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 September 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
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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, 1997.
THE SOUTHLAND CORPORATION
INDEX
Page
No.
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996....................... 1
Condensed Consolidated Statements of Earnings -
Three Months and Nine Months Ended September 30, 1997 and 1996. 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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 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
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . $ 46,012 $ 36,494
Accounts and notes receivable . . . . . . . . . . 96,491 109,413
Inventories . . . . . . . . . . . . . . . . 111,794 109,050
Other current assets . . . . . . . . . . . . . 114,724 95,943
----------- -----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . 369,021 350,900
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . 1,366,872 1,349,839
OTHER ASSETS . . . . . . . . . . . . . . . . . 295,892 338,409
----------- -----------
$ 2,031,785 $ 2,039,148
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable. . . . . . . . . . . . . $ 193,989 $ 211,060
Accrued expenses and other liabilities . . . . . . . 296,008 297,246
Commercial paper. . . . . . . . . . . . . . . 42,863 98,055
Long-term debt due within one year. . . . . . . . . 122,877 68,571
----------- -----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . 655,737 674,932
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . 198,523 214,343
LONG-TERM DEBT . . . . . . . . . . . . . . . . 1,601,977 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. . . . . . . . . . . . . . (1,350,067) (1,414,570)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) . . . . . . . (724,452) (788,955)
------------ ------------
$ 2,031,785 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
REVENUES:
Net sales (Including $256,235, $256,833,
$725,358 and $728,897 in excise taxes) $ 1,873,936 $ 1,839,870 $ 5,260,319 $ 5,194,220
Other income . . . . . . . . . . 22,850 22,821 66,578 64,040
------------ ------------ ------------ ------------
1,896,786 1,862,691 5,326,897 5,258,260
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . 1,321,793 1,298,437 3,736,076 3,685,445
Operating, selling, general and
administrative expenses . . . . . 497,202 479,314 1,415,620 1,381,886
Interest expense, net . . . . . . . 22,158 22,130 67,872 68,326
------------ ------------ ------------ ------------
1,841,153 1,799,881 5,219,568 5,135,657
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES . . . . . . 55,633 62,810 107,329 122,603
INCOME TAXES. . . . . . . . . . . . 22,162 25,124 42,706 49,041
------------ ------------ ------------ ------------
NET EARNINGS. . . . . . . . . . . . $ 33,471 $ 37,686 $ 64,623 $ 73,562
============ ============ ============ ============
NET EARNINGS PER COMMON SHARE
(Primary and Fully Diluted) . . . . . $.07 $.08 $.15 $.17
===== ===== ===== =====
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,
-------------------------------
1997 1996
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 64,623 $ 73,562
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment . . . . . 132,436 122,870
Other amortization. . . . . . . . . . . . . . . . . . 14,270 14,270
Deferred income taxes. . . . . . . . . . . . . . . . . 36,396 19,748
Noncash interest expense. . . . . . . . . . . . . . . . 2,210 1,332
Other noncash (income) expense. . . . . . . . . . . . . . (867) 144
Net (gain) loss on property and equipment . . . . . . . . . . (331) 54
Decrease in accounts and notes receivable . . . . . . . . . . 23,749 18,263
(Increase) decrease in inventories . . . . . . . . . . . . (2,744) 601
Increase in other assets. . . . . . . . . . . . . . . . (20,647) (3,166)
Decrease in trade accounts payable and other liabilities . . . . . (54,115) (12,353)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . 194,980 235,325
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment . . . . . . . . . (148,705) (137,371)
Proceeds from sale of property and equipment . . . . . . . . . . 12,583 12,214
Other . . . . . . . . . . . . . . . . . . . . . . . 2,939 2,938
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . (133,183) (122,219)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . . . . 4,034,465 3,012,509
Payments under commercial paper and revolving credit facilities . . . . (4,038,178) (3,004,127)
Principal payments under long-term debt agreements . . . . . . . . (48,046) (118,104)
Other . . . . . . . . . . . . . . . . . . . . . . . (520) -
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . (52,279) (109,722)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . 9,518 3,384
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . . 36,494 43,047
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . $ 46,012 $ 46,431
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . . . . $ (71,708) $ (77,622)
============= =============
Net income taxes paid . . . . . . . . . . . . . . . . . . $ (5,858) $ (15,485)
============= =============
See notes to condensed consolidated financial statements.
3
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of September 30, 1997, and
the condensed consolidated statements of earnings for the three-month and
nine-month periods ended September 30, 1997 and 1996, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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 September 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
nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
Per Statement of Earnings:
Primary and Fully Diluted $.07 $.08 $.15 $.17
Pro Forma:
Basic $.08 $.09 $.16 $.18
Diluted $.07 $.08 $.15 $.17
3. COMPREHENSIVE INCOME:
The Company is currently reviewing Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The statement
establishes standards for reporting comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 becomes
effective for fiscal years beginning after December 15, 1997, and early
adoption is permitted. The Company has not yet determined when it will adopt
the provisions of this statement.
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 September 30, 1997, the related
condensed consolidated statements of earnings for the three-month and nine-
month periods ended September 30, 1997 and 1996, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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 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
October 24, 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 third quarter and first nine months
of 1997 were $33.5 million ($.07 per share) and $64.6 million ($.15 per
share), respectively, compared to net earnings of $37.7 million ($.08 per
share) and $73.6 million ($.17 per share) for the same periods in 1996. The
decline in net earnings for the third quarter of 1997, compared to the prior
year, was due to more 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 to remodel and update 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 nine
months of 1997, 30 new stores opened. By year end, the Company expects
to have opened a total of approximately 70-85 new stores, with another
25-30 under construction.
* 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
September, 1996, the Company has expanded into five 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 the pilot program started in September, 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 $1.87 billion for the third quarter
and $5.26 billion in the first nine months of 1997, compared to net sales of
$1.84 billion and $5.19 billion during the same periods last year. The
third quarter increase was due to merchandise sales growth. Categories
contributing to the Company's largest U.S. same-store real growth since 1994
were SLURPEE, services, tobacco, coffee, fresh bakery, and noncarbonated
beverages. Merchandise sales growth per store was as follows:
PERIODS ENDING SEPTEMBER 30, 1997
---------------------------------
INCREASE (DECREASE) FROM PRIOR YEAR Three Months Nine Months
- ----------------------------------- ------------ -----------
U.S. same-store sales 2.2% 1.0%*
U.S. same-store real growth; excluding inflation 1.3% (0.1)%*
7-Eleven inflation 0.9% 1.1%
* THE FACT THAT 1996 WAS A LEAP YEAR NEGATIVELY IMPACTS THE
CURRENT YEAR-TO-DATE GROWTH RESULTS BY APPROXIMATELY 34 BASIS
POINTS. THE YEAR-TO-DATE INCREASE IN U.S. SAME-STORES SALES,
EXCLUDING THE LEAP YEAR IMPACT WOULD BE 1.4%, WITH THE U.S.
SAME-STORE REAL GROWTH BEING 0.2%.
Gasoline sales dollars per store decreased 1.2% for the third quarter
due to slight declines in both the average retail sales price and per-store
gasoline gallons sold.
GROSS PROFITS
Periods Ending September 30, 1997
---------------------------------
Three Months Nine Months
------------ -----------
Merchandise Gasoline Merchandise Gasoline
----------- -------- ----------- --------
Gross Profit - DOLLARS IN MILLIONS $ 505.8 $ 46.3 $ 1,392.6 $ 131.6
INCREASE/(DECREASE) FROM PRIOR YEAR - ALL STORES
- ------------------------------------------------
Average per-store gross profit dollar change 3.7% (14.2)% 2.3% (11.3)%
Margin point change (gasoline in cents per gallon) .38 (2.09) .26 (1.42)
Average per-store sales (gasoline in gallons) 2.6% (0.1)% 1.6% (1.3)%
Total merchandise gross profit dollars were $17.8 million higher in the
third quarter and $30.8 million higher for the nine months, when compared to
the same periods in 1996. The favorable third quarter results are due to
improved average per-store sales growth and strong merchandise margins. The
increase in merchandise margin during the third quarter and first nine
months, compared to last year, was primarily due to improvements in product
costs and increased sales of high margin services and products like SLURPEE,
coffee and noncarbonated beverages.
During the third quarter and first nine months of 1997, gasoline gross
profits decreased $7.1 million and $15.3 million, respectively, over the
same periods in 1996. The third quarter decline was primarily due to lower
margin (in cents per gallon), as gallon sales per store were virtually flat.
The lower margin was primarily the result of two factors, the aggressive
retail tactics of some competitors, and higher gas costs. The higher gas
costs, which trended up for much of the quarter, were brought on by further
tightening in industry inventory levels. Although retail prices trended up
during the third quarter, they were slightly below last year's averages for
the quarter.
8
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
Periods Ending September 30, 1997
---------------------------------
Three Months Nine Months
---------------- --------------
1997 1996 1997 1996
---- ---- ------ ------
Total OSG&A expenses $497.2 $479.3 $1,415.6 $1,381.9
Ratio of OSG&A to sales 26.5% 26.1% 26.9% 26.6%
Operating, selling, general and administrative expenses increased $17.9
million during the third quarter of 1997, compared to the same period in
1996 and $33.7 million for the first nine 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 $10 million more in the first nine months of 1997) and other
strategic initiatives (see Management Strategies). Other factors that have
pushed up the ratio of OSG&A expenses to sales for both the quarter and the
year are higher wages associated with tighter labor markets, a favorable
insurance adjustment in the third quarter of 1996 (as a result of positive
claims experience) and lower gasoline prices over the last two quarters.
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 for the third quarter has been virtually flat,
when compared with 1996, while decreasing $0.5 million during the first nine
months of 1997. Approximately 35% 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 5.8% for the third quarter
and 5.8% for the first nine 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
9
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 September 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 * 2.13 to 1.0 2.00 to 1.0
Fixed charge coverage 1.21 to 1.0 0.65 to 1.0
Senior indebtedness to EBITDA 3.07 to 1.0 3.40 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
During the first nine months of 1997, the Company repaid $48.0 million
of debt, which included $24.8 million for principal payments on the
Company's yen-denominated loan
10
(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 1997, for the commercial paper, the Term Loan and the Revolver, were
$392.9 million, $225.0 million and $0.0 million, respectively. As of
September 30, 1997, outstanding letters of credit issued pursuant to the New
Credit Agreement totaled $69.0 million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $94.6 million for the
third quarter and $195.0 million for the first nine months of 1997, an
increase of $10.7 million for the quarter and a decrease of $40.3 million
for the year, compared to 1996. (See Results of Operations section)
CAPITAL EXPENDITURES
In the first nine months of 1997, net cash used in investing activities
consisted primarily of payments of $148.7 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, further implement the retail
information system, replace equipment, upgrade store and gasoline facilities
and comply with environmental regulations. The amount of expenditures made
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 received conditional approval of its clean-
up plan. The Company has recorded undiscounted liabilities representing its
best estimates of the clean-up costs of $13.7 million at September 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
11
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 $7.9 million at September 30, 1997.
Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At September 30, 1997, the
Company's estimated undiscounted liability for these sites was
$34.4 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 September 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 September
30, 1997, the Company has a net receivable of $46.3 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 $6.8 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 5.8% 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.
T & L PROPERTY SERVICE (TAL-TEX)
As previously reported, on June 21, 1995, a lawsuit was filed in Dallas
County, Texas against the Company by T&L Property Service, an affiliate of
Tal-Tex, Inc. ("Tal-Tex"). Tal-Tex is a water supply company located near
Round Rock, Texas. The Complaint was subsequently amended to include claims
by Tal-Tex and its principals and claims by certain individuals who reside
in or near Round Rock on behalf of themselves and a purported class of
similarly situated residents, alleging personal injuries and property
damages as a result of a release of petroleum from underground storage tanks
at a 7-ELEVEN store in Round Rock, Texas that was discovered in July 1993
(the "Release"). In March, 1996, the individual claims of the Tal -Tex
entities were severed from the purported class action and, as previously
reported, the lawsuit involving the class claims was voluntarily dismissed
by the plaintiffs and refiled as TONKAWA SPRINGS HOMEOWNERS ASSOCIATION ET
AL. V. THE SOUTHLAND CORPORATION, Cause No. 97-021-C277, in the 277th
Judicial District Court for Williamson County, Texas, and then voluntarily
dismissed on May 8, 1997.
Prior to trial of the lawsuit involving the individual claims of the
Tal-Tex entities, the parties entered into a settlement agreement, effective
August 25, 1997, resolving all issues in connection with the Release. Under
the terms of the settlement, the plaintiffs released their claims against
Southland in exchange for payment of an agreed settlement amount. The
Company has no further obligations to the Tal-Tex entities in connection
with the Release, unless the Texas Natural Resource Conservation Commission
(i) subsequently orders Tal-Tex to shut down its water supply wells due to a
new finding of contamination and (ii) determines that such contamination was
a direct result of the Release that was discovered in 1993.
ARTURO M. VASQUEZ ET AL. V. THE SOUTHLAND CORPORATION ET AL.
As previously reported, a suit was filed in 1995 against the Company
styled ARTURO M. VASQUEZ ET AL. V. THE SOUTHLAND CORPORATION ET AL. which
asserted claims on behalf of a purported class of persons whose properties
had allegedly been damaged by petroleum releases at approximately 150 former
or current 7-Eleven locations in Texas. In late 1996, the plaintiffs
withdrew all class claims and proceeded with individual claims that were
allegedly associated with a single 7-Eleven store in Bryan, Texas. Prior to
the commencement of trial of the lawsuit, the parties entered into a
settlement agreement, effective as of September 8, 1997, resolving all
issues between them.
There are no other reportable suits or proceedings pending or
threatened against the Company, other than as previously reported.
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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 third 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: October 31, 1997 /s/ Clark J. Matthews, II
---------------- -----------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive
Officer
Date: October 31, 1997 /s/ Don Thomas
---------------- ------------------------------
(Principal Accounting Officer)
Donald E. Thomas
Vice President and Controller
15