<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 September 30, 1995
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, 1995.
<PAGE>
THE SOUTHLAND CORPORATION
INDEX
PAGE
NO.
----
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 ......................... 1
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1995 and 1994 ... 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 .................... 3
Notes 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 .............................................. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 13
SIGNATURES .............................................................. 14
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)
<PAGE>
<TABLE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<CAPTION>
ASSETS
September 30, December 31,
1995 1994
------------- -------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . $ 20,179 $ 59,288
Accounts and notes receivable . . . . . . . 92,770 102,230
Inventories . . . . . . . . . . . . . 103,870 101,468
Other current assets . . . . . . . . . . 39,112 40,411
------------- -------------
TOTAL CURRENT ASSETS . . . . . . . . . . . 255,931 303,397
PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . 1,340,737 1,314,499
OTHER ASSETS . . . . . . . . . . . . . . 374,323 382,698
------------ -------------
$ 1,970,991 $ 2,000,594
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable. . . . . . . . . . $ 181,603 $ 203,315
Accrued expenses and other liabilities . . . . 332,298 316,183
Commercial paper. . . . . . . . . . . . 30,417 41,322
Long-term debt due within one year. . . . . . 135,636 123,989
------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . 679,954 684,809
DEFERRED CREDITS AND OTHER LIABILITIES. . . . . . 234,347 245,807
LONG-TERM DEBT . . . . . . . . . . . . . 2,119,982 2,227,209
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value . . . . . . . 41 41
Additional capital . . . . . . . . . . . 625,574 625,574
Accumulated deficit . . . . . . . . . . (1,688,907) (1,782,846)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT ). . . . . . (1,063,292) (1,157,231)
------------- -------------
$ 1,970,991 $ 2,000,594
============= =============
See notes to condensed consolidated financial statements.
1
</TABLE>
<PAGE>
<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,
---------------------------- ----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales (including $255,799, $254,928,
$743,617 and $742,694 in excise taxes). . . $ 1,825,887 $ 1,810,979 $ 5,120,931 $ 5,043,366
Other income. . . . . . . . . . . . . 22,052 20,316 64,165 55,488
------------- ------------- ------------- -------------
1,847,939 1,831,295 5,185,096 5,098,854
COST OF GOODS SOLD AND EXPENSES:
Cost of goods sold. . . . . . . . . . . 1,392,464 1,385,897 3,945,648 3,885,102
Selling, general and administrative expenses . . 364,178 366,603 1,042,370 1,044,862
Interest expense . . . . . . . . . . . 24,622 26,316 77,031 78,171
Contributions to Employees' Savings and
Profit Sharing Plan . . . . . . . . . 5,381 2,748 11,878 9,541
------------- ------------- ------------- -------------
1,786,645 1,781,564 5,076,927 5,017,676
------------- ------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . 61,294 49,731 108,169 81,178
INCOME TAXES . . . . . . . . . . . . . . 11,647 6,465 22,726 14,410
------------- ------------- ------------- -------------
NET EARNINGS . . . . . . . . . . . . . . $ 49,647 $ 43,266 $ 85,443 $ 66,768
============= ============= ============= =============
NET EARNINGS PER COMMON SHARE
(Primary and Fully Diluted) . . . . . . . . $.12 $.10 $.21 $.16
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Nine Months
Ended September 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . $ 85,443 $ 66,768
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization of property, plant and equipment . . . . . 107,974 108,082
Other amortization. . . . . . . . . . . . . . . . . . . . 14,270 14,270
Deferred income taxes. . . . . . . . . . . . . . . . . . . 272 -
Noncash interest expense. . . . . . . . . . . . . . . . . . 1,522 6,434
Other noncash income . . . . . . . . . . . . . . . . . . . (1,854) (2,108)
Net gain on property, plant and equipment . . . . . . . . . . . . (6,571) (7,538)
Decrease in accounts and notes receivable . . . . . . . . . . . . 13,216 4,433
(Increase) decrease in inventories . . . . . . . . . . . . . . (2,402) 5,487
(Increase) decrease in other assets . . . . . . . . . . . . . . (1,256) 23,994
(Decrease) increase in trade accounts payable and other liabilities . . . (13,109) 1,482
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . 197,505 221,304
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment. . . . . . . (144,827) (114,039)
Proceeds from sale of property, plant and equipment. . . . . . . . 11,800 11,827
Other . . . . . . . . . . . . . . . . . . . . . . . 1,255 2,049
Net currency exchange principal transactions . . . . . . . . . . - (5,133)
Cash utilized by distribution and food center assets . . . . . . . - (2,295)
Proceeds from sale of distribution and food center assets. . . . . . - 6,305
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . (131,772) (101,286)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . . . . 2,981,083 3,215,933
Payments under commercial paper and revolving credit facilities. . . . (3,039,459) (3,227,823)
Principal payments under long-term debt agreements . . . . . . . . (45,679) (92,958)
Other . . . . . . . . . . . . . . . . . . . . . . . (787) -
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . (104,842) (104,848)
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . (39,109) 15,170
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR. . . . . . . . . . . 59,288 13,486
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . $ 20,179 $ 28,656
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . . . . $ (72,689) $ (72,067)
============= =============
Net income taxes paid. . . . . . . . . . . . . . . . . . $ (23,235) $ (4,997)
============= =============
See notes to condensed consolidated financial statements.
3
</TABLE>
<PAGE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of September 30, 1995, and the
condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 1995 and 1994, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 30, 1995 and 1994, 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, 1995, 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, 1994, 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, 1994, include accounting policies and
additional information pertinent to an understanding of both the December 31,
1994, 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, 1995.
2. DEBT REFINANCING:
On October 24, 1995, the Company announced a plan to refinance a portion of
its 5% First Priority Senior Subordinated Debentures due 2003 and 4 1/2% Second
Priority Senior Subordinated Debentures (Series A) due 2004 (collectively, the
"Debentures"). The plan consists of a cash tender offer to purchase up to 40%
of the principal amount of the Debentures with proceeds from the issuance of
$300 million principal amount of Convertible Quarterly Income Debt Securities
due 2010 ("Convertible Debt") to Ito-Yokado Co., Ltd. and Seven-Eleven Japan
Co., Ltd., the joint owners of IYG Holding Company, which is the majority
shareholder of the Company. The cash tender offer expiration is expected to
occur on November 21, 1995, unless extended. The Company will use approximately
$225 million of the proceeds to purchase the Debentures, and the remaining
proceeds will be used for general corporate purposes. In addition, accrued
interest on the purchased Debentures will be paid from June 16, 1995 to, but not
including, the settlement date, which is expected to occur on November 28, 1995,
unless extended.
The purchase of the Debentures will result in an extraordinary gain in the
fourth quarter since the Company is purchasing the Debentures at a discount and
due to the fact that, under Statement of Financial Accounting Standards No. 15,
all required future payments related to the Debentures, including undiscounted
interest payments, were initially recorded as part of the carrying amount of
the debt. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for further information regarding the anticipated
extraordinary gain on the purchase of the Debentures.
The Convertible Debt, which is subordinated to all the other debt of the
Company, will have an interest rate of 4 1/2% and allows the Company to defer
interest payments for up to 20 consecutive quarters. The holders of the
Convertible Debt can convert the debt into the Company's common shares at a
premium based on Southland's share price at the time of issuance of the
Convertible Debt.
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 September 30, 1995, the related
condensed consolidated statements of operations for the three-month and nine-
month periods ended September 30, 1995 and 1994, and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1995
and 1994. 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, 1994, 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 23, 1995, which included an explanatory paragraph
describing the change in method of accounting for postemployment benefits and
for income taxes 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,
1994, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
October 24, 1995
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER AND YEAR-TO-DATE, 1995
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings for the third quarter and first nine months
of 1995 were $49.6 million ($.12 per share) and $85.4 million ($.21 per share),
respectively, compared to net earnings of $43.3 million ($.10 per share) and
$66.8 million ($.16 per share) for the same periods in 1994. The significant
factors contributing to the improved third quarter results include increases
in gasoline gross profits and same-store merchandise sales.
(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 $1.83 billion in the third quarter
and $5.12 billion in the first nine months of 1995, compared to net sales of
$1.81 billion and $5.04 billion during the same periods last year. Merchandise
sales accounted for almost all of the third quarter improvement due to
favorable same-store sales results, despite an average of 157 fewer convenience
stores compared to 1994. U.S. same-store merchandise sales increases or
(decreases) as compared to the prior year and inflation information is
presented below:
<TABLE>
<CAPTION>
Periods Ending September 30, 1995
---------------------------------
Increase/(decrease) from prior year Three Months Nine Months
- ----------------------------------- ------------ -----------
<S> <C> <C>
Same-store sales 2.7% 2.0%
Same-store real growth; excluding inflation .6% (.2%)
7-Eleven inflation 2.1% 2.2%
</TABLE>
During the third quarter, same-store merchandise sales (excluding
inflation or deflation) increased .6% over prior year levels. The nine months
results, which showed a slight decline to 1994, were adversely affected by the
unseasonably cool and wet conditions that the west coast experienced during the
second quarter. In spite of this, the Company believes the third quarter
results combined with the improvement in six of the last seven quarters
reaffirms the strategies it is implementing (see Key Management Strategies).
Gasoline sales dollars per store increased 0.1% for the third quarter and
6.7% for the first nine months of 1995, compared to the same periods in 1994.
The nine month increase is due to an average increase in sales price of 5.8
cents per gallon, combined with per-store gallonage improvement of 1.5%. Sales
price per gallon, and per-store gallonage, were about the same for the third
quarter of 1995 as compared to 1994.
6
<PAGE>
OTHER INCOME
Other income of $22.1 million for the quarter and $64.2 million for the
first nine months of 1995 is $1.7 million and $8.7 million higher than the
same periods in 1994, respectively. The improvement is primarily the result of
increased royalty income, interest income and tenant rent income on the
Company's headquarters facilities.
KEY MANAGEMENT STRATEGIES
The Company is committed to several key strategies that it believes,
over the long term, will further differentiate it from its competitors and
allow 7-Eleven to maintain its position as the premier convenience store chain
in the industry. These strategies include:
- Strengthening the Company's store base through the pruning of
underachieving stores and an extensive remodeling plan that began in
1994 and will be substantially completed by the end of 1996.
- Expanding our store base, with new store openings expected to outpace
closures by 1997.
- A customer-driven approach to merchandising, which focuses on providing
an expanded selection of quality products at a good value to satisfy
the ever-changing preferences of our customers.
- Everyday-fair-pricing to provide consistent prices on all items by
reducing reliance on discounting of some products and lowering prices
on others.
- Daily delivery of fresh, perishable items and ready-to-eat foods that
provides fresher products, improved in-stock conditions and lower
product costs.
- Implementation of a retail automation system with an initial phase
involving automating accounting and other store-level tasks and future
phases that will provide each store and its suppliers with
information to make better decisions in anticipating customer needs.
GROSS PROFITS
Consolidated gross profits were $433.4 million for the quarter and
$1,175.3 million for the first nine months of 1995, an increase of $8.3 million
and $17.0 million, respectively, from the same periods in 1994. The following
chart highlights the percent change in merchandise gross profit per store and
the components thereof:
<TABLE>
<CAPTION>
Periods Ending September 30, 1995
----------------------------------
Increase/(decrease) from prior year Three Months Nine Months
- ----------------------------------- ------------ -----------
<S> <C> <C>
Average per store gross profit dollar 3.6% 3.5%
Margin percentage point (.11) .12
Average per store merchandise sales 3.9% 3.2%
</TABLE>
As a result of its continued growth in average per-store gross profit, the
Company's third quarter total merchandise gross profit dollars increased $3.7
million over 1994. Although the high margin financial services category
continues to have considerable sales growth, third quarter merchandise margins
declined, compared to the same time period in 1994. The decline was primarily
due to promotions and other costs associated with the introduction of new
products.
7
<PAGE>
Gasoline gross profits per store were 7.6% and 6.6% higher, compared to
the preceding year, for the third quarter and first nine months of 1995,
respectively. This improvement was primarily due to higher cents-per-gallon
gross profit. Gasoline gross profits were 15.5 and 14.2 cents per gallon for
the quarter and nine months, respectively, an increase of 1.0 cents and .7
cents compared to the same periods in 1994. This increase is attributed to
favorable market conditions, the positive impact of capital expenditure
programs and the continued improvement in by-store management of gasoline
merchandising strategies.
<TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
<CAPTION>
Periods Ended September 30, 1995
(Dollars in Millions) Three Months Nine Months
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total selling, general and administrative expenses $364.2 $366.6 $1,042.4 $1,044.9
Ratio of SG&A to sales 19.9% 20.2% 20.4% 20.7%
</TABLE>
The improvement in the ratio of SG&A to sales for the third quarter of
1995 is the result of the Company's continued focus on reducing expenses.
For the first three quarters of 1994, SG&A increased from previously
reported amounts, with a corresponding decrease in cost of goods sold, due
to an expense reclassification that was noted in the December 31, 1994,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
INTEREST EXPENSE
The Company's total interest expense in the third quarter and first nine
months of 1995 decreased $1.7 million and $1.1 million compared to the same
periods in 1994, respectively. Approximately 30% of the Company's debt
contains floating rates, which had a weighted average interest rate of 6.53%
for the third quarter and 6.71% for the first nine months of 1995 versus 5.77%
and 5.19% for the same periods in 1994, respectively. The interest savings
for the third quarter of 1995 is almost entirely non-cash, primarily due to
the refinancing of the bank debt under the senior bank debt credit agreement
("Credit Agreement") in December 1994 and the extension in the maturity of
the 7-7/8% Cityplace notes in February 1995 (see Liquidity and Capital
Resources - Financing Activities).
On October 24, 1995, the Company announced a tender offer and has committed
up to $225 million to purchase a portion of its public debt securities. The
purchase is to be financed by the issuance of $300 million in 4.5% Convertible
Quarterly Income Debt Securities due 2010 ("Convertible Debt"). The increase
in interest expense of $13.5 million annually from issuing the Convertible Debt
will not be offset by a corresponding reduction in the income statement related
to retiring the debentures, as the debentures are subject to Statement of
Financial Accounting Standards No. 15 ("SFAS No. 15") treatment. (see Liquidity
and Capital Resources - Financing Activities) However, the Company may benefit
from lower short-term borrowings and related interest savings depending upon
the use of the excess cash from the transaction.
8
<PAGE>
In February 1995, the Company extended the repayment of the debt relating
to its headquarters facilities (Cityplace) at a lower interest rate, reducing
1995 cash interest expense by approximately $2.8 million (see Liquidity and
Capital Resources - Financing Activities).
PROFIT SHARING
Profit sharing expense for the first nine months of 1995 has increased by
$2.3 million over the same period in 1994 due to the Company's higher
contribution related to its current level of earnings.
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 $150 million under its revolving
credit facility. 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 capital expenditure programs
as well as to service debt requirements.
FINANCING ACTIVITIES
On October 24, 1995, the Company issued a tender offer for up to 40% of the
face value of both its 5% First Priority Senior Subordinated Debentures due
December 15, 2003 and 4-1/2% Second Priority Senior Subordinated Debentures
(Series A) due June 15, 2004 (collectively, the "Debentures"). The Company has
committed up to $225 million to fund the tender offer on the Debentures under
the terms of a "Dutch auction". The tender price range for the 5% and 4-1/2%
Debentures will be from $815 to $875 and from $745 to $810 per $1,000 of
principal amount, respectively. This tender offer is scheduled to expire on
November 21, 1995, unless extended.
To finance the purchase of the Debentures, the Company plans to issue $300
million in Convertible Debt 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. The remaining proceeds will be made available for general
corporate purposes. The Convertible Debt will be subordinated to all existing
debt, will have a 15 year term with no amortization, and will be convertible
into the Company's common shares at a premium based on the market value of
Southland's common stock on the day the Convertible Debt is issued.
The Company will recognize an after tax extraordinary gain on the purchase
of the Debentures in the fourth quarter of 1995. The gain results from
purchasing the Debentures below their face value and from retiring the future
undiscounted interest payments on that portion of the Debentures being
purchased. As a result of the Company's financial restructuring in 1991,
SFAS No. 15 required the Company to record its future interest payments on the
Debentures as a debt on the balance sheet. The gain will be based upon
the actual number of debentures accepted during the tender offer and the final
price paid per debenture for each issue. If 40% of each issue is tendered, the
amount of the gain is estimated to be between $100 and $113 million.
9
<PAGE>
The Company's Credit Agreement contains a term loan ($300 million) and a
revolving credit facility. The term loan has scheduled quarterly repayments of
$18.75 million commencing March 31, 1996 through December 31, 1999. The
revolving credit facility contains both a revolving loan ("Revolver") and
letter of credit subfacility; each having a maximum limit of $150 million and
expiring on December 31, 1999. Interest on the Revolver and Term Loan is
generally based on a variable rate equal to the administrative agent bank's
base rate or, at the Company's option, at a rate equal to the Eurodollar rate
plus .975% per year.
The Credit Agreement contains certain financial and operating covenants
requiring, among other things, the maintenance of certain financial ratios,
including interest coverage, fixed charge coverage and senior indebtedness
to earnings before interest, taxes, depreciation, and amortization ("EBITDA").
The covenant levels established by the Credit Agreement generally require
continuing improvement in the Company's financial condition.
For the period ended September 30, 1995, the Company was in compliance
with all of the covenants required under the Credit Agreement. The Company
complied with the principal financial and operating covenants, which are
calculated over the latest 12-month period, as follows:
<TABLE>
<CAPTION>
Requirements:
---------------------------
Covenants Actuals Minimum Maximum
--------- ------- ------- -------
<S> <C> <C> <C>
Interest coverage * 2.74 to 1.0 2.35 to 1.0
Fixed charge coverage 1.00 to 1.0 .75 to 1.0
Senior indebtedness to EBITDA 3.71 to 1.0 4.85 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
The issuance of the Convertible Debt and the tender offer for the
Debentures do not require the approval of the Company's lenders under the Credit
Agreement. The Company is seeking an amendment to the Credit Agreement that
will, among other things, give greater flexibility in how it uses the proceeds
from the issuance of the Convertible Debt and how the refinancing is dealt with
under certain financial covenants. The proposed amendment will allow the
Company, among other things, to make subsequent purchases of subordinated debt
with any remaining proceeds from the issuance and to exclude payments for such
purchases from the Company's fixed charge coverage ratio.
The Company repaid $45.7 million of debt during the first nine months of
1995, of which $17.6 million was for SFAS No. 15 interest and $17.7 million
was for principal payments on its Yen denominated loan (secured by the royalty
income stream from its area licensee in Japan). Outstanding balances on
September 30, 1995 for the commercial paper, the Term Loan and the Revolver
were $380.4 million, $300.0 million and zero, respectively. As of September 30,
1995, outstanding letters of credit issued pursuant to the Credit Agreement
totaled $80.6 million.
As a result of an agreement reached in conjunction with the Company's
bankruptcy proceedings in 1990, on February 15, 1995, the 7-7/8% Cityplace
notes, issued by Cityplace Center East Corporation ("CCEC"), a wholly owned
subsidiary of the Company, were repaid under a drawing of a letter of credit
issued by The Sanwa Bank, Ltd. Under such agreement, the term of maturity of
the indebtedness of CCEC resulting from such draw has been extended by ten
years to March 1, 2005. New terms include monthly payments of principal and
interest over the ten-year period, based upon a 25-year amortization at 7-1/2%,
with the remaining principal due upon maturity.
10
<PAGE>
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $197.5 million for the first
nine months of 1995 (see "Results of Operations" section). Other items impacting
operating cash flows included a one time $13.4 million payment related to an
IRS examination of the Company's filings for 1990 and 1991. Such payment had no
material effect on 1995 earnings.
CAPITAL EXPENDITURES
In the first nine months, net cash used in investing activities consisted
primarily of payments of $144.8 million for property, plant and equipment. For
the year, the Company intends to spend approximately $200 million on capital
expenditures, primarily to complete remodels started in 1994 and to remodel about
1,400 additional stores, and to a lesser extent, in upgrading retail gasoline
facilities, replacing equipment and complying with environmental regulations.
Through September 30, 1995, approximately 3,800 stores have been
remodeled. The remodels are focusing on the 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.
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 that it will spend approximately
$16 million in 1995 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 $27
million on such capital improvements from 1996 through 1998.
ENVIRONMENTAL COMPLIANCE - STORES
The Company accrues for the anticipated future costs of environmental
clean-up activities (consisting of environmental assessment and remediation)
relating to detected releases of regulated substances at its existing and
previously owned or operated sites at which gasoline has been sold (including
store sites and other facilities that have been sold by the Company). At
September 30, 1995, the Company has an accrued liability of $57.9 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 consideration of such
factors as the age of the tanks, location of tank sites and experience with
contractors who perform environmental assessment and remedial work.
11
<PAGE>
Under state reimbursement programs the Company is eligible to receive
reimbursement for a portion of future costs, as well as costs previously paid.
At September 30, 1995, the Company has recorded a gross receivable of $76.2
million (a net receivable of $55.7 million after an allowance of $20.5 million)
for the estimated probable state reimbursement. 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 four years after payment of 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. As
required, the Company has submitted a clean-up plan to the New Jersey
Department of Environmental Protection (the "State"), which provides for
remediation of the site for approximately a three-to-five year period, as well
as continued groundwater treatment for a projected 20-year period. While the
Company has received initial comments from the State, the clean-up plan has not
been finalized. The Company has recorded liabilities representing its best
estimates of the clean-up costs of $38.1 million at September 30, 1995. Of
this amount, $31.1 million was included in deferred credits and other
liabilities and the remainder in accrued expenses and other liabilities. 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 $22.2 million at
September 30, 1995, representing the former owner's portion of the clean-up
costs.
None of the amounts related to environmental liabilities have been
discounted.
12
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no reportable suits or proceedings pending or threatened against
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 L.L.P.,
Independent Accountants.
3. Exhibit (27) -- Financial Data Schedule.
Submitted in electronic format only.
(b) 8-K Reports:
During the third quarter of 1995, the Company filed no reports on Form 8-K.
13
<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 30, 1995 /s/ Clark J. Matthews, II
---------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive
Officer
Date: October 30, 1995 /s/ Don Thomas
------------------------------
(Principal Accounting Officer)
Don E. Thomas
Controller
14
</TABLE>
<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,
------------------------ ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings for earnings per-share calculation. . $ 49,647 $ 43,266 $ 85,443 $ 66,768
=========== =========== =========== ===========
Average number of common shares outstanding . . . 409,923 409,923 409,923 409,923
=========== =========== =========== ===========
Net earnings per common share (Primary and
Fully Diluted) . . . . . . . . . . . $.12 $.10 $.21 $.16
===== ===== ===== =====
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 24, 1995 on our review of the
condensed consolidated balance sheet of The Southland Corporation and
Subsidiaries as of September 30, 1995, the related condensed consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1995 and 1994, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 1995 and 1994,
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 The Southland
Corporation Equity Participation Plan 33-23312
Post-Effective Amendment No. 1 to The Southland
Corporation Grant Stock Plan 33-25327
The Southland Corporation 1995 Stock Incentive
Plan 33-63617
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
November 2, 1995
Tab 2
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEPT-30-1995
<CASH> 20,179
<SECURITIES> 0
<RECEIVABLES> 99,505
<ALLOWANCES> 6,735
<INVENTORY> 103,870
<CURRENT-ASSETS> 255,931
<PP&E> 2,450,699
<DEPRECIATION> 1,109,962
<TOTAL-ASSETS> 1,970,991
<CURRENT-LIABILITIES> 679,954
<BONDS> 2,119,982
<COMMON> 41
0
0
<OTHER-SE> (1,063,333)
<TOTAL-LIABILITY-AND-EQUITY> 1,970,991
<SALES> 5,120,931
<TOTAL-REVENUES> 5,185,096
<CGS> 3,945,648
<TOTAL-COSTS> 3,945,648
<OTHER-EXPENSES> 1,054,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,031
<INCOME-PRETAX> 108,169
<INCOME-TAX> 22,726
<INCOME-CONTINUING> 85,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,443
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
