<PAGE>
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, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Numbers 0-676 and 0-16626
THE SOUTHLAND CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVE., DALLAS, TEXAS 75204-2906
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, 214/828-7011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
409,922,935 shares of common stock, $.0001 par value (the issuer's only
class of common stock), were outstanding as of June 30, 1994.
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THE SOUTHLAND CORPORATION
INDEX
PAGE
NO.
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993 ....................... 1
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1994 and 1993 .. 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 ................... 3
Note to Condensed Consolidated Financial Statements ......... 4
Report of Independent Accountants............................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 6
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ....................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................ 11
SIGNATURES ........................................................... 12
Exhibit (11) - Statement re Computation of Per-Share Earnings
.................................................................. Tab 1
Exhibit (15) - Letter re Unaudited Interim Financial Information
.................................................................. Tab 2
(i)
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<TABLE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 4,854 $ 13,486
Accounts and notes receivable....................................... 89,812 90,934
Inventories......................................................... 112,482 109,363
Other current assets................................................ 25,710 31,954
------------- -------------
TOTAL CURRENT ASSETS............................................ 232,858 245,737
PROPERTY, PLANT AND EQUIPMENT.......................................... 1,315,168 1,337,586
OTHER ASSETS........................................................... 389,456 415,422
------------- -------------
$ 1,937,482 $ 1,998,745
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable.............................................. $ 207,450 $ 196,026
Accrued expenses and other liabilities.............................. 319,075 347,563
Commercial paper.................................................... 48,868 41,220
Long-term debt due within one year.................................. 196,644 149,503
------------- -------------
TOTAL CURRENT LIABILITIES....................................... 772,037 734,312
DEFERRED CREDITS AND OTHER LIABILITIES................................. 246,592 242,426
LONG-TERM DEBT......................................................... 2,144,101 2,270,357
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value...................................... 41 41
Additional capital.................................................. 625,574 625,574
Accumulated deficit................................................. (1,850,863) (1,873,965)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............................ (1,225,248) (1,248,350)
------------- -------------
$ 1,937,482 $ 1,998,745
============= =============
See note to condensed consolidated financial statements.
1
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<TABLE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales (including $252,683, $249,549,
$487,766 and $477,567 in excise taxes)........... $1,720,410 $1,772,964 $3,232,387 $3,355,288
Other income........................................ 18,263 17,645 35,172 33,482
----------- ----------- ----------- -----------
1,738,673 1,790,609 3,267,559 3,388,770
COST OF GOODS SOLD AND EXPENSES:
Cost of goods sold.................................. 1,324,895 1,355,464 2,509,189 2,587,709
Selling, general and administrative expenses........ 346,103 387,693 668,275 741,330
Interest expense.................................... 26,003 22,342 51,855 45,472
Contributions to Employees' Savings and
Profit Sharing Plan.............................. 3,544 3,683 6,793 7,014
----------- ----------- ----------- -----------
1,700,545 1,769,182 3,236,112 3,381,525
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE............... 38,128 21,427 31,447 7,245
INCOME TAXES............................................. 6,495 2,150 7,945 3,850
----------- ----------- ----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE... 31,633 19,277 23,502 3,395
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE FOR POSTEMPLOYMENT BENEFITS.................... - - - (16,537)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS)...................................... $ 31,633 $ 19,277 $ 23,502 $ (13,142)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE
(Primary and Fully Diluted):
Before cumulative effect of accounting change.... $.08 $.05 $.06 $ .01
Cumulative effect of accounting change........... - - - (.04)
------ ------ ------ -------
Net earnings (loss).............................. $.08 $.05 $.06 $(.03)
====== ====== ====== =======
See note to condensed consolidated financial statements.
2
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<TABLE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------------
1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................................... $ 23,502 $ (13,142)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Cumulative effect of accounting change for postemployment benefits...... - 16,537
Depreciation and amortization of property, plant and equipment.......... 71,909 66,586
Other amortization...................................................... 9,513 9,780
Noncash interest expense................................................ 4,362 4,089
Other noncash (income) expense.......................................... (260) 2,393
Net (gain) loss on property, plant and equipment........................ (5,124) 1,656
(Increase) decrease in accounts and notes receivable.................... (2,532) 17,454
(Increase) decrease in inventories...................................... (3,119) 10,910
Decrease in other assets................................................ 25,187 1,306
Increase in trade accounts payable and other liabilities................ 2,600 15,860
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 126,038 133,429
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment...................... (73,008) (73,825)
Proceeds from sale of property, plant and equipment......................... 8,825 14,735
Net currency exchange principal transactions................................ (5,133) (3,952)
Payments on notes from sales of real estate................................. 853 556
Cash received from other investments........................................ 236 2,246
Cash (utilized) provided by distribution and food center assets............. (1,328) 1,610
Proceeds from sale of distribution and food center assets................... 6,305 33,078
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES......................... (63,250) (25,552)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities.............. 2,165,261 1,780,845
Payments under commercial paper and revolving credit facilities............. (2,171,208) (1,792,970)
Principal payments under long-term debt agreements.......................... (65,473) (90,554)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES......................... (71,420) (102,679)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (8,632) 5,198
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 13,486 1,804
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 4,854 $ 7,002
============ ============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS 15 Interest................................... $ (47,554) $ (43,022)
============ ============
Net income taxes paid....................................................... $ (705) $ (745)
============ ============
See note to condensed consolidated financial statements.
3
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<PAGE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1994
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of June 30, 1994, and the
condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 1994 and 1993, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1994 and
1993, 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, 1994, 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, 1993, 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, 1993, include accounting policies and
additional information pertinent to an understanding of both the December 31,
1993, 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, 1994.
4
<PAGE>
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, 1994, the related
condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 1994 and 1993, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1994 and
1993. 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, 1993, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the year then ended (not presented herein); and in our
report dated February 22, 1994, which included an explanatory paragraph
describing the change in method of accounting for postemployment benefits in
1993, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1993, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
COOPERS & LYBRAND
Dallas, Texas
July 28, 1994
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's net earnings for the second quarter and first six months of
1994 were $31.6 million ($.08 per share) and $23.5 million ($.06 per share),
respectively, compared to net earnings of $19.3 million ($.05 per share) and a
net loss of $13.1 million (-$.03 per share) for the same periods in 1993. The
1994 results for the second quarter and first six months included a $4.5
million pretax recovery on a 1992 insurance claim, and the 1993 results for
the first six months included a $16.5 million charge for the cumulative effect
of an accounting change for postemployment benefits as required by Statement
of Financial Accounting Standards ("SFAS") No. 112.
LIQUIDITY AND CAPITAL RESOURCES
In August 1993, the Company redeemed its 12% Notes due on December 15,
1996 (the "12% Notes"), which had an outstanding face value of $250.6 million,
and refinanced them with working capital and a $150 million term loan
("Refinanced Term Loan") which was in addition to the term loan ("Term Loan")
under the existing senior bank credit agreement (the "Credit Agreement").
As a result of the refinancing, at current interest rates, the Company
expects to save up to $14 million in 1994 cash interest payments. However,
since interest on the Refinanced Term Loan is not subject to SFAS No. 15
treatment, it will be expensed and, therefore, at current interest rates, the
Company's reported interest expense for 1994 will increase by an estimated $17
million.
The Company believes that it will have adequate liquidity going forward,
from its $400 million commercial paper facility (guaranteed by Ito-Yokado Co.,
Ltd.), from its revolving credit facility under the Credit Agreement ("the
Revolver"), which, respectively, had outstanding balances of $398.9 million
and zero on June 30, 1994, and from its operating cash flow. The Company's
cash availability from the Revolver is limited to $25 million until $375
million of commercial paper is outstanding, and thereafter to the lesser of
$150 million or the difference between $275 million and the amount of letters
of credit outstanding. As of June 30, 1994, outstanding letters of credit
totaled $122.0 million.
The Company's Term Loan and Revolver under the Credit Agreement expire,
respectively, on September 30, 1995 and on December 31, 1995. The Company
expects to refinance this facility before its maturity.
The Credit Agreement contains numerous financial and operating covenants
requiring, among other things, the attainment of certain levels of EBITDA
(defined in the Credit Agreement as earnings before interest income and
expense, income taxes, depreciation and amortization, the monetized royalty
income from the Company's area licensee in Japan, certain other unusual income
and expense items and certain other noncash items). In addition, the
covenants require the maintenance of certain financial ratios, including cash
interest coverage, fixed charge coverage, total debt to EBITDA and senior
indebtedness to subordinated indebtedness. The covenant levels established by
the Credit Agreement generally require continuing improvement in the Company's
financial condition.
6
<PAGE>
For the period ended June 30, 1994, the Company was in compliance with all
of the covenants required under the Credit Agreement. The Company complied
with the principal financial covenants, which are calculated over the latest
12-month period as follows: cash interest coverage (including the effect of
the SFAS No. 15 interest payments) was 2.46 to 1.00, higher than the
1.66-to-1.00 minimum; fixed charge coverage was 1.57 to 1.00, higher than the
0.99-to-1.00 minimum; total debt was 8.22 to 1.00, lower than the
12.28-to-1.00 maximum; senior indebtedness to subordinated indebtedness was
1.36 to 1.00, lower than the 1.58-to-1.00 maximum; and EBITDA was $292.1
million, higher than the $242.0 million minimum.
CASH FLOWS FROM OPERATING ACTIVITIES
During the first six months of 1994, net cash provided by operating
activities was $126.0 million, which included a $25.2 million decrease in
other assets primarily due to a reduction of $21.6 million in cash collateral
required for payment of anticipated insurance claims.
CASH FLOWS FROM INVESTING ACTIVITIES
During the first six months of 1994, net cash used in investing activities
consisted primarily of payments of $73.0 million for property, plant and
equipment, the majority of which was used for remodeling stores, upgrading
retail gasoline facilities, replacing equipment and meeting environmental
regulations. The Company expects 1994 capital expenditures to be
approximately $180 million, primarily to complete remodels started in 1993 and
to remodel at least 1,000 additional stores. The 1994 average-per-store
capital expenditures and associated upfront expenses are being reduced
compared to 1993 levels to focus remodeling activity on features that are most
noticeable to customers and have the most immediate and positive impact on
store performance, such as lighting and security, food service equipment,
necessary maintenance and consistent image. Reducing the scope of the
remodels has also mitigated the need to close stores while construction is
under way, which significantly slowed the merchandise sales recovery and
growth at stores that were closed during remodeling in 1993.
The Company anticipates that it will spend approximately $21 million in
1994 on capital improvements required to comply with environmental regulations
relating to below-ground gasoline storage tank systems and above-ground vapor
recovery equipment at store locations and approximately an additional $23
million on such capital improvements from 1995 through 1997. These amounts
are higher than previously estimated due to inclusion of the cost of newly
available state-of-the-art vapor recovery equipment which will enable the
Company to comply with vapor recovery requirements including those recently
mandated in Virginia.
Additionally, the Company accrues for the anticipated future costs of
environmental clean-up activities (consisting of contamination assessment and
remediation) relating to detected releases of regulated substances at its
existing and previously operated sites at which gasoline was sold (including
store sites and other facilities that have been sold by the Company). The
Company expects that it will be required to spend approximately $61 million on
such activities during the next five years. This estimate is based on the
Company's prior experience with gasoline sites and its analysis of such
factors as the age of the tanks, location of tank sites and experience with
contractors who perform contamination assessment and remedial work. However,
the Company is eligible to receive reimbursement for a large portion of these
assessment and remediation costs under state reimbursement programs.
At June 30, 1994, the Company had an accrued liability of $60,748,000 for
sites where releases have been detected. The Company has recorded a
receivable of $62,315,000 (net of an allowance of $16,283,000) for the
estimated probable state reimbursements in connection with paid and accrued
assessment and remediation expenses. The estimated future assessment and
remediation expenditures and related state reimbursement amounts could change
as governmental requirements and state reimbursement programs change in future
years.
7
<PAGE>
The Company anticipates that substantially all of the future assessment
and remediation costs for sites with detected releases at June 30, 1994 will
be incurred within the next five years. There is no assurance of the timing
of the receipt of state reimbursement funds. However, based on its
experience, the Company expects to receive state reimbursement funds within
one to three years after incurring eligible assessment and remediation
expenses, assuming that the state administrative procedures for processing
such reimbursements have been fully developed.
In December 1988, the Company closed its chemical manufacturing facility
in New Jersey. As a result, the Company is required to conduct environmental
remediation at the facility and has accrued a liability for this purpose. The
Company has submitted a clean-up plan to the New Jersey Department of
Environmental Protection and Energy (the "State"), which provides for
remediation at the site as well as continued groundwater monitoring for a
number of years. While the Company has received initial comments from the
State, a final clean-up plan has not been determined. At June 30, 1994, the
Company's recorded liability is $38,262,000, which represents its best
estimate of the clean-up and monitoring costs. In 1991, the Company entered
into a settlement agreement with a large chemical company that formerly owned
the chemical manufacturing facility. Under the settlement agreement, the
former owner agreed to pay a substantial portion of the clean-up costs
described above. The Company has recorded a receivable of $22,442,000 at June
30, 1994, representing the former owner's portion of the accrued clean-up
costs.
None of the amounts related to environmental liabilities have been
discounted.
The Company has subleased its distribution center in Champaign, Illinois,
and has contracted to sell it to the sublessee at the end of 1994. This will
be the last divestiture related to the Company's distribution operations.
CASH FLOWS FROM FINANCING ACTIVITIES
During the first six months of 1994, the Company repaid $47.9 million on
certain secured indebtedness, which included $28.6 million on the Term Loan
under the Credit Agreement.
RESULTS OF OPERATIONS-SECOND QUARTER AND YEAR-TO-DATE, 1994, COMPARED WITH
SECOND QUARTER AND YEAR-TO-DATE, 1993
The Company recorded net sales of $1.72 billion in the second quarter and
$3.23 billion in the first six months of 1994, compared to net sales of $1.77
billion and $3.36 billion during the same periods last year. The decline is
due to approximately 320 fewer convenience stores in the second quarter of
1994 and the deflationary effect of cigarette price reductions on certain
premium brands associated with manufacturers' cost reductions. Same-store
(stores open more than one year) merchandise sales increased 1.0% in the
second quarter and .6% in the first six months of 1994. Including the
deflationary factors noted above, real growth in merchandise sales was 3.3%
for the second quarter and 2.8% for the first six months. These year-to-date
results reflect a steadily improving trend and contain the first two quarters
of consecutive positive same-store merchandise sales growth since the third
quarter of 1991. The Company believes the improvement is due to the benefits
of its new merchandising processes, everyday fair pricing and store remodeling
strategies.
Gasoline sales dollars per store increased 7.0% for the second quarter and
6.6% for the first six months of 1994 due to per-store volume improvement of
11.0% for the quarter and 11.1% for the six months, respectively, reflecting
favorable market conditions as well as the impact of several successful
business strategies: ongoing remodeling to enhance the appeal and convenience
of the Company's gas facilities; promoting the high quality of 7-Eleven's
CITGO-brand gasoline; managing gasoline prices, inventories and product mix on
a by-store basis; and the closing of low-volume locations.
8
<PAGE>
Other income of $18.3 million for the quarter and $35.2 million for the
first six months of 1994 consisted primarily of royalties from area licensees,
principally Seven-Eleven Japan Co., Ltd.
Consolidated gross profits were $395.5 million for the quarter and $723.2
million for the first six months of 1994, $22.0 million and $44.4 million,
respectively, below the same periods in 1993, reflecting lower merchandise
gross profits because of fewer stores. Merchandise gross profits per store
were up .9% for the quarter and 1.0% for the first six months over 1993 levels
because of the increase in merchandise sales per store, which was offset by a
.4 percentage point decline in margins for both periods. The margin decline
reflected the Company's ongoing implementation of everyday fair pricing.
Merchandise gross profit per store has consistently improved over prior year
results for the last six quarters. Gross profit on retail gasoline sales was
12.3 cents per gallon for the second quarter and 13.1 cents for the first six
months of 1994, an increase of .3 cents and .5 cents compared to the same
periods in 1993, due to generally favorable market conditions and the positive
impact of capital expenditure programs. As a result of the gasoline sales and
margin improvement, per-store gasoline gross profits for the second quarter
and first six months of 1994 were 14.2% and 15.5% higher, respectively, than
in 1993. (Except where noted, all per-store numbers above refer to an average
of all stores rather than only stores open a year or more.)
Since 1992, the Company has adopted a more customer-driven approach to
merchandising, intended to greatly expand and improve the quality and variety
of 7-Eleven's product selection through improved ordering, consistently
phasing out slow-selling items and aggressively introducing new products in
the early stages of their life cycle. The new merchandising process was begun
in 1992, its usage was expanded in 1993 and the Company is improving its
implementation further in 1994. Since 1992, this new process has resulted in
improved sales and profits in those stores that are applying it to a
significant number of major product categories. In addition, in 1994, many
7-Eleven stores have continued to implement everyday fair pricing, which
minimizes discounting and promotions and instead charges a competitive
everyday fair price on all items, and the Company has continued to recommend
to its franchisees the adoption of these strategies. Going forward, 7-Eleven
is migrating toward lower retail prices as the Company achieves lower product
costs through strategic alliances with its suppliers.
In addition, the Company has taken several other steps in 1994 that,
together with 7-Eleven's everyday fair pricing strategy, have contributed to
the increased per-store merchandise sales in the first six months. These
steps include continued closure of low-volume stores and a more efficient
remodel process that limits store downtime.
Selling, general and administrative expenses ("SG&A") decreased $41.6
million in the second quarter and $73.1 million in the first six months of
1994 compared to the same periods in 1993. Most of this decrease in SG&A
expense resulted from cost savings realized from the reductions in force that
began late in 1992 and continued in 1993 and the effect of having
approximately 320 fewer stores in the second quarter of 1994. The ratio of
SG&A expenses to sales was 20.1% in the second quarter and 20.7% in the first
six months of 1994, a decrease of 1.75 and 1.42 percentage points,
respectively, from the same periods in 1993.
As expected, the Company's total interest expense increased $3.7 million
for the quarter and $6.4 million for the six months compared to the same
periods in 1993, primarily due to the refinancing of the 12% Notes (see
Liquidity and Capital Resources section). The weighted average interest rate
on the Company's floating rate debt was 5.18% for the second quarter and 4.92%
for the first six months of 1994. The Company does not believe that the
current rise in interest rates will have a material negative impact on its net
profitability, since on June 30, 1994 approximately 30% of its debt as
reported on its balance sheet carried floating rates.
9
<PAGE>
As a result of the operating improvements described above, the Company
recorded net earnings of $31.6 million for the second quarter and $23.5
million for the first six months of 1994, compared to net earnings of $19.3
million and a net loss of $13.1 million during the same periods in 1993. The
1994 results for the second quarter and the first six months included a $4.5
million pretax recovery on a 1992 insurance claim, and the 1993 results for
the first six months included a $16.5 million charge for the cumulative effect
of an accounting change for postemployment benefits as required by SFAS No.
112. In 1994, income tax expense reflects the utilization of certain tax
credits and loss carryforwards. The earnings per common share for the second
quarter and first six months of 1994, both primary and fully diluted, were
$.08 and $.06, respectively.
The Company believes that continued improvement and implementation of the
7-Eleven business concept, including its more customer-focused merchandising
programs, a more efficient remodel process and reductions in overhead expense,
is improving its ability to compete more effectively and will contribute to
improved results for 7-Eleven in 1994.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported, the Company was the defendant in a lawsuit filed
in the Hammond Division of the U.S. District Court of the Northern District of
Indiana entitled HEACOCKS V. THE SOUTHLAND CORPORATION, ET AL. On June 21,
1994, this lawsuit was settled pursuant to the terms of a Compromise
Settlement Agreement and Final Release, under which the Company paid
approximately $664,000 to the plaintiffs in exchange for a complete release of
all claims, as well as a Dismissal with Prejudice of the litigation. This
settlement reduced the $1.5 million in damages originally awarded by the jury,
which was previously reported.
In addition, the Company has previously reported the ongoing litigation
and settlement negotiations between the Company and the Circle K Corporation
("Circle K") relating to the 1988 Asset Purchase Agreement under which Circle
K acquired certain assets from the Company. The bankruptcy judge in Circle
K's bankruptcy entered an order approving the Settlement Agreement and Mutual
Release between the parties, and the order became final on May 1, 1994. This
litigation has now been terminated.
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.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 27, 1994, the Company held its annual meeting of shareholders.
Each of the fourteen nominated directors were elected without contest. In
addition, the shareholders ratified the approval of Coopers & Lybrand to be
the Company's independent auditors for 1994. These were the only two matters
voted on at the meeting.
The votes for and the votes withheld for each of the nominees for director
were as follows:
NOMINEE FOR WITHHELD
Masatoshi Ito 355,603,046 115,650
Toshifumi Suzuki 355,601,641 117,055
Clark J. Matthews, II 355,591,527 127,169
Yoshitami Arai 355,603,042 115,654
Timothy N. Ashida 355,604,361 114,335
Jay W. Chai 355,578,305 140,391
Gary J. Fernandes 355,573,651 145,045
Masaaki Kamata 355,604,871 113,825
Kazuo Otsuka 355,604,976 113,720
Asher O. Pacholder 355,575,219 143,477
Nobutake Sato 355,578,432 140,264
Tatsuhiro Sekine 355,603,834 114,862
Jere W. Thompson 355,467,983 250,713
John P. Thompson 355,480,490 238,206
The votes for, against, abstaining and broker non-votes in connection with
the ratification of the appointment of Coopers & Lybrand to be the independent
auditors of the Company for 1994 were as follows:
355,482,064 shares were voted for; 111,915 shares were voted against;
124,717 shares abstained from voting; and no broker non-votes were received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Exhibit (11) -- Statement re Computation of Per-Share Earnings.
2. Exhibit (15) -- Letter re Unaudited Interim Financial Information.
Letter of Coopers & Lybrand, Independent Accountants.
(b) Reports on Form 8-K:
During the second quarter of 1994, the Company filed no reports on
Form 8-K.
11
<PAGE>
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: July 29, 1994 /s/ CLARK J. MATTHEWS, II
(Officer)
Clark J. Matthews, II
President and Chief Executive Officer
Date: July 29, 1994 /s/ VERNON P. LOTMAN
(Principal Accounting Officer)
Vernon P. Lotman
Vice President and Controller
12
<PAGE>
<TABLE>
EXHIBIT 11
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before cumulative effect of accounting
change............................................. $ 31,633 $ 19,277 $ 23,502 $ 3,395
Cumulative effect of accounting change................. - - - (16,537)
---------- ---------- ---------- ----------
Net earnings (loss) for earnings (loss) per-share
calculation........................................ $ 31,633 $ 19,277 $ 23,502 $ (13,142)
========== ========== ========== ==========
Average number of common shares outstanding............ 409,923 409,919 409,923 409,956
========== ========== ========== ==========
Earnings (loss) per common share (Primary and
Fully Diluted):
Before cumulative effect of accounting change... $.08 $.05 $.06 $.01
Cumulative effect of accounting change.......... - - - (.04)
------ ------ ------ ------
Net earnings (loss)............................. $.08 $.05 $.06 $(.03)
====== ====== ====== ======
Tab 1
</TABLE>
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, Northwest
Washington, D.C. 20549
Attention: Document Control
RE: The Southland Corporation Form 10-Q
We are aware that our report dated July 28, 1994 on our review of the
condensed consolidated balance sheet of The Southland Corporation and
Subsidiaries as of June 30, 1994, the related condensed consolidated
statements of operations for the three-month and six-month periods ended June
30, 1994 and 1993, and the condensed consolidated statements of cash flows for
the six-month periods ended June 30, 1994 and 1993, included in this Form
10-Q, is incorporated by reference in the following registration statements:
REGISTRATION NO.
On Form S-8 for:
Post-Effective Amendment No. 3 to 33-23312
The Southland Corporation Equity Participation Plan
Post-Effective Amendment No. 1 to 33-25327
The Southland Corporation Grant Stock Plan
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statement prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND
Dallas, Texas
July 29, 1994
Tab 2
