FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-16626
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7-ELEVEN, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1085131
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVE., DALLAS, TEXAS 75204-2906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code,
214/828-7011
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
104,795,957 shares of common stock, $.0001 par value (the
issuer's only class of common stock), were outstanding as
of March 31, 2001.
7-ELEVEN, INC.
INDEX
PAGE
NO.
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
December 31, 2000 and March 31, 2001 1
Condensed Consolidated Statements of Earnings -
Three Months Ended March 31,2000 and 2001 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Report of Independent Accountants 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
Exhibit (10) - Credit Agreement, dated as of January 25, 2001,
among 7-Eleven, Inc., the financial institutions party thereto
as Senior Lenders, Citibank, N.A., as Administrative Agent,
The Sakura Bank, Limited, New York Branch, as Co-Agent and
Salomon Smith Barney, Inc., as Sole Lead Arranger and
Sole Book Manager Tab 1*
Exhibit (15) - Letter re Unaudited Interim Financial
Information Tab 2
* Submitted with filing; not attached hereto.
(i)
7-ELEVEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
DECEMBER 31, MARCH 31,
2000 2001
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 133,178 $ 94,454
Accounts receivable 187,510 163,032
Inventories 106,869 104,701
Other current assets 112,795 145,212
------------- -------------
Total current assets 540,352 507,399
Property and equipment 1,926,795 1,934,081
Other assets 275,141 267,367
------------- -------------
Total assets $ 2,742,288 $ 2,708,847
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 231,384 $ 226,342
Accrued expenses and other liabilities 445,769 397,241
Commercial paper - 49,412
Long-term debt due within one year 76,156 63,195
------------- -------------
Total current liabilities 753,309 736,190
Deferred credits and other liabilities 265,551 258,106
Long-term debt 1,261,322 1,267,605
Convertible quarterly income debt securities 380,000 380,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value - -
Common stock, $.0001 par value 10 10
Additional capital 1,166,225 1,166,489
Accumulated deficit (1,086,604) (1,094,114)
Accumulated other comprehensive earnings (loss) 2,475 (5,439)
------------- -------------
Total shareholders' equity 82,106 66,946
------------- -------------
Total liabilities and shareholders' equity $ 2,742,288 $ 2,708,847
============= =============
See notes to condensed consolidated financial statements.
1
7-ELEVEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
-----------------------------
2000 2001
------------- ------------
REVENUES:
Merchandise sales (including $143,417
and $146,542 in excise taxes) $ 1,509,289 $ 1,558,667
Gasoline sales (including $157,091
and $174,104 in excise taxes) 603,282 669,154
------------- -------------
Net sales 2,112,571 2,227,821
Other income 24,773 27,344
------------- -------------
Total revenues 2,137,344 2,255,165
COSTS AND EXPENSES:
Merchandise cost of goods sold 994,498 1,033,569
Gasoline cost of goods sold 551,634 617,281
------------ -------------
Total cost of goods sold 1,546,132 1,650,850
Franchisee gross profit expense 146,752 154,402
Operating, selling, general and administrative expenses 413,691 428,933
Interest expense, net 26,892 17,149
------------- -------------
Total costs and expenses 2,133,467 2,251,334
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EARNINGS BEFORE INCOME TAX (BENEFIT) EXPENSE 3,877 3,831
INCOME TAX (BENEFIT) EXPENSE (10,959) 1,494
------------- -------------
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 14,836 2,337
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (net of tax
benefit of $6,295) - (9,847)
------------- ------------
NET EARNINGS (LOSS) $ 14,836 $ (7,510)
============= ============
NET EARNINGS (LOSS) PER COMMON SHARE:
BASIC
Earnings before cumulative effect of
accounting change $ .17 $ .02
Cumulative effect of accounting change - (.09)
------------- ------------
Net earnings (loss) $ .17 $ (.07)
============= ============
DILUTED
Earnings before cumulative effect of
accounting change $ .16 $ .02
Cumulative effect of accounting change - (.09)
------------- -------------
Net earnings (loss) $ .16 $ (.07)
============= =============
See notes to condensed consolidated financial statements.
2
<Page
7-ELEVEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------------------
2000 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 14,836 $ (7,510)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Cumulative effect of accounting change - 9,847
Depreciation and amortization of property and equipment 51,469 59,360
Other amortization 4,998 5,017
Deferred income taxes (15,335) (2,331)
Noncash interest expense 558 741
Foreign currency net conversion gain (148) (11,216)
Other noncash income (963) (1,997)
Net (gain) loss on property and equipment (52) 379
(Increase) decrease in accounts receivable (5,022) 24,441
Decrease in inventories 22,136 2,168
Increase in other assets (7,255) (35,052)
Decrease in trade accounts payable and other liabilities (42,420) (42,371)
------------- -------------
Net cash provided by operating activities 22,802 1,476
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (71,975) (68,315)
Proceeds from sale of property and equipment 72,908 2,395
Proceeds from sale of domestic securities 996 2,000
Other (660) 252
------------- -------------
Net cash provided by (used in) investing activities 1,269 (63,668)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper and revolving credit facilities 792,843 1,119,671
Payments under commercial paper and revolving credit facilities (1,209,009) (1,066,034)
Principal payments under long-term debt agreements (131,210) (19,581)
Increase (decrease) in outstanding checks in excess of cash in bank 6,568 (10,224)
Net proceeds from issuance of common stock 539,720 223
Other - (587)
------------- -------------
Net cash (used in) provided by financing activities (1,088) 23,468
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,983 (38,724)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 76,859 133,178
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 99,842 $ 94,454
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING:
Interest paid, excluding SFAS No.15 Interest $ (32,088) $ (19,160)
============= =============
Net income taxes (paid) refunded $ (4,713) $ 9,067
============= =============
Assets obtained by entering into capital leases $ 14,514 $ 5,462
============= =============
See notes to condensed consolidated financial statements.
3
7-ELEVEN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March
31, 2001, and the condensed consolidated statements of
earnings and cash flows for the three-month periods ended
March 31, 2000 and 2001, have been prepared by 7-Eleven,
Inc. (the "Company") without audit. In the opinion of
management, all adjustments necessary to present fairly the
financial position at March 31, 2001, and the results of
operations and cash flows for all periods presented have
been made. Certain prior-period amounts have been
reclassified to conform to current-period presentation.
The results of operations for the interim periods are not
necessarily indicative of the operating results for the
full year.
The reported results include approximately 5,700
convenience stores that are operated or franchised in the
United States and Canada by the Company along with royalty
income from worldwide 7-Eleven area licensees. Sales and
cost of goods sold of stores operated by franchisees are
consolidated with the results of Company-operated stores in
the condensed consolidated statements of earnings. Gross
profit from franchise stores is split between the Company
and its franchisees pursuant to the terms of franchise
agreements.
The condensed consolidated balance sheet as of
December 31, 2000, is derived from the audited financial
statements but does not include all disclosures required by
generally accepted accounting principles. The notes
accompanying the consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, include accounting policies and
additional information pertinent to an understanding of
both the December 31, 2000, balance sheet and the interim
financial statements. The information has not changed
except as a result of normal transactions in the three
months ended March 31, 2001, and as discussed in the
following notes.
2. ADOPTION OF NEW ACCOUNTING STANDARD
The Company adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," ("SFAS No. 133") as of January 1, 2001. The
new standard changes the accounting for the Company's
interest rate swap and nullifies the hedge accounting
treatment for its yen-denominated debt and royalty.
Under SFAS No. 133, the Company's $250 million
interest rate swap is being treated as a cash flow hedge of
the Company's interest rate exposure in connection with its
commercial paper program. The transitional adjustment as
of January 1, 2001, was not material. Fair value is used
to account for this derivative going forward. The Company
adjusted the carrying value of the interest rate swap to
fair value at March 31, 2001, which was a liability of $7.9
million. The Company recorded a charge of $200,000 to
interest expense related to the effectiveness of the
interest rate swap at March 31, 2001.
The Company uses its royalty receipts from Seven-
Eleven Japan Co., Ltd. ("SEJ") to service the monthly
principal and interest payments on its yen loans. This
arrangement provides an "economic" hedge for the Company
against fluctuations in the Japanese yen to U.S. dollar
exchange rate. As a result of this hedge, the 1988 and
1998 yen loans and related interest expense and payable,
prior to the adoption of SFAS No. 133, were recorded in the
Company's consolidated financial statements utilizing the
Japanese yen to U.S. dollar exchange rates in effect at the
date of the borrowings (125.35 for the 1988 yen loan and
129.53 for the 1998 yen loan). Additionally, the SEJ royalty,
prior to the adoption of SFAS No. 133, was recorded at
the 125.35 exchange rate as it has been utilized to service
the 1988 yen loan.
4
Although SFAS No. 133 nullified the hedge accounting
treatment the Company had been using for the SEJ royalty
and yen loans, the Company's "economic" hedge against
changes in the Japanese yen to U.S. dollar exchange rate
remains in place. Upon adoption of SFAS No. 133, the
Company converted the yen loans, related interest payable
and the SEJ royalty receivable to reflect the Japanese yen
to U.S. dollar exchange rate quoted for January 1, 2001
(114.35 yen to one U.S. dollar). As a result, the
Company's transitional adjustment increased the yen loans,
related interest payable and SEJ royalty receivable by
$16.1 million, with an offsetting charge of $9.8 million
(net of $6.3 million of taxes) to Cumulative Effect of
Accounting Change.
The cumulative effect charge differs from the
Company's disclosure in its December 31, 2000 Form 10-K.
Subsequent to the filing of the Company's December 31, 2000
Form 10-K, the Financial Accounting Standards Board issued
a tentative conclusion that the transitional adjustment for
this type of transaction should be recorded in earnings as
a cumulative effect of accounting change. The Company
anticipates that final guidance will be issued in the
second quarter of 2001.
During the first quarter, the Company recorded in
Operating, Selling, General and Administrative Expense an
$11.2 million net conversion gain primarily as a result of
adjusting the balance of the yen loans to reflect the
Japanese yen to U.S. dollar exchange rate quoted for March
31, 2001 (126.21 yen to one U.S. dollar). The Company has
recorded the SEJ royalty income and interest expense on the
yen loans at the monthly average Japanese yen to U.S.
dollar exchange rate.
3. COMPREHENSIVE EARNINGS
The components of comprehensive earnings (loss) of the
Company for the periods presented are as follows (in
thousands):
Three Months
Ended March 31
---------------------------
2000 2001
------------ -------------
Net earnings (loss) $ 14,836 $ (7,510)
Other comprehensive earnings (loss):
Unrealized gains (losses) on equity securities
(net of $1,369 and ($319) deferred taxes) (2,142) 499
Reclassification adjustments for gains included
in net earnings (net of $785 and $782 deferred taxes) (1,228) (1,224)
Unrealized net loss related to interest rate swap
(net of $2,984 deferred tax) - (2,870)
Foreign currency translation adjustments (238) (4,319)
------------ -------------
Other comprehensive earnings (loss) (3,608) (7,914)
------------ -------------
Total comprehensive earnings (loss) $ 11,228 $ (15,424)
============ =============
5
4. EARNINGS PER SHARE
Computations for basic and diluted earnings (loss) per
share are presented below (in thousands, except per-share
data):
Three Months
Ended March 31
----------------------------
2000 2001
------------- ------------
BASIC:
Earnings before cumulative effect of accounting change $ 14,836 $ 2,337
Cumulative effect of accounting change - (9,847)
------------- ------------
Net earnings (loss) $ 14,836 $ (7,510)
============= ============
Weighted-average common shares outstanding 85,758 104,788
============= ============
Earnings per common share before cumulative effect
of accounting change $ .17 $ .02
Loss per common share on cumulative effect of
accounting change - (.09)
------------ ------------
Net earnings (loss) per common share $ .17 $ (.07)
============ ============
DILUTED:
Earnings before cumulative effect of accounting change $ 14,836 $ 2,337
Add interest on convertible quarterly income debt
securities, net of tax (A) 2,629 -
------------- ------------
Earnings before cumulative effect of accounting change
plus assumed conversions 17,465 2,337
Cumulative effect of accounting change - (9,847)
------------- -------------
Net earnings (loss) plus assumed conversions $ 17,465 $ (7,510)
============= =============
Weighted-average common shares outstanding (Basic) 85,758 104,788
Add effects of assumed conversions:
Stock options 582 84
Convertible quarterly income debt securities (A) 20,924 -
------------- -------------
Weighted-average common shares outstanding plus shares
from assumed conversions (Diluted) 107,264 104,872
============= =============
Earnings per common share before cumulative effect of
accounting change $ .16 $ .02
Loss per common share on cumulative effect of
accounting change - (.09)
------------- -------------
Net earnings (loss) per common share $ .16 $ (.07)
============= =============
(A) The convertible quarterly income debt securities,
which are convertible into 20,924,069 common shares, are
not assumed converted into shares of common stock for the
three months ended March 31, 2001, as they have an
antidilutive effect on earnings before cumulative effect of
accounting change.
6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
7-Eleven, Inc.:
We have reviewed the accompanying condensed consolidated
balance sheet of 7-Eleven, Inc. and Subsidiaries as of
March 31, 2001, and the related condensed consolidated
statements of earnings and cash flows for each of the
three-month periods ended March 31, 2000 and 2001. These
financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
condensed consolidated interim financial statements for
them to be in conformity with accounting principles
generally accepted in the United States of America.
We previously audited, in accordance with auditing
standards generally accepted in the United States of
America, the consolidated balance sheet as of December 31,
2000, and the related consolidated statements of earnings,
shareholders' equity (deficit), and cash flows for the year
then ended (not presented herein); and in our report dated
February 1, 2001 we expressed an unqualified opinion on
those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000 is
fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
April 24, 2001
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT INCLUDES CERTAIN STATEMENTS THAT
ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ANY
STATEMENT IN THIS REPORT THAT IS NOT A STATEMENT OF
HISTORICAL FACT MAY BE DEEMED TO BE A FORWARD-LOOKING
STATEMENT. WE OFTEN USE THESE TYPES OF STATEMENTS WHEN
DISCUSSING OUR PLANS AND STRATEGIES, OUR ANTICIPATION OF
REVENUES FROM DESIGNATED MARKETS AND STATEMENTS REGARDING
THE DEVELOPMENT OF OUR BUSINESSES, THE MARKETS FOR OUR
SERVICES AND PRODUCTS, OUR ANTICIPATED CAPITAL
EXPENDITURES, OPERATIONS, SUPPORT SYSTEMS, CHANGES IN
REGULATORY REQUIREMENTS AND OTHER STATEMENTS CONTAINED IN
THE QUARTERLY REPORT REGARDING MATTERS THAT ARE NOT
HISTORICAL FACTS. WHEN USED IN THIS QUARTERLY REPORT, THE
WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE,"
"SEEK," "ESTIMATE," AND OTHER SIMILAR EXPRESSIONS ARE
GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS. THERE CAN BE NO ASSURANCE THAT: (I) WE HAVE
CORRECTLY MEASURED OR IDENTIFIED ALL OF THE FACTORS
AFFECTING THESE MARKETS OR THE EXTENT OF THEIR LIKELY
IMPACT; (II) THE PUBLICLY AVAILABLE INFORMATION WITH
RESPECT TO THESE FACTORS ON WHICH OUR ANALYSIS IS BASED IS
COMPLETE OR ACCURATE; (III) OUR ANALYSIS IS CORRECT OR (IV)
OUR STRATEGY, WHICH IS BASED IN PART ON THIS ANALYSIS, WILL
BE SUCCESSFUL. WE DO NOT INTEND TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
GENERAL
7-Eleven is the world's largest operator, franchisor
and licensor of convenience stores and the largest
convenience retailer in North America. Over the last
several years we have refined our business strategy to take
advantage of our scale, retailer initiative and
infrastructure.
Our revenue principally consists of merchandise and
gasoline sales and to a lesser extent royalty income from
licensees. Our primary expenses consist of cost of goods
sold, operating expenses, interest expense and taxes. The
following discussion and analysis provides information that
management believes to be relevant to understanding 7-
Eleven's financial condition and results of operations.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE
MONTHS ENDED MARCH 31, 2000
EXCEPT WHERE NOTED, ALL PER STORE NUMBERS REFER TO AN
AVERAGE OF ALL STORES RATHER THAN ONLY STORES OPEN MORE
THAN ONE YEAR.
NET SALES
Merchandise sales for the three months ended March 31,
2001 were $1,558.7 million, an increase of $49.4 million,
or 3.3%, from $1,509.3 million for the three months ended
March 31, 2000. We attribute this increase primarily to
U.S. same-store merchandise sales growth of 2.3% and our
operating an average of 64 additional stores. Same-store
sales growth was 3.5%, after taking into consideration the
extra day in 2000 related to leap year. Wholesale
cigarette cost increases, which were reflected in higher
retail prices, accounted for less than one percentage point
of the increase in U.S. same-store merchandise sales.
Categories having the largest impact on merchandise sales
growth were cigarettes, prepaid cards, non-carbonated
8
beverages and beer/wine. Category growth was fueled by new
items and improved merchandising of product through
assortment. These category increases were partially offset
by decreases in sales of frozen beverages, due in part to
cooler temperatures in the first quarter of 2001, compared
to 2000, combined with lower sales of novelty cards.
Gasoline sales for the three months ended March 31, 2001
were $669.2 million, an increase of $65.9 million, or 10.9%,
from $603.3 million for the three months ended March 31,
2000. We attribute this increase primarily to a combination
of per store gallon growth of 3.8%, an average of 83
additional stores that sell gasoline and retail price
inflation of 2.8%. The average retail price of gasoline was
$1.48 per gallon during the quarter, a $0.04 increase over
the comparable quarter. The increase in average gallons sold
per store was primarily the result of adding new stores,
which tend to sell higher volumes of gasoline. We sold
450.8 million gallons in the three months ended March 31,
2001, an increase of 31.8 million gallons, or 7.6%, from
419.0 million gallons for the same period in 2000. We
believe the high price of gasoline continues to adversely
affect the increase in gallons sold, as evidenced by a
decline in demand in the U.S. in 2000 for the first time in
two decades.
GROSS PROFIT
Merchandise gross profit for the three months ended
March 31, 2001 was $525.1 million, an increase of $10.3
million, or 2.0%, from $514.8 million for the three months
ended March 31, 2000. This equates to merchandise gross
profit growth of 0.9% per store. We attribute this
increase primarily to higher U.S. same-store merchandise
sales and operating more stores.
Merchandise gross profit margin decreased to 33.69%
for the three months ended March 31, 2001 from 34.11% for
the same period in 2000. We attribute the decline in
overall margin primarily to product mix; sales increases
derived more from lower margin products than higher margin
items, in particular lower sales of cold beverages.
Gasoline gross profit for the three months ended March
31, 2001 was $51.9 million, an increase of $0.3 million,
from $51.6 million for the three months ended March 31,
2000. Gasoline gross profit improved during the quarter
due to a combination of increased gallons sold and our
operating an average of 83 more stores that sell gasoline.
Gasoline margin was unfavorably impacted during the first
quarter of 2001 by a cycle of prolonged high and increasing
costs, with retail prices moving upward at a slower rate,
combined with reduced sales of higher-margin grades of
gasoline. Gasoline margin was 11.51 cents per gallon for
the three months ended March 31, 2001, compared to 12.33
cents per gallon during the same period in 2000. As a
result of these factors, gasoline gross profit per store
decreased 3.1% for the three months ended March 31, 2001 as
compared to the same period in 2000.
FRANCHISEE GROSS PROFIT EXPENSE
We report all sales and gross profit from domestic
franchised stores in our consolidated results and record as
an expense a percentage of the gross profits generated by
those same franchised stores. Franchisee gross profit
expense for the three months ended March 31, 2001 was $154.4
million, an increase of $7.6 million, or 5.2%, from $146.8
million for the three months ended March 31, 2000. We
attribute the increase primarily to an increase in the number
of stores operated by franchisees and higher per store gross
profits at franchised stores.
9
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
("OSG&A")
OSG&A for the three months ended March 31, 2001 was
$428.9 million, an increase of $15.2 million, or 3.7%, from
$413.7 million for the three months ended March 31, 2000.
The increase in OSG&A costs was primarily due to costs
associated with operating an average of 64 more stores,
combined with higher utility costs of $7.6 million, mostly
due to increased rates in California. These incremental
costs were partially offset by net conversion gains of $11.2
million, related to our yen-denominated debt and foreign
operations (see OTHER ISSUES - Adoption of New Accounting
Standard). The ratio of OSG&A to net sales decreased to
19.3% for the three months ended March 31, 2001 from 19.6%
for the three months ended March 31, 2000.
INTEREST EXPENSE, NET
Net interest expense for the three months ended March
31, 2001 was $17.1 million, a decrease of $9.7 million, or
36.2%, from $26.9 million for the three months ended March
31, 2000. This decrease was primarily due to the repayment
of borrowings with proceeds from our sale of common stock to
IYG Holding Company on March 16, 2000. We expect net
interest expense for the remainder of the year to decrease
slightly, compared to 2000, based on anticipated levels of
debt and interest rate projections.
In accordance with Statement of Financial Accounting
Standards No. 15, we do not recognize interest expense on
our debentures in our statement of earnings. We recorded
these debentures at an amount equal to the future
undiscounted cash payments, both principal and interest.
Accordingly, we charge the cash interest payments against
the recorded amount of the debentures and not as interest
expense.
INCOME TAX EXPENSE
Income tax expense for the three months ended March 31,
2001 was $1.5 million, compared to a tax benefit of $11.0
million for the three months ended March 31, 2000. We
attribute this increase primarily to a non-recurring benefit
of $12.5 million recorded in the three months ended March 31,
2000, which resulted from a settlement with the Internal
Revenue Service related to audits of our federal income taxes
for the 1992 through 1995 tax years. Excluding the income
tax credit, our effective tax rate was 39.0% for the three
months ended March 31, 2001 compared to 39.5% for the same
period in 2000.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2001 we adopted "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"), which
resulted in a one-time charge of $9.8 million, net of taxes,
related to a cumulative effect of accounting change (see
OTHER ISSUES - Adoption of New Accounting Standard).
NET EARNINGS (LOSS)
Net loss for the three months ended March 31, 2001 was
$7.5 million ($0.07 per diluted share), a decrease of
$22.3 million, from net earnings of $14.8 million ($0.16
per diluted share) for the three months ended March 31,
2000. Net earnings before the cumulative effect of
accounting change were $2.3 million ($0.02 per diluted
share) for the three months ended March 31, 2001, while net
earnings for the three months ended March 31, 2000 were
$2.3 million ($0.03 per diluted share), excluding the non-
recurring tax benefit.
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LIQUIDITY AND CAPITAL RESOURCES
We obtain the majority of our working capital from three
sources:
* cash flows generated from our operating activities;
* a $650 million commercial paper facility,
guaranteed by Ito-Yokado Co., Ltd.; and
* seasonal borrowings of up to $200 million under our
revolving credit facility.
We believe that operating activities, coupled with
available working capital facilities, will provide sufficient
liquidity to fund operating and capital expenditure programs,
as well as to service debt requirements. The outstanding
balance at March 31, 2001 for commercial paper was $449.4
million, with no amounts outstanding under the revolver. We
expect capital expenditures for 2001, excluding lease
commitments, to be in excess of $300 million, which includes
capital associated with opening or acquiring 150-200 new
stores.
On January 25, 2001, we entered into a new unsecured
bank credit agreement, refinancing the old credit
agreement, which was scheduled to mature on February 27,
2002, with a new $200 million revolving credit facility.
The new revolving credit facility contains a sub-limit of
$150 million for letters of credit. As of March 31, 2001,
outstanding letters of credit issued pursuant to the credit
agreement totaled $64.0 million.
On January 25, 2001, we entered into a new lease
facility that will provide up to $100 million of off-
balance-sheet financing to be used for the construction of
new stores. Funding under this facility is available
through January 2003, with a final maturity of the leases
in July 2006.
On March 16, 2000, IYG Holding Company purchased
22,736,842 newly issued shares of our common stock for
$540.0 million, or $23.75 per share, in a private placement
transaction. We used the net proceeds from this
transaction to repay the outstanding balance on our bank
term loan, to repay the outstanding balance of our bank
revolver and to reduce indebtedness under our commercial
paper facility resulting in an upgrade of our rating.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was
$1.5 million for the three months ended March 31, 2001
compared to $22.8 million for the three months ended March
31, 2000, a decrease of $21.3 million. We attribute this
decrease primarily to changes in certain balance sheet
amounts.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was
$63.7 million for the three months ended March 31, 2001,
compared net cash provided of $1.3 million for the three
months ended March 31, 2000. Payments for capital
expenditures were $68.3 million for the three months ended
March 31, 2001 compared to $72.0 million for the same
period in 2000. In addition, we received $71.9 million of
net proceeds from a sale-leaseback transaction during the
three months ended March 31, 2000.
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Capital expenditures for each of the periods were used
for new store development, continued enhancements to our
retail information system, new equipment to support
merchandising initiatives, maintaining, remodeling and
upgrading store and gasoline facilities' image and equipment
and compliance with environmental regulations.
CASH FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $23.5
million for the three months ended March 31, 2001, compared
to net cash used in financing activities of $1.1 million
for the three months ended March 31, 2000.
Net borrowings under commercial paper and revolving
credit facilities totaled $53.6 million for the three months
ended March 31, 2001, compared to net repayments of
$416.2 million for the same period in 2000. Net long-term
debt repayments for the three months ended March 31, 2001
were $19.6 million compared to $131.2 million for the same
period in 2000. Cash from financing activities for the three
months ended March 31, 2000 also included $539.7 million in
net proceeds from issuance of common stock that we used to
pay down debt.
OTHER ISSUES
ENVIRONMENTAL
In December 1988, we closed our chemical manufacturing
facility in New Jersey. We are required to conduct
environmental remediation at the facility, including
groundwater monitoring and treatment for a projected 15-
year period, which commenced in 1998. We have recorded
undiscounted liabilities, representing our best estimates
of the clean-up costs, of $6.2 million at March 31, 2001.
In 1991, we entered into a settlement agreement with the
former owner of the facility pursuant to which the former
owner agreed to pay a substantial portion of the clean-up
costs. Based on the terms of the settlement agreement and
the financial resources of the former owner, we have
recorded a receivable of $3.6 million at March 31, 2001.
Additionally, we accrue for the anticipated future costs
and the related probable state reimbursement amounts for
remediation activities at our existing and previously
operated gasoline sites where releases of regulated
substances have been detected. At March 31, 2001, our
estimated undiscounted liability for these sites was $25.2
million. This estimate is based on our prior experience with
gasoline sites and contractors who perform environmental
assessment and remediation work as well as other factors such
as the age of the tanks and the location of tank sites. We
anticipate that substantially all of the future remediation
costs for detected releases of regulated substances at those
remediation sites of which we are aware, as of March 31,
2001, will be incurred within the next four to five years.
Under state reimbursement programs, we are eligible to
receive reimbursement for a portion of future remediation
costs, as well as a portion of remediation costs previously
paid. Accordingly, at March 31, 2001, we had recorded a net
receivable of $49.9 million based on the estimated state
reimbursements. In assessing the probability of state
reimbursements, we take into consideration each state's fund
balance, revenue sources, existing claim backlog, status of
clean-up activity and claim ranking systems. As a result of
these assessments, the recorded receivable amount is net of
an allowance of $7.6 million.
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While there can be no assurance of the timing of the
receipt of state reimbursement funds, based on our
experience we expect to receive the majority of state
reimbursement funds, except from California, within one to
three years after our payment of eligible remediation
expenses. This time period assumes that the state
administrative procedures for processing such
reimbursements have been fully developed. We estimate that
we will receive State of California reimbursement funds
within one to ten years after our payment of eligible
remediation expenses. As a result of the timing for
reimbursements, we have present-valued the portion of the
recorded receivable amount that relates to remediation
activities that have already been completed at a discount
rate of approximately 4.3%. Thus, the recorded receivable
amount is also net of a discount of $11.2 million.
The estimated future assessment and remediation
expenditures and related state reimbursement amounts could
change in the future as governmental requirements and state
reimbursement programs continue to be implemented or revised.
LITIGATION
We are a defendant in two legal actions, which are
referred to as the 7-Eleven Owners for Fair Franchising and
the Valente cases, filed by franchisees in 1993 and 1996,
respectively. A nationwide settlement was negotiated in
1997, and, in connection with the settlement, these two cases
were combined on behalf of a class of all persons who
franchised 7-Eleven convenience stores from us in the United
States at any time between January 1, 1987 and July 31, 1997.
A total of 98.5% of the class members have approved the
settlement, and the court presiding over the settlement
process gave its final approval of the settlement on
April 24, 1998. The settlement provides that class members
who are former franchisees will share in a settlement fund,
that we will make certain changes to the franchise agreements
of class members who are current franchisees and that we will
pay certain attorney fees. Our accruals are sufficient to
cover the total settlement costs, including payments due to
former franchisees when the settlement becomes effective.
Certain parties filed appeals challenging the settlement. In
April 2001, the California Supreme Court rejected those
appeals and the settlement will become effective during the
second quarter of 2001.
ADOPTION OF NEW ACCOUNTING STANDARD
As of January 1, 2001 we adopted the provisions of SFAS
No. 133, which changes the accounting for our interest rate
swap and nullifies the hedge treatment of our yen-denominated
debt and royalty.
Under SFAS No. 133, the $250 million interest rate swap
is being treated as a cash flow hedge of the interest rate
exposure in connection with our commercial paper program.
The transitional adjustment as of January 1, 2001 was not
material. Fair value is used to account for this derivative
going forward. We adjusted the carrying value of the
interest rate swap to fair value at March 31, 2001, which was
a liability of $7.9 million. We also recorded a charge of
$200,000 to interest expense related to the effectiveness of
the interest rate swap at March 31, 2001.
We use the royalty receipts from Seven-Eleven Japan Co.,
Ltd. ("SEJ") to service the monthly principal and interest
payments on our yen loans. This arrangement provides an
"economic" hedge against fluctuations in the Japanese yen to
U.S. dollar exchange rate. As a result of this hedge, the
1988 and 1998 yen loans and related interest expense and
payable, prior to the adoption of SFAS No. 133, were recorded
in the consolidated financial statements utilizing the Japanese
yen to U.S. dollar exchange rates in effect at the date of the
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borrowings (125.35 for the 1988 yen loan and 129.53 for the
1998 yen loan). Additionally, the SEJ royalty, prior to the
adoption of SFAS No. 133, was recorded at the 125.35 exchange
rate as it has been utilized to service the 1988 yen loan.
Although SFAS No. 133 nullified the hedge accounting
treatment we were applying to the SEJ royalty and yen loans,
our "economic" hedge against changes in the Japanese yen to
U.S. dollar exchange rate remains in place. Upon adoption of
SFAS No. 133, we converted the yen loans, related interest
payable and the SEJ royalty receivable to reflect the
Japanese yen to U.S. dollar exchange rate quoted for January
1, 2001 (114.35 yen to one U.S. dollar). As a result, the
transitional adjustment increased the yen loans, related
interest payable and SEJ royalty receivable by $16.1 million,
with an offsetting charge of $9.8 million (net of $6.3
million of taxes) to Cumulative Effect of Accounting Change.
The cumulative effect charge differs from our disclosure
in the December 31, 2000 Form 10-K. Subsequent to filing our
December 31, 2000 Form 10-K, the Financial Accounting
Standards Board issued a tentative conclusion that the
transitional adjustment for this type of transaction should
be recorded in earnings as a cumulative effect of accounting
change. We anticipate that final guidance will be issued in
the second quarter of 2001.
During the first quarter, we recorded in Operating,
Selling, General and Administrative Expense an $11.2 million
net conversion gain, primarily as a result of adjusting the
balance of the yen loans to reflect the Japanese yen to U.S.
dollar exchange rate quoted for March 31, 2001 (126.21 yen to
one U.S. dollar). We have recorded the SEJ royalty income
and interest expense on the yen loans at the monthly average
Japanese yen to U.S. dollar exchange rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
See "Management's Discussion and Analysis," above.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no reportable suits or proceedings pending or
threatened against the Company, other than as previously
reported.
For an update on a matter we have previously reported,
the 7-Eleven Owners for Fair Franchising case, we hereby
incorporate by reference the discussion contained on page 13
of this report (Management's Discussion and Analysis of
Financial Condition and Results of Operation - Other Issues
- - Litigation).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Exhibit (10) - Credit Agreement, dated as of
January 25, 2001, among 7-Eleven, Inc., the financial
institutions party thereto as Senior Lenders, Citibank,
N.A., as Administrative Agent, The Sakura Bank, Limited, New
York Branch, as Co-Agent and Salomon Smith Barney, Inc., as
Sole Lead Arranger and Sole Book Manager.
2. Exhibit (15) - Letter re Unaudited Interim
Financial Information. Letter of PricewaterhouseCoopers LLP
(b) 8-K Reports:
During the first quarter of 2001, the Company filed no
reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
7-ELEVEN, INC.
(Registrant)
Date: May 3, 2001 /s/ James W. Keyes
---------------------------
- -
(Officer)
James W. Keyes
President and Chief
Executive Officer
Date: May 3, 2001 /s/ Donald E. Thomas
---------------------------
- -
(Principal Accounting Officer)
Donald E. Thomas
Vice President, Chief Accounting
Officer and Controller
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