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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1994.
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THE SOUTHLAND CORPORATION
INDEX
PAGE
No.
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993.......................... 1
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1994 and 1993.... 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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............................................. 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
Exhibit (27) - Financial Data Schedule.............................. *
* Submitted in electronic format only.
(i)
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<TABLE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 28,656 $ 13,486
Accounts and notes receivable..................................... 81,968 90,934
Inventories....................................................... 103,876 109,363
Other current assets.............................................. 26,673 31,954
------------ -------------
TOTAL CURRENT ASSETS ......................................... 241,173 245,737
PROPERTY, PLANT AND EQUIPMENT........................................ 1,316,857 1,337,586
OTHER ASSETS......................................................... 384,942 415,422
------------ -------------
$ 1,942,972 $ 1,998,745
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable ........................................... $ 188,215 $ 196,026
Accrued expenses and other liabilities............................ 337,265 347,563
Commercial paper.................................................. 42,428 41,220
Long-term debt due within one year................................ 207,533 149,503
------------ -------------
TOTAL CURRENT LIABILITIES......................................... 775,441 734,312
DEFERRED CREDITS AND OTHER LIABILITIES............................... 241,955 242,426
LONG-TERM DEBT....................................................... 2,107,149 2,270,357
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value.................................... 41 41
Additional capital................................................ 625,574 625,574
Accumulated deficit............................................... (1,807,188) (1,873,965)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).......................... (1,181,573) (1,248,350)
------------- -------------
$ 1,942,972 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales (including $254,928, $241,148,
$742,694 and $718,715 in excise taxes)................. $1,810,979 $1,779,759 $5,043,366 $5,135,047
Other income................................................ 20,316 18,691 55,488 52,173
----------- ----------- ----------- -----------
1,831,295 1,798,450 5,098,854 5,187,220
COST OF GOODS SOLD AND EXPENSES:
Cost of goods sold.......................................... 1,390,768 1,345,621 3,899,957 3,933,330
Selling, general and administrative
expenses............................................... 361,732 402,498 1,030,007 1,143,828
Interest expense............................................ 26,316 23,298 78,171 68,770
Contributions to Employees' Savings
and Profit Sharing Plan................................ 2,748 3,227 9,541 10,241
----------- ----------- ----------- -----------
1,781,564 1,774,644 5,017,676 5,156,169
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES,
EXTRAORDINARY GAIN AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE.................................. 49,731 23,806 81,178 31,051
INCOME TAXES..................................................... 6,465 2,050 14,410 5,900
----------- ----------- ----------- -----------
EARNINGS BEFORE EXTRAORDINARY
GAIN AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE............................................. 43,266 21,756 66,768 25,151
EXTRAORDINARY GAIN ON DEBT REDEMPTION............................ - 98,968 - 98,968
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE FOR POSTEMPLOYMENT BENEFITS............................ - - - (16,537)
----------- ----------- ----------- -----------
NET EARNINGS..................................................... $43,266 $120,724 $66,768 $107,582
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE
(Primary and Fully Diluted):
Before extraordinary gain and cumulative effect of
accounting change.................................... $.10 $.05 $.16 $.06
Extraordinary gain....................................... - .24 - .24
Cumulative effect of accounting change................... - - - (.04)
----- ----- ----- ------
Net earnings............................................. $.10 $.29 $.16 $.26
===== ===== ===== ======
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>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1994 1993
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................. $ 66,768 $ 107,582
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Extraordinary gain on debt redemption ................................ - (98,968)
Cumulative effect of accounting change for postemployment benefits ... - 16,537
Depreciation and amortization of property, plant and equipment ....... 108,082 99,794
Other amortization ................................................... 14,270 14,670
Noncash interest expense ............................................. 6,434 6,187
Other noncash (income) expense ....................................... (2,108) 4,890
Net (gain) loss on property, plant and equipment ..................... (7,538) 3,412
Decrease in accounts and notes receivable ............................ 4,433 29,303
Decrease in inventories .............................................. 5,487 20,332
Decrease in other assets ............................................. 23,994 565
Increase in trade accounts payable and other liabilities ............. 1,482 7,474
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 221,304 211,778
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment ................... (114,039) (131,873)
Proceeds from sale of property, plant and equipment ...................... 11,827 18,653
Net currency exchange principal transactions ............................. (5,133) (8,530)
Payments on notes from sales of real estate .............................. 1,798 960
Cash received from other investments ..................................... 251 3,810
Cash utilized by distribution and food center assets ..................... (2,295) (16,175)
Proceeds from sale of distribution and food center assets ................ 6,305 36,327
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES ...................... (101,286) (96,828)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities ........... 3,215,933 2,948,795
Payments under commercial paper and revolving credit facilities .......... (3,227,823) (2,841,598)
Proceeds from issuance of long-term debt ................................. - 150,000
Principal payments under long-term debt agreements ....................... (92,958) (367,845)
Debt issuance costs ...................................................... - (2,355)
------------- ------------
NET CASH USED IN FINANCING ACTIVITIES ...................... (104,848) (113,003)
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 15,170 1,947
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................... 13,486 1,804
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 28,656 $ 3,751
============ ===========
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS 15 Interest ................................ $ (72,067) $ (63,596)
============ ===========
Net income taxes paid .................................................... $ (265) $ (983)
============ ===========
See note to condensed consolidated financial statements.
3
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THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of September 30, 1994, and the
condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 1994 and 1993, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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
September 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
nine months ended September 30, 1994.
4
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Southland Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
The Southland Corporation and Subsidiaries as of September 30, 1994, the
related condensed consolidated statements of operations for the three-month
and nine-month periods ended September 30, 1994 and 1993, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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 L.L.P.
Dallas, Texas
October 31, 1994
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER SUMMARY
The Company's net earnings for the third quarter and first nine months
of 1994 were $43.3 million ($.10 per share) and $66.8 million ($.16 per
share), respectively, compared to net earnings of $120.7 million ($.29 per
share) and $107.6 million ($.26 per share) for the same periods in 1993. The
results for the third quarter and first nine months of 1993 included an
extraordinary gain of $99.0 million on the redemption of the Company's 12%
Senior Notes ("12% Notes") which were refinanced, and a loss of $10
million for the disposition of Citijet, a fixed-base operation at Dallas Love
Field Airport. In addition, the first nine months of 1993 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.
Excluding the effects of the extraordinary gain, the significant
improvement in earnings was primarily due to savings in selling, general and
administrative expenses, offset by lower merchandise gross profit due to
fewer stores. Although merchandise gross profit declined in total,
merchandise sales and gross profits per store were favorable to last year in
both the third quarter and first nine months and have been improving each
quarter during 1994.
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, and iii) short-term seasonal borrowings
through its $275 million revolving credit facility (the "Revolver").
The Company's commercial paper facility is limited to $400 million,
all of which is guaranteed by Ito-Yokado Co., Ltd. The Revolver expires on
December 31, 1995 and is a facility under the bank credit agreement ("Credit
Agreement"), which also includes term loans (the "Term Loans") that expire
on September 30, 1995. 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. See
Cash Flows from Financing Activities section for discussion of working
capital facility balances and Credit Agreement covenant compliance.
The Company believes that its operating activities coupled with its
available short-term working capital facilities will provide sufficient
liquidity for it to fund its current operating and 1994 capital expenditure
programs. The Company is currently exploring opportunities to refinance the
debt under the Credit Agreement and anticipates that a new facility will be in
place prior to the end of the first quarter of 1995. The Company will need to
consummate the refinancing in order for it to fund future years capital
expenditures at desired levels.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $221.3 million for the
first nine months of 1994, an improvement of $9.5 million over the same
period last year. The majority of cash was provided by operations, combined
with a $24.0 million decrease in other assets primarily due to a reduction in
cash collateral required for payment of anticipated insurance claims. See the
Results of Operations section for further description.
CASH FLOWS FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURES
--------------------
During the first nine months of 1994, net cash used in investing
activities consisted primarily of payments of $114.0 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 about 1,200 additional stores. Under the current
program, the total number of stores remodeled through September 30, 1994
is 2,268. The 1994 average-per-store capital expenditures and associated
6
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upfront expenses have been 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 virtually
eliminated the need to close stores during construction, which slowed the
merchandise sales growth at stores remodeled in 1993.
CAPITAL EXPENDITURES - GASOLINE EQUIPMENT
-----------------------------------------
The Company anticipates that approximately $21 million of its total
capital expenditures in 1994 and another $27 million in additional
expenditures from 1995 through 1997, will be spent on capital improvements
required to comply with environmental regulations relating to below-ground
gasoline storage tank systems as well as above-ground vapor recovery
equipment at store locations.
ENVIRONMENTAL COMPLIANCE - STORES
---------------------------------
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 has been sold (including store
sites and other facilities that have been sold by the Company). At
September 30, 1994, the Company has an accrued liability of $62.7 million for
such activities and anticipates that substantially all such expenditures will
be incurred within the next five years. This estimate is based on the
Company's prior experience with gasoline sites and its 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.
The Company is eligible to receive reimbursement for a large portion
of these costs under state reimbursement programs and has recorded a
receivable of $63.6 million (net of an allowance of $14.9 million) for the
estimated probable state reimbursement of paid and accrued assessment and
remediation expenses. 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.
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.
ENVIRONMENTAL COMPLIANCE - CHEMICAL PLANT
-----------------------------------------
In December 1988, the Company closed its chemical manufacturing
facility in New Jersey. As a result, the Company is required to conduct
environmental remediation at the facility and has accrued a liability for this
purpose. 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
September 30, 1994, the Company's recorded liability is $38.0 million,
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 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 $22.3 million at
September 30, 1994, representing the former owner's portion of the accrued
clean-up costs.
None of the amounts related to environmental liabilities, for the
stores or the chemical plant, have been discounted.
OTHER
-----
The Company has subleased its distribution center in Champaign,
Illinois, and has contracted to sell it to the sublessee at the end of 1994.
7
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This will be the last divestiture related to the Company's distribution
operations.
CASH FLOWS FROM FINANCING ACTIVITIES
In August 1993, the Company redeemed its 12% Notes due on
December 15, 1996, which had an outstanding face value of $250.6 million,
and refinanced them with working capital and an additional term loan under
the Credit Agreement. As a result of the refinancing, at current interest
rates, the Company expects to save up to $15 million in 1994 cash interest
payments. However, since interest on the additional 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 $16 million.
During the first nine months of 1994, the Company repaid $93.0
million of debt principal of which $75.4 million was secured indebtedness
($47.3 million on the Term Loans) and $17.6 million was SFAS No. 15
interest. Outstanding balances on September 30, 1994 for the commercial
paper, the Revolver and the Term Loans were $392.4 million, zero, and
$281.7 million, respectively. As of September 30, 1994, outstanding letters
of credit totaled $121.1 million.
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.
For the period ended September 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:
<TABLE>
<CAPTION>
Requirements:
Covenants Actuals Minimum Maximum
------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
EBITDA (in millions) $313.9 $267.0
Cash interest coverage * 2.71 to 1.0 1.84 to 1.0
Fixed charge coverage 1.63 to 1.0 1.01 to 1.0
Total debt to EBITDA 7.58 to 1.0 12.28 to 1.0
Senior to subordinated indebtedness 1.35 to 1.0 1.58 to 1.0
* includes effects of the SFAS No. 15 interest payments.
</TABLE>
RESULTS OF OPERATIONS-THIRD QUARTER AND YEAR-TO-DATE, 1994, COMPARED
WITH THIRD QUARTER AND YEAR-TO-DATE, 1993
(Except where noted, all per-store numbers below refer to an average of all
stores rather than only stores open a year or more.)
SALES
The Company recorded net sales of $1.81 billion in the third quarter
and $5.04 billion in the first nine months of 1994, compared to net sales of
$1.78 billion and $5.14 billion during the same periods last year. The
increase in the third quarter would have been greater had it not been for
approximately 225 fewer convenience stores and the deflationary effect of
cigarette price reductions on certain premium brands associated with
manufacturers' cost reductions starting in August 1993. Same-store (stores
open more than one year) merchandise sales increased 2.9% in the third
quarter and 1.4% in the first nine months of 1994. After adjusting for
deflation, real growth in merchandise sales was 3.2% for the third quarter
and 2.9% for the first nine months. These year-to-date results reflect a
8
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steadily improving trend and contain the first three quarters of consecutive
positive same-store merchandise sales growth (including the effects of
deflation or inflation) since the third quarter of 1990. The Company believes
the improvement is due to the benefits of its new merchandising processes,
everyday fair pricing and store remodeling strategies.
The Company has closed 146 stores during 1994. The Company plans to
continue to prune its store base indefinitely as it identifies stores that
either are not achieving an acceptable level of profitability, do not achieve
minimal image standards, or should be closed for other operating reasons.
Since late 1992, the Company has been devoting the majority of its capital
resources toward refurbishing its existing store base. Upon completion of
the remodeling program, the Company plans to expand its store base and
expects new store development to outpace store closures by 1997.
Gasoline sales dollars per store increased 11.8% for the third quarter
and 8.6% for the first nine months of 1994 due to per-store volume
improvement of 5.5% for the quarter and 9.3% for the nine months,
respectively. This improvement over 1993 reflects 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; the closing of low-volume locations; and managing gasoline prices,
inventories and product mix on a by-store basis.
OTHER INCOME
Other income of $20.3 million for the quarter and $55.5 million for
the first nine months of 1994 consisted primarily of royalties from area
licensees, principally Seven-Eleven Japan Co., Ltd.
GROSS PROFITS
Consolidated gross profits of $420.2 million for the third quarter and
$1,143.4 million for the first nine months of 1994, were $13.9 million and
$58.3 million, respectively, below the same periods in 1993, reflecting lower
merchandise gross profits because of fewer stores. Merchandise gross profits
per store were up 2.1% for the quarter and 1.4% for the first nine months
over 1993 levels because of the increase in merchandise sales per store, which
was offset by a .7 and .5 percentage point decline in margins for the third
quarter and first nine months, respectively. The margin decline reflected the
Company's ongoing implementation of its everyday-fair-pricing strategy,
combined with increased cost for slow moving merchandise. Merchandise
gross profit per store has consistently improved over prior year results for
the last seven quarters.
Gross profit on gasoline sales was 14.4 cents per gallon for the third
quarter and 13.5 cents for the first nine months of 1994, a decrease of .4
cents and an increase of .2 cents compared to the same periods in 1993. As a
result of the gasoline gallon improvement for the quarter and both gasoline
gallon and margin improvement for the first nine months, per-store gasoline
gross profits for the third quarter and first nine months of 1994 were 2.7%
and 10.9% higher, respectively, than in the same periods in 1993.
MERCHANDISING STRATEGIES
Since 1992, the Company has adopted a more customer-driven
approach to merchandising, intended to greatly expand and enhance the
quality and variety of 7-Eleven's product selection through improved
ordering, consistently discontinuing 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 will continue to migrate toward lower
retail prices as the Company achieves decreased 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 nine months. These
steps include continued closure of low-volume stores and a more efficient
remodel process that virtually eliminates store downtime.
9
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") decreased
$40.8 million in the third quarter and $113.8 million in the first nine 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, the effect of having
fewer stores and the $10 million loss incurred in the third quarter of 1993 for
the disposition of Citijet. The ratio of SG&A expenses to sales was 20.0% in
the third quarter and 20.4% in the first nine months of 1994, a decrease of
2.7 and 1.9 percentage points, respectively, from the same periods in 1993.
During the third quarter, the Company began a review of the functions
necessary to enable its stores to respond faster, more creatively and more cost
efficiently to rapidly changing customer needs and preferences. The review
is expected to be completed around year end. Neither the recommendations
nor the timing of their implementation are known at this time.
INTEREST EXPENSE
As expected, the Company's total interest expense increased $3.0
million for the quarter and $9.4 million for the nine months compared to the
same periods in 1993, primarily due to the refinancing of the 12% Notes (see
Cash Flows from Financing Activities section). The weighted average
interest rate on the Company's floating rate debt was 5.77% for the third
quarter and 5.19% for the first nine months of 1994. Since only
approximately 29% of the Company's debt contains floating rates, the
Company does not believe that the current rise in interest rates will have a
material negative impact on its net profitability.
NET EARNINGS
As a result of the operating improvements described above, the
Company recorded net earnings of $43.3 million for the third quarter and
$66.8 million for the first nine months of 1994, compared to net earnings of
$120.7 million and $107.6 million during the same periods in 1993. The
results for the third quarter and first nine months of 1993 included an
extraordinary gain of $99.0 million on the redemption of the Company's 12%
Notes which were refinanced, and a loss of $10 million for the disposition of
Citijet. In addition, the first nine months of 1993 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 third quarter and first nine months of 1994, both
primary and fully diluted, were $.10 and $.16, 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.
10
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company may be involved in administrative
proceedings relating to compliance with federal, state or local regulations
relating to environmental matters in connection with the Company's operation
and maintenance of underground gasoline storage tanks at 7-Eleven stores and
other locations. During the third quarter, pursuant to a Consent Order with
the Florida Department of Environmental Protection, the Company paid $176,600
to the state in settlement of allegations that the Company had failed to
comply with state-mandated monitoring and record keeping requirements at
several store locations during 1992. Similar administrative proceedings
relating to the Company's operation and maintenance of underground gasoline
storage tanks are pending, both in Florida and other states, none of which is
expected to exceed $100,000 in fines and penalties.
There are no other reportable suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company, other
than as previously reported.
ITEM 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.
3. Exhibit (27) -- Financial Data Schedule.
Submitted in electronic format only.
(b) 8-K Reports:
During the third 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: October 31, 1994 /s/ CLARK J. MATTHEWS, II
(Officer)
Clark J. Matthews, II
President and Chief Executive Officer
Date: October 31, 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 PER COMMON SHARE
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before extraordinary gain and cumulative
effect of accounting change....................... $ 43,266 $ 21,756 $ 66,768 $ 25,151
Extraordinary gain.................................... - 98,968 - 98,968
Cumulative effect of accounting change................ - - - (16,537)
---------- ---------- ---------- ----------
Net earnings for earnings per-share calculation....... $ 43,266 $ 120,724 $ 66,768 $ 107,582
========== ========== ========== ==========
Average number of common shares outstanding........... 409,923 409,919 409,923 409,943
========== ========== ========== ==========
Earnings per common share (Primary and
Fully Diluted):
Before extraordinary gain and cumulative
effect of accounting change............... $.10 $.05 $.16 $.06
Extraordinary gain............................. - .24 - .24
Cumulative effect of accounting change......... - - - (.04)
------ ------ ------ -------
Net earnings................................... $.10 $.29 $.16 $.26
====== ====== ====== =======
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 October 31, 1994 on our review of the
condensed consolidated balance sheet of The Southland Corporation and
Subsidiaries as of September 30, 1994, the related condensed consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1994 and 1993, and the condensed consolidated statements of cash
flows for the nine-month periods ended September 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 L.L.P.
Dallas, Texas
October 31, 1994
Tab 2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 28,656
<SECURITIES> 0
<RECEIVABLES> 89,073
<ALLOWANCES> 7,105
<INVENTORY> 103,876
<CURRENT-ASSETS> 241,173
<PP&E> 2,318,985
<DEPRECIATION> 1,002,128
<TOTAL-ASSETS> 1,942,972
<CURRENT-LIABILITIES> 775,441
<BONDS> 2,107,149
<COMMON> 41
0
0
<OTHER-SE> (1,181,614)
<TOTAL-LIABILITY-AND-EQUITY> 1,942,972
<SALES> 5,043,366
<TOTAL-REVENUES> 5,098,854
<CGS> 3,899,957
<TOTAL-COSTS> 3,899,957
<OTHER-EXPENSES> 1,039,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,171
<INCOME-PRETAX> 81,178
<INCOME-TAX> 14,410
<INCOME-CONTINUING> 66,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,768
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
