SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2002
Commission file number 0-4769
DOLLAR GENERAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
TENNESSEE 61-0502302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 MISSION RIDGE
GOODLETTSVILLE, TN 37072
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (615) 855-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of the Exchange on
Title of Class which Registered
-------------- ----------------
Common Stock New York Stock Exchange
Series B Junior Participating New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 15, 2002, was $4,338,998,195, based upon the last
reported sale price on such date by the New York Stock Exchange.
The number of shares of common stock outstanding on March 15, 2002, was
332,649,343.
Documents Incorporated by Reference
The information required in Part III of this Form 10-K is incorporated
by reference to the Registrant's definitive proxy statement to be filed for the
Annual Meeting of Shareholders to be held on June 3, 2002.
The following text contains references to years 2002, 2001, 2000, 1999,
1998, 1997 and 1996, which represent fiscal years ending or ended January 31,
2003, February 1, 2002, February 2, 2001, January 28, 2000, January 29, 1999,
January 30, 1998, and January 31, 1997, respectively. This discussion and
analysis should be read with, and is qualified in its entirety by the
consolidated financial statements and the notes thereto.
PART I
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ITEM 1. BUSINESS
General
Dollar General Corporation (the "Company" or "Dollar General") is a
leading discount retailer of quality general merchandise at everyday low prices.
Through conveniently located stores, the Company offers a focused assortment of
consumable basic merchandise including health and beauty aids, packaged food
products, home cleaning supplies, housewares, stationery, seasonal goods, basic
clothing and domestics. Dollar General stores serve primarily low-, middle- and
fixed-income families.
The Company opened its first store in 1955, in which year the Company
was first incorporated as a Kentucky corporation under the name J.L. Turner &
Son, Inc. The Company changed its name to Dollar General Corporation in 1968,
and reincorporated as a Tennessee corporation in 1998. As of March 15, 2002, the
Company operated 5,620 stores in 27 states, primarily in the southeastern and
midwestern United States.
Overall Business Strategy
Dollar General's mission statement is "A Better Life for Everyone!" To
carry out this mission, the Company has developed a business strategy that
focuses on providing its customers with a focused assortment of consumable basic
merchandise in a convenient, small-store format.
Our Customers. The Company serves the consumable basics needs of
customers primarily in the low- and middle-income brackets, and customers on
fixed incomes. Research performed by an outside service on behalf of the Company
in the Spring of 2001 indicated that approximately 55% of its customers live in
households earning less than $30,000 a year, and approximately 36% earn less
than $20,000. The Company's merchandising and operating strategies are designed
to meet the consumable basics needs of the consumers in this group.
Our Stores. The average Dollar General store has approximately 6,700
selling square feet and serves customers whose homes are usually located within
three to five miles of the store. Most stores are in small towns with
populations of fewer than 20,000. The Company believes that its target customers
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prefer the convenience of a small, neighborhood store. As the discount store
industry continues to move toward larger, "super-center" type stores, which are
often built outside of towns, the Company believes that Dollar General's
convenient discount store format will continue to attract customers and provide
the Company with a competitive advantage.
Our Merchandise. The Company is committed to offering a focused
assortment of quality, consumable basic merchandise in a number of core
categories, such as health and beauty aids, packaged food products, home
cleaning supplies, housewares, stationery, seasonal goods, basic apparel and
domestics. Because the Company offers a focused assortment of consumable basic
merchandise, customers are able to shop at Dollar General stores for their
everyday household needs. In 2001, the average customer transaction was $8.43.
Our Prices. The Company distributes quality, consumable basic
merchandise at everyday low prices. The Company's strategy of a low-cost
operating structure and a focused assortment of merchandise is designed to allow
the Company to offer quality merchandise at highly competitive prices. As part
of this strategy, the Company emphasizes even-dollar price points. The majority
of the Company's products are priced at $10 or less, with approximately 33% of
the products priced at $1 or less. The most expensive items are generally priced
around $35.
Our Cost Controls. The Company places an emphasis on aggressively
managing its overhead cost structure. Additionally, the Company seeks to locate
stores in neighborhoods where rental and operating costs are low. The Company
attempts to control operating costs by implementing new technology where
feasible. Examples of this strategy in fiscal 2000 and 2001 include new IBM
registers designed to capture payroll information and monitor employee
productivity, new handheld store inventory ordering technology which should
result in lower inventory handling and carrying costs, and the introduction of a
new sales audit product which identifies register procedure violations by
providing transactional information about cashier activities.
Growth Strategy
The Company has experienced a rapid rate of expansion in recent years,
increasing its number of stores from 2,059 as of January 31, 1995, to 5,620 as
of March 15, 2002. In addition to growth from new store openings, the Company
recorded same-store sales increases of 7.3%, 0.9% and 6.4% in 2001, 2000 and
1999, respectively. Management will continue to seek to grow the Company's
business. The Company believes this growth will come from a combination of new
store openings, infrastructure investments and merchandising initiatives.
4
New Store Growth. Management believes that the Company's convenient,
small-store format is adaptable to small towns and neighborhoods throughout the
country. The Company currently serves more than 3,000 communities with
populations of fewer than 20,000. The Company intends to continue to focus on
small towns and neighborhoods within its existing market area where management
believes the Company has the potential to expand its store base. By opening new
stores in its existing market area, the Company takes advantage of brand
awareness and maximizes its operating efficiencies.
In addition, the Company expects to explore the potential for expansion
into new geographic markets as opportunities present themselves. Specifically,
in 2001 the Company opened its first stores in New York and New Jersey. As of
March 15, 2002, the Company had 60 stores in New York, and 10 stores in New
Jersey. Consistent with its strategy, the Company is focusing its efforts in
these states on small communities.
In 2001, 2000, and 1999, the Company opened 602, 758, and 646 new
stores, and remodeled or relocated 78, 237, and 409 stores, respectively. In
2002, the Company currently expects to open approximately 600 new stores, close
60 to 80 stores, and remodel or relocate approximately 100 stores.
Infrastructure Investments. In recent years, the Company has made
significant investments in its distribution network and management information
systems. In August 2000, the Company opened a 1.0 million square-foot
distribution center ("DC") in Alachua, Florida, and in April 2001, the Company
opened a 1.2 million square-foot DC in Zanesville, Ohio. Subsequent to the DC
opening in Alachua, Florida the Company closed a DC in Homerville, Georgia. In
addition, the Company closed a DC in Villa Rica, Georgia that had only served
new stores. As a result of these openings and closings, the Company has seven
distribution centers located throughout the southeastern and midwestern United
States. Of these seven DCs, four were opened between 1998 and 2001 - Alachua,
Florida; Zanesville, Ohio; Indianola, Mississippi; and Fulton, Missouri. The
remaining three DCs are located in Ardmore, Oklahoma; Scottsville, Kentucky; and
South Boston, Virginia. These significant investments in distribution were the
result of the Company's strategy to reduce transportation expenses and
effectively support the Company's growth. Each DC, on average, services 800
stores with an average distance per delivery of approximately 220 miles.
Recent investments in technology include a new merchandise planning
system designed to assist our merchants with their purchasing and store
allocation decisions (2001 and 2002); satellite technology that provides faster
check authorization and improves communications between the stores and the
corporate office (2001 and 2002); new handheld store-ordering technology to
improve the accuracy of store orders (2000 and 2001); new flatbed scanners to
increase checkout speed and scanning accuracy (2000); new IBM registers that
capture payroll data and monitor employee productivity (2000, 2001 and 2002);
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and an automated distribution center replenishment system to reduce inventory
safety stocks (2000).
Merchandising Initiatives. The Company's merchandising initiatives are
designed to promote same-store sales increases. In 2001, the Company increased
the number of stores offering perishable products. This program, which includes
a selection of dairy products, luncheon meats, frozen foods and ice cream, was
expanded from 20 stores in 2000 to approximately 400 stores by the end of 2001.
The Company also increased the number of items carried by its stores in certain
other categories, including home cleaning, paper products and pet supplies. The
Company will continue to evaluate the performance of its merchandise mix and
make changes where appropriate.
Merchandise
Dollar General stores offer a focused assortment of quality, consumable
basic merchandise in a number of core categories. The Company separates its
merchandise into the following four divisions for internal reporting purposes:
(1) highly consumable, (2) hardware and seasonal, (3) basic clothing, and (4)
home products.
Since 1997, the Company has increased its emphasis on the highly
consumable division by adding items in the food, paper, household chemicals, and
health and beauty care categories. During the same period, the Company has
reduced its emphasis on the home products division by eliminating items such as
bath mats, area rugs, and bath towels. In 1998, the Company introduced
approximately 400 new stock-keeping units ("SKUs") of family-oriented, basic
apparel including items such as jeans, khakis, T-shirts and knit shirts for men,
women and children at prices of $10 or less. As of March 15, 2002, the Company
continues to carry approximately half of those SKUs, which the Company considers
a part of its core apparel program.
The percentage of total sales of each of the four divisions tracked by
the Company is as follows: in 2001 total sales consisted of 58.0% highly
consumables, 16.7% hardware and seasonal, 10.9% basic clothing and 14.4% home
products; in 2000 total sales consisted of 55.3% highly consumables, 15.5%
hardware and seasonal, 12.2% basic clothing and 17.0% home products; and in 1999
total sales consisted of 51.3% highly consumables, 16.5% hardware and seasonal,
12.4% basic clothing and 19.8% home products. Of the four divisions, the
hardware and seasonal division typically records the highest gross profit rate
and the highly consumables division typically records the lowest gross profit
rate.
The Company purchases its merchandise from a wide variety of suppliers.
One supplier, Proctor and Gamble, accounted for approximately 12% of the
Company's purchases in 2001. No other supplier accounted for more than 4.5% of
the Company's purchases in 2001. Approximately 12% of the Company's purchases in
2001 were imported.
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The Company does not run weekly advertising circulars but does
advertise to support new store openings. Advertising expenses are less than 1%
of sales.
The Company maintains approximately 3,500 core SKUs per store. The
Company's average customer purchase in 2001 was $8.43. The average number of
items in each customer purchase was 5.7, and the average price of each purchased
item was $1.48.
As indicated in Note 3 to the Consolidated Financial Statements, the
Company believes that it has certain excess inventory that will require a
markdown to assist with its disposition. Accordingly, the Company recorded a
markdown which had the impact of reducing inventory at cost at February 2, 2001
and increasing cost of goods sold in the fourth quarter of 2000 by approximately
$21.5 million. The Company believes that this markdown will be adequate to sell
the excess inventory during fiscal year 2002. However, there can be no assurance
that the Company will be able to sell all of this inventory by the end of 2002
without a further markdown.
The Company's business is modestly seasonal in nature. The only
extended seasonal increase in business that the Company experiences is the
Christmas selling season. During the Christmas selling season, the Company
carries merchandise that it does not carry during the rest of the year such as
gift sets, trim-a-tree, certain baking items, and a broader assortment of toys
and candy. In 2001, 2000, and 1999 the fourth quarter generated 30%, 32% and 30%
of the Company's total annual revenues, respectively. Although all four of the
Company's divisions experienced their highest sales in the fourth quarter, the
hardware and seasonal division had the largest increases.
The Dollar General Store
The typical Dollar General store has approximately 6,700 square feet of
selling space and is operated by a manager, an assistant manager and two or more
sales clerks. Most stores are in small towns with populations of fewer than
20,000. As of March 15, 2002, approximately 58% of stores were located in strip
shopping centers, 38% were freestanding buildings and 4% were in downtown store
buildings. The Company generally has not encountered difficulty locating
suitable store sites in the past, and management does not currently anticipate
experiencing material difficulty in finding suitable locations at favorable
rents.
7
The Company's recent store growth is summarized in the following table:
Stores at Net
Beginning Stores Stores Store Stores at
Year of Year Opened Closed Increase Year End
- ------------------- ------------------ ----------------- ----------------- ----------------- ----------------
1999 3,687 646 39 607 4,294
2000 4,294 758 52 706 5,000
2001 5,000 602 62 540 5,540
In 2002, the Company currently expects to open approximately 600 new
stores, close 60 to 80 stores, and remodel or relocate approximately 100 stores.
As of March 15, 2002, the Company operated 5,620 retail stores.
Employees
As of March 15, 2002, the Company and its subsidiaries employed
approximately 48,000 full-time and part-time employees, including divisional and
regional managers, area managers, store managers, and DC and administrative
personnel, compared with approximately 39,500 employees on February 2, 2001.
Management believes the Company's relationship with its employees is good.
Competition
The Company is engaged in a highly competitive business. The Company
competes with discount stores and with many other retailers, including mass
merchandise, grocery, drug, convenience, variety and other specialty stores.
Some of the nation's largest retail companies operate stores in areas where the
Company operates. The Company's direct competitors in the dollar store retail
category include Family Dollar, Dollar Tree, Fred's and various local,
independent operators. Competitors from other retail categories include CVS,
Rite Aid, Walgreens, Eckerds, Wal-Mart and Kmart. Some of the Company's
competitors from outside the dollar store segment are better capitalized than
the Company.
The dollar store category differentiates itself from other forms of
retailing by offering consistently low prices in a convenient, small-store
format. The Company's prices are competitive because of its low cost operating
structure and the relatively limited assortment of products offered. Labor and
marketing expenses are minimized by not using circulars, limiting price points
and relying on simple merchandise presentation. Occupancy expenses are typically
low because the Company attempts to locate in second tier locations, either in
small towns or in the neighborhoods of more urban areas where such expenses are
low. The Company believes that its limited assortment of products allows it to
focus its purchasing efforts on fewer SKUs than other retailers, which helps
keep the cost of goods low.
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ITEM 2. PROPERTIES
As of March 15, 2002, the Company operated 5,620 retail stores located
in 27 states as follows:
State Number of Stores State Number of Stores
- ------------------------------ --------------------------- --------------------------- ----------------------
Alabama 266 Missouri 255
Arkansas 193 Nebraska 61
Delaware 20 New Jersey 10
Florida 323 New York 60
Georgia 311 North Carolina 291
Illinois 241 Ohio 305
Indiana 239 Oklahoma 225
Iowa 126 Pennsylvania 293
Kansas 138 South Carolina 205
Kentucky 242 Tennessee 312
Louisiana 194 Texas 710
Maryland 57 Virginia 219
Michigan 61 West Virginia 110
Mississippi 153
- ------------------------------ --------------------------- --------------------------- ----------------------
Substantially all of the Company's stores are located in leased
premises. Individual store leases vary as to their terms, rental provisions and
expiration dates. In 2001, the Company's aggregate store rental expense averaged
$5.05 per square foot of selling space. The Company's policy has been to
negotiate low-cost, short-term leases (usually with initial or primary terms of
three to five years) with multiple renewal options when available. In 2002, the
Company expects to open approximately 200 to 250 stores subject to built-to-suit
arrangements with landlords. Such stores will typically carry a primary lease
term of between 7 and 10 years.
The Company's DCs serve Dollar General stores as described in the
following table:
As of March 15, 2002
Approximate Number
Year Approximate Square of Stores
Location Opened Footage Served
- ---------------------------------------- ----------------- ---------------------------- ---------------------
Scottsville, Kentucky 1959 720,000 822
Ardmore, Oklahoma 1994 1,200,000 970
South Boston, Virginia 1997 1,210,000 884
Indianola, Mississippi 1998 820,000 620
Fulton, Missouri 1999 1,150,000 795
Alachua, Florida 2000 980,000 722
Zanesville, Ohio 2001 1,170,000 807
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The Company owns the DC located in Scottsville, Kentucky and leases all
of its other DCs. The Company opened its Zanesville, Ohio DC in April of 2001.
The Company's executive offices are located in approximately 302,000 square feet
of leased space in Goodlettsville, Tennessee.
ITEM 3. LEGAL PROCEEDINGS
Restatement-Related Proceedings
On April 30, 2001, the Company announced that it had become aware of
certain accounting issues that would cause it to restate its audited financial
statements for fiscal years 1999 and 1998, and to restate the unaudited
financial information for fiscal year 2000 that had been previously released by
the Company. The Company subsequently restated such financial statements and
financial information by means of its Form 10-K for the fiscal year ended
February 2, 2001, which was filed on January 14, 2002.
Following the April 30, 2001, announcement more than 20 purported class
action lawsuits were filed against the Company and certain current and former
officers and directors of the Company, asserting claims under the federal
securities laws. These lawsuits have been consolidated into a single action
pending in the United States District Court for the Middle District of
Tennessee. On July 17, 2001, the court entered an order appointing the Florida
State Board of Administration and the Teachers' Retirement System of Louisiana
as lead plaintiffs and the law firms of Entwistle & Cappucci LLP, Milberg Weiss
Bershad Hynes & Lerach LLP and Grant & Eisenhofer, P.A. as co-lead counsel. On
January 3, 2002, the lead plaintiffs filed an amended consolidated class action
complaint purporting to name as plaintiffs a class of persons who held or
purchased the Company's securities and related derivative securities between May
12, 1998, and September 21, 2001. Among other things, plaintiffs have alleged
that the Company and certain of its current and former officers and directors
made misrepresentations concerning the Company's financial results in the
Company's filings with the Securities and Exchange Commission and in various
press releases and other public statements. The plaintiffs seek damages with
interest, costs and such other relief as the court deems proper.
10
On January 3, 2002, the Company reached a settlement agreement with the
putative class action plaintiffs, pursuant to which the Company agreed to pay at
least $140 million to such plaintiffs in settlement for their claims and to
implement certain enhancements to its corporate governance and internal control
procedures. Such agreement was subject to confirmatory discovery, to the final
approval of the Company's Board of Directors, and to court approval. Under such
settlement agreement, the plaintiffs had the right, following the completion of
confirmatory discovery, to amend their complaint to increase the size of the
class and to negotiate with the Company for additional damages, the aggregate
amount of all damages to be paid in settlement of plaintiffs' claims not to
exceed $162 million.
On April 1, 2002, following the completion of such confirmatory
discovery, the Company and the putative class action plaintiffs amended their
settlement agreement. Pursuant to such amended settlement agreement, the Company
has agreed to pay $162 million to such plaintiffs in settlement for their claims
and to implement certain enhancements to its corporate governance and internal
control procedures. Such amended agreement is subject to the final approval of
the Company's Board of Directors and to court approval.
The Company recognized an expense of $162 million in the fourth quarter
of 2000 in respect of the class action settlement, which the Company expects to
disburse in the second or third quarter of 2002. The Company expects to receive
from its insurers approximately $4.5 million in respect of such settlement,
which amount has not been accrued in the Company's financial statements.
In addition, six purported shareholder derivative lawsuits have been
filed in Tennessee State Court against certain current and former Company
directors and officers and Deloitte & Touche LLP, the Company's former
independent accountant. The Company is named as a nominal defendant in the
actions, which seek restitution and/or compensatory and punitive damages with
interest, equitable and/or injunctive relief, costs and such further relief as
the court deems proper. By order entered October 31, 2001, the court appointed
Michael Dixon, Jr., Carolinas Electrical Workers Retirement Fund and Thomas
Dewey, plaintiffs in one of the six filed cases, as lead plaintiffs and the law
firms of Branstetter, Kilgore Stranch & Jennings and Stanley, Mandel & Iola as
lead counsel. In the same order, the court stayed the remaining cases pending
completion of the lead case. Among other things, the plaintiffs allege that
certain current and former Company directors and officers breached their
fiduciary duties to the Company and that Deloitte & Touche aided and abetted
those breaches and was negligent in its service as the Company's independent
accountant. During August and September 2001, the Company moved to dismiss all
six cases for failure to make a pre-suit demand on the Board of Directors and,
in the alternative, requested that the court stay the actions pending the
completion of an investigation into the allegations in the complaints by the
Shareholder Derivative Claim Review Committee of the Company's Board of
Directors. The lead plaintiffs filed an opposition to this motion on October 2,
2001. A hearing on the motion has not yet been scheduled.
Two purported shareholder derivative lawsuits also have been filed in
the United States District Court for the Middle District of Tennessee against
certain current and former Company directors and officers alleging that they
breached their fiduciary duties to the Company. The Company is named as a
nominal defendant in these actions, which seek declaratory relief, compensatory
and punitive damages, costs and such further relief as the court deems proper.
By motion filed on September 28, 2001, the Company requested that the federal
court abstain from exercising jurisdiction over the purported shareholder
derivative actions in deference to the pending state court actions. By agreement
of the parties and court order dated December 3, 2001, the case has been stayed
until June 3, 2002.
The Company and the individual defendants have reached a settlement
agreement with lead counsel to the plaintiffs in the lead Tennessee state
shareholder derivative action. The agreement includes a payment to the Company
from a portion of the proceeds of the Company's director and officer liability
insurance policies as well as certain corporate governance and internal control
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enhancements. Pursuant to the terms of such agreement, the Company anticipates
that all of the stayed cases, including the federal derivative cases described
above, will be dismissed with prejudice by the courts in which they are pending.
Such agreement is subject to confirmatory discovery, to the final approval of
the Company's Board of Directors, and to court approval. If the settlement
agreement is approved, the Company expects that it will result in a net payment
to the Company, after attorneys' fees payable to the plaintiffs' counsel, of
approximately $24.8 million, which has not been accrued in the Company's
financial statements.
The Company believes that it has substantial defenses to the purported
class action and the derivative lawsuits and intends to assert these defenses in
the courts in which the actions are pending in the event the settlement
agreements referred to above do not successfully resolve these matters. These
cases are at an early stage and the amount of potential loss, if any, should the
settlement agreements not become effective cannot be reasonably estimated. An
unfavorable outcome for the Company in these actions could have a material
adverse impact on the Company's financial position and results of operations.
The Company has been notified that the SEC is conducting an
investigation into the circumstances that gave rise to the Company's April 30,
2001, announcement. The Company is cooperating with this investigation by
providing documents and other information to the SEC.
Other Litigation
The Company was involved in other litigation, investigations of a
routine nature and various legal matters during 2001, which were and are being
defended and otherwise handled in the ordinary course of business. While the
ultimate results of these matters cannot be determined or predicted, management
believes that they have not had and will not have a material adverse effect on
the Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
the fiscal year ended February 1, 2002.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
under the symbol "DG." The following table sets forth the range of the high and
low closing prices of the Company's common stock during each quarter in 2001 and
2000, as reported on the New York Stock Exchange, together with dividends. All
numbers have been restated to reflect common stock splits.
2001 First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------- -------------------- ------------------- ------------------- -------------------
High $ 23.73 $ 20.90 $ 18.10 $ 16.70
Low $ 15.51 $ 15.94 $ 11.23 $ 13.34
Dividends $ .032 $ .032 $ .032 $ .032
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
- ---------------------------- -------------------- ------------------- ------------------- -------------------
High $ 21.80 $ 21.44 $ 23.06 $ 19.81
Low $ 14.65 $ 16.31 $ 14.75 $ 13.50
Dividends $ .026 $ .032 $ .032 $ .032
The Company's stock price at the close of the market on March 15, 2002,
was $15.42.
There were approximately 16,039 shareholders of record of the Company's
common stock as of March 15, 2002. The Company has paid cash dividends on its
common stock since 1975. The Board of Directors regularly reviews the Company's
dividend plans to ensure that they are consistent with the Company's earnings
performance, financial condition, need for capital and other relevant factors.
The Company did not sell any of its equity securities during 2001 without
registration under the Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA*
(In thousands except per share and operating data)
February 2,
2001 January 28, January 29,
February 1, 2002 (53 week year) 2000 1999
- ------------------------------ ----------------- ------------------- ------------------- -------------------
SUMMARY OF OPERATIONS:
Net sales $ 5,322,895 $ 4,550,571 $ 3,887,964 $ 3,220,989
Gross profit $ 1,509,412 $ 1,250,903 $ 1,093,498 $ 892,519
Litigation settlement expense - $ 162,000 - -
Income before income taxes $ 327,822 $ 108,647 $ 294,697 $ 239,009
Net income $ 207,513 $ 70,642 $ 186,673 $ 150,934
Net income as a % of sales 3.9% 1.6% 4.8% 4.7%
- ------------------------------ ----------------- ------------------- ------------------- -------------------
PER SHARE RESULTS:
Diluted earnings per share (a) $ 0.62 $ 0.21 $ 0.55 $ 0.45
Basic earnings per share (a) $ 0.63 $ 0.21 $ 0.61 $ 0.53
- ------------------------------ ----------------- ------------------- ------------------- -------------------
Cash dividends per share of $ 0.13 $ 0.12 $ 0.10 $ 0.08
common stock (a)
Weighted average diluted
shares (a) 335,017 333,858 337,904 335,763
- ------------------------------ ----------------- ------------------- ------------------- -------------------
FINANCIAL POSITION:
Assets $ 2,552,385 $ 2,282,462 $ 1,923,628 $ 1,376,012
Long-term obligations $ 339,470 $ 720,764 $ 514,362 $ 221,694
Shareholders' equity $ 1,041,718 $ 861,763 $ 845,353 $ 674,406
Return on average assets 8.7% 3.4% 11.3% 12.9%
Return on average equity 22.2% 8.3% 24.6% 24.4%
- ------------------------------ ----------------- ------------------- ------------------- -------------------
OPERATING DATA:
Retail stores at end of period 5,540 5,000 4,294 3,687
Year-end selling square feet 37,421,000 33,871,000 28,655,000 23,719,000
Highly consumable sales 58% 55% 51% 42%
Hardware and seasonal sales 17% 16% 17% 19%
Basic clothing sales 11% 12% 12% 12%
Home products sales 14% 17% 20% 27%
- ------------------------------ ----------------- ------------------- ------------------- -------------------
(a) As adjusted to give retroactive effect to all common stock splits.
* The Company has determined, as previously reported in its Annual Report
on Form 10-K for the fiscal year ended February 2, 2001 filed on
January 14, 2002 (the "2000 10-K"), that in light of the substantial
time, effort and expense required to prepare and audit its restated
financial statements for fiscal 2000, 1999 and 1998, an unreasonable
further effort and expense would be required to conduct a similar
process to restate its previously released financial data for fiscal
1997. Such financial data has not been restated and should not be
relied upon. For a further discussion of the Company's restatement of
its financial statements, see the 2000 10-K, Note 2 to the Consolidated
Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Accounting Periods. The following text contains references to years
2002, 2001, 2000 and 1999, which represent fiscal years ending or ended January
31, 2003, February 1, 2002, February 2, 2001 and January 28, 2000, respectively.
There were 53 weeks in the fiscal year ended February 2, 2001. There were 52
weeks in the fiscal years ended February 1, 2002 and January 28, 2000. There
will be 52 weeks in the fiscal year ended January 31, 2003. This discussion and
analysis should be read with, and is qualified in its entirety by, the
consolidated financial statements and the notes thereto. Please note that, by
means of its Annual Report on Form 10-K for the fiscal year ended February 2,
2001 filed on January 14, 2002, the Company has restated its financial
statements for fiscal years 1999 and 1998, as well as certain unaudited
financial information for fiscal year 2000 that had been previously released by
the Company. The following discussion reflects the results of that restatement.
Overview of 2001. During 2001, Dollar General increased its net sales
by 17.0%, primarily as a result of its continued rapid pace of new store
openings. From 1999 through 2001, the Company had a compound annual net sales
growth rate of 18.2%. Same-store sales increased 7.3% in 2001, as compared with
increases of 0.9% and 6.4% in 2000 and 1999, respectively.
As discussed further below, management believes that the Company's
relatively strong operating performance in 2001 was due in part to improved
in-stock conditions and various merchandising initiatives which helped generate
additional sales at acceptable gross profit rates.
The year 2001 marked the fourteenth consecutive year that the Company
increased its total number of store units. The Company opened 602 new stores in
2001, compared with 758 in 2000 and 646 in 1999, and remodeled or relocated 78
stores, compared with 237 in 2000 and 409 in 1999. During the last three years,
the Company has opened, remodeled or relocated 2,730 stores, accounting for
approximately 49% of the total stores as of February 1, 2002. The Company ended
fiscal 2001 with 5,540 stores.
In 2001, new stores, remodels and relocations, net of 62 closed stores,
added an aggregate of approximately 3.5 million selling square feet to the
Company's total sales space. As a result, the Company had an aggregate of
approximately 37.4 million selling square feet at the end of the year. The
average new store opened in 2001 had approximately 6,500 selling square feet
compared to approximately 6,900 selling square feet for new stores opened in
2000. Virtually all of the new stores opened in 2001 are subject to traditional
15
operating lease arrangements. The Company opened its seventh DC in Zanesville,
Ohio in April of 2001.
The Company currently expects to open approximately 600 new stores and
close 60 to 80 stores in 2002, and to remodel or relocate approximately 100
stores. The Company will continue to focus on opening new stores in towns with
populations of 20,000 or fewer and within 250 miles of its DCs. The Company
expects its new stores to be subject to operating lease arrangements. Capital
expenditures related to new store openings will be financed through a
combination of operating cash flow and credit facilities.
Store investment and infrastructure upgrades continued to be priorities
in 2001. At February 1, 2002, the systems to support perpetual inventories were
installed in approximately 4,800 stores. Management expects to have the systems
to support perpetual inventories in all stores by the end of 2002, and to begin
implementation in 2003. A perpetual inventory allows the Company to track store
level inventory at the SKU level, which should result in better inventory
management. Additionally, management expects to enhance store communications and
improve customer service through the installation of satellite communications
technology. At February 1, 2002 such technology was installed in approximately
3,500 stores. The Company expects to complete the rollout of its satellite
technology in all stores in 2002. The Company acquired a new merchandise
planning and allocation system in 2001 that improves its ability to prepare
sales, inventory and margin plans. The Company also established a
business-to-business website in 2001 for use in communicating with
transportation carriers to move loaded trailers to the DCs.
Critical Accounting Policies
As discussed in Note 1 to the Consolidated Financial Statements,
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 retail inventory method 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, merchandise markon, 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
16
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, and applying RIM
to transactions over a period of time that includes different rates of gross
profit, such as those relating to seasonal merchandise. 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. In addition, failure to
take markdowns currently can result in an overstatement of cost under the lower
of cost or market principle. During fiscal 2000, the Company recorded markdowns
that had not been taken and which served to reduce inventories to lower of cost
or market by approximately $21.5 million.
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.
The Company is collecting SKU level inventory information at each of
its stores during 2002 in an effort to establish an item-based perpetual
inventory system. In conjunction with this undertaking, the Company will be
expanding the number of departments it utilizes for its gross margin
calculations. As noted above (see "-Overview of 2001"), management expects to
implement its new inventory system in 2003. These changes may impact the RIM
calculation results in fiscal 2003 and in subsequent years.
Results of Operations
The following discussion of the Company's financial performance is
based on the Consolidated Financial Statements set forth herein.
Net Sales. Net sales totaled $5.32 billion for 2001, $4.55 billion for
2000 and $3.89 billion for 1999, representing annual increases of 17.0% in 2001,
17.0% in 2000 and 20.7% in 1999. The increases resulted primarily from 540 net
new stores and a same-store sales increase of 7.3% in 2001; 706 net new stores
and a same-store sales increase of 0.9% in 2000; and 607 net new stores and a
same-store sales increase of 6.4% in 1999.
The Company tracks its sales internally by four divisions: highly
consumable, hardware and seasonal, basic clothing and home products. Total sales
in the highly consumable department increased by 22.5%, 26.1% and 46.4% in 2001,
2000 and 1999, respectively. Total sales in the hardware and seasonal department
increased by 25.8%, 10.2%, and 6.0% in 2001, 2000 and 1999, respectively. Total
sales in the basic clothing department increased by 5.0%, 14.9% and 23.2% in
2001, 2000 and 1999, respectively. Total sales in the home products department
experienced annual changes of (0.6)%, 0.5% and (10.7)%, respectively.
17
The Company attributes the 7.3% same-store sales increase that it
achieved in 2001 to a number of factors, including but not limited to: an
improved in-stock position; an increase in the number of stores offering
perishable products from 20 in 2000 to approximately 400 by the end of 2001;
strong sales of seasonal merchandise resulting in part from additional floor
space dedicated to such items as part of the store reset program, described
below, that was undertaken in 2000; and expanded offerings in certain highly
consumable categories including home cleaning, paper products and pet supplies.
The Company believes that the lower same store sales increase in 2000
was due primarily to the disruptive effect of a comprehensive store reset
program designed to improve the product mix and appearance of its stores, which
affected the vast majority of the store base. Other factors that may have had an
impact on the lower same store sales increase in 2000 include a change in store
ordering procedures from a manual process to a new automated system relying on
the scanning of shelf tags, which may have been an additional cause of the
sporadic out-of-stock conditions experienced by the Company during this period,
and a general softening of economic conditions.
The relatively strong same store sales increase in 1999 was due
primarily to the Company's ongoing shift in emphasis to the consumable basics
segment of its business.
Gross Profit. Gross profit for 2001 was $1.51 billion, or 28.4% of
sales, compared with $1.25 billion, or 27.5% of sales in 2000 and $1.09 billion,
or 28.1% of sales in 1999. The improvement in the gross profit rate in 2001 as
compared to 2000 is due primarily to the $21.5 million effect of a markdown
recorded in 2000. As described in Note 3 to the Consolidated Financial
Statements (see Item 8), the markdown in 2000 resulted from the identification
by the Company of certain excess inventories that it believes will require a
markdown to assist with their disposition by the conclusion of 2002. There can
be no assurance that the Company will be able to sell all of this inventory by
the end of 2002 without marking down the inventory at issue in amounts exceeding
the markdown recorded to date. The Company also improved its initial margin on
inventory purchases by 48 basis points in 2001 as compared against 2000. The
Company was able to make particular improvements in its inventory margin in the
housewares, seasonal and mens and boys clothing product lines.
The decline in the gross profit rate in 2000 as compared to 1999 was
due primarily to the $21.5 million effect of the markdown described above.
Inventory shrinkage calculated at the retail value of the inventory, as
a percentage of sales, was 2.90% in 2001, 2.80% in 2000, and 2.62% in 1999. The
Company's goal is to maintain a shrink rate in the range of 1.75% to 2.00%. In
2001 the Company appointed approximately 25 financial control specialists to
assist its stores with various shrinkage reduction efforts. These financial
control specialists are focusing on activities such as investigating missing
18
cash deposits and evaluating the processes in stores with consistently poor
shrinkage results.
Distribution and transportation costs decreased by 35 basis points as a
percentage of sales in 2001 as compared to 2000, and increased by 16 basis
points in 2000 as compared to 1999. The reduction in distribution and
transportation costs as a percentage of sales in 2001 is due primarily to a
relatively modest increase in transportation costs during a period of increased
sales. Factors contributing to this result in 2001 included the opening of the
Zanesville, Ohio DC, which supported continued expansion in the number of stores
with only a modest increase in store delivery miles, increased trailer
utilization as a result of improved routing, and lower fuel costs. The increase
in distribution and transportation costs as a percentage of sales in 2000 was
due in part to the additional fixed costs associated with establishing the
Fulton and Alachua distribution centers, which were opened in 1999 and 2000,
respectively.
Selling, General and Administrative Expense. Total selling, general and
administrative ("SG&A") expense as a percentage of net sales was 21.3% in 2001,
compared with 20.5% in 2000 and 19.9% in 1999. SG&A expense for 2001 was $1.14
billion, an increase of 21.5% compared to 2000. SG&A expense in 2000 was $934.9
million, an increase of 21.0% over the 1999 total of $772.9 million.
The 80 basis point increase in SG&A expense as a percentage of net
sales experienced in 2001 was due in part to $28.4 million in expenses incurred
in such year, including professional service fees, related to the restatement of
the Company's financial statements described above in Item 3. There were no such
expenses in 2000, and such expenses were in addition to the litigation
settlement expense described below that was recorded in 2000. The increase in
SG&A expense in 2001 was also attributable in part to a 19.4% increase in labor
expenses at the Company's retail stores, which was in excess of the Company's
sales increase of 17.0%. The increased labor expenses incurred in 2001 resulted
from a decision by the Company's management to spend additional funds in this
area in order to attract and retain the talented employees necessary to improve
store conditions. The restatement related expenses and the increased store labor
costs together accounted for a 69 basis point increase in SG&A expense.
Excluding the restatement-related expenses, SG&A expense in 2001 would have been
$1.11 billion, or 20.8% of sales, an increase of 18.4% over the prior year.
The 66 basis point increase in SG&A expense as a percentage of net
sales experienced in 2000 was due in part to the fact that store labor, store
depreciation and amortization, and store utilities experienced annual increases
of 22.9%, 44.4% and 27.8%, respectively, which were all in excess of the
Company's sales increase of 17.0%. The increase in store labor as a percentage
of sales was due principally to the additional hours required to complete the
store reset program described above (see "-Net Sales"), and the general weakness
of same store sales. The increase in store depreciation and amortization expense
19
as a percentage of sales was a result of the number of new stores subject to
capital leases.
Litigation Settlement Expense. The Company recorded $162.0 million in
2000 for the proposed settlement of the restatement-related shareholder class
action litigation. (See Item 3). No litigation settlement expense was recorded
in 2001.
Interest Expense. In 2001, interest expense was $45.8 million, compared
with $45.4 million in 2000 and $25.9 million in 1999. The increase in interest
expense in 2000 as compared to 1999 resulted from the net addition of $213.6
million in various long-term obligations during 2000.
The average daily total debt outstanding in 2001 was $738.8 million at
an average interest rate of 6.25%. The average daily total debt outstanding in
2000 was $710.3 million at an average interest rate of 7.2%. The average total
debt outstanding in 1999 was $454.0 million at an average interest rate of 6.0%.
Provision for Taxes on Income. The effective income tax rates for 2001,
2000 and 1999 were 36.7%, 35.0% and 36.7%, respectively. The reduction in the
effective tax rate in 2000 was due to the 38.9% marginal tax rate applied
against the litigation settlement expense. Excluding the tax impact of the
litigation settlement expense, the effective tax rate in 2000 was 37.3%.
Liquidity and Capital Resources
Capital Structure. The Company has accessed capital through public
debt, bank financings, long-term leases and financing obligations. In 2001, the
Company financed its short-term working capital needs through cash flow from
operations and existing cash balances. The Company has historically satisfied
its working capital needs by utilizing seasonal lines of credit and its
revolving credit agreement in addition to its existing cash balances and cash
flow from operations. The Company's various seasonal lines of credit expired
during 2001 and the Company elected not to renew them. At February 1, 2002 the
Company had a $175 million revolving credit agreement which was not utilized
during 2001. The revolving credit facility has two financial covenants, a fixed
charge test and a leverage test. The leverage test was amended in 2000 to
provide the Company with increased operating flexibility. As of February 1,
2002, the revolving credit facility was priced at LIBOR plus 102.5 basis points.
As of February 1, 2002 the Company had no revolving loans outstanding and was in
compliance with the financial covenants under the revolving credit facility. The
revolving credit facility expires in September 2002. Until the
restatement-related legal proceedings referred to previously and in Note 8 to
the Consolidated Financial Statements are resolved, the Company may need waivers
in order to draw on the revolving credit facility. The Company's total debt as
20
of February 1, 2002 was $735.1 million, compared with $729.8 million as of
February 2, 2001, and $516.2 million as of January 28, 2000.
In June 2000, the Company issued $200 million of 8 5/8% notes to repay
outstanding short-term borrowings and for general corporate purposes. The notes
are unsecured and guaranteed by all of the Company's subsidiaries. The notes
have certain restrictive covenants, including limitations on secured
indebtedness and certain sale and leaseback transactions.
As of February 1, 2002, the Company had $383 million outstanding under
two synthetic lease facilities (the "Facilities") maturing in September 2002,
one with $212 million in outstanding capital leases and the other with $171
million in outstanding capital leases. The leases allow for the use and
occupancy of certain real property, including approximately 400 retail stores,
two distribution centers and the Company's headquarters in Goodlettsville,
Tennessee. The Company plans to purchase the properties from the lessor at the
maturity of the Facilities. The Company is currently working on a plan to
refinance the lease obligations. The Facilities have the same two financial
covenants as the revolving credit facility, a fixed charge test and a leverage
test. The facility with $212 million in outstanding capital leases is funded by
a syndicate of financial institutions; borrowings under the facility were priced
at LIBOR plus 102.5 basis points as of February 1, 2002. The pricing spread over
LIBOR fluctuates based on the Company's debt ratings as published by the debt
rating agencies. The Company's spread over LIBOR increased to 102.5 basis points
from 15 basis points as part of the October 19, 2001, waiver and amendment as
described below. The facility with $171 million in outstanding capital leases is
funded by commercial paper issued at prevailing market rates by a commercial
paper funding entity and is secured by a letter of credit facility.
In June 2000, distribution centers in Indianola, Mississippi and
Fulton, Missouri were purchased from the Facilities and sold in sale-leaseback
transactions resulting in twenty-two year, triple net leases with renewal
options for an additional thirty years. These were refinanced to bolster
liquidity and diversify sources of funds.
Throughout 2001, the Company obtained waivers from its lenders to,
among other things, extend the requirement to deliver its audited 2000 financial
statements, and unaudited 2001 quarterly financial statements, as a result of
delays related to the restatement described above. The Company executed waivers
with its lenders under the Facilities and revolving credit facility on May 10,
2001, June 8, 2001, and July 27, 2001, a waiver and amendment on October 19,
2001, and waivers on December 28, 2001, and January 10, 2002. The June 8, 2001,
waiver prohibited the Company from repurchasing its shares and limited its
capital expenditures to $160 million for the period commencing on February 2,
2001, and concluding with the delivery of the restated financial statements. The
October 19, 2001, amendment increased the pricing on the synthetic lease with
21
$212 million in outstanding capital leases and the revolving credit facility
from 15 basis points over LIBOR to 102.5 basis points over LIBOR, and
accelerated the maturity of the second synthetic lease to September 2002 from
June 2004. The Company executed waivers with the lenders under the Indianola,
Mississippi and Fulton, Missouri distribution center leases on May 7, 2001, May
11, 2001, June 8, 2001, July 30, 2001, October 31, 2001, December 31, 2001, and
January 10, 2002. In addition, the Company executed waivers with the lenders
under the Ardmore and South Boston distribution center leases on January 10,
2002, and the lender under the Company's airplane lease on December 21, 2001,
and January 7, 2002. The Company paid a total of approximately $1.6 million in
fees for all of the waivers and amendments, which were recorded in SG&A expense.
The Company has entered into an amended settlement agreement with the
lead plaintiffs in the restatement-related class action lawsuits brought against
the Company and its officers and directors. See Item 3 (Restatement-Related
Proceedings), above. Such agreement provides for the payment by the Company to
the class action plaintiffs of $162 million. This expense was accrued by the
Company in the fourth quarter of the 2000 fiscal year. The Company expects such
amount will be disbursed in the second or third quarter of 2002, and will be
funded out of operating cash flow, on-hand cash balances and the proceeds of
insurance relating to the settlement of the class action and derivative
litigation (see Note 8 to the Consolidated Financial Statements).
Cash Flow. In 2001, cash provided from operations and existing cash
balances provided the resources required to support operations, capital
expenditures and working capital requirements. The Company did not utilize its
revolving credit facility in 2001. The Company's only borrowing in 2001 under a
seasonal line of credit occurred on September 12, 2001 due to a temporary lack
of access to certain of its investment accounts resulting from the events of
September 11, 2001. Until the restatement-related legal proceedings referred to
previously and in Note 8 to the Consolidated Financial Statements are resolved,
the Company may need a waiver in order to draw on the revolving credit facility.
Net cash provided by operating activities for fiscal 2001 was $265.6
million, as compared to $215.5 million for fiscal 2000 and $196.7 million for
fiscal 1999. Cash flow from operations for fiscal 2001 compared to fiscal 2000
increased by $50.1 million due principally to the improvement in operating
performance in 2001 as described above (see "-Net Sales"). Cash flow from
operations for fiscal 2000 compared to fiscal 1999 increased by $18.8 million
due principally to a reduction in the amount of cash used to purchase inventory
and an increase in accrued expenses and other.
Net cash flows used in investing activities was $124.1 million in 2001,
versus $119.0 million in 2000 and $139.0 million in 1999. Capital expenditures
22
for 2001 totaled $125.4 million, compared with $216.6 million for 2000 and
$142.1 million for 1999. The Company opened 602 new stores and relocated or
remodeled 78 stores at a cost of $55.8 million in 2001, compared with opening
758 new stores and relocating or remodeling 237 stores at a cost of $112.7
million in 2000. The decrease in 2001 in store-related capital expenditures was
due to the smaller number of projects completed in 2001 and the construction of
approximately 72 Company-owned stores in 2000 versus no such construction in
2001. Capital expenditures for new, relocated and remodeled stores totaled $72.7
million in 1999.
The Company spent approximately $31.7 million on systems-related
capital projects in 2001 including $10.0 million for satellite technology and
$8.3 million for new point-of-sale cash registers.
The Company spent approximately $6.6 million on distribution-related
capital expenditures in 2001 as compared to $49.3 million in 2000 and $43.2
million in 1999. The 2000 expenditures related primarily to costs associated
with the new DCs in Alachua, Florida, and Zanesville, Ohio. The 1999
expenditures resulted primarily from costs associated with the expansion of the
Ardmore, Oklahoma DC and the purchase of new delivery trailers.
Capital expenditures during 2002 are projected to be approximately $150
million. The Company anticipates funding its 2002 capital requirements with cash
flow from operations.
Net cash provided by / (used in) financing activities was $(42.3)
million, $11.0 million and $(30.6) million in fiscal 2001, 2000 and 1999
respectively. Cash used in fiscal 2001 from financing activities primarily
reflected the payment of $42.5 million of cash dividends. Cash provided in
fiscal 2000 from financing activities reflected the $200 million of notes issued
in June 2000, partially offset by the payment of $42.2 million of cash
dividends, the repurchase of $63.0 million of common stock, and the repayment of
$112.3 million of long-term obligations related primarily to two of the
Company's DCs. Cash used in fiscal 1999 by financing activities reflected the
repurchase of $50.8 million of common stock and the payment of $33.8 million of
dividends, offset partially by $38.8 million of cash proceeds from the exercise
of stock options.
As noted above, in September 2002 the Company's synthetic leases, in
the amount of $383 million, will mature and the Company's $175 million revolving
credit facility will expire. The Company expects to refinance the synthetic
lease obligations and to replace the revolving credit facility prior to such
date. The Company also expects to fund in the second or third quarter of 2002
$162 million in settlement of the class action litigation, as further discussed
above. The Company believes that its existing cash balances, cash flow from
operations and its ongoing access to the capital markets will provide sufficient
financing to meet these obligations, as well as the Company's
23
other foreseeable liquidity and capital resource needs. However, there can be no
assurance that the Company will be able to obtain financing in the amounts that
it requires or that the terms of such financing will be as attractive as the
terms on which the Company has obtained financing in the past. Please refer to
"Forward Looking Statements / Risk Factors" for a discussion of issues that
could adversely impact the Company's financial position or its ability to obtain
financing.
The following table summarizes the Company's significant contractual
obligations and estimated litigation settlement payable as of February 1, 2002,
which excludes the effect of imputed interest (in thousands):
Payments Due by Period
Less Greater
than than
Contractual obligations Total 1 yr 1-3 yrs 4-5 yrs 5 yrs
- ----------------------- ----- ---- ------- ------- -----
Long-term debt $ 200,052 $ 52 $ - $ - $ 200,000
Capital lease obligations 460,807 406,085 30,957 17,537 6,228
Financing obligations 210,910 9,283 18,566 18,566 164,495
Operating leases 701,808 177,948 250,186 103,426 170,248
Litigation settlement 162,000 162,000 - - -
Capital expenditures 30,000 30,000 - - -
----------- ----------- ----------- ----------- --------
Total contractual cash obligations $ 1,765,577 $ 785,368 $ 299,709 $ 139,529 $ 540,971
=========== =========== =========== =========== ============
See Note 2 to the Consolidated Financial Statements for a discussion of amounts
outstanding under commercial letters of credit.
Effects of Inflation and Changing Prices
The Company believes that inflation and/or deflation had a minimal
impact on its overall operations during 2001, 2000 and 1999.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under
the new rules, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to be amortized
over their useful lives. The Company began applying the new accounting rules on
February 2, 2002. The adoption of SFAS No. 141 and No. 142 will not have a
material impact on the Company's financial position or results of operations.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. SFAS No. 143 applies to legal obligations associated
with the retirement of certain tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. Accordingly, the
Company will adopt this statement on February 1, 2003. The Company believes the
24
adoption of SFAS 143 will not have a material impact on its Consolidated
Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company adopted this statement on February 2, 2002. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company believes the adoption of SFAS No. 144 will not have a material
impact on its Consolidated Financial Statements.
Forward Looking Statements / Risk Factors
This discussion and analysis contains historical and forward-looking
information. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The Company
believes the assumptions underlying these forward-looking statements are
reasonable; however, any of the assumptions could be inaccurate, and therefore,
actual results may differ materially from those projected in the forward-looking
statements as a result of certain risks and uncertainties. These risks include,
but are not limited to, the following:
THE COMPANY'S REPUTATION AND FINANCIAL CONDITION COULD BE AFFECTED BY
THE RESTATEMENT. As previously described in the Company's Annual Report on Form
10-K for the 2000 fiscal year, on April 30, 2001, the Company announced that it
had become aware of certain accounting issues that would cause it to restate its
audited financial statements for fiscal years 1998 and 1999, and to revise the
unaudited financial information for the 2000 fiscal year that had been
previously released by the Company. Following this announcement, more than 20
purported class action lawsuits were filed against the Company and certain
current and former officers and directors of the Company, asserting claims under
the federal securities laws. These lawsuits have been consolidated into a single
action pending in the United States District Court for the Middle District of
Tennessee. In addition, six purported shareholder derivative lawsuits have been
filed in Tennessee State Court against certain current and former Company
directors and officers and Deloitte & Touche LLP, the Company's former
independent accountant, and two purported shareholder derivative lawsuits have
been filed in the United States District Court for the Middle District of
Tennessee against certain current and former Company directors and officers
alleging that they breached their fiduciary duties to the Company. The Company
has also been notified that the SEC is conducting an investigation into the
circumstances that gave rise to the Company's April 30, 2001, announcement.
25
As discussed above, the Company has entered into settlement agreements
with the purported class action plaintiffs and with the lead counsel in the lead
shareholders derivative action. However, such settlement agreements are subject
to conditions, including the completion of confirmatory due diligence and court
approval. In the event that these settlement agreements do not become effective,
the Company will incur additional significant expenditures in defending itself
and the Company may be exposed to financial losses in excess of the amounts that
the Company has agreed to pay in the settlement agreements. In addition, the
publicity surrounding the litigation and the SEC investigation could affect the
Company's reputation and have an impact on its financial condition.
THE COMPANY'S BUSINESS IS MODESTLY SEASONAL WITH THE HIGHEST SALES
OCCURRING DURING THE FOURTH QUARTER, AND ADVERSE EVENTS DURING THE FOURTH
QUARTER COULD THEREFORE AFFECT THE COMPANY'S FINANCIAL CONDITION. The Company
realizes a large portion of its net sales and net income during the Christmas
selling season. In anticipation of the holidays, the Company purchases
substantial amounts of seasonal inventory and hires many temporary employees. If
for any reason the Company's net sales during the Christmas selling season were
to fall below seasonal norms, a seasonal merchandise inventory imbalance could
result. If such an imbalance were to occur, markdowns might be required to
minimize this imbalance. The Company's profitability and operating results could
be adversely affected by unbudgeted markdowns.
Adverse weather conditions or other disruptions during the peak
Christmas season could also affect the Company's net sales and could make it
more difficult for the Company to obtain sufficient quantities of merchandise
from its suppliers.
COMPETITION IN THE RETAIL INDUSTRY COULD LIMIT THE COMPANY'S GROWTH
OPPORTUNITIES AND REDUCE ITS PROFITABILITY. The Company competes in the discount
retail merchandise business, which is highly competitive. This competitive
environment subjects the Company to the risk of reduced profitability resulting
from reduced margins required to maintain the Company's competitive position.
The Company competes with discount stores and with many other retailers,
including mass merchandise, grocery, drug, convenience, variety and other
specialty stores. Some of the nation's largest retail companies operate stores
in areas where the Company operates. The Company's direct competitors in the
dollar store retail category include Family Dollar, Dollar Tree, Fred's, and
various local, independent operators. Competitors from other retail categories
include CVS, Rite Aid, Walgreens, Eckerds, Wal-Mart and Kmart. The discount
retail merchandise business is subject to excess capacity and some of the
Company's competitors are much larger and have substantially greater resources
than the Company. The competition for customers has intensified in recent years
as larger competitors, such as Wal-Mart and Kmart, have moved into the Company's
geographic markets. The Company remains vulnerable to the marketing power and
high level of consumer recognition of these major national discount chains. The
26
Company expects a further increase in competition from these national discount
retailers.
THE COMPANY'S FINANCIAL PERFORMANCE IS SENSITIVE TO CHANGES IN OVERALL
ECONOMIC CONDITIONS THAT MAY IMPACT CONSUMER SPENDING. The general slowdown in
the United States economy may adversely affect the spending of the Company's
consumers, which would likely result in lower net sales than expected on a
quarterly or annual basis. Future economic conditions affecting disposable
consumer income, such as employment levels, business conditions, fuel and energy
costs, interest rates, and tax rates, could also adversely affect the Company's
business by reducing consumer spending or causing consumers to shift their
spending to other products.
THE COMPANY'S BUSINESS IS DEPENDENT ON ITS VENDORS. The Company
believes that it has generally good relations with its vendors and that it is
generally able to obtain attractive pricing and other terms from vendors. If the
Company fails to maintain good relations with its vendors, it may not be able to
obtain attractive pricing with the consequence that its net sales or profit
margins would be reduced. The Company may also face difficulty in obtaining
needed inventory from its vendors because of interruptions in production or for
other reasons, which would adversely affect the Company's business.
THE EFFICIENT OPERATION OF THE COMPANY'S BUSINESS IS HEAVILY DEPENDENT
ON ITS INFORMATION SYSTEMS. As part of its technology update, the Company
installed new flatbed scanners in all of its stores and is in the process of
installing new IBM registers and checkouts. The Company depends on a variety of
other information technology systems for the efficient functioning of its
business. The Company relies on certain software vendors to maintain and
periodically upgrade many of these systems so that they can continue to support
the Company's business. The software programs supporting many of the Company's
systems were licensed to the Company by independent software developers. The
inability of these developers to continue to maintain and upgrade these
information systems and software programs would disrupt or reduce the efficiency
of the Company's operations if it were unable to convert to alternate systems in
an efficient and timely manner.
THE COMPANY IS SUBJECT TO INTEREST RATE RISK. The Company is subject to
market risk from exposure to changes in interest rates based on its financing,
investing and cash management activities. The Company may utilize a credit
facility to fund working capital requirements, which is comprised of variable
rate debt. See "Item 7A - Quantitative and Qualitative Disclosures About Market
Risk."
THE COMPANY IS DEPENDENT UPON THE SMOOTH FUNCTIONING OF ITS
DISTRIBUTION NETWORK. The Company relies upon the ability to replenish depleted
inventory through deliveries to its distribution centers from vendors, and from
27
the distribution centers to its stores by various means of transportation,
including shipments by air, sea and truck on the roads and highways of the
United States. Long-term disruptions to the national and international
transportation infrastructure that lead to delays or interruptions of service
will adversely affect the Company's business.
THE COMPANY IS DEPENDENT ON THE CONTINUED AVAILABILITY OF CAPITAL TO
SUPPORT ITS BUSINESS. As discussed above, in September 2002 the Company's
synthetic leases, in the amount of $383 million, will mature and the Company's
$175 million revolving credit facility will expire. The Company also expects to
fund in the second or third quarter of 2002 $162 million in settlement of the
class action litigation, as further discussed above. In addition, the Company
will continue to need capital to support its plans for future growth. A decline
in the Company's generation of cash flow or the inability of the Company to
obtain financing from third parties would have a material adverse effect on the
Company.
On October 2, 2001, Standard & Poor's lowered the Company's corporate
credit, senior unsecured debt and senior unsecured bank loan ratings from BBB+
to BBB-; as the date hereof, these ratings remain on CreditWatch with negative
implications. On October 2, 2001, Moody's Investors Service, Inc. also lowered
the Company's senior unsecured credit rating, from Baa2 to Ba1, which rating is
on review for further possible downgrades. Credit ratings are generally used by
investors to assess the ability of a company to meet its obligations. The
downgrade in the Company's credit ratings may affect the Company's ability to
obtain financing in the future, and will also affect the terms of any such
financing.
Moreover, in order to issue debt securities to the public, the Company
will have to comply with the registration requirements of the Securities and
Exchange Commission, including among other things the requirement that the
Company disclose "Selected Financial Information" for a period of five fiscal
years. This may require the Company to restate its financial statements for
periods prior to the 1998 fiscal year. Unless and until it is able to do so, the
Company will not be able to access the public capital markets and as a result
will be limited to non-public sources of financing, which may result in
increased costs, less favorable terms, and/or lesser availability than might be
obtainable in the public capital markets.
CAUTION SHOULD BE TAKEN NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS MADE HEREIN, SINCE THE STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE
MADE. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO
ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE OF THIS REPORT OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Financial Risk Management
The Company is exposed to market risk primarily from adverse changes in
interest rates. To minimize such risk, the Company may periodically use
financial instruments, including derivatives. As a matter of policy, the Company
does not buy or sell financial instruments for speculative or trading purposes
and all financial instrument transactions must be authorized and executed
pursuant to Board of Directors approval. All financial instrument positions
taken by the Company are used to reduce risk by hedging an underlying economic
exposure. Because of high correlation between the financial instrument and the
underlying exposure being hedged, fluctuations in the value of the financial
instruments are generally offset by reciprocal changes in the value of the
underlying economic exposure. The financial instruments used by the Company are
straightforward instruments with liquid markets.
The Company has cash flow exposure relating to variable interest rates,
primarily associated with its revolving line of credit and certain lease
obligations, and seeks to manage this risk through the use of interest rate
swaps. The primary interest rate exposure on variable rate obligations is based
on the London Interbank Offered Rate ("LIBOR").
At February 1, 2002, and February 2, 2001, the fair value of the
Company's debt, excluding capital lease obligations, was estimated at
approximately $260.0 million and $295.9 million, respectively, based on the
estimated market value of the debt at those dates. Such fair value is less than
the carrying value of the debt at February 1, 2002, and February 2, 2001, by
approximately $35.6 million and $0.7 million, respectively.
At February 1, 2002, the Company was party to an interest rate swap
agreement with a notional amount of $100 million. The Company designated this
agreement as a hedge of its floating rate commitments relating to a portion of
its synthetic lease agreements. Under the terms of the agreement, the Company
will pay a fixed rate of 5.60% and will receive a floating rate (LIBOR) on the
$100 million notional amount through September 1, 2002. The fair value of the
interest rate swap agreement was $(2.6) million at February 1, 2002. The
counterparty to the Company's interest rate swap agreement was a major financial
institution. The Company is exposed to credit risk in the event of
non-performance by such counterparty, the amount of which exposure is limited to
the unpaid portion of amounts due to the Company pursuant to the interest rate
swap agreement, if any. Although there are no collateral requirements if a
downgrade in the credit rating of the counterparty occurs, the Company believes
that its exposure is mitigated by provisions in the interest rate swap agreement
29
that allow the Company to offset any amounts payable by the Company to the
counterparty with any amounts due to the Company from the counterparty.
At February 2, 2001, the Company was party to the same interest rate
swap agreement with a notional amount of $100 million. Under the terms of the
agreement, the Company paid the same fixed rate of 5.60% and received the same
floating rate (LIBOR) on the $100 million notional amount. The fair value of the
interest rate swap agreement was $(0.4) million at February 2, 2001.
In fiscal 2001, as required by SFAS 133, the Company recorded the fair
value of the interest rate swap in the balance sheet, with the offsetting,
effective portion of the change in fair value recorded in Other Comprehensive
Income, a separate component of Shareholders' Equity. Amounts recorded in Other
Comprehensive Income were reclassified into earnings, as an adjustment to
interest expense, in the same period during which the hedged synthetic lease
agreements affected earnings. In fiscal 2000, as required by the accounting
literature for derivatives and hedging instruments in effect at that time, the
Company recognized any differences paid or received on interest rate swap
agreements as adjustments to interest expense.
Based upon the Company's variable rate borrowing levels, a 1% change in
interest rates would have resulted in a pre-tax loss in earnings and cash flows
of approximately $2.8 million and $2.6 million, including the effects of
interest rate swaps, in 2001 and 2000, respectively. In 2002, the Company does
not anticipate the potential loss due to a 1% change in interest rates to vary
materially from the estimated impact in 2001.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
February 1, 2002 February 2, 2001
- -----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 261,525 $ 162,310
Merchandise inventories 1,131,023 896,235
Deferred income taxes 105,091 21,514
Other current assets 58,408 44,868
- ----------------------------------------------------------------------------------------
Total current assets 1,556,047 1,124,927
- ----------------------------------------------------------------------------------------
Property and equipment, at cost:
Land 144,490 119,410
Buildings 331,795 286,476
Furniture, fixtures and equipment 988,074 823,234
Construction in progress 9,334 110,434
- ----------------------------------------------------------------------------------------
1,473,693 1,339,554
Less accumulated depreciation and amortization 484,778 366,460
- ----------------------------------------------------------------------------------------
Net property and equipment 988,915 973,094
- ----------------------------------------------------------------------------------------
Merchandise inventories -- 116,000
- ----------------------------------------------------------------------------------------
Deferred income taxes -- 52,708
- ----------------------------------------------------------------------------------------
Other assets, net 7,423 15,733
- ----------------------------------------------------------------------------------------
Total assets $ 2,552,385 $ 2,282,462
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 395,675 $ 9,035
Accounts payable 322,463 297,262
Accrued expenses and other 242,780 214,192
Litigation settlement payable 162,000 --
Income taxes 10,633 17,446
- ----------------------------------------------------------------------------------------
Total current liabilities 1,133,551 537,935
- ----------------------------------------------------------------------------------------
Long-term obligations 339,470 720,764
- ----------------------------------------------------------------------------------------
Deferred income taxes 37,646 --
- ----------------------------------------------------------------------------------------
Litigation settlement payable -- 162,000
- ----------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Series B junior participating preferred stock,
stated value $0.50 per share; Shares
authorized: 10,000,000; Issued: None -- --
Common stock, par value $0.50 per share;
Shares authorized: 500,000,000; Issued:
2001-332,718,000; 2000-331,292,000 166,359 165,646
Additional paid-in capital 301,848 283,925
Retained earnings 579,265 414,318
Accumulated other comprehensive loss (3,228) --
- ----------------------------------------------------------------------------------------
1,044,244 863,889
Less common stock purchased by employee
deferred compensation trust:
2001-112,000; 2000-94,000 2,395 2,126
Less unearned compensation related to
outstanding restricted stock 131 --
- ----------------------------------------------------------------------------------------
Total shareholders' equity 1,041,718 861,763
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,552,385 $ 2,282,462
========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
31
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
For the years ended
-------------------------------------------------------------------------
February 1, 2002 February 2, 2001 January 28, 2000
---------------- ---------------- ----------------
% of % of % of
Net Net Net
Amount Sales Amount Sales Amount Sales
- --------------------------------------------------------------------------------------------------------
Net sales $5,322,895 100.00% $4,550,571 100.00% $3,887,964 100.00%
Cost of goods sold 3,813,483 71.64 3,299,668 72.51 2,794,466 71.87
- --------------------------------------------------------------------------------------------------------
Gross profit 1,509,412 28.36 1,250,903 27.49 1,093,498 28.13
Selling, general and
administrative 1,135,801 21.34 934,899 20.54 772,928 19.88
Litigation settlement
expense -- -- 162,000 3.56 -- --
- --------------------------------------------------------------------------------------------------------
Operating profit 373,611 7.02 154,004 3.39 320,570 8.25
Interest expense 45,789 0.86 45,357 1.00 25,873 0.67
- --------------------------------------------------------------------------------------------------------
Income before taxes on 327,822 6.16 108,647 2.39 294,697 7.58
income
Provisions for taxes on
income 120,309 2.26 38,005 0.84 108,024 2.78
- --------------------------------------------------------------------------------------------------------
Net income $ 207,513 3.90% $ 70,642 1.55% $ 186,673 4.80%
=======================================================================================================
Diluted earnings per $ 0.62 $ 0.21 $ 0.55
share
Weighted average diluted
shares (000) 335,017 333,858 337,904
Basic earnings per share $ 0.63 $ 0.21 $ 0.61
=======================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
32
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended February 1, 2002, February 2, 2001 and January 28, 2000
(Dollars in thousands except per share amounts)
Accumulated
Additional Other
Preferred Common Paid-in Retained Comprehensive Treasury Restricted
Stock Stock Capital Earnings Income Stock Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances January 29, 1999 $ 858 $ 164,073 $ 363,212 $ 346,790 $ - $ (200,527) $ - $ 674,406
Net income - - - 186,673 - - - 186,673
Cash dividends,
$0.10 per common share - - - (32,879) - - - (32,879)
Cash dividends,
$0.69 per preferred share - - - (1,178) - - - (1,178)
Issuance of common stock
under stock incentive
plans (5,442,000 shares) - 2,721 36,076 - - - - 38,797
Tax benefit from exercise of
options - - 30,287 - - - - 30,287
Repurchase of common stock
(2,766,000 shares) - (1,383) - (49,370) - - - (50,753)
Conversion of preferred to
common (51,133,000 shares) (858) - (199,669) - - 200,527 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, January 28, 2000 $ - $ 165,411 $ 229,906 $ 450,036 $ - $ - $ - $ 845,353
Net income - - - 70,642 - - - 70,642
Cash dividends,
$0.12 per common share - - - (42,266) - - - (42,266)
Issuance of common stock
under stock incentive
plans (4,103,000 shares) - 2,052 32,078 - - - - 34,130
Tax benefit from exercise of
options - - 19,018 - - - - 19,018
Repurchase of common stock,
net (3,634,000 shares) - (1,817) 2,923 (64,094) - - - (62,988)
Purchase of common stock by
employee deferred
compensation trust
(94,000 shares) - - - - - (2,126) - (2,126)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, February 2, 2001 $ - $ 165,646 $ 283,925 $414,318 $ - $ (2,126) $ - $ 861,763
Comprehensive income:
Net income - - - 207,513 - - - 207,513
Cumulative effect of SFAS
No. 133 - - - - (2,044) - - (2,044)
Net change in fair value
of derivatives - - - - (2,285) - - (2,285)
Net loss on derivatives - - - - 1,101 - - 1,101
----------
Comprehensive income 204,285
Cash dividends,
$0.13 per common share - - - (42,566) - - - (42,566)
33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended February 1, 2002, February 2, 2001 and January 28, 2000
(Dollars in thousands except per share amounts)
Accumulated
Additional Other
Preferred Common Paid-in Retained Comprehensive Treasury Restricted
Stock Stock Capital Earnings Income Stock Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
under stock incentive
plans (1,395,000 shares) - 697 11,571 - - - - 12,268
Tax benefit from exercise of
options - - 5,819 - - - - 5,819
Purchase of common stock by
employee deferred
compensation trust
(18,000 shares) - - - - - (269) - (269)
Issuance of restricted stock
(32,000 shares) - 16 533 - - - (131) 418
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, February 1, 2002 $ - $ 166,359 $ 301,848 $ 579,265 $ (3,228) $ (2,395) $ (131) $1,041,718
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended
--------------------------------------------------------
February 1, 2002 February 2, 2001 January 28, 2000
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 207,513 $ 70,642 $ 186,673
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 122,967 111,399 79,707
Deferred income taxes 6,777 (77,942) (2,261)
Tax benefit from stock option exercises 5,819 19,018 30,287
Litigation settlement - 162,000 -
Change in operating assets and liabilities:
Merchandise inventories (118,788) (59,803) (158,836)
Other current assets (13,540) 4,650 (15,351)
Accounts payable 25,201 (47,336) 78,002
Accrued expenses and other 25,907 39,391 (2,144)
Income taxes (4,941) (9,545) 4,125
Other 8,713 3,031 (3,480)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 265,628 215,505 196,722
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (125,365) (216,584) (142,070)
Proceeds from sale of property and
equipment 1,293 97,612 3,051
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (124,072) (118,972) (139,019)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term borrowings - 220,000 295,324
Repayments of short-term borrowings - (220,000) (295,324)
Issuance of long-term obligations - 199,595 22,848
Repayments of long-term obligations (11,823) (112,276) (7,705)
Payment of cash dividends (42,517) (42,237) (33,791)
Proceeds from exercise of stock options 12,268 34,130 38,797
Repurchase of common stock, net - (62,988) (50,753)
Purchase of common stock by employee
deferred compensation trust (269) (2,126) -
Settlement of derivative financial
instruments - (3,063) -
- -------------------------------------------------------------------------------------------------------
Net cash provided by / (used in) financing
activities (42,341) 11,035 (30,604)
- -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 99,215 107,568 27,099
Cash and cash equivalents, beginning of year 162,310 54,742 27,643
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 261,525 $ 162,310 $ 54,742
=======================================================================================================
Supplemental cash flow information:
Cash paid during year for:
Interest $ 50,297 $ 50,027 $ 28,026
Income taxes $ 110,944 $ 104,311 $ 77,038
- -------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash
investing and financing activities:
Purchase of property and equipment under
capital lease obligations $ 17,169 $ 126,290 $ 272,233
Conversion of preferred stock to common stock $ - - $ 200,527
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation and accounting policies
Basis of presentation
These notes contain references to the years 2002, 2001, 2000 and 1999,
which represent fiscal years ended January 31, 2003, February 1, 2002, February
2, 2001 and January 28, 2000, respectively. The Company's fiscal year ends on
the Friday closest to January 31. There will be 52 weeks in the fiscal year
ended January 31, 2003, and there were 52 weeks in the fiscal years ended
February 1, 2002, and January 28, 2000. There were 53 weeks in the fiscal year
ended February 2, 2001. The consolidated financial statements include all
subsidiaries. Intercompany transactions have been eliminated.
The Company sells general merchandise on a retail basis through 5,540
stores (as of February 1, 2002) located predominantly in small towns in the
Southeastern and Midwestern United States. The Company has Distribution Centers
("DCs") in Scottsville, Kentucky; Ardmore, Oklahoma; South Boston, Virginia;
Indianola, Mississippi; Fulton, Missouri; Alachua, Florida and Zanesville, Ohio.
All share and per share data reflect the effect of common stock splits.
Restatement
On April 30, 2001, the Company announced that it had become aware of
certain accounting issues that would cause it to restate its audited financial
statements for fiscal years 1999 and 1998, and to restate the unaudited
financial information for fiscal year 2000 that had been previously released by
the Company. The Company subsequently restated such financial statements and
financial information by means of its Form 10-K for the fiscal year ended
February 2, 2001, which was filed on January 14, 2002.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less when purchased.
Inventories
Inventories are stated at the lower of cost or market with cost
determined using the retail last-in, first-out ("LIFO") method. The excess of
current cost over LIFO cost was approximately $14.8 million at February 1, 2002,
$18.3 million at February 2, 2001 and $18.7 million at January 28, 2000. Current
cost is determined using the retail first-in first-out method. LIFO reserves
decreased $3.5 million in 2001, decreased $0.4 million in 2000 and increased
$0.2 million in 1999. Costs directly associated with warehousing and
distribution are capitalized into inventory.
36
Pre-opening costs
Pre-opening costs for new stores are expensed as incurred.
Property and equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on a straight-line basis over the following estimated useful lives:
40 years for buildings and 3 to 10 years for furniture, fixtures and equipment.
Amortization of capital lease assets is included in depreciation expense.
Depreciation expense related to property and equipment was approximately $122.3
million in 2001, $110.9 million in 2000 and $79.4 million in 1999.
Software costs
Costs associated with the application development stage of significant
new computer software applications for internal use are deferred and amortized
over periods ranging from three to five years. Costs associated with the
preliminary and post-implementation stages of these projects are expensed as
incurred.
Impairment
When indicators of impairment are present, the Company evaluates the
carrying value of property and equipment and intangibles in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. The Company adjusts the net book value of the underlying assets if the
sum of expected future cash flows is less than the book value. Assets to be
disposed of are adjusted to the fair value less the cost to sell if less than
the book value. In 2001, the Company recorded an approximate $1.1 million
impairment charge to reduce the carrying value of the closed Homerville, Georgia
DC. In 2000, the Company recorded an approximate $3.6 million impairment charge
to reduce the carrying value of the closed Homerville, Georgia DC that is
included in SG&A expense.
Other assets
Other assets consist primarily of debt issuance costs and deferred
finance charges which are amortized over the life of the related obligation.
Insurance claims provisions
The Greater Cumberland Insurance Company, a Vermont-based, wholly-owned
captive insurance subsidiary, charges Dollar General's subsidiary companies
competitive premium rates to insure workers' compensation and non-property
general liability claims risk. The insurance company currently insures no
unrelated third-party risk.
37
The Company retains a significant portion of the risk for its workers'
compensation, employee health insurance, general liability, property and
automobile coverage. Accordingly, provisions are made for the Company's
actuarially determined estimates of undiscounted future claim costs for such
risks. To the extent that subsequent claim costs vary from those estimates,
future earnings will be affected.
Fair value of financial instruments
The carrying amounts reflected in the consolidated balance sheets for
cash, cash equivalents, receivables and payables approximate their respective
fair values. At February 1, 2002 and February 2, 2001, the fair value of the
Company's debt, excluding capital lease obligations, was approximately $260.0
million and $295.9 million, respectively, based upon the estimated market value
of the debt at those dates. Such fair value is less than the carrying value of
the debt at February 1, 2002 and February 2, 2001, by approximately $35.6
million and $0.7 million, respectively. Fair values are based primarily on
quoted prices for those or similar instruments. A discussion of the carrying
value and fair value of the Company's derivative financial instruments is
included in the section entitled "Derivative financial instruments" in Note 1.
Derivative financial instruments
Effective February 3, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS Nos. 137 and 138 and interpreted by
numerous Financial Accounting Standards Board Issues. These statements require
the Company to recognize all derivative instruments on the balance sheet at fair
value. These statements also establish new accounting rules for hedging
instruments, which depend on the nature of the hedge relationship. A fair value
hedge requires that the effective portion of the change in the fair value of a
derivative instrument be offset against the change in the fair value of the
underlying asset, liability, or firm commitment being hedged through earnings. A
cash flow hedge requires that the effective portion of the change in the fair
value of a derivative instrument be recognized in Other Comprehensive Income
("OCI"), a component of Shareholders' Equity, and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.
Any ineffective portion of a derivative instrument's change in fair value is
immediately recognized in earnings. As disclosed in further detail below, the
2001 consolidated financial statements include the provisions required by SFAS
No. 133, while the 2000 consolidated financial statements were prepared in
accordance with the applicable professional literature for derivatives and
hedging instruments in effect at that time.
The adoption of SFAS No. 133 resulted in the Company recording a
cumulative after tax decrease to OCI of approximately $2.0 million. This
adjustment was recorded to recognize the Company's only outstanding derivative
instrument, which is designated and effective as a cash flow hedge, at fair
38
value (approximately $0.2 million) and to reclassify from asset accounts
deferred losses realized on the settlement of interest rate derivatives which
were designated and effective as hedges during fiscal year 2000 (approximately
$1.8 million). The Company estimated that it would reclassify into earnings
during the twelve-month period ending February 1, 2002, approximately $0.4
million of net losses relating to the transition adjustment recorded in OCI as
of February 3, 2001.
The Company uses derivative financial instruments primarily to reduce
its exposure to adverse fluctuations in interest rates and, to a much lesser
extent, other market exposures. When entered into, the Company formally
designates and documents the financial instrument as a hedge of a specific
underlying exposure, as well as the risk management objectives and strategies
for undertaking the hedge transaction. Because of the high degree of
effectiveness between the hedging instrument and the underlying exposure being
hedged, fluctuations in the value of the derivative instruments are generally
offset by changes in the value or cash flows of the underlying exposures being
hedged. Derivatives are recorded in the Consolidated Balance Sheet at fair value
in either other assets, net or accrued expenses and other, depending on whether
the amount is an asset or liability.
The fair values of derivatives used to hedge or modify the Company's
risks fluctuate over time. These fair value amounts should not be viewed in
isolation, but rather in relation to the fair values or cash flows of the
underlying hedged transactions and other exposures and to the overall reduction
in the Company's risk relating to adverse fluctuations in interest rates and
other market factors. In addition, the earnings impact resulting from the
Company's derivative instruments is recorded in the same line item within the
Consolidated Statement of Income as the underlying exposure being hedged. The
Company also formally assesses, both at