UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 2002
Commission file number 001-11421
DOLLAR GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 61-0502302
----------------------------------------------- ------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
100 Mission Ridge
Goodlettsville, Tennessee 37072
----------------------------------------------------
(Address of principal executive offices, zip code)
(615) 855-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
The number of shares of common stock outstanding as of August 16, 2002 was
333,259,413.
Dollar General Corporation
Form 10-Q
For the Quarter Ended August 2, 2002
Index
Page No.
Part I. - Financial Information........................................................3
Item 1. Financial Statements..........................................................3
Condensed Consolidated Balance Sheets as of August 2, 2002 and
February 1, 2002..............................................................3
Condensed Consolidated Statements of Income for the 13 and 26
weeks ended August 2, 2002 and August 3, 2001.................................4
Condensed Consolidated Statements of Cash Flows for the 26 weeks
ended August 2, 2002 and August 3, 2001.......................................6
Notes to Condensed Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................29
Part II. - Other Information..........................................................29
Item 1. Legal Proceedings............................................................29
Item 4. Submission of Matters to a Vote of Security Holders..........................32
Item 5. Other Information............................................................33
Item 6. Exhibits and Reports on Form 8-K.............................................34
Signatures...................................................................36
2
Part I. Financial Information
Item 1. Financial Statements
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
August 2, 2002 February 1,
(Unaudited) 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 39,517 $ 261,525
Merchandise inventories .......................... 1,058,200 1,131,023
Deferred income taxes ............................ 25,552 105,091
Income taxes receivable .......................... 55,573 6,820
Other current assets ............................. 65,263 51,588
----------- -----------
Total current assets ..................... 1,244,105 1,556,047
----------- -----------
Property and equipment, at cost .................. 1,547,346 1,473,693
Less accumulated depreciation and amortization ... 548,073 484,778
----------- -----------
Net property and equipment ............... 999,273 988,915
----------- -----------
Other assets ..................................... 21,851 7,423
----------- -----------
Total assets ............................. $ 2,265,229 $ 2,552,385
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations ......... $ 15,132 $ 395,675
Accounts payable ................................. 346,786 322,463
Accrued expenses and other ....................... 219,220 253,413
Litigation settlement payable .................... -- 162,000
----------- -----------
Total current liabilities ................ 581,138 1,133,551
----------- -----------
Long-term obligations ................................ 506,707 339,470
Deferred income taxes ................................ 46,030 37,646
Shareholders' equity:
Preferred stock .................................. -- --
Common stock ..................................... 166,670 166,359
Additional paid-in capital ....................... 312,589 301,848
Retained earnings ................................ 656,894 579,265
Accumulated other comprehensive loss ............. (2,012) (3,228)
----------- -----------
1,134,141 1,044,244
Less other shareholders' equity .................. 2,787 2,526
----------- -----------
Total shareholders' equity ............... 1,131,354 1,041,718
----------- -----------
Total liabilities and shareholders' equity $ 2,265,229 $ 2,552,385
=========== ===========
See notes to condensed consolidated financial statements.
3
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(Amounts in thousands except per share amounts)
13 Weeks Ended
--------------------------------------------------------------------
August 2, 2002 % of Net Sales August 3, 2001 % of Net Sales
-------------- -------------- -------------- --------------
Net sales ..................................... $ 1,453,727 100.0% $ 1,225,254 100.0%
Cost of goods sold ............................ 1,066,300 73.3 893,971 73.0
----------- ------------ ----------- ------------
Gross profit ............................ 387,427 26.7 331,283 27.0
Selling, general and administrative expense.... 313,667 21.6 276,069 22.5
Insurance proceeds ............................ (4,500) (0.3) -- --
----------- ------------ ----------- ------------
Operating profit ........................ 78,260 5.4 55,214 4.5
Interest expense .............................. 11,337 0.8 11,957 1.0
----------- ------------ ----------- ------------
Income before income taxes .............. 66,923 4.6 43,257 3.5
Provision for taxes on income ................. 24,561 1.7 16,157 1.3
----------- ------------ ----------- ------------
Net income .............................. $ 42,362 2.9% $ 27,100 2.2%
=========== ============ =========== ============
Earnings per share:
Basic ................................... $ 0.13 $ 0.08
=========== ===========
Diluted ................................. $ 0.13 $ 0.08
=========== ===========
Weighted average shares:
Basic ................................... 333,067 332,330
=========== ===========
Diluted ................................. 335,737 335,402
=========== ===========
Dividends per share ........................... $ .032 $ .032
=========== ===========
See notes to condensed consolidated financial statements.
4
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(Amounts in thousands except per share amounts)
26 Weeks Ended
--------------------------------------------------------------------
August 2, 2002 % of Net Sales August 3, 2001 % of Net Sales
-------------- -------------- -------------- --------------
Net sales ...................................... $ 2,843,139 100.0% $ 2,427,758 100.0%
Cost of goods sold ............................. 2,075,420 73.0 1,775,050 73.1
----------- ------------ ----------- ------------
Gross profit ............................. 767,719 27.0 652,708 26.9
Selling, general and administrative expense..... 610,971 21.5 528,059 21.8
Insurance proceeds ............................. (4,500) (0.2) -- --
----------- ------------ ----------- ------------
Operating profit ......................... 161,248 5.7 124,649 5.1
Interest expense ............................... 21,769 0.8 23,557 0.9
----------- ------------ ----------- ------------
Income before income taxes ............... 139,479 4.9 101,092 4.2
Provision for taxes on income .................. 51,189 1.8 37,759 1.6
----------- ------------ ----------- ------------
Net income ............................... $ 88,290 3.1% $ 63,333 2.6%
=========== ============ =========== ============
Earnings per share:
Basic .................................... $ 0.27 $ 0.19
=========== ============
Diluted .................................. $ 0.26 $ 0.19
=========== ============
Weighted average shares:
Basic .................................... 332,866 331,959
=========== ============
Diluted .................................. 335,286 335,293
=========== ============
Dividends per share ............................ $ .064 $ .064
=========== ============
See notes to condensed consolidated financial statements.
5
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
26 Weeks Ended
---------------------------------
August 2, 2002 August 3, 2001
-------------- --------------
Cash flows from operating activities:
Net income $ 88,290 $ 63,333
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 66,019 60,980
Deferred income taxes 87,296 (7,135)
Tax benefit from stock option exercises 2,120 4,656
Litigation settlement (162,000) --
Change in operating assets and liabilities:
Merchandise inventories 72,823 (84,621)
Other current assets (13,675) 2,269
Accounts payable 24,323 (2,478)
Accrued expenses and other (11,206) (59)
Income taxes (59,464) (21,995)
Other (13,914) (5,131)
--------- ---------
Net cash provided by operating activities 80,612 9,819
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (70,445) (73,942)
Proceeds from sale of property and equipment 127 144
--------- ---------
Net cash used in investing activities (70,318) (73,798)
--------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit facilities 170,000 --
Repayments of long-term obligations (389,561) (6,023)
Payments of cash dividends (21,307) (21,268)
Proceeds from exercise of stock options 4,509 10,623
Other financing activities 4,057 (33)
--------- ---------
Net cash used in financing activities (232,302) (16,701)
--------- ---------
Net decrease in cash and cash equivalents (222,008) (80,680)
Cash and cash equivalents, beginning of period 261,525 162,310
--------- ---------
Cash and cash equivalents, end of period $ 39,517 $ 81,630
========= =========
Supplemental schedule of noncash investing and financing activities -
Purchase of property and equipment under capital lease obligations $ 6,233 $ 17,393
========= =========
See notes to condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
1. Basis of presentation and accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements
of the Dollar General Corporation (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and are presented in accordance with the requirements of Form 10-Q
and Rule 10-01 of Regulation S-X. Such financial statements consequently do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally made in the Company's Annual Report on
Form 10-K. Accordingly, the reader of this quarterly report on Form 10-Q should
refer to the Company's Annual Report on Form 10-K for the year ended February 1,
2002 for additional information.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. In management's opinion, all adjustments (which are of a
normal recurring nature) necessary for a fair presentation of the consolidated
financial position and results of operations for the 13-week and 26-week periods
ended August 2, 2002 and August 3, 2001 have been made.
Certain prior year amounts have been reclassified to conform to the
current period presentation. Ongoing estimates of inventory shrinkage and
markdowns are included in the interim cost of goods sold calculation. Because
the Company's business is moderately seasonal, the results for interim periods
are not necessarily indicative of the results to be expected for the entire
year.
Accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("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 to apply the new accounting rules on
February 2, 2002. The adoption of SFAS No. 141 has not had a material impact on
the Company's financial position or results of operations.
The Company completed the transitional goodwill impairment reviews
required by SFAS No. 142 during the second quarter of 2002. In performing the
impairment
7
review, the Company reviewed the operating performance of its retail operations.
This review did not indicate any impairment of goodwill. The adoption of SFAS
No. 142 has not had 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
adoption of SFAS No. 143 will not have a material impact on the Company's
financial position or results of operations.
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. It
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 144 has not
had a material impact on the Company's financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds both SFAS Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and the amendment to SFAS No. 4, SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
SFAS No. 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, an entity is
not prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of APB Opinion No. 30. The
Company will adopt the provisions of SFAS No. 145 on February 1, 2003 and
believes the adoption of SFAS No. 145 will not have a material effect on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No. 94-3 had recognized the liability at the commitment date to an
exit plan. The Company is required to adopt the provisions of SFAS No. 146
effective for exit or disposal activities initiated after December 31, 2002. The
Company believes the adoption of this statement will not have a material impact
on its financial position or results of operations.
8
2. Comprehensive income
Comprehensive income consists of the following (in thousands):
13 Weeks Ended
----------------------------------
August 2, 2002 August 3, 2001
-------------- --------------
Net income $ 42,362 $ 27,100
Net change in derivative financial
instruments 665 (205)
-------- --------
$ 43,027 $ 26,895
======== ========
26 Weeks Ended
----------------------------------
August 2, 2002 August 3, 2001
-------------- --------------
Net income $ 88,290 $ 63,333
Net change in derivative financial
instruments 1,216 (3,044)
-------- --------
$ 89,506 $ 60,289
======== ========
3. Debt refinancing
At May 3, 2002, the Company had $383 million outstanding under two
synthetic lease facilities (the "Synthetic Lease Facilities"), one with $212
million in outstanding capital leases and the other with $171 million in
outstanding capital leases. As of such date, the Company also had a $175 million
revolving credit agreement (the "Old Credit Facility"), under which no amounts
were outstanding. The Synthetic Lease Facilities were scheduled to mature and
the Old Credit Facility was scheduled to expire in September 2002.
On June 21, 2002, the Company closed on its previously announced $450
million revolving credit facility (the "New Credit Facilities"), pursuant to
which SunTrust Bank is serving as Administrative Agent, Credit Suisse First
Boston is the Syndication Agent and KeyBank N.A. and U.S. Bank N.A. are
Co-Documentation Agents. The Company used the New Credit Facilities (i) to
replace the Old Credit Facility (ii) to refinance the Synthetic Lease Facilities
and (iii) for working capital and other general corporate purposes. The New
Credit Facilities are split between a $300 million three-year revolving credit
facility, and a $150 million 364-day revolving credit facility. The Company pays
interest on funds borrowed under the New Credit Facilities at rates that are
subject to change based upon the rating of the Company's senior debt by
independent agencies. The Company has two interest rate options, base rate
(which is usually equal to prime rate) and LIBOR. At the Company's current
ratings, the facility fees are 37.5 basis points and 32.5 basis points on the
two facilities, respectively. The all-in drawn margin under the LIBOR option is
LIBOR plus 237.5 basis points on both facilities. The all-in drawn margin
9
under the base rate option is the base rate plus 125 basis points and the base
rate plus 120 basis points on the two facilities, respectively. The New Credit
Facilities are secured by the same real estate assets that served as collateral
for the Synthetic Lease Facilities: approximately 400 of the Company's retail
stores, its headquarters and two of its distribution centers. As of August 2,
2002, the Company had $170 million outstanding under the New Credit Facilities,
at a rate of 4.3%.
4. Commitments and Contingencies
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 were 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. Among other things, plaintiffs 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 sought damages with interest, costs and such
other relief as the court deemed proper.
On January 3, 2002, the Company reached a settlement agreement with the
putative class action plaintiffs, pursuant to which the Company agreed to pay up
to $162 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.
On April 1, 2002, following the completion of such confirmatory
discovery, the Company and the putative class action plaintiffs amended their
settlement agreement and the plaintiffs filed a second amended complaint,
purporting to name as plaintiffs a class of persons who purchased or otherwise
made an investment decision regarding the Company's securities and related
derivative securities between March 5, 1997 and
10
January 14, 2002. Pursuant to the amended settlement agreement, the Company
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 was approved by the court on May 24,
2002.
Pursuant to the terms of such agreement, the Company disbursed $1
million of such funds in April 2002 and the remaining amount of $161 million in
June and July 2002. In addition, the Company received from its insurers $4.5
million in respect of such settlement in July 2002. The Company recognized an
expense of $162 million in the fourth quarter of 2000 in respect of the class
action settlement agreement, and income of $4.5 million in the second quarter of
2002 in respect of the receipt of such insurance proceeds.
Plaintiffs representing fewer than 1% of the shares traded during the
class period chose to opt out of the class settlement and may elect to pursue
recovery against the Company individually. Because no separate litigation has
yet been filed by parties who opted out, the Company cannot estimate the
potential liabilities associated with such litigation, but it does not believe
that the resolution of any such litigation will have a material effect on the
Company's financial position.
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.
Two purported shareholder derivative lawsuits also have been filed and
consolidated in the United States District Court for the Middle District of
Tennessee against certain current and former Company directors and officers
alleging that they
11
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 was stayed until
June 3, 2002. Based on the settlement of the Tennessee state derivative actions
described below and the dismissal of the appeal filed by Cornelius P. Warren,
the lead plaintiff in the federal derivative case, the Company and the
individual defendants moved to dismiss the federal derivative case on August 27,
2002. A status conference with respect to this case is currently scheduled for
September 12, 2002.
The Company and the individual defendants have reached a settlement
agreement with the plaintiffs in the lead Tennessee state shareholder derivative
action. The agreement includes a payment to the Company from a portion of the
proceeds of the Company's director and officer liability insurance policies as
well as certain corporate governance and internal control enhancements. The
terms of such agreements require that all of the stayed cases, including the
federal derivative cases described above, be dismissed with prejudice by the
courts in which they are pending in order for the settlement to be effective.
Following confirmatory discovery, the settlement agreement was preliminarily
approved by the Tennessee State Court on April 19, 2002, and received final
approval on June 4, 2002. On July 5, 2002, Cornelius P. Warren, the lead
plaintiff in the federal derivative case, appealed the approval of the
settlement in the state derivative cases to the Court of Appeals of Tennessee.
Such appeal was dismissed by the Court of Appeals of Tennessee by Order dated
July 22, 2002. Mr. Warren has not yet filed notice of his intention to appeal
this dismissal; any such notice must be filed by no later than September 20,
2002.
Pending the final resolution of the federal derivative case and any
further appeal of the settlement that Mr. Warren may bring, $31.5 million of
proceeds of the Company's director and officer insurance policies are being held
in escrow. If the settlement becomes final, the Company expects that it will
result in a net payment to the Company, after attorneys' fees payable to the
plaintiffs' counsel, of approximately $25.2 million, which payment has not yet
been accrued in the Company's financial statements.
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. At this time, the Company
is unable to predict the outcome of this investigation and the ultimate effects
on the Company.
12
5. Stock incentive plans
The Company has established stock incentive plans under which
restricted stock awards and stock options to purchase common stock may be
granted to executive officers, directors and key employees.
All stock options granted in 2002, 2001 and 2000 under the 1998 Stock
Incentive Plan, the 1995 Employee Stock Incentive Plan, the 1993 Employee Stock
Incentive Plan and the 1995 Outside Directors Stock Option Plan, were
non-qualified stock options issued at a price equal to the fair market value of
the Company's common stock on the date of grant. Non-qualified options granted
under these plans have expiration dates no later than 10 years following the
date of grant.
Under the plans, stock option grants are made to key management
employees ranging from executive officers to store managers and assistant store
managers, as well as other employees, as prescribed prior to June 3, 2002 by the
Corporate Governance and Compensation Committee of the Company's Board of
Directors and from such date by the Board's newly formed Compensation Committee,
in each case upon final approval by the Board. The number of options granted and
the vesting schedules of those options are directly linked to the employee's
performance, Company performance or employee tenure depending on the employee's
position within the Company.
The plans also provide for annual stock option grants to non-employee
directors according to a non-discretionary formula. The number of shares granted
is dependent upon current director compensation levels and the fair market value
of the stock on the grant date.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its plans. Under this intrinsic-value based
method of accounting, compensation expense is generally not recognized for stock
option grants in which the exercise price of the stock options equals the market
price of the underlying stock on the date of grant and the number of shares
subject to exercise is fixed. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock Based Compensation," net
income and earnings per share would have been reduced to the pro forma amounts
indicated in the following table.
13
13 Weeks 26 Weeks
(Amounts in thousands except Ended Ended
per share data) August 2, August 2, Fiscal Year Fiscal Year
2002 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------
Net income - as reported $ 42,362 $ 88,290 $ 207,513 $ 70,642
Net income - pro forma $ 38,257 $ 79,224 $ 196,052 $ 50,805
----------------------------------------------------------------------------------------------------------------------
Earnings per share - as reported
Basic $ 0.13 $ 0.27 $ 0.63 $ 0.21
Diluted $ 0.13 $ 0.26 $ 0.62 $ 0.21
Earnings per share - pro forma
Basic $ 0.11 $ 0.24 $ 0.59 $ 0.15
Diluted $ 0.11 $ 0.24 $ 0.59 $ 0.15
----------------------------------------------------------------------------------------------------------------------
Earnings per share have been adjusted to give retroactive effect to all
common stock splits.
The pro forma effects on net income for 2002, 2001 and 2000 are not
necessarily representative of the pro forma effect on net income in future years
because they do not take into consideration pro forma compensation expense
related to grants made prior to 1995. The average per share fair value of
options granted during 2002, 2001 and 2000 was $4.84, $6.77 and $10.76,
respectively.
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
2002 2001 2000
------------------------------------------------------------------------------------
Expected dividend yield 0.8% 0.8% 0.7%
Expected stock price volatility 39.0% 35.3% 49.0%
Weighted average risk-free interest rate 4.1% 4.8% 6.2%
Expected life of options (years) 3.6 6.0 6.8
------------------------------------------------------------------------------------
The Black-Scholes option model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee and director stock options.
6. Related party transactions
In July and August of 2002, Cal Turner, the Company's Chairman and
Chief Executive Officer, made voluntary payments to the Company totaling
approximately $6.8 million in cash. Of such amount, approximately $6.0 million
represented the value on April 10, 2002 of
14
stock Mr. Turner acquired on April 7, 1999 and April 20, 2000 upon the exercise
of stock options (net of the strike price of such options), which stock Mr.
Turner continues to own, and approximately $0.8 million represented the value of
performance-based bonuses received by Mr. Turner in April 1999 and April 2000.
Mr. Turner voluntarily paid such amounts to the Company because the options
vested and the performance bonuses were paid based on performance measures that
were attained under the Company's originally reported financial results for the
period covered by the Company's restatement. Those measures would not have been
attained under the subsequently restated results. The Company recorded the
approximately $6.0 million receipt as a contribution of capital, which was
recorded as an increase in additional paid in capital in the condensed
consolidated balance sheet as of August 2, 2002. The Company will record the
approximately $0.8 million receipt as a reduction of selling, general and
administrative expenses during the third quarter of 2002.
7. Segment reporting
The Company manages its business on the basis of one reportable
segment. As of August 2, 2002 and August 3, 2001, all of the Company's
operations were located within the United States. The following data is
presented in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The following amounts are in thousands:
13 Weeks Ended
----------------------------------
August 2, 2002 August 3, 2001
-------------- --------------
Sales by category:
Highly consumable ........ $ 892,507 $ 737,778
Hardware and seasonal..... 226,328 185,082
Basic clothing ........... 146,620 131,200
Home products ............ 188,272 171,194
---------- ----------
$1,453,727 $1,225,254
========== ==========
26 Weeks Ended
----------------------------------
August 2, 2002 August 3, 2001
-------------- --------------
Sales by category:
Highly consumable......... $ 1,743,744 $1,459,070
Hardware and seasonal..... 431,091 353,885
Basic clothing............ 288,921 261,832
Home products............. 379,383 352,971
----------- ----------
$ 2,843,139 $2,427,758
=========== ==========
15
8. Guarantor subsidiaries
All of the Company's subsidiaries (the "Guarantors") have fully and
unconditionally guaranteed on a joint and several basis the Company's
obligations under certain outstanding notes payable. Each of the Guarantors is a
wholly-owned subsidiary of the Company. The Guarantors comprise all of the
direct and indirect subsidiaries of the Company.
In order to participate as a subsidiary guarantor on certain of the
Company's financing arrangements, a subsidiary of the Company has entered into a
letter agreement with certain state regulatory agencies to maintain
stockholders' equity of at least $250 million.
Condensed combined financial information for the Guarantors is set
forth below. Dollar amounts are in thousands.
16
August 2, 2002
----------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents $ (2,611) $ 42,128 $ -- $ 39,517
Merchandise inventories -- 1,058,200 -- 1,058,200
Deferred income taxes 9,675 15,877 -- 25,552
Income taxes receivable 64,229 (8,656) -- 55,573
Other current assets 16,139 1,155,134 (1,106,010) 65,263
----------- ----------- ----------- -----------
Total current assets 87,432 2,262,683 (1,106,010) 1,244,105
----------- ----------- ----------- -----------
Property and equipment, at cost 163,857 1,383,489 -- 1,547,346
Less accumulated depreciation
and amortization 58,977 489,096 -- 548,073
----------- ----------- ----------- -----------
Net property and equipment 104,880 894,393 -- 999,273
----------- ----------- ----------- -----------
Other assets 2,562,235 3,559 (2,543,943) 21,851
----------- ----------- ----------- -----------
Total assets $ 2,754,547 $ 3,160,635 $(3,649,953) $ 2,265,229
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 8,116 $ 7,016 $ -- $ 15,132
Accounts payable 1,191,510 261,286 (1,106,010) 346,786
Accrued expenses and other 33,857 185,363 -- 219,220
----------- ----------- ----------- -----------
Total current liabilities 1,233,483 453,665 (1,106,010) 581,138
----------- ----------- ----------- -----------
Long-term obligations 389,034 871,395 (753,722) 506,707
Deferred income taxes 676 45,354 -- 46,030
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 166,670 23,853 (23,853) 166,670
Additional paid-in capital 312,589 1,247,279 (1,247,279) 312,589
Retained earnings 656,894 519,089 (519,089) 656,894
Accumulated other comprehensive
loss (2,012) -- -- (2,012)
----------- ----------- ----------- -----------
1,134,141 1,790,221 (1,790,221) 1,134,141
Less other shareholders' equity 2,787 -- -- 2,787
----------- ----------- ----------- -----------
Total shareholders' equity 1,131,354 1,790,221 (1,790,221) 1,131,354
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 2,754,547 $ 3,160,635 $(3,649,953) $ 2,265,229
=========== =========== =========== ===========
17
February 1, 2002
----------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents $ 217,539 $ 43,986 $ -- $ 261,525
Merchandise inventories -- 1,131,023 -- 1,131,023
Deferred income taxes 79,203 25,888 -- 105,091
Income taxes receivable 6,720 100 -- 6,820
Other current assets 8,686 912,982 (870,080) 51,588
----------- ----------- ----------- -----------
Total current assets 312,148 2,113,979 (870,080) 1,556,047
----------- ----------- ----------- -----------
Property and equipment, at cost 158,347 1,315,346 -- 1,473,693
Less accumulated depreciation
and amortization 51,832 432,946 -- 484,778
----------- ----------- ----------- -----------
Net property and equipment 106,515 882,400 -- 988,915
----------- ----------- ----------- -----------
Other assets 2,079,572 2,022 (2,074,171) 7,423
----------- ----------- ----------- -----------
Total assets $ 2,498,235 $ 2,998,401 $(2,944,251) $ 2,552,385
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 65,682 $ 329,993 $ -- $ 395,675
Accounts payable 944,830 247,713 (870,080) 322,463
Accrued expenses and other 76,526 176,887 -- 253,413
Litigation settlement payable 162,000 -- -- 162,000
----------- ----------- ----------- -----------
Total current liabilities 1,249,038 754,593 (870,080) 1,133,551
----------- ----------- ----------- -----------
Long-term obligations 200,460 830,881 (691,871) 339,470
Deferred income taxes 7,019 30,627 -- 37,646
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 166,359 23,853 (23,853) 166,359
Additional paid-in capital 301,848 929,680 (929,680) 301,848
Retained earnings 579,265 428,767 (428,767) 579,265
Accumulated other comprehensive loss (3,228) -- -- (3,228)
----------- ----------- ----------- -----------
1,044,244 1,382,300 (1,382,300) 1,044,244
Less other shareholders' equity 2,526 -- -- 2,526
----------- ----------- ----------- -----------
Total shareholders' equity 1,041,718 1,382,300 (1,382,300) 1,041,718
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 2,498,235 $ 2,998,401 $(2,944,251) $ 2,552,385
=========== =========== =========== ===========
18
Quarter Ended
----------------------------------------------------------------------------
August 2, 2002
----------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
STATEMENTS OF INCOME DATA:
Net sales $ 15,399 $1,453,727 $(15,399) $ 1,453,727
Cost of goods sold -- 1,066,300 -- 1,066,300
-------- ---------- -------- -----------
Gross profit 15,399 387,427 (15,399) 387,427
Selling, general and administrative
expense 16,560 312,506 (15,399) 313,667
Insurance proceeds (4,500) -- -- (4,500)
-------- ---------- -------- -----------
Operating profit 3,339 74,921 -- 78,260
Interest expense 7,546 3,791 -- 11,337
-------- ---------- -------- -----------
Income before income taxes (4,207) 71,130 -- 66,923
Provision (benefit) for taxes on income (1,637) 26,198 -- 24,561
Equity in subsidiaries' earnings, net 44,932 -- (44,932) --
-------- ---------- -------- -----------
Net income $ 42,362 $ 44,932 $(44,932) $ 42,362
======== ========== ======== ===========
Year to Date
----------------------------------------------------------------------------
August 2, 2002
----------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
STATEMENTS OF INCOME DATA:
Net sales $ 61,851 $2,843,139 $(61,851) $ 2,843,139
Cost of goods sold -- 2,075,420 -- 2,075,420
-------- ---------- -------- -----------
Gross profit 61,851 767,719 (61,851) 767,719
Selling, general and administrative
expense 58,121 614,701 (61,851) 610,971
Insurance proceeds (4,500) -- -- (4,500)
-------- ---------- -------- -----------
Operating profit 8,230 153,018 -- 161,248
Interest expense 11,550 10,219 -- 21,769
-------- ---------- -------- -----------
Income before income taxes (3,320) 142,799 -- 139,479
Provision (benefit) for taxes on income (1,289) 52,478 -- 51,189
Equity in subsidiaries' earnings, net 90,321 -- (90,321) --
-------- ---------- -------- -----------
Net income $ 88,290 $ 90,321 $(90,321) $ 88,290
======== ========== ======== ===========
19
Quarter Ended
----------------------------------------------------------------------------
August 3, 2001
----------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
STATEMENTS OF INCOME DATA:
Net sales $ 41,844 $1,225,254 $(41,844) $1,225,254
Cost of goods sold -- 893,971 -- 893,971
-------- ---------- -------- ----------
Gross profit 41,844 331,283 (41,844) 331,283
Selling, general and administrative expense 38,396 279,517 (41,844) 276,069
-------- ---------- -------- ----------
Operating profit 3,448 51,766 -- 55,214
Interest expense 5,297 6,660 -- 11,957
-------- ---------- -------- ----------
Income before income taxes (1,849) 45,106 -- 43,257
Provision (benefit) for taxes on income (690) 16,847 -- 16,157
Equity in subsidiaries' earnings, net 28,259 -- (28,259) --
-------- ---------- -------- ----------
Net income $ 27,100 $ 28,259 $(28,259) $ 27,100
======== ========== ======== ==========
Year to Date
----------------------------------------------------------------------------
August 3, 2001
----------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
STATEMENTS OF INCOME DATA:
Net sales $ 77,687 $2,427,758 $(77,687) $2,427,758
Cost of goods sold -- 1,775,050 -- 1,775,050
-------- ---------- -------- ----------
Gross profit 77,687 652,708 (77,687) 652,708
Selling, general and administrative expense 68,476 537,270 (77,687) 528,059
-------- ---------- -------- ----------
Operating profit 9,211 115,438 -- 124,649
Interest expense 9,920 13,637 -- 23,557
-------- ---------- -------- ----------
Income before income taxes (709) 101,801 -- 101,092
Provision (benefit) for taxes on income (264) 38,023 -- 37,759
Equity in subsidiaries' earnings, net 63,778 -- (63,778) --
-------- ---------- -------- ----------
Net income $ 63,333 $ 63,778 $(63,778) $ 63,333
======== ========== ======== ==========
20
For the 26 weeks ended
-------------------------------------------------------------------
August 2, 2002
-------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating activities:
Net income $ 88,290 $ 90,321 $ (90,321) $ 88,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,987 58,032 -- 66,019
Deferred income taxes 62,558 24,738 -- 87,296
Equity in subsidiaries' earnings, net (90,321) -- 90,321 --
Tax benefit from stock option exercises 2,120 -- -- 2,120
Litigation settlement (162,000) -- -- (162,000)
Change in operating assets and liabilities:
Merchandise inventories -- 72,823 -- 72,823
Other current assets (9,166) (131,100) 126,591 (13,675)
Accounts payable 276,945 (126,031) (126,591) 24,323
Accrued expenses and other (19,822) 8,616 -- (11,206)
Income taxes (68,080) 8,616 -- (59,464)
Other (10,802) (3,112) -- (13,914)
--------- --------- --------- ---------
Net cash provided by operating activities 77,709 2,903 -- 80,612
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (6,390) (64,055) -- (70,445)
Proceeds from sale of property and equipment 41 86 -- 127
Issuance of long-term notes receivable (61,851) -- 61,851 --
Contribution of capital (317,602) -- 317,602 --
--------- --------- --------- ---------
Net cash used in investing activities (385,802) (63,969) 379,453 (70,318)
--------- --------- --------- ---------
Cash flows from financing activities:
Issuance of long-term obligations 170,000 61,851 (61,851) 170,000
Repayments of long-term obligations (69,316) (320,245) -- (389,561)
Payments of cash dividends (21,307) -- -- (21,307)
Proceeds from exercise of stock options 4,509 -- -- 4,509
Other financing activities 4,057 -- -- 4,057
Issuance of common stock, net -- 317,602 (317,602) --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 87,943 59,208 (379,453) (232,302)
--------- --------- --------- ---------
Net decrease in cash and cash equivalents (220,150) (1,858) -- (222,008)
Cash and cash equivalents, beginning of period 217,539 43,986 -- 261,525
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ (2,611) $ 42,128 $ -- $ 39,517
========= ========= ========= =========
21
For the 26 weeks ended
-------------------------------------------------------------------
August 3, 2001
-------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------- ------------- ------------- ------------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating activities:
Net income $ 63,333 $ 63,777 $(63,777) $ 63,333
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization 7,040 53,940 -- 60,980
Deferred income taxes (473) (6,662) -- (7,135)
Equity in subsidiaries' earnings, net (63,777) -- 63,777 --
Tax benefit from stock option exercises 4,656 -- -- 4,656
Change in operating assets and liabilities:
Merchandise inventories -- (84,621) -- (84,621)
Other current assets (6,777) 21,547 (12,501) 2,269
Accounts payable (3,073) (11,906) 12,501 (2,478)
Accrued expenses and other 7,598 (7,657) -- (59)
Income taxes 467 (22,462) -- (21,995)
Other 6,048 (11,179) -- (5,131)
--------- -------- -------- ---------
Net cash provided by (used in) operating
activities 15,042 (5,223) -- 9,819
--------- -------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment (9,893) (64,049) -- (73,942)
Proceeds from sale of property and equipment 15 129 -- 144
Issuance of long-term notes receivable (77,687) -- 77,687 --
Other 2,049 -- (2,049) --
--------- -------- -------- ---------
Net cash used in investing activities (85,516) (63,920) 75,638 (73,798)
--------- -------- -------- ---------
Cash flows from financing activities:
Issuance of long-term obligations -- 77,687 (77,687) --
Repayments of long-term obligations (616) (5,407) -- (6,023)
Payments of cash dividends (21,268) -- -- (21,268)
Proceeds from exercise of stock options 10,623 -- -- 10,623
Other financing activities (33) (2,049) 2,049 (33)
--------- -------- -------- ---------
Net cash provided by (used in) financing activities (11,294) 70,231 (75,638) (16,701)
--------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents (81,768) 1,088 -- (80,680)
Cash and cash equivalents, beginning of period 120,643 41,667 -- 162,310
--------- -------- -------- ---------
Cash and cash equivalents, end of period $ 38,875 $ 42,755 $ -- $ 81,630
========= ======== ======== =========
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following text contains references to years 2002, 2001 and 2000,
which represent fiscal years of the Dollar General Corporation (the "Company")
ending or ended January 31, 2003, February 1, 2002 and February 2, 2001,
respectively. This discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the condensed consolidated financial
statements and the notes thereto as of August 2, 2002.
Results of Operations
The nature of the Company's business is modestly seasonal.
Historically, sales in the fourth quarter have been higher than sales achieved
in each of the first three quarters of the fiscal year. Expenses, and to a
greater extent operating income, vary by quarter. Results of a period shorter
than a full year may not be indicative of results expected for the entire year.
Furthermore, comparing any period with a period other than the same period of
the previous year may reflect the seasonal nature of the Company's business.
13 WEEKS ENDED AUGUST 2, 2002 AND AUGUST 3, 2001
Net Sales. Net sales for the 13 weeks ended August 2, 2002 were $1.45
billion as compared against $1.23 billion during the 13 weeks ended August 3,
2001, an increase of 18.6%. The increase resulted primarily from 563 net new
stores and a same store sales increase of 9.6%. Same store sales increases are
calculated based on the comparable calendar weeks in the prior year, and include
only those stores that were open both at the end of a fiscal period and the
beginning of the preceding fiscal year. The Company attributes the increase in
same store sales to a number of factors, including the introduction of new items
in the highly consumable category, a strong presentation of seasonal
merchandise, the addition of perishable products in approximately 600 stores,
and improved ordering practices by the Company's stores. Net sales increases by
category were as follows: highly consumable 21.0%, hardware and seasonal 22.3%;
basic clothing 11.8%; and home products 10.0%.
Gross Profit. Gross profit during the current year period was $387.4
million, or 26.7% of sales, versus $331.3 million, or 27.0% of sales during the
comparable period in the prior year, an increase of 16.9%. The reduction in the
gross margin rate as a percentage of sales was due to a number of factors,
including but not limited to a reduction in the average mark-up on inventory
purchases due to a decision by the Company to purchase fewer high margin but
slower turning items and to reduce its inventory position in the basic clothing
and home products categories, an increase in the shrink provision and the
continued shift in the Company's sales to lower margin consumable basics items.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
during the current year period were $313.7 million, or 21.6% of sales, versus
$276.1 million or 22.5% of sales, during the comparable period in the prior
year, an increase of 13.6%. Restatement-related expenses resulted in a net
reduction to SG&A expenses of $0.7 million in the current year period. The
Company adjusted its restatement-related professional fees accrual during the
current period to reflect a lower than anticipated incurrence of legal fees
during the current fiscal year. The Company incurred $8.7 million in
restatement-related expenses during the comparable period in the prior year.
Excluding restatement-related expenses, SG&A expenses would have been $314.4
23
million, or 21.6% of sales, in the current year period, versus $267.4 million,
or 21.8% of sales in the prior year period, an increase of 17.6%.
The increase in SG&A expenses is due principally to a 10.6% increase in
store count as compared to the prior year, and to increases in store labor and
workers compensation costs that were greater than standard inflationary
increases. The increase in store labor costs reflects various actions taken to
improve store conditions, including increasing labor hours and improving
employee wages.
Insurance Proceeds. The Company recorded $4.5 million in insurance
proceeds during the current year period relating to the settlement of certain
class action litigation. See Note 4 to the Company's condensed consolidated
financial statements as of August 2, 2002.
Interest Expense. Interest expense in the current year period was $11.3
million, or 0.8% of sales, as compared to $12.0 million, or 1.0% of sales, in
the prior year period, a decrease of 5.2%. The Company recorded $0.4 million in
net interest income in the current period related to various income tax issues,
including but not limited to interest due from the federal government as a
result of amended tax returns that the Company filed in conjunction with its
restated results.
Provision for Taxes on Income. The Company's effective tax rate was
36.7% in the current year period and 37.4% in the prior year period. The
reduction in the effective tax rate in the current year is a result of certain
tax planning strategies implemented in the fourth quarter of the prior year.
Net Income. Net income during the current year period was $42.4
million, or 2.9% of sales, versus $27.1 million, or 2.2% of sales, during the
comparable period in the prior year, an increase of 56.3%. Diluted earnings per
share in the current year period were $0.13 versus $0.08 in the prior year.
Excluding restatement-related expenses and the insurance proceeds noted above,
current year diluted earnings per share were $0.12 versus $0.10 in the prior
year.
26 WEEKS ENDED AUGUST 2, 2002 AND AUGUST 3, 2001
Net Sales. Net sales for the 26 weeks ended August 2, 2002 were $2.84
billion as compared against $2.43 billion during the comparable period in the
prior year, an increase of 17.1%. The increase resulted primarily from 563 net
new stores and a same store sales increase of 8.1%. Same store sales increases
are calculated based on the comparable calendar weeks in the prior year, and
include only those stores that were open both at the end of a fiscal period and
at the beginning of the preceding fiscal year. The Company attributes the
increase in same store sales to a number of factors, including the introduction
of new items in the highly consumable category, a strong presentation of
24
seasonal merchandise, the addition of perishable products in approximately 600
stores, and improved ordering practices by the Company's stores. Net sales
increases by category were as follows: highly consumable 19.5%, hardware and
seasonal 21.8%, basic clothing 10.3%, and home products 7.5%.
Gross Profit. Gross profit during the current year period was $767.7
million, or 27.0% of sales, versus $652.7 million, or 26.9% of sales, during the
comparable period in the prior year, an increase of 17.6%. The modest increase
in the gross margin rate as a percentage of sales was due principally to a 66
basis point reduction in distribution and transportation costs as a percentage
of sales and a higher mark-up percentage on the Company's total inventory
balance than that experienced during the comparable period in the prior year.
The reduction in distribution and transportation costs as a percentage of net
sales during the first twenty-six weeks is due to a relatively modest increase
in these expenses during a period of increased sales. The higher mark-up
percentage on the Company's inventories is primarily a result of a lower than
normal mark-up on the Company's inventory balance in the first half of 2001 due
to the ongoing impact of the markdown on certain excess inventories taken during
the fourth quarter of 2000. Factors that negatively impacted the year-over-year
comparison in the gross profit rate include a lower mark-up on inventory
purchases and an increase in the inventory shrink provision. The lower mark-up
on inventory purchases is due in part to a decision by the Company to purchase
fewer high margin but slower turning items and to reduce its inventory position
in the basic clothing and home products categories.
Selling, General and Administrative Expenses. SG&A expenses during the
current year period were $611.0 million, or 21.5% of sales, versus $528.1
million, or 21.8% of sales, during the comparable period in the prior year, an
increase of 15.7%. The Company recorded $4.6 million in expenses, primarily
professional fees, in the current year period related to the restatement of
certain previously released financial data versus $9.0 million of such expenses
in the prior year. Excluding restatement-related expenses, SG&A expenses would
have been $606.3 million, or 21.3% of sales in the current year versus $519.0
million or 21.4% of sales in the prior year, an increase of 16.8%.
The increase in SG&A expenses is primarily attributable to a 10.6%
increase in store count as compared to the prior year, and to increases in store
labor and workers compensation costs that were greater than standard
inflationary increases. The increase in store labor costs reflects various
actions taken to improve store conditions, including increasing labor hours and
improving employee wages.
Insurance Proceeds. The Company recorded $4.5 million in insurance
proceeds during the current year period relating to the settlement of certain
class action litigation. See Note 4 to the Company's condensed consolidated
financial statements as of August 2, 2002.
25
Interest Expense. Interest expense was $21.8 million, or 0.8% of sales,
in the current year period as compared to $23.6 million, or 0.9% of sales, in
the prior year period, a decrease of 7.6%. The decrease is primarily
attributable to the general reduction in interest rates on variable rate
obligations.
Provision for Taxes on Income. The Company's effective tax rate was
36.7% in the current year period and 37.4% in the prior year period. The
reduction in the effective tax rate in the current year is a result of certain
tax planning strategies implemented in the fourth quarter of the prior year.
Net Income. Net income during the current year period was $88.3
million, or 3.1% of sales, versus $63.3 million, or 2.6% of sales, during the
comparable period in the prior year, an increase of 39.4%. Diluted earnings per
share in the current year period were $0.26 versus $0.19 in the prior year.
Excluding restatement-related expenses and the insurance proceeds noted above,
current year diluted earnings per share were $0.26 versus $0.21 in the prior
year.
Liquidity and Capital Resources
Current Financial Condition / Recent Developments. At August 2, 2002,
the Company's total debt (including the current portion of long-term obligations
and short-term borrowings) was $521.8 million, and the Company had $39.5 million
of cash and equivalents and $1.13 billion of shareholders' equity, compared to
$735.1 million of total debt, $261.5 million of cash and equivalents and $1.04
billion of shareholders' equity at February 1, 2002.
At May 3, 2002, the Company had $383 million outstanding under two
synthetic lease facilities (the "Synthetic Lease Facilities"), one with $212
million in outstanding capital leases and the other with $171 million in
outstanding capital leases. As of such date, the Company also had a $175 million
revolving credit agreement (the "Old Credit Facility"), under which no amounts
were outstanding. The Synthetic Lease Facilities were scheduled to mature and
the Old Credit Facility was scheduled to expire in September 2002.
On June 21, 2002, the Company closed on its previously announced $450
million revolving credit facility (the "New Credit Facilities"), pursuant to
which SunTrust Bank is serving as Administrative Agent, Credit Suisse First
Boston is the Syndication Agent and KeyBank N.A. and U.S. Bank N.A. are
Co-Documentation Agents. The Company used the New Credit Facilities (i) to
replace the Old Credit Facility (ii) to refinance the Synthetic Lease Facilities
and (iii) for working capital and other general corporate purposes. The New
Credit Facilities are split between a $300 million three-year revolving credit
facility, and a $150 million 364-day revolving credit facility. The Company pays
interest on funds borrowed under the New Credit Facilities at rates that
26
are subject to change based upon the rating of the Company's senior debt by
independent agencies. The Company has two interest rate options, base rate
(which is usually equal to prime rate) and LIBOR. At the Company's current
ratings, the facility fees are 37.5 basis points and 32.5 basis points on the
two facilities, respectively. The all-in drawn margin under the LIBOR option is
LIBOR plus 237.5 basis points on both facilities. The all-in drawn margin under
the base rate option is the base rate plus 125 basis points and the base rate
plus 120 basis points on the two facilities, respectively. The New Credit
Facilities are secured by the same real estate assets that served as collateral
for the Synthetic Lease Facilities: approximately 400 of the Company's retail
stores, its headquarters and two of its distribution centers. As of August 2,
2002, the Company had $170 million outstanding under the New Credit Facilities,
at a rate of 4.3%.
The Company has $200 million (principal amount) of 8 5/8% unsecured
notes due June 15, 2010. Interest on the notes is payable semi-annually on June
15 and December 15 of each year. The holders of the notes may elect to have
their notes repaid on June 15, 2005, at 100% of the principal amount plus
accrued and unpaid interest.
The Company is currently in discussions with respect to the Company's
leases of its distribution centers in Indianola, Mississippi and Fulton,
Missouri, related to an alleged default arising under those leases from the
restatement of certain of the Company's financial statements as further
described in Part II, Item I of this Form 10-Q. The Company has reached
agreement in principle to incorporate certain amendments in the debt instruments
relating to such properties. The Company expects that this matter will be
resolved without any material adverse effect to the Company.
In July of 2002, the Company received from its insurers $4.5 million in
proceeds in connection with the settlement of certain class action litigation
brought against the Company as a result of the restatement of the Company's
financial statements. The Company disbursed during the current year quarter
approximately $161 million in settlement of these class action lawsuits. The
Company funded this amount from existing cash balances. In addition, $31.5
million in director and officer insurance proceeds has been placed in escrow in
connection with the settlement of shareholder derivative litigation brought
against certain current and former directors and officers of the Company. The
Company expects to receive approximately $25.2 million of this amount if the
settlement becomes final, which amount has not been accrued in the Company's
financial statements. For further information regarding this litigation, see
Note 4 to the Company's condensed consolidated financial statements as of August
2, 2002, and Part II, Item 1 of this report.
The Company believes that its existing cash balances, cash flows from
operations, the New Credit Facilities, remaining insurance proceeds expected in
connection with the settlement of the derivative lawsuits filed against the
Company as a result of the restatement of the Company's financial statements,
and its ongoing access to the capital
27
markets will provide sufficient financing to meet the Company's currently
foreseeable liquidity and capital resource needs.
Other than net reductions in borrowings outstanding under variable rate
debt as discussed above, there have been no other significant changes in the
fair value of the Company's outstanding debt.
Cash flows provided by operating activities. Net cash provided by
operating activities totaled $80.6 million during the first 26 weeks of 2002, as
compared to a $9.8 million source of cash during the comparable period in the
prior year. The primary source of cash in 2002 was the Company's net income plus
depreciation and amortization expense, which together totaled $154.3 million.
Another significant source of cash in the current year period was a decrease in
inventories of $72.8 million. The Company has made improving its inventory
productivity statistics a priority. Inventory turns have improved on a rolling
12-month basis from 3.2 times to 3.4 times as measured at August 3, 2001 and
August 2, 2002, respectively, and same store inventories have been reduced by
approximately 13% as compared to the comparable prior year period. The Company
has also reduced its purchases of high margin but slower turning items in the
basic clothing and home products categories. The Company paid approximately $162
million during the current year period in settlement of the shareholder class
action lawsuits as described in Note 4 to the Company's condensed consolidated
financial statements as of August 2, 2002.
The primary source of net cash from operating activities during the
prior year period was the Company's net income plus depreciation and
amortization expense, which together totaled $124.3 million. The primary uses of
cash in the prior year period were an increase in inventories of $84.6 million
and a decrease in the income tax payable of $22.0 million.
Cash flows used in investing activities. Net cash used in investing
activities during the first 26 weeks of 2002 totaled $70.3 million, as compared
to a $73.8 million use of cash during the comparable period in the prior year.
The $70.3 million spent in the current year period consisted primarily of $21.4
million for new stores, $13.3 million for various store-related technology
projects and $16.2 million for distribution and transportation projects. The
$73.8 million spent in the prior year period consisted primarily of $26.6
million for new stores and relocations and $34.9 million for various
store-related fixtures.
Cash flows used in financing activities. Net cash used in financing
activities during the first 26 weeks of 2002 was $232.3 million, which consisted
principally of $21.3 million in dividends and $219.6 million of net debt
repayments related primarily to the refinancing of the Company's Synthetic Lease
Facilities. Net cash used in financing activities during the comparable period
in the prior year was $16.7 million, which
28
consisted principally of $21.3 million in dividends offset by $10.6 million in
proceeds from stock options exercised.
The following table, which excludes the effect of imputed interest,
summarizes the Company's significant contractual obligations as of August 2,
2002, (in thousands):
Less than Greater than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------- ----- ------ --------- --------- -------
Long-term obligations $ 370,000 $ -- $ 170,000 $ -- $ 200,000
Capital lease obligations 68,714 17,724 33,626 13,437 3,927
Financing obligations 206,269 9,283 18,567 18,707 159,712
Operating leases 734,150 174,822 256,081 121,635 181,612
---------- ---------- ---------- ---------- ----------
$1,379,133 $ 201,829 $ 478,274 $ 153,779 $ 545,251
========== ========== ========== ========== ==========
Forward-Looking Statements
This discussion and analysis contains historical and forward-looking
information. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The Company
believes the assumptions underlying these forward-looking statements are
reasonable; however, any of the assumptions could be inaccurate, and therefore,
actual results may differ materially from those projected in the forward-looking
statements as a result of certain risks and uncertainties. These risks include,
but are not limited to, those set forth under Item 7 in the Company's Annual
Report on Form 10-K for the fiscal year ended February 1, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have no material changes to the disclosures relating to this item
that are set forth in our report on Form 10-K for the fiscal year ended February
1, 2002.
Part II. - Other Information
Item 1. 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
29
directors of the Company, asserting claims under the federal securities laws.
These lawsuits were 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. Among other
things, plaintiffs 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 sought damages with interest, costs and such other relief as the
court deemed proper.
On January 3, 2002, the Company reached a settlement agreement with the
putative class action plaintiffs, pursuant to which the Company agreed to pay up
to $162 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.
On April 1, 2002, following the completion of such confirmatory
discovery, the Company and the putative class action plaintiffs amended their
settlement agreement and the plaintiffs filed a second amended complaint,
purporting to name as plaintiffs a class of persons who purchased or otherwise
made an investment decision regarding the Company's securities and related
derivative securities between March 5, 1997 and January 14, 2002. Pursuant to
the amended settlement agreement, the Company 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 was approved by the court on May 24, 2002.
Pursuant to the terms of such agreement, the Company disbursed $1
million of such funds in April 2002 and the remaining amount of $161 million in
June and July 2002. In addition, the Company received from its insurers $4.5
million in respect of such settlement in July 2002. The Company recognized an
expense of $162 million in the fourth quarter of 2000 in respect of the class
action settlement agreement, and income of $4.5 million in the second quarter of
2002 in respect of the receipt of such insurance proceeds.
Plaintiffs representing fewer than 1% of the shares traded during the
class period chose to opt out of the class settlement and may elect to pursue
recovery against the Company individually. Because no separate litigation has
yet been filed by parties who opted out, the Company cannot estimate the
potential liabilities associated with such
30
litigation, but it does not believe that the resolution of any such litigation
will have a material effect on the Company's financial position.
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.
Two purported shareholder derivative lawsuits also have been filed and
consolidated 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 was
stayed until June 3, 2002. Based on the settlement of the Tennessee state
derivative actions described below and the dismissal of the appeal filed by
Cornelius P. Warren, the lead plaintiff in the federal derivative case, the
Company and the individual defendants moved to dismiss the federal derivative
case on August 27, 2002. A status conference with respect to this case is
currently scheduled for September 12, 2002.
The Company and the individual defendants have reached a settlement
agreement with 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
31
governance and internal control enhancements. The terms of such agreements
require that all of the stayed cases, including the federal derivative cases
described above, be dismissed with prejudice by the courts in which they are
pending in order for the settlement to be effective. Following confirmatory
discovery, the settlement agreement was preliminarily approved by the Tennessee
State Court on April 19, 2002, and received final approval on June 4, 2002. On
July 5, 2002, Cornelius P. Warren, the lead plaintiff in the federal derivative
case, appealed the approval of the settlement in the state derivative cases to
the Court of Appeals of Tennessee. Such appeal was dismissed by the Court of
Appeals of Tennessee by Order dated July 22, 2002. Mr. Warren has not yet filed
notice of his intention to appeal this dismissal; any such notice must be filed
by no later than September 20, 2002.
Pending the final resolution of the federal derivative case and any
further appeal of the settlement that Mr. Warren may bring, $31.5 million of
proceeds of the Company's director and officer insurance policies are being held
in escrow. If the settlement becomes final, the Company expects that it will
result in a net payment to the Company, after attorneys' fees payable to the
plaintiffs' counsel, of approximately $25.2 million, which payment has not yet
been accrued in the Company's financial statements.
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. At this time, the Company
is unable to predict the outcome of this investigation and the ultimate effects
on the Company.
Other Litigation
The Company was involved in other litigation, investigations of a
routine nature and various legal matters during the reporting period, which were
and are being defended and otherwise handled in the ordinary course of business.
While the ultimate results of these matters cannot be determined or predicted,
management believes that they have not had and will not have a material adverse
effect on the Company's results of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders of the Company was held on June 3,
2002. Following is a brief description of the matters voted upon at the meeting
and the tabulation of the voting therefor:
32
Proposal 1 - Election of Directors.
Number of Votes
---------------------------------------------------
Nominee For Withheld Broker Non-Votes
--------------------- ----------- --------- ----------------
David L. Bere 287,111,919 3,983,453 0
Dennis C. Bottorff 288,241,119 2,854,253 0
Barbara L. Bowles 287,343,520 3,751,852 0
James L. Clayton 287,467,127 3,628,245 0
Reginald D. Dickson 287,509,379 3,585,993 0
E. Gordon Gee 287,688,758 3,406,614 0
John B. Holland 287,328,096 3,767,276 0
Barbara M. Knuckles 287,493,555 3,601,817 0
James D. Robbins 288,378,514 2,716,858 0
Cal Turner 288,145,394 2,949,978 0
David M. Wilds 288,239,970 2,855,402 0
William S. Wire, II 288,203,819 2,891,553 0
Proposal 2 - Ratification of the Appointment of Independent Public
Accountants. A proposal to ratify the selection of Ernst & Young LLP as
independent public accountants for the fiscal year ending January 31, 2003 was
adopted, with 287,411,734 votes cast for, 2,550,728 votes cast against,
1,132,910 votes abstained and no broker non-votes.
Item 5. Other Information
Restatement-Related Events
In July and August of 2002, Cal Turner, the Company's Chairman and
Chief Executive Officer, made voluntary payments to the Company totaling
approximately $6.8 million in cash. Of such amount, approximately $6.0 million
represented the value on April 10, 2002 of stock Mr. Turner acquired on April 7,
1999 and April 20, 2000 upon the exercise of stock options (net of the strike
price of such options), which stock Mr. Turner continues to own, and
approximately $0.8 million represented the value of performance-based bonuses
received by Mr. Turner in April 1999 and April 2000. Mr. Turner voluntarily paid
such amounts to the Company because the options vested and the performance
bonuses were paid based on performance measures that were attained under the
Company's originally reported financial results for the period covered by the
Company's restatement. Those measures would not have been attained under the
subsequently restated results.
33
Other Issues
Mr. David M. Wilds, a director of the Company since 1991, has served
since August 1998 as one of two principal officers of The Family Office, LLC, a
Tennessee limited liability company that manages certain assets owned by members
of the family of Cal Turner, the Chairman and Chief Executive Officer of the
Company. Mr. Wilds' position with The Family Office, LLC has been in addition to
his primary employment as Chief Manager of Front Street LLC, general partner for
1st Avenue Partners, L.P. (from 1998 to present) and as President of Nelson
Capital Partners III, L.P. (from 1995 to 1998). The managers of The Family
Office, LLC consist of Mr. Turner and his three siblings. Prior to June 2002,
Mr. Wilds was a member of the Corporate Governance and Compensation Committee of
the board. Accordingly, the Company's proxy statement under the heading
"Compensation Committee Interlocks and Insider Participation" should be
considered supplemented to reflect Mr. Wilds' relationship, as a principal
officer of The Family Office, LLC, to the managers of that entity who may be
considered equivalent to its board of directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed as a
part of this report and such Exhibit Index is incorporated herein by
reference.
(b) Reports on Form 8-K.
(1) A Current Report on Form 8-K, dated July 11, 2002, was filed
with the SEC in connection with an announcement regarding June
2002 sales results and the July 2002 sales outlook.
(2) A Current Report on Form 8-K, dated June 24, 2002, was filed
with the SEC in connection with an announcement regarding
completion of the financing of the Company's previously
announced $450 million revolving credit facility.
(3) A Current Report on Form 8-K, dated June 6, 2002, was filed
with the SEC in connection with an announcement regarding May
2002 sales results and the June 2002 sales outlook.
(4) A Current Report on Form 8-K, dated June 4, 2002, was filed
with the SEC in connection with an announcement and conference
call regarding the Company's financial results for the first
quarter of the 2002 fiscal year.
34
(5) A Current Report on Form 8-K, dated June 3, 2002, was filed
with the SEC in connection with an announcement regarding the
appointment of David L. Bere to the Company's Board of
Directors.
(6) A Current Report on Form 8-K, dated May 24, 2002, was filed
with the SEC in connection with an announcement regarding the
entry of a final judgment and order approving the settlement of
the securities class action lawsuit pending against the
Company.
(7) A Current Report on Form 8-K, dated May 9, 2002, was filed with
the SEC in connection with an announcement regarding April 2002
sales results and the May 2002 sales outlook.
35
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR GENERAL CORPORATION
By:
/s/ James J. Hagan
--------------------------------
James J. Hagan
Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
August 28, 2002
36
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
----------- ----------------------
3(ii) By-laws, as amended effective June 3, 2002
10.1 3-Year Revolving Credit Agreement, dated as of June 21,
2002, by and among Dollar General Corporation, Suntrust
Bank, Credit Suisse First Boston, KeyBank National
Association, U.S. Bank National Association, and the
lenders from time to time party thereto
10.2 364-day Revolving Credit Agreement, dated as of June 21,
2002, by and among Dollar General Corporation, Suntrust
Bank, Credit Suisse First Boston, KeyBank National
Association, U.S. Bank National Association, and the
lenders from time to time party thereto
37