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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549



FORM 10-Q



QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended August 1, 2003


Commission file number 001-11421

DOLLAR GENERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)


TENNESSEE
(State or Other Jurisdiction of
Incorporation or Organization)

61-0502302
(I.R.S. Employer
Identification No.)

100 MISSION RIDGE
GOODLETTSVILLE, TN  37072
(Address of Principal Executive Offices, Zip Code)


Registrant’s telephone number, including area code:  (615) 855-4000



Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]


Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X ] No [  ]


The number of shares of common stock outstanding on August 15, 2003 was 334,702,065.






PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

 
 

(Unaudited)

August 1, 2003

January 31, 2003

ASSETS

  

Current assets:

  

Cash and cash equivalents

$

102,276

$

121,318

Merchandise inventories

1,184,709

1,123,031

Deferred income taxes

22,829

33,860

Other current assets

57,494

45,699

Total current assets

1,367,308

1,323,908

   

Property and equipment, at cost

1,639,164

1,577,823

Less accumulated depreciation and amortization

652,701

584,001

Net property and equipment

986,463

993,822

Other assets, net

11,610

15,423

Total assets

$

2,365,381

$

2,333,153

   

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

  

Current portion of long-term obligations

$

16,957

$

16,209

Accounts payable

352,717

341,303

Accrued expenses and other

255,027

239,898

Income taxes payable

9,182

67,091

Total current liabilities

633,883

664,501

   

Long-term obligations

272,420

330,337

Deferred income taxes

56,933

50,247

Shareholders’ equity:

  

Preferred stock

-

-

Common stock

167,345

166,670

Additional paid-in capital

331,185

313,269

Retained earnings

909,114

812,220

Accumulated other comprehensive loss

(1,266)

(1,349)

 

1,406,378

1,290,810

Less other shareholders’ equity

4,233

2,742

Total shareholders’ equity

1,402,145

1,288,068

Total liabilities and shareholders’ equity

$

2,365,381

$

2,333,153

 

See notes to condensed consolidated financial statements.


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands except per share amounts)

 
 

For the 13 weeks ended

 

August 1, 2003

August 2, 2002

Amount

% of

Net Sales

Amount

% of

Net Sales

Net sales

$

1,651,094

100.00%

$

1,453,727

100.00%

Cost of goods sold

1,178,264

71.36

1,066,300

73.35

Gross profit

472,830

28.64

387,427

26.65

Selling, general and administrative

370,987

22.47

313,667

21.58

Insurance proceeds

-

-

(4,500)

(0.31)

Operating profit

101,843

6.17

78,260

5.38

Interest expense, net

7,899

0.48

11,337

0.78

Income before taxes on income

93,944

5.69

66,923

4.60

Provision for taxes on income

34,008

2.06

24,561

1.69

Net income

$

59,936

3.63%

$

42,362

2.91%

  


 


Diluted earnings per share

$

0.18


$

0.13


Weighted average diluted shares (000s)

336,841


335,737

 

Basic earnings per share

$

0.18


$

0.13

 

Weighted average basic shares (000s)

333,871


333,067

 

Dividends per share

$

0.035

 

$

0.032


  


 


See notes to condensed consolidated financial statements.


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands except per share amounts)

 
 

For the 26 weeks ended

 

August 1, 2003

August 2, 2002

Amount

% of

Net Sales

Amount

% of

Net Sales

Net sales

$

3,220,158

100.00%

$

2,843,139

100.00%

Cost of goods sold

2,295,422

71.28

2,075,420

73.00

Gross profit

924,736

28.72

767,719

27.00

Selling, general and administrative

719,942

22.36

610,971

21.49

Insurance proceeds

                    -

         -

(4,500)

(0.16)

Operating profit

204,794

6.36

161,248

5.67

Interest expense, net

17,310

0.54

21,769

0.77

Income before taxes on income

187,484

5.82

139,479

4.90

Provision for taxes on income

67,216

2.09

51,189

1.80

Net income

$

120,268

3.73%

$

88,290

3.10%

  


 


Diluted earnings per share

$

0.36


$

0.26


Weighted average diluted shares (000s)

335,719


335,286

 

Basic earnings per share

$

0.36


$

0.27

 

Weighted average basic shares (000s)

333,557


332,866

 

Dividends per share

$

0.070

 

$

0.064


  


 


See notes to condensed consolidated financial statements.


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

 
 

For the 26 weeks ended

 

August 1, 2003

August 2, 2002

Cash flows from operating activities:

  

Net income

$

120,268

$

88,290

Adjustments to reconcile net income to net cash provided by operating activities:

  

Depreciation and amortization

74,883

66,019

Deferred income taxes

17,657

87,296

Tax benefit from stock option exercises

3,139

2,120

Litigation settlement

-

     (162,000)

Change in operating assets and liabilities:

 


Merchandise inventories

(61,678)

72,823

Other current assets

(11,795)

(13,675)

Accounts payable

11,414

24,323

Accrued expenses and other

15,930

(11,206)

Income taxes

(57,909)

(59,464)

Other

1,756

(13,914)

Net cash provided by operating activities

113,665

80,612

   

Cash flows from investing activities:

  

Purchase of property and equipment

(65,874)

(70,445)

Purchase of promissory notes (see Note 7)

(49,582)

-

Proceeds from sale of property and equipment

141

127

Net cash used in investing activities

(115,315)

(70,318)

   

Cash flows from financing activities:

 


Net borrowings under revolving credit facilities

-

    170,000

Repayments of long-term obligations

 (7,979)

(389,561)

Payment of cash dividends

(23,374)

(21,307)

Proceeds from exercise of stock options

14,214

4,509

Other financing activities

           (253)

4,057

Net cash used in financing activities

(17,392)

(232,302)

   

Net decrease in cash and cash equivalents

      (19,042)

    (222,008)

Cash and cash equivalents, beginning of period

121,318

261,525

Cash and cash equivalents, end of period

$

102,276

$

39,517

   

Supplemental schedule of noncash investing

  and financing activities:


 

Purchase of property and equipment under

  capital lease obligations

$

427

$

6,233

 

See notes to condensed consolidated financial statements.









DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


1.

Basis of presentation and accounting policies


Basis of presentation

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 January 31, 2003 for additional information.

The accompanying condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices and have not been audited.  In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position and results of operations for the 13-week and 26-week periods ended August 1, 2003 and August 2, 2002 have been made.

Certain prior year amounts have been reclassified to conform to the current period presentation. Ongoing estimates of inventory shrinkage and markdowns are included in the interim cost of goods sold calculation.  Because the Company’s business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

Accounting pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 rescinds both SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and the amendment to SFAS No. 4, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” Generally, under SFAS No. 145, gains and losses from debt extinguishments will no longer be classified as extraordinary items. The Company adopted the provisions of SFAS No. 145 on February 1, 2003 and the adoption of SFAS No. 145 did not have a material effect on the Company’s financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF 94-3 had recognized the liability at the commitment date to an exit plan.  The Company was required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002.  The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position or results of operations .

In November 2002, the EITF reached a consensus on EITF Issue No. 02-16 “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”) which addresses the accounting and income statement classification for consideration given by a vendor to a retailer in connection with the sale of the vendor’s products or for the promotion of sales of the vendor’s products. The EITF concluded that such consideration received from vendors should be reflected as a decrease in prices paid for inventory and recognized in cost of sales as the related inventory is sold, unless specific criteria are met qualifying the consideration for treatment as reimbursement of specific, identifiable incremental costs.  As clarified by the EITF in January 2003, this issue is effective for arrangements with vendors initiated on or after January 1, 200 3. The provisions of this consensus have been applied prospectively and are consistent with the Company’s existing accounting policy. Accordingly, the adoption of EITF 02-16 did not have a material impact on the Company’s financial position or results of operations.

FASB Interpretation No. 46, “Accounting for Variable Interest Entities” (“FIN 46”), expands upon current guidance relating to when a company should include in its financial statements the assets, liabilities and activities of a Variable Interest Entity (“VIE”). The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The consolidation requirements apply for “older” VIEs in the first fiscal year or interim period beginning after June 15, 2003, which would apply for the Company beginning in the third quarter of 2003.  The Company leases four of its distribution centers (“DCs”) from lessors, which meet the definition of VIEs.  Two of these DCs have been recorded as financing obligations whereby the property and equipment, along with the related lease obligations, are reflected in the accompanying cond ensed consolidated balance sheets.  The other two DCs, excluding the equipment, have been recorded as operating leases in accordance with SFAS No. 98, “Accounting for Leases.”  The Company adopted the provisions of FIN 46 on August 2, 2003 and the adoption of FIN 46 did not have a material effect on the Company’s financial position or results of operations.

2.

Comprehensive income

Comprehensive income consists of the following (in thousands):

 

13 Weeks Ended

August 1, 2003

August 2, 2002

Net income

       $     59,936

$     42,362

Net change in derivative financial instruments

                    46

            665

Comprehensive income

        $    59,982

$     43,027

   


 

26 Weeks Ended

August 1, 2003

August 2, 2002

Net income

     $   120,268

           $     88,290

Net change in derivative financial instruments

                   83

           1,216

Comprehensive income

     $   120,351

           $     89,506

   








3.

Earnings per share


The amounts reflected below are in thousands except per share data.

 

13 Weeks Ended August 1, 2003

Net Income

Shares

Per Share Amount

Basic earnings per share

$59,936

     333,871

    $0.18

Effect of dilutive stock options

      2,970

Diluted earnings per share

$59,936

     336,841

    $0.18

    


 

13 Weeks Ended August 2, 2002

Net Income

Shares

Per Share Amount

Basic earnings per share

$42,362

     333,067

$0.13

Effect of dilutive stock options

         2,670

Diluted earnings per share

$42,362

     335,737

$0.13

    


 

26 Weeks Ended August 1, 2003

Net Income

Shares

Per Share Amount

Basic earnings per share

$120,268

      333,557

$0.36

Effect of dilutive stock options

          2,162

Diluted earnings per share

$120,268

      335,719

$0.36

    


 

26 Weeks Ended August 2, 2002

Net Income

Shares

Per Share Amount

Basic earnings per share

$88,290

       332,866

$0.27

Effect of dilutive stock options

           2,420

Diluted earnings per share

$88,290

       335,286

$0.26

    

Basic earnings per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share was determined based on the dilutive effect of stock options using the treasury stock method.


4.

Commitments and contingencies


Legal proceedings

Restatement-Related Proceedings. As previously disclosed in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), the Company restated its audited financial statements for fiscal years 1999 and 1998, and certain unaudited financial information for fiscal year 2000, by means of its Form 10-K for the fiscal year ended February 2, 2001, which was filed on January 14, 2002. The SEC is conducting an investigation into the circumstances giving rise to the restatement. The Company is cooperating with this investigation by providing documents, testimony and other information to the SEC. At this time, the Company is unable to predict the outcome of this investigation and the ultimate effects on the Company, if any.

In addition, as previously discussed in the Company’s periodic reports filed with the SEC, the Company settled in the second quarter of 2002 the lead shareholder derivative action relating to the restatement that had been filed in Tennessee State Court.  All other pending state and federal derivative cases were subsequently dismissed during the third quarter of fiscal 2002. The settlement of the shareholder derivative lawsuits resulted in a net payment to the Company, after attorney’s fees payable to the plaintiffs’ counsel, of approximately $25.2 million, which was recorded as income during the third quarter of 2002. The Company also settled the federal consolidated restatement-related class action lawsuit in the second quarter of fiscal 2002. The $162 million settlement was paid in the first half of fiscal 2002, but was previously expensed in the fourth quarter of 2000. The Co mpany received from its insurers $4.5 million in respect of such settlement in July 2002, which was recorded as income during the second quarter of 2002.

Plaintiffs representing fewer than 1% of the shares traded during the class period chose to opt out of the federal class action settlement and may elect to pursue recovery against the Company individually. In the fourth quarter of 2002, the Company settled and paid a claim by one such plaintiff and recognized an expense of $0.2 million in respect of that agreement. To the Company’s knowledge, no other litigation has yet been filed or threatened by parties who opted out of the class action settlement. The Company cannot predict whether any additional litigation will be filed or estimate the potential liabilities associated with such litigation, but it does not believe that the resolution of any such litigation will have a material adverse effect on the Company’s financial position or results of operations.

Other Litigation.  On March 14, 2002, a complaint was filed in the United States District Court for the Northern District of Alabama to commence a purported collective action against the Company on behalf of current and former salaried store managers.  The complaint alleges that these individuals were entitled to overtime pay and should not have been classified as exempt employees under the Fair Labor Standards Act (“FLSA”).  Plaintiffs seek to recover overtime pay, liquidated damages, declaratory relief and attorneys’ fees.  This action is still in the initial discovery phase and the court has not found that the case should proceed as a collective action.  The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the action is not appropriate for collective action treatment.  Th e Company intends to vigorously defend the action.  However, no assurances can be given that the Company will be successful in defending this action on the merits or otherwise, and, if not, the resolution could have a material adverse effect on the Company’s financial position or results of operations.

The Company is involved in other legal actions and claims arising in the ordinary course of business.  The Company currently believes that such litigation and claims, both individually and in the aggregate, will be resolved without a material effect on the Company’s financial position or results of operations.  However, litigation involves an element of uncertainty.  Future developments could cause these actions or claims to have a material adverse effect on the Company’s financial position or results of operations.

Other matters

The Internal Revenue Service (“IRS”) is currently conducting a normal examination of the Company’s 1998 and 1999 federal income tax returns.  The results of the examination, and any other issues discussed with the IRS in the course of the examination, may result in changes to the Company’s future tax liability.

5.

Stock-based compensation


The Company has a shareholder-approved stock incentive plan under which stock options, restricted stock and other equity-based awards may be granted to officers, directors and key employees. Stock options currently are granted under this plan at the market price on the grant date and generally vest ratably over a four-year period. A 500,000 share grant under this plan to the Company’s Chief Executive Officer (“CEO”) in the first quarter of 2003, however, vests at a rate of 333,333 shares on the first anniversary, and 166,667 shares on the second anniversary, of the grant date. All stock options granted under this plan have a ten-year life.  Options granted prior to 2002 either pursuant to this plan or pursuant to other shareholder-approved stock incentive plans from which the Company no longer grants awards are subject to Company performance-based vesting, time-based vesting or a combination thereof, a nd have a ten-year life. In addition, prior to June 2003, the plan provided for automatic annual stock option grants to non-employee directors pursuant to a non-discretionary formula. Those stock options vest one year after the grant date and have a ten-year life.


The stock incentive plan was amended effective June 2, 2003 to provide for the automatic annual grant of 4,600 restricted stock units to each non-employee director (6,000 restricted stock units to any non-employee director serving as Chairman) in lieu of the automatic annual stock option grants. These units vest one year after the grant date, but no payout (in either cash or shares of common stock) shall be made until the director has ceased to be a member of the Board of Directors.

The terms of this plan limit the number of shares of restricted stock eligible for issuance thereunder to a maximum of 4 million shares. At August 1, 2003, 3,868,135 shares of restricted stock were available for grant under this plan.


In addition, as previously disclosed in the Company’s Form 10-Q for the quarter ended May 2, 2003, the Company granted stock options and restricted stock to its CEO in transactions that were not made under the stock incentive plan.

The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations because the Company believes the alternative fair value accounting provided for under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” requires the use of option valuation models that were not developed for use in valuing employee stock options.  Under APB No. 25, compensation expense is generally not recognized for plans in which the exercise price of the stock options equals the market price of the underlying stock on the date of grant and the number of shares subject to exercise is fixed. Had compensation cost for the Company’s stock - -based compensation plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table:

 

13 Weeks Ended

(Amounts in thousands except per share data)

August 1, 2003

August 2, 2002

Net income – as reported

$    59,936

$

42,362

Less pro forma effect of stock option grants

        1,111

4,105

Net income – pro forma

$    58,825

$

38,257

   

Earnings per share – as reported

  

Basic

$

0.18

$

0.13

Diluted

$

0.18

$

0.13

Earnings per share – pro forma

  

Basic

$

0.18

$

0.11

Diluted

      $

0.17

     $

0.11

   


 

26 Weeks Ended

(Amounts in thousands except per share data)

August 1, 2003

August 2, 2002

Net income – as reported

$   120,268

$

88,290

Less pro forma effect of stock option grants

         3,813

9,066

Net income – pro forma

$   116,455

$

79,224

   

Earnings per share – as reported

  

Basic

$

   0.36

$

0.27

Diluted

$

   0.36

$

0.26

Earnings per share – pro forma

  

Basic

$

   0.35

$

0.24

Diluted

$

   0.35

$

0.24

   


The pro forma effects on net income for the 13 weeks and 26 weeks ended August 1, 2003 and August 2, 2002 are not representative of the pro forma effect on net income in future periods because they do not take into consideration pro forma compensation expense related to grants made prior to 1995.

The fair value of options granted during the second quarter of 2003 and 2002 was $5.46 and $7.24 per share, respectively.  The fair value of options granted during the first half of 2003 and 2002 was $3.09 and $4.86 per share, respectively.  The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

13 Weeks Ended

 

August 1, 2003

August 2, 2002

Expected dividend yield

0.9%

0.8%

Expected stock price volatility

37.1%

35.4%

Weighted average risk-free interest rate

2.1%

5.4%

Expected life of options (years)

  4.0

7.0

 



 

26 Weeks Ended

 

August 1, 2003

August 2, 2002

Expected dividend yield

0.9%

0.8%

Expected stock price volatility

35.0%

38.9%

Weighted average risk-free interest rate

1.8%

2.8%

Expected life of options (years)

  2.9

3.7


The Black-Scholes option model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.


6.

Segment reporting


The Company manages its business on the basis of one reportable segment. As of August 1, 2003 and August 2, 2002, all of the Company’s operations were located within the United States.  The following data is presented in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”


13 Weeks Ended

(In thousands)

August 1, 2003

August 2, 2002

Classes of similar products:

  

Net sales:

  

Highly consumable

$1,027,854

$   892,507

Seasonal

     263,468

    226,328

Home products

     207,707

    188,272

Basic clothing

     152,065

    146,620

 

$1,651,094

$1,453,727

   
 

26 Weeks Ended

(In thousands)

August 1, 2003

August 2, 2002

Classes of similar products:

  

Net sales:

  

Highly consumable

$2,017,884

$1,743,744

Seasonal

    500,587

     431,091

Home products

    407,176

     379,383

Basic clothing

    294,511

     288,921

 

$3,220,158

$2,843,139

   

7.

Long-term obligations and related promissory notes


In May 2003, the Company purchased two secured promissory notes (the “Notes”) from Principal Life Insurance Company totaling $49.6 million. These Notes represent debt issued by a third party entity from which the Company leases its DC in South Boston, Virginia. This existing lease is recorded as a financing obligation in the accompanying condensed consolidated financial statements. By acquiring these Notes, the Company is holding the debt instruments pertaining to its lease-financing obligation and, because a legal right of offset exists, has reflected the acquired Notes as a reduction of its outstanding financing obligations in its consolidated financial statements.  There was no gain or loss recognized as a result of this transaction.


8.

Guarantor subsidiaries


All of the Company’s subsidiaries, except for one subsidiary whose assets and revenues are not material (the “Guarantors”), have fully and unconditionally guaranteed on a joint and several basis the Company’s obligations under certain outstanding debt obligations.  Each of the Guarantors is a direct or indirect wholly owned subsidiary of the Company. In order to participate as a subsidiary guarantor on certain of the Company’s financing arrangements, a subsidiary of the Company has entered into a letter agreement with certain state regulatory agencies to maintain stockholders’ equity of at least $50 million in excess of the Company’s debt it has guaranteed  ($550 million as of August 1, 2003).

The following consolidating schedules present condensed financial information on a combined basis. Dollar amounts are in thousands.


 

As of

August 1, 2003

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

 ELIMINATIONS

CONSOLIDATED
TOTAL

BALANCE SHEETS:

    

ASSETS

    

Current assets:

    

Cash and cash equivalents

$

54,393

$

47,883

      $               -

$

102,276

Merchandise inventories

-

1,184,709

                       -

1,184,709

Deferred income taxes

11,119

11,710

                       -

22,829

Other current assets

17,507

1,535,057

(1,495,070)

57,494

Total current assets

83,019

2,779,359

(1,495,070)

 1,367,308

     

Property and equipment, at cost

174,213

1,464,951

                       -

1,639,164

Less accumulated depreciation
and amortization

73,267

579,434

                       -

652,701

Net property and equipment

100,946

885,517

                       -

986,463

     

Other assets, net

2,980,884

40,864

(3,010,138)

11,610

     

Total assets

$

3,164,849

$

3,705,740

      $(4,505,208)

$

2,365,381

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term obligations

$

8,525

$

8,432

     $                -

$

16,957

Accounts payable

1,530,556

317,231

(1,495,070)

352,717

Accrued expenses and other

24,250

230,777

                       -

255,027

Income taxes payable

-

9,182

                       -

9,182

Total current liabilities

1,563,331

565,622

(1,495,070)

633,883

     

Long-term obligations

196,987

1,011,197

  (935,764)

272,420

Deferred income taxes

2,386

54,547

                       -

56,933

     

Shareholders’ equity:

    

Preferred stock

-

-

                       -

-

Common stock

167,345

23,853

   (23,853)

167,345

Additional paid-in capital

331,185

1,247,290

       (1,247,290)

331,185

Retained earnings

909,114

803,231

(803,231)

909,114

Accumulated other comprehensive loss

(1,266)

-

                       -

(1,266)

 

1,406,378

2,074,374

       (2,074,374)

1,406,378

Less other shareholders’ equity

4,233

-

                       -

4,233

Total shareholders’ equity

1,402,145

2,074,374

       (2,074,374)

1,402,145

     

Total liabilities and shareholders’ equity

$

3,164,849

$

3,705,740

     $ (4,505,208)

$

2,365,381

     


 

As of

January 31, 2003

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

 ELIMINATIONS

CONSOLIDATED
TOTAL

BALANCE SHEETS:

    

ASSETS

    

Current assets:

    

Cash and cash equivalents

$

72,799

$

48,519

$

-

$

121,318

Merchandise inventories

-

1,123,031

-

1,123,031

Deferred income taxes

8,937

24,923

-

33,860

Other current assets

19,004

1,328,417

  (1,301,722)

45,699

Total current assets

100,740

2,524,890

(1,301,722)

 1,323,908

     

Property and equipment, at cost

169,551

1,408,272

-

1,577,823

Less accumulated depreciation
and amortization

65,677

518,324

-

584,001

Net property and equipment

103,874

889,948

-

993,822

     

Other assets, net

2,786,977

38,949

(2,810,503)

15,423

     

Total assets

$

2,991,591

$

3,453,787

$

(4,112,225)

$

2,333,153

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term obligations

$

8,202

$

8,007

$

-

$

16,209

Accounts payable

1,412,008

230,273

(1,300,978)

341,303

Accrued expenses and other

32,642

208,000

(744)

239,898

Income taxes payable

-

67,091

-

67,091

Total current liabilities

1,452,852

513,371

(1,301,722)

664,501

     

Long-term obligations

249,748

937,473

(856,884)

330,337

Deferred income taxes

923

49,324

-

50,247

     

Shareholders’ equity:

    

Preferred stock

-

-

-

-

Common stock

166,670

23,853

(23,853)

166,670

Additional paid-in capital

313,269

1,247,279

(1,247,279)

313,269

Retained earnings

812,220

682,487

(682,487)

812,220

Accumulated other comprehensive loss

(1,349)

-

-

(1,349)

 

1,290,810

1,953,619

(1,953,619)

1,290,810

Less other shareholders’ equity

2,742

-

-

2,742

Total shareholders’ equity

1,288,068

1,953,619

(1,953,619)

1,288,068

     

Total liabilities and shareholders’ equity

$

2,991,591

$

3,453,787

$

(4,112,225)

$

2,333,153

     


 

For the 13 weeks ended

August 1, 2003

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

40,656

$

1,651,094

$

(40,656)

$

1,651,094

Cost of goods sold

-

1,178,264

-

1,178,264

Gross profit

40,656

472,830

(40,656)

472,830

Selling, general and administrative

32,038

379,605

(40,656)

370,987

Operating profit

8,618

93,225

-

101,843

Interest expense, net

6,135

1,764

-

7,899

Income before taxes on income

2,483

91,461

-

93,944

Provision for taxes on income

878

33,130

-

34,008

Equity in subsidiaries’ earnings, net of taxes

58,331

-

(58,331)

-

Net income

$

59,936

$

58,331

$

(58,331)

$

59,936

     


 

For the 13 weeks ended

August 2, 2002

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

15,399

$

1,453,727

$

(15,399)

$

1,453,727

Cost of goods sold

-

1,066,300

-

1,066,300

Gross profit

15,399

387,427

(15,399)

387,427

Selling, general and administrative

                    16,560

312,506

(15,399)

313,667

Insurance proceeds

(4,500)

-

-

(4,500)

Operating profit

                  3,339

74,921

-

78,260

Interest expense, net

7,546

3,791

-

11,337

Income (loss) before taxes on income

(4,207)

71,130

-

66,923

Provision (benefit) for taxes on income

(1,637)

26,198

-

24,561

Equity in subsidiaries’ earnings, net of taxes

44,932

-

(44,932)

-

Net income

$

42,362

$

44,932

$

(44,932)

$

42,362

     









 

For the 26 weeks ended

August 1, 2003

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

77,581

$

3,220,158

$

(77,581)

$

3,220,158

Cost of goods sold

-

2,295,422

-

2,295,422

Gross profit

77,581

924,736

(77,581)

924,736

Selling, general and administrative

65,328

732,195

(77,581)

719,942

Operating profit

12,253

192,541

-

204,794

Interest expense, net

13,061

4,249

-

17,310

Income (loss) before taxes on income

(808)

188,292

-

187,484

Provision (benefit) for taxes on income

(332)

67,548

-

67,216

Equity in subsidiaries’ earnings, net of taxes

120,744

-

(120,744)

-

Net income

$

120,268

$

120,744

$

(120,744)

$

120,268

     


 

For the 26 weeks ended

August 2, 2002

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

61,851

$

2,843,139

$

(61,851)

$

2,843,139

Cost of goods sold

-

2,075,420

-

2,075,420

Gross profit

61,851

767,719

(61,851)

767,719

Selling, general and administrative

                    58,121

614,701

(61,851)

610,971

Insurance proceeds

(4,500)

-

-

(4,500)

Operating profit

                  8,230

153,018

-

161,248

Interest expense, net

11,550

10,219

-

21,769

Income (loss) before taxes on income

(3,320)

142,799

-

139,479

Provision (benefit) for taxes on income

(1,289)

52,478

-

51,189

Equity in subsidiaries’ earnings, net of taxes

90,321

-

(90,321)

-

Net income

$

88,290

$

90,321

$

(90,321)

$

88,290

     



 

For the 26 weeks ended

August 1, 2003

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF CASH FLOWS:

    

Cash flows from operating activities:

    

Net income

$

120,268

$

120,744

$

(120,744)

$

120,268

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

10,268

64,615

-

74,883

Deferred income taxes

(779)

18,436

-

17,657

Tax benefit from stock option exercises

3,139

-

-

3,139

Equity in subsidiaries’ earnings, net

(120,744)

-

120,744

-

Change in operating assets and liabilities:

    

Merchandise inventories

-

(61,678)

-

(61,678)

Other current assets

(1,760)

(204,313)

194,278

(11,795)

Accounts payable

118,548

86,958

(194,092)

11,414

Accrued expenses and other

(8,392)

23,578

744

15,930

Income taxes

2,327

(60,236)

-

(57,909)

Other

3,079

(393)

(930)

1,756

Net cash provided by (used in) operating activities

125,954

(12,289)

-

113,665

     

Cash flows from investing activities:

    

Purchase of property and equipment

(4,809)

(61,065)

-

(65,874)

Purchase of promissory notes

(49,582)

-

-

(49,582)

Proceeds from sale of property and equipment

11

130

-

141

Issuance of long-term notes receivable

(77,736)

(1,144)

78,880

-

Contribution of capital

(10)

-

10

-

Net cash used in investing activities

(132,126)

(62,079)

78,890

(115,315)

     

Cash flows from financing activities:

    

Issuance of long-term obligations

1,144

77,736

(78,880)

-

Repayments of long-term obligations

(4,022)

(3,957)

-

(7,979)

Payment of cash dividends

(23,374)

-

-

(23,374)

Proceeds from exercise of stock options

14,214

-

-

14,214

Other financing activities

(196)

(57)

-

(253)

Issuance of common stock, net

-

10

(10)

-

Net cash provided by (used in) financing activities

(12,234)

73,732

(78,890)

(17,392)

     

Net decrease in cash and cash equivalents

(18,406)

(636)

-

(19,042)

Cash and cash equivalents, beginning of period

72,799

48,519

-

121,318

Cash and cash equivalents, end of period

$

54,393

$

47,883

$

-

$

102,276

     


 

For the 26 weeks ended

August 2, 2002

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF CASH FLOWS:

    

Cash flows from operating activities:

    

Net income

$

88,290

$

90,321

$

(90,321)

$

88,290

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

7,987

58,032

-

66,019

Deferred income taxes

62,558

24,738

-

87,296

Tax benefit from stock option exercises

2,120

-

-

2,120

Equity in subsidiaries’ earnings, net

(90,321)

-

90,321

-

Litigation settlement

(162,000)

-

-

(162,000)

Change in operating assets and liabilities:





Merchandise inventories

-

72,823

-

72,823

Other current assets

(9,166)

(131,100)

126,591

(13,675)

Accounts payable

276,945

(126,031)

(126,591)

24,323

Accrued expenses and other

(19,822)

8,616

-

(11,206)

Income taxes

(68,080)

8,616

-

(59,464)

Other

(10,802)

(3,112)

-

(13,914)

Net cash provided by operating activities

77,709

2,903

-

80,612

 




 

Cash flows from investing activities:


   

Purchase of property and equipment

(6,390)

(64,055)

-

(70,445)

Proceeds from sale of property and equipment

41

86

-

127

Issuance of long-term notes receivable

(61,851)

-

61,851

-

Contribution of capital

(317,602)

-

317,602

-

Net cash used in investing activities

(385,802)

(63,969)

379,453

(70,318)

 




 

Cash flows from financing activities:





Issuance of long-term obligations

170,000

61,851

(61,851)

170,000

Repayments of long-term obligations

(69,316)

(320,245)

-

(389,561)

Payment of cash dividends

(21,307)

-

-

(21,307)

Proceeds from exercise of stock options

4,509

-

-

4,509

Other financing activities

4,057

-

-

4,057

Issuance of common stock, net

-

317,602

(317,602)

-

Net cash provided by (used in) financing activities

87,943

59,208

(379,453)

(232,302)

 




 

Net decrease in cash and cash equivalents

(220,150)

(1,858)

-

(222,008)

Cash and cash equivalents, beginning of period

217,539

43,986

-

261,525

Cash and cash equivalents, end of period

$

(2,611)

$

42,128

$

-

$

39,517

     


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following text contains references to years 2003, 2002 and 2001, which represent fiscal years of Dollar General Corporation (the “Company”) ending or ended, as applicable, January 30, 2004, January 31, 2003 and February 1, 2002, respectively.  This discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and the notes thereto as of August 1, 2003.

Forward-Looking Statements

Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations or statements of future economic performance. These, and similar statements, are forward-looking statements concerning matters that involve risks, uncertainties and other factors which may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “will likely result,” or “will continue 8; and similar expressions generally identify forward-looking statements. 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.  The factors that may result in actual results differing from such forward-looking information include, but are not limited to:  the Company’s ability to maintain adequate liquidity through its cash resources and credit facilities; the Company’s ability to comply with the terms of its credit facilities (or obtain waivers for non-compliance); transportation and distribution delays or interruptions; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; changes in product mix; interruptions in suppliers' businesses; costs and potential problems and interruptions associated wit h implementation of new or upgraded systems and technology; fuel price and interest rate fluctuations; a deterioration in general economic conditions caused by acts of war or terrorism; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening and operating new stores; the impact of the Securities and Exchange Commission (“SEC”) inquiry related to the restatement of certain of the Company’s financial statements further described in Part II, Item 1 of this Form 10-Q; and other factors described from time to time in the Company’s filings with the SEC, press releases and other communications.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any further disclosures the Company may make on related subjects in its public disclosures or Forms 10-Q, 8-K and 10-K filed with the SEC.

Critical Accounting Policies

Merchandise inventories. Merchandise inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out (“LIFO”) method.  Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories.  RIM is an averaging method that has been widely used in the retail industry due to its practicality.  Also, it is recognized that the use of the RIM will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories.

Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, initial markups, markdowns, and shrinkage, which significantly impact the ending inventory valuation at cost as well as resulting gross margins.  These significant estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted or inaccurate cost figures.  Factors that can lead to distortion in the calculation of the inventory balance include:

applying the RIM to a group of products that is not fairly uniform in terms of its cost and selling price relationship and turnover

applying RIM to transactions over a period of time that include different rates of gross profit, such as those relating to seasonal merchandise

inaccurate estimates of inventory shrinkage between the date of the last physical inventory at a store and the financial statement date

inaccurate estimates of LIFO reserves

To reduce the potential of such distortions in the valuation of inventory from occurring, the Company’s RIM utilizes 10 departments in which fairly homogenous classes of merchandise inventories having similar gross margins are grouped.  The Company estimates its shrink provision based on historical experience and utilizes an outside statistician to assist in the LIFO sampling process and index formulation.  On a periodic basis, the Company reviews and evaluates its inventory and records an adjustment, if necessary, to reflect its inventory at the lower of cost or market.

The Company calculates its shrink provision based on actual physical inventory results during the fiscal year and an accrual for estimated shrink occurring subsequent to a physical inventory through the current fiscal reporting period.  This accrual is calculated as a percentage of sales and is determined by dividing the sum of all book-to-physical inventory adjustments recorded during the previous twelve months by the related sales for the same period.  To the extent that subsequent physical inventories yield different results than this estimated accrual, the Company’s shrink rate for a given reporting period will include the impact of adjusting the estimated results to the actual results.  

As previously discussed, the Company has been collecting SKU level inventory information at each of its stores in connection with its establishment of an item-based perpetual inventory system for financial reporting purposes.  In conjunction with the completion of this undertaking, in an effort to improve inventory valuation and cost of goods sold estimates, the Company will be refining estimates of its retail ownership mix and expanding the number of departments it utilizes for its gross margin calculations.  The Company has not established a date for these changes, which may result in an inventory adjustment and may also impact the RIM calculation results in the year of adoption and in subsequent years.  The impact of such changes on the Company’s future Consolidated Financial Statements cannot currently be estimated.

The implementation of the item-based perpetual inventory system in 2002 has improved our ability to identify items where we are carrying more inventory than our sales information would suggest is necessary.  The Company evaluates such information on an ongoing basis and takes periodic markdowns to ensure the salability of our inventory.

Management believes that the Company’s RIM provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market.

Property and Equipment.  Property and equipment are recorded at cost. The Company provides for depreciation on a straight-line basis over the estimated useful lives of the assets. The valuation and classification of these assets and the assignment of useful depreciable lives involves significant judgments and the use of estimates. Property and equipment are reviewed for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Self-Insurance Liability.  The Company retains a significant portion of the risk for its workers’ compensation, employee health insurance, general liability, property loss and automobile coverage. These costs are significant primarily due to the large employee base and number of stores. Provisions are made to this insurance liability on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed by outside actuaries utilizing historical claim trends.   If future claim trends deviate from recent historical patterns, the Company may be required to record additional expense or expense reductions which could be material to the Company’s results of operations.

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, the seasonal nature of the Company’s business may affect comparisons between periods.

The Company has included in this document certain financial information not derived in accordance with generally accepted accounting principles (“GAAP”), such as selling, general and administrative (“SG&A”) expenses, net income and earnings per share that exclude the impact of restatement-related items. The Company believes that this information is useful to investors as it indicates more clearly the Company’s comparative year-to-year operating results. This information should not be considered a substitute for any measures derived in accordance with GAAP.   The Compensation Committee of the Company’s Board of Directors may use portions of this information for compensation purposes to ensure that employees are not inappropriately penalized or rewarded as a result of unusual items affecting the Company’s financial statements.  Management also may use this information to better understand the Company’s underlying operating results. A reconciliation of this information to the most comparable GAAP measures has been included in the table at the end of this section.

13 WEEKS ENDED AUGUST 1, 2003 AND AUGUST 2, 2002

Net Sales.  Net sales for the 13 weeks ended August 1, 2003 were $1.65 billion as compared against $1.45 billion during the 13 weeks ended August 2, 2002, an increase of 13.6%.  The increase resulted primarily from 588 net new stores and a same store sales increase of 4.7%.  Same store sales increases are calculated based on the comparable calendar weeks in the prior year and include only those stores that were open both at the end of a fiscal period and the beginning of the preceding fiscal year.  The same store sales increase is primarily a result of strong sales of food, health and beauty aids and seasonal items.  Net sales increases by category were as follows:  highly consumable 15.2%; seasonal 16.4%; home products 10.3%; and basic clothing 3.7%.  

Gross Profit.  Gross profit during the current year period was $472.8 million, or 28.6% of sales, versus $387.4 million, or 26.7% of sales, during the comparable period in the prior year, an increase of 22.0%.  The increase in the gross margin rate as a percentage of sales is primarily attributable to an increase in the average mark-up on inventory purchases in all four of the Company’s merchandising categories.  Factors contributing to the increase in the purchase mark-up include increased purchases of high margin seasonal and basic home products, a 111% increase in import purchases compared with last year which carry higher than average mark-ups and increases in various performance based vendor rebates.  Other issues impacting the year over year comparison in the gross margin rate include a reduction in our shrink provision from 3.61% to 3.05% and a reduction in da maged product markdowns, partially offset by a $4.7 million charge to maintain the Company’s inventory value at the lower of cost or market.    

Selling, General and Administrative (“SG&A”).  SG&A expenses during the current year period were $371.0 million, or 22.5% of sales, versus $313.7 million, or 21.6% of sales, during the comparable period in the prior year, an increase of 18.3%.  The increase in SG&A expenses as a rate of sales as compared to the prior year is due principally to increases in workers compensation and general liability costs, costs related to the departures of both our former President and our Senior Vice President of Human Development and Planning, increases in store occupancy and utility costs and an increase in our accrual for bonuses due to our strong performance in the first half of this year.  

Insurance Proceeds.  The Company recorded $4.5 million in insurance proceeds during the prior year period relating to the settlement of certain class action litigation.  See Note 4 to the Company’s condensed consolidated financial statements as of August 1, 2003.  


Interest Expense, Net.  Net interest expense in the current year period was $7.9 million, or 0.5% of sales, as compared to $11.3 million, or 0.8% of sales, in the prior year period, a decrease of 30.3%.  The reduction in net interest expense is primarily attributable to lower average debt outstanding in the current year period.  The Company had $289.4 million in debt outstanding at August 1, 2003 as compared to $521.8 million in debt outstanding at August 2, 2002.


Provision for Taxes on Income.  The Company’s effective tax rate was 36.2% in the current year period and 36.7% in the prior year period.  The reduction in the effective tax rate in the current year period is primarily a result of a reduction of prior years’ estimated tax return liabilities and an increase in targeted jobs tax credits in the current year period.  


Net Income.  Net income during the current year period was $59.9 million, or 3.6% of sales, versus $42.4 million, or 2.9% of sales, during the comparable period in the prior year, an increase of 41.5%.  Diluted earnings per share in the current year period were $0.18 versus $0.13 in the prior year period. Excluding restatement-related items and the insurance proceeds noted above, diluted earnings per share were $0.18 in the current year period versus $0.12 in the prior year period.


 26 WEEKS ENDED AUGUST 1, 2003 AND AUGUST 2, 2002


Net Sales.  Net sales for the 26 weeks ended August 1, 2003 were $3.22 billion as compared against $2.84 billion during the comparable period in the prior year, an increase of 13.3%.  The increase resulted primarily from 588 net new stores and a same store sales increase of 4.5%.  Same store sales increases are calculated based on the comparable calendar weeks in the prior year, and include only those stores that were open both at the end of a fiscal period and at the beginning of the preceding fiscal year.  The same store sales increase is primarily a result of strong sales of food, health and beauty aids and seasonal items.  Net sales increases by category were as follows:  highly consumable 15.7%; seasonal 16.1%; home products 7.3%; and basic clothing 1.9%.


Gross Profit.  Gross profit during the current year period was $924.7 million, or 28.7% of sales, versus $767.7 million, or 27.0% of sales, during the comparable period in the prior year, an increase of 20.5%.  The increase in the gross margin rate as a percentage of sales was due principally to a higher mark-up percentage on the Company’s inventory purchases than that experienced during the comparable period in the prior year.  Factors contributing to the increase in the purchase mark-up include increased purchases of high margin seasonal and basic home products, a 79% increase in import purchases compared with last year which carry higher than average mark-ups and increases in various performance based vendor rebates. Other factors contributing to the increase in the gross margin rate include a reduction in our shrinkage provision from 3.34% in the prior year to 3.07% in the current year and a reduction in damaged product markdowns.  


Selling, General and Administrative.  SG&A expenses during the current year period were $719.9 million, or 22.4% of sales, versus $611.0 million, or 21.5% of sales, during the comparable period in the prior year, an increase of 17.8%.  The Company recorded $0.4 million and $4.6 million in net expenses, primarily professional fees, in the current and prior year period, respectively, related to the restatement of certain previously released financial data. Excluding restatement-related items, SG&A expenses would have been $719.6 million, or 22.3% of sales, in the current year versus $606.3 million, or 21.3% of sales, in the prior year, an increase of 18.7%.  


The increase in SG&A expenses as a rate of sales as compared to the prior year is primarily attributable to increases in store labor, workers compensation and general liability costs, store occupancy and store utility costs that were greater than the increase in sales.  


Insurance Proceeds.  The Company recorded $4.5 million in insurance proceeds during the prior year period relating to the settlement of certain class action litigation.  See Note 4 to the Company’s condensed consolidated financial statements as of August 1, 2003.  


Interest Expense, Net. Net interest expense was $17.3 million, or 0.5% of sales, in the current year period as compared to $21.8 million, or 0.8% of sales, in the prior year period, a decrease of 20.5%. The decrease is primarily attributable to lower average debt outstanding in the current year period.  The Company had $289.4 million in debt outstanding at August 1, 2003 as compared to $521.8 million in debt outstanding at August 2, 2002.


Provision for Taxes on Income.  The Company’s effective tax rate was 35.9% in the current year period and 36.7% in the prior year period.  The reduction in the effective tax rate in the current year is a result of a $0.8 million adjustment to our state income tax valuation reserves related to a change in tax laws in the state of Mississippi, a reduction of prior years’ estimated tax return liabilities and an increase in targeted jobs tax credits in the current year period.  


Net Income.  Net income during the current year period was $120.3 million, or 3.7% of sales, versus $88.3 million, or 3.1% of sales, during the comparable period in the prior year, an increase of 36.2%.  Diluted earnings per share in the current year period were $0.36 versus $0.26 in the prior year.  Excluding restatement-related items and the insurance proceeds noted above, current year diluted earnings per share were $0.36 versus $0.26 in the prior year.  


Reconciliation of Non-GAAP Disclosures

(in thousands, except per share amounts)

 

For the 13 weeks ended

For the 26 weeks ended

 

August 1, 2003

August 2, 2002

August 1, 2003

August 2, 2002

Net income in accordance with GAAP

$

59,936

$

42,362

$

120,268

$

88,290

Restatement-related items in SG&A

39

(695)

369

4,623

Insurance proceeds

-

(4,500)

-

(4,500)

Total restatement-related items

39

(5,195)

369

123

Tax effect

(14)

1,907

(133)

(45)

Total restatement-related items,

net of tax

25

(3,288)

236

78

     

Net income, excluding restatement-

related items

$

59,961

$

39,074

$

120,504

$

88,368

     

Weighted average diluted shares

outstanding

336,841

335,737

335,719

335,286

     

Diluted earnings per share,

excluding restatement-related items

$

0.18

$

0.12

$

0.36

$

0.26

     

SG&A in accordance with GAAP

$

370,987

$

313,667

$

719,942

$

610,971

Less restatement-related items

39

(695)

369

4,623

SG&A, excluding restatement-

related items

$

370,948

$

314,362

$

719,573

$

606,348

     

SG&A, excluding restatement-

related items, % to sales

22.5%


              21.6%

 

22.3%

21.3%

     

Liquidity and Capital Resources

Current Financial Condition / Recent Developments.  At August 1, 2003, the Company’s total debt (including the current portion of long-term obligations and short-term borrowings) was $289.4 million, and the Company had $102.3 million of cash and cash equivalents and $1.40 billion of shareholders’ equity, compared to $346.5 million of total debt, $121.3 million of cash and cash equivalents and $1.29 billion of shareholders’ equity at January 31, 2003.

The Company has a $300 million revolving credit facility (the “Credit Facility”).  The Company pays interest on funds borrowed under the Credit Facility at rates that are subject to change based upon the rating of the Company’s senior debt by independent agencies.  The Company has two interest rate options, base rate (which is usually equal to prime rate) and LIBOR.  Based upon the Company’s debt ratings during the first 26 weeks of 2003, the facility fees were 37.5 basis points, the all-in drawn margin under the LIBOR option was LIBOR plus 237.5 basis points and the all-in drawn margin under the base rate option was the base rate plus 125 basis points.  The Credit Facility is secured by approximately 400 of the Company’s retail stores, its headquarters and two of its distribution centers.  As of August 1, 2003, the Company had no outstanding borrow ings and $22.5 million of standby letters of credit under the Credit Facility.  In addition, the Company had $2.1 million of standby letters of credit that were not issued under the Credit Facility.     

The Company has $200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010.  Interest on the notes is payable semi-annually on June 15 and December 15 of each year.  The holders of the notes may elect to have their notes repaid on June 15, 2005, at 100% of the principal amount plus accrued and unpaid interest. The Company may seek, from time to time, to retire its outstanding notes through cash purchases on the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

The Company believes that its existing cash balances, cash flows from operations, the Credit Facility and its ongoing access to the capital markets will provide sufficient financing to meet the Company’s currently foreseeable liquidity and capital resource needs.

The Company plans to open approximately 650 stores during the fiscal year ending January 30, 2004.  The Company anticipates funding the costs associated with such openings by cash flows from operations and/or by the Credit Facility.

On March 13, 2003, the Board of Directors authorized the Company to repurchase up to 12 million shares of its outstanding common stock. Purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. This authorization expires March 13, 2005.  As of August 1, 2003, the Company had not purchased any of its shares pursuant to the current authorization.

Cash flows provided by operating activities.  Net cash provided by operating activities totaled $113.7 million during the first 26 weeks of 2003, as compared to an $80.6 million source of cash during the comparable period in the prior year.  The primary source of cash in 2003 was the Company’s net income plus depreciation and amortization expense, which together totaled $195.2 million.  Significant uses of cash in the current year include an increase in inventories of $61.7 million and a reduction in our income tax payable of $57.9 million.  Inventory turns have improved on a rolling 12-month basis from 3.7 times to 3.9 times as measured at August 2, 2002, and August 1, 2003, respectively.  

The primary source of net cash from operating activities during the prior year period was the Company’s net income plus depreciation and amortization expense, which together totaled $154.3 million.  In addition, the Company generated $72.8 million as a result of reductions in its inventory balances.  The Company paid $162 million during the prior year period in settlement of the shareholder class action lawsuits as described in Note 4 to the Company’s condensed consolidated financial statements as of August 1, 2003.   

Cash flows used in investing activities.  Net cash used in investing activities during the first 26 weeks of 2003 totaled $115.3 million, as compared to a $70.3 million use of cash during the comparable period in the prior year.  The Company purchased property and equipment totaling $65.9 million in the current year period which consisted primarily of $30.4 million for new stores, $22.6 million for other store-related projects and $8.2 million for various technology projects. Also during the current year period, the Company purchased two secured promissory notes totaling $49.6 million which represent debt issued by a third party entity from which the Company leases its DC in South Boston, Virginia.  See Note 7 to the Company’s condensed consolidated financial statements as of August 1, 2003.  The $70.3 million spent in the prior year period consisted primarily of $21 .4 million for new stores, $13.3 million for various store-related technology projects and $16.2 million for distribution and transportation projects.  

Cash flows used in financing activities.  Net cash used in financing activities during the first 26 weeks of 2003 was $17.4 million, which consisted principally of $23.4 million in dividends.  Net cash used in financing activities during the comparable period in the prior year was $232.3 million, which consisted principally of $21.3 million in dividends and $219.6 million of net debt repayments.  

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 January 31, 2003.

ITEM 4.

CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of August 1, 2003.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of August 1, 2003, the Company’s disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e).  There have been no changes during the quarter ended August 1, 2003 in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Restatement-Related Proceedings

As previously disclosed in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), the Company restated its audited financial statements for fiscal years 1999 and 1998, and certain unaudited financial information for fiscal year 2000, by means of its Form 10-K for the fiscal year ended February 2, 2001, which was filed on January 14, 2002. The SEC is conducting an investigation into the circumstances giving rise to the restatement. The Company is cooperating with this investigation by providing documents, testimony and other information to the SEC. At this time, the Company is unable to predict the outcome of this investigation and the ultimate effects on the Company, if any.

In addition, as previously discussed in the Company’s periodic reports filed with the SEC, the Company settled in the second quarter of 2002 the lead shareholder derivative action relating to the restatement that had been filed in Tennessee State Court.  All other pending state and federal derivative cases were subsequently dismissed during the third quarter of fiscal 2002. The settlement of the shareholder derivative lawsuits resulted in a net payment to the Company, after attorney’s fees payable to the plaintiffs’ counsel, of approximately $25.2 million, which was recorded as income during the third quarter of 2002. The Company also settled the federal consolidated restatement-related class action lawsuit in the second quarter of fiscal 2002. The $162 million settlement was paid in the first half of fiscal 2002, but was previously expensed in the fourth quarter of 2000. The Co mpany received from its insurers $4.5 million in respect of such settlement in July 2002, which was recorded as income during the second quarter of 2002.

Plaintiffs representing fewer than 1% of the shares traded during the class period chose to opt out of the federal class action settlement and may elect to pursue recovery against the Company individually. In the fourth quarter of 2002, the Company settled and paid a claim by one such plaintiff and recognized an expense of $0.2 million in respect of that agreement. To the Company’s knowledge, no other litigation has yet been filed or threatened by parties who opted out of the class action settlement. The Company cannot predict whether any additional litigation will be filed or estimate the potential liabilities associated with such litigation, but it does not believe that the resolution of any such litigation will have a material adverse effect on the Company’s financial position or results of operations.

Other Litigation

On March 14, 2002, a complaint was filed in the United States District Court for the Northern District of Alabama to commence a purported collective action against the Company on behalf of current and former salaried store managers.  The complaint alleges that these individuals were entitled to overtime pay and should not have been classified as exempt employees under the Fair Labor Standards Act (“FLSA”).  Plaintiffs seek to recover overtime pay, liquidated damages, declaratory relief and attorneys’ fees.  This action is still in the initial discovery phase and the court has not found that the case should proceed as a collective action.  The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the action is not appropriate for collective action treatment.  The Company intends to vigorously defend the action.  However, no assurances can be given that the Company will be successful in defending this action on the merits or otherwise, and, if not, the resolution could have a material adverse effect on the Company’s financial position or results of operations.

The Company is involved in other legal actions and claims arising in the ordinary course of business.  The Company currently believes that such litigation and claims, both individually and in the aggregate, will be resolved without a material effect on the Company’s financial position or results of operations.  However, litigation involves an element of uncertainty.  Future developments could cause these actions or claims to have a material adverse effect on the Company’s financial position or results of operations.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a)

The annual meting of shareholders was held on June 2, 2003.


(b)

Proxies for the meeting were solicited in accordance with Regulation 14 of the Securities Exchange Act of 1934.  There was no solicitation in opposition to management’s nominees and all of management’s nominees were elected.  Each director is elected to serve a one-year term.


(c)

The following sets forth the results of voting on each matter at the annual meeting of shareholders:



Proposal 1 – Election of Directors.



 


For

Withhold

Authority

 

David L. Beré

287,083,848

17,979,347

 

Dennis C. Bottorff

300,216,429

  4,846,766

 

Barbara L. Bowles

300,223,683

  4,839,512

 

James L. Clayton

287,127,967

17,935,228

 

Reginald D. Dickson

287,174,854

17,888,341

 

E. Gordon Gee

286,085,072

18,978,123

 

John B. Holland

298,824,822

  6,238,373

 

Barbara M. Knuckles

297,610,317

  7,452,878

 

David A. Perdue

300,366,434

  4,696,761

 

James D. Robbins

297,639,306

  7,423,889

 

David M. Wilds

300,331,276

  4,731,919

 

William S. Wire II

297,240,136

  7,823,059



Proposal 2 – Amendment to the Dollar General Corporation 1998 Stock Incentive Plan.


 

Votes cast for:

262,692,123

 

Votes cast against:

 39,854,306

 

Votes cast to abstain:

   2,516,757


Proposal 3 – Ratification of the Appointment of Ernst & Young LLP as Independent Auditors for 2003 Fiscal Year.


 

Votes cast for:

293,134,581

 

Votes cast against:

   9,872,036

 

Votes cast to abstain:

   2,056,575


ITEM 6.

Exhibits and Reports on Form 8-K


(a)

See the Exhibit Index immediately following the Signature page hereto.

   

(b)

(1)

A Current Report on Form 8-K, dated May 7, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding the resignation of the Company’s President and Chief Operating Officer.

 

(2)

A Current Report on From 8-K, dated May 8, 2003, was furnished to the SEC pursuant to Items 9 and 12 in connection with a news release regarding April and 2003 first quarter sales results, the May sales outlook and the conference call regarding 2003 first quarter earnings.

 

(3)

A Current Report on Form 8-K, dated May 29, 2003, was furnished to the SEC pursuant to Items 9 and 12 in connection with a news release and a conference call with respect to earnings for the 2003 first quarter, guidance for the 2003 fiscal year, and webcast of the annual meeting of shareholders.

 

(4)

A Current Report on Form 8-K, dated June 2, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding the election as Chairman of David A. Perdue and the declaration of a dividend.

 

(5)

A Current Report on Form 8-K, dated June 5, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding May sales results and the June sales outlook.

 

(6)

A Current Report on Form 8-K, dated June 12, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding planned presentations at and webcasts of three investor conferences in June.

 

(7)

A Current Report on Form 8-K, dated July 10, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding June sales results and the July sales outlook.  


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, both on behalf of the Registrant and in his capacity as principal financial and accounting officer of the Registrant.

 

DOLLAR GENERAL CORPORATION



Date:  August 29, 2003

By:

/s/ James J. Hagan

  

James J. Hagan

Executive Vice President and Chief Financial Officer


EXHIBIT INDEX


4.1

Fifth Supplemental Indenture, dated as of May 23, 2003, by and among Dollar General Corporation, the guarantors named therein, as guarantors, and Wachovia Bank, National Association (f/k/a First Union National Bank), as trustee.

4.2

Sixth Supplemental Indenture, dated as of July 15, 2003, by and among Dollar General Corporation, the guarantors named therein, as guarantors, and Wachovia Bank, National Association (f/k/a First Union National Bank), as trustee.

10.1

Purchase and Sale Agreement, dated as of May 29, 2003, by and between Dollar General Corporation and Principal Life Insurance Company (f/k/a Principal Mutual Life Insurance Company).

10.2

Dollar General Corporation 1998 Stock Incentive Plan, as amended and restated effective June 2, 2003, and as further modified through August 26, 2003.

10.3

Resignation Agreement, dated May 7, 2003, by and between Dollar General Corporation and Donald S. Shaffer (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2003, filed May 29, 2003).

10.4

Memorandum of Understanding, dated May 7, 2003, from Dollar General Corporation to Donald S. Shaffer (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2003, filed May 29, 2003).

31

Certifications of Chief Executive Officer and Chief Financial Officer under Exchange Act Rule 13a-14(a).

32

Certifications of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. 1350.