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 30,1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBERS 0-676 AND 0-16626
-----------------
THE SOUTHLAND CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVE., DALLAS, TEXAS 75204-2906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, 214/828-7011
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO 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, 1998.
THE SOUTHLAND CORPORATION
INDEX
Page
No.
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997............................ 1
Condensed Consolidated Statements of Earnings -
Three Months and Six Months Ended June 30, 1998 and 1997....... 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997........................ 3
Notes to Condensed Consolidated Financial Statements ............ 4
Report of Independent Accountants................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 16
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ........................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 18
SIGNATURES............................................................ 20
Exhibit 10(i)(1) - Second Amendment, dated as of April 29, 1998, to
Credit Agreement dated as of February 27, 1997,
among The Southland Corporation, the financial
institutions party thereto as Senior Lenders, the
financial institutions party thereto as Issuing
Banks, Citibank, N.A., as Administrative Agent, and
The Sakura Bank, Limited, New York Branch, as
Co-Agent.* ........................................Tab 1*
Exhibit 10(i)(2) - Secured Yen Loan Agreement for The Southland
Corporation relating to royalties from Seven-Eleven
(Japan) Company, Ltd. In the amount of Japanese Yen
12,500,000,000, dated as of April 21, 1998.*.......Tab 2*
Exhibit (15) - Letter re Unaudited Interim Financial Information......Tab 3
Exhibit (27) - Financial Data Schedule................................ **
* Submitted with filing; not attached hereto.
** 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,
1998 1997
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 59,696 $ 38,605
Accounts receivable 130,934 126,495
Inventories 118,667 125,396
Other current assets 156,301 96,145
----------- -----------
TOTAL CURRENT ASSETS 465,598 386,641
PROPERTY AND EQUIPMENT 1,523,032 1,416,687
OTHER ASSETS 312,538 286,753
----------- -----------
$ 2,301,168 $ 2,090,081
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 221,003 $ 196,799
Accrued expenses and other liabilities 287,823 275,267
Commercial paper 47,989 48,744
Long-term debt due within one year 265,073 208,839
----------- -----------
TOTAL CURRENT LIABILITIES 821,888 729,649
DEFERRED CREDITS AND OTHER LIABILITIES 196,213 187,414
LONG-TERM DEBT 1,586,788 1,594,545
CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES 380,000 300,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value 41 41
Additional capital 625,574 625,574
Accumulated deficit (1,320,455) (1,352,058)
Accumulated other comprehensive income 11,119 4,916
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT ) (683,721) (721,527)
------------ ------------
$ 2,301,168 $ 2,090,081
=========== ===========
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,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES:
Net sales (Including $257,426, $246,359,
$486,669 and $469,124 in excise taxes) $ 1,844,524 $ 1,781,983 $ 3,439,482 $ 3,386,383
Other income 23,434 22,105 43,877 43,728
------------ ------------ ------------ ------------
1,867,958 1,804,088 3,483,359 3,430,111
COSTS AND EXPENSES:
Cost of goods sold 1,298,806 1,259,650 2,439,345 2,414,283
Operating, selling, general and
administrative expenses 505,594 480,130 977,310 918,418
Interest expense, net 22,092 21,815 44,665 45,714
------------ ------------ ------------ ------------
1,826,492 1,761,595 3,461,320 3,378,415
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 41,466 42,493 22,039 51,696
INCOME TAXES 15,629 16,863 8,307 20,544
------------ ------------ ------------ ------------
EARNINGS BEFORE EXTRAORDINARY GAIN $ 25,837 $ 25,630 $ 13,732 $ 31,152
EXTRAORDINARY GAIN ON DEBT REDEMPTION (net
of tax effect of $11,425) - - 17,871 -
------------ ------------ ------------- ------------
NET EARNINGS $ 25,837 $ 25,630 $ 31,603 $ 31,152
============ ============ ============ =============
EARNINGS BEFORE EXTRAORDINARY GAIN PER COMMON SHARE:
Basic $.06 $.06 $.04 $.08
Diluted .06 .06 .03 .07
EXTRAORDINARY GAIN ON DEBT REDEMPTION PER COMMON SHARE:
Basic $.00 $.00 $.04 $.00
Diluted .00 .00 .04 .00
NET EARNINGS PER COMMON SHARE:
Basic $.06 $.06 $.08 $.08
Diluted .06 .06 .07 .07
See notes to condensed consolidated financial statements.
2
<Page
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
-------------------------------
1998 1997
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 31,603 $ 31,152
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary gain on debt redemption (17,871) -
Depreciation and amortization of property and equipment 85,744 88,648
Other amortization 9,535 9,513
Deferred income taxes 5,110 22,025
Noncash interest expense 454 1,964
Other noncash expense (income) 591 (299)
Net loss (gain) on property and equipment 89 (433)
Decrease in accounts and notes receivable 2,089 16,319
Decrease in inventories 17,719 1,305
Increase in other assets (9,441) (11,732)
Increase (decrease) in trade accounts payable and other liabilities 461 (58,036)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 126,083 100,426
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (159,855) (94,518)
Proceeds from sale of property and equipment 5,275 10,728
Increase in restricted cash (43,213) -
Acquisition of businesses, net of cash acquired (31,146) -
Other 2,118 2,220
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (226,821) (81,570)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities 3,078,640 2,856,548
Payments under commercial paper and revolving credit facilities (3,026,211) (2,829,800)
Proceeds from issuance of long-term debt 96,503 225,000
Principal payments under long-term debt agreements (102,627) (259,555)
Proceeds from issuance of Convertible Quarterly Income Debt Securities 80,000 -
Other (4,476) (520)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 121,829 (8,327)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,091 10,529
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 38,605 36,494
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,696 $ 47,023
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest $ (48,291) $ (48,122)
============= =============
Net income taxes paid $ (2,927) $ (3,042)
============= =============
Assets obtained by entering into capital leases $ 16,985 $ 8,340
============= =============
See notes to condensed consolidated financial statements.
3
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of June 30, 1998, and the
condensed consolidated statements of earnings for the three-month and six-
month periods ended June 30, 1998 and 1997,and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1998 and
1997, 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,
1998, 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, 1997, 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, 1997, include
accounting policies and additional information pertinent to an
understanding of both the December 31, 1997, 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, 1998, and as
discussed in the following notes.
2. COMPREHENSIVE INCOME:
In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which is required for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting comprehensive
income and its components in a full set of general-purpose financial
statements. The components of accumulated other comprehensive income, net
of tax, of the Company are as follows:
June 30, December 31,
1998 1997
----------- ------------
Unrealized gain on equity securities $ 16,119 $ 9,192
Foreign currency translation adjustments (5,000) (4,276)
----------- ------------
Accumulated other comprehensive income $ 11,119 $ 4,916
=========== ============
The components of comprehensive income of the Company for the three-month
and six-month periods ended June 30, 1998 and 1997, are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ----------------
1998 1997 1998 1997
------ -------- ------- ------
Net earnings $ 25,837 $ 25,630 $ 31,603 $ 31,152
Other comprehensive income (expense), net of tax:
Unrealized gains on equity securities 776 915 6,927 (1,572)
Foreign currency translation adjustments (695) 281 (724) (113)
-------- -------- -------- --------
Other comprehensive income (expense) 81 1,196 6,203 (1,685)
-------- -------- -------- --------
Comprehensive income $ 25,918 $ 26,826 $ 37,806 $ 29,467
========= ========= ======== ========
4
3. EARNINGS PER SHARE:
In December 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share," which requires the following reconciliation of the
numerators and the denominators of the basic and diluted per-share
computations for net earnings for the periods presented:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------
1998 1997 1998 1997
-------- -------- ------ ------
BASIC EPS COMPUTATION:
Earnings (Numerator):
Earnings before extraordinary gain available to common shareholders $ 25,837 $ 25,630 $ 13,732 $ 31,152
Earnings on extraordinary gain available to common shareholders - - 17,871 -
----------- -------- -------- ---------
Net earnings available to common shareholders $ 25,837 $ 25,630 $ 31,603 $ 31,152
========== ========= ======== =========
Shares (Denominator):
Weighted average number of common shares outstanding 409,923 409,923 409,923 409,923
========== ========= ======== =========
BASIC EPS:
Earnings per common share before extraordinary gain $ .06 $ .06 $ .04 $ .08
Earnings per common share on extraordinary gain - - .04 -
---------- --------- ------- --------
Net earnings per common share $ .06 $ .06 $ .08 $ .08
========== ========= ======== ========
DILUTED EPS COMPUTATION:
Earnings (Numerator):
Earnings before extraordinary gain available to common shareholders $ 25,837 $ 25,630 $ 13,732 $ 31,152
Add interest on Convertible Quarterly Income Debt Securities,
net of tax 2,706 2,071 5,053 4,138
---------- -------- -------- ---------
Earnings before extraordinary gain available to common shareholders
plus assumed conversions 28,543 27,701 18,785 35,290
Earnings on extraordinary gain available to common shareholders - - 17,871 -
--------- -------- -------- -------
Net earnings available to common shareholders plus assumed
conversions $ 28,543 $ 27,701 $ 36,656 $ 35,290
========== ======== ======== =========
Shares (Denominator):
Weighted average number of common shares outstanding 409,923 409,923 409,923 409,923
Add effects of assumed conversions:
Conversion of Convertible Quarterly Income Debt Securities 104,620 72,112 94,558 72,112
Exercise of stock options 113 682 56 341
--------- --------- -------- --------
Weighted average number of common shares outstanding plus shares
from assumed conversions 514,656 482,717 504,537 482,376
========= ======== ======== ========
DILUTED EPS :
Earnings per common share before extraordinary gain $ .06 $ .06 $ .03 $ .07
Earnings per common share on extraordinary gain - - .04 -
--------- --------- ------- --------
Net earnings per common share $ .06 $ .06 $ .07 $ .07
========= ========= ======= =========
5
4. ACQUISITIONS:
On May 4, 1998, the Company purchased 100% of the common stock of
Christy's Market, Inc., a Massachusetts company that operates 132
convenience stores in the New England area. On May 12, 1998, the Company
purchased the assets of 20 'red D mart' convenience stores in the South
Bend, Indiana, area from MDK Corporation of Goshen, Indiana.
These acquisitions were accounted for under the purchase method of
accounting and, accordingly, the results of operations of the acquired
businesses have been included in the accompanying consolidated financial
statements from their dates of acquisition. Pro forma information is not
provided as the impact of the acquisitions does not have a material effect
on the Company's results of operations, cash flows or financial position.
The following preliminary information is provided as supplemental cash
flow disclosure for the acquisitions of businesses as reported in the
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1998:
Fair value of assets acquired $ 67,773
Fair value of liabilities assumed 35,271
---------
Cash paid 32,502
Less cash acquired 1,356
---------
Net cash paid for acquisitions $ 31,146
=========
5. FINANCIAL INSTRUMENTS:
On April 30, 1998, funding occurred on a yen-denominated loan for 12.5
billion yen or $96.5 million of proceeds. The loan has an interest rate of
2.325% and will be repaid from the Seven-Eleven Japan area license royalty
income beginning in 2001, after the existing yen loan has been retired.
Both principal and interest of the loan are nonrecourse to the Company.
The proceeds included exercising a put option at the strike price of 129.53
yen per dollar. The purchase of this put option was financed by the
Company by selling a call option at a strike price of 125.08 yen per dollar
with the same yen amount and maturity as the put option, thereby committing
the Company to exchange at a rate of 125.08. The call option was marked to
market and, as a result, income of $1,510 was recognized during the first
quarter of 1998. The call option expired unexercised on April 28, 1998.
Proceeds of the loan will be used for general corporate purposes.
On June 26, 1998, the Company entered into an interest rate swap
agreement that fixes the interest rate on $250 million notional principal
amount of floating rate debt until June 26, 2003. A major financial
institution, as counterparty to the agreement, will pay the Company a
floating interest rate based on three-month LIBOR during the term of the
agreement in exchange for the Company paying a fixed interest rate.
Interest payments by both parties will be made quarterly commencing
September 28, 1998. The Company is at risk of loss from this swap
agreement in the event of nonperformance by the counterparty.
The Company is currently reviewing SFAS No. 133, "Accounting for
Derivative and Similar Financial Instruments and for Hedging Activities."
The statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 becomes effective for
all fiscal quarters of fiscal years beginning after June 15, 1999, and
earlier application is permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. The Company has not yet determined when it
will adopt the provisions of this statement. The impact of the adoption of
SFAS No. 133 is not reasonably estimable at this time due to the Company's
continuing investigation of its financial instruments and the applicability
of SFAS No. 133 to them.
6
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, 1998, and the
related condensed consolidated statements of earnings for the three-month
and six-month periods ended June 30, 1998 and 1997, and the condensed
consolidated statements of cash flows for the six-month periods ended June
30, 1998 and 1997. 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, 1997, 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 5, 1998 (except as to items 2 and 3 in
Note 17, for which the date is March 12, 1998), 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, 1997, is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been
derived.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
July 30, 1998
7
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 reported net earnings for the second quarter and first
six months were $25.8 million and $31.6 million, respectively, compared to
net earnings of $25.6 million and $31.2 million for the same periods in
1997. The increase in second quarter earnings resulted from growth in
merchandise gross profit, partially offset by higher store labor and
incremental costs associated with the further implementation of several
strategic initiatives. The year-to-date results included a $17.9 million
(after tax) extraordinary gain from the redemption of the Company's 12%
Senior Subordinated Debentures ("12% Debentures"), which was substantially
offset by the cumulative costs associated with a lease termination,
severance and a write-off of slow-moving inventory.
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. In 1998, new store openings are expected to
significantly outpace closings, with the expansion occurring in existing
markets to support the Company's fresh food and combined-distribution
initiatives.
* 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 time-sensitive or perishable items, along with
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.
* The development of a retail information system which initially has
automated accounting and other store-level tasks. The current phase
involves the installation of point-of-sale registers with scanning and
ordering capabilities.
8
(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 second quarter
and $3.44 billion in the first six months of 1998, compared to net sales of
$1.78 billion and $3.39 billion during the same periods last year. While
the Company's acquisition of 152 stores added to the overall sales
increase, the largest contributor was growth in per-store merchandise sales
(see Capital Expenditures - Acquisitions). Significantly lower retail
gasoline prices caused a decline in gasoline sales. Merchandise sales
growth per store was as follows:
PERIODS ENDING JUNE 30, 1998
----------------------------
INCREASE (DECREASE) FROM PRIOR YEAR THREE MONTHS SIX MONTHS
- ----------------------------------- ------------ ----------
U.S. same-store sales 5.1% 4.0%
U.S. same-store real growth; excluding inflation 3.1% 2.4%
7-Eleven inflation 2.0% 1.6%
The same-store merchandise sales increase of 5.1% was the largest such
increase this decade and continues a trend of strong same-store growth over
the last four quarters. Regionally, per-store merchandise sales were
favorable in all parts of North America, with stores in Florida, Texas and
Colorado leading the way recording second quarter double-digit growth.
Highlights of changes in category results for the first six months of
1998 compared to 1997 are as follows: CAFE COOLER, which was introduced
this spring, provided more than 1% of the second quarter's per-store sales
growth; COFFEE/SLURPEE SALES are up substantially, partially due to the
introduction of new products/flavors; CIGARETTE SALES have increased, but
primarily due to price increases in response to manufacturer-led cost
increases, which have had an unfavorable impact on margin and gross profit.
Gasoline sales dollars per store declined 9.1% for the second quarter
and 10.3% for the first six months, compared to last year. The decline in
gasoline sales dollars resulted from lower crude oil prices, which was the
primary factor causing the average retail price of gasoline to drop 16
cents per gallon during the first six months of 1998, compared to the same
period in 1997. Although sales dollars decreased, average per-store gallon
sales increased 3.4% during the second quarter. The gallonage increase was
primarily due to newly developed stores, which have considerably higher
volumes.
OTHER INCOME
Other Income of $43.9 million for year-to-date June and $23.4 million
for the second quarter was $0.1 million and $1.3 million favorable to the
same periods in 1997, respectively. Approximately 80% of other income is
derived from royalty income from licensed operations, some of which could
be unfavorably impacted by fluctuating exchange rates. Nearly 70% of the
royalties are from area license agreements with Seven-Eleven Japan Co., Ltd
("SEJ"). Though the dollar equivalent of the SEJ royalty income will
fluctuate with exchange rate movements, the Company has effectively hedged
this exposure by using the royalty income to make principal and interest
payments on its yen-denominated loans.
9
GROSS PROFITS
PERIODS ENDING JUNE 30, 1998
----------------------------
THREE MONTHS SIX MONTHS
------------ ----------
MERCHANDISE GASOLINE MERCHANDISE GASOLINE
----------- -------- ----------- --------
Gross Profit - dollars in millions $ 502.0 $ 43.7 $ 912.9 $ 87.2
INCREASE/(DECREASE) FROM PRIOR YEAR - ALL STORES
- ------------------------------------------------
Average per-store gross profit dollar change 4.1% (9.6)% 2.2% (0.6)%
Margin point change (gasoline in cents per gallon) (.32) (1.66) (.64) (.42)
Average per-store sales (gasoline in gallons) 5.1% 3.4% 4.1% 2.9%
Total merchandise gross profit dollars were $26.1 million higher in
both the second quarter and the six months, when compared to the same
periods in 1997. Higher average per-store merchandise sales were partially
offset by a lower merchandise margin. Merchandise margin was impacted by
introductory costs associated with new product offerings, combined with the
further roll-out of our fresh food initiatives into four new markets. In
addition, merchandise margin has been narrowed somewhat as a result of cost
increases and continuing refinement of the everyday-fair-pricing policy to
better reflect market conditions. As a result of the items discussed
above, merchandise margin is projected to be slightly lower in 1998, when
compared to 1997.
During the first six months of 1998, gasoline gross profits increased
$1.9 million over last year, however during the second quarter they were
lower by $2.7 million, when compared to the same period in 1997. Favorable
per-store gallon sales and more gasoline outlets created the six month
improvement in gasoline gross profits, as margin was down .42 cents per
gallon. The second quarter decrease resulted from gasoline margin being
down 1.66 cents per gallon in part due to competitive retail conditions.
Downward pressure on gasoline margin began to ease towards the end of the
second quarter, providing some optimism for improvement.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
PERIODS ENDING JUNE 30, 1998
----------------------------
THREE MONTHS SIX MONTHS
------------ ----------
1998 1997 1998 1997
---- ---- ---- ----
Total OSG&A expenses $505.6 $480.1 $977.3 $918.4
Ratio of OSG&A to sales 27.4% 26.9% 28.4% 27.1%
Operating, selling, general and administrative expenses increased
$25.5 million during the second quarter of 1998, compared to the same
period in 1997 and $58.9 million for the first six months of 1998, compared
to 1997. The ratio of OSG&A expenses increased 1.3 percentage points
during the first six months of 1998, over the same period in 1997. First
quarter expenses resulting from the cumulative effects of a computer
equipment lease termination, combined with severance costs, unfavorably
impacted 1998 OSG&A by nearly $19 million. The retail price of gasoline,
which dropped nearly 13% in 1998 compared to 1997's first six months, also
impacted the ratio of OSG&A expenses to sales. Excluding the items
discussed above, the ratio of OSG&A to sales was slightly favorable, when
comparing the first six months of 1998 and 1997.
In addition to the items discussed above, a portion of the increase in
OSG&A expenses resulted from costs associated with the Company's
implementation of its retail information system and other strategic
initiatives, as well as from higher store labor costs, all of which were
partially offset by lower insurance costs. Incremental costs of
approximately $5 million associated with the Company's retail information
10
system were expensed in the first six months of 1998. While the ratio of
OSG&A expenses to sales will vary on a quarterly basis, management believes
this ratio will not improve dramatically 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 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). In the first quarter of 1998, an accrual of $7.1 million was
made representing severance benefits for more than 150 management and
administrative employees to be terminated. The benefit from these
reductions on an annualized basis approximates the first quarter charge,
with the majority of the benefit carrying forward to future years.
The Company is a defendant in two legal actions, which are referred to
as the 7-Eleven OFFF and Valente cases, filed by franchisees in 1993 and
1996, respectively, asserting various claims against the Company. A
nationwide settlement was negotiated and, in connection with the
settlement, these two cases have been combined on behalf of a class of all
persons who operated 7-Eleven convenience stores in the United States at
any time between January 1, 1987 and July 31, 1997, under franchise
agreements with the Company. Class members have overwhelmingly approved
the settlement, and the court presiding over the settlement process gave
its final approval of the settlement on April 24, 1998. The settlement
provides that former franchisees will share in a settlement fund and that
certain changes will be made to the franchise agreements with current
franchisees.
Three separate notices of appeal of the order approving the settlement
have been filed. Therefore, the settlement agreement will not become
effective until the appeals are resolved, which could be more than two
years. However, the settlement agreement provides that while the appeals
are pending the Company will pay certain maintenance and supply expenses
relating to the cash registers and retail information system equipment of
current franchisees that are members of the settlement class. If the
settlement is overturned on appeal, the company has the right to require
franchisees to repay the amounts that the company paid during the appeal
for these expenses. The Company's payment of these expenses will have no
material impact on 1998 earnings, and the Company's accruals are sufficient
to cover the total settlement costs, including the payment due to former
franchisees when the settlement becomes effective.
INTEREST EXPENSE, NET
Net interest expense increased $0.3 million during the second quarter
of 1998, compared to the same period in 1997, but decreased $1.0 million
from 1997 during the six months. The decrease from the first six months of
1997 was primarily due to the write-off of deferred costs associated with
the Company's refinancing of its credit agreement in February 1997.
Approximately 38% of the Company's debt contains floating rates that
will be unfavorably impacted by rising interest rates. The weighted-
average interest rate for such debt was 5.8% for both the second quarter
and first six months of 1998 as well as the first six months of 1997. The
Company expects net interest expense in 1998 to remain relatively flat,
based upon anticipated levels of debt and interest rate projections.
Factors increasing 1998 interest expense include higher
borrowings/obligations to finance new store development and the redemption
of the Company's 12% Debentures for which no interest expense was recorded
11
in the Consolidated Statements of Earnings in accordance with SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring" (see
Liquidity and Capital Resources). Items that will decrease 1998 interest
expense include a lower interest rate on the existing yen-denominated loan
(see Liquidity and Capital Resources) and the new 2.325% yen-denominated
loan (which will reduce short-term borrowings). The interest rate on the
existing yen-denominated loan was reset in March of 1998, resulting in a
rate reduction of 315 basis points.
In June, 1998, the Company entered into an interest rate swap
agreement that fixes the interest rate on $250 million of existing floating
rate notional principal, through June, 2003. A major financial
institution, as counterparty to the agreement, will pay the Company a
floating interest rate based on three-month LIBOR during the term of the
agreement in exchange for the Company paying a fixed interest rate.
Interest payments by both parties will be made quarterly commencing
September 28, 1998.
In accordance with SFAS No. 15, no interest expense is recognized on
the Company's public debt securities. These securities were recorded at an
amount equal to the future undiscounted cash payments, both principal and
interest, and accordingly, the cash interest payments are charged against
the recorded amount of such securities and are not treated as interest
expense.
EXTRAORDINARY GAIN
In March 1998, redemption of the Company's 12% Debentures resulted in
a $17.9 million after-tax gain from the retirement of future undiscounted
interest payments as recorded under SFAS No. 15. The cash outlay to the
Company was $22.5 million, which was financed through the issuance of $80
million of 4-1/2% Convertible Quarterly Income Debt Securities ("1998
Convertible Debt") due 2013, 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.
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 April 1998, the Company entered into a financing agreement for 12.5
billion yen, or $96.5 million, monetizing its future yen royalty stream.
The financing, which bears interest at 2.325%, is secured by a pledge
(secondary to the existing yen loan) of the future royalty payments from
Seven-Eleven Japan associated with the Company's Japanese 7-Eleven
trademarks. Payment of principal and interest on the debt is non recourse
to the Company and will commence when the existing yen denominated loan is
paid in full, which is currently estimated to be in 2001. It is
anticipated that this loan will be fully repaid in 2006.
In February 1998, the Company issued $80 million of 1998 Convertible
Debt, which is subordinated to all existing debt except the 1995
Convertible Quarterly Income Debt Securities due 2010, which have the same
priority ranking. The debt has a 15-year life, no amortization and an
12
interest rate of 4.5%. The instrument gives the Company the right to defer
interest payments thereon for up to 20 consecutive quarters. The debt
mandatorily converts into 32,508,432 shares of the Company's common stock
if the Company's stock achieves certain levels after the third anniversary
of issuance. A portion of the proceeds from the 1998 Convertible Debt was
used to redeem the Company's 12% Debentures at par.
The credit agreement contains 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 net earnings before extraordinary items
and interest, taxes, depreciation and amortization ("EBITDA"). The
covenant levels established by the credit agreement generally require
continuing improvement in the Company's financial condition. In May 1998,
the financial covenant levels required by these instruments were amended
prospectively in order to allow the Company flexibility to continue its
store growth strategy. In addition, a maximum amount of annual capital
expenditures was established, which does permit the levels of capital
spending within the Company's strategic plans.
For the period ended June 30, 1998, the Company was in compliance with
all of the covenants required under the credit agreement, including
compliance with the principal financial and operating covenants under the
credit agreement (calculated over the latest 12-month period) as follows:.
REQUIREMENTS:
--------------------
COVENANTS ACTUALS MINIMUM MAXIMUM
--------- ------- ------- -------
Interest and rent coverage * 2.08 to 1.0 1.80 to 1.0
Fixed charge coverage 1.93 to 1.0 1.50 to 1.0
Senior indebtedness to EBITDA 3.56 to 1.0 4.10 to 1.0
Capital expenditure limit
(tested annually) $425 million
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS
NOT RECORDED IN INTEREST EXPENSE.
During the first six months of 1998, the Company repaid $102.6 million
of debt of which $22.5 million related to the redemption of the Company's
12% Debentures and $10.9 million was for debt assumed in the Christy's
acquisition (see Capital Expenditures - Acquisitions). The remaining
principal reduction of $69.2 million included $28.1 million for quarterly
installments due on the Term Loan, $18.8 million for principal payments on
the Company's yen-denominated loan (secured by the royalty income stream
from SEJ) and $9.9 million for SFAS No. 15 interest. Outstanding balances
at June 30, 1998, for commercial paper, Term Loan and Revolver, were $398.0
million, $196.9 million and $119.5 million, respectively. As of June 30,
1998, outstanding letters of credit issued pursuant to the credit agreement
totaled $75.0 million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $126.1 million for the
six months of 1998, an increase of $25.7 million from the same period of
1997 (see Results of Operations section).
CAPITAL EXPENDITURES
In the first six months, net cash used in investing activities
consisted primarily of payments of $159.9 million for property and
equipment and $31.1 million for acquisitions (see Capital Expenditures -
Acquisitions). The majority of the property and equipment capital was used
13
for new store development, continued implementation of the Company's retail
information system, remodeling stores, new equipment to support
merchandising initiatives, upgrading retail gasoline facilities, replacing
equipment and complying with environmental regulations.
The Company expects 1998 capital expenditures, excluding lease
commitments, to exceed $350 million. Capital expenditures are being used to
develop or acquire new stores, upgrade store facilities, further implement
a 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 proportion of new store
development funded through working capital versus leases and the speed at
which new sites/acquisitions can be located, negotiated, permitted and
constructed.
CAPITAL EXPENDITURES - ACQUISITIONS
In May 1998, the Company purchased all of the capital stock of
Christy's Market, Inc., of Brockton, Mass, thereby acquiring 132 Christy's
Market convenience stores, located in the New England area. Also in May
1998, the Company purchased the assets of 20 'red D mart' convenience
stores in the South Bend, Indiana, area from MDK Corporation of Goshen,
Indiana.
CAPITAL EXPENDITURES - GASOLINE EQUIPMENT
The Company incurs ongoing costs to comply with federal, state and
local environmental laws and regulations primarily relating to underground
storage tank ("UST") systems. The Company anticipates it will spend
approximately $10 million in 1998 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 $25 million on such capital improvements from 1999 through 2001.
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 active remediation of the site for approximately a
three-to-five-year period, as well as continued groundwater monitoring and
treatment for a projected 15-year planning period. The projected 15-year
clean-up period represents a reduction from the previously reported 20-year
period and is a result of revised estimates as determined by an independent
environmental management company in the first quarter of 1997. These
revised estimates, which generally resulted from the conditional approval
of the Company's plan, reduced both the estimated time and the estimated
costs to complete the project. While conditional approval was received on
its clean-up plan, the Company must supply additional information to the
State before the plan can be finalized. The Company has recorded
undiscounted liabilities representing its best estimates of the clean-up
costs of $9.5 million at June 30, 1998. 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 a receivable recorded of $5.6 million
at June 30, 1998.
Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
14
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At June 30, 1998, the Company's
estimated undiscounted liability for these sites was $34.6 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, 1998 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, at June 30,
1998, the Company has recorded a net receivable of $40.9 million 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 $8.6 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 seven
years to receive reimbursement funds from California. Therefore, the
portion of the recorded receivable amounts that relate to sites where
remediation activities have been conducted have been discounted at 5.5% to
reflect their present value. Thus, the recorded receivable amount is also
net of a discount of $5.9 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.
ENVIRONMENTAL - ACQUISITIONS
Both the 'red D mart' and Christy's Market acquisitions include retail
gasoline outlets that are subject to certain environmental regulations.
Under the terms of the acquisition agreements, the sellers are responsible
for ensuring compliance with all applicable environmental regulations
existing as of the closing date. In addition, the acquisition agreements
provide that the sellers will remain responsible for the expense of any
future environmental cleanup resulting from existing conditions at the
sites, which is required under applicable legal requirements (see Capital
Expenditures - Acquisitions).
YEAR 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Some of
the Company's older computer programs that have date-sensitive coding may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations.
The Company has replaced, over the last couple of years, or has plans
to replace significant portions of its existing systems with third-party-
provided software, which properly interpret dates beyond December 31, 1999.
In addition, the Company has contracted resources to modify the remainder
of its existing software to make it year 2000 compliant.
15
Based on a recent assessment, the Company believes all system modifications
and related testing should be completed by the middle of 1999.
The Company has initiated formal communications with its significant
suppliers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own year 2000 issue. At
this time, based on presently available information, the Company does not
foresee any material effects related to outside company compliance.
YEAR 2000 DISCLAIMER: The Company does not believe the costs related
to the year 2000 compliance project will be material to its financial
position or results of operations. However, the costs of the project and
the date on which the Company plans to complete the year 2000 modifications
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability
of certain resources, third party modification plans and other factors. As
a result, there can be no assurance that these forward looking estimates
will be achieved and the actual costs and vendor compliance could differ
materially from those plans, resulting in a material financial risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
16
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, the Company is a defendant in two legal
actions, which are referred to as the 7-Eleven OFFF and Valente cases,
filed by franchisees in 1993 and 1996, respectively, asserting various
claims against the Company. A nationwide settlement was negotiated and, in
connection with the settlement, these two cases have been combined on
behalf of a class of all persons who operated 7-Eleven convenience stores
in the United States at any time between January 1, 1987 and July 31, 1997,
under franchise agreements with the Company. Class members have
overwhelmingly approved the settlement, and the court presiding over the
settlement process gave its final approval of the settlement on April 24,
1998. The settlement provides that former franchisees will share in a
settlement fund and that certain changes will be made to the franchise
agreements with current franchisees.
Three separate notices of appeal of the order approving the settlement
have been filed. Therefore, the settlement agreement will not become
effective until the appeals are resolved, which could be more than two
years. However, the settlement agreement provides that while the appeals
are pending the company will pay certain maintenance and supply expenses
relating to the cash registers and retail information system equipment of
current franchisees who are members of the settlement class. If the
settlement is overturned on appeal, the Company has the right to require
franchisees to repay the amounts that the Company paid during the appeal
for these expenses. The Company's payment of these expenses will have no
material impact on 1998 earnings, and the Company's accruals are sufficient
to cover the total settlement costs, including the payment due to former
franchisees when the settlement becomes effective.
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 in the
United States District Court for the Northern District of Illinois, in
March, 1994. Of the eleven original causes of action, only one claim was
certified to proceed as a class action. The class has now been defined to
include those persons who owned 7-ELEVEN franchises at any time from
December 1, 1987 to March 4, 1991. Notices have been sent to all class
members, and pretrial discovery will continue until the discovery cut-off
date of October 15, 1998.
The Company has aggressively attacked the merits of this suit from its
inception and has successfully disposed of ten of the original eleven
claims prior to a trial. The Company believes it has meritorious defenses
to the one remaining claim and will continue its defense vigorously. At
this time, however, the litigation is still at an early stage and the
ultimate outcome cannot be predicted.
There are no other reportable suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company,
other than as previously reported.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 22, 1998, the Company held its annual meeting of
shareholders. Each of the thirteen nominated directors were elected
without contest. In addition, the shareholders ratified the approval of
Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) to be the
Company's independent auditors for 1998.
(a) The votes for and the votes withheld for each of the nominees
for director were as follows:
NOMINEE FOR WITHHELD
Masatoshi Ito 339,275,586 853,119
Toshifumi Suzuki 339,274,895 853,810
Clark J. Matthews, II 339,241,334 887,371
Yoshitami Arai 339,281,570 847,135
Masaaki Asakura 339,277,723 850,982
Timothy N. Ashida 339,282,115 846,590
Jay W. Chai 339,197,938 930,767
Gary J. Fernandes 339,204,642 924,063
Masaaki Kamata 339,281,102 847,603
James W. Keyes 339,279,446 849,259
Kazuo Otsuka 339,277,115 851,590
Asher O. Pacholder 339,275,031 853,674
Nobutake Sato 339,277,015 851,690
(b) The votes for, against, abstaining and broker non-votes in
connection with the ratification of the appointment of Coopers & Lybrand
L.L.P. (now PricewaterhouseCoopers LLP) to be the independent auditors of
the Company for 1998 were as follows:
339,974,946 shares were voted for; 82,313 shares were voted against;
71,446 shares abstained from voting; and no broker non-votes were received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 10(i)(1) - Second Amendment, dated as of April 29, 1998, to Credit
Agreement dated as of February 27, 1997, among The
Southland Corporation, the financial institutions party
thereto as Senior Lenders, the financial institutions
party thereto as Issuing Banks, Citibank, N.A., as
Administrative Agent, and The Sakura Bank, Limited, New
York Branch, as
Co-Agent.*.................................... Tab 1*
Exhibit 10(i)(2) - Secured Yen Loan Agreement for The Southland
Corporation relating to royalties from Seven-Eleven
(Japan) Company, Ltd. in the amount of Japanese Yen
12,500,000,000, dated as of April 21, 1998.* Tab 2*
Exhibit (15) - Letter re Unaudited Interim Financial Information Tab 3
18
Exhibit (27) - Financial Data Schedule
Submitted in electronic format only.
* Submitted with filing; not attached to conformed copies.
(b) 8-K Reports:
During the second quarter of 1998, the Company filed no reports on
Form 8-K.
19
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: 8/5/98 /s/ Clark J. Matthews II
------------- -------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive Officer
Date: 8/5/98 /s/ Donald E. Thomas
------------ --------------------------
(Principal Accounting Officer)
Donald E. Thomas
Vice President and Controller
20