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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------ to ------
Commission File Numbers 0-676 and 0-16626
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7-ELEVEN, INC.
(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
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- --------------------
NONE N/A
Securities Registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
Indicate by check mark whether we (1) have 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) have been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of our knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $284,966,478 at March 2, 2001, based upon
27,937,890 shares held by persons other than executive officers, directors
and 5% owners and aprice of $10.20 per share.
104,795,957 shares of common stock, $.0001 par value (our only class of
common stock), were outstanding as of March 2, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the listed Parts and Items of Form 10-K: Definitive Proxy Statement for April
25, 2001 Annual Meeting of Shareholders: Part III, Items 10, 11, 12 and 13.
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ANNUAL REPORT ON FORM 10-K OF 7-ELEVEN, INC.
For the year ended December 31, 2000
TABLE OF CONTENTS
Page
Reference
Form 10-K
PART I
Item 1. BUSINESS 1
GENERAL 1
BUSINESS MODEL 1
GROWTH STRATEGY 4
PRODUCTS AND SERVICES 4
RETAIL INFORMATION SYSTEM 6
COMMISSARIES AND BAKERIES 7
DISTRIBUTION 7
FRANCHISEES 7
LICENSEES 8
COMPETITION 9
TRADEMARKS 9
EMPLOYEES 9
OUR MAJORITY SHAREHOLDER 9
ENVIRONMENTAL MATTERS 10
RECAPITALIZATION 10
RISK FACTORS 11
Item 2. PROPERTIES 15
Item 3. LEGAL PROCEEDINGS 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
Item 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION 19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32
Report of Independent Accountants - PricewaterhouseCoopers LLP - on
7-Eleven, Inc. and Subsidiaries' Financial Statements for each of
the three years in the period ended December 31, 2000 65
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES 66
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 66*
Item 11. EXECUTIVE COMPENSATION 66*
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 66*
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 66*
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 67
SIGNATURES 74
- ----------------------------
*Included in Form 10-K by incorporation by reference to the Registrant's
Proxy Statement for our April 25, 2001 Annual Meeting of Shareholders.
THIS REPORT INCLUDES CERTAIN STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ANY STATEMENT IN THIS
REPORT THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A
FORWARD-LOOKING STATEMENT. BECAUSE THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. WE DO NOT
INTEND TO ASSUME ANY DUTY TO UPDATE OR REVISE ANY FORWARD-
LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE. FOR ADDITIONAL INFORMATION ABOUT FORWARD-LOOKING STATEMENTS, SEE
PAGE 19.
PART I
ITEM 1. BUSINESS.
GENERAL
We introduced the convenience store concept in 1927, when, as an ice
company, our retail outlets began selling milk, bread and eggs as a
convenience to customers. Today, we are the largest convenience store chain
in the world. We operate, franchise, or license more than 21,000 stores
worldwide, primarily under the name 7-ELEVEN.
The name "7-Eleven" originated in 1946 when our stores were open from 7
a.m. until 11 p.m. Today, the vast majority of our stores in the United
States and Canada provide more than 7 million daily customers with 24-hour
convenience, seven days a week. Our stores generally range in size from 2,400
to 3,000 square feet and carry approximately 2,300 to 2,800 items. Please
note that throughout this report, when we refer to "our stores," we mean our
company-operated and franchised stores in the United States and our company-
operated stores in Canada.
Over the last several years we have transformed our business model to
take advantage of our extensive store base, our widely recognized brand
identity and the best practices developed by our affiliate and largest area
licensee, Seven-Eleven Japan Co., Ltd. These competitive advantages are
allowing us to implement strategies to increase our total revenues and our
same-store sales as we seek to broaden our customer base.
Our U.S. same-store merchandise sales growth was 5.6% for 2000 and 9.1%
for 1999. Adjusting for the impact of cigarette cost increases passed
through to consumers, the U.S. same-store sales increases were approximately
4.0% for both 2000 and 1999.
Our principal executive offices are located at 2711 North Haskell
Avenue, Dallas, Texas 75204. Our telephone number is 214/828-7011. Our
website address is www.7-Eleven.com. We were incorporated in Texas in 1961
as the successor to an ice business organized in 1927. On April 30, 1999,
we changed our name from The Southland Corporation to 7-Eleven, Inc.
For financial reporting purposes, during 2000 we conducted our business
in one operating segment -- the operating, franchising and licensing of
convenience food stores. For specific information about our financial
results for 2000, refer to our financial statements at pages 32-64.
BUSINESS MODEL
Because of our market position, brand recognition and ability to share
best practices with Seven-Eleven Japan, we have been able to develop a
business model that we believe is difficult to replicate. The key elements of
this model are:
* a differentiated merchandising strategy;
* utilization of sophisticated retail information technology;
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* efficiently managing distribution to our stores;
* providing an attractive shopping environment; and
* a unique franchise model.
DIFFERENTIATED MERCHANDISING STRATEGY. We offer a broad range of products,
including many not traditionally available in convenience stores, in an
effort to broaden our customer base and continue to reduce our dependence on
gasoline and tobacco sales. These products include high-quality fresh foods
that are delivered daily to our stores. In addition, we sell a number of
products that are developed specifically for us. Partnering with key vendors
to develop and produce proprietary items is an integral part of this strategy.
These proprietary items tend to provide relatively higher profit margins than
other products we sell.
We implement our merchandising strategy through a variety of means. We
employ item-by-item inventory management to remain in-stock in certain basic
items that our customers expect to find in convenience stores. We also use
this inventory management approach to supplement our basic inventory with an
assortment of new products that we believe our customers will purchase in a
convenience store. We encourage our franchisee and store managers to monitor
customer purchasing trends closely. By doing so, our stores can stay in
stock on popular items, merchandise products effectively, maximize inventory
turns and delete slow-moving items.
Our goal is to maintain consistent, competitive prices on all items. Using
our significant purchasing power, we work closely with our vendors and
distributors to seek the lowest possible cost on the items we sell. This
allows us to offer everyday fair prices while maintaining margins.
Because we believe that gasoline sales contribute to increased store traffic,
we intend to sell gasoline wherever practical. We expect that most of the
approximately 150 to 200 stores per year we intend to open in the United
States and Canada over the next five years will sell gasoline.
APPLICATION OF TECHNOLOGY. We were the first major convenience store chain
in the United States to use an integrated set of retail information
technology tools. In designing our retail information system, we adapted the
best practices of our largest area licensee, Seven-Eleven Japan. We have
installed our system in all of our U.S. stores. Through the use of this
system, our franchisees and store managers are able to:
* analyze by-item sales results, trends, customer preferences and the
factors that affect each of these; and
* more effectively maintain optimal inventory levels and eliminate
slow-moving items from inventory.
The system automates various tasks that previously would have required
significant resources and time, so our franchisees and store managers can
focus on inventory management and customer service.
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All of our company-operated U.S. stores are able to use the retail
information system to place orders. We aggregate these orders at our
headquarters and re-transmit them to our vendors and distributors.
MANAGED DISTRIBUTION. We are working with our vendors and distributors to
provide for daily deliveries of fresh food and other items to our stores, to
increase the efficiency of deliveries and to shift some deliveries to
off-peak hours. The combined distribution centers, which consolidate orders
from multiple suppliers for daily distribution to individual stores, offer a
number of advantages over other distribution systems, including:
* more frequent deliveries of time-sensitive and perishable products
such as milk, bread and fresh foods;
* off-peak, consolidated deliveries that permit us to utilize store
labor more efficiently and reduce store parking lot congestion;
* more customized deliveries and improved in-stock levels; and
* access to products that traditionally have not been available to
individual convenience stores.
We are working to increase both the number of stores that use the combined
distribution centers and the number of items available for delivery from the
centers.
ATTRACTIVE SHOPPING ENVIRONMENT. We strive to provide our customers with a
convenient, safe and clean store environment. Over the last several years we
have improved lighting inside and outside our stores, modernized store
signage and installed canopies over our gasoline pumps. Additionally, we have
implemented a program to remodel stores or upgrade equipment at each of our
locations at least once every three years.
We also emphasize training programs that are designed to improve customer
satisfaction. Examples include our "University of 7-Eleven" seminars, which
provide our employees and franchisees an opportunity to review merchandising
case studies, evaluate potential new product offerings and learn product
display techniques.
UNIQUE FRANCHISE MODEL. More than half of our stores in the United States
are operated by independent franchisees. We believe our franchise model is
unique in that we own or lease the stores and equipment used by our
franchisees, and the ongoing fees we receive from our franchisees are based
on a percentage of store gross profit, which we believe better aligns our
interests with those of our franchisees. Our franchise model allows us to
provide a more uniform store environment and shopping experience for our
customers. We also provide more support to our franchisees than most
franchisors, including service support, training and access to our
infrastructure.
3
GROWTH STRATEGY
The key elements of our growth strategy are:
INCREASING SAME-STORE MERCHANDISE SALES. Our merchandising team focuses on
developing and introducing new products in order to increase our average
retail transaction size and same-store sales. In addition, by using the
retail information system, our merchandising team, franchisees and store
managers are better able to increase sales by enhancing the merchandise mix
in each store.
EXPANDING IN EXISTING MARKETS. Our store development efforts focus on our
core urban and suburban markets in order to take advantage of greater
population and traffic in these areas. These new stores will be concentrated
around our combined distribution centers, commissaries and bakeries and will
allow us to advertise and operate more efficiently. We believe that the
potential exists for significant expansion in our core urban and suburban
markets, and we plan toopen approximately 150 to 200 new stores per year in
these areas over thenext five years. We evaluate sites for new stores by
focusing on populationdensity, demographics, traffic volume, visibility, ease
of access and economic activity in the area.
PROVIDING GREATER CONVENIENCE TO CUSTOMERS. We intend to continue to improve
customer convenience through innovative merchandising programs, such as our
V.com computerized, interactive kiosks for self-service financial transactions.
The V.com kiosk allows our customers to make wire transfers, purchase money
orders and perform traditional ATM transactions. By July 2001, we expect that
the V.com kiosks will offer automated check cashing services.
In future years, we anticipate that the V.com kiosks will allow customers to
pay bills electronically and purchase event tickets and certain products
on-line. We are pursuing our V.com strategy by working with third parties in
a mannerthat minimizes our capital outlays.
The V.com kiosks are being piloted in five Dallas-area stores. During the
first half of 2001, we expect to expand the pilot program by installing
V.com kiosks in 89 additional stores in Texas and Florida. Based on the
results of the pilot program, we will refine our plans for a more
extensive rollout of V.com kiosks for our stores.
INCREASING THE VALUE OF OUR LICENSES AND EXPANDING INTERNATIONALLY. By
continuing to develop our systems and technology, we will increase the
strength of our brand and provide a more attractive opportunity to
prospective licensees. We believe this will, over time, allow us to expand
into a number of countries where we currently do not have a presence.
PRODUCTS AND SERVICES
Our stores carry a broad array of products which our category managers select
based on customer demands, sales potential and profitability. At the same time,
franchisees and store managers supplement this product selection with items
intended to appeal to local preferences.
4
Based upon total store purchases, we estimate that the breakdown of our
merchandise sales in the United States and Canada by principal product
category for the last three years is as follows:
Product Categories Years Ended December 31
------------------ -----------------------
1998 1999 2000
---- ---- ----
Tobacco Products 23.7% 25.8% 26.4%
Beverages 23.7% 22.9% 22.5%
Beer/Wine 11.3% 10.8% 10.9%
Non-Foods 8.8% 9.2% 9.6%
Candy/Snacks 9.5% 9.4% 9.4%
Food Service 6.0% 5.9% 5.7%
Dairy Products 5.3% 5.0% 4.8%
Baked Goods 4.2% 3.9% 3.8%
Other 4.6% 4.2% 4.1%
----- ----- ------
Total Product Sales 97.1% 97.1% 97.2%
Services 2.9% 2.9% 2.8%
----- ----- -----
Total Merchandise Sales 100.0% 100.0% 100.0%
===== ===== =====
In addition, gasoline sales accounted for 23.2% in 1998, 24.7% in 1999 and
29.0% in 2000 of our total net sales in the U.S. and Canada.
Our merchandise selection includes a number of items widely identified with
us, including SLURPEE semi-frozen carbonated beverages, CAFE SELECT coffee,
BIG GULP fountain beverages and BIG BITE hot dogs. We have capitalized on
the popularity of these proprietary names to introduce other products. For
example, we have introduced bubble gum, lip gloss and frozen novelties, all
under the SLURPEE brand. We continually develop new merchandise to add to
our proprietary merchandise lines, including Heaven Sent pantyhose,
Dot.Zero watches and I-Gear sunglasses. In addition to a broad array of
products, our stores offer a number of services to our customers. We have
the largest ATM network of any retailer, with approximately 5,000 ATMs in our
U.S. stores and an additional 450 in Canada. We continue to be one of the
leading retailers of money orders. Our stores provide other services that
draw additional store traffic such as public pay telephones and, where
permitted, the sale of lottery tickets.
We sell gasoline at more than 2,350 stores. We anticipate that most of our
new stores will sell gasoline. New stores tend to have higher gasoline sales
because they have more pumps with convenient configurations and offer the
"pay-at-the-pump" option. More than 1,750 of our stores are equipped
to accept credit cards at the pump. We arecontinuing to install
"pay-at-the-pump" technology in locations where webelieve it is cost effective.
We monitor gasoline sales to maintain a steady supply of gasoline to our
stores, to determine competitive retail pricing, to provide the appropriate
product mix at each location and to manage inventory levels based on market
conditions. Almost all of our stores that sell gasoline offer CITGO-
branded gasoline.
5
RETAIL INFORMATION SYSTEM
The retail information system is a proprietary system that provides our
franchisees and store managers and our management team with timely access to
item-by-item sales information captured by a point-of-sale scanning system at
the register. As a part of the system, stores can be linked to
vendors, our primary third-party distributor and our combined distribution
centers for ordering and item-level information sharing. Using the system
effectively is a core component of our business model, allowing individual
franchisees and store managers to manage both their products and time more
effectively while streamlining our corporate operations.
The system features:
* a point-of-sale touch-screen system with scanning and integrated
credit card authorization, supported by a centralized price book;
* daily ordering for all items, supported by regular weather
forecasts, merchandise messages and historical sales information;
* category management and item level sales analysis;
* integrated gasoline and "pay-at-the-pump" functionality;
* automated back office functions, such as sales and cash reporting,
payroll, gasoline pricing and inventory control, which are connected directly to
our accounting system; and
* the ability to make delivery adjustments and perform write-offs on a
hand-held unit.
We have installed hardware and software for the retail information system in
the United States. We worked with a number of vendors to design and develop
the system, including ACS Retail Solutions, EDS, NCR and NEC. Having adapted
Seven-Eleven Japan's best practices to our market areas, we developed
the system to support our business model in substantially the same manner
that Seven-Eleven Japan's retail technology supports its business model.
We made a number of enhancements to the system during 2000, including
ordering enhancements, improved item sales reporting and additional
automation of accounting functions, such as retail inventory adjustments.
During 2001, we plan additional enhancements to the system, including debit
card processing, additional credit card functionality, lottery management,
integration of money orders and check authorization into the point-of-sale
registers, additional support for age verification on restricted items and
further automation of accounting functions. We own all of the necessary
licenses for exclusive use of the retail information system. All of
our U.S. stores use the scanning capability of the system today. Following
additional development work during 2001, we plan to install the system in
Canada beginning in 2002.
6
COMMISSARIES AND BAKERIES
We have contracted with third-parties who own and operate 12 bakeries and 12
commissaries that provide our stores with daily deliveries of fresh foods
such as sandwiches, salads and baked goods. These commissaries and bakeries
average approximately 20,000 square feet in size. Each commissary ships
approximately 13,000 units daily to our stores. Each bakery ships approximately
28,000 units. All store deliveries from our commissaries and bakeries are
made from one of our combined distribution centers so that fresh products are in
the stores by 5 a.m. for our morning customers. We inspect these
third-party commissaries and bakeries to ensure that our products are
produced in a safe and sanitary environment, and so do regulatory officials.
Bakeries and commissaries currently serve more than 3,700 of our stores.
We expect to provide daily fresh food deliveries to approximately 850
additional stores by the end of 2001.
DISTRIBUTION
We rely primarily on traditional distribution services for the delivery of
non-perishable goods to our stores. McLane Company, Inc., a wholly-owned
subsidiary of Wal-Mart Stores, Inc. and our primary third-party distributor,
delivers products to all of our company-operated stores and a majority of our
franchised stores pursuant to a 10-year contract we entered into in 1992.
Our stores also purchase a variety of merchandise, including certain
beverages and snack foods, directly from a number of vendors and their
wholesalers. We have been working with these vendors and distributors to
improve the accuracy and scheduling of deliveries.
Currently, 21 combined distribution centers in the United States and Canada
service more than 3,700 of our stores, with approximately 850 additional
stores expected to be added to the system in 2001.
Combined distribution centers typically serve stores within a 90-minute
drive. The 21 combined distribution centers are owned and operated by third
parties experienced in logistics. The average center is approximately 20,000
square feet in size and ships approximately 60,000 units to our
stores daily. Each center has cross-docking facilities so that every
incoming shipment is matched with an outgoing order. Each center serves an
average of 150 to 200 stores using dedicated trucks on route systems that are
exclusive to us. The centers receive products such as milk, bread, fruit,
baked goods, fresh sandwiches and other perishables from a variety of suppliers,
including the commissaries and bakeries. The merchandise is then sorted to
fill orders placed by area stores. All store deliveries are made by 5 a.m.
the following day so that fresh products are ready for morning customers.
Because vendors deliver to the centers only those quantities ordered by the
stores, the centers do not maintain an inventory of merchandise.
FRANCHISEES
As of December 31, 2000, independent franchisees operated 3,118 7-ELEVEN
stores in the United States. Merchandise sales by franchisee-operated stores
are included in our net sales and totaled approximately $3.7 billion for the
year ended December 31, 2000. Gasoline sales at
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franchisee-operated stores are also included in our net sales. In addition,
we own all gasoline inventories at our franchisee-operated stores.
In our franchise program, we select qualified applicants and train the
operators who will participate in store management. The franchisee pays us
an initial fee that varies by store and is generally calculated based upon
the gross profit of the store if it has been operating for more than 12
months, or average gross profit of the 7-ELEVEN stores in the market area if
the store has been operating for less than 12 months. Under the standard
franchise agreement, we lease to the franchisee a ready-to-operate 7-ELEVEN
store and bear the costs of acquiring the land, building and equipment as
well as most utility costs and property taxes. The standard agreement has an
initial term of 10 years, or the term of our lease on the store, if shorter
than 10 years. The franchisee pays for all business licenses, permits and
all in-store selling expenses. We finance a portion of these costs, as well
as the ongoingoperating expenses and inventory purchases.
Under the standard agreements, we receive between 50% and 58% of the
merchandise gross profits. In addition, we pay the franchisee a commission
in connection with gasoline sales which, in most cases, is 25% of gross
margin. The franchisee may terminate the franchise at any time. We may
terminate the franchise only for cause, and upon the notice specified in the
franchise agreement.
LICENSEES
As of December 31, 2000, area license agreements covered the operation of
15,386 7-ELEVEN stores in the following countries and U.S. territories:
COUNTRY TOTAL STORES
-------------- ------------
Japan 8,478
Taiwan 2,641
Thailand 1,521
South Korea 680
China 464
United States 421
Mexico 295
Australia 247
Malaysia 176
Philippines 156
Singapore 124
Norway 54
Sweden 49
Denmark 29
Spain 17
Puerto Rico 13
Turkey 13
Guam 8
----------
TOTAL 15,386
==========
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We receive royalty payments from our area licensees based on a
percentage of their gross sales. We have an equity interest in the Puerto
Rico and Mexico area licensees.
COMPETITION
Our stores compete with a number of national, regional, local and independent
retailers, including grocery and supermarket chains, grocery wholesalers and
buyingclubs, other convenience store chains, oil company gasoline/mini-
conveniencestores, food stores and fast food chains as well as variety, drug
and candystores. In sales of gasoline, our stores compete with other food
stores, service stations and, increasingly, supermarket chains. We generate
only avery small percentage of the gasoline sales in the United States. Each
store's ability to compete depends on its location, accessibility and
individual service. Growing competitive pressures from new participants in the
convenience retailing industry and the rapid growth in numbers of
convenience-type stores opened by oil companies over the past several years
have intensified competition. Finally, we may encounter competition from new
sources, such as Internet retailers. In densely populated urban areas,
certain e-commerce retailers offer delivery of products traditionally
available at convenience stores.
TRADEMARKS
Our 7-ELEVEN trademark, registered in 1961, is well-known throughout the
United States and in many other parts of the world. Our other trademarks and
service marks include SLURPEE, BIG GULP, BIG BITE, DELI CENTRAL, CAFE SELECT,
WORLD OVENS and QUALITY CLASSIC SELECTION, as well as many other trade names,
marks and slogans relating to other foods, beverages and items such as
7-ELEVEN CAFE COOLER, 7-ELEVEN FRUT COOLER, 7-ELEVEN BAKERY STIX and V.com.
EMPLOYEES
At December 31, 2000, we had 33,400 employees.
OUR MAJORITY SHAREHOLDER
Our majority shareholder, IYG Holding Co., is owned 51% by Ito-Yokado and 49%
by Seven-Eleven Japan. IYG Holding is a Delaware corporation formed in 1991
to acquire and hold our common stock.
On March 16, 2000, IYG Holding purchased 22,736,842 shares of common stock
for $540.0 million in a private transaction. As a result of that purchase,
IYG Holding owned 76,124,428 shares, or 72.7%, of our common stock at
December 31, 2000. In addition, IYG Holding's shareholders own convertible
quarterly income debt securities convertible into a maximum of 20,924,069
shares of our common stock. If these debt securities were converted into the
maximum number of shares issuable upon conversion, IYG Holding's shareholders
would beneficially own approximately 77.2% of our common stock.
9
ITO-YOKADO. Ito-Yokado is among the largest retailers in Japan. Its
principal business consists of operating approximately 150 superstores that
sell a broad range of food, clothing and household goods. In addition, its
activities include operating a chain of supermarkets and two restaurant
chains doing business under the names "Denny's" and "Famil." All of Ito-
Yokado's operations are located in Japan except for two stores in China and
some limited overseas purchasing activities.
SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is a 50.3%-owned subsidiary of Ito-
Yokado and is our largest area licensee, operating over 8,000 stores in
Japan. It owns Seven-Eleven (Hawaii), Inc., which, as of December 31, 2000
operated an additional 50 7-ELEVEN stores in Hawaii under a separate area
license agreement covering that state.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local environmental laws and
regulations, including the Resource Conservation and Recovery Act of 1976,
the Comprehensive Environmental Response Compensation and Liability Act of
1980, the Superfund Amendments and Reauthorization Act of 1986 and the Clean
Air Act. The enforcement of these laws by the U.S. Environmental Protection
Agency and the states will continue to affect our operations by imposing
increased operating and maintenance costs and capital expenditures required
for compliance. In addition, certain procedures required by these laws can
result in increased lead times and costs for new facilities. Violation of
environmental statutes, regulations or orders could result in civil or
criminal enforcement actions.
For a description of current environmental projects and proceedings, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Other Issues-Environmental."
RECAPITALIZATION
On March 16, 2000, IYG Holding purchased 22,736,842 newly issued shares of
our common stock for $540 million, or $23.75 per share. This purchase price
represents a premium of $10.75, or 83%, over the stock's closing price on
February 29, 2000, the trading day immediately before we publicly announced
the sale. We used these funds to reduce debt and to position ourselves
better to accelerate new store growth. As a result of this purchase, IYG
Holding currently owns 76,124,428 shares, or 72.7%, of our common stock.
In addition, at our April 26, 2000 Annual Meeting of Shareholders, our
shareholders approved an amendment to our Articles of Incorporation to effect a
one-for-five reverse stock split of our common stock. The reverse stock
split became effective on May 1, 2000.
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RISK FACTORS
RISKS PARTICULAR TO OUR BUSINESS
FUTURE TOBACCO LEGISLATION, CAMPAIGNS TO DISCOURAGE SMOKING, INCREASED TAXES
ON TOBACCO PRODUCTS AND AN INCREASE IN WHOLESALE PRICES OF TOBACCO PRODUCTS
MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES AND GROSS PROFIT.
Sales of tobacco products have averaged approximately 25% of our merchandise
sales over the past three fiscal years. Future tobacco legislation, national
and local campaigns to discourage smoking and increases in taxes on
cigarettes and other tobacco products could cause further volume declines and
could have a material adverse effect on sales of and margins for the tobacco
products we sell.
In addition, major cigarette manufacturers have increased the wholesale
prices of their products. If we are unable to pass future price increases on
to our customers, our margins on tobacco products would suffer.
INCREASES IN THE WHOLESALE COST OF GASOLINE COULD ADVERSELY AFFECT OUR
REVENUE AND GROSS PROFIT.
Over the past three years, gasoline sales have averaged approximately 25% of
our net sales and 9% of our gross profit. Increases in the wholesale cost of
gasoline could adversely affect our revenues if our retail gasoline gallons
declined, and would adversely affect our gross profit if we are not able to
fully pass on these increases to our customers.
CHANGES IN TRAFFIC PATTERNS AND INCREASED COMPETITION COULD AFFECT OUR REVENUES.
We compete with numerous other convenience stores, supermarket chains,
drug stores, fast food operations and other retail outlets. In addition, our
stores that offer self-service gasoline compete with gasoline service
stations and, more recently, supermarkets that offer gasoline. Our stores
compete in large part based on their ability to offer convenience to
customers. As a result, changes in traffic patterns and the type, number and
location of competing stores could result in the loss of customers and a
corresponding decrease in revenues for affected stores.
UNFAVORABLE WEATHER CONDITIONS IN THE SPRING AND SUMMER MONTHS COULD
ADVERSELY AFFECT OUR BUSINESS.
Weather conditions may have a significant effect on our sales, as customers
tend to purchase higher profit margin items such as snacks, fountain drinks
and other beverages when weather conditions are favorable. Adverse weather
during the second and third quarters may result in lower sales, and
increased expenses due to overstaffing, which would result in lower than
expected profits for our stores.
11
AS A RESULT OF OUR GASOLINE BUSINESS, WE ARE SUBJECT TO EXTENSIVE AND
CHANGING ENVIRONMENTAL REGULATION, AND THE COSTS OF COMPLIANCE COULD REQUIRE
SUBSTANTIAL ADDITIONAL CAPITAL EXPENDITURES.
We are subject to extensive environmental laws and regulations, particularly
those regulating underground storage tanks and vapor recovery systems.
Compliance with these regulations requires significant capital expenditures.
These laws and regulations are subject to change. Any increased regulation
could require substantially greater capital expenditures.
WE MAY INCUR SUBSTANTIAL LIABILITIES FOR REMEDIATION OF ENVIRONMENTAL
CONTAMINATION AT OUR STORES.
Under various federal, state and local laws, ordinances and regulations, we
may be liable for the costs of removing or remediating contamination. We may
incur these liabilities at sites we currently own, or at sites we used to own
, regardless of whether we knew about, or were responsible for, any
contamination. The presence ofcontamination may subject us to liability to
third parties and may adversely affect our ability to sell or rent such
property.
Additionally, persons who arrange for the disposal or treatment of hazardous
or toxic substances may also be liable for removing or remediating
contamination at sites where these substances are located, whether or not the
sites are owned or operated by those persons. We may be deemed to have
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may be liable for removal or remediation costs, as well as other
related costs, including governmental fines, and injuries to persons,
property and natural resources.
OUR BUSINESS IS SUBJECT TO NUMEROUS OTHER REGULATIONS THAT MAY AFFECT OUR
REVENUES AND RESULTS OF OPERATIONS.
In certain areas where our stores are located, state or local laws limit the
stores' hours of operation or their sale of alcoholic beverages, tobacco
products, possible inhalants and lottery tickets. Failure to comply with
these laws could adversely affect our revenues because these state and
local regulatory agencies have the power to revoke, suspend or deny
applications for and renewals of permits and licenses relating to the sale of
these products or to seek other remedies. Regulations
related to wages also affect our business, and any appreciable increase in
the statutory minimum wage would result in an increase in our labor costs.
All of these regulations are subject to legislative and administrative change
from time to time.
OUR OPERATIONS IN CALIFORNIA MAY BE ADVERSELY AFFECTED BY INCREASES
IN THE PRICE OF ELECTRICITY
Electricity prices in California have risen significantly over the past few
months. As a result, we expect the operational costs for our California
stores to increase from their 2000 levels.
12
WE PURCHASE SUBSTANTIALLY ALL OF OUR GASOLINE FROM ONE SUPPLIER, AND ANY
SUDDEN DISRUPTION IN SUPPLY COULD ADVERSELY AFFECT OUR REVENUES.
Gasoline sales comprise a substantial portion of our sales. We purchase
substantially all of our gasoline from CITGO Petroleum Corporation under a
product purchase and supply agreement that expires in 2006. We may not be
able to obtain alternative sources of gasoline quickly if our supplies
from CITGO were suddenly disrupted. Any disruption in the supply of gasoline
from CITGO may leave us, at least for a period of time, unable to meet the
demand of our customers,which would adversely affect our sales and
profitability. Although we believe we would be able to purchase gasoline
from other suppliers if our supply from CITGO were disrupted, we likely
would pay a higher price, which would adversely affect our gasoline profits.
RISKS PARTICULAR TO OUR CAPITAL STRUCTURE
OUR DEBT LEVELS MAY IMPAIR OUR FLEXIBILITY IN OBTAINING ADDITIONAL FINANCING
AND IN PURSUING BUSINESS OPPORTUNITIES.
As of December 31, 2000, we had outstanding indebtedness of more than $1.3
billion. Our high degree of leverage could have important consequences to
the holders of our common stock, including the following:
* our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired;
* our substantial degree of leverage may limit our flexibility to
implement our business strategy and adjust to changing market conditions,
reduce our ability to withstand competitive pressures and make us more
vulnerable to a downturn in general economic conditions; and
* some of our borrowings are subject to fluctuating market rates,
including borrowings under our commercial paper facility, which exposes us to
the risk of increased interest rates.
If our cash flow and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay planned expansion
and capital expenditures, sell assets, obtain additional equity capital or
restructure our debt.
OUR DEBT FACILITIES CONTAIN RESTRICTIVE COVENANTS, WHICH MAY LIMIT OUR
ABILITY TO ENGAGE IN VARIOUS ACTIVITIES.
Our bank credit facilities and the indentures related to our indebtedness
contain a number of significant covenants that, among other things, restrict
our ability and that of our subsidiaries to dispose of assets, incur
additional indebtedness and pay dividends. In addition, we are required to
satisfy financial tests. Failure to comply with these covenants or meet
these financial tests could cause a default under our debt obligations and
result in our debt becoming immediately due and payable which would
materially adversely affect our business, financial condition and results of
operations.
13
AS A RESULT OF ITS POSITION AS OUR MAJORITY SHAREHOLDER, IYG HOLDING CAN
CONTROL THE OUTCOME OF ANY EVENT REQUIRING A VOTE OF OUR SHAREHOLDERS.
At December 31, 2000, IYG Holding owned 72.7% of our outstanding common
stock. In addition, IYG Holding's shareholders own convertible quarterly
income debt securities convertible into a maximum of 20,924,069 shares of our
common stock. If these debt securities were converted into the maximum number
of shares issuable upon conversion, IYG Holding's shareholders would
beneficially own approximately 77.2% of our common stock. As our majority
owner, IYG Holding is able to determine the outcome of all corporate actions
requiring shareholder approval. For example, IYG Holding can control
decisions with respect to:
* our direction and policies, including the election and removal of
directors;
* mergers or other business combinations involving us;
* our acquisition or disposition of assets;
* future issuances of our common stock or other securities;
* our incurrence of debt;
* the payment of any dividends on our common stock; and
* amendments to our certificate of incorporation and bylaws.
Ito-Yokado, as 51% owner of IYG Holding, can similarly control our business
decisions.
14
ITEM 2. PROPERTIES
STORES. The following table shows the location and number of our
company-operated and franchised 7-ELEVEN stores in operation on December 31,
2000. These figures include 16 stores that we operate under names other than
7-ELEVEN. We plan to convert these stores to the 7-Eleven name over the next
few years or close them.
STATE/PROVINCE STORES
- --------------- ---------------------------------------
OWNED LEASED TOTAL
U.S.
- -----
Arizona 35 62 97
California 244 928 1,172
Colorado 60 178 238
Connecticut 8 43 51
Delaware 10 16 26
District of Columbia 5 14 19
Florida 231 292 523
Idaho 5 8 13
Illinois 58 98 156
Indiana 10 30 40
Kansas 7 8 15
Maine 0 23 23
Maryland 90 211 301
Massachusetts 12 90 102
Michigan 49 71 120
Missouri 32 49 81
Nevada 90 111 201
New Hampshire 3 17 20
New Jersey 78 133 211
New York 44 208 252
North Carolina 2 5 7
Ohio 11 4 15
Oregon 38 93 131
Pennsylvania 74 92 166
Rhode Island 0 11 11
Texas 125 169 294
Utah 42 70 112
Vermont 0 4 4
Virginia 208 404 612
Washington 54 161 215
West Virginia 10 13 23
Wisconsin 15 0 15
CANADA
- -------
Alberta 33 103 136
British Columbia 27 126 153
Manitoba 14 35 49
Ontario 31 78 109
Saskatchewan 21 22 43
----- ----- ------
Total 1,776 3,980 5,756
===== ===== ======
15
ADDITIONAL INFORMATION ABOUT PROPERTIES AND LEASES. At December 31,
2000, 36 7-ELEVEN stores were under construction. We owned or were under
contract to purchase 37 undeveloped sites, and had leases on another 140
undeveloped sites.
Generally, we lease our stores for primary terms of 14 to 20 years, with
options to renew for additional periods. Many leases grant us a right of
first refusal if the lessor decides to sell the property. In addition to our
minimum annual rental payments, many leases require us to pay percentage
rental payments if sales exceed a certain amount, and to pay taxes, insurance
and maintenance.
HEADQUARTERS. Our headquarters are located in Dallas, Texas, in a
building known as Cityplace Tower. One of our subsidiaries owns Cityplace
Tower, subject to certain outstanding debt, and leases it to us. Our lease
covers the entire Cityplace Tower, but permits us to sublease. For the past
five years, our subleases to other tenants have resulted in Cityplace Tower
being virtually completely leased or reserved for expansion under current
leases.
ITEM 3. LEGAL PROCEEDINGS
For an update on certain previously disclosed litigation, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Other Issues-Litigation," on page 30.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
16
PART II
Item 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, $.0001 par value per share, is our only class of
common equity and is our only security with voting rights. As of March 2,
2001, 104,795,957 shares of our common stock were issued and outstanding,
held by 2,385 record holders. During 2000, our common stock was traded on
the Nasdaq Stock Market under the symbols "SVEV" and "SVEVD" from January 1
through July 6. On July 7, 2000, our common stock became listed on the New
York Stock Exchange under the symbol "SE." The table below shows the price
range for our common stock during each quarter of 1999 and 2000 and the
closing price of our common stock on the last trading day of each quarter.
We have adjusted all figures to reflect the one-for-five reverse split of our
common stock that became effective on May 1, 2000.
QUARTERS PRICE RANGE ($)
HIGH LOW CLOSE
1999
FIRST $ 12.81 $ 7.97 $ 10.16
SECOND 13.75 9.06 11.09
THIRD 11.09 9.38 9.84
FOURTH 10.63 7.97 8.91
2000
FIRST $ 21.25 $ 8.13 $ 18.75
SECOND 21.25 11.88 13.75
THIRD 15.63 12.00 12.75
FOURTH 13.00 8.00 8.75
The prices quoted in this table reflect inter-dealer prices without
retail mark-up, mark-down or commission. Therefore, these prices may not
necessarily represent the prices paid in actual transactions.
The indentures governing our outstanding debt securities permit the
payment of cash dividends only under limited circumstances. Our credit
agreement also restricts our ability to pay cash dividends on our common stock.
Under Texas law, we may pay cash dividends only (a) out of our surplus,
which is defined as the excess of the total value of our assets over the sum
of our debt, the par value of our stock and the consideration fixed by the
our board of directors for stock without par value, and (b) if, after paying
cash dividends, we would not be insolvent, which is defined as unable to pay
our debts as they become due in the usual course. Our board of directors may
determine that a surplus exists, among other ways, by examining our financial
statements, by conducting a fair valuation, or by analyzing information
derived from any other reasonable method. We cannot assure you that we will
have sufficient surplus to pay any cash dividends, even if the payment of a
cash dividend would be otherwise permitted.
In addition, see "Recapitalization," above.
17
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
7-ELEVEN, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31
-----------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
STATEMENT OF EARNINGS DATA:
Net Sales:
Merchandise $ 5,084.0 $ 5,181.8 $ 5,573.6 $ 6,216.1 $ 6,632.2
Gasoline 1,784.9 1,789.4 1,684.2 2,035.6 2,713.8
--------- --------- --------- --------- ---------
Total net sales 6,868.9 6,971.2 7,257.8 8,251.7 9,346.0
Other income 86.4 89.4 92.0 97.8 105.1
--------- --------- --------- --------- ---------
Total revenues 6,955.3 7,060.6 7,349.8 8,349.5 9,451.1
LIFO charge 4.7 0.1 2.9 9.9 4.6
Depreciation and amortization 185.4 196.2 194.7 205.5 219.2
Interest expense, net 90.2 90.1 91.3 102.2 79.3
Earnings before income tax expense and
extraordinary gain 130.8 115.3 82.6 127.3 153.7
Income tax expense (1) 41.3 45.3 31.9 48.5 47.2
Earnings before extraordinary gain 89.5 70.0 50.7 78.8 106.5
Net earnings (2) 89.5 70.0 74.0 83.1 108.3
Earnings before extraordinary gain
per common share:
Basic 1.09 .85 .62 .96 1.06
Diluted 1.01 .81 .60 .87 .97
Weighted-average shares outstanding:
Basic (3) 82.0 82.0 82.0 82.0 100.0
Diluted (3) 96.4 96.4 101.9 103.0 121.4
BALANCE SHEET DATA (END OF PERIOD):
Total assets 2,083.0 2,138.6 2,476.1 2,685.7 2,742.3
Total debt 1,805.5 1,852.1 1,958.9 2,044.7 1,337.5
Convertible Quarterly Income Debt Securities (4) 300.0 300.0 380.0 380.0 380.0
Total shareholders' equity (deficit) (3) (789.0) (721.5) (642.2) (559.6) 82.1
(1) Income tax expense in 2000 includes a $12.5 million benefit in connection with our settlement of
certain outstanding tax issues with the IRS.
(2) Net earnings in 1998, 1999 and 2000 include extraordinary gains of $23.3 million, $4.3 million and
$1.8 million, respectively, in connection with debt redemption.
(3) In the first quarter of 2000, we issued 22,736,842 shares of common stock at $23.75 per share to IYG
Holding Company, our majority owner, in a private placement transaction.
(4) The Convertible Quarterly Income Debt Securities have an interest rate of 4.5% and are potentially
convertible into a maximum of 20,924,069 shares of common stock.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS ANNUAL REPORT INCLUDES CERTAIN STATEMENTS THAT ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. ANY STATEMENT IN THIS REPORT THAT IS NOT A STATEMENT OF
HISTORICAL FACT MAY BE DEEMED TO BE A FORWARD-LOOKING STATEMENT. WE OFTEN
USE THESE TYPES OF STATEMENTS WHEN DISCUSSING OUR PLANS AND STRATEGIES, OUR
ANTICIPATION OF REVENUES FROM DESIGNATED MARKETS AND STATEMENTS REGARDING THE
DEVELOPMENT OF OUR BUSINESSES, THE MARKETS FOR OUR SERVICES AND PRODUCTS, OUR
ANTICIPATED CAPITAL EXPENDITURES, OPERATIONS, SUPPORT SYSTEMS, CHANGES IN
REGULATORY REQUIREMENTS AND OTHER STATEMENTS CONTAINED IN THE ANNUAL REPORT
REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS ANNUAL
REPORT, THE WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK,
"ESTIMATE," AND OTHER SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THERE CAN BE NO
ASSURANCE THAT: (I) WE HAVE CORRECTLY MEASURED OR IDENTIFIED ALL OF THE
FACTORS AFFECTING THESE MARKETS OR THE EXTENT OF THEIR LIKELY IMPACT; (II)
THE PUBLICLY AVAILABLE INFORMATION WITH RESPECT TO THESE FACTORS ON WHICH OUR
ANALYSIS IS BASED IS COMPLETE OR ACCURATE; (III) OUR ANALYSIS IS CORRECT OR
(IV) OUR STRATEGY, WHICH IS BASED IN PART ON THIS ANALYSIS, WILL BE
SUCCESSFUL. WE DO NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE. FOR ADDITIONAL INFORMATION ABOUT FACTORS THAT MAY
AFFECT OUR BUSINESS, SEE "RISK FACTORS" ON PAGES 11-14.
MANAGEMENT STRATEGY OVERVIEW
7-Eleven is the world's largest operator, franchisor and licensor of
convenience stores and the largest convenience store chain in North America.
Over the last several years we have refined our business strategy to take
advantage of our widely recognized brand and to leverage our size, technology
and people, including the following key elements:
INFORMATION TECHNOLOGY provides our stores with a competitive edge. Our
proprietary retail information system ("RIS") is designed to build
efficiencies into ordering, distribution and merchandising processes and to
provide timely and accurate store information on an item-by-item basis.
MERCHANDISING is aided by RIS technology, as product availability is improved
by ensuring high-demand products are always available. Brand strength and
scale enable us to capitalize on co-merchandising opportunities with key
vendors to develop and introduce products that are first, best or available
only at 7-Eleven.
An example of NEW PRODUCT DEVELOPMENT includes the limited rollout in test
stores of a web-enabled, integrated financial services kiosk that merges the
capabilities of an ATM with the benefits of the Internet. During the initial
stage of introduction, these kiosks will provide financial services beyond
those of a conventional ATM, including money orders, money transfers and
check cashing. In the future, services such as bill payment, deposit
capability, event ticketing and travel directions are anticipated.
Our FRESH FOOD program continues to evolve and we believe this category
represents a tremendous opportunity, as food-to-go increases in popularity.
Our network of third-party commissary/bakery operators and combined
distribution centers ("CDCs") delivers World Ovens baked goods, milk and
bread, fresh-made sandwiches and other foods daily to over 3,700 stores.
19
DEVELOPING NEW STORES continues to be a major initiative and accordingly we
opened 120 new stores in the United States and Canada in 2000. In 2001 we
plan to open approximately 150 to 200 new stores, focusing on existing
markets to further leverage our infrastructure and maximize the efficiencies
of the CDCs.
GENERAL
Our revenue principally consists of merchandise and gasoline sales and
to a lesser extent royalty income from licensees. Our primary expense
consists of cost of goods sold, operating expenses, interest expense and
taxes. The following discussion and analysis provides information that
management believes to be relevant to understanding 7-Eleven's financial
condition and results of operations.
COMPARISON OF 2000 TO 1999 RESULTS
Except where noted as "same store", all per store numbers refer to an
average of all stores rather than only stores open more than one year.
NET SALES
YEARS ENDED DECEMBER 31
-------------------------------
1999 2000
------ ------
Net Sales: (in millions)
Merchandise sales $6,216.1 $6,632.2
Gasoline sales 2,035.6 2,713.8
-------- --------
Total net sales $8,251.7 $9,346.0
Merchandise sales growth-U.S. same store 9.1% 5.6%
Gasoline gallons sold 1,686.6 1,769.6
Gasoline gallon sales change-per store 3.5% 0.6%
Average retail price of gasoline per gallon $ 1.21 $ 1.53
Merchandise sales for 2000 increased $416.1 million, or 6.7%, over 1999.
We attribute this increase to U.S. same-store merchandise sales growth of
5.6% and operating an average of 60 additional stores in 2000 as compared to
1999. The largest contributors to the merchandise sales growth were
cigarettes, prepaid cards, beer, non-carbonated beverages, coffee and snacks.
Wholesale cigarette cost increases, which were reflected in higher retail
prices, accounted for less than two percentage points of the increase in U.S.
same-store merchandise sales, while contributing approximately five percent
to the 1999 same-store growth. Growth in other categories was fueled by new
items, equipment upgrades and an improved product assortment, which was
offset, in part, by decreases in the sales of frozen beverages, newspapers
and other publications.
Gasoline sales for 2000 increased $678.2 million, or 33.3%, over 1999.
We attribute this increase primarily to a higher average retail price of
gasoline and operating an average of 95 additional gasoline stores. The
average retail price of gasoline was $1.53 per gallon in 2000, a 32-cent
increase over 1999. We believe the high price of gasoline adversely affected
the demand for gasoline and accordingly impacted our gallons sold. Gallons
sold per store increased 0.6% over 1999, the result of adding new stores,
whose average gallon volume is higher than our existing store average.
Industry wide, the demand for gas was flat in 2000, compared to 1999.
20
GROSS PROFIT
YEARS ENDED DECEMBER 31
-------------------------------
1999 2000
------ ------
Gross Profit (in millions)
Merchandise gross profit $2,142.4 $2,304.6
Gasoline gross profit 223.4 238.9
-------- --------
Total gross profit $2,365.8 $2,543.5
Merchandise gross profit margin 34.46% 34.75%
Merchandise gross profit growth-per store 8.8% 6.4%
Gasoline gross profit margin-cents per gallon 13.25 13.50
Gasoline gross profit change-per store 1.7% 2.5%
Merchandise gross profit for 2000 increased $162.2 million, or 7.6%,
over 1999 as a result of higher sales, combined with gross profit margin
improvement to 34.75% from the prior year's 34.46%. Gross profit margin
improvement was due to a combination of a change in product mix and reduced
shortages, which we attribute to initiatives put in place to improve
store-level accountability.
Gasoline gross profit for 2000 increased $15.5 million, or 6.9%, over
1999 as a result of new gasoline outlets opened in 1999 and 2000. In
addition, gasoline gross profit margin improved to 13.50 cents per gallon for
2000 compared to 13.25 cents per gallon in 1999. Our gasoline strategy is to
manage by daily price and volume tracking at store level, which helps
minimize the adverse effects of gasoline volatility. As a result of these
factors, gasoline gross profit per store increased 2.5% for the year,
compared to 1999.
OTHER INCOME
Other income for 2000 was $105.1 million, an increase of $7.2 million,
or 7.4%, from $97.9 million in 1999. We attribute this increase to higher
royalty income from our area licensees, resulting from both higher sales at
stores operated by licensees and an increase in the number of such stores,
combined with additional franchise fees. We received nearly $58 million of
royalties from an area license agreement with Seven-Eleven Japan during 2000.
Royalty payments from Seven-Eleven Japan will be reduced by approximately 70%
in accordance with the terms of the amended license agreement one year
following the final repayment of our 1988 Yen-denominated loan. At the
current trend, we project the 1988 Yen-denominated loan will be fully repaid
during the third quarter of 2001.
FRANCHISEE GROSS PROFIT EXPENSE
We report all sales and gross profits from domestic franchised stores in
our consolidated results and record as an expense a percentage of the gross
profits generated by those same franchised stores. Franchisee gross profit
expense for 2000 was $667.3 million, an increase of $55.1 million, or 9.0%,
from $612.2 million in 1999. We attribute this to higher per store gross
profits at franchised stores and an increase in the number of stores operated
by franchisees.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("OSG&A")
OSG&A for 2000 was $1,748.3 million, an increase of $126.4 million, or
7.8%, from $1,621.9 million in 1999. The increase in OSG&A was partly due to
the cost of operating an average of 60 more stores, approximately
21
$32 million of incremental costs related to the implementation of our
proprietary retail information system and increased credit card processing
charges, due in part to the significantly higher gasoline prices.
The ratio of OSG&A to net sales decreased to 18.7% for 2000 from 19.7%
for 1999. In 1999, OSG&A included a credit of $14.0 million related to
environmental legislation changes in California, which was partially offset
by $4.7 million of severance expenses. After adjusting for these items and
assuming that the average retail price of gasoline for 2000 was reduced to
the level which prevailed in 1999, the ratio of OSG&A to net sales would have
increased slightly to 19.9% in 2000, from 19.8% in 1999.
For 2001, we expect the operational costs for our California stores to
rise because electricity prices in California have increased significantly
over the past few months.
INTEREST EXPENSE, NET
Net interest expense for 2000 was $79.3 million, a decrease of $22.9
million, or 22.4%, from $102.2 million in 1999. Repayment of borrowings with
proceeds from the sale of common stock to IYG Holding Company on March 16,
2000 (see Liquidity and Capital Resources for more information) was the
primary contributor to the decrease. Net interest expense in 2001 is
expected to decrease approximately $10 million, compared to 2000, based on
anticipated levels of debt and interest rate projections.
In accordance with Statement of Financial Accounting Standards No. 15
("SFAS No. 15"), we do not recognize interest expense on our debentures in
our statement of earnings. These debentures are recorded at an amount equal
to the future undiscounted cash payments, both principal and interest.
Accordingly, the cash interest payments are charged against the recorded
amount of the debentures and are not treated as interest expense.
INCOME TAX EXPENSE
Income tax expense on earnings before extraordinary gains for 2000 was
$47.2 million and $48.5 million in 1999. The 2000 expense is net of a
non-recurring benefit of $12.5 million, which resulted from a favorable
settlement with the Internal Revenue Service related to audits of our federal
income taxes for the 1992 through 1995 tax years. Excluding the non-recurring
benefit, our effective tax rate was 38.8% for 2000 and 38.1% in 1999.
EXTRAORDINARY GAIN
In December 2000, we purchased $36.1 million of the outstanding principal of
debt related to Cityplace, our corporate headquarters, for $33.2 million,
resulting in a $1.8 million after-tax gain (see Note 8 to the Consolidated
Financial Statements). In 1999, we redeemed $19.4 million of our debentures
resulting in a $4.3 million after-tax gain. This gain resulted from the
retirement of future undiscounted interest payments as recorded under SFAS
No. 15, combined with repurchasing a portion of the debentures below their
face amount.
22
NET EARNINGS
Net earnings for 2000 were $108.3 million ($0.98 per diluted share), an
increase of $25.2 million, or 30.3%, from $83.1 million ($0.91 per diluted
share) in 1999. Net earnings before extraordinary gains (see preceding
paragraph) were $106.5 million ($0.97 per diluted share) for 2000, an
increase of $27.7 million, or 35.2%, from $78.8 million ($0.87 per diluted
share) in 1999. The diluted per-share data reflects a one-for-five reverse
split of our common stock effected May 1, 2000.
SEASONALITY
Weather conditions can have a significant impact on our sales, as buying
patterns have shown that our customers increase their transactions and also
purchase higher profit margin products when weather conditions are favorable.
Consequently, our results are seasonal, and accordingly we typically earn
more during the warmer second and third quarters.
COMPARISON OF 1999 TO 1998 RESULTS
NET SALES
YEARS ENDED DECEMBER 31
------------------------------
1998 1999
------ ------
Net Sales: (in millions)
Merchandise sales $5,573.6 $6,216.1
Gasoline sales 1,684.2 2,035.6
-------- --------
Total net sales $7,257.8 $8,251.7
Merchandise sales growth-U.S. same store 5.7% 9.1%
Gasoline gallons sold 1,543.0 1,686.6
Gasoline gallon sales change-per store 4.2% 3.5%
Average retail price of gasoline per gallon $ 1.09 $ 1.21
Merchandise sales for 1999 increased $642.5 million, or 11.5%, over
1998. We attribute this increase to U.S. same-store merchandise sales growth
of 9.1% and operating an average of 121 additional stores in 1999 as compared
to 1998. Excluding the impact of cigarette cost increases passed through to
customers, our U.S. same-store merchandise sales were approximately 4% higher
in 1999 as compared to 1998. Categories contributing to U.S. same-store
merchandise sales growth were prepaid phone cards, trading cards and non-
carbonated beverages, primarily as a result of new product introductions.
This growth was offset, in part, by decreases in the sales of newspapers,
carbonated beverages and prepackaged bakery goods.
Gasoline sales for 1999 increased $351.4 million, or 20.9%, over 1998.
We attribute this increase to a higher average retail price of gasoline,
higher average gallons sold per store and operating an average of 118
additional gasoline stores. The average retail price of gasoline was $1.21
per gallon in 1999, a $0.12 increase from $1.09 per gallon in 1998. Average
gallons sold per store increased 3.5% over 1998, primarily due to adding new
higher volume stores.
23
GROSS PROFIT
YEARS ENDED DECEMBER 31
-------------------------------
1998 1999
------ ------
Gross Profit (in millions)
Merchandise gross profit $1,927.6 $2,142.4
Gasoline gross profit 208.1 223.4
-------- ---------
Total gross profit $2,135.7 $2,365.8
Merchandise gross profit margin 34.58% 34.46%
Merchandise gross profit growth-per store 3.2% 8.8%
Gasoline gross profit margin-cents per gallon 13.48 13.25
Gasoline gross profit change-per store 7.5% 1.7%
Merchandise gross profit for 1999 increased $214.8 million, or 11.1%,
over 1998. We attribute this increase to higher U.S. same-store merchandise
sales and our operating a larger number of stores. Our gross profit margin
was 34.46% in 1999 compared to 34.58% in 1998. This margin decline
was principally the result of lower gross margin on cigarettes due to
wholesale and retail price increases. While our margin on cigarettes
decreased in 1999, per store gross profits generated from cigarette sales
increased primarily due to more effective merchandising. Somewhat offsetting
the margin decline was the successful introduction of new higher margin
products including Pokemon trading cards, 7-ELEVEN FRUT COOLER and 7-ELEVEN
BAKERY STIX, combined with increased sales of some traditional higher margin
products, such as coffee and non-carbonated beverages. Merchandise gross
profit per store increased 8.8% in 1999 compared to 1998.
Gasoline gross profit for 1999 increased $15.4 million, or 7.4%, from
$208.1 million in 1998, which represents an increase of 1.7% per store. We
attribute this increase in gasoline gross profit to higher gallons sold per
store and operating a larger number of gasoline stores in 1999 as compared
to 1998, partially offset by a decline in gasoline gross profit margin to
13.25 cents per gallon in 1999 from 13.48 cents per gallon in 1998. We
attribute this margin decrease primarily to rising wholesale gasoline costs.
OTHER INCOME
Other income for 1999 was $97.9 million, an increase of $5.9 million, or
6.3%, from $92.0 million in 1998, primarily due to increased franchise fees.
In addition, royalty income from our area licensees increased as a result of
higher sales at stores operated by licensees and an increase in the number of
such stores.
FRANCHISEE GROSS PROFIT EXPENSE
Franchisee gross profit expense for 1999 was $612.2 million, an increase
of $61.2 million, or 11.1%, from $551.0 million in 1998. We attribute this
increase to higher gross profits at franchised stores.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
OSG&A for 1999 was $1,621.9 million, an increase of $119.1 million, or
7.9%, from $1,502.8 million in 1998. We attribute this increase primarily to
higher store labor costs, the costs of operating a larger number of stores,
approximately $41 million of incremental costs related to the implementation
of our proprietary retail information system and additional costs associated
with other strategic initiatives.
24
The ratio of OSG&A to net sales decreased to 19.7% for 1999 from 20.7%
for 1998. In 1999, OSG&A included a credit of $14.0 million related to
environmental legislation changes in California, which was partially offset
by $4.7 million of severance expenses. In 1998, OSG&A included $14.1 million
associated with the write-offs of computer equipment and development costs
and $7.6 million in severance and related costs. After adjusting for these
items and assuming that the average retail price of gasoline for 1999 was
reduced to the level which prevailed in 1998, the ratio of OSG&A to net sales
would have been basically flat year over year.
INTEREST EXPENSE, NET
Net interest expense for 1999 was $102.2 million, an increase of $10.9
million, or 12.0%, from $91.3 million in 1998. We attribute this increase to
higher borrowing levels incurred to finance new store development, other
initiatives and the redemption of a total of $65 million of our debentures in
the fourth quarter of 1998 and first quarter of 1999 (see Extraordinary Gain
for more information). We accounted for the redeemed debentures in
accordance with SFAS No. 15; accordingly, we did not recognize interest
expense on these debentures in our statement of earnings. As a result,
interest expense on debt used to redeem our debentures increased our reported
interest expense.
INCOME TAX EXPENSE
Income tax expense on earnings before extraordinary gains for 1999 was
$48.5 million compared to $31.9 million in 1998. Our effective tax rate was
38.1% in 1999 compared to 38.6% in 1998.
EXTRAORDINARY GAIN
In 1999, we redeemed $19.4 million of our debentures resulting in a $4.3
million after-tax gain. During 1998, we redeemed $45.6 million of our
debentures resulting in a $23.3 million after-tax gain. These gains resulted
from the retirement of future undiscounted interest payments as recorded
under SFAS No. 15, combined with repurchasing a portion of the debentures
below their face amount.
NET EARNINGS
Net earnings for 1999 were $83.1 million ($0.91 per diluted share), an
increase of $9.1 million, or 12.2%, from $74.0 million ($0.83 per diluted
share) in 1998. Net earnings before extraordinary gains (see preceding
paragraph) for 1999 were $78.8 million ($0.87 per diluted share), an increase
of $28.1 million, or 55.4%, from $50.7 million ($0.60 per diluted share) in
1998. The diluted per-share data reflects a one-for-five reverse split of
our common stock effected May 1, 2000.
25
LIQUIDITY AND CAPITAL RESOURCES
The majority of our working capital is provided from three sources:
* cash flows generated from our operating activities;
* a $650 million commercial paper facility, guaranteed by Ito-Yokado
Co., Ltd.; and
* seasonal borrowings of up to $200 million under our revolving
credit facility.
We believe that operating activities, coupled with available working
capital facilities, will provide sufficient liquidity to fund operating and
capital expenditure programs, as well as to service debt requirements. The
outstanding balance at December 31, 2000 for commercial paper was $395.6
million, while there were no amounts outstanding under the revolver. We
expect capital expenditures for 2001, excluding lease commitments, to be in
excess of $300 million, which includes capital associated with opening or
acquiring approximately 150 to 200 new stores.
On January 25, 2001, we entered into a new unsecured bank credit
agreement, refinancing the old credit agreement, which was scheduled to
mature on February 27, 2002, with a new $200 million revolving credit
facility. The new revolving credit facility contains a sub-limit of $150
million for letters of credit. As of December 31, 2000, outstanding letters
of credit issued pursuant to the credit agreement totaled $64.0 million.
On January 25, 2001, we entered into a new lease facility that will
provide up to $100 million of off-balance-sheet financing to be used for the
construction of new stores. Funding under this facility is available through
January of 2003, with a final maturity of the leases in July 2006.
On March 16, 2000, IYG Holding Company purchased 22,736,842 newly issued
shares of our common stock for $540.0 million, or $23.75 per share, in a
private placement transaction. We used the net proceeds from this
transaction to repay the outstanding balance on our bank term loan, to repay
the outstanding balance of our bank revolver and to reduce indebtedness under
our commercial paper facility.
In January 2000, we entered into a sale-leaseback agreement for 33 of
our store properties whereby we sold land, buildings and related improvements
, which were then leased back to us. We received net proceeds of $71.9
million on the sale. The sale resulted in approximately $12 million of
deferred gains, which we will recognize on a straight-line basis over the
initial term of the leases. We used all of the proceeds from this
transaction to pay down our revolving credit facility.
In August 1999, we entered into a lease facility that provides up to
$100 million of off-balance-sheet financing to be used for the construction
of new stores. Funding under this facility is available through August 2001
with a final maturity of the leases in February 2005. As of December 31,
2000, $73.0 million was funded under this facility, which we expect will be
fully funded by the end of the second quarter of 2001.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $452.5 million for 2000,
compared to $281.9 million in 1999, an increase of $170.6 million. We
attribute this to increased levels of net earnings as adjusted for
26
non-cash items and changes in certain balance sheet amounts. Included in the
changes in balance sheet amounts was an increase in accounts payable and
other liabilities resulting from a change in terms with one of our major
vendors. In addition, inventory levels were lower in 2000, due in large part
to a strategic buildup of inventories in preparation for potential Y2K
related sales in December of 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $229.4 million for 2000, compared
to $350.2 million in 1999. Payments for capital expenditures were $300.4
million for 2000, compared to $428.8 million in 1999. In addition, we
received $71.9 million of net proceeds from a sale-leaseback transaction
during 2000, compared to $57.3 million in 1999.
Capital expenditures for each of the periods were used for new store
development, continued implementation of our retail information system, new
equipment to support merchandising initiatives as well as upgrading store and
gasoline facilities and equipment and compliance with environmental regulations.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities was $166.7 million for 2000,
compared to cash provided by financing activities of $58.1 million in 1999.
Net repayments under commercial paper and revolving credit facilities totaled
$483.6 million for 2000, compared to net borrowings of $210.8 million in 1999.
Net long-term debt repayments for 2000 were $240.3 million, compared to
$147.4 million in 1999. Cash from financing activities for 2000 also
included $539.7 million in net proceeds from issuance of common stock that
was used to pay down debt.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion summarizes the financial and derivative instruments
we held as of December 31, 2000, which are sensitive to changes in interest
rates, foreign exchange rates and equity prices. We use interest-rate swaps
to manage the primary market exposures associated with underlying liabilities
and anticipated transactions. We use these instruments to reduce risk by
essentially creating offsetting market exposures. In addition, our two yen-
denominated loans effectively serve as an economic hedge of our exposure to
yen-dollar currency fluctuations. The instruments we hold are not leveraged
and are held for purposes other than trading. On March 16, 2000, we received
$540.0 million in proceeds from a private placement transaction. We used
these proceeds to reduce floating rate debt, which has lowered our exposure
to interest rate risk (see Liquidity and Capital Resources for more
information). In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally include
country risk, credit risk and legal risk and are not represented in this
discussion.
INTEREST-RATE RISK MANAGEMENT
The table below presents descriptions of the floating-rate financial
instruments and interest-rate-derivative instruments we held at December 31,
2000. We entered into an interest-rate swap to achieve the levels of
variable and fixed-rate debt approved by senior management. Under the
interest-rate swap, we agreed with other parties to exchange the difference
between fixed-rate and floating-rate interest amounts on a quarterly basis.
27
For the debt, the table below presents principal cash flows that exist
by maturity date and the related average interest rate. For the swap, the
table presents the notional amounts outstanding and expected interest rates
that exist by contractual dates. We used the notional amount to calculate
the contractual payments to be exchanged under the contract and estimated the
variable rates based on implied forward rates in the yield curve at the
reporting date.
(dollars in millions) 2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ----------- ----- ---------
Floating-Rate Financial Instrument:
Commercial paper $0 $0 $0 $0 $0 $396 $396 $396
Average interest rate 5.5% 5.8% 6.0% 6.0% 6.0% 6.0% 5.9%
Interest-Rate Derivatives:
Notional amount $250 $250 $250 $250 $0 $0 $250 ($2)
Average pay rate 6.1% 6.1% 6.1% 6.1% 0.0% 0.0% 6.1%
Average receive rate 5.5% 5.8% 6.0% 6.0% 0.0% 0.0% 5.8%
The negative $2.0 million fair value of the interest-rate swap
represents an estimate of the amount we would pay to the counterparty if we
had chosen to terminate the swap as of December 31, 2000. See Note 10 to the
Consolidated Financial Statements for detailed information on floating-rate
and fixed-rate liabilities as well as fair value and derivative discussions.
As of December 31, 2000, approximately 30% of our debt contained floating
rates that will be unfavorably impacted by rising interest rates. We have
effectively eliminated 63% of our exposure to rising interest rates through
an interest rate swap agreement. The weighted-average interest rate for such
debt, including the impact of the interest rate swap agreement, was 6.2% for
the year ended December 31, 2000, as compared to 5.6% in 1999.
FOREIGN-EXCHANGE RISK MANAGEMENT
We recorded more than $77 million in royalty income in 2000 that could
have been impacted by fluctuating exchange rates. Approximately 75% of such
royalties were from area license agreements with Seven-Eleven Japan ("SEJ").
SEJ royalty income has not fluctuated with exchange rate movements, as we
have effectively hedged this exposure by using the royalty income to make
principal and interest payments on our yen-denominated loans. This economic
hedge remains, although SFAS No. 133 nullified the accounting treatment we
were applying to the SEJ royalty and yen-denominated loans. As a result,
both the SEJ royalty and yen-denominated loans are subject to exchange rate
fluctuations (see Recently Issued Accounting Standard).
28
In addition, we are exposed to fluctuating exchange rates on the non-
Seven-Eleven Japan portion of our royalties earned in foreign currency, but
we do not believe future risk is material based on current estimates. We
have several wholly- or partially-owned foreign subsidiaries and are
susceptible to exchange-rate risk on earnings from these subsidiaries,
however, based on current estimates, we do not consider future foreign-
exchange risk to be material.
EQUITY-PRICE RISK MANAGEMENT
We hold equity securities of other companies, which are classified as
available for sale and are carried on our consolidated balance sheet at fair
value. At December 31, 2000, we held 192,500 shares of Affiliated Computer
Services, Inc ("ACS") common stock, which had no cost, but had a fair value
of $11.7 million. We obtained the ACS stock in 1988, as partial
consideration for our entering into a mainframe data processing contract with
ACS. At the time, ACS was a privately held start-up company, and,
accordingly, the stock was valued with no cost. Changes in fair value are
recognized as other comprehensive earnings, net of tax, as a separate
component of shareholders' equity.
OTHER ISSUES
ENVIRONMENTAL
In December 1988, we closed our chemical manufacturing facility in New
Jersey. We are required to conduct environmental remediation at the facility
, including groundwater monitoring and treatment for a projected 15-year
period, which commenced in 1998. We have recorded undiscounted liabilities,
representing our best estimates of the clean-up costs, of $6.3 million at
December 31, 2000. In 1991, we entered into a settlement agreement with the
former owner of the facility 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, we have
a receivable recorded of $3.8 million at December 31, 2000.
Additionally, we accrue for the anticipated future costs and the related
probable state reimbursement amounts for remediation activities at our
existing and previously operated gasoline sites where releases of regulated
substances have been detected. At December 31, 2000, our estimated
undiscounted liability for these sites was $27.3 million. This estimate is
based on our prior experience with gasoline sites and contractors who perform
environmental assessment and remediation work as well as other factors such
as the age of the tanks and the location of tank sites. We anticipate that
substantially all of the future remediation costs for detected releases of
regulated substances at those remediation sites of which we are aware, as of
December 31, 2000, will be incurred within the next four to five years.
Under state reimbursement programs, we are eligible to receive
reimbursement for a portion of future remediation costs, as well as a portion
of remediation costs previously paid. Accordingly, at December 31, 2000, we
had recorded a net receivable of $50.3 million based on the estimated state
reimbursements. In assessing the probability of state reimbursements, we
take 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 $7.7 million.
29
While there can be no assurance of the timing of the receipt of state
reimbursement funds, based on our experience we expect to receive the
majority of state reimbursement funds, except from California, within one to
three years after our payment of eligible remediation expenses. This time
period assumes that the state administrative procedures for processing such
reimbursements have been fully developed. We estimate that we will receive
California reimbursement funds within one to ten years after our payment of
eligible remediation expenses. As a result of the timing for reimbursements,
we have present-valued the portion of the recorded receivable amount that
relates to remediation activities that have already been completed at a
discount rate of approximately 5.1%. Thus, the recorded receivable amount is
also net of a discount of $11.4 million.
The estimated future assessment and remediation expenditures and related
state reimbursement amounts could change in the future as governmental
requirements and state reimbursement programs continue to be implemented or
revised.
LITIGATION
We are a defendant in two legal actions, which are referred to as the
7-Eleven Owners for Fair Franchising and the Valente cases, filed by
franchisees in 1993 and 1996, respectively. A nationwide settlement was
negotiated in 1997, and, in connection with the settlement, these two cases
were combined on behalf of a class of all persons who franchised 7-Eleven
convenience stores from us in the United States at any time between
January 1, 1987 and July 31, 1997. A total of 98.5% of the class members
have approved the settlement, and the court presiding over the settlement
process gave its final approval of the settlement on April 24, 1998.
The settlement provides that class members who are former franchisees will
share in a settlement fund, that we will make certain changes to the franchise
agreements of class members who are current franchisees and that we will pay
certain attorney fees. Our accruals are sufficient to cover the total
settlement costs, including payments due to former franchisees when the
settlement becomes effective.
Certain parties challenged the settlement in an appeal to the California
Court of Appeal, which affirmed the settlement on December 29, 2000. The
opponents of the settlement filed a petition for review asking the California
Supreme Court to review the settlement. Assuming the California Supreme
Court decides not to grant review, the settlement will become final during
the second quarter of 2001.
RECENTLY ISSUED ACCOUNTING STANDARD
We have completed our review of derivative instruments and other
contracts that might be considered or contain derivative instruments in
connection with our adoption of the provisions of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," ("SFAS No. 133") as of
January 1, 2001. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities.
Under SFAS No. 133, the $250 million interest rate swap will be treated
as a cash flow hedge of our interest rate exposure in connection with our
commercial paper program. Upon adoption of SFAS No. 133, the transitional
adjustment was to record a liability of $2.0 million
30
representing the fair value of the interest rate swap as of January 1, 2001,
with the offset of $1.2 million (net of deferred taxes of $800,000) to
Accumulated Other Comprehensive Earnings. The carrying value of the interest
rate swap will be adjusted to its fair value at each reporting date with a
corresponding offset to Accumulated Other Comprehensive Earnings.
Additionally, a review of the effectiveness of the interest rate swap at each
reporting date will be performed and the ineffective portion of the interest
rate swap will be recognized in earnings for the period reported.
In addition, upon adoption of SFAS No. 133, we transferred January 1,
2001, asset and liability balances of $2.4 million and ($4.3 million),
respectively, related to the interest rate swap to Accumulated Other
Comprehensive Earnings. These balances will continue to be amortized into
earnings as an adjustment to interest expense through February 2004.
As discussed in Foreign-Exchange Risk Management and Note 10, we use the
SEJ royalty receipts to service the monthly principal and interest payments
on our yen loans. This arrangement provides an effective economic hedge
against fluctuations in the Japanese yen to U.S. dollar exchange rate. As a
result of this hedge, our yen-denominated loans and related interest expense
and payable had previously been recorded in the consolidated financial
statements utilizing the Japanese yen to U.S. dollar exchange rates in effect
at the date of the borrowings (125.35 for the 1988 yen loan and 129.53 for the
1998 yen loan). Additionally, the SEJ royalty had been recorded at the
125.35 exchange rate as it has been utilized to service the 1988 yen loan.
Although SFAS No. 133 nullified the hedge accounting treatment the
Company was applying to the SEJ royalty and yen loans, the effective economic
hedge against changes in the Japanese yen to U.S. dollar exchange rate
remains in place. Upon adoption of SFAS No. 133, we converted the yen loans,
related interest payable and the SEJ royalty receivable to reflect the
Japanese yen to U.S. dollar exchange rate quoted for January 1, 2001 (114.35
yen to one U.S. dollar). As a result, our transitional adjustment increased
the yen loans, related interest payable and SEJ royalty receivable by $16.1
million, with the offsetting reduction of $9.8 million (net of deferred taxes
of $6.3 million) to Accumulated Other Comprehensive Earnings. The
transitional adjustment to Accumulated Other Comprehensive Earnings will be
amortized into earnings over the remaining term of the yen loans.
Prospectively, we will adjust the balance of the yen loans at each reporting
date to reflect the current Japanese yen to U.S. dollar exchange rate, and
the resultant foreign currency exchange gain or loss will be recognized in
earnings. In addition, we will record the SEJ royalty and interest expense
on the yen loans at the average Japanese yen to U.S. dollar exchange rate for
the respective period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," above.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
7-ELEVEN, INC. AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1998, 1999 and 2000
32
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
DECEMBER 31
------------------------------
1999 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 76,859 $ 133,178
Accounts receivable 179,039 187,510
Inventories 134,050 106,869
Other current assets 115,328 112,795
------------- -------------
Total current assets 505,276 540,352
Property and equipment 1,880,520 1,926,795
Other assets 299,870 275,141
------------- -------------
Total assets $ 2,685,666 $ 2,742,288
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 168,302 $ 231,384
Accrued expenses and other liabilities 401,216 445,769
Commercial paper 34,418 -
Long-term debt due within one year 207,413 76,156
------------- -------------
Total current liabilities 811,349 753,309
Deferred credits and other liabilities 251,073 265,551
Long-term debt 1,802,819 1,261,322
Convertible quarterly income debt securities 380,000 380,000
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.0001 par value; 1,000,000,000 shares
authorized; 81,999,790 and 104,767,679 shares
issued and outstanding 8 10
Additional capital 625,761 1,166,225
Accumulated deficit (1,194,896) (1,086,604)
Accumulated other comprehensive earnings 9,552 2,475
------------- -------------
Total shareholders' equity (deficit) (559,575) 82,106
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 2,685,666 $ 2,742,288
============= =============
See notes to consolidated financial statements.
33
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
YEARS ENDED DECEMBER 31
---------------------------------------
1998 1999 2000
------------- ------------- -----------
REVENUES:
Merchandise sales (including $466,013, $527,422 and
$602,412 in excise taxes) $ 5,573,606 $ 6,216,133 $ 6,632,211
Gasoline sales (including $577,457, $625,893 and
$662,751 in excise taxes) 1,684,184 2,035,557 2,713,770
------------ ----------- ------------
Net sales 7,257,790 8,251,690 9,345,981
Other income 92,021 97,853 105,066
------------- ------------- ------------
Total revenues 7,349,811 8,349,543 9,451,047
------------- ------------- ------------
COSTS AND EXPENSES:
Merchandise cost of goods sold 3,645,974 4,073,743 4,327,594
Gasoline cost of goods sold 1,476,144 1,812,115 2,474,844
----------- ----------- -----------
Total cost of goods sold 5,122,118 5,885,858 6,802,438
Franchisee gross profit expense 551,003 612,233 667,311
Operating, selling, general and administrative expenses 1,502,788 1,621,881 1,748,277
Interest expense, net 91,289 102,232 79,302
------------- ------------- ------------
Total costs and expenses 7,267,198 8,222,204 9,297,328
------------- ------------- ------------
EARNINGS BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY GAIN 82,613 127,339 153,719
INCOME TAX EXPENSE 31,889 48,516 47,191
------------- ------------- ------------
EARNINGS BEFORE EXTRAORDINARY GAIN 50,724 78,823 106,528
EXTRAORDINARY GAIN ON DEBT REDEMPTION (net
of tax effect of $14,912, $2,743 and $1,128) 23,324 4,290 1,764
------------- ------------- ------------
NET EARNINGS $ 74,048 $ 83,113 $ 108,292
============= ============= ============
NET EARNINGS PER COMMON SHARE:
BASIC
Earnings before extraordinary gain $ .62 $ .96 $ 1.06
Extraordinary gain .28 .05 .02
----- ----- -----
Net earnings $ .90 $ 1.01 $ 1.08
===== ===== =====
DILUTED
Earnings before extraordinary gain $ .60 $ .87 $ .97
Extraordinary gain .23 .04 .01
----- ----- -----
Net earnings $ .83 $ .91 $ .98
===== ===== =====
See notes to consolidated financial statements.
34
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE EARNINGS
--------------------------
ACCUMULATED UNREALIZED FOREIGN SHAREHOLDERS'
PAR ADDITIONAL EARNINGS GAINS CURRENCY EQUITY
SHARES VALUE CAPITAL (DEFICIT) (LOSSES) TRANSLATION (DEFICIT)
------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 409,923 $ 41 $ 625,574 $ (1,352,057) $ 9,191 $ (4,276) $(721,527)
Net earnings 74,048 74,048
Other comprehensive earnings:
Unrealized gain on equity
securities (net of $7,293
deferred taxes) 11,408 11,408
Reclassification adjustments for
gains included in net earnings
(net of $2,649 deferred taxes) (4,143) (4,143)
Foreign currency translation (1,997) (1,997)
--------
Total other comprehensive
earnings (loss) 5,268
--------
Comprehensive earnings 79,316
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 409,923 41 625,574 (1,278,009) 16,456 (6,273) (642,211)
Net earnings 83,113 83,113
Other comprehensive earnings:
Unrealized loss on equity
securities (net of ($447)
deferred taxes) (698) (698)
Reclassification adjustments for
gains included in net earnings
(net of $2,946 deferred taxes) (4,607) (4,607)
Foreign currency translation 4,674 4,674
-------
Total other comprehensive
earnings (loss) (631)
-------
Comprehensive earnings 82,482
Issuance of stock 76 154 154
Reverse stock split (327,999) (33) 33 -
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 82,000 8 625,761 (1,194,896) 11,151 (1,599) (559,575)
Net earnings 108,292 108,292
Other comprehensive earnings:
Unrealized gain on equity
securities (net of $568
deferred taxes) 888 888
Reclassification adjustments for
gains included in net earnings
(net of $3,140 deferred taxes) (4,912) (4,912)
Foreign currency translation (3,053) (3,053)
-------
Total other comprehensive
earnings (loss) (7,077)
-------
Comprehensive earnings 101,215
Issuance of stock 22,768 2 540,464 540,466
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 104,768 $ 10 $1,166,225 $ (1,086,604) $ 7,127 $ (4,652) $ 82,106
====================================================================================================================
See notes to consolidated financial statements.
35
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31
------------------------------------------
1998 1999 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 74,048 $ 83,113 $ 108,292
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary gain on debt redemption (23,324) (4,290) (1,764)
Depreciation and amortization of property and equipment 175,086 185,495 219,223
Other amortization 19,611 19,968 20,051
Deferred income taxes 19,190 32,476 28,507
Noncash interest expense 1,725 1,466 1,363
Other noncash (income) expense 2,943 (4,099) (2,815)
Net loss on property and equipment 9,631 7,955 3,426
Increase in accounts receivable (22,674) (36,724) (13,730)
Decrease (increase) in inventories 11,306 (33,005) 27,651
(Increase) decrease in other assets (35,330) 3,925 (18)
Increase in trade accounts payable and other liabilities 600 25,595 62,298
------------- ------------- -------------
Net cash provided by operating activities 232,812 281,875 452,484
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (380,871) (428,837) (300,370)
Proceeds from sale of property and equipment 8,607 63,861 76,874
Proceeds from sale of domestic securities 6,754 7,522 8,016
Acquisition of businesses, net of cash acquired (32,929) - -
Other 1,625 7,219 (13,942)
------------- ------------- -------------
Net cash used in investing activities (396,814) (350,235) (229,422)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities 7,231,795 4,872,273 4,269,051
Payments under commercial paper and revolving credit facilities (7,032,120) (4,661,427) (4,752,613)
Proceeds from issuance of long-term debt 96,503 - -
Principal payments under long-term debt agreements (154,376) (147,392) (240,323)
Proceeds from issuance of convertible quarterly income
debt securities 15,000 - -
Net proceeds from issuance of common stock - - 539,690
Increase (decrease) in outstanding checks in excess of
cash in bank 11,765 (4,600) 17,497
Other (4,525) (750) (45)
------------- ------------- -------------
Net cash provided by (used in) financing activities 164,042 58,104 (166,743)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40 (10,256) 56,319
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 87,075 87,115 76,859
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 87,115 $ 76,859 $ 133,178
============= ============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest $ (99,240) $ (117,669) $ (95,785)
============= ============= =============
Net income taxes paid $ (11,721) $ (16,181) $ (31,342)
============= ============= =============
Assets obtained by entering into capital leases $ 33,643 $ 40,638 $ 26,759
============= ============= =============
See notes to consolidated financial statements.
36
7-ELEVEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999, and 2000
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION 7-Eleven, Inc. and its subsidiaries
("the Company") is owned 72.7% by IYG Holding Company (see Note 14), which is
jointly owned by Ito-Yokado Co., Ltd. ("IY") and Seven-Eleven Japan Co., Ltd.
("SEJ"). The Company operates more than 5,700 7-Eleven and other convenience
stores in the United States and Canada. Area licensees, or their franchisees,
and affiliates operate approximately 15,400 additional 7-Eleven convenience
stores in certain areas of the United States, in 15 foreign countries and in
the U. S. territories of Guam and Puerto Rico.
The consolidated financial statements include the accounts of
7-Eleven, Inc. and its subsidiaries. Intercompany transactions and account
balances are eliminated. Prior-year amounts have been reclassified to
conform to the current-year presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Merchandise sales and cost of goods sold of stores operated by
franchisees are consolidated with the results of Company-operated stores.
Merchandise sales of stores operated by franchisees are $3.03 billion, $3.39
billion and $3.68 billion from 2,960, 3,008 and 3,118 stores for the years
ended December 31, 1998, 1999 and 2000, respectively.
The gross profit of franchise stores is split between the Company
and its franchisees. The franchisees' share of the gross profit of franchise
stores generally ranges from 42% to 50% of the merchandise gross profit of
the store and is presented as franchisee gross profit expense in the
accompanying Consolidated Statements of Earnings. The Company's share of the
gross profit of franchise stores is its continuing franchise fee, generally
ranging from 50% to 58% of the merchandise gross profit of the store, which
is charged to the franchisee for the license to use the 7-Eleven operating
system and trademarks, for the lease and use of the store premises and
equipment, and for continuing services provided by the Company. These
services include merchandising, advertising, recordkeeping, store audits,
contractual indemnification, business counseling services and preparation of
financial summaries. In addition, franchisees receive the greater of one
cent per gallon sold or 25% of gasoline gross profit as compensation for
measuring and reporting deliveries of gasoline, conducting pricing surveys of
competitors, changing the price displays and cleaning the service areas.
Sales by stores operated under domestic and foreign area license
agreements are not included in consolidated revenues. All fees or royalties
arising from such agreements are included in other income. Initial fees,
which have been immaterial, are recognized when the services required under
the agreements are performed.
37
OPERATING SEGMENT - The Company operates in a single operating segment -
the operating, franchising and licensing of convenience food stores,
primarily under the 7-Eleven name. Revenues from external customers are
derived principally from two major product categories - merchandise and
gasoline. The Company's merchandise sales are comprised of groceries,
beverages, tobacco products, beer/wine, candy/snacks, fresh foods, dairy
products, non-food merchandise and services. Services include lottery, ATM
and money order service fees/commissions for which there are little, if any,
costs included in merchandise cost of goods sold.
The Company does not record merchandise sales on the basis of product
categories. However, based on the total dollar volume of store purchases,
management estimates that the percentages of its convenience store
merchandise sales by principal product category for the last three years were
as follows:
Product Categories Years Ended December 31
------------------ -----------------------
1998 1999 2000
---- ---- ----
Tobacco Products 23.7% 25.8% 26.4%
Beverages 23.7% 22.9% 22.5%
Beer/Wine 11.3% 10.8% 10.9%
Non-Foods 8.8% 9.2% 9.6%
Candy/Snacks 9.5% 9.4% 9.4%
Food Service 6.0% 5.9% 5.7%
Dairy Products 5.3% 5.0% 4.8%
Baked Goods 4.2% 3.9% 3.8%
Other 4.6% 4.2% 4.1%
----- ----- ------
Total Product Sales 97.1% 97.1% 97.2%
Services 2.9% 2.9% 2.8%
----- ----- -----
Total Merchandise Sales 100.0% 100.0% 100.0%
===== ===== =====
The Company does not rely on any major customers as a source of revenue.
Excluding area license royalties, which are included in other income as
stated above, the Company's operations are concentrated in the United States
and Canada. Approximately 8% of the Company's net sales for the years ended
December 31, 1998, 1999 and 2000 are from Canadian operations, and
approximately 5% of the Company's long-lived assets for the years ended
December 31, 1999 and 2000 are located in Canada.
OTHER INCOME - Other income is primarily area license royalties
and franchise fee income. The area license royalties include amounts from
area license agreements with SEJ of approximately $53 million, $56 million
and $58 million for the years ended December 31, 1998, 1999 and 2000,
respectively.
Under the present franchise agreements, initial franchise fees are
generally calculated based on gross profit experience for the store or market
area. These fees cover certain costs including training, an allowance for
lodging for the trainees and other costs relating to the franchising of the
store. The Company defers the recognition of these fees until its
obligations under the agreement are completed. Franchisee fees recognized in
earnings were $11.9 million, $14.0 million and $16.4 million for the years
ended December 31,1998, 1999 and 2000, respectively.
38
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")-
Buying and occupancy expenses are included in OSG&A. Advertising costs,
also included in OSG&A, generally are charged to expense as incurred and were
$40.1 million, $39.4 million and $34.4 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
INTEREST EXPENSE - Interest expense is net of interest income and
capitalized interest. Interest income was $12.0 million, $11.2 million and
$13.3 million, and capitalized interest was $2.3 million, $5.0 million and
$2.6 million for the years ended December 31, 1998, 1999 and 2000, respectively.
INCOME TAXES - Income taxes are determined using the liability
method, where deferred tax assets and liabilities are recognized for
temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements. Deferred tax assets
include tax carryforwards and are reduced by a valuation allowance if, based
on available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investment instruments purchased with maturities of three months or less to
be cash equivalents. Cash and cash equivalents include temporary cash
investments of $8.1 million and $37.7 million at December 31, 1999 and 2000,
respectively, stated at cost, which approximates market.
The Company utilizes a cash management system under which a book cash
overdraft exists for the Company's primary disbursement accounts. These
overdrafts represent uncleared checks in excess of cash balances in bank
accounts at the end of the reporting period. The Company transfers
cash on an as-needed basis to fund clearing checks (see Note 7).
INVENTORIES - Inventories are stated at the lower of cost or
market. Cost is generally determined by the LIFO method for company-operated
stores in the United States and by the FIFO method for stores in Canada.
DEPRECIATION AND AMORTIZATION - Depreciation of property and equipment
is based on the estimated useful lives of these assets using the
straight-line method. Acquisition and development costs for significant
business systems and related software for internal use are capitalized and
are depreciated or amortized on a straight-line basis. Amortization of
capital lease assets, improvements to leased properties and favorable
leaseholds is based on the remaining terms of the leases or the estimated
useful lives, whichever is shorter. The following table summarizes the
years over which significant assets are generally depreciated or amortized:
Years
---------
Buildings 25
Leasehold improvements 3 to 20
Equipment 3 to 10
Software and other intangibles 3 to 7
License royalties and goodwill 20 to 40
Effective August 1999, the Company changed the depreciable lives of all
buildings from 20 to 25 years. The effect of the change in estimate
decreased depreciation expense by approximately $2.4 million for the year
ended December 31, 1999. The change had an immaterial effect on earnings per
share for the same period. Had the change in estimate been made at
January 1, 1999, depreciation expense would have decreased by approximately
$5.9 million for the year ended December 31, 1999.
39
Foreign and domestic area license royalty intangibles were recorded in
1987 at the fair value of future royalty payments and are being amortize
over 20 years using the straight-line method. The 20-year life is less than
the estimated lives of the various royalty agreements, the majority of which
are perpetual.
STORE CLOSINGS / ASSET IMPAIRMENT - Provision is made on a
current basis for the write-down of identified owned-store closings to their
net realizable value. For identified leased-store closings, leasehold
improvements are written down to their net realizable value and a provision is
made on a current basis if anticipated expenses are in excess of expected
sublease rental income. The Company's long-lived assets, including goodwill,
are reviewed for impairment and written down to fair value whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
INSURANCE - The Company has established insurance programs to cover
certain insurable risks consisting primarily of physical loss to property,
business interruptions resulting from such loss, workers' compensation,
employee healthcare, comprehensive general and auto liability. Third-
party insurance coverage is obtained for property and casualty exposures
above predetermined deductibles as well as those risks required to be insured
by law or contract. Provisions for losses expected under the insurance
programs are recorded based on independent actuarial estimates of the
aggregate liabilities for claims incurred.
ENVIRONMENTAL - Environmental expenditures related to existing
conditions resulting from past or current operations and from which no
current or future benefit is discernible are expensed by the Company.
Expenditures that extend the life of the related property or prevent
future environmental contamination are capitalized. The Company determines
its liability on a site-by-site basis and records a liability when it is
probable and can be reasonably estimated. The estimated liability of the
Company is not discounted.
A portion of the environmental expenditures incurred for corrective
action at gasoline sites is eligible for reimbursement under state trust
funds and reimbursement programs. A related receivable is recorded for
estimated probable refunds. The receivable is discounted if the amount
relates to remediation activities that have already been completed. A
receivable is also recorded to reflect estimated probable reimbursement from
other parties (see Note 13).
40
2. ACCOUNTS RECEIVABLE
December 31
------------------------
1999 2000
---- ----
(Dollars in Thousands)
Trade accounts receivable $ 84,770 $ 92,149
Franchisee accounts receivable 71,756 66,980
Environmental cost reimbursements -
see Note 13 11,981 8,651
SEJ royalty receivable 4,522 4,649
Other accounts receivable 12,254 22,022
----------- -----------
185,283 194,451
Allowance for doubtful accounts (6,244) (6,941)
----------- -----------
$ 179,039 $ 187,510
=========== ===========
3. INVENTORIES
December 31
------------------------
1999 2000
---- ----
(Dollars in Thousands)
Merchandise $ 86,976 $ 78,415
Gasoline 47,074 28,454
--------- ---------
$ 134,050 $ 106,869
========= =========
Inventories stated on the LIFO basis that are included in
inventories in the accompanying Consolidated Balance Sheets were $60.5
million and $52.5 million for merchandise and $40.5 million and $21.7 million
for gasoline at December 31, 1999 and 2000, respectively. These amounts are
less than replacement cost by $37.2 million and $37.8 million for merchandise
and $7.1 million and $11.1 million for gasoline at December 31, 1999 and
2000, respectively.
At December 31, 2000, certain inventory quantities were reduced
resulting in a liquidation of LIFO inventory layers recorded at costs that
were lower than the costs of current purchases. The effect of this reduction
was a decrease in cost of goods sold of $5.8 million.
4. OTHER CURRENT ASSETS
December 31
-------------------------
1999 2000
--------- -----------
(Dollars in Thousands)
Prepaid expenses $ 29,134 $ 33,397
Deferred tax assets - see Note 16 50,287 50,314
Advances for lottery and other tickets 27,789 28,173
Other 8,118 911
---------- ---------
$ 115,328 $ 112,795
========== =========
41
5. PROPERTY AND EQUIPMENT
December 31
------------------------------
1999 2000
------------ ------------
(Dollars in Thousands)
Cost:
Land $ 495,598 $ 497,300
Buildings 419,288 426,133
Leaseholds 1,172,791 1,272,422
Equipment 1,113,561 1,158,028
Software 186,315 242,792
Construction in process 90,951 56,833
------------- ------------
3,478,504 3,653,508
Accumulated depreciation and amortization
(includes $47,415 and $78,483 related
to software) (1,597,984) (1,726,713)
------------ ------------
$ 1,880,520 $ 1,926,795
============ ============
6. OTHER ASSETS
December 31
--------------------------
1999 2000
----- -----
(Dollars in Thousands)
SEJ license royalty intangible
(net of accumulated amortization of
$197,049 and $213,065) $ 121,451 $ 105,435
Other license royalty intangibles
(net of accumulated amortization of
$35,095 and $37,931) 21,509 18,673
Environmental cost reimbursements -
see Note 13 45,046 45,433
Goodwill (net of accumulated amortization
of $1,159 and $1,920) 28,137 29,205
Investments in available-for-sale domestic
securities (no cost basis) 18,313 11,717
Other 65,414 64,678
---------- ----------
$ 299,870 $ 275,141
========== ==========
42
7. ACCRUED EXPENSES AND OTHER LIABILITIES
December 31
-------------------------
1999 2000
---- ----
(Dollars in Thousands)
Insurance $ 31,773 $ 30,043
Compensation 63,188 57,295
Taxes 55,577 56,502
Lotto, lottery and other tickets 40,756 43,511
Other accounts payable 26,132 39,730
Environmental costs - see Note 13 20,019 18,953
Profit sharing - see Note 12 16,491 19,105
Interest 6,243 10,746
Book overdrafts payable - see Note 1 55,635 73,132
Other current liabilities 85,402 96,752
--------- ---------
$ 401,216 $ 445,769
========= =========
For the years ended December 31, 1998 and 1999, the Company
accrued termination benefits of $7.6 million and $4.7 million for
approximately 120 and 40 employees, respectively. There have been no
significant changes to the initial accruals. The cost of the termination
benefits was recorded in OSG&A expense.
8. DEBT
December 31
---------------------------
1999 2000
---- -----
(Dollars in Thousands)
Bank Debt Term Loans $ 112,500 $ -
Bank Debt revolving credit facility 250,000 -
Commercial paper 600,000 395,554
5% First Priority Senior Subordinated
Debentures due 2003 287,152 275,187
4 1/2% Second Priority Senior Subordinated
Debentures (Series A) due 2004 133,948 128,935
4% Second Priority Senior Subordinated
Debentures (Series B) due 2004 21,849 21,108
Yen Loans 177,223 127,237
7 1/2% Cityplace Term Loan due 2005 267,448 225,509
Capital lease obligations 156,933 161,619
Other 3,179 2,329
----------- -----------
2,010,232 1,337,478
Less long-term debt due within one year 207,413 76,156
----------- -----------
$ 1,802,819 $ 1,261,322
=========== ============
43
BANK DEBT - As of January 25, 2001, the Company is obligated to a
group of lenders under a new, $200 million unsecured revolving credit
agreement ("Credit Agreement"). The Credit Agreement replaces an unsecured
credit agreement that included a $225 million term loan and a $400 million
revolving credit facility. The term loan was repaid in March 2000 with
proceeds from the sale of common stock in a private placement transaction
with IYG Holding Company (see Note 14).
The Credit Agreement includes a sublimit of $150 million for
letters of credit. Upon expiration of the revolving credit facility in
January 2006, all the then-outstanding letters of credit must expire and may
need to be replaced, and all other amounts then outstanding will be due and
payable in full. At December 31, 2000, outstanding letters of credit under
the previous facility totaled $64.0 million.
Interest on the borrowings under the revolving credit facility is
generally payable quarterly and is 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 a reserve-adjusted Eurodollar rate plus a margin determined by the
Company's credit ratings for senior long-term indebtedness. The applicable
margin as of January 25, 2001, was 0.475%. The weighted-average interest
rates were 6.6% on the term loan and 6.8% on borrowings outstanding under the
previous revolving credit facility at December 31, 1999.
A facility fee of 0.15% per year is charged on the aggregate
amount of the revolving credit facility. In addition, if the average
outstanding balance of the facility is greater than or equal to two-thirds of
the available borrowings under the facility, a utilization fee is charged
on the average outstanding principal amount of loans and the undrawn face
amount of the letters of credit. The utilization fee is also tied to the
Company's senior long-term indebtedness as described above and was 0.375% as
of January 25, 2001. All fees are paid quarterly.
The Credit Agreement contains various financial and operating
covenants which require, among other things, the maintenance of certain
financial ratios including interest and rent coverage and consolidated total
indebtedness to earnings before interest, income taxes, depreciation and
amortization. The Credit Agreement also contains various covenants which,
among other things, (a) limit the Company's ability to incur or guarantee
indebtedness or other liabilities other than under the Credit Agreement,
(b) limit the Company's ability to engage in asset sales and sale/leaseback
transactions, (c) limit the types of investments the Company can make and (d)
limit the Company's ability to pay cash dividends or redeem or prepay
principal and interest on any subordinated debt.
COMMERCIAL PAPER The outstanding balance on the Company's
commercial paper facility was reduced by approximately $177 million in
March 2000 with a portion of the proceeds from the private placement
transaction (see Note 14). As of December 31, 1999 and 2000, the availability
of borrowings under the Company's commercial paper facility was $650 million.
At December 31, 1999 and 2000, $600 million and $395.6 million of the
respective $634.4 million and $395.6 million outstanding principal amounts,
net of discount,was classified as long-term debt since the Company intends to
maintain at least these amounts outstanding during the next year. Such debt is
unsecured and is fully and unconditionally guaranteed by IY. IY has agreed
to continue its guarantee of all commercial paper issued through 2002. While
it is not anticipated that IY would be required to perform under its
commercial paper guarantee, in the event IY makes any payments under the
guarantee, the Company and IY have entered into an agreement by which the
Company is required to reimburse IY subject to certain restrictions in the
Credit Agreement, which principally specify that no reimbursements can be
made until one year after repayment in full of the debt and termination of
the Credit Agreement. The weighted-average interest rate on commercial paper
borrowings outstanding at December 31, 1999 and 2000, respectively, was 6.1%
and 6.6%.
44
DEBENTURES - The Debentures are accounted for in accordance with
SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructuring," and were recorded at an amount equal to the future
undiscounted cash payments, both principal and interest ("SFAS No. 15
Interest"). Accordingly, no interest expense will be recognized over the
life of these securities, and cash interest payments will be charged against
the recorded amount of such securities. Interest on all of the Debentures is
payable in cash semiannually on June 15 and December 15 of each year.
The 5% First Priority Senior Subordinated Debentures, due December
15, 2003 ("5% Debentures"), had an outstanding principal balance of $239.3
million at December 31, 2000, and are redeemable at any time at the Company's
option at 100% of the principal amount.
The Second Priority Senior Subordinated Debentures were issued in
three series, and each series is redeemable at any time at the Company's
option at 100% of the principal amount and are described as follows:
- 4 1/2% Series A Debentures, due June 15, 2004 ("4 1/2%
Debentures"), had an outstanding principal balance of $111.4 million
at December 31, 2000.
- 4% Series B Debentures, due June 15, 2004 ("4% Debentures"), had
an outstanding principal balance of $18.5 million at December 31, 2000.
In March 1998, the Company issued $80 million principal amount of
Convertible Quarterly Income Debt Securities due 2013 ("1998 QUIDS") to IY
and SEJ (see Note 9). The Company utilized a portion of the proceeds from
the 1998 QUIDS to redeem $21.8 million principal amount of its 12% Series C
Debentures due 2009 ("12% Debentures") and to purchase $15.7 million
principal amount of its 5% Debentures, $7.8 million principal amount of
its 4 1/2% Debentures and $250,000 principal amount of its 4% Debentures.
The partial purchases of these debentures, together with the redemption of
the 12% Debentures, resulted in an extraordinary gain of $23.3 million
(net of current tax effect of $14.9 million) in 1998 as a result of the
discounted purchase price and the inclusion of SFAS No. 15 Interest in the
carrying amount of the debt.
In addition, the Company purchased $15 million principal amount of its
5% Debentures in January 1999 and $4.4 million principal amount of its
4 1/2% Debentures in February 1999 with a portion of the proceeds of the
1998 QUIDS. These partial purchases resulted in an extraordinary
gain of $4.3 million (net of current tax effect of $2.7 million) in 1999 as a
result of the discounted purchase price and the inclusion of SFAS No. 15
Interest in the carrying amount of the debt.
The Debentures contain certain covenants that, among other things,
(a) limit the payment of dividends and certain other restricted payments by
both the Company and its subsidiaries, (b) require the purchase by the
Company of the Debentures at the option of the holder upon a change of
control, (c) limit additional indebtedness, (d) limit future exchange offers,
(e) limit the repayment of subordinated indebtedness, (f) require board
approval of certain asset sales, (g) limit transactions with certain
stockholders and affiliates and (h) limit consolidations, mergers and the
conveyance of all or substantially all of the Company's assets.
45
The First and Second Priority Senior Subordinated Debentures are
subordinate to the borrowings outstanding under the Credit Agreement and to
previously outstanding mortgages and notes that are either backed by specific
collateral or are general unsecured, unsubordinated obligations. The
Second Priority Debentures are subordinate to the First Priority Debentures.
YEN LOANS - In March 1988, the Company monetized its future royalty
payments from SEJ, its area licensee in Japan, through a loan that is
nonrecourse to the Company as to principal and interest ("1988 Yen Loan").
The original amount of the yen-denominated debt was 41 billion yen
(approximately $327 million at the exchange rate in March 1988) and is
collateralized by the Japanese trademarks and a pledge of the future royalty
payments. At December 31, 2000, the outstanding balance on this loan was
3.85 billion yen (approximately $30.7 million at the March 1988 exchange
rate). Payment of the debt is required no later than March 2006 through future
royalties from SEJ. The Company believes the 1988 Yen Loan will be repaid as
early as the third quarter of 2001. One year following the final repayment
of the 1988 Yen Loan, royalty payments from SEJ will be reduced by
approximately 70% in accordance with the terms of the license agreement. The
interest rate was 3.1% as of December 31, 2000 (see Note 10).
In April 1998, funding occurred on an additional yen-denominated loan
("1998 Yen Loan") for 12.5 billion yen or $96.5 million of proceeds. The
1998 Yen Loan has an interest rate of 2.325%, and both principal and interest
will be repaid from the Seven-Eleven Japan area license royalty income after
the 1988 Yen Loan has been retired, which is currently expected in the third
quarter of 2001. Both principal and interest of the loan are nonrecourse to
the Company. Proceeds of the loan were designated for general corporate
purposes (see Note 10).
CITYPLACE TERM LOAN - Cityplace Center East Corporation ("CCEC"), a
subsidiary of the Company, constructed the headquarters tower, parking
garages and related facilities of the Cityplace Center development and is
currently obligated to The Sanwa Bank, Limited, New York Branch ("Sanwa"),
which has a lien on the property financed. The debt with Sanwa has monthly
payments of principal and interest based on a 25-year amortization at 7.5%,
with the remaining principal due on March 1, 2005 (the"Cityplace Term Loan").
In December 2000, the Company purchased and retired approximately $36.1
million of the outstanding principal for $33.2 million,resulting in an
extraordinary gain of $1.8 million (net of current tax effect of $1.1 million).
The Company is occupying part of the building as its corporate
headquarters and the balance is leased to third parties. As additional
consideration through the extended term of the debt, CCEC will pay to Sanwa
an amount that it receives from the Company which is equal to the net
sublease income that the Company receives on the property and 60% of the
proceeds, less $275 million and permitted costs, upon a sale or refinancing
of the building.
46
MATURITIES - Long-term debt maturities assume the continuance of the
commercial paper program and the IY guarantee. The maturities, which include
capital lease obligations as well as SFAS No. 15 Interest accounted for in
the recorded amount of the Debentures, are as follows (dollars in thousands):
2001 $ 76,156
2002 79,115
2003 285,719
2004 163,326
2005 225,961
Thereafter 507,201
-----------
$ 1,337,478
===========
9. CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES
In November 1995, the Company issued $300 million principal amount
of Convertible Quarterly Income Debt Securities due 2010 ("1995 QUIDS") to IY
and SEJ. The 1995 QUIDS have an interest rate of 4.5% and give the Company
the right to defer interest payments thereon for up to 20 consecutive
quarters. The holder of the 1995 QUIDS can convert the debt anytime at a
rate of $20.80 per share of the Company's common stock. The conversion rate
represents a premium to the market value of the Company's common stock at the
time of issuance of the 1995 QUIDS. As of December 31, 2000, no shares had
been issued as a result of debt conversion.
In February 1998, the Company issued $80 million principal amount
of 1998 QUIDS, which have a 15-year life, no amortization and an interest
rate of 4.5%. The instrument gives the Company the right to defer interest
payments thereon for up to 20 consecutive quarters. The debt mandatorily
converts into 6,501,686 shares of the Company's common stock if (a) the
Company's stock trades above $12.30 for 20 of 30 consecutive trading days
after the fifth anniversary of issuance, (b) the Company's stock trades above
$14.77 for 20 of 30 consecutive trading days after the third anniversary of
issuance and before the fifth anniversary or (c) the Company's stock closes
at or above $12.30 on the last trading day prior to maturity. A portion of the
proceeds from the 1998 QUIDS was used to redeem the Company's 12% Debentures
at par and to fund the partial purchases of its other Debentures (see Note
8). The 1998 QUIDS, together with the 1995 QUIDS (collectively,
"Convertible Debt"), are subordinate to all existing debt.
The financial statements include interest payable of $723,000 as of
December 31, 1999 and 2000, as well as interest expense of $16.8 million for
the year ended December 31, 1998, and $17.4 million for the years ended
December 31, 1999 and 2000, related to the Convertible Debt. The Company has
not deferred any interest payments in connection with the Convertible Debt.
10. FINANCIAL INSTRUMENTS
FAIR VALUE - The disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies as indicated below.
The carrying amounts of cash and cash equivalents, trade accounts
receivable, trade accounts payable and accrued expenses and other liabilities
are reasonable estimates of their fair values. Letters of credit are
included in the estimated fair value of accrued expenses and other liabilities.
47
The carrying amounts and estimated fair values of other financial
instruments at December 31, 2000, are listed in the following table:
Carrying Estimated
Amount Fair Value
---------- ----------
(Dollars in Thousands)
Commercial Paper $ 395,554 $ 395,554
Debentures 425,231 321,473
Yen Loans 127,237 148,998
Cityplace Term Loan 225,509 227,657
Convertible Debt 380,000 -
Interest Rate Swap 1,965 2,010
The methods and assumptions used in estimating the fair value for
each of the classes of financial instruments presented in the table above are
as follows:
- Commercial paper borrowings are sold at market interest rates
and have an average remaining maturity of less than 56 days. Therefore, the
carrying amount of commercial paper is a reasonable estimate of its fair
value. The guarantee of the commercial paper by IY is an integral part of
the estimated fair value of the commercial paper borrowings.
- - The fair value of the Debentures is estimated based on December 31,
2000, bid prices obtained from investment banking firms where traders
regularly make a market for these financial instruments. The carrying amount
of the Debentures includes $56.0 million of SFAS No. 15 Interest.
- The fair value of the Yen Loans is estimated by calculating the
present value of the future yen cash flows at current interest and exchange
rates.
- The fair value of the Cityplace Term Loan is estimated by
calculating the present value of the future cash flows at a current interest
rate for a similar financial instrument.
- It is not practicable, without incurring excessive costs, to estimate
the fair value of the Convertible Debt (see Note 9) at December 31, 2000.
The fair value would be the sum of the fair values assigned to both an
interest rate and an equity component of the debt by a valuation firm.
- The fair value of the Interest Rate Swap is estimated based on
December 31, 2000, quoted market prices of the same or similar instruments
and represents the estimated amount the Company would pay if the Company
chose to terminate the swap as of December 31, 2000.
DERIVATIVES - The Company has completed its review of derivative
instruments and other contracts that might be considered or contain
derivative instruments in connection with its adoption of the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS No. 133") as of January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.
48
The Company uses derivative financial instruments to reduce its exposure
to market risk resulting from fluctuations in foreign exchange rates and
interest rates. The Company is party to a $250 million notional principal
amount interest rate swap agreement. The Company currently pays a fixed
interest rate of 6.096% on the $250 million notional amount until February
2004. A major financial institution, as counterparty to the agreement, pays
the Company interest at a floating rate based on three-month LIBOR on the
notional amount during the term of the agreement. Interest payments are made
quarterly by both parties. The interest rate swap has been accounted for as
a hedge and, accordingly, any difference between amounts paid and received is
recorded as interest expense. The impact on net interest expense as a result
of this agreement was nominally favorable for the years ended December 31,
1998, 1999 and 2000. The Company is at risk of loss from this
swap agreement in the event of nonperformance by the counterparty.
Under SFAS No. 133, the $250 million interest rate swap will be treated
as a cash flow hedge of the Company's interest rate exposure in connection
with its commercial paper program. Upon adoption of SFAS No. 133, the Company's
transitional adjustment was to record a liability of $2.0 million
representing the fair value of the interest rate swap as of January 1, 2001,
with the offset of $1.2 million (net of deferred taxes of $800,000) to
Accumulated Other Comprehensive Earnings. The Company will adjust the
carrying value of the interest rate swap to fair value at each reporting date
with a corresponding offset to Accumulated Other Comprehensive Earnings.
Additionally, the Company will review the effectiveness of the interest rate
swap at each reporting date and will recognize the ineffective portion of the
interest rate swap in earnings for the period reported.
In addition, upon adoption of SFAS No. 133, the Company transferred January
1, 2001, asset and liability balances of $2.4 million and ($4.3 million),
respectively, related to the interest rate swap to Accumulated Other
Comprehensive Earnings. These balances will continue to be amortized into
earnings as an adjustment to interest expense through February 2004.
As discussed in Note 8, the Company uses its SEJ royalty receipts to service
the monthly principal and interest payments on its yen loans. This
arrangement provides an economic hedge for the Company against fluctuations
in the Japanese yen to U.S. dollar exchange rate. As a result of this hedge,
the 1988 and 1998 yen loans and related interest expense and payable
have been recorded in the Company's consolidated financial statements
utilizing the Japanese yen to U.S. dollar exchange rates in effect at the
date of the borrowings (125.35 for the 1988 Yen Loan and 129.53 for the 1998
Yen Loan). Additionally, the SEJ royalty has been recorded at the 125.35
exchange rate as it has been utilized to service the 1988 Yen Loan.
Although SFAS No. 133 nullified the hedge accounting treatment the Company
was applying to the SEJ royalty and yen loans, the Company's economic hedge
against changes in the Japanese yen to U.S. dollar exchange rate remains in
place. Upon adoption of SFAS No. 133, the Company converted the yen loans,
related interest payable and the SEJ royalty receivable to reflect the
Japanese yen to U.S. dollar exchange rate quoted for January 1, 2001 (114.35
yen to one U.S. dollar). As a result, the Company's transitional adjustment
increased the yen loans, related
49
interest payable and SEJ royalty receivable by $16.1 million, with the
offsetting reduction of $9.8 million (net of deferred taxes of $6.3 million)
to Accumulated Other Comprehensive Earnings. The transitional adjustment to
Accumulated Other Comprehensive Earnings will be amortized into earnings over
the remaining term of the yen loans. Prospectively, the Company
will adjust the balance of the yen loans at each reporting date to reflect
the current Japanese yen to U.S. dollar exchange rate, and the resultant
foreign currency exchange gain or loss will be recognized in earnings. In
addition, the Company will record the SEJ royalty and interest expense on the
yen loans at the average Japanese yen to U.S. dollar exchange rate for
the respective period.
11. LEASES
LEASES - Certain property and equipment used in the Company's
business is leased. Generally, real estate leases are for primary terms from
14 to 20 years with options to renew for additional periods, and equipment
leases are for terms from one to ten years. The leases do not contain
restrictions that have a material effect on the Company's operations.
In 1999, the Company entered into a lease facility that provides up to
$100 million of off-balance-sheet financing to be used for the construction
of new stores. A trust (the lessor), funded primarily by a group of senior
lenders, will acquire land and undertake construction projects with the
Company acting as the construction agent. During the construction period
following the lease commencement date, interim rent will be added to the
amount funded for land and construction. Rental payments begin immediately
following the end of the construction period. Rental payments are based on
interest incurred by the trust on amounts funded under the facility; such
interest is based on LIBOR plus 2.075%. As of December 31, 2000, the trust
had funded $73.0 million from this facility. The lease has a maximum lease
term of 66 months. In January 2001, the Company entered into an additional
lease facility that will provide up to $100 million of off-balance-sheet
financing with essentially the same terms and covenants as the facility
entered into in 1999. Rental payments are based on interest incurred by the
trust on amounts funded under the facility; such interest is based on LIBOR
plus 1.13%. As of January 31, 2001, the trust had not drawn from this
facility. The facility is to be used for the construction of new stores.
Under either agreement, after the initial lease term has expired, the
Company has the option of (a) extending the lease for an additional period
subject to the approval of the trust, (b) purchasing the property for an
amount approximating the trust's interest in the property, or (c) to vacate
the property, arranging for the sale to a third party and pay the trust the
net proceeds from the sale (such payment not to exceed the trust's interest
in the property with any excess being returned to the Company). Payment of
any deficiency of the sale proceeds from approximately 84% of aggregate cost
is guaranteed by the Company. The lease, which is accounted for as an
operating lease, contains financial and operating covenants similar to those
under the Company's Credit Agreement (see Note 8).
In 1999 and 2000, the Company entered into sale-leaseback agreements
whereby land, buildings and associated real and personal property
improvements were sold and leased back by the Company. The Company received
net proceeds of $57.3 million and $71.9 million on the sale of 30 and 33
stores, respectively. The gains on the sale of the properties of
approximately $10 million and $12 million, respectively, were deferred and
will be recognized on a straight-line basis over the initial term of the
leases.
50
Under the terms of the agreements, the Company will make rental payments
over terms ranging from 16 to 18 years. At the expiration of the initial
lease term, the Company will have the option of renewing the lease for up to
six renewal terms of up to five years per renewal term at predetermined
increases. The leases do not contain purchase options or guaranteed residual
values; however, the Company does have the right of first refusal after the
first five years of the initial lease term with respect to any offers to
purchase the properties which the lessor receives. The leases are being
accounted for as operating leases.
The Company is party to a $115 million master lease facility used
primarily for electronic point-of-sale equipment and software associated with
the Company's retail information system. As of December 31, 1999, the Company
had received all of the available funding under the lease.
Individual leases under this master lease facility have base terms
that will expire at various times during the period September 30, 2002
through September 30, 2004, at which time the Company has an option to cancel
all leases under this facility by purchasing the equipment or arranging
its sale to a third party. The Company has an option to renew the leases
semiannually until five years after the beginning of the individual leases.
At each semiannual renewal date, the Company has the option to purchase the
equipment and end the lease. Individual leases may be extended beyond five
years through an extended rental agreement.
The composition of capital leases reflected as property and
equipment in the Consolidated Balance Sheets is as follows:
December 31
--------------------------
1999 2000
---- -----
(Dollars in Thousands)
Buildings $ 164,487 $ 181,062
Equipment 6,843 4,958
Software 40,813 40,813
----------- -----------
212,143 226,833
Accumulated amortization (77,503) (82,362)
----------- -----------
$ 134,640 $ 144,471
=========== ===========
The present value of future minimum lease payments for capital
lease obligations is reflected in the Consolidated Balance Sheets as
long-term debt. The amount representing imputed interest necessary to reduce
net minimum lease payments to present value has been calculated generally at
the Company's incremental borrowing rate at the inception of each lease.
51
Future minimum lease payments for years ending December 31 are as
follows:
Capital Operating
Leases Leases
---------- -----------
(Dollars in Thousands)
2001 $ 35,962 $ 167,689
2002 30,513 151,118
2003 22,616 131,023
2004 22,134 105,147
2005 21,362 79,255
Thereafter 145,496 510,552
---------- ----------
Future minimum lease payments 278,083 $ 1,144,784
===========
Estimated executory costs (16)
Amount representing imputed interest (116,448)
----------
Present value of future minimum lease payments $ 161,619
==========
Minimum noncancelable sublease rental income to be received in the
future, which is not included above as an offset to future payments, totals
$9.8 million for capital leases and $10.4 million for operating leases.
Rent expense on operating leases for the years ended December 31,
1998, 1999 and 2000, totaled $143.5 million, $164.6 million and $195.8
million, respectively, including contingent rent expense of $10.4 million,
$11.5 million and $12.4 million, but reduced by sublease rent income of $5.9
million, $4.9 million and $3.8 million. Contingent rent expense on capital
leases for the years ended December 31, 1998, 1999 and 2000, was $1.8
million, $1.5 million and $1.6 million,
respectively. Contingent rent expense is generally based on sales levels or
changes in the Consumer Price Index.
LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31,
2000, the 7-Eleven, Inc. Employees' Savings and Profit Sharing Plan ("Savings
and Profit Sharing Plan") owned one store leased to the Company under a
capital lease and 548 stores leased to the Company under operating leases at
rentals which, in the opinion of management, approximated market rates at the
inception date of each lease. In addition, in 1998, 1999 and 2000,
there were 99, 28 and 24 leases, respectively, that either expired or, as a
result of properties that were sold by the Savings and Profit Sharing Plan to
third parties, were canceled or assigned to the new owner. Also, the Company
exercised its right of first refusal and five, four and 19 properties were
sold to the Company by the Savings and Profit Sharing Plan in 1998, 1999 and
2000, respectively, for an aggregate purchase price of $2.8 million, $1.2
million and $9.2 million in the respective years.
52
Included in the consolidated financial statements are the following
amounts related to leases with the Savings and Profit Sharing Plan:
December 31
------------------------
1999 2000
---- ----
(Dollars in Thousands)
Buildings (net of accumulated amortization
of $39 and $42) $ 40 $ 37
=========== ============
Capital lease obligations (net of current
portion of $44 and $51) $ 34 $ 24
=========== ============
Years Ended December 31
---------------------------
1998 1999 2000
---- ---- ----
(Dollars in Thousands)
Rent expense under operating leases and
amortization of capital lease assets $19,987 $18,166 $18,299
======= ======= =======
Imputed interest expense on capital
lease obligations $ 59 $ 5 $ 4
======= ======= =======
Capital lease principal payments included
in principal payments under long-term
debt agreements $ 594 $ 3 $ 4
======= ======= =======
12. BENEFIT PLANS
PROFIT SHARING PLANS - The Company maintains the Savings and
Profit Sharing Plan for its U.S. employees and the 7-Eleven Canada, Inc.
Pension Plan for its Canadian employees. These plans provide retirement
benefits to eligible employees.
Contributions to the Savings and Profit Sharing Plan, a 401(k) defined
contribution plan, are made by both the participants and 7-Eleven. 7-Eleven
contributes the greater of approximately 10% of its net earnings, as defined,
or an amount determined by the Company. The contribution by the
Company is generally allocated to the participants on the basis of their
individual contribution and years of participation in the Savings and Profit
Sharing Plan. The provisions of the 7-Eleven Canada, Inc. Pension Plan are
similar to those of the Savings and Profit Sharing Plan. Total contributions
to these plans for the years ended December 31, 1998, 1999 and 2000 were
$13.4 million, $13.6 million and $16.0 million, respectively, and are
included in OSG&A.
POSTRETIREMENT BENEFITS - The Company's group insurance plan (the
"Insurance Plan") provides postretirement medical and dental benefits for all
retirees that meet certain criteria. Such criteria include continuous
participation in the Insurance Plan ranging from 10 to 15 years depending on
hire date, and the sum of age plus years of continuous service equal to at
least 70. The Company contributes toward the cost of the Insurance Plan a
fixed dollar amount per retiree based on age and number of dependents covered
, as adjusted for actual claims experience. All other future costs and cost
increases will be paid by the retirees. The Company continues to fund its
cost on a cash basis; therefore, no plan assets have been accumulated.
53
The Company amortizes cumulative unrecognized gains and losses in
excess of 10% of the accumulated postretirement benefit obligation ("APBO")
over the average remaining service period of the plan's participants. In
2000, the Company changed this method of amortization such that, if
cumulative unrecognized gains or losses at the beginning of a period exceed
40% of APBO, the entire unrecognized gain or loss will be amortized over a
three-year period beginning in the subsequent year. The Company believes
this new method of amortization results in a more accurate reflection
of its postretirement benefit obligation by providing for more immediate
recognition of gains and losses. Because the 40% threshold was first
exceeded at the beginning of 2000, the accelerated amortization method will
not be applied until 2001. This change in accounting principle had no
impact on the Company's 2000 results of operations and would have had no
impact on prior years' results of operations had it been adopted in an
earlier period.
The following information on the Company's Insurance Plan is provided:
December 31
-----------------------
1999 2000
---- ----
(Dollars in Thousands)
CHANGE IN BENEFIT OBLIGATION:
Net benefit obligation at beginning of year $ 22,914 $ 19,830
Service cost 658 559
Interest cost 1,541 1,530
Plan participants' contributions 2,479 3,232
Actuarial gain (3,020) (287)
Gross benefits paid (4,742) (4,686)
---------- ---------
Net benefit obligation at end of year $ 19,830 $ 20,178
========== =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ - $ -
Employer contributions 2,263 1,454
Plan participants' contributions 2,479 3,232
Gross benefits paid (4,742) (4,686)
--------- ---------
Fair value of plan assets at end of year $ - $ -
========= =========
Funded status at end of year $ (19,830) $ (20,178)
Unrecognized net actuarial gain (8,892) (8,488)
---------- ----------
Accrued benefit costs $ (28,722) $ (28,666)
========== ==========
54
Years Ended December 31
--------------------------------
1998 1999 2000
---- ---- ----
(Dollars in Thousands)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 536 $ 658 $ 559
Interest cost 1,523 1,541 1,530
Amortization of actuarial gain (560) (398) (691)
-------- -------- --------
Net periodic benefit cost $ 1,499 $ 1,801 $ 1,398
======== ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS USED:
Discount rate 6.75% 7.75% 7.75%
Health care cost trend on covered charges:
1999 trend 8.00% N/A N/A
2000 trend 7.00% 7.00% N/A
2001 trend 6.00% 6.00% 12.00%
Ultimate trend 6.00% 6.00% 6.00%
Ultimate trend reached in 2001 2001 2006
There is no effect of a one-percentage-point increase or decrease in
assumed health care cost trend rates on either the total service and interest
cost components or the postretirement benefit obligation for the years ended
December 31, 1998, 1999 and 2000, as the Company contributes a fixed dollar
amount.
STOCK INCENTIVE PLAN - The 1995 Stock Incentive Plan (the "Stock
Incentive Plan") provides for the granting of stock options, stock
appreciation rights, performance shares, restricted stock, restricted stock
units, bonus stock and other forms of stock-based awards and authorizes the
issuance of up to 8.2 million shares over a ten-year period to certain key
employees and officers of the Company. All options granted in 1998, 1999 and
2000 were granted at an exercise price that was equal to the fair market
value on the date of grant. The options granted vest in five equal
installments beginning one year after grant date with possible acceleration
thereafter based on certain improvements in the price of the Company's common
stock. Vested options are exercisable within ten years of the date granted.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for the options granted: for each year presented,
expected life of five years and no dividend yields, combined with risk-
free interest rates of 4.50%, 6.19% and 6.72% in 1998, 1999 and 2000,
respectively, and expected volatility of 61.76%, 62.95% and 67.76% in 1998,
1999 and 2000, respectively.
55
A summary of the status of the Stock Incentive Plan as of December 31,
1998, 1999 and 2000, and changes during the years ending on those dates, is
presented below:
1998 1999 2000
------------------------- ------------------------- ------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Fixed Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- -------------------------------- -------- ---------------- ------- ---------------- ------- ----------------
Outstanding at beginning of year 2,100 $ 14.45 2,686 $ 13.22 3,094 $ 12.13
Granted 672 9.53 773 9.38 2,063 18.97
Exercised - - - - (19) 13.52
Forfeited (86) 14.35 (365) 14.36 (247) 13.27
-------- ------- -------
Outstanding at end of year 2,686 13.22 3,094 12.13 4,891 14.95
======= ======= =======
Options exercisable at year-end 809 15.04 1,129 14.21 1,845 13.99
Weighted-average fair value of
options granted during the year $ 5.37 $ 5.53 $ 11.77
Options Outstanding Options Exercisable
------------------------------------------------------------ ----------------------------
Options Weighted- Options
Outstanding Average Weighted- Exercisable Weighted-
Range of at 12/31/00 Remaining Average at 12/31/00 Average
Exercise Prices (000's) Contractual Life Exercise Price (000's) Exercise Price
---------------- ----------- ---------------- -------------- ------------ --------------
$ 9.38-$ 9.53 1,311 8.21 $ 9.45 397 $ 9.47
12.35- 13.38 518 6.84 12.36 310 12.35
15.00- 15.94 1,080 5.23 15.45 972 15.50
19.00- 19.06 1,982 8.95 19.00 166 19.00
----------- -----------
9.38- 19.06 4,891 7.71 14.95 1,845 13.99
=========== ===========
The Company is accounting for the Stock Incentive Plan for
employees under the provisions of APB No. 25 and, accordingly, no
compensation cost has been recognized. If compensation cost had been
determined based on the fair value at the grant date for awards under this
plan consistent with the method prescribed by SFAS No. 123, the Company's net
earnings and earnings per share for the years ended December 31, 1998, 1999
and 2000, would have been reduced to the pro forma amounts indicated in the
table below:
1998 1999 2000
--------- -------- ----------
(Dollars in Thousands,
Except Per-Share Data)
Net earnings:
As reported $ 74,048 $ 83,113 $ 108,292
Pro forma 72,017 80,819 103,653
Earnings per common share:
As reported:
Basic $ .90 $ 1.01 $ 1.08
Diluted .83 .91 .98
Pro forma:
Basic $ .88 $ .99 $ 1.04
Diluted .81 .89 .94
56
13. COMMITMENTS AND CONTINGENCIES
MCLANE COMPANY, INC. - The Company has a ten-year service agreement
with McLane Company, Inc. ("McLane") under which McLane is making its
distribution services available to 7-Eleven stores in the United States. The
agreement expires in November 2002. Upon signing the service agreement, the
Company received a $9.5 million transitional payment that is being amortized
to cost of goods sold over the life of the agreement. If the Company does
not fulfill its obligation to McLane during this time period, the Company
must reimburse McLane on a pro-rata basis for a portion of the transitional
payment. The Company has exceeded the minimum annual purchases each year and
expects to exceed the minimum required purchase levels in future years.
CITGO PETROLEUM CORPORATION - The Company has a 20-year product
purchase agreement with Citgo Petroleum Corporation ("Citgo") to buy
specified quantities of gasoline at market prices. The agreement expires
September 2006. The market prices are determined pursuant to a formula based
on the prices posted by gasoline wholesalers in the various market areas where
the Company purchases gasoline from Citgo. Minimum required annual purchases
under this agreement are generally the lesser of 750 million gallons or 35%
of gasoline purchased by the Company for retail sale. The
Company has exceeded the minimum required annual purchases each year and
expects to exceed the minimum required annual purchase levels in future years.
ENVIRONMENTAL - In December 1988, the Company closed its chemical
manufacturing facility in New Jersey. The Company is required to conduct
environmental remediation at the facility, including groundwater monitoring
and treatment for a projected 15-year period, which commenced in 1998. The
Company has recorded undiscounted liabilities representing its best estimates
of the remaining clean-up costs of $7.3 million and $6.3 million at
December 31, 1999 and 2000, respectively. Of this amount, $4.4 million and
$4.0 million, respectively, are included in deferred credits and other
liabilities and the remainder in accrued expenses and other liabilities for
the respective years.
In 1991, the Company and the former owner of the facility entered into a
settlement agreement 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 receivable amounts of $4.3 million and $3.8 million at
December 31, 1999 and 2000, respectively. Of this amount, $2.5 million and
$2.4 million, respectively, are included in other assets and the remainder is
included in accounts receivable.
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 store sites where releases
of regulated substances have been detected. At December 31, 1999 and 2000,
respectively, the Company's estimated undiscounted liability for these sites
was $33.4 million and $27.3 million, of which $16.3 million and $10.7 million
are included in deferred credits and other liabilities and the remainder is
included in accrued expenses and other liabilities. These estimates are
based on the Company's prior experience with gasoline sites and its
consideration of such factors as the age of the tanks, location of
tank sites and experience with contractors who perform environmental
assessment and remediation work. The Company anticipates that substantially
all of the future remediation costs for detected releases at these sites as
of December 31, 2000, will be incurred within the next four or five years.
57
Under state reimbursement programs, the Company is eligible to receive
reimbursement for a portion of future remediation costs, as well as a portion
of remediation costs previously paid. Accordingly, at December 31, 1999 and
2000, the Company has recorded net receivable amounts of $52.8 million and
$50.3 million for the estimated probable state reimbursements, of which $42.5
million and $43.0 million, respectively, are included in other assets and the
remainder in accounts receivable. The net receivable amount was increased in
1999 by approximately $14 million as a result of legislative changes in
California, which have expanded and extended that state's reimbursement
program. 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 amounts in other assets
are net of allowances of $8.1 million and $7.7 million for 1999 and 2000,
respectively.
While there is no assurance of the timing of the receipt of state
reimbursement funds, based on the Company's 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 will
receive reimbursement of most of its identified remediation expenses in
California, although it may take one to ten years to receive those
reimbursement funds. As a result of the timing in receiving reimbursement
funds from the various states, the portion of the recorded receivable amounts
related to remedial activities which have already been completed has been
discounted at approximately 6.4% in 1999 and 5.1% in 2000 to reflect present
values. Thus, the 1999 and 2000 recorded receivable amounts are net of
present value discounts of $15.0 million and $11.4 million, respectively.
The estimated future 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.
14. EQUITY TRANSACTIONS
On March 16, 2000, the Company issued 22,736,842 shares of common stock
at $23.75 per share to IYG Holding Company in a private placement transaction,
which increased their ownership in the Company to 72.7%. The net proceeds of
$539.4 million were used to repay the outstanding balance on the Company's
bank term loan of $112.5 million and to reduce the Company's revolving
credit facility by approximately $250 million and commercial paper facility
by approximately $177 million (see Note 8).
In addition to the private placement, the Company's shareholders
approved a reverse stock split of one share of common for five shares of
common, which was effective May 1, 2000. Accordingly, all references to share
or per-share data in the accompanying consolidated financial statements and
related notes reflect the reverse stock split.
58
15. PREFERRED STOCK AND STOCK PLANS
PREFERRED STOCK - The Company has 5 million shares of preferred stock
authorized for issuance. Any preferred stock issued will have such rights,
powers and preferences as determined by the Company's Board of Directors.
STOCK PURCHASE PLANS - In 1999, the Company adopted noncompensatory
stock purchase plans that allow qualified employees and franchisees to
acquire shares of the Company's common stock at market value on the open
market. The Company is responsible for the payment of all administrative
fees for establishing and maintaining the stock purchase plans as well as the
payment of all brokerage commissions for the purchase of shares by the plans'
independent administrator.
STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS - In 1998, the
Company established the Stock Compensation Plan for Non-Employee Directors
under which up to an aggregate of 240,000 shares of the Company's common
stock is authorized to be issued to its non-employee directors. Eligible
directors may elect to receive all, none or a portion of their directors'
fees in shares of the Company's common stock. During 1999 and 2000, 15,204
and 12,785 shares, respectively, were issued under the plan.
16. INCOME TAXES
The components of earnings before income tax expense and
extraordinary gain are as follows:
Years Ended December 31
------------------------------------
1998 1999 2000
------- --------- --------
(Dollars in Thousands)
Domestic (including royalties of
$68,329, $72,947 and $77,119
from area license agreements
in foreign countries) $ 78,719 $ 115,588 $ 142,890
Foreign 3,894 11,751 10,829
--------- --------- ---------
$ 82,613 $ 127,339 $ 153,719
========== ========== ==========
59
The provision for income tax expense on earnings before extraordinary
gain in the accompanying Consolidated Statements of Earnings consists of the
following:
Years Ended December 31
-------------------------------
1998 1999 2000
-------- -------- ---------
(Dollars in Thousands)
Current:
Federal $ 1,146 $ 429 $ 520
Foreign 10,753 13,361 13,364
State 800 2,250 4,800
-------- -------- ---------
Subtotal 12,699 16,040 18,684
Deferred 19,190 32,476 28,507
-------- --------- ---------
Income tax expense on earnings
before extraordinary gain $ 31,889 $ 48,516 $ 47,191
======== ========= =========
Included in the accompanying Consolidated Statements of Shareholders'
Equity (Deficit) at December 31, 1998, 1999 and 2000, respectively, are $10.5
million, $7.1 million and $4.6 million of deferred income taxes provided on
unrealized gains on marketable securities.
Reconciliations of income tax expense on earnings before extraordinary
gain at the federal statutory rate to the Company's actual income tax expense
provided are as follows:
Years Ended December 31
--------------------------------
1998 1999 2000
-------- -------- ---------
(Dollars in Thousands)
Tax expense at federal statutory rate $ 28,915 $ 44,569 $ 53,802
Federal income tax settlement - - (12,490)
State income tax expense, net of
federal income tax benefit 520 1,463 3,120
Foreign tax rate difference 263 728 (176)
Other 2,191 1,756 2,935
--------- --------- ---------
$ 31,889 $ 48,516 $ 47,191
========= ========= =========
60
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31
------------------------
1999 2000
---------- ----------
(Dollars in Thousands)
Deferred tax assets:
Compensation and benefits $ 33,962 $ 30,797
SFAS No. 15 Interest 29,747 22,541
Accrued insurance 29,237 27,047
Accrued liabilities 25,863 26,585
Tax credit carryforwards 5,722 6,468
Debt issuance costs 4,718 3,660
Other 6,178 7,798
---------- ---------
Subtotal 135,427 124,896
Deferred tax liabilities:
Property and equipment (86,937) (112,957)
Area license agreements (55,754) (48,402)
Other (11,695) (9,102)
---------- - --------
Subtotal (154,386) (170,461)
---------- ----------
Net deferred tax liability $ (18,959) $ (45,565)
========== ==========
At December 31, 1999 and 2000, respectively, $69.2 million and
$95.9 million of the Company's net deferred tax liability is recorded in
deferred credits and other liabilities. The remaining balance is included in
other current assets (see Note 4). At December 31, 2000, the Company had
approximately $6.5 million of alternative minimum tax credit carryforwards,
which have no expiration date.
61
17. EARNINGS PER COMMON SHARE
Computations for basic and diluted earnings per share are presented below:
Years Ended December 31
-----------------------------
1998 1999 2000
------ ------- -------
(In Thousands, Except
Per-Share Data)
BASIC:
Earnings before extraordinary gain $ 50,724 $ 78,823 $ 106,528
Earnings on extraordinary gain 23,324 4,290 1,764
--------- -------- ----------
Net earnings $ 74,048 $ 83,113 $ 108,292
======= ======== =========
Weighted-average common shares outstanding 81,985 81,994 100,039
======== ======== =========
Earnings per common share before extraordinary gain $ .62 $ .96 $ 1.06
Earnings per common share on extraordinary gain .28 .05 .02
-------- -------- --------
Net earnings per common share $ .90 $ 1.01 $ 1.08
======== ======== =========
DILUTED:
Earnings before extraordinary gain $ 50,724 $ 78,823 $ 106,528
Add interest on convertible quarterly income debt
securities, net of tax - see Note 9 10,316 10,761 10,579
-------- -------- ---------
Earnings before extraordinary gain plus
assumed conversions 61,040 89,584 117,107
Earnings on extraordinary gain 23,324 4,290 1,764
--------- ---------- ----------
Net earnings plus assumed conversions $ 84,364 $ 93,874 $ 118,871
======== ========= ==========
Weighted-average common shares outstanding (Basic) 81,985 81,994 100,039
Add effects of assumed conversions:
Stock options - see Note 12 24 42 476
Convertible quarterly income debt securities -
see Note 9 19,918 20,924 20,924
-------- -------- --------
Weighted-average common shares outstanding plus
shares from assumed conversions (Diluted) 101,927 102,960 121,439
======== ======== ========
Earnings per common share before extraordinary gain $ .60 $ .87 $ .97
Earnings per common share on extraordinary gain .23 .04 .01
-------- -------- ---------
Net earnings per common share $ .83 $ .91 $ .98
======== ======== =========
18. ACQUISITIONS
In 1998, the Company purchased 100% of the common stock of Christy's
Market, Inc., a Massachusetts company that operated 135 convenience stores in
the New England area. The Company also purchased, in 1998, the assets of 20
'red D mart' convenience stores in the South Bend, Indiana, area from MDK
Corporation of Goshen, Indiana.
These acquisitions were accounted for under the purchase method of
accounting and, accordingly, the results of operations of the acquired
businesses have been included in the accompanying consolidated financial
statements from their dates of acquisition.
62
The following information is provided as supplemental cash flow
disclosure for the acquisitions of businesses and stores as reported in the
Consolidated Statements of Cash Flows for the year ended December 31, 1998
(dollars in thousands):
Fair value of assets acquired $ 75,479
Fair value of liabilities assumed 42,478
----------
Cash paid 33,001
Less cash acquired 72
----------
Net cash paid for acquisitions $ 32,929
==========
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1999 and 2000 is as follows:
YEAR ENDED DECEMBER 31, 1999:
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
Merchandise sales $1,362 $1,585 $1,695 $1,574 $6,216
Gasoline sales 408 504 548 576 2,036
------ ------ ------ ------ ------
Net sales 1,770 2,089 2,243 2,150 8,252
------ ------ ------ ------ ------
Merchandise gross profit 452 553 596 541 2,142
Gasoline gross profit 54 60 53 57 224
------ ------ ------ ------ ------
Gross profit 506 613 649 598 2,366
------ ------ ------ ------ ------
Income tax expense 1 19 25 4 49
Earnings before
extraordinary gain 2 29 38 10 79
Net earnings 6 29 38 10 83
Earnings per common share
before extraordinary gain:
Basic .03 .35 .46 .13 .96
Diluted .03 .30 .39 .13 .87
The first quarter includes an extraordinary gain of $4.3 million
resulting from the partial purchases of the 5% Debentures and the
4 1/2% Debentures (see Note 8). The third and fourth quarters include
income of approximately $10 million and $4 million, respectively, which
resulted from environmental legislative changes in California (see Note 13).
The fourth quarter includes a termination benefit accrual of $4.7 million
(see Note 7).
63
YEAR ENDED DECEMBER 31, 2000:
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
Merchandise sales $1,509 $1,722 $1,794 $1,607 $6,632
Gasoline sales 604 707 718 685 2,714
------ ------ ------ ------ ------
Net sales 2,113 2,429 2,512 2,292 9,346
------ ------ ------ ------ ------
Merchandise gross profit 515 608 624 558 2,305
Gasoline gross profit 51 68 63 57 239
------ ------ ------ ------ ------
Gross profit 566 676 687 615 2,544
------ ------ ------ ------ ------
Income tax expense (11) 24 27 7 47
Earnings before
extraordinary gain 15 38 41 13 107
Net earnings 15 38 41 14 108
Earnings per common share
before extraordinary gain:
Basic .17 .37 .39 .12 1.06
Diluted .16 .32 .35 .12 .97
The first quarter includes an income tax benefit of $12.5 million,
which resulted from the settlement of certain outstanding tax issues relating
to audits of the Company's federal income tax returns for the 1992 through
1995 tax years (see Note 16). The fourth quarter includes an extraordinary
gain of $1.8 million resulting from a partial redemption of the Cityplace
Term Loan (see Note 8).
64
Report of Independent Accountants
To the Board of Directors and Shareholders of
7-Eleven, Inc.:
We have audited the accompanying consolidated balance sheets of 7-Eleven,
Inc. and Subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of earnings, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of 7-Eleven, Inc. and Subsidiaries as of December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 1, 2001
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We have included the information required in response to this Item in
our Definitive Proxy Statement for our April 25, 2001, Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
We have included the information required in response to this Item in
our Definitive Proxy Statement for our April 25, 2001, Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
We have included the information required in response to this Item in
our Definitive Proxy Statement for our April 25, 2001, Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have included the information required in response to this Item in
our Definitive Proxy Statement for our April 25, 2001, Annual Meeting of
Shareholders.
66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. 7-Eleven, Inc. and Subsidiaries' Financial Statements for the three
years in the period ended December 31, 2000 are included in this report:
PAGE
Consolidated Balance Sheets - December 31,1999 and 2000 33
Consolidated Statements of Earnings - Years Ended December 31, 1998, 1999 and 2000 34
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended
December 31, 1998, 1999 and 2000 35
Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1999 and 2000 36
Notes to Consolidated Financial Statements 37
Report of Independent Accountants - PricewaterhouseCoopers LLP 65
2. 7-Eleven, Inc. and Subsidiaries' Financial Statement
Schedule, included in this report.
PAGE
Report of Independent Accountants on Financial Statement Schedule - PricewaterhouseCoopers LLP 72
II - Valuation and Qualifying Accounts 73
All other schedules have been omitted because they are not applicable, are
not required, or the required information is shown in the financial
statements or the notes to the financial statements.
3. The following is a list of the exhibits required to be filed by
Item 601 of Regulation S-K.
EXHIBIT NO.
3. ARTICLES OF INCORPORATION AND BYLAWS.
3.(1) Second Restated Articles of Incorporation of The Southland
Corporation, as amended through March 5, 1991, incorporated by reference to
The Southland Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, Exhibit 3.(1).
3.(2) Articles of Amendment to the Second Restated Articles of
Incorporation, as filed with the Secretary of State of Texas, to effect the
name change to 7-Eleven, Inc., incorporated by reference to 7-Eleven, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Exhibit 3.
3.(2) Articles of Amendment to the Second Restated Articles
of Incorporation, as filed with the Secretary of State of Texas, to
effect a one-for-five reverse split of the common stock of
7-Eleven, Inc., incorporated by reference to file No. 0-16626, 7-Eleven,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
Exhibit 3.
3.(2) Bylaws of 7-Eleven, Inc., restated as amended through April 24,
1996, incorporated by reference to File Nos. 0-676 and 0-16626, The Southland
Corporation's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, Exhibit 3.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES (SEE EXHIBITS
(3).(1) AND (3).(2), ABOVE).
4.(i)(1) Specimen Certificate for Common Stock,
$.0001 par value.* Tab 1
67
4.(i)(5) Subscription Agreement dated March 1, 2000, between IYG Holding
Company, 7-Eleven, Inc., Ito-Yokado Co., Ltd. and Seven-Eleven Co., Ltd,
incorporated by reference to 7-Eleven, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1999, Exhibit 4.(i)(5).
4.(i)(6) Agreement as to Shares dated March 16, 2000, between 7-Eleven,
Inc., Ito-Yokado Co., Ltd. And Seven-Eleven Co., Ltd., incorporated by
reference to 7-Eleven, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999, Exhibit 4.(i)(6).
4.(i)(7) Registration Rights Agreement dated March 16, 2000, between IYG
Holding Company, 7-Eleven, Inc., Ito-Yokado Co., Ltd. And Seven-Eleven Co.,
Ltd. incorporated by reference to 7-Eleven, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1999, Exhibit 4.(i)(7).
4.(ii)(1) Indenture, including Debenture, with Chase Manhattan Trust, N.A.
, as successor trustee, providing for 5% First Priority Senior Subordinated
Debentures due December 15, 2003, incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year ended December 31, 1990
, Exhibit 4.(ii)(2).
4.(ii)(2) Indenture, including Debentures, with Bank of New York as
successor trustee, providing for 4 1/2% Second Priority Senior Subordinated
Debentures (Series A) due June 15, 2004 and 4% Second Priority Senior
Subordinated Debentures (Series B) due June 15, 2004, incorporated by
reference to The Southland Corporation's Annual Report on Form 10-K for the
year ended December 31, 1990, Exhibit 4.(ii)(3).
4.(ii)(3) Form of 4.5% Convertible Quarterly Income Debt Securities due
2010, incorporated by reference to The Southland Corporation's Form 8-K,
dated November 21, 1995, Exhibit 4(v)-1.
4.(ii)(4) Form of 4.5% Convertible Quarterly Income Debt Securities due
2013, incorporated by reference to The Southland Corporation's Annual Report
on Form 10-K for the year ended December 31, 1997, Exhibit 4.(ii)(3).
10. MATERIAL CONTRACTS.
10.(i)(2) Credit Agreement, dated as of February 27, 1997, among The
Southland Corporation, the financial institutions party thereto as Senior
Lenders, the financial institutions party thereto as Issuing Banks, Citibank,
N.A., as Administrative Agent, and The Sakura Bank, Limited, New York Branch,
as Co-Agent, incorporated by reference to The Southland Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996, Exhibit 10.(i)(2).
10.(i)(3) First Amendment dated as of February 9, 1998 to Credit
Agreement dated as of February 27, 1997, among The Southland Corporation, the
financial institutions party thereto as Senior Lenders, the financial
institutions party thereto as Issuing Banks, Citibank, N.A., as
Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-
Agent, incorporated by reference to The Southland Corporation's Annual Report
on Form 10-K for the year ended December 31, 1997, Exhibit 10.(i)(3).
10.(i)(4) Second Amendment, dated as of April 29, 1998, to Credit
Agreement dated as of February 27, 1997, among The Southland Corporation, the
financial institutions party thereto as Senior Lenders, the financial
institutions party thereto as Issuing Banks, Citibank, N.A., as
Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-
Agent, incorporated by reference to The Southland Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, Exhibit 10.(i)(1).
68
10.(i)(5) Third Amendment, dated as of February 23, 1999, to Credit
Agreement dated as of February 27, 1997, among The Southland Corporation, the
financial institutions party thereto as Senior Lenders, the financial
institutions party thereto as Issuing Banks, Citibank, N.A., as
Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-
Agent, incorporated by reference to The Southland Corporation's Annual Report
on Form 10-K for the year ended December 31, 1998, Exhibit 10.(i)(5).
10.(i)(6) Credit and Reimbursement Agreement by and between Cityplace
Center East Corporation, an indirect wholly owned subsidiary of Southland,
and The Sanwa Bank Limited, Dallas Agency, dated February 15, 1987, relating
to $290 million of 7 7/8% Notes due February 15, 1995, issued by Cityplace
Center East Corporation (to which Southland is not a party and which is non-
recourse to Southland), incorporated by reference to The Southland
Corporation's Annual Report on Form 10-K for the year ended December 31, 1996
, Exhibit 10.(i)(6).
10.(i)(7) Third Amendment to Credit and Reimbursement Agreement, dated as
of February 10, 1995, by and between The Sanwa Bank, Limited, Dallas Agency
and Cityplace Center East Corporation, incorporated by reference to The
Southland Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994, Exhibit 10.(i)(4).
10.(i)(8) Amended and Restated Lease Agreement between Cityplace Center
East Corporation and The Southland Corporation relating to The Southland
Tower, Cityplace Center, Dallas, Texas, incorporated by reference to The
Southland Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, Exhibit 10.(i)(7).
10.(i)(9) Limited Recourse Financing for The Southland Corporation
relating to royalties from Seven-Eleven (Japan) Company, Ltd. in the amount
of Japanese Yen 41,000,000,000, dated March 21, 1988, incorporated by
reference to The Southland Corporation's Form 10-K for year ended December 31,
1988, Exhibit 10.(i)(6).
10.(i)(10) Secured Yen Loan Agreement for The Southland Corporation
relating to royalties from Seven-Eleven (Japan) Company, Ltd. in the amount
of Japanese Yen 12,500,000,000, dated as of April 21, 1998, incorporated by
reference to The Southland Corporation's Form 10-Q for the quarter ended
June 30, 1998, Exhibit 10.(i)(2).
10.(i)(11) Issuing and Paying Agency Agreement, dated as of August 17,
1992, relating to commercial paper facility, Form of Note, Indemnity and
Reimbursement Agreement and amendment thereto and Guarantee, incorporated by
reference to The Southland Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995, Exhibit 10.(i)(8).
10.(i)(12) Amendment, dated as of January 15, 1999, to Issuing and Paying
Agency Agreement, dated as of August 17, 1992, relating to commercial paper
facility, incorporated by reference to The Southland Corporation's Annual
Report on Form 10-K for the year ended December 31, 1998, Exhibit 10.(i)(12).
10.(ii)(B)(1) Standard Form of 7-Eleven Store Franchise Agreement,
incorporated by reference to The Southland Corporation's Annual Report on
Form 10-K for the year ended December 31, 1995, Exhibit 10(ii)(B)(1).
10.(ii)(D)(1) Master Leasing Agreement dated as of April 15, 1997, among
the financial institutions party thereto as Lessor Parties, CBL Capital
Corporation, as Agent for the Lessor Parties and The Southland Corporation,
as Lessee, incorporated by reference to The Southland Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, Exhibit 10.(ii)(D)(1).
10.(iii)(A)(1) 7-Eleven, Inc. Executive Protection Plan
Summary, as amended effective September 1, 2000 Tab 2
69
10.(iii)(A)(4) Letter Agreement dated March 7, 2000, between Clark
Matthews II and 7-Eleven, Inc., incorporated by reference to 7-Eleven, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999, Exhibit 10.
(iii)(A)(4).
10.(iii)(A)(5) 7-Eleven, Inc. 1995 Stock Incentive Plan, incorporated by
reference to Registration Statement on Form S-8, Reg. No. 333-63617, Exhibit
4.10.
10.(iii)(A)(6) 7-Eleven, Inc. Supplemental Executive Retirement Plan for
Eligible Employees incorporated by reference to Registration Statement on
Form S-8, Reg. No. 333-42731, Exhibit 4.(i)(3).
10.(iii)(A)(7) Form of Deferral Election Form for 7-Eleven, Inc.
Supplemental Executive Retirement Plan for Eligible Employees, incorporated
by reference to The Southland Corporation's Annual Report on Form 10-K for
the year ended December 31, 1997, Exhibit 10.(iii)(A)(7).
10.(iii)(A)(8) Form of Award Agreement granting options to purchase
Common Stock, dated October 23, 1995, under the 1995 Stock Incentive Plan
incorporated by reference to The Southland Corporation's Annual Report on
Form 10-K for the year ended December 31, 1995, Exhibit 10.(iii)(A)(10), Tab 4.
10.(iii)(A)(9) Form of Award Agreement granting options to purchase
Common Stock, dated October 1, 1996, under the 1995 Stock Incentive Plan
incorporated by reference to The Southland Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996, Exhibit 10.(iii)(A)(6).
10.(iii)(A)(10) Form of Award Agreement granting options to purchase
Common Stock, dated November 12, 1997, under the 1995 Stock Incentive Plan
incorporated by reference to The Southland Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997, Exhibit 10.(iii)(A)(10).
10.(iii)(A)(11) Form of Award Agreement granting options to purchase
Common Stock, dated October 8, 1999, under the 1995 Stock Incentive Plan,
incorporated by reference to 7-Eleven, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1999, Exhibit 10.(iii)(A)(11).
10.(iii)(A)(11) Form of Award Agreement granting options to
purchase Common Stock, dated May 23, 2000, under the 1995 Stock
Incentive Plan.* Tab 3
10.(iii)(A)(12) 7-Eleven, Inc. Stock Compensation Plan for Non-Employee
Directors and Election Form, effective October 1, 1998, incorporated by
reference to The Southland Corporation's Form S-8 Registration Statement,
Reg. No. 333-68491, Exhibit 4.(i)(4).
10.(iii)(A)(13) Consultant's Agreement between The Southland Corporation
and Timothy N. Ashida, incorporated by reference to The Southland Corporation
's Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit
10.(iii)(A)(10).
10.(iii)(A)(14) First Amendment to Consultant's Agreement between The
Southland Corporation and Timothy N. Ashida, effective as of May 1, 1995,
incorporated by reference to The Southland Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996, Exhibit 10.(iii)(A)(9).
11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS.
Not Required
18. LETTER ON CHANGE IN ACCOUNTING PRINCIPLES.* Tab 4
Preferability letter dated February 1, 2001, from
PricewaterhouseCoopers LLP
21. OUR SUBSIDIARIES AS OF MARCH 2001.* Tab 5
70
23. CONSENTS OF EXPERTS AND COUNSEL.* Tab 6
Consent of Independent Accountants PricewaterhouseCoopers LLP.
27. FINANCIAL DATA SCHEDULE.
FILED ELECTRONICALLY ONLY; NOT ATTACHED TO PRINTED REPORTS.
- --------------------------
*Filed or furnished with this report
(b) Reports on Form 8-K.
During the fourth quarter of 2000, the Company filed no reports on Form
8-K.
(c) The exhibits required by Item 601 of Regulation S-K are attached to
this report or specifically incorporated by reference.
(d)(3) The financial statement schedule for 7-Eleven, Inc. and
Subsidiaries is included in this report, as follows:
Schedule II - 7-Eleven, Inc. and Subsidiaries Page
Valuation and Qualifying Accounts
(for the Years Ended December 31, 1998, 1999
and 2000). 73
71
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Shareholders
of 7-Eleven, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 1, 2001, appearing on page 65 of this Form 10-K, also included
an audit of the financial statement schedule listed in the index on page 67
of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 1, 2001
72
SCHEDULE II
7-ELEVEN, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
Additions
-----------------------
Balance at Charged to Charged to Balance at
beginning costs and other end
of period expenses accounts Deductions (1) of period
--------- ----------- ----------- -------------- ----------
Allowance for doubtful accounts:
Year ended December 31, 1998.................... $ 6,796 $ 3,148 $ - $ (1,177) $ 8,767
Year ended December 31, 1999................... 8,767 3,531 - (6,054) (2) 6,244
Year ended December 31, 2000.................... 6,244 3,910 - (3,213) 6,941
Allowance for environmental cost reimbursements:
Year ended December 31, 1998.................... 9,704 288 - - 9,992
Year ended December 31, 1999.................... 9,992 (1,877) (3) - - 8,115
Year ended December 31, 2000.................... 8,115 (383) - - 7,732
(1) Uncollectible accounts written off, net of recoveries.
(2) Approximately $5 million of doubtful accounts receivable for franchisee deficits were determined to be
uncollectible.
(3) Approximately $1.8 million of disputed environmental cost reimbursements with the state of Texas were
settled and collected.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
7-ELEVEN, INC.
(Registrant)
March 12, 2001 /s/ James W. Keyes
------------------------------------
James W. Keyes
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
TITLE DATE
/s/ Masatoshi Ito
- ---------------------
Masatoshi Ito Chairman of the Board and Director March 12, 2001
/s/ Toshifumi Suzuki
- ---------------------
Toshifumi Suzuki Vice Chairman of the Board and Director March 12, 2001
/s/ Clark J. Matthews, II
- ---------------------
Clark J. Matthews, II Co-Vice Chairman of the Board and Director March 12, 2001
/s/ James W. Keyes
- ---------------------
James W. Keyes President and Chief Executive Officer
and Director March 12, 2001
/s/ Donald E. Thomas
- ---------------------
Donald E. Thomas Vice President, Chief Accounting Officer
and Controller (Principal Accounting
Officer and Acting Principal Financial Officer) March 12, 2001
/s/ Yoshitami Arai
- --------------------
Yoshitami Arai Director March 12, 2001
/s/ Masaaki Asakura
- --------------------
Masaaki Asakura Senior Vice President and Director March 12, 2001
/s/ Timothy N. Ashida
- ---------------------
Timothy N. Ashida Director March 12, 2001
/s/ Jay W. Chai
- -------------------
Jay W. Chai Director March 12, 2001
/s/ Gary J. Fernandes
- ----------------------
Gary J. Fernandes Director March 12, 2001
/s/ Masaaki Kamata
- ---------------------
Masaaki Kamata Director March 12, 2001
/s/ Kazuo Otsuka
- --------------------
Kazuo Otsuka Director March 12, 2001
/s/ Nobutake Sato
- ---------------------
Nobutake Sato Director March 12, 2001
74