10-Q 1 form10q-46549_82702.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 2, 2002 Commission file number 001-11421 DOLLAR GENERAL CORPORATION (Exact name of registrant as specified in its charter) Tennessee 61-0502302 ----------------------------------------------- ------------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) 100 Mission Ridge Goodlettsville, Tennessee 37072 ---------------------------------------------------- (Address of principal executive offices, zip code) (615) 855-4000 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 [ ]. The number of shares of common stock outstanding as of August 16, 2002 was 333,259,413.
Dollar General Corporation Form 10-Q For the Quarter Ended August 2, 2002 Index Page No. Part I. - Financial Information........................................................3 Item 1. Financial Statements..........................................................3 Condensed Consolidated Balance Sheets as of August 2, 2002 and February 1, 2002..............................................................3 Condensed Consolidated Statements of Income for the 13 and 26 weeks ended August 2, 2002 and August 3, 2001.................................4 Condensed Consolidated Statements of Cash Flows for the 26 weeks ended August 2, 2002 and August 3, 2001.......................................6 Notes to Condensed Consolidated Financial Statements..........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................22 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................29 Part II. - Other Information..........................................................29 Item 1. Legal Proceedings............................................................29 Item 4. Submission of Matters to a Vote of Security Holders..........................32 Item 5. Other Information............................................................33 Item 6. Exhibits and Reports on Form 8-K.............................................34 Signatures...................................................................36
2 Part I. Financial Information Item 1. Financial Statements
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) August 2, 2002 February 1, (Unaudited) 2002 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ........................ $ 39,517 $ 261,525 Merchandise inventories .......................... 1,058,200 1,131,023 Deferred income taxes ............................ 25,552 105,091 Income taxes receivable .......................... 55,573 6,820 Other current assets ............................. 65,263 51,588 ----------- ----------- Total current assets ..................... 1,244,105 1,556,047 ----------- ----------- Property and equipment, at cost .................. 1,547,346 1,473,693 Less accumulated depreciation and amortization ... 548,073 484,778 ----------- ----------- Net property and equipment ............... 999,273 988,915 ----------- ----------- Other assets ..................................... 21,851 7,423 ----------- ----------- Total assets ............................. $ 2,265,229 $ 2,552,385 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations ......... $ 15,132 $ 395,675 Accounts payable ................................. 346,786 322,463 Accrued expenses and other ....................... 219,220 253,413 Litigation settlement payable .................... -- 162,000 ----------- ----------- Total current liabilities ................ 581,138 1,133,551 ----------- ----------- Long-term obligations ................................ 506,707 339,470 Deferred income taxes ................................ 46,030 37,646 Shareholders' equity: Preferred stock .................................. -- -- Common stock ..................................... 166,670 166,359 Additional paid-in capital ....................... 312,589 301,848 Retained earnings ................................ 656,894 579,265 Accumulated other comprehensive loss ............. (2,012) (3,228) ----------- ----------- 1,134,141 1,044,244 Less other shareholders' equity .................. 2,787 2,526 ----------- ----------- Total shareholders' equity ............... 1,131,354 1,041,718 ----------- ----------- Total liabilities and shareholders' equity $ 2,265,229 $ 2,552,385 =========== ===========
See notes to condensed consolidated financial statements. 3
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Amounts in thousands except per share amounts) 13 Weeks Ended -------------------------------------------------------------------- August 2, 2002 % of Net Sales August 3, 2001 % of Net Sales -------------- -------------- -------------- -------------- Net sales ..................................... $ 1,453,727 100.0% $ 1,225,254 100.0% Cost of goods sold ............................ 1,066,300 73.3 893,971 73.0 ----------- ------------ ----------- ------------ Gross profit ............................ 387,427 26.7 331,283 27.0 Selling, general and administrative expense.... 313,667 21.6 276,069 22.5 Insurance proceeds ............................ (4,500) (0.3) -- -- ----------- ------------ ----------- ------------ Operating profit ........................ 78,260 5.4 55,214 4.5 Interest expense .............................. 11,337 0.8 11,957 1.0 ----------- ------------ ----------- ------------ Income before income taxes .............. 66,923 4.6 43,257 3.5 Provision for taxes on income ................. 24,561 1.7 16,157 1.3 ----------- ------------ ----------- ------------ Net income .............................. $ 42,362 2.9% $ 27,100 2.2% =========== ============ =========== ============ Earnings per share: Basic ................................... $ 0.13 $ 0.08 =========== =========== Diluted ................................. $ 0.13 $ 0.08 =========== =========== Weighted average shares: Basic ................................... 333,067 332,330 =========== =========== Diluted ................................. 335,737 335,402 =========== =========== Dividends per share ........................... $ .032 $ .032 =========== ===========
See notes to condensed consolidated financial statements. 4
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Amounts in thousands except per share amounts) 26 Weeks Ended -------------------------------------------------------------------- August 2, 2002 % of Net Sales August 3, 2001 % of Net Sales -------------- -------------- -------------- -------------- Net sales ...................................... $ 2,843,139 100.0% $ 2,427,758 100.0% Cost of goods sold ............................. 2,075,420 73.0 1,775,050 73.1 ----------- ------------ ----------- ------------ Gross profit ............................. 767,719 27.0 652,708 26.9 Selling, general and administrative expense..... 610,971 21.5 528,059 21.8 Insurance proceeds ............................. (4,500) (0.2) -- -- ----------- ------------ ----------- ------------ Operating profit ......................... 161,248 5.7 124,649 5.1 Interest expense ............................... 21,769 0.8 23,557 0.9 ----------- ------------ ----------- ------------ Income before income taxes ............... 139,479 4.9 101,092 4.2 Provision for taxes on income .................. 51,189 1.8 37,759 1.6 ----------- ------------ ----------- ------------ Net income ............................... $ 88,290 3.1% $ 63,333 2.6% =========== ============ =========== ============ Earnings per share: Basic .................................... $ 0.27 $ 0.19 =========== ============ Diluted .................................. $ 0.26 $ 0.19 =========== ============ Weighted average shares: Basic .................................... 332,866 331,959 =========== ============ Diluted .................................. 335,286 335,293 =========== ============ Dividends per share ............................ $ .064 $ .064 =========== ============
See notes to condensed consolidated financial statements. 5
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) 26 Weeks Ended --------------------------------- August 2, 2002 August 3, 2001 -------------- -------------- Cash flows from operating activities: Net income $ 88,290 $ 63,333 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 66,019 60,980 Deferred income taxes 87,296 (7,135) Tax benefit from stock option exercises 2,120 4,656 Litigation settlement (162,000) -- Change in operating assets and liabilities: Merchandise inventories 72,823 (84,621) Other current assets (13,675) 2,269 Accounts payable 24,323 (2,478) Accrued expenses and other (11,206) (59) Income taxes (59,464) (21,995) Other (13,914) (5,131) --------- --------- Net cash provided by operating activities 80,612 9,819 --------- --------- Cash flows from investing activities: Purchase of property and equipment (70,445) (73,942) Proceeds from sale of property and equipment 127 144 --------- --------- Net cash used in investing activities (70,318) (73,798) --------- --------- Cash flows from financing activities: Net borrowings under revolving credit facilities 170,000 -- Repayments of long-term obligations (389,561) (6,023) Payments of cash dividends (21,307) (21,268) Proceeds from exercise of stock options 4,509 10,623 Other financing activities 4,057 (33) --------- --------- Net cash used in financing activities (232,302) (16,701) --------- --------- Net decrease in cash and cash equivalents (222,008) (80,680) Cash and cash equivalents, beginning of period 261,525 162,310 --------- --------- Cash and cash equivalents, end of period $ 39,517 $ 81,630 ========= ========= Supplemental schedule of noncash investing and financing activities - Purchase of property and equipment under capital lease obligations $ 6,233 $ 17,393 ========= =========
See notes to condensed consolidated financial statements. 6 Notes to Condensed Consolidated Financial Statements (UNAUDITED) 1. Basis of presentation and accounting policies Basis of presentation The accompanying unaudited condensed consolidated financial statements of the Dollar General Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Such financial statements consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's Annual Report on Form 10-K. Accordingly, the reader of this quarterly report on Form 10-Q should refer to the Company's Annual Report on Form 10-K for the year ended February 1, 2002 for additional information. The accompanying condensed consolidated financial statements have been prepared in accordance with the Company's customary accounting practices and have not been audited. In management's opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position and results of operations for the 13-week and 26-week periods ended August 2, 2002 and August 3, 2001 have been made. Certain prior year amounts have been reclassified to conform to the current period presentation. Ongoing estimates of inventory shrinkage and markdowns are included in the interim cost of goods sold calculation. Because the Company's business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year. Accounting pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The Company began to apply the new accounting rules on February 2, 2002. The adoption of SFAS No. 141 has not had a material impact on the Company's financial position or results of operations. The Company completed the transitional goodwill impairment reviews required by SFAS No. 142 during the second quarter of 2002. In performing the impairment 7 review, the Company reviewed the operating performance of its retail operations. This review did not indicate any impairment of goodwill. The adoption of SFAS No. 142 has not had a material impact on the Company's financial position or results of operations. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" in June 2001. SFAS No. 143 applies to legal obligations associated with the retirement of certain tangible long-lived assets. This statement is effective for fiscal years beginning after June 15, 2002. Accordingly, the Company will adopt this statement on February 1, 2003. The Company believes the adoption of SFAS No. 143 will not have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company adopted this statement on February 2, 2002. It supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 144 has not had a material impact on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds both SFAS Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS No. 4, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria in paragraph 20 of APB Opinion No. 30. The Company will adopt the provisions of SFAS No. 145 on February 1, 2003 and believes the adoption of SFAS No. 145 will not have a material effect on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company believes the adoption of this statement will not have a material impact on its financial position or results of operations. 8 2. Comprehensive income Comprehensive income consists of the following (in thousands): 13 Weeks Ended ---------------------------------- August 2, 2002 August 3, 2001 -------------- -------------- Net income $ 42,362 $ 27,100 Net change in derivative financial instruments 665 (205) -------- -------- $ 43,027 $ 26,895 ======== ======== 26 Weeks Ended ---------------------------------- August 2, 2002 August 3, 2001 -------------- -------------- Net income $ 88,290 $ 63,333 Net change in derivative financial instruments 1,216 (3,044) -------- -------- $ 89,506 $ 60,289 ======== ======== 3. Debt refinancing At May 3, 2002, the Company had $383 million outstanding under two synthetic lease facilities (the "Synthetic Lease Facilities"), one with $212 million in outstanding capital leases and the other with $171 million in outstanding capital leases. As of such date, the Company also had a $175 million revolving credit agreement (the "Old Credit Facility"), under which no amounts were outstanding. The Synthetic Lease Facilities were scheduled to mature and the Old Credit Facility was scheduled to expire in September 2002. On June 21, 2002, the Company closed on its previously announced $450 million revolving credit facility (the "New Credit Facilities"), pursuant to which SunTrust Bank is serving as Administrative Agent, Credit Suisse First Boston is the Syndication Agent and KeyBank N.A. and U.S. Bank N.A. are Co-Documentation Agents. The Company used the New Credit Facilities (i) to replace the Old Credit Facility (ii) to refinance the Synthetic Lease Facilities and (iii) for working capital and other general corporate purposes. The New Credit Facilities are split between a $300 million three-year revolving credit facility, and a $150 million 364-day revolving credit facility. The Company pays interest on funds borrowed under the New Credit Facilities at rates that are subject to change based upon the rating of the Company's senior debt by independent agencies. The Company has two interest rate options, base rate (which is usually equal to prime rate) and LIBOR. At the Company's current ratings, the facility fees are 37.5 basis points and 32.5 basis points on the two facilities, respectively. The all-in drawn margin under the LIBOR option is LIBOR plus 237.5 basis points on both facilities. The all-in drawn margin 9 under the base rate option is the base rate plus 125 basis points and the base rate plus 120 basis points on the two facilities, respectively. The New Credit Facilities are secured by the same real estate assets that served as collateral for the Synthetic Lease Facilities: approximately 400 of the Company's retail stores, its headquarters and two of its distribution centers. As of August 2, 2002, the Company had $170 million outstanding under the New Credit Facilities, at a rate of 4.3%. 4. Commitments and Contingencies On April 30, 2001, the Company announced that it had become aware of certain accounting issues that would cause it to restate its audited financial statements for fiscal years 1999 and 1998, and to restate the unaudited financial information for fiscal year 2000 that had been previously released by the Company. The Company subsequently restated such financial statements and financial information by means of its Form 10-K for the fiscal year ended February 2, 2001, which was filed on January 14, 2002. Following the April 30, 2001 announcement more than 20 purported class action lawsuits were filed against the Company and certain current and former officers and directors of the Company, asserting claims under the federal securities laws. These lawsuits were consolidated into a single action pending in the United States District Court for the Middle District of Tennessee. On July 17, 2001, the court entered an order appointing the Florida State Board of Administration and the Teachers' Retirement System of Louisiana as lead plaintiffs and the law firms of Entwistle & Cappucci LLP, Milberg Weiss Bershad Hynes & Lerach LLP and Grant & Eisenhofer, P.A. as co-lead counsel. On January 3, 2002, the lead plaintiffs filed an amended consolidated class action complaint. Among other things, plaintiffs alleged that the Company and certain of its current and former officers and directors made misrepresentations concerning the Company's financial results in the Company's filings with the Securities and Exchange Commission and in various press releases and other public statements. The plaintiffs sought damages with interest, costs and such other relief as the court deemed proper. On January 3, 2002, the Company reached a settlement agreement with the putative class action plaintiffs, pursuant to which the Company agreed to pay up to $162 million to such plaintiffs in settlement for their claims and to implement certain enhancements to its corporate governance and internal control procedures. Such agreement was subject to confirmatory discovery, to the final approval of the Company's Board of Directors, and to court approval. On April 1, 2002, following the completion of such confirmatory discovery, the Company and the putative class action plaintiffs amended their settlement agreement and the plaintiffs filed a second amended complaint, purporting to name as plaintiffs a class of persons who purchased or otherwise made an investment decision regarding the Company's securities and related derivative securities between March 5, 1997 and 10 January 14, 2002. Pursuant to the amended settlement agreement, the Company agreed to pay $162 million to such plaintiffs in settlement for their claims and to implement certain enhancements to its corporate governance and internal control procedures. Such amended agreement was approved by the court on May 24, 2002. Pursuant to the terms of such agreement, the Company disbursed $1 million of such funds in April 2002 and the remaining amount of $161 million in June and July 2002. In addition, the Company received from its insurers $4.5 million in respect of such settlement in July 2002. The Company recognized an expense of $162 million in the fourth quarter of 2000 in respect of the class action settlement agreement, and income of $4.5 million in the second quarter of 2002 in respect of the receipt of such insurance proceeds. Plaintiffs representing fewer than 1% of the shares traded during the class period chose to opt out of the class settlement and may elect to pursue recovery against the Company individually. Because no separate litigation has yet been filed by parties who opted out, the Company cannot estimate the potential liabilities associated with such litigation, but it does not believe that the resolution of any such litigation will have a material effect on the Company's financial position. In addition, six purported shareholder derivative lawsuits have been filed in Tennessee State Court against certain current and former Company directors and officers and Deloitte & Touche LLP, the Company's former independent accountant. The Company is named as a nominal defendant in the actions, which seek restitution and/or compensatory and punitive damages with interest, equitable and/or injunctive relief, costs and such further relief as the court deems proper. By order entered October 31, 2001, the court appointed Michael Dixon, Jr., Carolinas Electrical Workers Retirement Fund and Thomas Dewey, plaintiffs in one of the six filed cases, as lead plaintiffs and the law firms of Branstetter, Kilgore, Stranch & Jennings and Stanley, Mandel & Iola as lead counsel. In the same order, the court stayed the remaining cases pending completion of the lead case. Among other things, the plaintiffs allege that certain current and former Company directors and officers breached their fiduciary duties to the Company and that Deloitte & Touche aided and abetted those breaches and was negligent in its service as the Company's independent accountant. During August and September 2001, the Company moved to dismiss all six cases for failure to make a pre-suit demand on the Board of Directors and, in the alternative, requested that the court stay the actions pending the completion of an investigation into the allegations in the complaints by the Shareholder Derivative Claim Review Committee of the Company's Board of Directors. The lead plaintiffs filed an opposition to this motion on October 2, 2001. Two purported shareholder derivative lawsuits also have been filed and consolidated in the United States District Court for the Middle District of Tennessee against certain current and former Company directors and officers alleging that they 11 breached their fiduciary duties to the Company. The Company is named as a nominal defendant in these actions, which seek declaratory relief, compensatory and punitive damages, costs and such further relief as the court deems proper. By motion filed on September 28, 2001, the Company requested that the federal court abstain from exercising jurisdiction over the purported shareholder derivative actions in deference to the pending state court actions. By agreement of the parties and court order dated December 3, 2001, the case was stayed until June 3, 2002. Based on the settlement of the Tennessee state derivative actions described below and the dismissal of the appeal filed by Cornelius P. Warren, the lead plaintiff in the federal derivative case, the Company and the individual defendants moved to dismiss the federal derivative case on August 27, 2002. A status conference with respect to this case is currently scheduled for September 12, 2002. The Company and the individual defendants have reached a settlement agreement with the plaintiffs in the lead Tennessee state shareholder derivative action. The agreement includes a payment to the Company from a portion of the proceeds of the Company's director and officer liability insurance policies as well as certain corporate governance and internal control enhancements. The terms of such agreements require that all of the stayed cases, including the federal derivative cases described above, be dismissed with prejudice by the courts in which they are pending in order for the settlement to be effective. Following confirmatory discovery, the settlement agreement was preliminarily approved by the Tennessee State Court on April 19, 2002, and received final approval on June 4, 2002. On July 5, 2002, Cornelius P. Warren, the lead plaintiff in the federal derivative case, appealed the approval of the settlement in the state derivative cases to the Court of Appeals of Tennessee. Such appeal was dismissed by the Court of Appeals of Tennessee by Order dated July 22, 2002. Mr. Warren has not yet filed notice of his intention to appeal this dismissal; any such notice must be filed by no later than September 20, 2002. Pending the final resolution of the federal derivative case and any further appeal of the settlement that Mr. Warren may bring, $31.5 million of proceeds of the Company's director and officer insurance policies are being held in escrow. If the settlement becomes final, the Company expects that it will result in a net payment to the Company, after attorneys' fees payable to the plaintiffs' counsel, of approximately $25.2 million, which payment has not yet been accrued in the Company's financial statements. The Company has been notified that the SEC is conducting an investigation into the circumstances that gave rise to the Company's April 30, 2001 announcement. The Company is cooperating with this investigation by providing documents and other information to the SEC. At this time, the Company is unable to predict the outcome of this investigation and the ultimate effects on the Company. 12 5. Stock incentive plans The Company has established stock incentive plans under which restricted stock awards and stock options to purchase common stock may be granted to executive officers, directors and key employees. All stock options granted in 2002, 2001 and 2000 under the 1998 Stock Incentive Plan, the 1995 Employee Stock Incentive Plan, the 1993 Employee Stock Incentive Plan and the 1995 Outside Directors Stock Option Plan, were non-qualified stock options issued at a price equal to the fair market value of the Company's common stock on the date of grant. Non-qualified options granted under these plans have expiration dates no later than 10 years following the date of grant. Under the plans, stock option grants are made to key management employees ranging from executive officers to store managers and assistant store managers, as well as other employees, as prescribed prior to June 3, 2002 by the Corporate Governance and Compensation Committee of the Company's Board of Directors and from such date by the Board's newly formed Compensation Committee, in each case upon final approval by the Board. The number of options granted and the vesting schedules of those options are directly linked to the employee's performance, Company performance or employee tenure depending on the employee's position within the Company. The plans also provide for annual stock option grants to non-employee directors according to a non-discretionary formula. The number of shares granted is dependent upon current director compensation levels and the fair market value of the stock on the grant date. The Company applies Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its plans. Under this intrinsic-value based method of accounting, compensation expense is generally not recognized for stock option grants in which the exercise price of the stock options equals the market price of the underlying stock on the date of grant and the number of shares subject to exercise is fixed. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock Based Compensation," net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table. 13
13 Weeks 26 Weeks (Amounts in thousands except Ended Ended per share data) August 2, August 2, Fiscal Year Fiscal Year 2002 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------- Net income - as reported $ 42,362 $ 88,290 $ 207,513 $ 70,642 Net income - pro forma $ 38,257 $ 79,224 $ 196,052 $ 50,805 ---------------------------------------------------------------------------------------------------------------------- Earnings per share - as reported Basic $ 0.13 $ 0.27 $ 0.63 $ 0.21 Diluted $ 0.13 $ 0.26 $ 0.62 $ 0.21 Earnings per share - pro forma Basic $ 0.11 $ 0.24 $ 0.59 $ 0.15 Diluted $ 0.11 $ 0.24 $ 0.59 $ 0.15 ----------------------------------------------------------------------------------------------------------------------
Earnings per share have been adjusted to give retroactive effect to all common stock splits. The pro forma effects on net income for 2002, 2001 and 2000 are not necessarily representative of the pro forma effect on net income in future years because they do not take into consideration pro forma compensation expense related to grants made prior to 1995. The average per share fair value of options granted during 2002, 2001 and 2000 was $4.84, $6.77 and $10.76, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
2002 2001 2000 ------------------------------------------------------------------------------------ Expected dividend yield 0.8% 0.8% 0.7% Expected stock price volatility 39.0% 35.3% 49.0% Weighted average risk-free interest rate 4.1% 4.8% 6.2% Expected life of options (years) 3.6 6.0 6.8 ------------------------------------------------------------------------------------
The Black-Scholes option model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee and director stock options. 6. Related party transactions In July and August of 2002, Cal Turner, the Company's Chairman and Chief Executive Officer, made voluntary payments to the Company totaling approximately $6.8 million in cash. Of such amount, approximately $6.0 million represented the value on April 10, 2002 of 14 stock Mr. Turner acquired on April 7, 1999 and April 20, 2000 upon the exercise of stock options (net of the strike price of such options), which stock Mr. Turner continues to own, and approximately $0.8 million represented the value of performance-based bonuses received by Mr. Turner in April 1999 and April 2000. Mr. Turner voluntarily paid such amounts to the Company because the options vested and the performance bonuses were paid based on performance measures that were attained under the Company's originally reported financial results for the period covered by the Company's restatement. Those measures would not have been attained under the subsequently restated results. The Company recorded the approximately $6.0 million receipt as a contribution of capital, which was recorded as an increase in additional paid in capital in the condensed consolidated balance sheet as of August 2, 2002. The Company will record the approximately $0.8 million receipt as a reduction of selling, general and administrative expenses during the third quarter of 2002. 7. Segment reporting The Company manages its business on the basis of one reportable segment. As of August 2, 2002 and August 3, 2001, all of the Company's operations were located within the United States. The following data is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The following amounts are in thousands: 13 Weeks Ended ---------------------------------- August 2, 2002 August 3, 2001 -------------- -------------- Sales by category: Highly consumable ........ $ 892,507 $ 737,778 Hardware and seasonal..... 226,328 185,082 Basic clothing ........... 146,620 131,200 Home products ............ 188,272 171,194 ---------- ---------- $1,453,727 $1,225,254 ========== ========== 26 Weeks Ended ---------------------------------- August 2, 2002 August 3, 2001 -------------- -------------- Sales by category: Highly consumable......... $ 1,743,744 $1,459,070 Hardware and seasonal..... 431,091 353,885 Basic clothing............ 288,921 261,832 Home products............. 379,383 352,971 ----------- ---------- $ 2,843,139 $2,427,758 =========== ========== 15 8. Guarantor subsidiaries All of the Company's subsidiaries (the "Guarantors") have fully and unconditionally guaranteed on a joint and several basis the Company's obligations under certain outstanding notes payable. Each of the Guarantors is a wholly-owned subsidiary of the Company. The Guarantors comprise all of the direct and indirect subsidiaries of the Company. In order to participate as a subsidiary guarantor on certain of the Company's financing arrangements, a subsidiary of the Company has entered into a letter agreement with certain state regulatory agencies to maintain stockholders' equity of at least $250 million. Condensed combined financial information for the Guarantors is set forth below. Dollar amounts are in thousands. 16
August 2, 2002 ---------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ BALANCE SHEET DATA: ASSETS Current assets: Cash and cash equivalents $ (2,611) $ 42,128 $ -- $ 39,517 Merchandise inventories -- 1,058,200 -- 1,058,200 Deferred income taxes 9,675 15,877 -- 25,552 Income taxes receivable 64,229 (8,656) -- 55,573 Other current assets 16,139 1,155,134 (1,106,010) 65,263 ----------- ----------- ----------- ----------- Total current assets 87,432 2,262,683 (1,106,010) 1,244,105 ----------- ----------- ----------- ----------- Property and equipment, at cost 163,857 1,383,489 -- 1,547,346 Less accumulated depreciation and amortization 58,977 489,096 -- 548,073 ----------- ----------- ----------- ----------- Net property and equipment 104,880 894,393 -- 999,273 ----------- ----------- ----------- ----------- Other assets 2,562,235 3,559 (2,543,943) 21,851 ----------- ----------- ----------- ----------- Total assets $ 2,754,547 $ 3,160,635 $(3,649,953) $ 2,265,229 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 8,116 $ 7,016 $ -- $ 15,132 Accounts payable 1,191,510 261,286 (1,106,010) 346,786 Accrued expenses and other 33,857 185,363 -- 219,220 ----------- ----------- ----------- ----------- Total current liabilities 1,233,483 453,665 (1,106,010) 581,138 ----------- ----------- ----------- ----------- Long-term obligations 389,034 871,395 (753,722) 506,707 Deferred income taxes 676 45,354 -- 46,030 Shareholders' equity: Preferred stock -- -- -- -- Common stock 166,670 23,853 (23,853) 166,670 Additional paid-in capital 312,589 1,247,279 (1,247,279) 312,589 Retained earnings 656,894 519,089 (519,089) 656,894 Accumulated other comprehensive loss (2,012) -- -- (2,012) ----------- ----------- ----------- ----------- 1,134,141 1,790,221 (1,790,221) 1,134,141 Less other shareholders' equity 2,787 -- -- 2,787 ----------- ----------- ----------- ----------- Total shareholders' equity 1,131,354 1,790,221 (1,790,221) 1,131,354 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $ 2,754,547 $ 3,160,635 $(3,649,953) $ 2,265,229 =========== =========== =========== ===========
17
February 1, 2002 ---------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ BALANCE SHEET DATA: ASSETS Current assets: Cash and cash equivalents $ 217,539 $ 43,986 $ -- $ 261,525 Merchandise inventories -- 1,131,023 -- 1,131,023 Deferred income taxes 79,203 25,888 -- 105,091 Income taxes receivable 6,720 100 -- 6,820 Other current assets 8,686 912,982 (870,080) 51,588 ----------- ----------- ----------- ----------- Total current assets 312,148 2,113,979 (870,080) 1,556,047 ----------- ----------- ----------- ----------- Property and equipment, at cost 158,347 1,315,346 -- 1,473,693 Less accumulated depreciation and amortization 51,832 432,946 -- 484,778 ----------- ----------- ----------- ----------- Net property and equipment 106,515 882,400 -- 988,915 ----------- ----------- ----------- ----------- Other assets 2,079,572 2,022 (2,074,171) 7,423 ----------- ----------- ----------- ----------- Total assets $ 2,498,235 $ 2,998,401 $(2,944,251) $ 2,552,385 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 65,682 $ 329,993 $ -- $ 395,675 Accounts payable 944,830 247,713 (870,080) 322,463 Accrued expenses and other 76,526 176,887 -- 253,413 Litigation settlement payable 162,000 -- -- 162,000 ----------- ----------- ----------- ----------- Total current liabilities 1,249,038 754,593 (870,080) 1,133,551 ----------- ----------- ----------- ----------- Long-term obligations 200,460 830,881 (691,871) 339,470 Deferred income taxes 7,019 30,627 -- 37,646 Shareholders' equity: Preferred stock -- -- -- -- Common stock 166,359 23,853 (23,853) 166,359 Additional paid-in capital 301,848 929,680 (929,680) 301,848 Retained earnings 579,265 428,767 (428,767) 579,265 Accumulated other comprehensive loss (3,228) -- -- (3,228) ----------- ----------- ----------- ----------- 1,044,244 1,382,300 (1,382,300) 1,044,244 Less other shareholders' equity 2,526 -- -- 2,526 ----------- ----------- ----------- ----------- Total shareholders' equity 1,041,718 1,382,300 (1,382,300) 1,041,718 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $ 2,498,235 $ 2,998,401 $(2,944,251) $ 2,552,385 =========== =========== =========== ===========
18
Quarter Ended ---------------------------------------------------------------------------- August 2, 2002 ---------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ STATEMENTS OF INCOME DATA: Net sales $ 15,399 $1,453,727 $(15,399) $ 1,453,727 Cost of goods sold -- 1,066,300 -- 1,066,300 -------- ---------- -------- ----------- Gross profit 15,399 387,427 (15,399) 387,427 Selling, general and administrative expense 16,560 312,506 (15,399) 313,667 Insurance proceeds (4,500) -- -- (4,500) -------- ---------- -------- ----------- Operating profit 3,339 74,921 -- 78,260 Interest expense 7,546 3,791 -- 11,337 -------- ---------- -------- ----------- Income before income taxes (4,207) 71,130 -- 66,923 Provision (benefit) for taxes on income (1,637) 26,198 -- 24,561 Equity in subsidiaries' earnings, net 44,932 -- (44,932) -- -------- ---------- -------- ----------- Net income $ 42,362 $ 44,932 $(44,932) $ 42,362 ======== ========== ======== ===========
Year to Date ---------------------------------------------------------------------------- August 2, 2002 ---------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ STATEMENTS OF INCOME DATA: Net sales $ 61,851 $2,843,139 $(61,851) $ 2,843,139 Cost of goods sold -- 2,075,420 -- 2,075,420 -------- ---------- -------- ----------- Gross profit 61,851 767,719 (61,851) 767,719 Selling, general and administrative expense 58,121 614,701 (61,851) 610,971 Insurance proceeds (4,500) -- -- (4,500) -------- ---------- -------- ----------- Operating profit 8,230 153,018 -- 161,248 Interest expense 11,550 10,219 -- 21,769 -------- ---------- -------- ----------- Income before income taxes (3,320) 142,799 -- 139,479 Provision (benefit) for taxes on income (1,289) 52,478 -- 51,189 Equity in subsidiaries' earnings, net 90,321 -- (90,321) -- -------- ---------- -------- ----------- Net income $ 88,290 $ 90,321 $(90,321) $ 88,290 ======== ========== ======== ===========
19
Quarter Ended ---------------------------------------------------------------------------- August 3, 2001 ---------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ STATEMENTS OF INCOME DATA: Net sales $ 41,844 $1,225,254 $(41,844) $1,225,254 Cost of goods sold -- 893,971 -- 893,971 -------- ---------- -------- ---------- Gross profit 41,844 331,283 (41,844) 331,283 Selling, general and administrative expense 38,396 279,517 (41,844) 276,069 -------- ---------- -------- ---------- Operating profit 3,448 51,766 -- 55,214 Interest expense 5,297 6,660 -- 11,957 -------- ---------- -------- ---------- Income before income taxes (1,849) 45,106 -- 43,257 Provision (benefit) for taxes on income (690) 16,847 -- 16,157 Equity in subsidiaries' earnings, net 28,259 -- (28,259) -- -------- ---------- -------- ---------- Net income $ 27,100 $ 28,259 $(28,259) $ 27,100 ======== ========== ======== ==========
Year to Date ---------------------------------------------------------------------------- August 3, 2001 ---------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ STATEMENTS OF INCOME DATA: Net sales $ 77,687 $2,427,758 $(77,687) $2,427,758 Cost of goods sold -- 1,775,050 -- 1,775,050 -------- ---------- -------- ---------- Gross profit 77,687 652,708 (77,687) 652,708 Selling, general and administrative expense 68,476 537,270 (77,687) 528,059 -------- ---------- -------- ---------- Operating profit 9,211 115,438 -- 124,649 Interest expense 9,920 13,637 -- 23,557 -------- ---------- -------- ---------- Income before income taxes (709) 101,801 -- 101,092 Provision (benefit) for taxes on income (264) 38,023 -- 37,759 Equity in subsidiaries' earnings, net 63,778 -- (63,778) -- -------- ---------- -------- ---------- Net income $ 63,333 $ 63,778 $(63,778) $ 63,333 ======== ========== ======== ==========
20
For the 26 weeks ended ------------------------------------------------------------------- August 2, 2002 ------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ STATEMENTS OF CASH FLOWS DATA: Cash flows from operating activities: Net income $ 88,290 $ 90,321 $ (90,321) $ 88,290 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,987 58,032 -- 66,019 Deferred income taxes 62,558 24,738 -- 87,296 Equity in subsidiaries' earnings, net (90,321) -- 90,321 -- Tax benefit from stock option exercises 2,120 -- -- 2,120 Litigation settlement (162,000) -- -- (162,000) Change in operating assets and liabilities: Merchandise inventories -- 72,823 -- 72,823 Other current assets (9,166) (131,100) 126,591 (13,675) Accounts payable 276,945 (126,031) (126,591) 24,323 Accrued expenses and other (19,822) 8,616 -- (11,206) Income taxes (68,080) 8,616 -- (59,464) Other (10,802) (3,112) -- (13,914) --------- --------- --------- --------- Net cash provided by operating activities 77,709 2,903 -- 80,612 --------- --------- --------- --------- Cash flows from investing activities: Purchase of property and equipment (6,390) (64,055) -- (70,445) Proceeds from sale of property and equipment 41 86 -- 127 Issuance of long-term notes receivable (61,851) -- 61,851 -- Contribution of capital (317,602) -- 317,602 -- --------- --------- --------- --------- Net cash used in investing activities (385,802) (63,969) 379,453 (70,318) --------- --------- --------- --------- Cash flows from financing activities: Issuance of long-term obligations 170,000 61,851 (61,851) 170,000 Repayments of long-term obligations (69,316) (320,245) -- (389,561) Payments of cash dividends (21,307) -- -- (21,307) Proceeds from exercise of stock options 4,509 -- -- 4,509 Other financing activities 4,057 -- -- 4,057 Issuance of common stock, net -- 317,602 (317,602) -- --------- --------- --------- --------- Net cash provided by (used in) financing activities 87,943 59,208 (379,453) (232,302) --------- --------- --------- --------- Net decrease in cash and cash equivalents (220,150) (1,858) -- (222,008) Cash and cash equivalents, beginning of period 217,539 43,986 -- 261,525 --------- --------- --------- --------- Cash and cash equivalents, end of period $ (2,611) $ 42,128 $ -- $ 39,517 ========= ========= ========= =========
21
For the 26 weeks ended ------------------------------------------------------------------- August 3, 2001 ------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL ---------------- ------------- ------------- ------------ STATEMENTS OF CASH FLOWS DATA: Cash flows from operating activities: Net income $ 63,333 $ 63,777 $(63,777) $ 63,333 Adjustments to reconcile net income to net cash provided by / (used in) operating activities: Depreciation and amortization 7,040 53,940 -- 60,980 Deferred income taxes (473) (6,662) -- (7,135) Equity in subsidiaries' earnings, net (63,777) -- 63,777 -- Tax benefit from stock option exercises 4,656 -- -- 4,656 Change in operating assets and liabilities: Merchandise inventories -- (84,621) -- (84,621) Other current assets (6,777) 21,547 (12,501) 2,269 Accounts payable (3,073) (11,906) 12,501 (2,478) Accrued expenses and other 7,598 (7,657) -- (59) Income taxes 467 (22,462) -- (21,995) Other 6,048 (11,179) -- (5,131) --------- -------- -------- --------- Net cash provided by (used in) operating activities 15,042 (5,223) -- 9,819 --------- -------- -------- --------- Cash flows from investing activities: Purchase of property and equipment (9,893) (64,049) -- (73,942) Proceeds from sale of property and equipment 15 129 -- 144 Issuance of long-term notes receivable (77,687) -- 77,687 -- Other 2,049 -- (2,049) -- --------- -------- -------- --------- Net cash used in investing activities (85,516) (63,920) 75,638 (73,798) --------- -------- -------- --------- Cash flows from financing activities: Issuance of long-term obligations -- 77,687 (77,687) -- Repayments of long-term obligations (616) (5,407) -- (6,023) Payments of cash dividends (21,268) -- -- (21,268) Proceeds from exercise of stock options 10,623 -- -- 10,623 Other financing activities (33) (2,049) 2,049 (33) --------- -------- -------- --------- Net cash provided by (used in) financing activities (11,294) 70,231 (75,638) (16,701) --------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents (81,768) 1,088 -- (80,680) Cash and cash equivalents, beginning of period 120,643 41,667 -- 162,310 --------- -------- -------- --------- Cash and cash equivalents, end of period $ 38,875 $ 42,755 $ -- $ 81,630 ========= ======== ======== =========
22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following text contains references to years 2002, 2001 and 2000, which represent fiscal years of the Dollar General Corporation (the "Company") ending or ended January 31, 2003, February 1, 2002 and February 2, 2001, respectively. This discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and the notes thereto as of August 2, 2002. Results of Operations The nature of the Company's business is modestly seasonal. Historically, sales in the fourth quarter have been higher than sales achieved in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, comparing any period with a period other than the same period of the previous year may reflect the seasonal nature of the Company's business. 13 WEEKS ENDED AUGUST 2, 2002 AND AUGUST 3, 2001 Net Sales. Net sales for the 13 weeks ended August 2, 2002 were $1.45 billion as compared against $1.23 billion during the 13 weeks ended August 3, 2001, an increase of 18.6%. The increase resulted primarily from 563 net new stores and a same store sales increase of 9.6%. Same store sales increases are calculated based on the comparable calendar weeks in the prior year, and include only those stores that were open both at the end of a fiscal period and the beginning of the preceding fiscal year. The Company attributes the increase in same store sales to a number of factors, including the introduction of new items in the highly consumable category, a strong presentation of seasonal merchandise, the addition of perishable products in approximately 600 stores, and improved ordering practices by the Company's stores. Net sales increases by category were as follows: highly consumable 21.0%, hardware and seasonal 22.3%; basic clothing 11.8%; and home products 10.0%. Gross Profit. Gross profit during the current year period was $387.4 million, or 26.7% of sales, versus $331.3 million, or 27.0% of sales during the comparable period in the prior year, an increase of 16.9%. The reduction in the gross margin rate as a percentage of sales was due to a number of factors, including but not limited to a reduction in the average mark-up on inventory purchases due to a decision by the Company to purchase fewer high margin but slower turning items and to reduce its inventory position in the basic clothing and home products categories, an increase in the shrink provision and the continued shift in the Company's sales to lower margin consumable basics items. Selling, General and Administrative Expenses ("SG&A"). SG&A expenses during the current year period were $313.7 million, or 21.6% of sales, versus $276.1 million or 22.5% of sales, during the comparable period in the prior year, an increase of 13.6%. Restatement-related expenses resulted in a net reduction to SG&A expenses of $0.7 million in the current year period. The Company adjusted its restatement-related professional fees accrual during the current period to reflect a lower than anticipated incurrence of legal fees during the current fiscal year. The Company incurred $8.7 million in restatement-related expenses during the comparable period in the prior year. Excluding restatement-related expenses, SG&A expenses would have been $314.4 23 million, or 21.6% of sales, in the current year period, versus $267.4 million, or 21.8% of sales in the prior year period, an increase of 17.6%. The increase in SG&A expenses is due principally to a 10.6% increase in store count as compared to the prior year, and to increases in store labor and workers compensation costs that were greater than standard inflationary increases. The increase in store labor costs reflects various actions taken to improve store conditions, including increasing labor hours and improving employee wages. Insurance Proceeds. The Company recorded $4.5 million in insurance proceeds during the current year period relating to the settlement of certain class action litigation. See Note 4 to the Company's condensed consolidated financial statements as of August 2, 2002. Interest Expense. Interest expense in the current year period was $11.3 million, or 0.8% of sales, as compared to $12.0 million, or 1.0% of sales, in the prior year period, a decrease of 5.2%. The Company recorded $0.4 million in net interest income in the current period related to various income tax issues, including but not limited to interest due from the federal government as a result of amended tax returns that the Company filed in conjunction with its restated results. Provision for Taxes on Income. The Company's effective tax rate was 36.7% in the current year period and 37.4% in the prior year period. The reduction in the effective tax rate in the current year is a result of certain tax planning strategies implemented in the fourth quarter of the prior year. Net Income. Net income during the current year period was $42.4 million, or 2.9% of sales, versus $27.1 million, or 2.2% of sales, during the comparable period in the prior year, an increase of 56.3%. Diluted earnings per share in the current year period were $0.13 versus $0.08 in the prior year. Excluding restatement-related expenses and the insurance proceeds noted above, current year diluted earnings per share were $0.12 versus $0.10 in the prior year. 26 WEEKS ENDED AUGUST 2, 2002 AND AUGUST 3, 2001 Net Sales. Net sales for the 26 weeks ended August 2, 2002 were $2.84 billion as compared against $2.43 billion during the comparable period in the prior year, an increase of 17.1%. The increase resulted primarily from 563 net new stores and a same store sales increase of 8.1%. Same store sales increases are calculated based on the comparable calendar weeks in the prior year, and include only those stores that were open both at the end of a fiscal period and at the beginning of the preceding fiscal year. The Company attributes the increase in same store sales to a number of factors, including the introduction of new items in the highly consumable category, a strong presentation of 24 seasonal merchandise, the addition of perishable products in approximately 600 stores, and improved ordering practices by the Company's stores. Net sales increases by category were as follows: highly consumable 19.5%, hardware and seasonal 21.8%, basic clothing 10.3%, and home products 7.5%. Gross Profit. Gross profit during the current year period was $767.7 million, or 27.0% of sales, versus $652.7 million, or 26.9% of sales, during the comparable period in the prior year, an increase of 17.6%. The modest increase in the gross margin rate as a percentage of sales was due principally to a 66 basis point reduction in distribution and transportation costs as a percentage of sales and a higher mark-up percentage on the Company's total inventory balance than that experienced during the comparable period in the prior year. The reduction in distribution and transportation costs as a percentage of net sales during the first twenty-six weeks is due to a relatively modest increase in these expenses during a period of increased sales. The higher mark-up percentage on the Company's inventories is primarily a result of a lower than normal mark-up on the Company's inventory balance in the first half of 2001 due to the ongoing impact of the markdown on certain excess inventories taken during the fourth quarter of 2000. Factors that negatively impacted the year-over-year comparison in the gross profit rate include a lower mark-up on inventory purchases and an increase in the inventory shrink provision. The lower mark-up on inventory purchases is due in part to a decision by the Company to purchase fewer high margin but slower turning items and to reduce its inventory position in the basic clothing and home products categories. Selling, General and Administrative Expenses. SG&A expenses during the current year period were $611.0 million, or 21.5% of sales, versus $528.1 million, or 21.8% of sales, during the comparable period in the prior year, an increase of 15.7%. The Company recorded $4.6 million in expenses, primarily professional fees, in the current year period related to the restatement of certain previously released financial data versus $9.0 million of such expenses in the prior year. Excluding restatement-related expenses, SG&A expenses would have been $606.3 million, or 21.3% of sales in the current year versus $519.0 million or 21.4% of sales in the prior year, an increase of 16.8%. The increase in SG&A expenses is primarily attributable to a 10.6% increase in store count as compared to the prior year, and to increases in store labor and workers compensation costs that were greater than standard inflationary increases. The increase in store labor costs reflects various actions taken to improve store conditions, including increasing labor hours and improving employee wages. Insurance Proceeds. The Company recorded $4.5 million in insurance proceeds during the current year period relating to the settlement of certain class action litigation. See Note 4 to the Company's condensed consolidated financial statements as of August 2, 2002. 25 Interest Expense. Interest expense was $21.8 million, or 0.8% of sales, in the current year period as compared to $23.6 million, or 0.9% of sales, in the prior year period, a decrease of 7.6%. The decrease is primarily attributable to the general reduction in interest rates on variable rate obligations. Provision for Taxes on Income. The Company's effective tax rate was 36.7% in the current year period and 37.4% in the prior year period. The reduction in the effective tax rate in the current year is a result of certain tax planning strategies implemented in the fourth quarter of the prior year. Net Income. Net income during the current year period was $88.3 million, or 3.1% of sales, versus $63.3 million, or 2.6% of sales, during the comparable period in the prior year, an increase of 39.4%. Diluted earnings per share in the current year period were $0.26 versus $0.19 in the prior year. Excluding restatement-related expenses and the insurance proceeds noted above, current year diluted earnings per share were $0.26 versus $0.21 in the prior year. Liquidity and Capital Resources Current Financial Condition / Recent Developments. At August 2, 2002, the Company's total debt (including the current portion of long-term obligations and short-term borrowings) was $521.8 million, and the Company had $39.5 million of cash and equivalents and $1.13 billion of shareholders' equity, compared to $735.1 million of total debt, $261.5 million of cash and equivalents and $1.04 billion of shareholders' equity at February 1, 2002. At May 3, 2002, the Company had $383 million outstanding under two synthetic lease facilities (the "Synthetic Lease Facilities"), one with $212 million in outstanding capital leases and the other with $171 million in outstanding capital leases. As of such date, the Company also had a $175 million revolving credit agreement (the "Old Credit Facility"), under which no amounts were outstanding. The Synthetic Lease Facilities were scheduled to mature and the Old Credit Facility was scheduled to expire in September 2002. On June 21, 2002, the Company closed on its previously announced $450 million revolving credit facility (the "New Credit Facilities"), pursuant to which SunTrust Bank is serving as Administrative Agent, Credit Suisse First Boston is the Syndication Agent and KeyBank N.A. and U.S. Bank N.A. are Co-Documentation Agents. The Company used the New Credit Facilities (i) to replace the Old Credit Facility (ii) to refinance the Synthetic Lease Facilities and (iii) for working capital and other general corporate purposes. The New Credit Facilities are split between a $300 million three-year revolving credit facility, and a $150 million 364-day revolving credit facility. The Company pays interest on funds borrowed under the New Credit Facilities at rates that 26 are subject to change based upon the rating of the Company's senior debt by independent agencies. The Company has two interest rate options, base rate (which is usually equal to prime rate) and LIBOR. At the Company's current ratings, the facility fees are 37.5 basis points and 32.5 basis points on the two facilities, respectively. The all-in drawn margin under the LIBOR option is LIBOR plus 237.5 basis points on both facilities. The all-in drawn margin under the base rate option is the base rate plus 125 basis points and the base rate plus 120 basis points on the two facilities, respectively. The New Credit Facilities are secured by the same real estate assets that served as collateral for the Synthetic Lease Facilities: approximately 400 of the Company's retail stores, its headquarters and two of its distribution centers. As of August 2, 2002, the Company had $170 million outstanding under the New Credit Facilities, at a rate of 4.3%. The Company has $200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010. Interest on the notes is payable semi-annually on June 15 and December 15 of each year. The holders of the notes may elect to have their notes repaid on June 15, 2005, at 100% of the principal amount plus accrued and unpaid interest. The Company is currently in discussions with respect to the Company's leases of its distribution centers in Indianola, Mississippi and Fulton, Missouri, related to an alleged default arising under those leases from the restatement of certain of the Company's financial statements as further described in Part II, Item I of this Form 10-Q. The Company has reached agreement in principle to incorporate certain amendments in the debt instruments relating to such properties. The Company expects that this matter will be resolved without any material adverse effect to the Company. In July of 2002, the Company received from its insurers $4.5 million in proceeds in connection with the settlement of certain class action litigation brought against the Company as a result of the restatement of the Company's financial statements. The Company disbursed during the current year quarter approximately $161 million in settlement of these class action lawsuits. The Company funded this amount from existing cash balances. In addition, $31.5 million in director and officer insurance proceeds has been placed in escrow in connection with the settlement of shareholder derivative litigation brought against certain current and former directors and officers of the Company. The Company expects to receive approximately $25.2 million of this amount if the settlement becomes final, which amount has not been accrued in the Company's financial statements. For further information regarding this litigation, see Note 4 to the Company's condensed consolidated financial statements as of August 2, 2002, and Part II, Item 1 of this report. The Company believes that its existing cash balances, cash flows from operations, the New Credit Facilities, remaining insurance proceeds expected in connection with the settlement of the derivative lawsuits filed against the Company as a result of the restatement of the Company's financial statements, and its ongoing access to the capital 27 markets will provide sufficient financing to meet the Company's currently foreseeable liquidity and capital resource needs. Other than net reductions in borrowings outstanding under variable rate debt as discussed above, there have been no other significant changes in the fair value of the Company's outstanding debt. Cash flows provided by operating activities. Net cash provided by operating activities totaled $80.6 million during the first 26 weeks of 2002, as compared to a $9.8 million source of cash during the comparable period in the prior year. The primary source of cash in 2002 was the Company's net income plus depreciation and amortization expense, which together totaled $154.3 million. Another significant source of cash in the current year period was a decrease in inventories of $72.8 million. The Company has made improving its inventory productivity statistics a priority. Inventory turns have improved on a rolling 12-month basis from 3.2 times to 3.4 times as measured at August 3, 2001 and August 2, 2002, respectively, and same store inventories have been reduced by approximately 13% as compared to the comparable prior year period. The Company has also reduced its purchases of high margin but slower turning items in the basic clothing and home products categories. The Company paid approximately $162 million during the current year period in settlement of the shareholder class action lawsuits as described in Note 4 to the Company's condensed consolidated financial statements as of August 2, 2002. The primary source of net cash from operating activities during the prior year period was the Company's net income plus depreciation and amortization expense, which together totaled $124.3 million. The primary uses of cash in the prior year period were an increase in inventories of $84.6 million and a decrease in the income tax payable of $22.0 million. Cash flows used in investing activities. Net cash used in investing activities during the first 26 weeks of 2002 totaled $70.3 million, as compared to a $73.8 million use of cash during the comparable period in the prior year. The $70.3 million spent in the current year period consisted primarily of $21.4 million for new stores, $13.3 million for various store-related technology projects and $16.2 million for distribution and transportation projects. The $73.8 million spent in the prior year period consisted primarily of $26.6 million for new stores and relocations and $34.9 million for various store-related fixtures. Cash flows used in financing activities. Net cash used in financing activities during the first 26 weeks of 2002 was $232.3 million, which consisted principally of $21.3 million in dividends and $219.6 million of net debt repayments related primarily to the refinancing of the Company's Synthetic Lease Facilities. Net cash used in financing activities during the comparable period in the prior year was $16.7 million, which 28 consisted principally of $21.3 million in dividends offset by $10.6 million in proceeds from stock options exercised. The following table, which excludes the effect of imputed interest, summarizes the Company's significant contractual obligations as of August 2, 2002, (in thousands):
Less than Greater than Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years ----------------------- ----- ------ --------- --------- ------- Long-term obligations $ 370,000 $ -- $ 170,000 $ -- $ 200,000 Capital lease obligations 68,714 17,724 33,626 13,437 3,927 Financing obligations 206,269 9,283 18,567 18,707 159,712 Operating leases 734,150 174,822 256,081 121,635 181,612 ---------- ---------- ---------- ---------- ---------- $1,379,133 $ 201,829 $ 478,274 $ 153,779 $ 545,251 ========== ========== ========== ========== ==========
Forward-Looking Statements This discussion and analysis contains historical and forward-looking information. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements as a result of certain risks and uncertainties. These risks include, but are not limited to, those set forth under Item 7 in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2002. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have no material changes to the disclosures relating to this item that are set forth in our report on Form 10-K for the fiscal year ended February 1, 2002. Part II. - Other Information Item 1. Legal Proceedings Restatement-Related Proceedings On April 30, 2001, the Company announced that it had become aware of certain accounting issues that would cause it to restate its audited financial statements for fiscal years 1999 and 1998, and to restate the unaudited financial information for fiscal year 2000 that had been previously released by the Company. The Company subsequently restated such financial statements and financial information by means of its Form 10-K for the fiscal year ended February 2, 2001, which was filed on January 14, 2002. Following the April 30, 2001, announcement more than 20 purported class action lawsuits were filed against the Company and certain current and former officers and 29 directors of the Company, asserting claims under the federal securities laws. These lawsuits were consolidated into a single action pending in the United States District Court for the Middle District of Tennessee. On July 17, 2001, the court entered an order appointing the Florida State Board of Administration and the Teachers' Retirement System of Louisiana as lead plaintiffs and the law firms of Entwistle & Cappucci LLP, Milberg Weiss Bershad Hynes & Lerach LLP and Grant & Eisenhofer, P.A. as co-lead counsel. On January 3, 2002, the lead plaintiffs filed an amended consolidated class action complaint. Among other things, plaintiffs alleged that the Company and certain of its current and former officers and directors made misrepresentations concerning the Company's financial results in the Company's filings with the Securities and Exchange Commission and in various press releases and other public statements. The plaintiffs sought damages with interest, costs and such other relief as the court deemed proper. On January 3, 2002, the Company reached a settlement agreement with the putative class action plaintiffs, pursuant to which the Company agreed to pay up to $162 million to such plaintiffs in settlement for their claims and to implement certain enhancements to its corporate governance and internal control procedures. Such agreement was subject to confirmatory discovery, to the final approval of the Company's Board of Directors, and to court approval. On April 1, 2002, following the completion of such confirmatory discovery, the Company and the putative class action plaintiffs amended their settlement agreement and the plaintiffs filed a second amended complaint, purporting to name as plaintiffs a class of persons who purchased or otherwise made an investment decision regarding the Company's securities and related derivative securities between March 5, 1997 and January 14, 2002. Pursuant to the amended settlement agreement, the Company agreed to pay $162 million to such plaintiffs in settlement for their claims and to implement certain enhancements to its corporate governance and internal control procedures. Such amended agreement was approved by the court on May 24, 2002. Pursuant to the terms of such agreement, the Company disbursed $1 million of such funds in April 2002 and the remaining amount of $161 million in June and July 2002. In addition, the Company received from its insurers $4.5 million in respect of such settlement in July 2002. The Company recognized an expense of $162 million in the fourth quarter of 2000 in respect of the class action settlement agreement, and income of $4.5 million in the second quarter of 2002 in respect of the receipt of such insurance proceeds. Plaintiffs representing fewer than 1% of the shares traded during the class period chose to opt out of the class settlement and may elect to pursue recovery against the Company individually. Because no separate litigation has yet been filed by parties who opted out, the Company cannot estimate the potential liabilities associated with such 30 litigation, but it does not believe that the resolution of any such litigation will have a material effect on the Company's financial position. In addition, six purported shareholder derivative lawsuits have been filed in Tennessee State Court against certain current and former Company directors and officers and Deloitte & Touche LLP, the Company's former independent accountant. The Company is named as a nominal defendant in the actions, which seek restitution and/or compensatory and punitive damages with interest, equitable and/or injunctive relief, costs and such further relief as the court deems proper. By order entered October 31, 2001, the court appointed Michael Dixon, Jr., Carolinas Electrical Workers Retirement Fund and Thomas Dewey, plaintiffs in one of the six filed cases, as lead plaintiffs and the law firms of Branstetter, Kilgore, Stranch & Jennings and Stanley, Mandel & Iola as lead counsel. In the same order, the court stayed the remaining cases pending completion of the lead case. Among other things, the plaintiffs allege that certain current and former Company directors and officers breached their fiduciary duties to the Company and that Deloitte & Touche aided and abetted those breaches and was negligent in its service as the Company's independent accountant. During August and September 2001, the Company moved to dismiss all six cases for failure to make a pre-suit demand on the Board of Directors and, in the alternative, requested that the court stay the actions pending the completion of an investigation into the allegations in the complaints by the Shareholder Derivative Claim Review Committee of the Company's Board of Directors. The lead plaintiffs filed an opposition to this motion on October 2, 2001. Two purported shareholder derivative lawsuits also have been filed and consolidated in the United States District Court for the Middle District of Tennessee against certain current and former Company directors and officers alleging that they breached their fiduciary duties to the Company. The Company is named as a nominal defendant in these actions, which seek declaratory relief, compensatory and punitive damages, costs and such further relief as the court deems proper. By motion filed on September 28, 2001, the Company requested that the federal court abstain from exercising jurisdiction over the purported shareholder derivative actions in deference to the pending state court actions. By agreement of the parties and court order dated December 3, 2001, the case was stayed until June 3, 2002. Based on the settlement of the Tennessee state derivative actions described below and the dismissal of the appeal filed by Cornelius P. Warren, the lead plaintiff in the federal derivative case, the Company and the individual defendants moved to dismiss the federal derivative case on August 27, 2002. A status conference with respect to this case is currently scheduled for September 12, 2002. The Company and the individual defendants have reached a settlement agreement with the plaintiffs in the lead Tennessee state shareholder derivative action. The agreement includes a payment to the Company from a portion of the proceeds of the Company's director and officer liability insurance policies as well as certain corporate 31 governance and internal control enhancements. The terms of such agreements require that all of the stayed cases, including the federal derivative cases described above, be dismissed with prejudice by the courts in which they are pending in order for the settlement to be effective. Following confirmatory discovery, the settlement agreement was preliminarily approved by the Tennessee State Court on April 19, 2002, and received final approval on June 4, 2002. On July 5, 2002, Cornelius P. Warren, the lead plaintiff in the federal derivative case, appealed the approval of the settlement in the state derivative cases to the Court of Appeals of Tennessee. Such appeal was dismissed by the Court of Appeals of Tennessee by Order dated July 22, 2002. Mr. Warren has not yet filed notice of his intention to appeal this dismissal; any such notice must be filed by no later than September 20, 2002. Pending the final resolution of the federal derivative case and any further appeal of the settlement that Mr. Warren may bring, $31.5 million of proceeds of the Company's director and officer insurance policies are being held in escrow. If the settlement becomes final, the Company expects that it will result in a net payment to the Company, after attorneys' fees payable to the plaintiffs' counsel, of approximately $25.2 million, which payment has not yet been accrued in the Company's financial statements. The Company has been notified that the SEC is conducting an investigation into the circumstances that gave rise to the Company's April 30, 2001, announcement. The Company is cooperating with this investigation by providing documents and other information to the SEC. At this time, the Company is unable to predict the outcome of this investigation and the ultimate effects on the Company. Other Litigation The Company was involved in other litigation, investigations of a routine nature and various legal matters during the reporting period, which were and are being defended and otherwise handled in the ordinary course of business. While the ultimate results of these matters cannot be determined or predicted, management believes that they have not had and will not have a material adverse effect on the Company's results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders An Annual Meeting of Shareholders of the Company was held on June 3, 2002. Following is a brief description of the matters voted upon at the meeting and the tabulation of the voting therefor: 32 Proposal 1 - Election of Directors. Number of Votes --------------------------------------------------- Nominee For Withheld Broker Non-Votes --------------------- ----------- --------- ---------------- David L. Bere 287,111,919 3,983,453 0 Dennis C. Bottorff 288,241,119 2,854,253 0 Barbara L. Bowles 287,343,520 3,751,852 0 James L. Clayton 287,467,127 3,628,245 0 Reginald D. Dickson 287,509,379 3,585,993 0 E. Gordon Gee 287,688,758 3,406,614 0 John B. Holland 287,328,096 3,767,276 0 Barbara M. Knuckles 287,493,555 3,601,817 0 James D. Robbins 288,378,514 2,716,858 0 Cal Turner 288,145,394 2,949,978 0 David M. Wilds 288,239,970 2,855,402 0 William S. Wire, II 288,203,819 2,891,553 0 Proposal 2 - Ratification of the Appointment of Independent Public Accountants. A proposal to ratify the selection of Ernst & Young LLP as independent public accountants for the fiscal year ending January 31, 2003 was adopted, with 287,411,734 votes cast for, 2,550,728 votes cast against, 1,132,910 votes abstained and no broker non-votes. Item 5. Other Information Restatement-Related Events In July and August of 2002, Cal Turner, the Company's Chairman and Chief Executive Officer, made voluntary payments to the Company totaling approximately $6.8 million in cash. Of such amount, approximately $6.0 million represented the value on April 10, 2002 of stock Mr. Turner acquired on April 7, 1999 and April 20, 2000 upon the exercise of stock options (net of the strike price of such options), which stock Mr. Turner continues to own, and approximately $0.8 million represented the value of performance-based bonuses received by Mr. Turner in April 1999 and April 2000. Mr. Turner voluntarily paid such amounts to the Company because the options vested and the performance bonuses were paid based on performance measures that were attained under the Company's originally reported financial results for the period covered by the Company's restatement. Those measures would not have been attained under the subsequently restated results. 33 Other Issues Mr. David M. Wilds, a director of the Company since 1991, has served since August 1998 as one of two principal officers of The Family Office, LLC, a Tennessee limited liability company that manages certain assets owned by members of the family of Cal Turner, the Chairman and Chief Executive Officer of the Company. Mr. Wilds' position with The Family Office, LLC has been in addition to his primary employment as Chief Manager of Front Street LLC, general partner for 1st Avenue Partners, L.P. (from 1998 to present) and as President of Nelson Capital Partners III, L.P. (from 1995 to 1998). The managers of The Family Office, LLC consist of Mr. Turner and his three siblings. Prior to June 2002, Mr. Wilds was a member of the Corporate Governance and Compensation Committee of the board. Accordingly, the Company's proxy statement under the heading "Compensation Committee Interlocks and Insider Participation" should be considered supplemented to reflect Mr. Wilds' relationship, as a principal officer of The Family Office, LLC, to the managers of that entity who may be considered equivalent to its board of directors. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed as a part of this report and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. (1) A Current Report on Form 8-K, dated July 11, 2002, was filed with the SEC in connection with an announcement regarding June 2002 sales results and the July 2002 sales outlook. (2) A Current Report on Form 8-K, dated June 24, 2002, was filed with the SEC in connection with an announcement regarding completion of the financing of the Company's previously announced $450 million revolving credit facility. (3) A Current Report on Form 8-K, dated June 6, 2002, was filed with the SEC in connection with an announcement regarding May 2002 sales results and the June 2002 sales outlook. (4) A Current Report on Form 8-K, dated June 4, 2002, was filed with the SEC in connection with an announcement and conference call regarding the Company's financial results for the first quarter of the 2002 fiscal year. 34 (5) A Current Report on Form 8-K, dated June 3, 2002, was filed with the SEC in connection with an announcement regarding the appointment of David L. Bere to the Company's Board of Directors. (6) A Current Report on Form 8-K, dated May 24, 2002, was filed with the SEC in connection with an announcement regarding the entry of a final judgment and order approving the settlement of the securities class action lawsuit pending against the Company. (7) A Current Report on Form 8-K, dated May 9, 2002, was filed with the SEC in connection with an announcement regarding April 2002 sales results and the May 2002 sales outlook. 35 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. DOLLAR GENERAL CORPORATION By: /s/ James J. Hagan -------------------------------- James J. Hagan Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) August 28, 2002 36 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit No. Description of Exhibit ----------- ---------------------- 3(ii) By-laws, as amended effective June 3, 2002 10.1 3-Year Revolving Credit Agreement, dated as of June 21, 2002, by and among Dollar General Corporation, Suntrust Bank, Credit Suisse First Boston, KeyBank National Association, U.S. Bank National Association, and the lenders from time to time party thereto 10.2 364-day Revolving Credit Agreement, dated as of June 21, 2002, by and among Dollar General Corporation, Suntrust Bank, Credit Suisse First Boston, KeyBank National Association, U.S. Bank National Association, and the lenders from time to time party thereto 37