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 November 2, 2001
Commission file number 1-11421
TENNESSEE 61-0502302
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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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 [ ] No [X]. Note: The Company did not timely file its Annual Report on Form 10-K for fiscal 2000 and its quarterly reports on Form 10-Q for the first three quarters of fiscal 2001 as a result of the restatement of the Company's financial statements described herein and therein. Such quarterly report for the third quarter of fiscal 2001 on Form 10-Q is filed herewith, and such other quarterly reports on Form 10-Q and Annual Report on Form 10-K are being filed on the date hereof.
The number of shares of common stock outstanding as of December 14, 2001 was 332,577,284.
Dollar General Corporation
Form 10-Q
For the Quarter Ended November 2, 2001
Index
Page No.
Part I. Financial Information 3
Item 1. Financial Statements (unaudited): 3
Condensed Consolidated Balance Sheets as of
November 2, 2001 and February 2, 2001 3
Condensed Consolidated Statements of Income for the
13 and 39 weeks ended November 2, 2001 and
October 27, 2000 (restated) 4
Condensed Consolidated Statements of Cash Flows for
the 39 weeks ended November 2, 2001 and
October 27, 2000 (restated) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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Part I - Financial Information
Item 1. Financial Statements
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
November 2, 2001
(Unaudited) February 2, 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 74,819 $ 162,310
Merchandise inventories ............................ 1,133,215 896,235
Deferred income taxes .............................. 90,307 21,514
Other current assets ............................... 48,600 44,868
----------- -----------
Total current assets ..................... 1,346,941 1,124,927
----------- -----------
Property and equipment, at cost .................... 1,454,268 1,339,554
Less: accumulated depreciation and amortization ... 456,478 366,460
----------- -----------
997,790 973,094
----------- -----------
Merchandise inventories ............................ 116,000 116,000
Other assets ....................................... 8,535 68,441
----------- -----------
Total assets ............................. $ 2,469,266 $ 2,282,462
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations ........... $ 391,089 $ 9,035
Accounts payable ................................... 381,843 297,262
Accrued expenses and other ......................... 223,508 214,192
Litigation settlement payable....................... 162,000 --
Income taxes ....................................... 10,492 17,446
----------- -----------
Total current liabilities ................ 1,168,932 537,935
----------- -----------
Long-term obligations ................................... 347,174 720,764
Litigation settlement payable ........................... -- 162,000
Shareholders' equity:
Preferred stock .................................... -- --
Common stock ....................................... 166,302 165,646
Additional paid-in capital ......................... 300,622 283,925
Accumulated other comprehensive loss ............... (3,552) --
Retained earnings .................................. 492,473 414,318
----------- -----------
955,845 863,889
Less: common stock purchased by employee deferred
compensation trust .............................. 2,685 2,126
----------- -----------
Total shareholders' equity ............... 953,160 861,763
----------- -----------
Total liabilities and shareholders' equity.. $ 2,469,266 $ 2,282,462
=========== ===========
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See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
39 Weeks Ended
----------------------------
November 2, October 27,
2001 2000
(Restated)
----------- -----------
Cash flows from operating activities:
Net income $ 110,070 $ 102,797
Adjustments to reconcile net income to net
cash provided by / (used in) operating activities:
Depreciation and amortization 92,104 83,737
Deferred income taxes (5,795) (12,792)
Tax benefit from stock option exercises 5,243 15,021
Change in operating assets and liabilities:
Merchandise inventories (236,980) (155,814)
Other current assets (3,732) 2,517
Accounts payable 84,581 (45,479)
Accrued expenses and other 5,759 7,449
Income taxes (6,954) (14,626)
Other (2,549) 537
--------- ---------
Net cash provided by / (used in) operating activities 41,747 (16,653)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (100,184) (193,315)
Proceeds from sale of property and equipment 230 97,535
--------- ---------
Net cash used in investing activities (99,954) (95,780)
--------- ---------
Cash flows from financing activities:
Issuance of short-term borrowings -- 221,369
Repayments of short-term borrowings -- (160,000)
Issuance of long-term obligations -- 199,584
Repayments of long-term obligations (8,925) (109,472)
Payments of cash dividend (31,910) (29,522)
Proceeds from exercise of stock options 11,557 29,239
Repurchase of common stock, net -- (65,549)
Purchase of common stock for employee deferred compensation trust (6) --
--------- ---------
Net cash (used in) / provided by financing activities (29,284) 85,649
--------- ---------
Net decrease in cash and cash equivalents (87,491) (26,784)
Cash and cash equivalents at beginning of period 162,310 54,742
--------- ---------
Cash and cash equivalents, end of period $ 74,819 $ 27,958
========= =========
Supplemental schedule of noncash investing and financing activities:
Purchase of property and equipment under capital lease obligations $ 17,393 $ 110,114
========= =========
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See notes to condensed consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation and accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements 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 2, 2001 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 results of operations for the 13-week and 39-week periods ended November 2, 2001 and October 27, 2000 have been made.
Interim cost of goods sold is determined using ongoing estimates of inventory shrinkage, inflation, and markdowns. 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
Effective February 3, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. These statements require the Company to recognize all derivative instruments on the balance sheet at fair value. These statements also establish new accounting rules for hedging instruments, which depend on the nature of the hedge relationship. A fair value hedge requires that the effective portion of the change in the fair value of a derivative instrument be offset against the change in the fair value of the underlying asset, liability, or firm commitment being hedged through earnings. A cash flow hedge requires that the effective portion of the change in the fair value of a derivative instrument be recognized in Other Comprehensive Income ("OCI"), a component of Shareholders' Equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a derivative instrument's change in fair value is
immediately recognized in earnings. The 2001 unaudited condensed consolidated financial statements include the provisions required by SFAS No. 133, while the 2000 unaudited condensed consolidated financial statements were prepared in accordance with the applicable professional literature for derivatives and hedging instruments in effect at that time.
Upon adoption of SFAS No. 133 on February 3, 2001, the Company recorded a cumulative after-tax decrease to OCI of approximately $2.0 million. This transition adjustment was recorded to recognize the Company's only outstanding derivative instrument, which is designated and effective as a cash flow hedge, at fair value (approximately $0.2 million) and to reclassify from asset accounts deferred losses realized on the settlement of interest rate derivatives which were designated and effective as hedges during fiscal year 2000 (approximately $1.8 million).
2. Restatement of financial statements
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 revise the unaudited financial information for the fiscal year 2000 that had been previously released by the Company. As disclosed in further detail in the Company's Form 10-K for fiscal year 2000, the Company has restated its audited financial statements for fiscal years 1999 and 1998, as well as the unaudited financial information for the fiscal year 2000 that had been previously released by the Company.
As a result, the comparative information contained in this quarterly report on Form 10-Q with respect to the 13 and 39 weeks ended October 27, 2000 has been restated. Restated net income, diluted earnings per share and retained earnings for the quarter ended October 27, 2000 are $45.7 million, $0.14 and $ 457.1 million, respectively, as compared to the previously reported amounts of $51.0 million, $0.15 and $ 576.9 million. Restated net income, diluted earnings per share and retained earnings for the 39 weeks ended October 27, 2000 are $102.8 million, $0.31 and $457.1 million, respectively, as compared to the previously reported amounts of $134.6 million, $0.40 and $576.9 million.
3. Comprehensive income
Comprehensive income consists of the following (in thousands):
13 weeks ended 39 weeks ended
--------------------------- ---------------------------
November 2, October 27, November 2, October 27,
2001 2000 2001 2000
------------ ----------- ----------- -----------
Net income $ 46,737 $ 45,676 $ 110,070 $ 102,797
Accumulated net losses on
derivative financial instruments (508) -- (3,552) --
------------ ----------- ----------- -----------
$ 46,229 $ 45,676 $ 106,518 $ 102,797
============ =========== =========== ===========
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4. Inventory
In the fourth quarter of 2000, the Company determined that it had certain excess inventory that would require a markdown to assist with its disposition. While the Company believes that this markdown will be adequate to ensure the sale of the excess inventory during fiscal years 2001 and 2002, there can be no assurance that the Company will be able to sell all of this inventory by the end of 2002 without a further markdown. The Company reclassified $116.0 million of inventory out of current assets at February 2, 2001 that it does not expect to sell before February 1, 2002. Because the Company believes that such inventory may not be sold prior to November 1, 2002, this amount has continued to be excluded from current assets at November 2, 2001.
5. Segment reporting
The Company manages its business on the basis of one reportable segment. As of November 2, 2001 and October 27, 2000, all of the Company's operations were located within the United States. The following data is presented in accordance with Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information." The following amounts are in thousands:
13 Weeks Ended 39 Weeks Ended
--------------------------- ---------------------------
November 2, October 27, November 2, October 27,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales by Category:
Highly Consumable ....... $ 796,271 $ 638,372 $ 2,255,342 $ 1,767,008
Hardware and Seasonal.... 185,028 148,415 538,913 429,230
Basic Clothing .......... 148,617 133,817 410,448 375,047
Home Products ........... 179,209 173,756 532,180 537,572
----------- ----------- ----------- -----------
$ 1,309,125 $ 1,094,360 $ 3,736,883 $ 3,108,857
=========== =========== =========== ===========
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6. 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 the Notes. 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.
Condensed combined financial information for the Guarantors is set forth below. Dollar amounts are in thousands.
November 2, 2001
-------------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------- ------------ ------------ ------------
BALANCE SHEET DATA:
ASSETS
Current assets
Cash and cash equivalents $ 20,004 $ 54,815 $ -- $ 74,819
Merchandise inventories - 1,133,215 -- 1,133,215
Deferred income taxes 69,551 20,756 -- 90,307
Other current assets 19,568 640,176 (611,144) 48,600
----------- ----------- ------------ -----------
Total current assets 109,124 1,848,961 (611,144) 1,346,941
----------- ----------- ------------ -----------
Property and equipment, at cost 159,380 1,294,888 -- 1,454,268
Less: accumulated depreciation
and amortization 48,219 408,259 -- 456,478
----------- ----------- ------------ -----------
Net property and equipment 111,161 886,629 -- 997,790
----------- ----------- ------------ -----------
Merchandise inventories -- 116,000 -- 116,000
Other assets 1,921,338 7,171 (1,919,974) 8,535
----------- ----------- ------------ -----------
Total assets $ 2,141,622 $ 2,858,762 $ (2,531,118) $ 2,469,266
=========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 65,942 $ 325,147 $ -- $ 391,089
Accounts payable 692,772 300,215 (611,144) 381,843
Accrued expenses and other 62,249 161,259 -- 223,508
Litigation settlement payable 162,000 -- -- 162,000
Income taxes 5,040 5,452 -- 10,492
----------- ----------- ------------ -----------
Total current liabilities 988,003 792,073 (611,144) 1,168,932
----------- ----------- ------------ -----------
Long-term obligations 200,459 784,494 (637,779) 347,174
----------- ----------- ------------ -----------
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 166,302 23,853 (23,853) 166,302
Additional paid-in capital 300,622 927,628 (927,628) 300,622
Accumulated other comprehensive
loss (3,552) -- -- (3,552)
Retained earnings 492,473 330,714 (330,714) 492,473
----------- ----------- ------------ -----------
955,845 1,282,195 (1,282,195) 955,845
Less: common stock purchased by
employee deferred compensation
trust 2,685 -- -- 2,685
----------- ----------- ------------ -----------
Total shareholders' equity 953,160 1,282,195 (1,282,195) 953,160
----------- ----------- ------------ -----------
Total liabilities and shareholders' equity $ 2,141,622 $ 2,858,762 $ (2,531,118) $ 2,469,266
=========== =========== ============= ===========
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February 2, 2001
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------------------------------
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents $ 120,643 $ 41,667 $ -- $ 162,310
Merchandise inventories -- 896,235 -- 896,235
Deferred income taxes 6,380 15,134 -- 21,514
Other current assets 15,372 606,000 (576,504) 44,868
---------------------------------------------------------------------------
Total current assets 142,395 1,559,036 (576,504) 1,124,927
---------------------------------------------------------------------------
Property and equipment, at cost 145,294 1,194,260 -- 1,339,554
Less accumulated
depreciation and amortization 37,876 328,584 -- 366,460
---------------------------------------------------------------------------
Net property and equipment 107,418 865,676 -- 973,094
---------------------------------------------------------------------------
Merchandise inventories -- 116,000 -- 116,000
Deferred income taxes 57,946 -- (5,238) 52,708
Other assets, net 1,707,740 578 (1,692,585) 15,733
---------------------------------------------------------------------------
Total assets $ 2,015,499 $ 2,541,290 $(2,274,327) $ 2,282,462
===========================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations $ 856 $ 8,179 $ -- $ 9,035
Accounts payable 663,373 210,393 (576,504) 297,262
Accrued expenses and other 54,289 159,903 -- 214,192
Income taxes 6,875 10,571 -- 17,446
---------------------------------------------------------------------------
Total current liabilities 725,393 389,046 (576,504) 537,935
---------------------------------------------------------------------------
Long-term obligations 266,343 972,401 (517,980) 720,764
---------------------------------------------------------------------------
Litigation settlement payable 162,000 -- -- 162,000
---------------------------------------------------------------------------
Deferred income taxes -- 5,238 (5,238) --
---------------------------------------------------------------------------
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 165,646 23,853 (23,853) 165,646
Additional paid-in capital 283,925 929,677 (929,677) 283,925
Retained earnings 414,318 221,075 (221,075) 414,318
---------------------------------------------------------------------------
863,889 1,174,605 (1,174,605) 863,889
Less common stock
purchased by employee
deferred compensation trust 2,126 -- -- 2,126
---------------------------------------------------------------------------
Total shareholders' equity 861,763 1,174,605 (1,174,605) 861,763
---------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,015,499 $ 2,541,290 $(2,274,327) $ 2,282,462
===========================================================================
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Quarter to Date
---------------------------------------------------------------------------
November 2, 2001
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
STATEMENTS OF INCOME DATA:
Net sales $ 42,113 $ 1,309,125 $ (42,113) $ 1,309,125
Cost of goods sold -- 927,944 -- 927,944
--------- ----------- --------- -----------
Gross profit 42,113 381,181 (42,113) 381,181
Selling, general and administrative 38,446 298,770 (42,113) 295,103
--------- ----------- --------- -----------
Operating profit 3,667 82,411 -- 86,078
Interest expense 2,270 9,210 -- 11,480
--------- ----------- --------- -----------
Income before taxes on income 1,397 73,201 -- 74,598
Provisions for taxes on income 521 27,340 -- 27,861
Equity in subsidiaries' earnings, net 45,861 -- (45,861) --
--------- ----------- --------- -----------
Net income $ 46,737 $ 45,861 $ (45,861) $ 46,737
========= =========== ========= ===========
Year to Date
---------------------------------------------------------------------------
November 2, 2001
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
STATEMENTS OF INCOME DATA:
Net sales $ 119,799 $ 3,736,883 $(119,799) $ 3,736,883
Cost of goods sold -- 2,702,994 -- 2,702,994
--------- ----------- --------- -----------
Gross profit 119,799 1,033,889 (119,799) 1,033,889
Selling, general and administrative 106,922 836,040 (119,799) 823,163
--------- ----------- --------- -----------
Operating profit 12,877 197,849 -- 210,726
Interest expense 12,191 22,845 -- 35,036
--------- ----------- --------- -----------
Income before taxes on income 686 175,004 -- 175,690
Provisions for taxes on income 257 65,363 -- 65,620
Equity in subsidiaries' earnings, net 109,641 -- (109,641) --
--------- ----------- --------- -----------
Net income $ 110,070 $ 109,641 $(109,641) $ 110,070
========= =========== ========= ===========
Quarter to Date
---------------------------------------------------------------------------
October 27, 2000
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
STATEMENTS OF INCOME DATA:
Net sales $ 43,810 $ 1,094,360 $ (43,810) $ 1,094,360
Cost of goods sold -- 776,016 -- 776,016
--------- ----------- --------- -----------
Gross profit 43,810 318,344 (43,810) 318,344
Selling, general and administrative 26,983 248,760 (43,810) 231,933
--------- ----------- --------- -----------
Operating profit 16,827 69,584 -- 86,411
Interest expense 6,659 6,876 -- 13,537
--------- ----------- --------- -----------
Income before taxes on income 10,168 62,706 -- 72,874
Provisions for taxes on income 3,795 23,403 -- 27,198
Equity in subsidiaries' earnings, net 39,303 -- (39,303) --
--------- ----------- --------- -----------
Net income $ 45,676 $ 39,303 $ (39,303) $ 45,676
========= =========== ========= ===========
Year to Date
---------------------------------------------------------------------------
October 27, 2000
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
STATEMENTS OF INCOME DATA:
Net sales $ 118,582 $ 3,108,857 $(118,582) $ 3,108,857
Cost of goods sold -- 2,237,056 -- 2,237,056
--------- ----------- --------- -----------
Gross profit 118,582 871,801 (118,582) 871,801
Selling, general and administrative 80,371 710,473 (118,582) 672,262
--------- ----------- --------- -----------
Operating profit 38,211 161,328 -- 199,539
Interest expense 15,858 19,674 -- 35,532
--------- ----------- --------- -----------
Income before taxes on income 22,353 141,654 -- 164,007
Provisions for taxes on income 8,342 52,868 -- 61,210
Equity in subsidiaries' earnings, net 88,786 -- (88,786) --
--------- ----------- --------- -----------
Net income $ 102,797 $ 88,786 $ (88,786) $ 102,797
========= =========== ========= ===========
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For the 39 weeks ended
------------------------------------------------------------------------
November 2, 2001
------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating activities:
Net income $ 110,070 $ 109,641 $ (109,641) $ 110,070
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization 10,984 81,120 -- 92,104
Deferred income taxes (171) (5,624) -- (5,795)
Tax benefits from stock options exercises 5,243 -- -- 5,243
Change in operating assets and liabilities:
Merchandise inventories - (236,980) -- (236,980)
Other current assets (4,296) 35,204 (34,640) (3,732)
Accounts payable 29,400 20,541 34,640 84,581
Accrued expenses and other 4,860 899 -- 5,759
Income taxes (876) (6,078) -- (6,954)
Other (102,190) (10,000) 109,641 (2,549)
---------- --------- ---------- -----------
Net cash provided by / (used in)
operating activities 53,024 (11,277) -- 41,747
---------- --------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (14,772) (85,412) -- (100,184)
Proceeds from sale of property and equipment 15 215 -- 230
Issuance of long-term notes receivable (119,799) -- 119,799 --
Other 2,050 -- (2,050) --
---------- --------- ---------- -----------
Net cash used in investing activities (132,506) (85,197) 117,749 (99,954)
---------- --------- ---------- -----------
Cash flows from financing activities:
Issuance of long-term obligations 119,799 (119,799) --
Repayments of long-term obligations (798) (8,127) -- (8,925)
Payment of cash dividends (31,910) -- -- (31,910)
Proceeds from exercise of stock options 11,557 -- -- 11,557
Other (6) (2,050) 2,050 (6)
---------- --------- ---------- -----------
Net cash provided by / (used in)
financing activities (21,157) 109,622 (117,749) (29,284)
---------- --------- ---------- -----------
Net increase / (decrease) in cash and
cash equivalents (100,639) 13,148 -- (87,491)
Cash and cash equivalents, beginning of year 120,643 41,667 -- 162,310
---------- --------- ---------- -----------
Cash and cash equivalents, end of period $ 20,004 $ 54,815 $ -- $ 74,819
========== ========= ========== ===========
|
For the 39 weeks ended
---------------------------------------------------------------------
October 27, 2000
---------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------- ------------ ------------ ------------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating activities:
Net income $ 102,797 $ 88,786 $ (88,786) $ 102,797
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization 9,867 73,870 - 83,737
Deferred income taxes (664) (12,128) - (12,792)
Tax benefits from stock options exercises 15,021 - - 15,021
Change in operating assets and liabilities:
Merchandise inventories - (155,814) - (155,814)
Other current assets 10,804 88,977 (97,264) 2,517
Accounts payable (148,878) 11,081 92,318 (45,479)
Accrued expenses and other 5,855 1,594 - 7,449
Income taxes 1,812 (16,438) - (14,626)
Other (92,819) 4,570 88,786 537
---------- -------- --------- ---------
Net cash provided by / (used in)
operating activities (96,205) 84,498 (4,946) (16,653)
---------- -------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (17,673) (180,588) 4,946 (193,315)
Proceeds from sale of property and equipment 83 97,452 - 97,535
Issuance of long-term notes receivable (118,582) - 118,582 -
Contribution of capital (856) - 856 -
---------- -------- --------- ---------
Net cash used in investing activities (137,028) (83,136) 124,384 (95,780)
---------- -------- --------- ---------
Cash flows from financing activities:
Issuance of short-term borrowings 221,369 - - 221,369
Repayments of short-term borrowings (160,000) - - (160,000)
Issuance of long-term obligations 199,584 118,582 (118,582) 199,584
Repayments of long-term obligations (924) (108,548) - (109,472)
Payment of cash dividends (29,522) - - (29,522)
Proceeds from exercise of stock options 29,239 - - 29,239
Repurchase of common stock, net (65,549) - - (65,549)
Issuance of common stock, net - 856 (856) -
---------- -------- --------- ---------
Net cash provided by / (used in)
financing activities 194,197 10,890 (119,438) 85,649
---------- -------- --------- ---------
Net increase / (decrease) in cash and
cash equivalents (39,036) 12,252 - (26,784)
Cash and cash equivalents, beginning of year 42,688 12,054 - 54,742
---------- -------- --------- ---------
Cash and cash equivalents, end of period $ 3,652 $ 24,306 $ - $ 27,958
========== ======== ========= =========
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7. Commitments and Contingencies
As disclosed in further detail in the Company's Form 10-K for fiscal year 2000, more than 20 purported class action lawsuits have been filed against the Company and certain current and former officers and directors of the Company, asserting claims under the federal securities laws relating to the restatement of the Company's financial statements. The Company has reached a settlement agreement with the purported class action plaintiffs, which is subject to confirmatory discovery, to approval of the Company's Board and to court approval, and the Company has recognized an expense of $162 million in the fourth quarter of 2000 in connection with such settlement. The Company expects to receive from its insurers approximately $4.5 million in respect of the class action settlement, which amount has not been accrued in the Company's financial statements.
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, and two purported shareholder derivative lawsuits have been filed in the United States District Court for the Middle District of Tennessee, which lawsuits seek damages and other relief. The Company and the individual defendants have reached a settlement agreement with counsel to the lead plaintiffs in the lead Tennessee state shareholder derivative action, and the Company anticipates that pursuant to such agreement the other shareholder derivative actions, which have been stayed, will be dismissed with prejudice. Such agreement is subject to confirmatory discovery, to the final approval of the Company's Board of Directors, and to court approval. If the settlement agreement is approved, the Company expects that it will result in a net payment to the Company, after attorneys' fees payable to the plaintiffs' counsel, of approximately $24.8 million, which has not been accrued in the Company's financial statements.
These cases are at an early stage and the amount of potential loss, if any, should the settlement agreements not become effective cannot be reasonably estimated. An unfavorable outcome for the Company in these actions could have a material adverse impact on the Company's financial position and results of operations.
The Company has been notified that the Securities and Exchange Commission ("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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following text contains references to years 2002, 2001, 2000, 1999, and 1998, which represent fiscal years ending or ended January 31, 2003, February 1, 2002, February 2, 2001, January 28, 2000, and January 29, 1999 respectively. This discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto.
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. The Company defines same stores as those opened before the beginning of the previous fiscal year which have remained open throughout the current period.
39 WEEKS ENDED NOVEMBER 2, 2001 AND OCTOBER 27, 2000
Net Sales. Net sales for the 39 weeks ended November 2, 2001 were $3.74 billion as compared against $3.11 billion during the comparable period in the prior year, an increase of 20.2%. The increase resulted primarily from 591 net new stores and a same store sales increase of 7.6%. The same store sales increase is calculated based on the comparable calendar weeks in the prior year. The Company attributes the increase in same store sales to a number of factors, including a stronger in-stock position versus the prior year, the continued acceptance by the consumer of the Company's consumable basics strategy, and increased seasonal sales due to a stronger presentation of seasonal products as a result of the store reset program undertaken in 2000. Net sales increases by division were as follows: highly consumables 27.6%; hardware and seasonal 25.6%; basic clothing 9.4%; and basic home products (1.0%).
Gross Profit. Gross profit during the current year period was $1.03
billion, or 27.7% of sales versus $0.87 billion, or 28.0% of sales, during the
comparable period in the prior year, an increase of 18.6%. The reduction in the
margin rate as a percentage of sales was due to a number of factors including:
an increase in the shrink provision of 14 basis points; higher store initiated
markdowns; and the continued shift in the Company's sales to lower margin
consumable basic items.
Selling, General and Administrative Expense ("SG&A"). SG&A expenses during the current year period were $823.2 million, or 22.0% of sales, versus $672.3 million, or 21.6% of sales during the comparable period in the prior year, an increase of 22.4%. The increase in SG&A is due to the 12.1% increase in store count as compared to the prior year, and to increases in store labor and utilities costs that were greater than the percentage increase in store count. In addition, the Company recorded $18.3 million in expenses, primarily professional fees, in the current year period related to the restatement of certain previously released financial data. Excluding the restatement related expenses, SG&A would have been $804.9 million, or 21.5% of sales, an increase of 19.7% over the prior year.
Interest Expense. Interest expense during the current year period was $35.0 million, or 1.0% of sales, versus $35.5 million, or 1.1% of sales during the comparable period in the prior year, a decrease of 1.4%. The decrease in interest expense is due to lower interest rates and reduced capital spending in the current year period.
Provision for Taxes on Income. The Company's effective tax rate was 37.4% in the current year period and 37.3% in the prior year period.
Net Income. Net income during the current year period was $110.1 million, or 2.9% of sales, versus $102.8 million, or 3.3% of sales, during the comparable period in the prior year, an increase of 7.1%. Diluted earnings per share were $0.33 in the current
year period versus $0.31 in the prior year. Excluding restatement-related expenses, diluted earnings per share in the current year period were $0.36.
THIRTEEN WEEKS ENDED NOVEMBER 2, 2001 AND OCTOBER 27, 2000
Net Sales. Net sales for the 13 weeks ended November 2, 2001 were $1.31 billion as compared against $1.09 billion during the comparable period in the prior year, an increase of 19.6%. The increase resulted primarily from 591 net new stores and a same store sales increase of 8.2%. The same store sales increase is calculated based on the comparable calendar weeks in the prior year. The Company attributes the increase in same store sales to a number of factors including a stronger in-stock position versus the prior year, the continued acceptance by the consumer of the Company's consumable basics strategy, and increased seasonal sales due to a stronger presentation of seasonal products emanating from the store reset program undertaken in 2000. Net sales increases by division were as follows: highly consumables 24.7%; hardware and seasonal 24.7%; basic clothing 11.1%, and basic home products 3.1%.
Gross Profit. Gross profit during the current year period was $381.2 million, or 29.1% of sales, versus $318.3 million or 29.1% of sales during the comparable period in the prior year, an increase of 19.7%.
Selling, General and Administrative Expense. SG&A expenses during the current year period were $295.1 million, or 22.5% of sales, versus $231.9 million, or 21.2% of sales during the comparable period in the prior year, an increase of 27.2%. The increase in SG&A is due to the additional number of open stores as compared to the prior year period and to increases in store labor and utilities costs that were greater than the percentage increase in store count. In addition, the Company recorded $9.3 million in expenses, primarily professional fees, during the current year period related to the restatement of certain previously released financial data. Excluding the restatement related expenses, SG&A would have been $285.8 million, or 21.8% of sales, an increase of 23.2% over the prior year.
Interest Expense. Interest expense during the current year period was $11.5 million, or 0.9% of sales versus $13.5 million, or 1.2% of sales during the comparable period in the prior year, a decrease of 15.2%. The decrease in interest expense is due to lower interest rates and reduced capital spending in the current year period.
Provision for Taxes on Income. The Company's effective tax rate was 37.4% in the current year period and 37.3% in the prior year period.
Net Income. Net income during the current year period was $46.7 million, or 3.6% of sales, versus $45.7 million, or 4.2% of sales during the comparable period in the prior year, an increase of 2.3%. Diluted earnings per share were $0.14 in the current year
period versus $0.14 in the comparable prior year period. Excluding restatement-related expenses, diluted earnings per share in the current year period were $0.16.
Liquidity and Capital Resources
Cash flows provided by or used in operating activities. Net cash provided by operating activities totaled $41.7 million during the first 39 weeks of 2001, as compared to a $16.7 million use of cash during the comparable period in the prior year. The primary source of cash in 2001 was the combination of net income and depreciation and amortization expenses, which together provided $202.2 million in cash during the current year period. The primary use of cash in the current year period was the $237.0 million increase in inventory reflecting the net addition of 485 stores and an increase in seasonal merchandise. The increase in inventory was partially financed by a $84.6 million increase in accounts payable.
The primary use of cash during the first 39 weeks of 2000 was an increase in merchandise inventories of $155.8 million reflecting the addition of 600 net stores and the build-up of seasonal inventories. Net income and depreciation and amortization expenses together provided $186.5 million in cash in 2000.
Cash flows provided by or used in investing activities. Net cash used in investing activities during the first 39 weeks of 2001 totaled $100.0 million, as compared to a $95.8 million use of cash during the comparable period in the prior year. The $100.0 million spent in the current year consisted primarily of $39.6 million for new stores and relocations, $42.8 million for various store-related fixtures, and $11.4 million for various systems related projects. The $95.8 million spent in the prior year is a net number that includes $97.5 million in proceeds from sale-leaseback transactions on two of the Company's distribution centers. Significant capital expenditure activity in 2000 consisted in part of $39.2 million for new stores and relocations subject to lease agreements, $36.0 million in construction costs relating to Company owned stores and $49.4 million for distribution center-related projects including construction costs associated with the Company's new distribution centers in Zanesville, Ohio and Alachua, Florida.
Cash flows provided by or used in financing activities. Net cash used in financing activities during the first 39 weeks of 2001 was $29.3 million. The principal use of funds was the payment of cash dividends of $31.9 million. Financing activities during the comparable period in the prior year were a source of funds of $85.6 million. Cash provided by financing activities in the prior year reflected the $200 million of notes described below offset by the payment of cash dividends, the repurchase of common stock and the repayment of long-term obligations related primarily to two of the Company's distribution centers. The Company also increased its net short-term borrowings by $61.4 million during the prior year period to fund seasonal working capital needs. The Company believes that seasonal working capital requirements will continue
to be met through cash flow provided by operations supplemented by various short-term borrowing arrangements.
In September 2002, the Company's synthetic leases, in the amount of $383 million, will mature and the Company's $175 million revolving credit facility will expire. The Company expects to refinance the synthetic lease obligations and to replace the revolving credit facility prior to such date. The Company may also have to fund during the second half of 2002 the settlement of the class action litigation in an amount of up to $162 million, as further discussed above. The Company believes that its existing cash balances, cash flow from operations and its ongoing access to the capital markets will provide sufficient financing to meet these obligations, as well as the Company's other foreseeable liquidity and capital resource needs. However, there can be no assurance that the Company will be able to obtain financing in the amounts that it requires or that the terms of such financing will be as attractive as the terms on which the Company has obtained financing in the past. Please refer to "Forward Looking Statements / Risk Factors" in the Company's Annual Report on Form 10-K for the year ended February 2, 2001 for a discussion of issues that could adversely impact the Company's financial position or its ability to obtain financing.
Total debt (including current maturities and short-term borrowings) was $738.3 million at November 2, 2001 and $729.8 million at February 2, 2001.
The Company has $200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010. The notes pay interest 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.
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 2, 2001.
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 2, 2001.
Part II - Other Information
Item 1. Legal Proceedings
Restatement-Related Proceedings
Following the April 30, 2001 announcement discussed above, 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 have been 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 purporting to name as plaintiffs a class of persons who held or purchased the Company's securities and related derivative securities
between May 12, 1998 and September 21, 2001. Among other things, plaintiffs have 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 seek damages with interest, costs and such other relief as the court deems proper.
The Company has reached a settlement agreement with the purported class action plaintiffs, pursuant to which the Company has agreed to pay $140 million to such plaintiffs in settlement for their claims, and to implement certain enhancements to its corporate governance and internal control procedures. Such agreement is subject to confirmatory discovery, to the final approval of the Company's Board of Directors, and to court approval. Following the completion of confirmatory discovery, plaintiffs have the right under the settlement agreement to amend their complaint further to increase the size of the class, and to negotiate with the Company for additional damages, the aggregate amount of all damages to be paid in settlement of plaintiffs' claims not to exceed $162 million. The Company expects that following the completion of such confirmatory discovery, the plaintiffs will amend their complaint and seek aggregate damages of $162 million, and the Company has accordingly recognized an expense of $162 million in the fourth quarter of 2000. The Company expects to receive from its insurers approximately $4.5 million in respect of the class action settlement, which amount has not been accrued in the Company's financial statements.
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. A hearing on the motion has not yet been scheduled.
Two purported shareholder derivative lawsuits also have been filed 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 has been stayed until June 3, 2002.
The Company and the individual defendants have reached a settlement agreement with lead counsel to 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. Pursuant to the terms of such agreement, the Company anticipates that all of the stayed cases, including the federal derivative cases described above, will be dismissed with prejudice by the courts in which they are pending. Such agreement is subject to confirmatory discovery, to the final approval of the Company's Board of Directors, and to court approval. If the settlement agreement is approved, the Company expects that it will result in a net payment to the Company, after attorneys' fees payable to the plaintiffs' counsel, of approximately $24.8 million, which has not been accrued in the Company's financial statements.
The Company believes that it has substantial defenses to the purported class action and the derivative lawsuits and intends to assert these defenses in the courts in which the actions are pending in the event the settlement agreements referred to above do not successfully resolve these matters. These cases are at an early stage and the amount of potential loss, if any, should the settlement agreements not become effective cannot be reasonably estimated. An unfavorable outcome for the Company in these actions could have a material adverse impact on the Company's financial position and results of operations.
The Company has been notified that the Securities and Exchange Commission ("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.
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 6. Exhibits and Reports on Form 8-K
(a) Not Applicable
(b) Reports on Form 8-K:
(1) A Current Report on Form 8-K, dated August 10, 2001, was filed with
the SEC in connection with the announcement of July sales results.
(2) A Current Report on Form 8-K, dated September 7, 2001, was filed with
the SEC in connection with the announcement of August sales results.
(3) A Current Report on Form 8-K, dated September 21, 2001, was filed with
the SEC in connection with an announcement of the dismissal of the
Company's independent accountants, Deloitte & Touche LLP, the
retention and subsequent resignation of PricewaterhouseCoopers LLP as
independent accountants, and the possible future retention of Ernst &
Young LLP as the Company's new independent accountants.
(4) An Amendment to the Current Report on Form 8-K, dated September 21,
2001, was filed with the SEC on October 9, 2001, disclosing the
retention of Ernst & Young LLP as the Company's new independent
accountants, and including letters from Deloitte & Touche LLP and
PricewaterhouseCoopers LLP.
(5) A Current Report on Form 8-K, dated October 12, 2001, was filed with
the SEC in connection with the announcement of September sales
results.
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)
January 14, 2002
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