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, 2003
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:
104,986,071 shares of common stock, $.0001 par value (the issuer's
only class of common stock), were outstanding as of March 31, 2003.
7-ELEVEN, INC.
INDEX
<Table>
<Caption>
PAGE
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
December 31, 2002 and March 31, 2003 1
Condensed Consolidated Statements of Earnings -
Three Months Ended March 31, 2002 and 2003 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2003 3
Notes to Condensed Consolidated Financial Statements 4
Report of Independent Accountants 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 17
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
Certifications Under Section 302 of the Sarbanes-Oxley Act of 2002 20-21
Exhibit 10 - Note Purchase Agreement Between Seven - Eleven Japan Co.,
Ltd. and 7-Eleven, Inc. Tab 1*
Exhibit 15 - Letter re Unaudited Interim Financial Information Tab 2
Exhibit 99(i)(1) - Certification by Chief Executive Officer
Required by Section 906 of the Sarbanes-Oxley Act of 2002 Tab 3
Exhibit 99(i)(2) - Certification by Chief Financial Officer
Required by Section 906 of the Sarbanes-Oxley Act of 2002 Tab 4
</Table>
* Submitted with filing; not attached hereto.
(i)
<Table>
<Caption>
7-ELEVEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
DECEMBER 31, MARCH 31,
2002 2003
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 82,423 $ 100,037
Cash for Vcom kiosks 38,342 52,986
------------- -------------
Total cash and cash equivalents 120,765 153,023
Accounts receivable 248,483 251,616
Inventories 114,091 99,917
Other current assets 140,837 180,430
------------- -------------
Total current assets 624,176 684,986
Property and equipment 2,175,360 2,175,404
Goodwill and intangible assets 140,490 140,509
Other assets 124,299 131,330
------------- -------------
Total assets $ 3,064,325 $ 3,132,229
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 260,978 $ 240,931
Accrued expenses and other liabilities 457,623 392,878
Long-term debt due within one year 48,609 50,270
------------- -------------
Total current liabilities 767,210 684,079
Deferred credits and other liabilities 386,995 403,263
Long-term debt 1,366,623 1,488,367
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 1,168,182 1,168,248
Unearned compensation (1,068) (914)
Accumulated deficit (990,107) (985,151)
Accumulated other comprehensive loss (13,520) (5,673)
------------- -------------
Total shareholders' equity 163,497 176,520
------------- -------------
Total liabilities and shareholders' equity $ 3,064,325 $ 3,132,229
============= =============
See notes to condensed consolidated financial statements.
</Table>
1
<Table>
<Caption>
7-ELEVEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
-----------------------------
2002 2003
-------------- ------------
<S
REVENUES
Merchandise sales (including $153,516 and
$191,991 in excise taxes) $ 1,598,892 $ 1,712,256
Gasoline sales (including $177,387 and
$192,163 in excise taxes) 559,019 824,627
------------- ------------
Net sales 2,157,911 2,536,883
Other income 26,503 20,767
------------- ------------
Total revenues 2,184,414 2,557,650
COSTS AND EXPENSES
Merchandise cost of goods sold 1,046,052 1,131,673
Gasoline cost of goods sold 516,324 756,378
------------ ------------
Total cost of goods sold 1,562,376 1,888,051
Franchisee gross profit expense 162,303 174,630
Operating, selling, general and administrative expenses 445,570 467,864
Interest expense, net 15,810 16,371
------------ ------------
Total costs and expenses 2,186,059 2,546,916
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAX AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,645) 10,734
INCOME TAX EXPENSE (BENEFIT) (658) 4,186
------------ -------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (987) 6,548
LOSS ON DISCONTINUED OPERATIONS
(net of tax benefit of $6,311 and $1,018) (9,466) (1,592)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
(net of tax benefit of $18,759) (28,139) -
------------- -------------
NET EARNINGS (LOSS) $ (38,592) $ 4,956
============= =============
NET EARNINGS (LOSS) PER COMMON SHARE
BASIC
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (.01) $ .07
Loss on discontinued operations (.09) (.02)
Cumulative effect of accounting change (.27) -
------------- -------------
Net earnings (loss) $ (.37) $ .05
============= =============
DILUTED
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (.01) $ .07
Loss on discontinued operations (.09) (.02)
Cumulative effect of accounting change (.27) -
------------- -------------
Net earnings (loss) $ (.37) $ .05
============= =============
See notes to condensed consolidated financial statements.
</Table>
2
<Table>
<Caption>
7-ELEVEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------------------
2002 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (38,592) $ 4,956
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change 28,139 -
Depreciation and amortization of property and equipment 66,295 71,718
Other amortization 89 89
Deferred income tax expense (benefit) 1,666 (5,849)
Noncash interest expense 258 207
Foreign currency net conversion gain (1,210) (415)
Other noncash (income) loss (62) 1,545
Net loss (gain) on property and equipment 3,739 (120)
Increase in accounts receivable (4,213) (3,129)
Decrease in inventories 6,044 14,174
Decrease (increase) in other assets 4,300 (22,729)
Decrease in trade accounts payable and other liabilities (10,202) (67,161)
------------- -------------
Net cash provided by (used in) operating activities 56,251 (6,714)
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CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment (115,781) (56,846)
Proceeds from sale of property and equipment 1,947 2,587
Proceeds from sale of domestic securities 746 498
Restricted cash (12,300) (4,103)
Other 28 10
------------- -------------
Net cash used in investing activities (125,360) (57,854)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from commercial paper and revolving credit facilities 1,292,872 1,668,646
Payments under commercial paper and revolving credit facilities (1,242,943) (1,657,023)
Proceeds from issuance of long-term debt - 100,000
Principal payments under long-term debt agreements (5,817) (4,520)
Decrease in outstanding checks in excess of cash in bank (7,825) (10,277)
Net proceeds from issuance of common stock 51 -
Other (742) -
------------- -------------
Net cash provided by financing activities 35,596 96,826
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (33,513) 32,258
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 125,599 120,765
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 92,086 $ 153,023
============= =============
RELATED DISCLOSURES FOR CASH FLOW REPORTING
Interest paid, excluding SFAS No.15 Interest $ (17,696) $ (17,027)
============= =============
Net income taxes refunded (paid) $ 6,289 $ (891)
============= =============
Assets obtained by entering into capital leases $ 13,556 $ 15,637
============= =============
See notes to condensed consolidated financial statements.
</Table>
3
7-ELEVEN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 2003,
and the condensed consolidated statements of earnings and cash
flows for the three-month periods ended March 31, 2002 and 2003,
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, 2003, and the results of
operations and cash flows for all periods presented have been made.
Certain prior-period amounts have been reclassified to conform to
current-period presentation. The results of operations for the
interim periods are not necessarily indicative of the operating
results for the full year.
The reported results include approximately 5,800 convenience
stores that are operated or franchised in the United States and
Canada by the Company along with royalty income from worldwide 7-
Eleven area licensees. Sales and cost of goods sold of stores
operated by franchisees are consolidated with the results of
Company-operated stores in the condensed consolidated statements of
earnings. Gross profit from franchise stores is split between the
Company and its franchisees pursuant to the terms of franchise
agreements.
The condensed consolidated balance sheet as of December 31,
2002, 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, 2002, include accounting policies and additional
information pertinent to an understanding of both the December 31,
2002, 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, 2003, and as
discussed in the following notes.
2. STOCK-BASED COMPENSATION
The Company adopted the interim disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123," effective
January 1, 2003 (see Note 7).
The fair value of each option grant under the Company's 1995
Stock Incentive Plan ("Stock Incentive Plan") 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: expected life of five years and no dividend yields for
each period presented, risk-free interest rates of 4.67% and 2.65%
and expected volatility of 67.54% and 64.98% for the three-month
periods ended March 31, 2002 and 2003, respectively.
The Company has recognized no compensation cost for its stock
options as it is accounting for its Stock Incentive Plan for
employees under the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." If compensation
4
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, "Accounting for Stock-Based Compensation," the
Company's net earnings (loss) and net earnings (loss) per common
share for the three months ended March 31, 2002 and 2003, would have
been reduced to the pro forma amounts indicated in the following
table (dollars in thousands, except per-share data):
<Table>
<Caption>
Three Months
Ended March 31
-------------------------
2002 2003
------------ -----------
Net earnings (loss) as reported $ (38,592) $ 4,956
Add: Stock-based compensation expense included in
reported net earnings (loss), net of tax - 372
Less: Total stock-based compensation expense determined
under the fair-value-based method for all
stock-based awards, net of tax (825) (1,372)
----------- ----------
Pro forma net earnings (loss) $ (39,417) $ 3,956
Net earnings (loss) per common share as reported
Basic $ (.37) $ .05
Diluted (.37) .05
Pro forma net earnings (loss) per common share
Basic $ (.38) $ .04
Diluted (.38) .04
</Table>
3. COMPREHENSIVE EARNINGS
The components of comprehensive earnings (loss) of the
Company for the periods presented are as follows (in thousands):
<Table>
<Caption>
Three Months
Ended March 31
---------------------------
2002 2003
------------ ------------
Net earnings (loss) $ (38,592) $ 4,956
Other comprehensive earnings:
Unrealized gain (loss) on equity securities
(net of $167 and ($353) deferred taxes) 262 (469)
Reclassification adjustments for gains included
in net earnings (net of $292 and $215 deferred taxes) (456) (285)
Unrealized net gain related to interest rate swap
(net of $958 and $1,086 deferred taxes) 2,003 1,216
Foreign currency translation adjustments (349) 7,385
------------ ------------
Other comprehensive earnings 1,460 7,847
------------ ------------
Total comprehensive earnings (loss) $ (37,132) $ 12,803
============ ============
</Table>
5
4. STORE CLOSINGS, ASSET IMPAIRMENT AND ASSET RETIREMENT OBLIGATIONS
The results of operations of certain owned and leased stores
are presented as discontinued operations in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The results of operations of owned
stores are presented as discontinued operations beginning in the
quarter in which management commits to a plan to close the related
store and actively markets the store. The results of operations of
a leased store are presented as discontinued operations beginning
in the quarter in which the related store ceases operations. The
results of operations include related write-downs of stores to
estimated net realizable value and accruals for future estimated
rent and other expenses in excess of estimated sublease rental
income. Amounts related to discontinued operations of prior
periods have been reclassified to conform to discontinued
operations of the current period in the accompanying Condensed
Consolidated Statements of Earnings.
For the three months ended March 31, 2002 and 2003, the
stores presented as discontinued operations had total revenues of
$40.8 million and $13.6 million and pretax losses of $15.8 million
and $2.6 million, respectively. Included in the loss on
discontinued operations are losses on disposal of $6.9 million (net
of tax benefit of $4.7 million) and $158,000 (net of tax benefit of
$101,000) for the three months ended March 31, 2002 and 2003,
respectively. The losses on disposal represent write-downs of
stores to net realizable value and anticipated future rent and
other expenses in excess of related estimated sublease income in
connection with the store closings.
As of March 31, 2002 and 2003, assets held for sale were $14.1
million and $15.9 million, respectively, and are included in other
current assets in the accompanying Condensed Consolidated Balance
Sheets.
As required by SFAS No. 143, "Accounting for Asset Retirement
Obligations," the Company recognizes an estimated liability for the
removal of its underground storage tanks. Upon adoption of SFAS
143 in January 2002, the Company recorded a discounted liability of
$53.6 million, increased net property and equipment by $6.7 million
and recognized a one-time cumulative effect charge of $28.1 million
(net of deferred tax benefit of $18.8 million).
5. SEJ NOTES
In January 2003, the Company entered into a note purchase
agreement with Seven-Eleven Japan Co., Ltd. ("SEJ") that authorizes
the issuance and sale of up to $400 million aggregate principal
amount of Senior Subordinated Notes due January 27, 2010 ("SEJ
Notes"). The SEJ Notes, the proceeds of which will be used for
general corporate purposes and to retire the Company's existing
senior subordinated debentures, will be issued by the Company and
purchased by SEJ in multiple tranches through December 30, 2003.
Interest on the SEJ Notes is calculated for each tranche on its
issuance date and is set by a formula tied to the United States
Treasury Rate and Japanese government bond rates. The SEJ Notes
are subordinate to all obligations outstanding under the Company's
revolving credit facility. The Company is required to repay the
SEJ Notes in eight equal semiannual installments beginning July
2006 and ending January 2010, and interest payments on the unpaid
balance of the SEJ Notes are required semiannually beginning
January 2003. On January 10, 2003, the Company received $100
million from SEJ under the note purchase agreement; the interest
rate on this tranche is stated at 3.41%.
6
6. EARNINGS PER SHARE
Computations for basic and diluted earnings (loss) per common
share are presented below (in thousands, except per-share data):
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31
----------------------------
2002 2003
------------- ------------
BASIC:
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (987) $ 6,548
Loss on discontinued operations (9,466) (1,592)
Cumulative effect of accounting change (28,139 -
------------ ------------
Net earnings (loss) $ (38,592) $ 4,956
============ ============
Weighted-average common shares outstanding 104,819 104,853
============ ============
Earnings (loss) per common share from continuing operations
before cumulative effect of accounting change $ (.01) $ .07
Loss per common share on discontinued operations (.09) (.02)
Loss per common share on cumulative effect of accounting change (.27) -
------------ ------------
Net earnings (loss) per common share $ (.37) $ .05
============ =============
DILUTED:
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (987) $ 6,548
Add interest on convertible quarterly income debt
securities, net of tax (1) - -
------------- -------------
Earnings (loss) from continuing operations before cumulative
effect of accounting change plus assumed conversions (987) 6,548
Loss on discontinued operations (9,466) (1,592)
Cumulative effect of accounting change (28,139) -
------------- -------------
Net earnings (loss) plus assumed conversions $ (38,592) $ 4,956
============= =============
Weighted-average common shares outstanding (Basic) 104,819 104,853
Add effects of assumed conversions:
Stock options, stock units, performance share units
and restricted stock (2) - 443
Convertible quarterly income debt securities (1) - -
------------- -------------
Weighted-average common shares outstanding plus shares
from assumed conversions (Diluted) 104,819 105,296
============= =============
Earnings (loss) per common share from continuing operations
before cumulative effect of accounting change $ (.01) $ .07
Loss per common share on discontinued operations (.09) (.02)
Loss per common share on cumulative effect of
accounting change (.27) -
------------- -------------
Net earnings (loss) per common share $ (.37) $ .05
============= =============
(1) The 1995 and 1998 convertible quarterly income debt securities are not assumed converted for
the three-month periods ended March 31, 2002 and 2003, as they have an antidilutive effect
on earnings per share.
(2) The weighted-average shares for the three months ended March 31, 2002, do not assume exercise
of the stock-based awards as they have an antidilutive effect on earnings per share. Stock
options for 6.3 million shares of common stock for the three-month period ended March 31,
2003, have exercise prices that are greater than the average market price of the common
shares for that period.
</Table>
7
7. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2003, the Company adopted the
provisions of SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which was issued in July 2002 and is
effective for exit or disposal activities initiated after December
31, 2002. The statement requires that costs associated with exit
or disposal activities must be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal
plan. Such costs include lease termination costs and certain
employee severance costs associated with a restructuring,
discontinued operation or other exit or disposal activity. For the
Company, these costs generally arise from store closings and will
be recorded at the time the store is closed.
SFAS No. 148 was issued in December 2002 to provide
alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of
the method used on reported results.
The transition guidance and annual disclosure provisions of
SFAS No. 148 are effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for
financial statements for interim periods beginning after December
15, 2002, and are included in Note 2. At the present time, the
Company does not intend to adopt the fair-value-based method of
accounting for its stock compensation plans.
Financial Accounting Standards Board ("FASB") Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to
Others," was issued in November 2002. The Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Interpretation
incorporates, without change, the guidance in FASB Interpretation
No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," which is being superseded. The initial recognition and
measurement provisions of the Interpretation are to be applied on a
prospective basis to guarantees issued or modified after December
31, 2002, irrespective of the guarantor's fiscal year-end. The
adoption of this statement did not have a material impact on the
Company's financial statements as it has not issued or modified any
guarantees since December 31, 2002.
FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51," was issued in
January 2003. The Interpretation addresses consolidation of
variable interest entities ("VIEs") to which the usual condition
for consolidation described in Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," does not apply because the
VIEs have no voting interests or otherwise are not subject to
control through ownership of voting interests. It requires
existing unconsolidated VIEs to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks
among parties involved. The provisions of the Interpretation are
effective immediately for VIEs created after January 31, 2003, and
to VIEs in which an entity obtains an interest after that date. An
entity with a variable interest in a VIE created before February 1,
2003, must apply the provisions no later than the first reporting
period beginning after June 15, 2003. The Interpretation may be
applied prospectively with a cumulative-effect adjustment as of the
date on which it is first applied or by restating previously issued
financial statements.
8
The Company expects to include the assets, liabilities,
noncontrolling interests and results of activities of certain
trusts in its consolidated financial statements effective July 1,
2003. The trusts, which were funded by a group of senior lenders,
were established in connection with two lease facilities that have
provided the Company with $191.2 million as of March 31, 2003, in
off-balance sheet financing for constructing new stores and
acquiring operating convenience stores from unaffiliated third
parties. The trusts either acquired land and undertook construction
projects for which the Company was the construction agent or
acquired operating convenience stores from third parties. The
Company estimates that this will result in an after-tax, one-time
cumulative effect charge of approximately $9 million to $12
million. On an annual basis, the Company expects the after-tax
impact on earnings from continuing operations to be a charge of
approximately $5 million to $7 million.
9
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, 2003, and
the related condensed consolidated statements of earnings and cash
flows for each of the three-month periods ended March 31, 2002 and
2003. 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, 2002, and the related
consolidated statements of earnings, shareholders' equity
(deficit), and cash flows for the year then ended (not presented
herein); and in our report dated January 30, 2003, 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, 2002, 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 22, 2003
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS REPORT INCLUDES CERTAIN STATEMENTS THAT ARE "FORWARD-
LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ANY STATEMENT IN THIS REPORT THAT
IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A
FORWARD-LOOKING STATEMENT. WE OFTEN USE THESE TYPES OF STATEMENTS
WHEN DISCUSSING OUR PLANS AND STRATEGIES, OUR ANTICIPATION OF
REVENUES FROM DESIGNATED MARKETS AND STATEMENTS REGARDING THE
DEVELOPMENT OF OUR BUSINESSES, THE MARKETS FOR OUR SERVICES AND
PRODUCTS, OUR ANTICIPATED CAPITAL EXPENDITURES, OPERATIONS, SUPPORT
SYSTEMS, CHANGES IN REGULATORY REQUIREMENTS AND OTHER STATEMENTS
CONTAINED IN THIS REPORT REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS. WHEN USED IN THIS REPORT, THE WORDS "EXPECT," "ANTICIPATE,"
"INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE," AND OTHER SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS
AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THERE
CAN BE NO ASSURANCE THAT: (I) WE HAVE CORRECTLY MEASURED OR
IDENTIFIED ALL OF THE FACTORS AFFECTING THESE MARKETS OR THE EXTENT
OF THEIR LIKELY IMPACT; (II) THE PUBLICLY AVAILABLE INFORMATION
WITH RESPECT TO THESE FACTORS ON WHICH OUR ANALYSIS IS BASED IS
COMPLETE OR ACCURATE; (III) OUR ANALYSIS IS CORRECT OR (IV) OUR
STRATEGY, WHICH IS BASED IN PART ON THIS ANALYSIS, WILL BE
SUCCESSFUL. WE DO NOT ASSUME ANY OBLIGATION TO UPDATE OR REVISE
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
We are the world's largest operator, franchisor and licensor
of convenience stores and the largest convenience store chain in
North America. Our revenue principally consists of merchandise and
gasoline sales and, to a lesser extent, royalty income from
licensees. Our primary expenses consist of cost of goods sold;
operating, selling, general and administrative expense; occupancy
expense; interest expense and taxes.
We seek to meet the changing needs of convenience customers
and maintain a leadership position in the convenience store
industry by leveraging our scale, technology, people and widely
recognized brand. In 2003, we will continue to focus on our
traditional convenience store business as well as our growth
strategy to further our competitive advantage and improve our
financial results.
11
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED
MARCH 31, 2002
<Table>
<Caption>
NET SALES
Three Months Ended
March 31
------------------------
2002 2003
-------- ---------
Net Sales: (in millions)
Merchandise sales $ 1,598.9 $ 1,712.3
Gasoline sales 559.0 824.6
--------- ---------
Total net sales $ 2,157.9 $ 2,536.9
U.S. same store merchandise sales growth 3.7% 4.5%
Gasoline gallons sold (in millions) 466.8 506.4
Gasoline gallon sales change per store 2.7% 5.0%
Average retail price of gasoline per gallon $ 1.20 $ 1.63
</Table>
Merchandise sales for the three months ended March 31, 2003,
increased $113.4 million, or 7.1%, over the same period in 2002.
U.S. same-store merchandise sales growth was 4.5% for the three
months ended March 31, 2003, on top of 3.7% for the three months
ended March 31, 2002. Key contributors to the merchandise sales
growth in 2003 were increases in the sales of fresh food, prepaid
cards, beer, non-carbonated beverages and cigarettes. Changes in
the retail price of cigarettes due to wholesale cost changes were
negligible for 2003 and accounted for less than 1.5% in 2002.
Gasoline sales for the three months ended March 31, 2003,
increased $265.6 million or 47.5% compared to the same period in
2002. We attribute this increase to an increase of 43 cents per
gallon in our average retail price of gasoline in the first quarter
of 2003, compared to the same quarter in 2002, as well as an increase
of 8.5% in gallons sold to 506.4 million gallons. This increase in
gallons sold was primarily due to the addition of new gasoline
stores, and translates into a 5.0% growth in gallons sold per store.
<Table>
<Caption>
GROSS PROFIT
Three Months Ended
March 31
----------------------
2002 2003
--------- ---------
Gross Profit (in millions)
Merchandise gross profit $ 552.8 $ 580.6
Gasoline gross profit 42.7 68.2
--------- ---------
Total gross profit $ 595.5 $ 648.8
Merchandise gross profit margin 34.58% 33.91%
Merchandise gross profit growth per store 5.8% 2.9%
Gasoline gross profit margin cents per gallon 9.1 13.5
Gasoline gross profit change per store (18.9)% 54.7%
</Table>
Merchandise gross profit for the three months ended March 31,
2003, increased $27.8 million, or 5.0%, over the same period in
2002 as a result of higher sales. Gross profit margin declined
67 basis points to 33.91% for the first quarter of 2003 from 34.58%
for the same period in 2002. The decrease in overall gross profit
margin is attributable to our strategy of maximizing gross profit
dollars. The changing product mix affects merchandise margins as
we sell more items that contribute to gross profit dollars but
negatively impact gross profit margin, such as cigarette cartons.
The impact from product assortment changes was partially offset by
the continued emphasis on reducing our costs of goods sold.
12
Gasoline gross profit for the three months ended March 31,
2003, increased $25.5 million, or 59.9%, to $68.2 million.
Expressed as cents per gallon, our gasoline margin was 13.5 cents
in the first quarter of 2003 compared to 9.1 cents in the first
quarter of 2002. Although wholesale costs were significantly
greater in the first quarter of 2003 than in the same quarter a
year ago, retail prices were much higher than in the prior-year
quarter, contributing to the increase in profit margin.
OTHER INCOME
Other income for the three months ended March 31, 2003, was
$20.8 million, a decrease of $5.7 million, or 21.6%, from $26.5
million for the same period in 2002. Our royalty income from our
area licensees was $12.2 million for the three months ended March
31, 2003, compared to $19.7 million for the same period in 2002.
This decrease was primarily due to the anticipated reduction in the
Seven-Eleven Japan licensing royalties of $8.8 million.
FRANCHISEE GROSS PROFIT EXPENSE
Franchisee gross profit expense for the three months ended March
31, 2003, was $174.6 million, an increase of $12.3 million, or 7.6%,
from $162.3 million for the same period in 2002. The increase is due
to higher per-store gross profits at franchised stores and an
increase in the number of stores operated by franchisees.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (OSG&A)
The primary components of OSG&A are store labor, occupancy
(including depreciation) and corporate expenses. OSG&A for the
three months ended March 31, 2003, was $467.9 million, an increase
of $22.3 million, or 5.0%, from $445.6 million for the same period
in 2002. The primary drivers of the increase were higher occupancy
expenses from new store openings, labor, repairs and maintenance
and credit card processing fees.
The ratio of OSG&A to revenues decreased to 18.3% for the first
quarter of 2003 from 20.4% for the first quarter of 2002. Included
in OSG&A for the first quarter of 2003 was a $3.6 million gain
related to life insurance proceeds. Included in OSG&A for the first
quarter of 2002 was a $6.9 million charge related to severance and
other costs.
INTEREST EXPENSE, NET
Net interest expense for the three months ended March 31, 2003,
was $16.4 million, an increase of $561,000, or 3.5%, from $15.8
million for the same period in 2002. The increase is primarily due
to new borrowings of senior subordinated notes from Seven-Eleven
Japan Co., Ltd. ("SEJ") during the first quarter. See "Liquidity and
Capital Resources."
In accordance with SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring," our debentures are
recorded at an amount equal to the undiscounted cash payments of both
principal and interest, and we do not recognize interest expense on
our debentures in our Condensed Consolidated Statement of Earnings.
Accordingly, we charge the cash interest payments against the
recorded amount of the debentures.
13
INCOME TAX EXPENSE
Income tax expense for the three months ended March 31, 2003,
was $4.2 million compared to income tax benefit of $658,000 for the
same period in 2002. Our effective tax rate was 39.0% for the first
quarter of 2003 compared to 40.0% for the first quarter of 2002.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
For the three months ended March 31, 2003, our earnings from
continuing operations before cumulative effect of accounting change
was $6.5 million ($0.07 per diluted share), compared to a loss of
$1.0 million ($0.01 per diluted share) for the same period in 2002.
DISCONTINUED OPERATIONS
Discontinued operations for the three months ended March 31,
2003, was a loss of $1.6 million (net of $1.0 million tax benefit)
compared to a loss of $9.5 million (net of $6.3 million tax
benefit) for the same period in 2002. These stores had total
revenues of $13.6 million and $40.8 million and pretax losses of
$2.6 million and $15.8 million for the three months ended March 31,
2003 and 2002, respectively. Included in the loss on discontinued
operations are losses on disposal of $158,000 (net of $101,000 tax
benefit) and $6.9 million (net of $4.7 million tax benefit) for the
three months ended March 31, 2003 and 2002, respectively. The loss
on disposal represents write-downs of stores to net realizable
value and anticipated future rent and other expenses in excess of
related estimated sublease income in connection with the store
closings.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2002, we adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations," which resulted in a one-time charge
of $28.1 million, net of deferred tax benefit, related to the
cumulative effect of the accounting change which relates to the
accounting for costs associated with future removal of underground
gasoline storage tanks.
NET EARNINGS
Net earnings for the three months ended March 31, 2003, were
$5.0 million ($0.05 per diluted share), compared to a net loss of
$38.6 million ($0.37 per diluted share) for the same period in 2002.
SEASONALITY
Weather conditions can have a significant impact on our sales,
as buying patterns have shown that our customers increase their
transactions and also purchase higher profit margin products when
weather conditions are favorable. Consequently, our results are
seasonal, and we typically earn more during the warmer second and
third quarters.
LIQUIDITY AND CAPITAL RESOURCES
We obtain the majority of our working capital from these
sources:
* Cash flows generated from our operating activities;
* A $650 million commercial paper facility, guaranteed by
Ito-Yokado Co., Ltd.;
* A $400 million facility with Seven-Eleven Japan; and
* Borrowings of up to $200 million under our revolving credit
facility.
14
We believe that operating activities, available working capital
sources and additional borrowings will provide sufficient liquidity
in 2003 to fund our operating costs, capital expenditures and debt
service. In addition, we intend to continue accessing the leasing
market to finance our new stores and certain equipment, including
Vcom kiosks.
We expect capital expenditures for 2003, excluding lease
commitments, will be between $335 million and $365 million. Our
capital expenditures decreased 51% for the three months ended March
31, 2003, compared to the same period in 2002. For the first quarter
of 2003, our capital expenditures were primarily related to
developing new stores and replacing store equipment. We opened 16
stores in the first quarter of 2003.
In January 2003, we entered into a note purchase agreement
with SEJ that authorizes the issuance and sale of up to $400
million aggregate principal amount of Senior Subordinated Notes due
January 27, 2010 ("SEJ Notes"). The SEJ Notes, the proceeds of
which will be used for general corporate purposes and to retire our
existing senior subordinated debentures, will be purchased by SEJ
in multiple tranches through December 30, 2003. Interest on the
SEJ Notes is calculated for each tranche on its issuance date and
is set by a formula tied to the United States Treasury Rate and
Japanese government bond rates. The SEJ Notes are subordinate to
all obligations outstanding under the Company's revolving credit
facility. On January 10, 2003, we received $100 million from SEJ
under the note purchase agreement; the interest rate on this
tranche is 3.41%. As a result of the planned retirement of the
existing senior subordinated debentures, interest expense will
increase in 2003, as we currently do not recognize interest expense
on the existing debentures. See-Comparison of Three Months Ended
March 31, 2003 to Three Months Ended March 31, 2002-Interest
Expense, Net and Note 5 to the Notes to the Condensed Consolidated
Financial Statements.
VCOM
We announced plans in the third quarter of 2002 to expand
Vcom to 1,000 stores adding to our current Vcom pilot program in
Texas and Florida. As of March 31, 2003, we had installed 575 Vcom
kiosks. We anticipate that we will have 1,000 kiosks rolled out by
the end of the second quarter 2003. Our estimated capital
investment for the rollout to 1,000 kiosks will total approximately
$55 million and will be funded primarily by a capital lease
program. We estimate that we will need approximately $110 million
to fund the amount of cash in the kiosks necessary for check
cashing and ATM transactions. Currently we will fund this with our
commercial paper program.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities for the three months
ended March 31, 2003, was $6.7 million compared to net cash
provided by operating activities of $56.3 million for the three
months ended March 31, 2002. We attribute this decrease to changes
in working capital items, primarily as a result of timing of the
funding for money orders, the timing of payment of merchandise and
gasoline payables and decreases in employee benefits payables.
15
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities for the three months
ended March 31, 2003, was $57.9 million, a decrease of $67.5
million, or 53.8%, from $125.4 million for the three months ended
March 31, 2002. The primary driver of the decrease was a $59.0
million decrease in capital expenditures to $56.8 million for the
three months ended March 31, 2003, from $115.8 million for the same
period in 2002. Capital expenditures in the first quarter of 2003
primarily related to developing new stores and replacing store
equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $96.8 million
for the three months ended March 31, 2003, an increase of $61.2
million from net cash provided by financing activities of $35.6
million for the three months ended March 31, 2002. Net proceeds
under commercial paper and revolving credit facilities for the
three months ended March 31, 2003, totaled $11.6 million compared
to $49.9 million for the same period in 2002. The $100.0 million
of proceeds from issuance of long-term debt in 2003 is from the
borrowing under the $400 million SEJ Notes, referred to above. See
also Note 5 to the Notes to the Condensed Consolidated Financial
Statements.
OTHER ISSUES
ENVIRONMENTAL
At March 31, 2003, our estimated undiscounted liability for
our environmental costs related to remedial action at existing and
previously operated gasoline storage sites and other operating and
non-operating properties where releases of regulated substances
have been detected was $36.8 million. We anticipate that
substantially all of the future remediation costs for detected
releases of regulated substances at remediation sites of which we
are aware, as of March 31, 2003, will be incurred within the next
five to six years. The estimated liability could change within the
near future for several reasons, including revisions to or the
creation of governmental requirements, existing remediation
projects become fully defined and revised cost-to-closure estimates
become available and unplanned future failures of underground
gasoline storage tank systems.
Under state reimbursement programs, we are eligible to be
reimbursed for a portion of remediation costs previously incurred.
At March 31, 2003, we had recorded a net receivable of
$61.1 million for the estimated state reimbursements of which $34.3
million relates to remediation costs incurred in the State of
California. In assessing the probability of state reimbursements,
we take into consideration each state's fund balance, revenue
sources, existing claim backlog, historical payments and claim
ranking. As a result of these assessments, the recorded receivable
amounts, at March 31, 2003, are net of allowances of $11.1 million.
The estimated future state reimbursement amounts could change
within the near future as governmental requirements and state
reimbursement programs continue to be revised or extended. Our
estimated reimbursement amounts could change materially as
remediation costs are spent and as receipts of state trust funds
are recorded.
While we cannot be certain of the timing of our receipt of
state reimbursement funds, based on our experience we expect to
receive the majority of state reimbursement funds within one to
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. One
exception to our assumption is California, where we estimate that
we will receive reimbursement funds within one to nine years after
our payment of eligible remediation expenses. As a result of the
timing for reimbursements, we have present-valued the portion of
the recorded receivable amount that relates to remediation
activities that have already been completed at a discount rate of
approximately 3.8%. Thus, in addition to the allowance set forth
in the preceding paragraph, the recorded receivable amount is also
net of a discount of $8.6 million.
16
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. Such revisions could have a material
impact on our operations and financial position.
NEW ACCOUNTING STANDARDS
Effective January 1, 2003, we adopted the provisions of SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The statement requires that costs associated with
exit or disposal activities must be recognized when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. Such costs include lease termination costs and
certain employee severance costs associated with a restructuring,
discontinued operation or other exit or disposal activity. These
costs generally arise from our store closings and will be recorded
at the time the store is closed.
SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No.
123," provides alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based
employee compensation. At the present time, we do not intend to
adopt the fair-value-based method of accounting for our stock
compensation plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," ABOVE.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to
provide reasonable assurance as to the reliability of the financial
statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition.
Within 90 days prior to the filing of this report, our Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures with the assistance and participation of
other members of management. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information the Company is required to
disclose in the reports it files under the Securities Exchange Act
of 1934 within the time periods specified in the SEC's rules and
forms. There have been no significant changes in the Company's
internal controls or in other factors which could significantly
affect internal controls subsequent to the date the Company carried
out its evaluation.
17
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no reportable suits or proceedings pending or
threatened against the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Exhibit (10) - Note Purchase Agreement Between
Seven-Eleven Japan Co., Ltd. and 7-Eleven, Inc.
2. Exhibit (15) - Letter re Unaudited Interim
Financial Information.
Letter of PricewaterhouseCoopers LLP.
3. Exhibit (99)(i)(1) - Certification by Chief
Executive Officer
Required by Section 906 of the Sarbanes-Oxley
Act of 2002.
4. Exhibit (99)(i)(2) - Certification by Chief
Financial Officer
Required by Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) 8-K Reports:
During the first quarter of 2003, the Company filed
the following report on Form 8-K
* January 7, 2003 - Item 9 (Regulation FD
Disclosure), attaching press release
entitled "7-Eleven Obtains a Commitment
for $400 Million Financing."
18
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 2, 2003 /s/ James W. Keyes
-------------------------------
(Officer)
James W. Keyes
President and Chief Executive Officer
Date: May 2, 2003 /s/ Edward W. Moneypenny
------------------------------
(Principal Financial Officer)
Edward W. Moneypenny
Senior Vice President
and Chief Financial Officer
19
CERTIFICATION
I, James W. Keyes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 7-
Eleven, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 2, 2003 /s/ James W. Keyes
--------------------------
James W. Keyes
President and Chief Executive Officer
20
CERTIFICATION
I, Edward W. Moneypenny, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 7-
Eleven, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 2, 2003 /s/ Edward W. Moneypenny
-----------------------------
Edward W. Moneypenny
Senior Vice President and Chief
Financial Officer
21