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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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBERS 0-676 AND 0-16626
-----------------
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 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 March 31, 1997.
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THE SOUTHLAND CORPORATION
INDEX
Page
No.
----
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996........................... 1
Condensed Consolidated Statements of Earnings -
Three Months Ended March 31, 1997 and 1996..................... 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996..................... 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 ...................................... 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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<CAPTION>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . $ 50,571 $ 36,494
Accounts and notes receivable. . . . . . . . 102,987 109,413
Inventories. . . . . . . . . . . . . . 101,684 109,050
Other current assets. . . . . . . . . . . 100,120 95,943
------------- -------------
TOTAL CURRENT ASSETS . . . . . . . . . 355,362 350,900
PROPERTY AND EQUIPMENT . . . . . . . . . . . 1,344,414 1,349,839
OTHER ASSETS . . . . . . . . . . . . . . 318,710 338,409
------------- -------------
$ 2,018,486 $ 2,039,148
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable . . . . . . . . . . $ 198,334 $ 211,060
Accrued expenses and other liabilities . . . . 280,857 297,246
Commercial paper . . . . . . . . . . . . 48,211 98,055
Long-term debt due within one year . . . . . . 120,079 68,571
------------- -------------
TOTAL CURRENT LIABILITIES. . . . . . . . 647,481 674,932
DEFERRED CREDITS AND OTHER LIABILITIES. . . . . . 194,168 214,343
LONG-TERM DEBT. . . . . . . . . . . . . . 1,663,152 1,638,828
CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES. . . . 300,000 300,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value . . . . . . . 41 41
Additional capital . . . . . . . . . . . 625,574 625,574
Accumulated deficit . . . . . . . . . . . (1,411,930) (1,414,570)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT ). . . . (786,315) (788,955)
------------- -------------
$ 2,018,486 $ 2,039,148
============= =============
See notes to condensed consolidated financial statements.
1
</TABLE>
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<TABLE>
<CAPTION>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUES:
Net sales (Including $222,765 and $229,425 in excise taxes). $ 1,604,400 $ 1,562,614
Other income . . . . . . . . . . . . . . . . 21,623 19,037
------------- -------------
1,626,023 1,581,651
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . . 1,154,633 1,120,568
Operating, selling, general and administrative expenses . . 438,288 428,867
Interest expense, net . . . . . . . . . . . . . 23,899 23,068
------------- -------------
1,616,820 1,572,503
------------- -------------
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . 9,203 9,148
INCOME TAXES . . . . . . . . . . . . . . . . . . 3,681 3,659
------------- -------------
NET EARNINGS . . . . . . . . . . . . . . . . . . $ 5,522 $ 5,489
============= =============
NET EARNINGS PER COMMON SHARE (Primary and Fully Diluted) . . . $.01 $.01
===== =====
See notes to condensed consolidated financial statements.
2
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THE SOUTHLAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 5,522 $ 5,489
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment . . . . . 43,593 39,746
Other amortization. . . . . . . . . . . . . . . . . . 4,757 4,757
Deferred income taxes. . . . . . . . . . . . . . . . . 744 (1,209)
Noncash interest expense. . . . . . . . . . . . . . . . 1,723 459
Other noncash income . . . . . . . . . . . . . . . . . (119) (88)
Net loss on property and equipment . . . . . . . . . . . . 312 756
Decrease in accounts and notes receivable . . . . . . . . . . 15,601 5,952
Decrease (increase) in inventories . . . . . . . . . . . . 7,366 (3,259)
Increase in other assets. . . . . . . . . . . . . . . . (3,365) (449)
(Decrease) increase in trade accounts payable and other liabilities . (49,027) 4,024
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . 27,107 56,178
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment . . . . . . . . . (41,149) (45,246)
Proceeds from sale of property and equipment . . . . . . . . . . 4,502 2,448
Other . . . . . . . . . . . . . . . . . . . . . . . 478 (904)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . (36,169) (43,702)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities . . . . 1,460,167 823,488
Payments under commercial paper and revolving credit facilities . . . . (1,425,198) (765,987)
Principal payments under long-term debt agreements . . . . . . . . (11,380) (28,693)
Other . . . . . . . . . . . . . . . . . . . . . . . (450) -
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . 23,139 28,808
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . 14,077 41,284
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . . 36,494 43,047
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . $ 50,571 $ 84,331
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest . . . . . . . . . . $ (25,009) $ (25,455)
============= =============
Net income taxes refunded. . . . . . . . . . . . . . . . . $ 1,522 $ 1,181
============= =============
See notes to condensed consolidated financial statements.
3
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<PAGE>
THE SOUTHLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of March 31, 1997, and the
condensed consolidated statements of earnings and cash flows for the
three-month periods ended March 31, 1997 and 1996, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1997, and the results of operations and cash
flows for all periods presented have been made. The results of operations for
the interim periods are not necessarily indicative of the operating results
for the full year.
The condensed consolidated balance sheet as of December 31, 1996, is
derived from the audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The notes
accompanying the consolidated financial statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, include accounting
policies and additional information pertinent to an understanding of both the
December 31, 1996, balance sheet and the interim financial statements. The
information has not changed except as a result of normal transactions in the
three months ended March 31, 1997.
2. EARNINGS PER SHARE:
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," in December 1997. SFAS No. 128
establishes simplified accounting standards for computing earnings per share
and makes them comparable to international earnings per share standards. The
table below reflects both the current earnings per share amount and the pro
forma earnings per share amount assuming adoption of SFAS No. 128.
Three Months
Ended March 31
---------------
1997 1996
----- -----
Per Statement of Earnings:
Primary and Fully Diluted (a) $ .01 $ .01
Pro Forma:
Basic and Diluted $ .01 $ .01
(a) The Convertible Quarterly Income Debt Securities are common stock
equivalents but are not included in the first quarter earnings per
share calculations because they have an antidilutive effect. While
the first quarter 1996 earnings per share calculations ($.02 as
previously reported) have been restated, this issue only affects the
first quarter calculation and no other 1996 earnings per share
calculations will require restatement.
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 March 31, 1997, and the related
condensed consolidated statements of earnings and cash flows for the three-
month periods ended March 31, 1997 and 1996. These financial statements are
the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements of The Southland
Corporation and Subsidiaries for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of earnings, shareholders' equity (deficit),
and cash flows for the year then ended (not presented herein); and in our
report dated February 18, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1996, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 21, 1997
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the matters discussed in this quarterly report contain forward-
looking statements regarding the Company's future business which are subject
to certain risks and uncertainties, including competitive pressures, adverse
economic conditions and government regulations. These issues, and other
factors which may be identified from time to time in the Company's reports
filed with the SEC, could cause actual results to differ materially from
those indicated in the forward-looking statements.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The Company's net earnings of $5.5 million ($.01 per share) for the
first quarter of 1997, increased slightly when compared to the first quarter
of 1996. The results for the first quarter of both 1997 and 1996 include
several special or unusual items, the most significant of which, for 1997, is
a reduction in an estimated environmental liability. The net effect of these
items on the quarter, for each year, was a pretax increase of approximately
$3 million. (See Liquidity and Capital Resources - Environmental)
MANAGEMENT STRATEGIES
Since 1992, the Company has been committed to several key strategies
that it believes, over the long term, will provide further differentiation
from competitors and allow 7-Eleven to maintain its position as the premier
convenience retailer. These strategies include:
* Upgrading the Company's store base through developing or acquiring new
stores, continuing the upgrading of existing stores and closing
underachieving stores. During 1997, the Company expects to have net
store growth in the U.S. and Canada for the first time in ten years.
* A customer-driven approach to merchandising, which focuses on providing
the customer an expanded selection of quality products at a good value.
* An everyday-fair-pricing strategy which provides consistent, reasonable
prices on all items.
* Daily delivery of fresh perishable items and high-quality, ready-to-eat
foods through the use of combined distribution centers, fresh-food
commissaries and bakery facilities. These facilities, which are
generally third party operated, are designed to provide fresher
products, improve in-stock conditions and lower product costs.
* The development of a retail information system which initially only
automated accounting and other store-level tasks. The current phase
involves the installation of point-of-sale registers with scanning and
ordering capabilities.
(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 $1.60 billion for the three months
ended March 31, 1997, compared to sales of $1.56 billion during the same
period in 1996. The increase in sales is due to higher average per store
merchandise sales and gasoline prices. The first quarter of 1997 produced a
6
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U.S. same-store (stores open more than one year) merchandise sales increase
of 0.4% (1.5% excluding the additional day in 1996 for leap year). After
adjusting for first quarter inflation of 1.7%, same-store merchandise sales
real growth was -1.3% ( -0.2% excluding the day for leap year).
Gasoline sales dollars per store increased 5.9% for the first quarter,
due to higher retail prices. Average per-store gallonage decreased 3.8% when
compared to 1996.
OTHER INCOME
Other income of $21.6 million for the first quarter of 1997 was $2.6
million higher than the same period in 1996. The improvement is primarily
the result of increased royalty income from licensed operations.
<TABLE>
<CAPTION>
GROSS PROFITS THREE MONTHS ENDED
MARCH 31, 1997
----------------------
MERCHANDISE GASOLINE
----------- --------
<S> <C> <C>
Gross Profit - dollars in millions $ 410.9 $ 38.9
INCREASE/(DECREASE) FROM PRIOR YEAR - ALL STORES
- ------------------------------------------------
Average per-store gross profit dollar change 2.3% (5.1)%
Margin percentage point change (gasoline in cents per gallon) .42 ( .16)
Average per-store sales (gasoline in gallons) 1.0% (3.8)%
</TABLE>
Total merchandise gross profit dollars were $9.3 million higher in the
first quarter of 1997 than the comparable period in 1996. The increase was
primarily due to favorable margins, combined with the modest average per
store sales growth. Merchandise margin improvement was primarily due to
lower product costs resulting from negotiations of new contracts with
vendors. In addition, margin benefited from increases in sales of higher
margin items. While most of the benefits from these new contracts should
continue, margins are expected to return to last year's range as the Company
continues to utilize cost reductions to further its ongoing strategy to
achieve everyday-fair prices.
During the first three months of 1997, gasoline gross profits declined
$1.6 million versus the comparable period in 1996 due to lower per-store
gallon sales and margins. During the first quarter, the industry's product
supply problems on the west coast caused competitive conditions to intensify,
creating the situation where, in some cases, the Company's cost exceeded
other operators' retail price of gasoline. As a result, the Company's west
coast operations (24% of the Company's total gas stores) experienced a 35%
decline in gross profits in the first quarter of 1997 compared to the first
quarter of 1996. Average per-store gross profit for the first quarter of
1997, excluding the west coast stores, increased 2.3% over the comparable
period of 1996.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
Operating, selling, general and administrative expenses increased $9.4
million in the first quarter of 1997 compared to the same period in 1996. A
portion of the increase in OSG&A expenses resulted from costs associated with
the Company's implementation of its retail information system and other
strategic initiatives. The incremental costs of these initiatives is
7
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approximately $2 million more in the first quarter 1997, when compared to
1996. The ratio of OSG&A expenses to sales was 27.3% in the first three
months of 1997, a decrease of 0.1 percentage points from the same period in
1996. While the ratio will vary on a quarterly basis, management believes
this ratio will become slightly less favorable during the roll-out phase of
the retail information system.
The Company continues to review the functions necessary to enable its
stores to respond faster and more cost efficiently to rapidly changing
customer needs and preferences. In conjunction with this review, management
continues to realign and reduce personnel and office facilities, in order to
eliminate non-essential costs, while devoting resources to the implementation
of its retail information system and other strategic initiatives (see
Management Strategies).
INTEREST EXPENSE, NET
Net interest expense increased $0.8 million in 1997 over the first
quarter of 1996. The increase was due to two factors: the write-off of
deferred costs associated with the Company's refinancing of its credit
agreement and lower interest income, partially offset by lower borrowing
levels and more favorable rates (see Liquidity and Capital Resources).
Approximately 36% of the Company's debt contains floating rates that
will be unfavorably impacted by rising interest rates. The weighted average
interest rate for such debt was 5.8% through March of 1997 versus 6.1% for
the first quarter of 1996. The Company expects net interest expense in 1997
to remain relatively flat due to higher borrowings to finance new store
development, offset by increased capitalized interest and a .6% reduction in
the cost of borrowing that the Company negotiated with the lenders in its
new, unsecured bank debt credit agreement ("New Credit Agreement") (see
Liquidity and Capital Resources).
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's working capital is provided from three
sources: i) cash flows generated from its operating activities; ii) a $400
million commercial paper facility (guaranteed by Ito-Yokado Co., Ltd.); and
iii) short-term seasonal borrowings of up to $400 million (reduced by
outstanding letters of credit) under its revolving credit facility. The
Company believes that operating activities, coupled with available short-term
working capital facilities, will provide sufficient liquidity to fund current
operating and capital expenditure programs, as well as to service debt
requirements.
In February 1997, the Company entered into a New Credit Agreement,
refinancing its old term loan ($225 million), revolving credit facility and
letters of credit ($150 million each), all of which were scheduled to mature
on December 31, 1999, with a new term loan facility ("Term Loan") and
revolving credit facility. The Term Loan ($225 million) has scheduled
quarterly repayments of $14.1 million commencing March 31, 1998 through
December 31, 2001. The new revolving credit facility ($400 million) expires
February 2002 and allows for revolving borrowings ("Revolver"), and for
issuance of letters of credit not to exceed $150 million. Interest on the
Term Loan and Revolver is based on a variable rate equal to the
administrative agent bank's base rate or, at the Company's option, a rate
equal to a reserve-adjusted Eurodollar rate plus .225% per year for drawn
amounts. The new agreement requires letter of credit fees to be paid
8
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quarterly at .325% per year on the outstanding amount. In addition, a
facility fee of .15% per year is payable quarterly on the total amount
available under the New Credit Agreement, as such amount is reduced from time
to time. The cost of borrowings and letters of credit under the New Credit
Agreement represents a decrease of .6% and .45% per year, respectively, from
the secured senior bank debt credit agreement.
In April of 1997, the Company entered into a Master Lease Facility
("MLF") of $115 million, which will be used to finance a complete integrated
point-of-sale system that is scheduled to be rolled out over the subsequent
six quarters (see Management Strategies). The lease payment on the MLF will
be based on a variable rate equal to the Eurodollar rate plus a blended all-
inclusive spread of .46% per year. The MLF has a three-year noncancellable
term with semiannual options to renew for up to an additional two years.
Based upon current roll-out schedules, it is anticipated that the commitment
under the MLF will be fully utilized by the end of 1998.
The New Credit Agreement and the MLF contain certain financial and
operating covenants requiring, among other things, the maintenance of certain
financial ratios, including interest and rent coverage, fixed-charge coverage
and senior indebtedness to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The covenant levels established by the New Credit
Agreement and the MLF generally require continuing improvement in the
Company's financial condition.
For the period ended March 31, 1997, the Company was in compliance with
all of the covenants required under the New Credit Agreement, including
compliance with the principal financial and operating covenants (calculated
over the latest 12-month period) as follows:
Requirements:
--------------------
Covenants Actuals Minimum Maximum
--------- ------- ------- -------
Interest and rent coverage * 2.17 to 1.0 2.00 to 1.0
Fixed charge coverage 1.04 to 1.0 0.65 to 1.0
Senior indebtedness to EBITDA 3.11 to 1.0 3.40 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
During the first three months of 1997, the Company repaid $11.4 million
of debt, which included $7.6 million for principal payments on the
Company's yen-denominated loan (secured by the royalty income stream from its
area licensee in Japan). Outstanding balances at March 31, 1997, for the
commercial paper, the Term Loan and the Revolver, were $398.2 million, $225.0
million and $35.0 million, respectively. As of March 31, 1997, outstanding
letters of credit issued pursuant to the New Credit Agreement totaled $68.6
million.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $27.1 million for the
first quarter of 1997, a decrease of $29.1 million from the same period in
1996. The majority of the decrease was due to the timing of payments related
to trade payables (see Results of Operations section).
9
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CAPITAL EXPENDITURES
In the first three months, net cash used in investing activities
consisted primarily of payments of $41.1 million for property and equipment,
the majority of which was used for implementation of the Company's retail
information system, new store development, remodeling stores, upgrading
retail gasoline facilities, replacing equipment and complying with
environmental regulations.
The Company expects 1997 capital expenditures, excluding lease
commitments, to be approximately $325 million. Capital expenditures are
being used to develop or acquire new stores, upgrade store facilities,
further implement the retail information system, replace equipment, upgrade
gasoline facilities and comply with environmental regulations. The amount of
expenditures during the year will be materially impacted by the Company's
ability to find and acquire new stores that fit with its growth strategy and
the proportion of new store development funded through working capital versus
leases. Most leases related to new store construction would contain initial
terms of 15-20 years with typical option renewal periods.
CAPITAL EXPENDITURES - GASOLINE EQUIPMENT
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations primarily relating to underground storage
tank ("UST") systems. The Company anticipates it will spend approximately $15
million in 1997 on capital improvements required to comply with environmental
regulations relating to USTs, as well as above-ground vapor recovery
equipment at store locations, and approximately an additional $20 million on
such capital improvements from 1998 through 2000.
ENVIRONMENTAL
In December 1988, the Company closed its chemical manufacturing facility
in New Jersey. As a result, the Company is required to conduct environmental
remediation at the facility and has submitted a clean-up plan to the New
Jersey Department of Environmental Protection (the "State"), which provides
for remediation of the site for approximately a three-to-five-year period, as
well as continued groundwater treatment for a projected 20-year period. The
Company has recently received conditional approval of its clean-up plan.
Based on revised cost projections associated with the current clean-up plan,
the company reduced the undiscounted liability and related receivable
balances by $16.3 million and $9.7 million, respectively, during the first
quarter of 1997. The Company has recorded undiscounted liabilities
representing its best estimates of the clean-up costs of $14.1 million at
March 31, 1997. In 1991, the Company and the former owner of the facility
executed a final settlement pursuant to which the former owner agreed to pay
a substantial portion of the clean-up costs. Based on the terms of the
settlement agreement and the financial resources of the former owner, the
Company has recorded a receivable of $8.2 million at March 31, 1997.
Additionally, the Company accrues for the anticipated future costs and
the related probable state reimbursement amounts for remediation activities
at its existing and previously operated gasoline sites where releases of
regulated substances have been detected. At March 31, 1997, the Company's
estimated undiscounted liability for these sites was $42.1 million. This
estimate is based on the Company's prior experience with gasoline sites and
its consideration of such factors as the age of the tanks, location of tank
sites and experience with contractors who perform environmental assessment
and remediation work. The Company anticipates that substantially all of the
10
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future remediation costs for detected releases at these sites as of March 31,
1997, will be incurred within the next five years.
Under state reimbursement programs, the Company is eligible to receive
reimbursement for a portion of future remediation costs, as well as a portion
of remediation costs previously paid. Accordingly, as of March 31, 1997, the
Company has a net receivable of $48.6 million recorded for the estimated
probable state reimbursements. In assessing the probability of state
reimbursements, the Company takes into consideration each state's fund
balance, revenue sources, existing claim backlog, status of clean-up activity
and claim ranking systems. As a result of these assessments, the recorded
receivable amount is net of an allowance of $8.5 million. While there is no
assurance of the timing of the receipt of state reimbursement funds, based on
its experience, the Company expects to receive the majority of state
reimbursement funds, except from California, within one to three years after
payment of eligible remediation expenses, assuming that the state
administrative procedures for processing such reimbursements have been fully
developed. The Company estimates that it may take one to eight years to
receive reimbursement funds from California. Therefore, the portion of the
recorded receivable amounts that relate to sites where remediation activities
have been completed have been discounted at 6.6% to reflect their present
value. Thus, the recorded receivable amount is also net of a discount of
$6.0 million.
The estimated future assessment and remediation expenditures and related
state reimbursement amounts could change within the near future as
governmental requirements and state reimbursement programs continue to be
implemented or revised.
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 first quarter of 1997, 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: April 29, 1997 /s/ Clark J. Matthews, II
-----------------------------
(Officer)
Clark J. Matthews, II
President and Chief Executive Officer
Date: April 29, 1997 /s/ Donald E. Thomas
------------------------
(Principal Accounting Officer)
Donald E. Thomas
Controller
12
<TABLE>
<CAPTION>
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
THREE MONTHS
ENDED MARCH 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net earnings . . . . . . . . . . . . . . . $ 5,522 $ 5,489
Add interest on Convertible Debt, net of tax * . . . . - -
------------- -------------
Net earnings applicable to common stock and
equivalents outstanding . . . . . . . . . . $ 5,522 $ 5,489
============= =============
Weighted average number of common shares outstanding . . 409,923 409,923
Weighted average number of common shares issuable
upon conversion of Convertible Debt *. . . . . . - -
------------- -------------
Weighted average number of common shares and
equivalents outstanding. . . . . . . . . . . 409,923 409,923
============= =============
Net earnings per common share and equivalents
(Primary and Fully Diluted) . . . . . . . . . $.01 $.01
===== =====
* The Convertible Quarterly Income Debt Securities are common stock equivalents but are not
included in the first quarter earnings per share calculations because they have an antidilutive
effect. While the first quarter 1996 earnings per share calculations ($.02 as previously
reported) have been restated, this issue only affects the first quarter calculation and no other
1996 earnings per share calculations will require restatement.
</TABLE>
Tab 1
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 April 21, 1997 on our review of the
condensed consolidated balance sheet of The Southland Corporation and
Subsidiaries as of March 31, 1997, and the condensed consolidated statements
of earnings and cash flows for the three-month period then ended, 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
April 28, 1997
Tab 2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 50,571
<SECURITIES> 0
<RECEIVABLES> 108,569
<ALLOWANCES> 5,582
<INVENTORY> 101,684
<CURRENT-ASSETS> 355,362
<PP&E> 2,608,511
<DEPRECIATION> 1,264,097
<TOTAL-ASSETS> 2,018,486
<CURRENT-LIABILITIES> 647,481
<BONDS> 1,963,152
<COMMON> 41
0
0
<OTHER-SE> (786,356)
<TOTAL-LIABILITY-AND-EQUITY> 2,018,486
<SALES> 1,604,400
<TOTAL-REVENUES> 1,626,023
<CGS> 1,154,633
<TOTAL-COSTS> 1,154,633
<OTHER-EXPENSES> 438,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,899
<INCOME-PRETAX> 9,203
<INCOME-TAX> 3,681
<INCOME-CONTINUING> 5,522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,522
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
