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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
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7-ELEVEN, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 North Haskell Ave., Dallas, Texas 75204-2906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, 214-828-7011
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- --------------------
NONE N/A
Securities Registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
Indicate by check mark whether 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.
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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
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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
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*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.
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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
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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
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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.
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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.
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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
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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.
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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:
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Product Categories Years Ended December 31
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1999 1998 1997
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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%
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Total Product Sales 97.1% 97.1% 97.3%
Services 2.9% 2.9% 2.7%
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Total Merchandise Sales 100.0% 100.0% 100.0%
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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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
AGE AT
NAME 3-01-00 POSITIONS AND OFFICES
WITH REGISTRANT AT 12-31-99
- ----------------- --------- --------------------------
<S> <C> <C>
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)
</TABLE>
(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
<PAGE>
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.
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<PAGE>
(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.
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<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
"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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- -------------------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
======= ======= ======
</TABLE>
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
<PAGE>
(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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
INCREASE/(DECREASE) FROM PRIOR YEAR 1999 1998 1997
----------------------------------- ------ ----- -----
<S> <C> <C> <C>
Net Sales (in billions) $8.25 $7.26 $6.97
U.S. same-store merchandise sales growth 9.1% 5.7% 1.5%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1999 1998 1997
---- ----- -----
<S> <C> <C> <C>
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)%
</TABLE>
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.
<TABLE>
<CAPTION>
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A")
YEARS ENDED DECEMBER 31
------------------------------
(DOLLARS IN MILLIONS) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
32
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
REQUIREMENTS
------------------------
Covenants Actuals Minimum Maximum
- --------- ------- ------- -------
<S> <C> <C> <C>
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.
</TABLE>
35
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ----------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Cost Fair Value
---- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
387,200 shares of ACS common stock $0 $17.8
151,452 shares of Precept common stock $0 $ 0.5
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
ASSETS 1999 1998
------------ -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
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
------------- ------------- -------------
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
====================================================================================================================
</TABLE>
See notes to consolidated financial statements
44
<PAGE>
<TABLE>
<CAPTION>
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Product Categories Years Ended December 31
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
As Pro Forma
Presented Adjustments Pro Forma
--------------------------------------
<S> <C> <C> <C>
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.
</TABLE>
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
<PAGE>
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
5. OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
--------- -----------
(Dollars in Thousands)
<S> <C> <C>
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
========== =========
</TABLE>
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31
---------------------------
1999
1998
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
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
============ ============
</TABLE>
52
<PAGE>
7. OTHER ASSETS
<TABLE>
<CAPTION>
December 31
--------------------------
1999 1998
----- -----
(Dollars in Thousands)
<S> <C> <C>
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
========== ==========
</TABLE>
8. ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE>
9. DEBT
<TABLE>
<CAPTION>
December 31
---------------------------
1999 1998
---- -----
(Dollars in Thousands)
<S> <C> <C>
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
=========== ============
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
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)
</TABLE>
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
<PAGE>
- - 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
-----------------------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
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)
========== ==========
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
- -------------------------------- -------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
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
---------------- ----------- ---------------- -------------- ------------ --------------
<C> <C> <C> <C> <C> <C>
$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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ----------
(Dollars in Thousands,
Except Per-Share Data)
<S> <C> <C> <C>
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
</TABLE>
63
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
--------------------------
1999 1998
---- -----
(Dollars in Thousands)
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
(Dollars in Thousands)
<S> <C> <C>
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
==========
</TABLE>
65
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Buildings (net of accumulated amortization
of $39 and $886) $ 40 $ 281
========= ==========
Capital lease obligations (net of current
portion of $44 and $56) $ 34 $ 314
========= =========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
66
<PAGE>
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
<PAGE>
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
<PAGE>
16. INCOME TAXES
The components of earnings before income taxes and extraordinary
gain are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1999 1998 1997
------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
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
========== ========== =========
</TABLE>
The provision for income taxes on earnings before extraordinary
gain in the accompanying Consolidated Statements of Earnings
consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1999 1998 1997
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
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
======== ========= =========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
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
========== ==========
</TABLE>
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
<PAGE>
17. EARNINGS PER COMMON SHARE
Computations for basic and diluted earnings per share are
presented below:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------
1999 1998 1997
------ ------- -------
(In Thousands, Except
Per-Share Data)
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in Millions, Except Per-Share Data)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PAGE
<S> <C>
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
</TABLE>
2. 7-Eleven, Inc. and Subsidiaries' Financial Statement
Schedule, included herein.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants on Financial Statement Schedule - PricewaterhouseCoopers LLP 81
II - Valuation and Qualifying Accounts 82
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
--------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
82
<PAGE>
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.
<TABLE>
<CAPTION>
TITLE DATE
<S> <C> <C>
/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
</TABLE>
83
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
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
<PAGE>
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
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
<PAGE>
"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
<PAGE>
(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.
<PAGE>
(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.
<PAGE>
(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
<PAGE>
(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.
<PAGE>
(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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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.
<PAGE>
(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
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
<PAGE>
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,
<PAGE>
(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.
<PAGE>
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,
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
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
<PAGE>
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.
<PAGE>
(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.
<PAGE>
(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.
<PAGE>
(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.
<PAGE>
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:
EXHIBIT 21
SUBSIDIARIES/AFFILIATES OF 7-ELEVEN, INC.
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
----------------
<S> <C>
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)
</TABLE>
Tab 6
<PAGE>
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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 76,859
<SECURITIES> 0
<RECEIVABLES> 185,283
<ALLOWANCES> 6,244
<INVENTORY> 134,050
<CURRENT-ASSETS> 505,276
<PP&E> 3,478,504
<DEPRECIATION> 1,597,984
<TOTAL-ASSETS> 2,685,666
<CURRENT-LIABILITIES> 811,349
<BONDS> 2,182,819
<COMMON> 41
0
0
<OTHER-SE> (559,616)
<TOTAL-LIABILITY-AND-EQUITY> 2,685,666
<SALES> 8,251,690
<TOTAL-REVENUES> 8,349,543
<CGS> 5,885,858
<TOTAL-COSTS> 5,885,858
<OTHER-EXPENSES> 2,234,114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,232
<INCOME-PRETAX> 127,339
<INCOME-TAX> 48,516
<INCOME-CONTINUING> 78,823
<DISCONTINUED> 0
<EXTRAORDINARY> 4,290
<CHANGES> 0
<NET-INCOME> 83,113
<EPS-BASIC> 0.20 <F1>
<EPS-DILUTED> 0.18 <F2>
<FN>
<F1> BASIC EPS FROM CONTINUING OPERATIONS (BEFORE EXTRAORDINARY ITEM) IS .19
<F2> DILUTED EPS FROM CONTINUING OPERATIONS (BEFORE EXTRAORDINARY ITEM) IS .17
</FN>
</TABLE>
