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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 October 31, 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 December 2, 2003 was 337,010,790.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

 
 

(Unaudited)

October 31, 2003

January 31, 2003

ASSETS

  

Current assets:

  

Cash and cash equivalents

$

138,470

$

121,318

Merchandise inventories

1,373,200

1,123,031

Deferred income taxes

21,729

33,860

Other current assets

65,301

45,699

Total current assets

1,598,700

1,323,908

   

Property and equipment, at cost

1,667,438

1,577,823

Less accumulated depreciation and amortization

687,951

584,001

Net property and equipment

979,487

993,822

Other assets, net

11,007

15,423

Total assets

$

2,589,194

$

2,333,153

   

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

  

Current portion of long-term obligations

$

17,295

$

16,209

Accounts payable

440,505

341,303

Accrued expenses and other

287,724

239,898

Income taxes payable

14,553

67,091

Total current liabilities

760,077

664,501

   

Long-term obligations

268,357

330,337

Deferred income taxes

59,100

50,247

Shareholders’ equity:

  

Preferred stock

-

-

Common stock

168,415

166,670

Additional paid-in capital

363,767

313,269

Retained earnings

975,255

812,220

Accumulated other comprehensive loss

(1,206)

(1,349)

 

1,506,231

1,290,810

Less other shareholders’ equity

4,571

2,742

Total shareholders’ equity

1,501,660

1,288,068

Total liabilities and shareholders’ equity

$

2,589,194

$

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

 

October 31, 2003

November 1, 2002

 

Amount

% of

Net Sales

Amount

% of

Net Sales

Net sales

$

1,685,346

100.00%

$

1,497,702

100.00%

Cost of goods sold

1,168,449

69.33

1,069,119

71.38

Gross profit

516,897

30.67

428,583

28.62

Selling, general and administrative

385,551

22.88

335,152

22.38

Litigation settlement and related proceeds

-

-

(25,041)

(1.67)

Operating profit

131,346

7.79

118,472

7.91

Interest expense, net

7,976

0.47

11,537

0.77

Income before taxes on income

123,370

7.32

106,935

7.14

Provision for taxes on income

45,467

2.70

38,365

2.56

Net income

$

77,903

4.62%

$

68,570

4.58%

  


 


Diluted earnings per share

$

0.23


$

0.20


Weighted average diluted shares (000s)

339,238


334,970

 

Basic earnings per share

$

0.23


$

0.21

 

Weighted average basic shares (000s)

335,411


333,227

 

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 39 weeks ended

 

October 31, 2003

November 1, 2002

 

Amount

% of

Net Sales

Amount

% of

Net Sales

Net sales

$

4,905,504

100.00%

$

4,340,841

100.00%

Cost of goods sold

3,463,871

70.61

3,144,539

72.44

Gross profit

1,441,633

29.39

1,196,302

27.56

Selling, general and administrative

1,105,493

22.54

946,123

21.80

Litigation settlement and related proceeds

-

         -

(29,541)

(0.68)

Operating profit

336,140

6.85

279,720

6.44

Interest expense, net

25,286

0.51

33,306

0.77

Income before taxes on income

310,854

6.34

246,414

5.67

Provision for taxes on income

112,683

2.30

89,554

2.06

Net income

$

198,171

4.04%

$

156,860

3.61%

  


 


Diluted earnings per share

$

0.59


$

0.47


Weighted average diluted shares (000s)

336,892


335,180

 

Basic earnings per share

$

0.59


$

0.47

 

Weighted average basic shares (000s)

334,175


332,986

 

Dividends per share

$

0.105

 

$

0.096


  


 


See notes to condensed consolidated financial statements.


DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

 
 

For the 39 weeks ended

 

October 31, 2003

November 1, 2002

Cash flows from operating activities:

  

Net income

$

198,171

$

156,860

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

  

Depreciation and amortization

113,114

102,302

Deferred income taxes

20,912

68,424

Tax benefit from stock option exercises

10,780

2,278

Litigation settlement (see Note 4)

-

(161,800)

Change in operating assets and liabilities:

 


Merchandise inventories

(250,169)

(118,097)

Other current assets

(19,602)

(2,774)

Accounts payable

99,202

87,963

Accrued expenses and other

49,039

10,105

Income taxes

(52,538)

(3,137)

Other

1,974

(14,124)

Net cash provided by operating activities

170,883

128,000

   

Cash flows from investing activities:

  

Purchase of property and equipment

(96,923)

(104,727)

Purchase of promissory notes (see Note 7)

(49,582)

-

Proceeds from sale of property and equipment

195

379

Net cash used in investing activities

(146,310)

(104,348)

   

Cash flows from financing activities:

 


Net borrowings under revolving credit facilities

-

168,400

Repayments of long-term obligations

(11,808)

(393,378)

Payment of cash dividends

(35,136)

(31,972)

Proceeds from exercise of stock options

39,660

4,844

Other financing activities

(137)

4,030

Net cash used in financing activities

(7,421)

(248,076)

   

Net increase (decrease) in cash and cash equivalents

17,152

(224,424)

Cash and cash equivalents, beginning of period

121,318

261,525

Cash and cash equivalents, end of period

$

138,470

$

37,101

   

Supplemental schedule of noncash investing

  and financing activities:


 

Purchase of property and equipment under

  capital lease obligations

$

551

$

8,134

 

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 39-week periods ended October 31, 2003 and November 1, 2002 have been made.

Certain prior year amounts have been reclassified to conform to the current period presentation. Ongoing estimates of inventory shrinkage, initial markups 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 posi tion 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 initiat ed on or after January 1, 2003. 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, “Consolidation of 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. At the October 8, 2003 FASB meeting, the FASB deferred the effective date of FIN 46, and the consolidation requirements for “older” VIEs currently are the first fiscal year or interim period ending after December 15, 2003, which would apply for the Company at the end of its 2003 fiscal year. Additional modifications of FIN 46 have been proposed by the FASB, and the Company will continue to monitor future developments related to this interpretation.  The Company leases f our 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 condensed 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

 

October 31, 2003

November 1, 2002

Net income

$

77,903

$

68,570

Net change in derivative financial instruments

60

630

Comprehensive income

$

77,963

$

69,200

   
 

39 Weeks Ended

 

October 31, 2003

November 1, 2002

Net income

$

198,171

$

156,860

Net change in derivative financial instruments

143

1,846

Comprehensive income

$

198,314

$

158,706

   


3.

Earnings per share


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

 

13 Weeks Ended October 31, 2003

 

Net Income

Shares

Per Share

Amount

Basic earnings per share

$

77,903

335,411

$

0.23

Effect of dilutive stock options

 

3,827

 

Diluted earnings per share

$

77,903

339,238

$

0.23


 

13 Weeks Ended November 1, 2002

 

Net Income

Shares

Per Share

Amount

Basic earnings per share

$

68,570

333,227

$

0.21

Effect of dilutive stock options

 

1,743

 

Diluted earnings per share

$

68,570

334,970

$

0.20


 

39 Weeks Ended October 31, 2003

 

Net Income

Shares

Per Share

Amount

Basic earnings per share

$

198,171

334,175

$

0.59

Effect of dilutive stock options

 

2,717

 

Diluted earnings per share

$

198,171

336,892

$

0.59


 

39 Weeks Ended November 1, 2002

 

Net Income

Shares

Per Share

Amount

Basic earnings per share

$

156,860

332,986

$

0.47

Effect of dilutive stock options

 

2,194

 

Diluted earnings per share

$

156,860

335,180

$

0.47


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 f ourth quarter of 2000. The Company 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 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.  In the third quarter of 2003, the court denied the plaintiff’s motion to allow the action to proceed as a nationwide collective action, but determined that the action could proceed collectively as to a region that has not yet been defined.  This action is still in the discovery phase.  The Co mpany 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 appeal the decision to allow the action to proceed as a regional collective action and to vigorously defend the action.  However, no assurances can be given that the Company will be successful either in its appeal or 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


As previously disclosed in the Company’s periodic reports filed with the SEC, the Internal Revenue Service (“IRS”) has conducted a normal examination of the Company’s 1998 and 1999 federal income tax returns.  At this time, the local audit fieldwork has been completed, and the Company is awaiting the final IRS report.  The Company does not anticipate any material changes to its tax liabilities as a result of these audits.  

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 vestin g or a combination thereof, and 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 generally 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 October 31, 2003, 3,839,135 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)

October 31, 2003

November 1, 2002

Net income – as reported

$

77,903

$

68,570

Less pro forma effect of stock option grants

791

3,894

Net income – pro forma

$

77,112

$

64,676

   

Earnings per share – as reported

  

Basic

$

0.23

$

0.21

Diluted

$

0.23

$

0.20

Earnings per share – pro forma

 


Basic

$

0.23

$

0.19

Diluted

$

0.23

$

0.19

   













 

39 Weeks Ended

(Amounts in thousands except per share data)

October 31, 2003

November 1, 2002

Net income – as reported

$

198,171

$

156,860

Less pro forma effect of stock option grants

4,604

12,960

Net income – pro forma

$

193,567

$

143,900

   

Earnings per share – as reported

  

Basic

$

0.59

$

0.47

Diluted

$

0.59

$

0.47

Earnings per share – pro forma

  

Basic

$

0.58

$

0.43

Diluted

$

0.57

$

0.43


The pro forma effects on net income for the 13 weeks and 39 weeks ended October 31, 2003 and November 1, 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 third quarter of 2003 and 2002 was $6.34 and $6.47 per share, respectively.  The fair value of options granted during the first 39 weeks of 2003 and 2002 was $5.42 and $6.85 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

 

October 31, 2003

November 1, 2002

Expected dividend yield

0.9%

0.8%

Expected stock price volatility

37.6%

34.8%

Weighted average risk-free interest rate

3.0%

3.9%

Expected life of options (years)

4.0

7.0

 



 

39 Weeks Ended

 

October 31, 2003

November 1, 2002

Expected dividend yield

0.9%

0.8%

Expected stock price volatility

36.9%

35.5%

Weighted average risk-free interest rate

2.6%

5.3%

Expected life of options (years)

3.7

6.6


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 October 31, 2003 and November 1, 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)

October 31, 2003

November 1, 2002

Classes of similar products:

  

Net sales:

  

Highly consumable

$

1,076,913

$

959,873

Seasonal

237,365

196,213

Home products

207,570

187,250

Basic clothing

163,498

154,366

 

$

1,685,346

$

1,497,702

   
 

39 Weeks Ended

(In thousands)

October 31, 2003

November 1, 2002

Classes of similar products:

  

Net sales:

  

Highly consumable

$

3,094,797

$

2,703,617

Seasonal

737,952

627,303

Home products

614,746

566,634

Basic clothing

458,009

443,287

 

$

4,905,504

$

4,340,841


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 condensed 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 a minimum balance of stockholders’ equity of $550 million as of October 31, 2003, which is equivalent to the sum of the Company’s debt it has guaranteed plus $50 million.  The Company was in compliance with such agreement as of October 31, 2003.  

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


 

As of

October 31, 2003

 

DOLLAR GENERAL CORPORATION

GUARANTOR SUBSIDIARIES

 ELIMINATIONS

CONSOLIDATED
TOTAL

BALANCE SHEETS:

    

ASSETS

    

Current assets:

    

Cash and cash equivalents

$

93,345

$

45,125

$

-

$

138,470

Merchandise inventories

-

1,373,200

-

1,373,200

Deferred income taxes

13,854

7,875

-

21,729

Other current assets

23,450

1,587,522

(1,545,671)

65,301

Total current assets

130,649

3,013,722

(1,545,671)

 1,598,700

     

Property and equipment, at cost

176,199

1,491,239

-

1,667,438

Less accumulated depreciation
and amortization

77,147

610,804

-

687,951

Net property and equipment

99,052

880,435

-

979,487

     

Other assets, net

3,100,858

40,908

(3,130,759)

11,007

     

Total assets

$

3,330,559

$

3,935,065

$

(4,676,430)

$

2,589,194

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term obligations

$

8,687

$

8,608

$

-

$

17,295

Accounts payable

1,587,143

398,938

(1,545,576)

440,505

Accrued expenses and other

35,317

252,502

(95)

287,724

Income taxes payable

-

14,553

-

14,553

Total current liabilities

1,631,147

674,601

(1,545,671)

760,077

     

Long-term obligations

195,216

1,058,427

(985,286)

268,357

Deferred income taxes

2,536

56,564

-

59,100

     

Shareholders’ equity:

    

Preferred stock

-

-

-

-

Common stock

168,415

23,853

(23,853)

168,415

Additional paid-in capital

363,767

1,247,290

(1,247,290)

363,767

Retained earnings

975,255

874,330

(874,330)

975,255

Accumulated other comprehensive loss

(1,206)

-

-

(1,206)

 

1,506,231

2,145,473

(2,145,473)

1,506,231

Less other shareholders’ equity

4,571

-

-

4,571

Total shareholders’ equity

1,501,660

2,145,473

(2,145,473)

1,501,660

     

Total liabilities and shareholders’ equity

$

3,330,559

$

3,935,065

$

(4,676,430)

$

2,589,194


 

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

October 31, 2003

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

48,202

$

1,685,346

$

(48,202)

$

1,685,346

Cost of goods sold

-

1,168,449

-

1,168,449

Gross profit

48,202

516,897

(48,202)

516,897

Selling, general and administrative

32,464

401,289

(48,202)

385,551

Operating profit

15,738

115,608

-

131,346

Interest expense, net

4,567

3,409

-

7,976

Income before taxes on income

11,171

112,199

-

123,370

Provision for taxes on income

4,366

41,101

-

45,467

Equity in subsidiaries’ earnings, net of taxes

71,098

-

(71,098)

-

Net income

$

77,903

$

71,098

$

(71,098)

$

77,903

     


 

For the 13 weeks ended

November 1, 2002

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

34,739

$

1,497,702

$

(34,739)

$

1,497,702

Cost of goods sold

-

1,069,119

-

1,069,119

Gross profit

34,739

428,583

(34,739)

428,583

Selling, general and administrative

26,863

343,028

(34,739)

335,152

Litigation settlement and related proceeds

(25,041)

-

-

(25,041)

Operating profit

32,917

85,555

-

118,472

Interest expense, net

8,389

3,148

-

11,537

Income before taxes on income

24,528

82,407

-

106,935

Provision for taxes on income

9,658

28,707

-

38,365

Equity in subsidiaries’ earnings, net of taxes

53,700

-

(53,700)

-

Net income

$

68,570

$

53,700

$

(53,700)

$

68,570

     





 

For the 39 weeks ended

October 31, 2003

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

125,783

$

4,905,504

$

(125,783)

$

4,905,504

Cost of goods sold

-

3,463,871

-

3,463,871

Gross profit

125,783

1,441,633

(125,783)

1,441,633

Selling, general and administrative

97,792

1,133,484

(125,783)

1,105,493

Operating profit

27,991

308,149

-

336,140

Interest expense, net

17,628

7,658

-

25,286

Income before taxes on income

10,363

300,491

-

310,854

Provision for taxes on income

4,034

108,649

-

112,683

Equity in subsidiaries’ earnings, net of taxes

191,842

-

(191,842)

-

Net income

$

198,171

$

191,842

$

(191,842)

$

198,171

     
  
 

For the 39 weeks ended

November 1, 2002

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF INCOME:

    

Net sales

$

96,590

$

4,340,841

$

(96,590)

$

4,340,841

Cost of goods sold

-

3,144,539

-

3,144,539

Gross profit

96,590

1,196,302

(96,590)

1,196,302

Selling, general and administrative

84,984

957,729

(96,590)

946,123

Litigation settlement and related proceeds

(29,541)

-

-

(29,541)

Operating profit

41,147

238,573

-

279,720

Interest expense, net

19,939

13,367

-

33,306

Income before taxes on income

21,208

225,206

-

246,414

Provision for taxes on income

8,369

81,185

-

89,554

Equity in subsidiaries’ earnings, net of taxes

144,021

-

(144,021)

-

Net income

$

156,860

$

144,021

$

(144,021)

$

156,860

     



 

For the 39 weeks ended

October 31, 2003

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF CASH FLOWS:

    

Cash flows from operating activities:

    

Net income

$

198,171

$

191,842

$

(191,842)

$

198,171

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

    

Depreciation and amortization

14,858

98,256

-

113,114

Deferred income taxes

(3,376)

24,288

-

20,912

Tax benefit from stock option exercises

10,780

-

-

10,780

Equity in subsidiaries’ earnings, net

(191,842)

-

191,842

-

Change in operating assets and liabilities:

    

Merchandise inventories

-

(250,169)

-

(250,169)

Other current assets

(7,473)

(255,039)

242,910

(19,602)

Accounts payable

175,135

168,665

(244,598)

99,202

Accrued expenses and other

2,675

45,715

649

49,039

Income taxes

4,177

(56,715)

-

(52,538)

Other

1,197

(262)

1,039

1,974

Net cash provided by (used in) operating activities

204,302

(33,419)

-

170,883

     

Cash flows from investing activities:

    

Purchase of property and equipment

(6,897)

(90,026)

-

(96,923)

Purchase of promissory notes

(49,582)

-

-

(49,582)

Proceeds from sale of property and equipment

18

177

-

195

Issuance of long-term notes receivable

(127,258)

(1,144)

128,402

-

Contribution of capital

(10)

-

10

-

Net cash used in investing activities

(183,729)

(90,993)

128,412

(146,310)

     

Cash flows from financing activities:

    

Issuance of long-term obligations

1,144

127,258

(128,402)

-

Repayments of long-term obligations

(5,642)

(6,166)

-

(11,808)

Payment of cash dividends

(35,136)

-

-

(35,136)

Proceeds from exercise of stock options

39,660

-

-

39,660

Other financing activities

(53)

(84)

-

(137)

Issuance of common stock, net

-

10

(10)

-

Net cash provided by (used in) financing activities

(27)

121,018

(128,412)

(7,421)

     

Net increase (decrease) in cash and cash equivalents

20,546

(3,394)

-

17,152

Cash and cash equivalents, beginning of period

72,799

48,519

-

121,318

Cash and cash equivalents, end of period

$

93,345

$

45,125

$

-

$

138,470

     


 

For the 39 weeks ended

November 1, 2002

 

DOLLAR
GENERAL
CORPORATION

GUARANTOR
SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED
TOTAL

STATEMENTS OF CASH FLOWS:

    

Cash flows from operating activities:

    

Net income

$

156,860

$

144,021

$

(144,021)

$

156,860

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

    

Depreciation and amortization

12,106

90,196

-

102,302

Deferred income taxes

64,235

4,189

-

68,424

Tax benefit from stock option exercises

2,278

-

-

2,278

Equity in subsidiaries’ earnings, net

(144,021)

-

144,021

-

Litigation settlement

(161,800)

-

-

(161,800)

Change in operating assets and liabilities:





Merchandise inventories

-

(118,097)

-

(118,097)

Other current assets

(6,783)

(13,518)

17,527

(2,774)

Accounts payable

260,992

(157,249)

(15,780)

87,963

Accrued expenses and other

(28,235)

38,340

-

10,105

Income taxes

(20,970)

17,833

-

(3,137)

Other

(8,826)

(3,551)

(1,747)

(14,124)

Net cash provided by operating activities

125,836

2,164

-

128,000

 




 

Cash flows from investing activities:


   

Purchase of property and equipment

(9,586)

(95,141)

-

(104,727)

Proceeds from sale of property and equipment

169

210

-

379

Issuance of long-term notes receivable

(96,590)

-

96,590

-

Contribution of capital

(317,602)

-

317,602

-

Net cash used in investing activities

(423,609)

(94,931)

414,192

(104,348)

 




 

Cash flows from financing activities:





Net borrowings under revolving credit facilities

168,400

-

-

168,400

Issuance of long-term obligations

-

96,590

(96,590)

-

Repayments of long-term obligations

(71,418)

(321,960)

-

(393,378)

Payment of cash dividends

(31,972)

-

-

(31,972)

Proceeds from exercise of stock options

4,844

-

-

4,844

Other financing activities

4,030

-

-

4,030

Issuance of common stock, net

-

317,602

(317,602)

-

Net cash provided by (used in) financing activities

73,884

92,232

(414,192)

(248,076)

 




 

Net decrease in cash and cash equivalents

(223,889)

(535)

-

(224,424)

Cash and cash equivalents, beginning of period

217,539

43,986

-

261,525

Cash and cash equivalents, end of period

$

(6,350)

$

43,451

$

-

$

37,101

     


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 October 31, 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, statements of future economic performance, or statements regarding the expected outcome or impact of pending or threatened litigation.  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” 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 impact on transportation costs from the “driver hours of service” regulations adopted by the Federal Motor Carriers Safety Administ ration, which are scheduled to become effective on  January 4, 2004;  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 with 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; delays associated with building, opening, expanding or converting new or existing distribution centers; 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 documents 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.  The 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 the RIM to transactions over a period of time that includes 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, the Company’s RIM currently utilizes 10 departments in which fairly homogenous classes of merchandise inventories having similar gross margins are grouped.  In the future, in order to further refine its RIM calculation, the Company intends to expand the number of departments it utilizes for its gross margin calculation. The impact of this  intended change on the Company’s future consolidated financial statements cannot currently be estimated. Other factors that reduce potential distortion include the use of historical experience in estimating the shrink provision (see discussion below) and the utilization of an outside statistician to assist in the LIFO sampling process and index formulation. Also, on a periodic basis, the Company reviews and evaluates the salabili ty of its inventory and records adjustments, 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.

During the current period, the Company implemented an item level perpetual inventory system for financial reporting purposes. This new system provides better information regarding the type of inventory that we own and improves our ability to estimate our shrink provision. The utilization of this improved information in our RIM calculation resulted in a non-recurring inventory adjustment of approximately $7.8 million, which favorably impacted gross margin in the current period.

Property and Equipment.  Property and equipment are recorded at cost. The Company groups its assets into relatively homogeneous classes and provides for depreciation on a straight-line basis over the estimated average useful life of each asset class. 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 expenses or expense reductions which could be material to the Company’s financial results.

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 diluted 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 OCTOBER 31, 2003 AND NOVEMBER 1, 2002

Net Sales.  Net sales for the 13 weeks ended October 31, 2003 were $1.69 billion as compared against $1.50 billion during the 13 weeks ended November 1, 2002, an increase of 12.5%.  The increase resulted primarily from 577 net new stores and a same store sales increase of 3.8%.  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 12.2%; seasonal 21.0%; home products 10.9%; and basic clothing 5.9%.  

Gross Profit.  Gross profit during the current year period was $516.9 million, or 30.7% of sales, versus $428.6 million, or 28.6% of sales, during the comparable period in the prior year, an increase of 20.6%.  The increase in the gross margin rate as a percentage of sales is primarily attributable to a higher average mark-up on beginning inventory balances in all four of the Company’s merchandise categories as compared against the same period last year.  This resulted from having higher average mark-ups on inventory purchased during the first two quarters of 2003 due to increased purchases of higher margin seasonal and basic home products, an increase in import purchases compared with the same period last year which carry higher than average mark-ups and increases in various performance-based vendor rebates.  Other issues impacting the y ear over year comparison in the gross margin rate include a reduction in our shrink provision from 4.00% to 3.15% (calculated using retail dollars as a percentage of sales) and a reduction in distribution and transportation expenses as a percentage of sales. Gross profit during the current year period was favorably impacted by an approximately $7.8 million non-recurring inventory adjustment primarily representing a change in the Company’s estimated provision for shrinkage.  The adjustment resulted from having better information regarding the type of inventory that we own as provided by the Company’s item level perpetual inventory system that was recently implemented for financial reporting purposes. The relatively strong increase in sales of higher margin seasonal items experienced in the current year period also impacted the year over year comparison in the gross margin rate.

Selling, General and Administrative.  SG&A expenses during the current year period were $385.6 million, or 22.9% of sales, versus $335.2 million, or 22.4% of sales, during the comparable period in the prior year, an increase of 15.0%.  The increase in SG&A expenses as a rate of sales as compared to the prior year period is due principally to an increase in our accrual for bonuses, increases in workers’ compensation and general liability costs, and increases in store training-related costs.  

Litigation Settlement and Related Proceeds.  The Company recorded $25.0 million in net restatement litigation proceeds during the prior year period, which amount included $25.2 million in insurance proceeds associated with the restatement-related shareholders derivative litigation offset by a $0.2 million settlement accrual for a shareholders class action opt-out claim also related to the Company’s restatement. See Note 4 to the Company’s condensed consolidated financial statements as of October 31, 2003.


Interest Expense, Net.  Net interest expense in the current year period was $8.0 million, or 0.5% of sales, as compared to $11.5 million, or 0.8% of sales, in the prior year period, a decrease of 30.9%.  The reduction in net interest expense is primarily attributable to lower average debt outstanding in the current year period.  The Company had $285.7 million in debt outstanding at October 31, 2003 as compared to $518.3 million in debt outstanding at November 1, 2002.


Provision for Taxes on Income.  The Company’s effective tax rate was 36.9% in the current year period compared to 35.9% in the prior year period.  The effective tax rate in the current year period was impacted by an adjustment that increased certain state income tax liabilities.  The Company’s effective tax rate was lowered in the prior year quarter by favorable adjustments to prior estimates determined after the filing of the Company’s amended tax returns for 1998 and 1999 as well as the original returns for the 2000 and 2001 years.    


Net Income.  Net income during the current year period was $77.9 million, or 4.6% of sales, versus $68.6 million, or 4.6% of sales, during the comparable period in the prior year, an increase of 13.6%.  Diluted earnings per share in the current year period were $0.23 versus $0.20 in the prior year period. Excluding restatement-related items and the insurance proceeds noted above, diluted earnings per share were $0.23 in the current year period versus $0.16 in the prior year period. See reconciliation of non-GAAP disclosures below.


 39 WEEKS ENDED OCTOBER 31, 2003 AND NOVEMBER 1, 2002


Net Sales.  Net sales for the 39 weeks ended October 31, 2003 were $4.91 billion as compared against $4.34 billion during the comparable period in the prior year, an increase of 13.0%.  The increase resulted primarily from 577 net new stores and a same store sales increase of 4.3%.  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 14.5%; seasonal 17.6%; home products 8.5%; and basic clothing 3.3%.


Gross Profit.  Gross profit during the current year period was $1.44 billion, or 29.4% of sales, versus $1.20 billion, or 27.6% 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 higher margin seasonal and basic home products, a 64% increase in import purchases compared with the same period 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 3.57% in the prior year period to 3.10% in the current year period  (calculated using retail dollars as a percentage of sales), a reduction in the rate of sales of distribution and transportation expenses, a reduction in damaged product markdowns, and the relatively strong increase in sales in higher margin seasonal items experienced in the current year period.


Selling, General and Administrative.  SG&A expenses during the current year period were $1.11 billion, or 22.5% of sales, versus $0.95 billion, or 21.8% of sales, during the comparable period in the prior year, an increase of 16.8%.  The Company recorded $0.4 million and $5.4 million in net expenses, primarily professional fees, in the current and prior year periods, respectively, related to the restatement of certain previously released financial data. Excluding restatement-related items, SG&A expenses would have increased by 17.5% to 22.5% of sales in the current year period versus 21.7% of sales in the prior year period. See reconciliation of non-GAAP disclosures below.


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


Litigation Settlement and Related Proceeds.  The Company recorded $29.5 million in net restatement litigation proceeds during the prior year period, which amount included $29.7 million in insurance proceeds associated with the settlement of the restatement-related class action and shareholder derivative litigation offset by a $0.2 million settlement accrual for a shareholder class action opt-out claim related to the Company’s restatement.  See Note 4 to the Company’s condensed consolidated financial statements as of October 31, 2003.  


Interest Expense, Net. Net interest expense was $25.3 million, or 0.5% of sales, in the current year period as compared to $33.3 million, or 0.8% of sales, in the prior year period, a decrease of 24.1%. The decrease is primarily attributable to lower average debt outstanding in the current year period.  The Company had $285.7 million in debt outstanding at October 31, 2003 as compared to $518.3 million in debt outstanding at November 1, 2002.


Provision for Taxes on Income.  The Company’s effective tax rate was 36.2% in the current year period and 36.3% in the prior year period.  The effective tax rate in the current year period was favorably impacted by a $0.8 million adjustment related to a change in tax laws in the state of Mississippi.  


Net Income.  Net income during the current year period was $198.2 million, or 4.0% of sales, versus $156.9 million, or 3.6% of sales, during the comparable period in the prior year, an increase of 26.3%.  Diluted earnings per share in the current year period were $0.59 versus $0.47 in the prior year period.  Excluding restatement-related items and the insurance proceeds noted above, diluted earnings per share for the current year period were $0.59 versus $0.42 in the prior year period. See reconciliation of non-GAAP disclosures below.


Reconciliation of Non-GAAP Disclosures

(in thousands, except per share amounts)

For the 13 weeks ended

For the 39 weeks ended

 

October 31, 2003

November 1, 2002

October 31, 2003

November 1, 2002

Net income in accordance with GAAP

$

77,903

$

68,570

$

198,171

$

156,860

Restatement-related items in SG&A

2

783

371

5,406

Litigation settlement and related proceeds

-

(25,041)

-

(29,541)

Total restatement-related items

2

(24,258)

371

(24,135)

Tax effect

(13)

8,924

(146)

8,879

Total restatement-related items, net of tax

(11)

(15,334)

225

(15,256)

Net income, excluding restatement-related items

$

77,892

$

53,236

$

198,396

$

141,604

     

Weighted average diluted shares outstanding

339,238

334,970

336,892

335,180

     

Diluted earnings per share, excluding

restatement-related items

$

0.23

$

0.16

$

0.59

$

0.42

     

SG&A in accordance with GAAP

$

385,551

$

335,152

$

1,105,493

$

946,123

Less restatement-related items

2

783

371

5,406

SG&A, excluding restatement-related items

$

385,549

$

334,369

$

1,105,122

$

940,717

     

SG&A, excluding restatement-related items,

% to sales

22.9%

22.3%

22.5%

21.7%


Liquidity and Capital Resources

Current Financial Condition / Recent Developments.  At October 31, 2003, the Company’s total debt (including the current portion of long-term obligations and short-term borrowings) was $285.7 million, and the Company had $138.5 million of cash and cash equivalents and $1.50 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 39 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 October 31, 2003, the Co mpany had no outstanding borrowings and $22.5 million of standby letters of credit under the Credit Facility.  In addition, the Company had outstanding $2.1 million of standby letters of credit that were issued under separate agreements.

The Company has outstanding $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 670 stores during the fiscal year ending January 30, 2004.  On November 17, 2003 the Company announced its intention to open 695 stores in fiscal 2004 and to continue growing at a similar pace in 2005 and 2006.  The Company also announced on November 17, 2003 its intention to increase its merchandise handling capabilities by converting two distribution centers from single to dual sortation facilities during the first half of 2004 and to open a new distribution center in 2005.  The Company anticipates funding the costs associated with such openings and DC conversions with cash flows from operations and/or by borrowings under 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 October 31, 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 $170.9 million during the first 39 weeks of 2003, as compared to a $128.0 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 $311.3 million.  In addition, the Company generated $99.2 million as a result of increases in its accounts payable balances.  The increase in accounts payable is a result of the seasonal increase in inventory levels in anticipation of the holiday selling season.  Significant uses of cash in the current year period include an increase in inventories of $250.2 million and a reduction in our income tax payable of $52.5 million.  Inventory turns have improved on a ro lling 12-month basis from 3.7 times to 3.9 times as measured at November 1, 2002, and October 31, 2003, respectively.  

The primary source of net cash provided by operating activities during the corresponding prior year period was the Company’s net income plus depreciation and amortization expense, which together totaled $259.2 million. Other sources of cash in the prior year period include an increase in accounts payable of $88.0 million and a decrease in the net deferred tax asset of $68.4 million.  The decrease in the net deferred tax asset primarily reflects the tax benefit that the Company received in its 2002 income tax return with respect to the $162.0 million payment in settlement of the restatement-related class action litigation, described in Note 4 of the Company’s condensed consolidated financial statements as of October 31, 2003.  Significant uses of cash in the prior year period include a $118.1 million increase in inventory levels and the $162.0 million shareholder class action litigation settlement payment described above.  

Cash flows used in investing activities.  Net cash used in investing activities during the first 39 weeks of 2003 totaled $146.3 million, as compared to a $104.3 million use of cash during the comparable period in the prior year.  The Company purchased property and equipment totaling $96.9 million in the current year period which consisted primarily of $45.7 million for new stores, $31.5 million for other store-related projects and $13.6 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 October 31, 2003.  The $104.7 million spent in the prior year period consisted primarily of $39.1 million for new stores and relocations, $15.5 million for various store-related technology projects and $21.2 million for distribution and transportation projects.  

Cash flows used in financing activities.  Net cash used in financing activities during the first 39 weeks of 2003 was $7.4 million, which consisted principally of $35.1 million in dividend payments and repayments of long-term obligations of $11.8 million, offset by proceeds from stock option exercises of $39.7 million.  Net cash used in financing activities during the comparable period in the prior year was $248.1 million, which consisted principally of $32.0 million in dividends and $225.0 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

(a)

Disclosure 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 October 31, 2003.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 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).  


(b)

Changes in Internal Control Over Financial Reporting.  There have been no changes during the quarter ended October 31, 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

The information contained in Note 4 to the Condensed Consolidated Financial Statements under the heading “Legal Proceedings” contained in Part I, Item 1 of this Form 10-Q is incorporated herein by this reference.


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 August 7, 2003, was furnished to the SEC pursuant to Item 9 and Item 12 in connection with a news release regarding the sales results for the four-week period, 26 weeks and second quarter ended August 1, 2003, and other matters.

 

(2)

A Current Report on Form 8-K, dated August 26, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding the declaration of a dividend.

 

(3)

A Current Report on Form 8-K, dated August 28, 2003, as amended by Form 8-K/A dated August 28, 2003, was furnished to the SEC pursuant to Items 9 and 12 in connection with news releases regarding results of operations and financial condition for the second quarter and 26 weeks ended August 1, 2003, the updated 2003 outlook, the conference call regarding 2003 second quarter earnings, and the naming of a new President and COO.  

 

(4)

A Current Report on Form 8-K, dated September 4, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding August sales results and the September sales outlook.  

 

(5)

A Current Report on Form 8-K, dated September 17, 2003, was filed with the SEC pursuant to Item 11 in connection with a temporary trading suspension under the Company’s 401(k) Plan.  

 

(6)

A Current Report on Form 8-K, dated September 19, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding the naming of a new Executive Vice President.  

 

(7)

A Current Report on Form 8-K, dated October 9, 2003, was furnished to the SEC pursuant to Item 9 in connection with a news release regarding September sales results and the October 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:  December 4, 2003

By:

/s/ James J. Hagan

  

James J. Hagan

Executive Vice President and Chief Financial Officer


EXHIBIT INDEX


10.1

Dollar General Corporation 1998 Stock Incentive Plan, as amended and restated effective June 2, 2003, and as further modified through August 26, 2003, (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2003, filed August 29, 2003).

10.2

Employment Agreement, effective September 22, 2003, by and between Dollar General Corporation and Lawrence V. Jackson.

10.3

Supplemental Retirement Plan for Lawrence V. Jackson, effective September 22, 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.