-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WwAo1qQqo3uMV7Mfc9fXqzST65QzlXSeCr9okkgb+3IkWKo0fTGTcW68N0SN3wVT dOu+nPZA2biWs+ch5NrwRg== 0000092344-00-000003.txt : 20000320 0000092344-00-000003.hdr.sgml : 20000320 ACCESSION NUMBER: 0000092344-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 7 ELEVEN INC CENTRAL INDEX KEY: 0000092344 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CONVENIENCE STORES [5412] IRS NUMBER: 751085131 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16626 FILM NUMBER: 572824 BUSINESS ADDRESS: STREET 1: 2711 N HASKELL AVE CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2148287011 MAIL ADDRESS: STREET 1: 2711 NORTH HASKELL AVE CITY: DALLAS STATE: TX ZIP: 75204 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHLAND CORP DATE OF NAME CHANGE: 19920703 10-K 1 10-K ======================================================================= UNITED STATES 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, 1999 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 ---------------------- 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 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 [ ] 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 registrant's 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. [] The aggregate market value of the voting stock held by non- affiliates of the registrant was approximately $487,365,522 at March 3, 2000, based upon 139,247,292 shares held by persons other than officers, directors and 5% owners and a price of $3.50 per share. 410,112,375 shares of Common Stock, $.0001 par value (the registrant's only class of Common Stock), were outstanding as of March 3, 2000. 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 26, 2000 Annual Meeting of Shareholders: Part III, a portion of Item 10 and Items 11, 12 and 13. =======================================================================
7-ELEVEN, INC. ANNUAL REPORT ON FORM 10-K For the year ended December 31, 1999 TABLE OF CONTENTS Page Reference Form 10-K PART I Item 1. BUSINESS 1 General 1 Operating, Franchising and Licensing of Convenience Food Stores 2 Franchises and Licenses 8 Other Information about the Company 9 Environmental Matters 11 Risk Factors 12 Executive Officers of the Registrant 15 Item 2. PROPERTIES 20 Item 3. LEGAL PROCEEDINGS 23 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 25 Item 6. SELECTED FINANCIAL DATA 26 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 27 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 40 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41 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, 1999 74 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 75 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND SEE PART I, ITEM 1, ABOVE 75* Item 11. EXECUTIVE COMPENSATION 75* Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 75* Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 75* PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 76 SIGNATURES 83 - ---------------------------- *Included in Form 10-K by incorporation by reference to the Registrant's Proxy Statement, for the April 26, 2000 Annual Meeting of Shareholders. SOME OF THE MATTERS DISCUSSED IN THIS FORM 10-K CONTAIN FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S FUTURE BUSINESS PROSPECTS WHICH ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING COMPETITIVE PRESSURES, ADVERSE ECONOMIC CONDITIONS AND GOVERNMENT REGULATIONS. THESE ISSUES, AND OTHER FACTORS WHICH MAY BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS.
PART I ITEM 1. BUSINESS. GENERAL 7-Eleven, Inc., ("7-Eleven," the "Company" or "Registrant"), conducting business principally under the name 7-ELEVEN, is the largest convenience store chain in the world, with approximately 19,500 Company-operated, franchised and licensed locations worldwide, and is among the nation's largest retailers. The Company, with executive offices at 2711 North Haskell Avenue, Dallas, Texas 75204 (telephone 214/828-7011), was incorporated in Texas in 1961 as the successor to an ice business organized in 1927. On April 30, 1999, the Company changed its name to 7-Eleven, Inc. from The Southland Corporation. Unless the context otherwise requires, the terms "Company," "7-Eleven" and "Registrant" as used herein include 7-Eleven and its subsidiaries and predecessors. In 1999, the Company's operations (for financial reporting purposes) were conducted in one operating segment -- the Operating, Franchising and Licensing of Convenience Food Stores, primarily under the 7-ELEVEN name. HIGHLIGHTS: The 7-ELEVEN trademark has been registered since 1961 and is well known throughout the United States and in many other parts of the world. The Company believes that 7-ELEVEN is the leading name in the convenience store industry. During 1999, the Company focused on the continued development of a point-of-sale automated retail information system and, by year-end, the system had been installed in all stores in the U.S. In addition, the Company opened 165 stores during 1999 and continued to seek new sites for development. The Company closed 88 stores in 1999. The Company added some highly successful new products in 1999 (such as 7-ELEVEN FRUT COOLER and 7-ELEVEN BAKERY STIX, as well as new flavors of both 7-ELEVEN CAFE COOLER and the ever-popular SLURPEE drink), and provided an expanded assortment of personal telecommunications products and seasonal and novelty merchandise in the stores. The Company has also continued to expand its programs to provide daily delivery of fresh foods to the stores. By year-end, approximately 3,700 stores were receiving daily delivery of fresh foods, which is an increase of over 500 stores during the year. At December 31, 1999, the Company's operations included 5,665 7- ELEVEN convenience stores in the United States and Canada, and 38 other retail locations, including Christy's Markets, a HIGH'S Dairy Store, and Quik Marts. The Company also has an equity interest in 270 convenience stores in Mexico. Area licensees, including Seven-Eleven Japan Co., Ltd. ("Seven-Eleven Japan"), or their franchisees, operate additional 7-ELEVEN stores in certain areas of the United States, in 15 foreign countries and the U.S. territories of Guam and Puerto Rico. During 1999, the Company continued to focus on the implementation of its business strategy, by emphasizing to each store operator the importance of meeting the needs of each store's customers with an ever- changing broad selection of the quality products and services that they 1 want. The introduction of new products which are "first, best or available only" at 7-ELEVEN continued to be an important part of the Company's merchandising strategy. In addition, the Company emphasized (1) quality and freshness (fresh products with high quality ingredients); (2) selection/availability (being in-stock on the fastest selling items and continually introducing new items, with merchandise placed in the best possible location); (3) fast, friendly service (provide a pleasant and speedy shopping experience); (4) cleanliness (exceeding health code requirements, a clean store at all times); and (5) value (merchandise priced fairly with price tags or cards that are easy for customers to see). BACKGROUND. In 1987, the Company was financially restructured through a leveraged buyout (the "LBO") and in October 1990, filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. On February 21, 1991, the U.S. Bankruptcy Court for the Northern District of Texas issued an order (the "Confirmation Order") confirming the Company's Plan of Reorganization (the "Plan") and on March 4, 1991, the Confirmation Order became final and non-appealable. The Plan provided for holders of the Company's then outstanding debt and equity securities (the "Old Securities") to receive new debt securities, common stock and, in certain cases, cash, in exchange for their Old Securities and, pursuant to a Stock Purchase Agreement, for IYG Holding Company ("IYG"), which is jointly owned by Ito-Yokado Co., Ltd. ("Ito- Yokado") and Seven-Eleven Japan Co., Ltd. ("Seven-Eleven Japan"), both Japanese corporations, to acquire approximately 70% of the Company's outstanding shares for $430 million in cash. Seven-Eleven Japan is the Company's largest area licensee, operating over 8,000 7-ELEVEN stores in Japan and, through its wholly-owned subsidiary Seven-Eleven (Hawaii), Inc., 50 7-ELEVEN stores in Hawaii. CURRENT RECAPITALIZATION PLANS. On March 16, 2000, IYG acquired an additional 113,684,211 newly issued shares of common stock for $540 million at $4.75 per share. The Company will use these funds to reduce debt and to be better positioned to accelerate new store growth and facilitate its e-commerce strategy. In addition, the Company is proposing that shareholders approve, at the April 26, 2000 Annual Meeting, an amendment to the Company's Articles of Incorporation to effect a reverse stock split of the Company's Common Stock. OPERATING, FRANCHISING AND LICENSING OF CONVENIENCE FOOD STORES 7-ELEVEN STORES. On December 31, 1999, the Company's operations included 5,703 stores in the United States and Canada, operated principally under the name 7-ELEVEN. An additional 444 stores in the United States are operated by area licensees. These stores are located in 31 states, the District of Columbia, and five provinces of Canada. During 1999, the Company opened 165 new convenience stores, 23 of which were rebuilds or relocations of existing stores and 142 of which were new locations. In addition, 88 convenience stores were closed during the year (including relocations and rebuilds), mostly due to changing market patterns, lease expirations and the closing of selected stores that were not profitable. The Company's convenience stores are extended-hour retail stores, emphasizing convenience to the customer and providing beverages, candy, fresh take-out foods, groceries, tobacco items, self-serve gasoline (provided at almost 2,300 stores in the U.S. and Canada), dairy products, non-food merchandise, specialty items, certain financial services, lottery tickets, and incidental services. Generally, the Company's stores are open every day of the year and are located in neighborhood areas, on main thoroughfares, in shopping centers, or on other sites where they are easily accessible and have ample parking facilities for quick in-and-out shopping. New store development has 2 focused on corner sites, near large shopping centers, with easy access and higher visibility. Stores are generally from 2,400 to 3,000 square feet in size and carry 2,300 to 2,800 items. The vast majority of the stores operate 24 hours a day. The stores attract early and late shoppers, lunch-time customers, weekend and holiday shoppers and customers who may need only a few items at any one time and desire rapid service. The Company's sales are affected by seasonality and weather, because many of the Company's traditional products attract more shoppers during warm and dry weather and during the longer daylight hours of the summer months, when leisure-time activities are more prevalent. The Company has introduced new products in 1999 to build sales in the weaker winter months. Substantially all convenience store sales are for cash (including sales for which checks are accepted), although major credit cards, along with the "Citgo Plus" credit card, are accepted in most markets for purchases of both merchandise and gasoline. Credit card sales currently account for approximately 11.8% of sales, including gasoline. This percentage has increased over the past few years with the installation of additional "Pay-At-The-Pump" equipment which has positively affected the volume of credit card purchases of gasoline. UPDATING THE STORE FIXTURES AND EQUIPMENT. Over the past several years, the Company completed a major remodel and updating of its stores. In 1999, most of the updates were to (a) install new cigarette merchandisers; (b) add equipment for the introduction of 7-ELEVEN FRUT COOLER; (c) provide more roller grill space for the new 7-ELEVEN BAKERY STIX products and (d) to test the installation of new 54" high shelving that is more flexible to changing merchandising needs. MERCHANDISING. Each store's merchandise includes a selection of core items which is supplemented by those optional items that are selected by the individual store operators to meet their customers' local needs and preferences. There is continuing focus on the need to delete slow- moving or "dead" merchandise and to constantly update the stores' selection of products by adding new items to the mix. Merchandising strategy includes aggressively searching for new products that can initially be offered exclusively at 7-ELEVEN, thus attracting customers because they have to come to 7-ELEVEN if they want that new item. New products are crucial to the growth of 7-ELEVEN because customer demands constantly change and 7-ELEVEN's products and services are constantly being adjusted to serve those needs. The use of third-party owned and operated commissaries and bakeries that manufacture food products to 7-ELEVEN's specifications, and combined distribution centers ("CDC's") that allow for daily delivery of the fresh or perishable merchandise (see "Distribution," below) continued to be a cornerstone of the Company's merchandising efforts. NEW PRODUCTS. New product introductions, most notably 7-ELEVEN FRUT COOLER 7-ELEVEN BAKERY STIX, telecommunications products, re-formulated Breakfast Sandwiches and Super Subs, as well as innovative packaging for SLURPEE, a supply of popular Pokemon trading cards, nutritional bars, and new soft drinks and juices, led the stores' new product focus during the year. Much of the improvement in merchandise sales can be attributed to the aggressive introduction of new products at 7-ELEVEN. 3 FRESH FOODS AND FOOD PRODUCTS. During 1999, the Company continued to focus on its fresh food products, utilizing daily deliveries from local commissaries and bakeries, owned and operated by companies with expertise in foodservice. These companies prepare food to 7-ELEVEN specifications exclusively for the stores and deliver the product in the exact quantities ordered by the stores through the CDC program (see "Distribution, Fresh Products," below). The Company developed new, more attractive, packaging for sandwiches, tested new breads and condiments, and introduced the reformulated items and new WORLD OVENS offerings during the year. In an effort to maximize utilization of the grill, which formerly was used only for hot dogs and Big Bites, the Company introduced 7- ELEVEN BAKERY STIX, a stick-shaped pastry filled with cheese and sausage, ham or pepperoni. Breakfast Bakery Stix, filled with eggs, cheese and meat, were introduced later in the year, just as the weather turned cooler and the morning drive-time coffee business in the stores was heating up. In addition, the Company promoted its line of breakfast sandwiches during the year. These are proprietary products that compete with the products available at many quick-serve restaurants. By the end of 1999, with additional facilities opened in Phoenix, Las Vegas and Salt Lake City, there were 11 DELI CENTRAL commissary facilities and 11 WORLD OVENS bakeries able to serve large concentrations of stores by providing fresh-made foods including sandwiches, salads and desserts. Approximately 3,500 U.S. stores were served by these facilities by the end of 1999 with more additions planned for 2000. Six commissary facilities operate in Canada, providing fresh foods to 234 stores in Canada, seven days a week. BEVERAGES. The Company introduced new flavors of 7-ELEVEN CAFE COOLER, a frozen cappuccino-type product, which kept this item "new" during the year. The most noteworthy new beverage product in 1999 was 7-ELEVEN FRUT COOLER, a frozen smoothie-like beverage, which was introduced in both orange and strawberry flavors, and has been described as "fruit with a straw." New flavors of both these popular items can be easily introduced. The Company continued to expand its focus on introducing a selection of premium domestic and imported wines, which are being attractively merchandised in specially designed wine display racks, along with product identifiers to help customers make their selections. During 1999, the Company introduced a French chardonnay and a sparkling wine, both proprietary to 7-ELEVEN and imported only to 7-ELEVEN stores. The premium wine program proved very popular during the November and December holiday periods. The Company also continued to build and promote its SLURPEE brand by continuing to introduce and market new packaging. A new 44 oz. SLURPEE STRATA Cup and SLURPEE SPLITZ-O (a two-chamber container to keep the flavors separate) were introduced and promoted. The Company also focused on its fountain soft drink program by adding new items to those available (most notably Pepsi One and Gatorade). In addition, the Company continued to use fountain drinks for promotional opportunities with new cups or special offers with the purchase of other products. 4 In the hot beverage area, as a complement to promoting its ever- popular 7-ELEVEN Exclusive Blend coffee, the Company continued to emphasize its own proprietary regular and decaffeinated CAFE SELECT line of gourmet-flavored coffees and coffee roasts, hot chocolates and cappuccinos, and focused on its special French Roast blend. SNACKS. Ice cream and other frozen novelty treats were displayed in easy-access, two-sided novelty cases, that used new point-of-purchase signs to highlight various products and to provide price information. New varieties - both brands and flavors - of ice cream were also added to the stores' frozen foods section. The candy category was favorably impacted by the tremendous popularity of Pokemon-branded items, including trading cards, which were introduced as new items throughout the year. The Company also introduced other trading cards, and continued its program of offering cards featuring Major League Baseball players, which favorably impacted this category. Nutritional snacks, such as Power Bars and protein bars, began to show great popularity. As a result, the Company has expanded the selection available and provided stores with information to assist with merchandising the category properly. NON-FOOD ITEMS. The Company has continued to aggressively market its prepaid long distance phone cards and international phone cards, adding both prepaid cellular phone service and pagers to its product mix. A cellular phone package is also offered. The Company continues to have the largest ATM network of any retailer, with over 5,000 ATMs in U.S. stores and an additional 480 in Canada. In addition, the Company's ongoing test of an integrated, self-service, automated financial services center in 37 stores in Austin, will now be expanded to 200 stores in the Dallas/Fort Worth area as the Company's new V.com (TM) equipment is rolled out. This equipment allows customers to cash checks, send money transfers, pay bills and make ATM transactions. It also sells money orders and phone cards and will accept cash or bank cards for purchases. Customers use simple, menu-driven touch-screens, featuring instructions in English or Spanish, to perform their transactions. Those who need personal attention or have questions are able to speak with a bilingual customer service representative. The Company continues to be one of the nation's leading retailers of money orders. The new machine is web- enabled to allow for future development of on-line shopping and event ticketing capabilities and will be used to implement the Company's new e-commerce strategy. The Company's seasonal merchandising strategy put a major focus on the key holidays. New Feature Fixture racks, which are moveable and provide versatility for the stores to merchandise high potential seasonal products, have provided additional flexibility for this category. Novelty gift merchandise was featured, and the Company continued to encourage store operators to stock appropriate holiday items for last-minute shoppers, as well as to provide products for impulse shoppers. The Company responded to the explosive growth in demand for one-time use cameras with SNAPPIX, its proprietary brand for a 35mm, 27-exposure flash camera and 200- and 400-speeds of 35mm film. The 7-ELEVEN collectible truck series was repeated again during the 1999 holiday season. TOBACCO PRODUCTS. During 1999, the tobacco category continued to be impacted by changes in the way manufacturers are pricing and marketing tobacco. The Company installed new "back counter" merchandising display and storage racks, which comply with all current local, state, and federal regulations relating to the sale of cigarettes and other tobacco products, as well as with any anticipated future restrictions. At the same time, it greatly improves the total category presentation to adult 5 smoker customers. The Company anticipates there will be ever- increasing restrictions and regulations relating to the display and sale of tobacco products. During the year, the Company offered several multi-pack sales promotions, which provided additional interest in this category. GASOLINE. During 1999 the Company added 134 gasoline stores in the U.S. and 9 in Canada so that, by year-end, gasoline was offered at approximately 2,300 stores. New stores tend to have higher sales volume, primarily as a result of a greater number of pumps, easier access to the pumps, faster equipment and "Pay-at-the-Pump" options. The Company has remodeled its gasoline locations over the last five years to meet the new EPA standards that became effective last year. The Company added Pay-at-the-Pump equipment at 215 existing stores. Over 1,400 stores are now equipped to accept credit cards for the purchase of gasoline at the pump, which makes gasoline shopping at 7- ELEVEN stores even more convenient for the credit customer. The Company closed 27 gas locations in the U.S. and 5 in Canada during 1999. The Company monitors gasoline sales daily to maintain a steady supply of petroleum products to the Company's 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 the Company's stores that sell gasoline offer CITGO-branded gasoline. The Company has a long-term product purchase agreement with CITGO Petroleum Corporation ("Citgo") under which 7-ELEVEN purchases substantially all its U.S. gasoline requirements from Citgo at market- related prices through the year 2006. Holders of the "Citgo Plus" credit card can use the card to finance purchases of gasoline, as well as other merchandise, at 7- ELEVEN stores. At year-end, there were approximately 1.4 million active "Citgo Plus" credit card accounts. DISTRIBUTION. FRESH PRODUCTS. By the end of 1999, approximately 3,700 stores in various parts of the U.S. and in Alberta, Canada were receiving daily deliveries from 20 combined distribution centers ("CDCs"). The CDC concept "combines" products from multiple suppliers, for daily distribution to the stores by a third party operator of the CDC. In so doing, 7-ELEVEN reduces the number of deliveries that a store must accept throughout the day, freeing up time for its store operators to accomplish other tasks, and also keeping more of the limited parking lot space available for customer use. Additionally, store operators are provided extensive CDC management reports, which allow them to make better informed ordering and other business decisions. In 2000, the Company plans to add an additional 800 stores to those that receive CDC delivery. There are 20 CDCs strategically located throughout North America, which deliver products such as 7-ELEVEN's proprietary lines of DELI CENTRAL fresh foods, WORLD OVENS fresh bakery products and 7-ELEVEN CAFE COOLER and 7-ELEVEN FRUT COOLER, 7-ELEVEN's proprietary frozen beverages. CDCs also provide dairy products, juices, eggs, bread, packaged bakery, produce, fresh cut flowers, snack foods and other perishable items, as well as magazines, to 7-ELEVEN stores every day of the year. This has meant that the Company can keep the freshest milk, bread and eggs available, which, when combined with the fair pricing strategy, has attracted an entirely new type of shopper to the stores. 6 WAREHOUSE PRODUCTS. The Company continued to utilize the distribution services of McLane Company, Inc. ("McLane"), pursuant to a ten-year contract entered into in 1992, for delivery of warehouse products to all of the Company's corporate stores and those franchised stores that utilize McLane for distribution services. McLane serves 7-ELEVEN using two former 7-ELEVEN distribution centers and nine additional distribution centers throughout the country. SUPPLY AGREEMENTS. In connection with the sale of the Company's Reddy Ice and Dairies Group divisions, both in 1988, the Company entered into long-term contracts to purchase the products historically supplied to the Company's stores by such divested operations. Although both contracts have expired, the Company has continued to buy from those vendors. RETAIL INFORMATION SYSTEM. In 1994, the Company began development of its own proprietary retail information system, which is being implemented in phases, over a multi-year period. The system 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. The rollout of the Phase 2 System, which included new POS registers and ordering, merchandising and distribution support, was completed in 1999, with all stores live by year end. The system currently provides store operators with cash and gasoline reports and also assists with payroll functions. The system also establishes a central item master and order book as well as scanning ability to provide item level merchandise sales information and gas pump interface with credit card and CRIND support. The utilization of the ordering system continues to be rolled out in 2000, which provides both hand-held terminals and ISP screens to assist in the daily ordering process. The ordering components also incorporate information such as weather and merchandising messages to aid in the decision making. Numerous enhancements were made to the system at the end of 1999, many of which were related to ordering. Planned 2000 enhancements relate to additional ordering improvements, improved inventory control information, debit card processing ability, integration of money orders into POS functions and a 7-Eleven store homepage via the intranet. The store-level intranet will allow multimedia based training as well as on-line access to all 7-Eleven forms, the merchandise information packet and other video-based training modules. The rollout of the retail information system to Canada is planned for 2001. PRODUCT CATEGORIES. The Company does not record product sales on the basis of product categories. However, based upon the total dollar volume of store product purchases, management estimates that the percentages of its 7-ELEVEN convenience store merchandise sales in the United States and Canada by principal categories for the last three years were as follows: 7
Product Categories Years Ended December 31 ----------------------- 1999 1998 1997 ---- ---- ---- Tobacco Products 25.8% 23.7% 22.5% Beverages 22.9% 23.7% 23.2% Beer/Wine 10.8% 11.3% 11.8% Candy/Snacks 9.4% 9.5% 9.8% Non-Foods 9.2% 8.8% 9.2% Food Service 5.9% 6.0% 5.9% Dairy Products 5.0% 5.3% 5.6% Other 4.2% 4.6% 4.9% Baked Goods 3.9% 4.2% 4.4% ----- ----- ------ Total Product Sales 97.1% 97.1% 97.3% Services 2.9% 2.9% 2.7% ----- ----- ----- Total Merchandise Sales 100.0% 100.0% 100.0% ===== ===== =====
In addition, gasoline sales accounted for 24.7%, 23.2% and 25.7% in 1999, 1998, and 1997, respectively, of the Company's total sales in the U.S. and Canada. FRANCHISES AND LICENSES FRANCHISEES. At December 31, 1999, 3,008 7-ELEVEN stores were operated by independent franchisees under the Company's franchise program for individual 7-ELEVEN stores. Sales by stores operated by franchisees (which are included in the Company's net sales) were approximately $3.4 billion for the year ended December 31, 1999. In its franchise program for individual 7-ELEVEN stores, the Company selects qualified applicants and trains the individuals who will participate personally in operating the store. The franchisee pays the Company an initial fee, which varies by store, and is generally calculated based upon gross profit experience for the store or market area, to cover certain costs relating to the franchising of the store, and may provide a profit. Under the standard form of franchise agreement, the Company leases or subleases, to the franchisee, a ready-to-operate 7-ELEVEN store that has been fully equipped and stocked. The Company bears the costs of acquiring the land, building and equipment, as well as most utility costs and property taxes. The standard franchise agreement has an initial term of 10 years. The franchisee pays for all business licenses and permits, as well as all in-store selling expenses. The Company finances a portion of these costs, as well as the ongoing operating expenses and purchases of inventory. Under the standard agreements that are currently in effect, the Company receives a share in the gross profit of the store (ranging from 50% to 58%) depending on certain variables related to the individual store. This is called the "7-ELEVEN Charge." Beginning in fiscal year 1999, the franchise gross profit split is now being reported as a separate line item in the Company's financial statements. The franchise may be terminated by the franchisee at any time, or by the Company only for the causes, and upon such notices, as are specified in the franchise agreement and as provided by applicable law. The Company continues to encourage existing successful franchisees to franchise multiple locations. This provides growth opportunities for current franchisees within the 7-ELEVEN system by encouraging them to pursue additional stores and may result in increased income for the franchisee, partly by creating opportunities for lower per unit operating expenses for the franchisee and the Company. 8 AREA LICENSEES. As of December 31, 1999, the Company had granted domestic area licenses to six companies which were operating 444 convenience stores using the 7-ELEVEN system and name in certain areas of Hawaii, Indiana (using the name SUPER-7 in Indianapolis), Maryland, Michigan, New Mexico, Ohio, Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Although parts of Kentucky, Nevada and Virginia are also covered by area licenses, there are no stores currently operated under the area licenses in those states. As of the end of 1999, foreign area license agreements covered the operation of 8,027 7-ELEVEN stores in Japan, 2,247 in Taiwan, 1,324 in Thailand, 430 in China (380 of which are in Hong Kong), 193 in Australia, 252 in South Korea, 144 in Malaysia, 154 in the Philippines, 109 in Singapore, 47 in Sweden, 49 in Norway, 30 in Denmark, 20 in Spain, 14 in Puerto Rico, 9 in Guam and 12 in Turkey. The Company has an equity interest in the Puerto Rican area licensee. Stores operating under area licenses are not included in the number of Company operating units, and their sales are not included in the Company's revenue. Revenues from initial fees paid for area licenses and continuing royalties based on the sales volume of the stores are included in Other Income. INTERNATIONAL AFFILIATES. The Company also has an equity interest in 264 convenience stores in Mexico operated by 7-ELEVEN Mexico. There are six additional stores in Mexico operated under a sublicense. The 7-ELEVEN stores in Mexico feature merchandise and services essentially the same as 7-ELEVEN stores in the U.S. Sales from the stores in Mexico are not included in 7-ELEVEN's revenues, but 7-ELEVEN's equity in their operating results is included in Other Income and has not been material. OTHER RETAIL. As of December 31, 1999, the Company operated 27 Christy's Markets, which are going to be converted to 7-ELEVENs in the future, six Quik Mart high-volume gasoline outlets combined with a mini-convenience store ranging in size from 300 to 1,600 square feet of sales space stocked primarily with snack food, candy, cold drinks and other immediately consumable items, three other CITGO-branded high- volume, multi-pump, self-service gasoline-dispensing locations, one HIGH'S Dairy Store located in Virginia, which is similar in size and location to a 7-ELEVEN store and one other retail location in Illinois. OTHER INFORMATION ABOUT THE COMPANY MAJORITY OWNER. IYG Holding Company, a Delaware corporation ("IYG"), is a jointly owned subsidiary of Ito-Yokado and Seven-Eleven Japan, formed for the specific purpose of purchasing the Common Stock of the Company. Ito-Yokado owns 51% and Seven-Eleven Japan owns 49%, respectively, of IYG. See "Current Recapitalization Plans", above. ITO-YOKADO. Ito-Yokado is among the largest retailing companies in Japan. Its principal business consists of the operation of approximately 150 superstores that sell a broad range of food, clothing and household goods. In addition, its activities include operating two 9 restaurant chains doing business under the names "Denny's" and "Famil" and a chain of supermarkets. All of Ito-Yokado's operations are located in Japan except for some limited overseas purchasing activities and two stores in China. Ito-Yokado guarantees the Company's $650 million commercial paper facility. In addition, in 1995, Ito-Yokado purchased $153 million of 4.5% Convertible Quarterly Income Debt Securities due 2010 issued by the Company and, in February, 1998, purchased $40.8 million of 4.5% Convertible Quarterly Income Debt Securities due 2013 issued by the Company. SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is a 50.3%-owned subsidiary of Ito-Yokado. Seven-Eleven Japan is the largest area licensee of the Company with approximately 8,027 7-ELEVEN stores in Japan. In addition, Seven-Eleven Japan owns Seven-Eleven (Hawaii), Inc., which, as of year-end 1999, operated an additional 50 7-ELEVEN stores in Hawaii under a separate area license agreement covering that state. In November 1995, Seven-Eleven Japan purchased $147 million of 4.5% Convertible Quarterly Income Debt Securities due 2010 issued by the Company and, in February 1998, purchased $39.2 million of 4.5% Convertible Quarterly Income Debt Securities due 2013, issued by the Company. RESEARCH AND DEVELOPMENT. The Company conducted extensive testing in 1999 of new recipes, products, packaging and imaging of the fresh food case in connection with the development and merchandising of new or reformulated fresh food products. The Company's test kitchen was involved in taste tests and testing of equipment used for cooking and displaying food products, including quality assurance testing. TRADEMARKS. The Company's 7-ELEVEN trademark has been registered since 1961 and is well known throughout the United States and in many other parts of the world. Other trademarks and service marks owned by the Company include SUPER-7, SLURPEE, BIG GULP, BIG BITE, DELI CENTRAL, WORLD OVENS and QUALITY CLASSIC SELECTION, as well as many additional trade names, marks and slogans relating to other individual types of foods, beverages and other items and 7-ELEVEN FRUT COOLER as well as 7-ELEVEN BAKERY STIX and V.com. ADVERTISING. In 1999, the Company continued its radio and television advertising with the "7-Eleven Angel", which focused on the introduction of 7-ELEVEN FRUT COOLER and 7-ELEVEN BAKERY STIX. Radio advertising was also used to highlight specific products, including 7- ELEVEN's exclusive blend coffee, especially highlighting the rich French roast coffee, new breakfast sandwiches, the new SLURPEE SPLITZ- O cup, as well as the FSD Star Wars cups and 7-ELEVEN FRUT COOLER , 7- ELEVEN CAFE COOLER, and 7-ELEVEN BAKERY STIX. The Company also used outdoor billboard advertising in select markets. COMPETITION. During the past few years the Company, like other traditional convenience retailers, has experienced increased competitive pressures from supermarkets and drug stores offering extended hours and services, as well as from an increasing number of convenience-type stores built by the oil companies. While many retailers are also facing increased competition from the Internet, the Company does not currently think that its traditional sales categories will be impacted by the availability of merchandise over the Internet, but the Company is developing an e-commerce strategy to provide ways for the stores to participate in the expanding variety of internet driven merchandising opportunities. 10 While it is difficult to determine the exact number of competitive c-store type outlets in the U.S., the Company estimates, based on industry surveys, that approximately 120,000 c-stores (including gasoline retailers that carry at least 500 sku's) are in operation in the U.S. It is widely recognized that 7-ELEVEN is the most prominent name in the convenience retailing industry. However, the Company's convenience retailing operations represent only a very small percentage of the highly competitive food retailing industry. Independent industry sources estimate that in the United States annual sales in 1998 (the most recent data available) for the convenience store industry were approximately $164 billion (including $88.9 billion of gasoline). The Company's stores compete with a number of national, regional, local and independent retailers, including grocery and supermarket chains, grocery wholesalers and buying clubs, other convenience store chains, oil company gasoline/mini-convenience "g-stores," independent food stores, and fast food chains as well as variety, drug and candy stores. In sales of gasoline, the Company's stores compete with other food stores and service stations and generate only a very small percentage of the gasoline sales in the United States. Each store's ability to compete is dependent 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 competitive pressures for the Company. EMPLOYEES. At December 31, 1999, the Company had 33,687 employees, of whom approximately 28% percent were considered to be either temporary or part-time employees. None of the Company's employees in the U.S. were subject to collective bargaining agreements at year-end. Approximately 60 nonsupervisory employees in Canada, in five separate stores in British Columbia, have had the United Food and Commercial Workers Union ("UFCW") certified as their agent for collective bargaining. The Company has entered into an agreement regarding these five stores. ENVIRONMENTAL MATTERS. GENERAL. The operations of the Company are subject to various federal, state and local laws and regulations relating to the environment. Certain of the more significant federal laws are 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 implementation of these laws by the United States Environmental Protection Agency ("EPA") and the states will continue to affect the Company's operations by imposing increased operating and maintenance costs and capital expenditures required for compliance. Additionally, the procedural provisions of these laws can result in increased lead times and costs for new facilities. Violation of any federal environmental statutes or regulations or orders issued thereunder, as well as relevant state and local laws and regulations, 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, Environmental" beginning on page 38, below. 11 RISK FACTORS RISKS PARTICULAR TO OUR INDEBTEDNESS. OUR DEBT LEVELS MAY LIMIT OUR FUTURE FLEXIBILITY IN OBTAINING ADDITIONAL FINANCING AND IN PURSUING BUSINESS OPPORTUNITIES. As of December 31, 1999, we had outstanding indebtedness of $2.045 billion, including $362.5 million under our senior bank facilities and $287.2 million of our 5% First Priority Senior Subordinated Debentures due 2003, $133.9 million of our 4.5% Second Priority Senior Subordinated Debentures (Series A) due 2004, $21.8 million of our 4% Second Priority Senior Subordinated Debentures (Series B) due 2004 and $634.4 million of commercial paper outstanding. In addition, there are $380 million aggregate amount of 4.5% QUIDS outstanding, owned by Ito-Yokado and Seven-Eleven Japan. (The Company's indebtedness, other than the bank indebtedness, shall be collectively referred to as the "Debt Securities.") On March 16, 2000 the Company received $540 million which was used to repay the outstanding balance of $112.5 million on the Company's bank term loan and will be used to reduce the Company's revolving credit facility by approximately $250 million and commercial paper facility by $177 million. (See Note 2 to the Consolidated Financial Statements.) Our high degree of leverage could have important consequences to the holders of our common stock, including but not limited to the following: * our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired in the future; * certain of our borrowings are at variable rates of interest, including borrowings under the senior bank facilities, which expose us to the risk of increased interest rates; and * 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. Our ability to make scheduled payments or to refinance our obligations with respect to our indebtedness will depend on our financial and operating performance, which in turn will be subject to prevailing economic conditions and to certain financial, business and other factors beyond our control. 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. We cannot assure you that our operating results, cash flow and capital resources will be sufficient for payment of our indebtedness in the future. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations, and we cannot assure you as to the timing of these sales or the proceeds that we could realize therefrom. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources," for more information. 12 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 Debt Securities 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. These restrictive covenants may restrict our ability to implement our growth strategy, respond to changes in industry conditions, secure additional financing, engage in acquisitions and develop new locations and other expansion of our operations. In addition, we are required to comply with specific financial ratios and satisfy certain financial conditions. Any breach of these covenants could cause a default under our debt obligations and result in our debt becoming immediately due and payable which would adversely affect our business, financial condition and results of operations. RISKS PARTICULAR TO OUR OPERATIONS. CHANGES IN GASOLINE SUPPLY, PRICES AND DEMAND AFFECT OUR BUSINESS. Gasoline sales comprise a substantial portion of our revenues. Therefore, interruptions in the supply of gasoline and increases in the cost of gasoline could adversely affect our business, financial condition or results of operations. Gasoline profit margins have a significant impact on our earnings because gasoline revenue has averaged approximately 25% of our revenues during the last three-year period. Although we have a long-term product purchase and a product supply agreement with CITGO Petroleum Corporation ("Citgo"), the following factors are beyond our control and affect the volume of gasoline we sell and the gasoline profit margins we achieve: * the worldwide supply and demand for gasoline; * any volatility in the wholesale gasoline market; and * the pricing policies of competitors in local markets. In addition, because gasoline sales generate customer traffic to our stores, decreases in gasoline sales could impact merchandise sales. CHANGES IN TOBACCO LEGISLATION, PRICING AND DEMAND AFFECT OUR BUSINESS. Future tobacco legislation and increased pricing by cigarette manufacturers could have an impact on sales and margins in the tobacco category. If we are unable to pass along price increases of tobacco products to our customers, our business, financial condition or results of operations could be adversely affected because tobacco sales comprise an important part of our revenues. Based on purchases, the Company estimates that sales of tobacco products have averaged approximately 24% of our merchandise revenue over the past three fiscal years. National and local campaigns to discourage smoking, as well as increases in taxes on cigarettes and other tobacco products, may have a material impact on our sales of tobacco products. The consumer price index for 1999 on tobacco products increased approximately 9%. In addition, major cigarette manufacturers have increased the wholesale prices and then offered rebates to offset the price increases. We cannot assure you that major cigarette manufacturers will continue to offer these rebates or that any resulting increase in prices to our customers will not have a material adverse effect on our cigarette sales and gross profit dollars. A reduction in the amount of cigarettes sold by us could adversely affect our business, financial condition and results of operations. 13 INDUSTRY RISKS THE CONVENIENCE STORE AND RETAIL GASOLINE INDUSTRIES ARE HIGHLY COMPETITIVE. We compete with numerous other convenience stores and supermarkets. In addition, our stores offering self-service gasoline compete with gasoline service stations and, more recently, supermarkets. Our stores also compete to some extent with supermarket chains, drug stores, fast food operations and other similar retail outlets. Major competitive factors include, among others, location, ease of access, gasoline brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. In addition, inflation, increased labor and benefit costs and the lack of availability of experienced management and hourly employees may adversely affect the profitability of the convenience store industry. In addition, changes in the minimum wage can impact both the availability of labor and the competitive cost of doing business. Any or all of these factors could create heavy competitive pressures and have an adverse effect on our business, financial condition or results of operations. OUR BUSINESS IS SEASONAL. Unfavorable weather conditions in the spring and summer months could adversely affect our business, financial condition or results of operations. During the spring and summer vacation season, customers are more likely to purchase higher profit margin items at our stores, such as fast foods, fountain drinks and other beverages, and more gasoline at our gasoline locations. As a result, we typically generate higher revenues and gross margins during warmer weather months. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected. OUR BUSINESS IS SUBJECT TO EXTENSIVE AND CHANGING ENVIRONMENTAL REGULATION. We are subject to extensive environmental regulation, and increased regulation or our failure to comply with existing regulations could require substantial capital expenditures or affect our business, financial condition or results of operations. In addition, our business is subject to extensive environmental requirements, particularly environmental laws regulating underground storage tanks. Compliance with these regulations will require significant capital expenditures. See "Environmental Matters," above. OUR BUSINESS IS SUBJECT TO NUMEROUS LOCAL REGULATIONS. In certain areas where stores are located, state or local laws limit the hours of operation or sale of certain products, most significantly alcoholic beverages, tobacco products, possible inhalants and lottery tickets. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of these products or to seek other remedies. In most states, such agencies have discretion to determine if a licensee is qualified to be licensed, and denials may be based on past noncompliance with applicable statutes and regulations, as well as on the involvement of the licensee in criminal proceedings or activities which in such agencies' discretion are determined to adversely reflect on the licensee's qualifications. Such regulation is subject to legislative and administrative change from time to time. In addition, federal regulations now require retailers to have procedures in place to determine the age of persons wanting to purchase tobacco products. The Company anticipates that in the future there may be additional restrictions on the sale of tobacco products. These factors, among others, may have an impact on the Company in 2000 and thereafter. 14 EXECUTIVE OFFICERS OF THE REGISTRANT OFFICERS AS OF DECEMBER 31, 1999. The names, ages, positions and offices with the registrant of all executive officers, as well as the Chairman of the Board and the Vice Chairman of the Board, of the Company are shown in the following chart. The term of office of each executive officer is at the pleasure of the board of directors. The business experience of each such executive officer for at least the last five years, and the period during which he or she served in office, as well as the date each was employed by the Company, are reflected in the applicable footnotes to the chart. Mr. Ito and Mr. Suzuki, as Chairman of the Board and Vice Chairman of the Board, respectively, are officers of the Board and are not administrative executive officers.
AGE AT NAME 3-01-00 POSITIONS AND OFFICES WITH REGISTRANT AT 12-31-99 - ----------------- --------- -------------------------- Masatoshi Ito 75 Chairman of the Board and Director (1) Toshifumi Suzuki 67 Vice Chairman of the Board and Director (2) Clark J. Matthews, II 63 President, Chief Executive Officer; Secretary and Director (3) James W. Keyes 44 Executive Vice President and Chief Operating Officer and Director(4) Masaaki Asakura 57 Senior Vice President and Director (5) Rodney A. Brehm 52 Senior Vice President, Store Operations(6) Joseph F. Gomes 60 Senior Vice President, Logistics (7) Gary Rose 54 Senior Vice President, Merchandising (8) Bryan F. Smith, Jr. 47 Senior Vice President and General Counsel (9) Frank Crivello 46 Vice President, Northeast Division (10) Cynthia L. Davis 45 Vice President, Central Division (11) Krista Fuller 45 Vice President, Development (12) Jeff Hamill 45 Vice President, Southwest Division (13) John Harris 53 Vice President, Florida Division (14) David Huey 47 Vice President, North Pacific Division (15) Gary Lockhart 54 Vice President, Gasoline Supply (16) Dave Podeschi 49 Vice President, Foods/Non Foods Merchandising (17) Sharon R. Powell 48 Vice President, Fresh Foods (18) Jeffrey Schenck 49 Vice President, Great Lakes Division (19) Ezra Shashoua 45 Treasurer (20) Nancy A. Smith 42 Vice President, Marketing and Communications (21) Linda Svehlak 54 Vice President, Information Systems (22) Donald E. Thomas 41 Vice President and Controller (23) Rick Updyke 40 Vice President, Planning (24)
(1) Chairman of the Board and Director of the Company since March 5, 1991. Director and Honorary Chairman of Ito-Yokado Group, which includes Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and Denny's Japan Co., Ltd., as well as other companies. Ito-Yokado Co., Ltd. is one of Japan's leading diversified retailing companies which, together with its subsidiaries and affiliates, operates superstores, convenience stores, department stores, supermarkets, specialty shops and discount stores. President of Ito-Yokado Co., Ltd. from 1958 to 1992. Chairman of Seven-Eleven Japan Co., Ltd. from 1978 to 1992, and President from 1973 to 1978. Chairman of Denny's Japan Co., Ltd. from 1981 to 1992, and President from 1973 to 1981. Chairman of Famil Co., Ltd. since 1986. Chairman of York Mart Co., Ltd. since 1979. Chairman of Robinson's Japan Co., Ltd. since 1995. Chairman of Maryann Co., Ltd. since 1977. President of Oshman's Japan Co., Ltd. since 1984. 15 Statutory Auditor of Steps Co., Ltd. since 1992. Chairman of York- Keibi Co., Ltd. since 1989. President of Union Lease Co., Ltd. since 1985. Statutory Auditor of Daikuma Co., Ltd. since 1982. Chairman of Marudai Co., Ltd. since 1989. Director of Seven-Eleven (Hawaii), Inc. since 1989. Chairman of Umeya Co., Ltd. since 1981. Director and Chairman of the Board of IYG Holding Company since 1990. (2) Vice Chairman of the Board and Director of the Company since March 5, 1991. President and Chief Executive Officer of Ito- Yokado Co., Ltd., one of Japan's leading diversified retailing companies which, together with its subsidiaries and affiliates, operates superstores, convenience stores, department stores, supermarkets, specialty shops and discount stores, since October 1992 and Director since 1971; Executive Vice President from 1985 to 1992; Senior Managing Director from 1983 to 1985; Managing Director from 1977 to 1983; employee since 1963. Chairman of the Board and Chief Executive Officer of Seven-Eleven Japan Co., Ltd. since October 1992 and Director since 1973; President from 1975 to 1992; Senior Managing Director from 1973 to 1975. Statutory Auditor of Robinson's Japan Co., Ltd. since 1984. Chairman of Daikuma Co., Ltd. since 1985. President of Seven-Eleven (Hawaii), Inc. since 1989. President and Director of IYG Holding Company since 1990. (3) Director of the Company since March 5, 1991, and from 1981 until December 15, 1987; President and Chief Executive Officer since March 5, 1991 and Secretary since April 1995; Executive Vice President (or Senior Executive Vice President) and Chief Financial Officer from 1979 to 1991; Vice President and General Counsel from 1973 to 1979; employee of the Company since 1965. (The Company has announced that Mr. Matthews will retire as President and Chief Executive Officer, effective April 30, 2000.) (4) Director of the Company since April 23, 1997; Executive Vice President and Chief Operating Officer since May 1, 1998; (Proposed President and Chief Executive Officer, to be elected April 26, 2000, effective May 1, 2000); Chief Financial Officer from May 1996; Senior Vice President, Finance, from June 1993 to April 1996; Vice President, Planning and Finance, from August 1992 to June 1, 1993; Vice President and/or Vice President, National Gasoline, from August 1991 to August 1992; General Manager, National Gasoline, from 1986 to 1991; employee of the Company since 1985. (5) Director of the Company since April 23, 1997; Senior Vice President from May 1998 to present; Vice President from May 1997 to April 1998; General Manager and Overseas Liaison, Planning Department, Seven-Eleven Japan Co., Ltd., from 1995 to 1997; Executive Vice President and General Manager, Seven-Eleven (Hawaii), Inc., from 1991 to 1994; employee of Seven-Eleven Japan Co., Ltd. since 1976. (6) Senior Vice President since January 1, 1999; Senior Vice President, Chesapeake Division from May 1998 to December 1998; Senior Vice President, Southwest Division from May 1997 to April 1998; Senior Vice President, Distribution from May 1996 to April 1997; Senior Vice President, Distribution and Foodservice, from June 1993 to April 1996; Vice President, Merchandising, from February 1992 to June 1993; Vice President, Marketing, from 1990 to 1992; Vice President, Northwest Region, 7-ELEVEN Stores, from 1989 to 1990; National Marketing Manager from 1986 to 1989; Division Manager, Central Pacific Division, 7- ELEVEN Stores, from 1979 to 1986; employee of the Company since 1972. 16 (7) Senior Vice President, Logistics, from May 1, 1998 until his retirement, effective January 31, 2000; Vice President, Logistics, from May 1997 to April 1998; Vice President, Central Division, from May 1996 to April 1997; Division Manager, August 1993 to April 1996; Operations Manager, January 1992 to August 1993; Operations Division Manager from June 1989 to January 1992; employee of the Company from 1978 to 2000. (8) Senior Vice President, Merchandising, from May 1, 1998 to present; Vice President, Non-Foods Merchandising from May 1997 to April 1998; Vice President, Gasoline and Environmental Services from May 1995 to April 1997; National Gasoline Manager from January 1991 to April 1995; Manager, East/West Gasoline from November 1987 to January 1991; employee of the Company since 1968. (9) Senior Vice President and General Counsel from May 1, 1995 to present; Vice President and General Counsel from August 1992 to April 1995; Assistant General Counsel from January 1990 to July 1992; Associate General Counsel from January 1987 to December 1989; employee of the Company since 1980. (10) Vice President, Northeast Division, from May 1, 1996 to present; Division Manager from October 1987 to April 1996; employee of the Company since 1981. (11) Vice President, Central Division, from May 1, 1997 to present; Division Manager from February 1997 to April 1997; Product Director from January 1995 to February 1997; Category Manager from November 1993 to January 1995; Merchandising Manager from September 1992 to November 1993; Operations Division Manager from November 1990 to August 1992; Division Manager from October 1987 to October 1990; employee of the Company since 1978. (12) Vice President, Development, from May 1, 1998 until January 15, 2000; Vice President, Construction and Maintenance, from July 1997 to April 1998; Manager, Corporate Maintenance from April 1992 to July 1997; Division Operations Manager from November 1990 to January 1992; Division Manager from October 1987 to October 1990; employee of the Company from 1981 to 2000. (13) Vice President, Southwest Division, from May 1, 1998 to present; Southwest Division Manager from January 1998 to April 1998; Southwest Division Sales/Marketing Manager from March 1997 to December 1997; Southwest Division Merchandising Manager from March 1992 to February 1997; employee of the Company since 1979. (14) Vice President, Florida Division, from May 1, 1998 to present; Vice President, Chesapeake Division from May 1997 to April 1998; Vice President, Florida Division from May 1996 to April 1997; Division Manager from October 1987 to April 1996; employee of the Company since 1979. (15) Vice President, North Pacific Division, from May 1, 1999 to present; Division Manager from December 1998 to April 1999; Vice President -Marketing (VP of Southland Canada) from April 1994 to November 1998; National Merchandising Manager from April 1993 to April 1994; National Marketing Manager from June 1990 to April 1993; employee of the Company since 1975. 17 (16) Vice President, Gasoline Supply, from May 1, 1998 to present; General Manager, Gasoline Supply from September 1997 to April 1998; employee of the Company since 1997. General Manager, Product Supply and Distribution, CITGO Petroleum Corporation, a petroleum refining and marketing company, from 1984 until September 1997. (17) Vice President, Foods Merchandising, from May 1, 1998 to present; Manager, Business Systems Development - Merchandising from December 1994 to April 1998; Retail Automation Study Team Leader from May 1993 to December 1994; employee of the Company since 1980. (18) Vice President, Fresh Foods, from March 23, 1998 to present; Vice President, Florida Division, from May 1997 to March 1998; Division Manager, April 1997; Division Logistics Manager from March to April 1997; Fresh Foods Area Operations Manager from March 1995 to February 1997; Market Manager from December 1993 to February 1995; Director of Operations from September 1992 to November 1993; Operations Division Manager from April 1992 to August 1992; employee of the Company since 1974. (19) Vice President, Greater Midwest Division, from May 1, 1996 to present; Division Manager from October 1987 to April 1997; employee of the Company since 1976. (20) Treasurer from May 1, 1998 to present; Assistant General Counsel from December 1989 to April 1998; employee of the Company since 1982. (21) Vice President, Marketing, since January 7, 2000; Vice President, Marketing and Communications from May 1, 1999 to January 2000; Director Advertising and Promotions from January 1999 to May 1999; National Promotions/POP Manager from October 1997 to January 1999; employee since 1980. (22) Vice President, Information Systems, from May 1997 to present; Manager, MIS from May 1992 to April 1997; Systems Manager from December 1984 to May 1992; employee of the Company since 1970. (23) Vice President and Controller from May 1, 1997 to present; Controller from August 1995 to April 30, 1997; Assistant Controller from January 1993 to July 1995; employee of the Company since 1993. Financial Manager, The Trane Company, from April 1992 to December 1992; Senior Manager, Audit Department, Deloitte & Touche, from January 1990 to March 1992; Audit Department, Deloitte & Touche, from 1989 to 1992. (24) Vice President, Planning, from May 1, 1998 to present; Manager of Planning from February 1997 to April 1998; Manager Investor Relations & Business Analysis from November 1995 to February 1997; Consulting Group Manager from December 1994 to November 1995; Manager Investor Relations from January 1994 to December 1994; employee of the Company since 1984. FORMER OFFICERS. The names, ages, positions and offices formerly held with the registrant and the business experience for the past five years of all persons who served as officers of the Company during 1999 but who no longer serve as such are shown below. Also shown for each such person is the period during which he or she served in his or her office, as reflected in the footnotes to the following chart. 18 Age at Name 3-01-00 --------- ------------ Terry L. Blocher (1) 55 Paul L. Bureau, Jr. (2) 58 Nathan D. Potts (3) 61 David A. Urbel (4) 58 (1) Vice President, Canada Division, from March 1998 until January 1999; Vice President, Human Resources from March 1997 to February 1998; Vice President, Southwest Division, from May 1995, to April 1997; Division Manager from February 1985 to April 1995; employee of the Company since 1971. (2) Vice President, Corporate Tax, from May 1993 until retirement in February 1999; Corporate Tax Manager from March 1983 to May 1993; Partner, Touche Ross & Co., from 1978 to 1983; employee of the Company from 1983 to 1999. (3) Vice President, Non-Foods Merchandising, from May 1, 1998 until retirement in February 1999; Vice President, Foods Merchandising, from May 1997 to April 1998; Product Director from May 1993 to April 1997; Regional Merchandising Manager, March 1992 to April 1993; General Manager from November 1990 to March 1992; Division Manager from 1989 to 1990; Regional Marketing Manager from 1985 to 1989; employee of the Company from 1971 to 1999. (4) Vice President, Finance, from May 1, 1998 until retirement on April 30, 1999; Vice President and Treasurer from May 1997 to May 1998; Vice President, Planning and Treasurer from August, 1992 to April 1997; Vice President since April, 1992 and Treasurer since December 1987; Deputy Treasurer from 1984 to 1987; Assistant Treasurer from 1983 to 1984; employee of the Company from 1970 until 1999. 19 ITEM 2. PROPERTIES In February, 1997, the Company refinanced all of its remaining debt under the Prior Credit Agreement. The new Credit Agreement is unsecured and, therefore, the encumbrances on all the Company's properties were released. NEW LEASE FACILITY. In August 1999, the Company entered into a leasing facility that will provide 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%. The lease has a maximum lease term of 66 months. 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 "Notes to the Consolidated Financial Statements.") SALE-LEASEBACK TRANSACTIONS. Beginning in the last quarter of 1999 and continuing in the first quarter 2000, the Company has entered into a series of sale-leaseback financing agreements whereby land, buildings and real and personal property improvements associated with 63 7- ELEVEN stores were sold and leased back by the Company. The transactions that occurred in the first quarter 2000 are not reflected in the following table, which provides information as of December 31, 1999. 20 7-ELEVEN STORES The following table shows the location and number of the Company's 7- Eleven convenience stores (excluding stores under area licenses and of certain affiliates) in operation on December 31, 1999. STATE/PROVINCE OPERATING 7-ELEVEN CONVENIENCE STORES - --------------- --------------------------------------- OWNED LEASED (A) TOTAL U.S. - ----- Arizona 45 57 102 California 243 927 1,170 Colorado 61 174 235 Connecticut 7 43 50 Delaware 10 17 27 District of Columbia 4 14 18 Florida 229 267 496 Idaho 6 8 14 Illinois 58 91 149 Indiana 10 30 40 Kansas 7 8 15 Maine 0 13 13 Maryland 87 218 305 Massachusetts 13 81 94 Michigan 50 67 117 Missouri 33 50 83 Nevada 96 101 197 New Hampshire 3 14 17 New Jersey 75 133 208 New York 43 204 247 North Carolina 2 5 7 Ohio 11 4 15 Oregon 37 95 132 Pennsylvania 74 92 166 Rhode Island 0 11 11 Texas 114 172 286 Utah 42 70 112 Virginia 201 403 604 Washington 54 163 217 West Virginia 10 13 23 Wisconsin 15 0 15 CANADA - ------- Alberta 30 103 133 British Columbia 25 120 145 Manitoba 14 35 49 Ontario 31 79 110 Saskatchewan 21 22 43 ----- ----- ------ Total 1,761 3,904 5,665 ===== ===== ====== (a) Of the 7-ELEVEN convenience stores set forth in the foregoing table, 578 are leased by the Company from the 7-ELEVEN, Inc. Employees' Savings and Profit Sharing Plan (the "Savings and Profit Sharing Plan"). As of year-end 1999, the Company also leased 14 closed convenience stores or office locations from the Savings and Profit Sharing Plan. At the end of 1999, the 7-ELEVEN stores group was using 66 offices in 20 states and Canada. 21 OTHER RETAIL. As shown in the following table, at year-end 1999, the Company operated 27 stores still using the Christy's Market name in Massachusetts, Maine, New Hampshire and Vermont. There were also six Quik Marts and three other high volume gasoline dispensing locations in California, Indiana, Texas and Virginia, one HIGH'S Dairy Store located in Virginia and one other retail location in Illinois included in the Company's operations. The following table shows the location and number of the Company's other operating retail locations including Christy's Market, Quik Marts, HIGH'S and other locations in operation on December 31, 1999. STATE OTHER OPERATING RETAIL LOCATIONS ------- ---------------------------------- OWNED LEASED TOTAL California 3 0 3 Illinois 0 1 1 Indiana 0 1 1 Maine 0 11 11 Massachusetts 0 9 9 New Hampshire 0 3 3 Texas 2 0 2 Vermont 0 4 4 Virginia 3 1 4 ----- ----- ----- Total 8 30 38 ===== ===== ===== The Company plans to either close or convert most of these units to 7-ELEVEN stores over the next few years. OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1999, there were 32 7-ELEVEN stores in various stages of construction. The Company owned or was under contract to purchase 40, and had leases on 102, undeveloped convenience store sites. In addition, the Company held 71 7-ELEVEN, HIGH'S and Quik Mart properties available for sale consisting of 35 unimproved parcels of land, 25 closed store locations and 11 parcels of excess property adjoining store locations. At December 31, 1999, 8 of these properties were under contract for sale. On December 31, 1999, the Company held leases on 223 closed store or other non-operating facilities, 14 of which were leased from the Savings and Profit Sharing Plan. Of these, 161 were subleased to outside parties. Generally, the Company's store leases are for primary terms of from 14 to 20 years, with options to renew for additional periods. Many leases contain provisions granting the Company a right of first refusal in the event the lessor decides to sell the property. Many of the Company's store leases, in addition to minimum annual rentals, provide for percentage rentals based upon gross sales in excess of a specified amount and for payment of taxes, insurance and maintenance. OTHER PROPERTIES. The Company also leases 53,580-square-feet of office/warehouse space in Denver, Colorado, for an equipment warehouse and service center. The Company also owns a 287-acre tract in Great Meadows, New Jersey. The chemical plant that was located on this property has now been demolished and a part of the property is currently involved in environmental clean-up. The Company holds tracts in Dallas, Texas, not included in the corporate headquarters, totaling approximately two acres which are available for sale. 22 CORPORATE. The Company's corporate office headquarters is in Dallas, Texas in a 42-story office building, known as Cityplace Tower. A subsidiary of the Company owns the Cityplace Tower and leases it to the Company. The Company's lease covers the entire Cityplace Tower, but gives the Company the right to sublease to other parties. Since 1996, subleases with third parties have been in place so that (including the space leased by the Company) the building is virtually completely leased or reserved for expansion under current leases. The Company currently utilizes other office space in and around Dallas (although most corporate office space is consolidated in Cityplace Tower). ITEM 3. LEGAL PROCEEDINGS THE FOLLOWING INFORMATION UPDATES THE STATUS OF CERTAIN PREVIOUSLY REPORTED PENDING LITIGATION INVOLVING THE COMPANY. 7-ELEVEN OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION ("OFFF") VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. As previously reported, the Company is a defendant in two legal actions, which are referred to as the 7-ELEVEN OFFF and VALENTE cases, filed by franchisees in 1993 and 1996, respectively, asserting various claims against the Company, including claims that the Company wrongfully failed to credit the franchisees' accounts with the value of equipment and with various rebates, discounts and allowances that the Company received from various vendors. A nationwide settlement of the litigation was negotiated. In connection with the settlement, the OFFF and VALENTE cases have been combined on behalf of a nationwide class of all persons who operated 7- ELEVEN convenience stores in the continental United States at any time between January 1, 1987 and July 31, 1997, pursuant to franchise agreements with the Company. Class members have overwhelmingly approved the settlement, and the court presiding over the settlement process gave its final approval of the settlement on April 24, 1998. Notices of appeal of the order approving the settlement were filed on behalf of three of the attorneys who represented the class, six former franchisees and two current franchisees. One of these current franchisees has dismissed his appeal. The settlement agreement will not become effective until the appeals are resolved. The status of this matter has not changed since previously reported. GENERAL In addition, the Company is also occasionally sued by persons who allege that they have incurred property damage and personal injuries as a result of releases of motor fuels from underground storage tanks operated by the Company at its retail outlets. It is the Company's policy to vigorously defend against such claims. Except as specifically disclosed in this section on "Legal Proceedings" or in the section on 23 "Environmental Matters", above, the Company does not believe that its exposure from such claims, either individually or in the aggregate, is material to its business or financial condition. Information concerning other legal proceedings is incorporated herein from "Management's Discussion and Analysis, Environmental," beginning on page 38, below. In the ordinary course of business, the Company is also involved in various other legal proceedings which, in the Company's opinion, are not material, either individually or in the aggregate. 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 1999. 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.0001 par value per share, is the only class of common equity of the Company and represents the only voting securities of the Company. As of March 3, 2000, there were 410,112,375 shares of Common Stock issued and outstanding and 3,999 record holders of the Common Stock. The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol "SVEV". The following information has been provided to the Company by The Nasdaq Stock Market. QUARTERS PRICE RANGE HIGH LOW CLOSE 1999 FIRST $ 2.563 $ 1.594 $ 2.031 SECOND 2.750 1.813 2.219 THIRD 2.219 1.875 1.969 FOURTH 2.125 1.594 1.781 1998 FIRST $ 3.031 $ 1.563 $ 2.078 SECOND 3.031 2.063 2.750 THIRD 3.031 2.063 2.500 FOURTH 2.375 1.750 1.906 (a) These quotations reflect inter-dealer prices without retail mark- up, mark-down or commission and may not necessarily represent actual transactions. The indentures governing the Company's outstanding debt securities do not permit the payment of cash dividends except in limited circumstances. The Credit Agreement also restricts the Company's ability to pay cash dividends on the Common Stock. Under Texas law, cash dividends may only be paid (a) out of the surplus of a corporation, which is defined as the excess of the total value of the corporation's assets over the sum of its debt, the par value of its stock and the consideration fixed by the corporation's board of directors for stock without par value, and (b) only if, after giving effect thereto, the corporation would not be insolvent, which is defined to mean the inability of a corporation to pay its debts as they become due in the usual course. Surplus may be determined by a corporation's board of directors by, among other things, the corporation's financial statements or by a fair valuation or information from any other method that is reasonable in the circumstances. No assurances can be given that the Company will have sufficient surplus to pay any cash dividends even if the payment thereof is not otherwise restricted. In addition, see "Current Recapitalization Plans," above. 25
ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA 7-ELEVEN, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) Merchandise sales $ 6,216.1 $ 5,573.6 $ 5,181.8 $ 5,084.0 $ 5,063.7 Gasoline sales 2,035.6 1,684.2 1,789.4 1,784.9 1,682.1 Net sales 8,251.7 7,257.8 6,971.2 6,868.9 6,745.8 Other income 97.8 92.0 89.4 86.4 78.5 Total revenues 8,349.5 7,349.8 7,060.6 6,955.3 6,824.3 LIFO charge 9.9 2.9 0.1 4.7 2.6 Depreciation and amortization 205.5 194.7 196.2 185.4 166.4 Interest expense, net 102.2 91.3 90.1 90.2 85.6 Earnings before income taxes and extraordinary gain 127.3 82.6 115.3 130.8 101.5 Income taxes (benefit) (1) 48.5 31.9 45.3 41.3 (66.1) Earnings before extraordinary gain 78.8 50.7 70.0 89.5 167.6 Net earnings (2) 83.1 74.0 70.0 89.5 270.8 Earnings before extraordinary gain per common share: Basic .19 .12 .17 .22 .41 Diluted .17 .12 .16 .20 .40 Total assets (3) 2,685.7 2,476.1 2,138.6 2,083.0 2,135.2 Long-term debt, including current portion 2,010.2 1,940.6 1,803.4 1,707.4 1,850.6
- ------------------------- (1) Income taxes (benefit) for 1995 includes an $84.3 million tax benefit from recognition of the remaining portion of the Company's net deferred tax assets. (2) Net earnings for 1999, 1998 and 1995 include extraordinary gains of $4.3 million, $23.3 million and $103.2 million, respectively, on debt redemptions. (See Note 9 to the Consolidated Financial Statements.) (3) Total assets for 1998, 1997, 1996 and 1995 have been reclassified to conform to the current-year presentation. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Some of the matters discussed in this annual report contain forward-looking statements regarding the Company's future business which are subject to certain risks and uncertainties, including competitive pressures, adverse economic conditions and government regulations. These issues, and other factors, which may be identified from time to time in the Company's reports filed with the SEC, could cause actual results to differ materially from those indicated in the forward-looking statements. MANAGEMENT STRATEGY OVERVIEW Over the past several years, the Company has undertaken a number of operating strategies and infrastructure development initiatives designed to improve efficiencies in operations, provide better service to customers, ensure product variety, quality and freshness, and position the Company to deliver sustainable, long-term growth. These strategies include: * utilization of technology; * improved merchandising; * continual introduction of new items; * expanding and enhancing the fresh food program; * utilization of a more efficient distribution system; and * developing new stores. INFORMATION TECHNOLOGY. The core of these operating strategies is the Retail Information System (RIS), which is now installed in all U.S. stores. This proprietary system provides store operators and management at the corporate office and in the field with timely access to item-by- item sales information captured via a point-of-sale scanning system at the register. Access to product assortment and historical sales data enhances the ability: * to improve merchandising decisions and in-stock conditions; * to identify customer changes in preference, developing trends in the market and items with high or limited sales potential; * for the store operator to make better merchandising and ordering decisions; and * for each store to better tailor its product mix to align with customer demographics and buying patterns. MERCHANDISING/NEW ITEM INTRODUCTION. The continual introduction of new items is an important part of the long-term operating strategy. To meet changing customer needs and build sales, an average of 40 new items were available to 7-Eleven stores each week during 1999. Several significant new item introductions contributed approximately $150 million, or 25%, to the growth in merchandise sales year over year. Partnering with key vendors to develop and introduce proprietary items is an integral part of merchandising strategy, like the introduction of Bakery Stix by Kraft in July. With approximately 19,500 stores located throughout the world, management is seeking opportunities to leverage the number of stores to achieve greater purchasing efficiencies as well as enhance access to products, like the introduction of a proprietary French wine during the 1999 holiday season. 27 FRESH FOODS. The Company continues to refine its fresh food program and believes this category represents a tremendous opportunity, as food-to-go increases in popularity among all consumer segments. The Company has partnered with third-party commissary and bakery experts who own and operate the facilities, which are strategically located in close proximity to one of the Combined Distribution Centers ("CDCs"). This arrangement has a number of key advantages including: * allowing new items to be tested easily * allowing item selection to be regionalized based on demographics; and * providing management the ability to focus more on new product development. Today, proprietary World Ovens bakery products and Prime Deli sandwiches and breakfast items are delivered fresh each day to over 3,700 stores. DEMAND CHAIN MANAGEMENT. The Company has been implementing a daily distribution infrastructure to support the fresh food program and other merchandising initiatives and has partnered with third-party logistics experts, who own and operate the 20 CDCs that are located throughout the U.S. and Canada. Today, 3,700 stores receive daily delivery of fresh food and other time-sensitive and perishable items such as dairy products. The advantages of CDCs are as follows: * the accuracy of deliveries is greatly improved; * stores have access to a much broader range of products that might otherwise not be available through traditional methods of delivery; * delivery times occur during off-peak hours; * products are fresher; * economies of scale provide a better product cost structure; and * frequent replenishment minimizes inventory in the stores. As part of the overall strategy to improve distribution to the stores, the Company has worked with other vendors who deliver directly to the store to minimize the frequency of deliveries, improve the accuracy and scheduling of deliveries and increase the number of items delivered through the CDCs. NEW STORE DEVELOPMENT. 7-Eleven stores are located strategically in urban and suburban markets, which has a number of advantages, including: * stores being located in high traffic areas; * the ability of the Company to establish itself as the primary provider of convenience in those areas; and * greater efficiencies for both infrastructure utilization and advertising dollars. During 1999, the Company opened 165 new stores in the U.S. and Canada and plans to open 200 new stores each year for the foreseeable future. These new stores are generally located in existing markets, which increases utilization of both the CDC and fresh food programs as well as providing a stronger market presence. 28 E-COMMERCE. In January 2000, the Company announced plans to install self-service financial services kiosks in stores located in the Dallas/Fort Worth area during 2000. The touch-screen kiosks will immediately provide customers with the ability to: * cash checks; * purchase money orders; * perform traditional ATM transactions; and * execute wire transfers. In the future, a wide range of services will be introduced, including event ticketing and e-commerce applications such as on-line shopping for books, music and videos. The Company has a unique opportunity to serve as a point of access for both the ordering and delivery of a wide variety of e-commerce products and services. The Company's e-commerce strategy is to leverage the kiosks and the 7- Eleven web site, providing customers a point of contact to the Internet, with the nationwide network of stores and daily distribution infrastructure to provide an element of convenience to on-line shopping. The daily distribution capabilities provided by the combined distribution centers will enable customers to pick up items ordered on- line at their convenience 24 hours a day, 365 days a year. RESULTS OF OPERATIONS SUMMARY OF RESULTS OF OPERATIONS The Company's net earnings for the year ended December 31, 1999, were $83.1 million, compared to net earnings of $74.0 million in 1998 and $70.0 million in 1997.
YEARS ENDED DECEMBER 31 ------------------------- (DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1999 1998 1997 ---- ---- ---- Earnings before income taxes and extraordinary gain $127.3 $ 82.6 $115.3 Income tax expense (48.5) (31.9) (45.3) Extraordinary gain on debt redemption (net of tax) 4.3 23.3 - ------- ------- ------- Net earnings $ 83.1 $ 74.0 $ 70.0 ======= ====== ======= Net earnings per common share - Basic $ .20 $ .18 $ .17 ======= ======= ====== Net earnings per common share - Diluted $ .18 $ .17 $ .16 ======= ======= ======
The Company's earnings before income taxes and extraordinary gain increased $44.7 million in 1999, primarily due to merchandise sales and gross profit growth, combined with several charges or credits that impacted 1999 and 1998 results. 1999 results included a $14 million credit related to an environmental adjustment, offset by $4.7 million of termination benefits. The 1998 results included charges of $14.1 million associated with write-offs of computer equipment and development costs, $11.4 million for deletion of excess or slow-moving inventory and $7.6 million in severance and related costs. 29 (EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL STORES RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR.) SALES Net sales grew $994 million in 1999, or 13.7%, when compared to 1998. The following table illustrates the Company's sales growth over the last 3 years:
YEARS ENDED DECEMBER 31 ------------------------ INCREASE/(DECREASE) FROM PRIOR YEAR 1999 1998 1997 ----------------------------------- ------ ----- ----- Net Sales (in billions) $8.25 $7.26 $6.97 U.S. same-store merchandise sales growth 9.1% 5.7% 1.5%
MERCHANDISE SALES GROWTH DATA. Total merchandise sales increased 11.5% in 1999 and 7.6% in 1998 compared to the prior year. Sales increases have been driven by strong same-store sales growth, increases in the store base (77 stores in 1999 and 203 stores in 1998) and cost inflation relative to cigarettes in 1999. The same-store sales growth in part is attributable to the ongoing implementation of strategic initiatives and the consistent introduction of new products. With the exception of cigarettes, inflation has been relatively low and fairly consistent over the last several years. Cigarette wholesale cost increases, which were reflected in higher retail prices, accounted for approximately four to five percentage points of the same-store merchandise sales growth in 1999. In 1998, the cigarette category impacted same-store merchandise sales growth by less than 2%. While average per-store merchandise sales growth has been fairly consistent among the various geographical areas, category results have been mixed. Categories driving the 1999 merchandise sales increase included: * cigarettes, where sales increased primarily due to retail price increases associated with manufacturer cost and excise tax increases; * prepaid phone cards and trading cards, where sales are up primarily due to the introduction of new products; and * non-carbonated beverage sales continue to rise due to the introduction of new products and flavors and the continuing shift away from carbonated drinks. Categories with significant merchandise sales increases in 1998 were: * cigarettes, where sales increased primarily due to retail price increases associated with manufacturer cost increases; * Cafe Cooler, a frozen non-carbonated drink introduced in the spring of 1998, which provided incremental growth in per-store sales; * Slurpee, non-carbonated drinks and coffee, which increased substantially, partially due to the introduction of new products, flavors and packaging; and * fresh foods/bakery, due in part to new and expanded CDC services/products. Several mature categories have had slight declines over the last two years primarily due to a shift in customer preferences. These categories include newspapers, carbonated beverages and prepackaged bakery/bread. 30 GASOLINE SALES GROWTH DATA. Gasoline sales dollars per store increased 14.4% in 1999, compared to 1998, after a decline of 10.6% in 1998, compared to 1997. The retail price of gasoline is a large factor in these fluctuating sales dollars, with the average price increasing 12 cents per gallon in 1999 after dropping 18 cents per gallon in 1998, compared to the prior year. Other factors increasing 1999 sales were an average per-store gallon volume increase of 3.5%, combined with operating an average of 118 more gasoline facilities. In 1998, gasoline gallon sales per store increased 4.2% when compared to 1997. The average per-store gasoline volume increases are primarily due to new stores, which pump higher volumes than existing stores. OTHER INCOME Other income of $97.9 million for 1999 was $5.8 million higher than 1998 and $8.4 million higher than 1997. The improvement over the last two years is a combination of increased royalty income from licensed operations, combined with fees generated from higher levels of franchising activity. In 1999, approximately $56 million of the royalties were from area license agreements with Seven-Eleven Japan Co., Ltd. ("SEJ"). One year following repayment of the Company's 1988 Yen-denominated loan (see Note 9 to the Consolidated Financial Statements), currently projected for 2001, royalty payments from SEJ will be reduced by approximately two-thirds in accordance with terms of the amended license agreement. GROSS PROFITS GROSS PROFIT ON MERCHANDISE. The following table sets forth information on the Company's gross profits on merchandise sales for each of the last three years:
YEARS ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 ------ ------- ------- Merchandise Gross Profit - DOLLARS IN MILLIONS $ 2,142.4 $ 1,927.6 $ 1,828.4 Gross profit margin percent 34.46% 34.58% 35.29% INCREASE/(DECREASE) FROM PRIOR YEAR - ALL STORES Average per-store gross profit dollar change 8.8% 3.2% 2.3% Margin percentage point change (.12) (.71) .13 Average per-store merchandise sales 9.1% 5.2% 1.9%
The improvement in 1999 and 1998 total merchandise gross profit dollars, compared to 1998 and 1997, respectively, was due to a combination of higher per-store sales and more stores. Somewhat offsetting these increases in sales was margin, which declined 12 basis points in 1999 and 71 basis points in 1998. The slight merchandise margin decline in 1999 was primarily due to several cigarette cost and excise tax increases (net of manufacturer buy-downs) since November of 1998. Although the cigarette cost increases have caused margin to decline, per-store gross profit dollars in the category have increased. Partially offsetting the impact of these cost increases was the successful introduction of new high-margin products, including Pokemon trading cards, Frut Cooler and Bakery Stix, combined with increased sales in certain higher margin products such as coffee and non-carbonated beverages. Merchandise margin declined in 1998, primarily due to product cost increases and continuing refinement of the Company's everyday-fair- pricing strategy. Merchandise margin was also impacted by introductory costs associated with new product offerings, combined with the further rollout of the Company's fresh food initiatives into four new markets. 31 Cigarettes (based on the Company's purchases) currently contribute nearly 24% of the Company's total merchandise sales and more than 17% of merchandise gross profit. With the recent and pending legal settlements between cigarette manufacturers and several state governments, as well as potential additional taxes and litigation threatened by the federal government, the Company anticipates that the cost of cigarettes could continue to rise. Additionally, there are numerous examples of pending state and federal legislation aimed at reducing minors' consumption of tobacco products, which include significant increases in cigarette taxes. Although the Company expects merchandise margin percent to be negatively impacted by these price increases, it is impossible to predict the impact potential cost increases could have on the Company's gross profit dollars, due to uncertainties regarding competitors' reactions and consumers' buying habits. GROSS PROFIT ON GASOLINE. The following table sets forth information on the Company's gross profits on sales of gasoline for each of the last three years:
YEARS ENDED DECEMBER 31 --------------------------- 1999 1998 1997 ---- ----- ----- Gasoline Gross Profit - DOLLARS IN MILLIONS $ 223.4 $ 208.0 $ 183.8 Gross profit margin (in cents per gallon) 13.25 13.48 13.07 INCREASE/(DECREASE) FROM PRIOR YEAR Average per-store gross profit dollar change 1.7% 7.5% (3.5)% Gross profit margin (in cents per gallon) (.23) .41 (.38) Average per-store gas gallonage 3.5% 4.2% (.7)%
Gasoline gross profits improved $15.4 million in 1999 over 1998. This improvement was due to more gas stores and higher average per- store gasoline gallon sales, which were partially offset by lower gasoline margin. The gasoline market in 1999 saw rising wholesale costs associated with OPEC lowering its production, while the 1998 market had declining cost, which helped ease the competitive pressures that had narrowed margins in 1997. As a result, the Company experienced slightly less favorable gross profit growth in 1999, than it would have under 1998's market conditions. FRANCHISEE SHARE OF GROSS PROFIT The Company reports all sales and gross profits from franchised stores in its consolidated results. As part of its franchise agreement, the Company records as an expense a percentage of the gross profits generated by the franchisees. As franchisee gross profits have increased, this expense has increased to $612.2 million in 1999, from $551.0 million in 1998 and $524.9 million in 1997.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A") YEARS ENDED DECEMBER 31 ------------------------------ (DOLLARS IN MILLIONS) 1999 1998 1997 ---- ---- ---- Total operating, selling, general and administrative expenses $ 1,621.9 $ 1,502.8 $ 1,371.3 Ratio of OSG&A to sales 19.7% 20.7% 19.7% Increase/(decrease)in OSG&A compared to prior year $ 119.1 $ 131.5 $ 50.3
32 The ratio of OSG&A expenses to sales decreased 1.0 percentage point in 1999 compared to 1998, after increasing 1.0 percentage point in 1998 compared to 1997. Fluctuations in the retail price of gasoline have impacted this ratio significantly over the last two years, with a 12 cent per gallon increase in 1999, when compared to 1998, which followed an 18 cent per gallon decrease in 1998, compared to 1997. In addition, several charges/credits impacted 1999 and 1998 OSG&A expenses. In 1999 OSG&A expenses included an environmental credit of $14 million related to legislative changes in California (see Environmental section), offset by $4.7 million of termination benefit costs. 1998 OSG&A expenses included $14.1 million associated with the write-offs of computer equipment and development costs and $7.6 million in severance and related costs (see Summary of Results of Operations). After adjusting for retail gasoline price fluctuations and these charges/credits, the ratio of OSG&A expense to sales decreased slightly in 1999, compared to 1998, while the 1998 and 1997 ratios are virtually even. The 1999 OSG&A expense was $119 million higher than 1998, while 1998 was $132 million higher than 1997. Contributing to these increases were higher store labor costs, costs associated with operating more stores and increased expenses related to the implementation of the Company's retail information system as well as other strategic initiatives. Expenses associated with the Company's retail information system were approximately $27 million higher in 1999, compared to 1998 and $13 million higher in 1998 than in 1997. While the Company has had strong sales growth over the past two years, the ratio of OSG&A expenses to sales has not improved consistently, in part due to investing in the retail information system and other strategic initiatives to better situate the Company for future growth and an improved competitive position. The Company continues to review the functions necessary to enable its stores to respond faster and more cost efficiently to rapidly changing customer needs and preferences. In conjunction with this review, management continues to realign and reduce personnel in order to eliminate non-essential costs, while devoting resources to the implementation of its retail information system and other strategic initiatives (see Management Strategies). In 1999, accruals of $4.7 million were made representing termination benefits for 40 management and administrative employees. During 1998, accruals of $7.6 million were made representing severance benefits for close to 120 employees whose positions were terminated. INTEREST EXPENSE, NET Net interest expense increased $10.9 million in 1999, compared to 1998. Factors increasing 1999 interest expense include higher borrowings to finance new store development and other initiatives, combined with the redemption of $65 million of the Company's public debt securities in 1998 and early 1999. The redeemed public debt had been accounted for under Statement of Accounting Standards No. 15 ("SFAS No. 15") (see discussion below and the Extraordinary Gain section). As of December 31, 1999 approximately 49% of the Company's debt contains floating rates that will be unfavorably impacted by rising interest rates. The Company has effectively eliminated 25% of its exposure to rising interest rates through an interest rate swap agreement (see Interest Rate Swap Agreement). The weighted-average interest rate for such debt, including the impact of the interest rate swap agreement, was 5.6% for 1999, versus 5.7% for 1998 and 5.8% for 1997. 33 The Company expects net interest expense in 2000 to decrease approximately $23 million, compared to 1999 based on anticipated levels of debt and interest rate projections. The reduced interest expense is primarily due to a $540 million investment by IYG Holding Company in 7- Eleven, Inc. (see Liquidity and Capital Resources). In accordance with SFAS No. 15, no interest expense is recognized on the Company's public debt securities. These securities were recorded at an amount equal to the future undiscounted cash payments, both principal and interest, and accordingly, the cash interest payments are charged against the recorded amount of such securities and are not treated as interest expense. As a result, interest expense on debt used to redeem public debt securities would increase the Company's reported interest expense. INTEREST RATE SWAP AGREEMENT In February 1999, the Company amended the terms of an interest rate swap agreement. The terms of the amended agreement fixes the interest rate on $250 million notional principal of existing floating rate debt, at 6.1% through February 2004. INCOME TAXES The Company recorded income tax expense, from earnings before extraordinary gains, in 1999 of $48.5 million, compared to $31.9 million in 1998 and $45.3 million in 1997. The 1999 and 1998 extraordinary gains were net of tax expense of $2.7 million and $14.9 million, respectively. EXTRAORDINARY GAIN In the first quarter of 1999, the Company redeemed $19.4 million of its public debt securities resulting in a $4.3 million after-tax gain. During 1998, the Company redeemed $45.6 million of its public debt securities 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. LIQUIDITY AND CAPITAL RESOURCES The majority of the Company's working capital is provided from three sources: * cash flows generated from its operating activities; * a $650 million commercial paper facility (guaranteed by Ito- Yokado Co., Ltd.); and * short-term seasonal borrowings of up to $400 million (reduced by outstanding letters of credit) under its revolving credit facility. The Company believes that operating activities, coupled with available short-term working capital facilities, will provide sufficient liquidity to fund current commitments for operating and capital expenditure programs, as well as to service debt requirements. Actual capital expenditure funding will be dependent on the level of cash flow generated from operating activities and the funds available from financings. On March 16, 2000, the Company issued 113,684,211 shares of common stock at $4.75 per share to IYG Holding Company in a private placement transaction. The net proceeds of $540 million are primarily being used to repay the outstanding balance on the Company's bank term loan, to repay the outstanding balance of the Company's bank revolver and to reduce commercial paper facility borrowings. 34 In December 1999 and January 2000, the Company entered into separate sale-leaseback agreements for certain of its store properties, pursuant to which land, buildings and related improvements were sold and leased back by the Company. The Company received proceeds of $58.9 million and $73.4 million on the sale of 30 and 33 stores, respectively. These proceeds will be used primarily for further debt reduction. The sales resulted in deferred gains of approximately $22 million that will be recognized on a straight-line basis over the initial term of the leases. (See Note 13 to the Consolidated Financial Statements). In August 1999, the Company entered into a leasing 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 August of 2001 with a final maturity of the leases of February 2005. As of December 31, 1999, $28.3 million was funded under this facility. (See Note 13 to the Consolidated Financial Statements). In January 1999, the Company expanded the existing commercial paper facility from $400 million to $650 million. The commercial paper is unsecured but is fully and unconditionally guaranteed by Ito-Yokado Co., Ltd. 7-Eleven's credit agreement, established in February 1997, includes a term loan with a balance of $112.5 million at December 31, 1999 and a $400 million revolving credit facility, which has a sublimit of $150 million for letters of credit ("Credit Agreement"). The Credit Agreement contains certain financial and operating covenants requiring, among other things, the maintenance of certain financial ratios, including interest and rent coverage, fixed-charge coverage and senior indebtedness to net earnings before extraordinary items and interest, taxes, depreciation and amortization ("EBITDA"). The covenant levels established by the Credit Agreement generally require continuing improvement in the Company's financial condition. In March 1999, the financial covenant levels required by these instruments were amended prospectively in order to allow the Company flexibility to continue its strategic initiatives including store growth. In connection with this amendment, the interest rate on borrowings was changed to a reserve- adjusted Eurodollar rate plus .475% instead of the previous increment of .225%. For the period ended December 31, 1999, the Company was in compliance with all of the covenants required under the Credit Agreement, including compliance with the principal financial and operating covenants under the Credit Agreement (calculated over the latest 12-month period) as follows:
REQUIREMENTS ------------------------ Covenants Actuals Minimum Maximum - --------- ------- ------- ------- Interest and rent coverage * 2.06 to 1.0 1.90 to 1.0 Fixed charge coverage 1.70 to 1.0 1.50 to 1.0 Senior indebtedness to EBITDA 3.71 to 1.0 3.95 to 1.0 Total expenditure limit (tested annually) $442.9 $475 million *INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
35 In 1999, the Company repaid $147.4 million of debt, which included principal payments of $56.3 million for quarterly installments due on the term loan, $46.5 million on the Company's yen-denominated loan (secured by the royalty income stream from its area licensee in Japan), $20.9 million related to capital lease obligations and $17.8 million for SFAS No. 15 interest. Outstanding balances at December 31, 1999 for commercial paper, revolver and term loan, were $634.4 million, $250.0 million and $112.5 million, respectively. As of December 31, 1999, outstanding letters of credit issued pursuant to the Credit Agreement totaled $70.2 million. CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $292.2 million for 1999, compared to $232.8 million in 1998 and $197.9 million in 1997. CAPITAL EXPENDITURES In 1999, net cash used in investing activities consisted primarily of payments of $428.8 million for property and equipment. The majority of this capital was used for new-store development, continued implementation of the Company's retail information system, remodeling stores, new equipment to support merchandising initiatives, upgrading retail gasoline facilities, replacing equipment and complying with environmental regulations. The Company expects 2000 capital expenditures, excluding lease commitments, to exceed $325 million. Capital expenditures are being used to develop or acquire new stores, upgrade store facilities, further enhance the retail information system, replace equipment, upgrade gasoline facilities and comply with environmental regulations. The amount of expenditures during the year will be materially impacted by the proportion of new store development funded through capital expenditures versus leases and the speed at which new sites/acquisitions can be located, negotiated, permitted and constructed. CAPITAL EXPENDITURES - GASOLINE EQUIPMENT The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations primarily relating to underground storage tank ("UST") systems. The Company anticipates it will spend nearly $0.4 million in 2000 on capital improvements required to comply with environmental regulations relating to UST systems as well as above-ground vapor recovery equipment at store locations, with approximately $12-15 million on such capital improvements from 2001 through 2003. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discussion summarizes the financial and derivative instruments held by the Company at December 31, 1999, which are sensitive to changes in interest rates, foreign exchange rates and equity prices. The Company uses interest-rate swaps to manage the primary market exposures associated with underlying liabilities and anticipated transactions. The Company uses these instruments to reduce risk by essentially creating offsetting market exposures. In addition, the two yen-denominated loans serve to effectively hedge the Company's exposure to yen-dollar currency fluctuations. The instruments held by the Company are not leveraged and are held for purposes other than trading. There are no material quantitative changes in market risk exposure at December 31, 1999, when compared to December 31, 1998. 36 In the normal course of business, the Company also faces risks that are either nonfinancial or nonquantifiable. 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 the Company held at December 31, 1999. The Company entered into an interest-rate swap to achieve the appropriate level of variable and fixed-rate debt as approved by senior management. Under the interest-rate swap, the Company agreed with other parties to exchange the difference between fixed-rate and floating-rate interest amounts on a quarterly basis. 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. The notional amount is used to calculate the contractual payments to be exchanged under the contract. The variable rates are estimated based on implied forward rates in the yield curve at the reporting date. Additionally, the interest rate on the bank debt reflects a LIBOR margin of 47.5 basis points as prescribed in the Credit Agreement.
(DOLLARS IN MILLIONS) 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ----------- ----- ---------- Floating-Rate Financial Instruments: Bank debt $56 $56 $250 $0 $0 $0 $362 $362 Commercial paper $34 $0 $0 $0 $0 $600 $634 $634 Average interest rate 6.9% 7.5% 7.3% 7.3% 7.5% 7.5% 7.3% Interest-Rate Derivatives: Notional amount $250 $250 $250 $250 $250 $0 $250 $7 Average pay rate 6.1% 6.1% 6.1% 6.1% 6.1% 0% 6.1% Average receive rate 6.8% 7.3% 7.3% 7.3% 7.5% 0% 7.2%
The $7 million fair value of the interest-rate swap represents the amount that would be received from the counterparty if the Company chose to terminate the swap. See Note 11 to the Consolidated Financial Statements for detailed information on floating-rate and fixed-rate liabilities as well as fair value and derivative discussions. FOREIGN-EXCHANGE RISK MANAGEMENT. The Company recorded nearly $73 million in royalty income in 1999 that could have been impacted by fluctuating exchange rates. Approximately 77% of such royalties were from area license agreements with Seven-Eleven Japan Co., Ltd. ("SEJ"). SEJ royalty income will not 37 fluctuate with exchange rate movements since the Company has effectively hedged this exposure by using the royalty income to make principal and interest payments on its yen-denominated loans (see Note 9 to the Consolidated Financial Statements). The Company is exposed to fluctuating exchange rates on the non-SEJ portion of its royalties earned in foreign currency, but based on current estimates, future risk is not material. The Company has several wholly or partially owned foreign subsidiaries and is susceptible to exchange-rate risk on earnings from these subsidiaries. Based on current estimates, the Company does not consider future foreign-exchange risk associated with these subsidiaries to be material. EQUITY-PRICE RISK MANAGEMENT. The Company has equity securities of other companies, which are classified as available for sale and are carried in the Consolidated Balance Sheets at fair value. Changes in fair value are recognized as other comprehensive earnings, net of tax, as a separate component of shareholders' equity. At December 31, 1999, the Company held the following available-for-sale marketable equity securities:
Cost Fair Value ---- ---------- (DOLLARS IN MILLIONS) 387,200 shares of ACS common stock $0 $17.8 151,452 shares of Precept common stock $0 $ 0.5
The Affiliated Computer Services, Inc. stock ("ACS") was obtained in 1988 as partial consideration for the Company to enter 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. Subsequently ACS became a public company and Precept Business Services, Inc. was spun off from ACS and also became a public company. OTHER ISSUES 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 clean-up costs of $7.3 million at December 31, 1999. 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 a receivable of $4.3 million recorded at December 31, 1999. Additionally, the Company accrues for the anticipated future costs and the related probable state reimbursement amounts for remediation activities at its existing and previously operated gasoline sites where releases of regulated substances have been detected. At December 31, 1999 the Company's estimated undiscounted liability for these sites was $33.4 million. This estimate is based on the Company's prior experience with gasoline sites and 38 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, 1999 will be incurred within the next four to five years. Under state reimbursement programs, the Company is eligible to receive reimbursement for a portion of future remediation costs, as well as a portion of remediation costs previously paid. Accordingly, at December 31, 1999, the Company has recorded a net receivable of $52.8 million for the estimated probable state reimbursements, which includes an increase of approximately $14 million resulting from recent legislative changes in California which have expanded and extended that state's 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 amount is net of an allowance of $8.1 million. While there is no assurance of the timing of the receipt of state reimbursement funds, based on its experience, the Company expects to receive the majority of state reimbursement funds, except from California, within one to three years after payment of eligible remediation expenses. This time period assumes that the state administrative procedures for processing such reimbursements have been fully developed. Because of recent legislative changes in California, the Company now estimates it will receive reimbursement of most of its identified remediation expenses in California, although it may take one to ten years to receive these reimbursement funds. As a result of the timing in receiving reimbursement funds from the various states, the Company has present valued the portion of the total recorded receivable amount that relates to remedial activities that have already been completed at a discount rate of approximately 6.4%. Thus, the recorded receivable amount is also net of an aggregate discount of $15.0 million. The estimated future assessment and remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. LITIGATION The Company is a defendant in two legal actions, which are referred to as the 7-Eleven OFFF and Valente cases, filed by franchisees in 1993 and 1996, respectively, asserting various claims against the Company. A nationwide settlement was negotiated and, in connection with the settlement, these two cases have been combined on behalf of a class of all persons who operated 7-Eleven convenience stores in the United States at any time between January 1, 1987 and July 31, 1997, under franchise agreements with the Company. Class members have overwhelmingly 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 former franchisees will share in a settlement fund and that certain changes will be made to the franchise agreements with current franchisees. Notices of appeal of the order approving the settlement were filed on behalf of three of the attorneys who represented the class, six former franchisees and two current franchisees. One of these current franchisees has dismissed his appeal. The settlement agreement will not become effective 39 until the appeals are resolved. However, the settlement agreement provides that while the appeals are pending the Company will pay certain maintenance and supply expenses relating to the cash registers and retail information system equipment of current franchisees that are members of the settlement class. If the settlement is overturned on appeal, the Company has the right to require franchisees to repay the amounts that the Company paid for these expenses while the appeals were pending. The Company's payment of these expenses had no material impact on earnings for 1998 or 1999 and should have no material impact on future earnings. The Company's accruals are sufficient to cover the total settlement costs, including the payment due to former franchisees when the settlement becomes effective. IMPACT OF YEAR 2000 ISSUES Over the last several years, the Company has prepared for the possible disruptions that might have resulted from the date change to the Year 2000. No significant Year 2000 problems were experienced and at this point the Company believes no material exposure to Year 2000 issues exist. Total expenditures related to the modifications of existing software and conversions to new software for the Year 2000 issues totaled approximately $8.8 million, of which $3.7 million was capitalized. RECENTLY ISSUED ACCOUNTING STANDARD The Company is currently reviewing SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 becomes effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and earlier application is permitted as of the beginning of any fiscal quarter subsequent to June 15, 2000. The Company intends to adopt the provisions of this statement as of January 1, 2001. The impact of the adoption of SFAS No. 133 has not been determined at this time due to the Company's continuing investigation of its financial instruments and the applicability of SFAS No. 133 to them. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Management's Discussion and Analysis of Financial Condition and Results of Operations," above. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 7-ELEVEN, INC. AND SUBSIDIARIES Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997 41
7-ELEVEN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) ASSETS 1999 1998 ------------ ----------- CURRENT ASSETS: Cash and cash equivalents $ 76,859 $ 87,115 Accounts receivable 179,039 148,046 Inventories 134,050 101,045 Other current assets 115,328 162,631 ----------- ----------- Total current assets 505,276 498,837 PROPERTY AND EQUIPMENT 1,880,520 1,652,932 OTHER ASSETS 299,870 324,310 ----------- ----------- $ 2,685,666 $ 2,476,079 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable $ 168,302 $ 136,059 Accrued expenses and other liabilities 401,216 422,633 Commercial paper 34,418 18,348 Long-term debt due within one year 207,413 151,754 ----------- ----------- Total current liabilities 811,349 728,794 DEFERRED CREDITS AND OTHER LIABILITIES 251,073 220,653 LONG-TERM DEBT 1,802,819 1,788,843 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; 409,998,953 and 409,922,935 shares issued and outstanding 41 41 Additional capital 625,728 625,574 Accumulated deficit (1,194,896) (1,278,009) Accumulated other comprehensive earnings 9,552 10,183 ------------ ------------ Total shareholders' equity (deficit) (559,575) (642,211) ------------ ------------ $ 2,685,666 $ 2,476,079 =========== ===========
See notes to consolidated financial statements. 42
7-ELEVEN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1999 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) 1999 1998 1997 ------------- ------------- ------------- REVENUES: Merchandise sales (including $527,422, $466,013 and $438,489 in excise taxes) $ 6,216,133 $ 5,573,606 $ 5,181,762 Gasoline sales (including $634,199, $577,457 and $532,635 in excise taxes) 2,035,557 1,684,184 1,789,383 ------------ ----------- ------------ Net sales 8,251,690 7,257,790 6,971,145 Other income 97,853 92,021 89,412 ------------- ------------- ------------ 8,349,543 7,349,811 7,060,557 COSTS AND EXPENSES: Merchandise cost of goods sold 4,073,743 3,645,974 3,353,323 Gasoline cost of goods sold 1,812,115 1,476,144 1,605,603 ----------- ----------- ----------- Total cost of goods sold 5,885,858 5,122,118 4,958,926 Franchisee gross profit 612,233 551,003 524,941 Operating, selling, general and administrative expenses 1,621,881 1,502,788 1,371,265 Interest expense, net 102,232 91,289 90,130 ------------- ------------- ------------ 8,222,204 7,267,198 6,945,262 ------------- ------------- ------------ EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY GAIN 127,339 82,613 115,295 INCOME TAXES 48,516 31,889 45,253 ------------- ------------- ------------ EARNINGS BEFORE EXTRAORDINARY GAIN 78,823 50,724 70,042 EXTRAORDINARY GAIN ON DEBT REDEMPTION (net of tax effect of $2,743 and $14,912) 4,290 23,324 - ------------- ------------- ------------ NET EARNINGS $ 83,113 $ 74,048 $ 70,042 ============= ============= ============ NET EARNINGS PER COMMON SHARE: BASIC Earnings before extraordinary gain $ .19 $ .12 $ .17 Extraordinary gain .01 .06 - ----- ----- ----- Net earnings $ .20 $ .18 $ .17 ===== ===== ===== DILUTED Earnings before extraordinary gain $ .17 $ .12 $ .16 Extraordinary gain .01 .05 - ----- ----- ----- Net earnings $ .18 $ .17 $ .16 ===== ===== ===== See notes to consolidated financial statements. 43
7-ELEVEN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (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, 1996 409,923 $ 41 $ 625,574 $ (1,422,099) $ 10,765 $ (3,236) $(788,955) Net earnings 70,042 70,042 Other comprehensive earnings: Unrealized gain on equity securities (net of $958 deferred taxes) 1,498 1,498 Reclassification adjustments for gains included in net earnings (net of $1,964 tax expense) (3,072) (3,072) Foreign currency translation (1,040) (1,040) -------- Total other comprehensive earnings (loss) (2,614) -------- Comprehensive earnings 67,428 - ------------------------------------------------------------------------------------------------------------------- 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 tax expense) (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 gain on equity securities (net of ($447) deferred taxes) (698) (698) Reclassification adjustments for gains included in net earnings (net of $2,946 tax expense) (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 - -------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 409,999 $ 41 $ 625,728 $ (1,194,896) $ 11,151 $ (1,599) $ (559,575) ====================================================================================================================
See notes to consolidated financial statements 44
7-ELEVEN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS) 1999 1998 1997 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 83,113 $ 74,048 $ 70,042 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary gain on debt redemption (4,290) (23,324) - Depreciation and amortization of property and equipment 185,495 175,086 177,174 Other amortization 19,968 19,611 19,026 Deferred income taxes 32,476 19,190 31,812 Noncash interest expense 1,466 1,725 2,342 Other noncash (income) expense (4,099) 2,943 96 Net loss on property and equipment 7,955 9,631 2,391 Increase in accounts receivable (36,724) (22,674) (1,563) (Increase) decrease in inventories (33,005) 11,306 (16,010) Decrease (increase) in other assets 3,925 (35,330) (11,114) Increase (decrease) in trade accounts payable and other liabilities 35,944 600 (76,250) ------------- ------------- ------------- Net cash provided by operating activities 292,224 232,812 197,946 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of property and equipment (428,837) (380,871) (232,539) Proceeds from sale of property and equipment 53,512 8,607 39,648 Proceeds from sale of domestic securities 7,522 6,754 4,997 Acquisition of businesses, net of cash acquired - (32,929) - Other 7,219 1,625 1,911 ------------- ------------- ------------- Net cash used in investing activities (360,584) (396,814) (185,983) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from commercial paper and revolving credit facilities 4,872,273 7,231,795 5,907,243 Payments under commercial paper and revolving credit facilities (4,661,427) (7,032,120) (5,842,539) Proceeds from issuance of long-term debt - 96,503 225,000 Principal payments under long-term debt agreements (147,392) (154,376) (299,005) Proceeds from issuance of convertible quarterly income debt securities - 15,000 - (Decrease) increase in outstanding checks in excess of cash in bank (4,600) 11,765 4,665 Other (750) (4,525) (551) ------------- ------------- ------------- Net cash provided by (used in) financing activities 58,104 164,042 (5,187) ------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,256) 40 6,776 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 87,115 87,075 80,299 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 76,859 $ 87,115 $ 87,075 ============= ============= ============= RELATED DISCLOSURES FOR CASH FLOW REPORTING: Interest paid, excluding SFAS No.15 Interest $ (117,669) $ (99,240) $ (97,568) ============= ============= ============= Net income taxes paid $ (16,181) (11,721) $ (10,482) ============= ============= ============= Assets obtained by entering into capital leases $ 40,638 $ 33,643 $ 56,745 ============= ============= ============= See notes to consolidated financial statements. 45
7-ELEVEN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) 1. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - 7-Eleven, Inc. and its subsidiaries ("the Company") is owned approximately 65% by IYG Holding Company, 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 13,800 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 $3,385,554, $3,034,951 and $2,880,148 from 3,008, 2,960 and 2,868 stores for the years ended December 31, 1999, 1998 and 1997, respectively. The gross profit of the franchise stores is split between the Company and its franchisees. 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 prices 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. 46 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 ----------------------- 1999 1998 1997 ---- ---- ---- Tobacco Products 25.8% 23.7% 22.5% Beverages 22.9% 23.7% 23.2% Beer/Wine 10.8% 11.3% 11.8% Candy/Snacks 9.4% 9.5% 9.8% Non-Foods 9.2% 8.8% 9.2% Food Service 5.9% 6.0% 5.9% Dairy Products 5.0% 5.3% 5.6% Other 4.2% 4.6% 4.9% Baked Goods 3.9% 4.2% 4.4% ----- ----- ------ Total Product Sales 97.1% 97.1% 97.3% Services 2.9% 2.9% 2.7% ----- ----- ----- 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, 1999, 1998 and 1997 are from Canadian operations, and approximately 5% of the Company's long-lived assets for the years ended December 31, 1999 and 1998 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 $56 million, $53 million and $50 million for the years ended December 31, 1999, 1998 and 1997, 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 in income until its obligations under the agreement are completed. Franchisee fee income was $13,987, $11,881 and $8,309 for the years ended December 31, 1999, 1998 and 1997, respectively. 47 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 $39,418, $40,144 and $35,111 for the years ended December 31, 1999, 1998 and 1997, respectively. INTEREST EXPENSE - Interest expense is net of interest income and capitalized interest. Interest income was $11,159, $12,021 and $8,788, and capitalized interest was $4,952, $2,328 and $572 for the years ended December 31, 1999, 1998 and 1997, 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 $8,114 and $29,167 at December 31, 1999 and 1998, respectively, stated at cost, which approximates market. The Company utilizes a cash management system under which a book balance 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 8). INVENTORIES - Inventories are stated at the lower of cost or market. Cost is generally determined by the LIFO method for 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 goodw 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 $2,400 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 $5,900 for the year ended December 31, 1999. 48 Foreign and domestic area license royalty intangibles were recorded in 1987 at the fair value of future royalty payments and are being amortized 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 which have already been completed. A receivable is also recorded to reflect estimated probable reimbursement from other parties (see Note 14). 2. SUBSEQUENT EVENTS On March 16, 2000, the Company issued 113,684,211 shares of common stock at $4.75 per share to IYG Holding Company in a private placement transaction, which increased their ownership in the Company to approximately 72%. The net proceeds of approximately $540 million was used on March 16, 2000, to repay the outstanding balance on the Company's bank term loan of $112,500 and will be used to reduce the Company's revolving credit facility by approximately $250 million and commercial paper facility by approximately $177 million (see Note 9). The reduction of the revolver and commercial paper facilities will occur as the various instruments mature during the month of March 2000. The impact of the issuance of the additional shares of common stock and the reduction of debt on earnings before extraordinary gain and related earnings per share, had the transaction occurred on January 1, 1999, is presented in the following condensed consolidated pro forma information for the year ended December 31, 1999 (unaudited, in thousands, except per-share data): 49
As Pro Forma Presented Adjustments Pro Forma -------------------------------------- Earnings before extraordinary gain: Basic $ 78,823 $ 18,296 (1) $ 97,119 Diluted $ 89,584 $ 18,296 (1) $ 107,880 Weighted-average common shares outstanding: Basic 409,969 113,684 (2) 523,653 Diluted 514,798 113,684 (2) 628,482 Earnings per common share before extraordinary gain: Basic $ .19 $ .19 Diluted $ .17 $ .17 (1) Represents interest on retired bank term loan and reduced revolving credit and commercial paper facilities net of tax. (2) Represents additional common shares issued in private placement.
In addition to the private placement, the Company announced that it will submit a proposed reverse stock split to its shareholders. The proposed reverse stock split is estimated to be one share of common for six shares of common. As a result of the anticipated reverse stock split, the total shares outstanding as of December 31, 1999, after giving effect to the shares issued in the private placement, would have been 87,280,527. The impact of the reverse stock split on earnings per common share before extraordinary gain, after giving effect to the private placement, is presented in the following condensed consolidated pro forma information for the year ended December 31, 1999 (unaudited, in thousands, except per-share data): Pro Forma ------------ Earnings before extraordinary gain: Basic $ 97,119 (1) Diluted $ 107,880 (1) Weighted-average common shares outstanding: Basic 87,276 (2) Diluted 104,747 (2) Earnings per common share before extraordinary gain: Basic $ 1.11 Diluted $ 1.03 (1) Pro forma earnings before extraordinary gain after giving effect to the private placement. (2) Pro forma weighted-average shares outstanding after giving effect to the private placement and the proposed reverse stock split. The pro forma results are not necessarily indicative of what would have occurred if the private placement and reverse stock split had been made at the beginning of the period presented. In addition, they are not intended to be a projection of future results. 50 3. ACCOUNTS RECEIVABLE
December 31 ------------------------ 1999 1998 ---- ---- (Dollars in Thousands) Trade accounts receivable $ 84,770 $ 59,985 Franchisee accounts receivable 71,756 74,176 Environmental cost reimbursements - see Note 14 11,981 9,798 SEJ royalty receivable 4,522 4,230 Other accounts receivable 12,254 8,624 ----------- ----------- 185,283 156,813 Allowance for doubtful accounts (6,244) (8,767) ----------- ----------- $ 179,039 $ 148,046 =========== ===========
4. INVENTORIES December 31 ------------------------ 1999 1998 ---- ---- (Dollars in Thousands) Merchandise $ 86,976 $ 74,835 Gasoline 47,074 26,210 --------- --------- $ 134,050 $ 101,045 ========= ========= Inventories stated on the LIFO basis that are included in inventories in the accompanying Consolidated Balance Sheets were $60,505 and $50,242 for merchandise and $40,466 and $21,070 for gasoline at December 31, 1999 and 1998, respectively. These amounts are less than replacement cost by $37,203 and $33,804 for merchandise and $7,124 and $600 for gasoline at December 31, 1999 and 1998, respectively. 51 5. OTHER CURRENT ASSETS
December 31 ------------------------- 1999 1998 --------- ----------- (Dollars in Thousands) Prepaid expenses $ 29,134 $ 26,670 Deferred tax assets - see Note 16 50,287 61,260 Restricted cash - 22,810 Advances for lottery and other tickets 27,789 22,247 Reimbursable equipment purchases under the master lease facility - see Note 13 - 22,892 Other 8,118 6,752 ---------- --------- $ 115,328 $ 162,631 ========== =========
6. PROPERTY AND EQUIPMENT
December 31 --------------------------- 1999 1998 ------------ ------------ (Dollars in Thousands) Cost: Land $ 495,598 $ 493,369 Buildings 419,288 389,751 Leaseholds 1,172,791 1,047,791 Equipment 1,113,561 953,001 Software 186,315 131,693 Construction in process 90,951 102,524 ------------- ------------- 3,478,504 3,118,129 Accumulated depreciation and amortization (includes $47,415 and $29,886 related to software) (1,597,984) (1,465,197) ------------ ------------- $ 1,880,520 $ 1,652,932 ============ ============
52 7. OTHER ASSETS
December 31 -------------------------- 1999 1998 ----- ----- (Dollars in Thousands) SEJ license royalty intangible (net of accumulated amortization of $197,049 and $181,034) $ 121,451 $ 137,466 Other license royalty intangibles (net of accumulated amortization of $35,095 and $32,259) 21,509 24,345 Environmental cost reimbursements - see Note 14 45,046 42,012 Goodwill (net of accumulated amortization of $1,159 and $449) 28,137 30,671 Investments in available-for-sale domestic securities (no cost basis) 18,313 27,011 Other 65,414 62,805 ---------- ---------- $ 299,870 $ 324,310 ========== ==========
8. ACCRUED EXPENSES AND OTHER LIABILITIES
December 31 ------------------------- 1999 1998 ---- ---- (Dollars in Thousands) Insurance $ 31,773 $ 54,059 Compensation 63,188 47,216 Taxes 55,577 51,807 Lotto, lottery and other tickets 40,756 37,446 Other accounts payable 26,132 33,320 Environmental costs - see Note 14 20,019 22,364 Profit sharing - see Note 12 16,491 16,490 Interest 6,243 20,432 Book overdrafts payable - see Note 1 55,635 60,235 Other current liabilities 85,402 79,264 --------- --------- $ 401,216 $ 422,633 ========= =========
The Company continues to review the functions necessary to enable its stores to respond faster, more creatively and more cost efficiently to rapidly changing customer needs and preferences. To accomplish this goal, the Company continues to realign and reduce personnel. For the year ended December 31, 1998, the Company accrued $7,643 for severance benefits for the reduction in force of approximately 120 management and administrative employees. There have been no significant changes to the initial accrual, and the unpaid balance of $2,936 is included in accrued expenses and other liabilities as of December 31, 1999. In addition, the Company accrued termination benefits of $4,654 in December 1999 for approximately 40 employees. The cost of the termination benefits in 1999 and 1998 was recorded in OSG&A expense. 53 9. DEBT
December 31 --------------------------- 1999 1998 ---- ----- (Dollars in Thousands) Bank Debt Term Loans $ 112,500 $ 168,750 Bank Debt revolving credit facility 250,000 295,000 Commercial paper 600,000 350,000 5% First Priority Senior Subordinated Debentures due 2003 287,152 317,866 4-1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004 133,948 144,472 4% Second Priority Senior Subordinated Debentures (Series B) due 2004 21,849 22,590 Yen Loans 177,223 223,751 7-1/2% Cityplace Term Loan due 2005 267,448 272,883 Capital lease obligations 156,933 137,152 Other 3,179 8,133 ----------- ----------- 2,010,232 1,940,597 Less long-term debt due within one year 207,413 151,754 ----------- ----------- $ 1,802,819 $ 1,788,843 =========== ============
BANK DEBT - The Company is obligated to a group of lenders under an unsecured credit agreement ("Credit Agreement") that includes a $225 million term loan and a $400 million revolving credit facility. A sublimit of $150 million for letters of credit is included in the revolving credit facility. In addition, to the extent outstanding letters of credit are less than the $150 million maximum, the excess availability can be used for additional borrowings under the revolving credit facility. Payments on the term loan, which matures on December 31, 2001, commenced in March 1998, when the first installment of 16 quarterly installments of $14,063 was paid. Upon expiration of the revolving credit facility in February 2002, 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, 1999, outstanding letters of credit under the facility totaled $70,152. Interest on the term loan and 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 .475% per year. A fee of .325% per year on the outstanding amount of letters of credit is required to be paid quarterly. In addition, a facility fee of .15% per year is charged on the aggregate amount of the credit agreement facility and is payable quarterly. The weighted- average interest rate on the term loan outstanding at December 31, 1999 and 1998, respectively, was 6.6% and 5.6%. The weighted-average interest rate on the revolving credit facility borrowings outstanding at December 31, 1999 and 1998, respectively, was 6.8% and 5.6%. 54 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, fixed-charge coverage and senior 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) restrict the Company's ability to engage in asset sales and sale/leaseback transactions, (c) restrict the types of investments the Company can make and (d) restrict the Company's ability to pay cash dividends, redeem or prepay principal and interest on any subordinated debt and certain senior debt. COMMERCIAL PAPER - Effective January 1999, the availability of borrowings under the Company's commercial paper facility was increased from $400 million to $650 million. At December 31, 1999 and 1998, $600 million and $350 million of the respective $634,418 and $368,348 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 2001. 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 restrictions in the Credit Agreement. The weighted-average interest rate on commercial paper borrowings outstanding at December 31, 1999 and 1998, respectively, was 6.1% and 5.2%. 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 $239,293 at December 31, 1999, 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 $111,391 at December 31, 1999. - 4% Series B Debentures, due June 15, 2004 ("4% Debentures"), had an outstanding principal balance of $18,516 at December 31, 1999. - 12% Series C Debentures, due June 15, 2009 ("12% Debentures"), were redeemed by the Company in March 1998 with a portion of the proceeds from the issuance of $80 million principal amount of Convertible Quarterly Income Debt Securities due 2013 ("1998 QUIDS") to IY and SEJ (see Note 10). The 12% Debentures had an outstanding principal balance of $21,787 when they were redeemed. 55 The Company also utilized a portion of the proceeds from the 1998 QUIDS to purchase $15,700 principal amount of its 5% Debentures, $7,845 principal amount of its 4-1/2% Debentures and $250 principal amount of its 4% Debentures during the fourth quarter of 1998. The partial purchases of these debentures, together with the redemption of the 12% Debentures, resulted in an extraordinary gain of $23,324 (net of current tax effect of $14,912) 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 $15,000 principal amount of its 5% Debentures in January 1999 and $4,418 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 $4,290 (net of current tax effect of $2,743) 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. Prior to the partial purchases, the 5% Debentures were subject to a sinking fund payment of $8,696 due in December 2002. The Company used its purchase of the 5% Debentures to satisfy all sinking fund requirements so that no sinking fund payments remain. 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. 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. By designating its future royalty receipts during the term of the loan to service the monthly interest and principal payments, the Company has hedged the impact of future exchange rate fluctuations. As a result of the hedge with the SEJ royalty, the 1988 Yen Loan and related interest are converted at 125.35 yen to one U.S. dollar. Payment of the debt is required no later than March 2006 through future royalties from SEJ. The Company believes it is a remote possibility that there will be any principal balance remaining at that date because current royalty projections suggest the 1988 Yen Loan could be repaid as early as 2001. One year following the final repayment of the 1988 Yen Loan, royalty payments from SEJ will be reduced by approximately two-thirds in accordance with the terms of the license agreement. The interest rate was 3.10% as of December 31, 1999. 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 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 2001. Both principal and interest of the loan are nonrecourse to the Company. The Company utilized a short-term put option to lock-in the 56 exchange rate and avoid the risk of foreign currency exchange loss. The put option was financed by selling a call option with the same yen amount and maturity as the put option. Due to market conditions, the call option was not exercised and, as a result, income of $1.6 million was recognized during 1998. Proceeds of the loan were designated for general corporate purposes. As a result of the hedge with the SEJ royalty, the 1998 Yen Loan and related interest are converted at 129.53 yen to one U.S. dollar. CITYPLACE DEBT - 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"). 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. 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): 2000 $ 207,413 2001 132,545 2002 84,909 2003 288,859 2004 166,943 Thereafter 1,129,563 ----------- $ 2,010,232 =========== 10. 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 into a maximum of 72,111,917 shares 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, 1999, 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 32,508,432 shares of the Company's common stock if the Company's stock trades above $2.46 for 20 of 30 consecutive trading days after the fifth anniversary of issuance. In addition, the debt mandatorily converts into 27,090,359 shares of the 57 Company's common stock if the Company's stock trades above $2.95 for 20 of 30 consecutive trading days after the third anniversary of issuance and before the fifth anniversary. 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 9). 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 as of December 31, 1999 and 1998, and interest expense of $17,384, $16,801 and $13,733 for the years ended December 31, 1999, 1998 and 1997, respectively, related to the Convertible Debt. The Company has not deferred any interest payments in connection with the Convertible Debt. 11. 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. The carrying amounts and estimated fair values of other financial instruments at December 31, 1999, are listed in the following table:
Carrying Estimated Amount Fair Value ---------- ---------- (Dollars in Thousands) Bank Debt $ 362,500 $ 362,500 Commercial Paper 634,418 634,418 Debentures 442,949 308,810 Yen Loans 177,223 223,753 Cityplace Term Loan 267,448 254,908 Convertible Debt 380,000 305,561 Interest Rate Swap 2,399 (6,768)
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: - The carrying amount of the Bank Debt approximates fair value because the interest rates are variable. - Commercial paper borrowings are sold at market interest rates and have an average remaining maturity of less than 49 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. 58 - - The fair value of the Debentures is estimated based on December 31, 1999, bid prices obtained from investment banking firms where traders regularly make a market for these financial instruments. The carrying amount of the Debentures includes $73,749 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. - The fair value of the Convertible Debt (see Note 10) at December 31,1999, is based on the sum of the fair values assigned to both an interest rate and an equity component of the debt by a valuation firm. The interest rate component is based on the ten-year treasury rate plus the Company's subordinated borrowing spread. The equity component is based on the Company's stock price as of December 31, 1999, using a 35% volatility factor. Subsequent to December 31, 1999, the Company's stock price has increased substantially. This increase would result in the fair value of the Convertible Debt moving closer to its carrying value. - - The fair value of the Interest Rate Swap is estimated based on December 31, 1999, quoted market prices of the same or similar instruments and represents the estimated amount the Company would receive if the Company chose to terminate the swap as of December 31 ,1999. DERIVATIVES - The Company uses derivative financial instruments to reduce its exposure to market risk resulting from fluctuations in foreign exchange rates (see Note 9), gasoline prices and interest rates. In June 1998, the Company entered into an interest rate swap agreement that fixed the interest rate at 5.395% on $250 million notional principal amount of floating rate debt until June 2003. This agreement was amended in February 1999, and the Company will pay a fixed interest rate of 6.096% on the floating rate debt until February 2004. A major financial institution, as counterparty to the agreement, will pay the Company a floating interest rate based on three- month LIBOR during the term of the agreement in exchange for the Company paying the fixed interest rate. Interest payments related to the original agreement commenced in September 1998, and interest payments related to the amended agreement commenced in May 1999. Interest payments are made quarterly by both parties. Except for the option component discussed below, the swap is accounted for as a hedge and, accordingly, any difference between amounts paid and received under the swap are 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, 1999 and 1998, and the Company does not anticipate a material impact on its earnings as a result of the amended agreement. The Company is at risk of loss from this swap agreement in the event of nonperformance by the counterparty. Upon expiration of the initial swap term, the original agreement was extendible for an additional five years at the option of the counterparty. This extendible option component of the original agreement was unwound by the amended agreement. The option component was recognized at fair value and marked to market as of December 31, 1998, and also at the time of unwinding. Due to declining interest rates throughout the third and fourth quarters of 1998, the Company recognized $3,677 of expense related to the option component in 1998. However, with respect to its unhedged floating rate debt, the Company experienced a positive economic benefit from the declining interest rates during the same period. In the first quarter of 1999, the Company recognized income of $1,505 as a result of the mark-to- market adjustment of the option component through the date of the unwinding. 59 The Company is currently reviewing SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 becomes effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and earlier application is permitted as of the beginning of any fiscal quarter subsequent to June 15, 2000. The Company intends to adopt the provisions of this statement as of January 1, 2001. The impact of the adoption of SFAS No. 133 has not been determined at this time due to the Company's continuing investigation of its financial instruments and the applicability of SFAS No. 133 to them. 12. BENEFIT PLANS PROFIT SHARING PLANS - The Company maintains the 7-Eleven, Inc. Employees' Savings and Profit Sharing Plan (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 minus the amount contributed to the 7- Eleven, Inc. Supplemental Executive Retirement Plan for Eligible Employees (the "Supplemental Executive Retirement Plan") or an amount determined by the Company. Net earnings are calculated without regard to the contribution to the Savings and Profit Sharing Plan, federal income taxes, gains from debt repurchases and refinancings and, at the discretion of the chief executive officer of the Company, income from accounting changes. 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, 1999, 1998 and 1997 were $13,616, $13,403 and $12,977, respectively, and are included in OSG&A. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Effective January 1998, the Company established the Supplemental Executive Retirement Plan, which is an unfunded employee benefit plan maintained primarily to allow compensation to be deferred by highly compensated employees as defined by the Internal Revenue Service. Benefits under this plan constitute general obligations of the Company, subject to the claims of general creditors of the Company, and participants have no security or other interest in such funds. Contributions to the Supplemental Executive Retirement Plan are made by the participant and may be made by the Company. A participant may elect to defer a maximum of 12 percent of eligible compensation. The Company may make a matching contribution, if so authorized each plan year, up to a maximum of six percent of the participant's eligible compensation minus the amount of the participant's deferral to the Savings and Profit Sharing Plan. Matching contributions, if any, will be credited to the participant's account at the same rate that 7- Eleven matches under the Savings and Profit Sharing Plan, but using years of service with the Company, minus one, rather than years of participation in the Savings and Profit Sharing Plan to determine a participant's group. There were no Company contributions to this plan for the years ended December 31, 1999 and 1998. 60 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. The following information on the Company's Insurance Plan is provided:
December 31 ----------------------- 1999 1998 ---- ---- (Dollars in Thousands) CHANGE IN BENEFIT OBLIGATION: Net benefit obligation at beginning of year $ 22,914 $ 21,238 Service cost 658 536 Interest cost 1,541 1,523 Plan participants' contributions 2,479 2,953 Actuarial (gain) loss (3,020) 894 Gross benefits paid (4,742) (4,230) ---------- --------- Net benefit obligation at end of year $ 19,830 $ 22,914 ========== ========= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ - $ - Employer contributions 2,263 1,277 Plan participants' contributions 2,479 2,953 Gross benefits paid (4,742) (4,230) --------- --------- Fair value of plan assets at end of year $ - $ - ========= ========= Funded status at end of year $ (19,830) $ (22,914) Unrecognized net actuarial (gain) loss (8,892) (6,270) ---------- ---------- Accrued benefit costs $ (28,722) $ (29,184) ========== ==========
61
Years Ended December 31 -------------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in Thousands) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 658 $ 536 $ 521 Interest cost 1,541 1,523 1,535 Amortization of actuarial (gain) loss (398) (560) (603) -------- -------- -------- Net periodic benefit cost $ 1,801 $ 1,499 $ 1,453 ======== ======== ======== WEIGHTED-AVERAGE ASSUMPTIONS USED: Discount rate 7.75% 6.75% 7.25% Health care cost trend on covered charges: 1998 trend N/A N/A 9.00% 1999 trend N/A 8.00% 8.00% 2000 trend 7.00% 7.00% 7.00% Ultimate trend 6.00% 6.00% 6.00% Ultimate trend reached in 2001 2001 2001
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, 1999, 1998 and 1997 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 41 million shares over a ten-year period to certain key employees and officers of the Company. All options granted in 1999, 1998 and 1997 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 upon 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 6.19%, 4.50% and 5.81% in 1999, 1998 and 1997, respectively, and expected volatility of 62.95%, 61.76% and 51.37% in 1999, 1998 and 1997, respectively. 62 A summary of the status of the Stock Incentive Plan as of December 31, 1999, 1998 and 1997, and changes during the years ending on those dates, is presented below:
1999 1998 1997 ------------------------- ------------------------- ------------------------ 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 13,428 $2.6448 10,500 $2.8903 7,618 $3.0895 Granted 3,863 1.8750 3,359 1.9063 3,390 2.4690 Exercised - - - - - - Forfeited (1,821) 2.8717 (431) 2.8693 (508) 3.0679 -------- ------- ------- Outstanding at end of year 15,470 2.4259 13,428 2.6448 10,500 2.8903 ======= ======= ======= Options exercisable at year-end 5,645 2.8422 4,044 3.0074 2,126 3.1231 Weighted-average fair value of options granted during the year $1.1053 $1.0741 $1.2691
Options Outstanding Options Exercisable ------------------------------------------------------------ ---------------------------- Options Weighted- Options Outstanding Average Weighted- Exercisable Weighted- Range of at 12/31/99 Remaining Average at 12/31/99 Average Exercise Prices (000's) Contractual Life Exercise Price (000's) Exercise Price ---------------- ----------- ---------------- -------------- ------------ -------------- $1.8750 3,863 9.77 $1.8750 - - 1.9063 3,296 8.79 1.9063 659 $1.9063 2.4690 2,706 7.87 2.4690 1,083 2.4690 3.0000 2,906 6.75 3.0000 1,743 3.0000 3.1875 2,699 5.81 3.1875 2,160 3.1875 ----------- ----------- 1.8750 - 3.1875 15,470 7.97 2.4259 5,645 2.8422 =========== ===========
The Company is accounting for the Stock Incentive Plan 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, 1999, 1998 and 1997, would have been reduced to the pro forma amounts indicated in the table below:
1999 1998 1997 --------- -------- ---------- (Dollars in Thousands, Except Per-Share Data) Net earnings: As reported $ 83,113 $ 74,048 $ 70,042 Pro forma 80,819 72,017 68,542 Earnings per common share: As reported: Basic $ .20 $ .18 $ .17 Diluted .18 .17 .16 Pro forma: Basic $ .20 $ .18 $ .17 Diluted .18 .16 .16
63 13. 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 August 1999, the Company entered into a leasing facility that will provide 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, 1999, the trust had funded $28,310 from this facility. The lease has a maximum lease term of 66 months. After the initial lease term has expired, the Company has the option of (1) extending the lease for an additional period subject to the approval of the trust, (2) purchasing the property for an amount approximating the trust's interest in the property, or (3) 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 9). In December 1999 and January 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 proceeds of $58,937 and $73,360 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. Under the terms of the agreements, the Company will make rental payments over a sixteen-year lease term. 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. In April 1997, the Company obtained commitments from the same group of lenders that participated in the Credit Agreement (see Note 9) for up to $115 million of lease financing under a master lease facility to be 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 facility. Lease payments are variable based on changes in LIBOR. 64 Individual leases under this master lease facility have initial terms that expire on June 30, 2000, 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 also has the 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 1998 ---- ----- (Dollars in Thousands) Buildings $ 164,487 $ 129,520 Equipment 6,843 6,755 Software 40,813 40,813 ----------- ----------- 212,143 177,088 Accumulated amortization (77,503) (69,989) ----------- ----------- $ 134,640 $ 107,099 =========== ===========
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. Future minimum lease payments for years ending December 31 are as follows:
Capital Operating Leases Leases ---------- ----------- (Dollars in Thousands) 2000 $ 36,370 $ 153,345 2001 33,245 138,365 2002 27,636 121,217 2003 19,676 101,175 2004 19,126 75,488 Thereafter 127,124 357,350 ---------- ---------- Future minimum lease payments 263,177 $ 946,940 =========== Estimated executory costs (23) Amount representing imputed interest (106,221) ---------- Present value of future minimum lease payments $ 156,933 ==========
65 Minimum noncancelable sublease rental income to be received in the future, which is not included above as an offset to future payments, totals $13,263 for capital leases and $12,780 for operating leases. Rent expense on operating leases for the years ended December 31, 1999, 1998 and 1997 totaled $164,643, $143,539 and $136,516, respectively, including contingent rent expense of $11,541, $10,441 and $9,360, but reduced by sublease rent income of $4,936, $5,909 and $6,620. Contingent rent expense on capital leases for the years ended December 31, 1999, 1998 and 1997, was $1,539, $1,818 and $1,987, 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, 1999, the Savings and Profit Sharing Plan owned one store leased to the Company under a capital lease and 591 stores leased to the Company under operating leases at rentals which, in the opinion of management, approximated market rates at the date of lease. In addition, in 1999, 1998 and 1997, there were 28, 99 and 64 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, four properties, five properties and one property, respectively, were sold to the Company by the Savings and Profit Sharing Plan in 1999, 1998 and 1997. Included in the consolidated financial statements are the following amounts related to leases with the Savings and Profit Sharing Plan:
December 31 ------------------------ 1999 1998 ---- ---- (Dollars in Thousands) Buildings (net of accumulated amortization of $39 and $886) $ 40 $ 281 ========= ========== Capital lease obligations (net of current portion of $44 and $56) $ 34 $ 314 ========= =========
Years Ended December 31 --------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in Thousands) Rent expense under operating leases and amortization of capital lease assets $18,166 $19,987 $23,961 ======= ======= ======= Imputed interest expense on capital lease obligations $ 5 $ 59 $ 159 ======= ======= ======= Capital lease principal payments included in principal payments under long-term debt agreements $ 3 $ 594 $ 1,183 ======= ======= =======
66 14. 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 $9,450 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 $7,281 and $8,726 at December 31, 1999 and 1998, respectively. Of this amount, $4,382 and $6,462, 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 $4,259 and $5,098 at December 31 ,1999 and 1998, respectively. Of this amount, $2,528 and $3,750, 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 1998, respectively, the Company's estimated undiscounted liability for these sites was $33,449 and $41,897, of which $16,329 and $21,797 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, 1999, will be incurred within the next four or five years. 67 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 1998, the Company has recorded net receivable amounts of $52,768 and $46,712 for the estimated probable state reimbursements, of which $42,518 and $38,262, 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 $8,115 and $9,992 for 1999 and 1998, 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 4.6% in 1998 to reflect present values. Thus, the 1999 and 1998 recorded receivable amounts are net of present value discounts of $14,996 and $4,051, 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. 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 - Effective October 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 - Effective October 1998, the Company established the Stock Compensation Plan for Non-Employee Directors under which up to an aggregate of 1,200,000 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, 76,018 shares were issued under the plan. 68 16. INCOME TAXES The components of earnings before income taxes and extraordinary gain are as follows:
Years Ended December 31 ------------------------------------ 1999 1998 1997 ------- --------- -------- (Dollars in Thousands) Domestic (including royalties of $72,947, $68,329 and $67,259 from area license agreements in foreign countries) $ 115,588 $ 78,719 $ 109,982 Foreign 11,751 3,894 5,313 --------- --------- --------- $ 127,339 $ 82,613 $ 115,295 ========== ========== =========
The provision for income taxes on earnings before extraordinary gain in the accompanying Consolidated Statements of Earnings consists of the following:
Years Ended December 31 ------------------------------- 1999 1998 1997 -------- -------- --------- (Dollars in Thousands) Current: Federal $ 429 $ 1,146 $ 1,182 Foreign 13,361 10,753 11,559 State 2,250 800 700 -------- -------- --------- Subtotal 16,040 12,699 13,441 Deferred 32,476 19,190 31,812 -------- --------- --------- Income taxes on earnings before extraordinary gain $ 48,516 $ 31,889 $ 45,253 ======== ========= =========
Included in the accompanying Consolidated Statements of Shareholders' Equity (Deficit) at December 31, 1999, 1998 and 1997, respectively, are $7,128, $10,521 and $5,877 of income taxes provided on unrealized gains on marketable securities. 69 Reconciliations of income taxes on earnings before extraordinary gain at the federal statutory rate to the Company's actual income taxes provided are as follows:
Years Ended December 31 -------------------------------- 1999 1998 1997 -------- -------- --------- (Dollars in Thousands) Taxes at federal statutory rate $ 44,569 $ 28,915 $ 40,353 State income taxes, net of federal income tax benefit 1,463 520 455 Foreign tax rate difference 728 263 2,095 Other 1,756 2,191 2,350 --------- --------- --------- $ 48,516 $ 31,889 $ 45,253 ========= ========= =========
Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31 ------------------------ 1999 1998 ---------- ---------- (Dollars in Thousands) Deferred tax assets: Compensation and benefits $ 33,962 $ 38,823 SFAS No. 15 Interest 29,747 43,983 Accrued insurance 29,237 25,483 Accrued liabilities 25,863 25,842 Tax credit carryforwards 5,722 11,515 Debt issuance costs 4,718 6,518 Other 6,178 6,075 ---------- --------- Subtotal 135,427 158,239 Deferred tax liabilities: Property and equipment (86,937) (70,943) Area license agreements (55,754) (63,106) Other (11,695) (15,498) ---------- - -------- Subtotal (154,386) (149,547) ---------- ---------- Net deferred tax (liability) asset $ (18,959) $ 8,692 ========== ==========
At December 31, 1999 and 1998, respectively, $69,246 and $52,568 of the Company's net deferred tax (liability) asset is recorded in deferred credits and other liabilities. The remaining balance is included in other current assets (see Note 5). At December 31, 1999, the Company had approximately $5,700 of alternative minimum tax credit carryforwards, which have no expiration date. 70 17. EARNINGS PER COMMON SHARE Computations for basic and diluted earnings per share are presented below:
Years Ended December 31 ----------------------------- 1999 1998 1997 ------ ------- ------- (In Thousands, Except Per-Share Data) BASIC: Earnings before extraordinary gain $ 78,823 $ 50,724 $ 70,042 Earnings on extraordinary gain 4,290 23,324 - --------- -------- --------- Net earnings $ 83,113 $ 74,048 $ 70,042 ======= ======== ======== Weighted-average common shares outstanding 409,969 409,923 409,923 ======== ======== ======== Earnings per common share before extraordinary gain $ .19 $ .12 $ .17 Earnings per common share on extraordinary gain .01 .06 - -------- -------- ------- Net earnings per common share $ .20 $ .18 $ .17 ======== ======== ======== DILUTED: Earnings before extraordinary gain $ 78,823 $ 50,724 $ 70,042 Add interest on convertible quarterly income debt securities, net of tax - see Note 10 10,761 10,316 8,343 -------- -------- -------- Earnings before extraordinary gain plus assumed conversions 89,584 61,040 78,385 Earnings on extraordinary gain 4,290 23,324 - -------- -------- -------- Net earnings plus assumed conversions $ 93,874 $ 84,364 $ 78,385 ======== ======== ======== Weighted-average common shares outstanding (Basic) 409,969 409,923 409,923 Add effects of assumed conversions: Stock options - see Note 12 209 119 170 Convertible quarterly income debt securities - see Note 10 104,620 99,589 72,112 -------- -------- -------- Weighted-average common shares outstanding plus shares from assumed conversions (Diluted) 514,798 509,631 482,205 ======== ======== ======== Earnings per common share before extraordinary gain $ .17 $ .12 $ .16 Earnings per common share on extraordinary gain .01 .05 - -------- ------- -------- Net earnings per common share $ .18 $ .17 $ .16 ======== ======== =========
18. ACQUISITIONS In May 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 the assets of 20 'red D mart' convenience stores in the South Bend, Indiana, area from MDK Corporation of Goshen, Indiana, at approximately the same time. 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. Pro forma information is not provided as the impact of the acquisitions does not have a material effect on the Company's results of operations, cash flows or financial position. 71 The following information is provided as supplemental cash flow disclosure for the acquisitions of businesses 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 1998 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 taxes 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 .01 .07 .09 .03 .19 Diluted .01 .06 .08 .03 .17
The first quarter includes an extraordinary gain of $4,290 resulting from the partial purchases of the 5% Debentures and the 4-1/2% Debentures (see Note 9). 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 14). The fourth quarter includes a termination benefit accrual of $4,700 (see Note 8). 72
YEAR ENDED DECEMBER 31, 1998: First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------ (Dollars in Millions, Except Per-Share Data) Merchandise sales $1,204 $1,421 $1,556 $1,393 $5,574 Gasoline sales 391 424 444 425 1,684 ------ ------ ------ ------ ------ Net sales 1,595 1,845 2,000 1,818 7,258 ------ ------ ------ ------ ------ Merchandise gross profit 411 502 546 469 1,928 Gasoline gross profit 43 44 59 62 208 ------ ------ ------ ------ ------ Gross profit 454 546 605 531 2,136 ------ ------ ------ ------ ------ Income taxes (benefit) (7) 16 22 1 32 Earnings (loss) before extraordinary gain (12) 26 36 1 51 Net earnings 6 26 36 6 74 Earnings (loss) per common share before extraordinary gain: Basic (.03) .06 .09 .01 .12 Diluted (.03) .06 .07 .01 .12
The first and fourth quarters include extraordinary gains of $17,871 and $5,453, respectively, resulting from the redemption of the 12% Debentures and the partial purchases of the 5% Debentures, the 4-1/2% Debentures and the 4% Debentures (see Note 9). The first quarter includes an expense of $11,839 resulting from a computer equipment lease termination and an accrual of $7,104 for severance benefits and related costs. 73 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 1998, 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, 1999. 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. 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 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 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Dallas, Texas February 3, 2000, except as to the information included in the fourth paragraph of Note 13, for which the date is March 2, 2000, and the information included in Note 2, for which the date is March 16, 2000. 74 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 Certain of the information required in response to this Item is incorporated by reference from the Registrant's Definitive Proxy Statement for the April 26, 2000 Annual Meeting of Shareholders. See also "Executive Officers of the Registrant" beginning on page 15, herein. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the April 26, 2000 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the April 26, 2000 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item is incorporated herein by reference to the Registrant's Definitive Proxy Statement for the April 26, 2000 Annual Meeting of Shareholders. 75 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, 1999 are included herein:
PAGE Consolidated Balance Sheets - December 31,1999 and 1998 42 Consolidated Statements of Earnings - Years Ended December 31, 1999, 1998 and 1997 43 Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31, 1999, 1998 and 1997 44 Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998 and 1997 45 Notes to Consolidated Financial Statements 46 Report of Independent Accountants - PricewaterhouseCoopers LLP 74
2. 7-Eleven, Inc. and Subsidiaries' Financial Statement Schedule, included herein.
PAGE Report of Independent Accountants on Financial Statement Schedule - PricewaterhouseCoopers LLP 81 II - Valuation and Qualifying Accounts 82
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 notes thereto. 3. The following is a list of the Exhibits required to be filed by Item 601 of Regulation S-K. EXHIBIT NO. 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.(1) Debtor's Plan of Reorganization, dated October 24, 1990, as filed in the United States Bankruptcy Court, Northern District of Texas, Dallas Division, and Addendum to Debtor's Plan of Reorganization dated January 23, 1991, incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated January 23, 1991, File Numbers 0-676 and 0-16626, Exhibits 2.1 and 2.2. 2.(2) Stock Purchase Agreement, dated as of January 25, 1991, by and among The Southland Corporation, Ito-Yokado Co., Ltd. and Seven-Eleven Japan Co., Ltd., incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated January 23, 1991, File Numbers 0-676 and 0-16626, Exhibit 2.3. 2.(3) Confirmation Order issued on February 21, 1991 by the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated March 4, 1991, File Numbers 0-676 and 0-16626, Exhibit 2.1. 76 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) 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, incorporated by reference to 7-Eleven, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, Exhibit 4.. 4.(i)(2) Shareholders Agreement dated as of March 5, 1991, among The Southland Corporation, Ito-Yokado Co., Ltd., IYG Holding Company, Thompson Brothers, L.P., Thompson Capital Partners, L.P., The Hayden Company, The Williamsburg Corporation, Four J Investment, L.P., The Philp Co., participants in the Company's Grant Stock Plan who are signatories thereto and certain limited partners of Thompson Capital Partners, L.P. who are signatories thereto, incorporated by reference to Schedule 13D filed by Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company, Exhibit A. 4.(i)(3) First Amendment, dated December 30, 1992, to Shareholders Agreement, dated as of March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 4.(i)(5). 4.(i)(4) Second Amendment, dated February 28, 1996, to Shareholders Agreement, dated as of March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, Exhibit 4.(i)(6), Tab 1. 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.* Tab 1 4.(i)(6) Agreement as to Shares dated March 16, 2000, between 7- Eleven, Inc., Ito-Yokado Co., Ltd. And Seven-Eleven Co., Ltd.* Tab 2 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.* Tab 3 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). 77 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). 9. VOTING TRUST AGREEMENT. NONE. (EXCEPT SEE EXHIBITS 4.(I)(2), ABOVE.) 10. MATERIAL CONTRACTS. 10.(i)(1) Stock Purchase Agreement among The Southland Corporation, Ito-Yokado Co., Ltd. and Seven-Eleven Japan Co., Ltd., dated as of January 25, 1991. See Exhibit 2.(2), above. 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). 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). 78 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, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.(iii)(A)(3). 10.(iii)(A)(2) 7-Eleven, Inc. Officers' Deferred Compensation Plan, sample agreement, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.(iii)(A)(4). 10.(iii)(A)(3) Form of Bonus Deferral Agreement relating to deferral of Annual Performance Incentive Payment, 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)(3). 10.(iii)(A)(4) Letter Agreement dated March 7, 2000, between Clark Matthews II and 7-Eleven, Inc. Tab 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). 79 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.* Tab 5 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 21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 2000.* Tab 6 23. CONSENTS OF EXPERTS AND COUNSEL. Consent of Independent Accountants - PricewaterhouseCoopers LLP.* Tab 7 27. FINANCIAL DATA SCHEDULE. FILED ELECTRONICALLY ONLY, NOT ATTACHED TO PRINTED REPORTS. - ------------------------------ *Filed or furnished herewith (b) Reports on Form 8-K. During the fourth quarter of 1999, the Company filed no reports on Form 8-K. (c) The exhibits required by Item 601 of Regulation S-K are attached hereto or incorporated by reference herein. (d)(3) The financial statement schedule for 7-Eleven, Inc. and Subsidiaries is included herein, as follows: Schedule II - 7-Eleven, Inc. and Subsidiaries Page Valuation and Qualifying Accounts (for the Years Ended December 31, 1999, 1998 and 1997). 82 80 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 3, 2000, except as to the information included in the fourth paragraph of Note 13, for which the date is March 2, 2000, and the information included in Note 2, for which the date is March 16, 2000, appearing on page 74 of this Form 10-K also included an audit of the financial statement schedule listed in the index on page 76 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 3, 2000 81
SCHEDULE II 7-ELEVEN, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (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, 1999.................... $ 8,767 $ 3,531 $ - $ (6,054)(2) $ 6,244 Year ended December 31, 1998.................... 6,796 3,148 - (1,177) 8,767 Year ended December 31, 1997.................... 5,009 2,459 - (672) 6,796 Allowance for environmental cost reimbursements: Year ended December 31, 1999.................... 9,992 (1,877) (3) - - 8,115 Year ended December 31, 1998.................... 9,704 288 - - 9,992 Year ended December 31, 1997.................... 9,459 245 - - 9,704 (1) Uncollectible accounts written off, net of recoveries. (2) Includes approximately $5 million of doubtful accounts receivable for franchisee deficits. (3) Approximately $1.8 million of disputed environmental cost reimbursements with the State of Texas were settled and collected.
82 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 15, 2000 /s/ Clark J. Matthews II ------------------------------------ Clark J. Matthews, II (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 15, 2000 /s/ Toshifumi Suzuki - --------------------- Toshifumi Suzuki Vice Chairman of the Board and Director March 15, 2000 /s/ Clark Matthews - --------------------- Clark J. Matthews, II President and Chief Executive Officer and Director (Principal Executive Officer) and Acting Chief Financial Officer (Principal Financial Officer) March 15, 2000 /s/ James W. Keyes - --------------------- James W. Keyes Executive Vice President and Chief Operating Officer and Director March 15, 2000 /s/ Donald E. Thomas - --------------------- Donald E. Thomas Vice President and Controller (Principal Accounting Officer) March 15, 2000 /s/ Yoshitami Arai - -------------------- Yoshitami Arai Director March 15, 2000 /s/ Masaaki Asakura - -------------------- Masaaki Asakura Senior Vice President and Director March 15, 2000 /s/ Timothy N. Ashida - --------------------- Timothy N. Ashida Director March 15, 2000 /s/ Jay W. Chai - ------------------- Jay W. Chai Director March 15, 2000 /s/ Gary J. Fernandes - ---------------------- Gary J. Fernandes Director March 15, 2000 /s/ Masaaki Kamata - --------------------- Masaaki Kamata Director March 15, 2000 /s/ Kazuo Otsuka - -------------------- Kazuo Otsuka Director March 15, 2000 /s/ Asher O. Pacholder - ---------------------- Asher O. Pacholder Director March 15, 2000 /s/ Nobutake Sato - --------------------- Nobutake Sato Director March 15, 2000
83 EX-4 2 SUBSCRIPTION AGREEMENT Exhibit 4.(i)(5) SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT is made and entered into March 1, 2000 between 7-Eleven, Inc. (the "Company") and IYG Holding Company ("IYG"). The parties hereto agree as follows. 1. IYG shall purchase on March 16, 2000 and the Company shall issue to IYG on March 16, 2000, 113.7 million unregistered shares of common stock of the Company for $4.75 per share or an aggregate purchase price of $540,000,000. IYG agrees to transfer $540,000,000 to the Company on March 16, 2000 as payment of the purchase price for such common stock. 2. On March 16, 2000, the Company and IYG shall execute the Registration Rights Agreement attached hereto as Exhibit A. 3. On March 16, 2000, Ito-Yokado, Co., Ltd., Seven-Eleven Japan Co., Ltd. and the Company shall execute the Agreement as to Shares attached hereto as Exhibit B. IN WITNESS WHEREOF the parties hereto have executed this agreement as of March 1, 2000. 7-ELEVEN, INC. By: /s/ Ezra Shashoua ------------------- Name: Ezra Shashoua Title: Treasurer ITO YOKADO CO., LTD. By /s/ Andrew B. Janszky --------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact SEVEN-ELEVEN JAPAN CO., LTD. By /s/ Andrew B. Janszky --------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact IYG HOLDING COMPANY By /s/ Andrew B. Janszky --------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact Tab 1 EX-4 3 SHARES AGREEMENT Exhibit 4.(i)(6) AGREEMENT AS TO SHARES 7-Eleven, Inc. 2711 North Haskell Avenue Dallas, Texas 75204 March 16, 2000 IYG Holding Company c/o Andrew Janszky Shearman & Sterling 599 Lexington Avenue New York, NY 10022-6030 Ito-Yokado, Co., Ltd. 4-1-4, Shibakoen Minato-Ku, Tokyo 105 Japan Attention: President Seven-Eleven Japan Co., Ltd. 4-1-4, Shibakoen Minato-Ku, Tokyo 105 Japan Attention: Chairman Ladies and Gentlemen: Reference is made to (i) the Registration Rights Agreement dated as of November 22, 1995 (the "1995 Agreement") between Ito-Yokado, Co., Ltd. ("IY"), Seven-Eleven Japan Co., Ltd. ("SEJ") and 7-Eleven, Inc. ("7-Eleven"), (ii) the Registration Rights Agreement dated as of February 26, 1998 (the "1998 Agreement" and, together with the 1995 Agreement, the "Registration Rights Agreements") between IY, SEJ and 7- Eleven and (iii) the 266,937,933 shares of 7-Eleven's common stock currently held by IYG Holding Company ("IYG Shares"). On March 16, 2000, IYG Holding Company ("IYG") intends to purchase from 7-Eleven $540 Million of 7-Eleven's common stock at $4.75 a share ("Stock Purchase"). IY and SEJ, which companies together own 100% of IYG, intends to provide IYG with the funds (the "Funding") to make the Stock Purchase by purchasing 51% and 49%, respectively, of additional common stock of IYG. Tab 2 In connection with the Stock Purchase and the Funding, 7-Eleven hereby requests, and by executing this document at the space provided below each of IY, SEJ and IYG hereby agree as follows: (i) IY and SEJ agree not to exercise any and all registration rights with respect to any of their Registrable Securities (as defined in the Registration Rights Agreements) in connection with the Stock Purchase pursuant to Section 2.1 and 2.2 of each Registration Rights Agreement; (ii) IYG agrees not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of the IYG Shares for the nine months following the consummation of the Stock Purchase; and (iii) IY and SEJ agree to waive any notice requirements relating to the Stock Purchase arising under either Registration Rights Agreement. Except as specifically provided herein, the rights held by IY and SEJ pursuant to the Registration Rights Agreements shall continue in full force and effect, as set forth in the Registration Rights Agreements. This waiver may be executed by the parties hereto in separate counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned has executed this agreement as of this 16th day of March, 2000. 7-ELEVEN, INC. By /s/ Ezra Shashoua ------------------------ Name: Ezra Shashoua Title: Treasurer Acknowledged and Agreed: ITO-YOKADO, CO., LTD. By /s/ Andrew B. Janszky --------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact SEVEN-ELEVEN JAPAN CO., LTD. By /s/ Andrew B. Janszky ----------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact IYG HOLDING COMPANY By /s/ Andrew B. Janszky ------------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact EX-4 4 REGISTRATION RIGHTS AGREEMENT Exhibit 4.(i)(7) REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made and entered into as of March 16, 2000, between 7-Eleven, Inc. a Texas corporation (the "COMPANY"), and IYG Holding Company, a Japanese corporation (the "HOLDER"). This Agreement is made concurrently with the purchase by the Holder of 113.7 million unregistered shares of the Company's Common Stock (the "SECURITIES") at $4.75 per share for an aggregate purchase price of $540 million. In order to induce the Holder to purchase the Securities, the Company has agreed to provide to the Holder the registration rights set forth in this Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following capitalized defined terms shall have the meanings set forth below (certain terms being defined elsewhere in this Agreement): "1933 ACT" shall mean the Securities Act of 1933, as amended from time to time. "COMPANY" shall have the meaning set forth in the preamble and shall also include the Company's successors. "COMMON STOCK" shall mean the Common Stock of the Company, par value $.0001. "PERSON" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "PROSPECTUS" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented, including all material incorporated by reference therein. "REGISTRABLE SECURITIES" shall mean the Securities; PROVIDED, HOWEVER, that any given Security shall cease to be a Registrable Security (i) when a Registration Statement with respect to such security shall have been declared effective under the 1933 Act and such Security shall have been disposed of pursuant to such Registration Statement or (ii) when such Security shall have ceased to be outstanding. Tab 3 "REGISTRATION EXPENSES" shall mean any and all reasonable expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or the Holder in connection with blue sky qualification of any of the Registrable Securities), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreement and other documents relating to the performance of and compliance with this Agreement, (iv) the fees and disbursements of counsel for the Company and (v) the fees and disbursements of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above), if any, or the Holder and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by the Holder. "REGISTRATION STATEMENT" shall mean any registration statement of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. 2.1. REGISTRATION ON REQUEST. (a) Subject to the limitations set forth herein, if the Company shall receive written notice requesting registration of Registrable Securities (a "REGISTRATION REQUEST") from the Holder: (i) the Company shall promptly, but in no event more than ten (10) days following the receipt of such request, deliver to the Holder written notice of its intention to file a Registration Statement pursuant to such Registration Request and specify the principal amount, or number of shares, as the case may be, of Registrable Securities proposed to be included pursuant to the Registration Request by the initiator of such request; (ii) the Company shall, within the time period specified in paragraph 2.1(b), below, prepare, file and use its best efforts to cause to become effective a Registration Statement under the 1933 Act relating to the Registrable Securities specified in the Registration Request for inclusion; and (iii) the Company shall use its best efforts to keep such Registration Statement current and effective until the earlier of (i) three (3) months after the date such Registration Statement is declared effective and (ii) the date that the Registrable Securities covered by such Registration Statement have been disposed of pursuant thereto. (b) The Company shall be obligated to file such Registration Statement as promptly as practicable, but in any event within sixty (60) days after receipt of the first Registration Request and within ninety (90) days of receipt of each subsequent request; PROVIDED, HOWEVER, that, with respect to any Registration Statement filed, or to be filed, pursuant to this paragraph 2.1, if the Company shall furnish to the Holder a certificate of an executive officer of the Company stating that, in such officer's good faith judgment, it would (because of the existence of, or in anticipation of, any acquisition or financing activity, or the unavailability for reasons beyond the Company's control of any required financial statements, or any other event or condition of significance to the Company) be significantly disadvantageous (a "DISADVANTAGEOUS CONDITION") to the Company or the Holder for such Registration Statement to be maintained effective, or to be filed and become effective, the Company shall be entitled to cause such Registration Statement to be withdrawn and the effectiveness of such Registration Statement to be terminated, or, in the event such Registration Statement has not yet been filed, shall be entitled not to file any such Registration Statement, until such Disadvantageous Condition no longer exists (notice of which the Company shall promptly deliver to the Holder) and, upon receipt of any such notice of a Disadvantageous Condition, the Holder will forthwith discontinue use of the Prospectus contained in such Registration Statement and, if so directed by the Company, the Holder will deliver to the Company all copies, other than permanent file copies then in the Holder's possession, of the Prospectus then covering such Registrable Securities at the time of receipt of such notice, and, in the event no Registration Statement has yet been filed, all drafts of the Prospectus covering such Registrable Securities. Upon termination of such Disadvantageous Condition, the Company will, if requested by the Holder, use its best efforts to file such Registration Statement as promptly as practicable, but in any event within thirty (30) days of such termination. If the Company declines to file or withdraws a Registration Statement in accordance with this paragraph, then the election to initiate the proposed offering shall not constitute the exercise of a Registration Request by the Holder. The Company shall not be required to file a Registration Statement within three (3) months of the effective date of a prior Registration Statement filed as a result of a Registration Request. To the extent reasonably requested by the Holder, any offering pursuant to this paragraph 2.1 shall be an underwritten public offering. (c) Notwithstanding anything contained herein to the contrary, (i) no Registration Request shall be effective pursuant to this paragraph 2.1 unless such request includes Registrable Securities having a principal amount of at least $200 million or a fair market value (as determined by the Board of Directors of the Company or any Committee thereunder authorized to act with respect to this Agreement (the "BOARD") in good faith) of at least $150 million with respect to any subsequent Registration Request; and (ii) the Holder shall be entitled to make 3 (three) separate Registration Requests. (d) The Company will pay all Registration Expenses in connection with the registration of Registrable Securities effected by it pursuant to paragraph 2.1, and the balance of any costs and expenses shall be paid by the Holder. (e) In the event that the underwriters, if any, with respect to an offering to be made under this paragraph 2.1 should recommend that the principal amount, or number of shares, of Registrable Securities to be included in such offering should be limited due to market conditions or otherwise, then the Holder shall determine the Registrable Securities to be included. 2.2. INCIDENTAL REGISTRATION. (a) If the Company at any time proposes to register any of its securities under the 1933 Act (other than pursuant to paragraph 2.1 above), whether or not for sale for its own account, on a form and in a manner which would permit registration of Registrable Securities for sale to the public under the 1933 Act, it will give written notice promptly (and in no event less than twenty (20) days prior to the proposed filing date) to the Holder of its intention to do so, describing such securities and specifying the form and manner and the other relevant facts involved in such proposed registration, and upon the written request of the Holder delivered to the Company within ten (10) days after the giving of any such notice (which request shall specify the principal amount, or number of shares, as the case may be, of Registrable Securities intended to be disposed of by the Holder and the intended method of disposition thereof), the Company will use its best efforts to effect the registration under the 1933 Act of all of the Registrable Securities which the Company has been so requested to register by the Holder; PROVIDED THAT: (i) The Holder may request registration of Securities only if the Company is registering its Common Stock in a public offering other than any public offering of the Company's Common Stock which is consummated within nine months following the date hereof. (ii) if, at any time after giving such written notice of its intention to register any of its securities and prior to the effective date of the Registration Statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to the Holder and thereupon shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith as provided in paragraph 2.2(c)), without prejudice, however, to the rights, if any, of the Holder to request that such registration be effected as a registration under paragraph 2.1, above; and (iii) if (A) the Company has filed a registration statement covering the sale for its own account of its own securities to underwriters for the purpose of making a public offering of the Common Stock and Registrable Securities are to be included therein pursuant to the provisions of this paragraph 2.2, (B) in the judgment of the managing underwriter or underwriters of the proposed public offering of such Common Stock, such inclusion would materially adversely affect such public offering, and (C) notification of such determination is given to the Holder participating in such offering prior to the effective date of such registration statement, then the Registrable Securities as to which registration has been requested need not be included by the Company in such registration; PROVIDED, HOWEVER, that such managing underwriter or underwriters may elect to permit the inclusion of a portion of the Registrable Securities as to which registration has been requested, pro rata on the basis of the Holder's holdings of Registrable Securities. (b) The Company shall not be obligated to effect any registration of Registrable Securities under this paragraph 2.2 incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, dividend reinvestment plans, retirement plans or stock option or other employee benefit plans. (c) The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this paragraph 2.2 and the balance of any costs and expenses shall be paid by the Holder. 2.3. RELATED PROVISIONS. (a) In connection with any registration of Registrable Securities pursuant to paragraph 2.1 or 2.2, the Company will: (i) furnish to the Holder such number of conformed copies of the Registration Statement and of each amendment or supplement thereto (in each case including not more than two copies of all exhibits), such number of copies of the Prospectus included in the Registration Statement (including each preliminary Prospectus and any summary Prospectus), in conformity with the requirements of the 1933 Act, any documents incorporated by reference in the Registration Statement or Prospectus, and such other documents, as the Holder may reasonably request; (ii) use its best efforts to register or qualify all Registrable Securities and other securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions in the United States, Canada, Japan, Hong Kong and western Europe as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the disposition in any such reasonably requested jurisdiction of the Registrable Securities covered by such Registration Statement, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process of any such jurisdiction; (iii) furnish to the Holder the following letters: (A) a signed counterpart of an opinion of counsel for the Company, dated the effective date of such Registration Statement (except, if such registration involves an underwritten public offering, such opinion shall be dated the date of the closing under the underwriting agreement), covering such matters as the Holder, or its counsel, may reasonably request; and (B) a letter signed by the independent public accountants who have certified the Company's financial statements included in the Registration Statement, covering such matters as the Holder, or its counsel, may reasonably request; such letters or opinions shall be in the form as is customary for similar letters or opinions, so long as such form is acceptable to the managing underwriters, if any, of such offering; (iv) promptly notify the Holder of Registrable Securities covered by such Registration Statement at any time when a Prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the Prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Holder prepare and furnish to the Holder a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (v) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its securityHolder, as soon as reasonably practicable, but in no event more than eighteen (18) months after the effective date of such Registration Statement, an earnings statement covering a period of at least twelve (12) months after the effective date of such Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act. The Company may require the Holder to furnish the Company such information regarding the Holder and the distribution of such securities by the Holder as the Company may from time to time reasonably request in writing or as shall be required by law or by the SEC in connection therewith. (b) If requested by the underwriters for any offering pursuant to a Registration Request under paragraph 2.1, above, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions including, without limitation, agreements to indemnify and to contribute to the effect and to the extent provided in paragraphs 3.1 and 3.2, respectively. (c) If the Company at any time proposes to register any of its Common Stock or convertible debt securities that are convertible into Common Stock under the 1933 Act (other than pursuant to a request made under paragraph 2.1, above), whether or not for sale for its own account, and such securities are to be distributed by or through one or more underwriters, the Company will make reasonable efforts, if requested by one Holder to arrange for such underwriters to include such Registrable Securities among those securities to be distributed by or through such underwriters; PROVIDED that the Holder may request registration of Securities only if the Company is registering its Common Stock in a public offering other than any public offering of the Company's Common Stock which is consummated during the nine month period following the date hereof; PROVIDED, FURTHER, HOWEVER, that for purposes of this sentence, reasonable efforts shall not require the Company or any other seller of the securities proposed to be distributed by or through such underwriters to reduce the amount or net sale price of such securities proposed to be so distributed. The Holder shall be party to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Holder. (d) In the case of any registration pursuant to paragraph 2.1 or 2.2 which shall be in connection with an underwritten public offering, the Company and the Holder agrees, if so required in writing delivered to the Holder by the managing underwriter or underwriters, not to effect any public sale or distribution of Registrable Securities (other than as part of such underwritten public offering): (i) within thirty (30) days prior to the effective date of such Registration Statement, or (ii) thereafter until the later of one hundred eighty (180) days after the effective date of such Registration Statement and the date on which all securities under such Registration Statement are sold. 2.4. PREPARATION; REASONABLE INVESTIGATION. In connection with the preparation and filing of each Registration Statement registering Registrable Securities under the 1933 Act, the Company will give the Holder and its underwriters, if any, and their respective counsel and accountants, the reasonable opportunity to participate in the preparation of such Registration Statement, each Prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of the Holder and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. 3.1 INDEMNIFICATION. (a) In the event of any registration of securities of the Company under the 1933 Act, the Company will, and hereby does, indemnify and hold harmless in the case of any Registration Statement filed pursuant to paragraph 2.1 or 2.2, above, the Holder, its directors and officers, each underwriter of such securities, each officer and director of each such underwriter, each Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the 1933 Act, against any losses, claims, damages, liabilities and expenses, joint or several, to which the Holder, underwriter or any such director, officer, participating Person or controlling Person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceeding in respect thereof) arise out of or are based upon (x) any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such securities were registered under the 1933 Act, any preliminary Prospectus, final Prospectus or summary Prospectus included therein, or any amendment or supplement thereto, or any statement incorporated by reference therein, or (y) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such seller, underwriter and Holder and each such director, officer, participating Person and controlling Person for any legal or any other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, any such preliminary Prospectus, final Prospectus, summary Prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller, underwriter or Holder specifically stating that it is for use in the preparation of such Registration Statement, preliminary Prospectus, final Prospectus, summary Prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Holder, underwriter, or any such director, officer, participating Person or controlling Person and shall survive the transfer of such securities by the Holder. (b) The Company may require that, as a condition to including any Registrable Securities in any Registration Statement, the Company shall have received an undertaking reasonably satisfactory to it from the Holder or underwriter of such securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in paragraph 3.1(a) above) the Company, each director of the Company, each officer of the Company who shall sign such Registration Statement and each other Person, if any, who controls the Company within the meaning of the 1933 Act, with respect to any statement in or omission from such Registration Statement, any preliminary Prospectus, final Prospectus or summary Prospectus included therein, or any amendment or supplement thereto, if such statement or omission was made in reliance upon and in conformity with written information reliance upon and in conformity with written furnished to the Company through an instrument duly executed by the Holder or underwriter specifically stating that it is for use in the preparation of such Registration Statement, preliminary Prospectus, final Prospectus, summary Prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer of such securities by the Holder or underwriter. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding paragraphs of this paragraph 3.1, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED, HOWEVER, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this paragraph 3.1 or relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this paragraph 3.1. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, then, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such action, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties arises in respect of such actions after assumption of the defense thereof. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. (d) Indemnification similar to that specified in the preceding paragraphs of this paragraph 3.1 (with appropriate modifications) shall be given by the Company and the Holder with respect to any required registration or other qualification of such Registrable Securities under any federal or state law or regulation or governmental authority other than the 1933 Act. 3.2. CONTRIBUTION. If the indemnification provided for in paragraph 3.1 above is unavailable to the indemnified parties in respect of any losses, claims, damages or liabilities referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) as between the Company and the Holder on the one hand and the underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and the Holder on the one hand and the underwriters on the other hand from the offering of the Registrable Securities, or, if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company and the Holder on the one hand and of the underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations and (ii) as between the Company on the one hand and the Holder on the other hand, in such proportion as is appropriate to reflect the relative fault of the Company and of the Holder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Holder on the one hand and the underwriters on the other hand shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Holder bear to the total underwriting discounts and commissions received by the underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Holder on the one hand and of the underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Holder or by the underwriters. The relative fault of the Company on the one hand and of the Holder on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holder agree (and the underwriters, if any, are deemed to agree) that it would not be just and equitable if contribution pursuant to this paragraph 3.2 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph 3.2, no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of the Holder were offered to the public exceeds the amount of any damages which the Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 4. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Holder affected thereby. (b) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to the Holder, at [1-4, Shibakoen 4-Chome, Minato-Ku, Tokyo 105, Japan, Attention: [President] [Chairman];] if to the Company, at 2711 North Haskell Avenue, Dallas, Texas, Attention: General Counsel. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if applicable; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, other than a transferee of Securities. (d) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (f) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (g) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. 7-ELEVEN, INC. By /s/ Ezra Shashoua ------------------------- Name: Ezra Shashoua Title: Treasurer IYG HOLDING COMPANY By /s/ Andrew B. Janszky ------------------------- Name: Andrew B. Janszky Title: Attorney-In-Fact EX-10 5 LETTER AGREEMENT Exhibit 10.(iii)(A)(4) 7-ELEVEN, INC. March 7, 2000 Clark J. Matthews, II 7005 Stefani Dallas, Texas 75225 Dear Clark: This letter (the "Agreement") sets forth the terms and conditions under which 7-Eleven, Inc. ("7-Eleven" or the "Company") will provide you with certain enhanced benefits upon your retirement from the Company: 1. Your service as an officer and employee of 7-Eleven, and as an officer or director of any subsidiaries or affiliates of 7-Eleven, shall end as of April 30, 2000 (the "Retirement Date"). You have been nominated for reelection to the Company's Board of Directors on or about April 26, 2000. If you are reelected to the Board of Directors, you will not be entitled to any director's fees for your service on the Board or any committee thereof; however, you will be reimbursed for any reasonable travel and related expenses associated with such service. 2. On or before May 15, 2000, 7-Eleven shall pay you the total sum of $3,657,037 (the "Retirement Grant"), as well as certain other benefits outlined in this Agreement. The terms of payment and the various components of the Retirement Grant are specifically delineated in the document attached hereto as Exhibit A. The Retirement Grant, and many of the other benefits outlined in this Agreement, represent benefits in excess of what you are otherwise entitled to receive upon your retirement from the Company, and shall, therefore, constitute good and valuable consideration for the release of any and all claims that you might have by virtue of such retirement (for purposes of this Agreement, the term "Retirement" shall refer to your employment with, and retirement from, 7-Eleven). The Retirement Grant (and any other benefits under this Agreement) shall be subject to such deductions as may be required by law. Tab 4 3. Your active employment with the Company shall continue between now and the Retirement Date (the "Transition Period"). During the Transition Period, you will continue to carry out your current duties as president and chief executive officer. During the Transition Period, you shall be paid your current base salary and you shall remain eligible to participate in 7-Eleven's benefit plans as an active employee. As with other agreements involving departing Company executives, the Transition Period is an essential part of this Agreement. Therefore, if you should (i) voluntarily resign from 7-Eleven prior to the Retirement Date, (ii) be separated from employment with 7-Eleven for gross misconduct or willful refusal to perform your job duties, or (iii) refuse to cooperate reasonably in effectuating an orderly transition between now and the Retirement Date, no benefits shall be available to you under this Agreement. In addition, notwithstanding any other provision of this Agreement, if your employment should end by reason of your death between now and the Retirement Date, you shall be eligible for any and all benefits that are generally provided to similarly situated employees pursuant to 7-Eleven's policies and practices (including, without limitation, the Pre-Retirement Salary Continuation Benefit under the Executive Protection Plan), but no benefits shall be payable to your heirs or beneficiaries by virtue of this Agreement. 4. By signing below, you agree that between the Retirement Date and the date you cease to receive any benefit under this Agreement, you shall cooperate with the Company, upon the Company's reasonable request (and only to the extent that such cooperation does not interfere with your other business and personal obligations), if your assistance should be needed in connection with (i) any legal matters in which the Company is, or may become, involved, or (ii) the transfer of knowledge or information regarding operational or other issues with which you were involved during your employment. Such cooperation is an integral part of this Agreement, and you shall not be entitled to any further compensation for such cooperation; however, the Company will reimburse any reasonable expenses you may incur in connection with such cooperation. 5. With respect to the annual performance incentive ("API") for 2000 and 2001, your entitlement to API payments for those years is specifically and completely described in Exhibit A attached hereto. You shall not be eligible for any API corresponding to any years subsequent to 2001. 6. With respect to the Executive Protection Plan ("EPP"), if you had chosen to retire as of April 30, 2000, you would have been entitled to post-retirement salary continuation and post- retirement life insurance benefits at a 90 percent level, based on your age (at retirement) of 63, and based on your total compensation in 1997. As part of this Agreement, however, you shall be provided the benefits listed in (i) and (ii), below, which are at the 100 percent level (in other words, as if you had retired at age 65), and based on your compensation for 1999. Your entitlement to pre-retirement salary continuation benefits under the EPP shall be controlled by the EPP plan document. (i). a payment that is equivalent to the net present value of the total of ten annual installments of $119,194, which is what you would have received under the EPP Post-Retirement Salary Continuation benefit if you retired at age 65 and based the calculation on your 1999 compensation. The details of this payment are set forth in Exhibit A attached hereto; and, (ii). an assignment of post-retirement life insurance benefits comparable to the benefit that would have been provided under the EPP if you had retired under the EPP at age 65, and based the calculation on your 1999 compensation, such assignment to be made during May 2000. Under this benefit, 7-Eleven shall pay your designated beneficiaries a post-retirement life insurance benefit of $1,604,250.00 upon your death, provided your death occurs after April 30, 2000. 7. 7-Eleven previously completed an additional assignment of life insurance to you under the EPP in the amount of $822,000.00. This assignment was made from a portion of a policy owned by the Company, said policy being more particularly described as Manufacturers Life Insurance Co. Policy No. 5816436-9, in the face amount of $3,000,000. The portion of this policy that was not assigned to you remains the property of 7-Eleven, and you shall retain the benefit of the previously assigned $822,000 portion of that policy. 8. Beginning as of May 1, 2000, you and your eligible dependents shall receive retiree medical and dental coverage under the 7-Eleven, Inc. Comprehensive Welfare Benefits Plan (the "Benefits Plan"), subject to (i) your timely payment of all applicable monthly retiree medical and dental premiums to 7- Eleven's Group Insurance Department; and (ii) the terms and conditions contained in the applicable plan document. In order to receive this coverage, you must remit payment of premiums for this coverage in the same manner as other covered retirees and their dependents, and your premiums for this coverage will be the same amount as other 7-Eleven retirees with equivalent coverage. As indicated in Exhibit A, as a part of the Retirement Grant, 7- Eleven will make a single payment to you, the amount of which will be approximately equal to the cost of retiree medical and dental coverage for you and your covered dependents through April 30, 2004, less an amount equal to the premiums that would be charged to an active employee of 7-Eleven for comparable coverage over the same time period. 9. Your entitlement to any benefits under the 1995 Stock Incentive Plan shall be governed by the terms of the plan document and any applicable award agreements; provided, however, that your Retirement shall be deemed to be as a result of Early Retirement, as that term is defined in the plan document. 10. You shall remain covered under the Company's directors and officers liability coverage for acts and omissions that occurred on or prior to the Retirement Date, and for so long as you continue to serve on the Company's Board of Directors, but only to the same extent, and subject to the same deductibles, as other officers and directors of the Company. 11. You shall not be permitted to make any deferrals to the 7-Eleven, Inc. Employees' Savings and Profit Sharing Plan (the "Profit Sharing Plan") after the Retirement Date. Your other rights pertaining to the Profit Sharing Plan shall be governed by the terms of the plan document. 12. You shall be permitted to retain ownership of a life insurance policy previously obtained for your benefit by 7- Eleven, said policy being more particularly described as Transamerica Life Companies Policy No. 5812034-6, in the face amount of $1,050,000. 13. Your coverage under the 7-Eleven, Inc. Basic Life Plan (the "Life Plan") shall cease as of the Retirement Date. Within 31 days after the Retirement Date, you shall have the option to convert your coverage under the Life Plan to an individual policy, on such terms as may be prescribed by 7-Eleven's Group Insurance Department. 14. Your coverage under any and all employee-paid life insurance programs, including optional term life insurance and accidental death and dismemberment insurance, shall cease as of the Retirement Date. You may convert any employee-paid life insurance you may have to individual policies within 31 days after the Retirement Date, on such terms as may be prescribed by the respective insurance companies. 15. The Retirement Grant is intended to include any separation pay you might have been entitled to under the 7-Eleven, Inc. Separation Pay Plan, and 7-Eleven shall not be otherwise obligated to provide you any separation pay (other than the retirement benefits referenced in this Agreement). 16. Your coverage under the 7-Eleven, Inc. Executive Physical Plan shall continue through April 30, 2004. 17. Your coverage, and your entitlement to any benefits, under the short- and long-term disability components of the Benefits Plan, as well as your entitlement to any other benefits not specifically mentioned in this Agreement, shall cease as of the Retirement Date. 18. After the Retirement Date and until April 30, 2003, 7- Eleven will provide you with, at 7-Eleven's expense, office space, secretarial assistance, and access to and use of appropriate office equipment in the Cityplace Center East, or at another location of the Company's choice. As with all occupants of Cityplace Center East, your continued occupancy of an office in the facility will be conditioned upon your compliance with all of the facilities' rules, City ordinances, and any other applicable laws. 19. On or before the Retirement Date, you shall (i) return to 7-Eleven any items in your possession that are owned by 7-Eleven and (ii) repay to 7-Eleven any outstanding balance in your account entitled "Employee Receivables." With regard to the computer you currently use at your home, you may retain possession of it until April 30, 2003, at which time you will be given the option of returning or purchasing that computer at its then-current book value. 20. You covenant that as of your execution of this Agreement, you have neither filed nor authorized another person or entity to file on your behalf any administrative actions, claims, or lawsuits of any type with respect to the Retirement or otherwise. In addition, from the date of execution of this Agreement forward, you shall not institute any actions or lawsuits, or otherwise assert or attempt to assert any claim against 7-Eleven or any of its present and former officers, directors, employees, agents, representatives, and any and all of its subsidiaries, affiliates, successors, predecessors, benefit plans and all of its present and former stockholders (collectively, the "Released Parties"), including but not limited to administrative claims of any sort, with respect to any matter relating to the Retirement. Moreover, you shall not authorize the bringing of any such action on your behalf by any person, agency, organization, or other entity. If you should breach this provision by filing a claim or lawsuit in which you assert that the release contained in this Agreement is invalid, you agree that you shall be immediately obligated to repay to 7- Eleven all the consideration previously paid to you by 7-Eleven in connection with the Agreement, and 7-Eleven shall be permitted to discontinue any benefits contemplated under this Agreement that have not been paid as of the time such a claim or lawsuit is filed. If any other person or entity should file a claim or lawsuit on your behalf or in your name (despite your agreement that you shall not authorize such a claim or lawsuit to be filed), this Agreement shall constitute a complete bar to any recovery in connection with the assertion of such a claim or lawsuit. 21. You, for yourself, your heirs, and assigns, and any person claiming by, through, or under you, unconditionally release the Released Parties from any existing claims or liabilities of any kind whatsoever, known or unknown, fixed or contingent, that you, your heirs, assigns or administrators may have or may have had, including all matters that could have been alleged in any suit, charge, or claim related in any way to the Retirement. This release includes but is not limited to claims arising under federal, state, or local laws, ordinances, and/or regulations prohibiting employment discrimination (for example, discrimination based on age, sex, race, color, national origin, religion, or disability), including but not limited to claims under Title VII of the Civil Rights Act of 1964, as amended, and the Age Discrimination in Employment Act of 1967, as amended (the "ADEA"), or claims arising out of any other legal restrictions on 7-Eleven's right to control the terms, conditions, privileges, and/or duration of 7-Eleven's employment relationships. Notwithstanding any other provision of this Agreement, you shall not be required to waive any rights or claims that may arise under the ADEA after the date this Agreement is executed. 22. By signing this Agreement below, you indicate (i) your concurrence with 7-Eleven that the enhanced retirement benefit package contained in this Agreement is the product of negotiation between you and 7-Eleven, and does not constitute an "exit incentive or other employment termination program offered to a group or class of employees" within the meaning of federal law and (ii) your understanding that 7-Eleven is relying upon your concurrence on this issue in providing you the enhanced retirement benefit package. Further, you agree that at no time will you, or anyone authorized by you, contend in a charge, lawsuit, or other proceeding that the enhanced retirement benefit package is an "exit incentive or other employment termination program offered to a group or class of employees." If, despite your agreement to the contrary, you contend in a charge, lawsuit, or other proceeding that the enhanced retirement benefit package is an "exit incentive or other employment termination program offered to a group or class of employees," 7-Eleven shall have the right to immediately terminate any further unpaid benefits or payments under the Agreement and to recover from you any benefits under the enhanced retirement benefit package already provided to you. 23. You acknowledge that the nature of your employment with the Company has, of necessity, involved the creation, transmittal, handling of, and access to confidential information of a secret or proprietary nature (collectively, "Proprietary Information"). You acknowledge and agree that all items of such Proprietary Information are valuable, special, and unique assets, the disclosure or use of which may cause substantial injury and loss of profits and goodwill to the Company. You agree that you will not, either directly or indirectly, use, disclose, or disseminate to any person or other entity any such Proprietary Information. 24. You acknowledge that the information and experience you have acquired during the course of your employment may enable you, even inadvertently, to injure the Company if you should engage in any business that is competitive with the business conducted by the Company. You agree that from now until April 30, 2004, unless you obtain prior written permission from 7- Eleven's then-president and chief executive officer, you shall not, directly or indirectly, provide consulting, management, or advisory services to any entity, or operational unit of any entity, that owns, operates, or franchises convenience stores or "g" stores (collectively, "Competing Businesses"). The restriction shall apply only with respect to entities that operate Competing Businesses in any of those counties of the United States and any of those cities and towns in Canada in which 7-Eleven, its franchisees, or its licensees operate convenience stores. In addition, from now until April 30, 2004, you shall not, directly or indirectly (through a professional search firm, human resources department, or otherwise) induce, encourage, or otherwise recruit any 7-Eleven employee to accept employment at any company or other entity. 25. You expressly covenant and warrant that neither you nor others acting at your behest will disclose the contents of this Agreement or the substance of any inducements to enter into this Agreement including, but not limited to, the nature or amount of the benefits afforded to you by this Agreement, unless compelled to do so by law. 7-Eleven recognizes that you may, without breaching the Agreement, disclose the terms of this Agreement to members of your immediate family, your attorney, and your accountant or tax adviser, subject to your agreement first to caution such persons about this confidentiality provision. This confidentiality provision is an essential aspect of the consideration for 7-Eleven's entering into this Agreement, however, the parties also acknowledge that some disclosure of the terms of this Agreement may be legally required as a part of the regular public reporting obligations of the Company. Nothing in this paragraph is intended to limit either parties' ability or obligation to comply with those laws and regulations. 26. You shall refrain from making any derogatory or harmful public statements of any kind about the Company. 27. You agree that if you breach any obligation contained in paragraphs 4, 19, 20, 21, 22, 23, 24, 25, or 26 7-Eleven shall have the right to withhold permanently any benefits that, at the time of such breach, remain unpaid. 28. In the event you shall bring an action, claim, or suit against 7-Eleven that is covered by the release provisions of this Agreement, and 7-Eleven is the prevailing party in such action, claim or suit, then you shall pay to 7-Eleven any costs or expenses (including attorney fees and court costs) incurred by 7-Eleven in connection with such action, claim or suit. 29. You further covenant and warrant that you have not assigned or transferred to any person any portion of any claims that are waived, released and/or discharged in this Agreement. 30. The furnishing of the Retirement Grant and the other benefits under this Agreement shall not be deemed or construed at any time or for any purpose to be an admission of liability by 7- Eleven. 7-Eleven expressly denies any liability related to the Retirement. 31. This Agreement contains all of the agreements and understandings between 7-Eleven and you, and supersedes any prior negotiations or proposed agreements, written or oral. 7-Eleven and you acknowledge that no other party, directly or through an agent, has made any promises, representations or warranties whatsoever, express or implied, not contained in this Agreement, to induce the execution of this Agreement. This document may be amended only by a subsequent written document signed by 7- Eleven's then-president and chief executive officer and you. 32. The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against either you or 7-Eleven. 33. Should any provision of this Agreement be declared or be determined by any court to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in place of each such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. 34. BY SIGNING THIS AGREEMENT BELOW, YOU EXPRESSLY COVENANT AND WARRANT THAT YOU PERSONALLY HAVE READ THIS AGREEMENT, THAT YOU HAVE BEEN ADVISED IN WRITING TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT, THAT 7-ELEVEN HAS GIVEN YOU THE OPTION OF CONSIDERING THIS AGREEMENT, PRIOR TO YOUR EXECUTING IT, FOR A PERIOD OF AT LEAST 21 DAYS, AND THAT YOU FULLY UNDERSTAND ITS CONTENTS. FURTHER, YOU ACKNOWLEDGE THAT YOU HAVE FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT. 35. IN ACCORDANCE WITH THE REVOCATION PERIOD ADEA, YOU SHALL BE ALLOWED A SEVEN-DAY PERIOD FOLLOWING THE DATE OF YOUR SIGNATURE TO REVOKE THIS AGREEMENT (THE "REVOCATION PERIOD"). THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE BY EITHER 7-ELEVEN OR YOU UNTIL THE FIRST BUSINESS DAY FOLLOWING THE EXPIRATION OF THE. IF YOU WISH TO REVOKE THIS AGREEMENT, YOU MUST DELIVER A WRITTEN STATEMENT OF REVOCATION TO BUCK SMITH IN 7-ELEVEN'S LEGAL DEPARTMENT BEFORE THE REVOCATION PERIOD EXPIRES. 36. The Parties shall each bear their own costs and attorney fees associated with the negotiation and preparation of this Agreement, as well as the costs and fees associated with representation sought and received in this matter. If you are in accord with the terms of this Agreement, please sign in the space indicated below and return the enclosed copy of the Agreement to me. Sincerely, James W. Keyes Executive Vice President and Chief Operating Officer ACCEPTED AND AGREED TO: - --------------------------------- Clark J. Matthews, II - --------------------------------- Date EXHIBIT A RETIREMENT GRANT SUMMARY CLARK J. MATTHEWS, II The $3,657,037 Retirement Grant referenced in paragraph 1 of the Agreement to which this Exhibit is attached (the "Agreement") shall be paid in a lump sum on or before May 15, 2000, and is comprised of the following components: 1. RETIREMENT PAY: $1,648,732 This amount is equivalent to the present value of four (4) years of Mr. Matthews' base salary ($490,000 per year), discounted at a rate of 8.75%. 2. API FOR 2000, 2001: $527,790 This amount is equivalent to the present value of payments of 100% of Mr. Matthews' API bonus potential for the years 2000 and 2001 ($294,000 for each year), discounted at a rate of 8.75%. 3. CAR ALLOWANCE: $48,000 This amount is equivalent to four (4) years of Mr. Matthews' executive car allowance paid through April 30, 2004 ($1,000 per month). 4. SPECIAL BONUS: $526,047 This amount is being paid in recognition of Mr. Matthews 34 years of service to the Company. 5. EPP POST-RETIREMENT SALARY CONTINUATION BENEFIT: $841,112 This amount is equivalent to the present value of the Post-Retirement Salary Continuation Benefit portion of the Executive Protection Plan ("EPP") benefits to which Mr. Matthews is entitled under the terms of the Agreement ($1,191,940, paid in 10 annual installments of $119,194), discounted at a rate of 8.75%. 6. VACATION PAY: $62,192 This amount is equivalent to the value of Mr. Matthews' remaining vacation time as of March 17, 2000. This amount will be reduced to reflect any additional vacation time taken prior to April 30, 2000. 7. RETIREE MEDICAL: $3,164 This amount is approximately equal to the present value of the difference between active employee rates and retiree rates for the type of medical coverage currently selected by Mr. Matthews, calculated through April 30, 2004, and discounted at a rate of 8.75%. TOTAL RETIREMENT GRANT $3,657,037 EX-10 6 1999 AWARD AGREEMENT Exhibit 10.(iii)(A)(11) AWARD NUMBER 7-ELEVEN, INC. 1995 Stock Incentive Plan 1999 Award Agreement GRANT OF NONQUALIFIED STOCK OPTION (NQSO) 7-Eleven, Inc. (the "Company") hereby grants to, SSN # (the "Participant") on October 8, 1999 (the "Date of Grant"), pursuant to the 1995 Stock Incentive Plan (the "Plan"), a stock option subject to the Plan and upon the terms and conditions set forth below. Capitalized terms used and not otherwise defined herein have the meanings given to them in the Plan. 1. GRANT OF OPTION Subject to the terms and conditions hereinafter set forth, the Company, with the approval and direction of the Committee and the Board of Directors, grants to the Participant, as of the Date of Grant, an option to purchase up to shares of Common Stock at a price of $1.875 per share, the Fair Market Value of the Common Stock on the Date of Grant. Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter referred to as the "Option Shares." This Option is a Nonqualified Stock Option, and as such is not intended by the parties hereto to be an Incentive Stock Option (as such term is defined under the Code). 2. EXERCISABILITY OF OPTIONS Subject to such further limitations as are provided herein, the Option shall become exercisable in five (5) installments, the Participant having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (a) on and after the first anniversary of the Date of Grant, up to one-fifth (ignoring fractional shares) of the total number of Option Shares; (b) on and after the second anniversary of the Date of Grant, up to an additional one-fifth (ignoring fractional shares) of the total number of Option Shares; (c) on and after the third anniversary of the Date of Grant, up to an additional one-fifth (ignoring fractional shares) of the total number of Option Shares; (d) on and after the fourth anniversary of the Date of Grant, up to an additional one-fifth (ignoring fractional shares) of the total number of Option Shares; and (e) on and after the fifth anniversary of the Date of Grant, the remaining Option Shares. Tab 5 3. PERFORMANCE ACCELERATED VESTING After the first anniversary of the Date of Grant, an additional one- fifth (ignoring fractional shares) of the total number of Option Shares shall become exercisable on and after each of the following events: (a) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $4.00; (b) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $5.00; (c) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $6.50; and (d) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $8.00. 4. Termination of Option (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten (10) years from the Date of Grant (the "Option Term") unless sooner terminated pursuant to paragraphs (b) through (h) below. (b) If the Participant has an exercisable Option (in whole or in part) as of the date of the Participant's termination of employment with the Company, whether voluntary or involuntary, and such termination is for any reason other than those described in the following paragraphs (c) through (h) of this Section 4, then the exercisable portion of such Option shall remain exercisable for a period equal to the lesser of (1) the remainder of the Option Term or (2) the date which is 60 days after the date of Participant's termination of employment. (c) Upon termination of the Participant's employment with the Company by reason of Normal Retirement, the Option shall become immediately one hundred percent (100%) vested, and the Participant shall have until the expiration of the Option Term to exercise the Option. (d) Upon termination of the Participant's employment with the Company by reason of Early Retirement or Disability, any portion of the Option that is not yet vested shall continue to vest and to be exercisable in accordance with the provisions of Sections 2 and 3 of this Award Agreement and, once vested, the Option shall remain exercisable until the expiration of the Option Term unless, prior thereto, the Participant reaches age 65, at which time all remaining Options shall vest. (e) Upon termination of the Participant's employment with the Company by reason of Divestiture, any portion of the Option that as of the date of termination is not yet exercisable shall become null and void as of the date of termination and the portion, if any, of the Option that is exercisable as of the date of termination shall remain exercisable for a period equal to the lesser of (1) the remainder of the Option Term or (2) the date which is one year after the date of termination. (f) In the event of death of the Participant, regardless whether the Participant had previously retired (either Early Retirement or Normal Retirement) or was Disabled at the time of death, the Option shall become immediately one hundred percent (100%) vested and the Participant's Designated Beneficiary shall have twelve (12) months following the Participant's death during which to exercise the Option. (g) A transfer of the Participant's employment between the Company and any Subsidiary of the Company, shall not be deemed to be a termination of the Participant's employment. (h) Notwithstanding any other provisions set forth herein or in the Plan, if the Participant shall (i) commit any act of malfeasance or wrongdoing affecting the Company or any Subsidiary of the Company, (ii) breach any covenant not to compete, or employment contract with the Company or any Subsidiary of the Company, or (iii) engage in conduct that would warrant the Participant's discharge for cause (excluding general dissatisfaction with the performance of the Participant's duties, but including any act of disloyalty or any conduct clearly discrediting the Company or any Subsidiary or Affiliate of the Company), any unexercised portion of the Option shall immediately terminate and be void. 5. EXERCISE OF OPTIONS (a) The Participant may exercise the Option from time to time with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Company's Manager of Compensation and Benefits written notice of the intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised, the Award Number (as indicated on the first page of the applicable Award Agreement), and the date of the exercise thereof (the "Exercise Date"), which date shall be within five days after the giving of such notice. (b) On or before the Exercise Date, the Participant shall pay the full amount of the purchase price for the Option Shares in cash (U.S. dollars) or through the surrender of previously acquired shares of Stock valued at their Fair Market Value on the Exercise Date. In addition, to the extent permitted by applicable law, the Participant may arrange with a brokerage firm for that brokerage firm, on behalf of the Participant, to pay the Company the Exercise Price of the Option being exercised (either as a loan to the Participant or from the proceeds of the sale of Stock issued pursuant to that exercise of the Option), and the Company shall promptly cause the exercised shares to be delivered to the brokerage firm. Such transactions shall be effected in accordance with such further procedures as the Committee may establish from time to time. On the Exercise Date or as soon thereafter as is practicable, the Company shall cause to be delivered to the Participant, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Option Shares shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or such other securities trading system or market or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of the Option Shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (c) If the Participant fails to pay for any of the Option Shares specified in such notice or to pay any applicable withholding tax relating thereto or fails to accept delivery of the Option Shares, the Participant's right to purchase such Option Shares may be terminated by the Committee. 6. FAIR MARKET VALUE As used herein, the "fair market value" of a share of Stock shall be the Closing Price per share of Stock on The Nasdaq Stock Market, or such other securities trading system or exchange which is the primary market on which the Stock may then be listed or traded on the date in question, or if the Stock has not been traded on such date, the Closing Price on the first day prior thereto on which the Stock was so traded. 7. NO RIGHTS OF SHAREHOLDERS Neither the Participant nor any personal representative shall be, or shall have any of the rights and privileges of, a shareholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 8. NON-TRANSFERABILITY OF OPTION During the Participant's lifetime, the Option shall be exercisable only by the Participant or any guardian or legal representative of the Participant, and the Option shall not be transferable except, in case of the death of the Participant, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Participant to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Participant and it shall thereupon become null and void. Notwithstanding the above, in the discretion of the Committee, Options may be transferable pursuant to a QDRO. 9. RESTRICTIONS ON TRANSFER FOLLOWING EXERCISE (a) Thirty percent (30%) of the Option Shares (the "Restricted Option Shares") acquired upon exercise of the Option shall be delivered to Participant via a stock certificate bearing a legend restricting the transfer or sale of such Option Shares for a period of 24 months following the Exercise Date. Seventy percent (70%) of the Option Shares acquired upon exercise of the Option shall not be subject to any restriction against the transfer or sale of such Option Shares by the Participant. (b) If the Participant's employment with the Company is voluntarily terminated within the 24-month period following the Exercise Date (other than due to Early Retirement or Normal Retirement) or is terminated due to cause, the Company may repurchase the Restricted Option Shares at the Exercise Price paid by the Participant. If the Company elects not to purchase such Restricted Option Shares, the Participant shall continue to hold such Shares subject to the restrictions thereon. (c) Upon a termination of employment as a result of death, Disability, Divestiture, Early Retirement or Normal Retirement, any Restricted Option Shares then held by a Participant or a Participant's Designated Beneficiary shall be released from, and no Option Shares acquired after the date of termination shall be subject to, the restrictions on transfer or sale set forth in paragraph 9(a) above. Promptly after the date of any such termination, upon receipt of certificates representing any Restricted Option Shares, the Company shall exchange any such certificates for certificates representing such Shares free of any restrictive legend relating to the lapsed restrictions. 10. WITHHOLDING TAX REQUIREMENTS Following receipt of each notice of exercise of the Option, the Company shall deliver to Participant a notice specifying the amount that Participant is required to pay to satisfy applicable tax withholding requirements. Participant hereby agrees to either (i) deliver to the Company by the due date specified in such notice from the Company a check payable to the Company and equal to the amount set forth in such notice or (ii) make other appropriate arrangements acceptable to the Company to satisfy such tax withholding requirements. 11. NO RIGHT TO EMPLOYMENT Neither the granting of the Option nor its exercise shall be construed as granting to the Participant any right with respect to continued employment with the Company. 12. CHANGE IN CONTROL The Committee shall, in its sole discretion, have the right to accelerate the vesting of any Option and to release any restrictions on the Restricted Option Shares, in the event of a Change in Control. 13. ADJUSTMENT OF AWARDS The terms of this Option and the number of Option Shares purchasable hereunder shall be subject to adjustment pursuant to Sections 5(c) through (h) of the Plan. 14. AMENDMENT OF OPTION The Option may be amended by the Committee at any time (i) if the Committee determines, in its sole discretion, that amendment is necessary or advisable in the light of any additions to or changes in the Code or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of the Participant. 15. NOTICE Any notice to the Company provided for in this Award Agreement shall be in writing and addressed to the Company in care of the Manager of the Company's Compensation and Benefits Department, and any notice to the Participant shall be in writing and addressed to the Participant at the Participant's current address shown on the records of the Company or such other address as the Participant may submit to the Company in writing. Any notice shall be deemed to be duly given if and when properly addressed with postage prepaid, or if personally delivered to the addressee or, in the case of notice to the Company, if sent via telecopy to the Compensation and Benefits Department's facsimile machine at such telephone number as may be published in the Company's published telephone directory. 16. INCORPORATION OF PLAN BY REFERENCE The Option is granted pursuant to the terms of the Plan, which terms are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this Award Agreement, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. In the event of a conflict between the terms of this Award Agreement and the Plan, the terms of the Plan shall control. 17. GOVERNING LAW The validity, construction, interpretation and effect of this Award Agreement shall exclusively be governed by and determined in accordance with the law of the State of Texas, except to the extent preempted by federal law, which shall to that extent govern. IN WITNESS WHEREOF, 7-Eleven, Inc., has caused its duly authorized officer to execute this Grant of Nonqualified Stock Option, and the Participant has placed his or her signature hereon, effective as of the Date of Grant. 7-ELEVEN, INC. By: --------------------------------------- President and Chief Executive Officer ACCEPTED AND AGREED TO: By: ------------------------------ Participant Participant's Social Security Number: EX-21 7 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES/AFFILIATES OF 7-ELEVEN, INC.
JURISDICTION OF INCORPORATION ---------------- Bawco Corporation---------------------------------------------------------------------------Ohio Bev of Vermont, Inc.---------------------------------------------------------------------Vermont Brazos Comercial E Empreendimentos Ltda. (a)----------------------------------------------Brazil Christy's Market, Inc. (Inactive)-------------------------------------------------Massachusetts Cityplace Center East Corporation----------------------------------------------------------Texas IYG Holding Company (b)-----------------------------------------------------------------Delaware Lavicio's, Inc. (Inactive)-----------------------------------------------------------California Melin Enterprises, Inc. (c)-------------------------------------------------------------Colorado MTA CAL, Inc. (Inactive)-------------------------------------------------------------California Philippine Seven Properties Corporation (d)------------------------------------------Philippines Puerto Rico - 7, Inc. (e)------------------------------------------------------------Puerto Rico Sao Paulo-Seven Comercial, S.A. (f)-------------------------------------------------------Brazil 7-Eleven Beverage Company, Inc.------------------------------------------------------------Texas 7-Eleven Canada, Inc. (g)-----------------------------------------------------------------Canada 7-Eleven Comercial Ltda. (h)--------------------------------------------------------------Brazil 7-Eleven, Inc.-----------------------------------------------------------------------------Texas 7-Eleven International, Inc.--------------------------------------------------------------Nevada 7-Eleven Limited (Inactive)------------------------------------------------------United Kingdom 7-Eleven of Idaho, Inc. (i)----------------------------------------------------------------Idaho 7-Eleven of Massachusetts, Inc. (i)------------------------------------------------Massachusetts 7-Eleven of Nevada, Inc.----------------------------------------------------------------Delaware 7-Eleven of Virginia, Inc.--------------------------------------------------------------Virginia 7-Eleven Pty. Ltd. (Inactive) (j)-----------------------------------------------------Australia 7-Eleven Sales Corporation (i)-------------------------------------------------------------Texas 7-Eleven Stores (NZ) Limited (Inactive) (k)------------------------------------------New Zealand 7-Eleven Stores Sales Corporation----------------------------------------------------------Texas SLC Financial Services, Inc. (Inactive)----------------------------------------------------Texas Southland International Investment Corporation N.V. (g)---------------------Netherlands Antilles Southland Investment Canada Limited-------------------------------------------------------Canada TSC Lending Group, Inc.--------------------------------------------------------------------Texas The Seven Eleven Limited (Inactive) (l)------------------------------------------------Hong Kong The Southland Corporation (Inactive)-------------------------------------------------------Texas The Southland Corporation Employees' Savings and Profit Sharing Plan Title Holding Corporation (m)--------------------------------------------------------------------Texas Valso, S.A. (n)---------------------------------------------------------------------------Mexico 7-Eleven Mexico, S.A. de C.V. (Active Subsidiary of Valso) (o)----------------------Mexico W V ABC (p)-----------------------------------------------------------------------(West Virginia)
Tab 6 FOOTNOTES: - ---------- (a) 2,248,800 quotas (almost 100%) owned by Southland International Investment Corporation N.V. (a wholly owned subsidiary of 7-Eleven International, Inc., a wholly owned subsidiary of 7-Eleven, Inc.), and remaining 10 quotas owned by 7-Eleven, Inc. (b) 51% owned by Ito-Yokado Co., Ltd., and remaining 49% owned by Seven-Eleven Japan Co., Ltd. (As of 5-4-98, IYG Holding Company held 65.12% of the common stock of 7-Eleven, Inc.) (c) 100% owned by Bawco Corporation (a wholly owned subsidiary of 7- Eleven, Inc.). (d) 13,970 warrants are issued to 7-Eleven, Inc., but held in escrow due to the restrictions in the Philippine Retail Trade Nationalization Law. (e) All Class A shares (equalling 59.07% of all shares outstanding) owned by 7-Eleven, Inc., and remaining 40.93% owned by group of investors in Puerto Rico. (f) 1.109% owned by 7-Eleven, Inc., 98.825% owned by Super Trade, Ltd., and remaining .04% owned by other investors. (g) 100% owned by 7-Eleven International, Inc. (a wholly owned subsidiary of 7-Eleven, Inc.). (h) 15,999 quotas (almost 100% owned by 7-Eleven, Inc., and remaining 1 quota owned by 7-Eleven of Nevada, Inc. (a wholly owned subsidiary of 7-Eleven, Inc.).) (i) 100% owned by 7-Eleven Stores Sales Corporation (a wholly owned subsidiary of 7-Eleven, Inc.). (j) 50% owned by David Anthony Walsh, and remaining 50% owned by Anthony Peter John Kelly, for the benefit of 7-Eleven, Inc. (k) 99% owned by 7-Eleven, Inc., and remaining 1% owned jointly by 7- Eleven's local counsel, Bruce Nelson Davidson and Anthony Francis Segedin. (l) 99.9% owned by 7-Eleven, Inc., and remaining .1% owned by Wilgrist Nominees Limited, 7-Eleven's agent in Hong Kong. (m) This company was established by 7-Eleven, Inc. Employees' Savings and Profit Sharing Plan to hold title to properties under tax code Section 501(c)(25). As of November 15, 1991, U.S. Trust Company of California, N.A. was appointed as trustee for 7-Eleven, Inc. Employees' Trust and 7-Eleven, Inc. Employees' Savings and Profit Sharing Plan and assumed all responsibility for this company. (n) 49% owned by 7-Eleven, Inc., and remaining 51% owned by Grupo Chapa, S.A. de C.V. (o) 99.965% of Series A shares owned by Valso, S.A., and remaining .035% owned by Casa Chapa, S.A.; 100% of Series B shares owned by Valso, S.A.. (p) All shares owned by Bryan F. Smith, Jr. EX-23 8 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements listed below of our reports dated February 3, 2000, except as to the information included in the fourth paragraph of Note 13, for which the date is March 2, 2000, and the information included in Note 2, for which the date is March 16, 2000, on our audits of the consolidated financial statements and financial statement schedule of 7-Eleven, Inc. and Subsidiaries as of December 31 , 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which reports are included in this Annual Report on Form 10-K. REGISTRATION NO. ---------------- On Form S-8 for: 7-Eleven, Inc. 1995 Stock Incentive Plan 33-63617 7-Eleven, Inc. Supplemental Executive Retirement Plan for Eligible Employees 333-42731 7-Eleven, Inc. Stock Compensation Plan for Non-Employee Directors 333-68491 PricewaterhouseCoopers LLP Dallas, Texas March 16, 2000 Tab 7 EX-27 9 EXHIBIT 27 (FDS) FILED WITH FORM 10-K
5 1,000 12-MOS DEC-31-1999 DEC-31-1999 76,859 0 185,283 6,244 134,050 505,276 3,478,504 1,597,984 2,685,666 811,349 2,182,819 41 0 0 (559,616) 2,685,666 8,251,690 8,349,543 5,885,858 5,885,858 2,234,114 0 102,232 127,339 48,516 78,823 0 4,290 0 83,113 0.20 0.18 BASIC EPS FROM CONTINUING OPERATIONS (BEFORE EXTRAORDINARY ITEM) IS .19 DILUTED EPS FROM CONTINUING OPERATIONS (BEFORE EXTRAORDINARY ITEM) IS .17
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