Dollar General is a US department store chain headquartered in Goodlettsville, Tennessee. The company employed around 143,000 people in 16,278 stores in early 2020. The company was founded in 1939 by Cal Turner in Scottsville, Kentucky.
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 3, 2001 Commission file number 1-11421 Dollar General Corporation (Exact name of registrant as specified in its charter) Tennessee 610502302 - --------------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 Mission Ridge Goodlettsville, Tennessee 37072 (615) 855-4000 - --------------------------------------- ------------------------------ (Address of principal executive (Registrant's telephone number, offices, zip code) 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 [ ] 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 second quarter of fiscal 2001 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 August 3, 2001 Index Page No. Part I. Financial Information 3 Item 1. Financial Statements (unaudited): 3 Condensed Consolidated Balance Sheets as of August 3, 2001 and February 2, 2001 3 Condensed Consolidated Statements of Income for the 13 and 26 weeks ended August 3, 2001 and July 28, 2000 (restated) 4 Condensed Consolidated Statements of Cash Flows for the 26 weeks ended August 3, 2001 and July 28, 2000 (restated) 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II. Other Information 17 Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 2
Part I - Financial Information Item 1. Financial Statements <TABLE> <CAPTION> Dollar General Corporation and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) August 3, 2001 February 2, (Unaudited) 2001 ----------- ----------- Assets <S> <C> <C> Current assets: Cash and cash equivalents........................................... $ 81,630 $ 162,310 Merchandise inventories............................................. 980,856 896,235 Deferred income taxes............................................... 24,962 21,514 Other current assets................................................ 53,231 44,868 ----------- ----------- Total current assets........................................... 1,140,679 1,124,927 ----------- ----------- Property and equipment, at cost..................................... 1,429,373 1,339,554 Less: accumulated depreciation and amortization.................... 426,149 366,460 ----------- ----------- 1,003,224 973,094 ----------- ----------- Merchandise inventories............................................. 116,000 116,000 Other assets........................................................ 70,421 68,441 ----------- ----------- Total assets................................................... $ 2,330,324 $ 2,282,462 =========== ============ Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term obligations............................ $ 7,942 $ 9,035 Accounts payable.................................................... 294,784 297,262 Accrued expenses and other.......................................... 214,133 214,192 Income taxes........................................................ -- 17,446 ----------- ----------- Total current liabilities..................................... 516,859 537,935 ----------- ----------- Long-term obligations.................................................. 735,435 720,764 Litigation settlement payable.......................................... 162,000 162,000 Shareholders' equity: Preferred stock..................................................... -- -- Common stock........................................................ 166,232 165,646 Additional paid-in capital.......................................... 299,149 283,925 Accumulated other comprehensive loss................................ (3,044) -- Retained earnings................................................... 456,383 414,318 ----------- ----------- 918,720 863,889 Less: common stock purchased by employee deferred compensation trust............................................... 2,690 2,126 ----------- ----------- Total shareholders' equity..................................... 916,030 861,763 ----------- ----------- Total liabilities and shareholders' equity..................... $ 2,330,324 $ 2,282,462 =========== =========== See notes to condensed consolidated financial statements. </TABLE> 3
<TABLE> <CAPTION> Dollar General Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) (Dollars in thousands except share and per share amounts) Thirteen Weeks Ended ------------------------------------------------------- % of Net % of Net August 3, 2001 Sales July 28, 2000 Sales (Restated) ---------------- -------- ------------- ------- <S> <C> <C> <C> <C> Net sales................................. $ 1,225,254 100.0% $ 1,017,418 100.0% Cost of goods sold........................ 893,971 73.0 733,368 72.1 --------------- ------ ----------- ------ Gross profit........................... 331,283 27.0 284,050 27.9 Selling, general and administrative....... 276,069 22.5 226,988 22.3 --------------- ------ ----------- ------ Operating profit....................... 55,214 4.5 57,062 5.6 Interest expense.......................... 11,957 1.0 12,732 1.3 --------------- ------ ----------- ------ Income before income taxes............. 43,257 3.5 44,330 4.3 Income taxes.............................. 16,157 1.3 16,544 1.6 --------------- ------ ----------- ------ Net income............................. $ 27,100 2.2% $ 27,786 2.7% =============== ======= ============ ====== Earnings per share: Basic.................................. $ 0.08 $ 0.08 =============== =============== Diluted................................ $ 0.08 $ 0.08 =============== =============== Weighted average shares: Basic.................................. 332,330 328,578 =============== =============== Diluted................................ 335,402 333,038 =============== =============== Dividends per share....................... $ .032 $ .032 =============== =============== <CAPTION> Twenty-Six Weeks Ended ------------------------------------------------------- % of Net % of Net August 3, 2001 Sales July 28, 2000 Sales (Restated) ---------------- -------- ------------- ------- <S> <C> <C> <C> <C> Net sales................................. $ 2,427,758 100.0% $ 2,014,497 100.0% Cost of goods sold........................ 1,775,050 73.1 1,461,040 72.5 --------------- ------ ----------- ------ Gross profit........................... 652,708 26.9 553,457 27.5 Selling, general and administrative....... 528,059 21.8 440,329 21.9 --------------- ------ ----------- ------ Operating profit....................... 124,649 5.1 113,128 5.6 Interest expense.......................... 23,557 0.9 21,995 1.1 --------------- ------ ----------- ------ Income before income taxes............. 101,092 4.2 91,133 4.5 Income taxes.............................. 37,759 1.6 34,012 1.7 --------------- ------ ----------- ------ Net income............................. $ 63,333 2.6% $ 57,121 2.8% =============== ====== =========== ====== Earnings per share: Basic.................................. $ 0.19 $ 0.17 =============== =============== Diluted................................ $ 0.19 $ 0.17 =============== =============== Weighted average shares: Basic.................................. 331,959 329,027 =============== =============== Diluted................................ 335,293 333,666 =============== =============== Dividends per share....................... $ .065 $ .058 =============== =============== </TABLE> See notes to condensed consolidated financial statements. 4
<TABLE> <CAPTION> Dollar General Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) 26 Weeks Ended -------------------------------- August 3, 2001 July 28, 2000 (Restated) -------------- ------------- <S> <C> <C> Cash flows from operating activities: Net income $ 63,333 $ 57,121 Adjustments to reconcile net income to net cash provided by / (used in) operating activities: Depreciation and amortization 60,980 55,601 Deferred income taxes (2,627) (9,849) Tax benefit from stock option exercises 4,656 7,642 Change in operating assets and liabilities: Merchandise inventories (84,621) (68,845) Other current assets (607) 5,333 Accounts payable (2,478) (60,067) Accrued expenses and other (1,740) 3,771 Income taxes (17,446) (19,364) Other (9,631) 946 --------- --------- Net cash provided by / (used in) operating activities 9,819 (27,711) --------- --------- Cash flows from investing activities: Purchase of property and equipment (73,942) (153,195) Proceeds from sale of property and equipment 144 97,492 --------- --------- Net cash used in investing activities (73,798) (55,703) --------- --------- Cash flows from financing activities: Issuance of short-term borrowings -- 181,992 Repayments of short-term borrowings -- (160,000) Issuance of long-term obligations -- 199,573 Repayments of long-term obligations (6,023) (104,303) Payments of cash dividend (21,268) (18,984) Proceeds from exercise of stock options 10,623 17,024 Repurchase of common stock, net -- (65,549) Purchase of common stock for employee deferred compensation trust (33) -- --------- --------- Net cash (used in) / provided by financing activities (16,701) 49,753 --------- --------- Net increase (decrease) in cash and cash equivalents (80,680) (33,661) Cash and cash equivalents at beginning of period 162,310 54,742 --------- --------- Cash and cash equivalents at end of period $ 81,630 $ 21,081 ========= ========= Supplemental schedule of noncash investing and financing activities: Purchase of property and equipment under capital lease obligations $ 17,393 $ 82,104 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 5
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 26-week periods ended August 3, 2001 and July 28, 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 6
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 26 weeks ended July 28, 2000 has been restated. Restated net income, diluted earnings per share and retained earnings for the quarter ended July 28, 2000 are $27.8 million, $0.08 and $422.0 million, respectively, as compared to the previously reported amounts of $39.3 million, $0.12 and $536.5 million. Restated net income, diluted earnings per share and retained earnings for the 26 weeks ended July 28, 2000 are $57.1 million, $0.17 and $422.0 million, respectively, as compared to the previously reported amounts of $83.7 million, $0.25 and $536.5 million. 3. Comprehensive income <TABLE> <CAPTION> Comprehensive income consists of the following (in thousands): 13 weeks ended 26 weeks ended ------------------------------- ------------------------------- August 3, 2001 July 28, 2000 August 3, 2001 July 28, 2000 -------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> Net income $ 27,100 $ 27,786 $ 63,333 $ 57,121 Accumulated net losses on derivative financial instruments (205) -- (3,044) -- -------- -------- -------- --------- $ 26,895 $ 27,786 $ 60,289 $ 57,121 ======== ======== ======== ========= </TABLE> 7
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 August 2, 2002, this amount has continued to be excluded from current assets at August 3, 2001. 5. Segment reporting The Company manages its business on the basis of one reportable segment. As of August 3, 2001 and July 28, 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: <TABLE> <CAPTION> 13 Weeks Ended 26 Weeks Ended --------------------------------- -------------- ------------- August 3, 2001 July 28, 2000 August 3, 2001 July 28, 2000 -------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> Sales by Category: Highly Consumable....................... $ 737,778 $ 583,003 $ 1,459,070 $ 1,128,636 Hardware and Seasonal................... 185,082 143,120 353,885 280,815 Basic Clothing.......................... 131,200 120,320 261,832 241,230 Home Products........................... 171,194 170,975 352,971 363,816 ----------- ----------- ----------- ----------- $ 1,225,254 $ 1,017,418 $ 2,427,758 $ 2,014,497 =========== =========== =========== =========== </TABLE> 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. 8
<TABLE> <CAPTION> August 3, 2001 ----------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED TOTAL -------------- ------------ ------------ ------------------ <S> <C> <C> <C> <C> BALANCE SHEET DATA: ASSETS Current assets Cash and cash equivalents $ 38,875 $ 42,755 $ -- $ 81,630 Merchandise inventories - 980,856 -- 980,856 Deferred income taxes 6,473 18,489 -- 24,962 Other current assets 22,019 626,562 (595,350) 53,231 ----------- ----------- ------------ ----------- Total current assets 67,367 1,668,662 (595,350) 1,140,679 ----------- ----------- ------------ ----------- Property and equipment, at cost 154,784 1,274,589 -- 1,429,373 Less: accumulated depreciation and amortization 44,551 381,598 -- 426,149 ----------- ----------- ------------ ----------- Net property and equipment 110,233 892,991 -- 1,003,224 ----------- ----------- ------------ ----------- Merchandise inventories - 116,000 -- 116,000 Deferred income taxes - - -- -- Other assets 1,897,732 4,689 (1,832,000) 70,421 ----------- ----------- ------------ ----------- Total assets $ 2,075,332 $ 2,682,342 $ (2,427,350) $ 2,330,324 =========== =========== ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 539 $ 7,403 $ -- $ 7,942 Accounts payable 660,300 223,489 (589,005) 294,784 Accrued expenses and other 61,887 152,246 -- 214,133 Income taxes 6,345 - (6,345) -- ----------- ----------- ------------ ----------- Total current liabilities 729,071 383,138 (595,350) 516,859 ----------- ----------- ------------ ----------- Long-term obligations 268,231 1,062,871 (595,667) 735,435 ----------- ----------- ------------ ----------- Litigation settlement payable 162,000 -- -- 162,000 ----------- ----------- ------------ ----------- Shareholders' equity: Preferred Stock -- -- -- -- Common Stock 166,232 23,853 (23,853) 166,232 Additional paid-in capital 299,149 927,629 (927,629) 299,149 Accumulated other comprehensive loss (3,044) -- -- (3,044) Retained earnings 456,383 284,851 (284,851) 456,383 ----------- ----------- ------------ ----------- 918,720 1,236,333 (1,236,333) 918,720 Less: common stock purchased by employee deferred compensation trust 2,690 -- -- 2,690 ----------- ----------- ------------ ----------- Total shareholders' equity 916,030 1,236,333 (1,236,333) 916,030 ----------- ----------- ------------ ----------- Total liabilities and shareholders' equity $ 2,075,332 $ 2,682,342 $ (2,427,350) $ 2,330,324 =========== =========== ============ =========== <CAPTION> February 2, 2001 --------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL --------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 =========================================================================== </TABLE> 9
<TABLE> <CAPTION> Quarter to Date ------------------------------------------------------------------ August 3, 2001 ------------------------------------------------------------------ DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL <S> <C> <C> <C> <C> 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 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 taxes on income (1,849) 45,106 -- 43,257 Provisions 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 ======== =========== ========= =========== <CAPTION> Year to Date ------------------------------------------------------------------ August 3, 2001 ------------------------------------------------------------------ DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL <S> <C> <C> <C> <C> 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 68,476 537,271 (77,687) 528,060 -------- ----------- --------- ----------- Operating profit 9,211 115,437 -- 124,648 Interest expense 9,920 13,636 -- 23,556 -------- ----------- --------- ----------- Income before taxes on income (709) 101,801 -- 101,092 Provisions 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 ======== =========== ========= =========== <CAPTION> Quarter to Date ------------------------------------------------------------------ July 28, 2000 ------------------------------------------------------------------ DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL <S> <C> <C> <C> <C> STATEMENTS OF INCOME DATA: Net sales $ 32,951 $ 1,017,418 $ (32,951) $ 1,017,418 Cost of goods sold -- 733,368 -- 733,368 -------- ----------- --------- ----------- Gross profit 32,951 284,050 (32,951) 284,050 Selling, general and administrative 25,372 234,567 (32,951) 226,988 -------- ----------- --------- ----------- Operating profit 7,579 49,483 -- 57,062 Interest expense 6,358 6,374 -- 12,732 -------- ----------- --------- ----------- Income before taxes on income 1,221 43,109 -- 44,330 Provisions for taxes on income 456 16,088 -- 16,544 Equity in subsidiaries' earnings, net 27,021 -- (27,021) -- -------- ----------- --------- ----------- Net income $ 27,786 $ 27,021 $ (27,021) $ 27,786 ======== =========== ========= =========== <CAPTION> Year to Date ------------------------------------------------------------------ July 28, 2000 ------------------------------------------------------------------ DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL <S> <C> <C> <C> <C> STATEMENTS OF INCOME DATA: Net sales $ 74,772 $ 2,014,497 $ (74,772) $ 2,014,497 Cost of goods sold -- 1,461,040 -- 1,461,040 -------- ----------- --------- ----------- Gross profit 74,772 553,457 (74,772) 553,457 Selling, general and administrative 53,388 461,713 (74,772) 440,329 -------- ----------- --------- ----------- Operating profit 21,384 91,744 -- 113,128 Interest expense 9,200 12,795 -- 21,995 -------- ----------- --------- ----------- Income before taxes on income 12,184 78,949 -- 91,133 Provisions for taxes on income 4,547 29,465 -- 34,012 Equity in subsidiaries' earnings, net 49,484 -- (49,484) -- -------- ----------- --------- ----------- Net income $ 57,121 $ 49,484 $ (49,484) $ 57,121 ======== =========== ========= =========== </TABLE> 10
<TABLE> <CAPTION> For the 26 weeks ended ------------------------------------------------------------------------- August 3, 2001 ------------------------------------------------------------------------- DOLLAR GENERAL GUARANTOR CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED TOTAL -------------- ------------ ------------ ------------------ <S> <C> <C> <C> <C> 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 (93) (2,534) -- (2,627) Tax benefits from stock options exercises 4,657 (1) -- 4,656 Change in operating assets and liabilities: Merchandise inventories -- (84,621) -- (84,621) Other current assets (6,777) 18,671 (12,501) (607) Accounts payable (3,073) (11,906) 12,501 (2,478) Accrued expenses and other 7,598 (9,338) -- (1,740) Income taxes 467 (17,913) -- (17,446) Other (58,110) (15,298) 63,777 (9,631) -------- -------- --------- -------- Net cash provided by / (used in) operating activities 15,042 (5,223) -- 9,819 -------- -------- --------- -------- Cash flows from investing activities: Purchases 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) Payment of cash dividends (21,268) -- -- (21,268) Proceeds from exercise of stock options 10,623 -- -- 10,623 Other (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 year 120,643 41,667 162,310 -------- -------- --------- -------- Cash and cash equivalents, end of period $ 38,875 $ 42,755 $ -- $ 81,630 ======== ======== ========= ======== </TABLE> 11
<TABLE> <CAPTION> For the 26 weeks ended ------------------------------------------------------------------------ July 28, 2000 ------------------------------------------------------------------------ DOLLAR GENERAL GUARANTOR CONSOLIDATED CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL -------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> STATEMENTS OF CASH FLOWS DATA: Cash flows from operating activities: Net income $ 57,121 $ 49,484 $ (49,484) $ 57,121 Adjustments to reconcile net income to net cash provided by / (used in) operating activities: Depreciation and amortization 6,577 49,024 -- 55,601 Deferred income taxes (94) (9,755) -- (9,849) Tax benefits from stock options exercises 7,642 -- -- 7,642 Change in operating assets and liabilities: Merchandise inventories -- (68,845) -- (68,845) Other current assets 11,475 98,223 (104,365) 5,333 Accounts payable (151,927) (11,146) 103,006 (60,067) Accrued expenses and other 4,764 (993) -- 3,771 Income taxes 256 (19,620) -- (19,364) Other (53,202) 4,664 49,484 946 -------- ----------- --------- --------- Net cash provided by / (used in) operating activities (117,388) 91,036 (1,359) (27,711) -------- ----------- --------- --------- Cash flows from investing activities: Purchases of property and equipment (12,456) (142,098) 1,359 (153,195) Proceeds from sale of property and equipment 75 97,417 -- 97,492 Issuance of long-term notes receivable (74,772) -- 74,772 -- Contribution of capital (482) -- 482 -- -------- ----------- --------- --------- Net cash used in investing activities (87,635) (44,681) 76,613 (55,703) -------- ----------- --------- --------- Cash flows from financing activities: Issuance of short-term borrowings 181,992 -- -- 181,992 Repayments of short-term borrowings (160,000) -- -- (160,000) Issuance of long-term obligations 199,573 74,772 (74,772) 199,573 Repayments of long-term obligations (612) (103,691) -- (104,303) Payment of cash dividends (18,984) 0 -- (18,984) Proceeds from exercise of stock options 17,024 0 -- 17,024 Repurchase of common stock, net (65,549) 0 -- (65,549) Issuance of common stock, net - 482 (482) -- -------- ----------- --------- --------- Net cash provided by / (used in) financing activities 153,444 (28,437) (75,254) 49,753 -------- ----------- --------- --------- Net increase / (decrease) in cash and cash equivalents (51,579) 17,918 -- (33,661) Cash and cash equivalents, beginning of year 42,688 12,054 -- 54,742 -------- ----------- --------- --------- Cash and cash equivalents, end of period $ (8,891) $ 29,972 $ -- $ 21,081 ======== =========== ========= ========= </TABLE> 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. 12
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 and 1999, which represent fiscal years ending or ended January 31, 2003, February 1, 2002, February 2, 2001 and January 28, 2000, 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. 13
26 Weeks Ended August 3, 2001 and July 28, 2000 Net Sales. Net sales for the 26 weeks ended August 3, 2001 were $2.43 billion as compared against $2.01 billion during the comparable period in the prior year, an increase of 20.5%. The increase resulted primarily from 606 net new stores and a same store sales increase of 7.3%. 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 29.3%, hardware and seasonal 26.0%, basic clothing 8.5%, and basic home products (3.0%). Gross Profit. Gross profit during the current year period was $652.7 million, or 26.9% of sales, versus $553.5 million, or 27.5% of sales, during the comparable period in the prior year, an increase of 17.9%. The reduction in the margin rate as a percentage of sales was due principally to a 14 basis point increase in the shrink provision, an increase in store initiated markdowns, and the continued shift in the Company's sales to lower margin consumable basic items. Selling, General and Administrative Expenses ("SG&A"). SG&A expenses during the current year period were $528.1 million, or 21.8% of sales, versus $440.3 million, or 21.9% of sales, during the comparable period in the prior year, an increase of 19.9%. The increase is attributable to a 12.8% increase in store count as compared to the prior year and to increases in store labor and utilities that were greater than the percentage increase in store count. The Company recorded $9.0 million in expenses, primarily professional fees, in the current year period related to the restatement of certain previously released financial data. Excluding those expenses, SG&A would have been $519.1 million, or 21.4% of sales, an increase of 17.9% over the prior year. Interest Expense. Interest expense was $23.6 million, or 0.9% of sales, in the current year period as compared to $22.0 million, or 1.1% of sales, in the prior 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 period was $63.3 million, or 2.6% of sales, versus $57.1 million, or 2.8% of sales, during the same period in the prior year, an increase of 10.9%. Diluted earnings per share in the period were $0.19 versus $0.17 in the prior year. Excluding $9.0 million in restatement-related expenses, current year earnings per share were $0.21. 14
Thirteen Weeks Ended August 3, 2001 and July 28, 2000 Net Sales. Net sales for the 13 weeks ended August 3, 2001 were $1.23 billion as compared against $1.02 billion during the 13 weeks ended July 28, 2000, an increase of 20.4%. The increase resulted primarily from 606 net new stores and a same store sales increase of 7.8%. 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 26.5%; hardware and seasonal 29.3%; basic clothing 9.0%; and basic home products 0.1%. Gross Profit. Gross profit during the current year period was $331.3 million, or 27.0% of sales, versus $284.1 million, or 27.9% of sales, during the comparable period in the prior year, an increase of 16.6%. The reduction in the margin rate as a percentage of sales was due to a number of factors, including an increase in store initiated markdowns, an increase in transportation expenses due in part to higher fuel costs, a 14 basis point increase in the shrink provision, and the continued shift in the Company's sales to lower margin consumable basic items. Selling, General and Administrative Expenses. SG&A expenses during the current year period were $276.1 million, or 22.5% of sales, versus $227.0 million, or 22.3% of sales, during the comparable period in the prior year, an increase of 21.6%. The increase in SG&A is due principally to the increase in the number of open stores as compared to the prior year, and to $8.7 million in expenses, primarily professional fees, recorded 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 $267.4 million or 21.8% of sales, an increase of 17.8% over the comparable period during the prior year. Interest Expense. Interest expense during the current year period was $12.0 million, or 1.0% of sales, versus $12.7 million, or 1.3% of sales, during the comparable period in the prior year, a decrease of 6.1%. 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 $27.1 million, or 2.2% of sales, versus $27.8 million, or 2.7% of sales, during the comparable period in the prior year, a decrease of 2.5%. Earnings per share were $0.08 in the current year period and $0.08 in the prior year period. During the current year period, the Company recorded $8.7 million in restatement-related expenses. Excluding those expenses, earnings per share in the current year period were $0.10. 15
Liquidity and Capital Resources Cash flows provided by or used in operating activities. Net cash provided by operating activities totaled $9.8 million during the first 26 weeks of 2001, as compared to a $27.7 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 totaled $124.3 million during the current year period. The primary uses of cash in 2001 were an increase in inventories of $84.6 million and a decrease in the income tax payable of $17.4 million. The increase in inventories reflects the net addition of 328 stores and an increase in seasonal inventories. The decrease in the income tax payable reflects the payment of taxes in excess of amounts accrued in the same period. The use of cash during the first 26 weeks of 2000 was due in part to an increase in merchandise inventories of $68.8 million reflecting the net addition of 428 stores. Additionally, the Company experienced a reduction in payables of $60.1 million resulting from the payment in 2000 of bills from the fourth quarter of 1999 on which the company took extended terms. Cash flows provided by or used in investing activities. Net cash used in investing activities during the first 26 weeks of 2001 totaled $73.8 million, as compared to a $55.7 million use of cash during the comparable period in the prior year. The $73.8 million spent in the current year consisted primarily of $26.6 million for new stores and relocations and $34.9 million for various store-related fixtures. The $55.7 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 $28.9 million for new stores and relocations subject to lease agreements, $22.6 million in construction costs relating to company owned stores and $37.7 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 26 weeks of 2001 was $16.7 million. Financing activities during the comparable period in the prior year were a source of funds of $49.8 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 believes that seasonal working capital requirements will continue to be met through cash flow provided by operations supplemented by various short-term borrowing arrangements. 16
Total debt (including current maturities and short-term borrowings) was $743.4 million at August 3, 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 17
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 18
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. 19
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 May 11, 2001, was filed with the SEC in connection with the announcement of April sales results and sales results for the first quarter ending May 4, 2001. (2) A Current Report on Form 8-K, dated June 8, 2001, was filed with the SEC in connection with the announcement of May sales results. (3) A Current Report on Form 8-K, dated July 13, 2001, was filed with the SEC in connection with the announcement of June sales results. 20
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 21