain.
VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
VALENTE I: As previously reported, on March 15, 1996, the same lawyers
representing the plaintiffs in the 7-Eleven OFFF case filed another purported
class action lawsuit against the Company and most of the other defendants in
the 7-Eleven OFFF case, 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 I"). Valente I alleged essentially the
same claims as the 7-Eleven OFFF case, and was filed on behalf of all persons
who signed a franchise agreement with Southland on or after March 15, 1990,
relating to a 7-Eleven store in any state, except California.
The Company filed a motion to transfer the case to federal court in
Dallas and on June 24, 1996, that motion was granted. After the transfer of
the case to federal court in Dallas, the plaintiffs moved to dismiss the
case, and on May 27, 1997, that motion was granted and this litigation is now
terminated.
VALENTE II: On November 14, 1996, a third purported class action
lawsuit was filed in the state court in Dallas, Texas (VALENTE, ET AL. V. THE
SOUTHLAND CORPORATION, 14th Judicial District, Case No. 96-11972-A) ("Valente
II"). Southland is the only defendant named in this case, which alleges
breach of contract relating to the manner in which the Company accounted for
discounts and allowances from merchandise vendors. The plaintiffs purport to
represent all persons who signed a franchise agreement with Southland on or
after January 1, 1967, with respect to a 7-Eleven store in any state, except
California.
On June 20, 1997, the Court granted Southland's motion for partial
summary judgment denying the Plaintiffs allegation that a Texas statute
entitled them to seek damages for a period in excess of the four years
allowed by the statute of limitations for breach of contract. The plaintiffs
have attempted to replead their claims in order to avoid the four year
statute of limitations. The Company will continue to resist the plaintiffs'
efforts to avoid the four year statute of limitations.
The hearing on plaintiffs' motion for class certification is scheduled
for November 20, 1997. The Company intends to contest the certification of a
class in this case and to defend
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vigorously against all of the plaintiffs' allegations. The Company continues
to believe it has meritorious defenses to all of the claims asserted by the
plaintiffs in this case. The ultimate outcome of a complicated case of this
nature cannot be predicted, because such litigation is inherently uncertain.
EMIL V. SPARANO, ET AL. V. THE SOUTHLAND CORPORATION, ET AL.
As previously reported, a lawsuit entitled EMIL V. SPARANO, ET AL. V.
THE SOUTHLAND CORPORATION, ET AL. was filed against the Company, its majority
owners and seven of its current and former officers in the United States
District Court for the Northern District of Illinois, in April 1994.
Plaintiffs are several franchisees of 7-Eleven stores in Illinois,
Pennsylvania, New Jersey and Nevada, who 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. During 1996, as the result of several
rulings in the Company's favor, the only defendants remaining in the case are
the Company, John Thompson, Jere Thompson and Clark Matthews. In addition,
of the 11 original causes of action, only one claim has been certified to
proceed as a class action against the remaining defendants. This claim
alleges that 7-Eleven franchisees were injured as a result of allegedly
fraudulent statements about the Company's financial condition that were made
during and after the Company's LBO and Chapter 11 bankruptcy proceedings.
The class has now been defined to consist of all persons who operated a
7-Eleven convenience store franchise at any time between December 1, 1987 and
March 4, 1991. The Class Notice was mailed on or about April 24, 1997. No
trial date has been set for this matter and no motions are currently pending.
The Company has aggressively attacked the merits of this suit from its
inception and believes that it has meritorious defenses to the remaining
claim. At this time, however, the litigation is still at an early stage of
development and the ultimate outcome of a complicated case of this nature
cannot be predicted because such litigation is inherently uncertain.
TONKAWA SPRINGS HOMEOWNERS ASSOCIATION, ET AL. V. THE SOUTHLAND CORPORATION
As previously reported a lawsuit was filed in Georgetown, Texas on
behalf of a purported class of property owners in a subdivision near Round
Rock, Texas who claimed their properties had been damaged as the result of a
release of petroleum products from the 7-Eleven store in Round Rock (TONKAWA
SPRINGS HOMEOWNERS ASSOCIATION VS. THE SOUTHLAND CORPORATION, 97-021-C277, in
the 277th Judicial District Court for Williamson County, Texas). On May 8,
1997, this case was dismissed pursuant to a Notice of Nonsuit filed by the
plaintiffs. The Company paid no damages to plaintiffs in connection with the
dismissal.
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 23, 1997, the Company held its annual meeting of shareholders.
Each of the fourteen nominated directors were elected without contest. In
addition, the shareholders approved the adoption of the Company's 1997
Performance Plan, and ratified the approval of Coopers & Lybrand L.L.P. to be
the Company's independent auditors for 1997.
(a) The votes for and the votes withheld for each of the nominees for
director were as follows:
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NOMINEE FOR WITHHELD
Masatoshi Ito 317,098,101 128,783
Toshifumi Suzuki 317,098,101 128,783
Clark J. Matthews, II 317,068,551 158,333
Yoshitami Arai 317,099,111 127,773
Masaaki Asakura 317,099,196 127,688
Timothy N. Ashida 317,099,196 127,688
Jay W. Chai 317,097,702 129,182
Gary J. Fernandes 317,097,927 128,957
Masaaki Kamata 317,099,111 127,773
James W. Keyes 317,091,193 135,691
Stephen B. Krumholz 317,099,195 127,689
Kazuo Otsuka 317,099,196 127,688
Asher O. Pacholder 317,099,195 127,689
Nobutake Sato 317,099,111 127,773
(b) The votes for, against, abstaining and broker non-votes in
connection with the approval of the Company's 1997 Performance Plan were as
follows:
303,512,176 shares were voted for; 581,487 shares were voted against;
74,086 shares abstained from voting; and 13,059,135 broker non-votes were
received.
(c) 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 1997 were as
follows:
317,013,985 shares were voted for; 77,356 shares were voted against;
45,010 shares abstained from voting; and 90,533 broker non-votes were
received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Exhibit 10(ii)(D) -- Material Contracts
Master Leasing Agreement dated as of April 15, 1997, among
the financial institutions party thereto as Lessor Parties,
CBL Capital Corporation, as Agent for the Lessor Parties
and The Southland Corporation, as Lessee.
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 second quarter of 1997, 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: 8/5/97 /s/ Clark J. Matthews II
------------- ----------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive
Officer
Date: 8/5/97 /s/ Donald E. Thomas
------------- -----------------------------
(Principal Accounting Officer)
Donald E. Thomas
Vice President and Controller
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