7 ELEVEN INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 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

--------------

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No

APPLICABLE ONLY TO CORPORATE ISSUERS:

104,970,208 shares of common stock, $.0001 par value (the issuer's only
class of common stock), were outstanding as of September 30, 2002.

7-ELEVEN, INC.
INDEX

PAGE
NO.
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Part I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS:

Condensed Consolidated Balance Sheets -
December 31, 2001 and September 30, 2002 1

Condensed Consolidated Statements of Earnings -
Three Months and Nine Months Ended September 30, 2001 and 2002 2

Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2002 3

Notes to Condensed Consolidated Financial Statements 4

Report of Independent Accountants 11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24

ITEM 4. CONTROLS AND PROCEDURES 24

Part II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS 25

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25

SIGNATURES 26

Certifications Under Section 302 of the Sarbanes-Oxley Act of 2002 27-28

Exhibit 10 - Service Agreement Between 7-Eleven, Inc., and
McLane Company, Inc., Effective September 21, 2002 Tab 1

Exhibit 15 - Letter re Unaudited Interim Financial Information Tab 2

Exhibit 99(i)(1) - Certification by Chief Executive Officer
Required by Section 906 of the Sarbanes-Oxley Act of 2002 Tab 3

Exhibit 99(i)(2) - Certification by Chief Financial Officer
Required by Section 906 of the Sarbanes-Oxley Act of 2002 Tab 4

(i)

See notes to condensed consolidated financial statements.

1

7-ELEVEN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002

(UNAUDITED)

1. BASIS OF PRESENTATION

The condensed consolidated balance sheet as of September 30,
2002, and the condensed consolidated statements of earnings for the
three-month and nine-month periods ended September 30, 2001 and
2002, and the condensed consolidated statements of cash flows for
the nine-month periods ended September 30, 2001 and 2002, have been
prepared by 7-Eleven, Inc. (the "Company") without audit. In the
opinion of management, all adjustments necessary to present fairly
the financial position at September 30, 2002, and the results of
operations and cash flows for all periods presented have been made.
Certain prior-period amounts have been reclassified to conform to
current-period presentation. The results of operations for the
interim periods are not necessarily indicative of the operating
results for the full year.

The reported results include approximately 5,800 convenience
stores that are operated or franchised in the United States and
Canada by the Company along with royalty income from worldwide 7-
Eleven area licensees. Sales and cost of goods sold of stores
operated by franchisees are consolidated with the results of
Company-operated stores in the condensed consolidated statements of
earnings. Gross profit from franchise stores is split between the
Company and its franchisees pursuant to the terms of franchise
agreements.

The condensed consolidated balance sheet as of December 31,
2001, is derived from the audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. The notes accompanying the consolidated financial
statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, include accounting policies and additional
information pertinent to an understanding of both the December 31,
2001, balance sheet and the interim financial statements. The
information has not changed except as a result of normal
transactions in the nine months ended September 30, 2002, and as
discussed in the following notes.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," which addresses financial
accounting and reporting for acquired goodwill and other intangible
assets. The statement eliminates amortization of goodwill and
intangible assets with indefinite lives and requires a transitional
impairment test of these assets within six months of the date of
adoption and an annual impairment test thereafter and in certain
circumstances. The Company has completed both the transitional
impairment test of goodwill and intangible assets with indefinite
lives as of January 1, 2002, and the annual impairment test of these
assets as of September 30, 2002, and there was no evidence of
impairment in either test.

4

Included in other assets in the accompanying Condensed
Consolidated Balance Sheets are the following amounts for intangible
assets and goodwill (in thousands):

Other intangibles include $1.4 million and $1.1 million as of
December 31, 2001 and September 30, 2002, respectively, in assets
that will continue to be amortized over their remaining useful
lives.

The following is a reconciliation of both the net earnings and
the basic and diluted net earnings per common share between the
amounts reported by the Company and the adjusted amounts reflecting
the new accounting requirements for the periods presented (in
thousands, except per-share data):

3. ASSET RETIREMENT OBLIGATIONS

Effective January 1, 2002, the Company adopted the provisions
of SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 143 generally applies to legal obligations associated with
the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation
of a long-lived asset. SFAS No. 143 requires the Company to
recognize an estimated liability for the removal of its underground
gasoline storage tanks.

5

As of January 1, 2002, the Company recognizes the future cost to
remove an underground storage tank over the estimated useful life of
the storage tank in accordance with the provisions of SFAS No. 143.
A liability for the fair value of an asset retirement obligation
with a corresponding increase to the carrying value of the related
long-lived asset is recorded at the time an underground storage tank
is installed. The Company amortizes the amount added to property
and equipment and recognizes accretion expense in connection with
the discounted liability over the remaining life of the respective
underground storage tank.

The estimated liability is based on historical experience in
removing these tanks, estimated tank useful lives, external
estimates as to the cost to remove the tanks in the future and
federal and state regulatory requirements. The liability is
discounted using a credit-adjusted risk-free rate of approximately
8%. Revisions to the liability could occur due to changes in tank
removal costs or tank useful lives, or if federal or state
regulators enact new requirements on the removal of such tanks.

Upon adoption of SFAS No. 143, the Company recorded a
discounted liability of $53.6 million, increased net property and
equipment by $6.7 million and recognized a one-time cumulative
effect charge of $28.1 million (net of deferred tax benefit of $18.8
million). The Company amortizes the amount added to property and
equipment and recognizes accretion expense in connection with the
discounted liability over the remaining lives of the respective
underground storage tanks. Pro forma effects on earnings from
continuing operations before cumulative effect of accounting change
for the three and nine months ended September 30, 2001, assuming the
adoption of SFAS No. 143 as of January 1, 2001, were not material to
net earnings or earnings per share.

A reconciliation of the Company's liability for the nine months
ended September 30, 2002, is as follows (in thousands):

Upon adoption at January 1, 2002 $ 53,648
Liabilities incurred 165
Liabilities settled (1,800)
Accretion expense 2,017
Revisions to estimate -
---------
$ 54,030
=========

As of September 30, 2002, $1.9 million of the $54.0 million
liability is included in accrued expenses and other liabilities in
the accompanying Condensed Consolidated Balance Sheets. The
remaining $52.1 million is included in deferred credits and other
liabilities in the accompanying Condensed Consolidated Balance
Sheets.

4. STORE CLOSINGS, ASSET IMPAIRMENT AND COST REDUCTIONS

The Company adopted the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets to be held and
used or to be disposed of. The statement also broadens the
definition of what constitutes a discontinued operation and how the
results of a discontinued operation are to be measured and
presented. Adoption of the standard did not have a material impact
on the Company's impairment policy or net earnings; however, it did
result in classifying the operations of certain stores as
discontinued operations in the accompanying Condensed Consolidated
Statements of Earnings.

The Company writes down property and equipment of stores it is
closing to estimated net realizable value at the time that
management commits to a plan to close such stores. If the stores
are leased, the Company will accrue for related future estimated
rent and other expenses if the expenses are expected to exceed
estimated sublease rental income. The Company bases the estimated
net realizable value of property and equipment on its experience in
utilizing and/or disposing of similar assets

6

and on estimates provided by its own and/or third-party real estate
experts. The Company also uses its experience in subleasing similar
property to estimate future sublease income.

The Company's long-lived assets 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.

Effective January 1, 2002, the results of operations of certain
owned and leased stores are presented as discontinued operations in
accordance with the provisions of SFAS No. 144. The results of
operations of owned stores are included in discontinued operations
for all periods presented when management commits to a plan to close
the related store. The results of operations of a leased store are
included in discontinued operations for all periods presented when
the related store ceases operations. The results of operations
include related write-downs of stores to estimated net realizable
value and accruals for future estimated rent and other expenses in
excess of estimated sublease rental income.

In the first quarter of 2002, management committed to a plan to
close up to 128 underperforming stores in 2002. The stores being
closed include those stores for which the Company recorded an asset
impairment charge of $5.3 million in the fourth quarter of 2001. In
connection with the planned store closings, the Company recorded a
pretax charge of $11.8 million in the first quarter of 2002 for
write-downs of stores to net realizable value and for anticipated
future rent and other expenses in excess of related estimated
sublease income. Substantially all of the $11.8 million is included
in discontinued operations in the accompanying Condensed
Consolidated Statements of Earnings for the nine months ended
September 30, 2002. The Company has closed 125 stores as of
September 30, 2002.

In addition to the store closings, the Company initiated cost
reduction efforts to streamline administrative functions and
consolidate divisions, resulting in the elimination of approximately
125 positions. The results of operations for the nine months ended
September 30, 2002, include a $6.9 million charge to operating,
selling, general and administrative expense for severance costs and
other expenses, all of which was recorded in the first quarter of
2002. As of September 30, 2002, $1.4 million was included in
accrued expenses and other liabilities in the accompanying Condensed
Consolidated Balance Sheets relating to unpaid severance costs.

The stores presented as discontinued operations had total
revenues and pretax operating losses as follows for the periods
presented (in thousands):

As of December 31, 2001 and September 30, 2002, assets held for
sale were $15.0 million and $10.3 million, respectively, and are
included in other current assets in the accompanying Condensed
Consolidated Balance Sheets. The properties are being actively
marketed.

7

5. COMPREHENSIVE EARNINGS

The components of comprehensive earnings of the Company for the
periods presented are as follows (in thousands):

6. OTHER INCOME

The area license royalties that the Company receives from area
license agreements are classified as other income in the
accompanying Condensed Consolidated Statements of Earnings. In
August 2002, the royalty rate from Seven-Eleven Japan Co., Ltd.
("SEJ") was reduced in accordance with the terms of the license
agreement. Primarily due to the royalty rate reduction, the SEJ
royalty payments for the three and nine months ended September 30,
2002, decreased $6.0 million and $7.2 million, respectively, as
compared to the same periods in 2001.

7. DISTRIBUTION SERVICES

On July 10, 2002, the Company signed a new 40-month service
agreement with McLane Company, Inc. ("McLane") under which McLane
will provide distribution services to 7-Eleven stores and designated
combined distribution centers in the United States. The new
agreement became effective in September 2002.

8

8. EARNINGS PER SHARE

Computations for basic and diluted earnings per share are
presented below (in thousands, except per-share data):

9

9. RELATED PARTY TRANSACTION

In May 2002, a financial-services subsidiary of Seven-Eleven
Japan Co., Ltd. made a personal loan of 227.5 million Japanese yen
(approximately $1.75 million) to one of the Company's non-management
directors. The loan is secured by certain shares of stock owned by
the director, bears interest at 2.6% and is due in May 2003.
Interest expense incurred on the loan as of September 30, 2002,
approximates $17,000.

10. RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." The statement, which was issued in
May 2002, rescinds FASB No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that
statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." As a result, gains and
losses from extinguishment of debt will no longer be
aggregated and classified as an extraordinary item, net of
related income tax effect, on the statement of earnings.
Instead, such gains and losses will be classified as
extraordinary items only if they meet the criteria of unusual
or infrequently occurring items. SFAS No. 145 also requires
that gains and losses from debt extinguishments, which were
classified as extraordinary items in prior periods, be
reclassified to continuing operations if they do not meet the
criteria for extraordinary items.

SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," was issued in July 2002. The
statement requires that costs associated with exit or disposal
activities must be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan.
Such costs include lease termination costs and certain
employee severance costs associated with a restructuring,
discontinued operation or other exit or disposal activity.
For the Company, these costs generally arise from store
closings. The Company is currently reviewing SFAS No. 146,
which is effective for exit or disposal activities initiated
after December 31, 2002.

10

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of 7-Eleven, Inc.:

We have reviewed the accompanying condensed consolidated
balance sheet of 7-Eleven, Inc. and Subsidiaries as of September 30,
2002, and the related condensed consolidated statements of earnings
for the three-month and nine-month periods ended September 30, 2001
and 2002, and the condensed consolidated statements of cash flows
for the nine-month periods ended September 30, 2001 and 2002. These
financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.

Based on our review, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the
United States of America.

We previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet as of December 31, 2001, and the related consolidated
statements of earnings, shareholders' equity (deficit), and cash
flows for the year then ended (not presented herein); and in our
report dated January 31, 2002, except as to Note 19, for which the
date is February 6, 2002, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2001, is fairly stated in all
material respects in relation to the consolidated balance sheet from
which it has been derived.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
October 24, 2002

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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. 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
THIS REPORT REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS. WHEN
USED IN THIS 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
ASSUME ANY OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.

We are the world's largest operator, franchisor and licensor
of convenience stores and the largest convenience store chain in
North America. Our revenue principally consists of merchandise and
gasoline sales and, to a lesser extent, royalty income from
licensees. Our primary expenses consist of cost of goods sold,
operating, selling, general and administrative, occupancy and
interest expense and taxes.

2002 BUSINESS ISSUES

STORE CLOSINGS AND COST REDUCTIONS

During the first quarter of 2002, we committed to a plan to
close up to 128 underperforming stores. The stores being closed
include those stores for which we recorded an asset impairment
charge of $5.3 million in the fourth quarter of 2001. In connection
with the planned store closings, we recorded a pretax charge of
$11.8 million in the first quarter of 2002 for write-downs of stores
to net realizable value and for anticipated future rent and other
expenses in excess of related estimated sublease income.
Substantially all of the $11.8 million is included in discontinued
operations in the Condensed Consolidated Statements of Earnings for
the nine months ended September 30, 2002. We had closed 125 stores
as of September 30, 2002. We anticipate the remainder of the stores
identified for closing under our plan will be closed by year-end
2002.

In addition, during the first quarter of 2002, we implemented
cost reduction efforts to continue to streamline administrative
functions and also consolidated two divisions, resulting in the
elimination of approximately 125 positions. Our results of
operations for the nine months ended September 30, 2002, include a
$6.9 million pretax charge to OSG&A expense for severance costs and
other expenses, all of which was recorded in the first quarter of
2002.

We expect to realize an annual pretax operating earnings
benefit of approximately $17 million due to our store closings and
cost reduction efforts. We will not realize the full amount of
these savings until 2003. We have initiated and intend to continue
other cost reductions to improve operating earnings such as
standardizing procurement procedures. In addition, we signed a new
primary wholesale agreement with McLane Company, Inc.

12

("McLane"), a wholly-owned subsidiary of Wal-Mart Stores, Inc., with
more favorable terms than our previous agreement. The terms of the
new agreement went into effect in September 2002. See "Liquidity
and Capital Resource - Contractual Obligations and Commercial
Commitments."

ROYALTY PAYMENT REDUCTION

We have a licensing agreement with Seven-Eleven Japan under
which Seven-Eleven Japan pays us a royalty fee based on a percentage
of its total revenues. Under the terms of a 1988 amendment to that
agreement, Seven-Eleven Japan reduced its royalty payments to us by
approximately 70% in August 2002. Primarily due to this reduction,
our Seven-Eleven Japan royalty receipts decreased by $6.0 million
and $7.2 million for the three and nine months ended September 30,
2002 compared to the same periods in 2001. At current exchange
rates, the reduction will decrease our Seven-Eleven Japan royalty
receipts by approximately $11 million in fourth quarter of 2002
compared to the fourth quarter of 2001. We expect that our Seven-
Eleven Japan royalty receipts will decrease in 2003 by approximately
$24 million compared to 2002. We do not anticipate any further
reductions in the amount of the license fee percentage.

NEW ACCOUNTING STANDARDS

We adopted four new accounting standards effective January 1,
2002, which had an impact on our reported results of operations. We
adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets." Adopting SFAS No. 142
means we no longer amortize goodwill and certain intangible assets.
This resulted in a reduction in amortization expense for the three
and nine month periods ended September 30, 2002, of $4.9 million and
$14.8 million, respectively.

We also adopted the provisions of SFAS No. 143, "Accounting
for Asset Retirement Obligations," which for our purposes relates to
the accounting for costs associated with future removal of
underground gasoline tanks. This adoption resulted in a one-time,
cumulative effect after-tax charge of $28.1 million. We anticipate
the adoption will reduce our 2002 earnings from continuing
operations before cumulative effect of accounting change by
approximately $2 million.

SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be
disposed of. This statement also broadens the definition of what
constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. The
provisions did not have a material impact on our net earnings;
however, adoption of the standard resulted in our presenting
discontinued operations in the Condensed Consolidated Statement of
Earnings. See "Critical Accounting Policies and Estimates - Store
Closings and Asset Impairment," "Comparison of Three Months Ended
September 30, 2002 to Three Months Ended September 30, 2001 -
Discontinued Operations" and "Comparison of Nine Months Ended
September 30, 2002 to Nine Months Ended September 30, 2001 -
Discontinued Operations."

We have adopted the provisions of SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections," effective January 1, 2002. The
statement, which was issued in May 2002, rescinds FASB No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an
amendment of that statement, FASB No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." As a result, gains and
losses from extinguishment of debt will no longer be aggregated and
classified as an extraordinary item, net of related income tax
effect, on the statement of earnings. Instead, such gains and
losses will be classified as extraordinary items only if they meet
the criteria of unusual or infrequently occurring items. SFAS No.
145 also requires that gains and losses from debt extinguishments,
which were classified as extraordinary items in prior periods, be
reclassified to continuing operations if they do not meet the
criteria for extraordinary items.

13

SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued in July 2002. The statement
requires that costs associated with exit or disposal activities must
be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Such costs include lease
termination costs and certain employee severance costs associated
with a restructuring, discontinued operations or other exit or
disposal activity. For us, these costs generally arise from store
closings. We are currently reviewing SFAS No. 146, which is
effective for exit or disposal activities initiated after December
31, 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

STORE CLOSINGS AND ASSET IMPAIRMENT

We write down property and equipment of stores we are closing
to estimated net realizable value at the time we commit to a plan to
close such stores. If we lease the store, we also accrue for
related future estimated rent and other expenses if we believe the
expenses will exceed estimated sublease rental income. We base the
estimated net realizable value of property and equipment on our
experience in utilizing and/or disposing of similar assets and on
estimates provided by our own and/or third-party real estate
experts. We also use our experience in subleasing similar property
to estimate future sublease income. If there is a significant
change in the real estate market, our net realizable value estimates
and/or our estimated future sublease income could change materially.

We review our long-lived assets for impairment and write them
down to fair value whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.

Effective January 1, 2002, we present the results of operations
of certain owned and leased stores as discontinued operations in
accordance with the provisions of SFAS No. 144 (see "2002 Business
Issues - New Accounting Standards"). The results of operations of
owned stores are included in discontinued operations for all periods
presented when management commits to a plan to close the related
store. The results of operations of leased stores are included in
discontinued operations for all periods presented when the related
store ceases operations. The results of operations include related
write-downs of stores to estimated net realizable value and accruals
for future estimated rent and other expenses in excess of estimated
sublease rental income.

ASSET RETIREMENT OBLIGATIONS

Effective January 1, 2002, we recognize the future cost to
remove an underground gasoline storage tank over the estimated
useful life of the storage tank in accordance with the provisions of
SFAS No. 143 (see "2002 Business Issues - New Accounting
Standards"). SFAS 143 requires that we record a liability for the
fair value of an asset retirement obligation with a corresponding
increase to the carrying value of the related long-lived asset. We
amortize the amount added to property and equipment and recognize
accretion expense in connection with the discounted liability over
the remaining lives of the respective underground storage tanks.

Our liability estimate is based on our historical experience in
removing these tanks, estimated tank useful lives, external
estimates as to the cost to remove the tanks in the future and
federal and state regulatory requirements. The liability is
discounted using a credit-adjusted risk-free rate of approximately
8%. Revisions to the liability could occur due to changes in tank
removal costs or tank useful lives, or if federal or state
regulators enact new requirements on the removal of such tanks.

14

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002
TO THREE MONTHS ENDED SEPTEMBER 30, 2001

NET SALES

Merchandise sales for the three months ended September 30,
2002, increased $102.7 million, or 5.4%, over the same period in
2001. U.S. same-store merchandise sales increased 3.2% for the
three months ended September 30, 2002, on top of 6.2% for the three
months ended September 30, 2001. Contributors to the merchandise
sales increase in 2002 include improvements in the categories of
fresh food, Slurpee, candy, beer, cigarettes and non-carbonated
beverages. Increases in the retail price of cigarettes due to
wholesale cost increases accounted for approximately 0.5% of the
increase in 2002 and less than 0.5% of the increase in 2001.

Gasoline sales for the three months ended September 30, 2002,
increased $54.5 million, or 7.6%, compared to the same period in 2001.
We attribute this increase to a 9.5% increase in gallons sold, to
534.4 million gallons. Partially offsetting the increase in gallons
sold was a two cents per gallon decrease in the retail price of
gasoline. On a per-store month basis, growth in gallons increased
4.3%, which is primarily due to the addition of new higher-volume
gasoline stores, which typically have more gasoline pumps than
existing stores.

GROSS PROFIT

Merchandise gross profit for the three months ended September
30, 2002, increased $52.0 million, or 8.0%, over the same period in
2001. This is a result of higher sales and an increase in our gross
profit margin to 35.16% for the third quarter of 2002 from 34.32%
for the same period in 2001. Our increases in overall gross profit
margin and gross profit per store are attributable to a variety of
factors. We continue to focus on improved cost of goods management
through initiatives

15

like daily cost reporting, enhanced competitive bidding practices
and improving results at the store level to lower write-offs and
shortages. Product mix also contributed to the improvement, as we
sold more higher-margin products. We anticipate that our
merchandise gross profit margin will improve in 2002 over the gross
profit margins we achieved during 2001 by monitoring our retail
pricing and continuing our efforts to reduce the cost of goods sold.

Gasoline gross profit for the three months ended September 30,
2002, decreased $6.3 million, or 8.6%, to $67.6 million. Expressed
as cents per gallon, our gasoline margin was 12.7 cents in the third
quarter of 2002 compared to 15.1 cents in the third quarter of 2001.
Rising wholesale costs during the third quarter, due mainly to
continued uncertainty in the Middle East, contributed to unfavorable
gasoline gross profit results for the quarter. The increasing costs
resulted in a $3.8 million charge to cost of goods in connection
with our LIFO accounting for gasoline inventory. Based on current
market conditions, we expect to maintain our gasoline margins
(expressed as cents per gallon) during the remainder of the year in
the range of 12 to 13 cents per gallon.

OTHER INCOME

Other income for the three months ended September 30, 2002, was
$24.3 million, a decrease of $4.8 million, or 16.6%, from $29.1
million for the same period in 2001. Our royalty income from our
area licensees was $17.8 million for the three months ended
September 30, 2002, compared to $22.8 million for the same period in
2001. This decrease is primarily due to a $6.0 million decrease in
the Seven-Eleven Japan royalty as a result of the royalty rate
reduction (See "2002 Business Issues - Royalty Payment Reduction"),
partially offset by increased sales at stores operated by our
licensees.

FRANCHISEE GROSS PROFIT EXPENSE

Franchisee gross profit expense for the three months ended
September 30, 2002, was $208.3 million, an increase of $13.5 million,
or 6.9%, from $194.8 million for the same period in 2001. The
increase is due 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)

The primary components of OSG&A are store labor, occupancy
(including depreciation) and corporate expenses. OSG&A for the
three months ended September 30, 2002, was $520.2 million, an
increase of $45.2 million, or 9.5%, from $475.0 million for the same
period in 2001. Excluding a $5.4 million impact from the change in
currency conversion from 2001 to 2002, which primarily relates to
our yen-denominated loans and the elimination of $4.9 million of
amortization expense in 2002 due to the adoption of SFAS No. 142
(see "2002 Business Issues - New Accounting Standards"), OSG&A
increased $55.5 million or 11.9% to $521.0 million. The primary
drivers of the increase were higher employee-related costs, rising
occupancy expenses from store openings, as well as the impact from
incremental spending on technology initiatives.

The ratio of OSG&A to net sales increased to 18.8% for the third
quarter of 2002 from 18.2% for the third quarter of 2001. Adjusting
for the two-cent decline in the retail price of gasoline, the
currency conversion loss, and the elimination of amortization, the
ratio of OSG&A to net sales for the third quarter of 2002 was 18.8%
compared to 17.8% for the third quarter of 2001.

16

INTEREST EXPENSE, NET

Net interest expense for the three months ended September 30,
2002, was $16.3 million, an increase of $1.4 million, or 9.3%, from
$14.9 million for the same period in 2001. The increase is primarily
due to an increase in our total debt and a decline in interest income
due to lower interest rates, partially offset by lower interest rates
during the quarter on our variable rate debt.

In accordance with SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring," our debentures are
recorded at an amount equal to the undiscounted cash payments of both
principal and interest, and we do not recognize interest expense on
our debentures in our Condensed Consolidated Statement of Earnings.
Accordingly, we charge the cash interest payments against the recorded
amount of the debentures.

INCOME TAX EXPENSE

Income tax expense for the three months ended September 30, 2002,
was $19.8 million compared to income tax expense of $26.8 million for
the same period in 2001. Our effective tax rate was 40.0% for the
third quarter of 2002 compared to 39.0% for the third quarter of 2001.

EARNINGS FROM CONTINUING OPERATIONS

For the three months ended September 30, 2002, our earnings from
continuing operations were $29.8 million ($0.25 per diluted share),
compared to $42.0 million ($0.35 per diluted share) for the same
period in 2001.

DISCONTINUED OPERATIONS

Discontinued operations for the three months ended September
30, 2002, resulted in a loss of $316,000 (net of $211,000 tax
benefit) compared to a loss of $596,000 (net of $381,000 tax
benefit) for the same period in 2001. The stores included in
discontinued operations for the three months ended September 30,
2002 and 2001, had total revenues of $1.8 million and $40.6 million,
respectively, and pretax operating losses of $527,000 and $1.0
million, respectively. See "2002 Business Issues - Store Closings
and Cost Reductions."

NET EARNINGS

Net earnings for the three months ended September 30, 2002, were
$29.5 million ($0.25 per diluted share), compared to $41.4 million
($0.35 per diluted share) for the same period in 2001.

SEASONALITY

Weather conditions can have a significant impact on our sales, as
our customers tend to buy more and to purchase higher profit margin
products when weather conditions are favorable. Consequently, our
results are seasonal, and we typically earn more during the warmer
second and third quarters.

17

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002
TO NINE MONTHS ENDED SEPTEMBER 30, 2001

NET SALES

Merchandise sales for the nine months ended September 30, 2002,
increased $256.1 million, or 4.9%, over the same period in 2001.
U.S. same-store merchandise sales increased 3.1% for the nine months
ended September 30, 2002, on top of 4.9% for the nine months ended
September 30, 2001. Key contributors to the merchandise sales
increases in 2002 included the categories of cigarettes, beer,
prepaid cards, non-carbonated beverages, grill items and candy.
Increases in the retail price of cigarettes due to wholesale cost
increases accounted for approximately 1% of the increase in 2002 and
less than 1% of such growth in 2001.

Gasoline sales for the nine months ended September 30, 2002,
decreased $67.9 million or 3.2% compared to the same period in 2001.
We attribute this decrease to a decline of 16 cents per gallon in the
average retail price of gasoline in the nine months ended September
30, 2002, compared to the same period in 2001. Gasoline sold was
1,515.7 million gallons, an increase of 8.5%. On a per-store month
basis, growth in gallons increased 3.4% primarily due to the addition
of new higher-volume gasoline stores, which typically have more
gasoline pumps than existing stores.

GROSS PROFIT

Merchandise gross profit for the nine months ended
September 30, 2002, increased $132.0 million, or 7.4%, over
the same period in 2001. This was a result of higher sales
and an increase in our gross profit margin to 34.99% for the
nine months ended September 30, 2002, from 34.17% for the same
period in 2001. Our increases in overall gross profit margin
and gross profit per store are attributable to a variety of
factors. We continue to focus on improved cost of goods
management through initiatives like daily cost reporting,
enhanced competitive bidding practices and improving results
at the store level through lower write-offs and shortages.
Product mix also contributed to the improvement, as we sold
more higher-margin products.

18

Gasoline gross profit for the nine months ended September 30,
2002, decreased $6.9 million, or 3.5%, to $187.5 million. Expressed
as cents per gallon, our gasoline margin was 12.4 cents for the nine
months ended September 30, 2002, compared to 13.9 cents for the same
period of 2001. The decrease is due to retail prices falling faster
than wholesale costs resulting in lower retail margins early in the
first quarter of 2002 combined with the uncertainty in the Middle
East during the third quarter of 2002. Increasing costs resulted in
a $5.6 million charge to cost of goods in connection with our LIFO
accounting for gasoline inventory for the nine months ended
September 30, 2002.

OTHER INCOME

Other income for the nine months ended September 30, 2002, was
$78.8 million, a decrease of $4.3 million, or 5.1%, from $83.1
million for the same period in 2001. Our royalty income from our
area licensees was $59.5 million for the nine months ended September
30, 2002, compared to $63.5 million for the same period in 2001.
This decrease is primarily due to a $7.2 million decrease in the
Seven-Eleven Japan royalty as a result of the royalty rate reduction
(See "2002 Business Issues - Royalty Payment Reduction"), partially
offset by increased sales at stores operated by our licensees.

FRANCHISEE GROSS PROFIT EXPENSE

Franchisee gross profit expense for the nine months ended
September 30, 2002, was $563.5 million, an increase of $32.0 million,
or 6.0%, from $531.5 million for the same period in 2001. The
increase is due 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)

The primary components of OSG&A are store labor, occupancy
(including depreciation) and corporate expenses. OSG&A for the nine
months ended September 30, 2002, was $1,467.6 million, an increase
of $112.9 million, or 8.3%, from $1,354.7 million for the same
period in 2001. Excluding the one-time charges of severance and
other expenses of $6.9 million (see "2002 Business Issues - Store
Closings and Cost Reductions"), a $16.7 million unfavorable impact
from the change in currency conversion from 2001 to 2002, which
primarily relates to our yen-denominated loans, and the elimination
of $14.8 million of amortization expense in 2002 due to the adoption
of SFAS No. 142 (see "2002 Business Issues - New Accounting
Standards"), OSG&A increased $104.0 million or 7.7% to $1,448.5
million. The primary drivers of the increase were higher employee-
related costs, rising occupancy expenses from store openings, as
well as the impact from incremental spending on technology
initiatives.

The ratio of OSG&A to net sales increased to 19.4% for the nine
months ended September 30, 2002, from 18.4% for the same period in
2001. Adjusting for the 16-cent decline in the retail price of
gasoline, the one-time charges, the currency conversion, and the
elimination of amortization, the ratio of OSG&A to net sales for the
nine months ended September 30, 2002, was 19.2% compared to 18.3% for
the nine months ended September 30, 2001.

19

INTEREST EXPENSE, NET

Net interest expense for the nine months ended September 30,
2002, was $48.5 million, an increase of $592,000, or 1.2%, from $47.9
million for the same period in 2001. The increase is primarily due to
increased debt levels and decreased interest income, which were
partially offset by lower interest rates during 2002 on our variable
rate debt.

INCOME TAX EXPENSE

Income tax expense for the nine months ended September 30,
2002, was $41.9 million compared to income tax expense of $50.5
million for the same period in 2001. Our effective tax rate was 40.0%
for the nine months ended September 30, 2002, compared to 39.0% for
the same period in 2001.

EARNINGS FROM CONTINUING OPERATIONS

For the nine months ended September 30, 2002, earnings from
continuing operations before cumulative effect of accounting change
were $62.9 million ($0.56 per diluted share), compared to
$79.0 million ($0.69 per diluted share) for the same period in 2001.

DISCONTINUED OPERATIONS

Discontinued operations for the nine months ended September
30, 2002, resulted in a loss of $10.5 million (net of $7.0 million
tax benefit) compared to a loss of $2.5 million (net of $1.6 million
tax benefit) for the same period in 2001. Included in the
discontinued operations loss for the nine months ended September 30,
2002, is a charge of $6.9 million (net of $4.6 million tax benefit)
for write-downs of stores to net realizable value and anticipated
future rent and other expenses in excess of related estimated
sublease income. See "2002 Business Issues - Store Closings and
Cost Reductions."

The stores included in discontinued operations for the nine
months ended September 30, 2002 and 2001, had total revenues of
$29.6 million and $116.1 million, respectively, and pretax operating
losses of $17.5 million and $4.0 million, respectively.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

On January 1, 2002, we adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations," which resulted in a one-time charge
of $28.1 million, net of deferred tax benefit, related to the
cumulative effect of the accounting change for costs associated with
the future removal of underground gasoline storage tanks.

On January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which resulted in a
one-time charge of $9.8 million, net of deferred tax benefit,
related to the cumulative effect of the accounting change on our
yen-denominated debt.

NET EARNINGS

Net earnings for the nine months ended September 30, 2002, were
$24.3 million ($0.26 per diluted share), compared to net earnings of
$66.7 million ($0.59 per diluted share) for the same period in 2001.

20

LIQUIDITY AND CAPITAL RESOURCES

We obtain the majority of our working capital from three sources:

* cash flows generated from our operating activities;
* a $650 million commercial paper facility, guaranteed by
Ito-Yokado Co., Ltd.; and
* borrowings of up to $200 million under our revolving
credit facility.

We believe that operating activities, available working capital
sources and additional borrowings will provide sufficient liquidity in
2002 to fund our operating costs, capital expenditures and debt
service. In addition, we intend to continue accessing the leasing
market to finance our new stores and certain equipment, including Vcom
kiosks.

We expect capital expenditures for 2002, excluding lease
commitments, to be $425 million to $450 million. This is a decrease
from our initial estimate of $450 million to $500 million. The
decrease is primarily due to a reassessment of the timing of our
capital spending program in 2002.

Our capital expenditures were $303.5 million for the nine months
ended September 30, 2002, compared to $231.7 million for the same
period in 2001. Our new capital lease commitments during the nine
months ended September 30, 2002, were $23.7 million compared to $14.6
million for the same period in 2001. These increases are due to our
growth initiatives, which were disclosed in our Report on Form 10-K
for the year ended December 31, 2001. For the nine months ended
September 30, 2002, our capital expenditures were primarily related to
developing new stores and replacing store equipment. We opened 78
stores in the nine months ended September 30, 2002.

We are obligated to a group of banks under a $200 million
unsecured revolving credit agreement ("Credit Agreement").
Effective March 31, 2002, we executed an amendment to the Credit
Agreement, which modified our financial covenants to allow capital
spending on our growth initiatives. There was no funded debt
outstanding under the revolving credit agreement at September 30,
2002.

The amendment modified the applicable margin rate; the
facility fee and utilization fee remained unchanged. The applicable
margin rate was 0.725% as of September 30, 2002. The amendment
includes modifications to existing financial and operating covenants
that require, among other things, the maintenance of certain
financial ratios. In addition, the amendment adds a new financial
covenant of senior indebtedness to earnings before interest, income
taxes, depreciation, amortization and the interest component of rent
expense on certain lease facilities.

VCOM

Vcom is our proprietary kiosk solution to meet consumer
demands for convenient and continuously available financial and
e-commerce services. We believe that the deployment of these
web-enabled, integrated services kiosks represents a significant
market opportunity to offer financial and e-commerce services to a
large segment of our current and future customers who have little or
no access to banks or the Internet. We believe that we are uniquely
positioned to capitalize on this opportunity because of the
demographics of our existing customer base and the large number of
our conveniently located stores. Through exclusive agreements with
third party service providers, we currently offer or plan to offer
ATM services (American Express Co.), money order and money transfer
services (Western Union Financial Services, Inc.), check cashing
services (Certegy Inc.), telecommunications services (Verizon Select
Services, Inc.) and e-shopping (Cyphermint, Inc.).

21

In the third quarter of 2002, we announced and began
implementation of plans to expand Vcom to 1,000 stores following the
conclusion of our Vcom pilot in Texas and Florida. Our estimated
capital investment for the additional kiosks will be approximately
$55 million and will be funded by a capital lease program. In
addition, we estimate that we will need approximately $110 million
to fund the amount of cash in the kiosks necessary for check cashing
and ATM transactions, which will initially be funded through our
commercial paper program.

We estimate cumulative pretax losses of up to $20 million
during the 2002 and 2003 roll out period. Our assumptions are based
on proceeding with the 3,500 unit rollout and third party funding
for the Vcom equipment and cash balance requirements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

DISTRIBUTION SERVICES. On July 10, 2002, we signed a 40-
month service agreement with McLane, under which McLane will be our
primary distributor of traditional grocery products to our U.S.
stores and designated combined distribution centers in the United
States. The new agreement became effective in September 2002. We
believe the terms of the distribution services agreement are more
favorable than those set forth in our previous agreement with
McLane.

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities for the nine months
ended September 30, 2002, was $382.7 million compared to $275.1
million for the nine months ended September 30, 2001. We attribute
this increase to changes in balance sheet items, primarily due to
the timing of working capital items such as the funding for money
orders, receipt of vendor promotional allowances and the payment of
merchandise and gasoline payables and other liabilities.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in investing activities for the nine months
ended September 30, 2002, was $331.9 million, an increase of $105.9
million, or 46.9%, from $226.0 million for the nine months ended
September 30, 2001. The primary driver of the increase was a $71.8
million increase in capital expenditures to $303.5 million for the
nine months ended September 30, 2002, from $231.7 million for the
same period in 2001, primarily as a result of our strategic growth
initiatives. In addition, restricted cash in connection with our
yen loans increased $26.8 million during the nine months ended
September 30, 2002, compared to the same period in 2001.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash used in financing activities was $66.2 million for
the nine months ended September 30, 2002, compared to net cash
provided by financing activities of $42.1 million for the nine
months ended September 30, 2001. Net payments under commercial
paper and revolving credit facilities for the nine months ended
September 30, 2002, totaled $19.3 million compared to net proceeds
of $16.0 million for the same period in 2001. Long-term debt
repayments of $27.7 million for the nine months ended September 30,
2002, consist of payments of scheduled debt maturities compared to
$61.4 million for the same period in 2001. The decrease in
scheduled debt payments is due to our repayment of the 1988 yen loan
in August 2001.

22

OTHER ISSUES

EXPANSION IN CHINA

There are currently approximately 450 7-Eleven stores in Hong
Kong and approximately 100 7-Eleven stores in the south China
province of Guandong operated by subsidiaries of Dairy Farm
International Ltd. pursuant to a licensing arrangement. During the
third quarter of 2001, we announced plans to explore additional
licensing arrangements to expand the development and operation of 7-
Eleven stores in additional provinces of China.

We have evaluated the possibility of entering into a
licensing arrangement for at least one additional market area in
China with a joint venture formed by Seven-Eleven Japan, President
Chain Store Corporation and the two Chinese participants referenced
below. President Chain Store Corporation is our current licensee in
Taiwan, where it operates approximately 3,150 7-Eleven stores, and
Seven-Eleven Japan is our current licensee in Japan, where it
operates approximately 9,300 7-Eleven stores. We have focused on
the possibility of negotiating a licensing arrangement with Seven-
Eleven Japan and President Chain Store Corporation because of their
financial strength, business experience in China and proven ability
to develop and operate 7-Eleven stores.

Because we anticipate entering into a licensing arrangement
with Seven-Eleven Japan, which together with Ito-Yokado owns 72.5%
of our common stock, our Board of Directors has appointed a Special
Committee comprised of three directors, none of whom is affiliated
with Seven-Eleven Japan, Ito-Yokado or any of the proposed joint
venture partners, to review and consider the proposed licensing
arrangement for approval. (See note 9 to our Condensed Consolidated
Financial Statements for a description of a loan between one of the
Special Committee members and a financial-services subsidiary of
Seven-Eleven Japan.)

The Special Committee has met three times so far this year.
Following the Committee's evaluation of potential joint venture
partners based on criteria that the Committee has deemed important
to the joint venture's success, during the third quarter of 2002 the
Special Committee approved Seven-Eleven Japan and President Chain
Store Corporation as the foreign partners in the Chinese joint
venture, with Seven-Eleven Japan holding a controlling interest in
the venture.

Chinese law requires that one or more Chinese entities
collectively have at least a 35% ownership interest in the joint
venture. During the third quarter of 2002, the Special Committee
approved two Chinese partners to be included in the joint venture:
Beijing Shoulian Commercial Group Co. Ltd. and China National Sugar
& Alcohol Group.

The Special Committee's approval of all partners to the joint
venture is subject to the Committee's receipt and review of certain
additional documentation relating to the joint venture partners and
to the Committee's approval of the final terms of the license
agreement that will be negotiated between the Company and the joint
venture.

ENVIRONMENTAL

At September 30, 2002, our estimated undiscounted liability
for our environmental costs related to remedial action at existing
and previously operated gasoline storage sites and other operating
and non-operating properties where releases of regulated substances
have been detected was $35.6 million. We anticipate that
substantially all of the future remediation costs for detected
releases of regulated substances at remediation sites of which we
are aware, as of September 30, 2002, will be incurred within the
next five to six years. The estimated liability could change for
several reasons, including revisions to or the creation of
governmental requirements, existing remediation projects become
fully defined and cost-to-closure estimates become available and
unplanned future failures of underground gasoline storage tank
systems.

23

Under state reimbursement programs, we are eligible to be
reimbursed for a portion of remediation costs previously incurred.
At September 30, 2002, we had recorded a net receivable of $60.3
million for the estimated state reimbursements, of which $35.0
million relates to remediation costs incurred in California. In
assessing the probability of state reimbursements, we take into
consideration each state's fund balance, revenue sources, existing
claim backlog, historical payments and claim ranking systems. As a
result of these assessments, the recorded receivable amounts at
September 30, 2002, are net of allowances of $10.4 million. The
estimated future state reimbursement amounts could change as
governmental requirements and state reimbursement programs continue
to be revised or extended. Our estimated reimbursement amounts
could change materially as remediation costs are spent and as
receipts from state trust funds are recorded.

While we cannot be certain of the timing of our receipt of
state reimbursement funds, based on our experience we expect to
receive the majority of state reimbursement funds within one to six
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. One
exception to our assumption is California, where we estimate that we
will receive 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
3.6%. Thus, in addition to the allowance set forth in the preceding
paragraph, the recorded receivable amount is also net of a discount
of $9.0 million.

The estimated future remediation expenditures and related state
reimbursement amounts could change as governmental requirements and
state reimbursement programs continue to be implemented or revised.
Such revisions could have a material impact on our operations and
financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," above.

ITEM 4. CONTROLS AND PROCEDURES.

We maintain a system of controls and procedures designed to
provide reasonable assurance as to the reliability of the financial
statements and other disclosures included in this report, as well as
to safeguard assets from unauthorized use or disposition. Within 90
days prior to the filing of this report, our Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures with
the assistance and participation of other members of management.
Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it
files under the Securities Exchange Act of 1934 within the time
periods specified in the SEC's rules and forms. There have been no
significant changes in the Company's internal controls or in other
factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.

24

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no reportable suits or proceedings pending or
threatened against the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

1. * Exhibit (10) - Service Agreement Between
7-Eleven, Inc., and McLane Company, Inc.,
Effective September 21, 2002.

2. Exhibit (15) - Letter re Unaudited Interim
Financial Information. Letter of
PricewaterhouseCoopers LLP.

3. Exhibit (99)(i)(1) - Certification by Chief
Executive Officer. Required by Section 906 of
the Sarbanes-Oxley Act of 2002.

4. Exhibit (99)(i)(2) - Certification by Chief
Financial Officer. Required by Section 906 of
the Sarbanes-Oxley Act of 2002.

(b) 8-K Reports:

During the third quarter of 2002, the Company
filed no reports on Form 8-K.

- --------------------------
* Certain portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission under a
confidential treatment request pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.

25

SIGNATURES

Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.

7-ELEVEN, INC.
(Registrant)

Date: November 13, 2002 /s/ James W. Keyes
---------------------------
(Officer)
James W. Keyes
President and Chief Executive
Officer

Date: November 13, 2002 /s/ Edward W. Moneypenny
---------------------------
(Principal Financial Officer)
Edward W. Moneypenny
Senior Vice President and Chief
Financial Officer

26

CERTIFICATION
I, James W. Keyes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 7-Eleven,
Inc. (the "registrant");

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

Date: November 13, 2002 /s/ James W. Keyes
------------------------
James W. Keyes
President and Chief
Executive Officer
27

CERTIFICATION
I, Edward W. Moneypenny, certify that:

1. I have reviewed this quarterly report on Form 10-Q of
7-Eleven, Inc. (the "registrant");

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

Date: November 13, 2002 /s/ Edward W. Moneypenny
------------------------
Edward W. Moneypenny
Senior Vice President
and Chief Financial
Officer
28