UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2008
Commission file number: 001-11421
DOLLAR GENERAL CORPORATION
TENNESSEE | 61-0502302 (I.R.S. Employer Identification No.) | |
100 MISSION RIDGE GOODLETTSVILLE, TN 37072 (Address of principal executive offices, zip code) | ||
Registrant’s telephone number, including area code: (615) 855-4000 | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of the exchange on which registered | |
Common Stock, par value $0.875 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [[X ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate fair market value of the registrant’s common stock outstanding and held by non-affiliates as of August 3, 2007July 30, 2010 was $663,400, all$2,057,296,011 calculated using the closing market price of which was owned by employees ofour common stock as reported on the registrant and not tradedNYSE on a public market.such date ($29.18). For this purpose, directors, executive officers and greater than 10% record shareholders are considered the affiliates of the registrant.
The registrant had 555,481,897341,521,858 shares of common stock outstanding as of March 16, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Certain of 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 March 17, 2008.
INTRODUCTION
General
This report contains references to years 2011, 2010, 2009, 2008, 2007 2006, 2005, 2004 and 2003,2006, which represent fiscal years ending or ended February 3, 2012, January 28, 2011, January 29, 2010, January 30, 2009, February 1, 2008 and February 2, 2007, February 3, 2006, January 28, 2005, and January 30, 2004, respectively. All of the discussion and analysis in this report should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and related notes.
Solely for convenience, our trademarks and tradenames referred to in this document may appear without the ® or TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right to these trademarks and tradenames.
Cautionary Disclosure Regarding Forward-Looking Statements
We include “forward-looking statements” within the meaning of the federal securities laws are included throughout this report, particularly under the headings “Business” and“Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,Operations,” and “Note 9 Commitments and Contingencies,” among others. You can identify these statements because they are not solely statements oflimited to historical fact or they use words such as “may,” “will,” “should,” “expect,“could,” “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “potential,” “opportunity,” “intend,” “will likely result,” or “will continue” and similar expressions that concern our strategy, plans, intentions or intentions.beliefs about future occurrences or results. For example, all statements relating to our estimated and projected earnings, costs, expenditures, cash flows, results of operations, financial condition and financial results,liquidity; our plans, objectives and objectivesexpectations for future operations, growth or initiatives,initiatives; or the expected outcome or impacteffect of pending or threatened litigation or audits are forward-looking statements.
All forward-looking statements are subject to risks and uncertainties that may change at any time, so our actual results may differ materially from those that we expected. We derive many of these statements from our operating budgets and forecasts, which are based on many detailed assumptions that we believe are reasonable. However, it is very difficult to predict the impacteffect of known factors, and we cannot anticipate all factors that could affect our actual results.
Important factors that could cause actual results to differ materially from the expectations expressed in our forward-looking statements are disclosed under “Risk Factors” in Part I, Item 1A and elsewhere in this document (including, without limitation, in conjunction with the forward-looking statements themselves and under the heading “Critical Accounting Policies and Estimates”). All written and oral forward-looking statements we make in the future are expressly qualified in their entirety by these cautionary statements as well asand other cautionary statements that we make from time to time in our other SEC filings and public communications. You should evaluate all of our forward-looking statements in the context of these risks and uncertainties.
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anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect.
The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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PART I
ITEM 1.
BUSINESS
General
We are the largest discount retailer in the United States by number of stores, with 8,2229,414 stores located in 35 states as of February 25, 2011, primarily in the southern, southwestern, midwestern and eastern United States, as of February 29, 2008. We serve a broad customer base and offer a focused assortment of everyday items, including basic consumable merchandise and other home, apparel and seasonal products. A majority of our products are priced at $10 or less and approximately 30% of our products are priced at $1 or less.
Our business model is focused on strong and sustainable sales growth, attractive margins and limited maintenance capital expenditure and working capital needs, which results in significant cash flow from operations (before interest).
J.L. Turner founded our Company in 1939 as J.L. Turner and Son, Wholesale. We opened our first dollar store in 1955, when we were first incorporated as a Kentucky corporation under the name J.L. Turner & Son, Inc. in 1955, when we opened our first Dollar General store. We changed our name to Dollar General Corporation in 1968 and reincorporated in 1998 as a Tennessee corporation in 1998.
Our Business Model
Our long history of certain membersprofitable growth is founded on a commitment to a relatively simple business model: providing a broad base of customers with their basic everyday and household needs, supplemented with a variety of general merchandise items, at everyday low prices in conveniently located, small-box stores.
Fiscal year 2010 represented our 21st consecutive year of same-store sales growth. This growth, regardless of economic conditions, suggests that we have a less cyclical model than most retailers and, we believe, is a result of our management and the debt financings discussed below. Our outstanding common stock is now owned by Parent and certain members of management. Our common stock is no longer registered with the Securities and Exchange Commission (“SEC”) and is no longer traded on a national securities exchange.
Our attractive store at any time. In 2005economics, including a relatively low initial investment and 2006, we implemented “EZstoreTM”, our initiative designed to improve inventory flow from our distribution centers, or DCs, to consumers. EZstore hassimple, low cost operating model, have allowed us to reallocate store labor hours to more customer-focused activities, improving the work content in our stores.
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Compelling Value and implement our operational initiatives. Our target customers are those seeking value and convenience. According to Nielsen Media Research as of mid-2007, approximately 64% of households shopped at least once at a discount store (up from 59% in 2001)Convenience Proposition.
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Convenient Locations. Our stores are conveniently located in a variety of rural, suburban and drugstoreurban communities, currently with nearly 70% serving communities with populations of less than 20,000. In more densely populated areas, our small-box stores typically serve the closely surrounding neighborhoods. The majority of our customers live within three to five miles, or a 10-minute drive, of our stores. Our close proximity to customers drives customer loyalty and trip frequency and makes us an attractive alternative to large discount and other large-box retail and grocery stores which are often located farther away. Our low cost economic model enables us to serve many areas with fewer than 1,500 households.
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Time-Saving Shopping Experience. We also provide customers with a highly convenient shopping experience. Our stores’ smaller size allows us to locate parking near the front entrance where shopping carts are located to promote efficient navigation of the store. Our product offering includes most necessities, such as basic packaged and refrigerated food and dairy products, cleaning supplies, paper products, and health and beauty care items, as well as greeting cards, party supplies, apparel, housewares, hardware and automotive supplies, among others. Our typical store hours are 8:00 a.m. to 9:00 p.m., seven days per week. Our convenient hours and broad merchandise offering allow our customers to fulfill their routine shopping requirements and minimize their need to shop elsewhere.
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Everyday Low Prices on Quality Merchandise. Our research indicates that we offer a price advantage over most food and drug retailers and that our prices are highly competitive with even the largest discount retailers.
Attractive Store Economics.
The traditional Dollar General store size, design and location requires4
and new store approval processes as well as our new store marketing programs help us optimize financial returns and minimize the risks of opening unprofitable stores.
Our lean store staffing model and centralized management of utilities, maintenance and supplies procurement contribute to our relatively low operating costs and efficient store operations.
Substantial Growth Opportunities. We believe that we have substantial growth opportunities through both improved profitability of existing stores and new store openings. We are pursuing a number of initiatives which we expect to continue to improve the profitability of our existing store base. In addition, we have identified significant opportunities to add new stores in both existing and new markets. We believe we have the long-term potential in the U.S. to more than double our existing store base while maintaining strong returns on capital. See ‘‘Our Growth Strategy’’ for additional details.
Our Growth Strategy
We believe we have the right strategy and execution capabilities to capitalize on the considerable growth opportunities afforded by our business model. We believe we continue to have significant opportunities to drive profitable growth through increasing same-store sales, expanding our operating profit rate and growing our store base.
Increasing Same-Store Sales. We believe the combination of our necessity-driven product mix and our attractive value proposition, including a well-balanced merchandising approach, provides a strong basis for increased sales. Our average unit volumes, providesales per square foot increased to $201 in 2010 from $195 in 2009 and $180 in 2008. We believe we will continue to have additional opportunities to increase our store productivity through improved in-stock positions, price optimization, continued improvements in space utilization, and additional operating and merchandising initiatives. Among numerous additional projects in 2011, we plan to further expand our frozen and refrigerated food and health and beauty aids offerings. We will also continue to focus on increasing sales in our home, apparel and seasonal categories.
In addition, we plan to relocate or remodel approximately 550 stores in 2011, which we expect to further drive same-store sales growth. In 2010, we remodeled or relocated 504 stores. Remodels and relocations generally consist of updating the stores to our new customer centric format, which we believe appeals to a broader customer base. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We continue to have opportunities for additional remodels and relocations beyond 2011.
Expanding Operating Profit Rate. Another key component of our growth strategy is improving our operating profit rate through enhanced gross profit and expense reduction initiatives. Our financial results during 2010 and 2009 reflect the favorable impact of our strong category management processes on gross margin improvement and our continued efforts to reduce selling, general and administrative expenses as a quick recoverypercent of sales.
In recent months, we have begun to see many of our product categories impacted by increased costs of commodities, including cotton, wheat, corn, sugar, coffee and resin, as well as increased transportation fuel costs, which have increased significantly in early 2011. These
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increases pose a challenge to our continued priority of improving our gross profit rate. However, we believe we have options available to mitigate the impact of these increases, including our price optimization, changes to our product selection, such as alternate national brands and the expansion of our private brands, and modifications to our packaging and product size, including items in our planned expansion of merchandise selections priced at $1.00. In addition, we continue to focus on reducing inventory shrinkage and improving distribution efficiencies.
We intend to continue to drive our private brand penetration going forward. Our private brand program complements our model of offering customers nationally branded consumables merchandise at everyday low prices. Generally, private brand items have higher gross profit margins than similar national brand items, and in 2010 represented approximately 22% of our consumables sales. In 2010, we made significant progress in expanding our private brand efforts to our non-consumable offerings, dramatically improving the visual impact of our many non-consumables, including housewares, domestics, lawn and garden tools and summer toys.
We believe we have the potential to directly source a larger portion of our products at significant savings to current costs. In 2010, we imported approximately $750 million of goods, or 8% of total purchases, at cost.
We continually look for ways to improve our cost structure and enhance efficiencies throughout the organization. In 2010, we centralized our procurement system which we expect to aid us in reducing the cost of purchases throughout the company in 2011 and beyond. In addition, we have begun to implement a store start-up costs.labor management and work simplification program, and we are continuing our store rent reduction initiative.
Growing Our Store Base. Based on a detailed, market-by-market analysis, we believe we have the potential to at least double our current number of stores through expansion in both existing and new markets. In 2011, we plan to enter three new states, Connecticut, New Hampshire and Nevada. We have confidence in our real estate disciplines and in our ability to identify, open and operate successful new stores. As a result, we believe that at least our present level of new store growth is sustainable for the foreseeable future. In addition, we continue to believe that in the current real estate market environment there may be opportunities to negotiate lower rent than would have previously been available, allowing us to continue to improve the overall quality of our sites at attractive rental rates.
Our Merchandise
We offer a focused assortment of everyday necessities, which drive frequent customer visits, and key items in a broad range of general merchandise categories. Our product assortment provides the opportunity for our customers to address most of their basic shopping needs with one trip. We sell high quality national brands from leading manufacturers such as Procter & Gamble, Kimberly Clark, Unilever, Kellogg’s, General Mills, Nabisco, Coca-Cola and PepsiCo, which are typically found at higher retail prices elsewhere. Additionally, our private brand selections offer consumers even greater value with options to purchase value items and national brand equivalent products at substantial discounts to the national brand.
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Our stores generally offer approximately 10,000 total SKUs per store. The abilitynumber of SKUs in a given store can vary based upon the store’s size, geographic location, merchandising initiatives, seasonality, and other factors. Most of our products are priced at $10 or less, with approximately 24% at $1 or less. We separate our merchandise into four categories: 1) consumables; 2) seasonal; 3) home products; and 4) apparel.
Consumables is our largest category and includes paper and cleaning products (such as paper towels, bath tissue, paper dinnerware, trash and storage bags, laundry and other home cleaning supplies); food, including packaged food and perishables (such as cereals, canned soups and vegetables, sugar, flour, milk, eggs and bread); beverages and snacks (including candy, cookies, crackers, salty snacks and carbonated beverages); health and beauty (including over-the-counter medicines and personal care products, such as soap, body wash, shampoo, dental hygiene and foot care products); and pet (including pet supplies and pet food).
Seasonal products include decorations, toys, batteries, small electronics, greeting cards, stationery, prepaid cell phones and accessories, gardening supplies, hardware, automotive and home office supplies.
Home products includes kitchen supplies, cookware, small appliances, light bulbs, storage containers, frames, candles, craft supplies and kitchen, bed and bath soft goods.
Apparel includes casual everyday apparel for infants, toddlers, girls, boys, women and men, as well as socks, underwear, disposable diapers, shoes and accessories.
The percentage of net sales of each of our four categories of merchandise for the fiscal years indicated below was as follows:
| 2010 |
| 2009 |
| 2008 | |||
Consumables | 71.6 | % |
| 70.8 | % |
| 69.3 | % |
Seasonal | 14.5 | % |
| 14.5 | % |
| 14.6 | % |
Home products | 7.0 | % |
| 7.4 | % |
| 8.2 | % |
Apparel | 6.9 | % |
| 7.3 | % |
| 7.9 | % |
Our home products and seasonal categories typically account for the highest gross profit margins, and the consumables category typically accounts for the lowest gross profit margin.
The Dollar General Store
The average Dollar General store has approximately 7,200 square feet of selling space and is typically operated by a manager, an assistant manager and three or more sales clerks. Approximately 58% of our stores are in freestanding buildings, 41% in strip shopping centers and 1% are in downtown buildings. Most of our customers live within three to generatefive miles, or a 10 minute drive, of our stores. Our store strategy features low initial capital expenditures, limited maintenance capital, low occupancy and operating costs, and a focused merchandise offering within a broad range of categories, allowing us to deliver low retail prices while generating strong cash flows with minimaland investment resultsreturns. In 2010, the average cost of equipment and fixtures in our leased stores was approximately $165,000. Initial inventory, net of payables, increases the investment in a short payback period.
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We generally have not encountered difficulty locating suitable store sites in the past. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. In addition, the current real estate market is providing an opportunity for us to access higher quality sites at lower rates than in recent years. Also, we believe we have significant opportunities available for our relocation and remodel programs. We spend approximately $75,000 for equipment and fixtures to remodel a store and approximately $140,000 to relocate one. We remodeled or relocated 504 stores in 2010, 450 in 2009 and 404 in 2008.
Our recent store growth is summarized in the following table:
Year | Stores at | Stores | Stores | Net | Stores at |
2008 | 8,194 | 207 | 39 | 168 | 8,362 |
2009 | 8,362 | 500 | 34 | 466 | 8,828 |
2010 | 8,828 | 600 | 56 | 544 | 9,372 |
Our Customers
Our customers seek value and convenience. Depending on their financial situation and geographic proximity, customers’ reliance on Dollar General varies from fill-in shopping to periodic routine trips in order to stock up on household items, to weekly or more frequent trips to meet most essential needs. We believe that our value and convenience proposition attracts customers from a wide range of income brackets and life stages. In the last year, we have seen increases in the annual number of shopping trips that our customers make to Dollar General as well as the amount spent during each trip.
We continue to focus on the quality, selection and pricing of our merchandise, targeted advertising, improved store standards and site selection processes, among other initiatives, to attract new and retain existing customers.
Our Suppliers
We purchase merchandise from a wide variety of suppliers and maintain direct buying relationships with many producers of national brand merchandise, such as Procter & Gamble, Kimberly Clark, Unilever, Kellogg’s, General Mills, Nabisco, Coca-Cola and PepsiCo. Despite our broad offering, we maintain only a limited number of SKUs per category, giving us a pricing advantage in dealing with our suppliers. Approximately 9% and 7% of our purchases in 2010 were from our largest and second largest suppliers, respectively. Our private brands come from a diversified supplier base. We directly imported approximately 8% of our purchases at cost (13% of our purchases at retail) in 2010. Our vendor arrangements generally provide for payment for such merchandise in U.S. dollars.
We have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, if one or more of our current sources of supply became unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our
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merchandise costs or reduce the quality of our merchandise, and an inability to obtain alternative sources could adversely affect our sales.
Distribution, Transportation and Inventory Management
Our stores are supported by nine distribution centers located strategically throughout our geographic footprint. Of these nine, we own six and lease the other three. We lease additional temporary warehouse space as necessary to support our distribution network is an integral component of our efforts to reduce transportation expenses and effectivelyneeds. To support our growth. In recentgrowth, we are in the process of constructing our tenth distribution center near Birmingham, Alabama. We expect this new distribution center to be operational in 2012. Over the past few years we have made significant investments in facilities, technological improvements and upgrades, and we continue to improve work processes, all of which have increasedincrease our efficiency and capacityability to support our merchandising and operations initiatives as well as futureour new store growth.
Most of retail experience,our merchandise flows through our distributions centers and is delivered to serve as our Chief Executive Officer. Over the past two years we strengthenedstores by third-party trucking firms, utilizing our management teamtrailers. Our agreements with these trucking firms are based on estimated costs of diesel fuel, with the hiringdifference in estimated and current market fuel costs passed through to us. The costs of David Beré,diesel fuel are significantly influenced by international, political and economic circumstances, and have risen in recent months, including considerable increases in early 2011. If such increased prices remain in effect, or if further price increases were to arise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could materially increase our Presidenttransportation costs.
In addition, we believe that there remains opportunity to improve our inventory turns. Initiatives in process include operational efforts to optimize presentation levels and Chief Operating Officer.decrease excess quantities shipped to our stores. We also replaced a majority of our senior merchandising and real estate teams. In connection with the Merger, we entered into agreements with certain
Seasonality
Our business is seasonal to a certain extent. Generally, our highest sales volume occurs in the fourth quarter, which includes the Christmas selling season, and the lowest occurs in the first quarter. In addition, our quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, as well as the timing of certain holidays. We purchase substantial amounts of inventory in the third quarter and incur higher shipping costs and higher payroll costs in anticipation of the increased sales activity during the fourth quarter. In addition, we carry merchandise during our fourth quarter that we do not carry during the rest of the year, such as gift sets, holiday decorations, certain baking items, and a broader assortment of toys and candy.
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The following table reflects the seasonality of net sales, gross profit, and net income (loss) by quarter for each of the quarters of the current fiscal year as well as each of the quarters of the twoour three most recent fiscal years. All of the quarters reflected below are comprised of 13 weeks with the exceptionweeks.
(in millions) | 1st | 2nd | 3rd | 4th | ||||
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Year Ended January 28, 2011 |
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Net sales | $ | 3,111.3 | $ | 3,214.2 | $ | 3,223.4 | $ | 3,486.1 |
Gross profit |
| 999.8 |
| 1,036.0 |
| 1,010.7 |
| 1,130.2 |
Net income |
| 136.0 |
| 141.2 |
| 128.1 |
| 222.5 |
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Year Ended January 29, 2010 |
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Net sales | $ | 2,779.9 | $ | 2,901.9 | $ | 2,928.8 | $ | 3,185.8 |
Gross profit |
| 855.4 |
| 906.0 |
| 903.1 |
| 1,025.4 |
Net income (a) |
| 83.0 |
| 93.6 |
| 75.6 |
| 87.2 |
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Year Ended January 30, 2009 |
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Net sales | $ | 2,403.5 | $ | 2,609.4 | $ | 2,598.9 | $ | 2,845.8 |
Gross profit |
| 693.1 |
| 758.0 |
| 772.3 |
| 837.7 |
Net income (loss) (b) |
| 5.9 |
| 27.7 |
| (7.3) |
| 81.9 |
(a)
Includes expenses, net of income taxes, of $82.9 million related to our initial public offering during the fourth quarter of our fiscal year ended February 3, 2006, which was comprised2009.
(b)
Includes expenses, net of 14 weeks.
(in millions) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
Year Ended February 1, 2008(a) | |||||||||||||||||
Net sales | $ | 2,275.3 | $ | 2,347.6 | $ | 2,312.8 | $ | 2,559.6 | |||||||||
Gross profit(b) | 633.1 | 623.2 | 646.8 | 740.4 | |||||||||||||
Net income (loss)(b) | 34.9 | (70.1 | ) | (33.0 | ) | 55.4 | |||||||||||
Year Ended February 2, 2007 | |||||||||||||||||
Net sales | 2,151.4 | 2,251.1 | 2,213.4 | 2,554.0 | |||||||||||||
Gross profit(b) | 584.3 | 611.5 | 526.4 | 646.0 | |||||||||||||
Net income (loss)(b) | 47.7 | 45.5 | (5.3 | ) | 50.1 | ||||||||||||
Year Ended February 3, 2006 | |||||||||||||||||
Net sales | 1,977.8 | 2,066.0 | 2,057.9 | 2,480.5 | |||||||||||||
Gross profit | 563.3 | 591.5 | 579.0 | 730.9 | |||||||||||||
Net income | 64.9 | 75.6 | 64.4 | 145.3 |
2007 | 2006 | 2005 | ||||||||||
Highly consumable | 66.5 | % | 65.7 | % | 65.3 | % | ||||||
Seasonal | 15.9 | % | 16.4 | % | 15.7 | % | ||||||
Home products | 9.2 | % | 10.0 | % | 10.6 | % | ||||||
Basic clothing | 8.4 | % | 7.9 | % | 8.4 | % |
Our next largest supplier accounted for approximately 6% of our purchases in 2007. We directly imported approximately 9% of our purchases at cost (15% at retail) in 2007.
Year | Stores at Beginning of Year | Stores Opened | Stores Closed | Net Store Increase/(Decrease) | Stores at End of Year |
2005 | 7,320 | 734 | 125(a) | 609 | 7,929 |
2006 | 7,929 | 537 | 237(b) | 300 | 8,229 |
2007 | 8,229 | 365 | 400(b) | (35) | 8,194 |
We operate in the basic discount retail merchandise business,consumer goods market, which is highly competitive with respect to price, store location, merchandise quality, assortment and presentation, in-stock consistency, and customer service. We compete with discount stores and with many other retailers, including mass merchandise, grocery, drug, convenience, variety and other specialty stores. These other retail companies operate stores in many of the areas where we operate, and many of them engage in extensive advertising and marketing efforts. Our direct competitors in the dollar store retail category include Family Dollar, Dollar Tree, Fred’s, 99 Cents Only and various local, independent operators. Competitors from other retail categories include Wal-Martoperators, as well as Walmart, Walgreens, CVS, Rite Aid, Target and Costco, among others. Certain of our competitors have greater financial, distribution, marketing and other resources than we do.
We differentiate ourselves from other forms of retailing by offering consistently low prices in a convenient, small-store format. We believe that our prices are competitive due in part to our low cost operating structure and the relatively limited assortment of products offered. Historically, we have minimized labor by offering fewer price points and a reliance on simple merchandise presentation. We maintain strong purchasing power due to our leadership position in the dollar store retail category andPurchasing large volumes of merchandise within our focused assortment in each merchandise category allows us to keep our average costs low, contributing to our ability to offer competitive everyday low prices to our customers. See “—Our Business Model” above for further discussion of merchandise.
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Our Employees
As of February 25, 2011, we employed approximately 85,900 full-time and part-time employees, including divisional and regional managers, district managers, store managers, other store personnel and distribution center and administrative personnel. We have increasingly focused on recruiting, training, motivating and retaining employees, and we believe that the quality, performance and morale of our employees have increased as a result. We currently are not a party to any collective bargaining agreements.
Our Trademarks
We own marks that are registered with the United States Patent and Trademark Office and are protected under applicable intellectual property laws, including without limitation the trademarks Dollar General®, Dollar General Market®, Clover Valley®, American Value®DG®, DG Guarantee®, Smart & Simple®, trueliving®, Sweet Smiles® and the Dollar General price point designs, along with variations and formatives of these trademarks as well as certain other trademarks. We attempt to obtain registration of our trademarks whenever practicable and to pursue vigorously any infringement of those marks. Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are properly renewed, they have a perpetual duration.
We also hold licenses to use various trademarks owned by third parties, including an exclusive license to the Bobbie Brooks brand for clothing through March 31, 2011, with the option to renew such license on a year-to-year basis, a license to the Fisher Price brand for certain items of children’s clothing through December 31, 2013, and an exclusive license to the Rexall brand through March 5, 2020.
Available Information
Our Web site address is www.dollargeneral.com. We make available through this address, without charge, ourfile with or furnish to the Securities and Exchange Commission (the “SEC”) annual reportreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filedproxy statements and annual reports to shareholders, and, from time to time, registration statements and other documents. These documents are available free of charge to investors on or furnished pursuant to Section 13(a) or 15(d)through the Investor Information portion of the Exchange Actour Web site as soon as reasonably practicable after they arewe electronically filedfile them with or furnishedfurnish them to the SEC.
ITEM 1A.
RISK FACTORS
You should carefully consider the risks described below and the other information contained in this report and other filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes. Any of the following risks could materially and adversely affect our business, financial condition, or results of operations.operations or liquidity. In addition, the risks described below are not the only risks facing us. Additionalwe face. Our business, financial condition, results of operations or liquidity could also be adversely affected by additional factors that apply to all companies generally, as well as other risks and uncertaintiesthat are not currently known to us or thosethat we currently view to be immaterial also may materially and adversely affect our business, financial condition or results of operations. In any such case, the trading price of our securities could decline orimmaterial. While we may not be ableattempt to make payments of principal and interest on our outstanding notes, and you may lose all or part of your original investment.
Current economic conditions and other covenants.
We believe that many of our customers are on fixed or more of the markets we serve may adversely affect our financial performance.low incomes and generally have limited discretionary spending dollars. A generalfurther slowdown in the economy, higher interest rates, higher than expectedor a delayed recovery, or other economic conditions affecting disposable consumer income, such as increased unemployment or underemployment levels, inflation, increases in fuel andor other energy costs inflation, higher levelsand interest rates, lack of unemployment, higheravailable credit, consumer debt levels, higher tax rates and other changes in tax laws, tightening of the credit markets, and other economic factors couldfurther erosion in consumer confidence, may adversely affect consumer demand for theour business by reducing our customers’ spending or by causing them to shift their spending to products we sell, change our sales mixother than those sold by us or to products sold by us that are less profitable than other product choices, all of products to one with a lower average gross profit andwhich could result in slowerlower net sales, decreases in inventory turnover, and greater markdowns on inventory. Higher interestinventory, and a reduction in profitability due to lower margins. Many of those factors, as well as commodity rates, higher commodities rates, higher fuel and other energy costs, transportation costs inflation, higher(including the costs of diesel fuel), costs of labor, insurance and healthcare, foreign exchange rate fluctuations, higher tax rates and other changes in tax laws,lease costs, measures that create barriers to or increase the costs associated with international trade, changes in other laws and regulations and other economic factors, increasealso affect our cost of salesgoods sold and our selling, general and administrative expenses, and otherwisewhich may adversely affect our sales or profitability. We have limited or no ability to control many of these factors. We saw product costs begin to escalate in our 2010 fourth quarter as a result of increases in the operationscosts of certain commodities (including cotton, wheat, corn, sugar, coffee, resin), and operating resultsincreasing diesel fuel costs. We will be diligent in our efforts to keep product costs as low as possible in the face of these increases while still working to optimize gross profit and meet the needs of our stores.
In addition, many of the factors discussed above, along with current global economic conditions and uncertainties, the potential for additional failures or realignments of financial institutions, and the related impact on available credit may affect us and our suppliers and other business partners, landlords and service providers in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk of bankruptcy of our suppliers, landlords or counterparties to or other financial institutions involved in our credit facilities and our derivative and other contracts, increasing the cost of goods to us, and other adverse consequences which we are unable to fully anticipate or control.
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Our plans depend significantly on initiatives designed to increase sales and improve the efficiencies, costs and effectiveness of our operations, and failure to achieve or sustain these plans could affect our performance adversely.
We have had, and expect to continue to have initiatives (such as those relating to marketing, merchandising, promotions, sourcing, shrink, private label,brand, store operations and real estate) in various stages of testing, evaluation, and implementation, upon which we expect to rely to continue to improve our results of operations and financial condition.condition and to achieve our financial plans. These initiatives are inherently risky and uncertain, even when tested successfully, in their application to our business in general. It is possible that successful testing can result partially from resources and attention that cannot be duplicated in broader implementation. Testingimplementation, particularly in light of the diverse geographic locations of our stores and generalthe fact that our field management is so decentralized. General implementation also canmay be negatively affected by other risk factors described herein that reduce the results expected.herein. Successful systemwide implementation relies on consistency of training, stability of workforce, ease of execution, and the absence of offsetting factors that can influence results adversely. Failure to achieve successful implementation of our initiatives or the cost of these initiatives exceeding management’s estimates could adversely affect our results of operations and financial condition.
In addition, the highest volume of net sales during the fourth quarter, adverse events during the fourth quarter could materially affect our financial statements as a whole.
We face intense competition that could limit our growth opportunities and adversely impact our financial performance.
The retail business is highly competitive. We operate in the basic discount retail merchandise business,consumer goods market, which is highly competitive with respect to price, store location, merchandise quality, assortment and presentation, in-stock consistency, and customer service. This competitive environment subjects us to the risk of adverse impact to our financial performance because of the lower prices, and thus the lower margins, required to maintain our competitive position. Also, companies like ours operating in the basic discount retail merchandise sectorconsumer goods market (due to customer demographics and other factors) may have limited ability to increase prices in response to increased costs (including vendor price increases).without losing competitive position. This limitation may adversely affect our margins and financial performance. We compete for customers, employees, store sites, products and services and in other important aspects of our business with many other local, regional and national retailers. We compete with retailers operating discount, mass merchandise, outlet, warehouse club, grocery, drug, convenience, variety and other specialty stores. Certain of our competitors have greater financial, distribution, marketing and other resources than we do.do and may be able to secure better arrangements with suppliers than we can. These other competitors
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compete in a variety of other ways, including aggressive promotional activities, merchandise selection and availability, services offered to customers, location, store hours, in-store amenities and price. If we fail to respond effectively to competitive pressures and changes in the retail markets, it could adversely affect our financial performance. See “Business—Our Industry, —Competitive Strengths, and —Competition” for additional discussion of our competitive situation.
Competition for customers has intensified in recent years as larger competitors have moved into, or increased their presence in, our geographic markets. In addition, some of our large box competitors are or may be developing small box formats which may produce more competition. We remain vulnerable to the marketing power and high level of consumer recognition of these larger competitors and to the risk that these competitors or others could venture into the “dollar store”our industry in a significant way. Generally, we expect an increase in competition.
Our private brands may not achieve or maintain broad market acceptance and geo-political eventsincrease the risks we face.
We have substantially increased the number of our private brand items, and the program is a sizable part of our future growth plans. We believe that our success in gaining and maintaining broad market acceptance of our private brands depends on many factors, including pricing, our costs, quality and customer perception. We may not achieve or maintain our expected sales for our private brands. As a result, our business, financial condition and results of operations could be materially and adversely affected.
A significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would decrease our profits.
We rely on our distribution and transportation network to provide goods to our stores in a timely and cost-effective manner through deliveries to our distribution centers from vendors and then from the distribution centers or direct ship vendors to our stores by various means of transportation, including shipments by sea and truck. Any disruption, unanticipated expense or operational failure related to this process could affect store operations negatively. For example, unexpected delivery delays or increases in transportation costs (including through increased fuel costs or a decrease in transportation capacity for overseas shipments) could significantly decrease our ability to make sales and earn profits. In addition, labor shortages or work stoppages in the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries could negatively affect our business.
We maintain a network of distribution facilities and have plans to build new facilities to support our growth objectives. Delays in opening distribution centers could adversely affect our financial performance.
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completion date and geo-political events, such as civil unrest in countries in which our suppliers are located and actsultimate cost of terrorism,this or similar disruptionsfuture projects could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that any project will be completed on time or within established budgets.
Rising fuel costs could materially adversely affect our operationsbusiness.
Fuel prices have risen considerably in recent months and financial performance.are significantly influenced by international, political and economic circumstances. These eventsincreases pose a challenge to our continued priority of improving our gross profit rate. If such increased prices remain in effect, or if further price increases were to arise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could resultmaterially increase our transportation costs, adversely affecting our gross profit and results of operations. In addition, competitive pressures in physical damageour industry may have the effect of inhibiting our ability to one or morereflect these increased costs in the prices of our properties,products. We will be diligent in our efforts to keep product costs as low as possible in the face of these increases in fuel (or other energy) prices,while still working to optimize gross profit and meet the temporary or permanent closure of one or moreneeds of our stores or distribution centers, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our distribution centers or stores, the temporary reduction in the availability of products in our stores and disruption to our information systems. These events also can have
Risks associated with or faced by the domestic and foreign suppliers from whom our products are sourced could adversely affect our financial performance.
The products we sell are sourced from a wide variety of domestic and international suppliers. Approximately 12%In fact, our largest supplier accounted for 9% of our purchases in 2007 were from The Procter & Gamble Company. Our2010, and our next largest supplier accounted for approximately 6%7% of such purchases. We have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, if one or more of our purchases in 2007. current sources of supply became unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our merchandise costs and reduce the quality of our merchandise, and an inability to obtain alternative sources could adversely affect our sales.
We directly imported approximately 9%8% of our purchases (measured at costcost) in 2007,2010, but many of our domestic vendors directly import their products or components of their products. PoliticalChanges to the prices and flow of these goods for any reason, such as political and economic instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers’ failure to meet our supplier standards, issues with labor practices of our suppliers or labor problems experienced by our suppliers,they may experience (such as strikes), the availability and cost of raw materials to suppliers, merchandise quality or safety issues, currency exchange rates, transport availability and cost, inflation, and other factors relating to the suppliers and the countries in which they are located or from which they import, are beyond our control.control and could adversely affect our operations and profitability. Because a substantial amount of our imported merchandise comes from China, a change in the Chinese currency or other policies could negatively impact our merchandise costs. In addition, the United States’ foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control. Disruptions due to labor stoppages, strikes or slowdowns, or other disruptions involving our vendors or the transportation and handling industries also may negatively affect our ability to receive
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merchandise and thus may negatively affect sales. These and other factors affecting our suppliers and our access to products could adversely affect our financial performance. In addition,As we increase our imports of merchandise from foreign vendors, the risks associated with foreign imports will increase.
Product liability and food safety claims could adversely affect our business, reputation and financial performance.
Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers or penalties from government agencies relating to products, including food products, that are recalled, defective or otherwise alleged to be harmful. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. All of our vendors and their products must comply with applicable product and food safety laws. We generally seek contractual indemnification and insurance coverage from our suppliers. However, if we do not have adequate contractual indemnification and/or insurance available, such claims could have a material adverse effect on our business, financial condition and results of operations. Our ability to obtain indemnification from foreign suppliers may be hindered by the manufacturers’ lack of understanding of U.S. product liability or other laws, which may make it more likely that we may be required to respond to claims or complaints from customers as if we were the manufacturer of the products. As weEven with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could increase our imports of merchandise from foreign vendors, the risks associated with foreign imports will increase.
We are subject to governmental regulations, procedures and requirements. A significant change in, or noncompliance with, these regulations could have a material adverse effect on our financial performance.
Our business is subject to numerous federal, state and local laws and regulations. ChangesWe routinely incur costs in complying with these regulations. New laws or regulations, particularly those dealing with healthcare reform, product safety, and labor and employment, among others, or changes in existing laws and regulations, particularly those governing the sale of products, may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement andand/or could materially increase our cost of doing business. In addition, such changes or new laws may require the write off and disposal of existing product inventory, resulting in significant adverse financial impact to us. Untimely compliance or noncompliance with applicable regulations or untimely or incomplete execution of a required product recall can result in the imposition of penalties, including loss of licenses or significant fines or monetary penalties, in addition to reputational damage.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation by employees, consumers, suppliers, competitors, shareholders, government agencies orand others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The number of employment-related class actions filed each year has continued to increase, and recent changes and proposed changes in Federal and state laws may cause claims to rise even more. The outcome of litigation, particularly class action lawsuits, and regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. See Part I, Item 3 “Legal Proceedings”Note 9 to the consolidated financial statements for further details regarding certain of these pending matters.
If we cannot open new stores profitably and on schedule, our planned future growth will be impeded, which would adversely affect sales.
Our ability to open profitable new stores is a key component of our planned future growth. Our ability to timely open such stores and to expand into additional market areas depends in part on the following factors: the availability of attractive store locations; the absence of occupancy delays; the ability to negotiate acceptable lease and development terms; the ability to hire and train new personnel, especially store managers, in a cost effective manner; the ability to identify customer demand in different geographic areas; general economic conditions; and the availability of sufficient funds for expansion. Many of these factors affect our ability to successfully relocate stores, and many of them are beyond our control. In addition, our credit ratings, combined with tighter lending practices, have made financing more challenging for our real estate developers in today’s market. These unfavorable lending trends could potentially impact the timing of our store openings and build-to-suit program.
Delays or failures in opening new stores, or achieving lower than expected sales in new stores, or drawing a greater than expected proportion of sales in new stores away from timeexisting stores, could materially adversely affect our growth and/or profitability. In addition, we may not anticipate all of the challenges imposed by the expansion of our operations and, as a result, may not meet our targets for opening new stores, remodeling or relocating stores or expanding profitably.
Some of our new stores may be located in areas where we have little or no meaningful experience or brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing
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markets, which may cause our new stores to time, third partiesbe less successful than stores in our existing markets.
Many of our new stores will be located in areas where we have existing units. Although we have experience in these markets, increasing the number of locations in these markets may claim thatresult in inadvertent over-saturation of markets and temporarily or permanently divert customers and sales from our trademarks or product offerings infringe upon their proprietary rights. Any such claim, whetherexisting stores, thereby adversely affecting our overall financial performance.
Natural disasters (whether or not it has merit,caused by climate change), unusual weather conditions, pandemic outbreaks, terrorist acts, and global political events could cause permanent or temporary distribution center or store closures, impair our ability to purchase, receive or replenish inventory, or decrease customer traffic, all of which could result in lost sales and otherwise adversely affect our financial performance.
The occurrence of one or more natural disasters, such as hurricanes, fires, floods, and earthquakes (whether or not caused by climate change), unusual weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliers are located, or similar disruptions could adversely affect our operations and financial performance. To the extent these events result in the closure of one or more of our distribution centers, a significant number of stores, or our corporate headquarters or impact one or more of our key suppliers, our operations and financial performance could be time-consumingmaterially adversely affected through an inability to make deliveries or provide other support functions to our stores and distracting for executive management,through lost sales. In addition, these events could result in costly litigation, cause changesincreases in fuel (or other energy) prices or a fuel shortage, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some domestic and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our private label offeringsdistribution centers or delaysstores, the temporary reduction in introducing new private label offerings,the availability of products in our stores and disruption of our utility services or require us to enter into royaltyour information systems. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or licensing agreements. Asother insurable damage.
Material damage to, or interruptions to, our information systems as a result any such claimof external factors, staffing shortages and difficulties in updating our existing technology or developing or implementing new technology could have a material adverse effect on our business or results of operations.
We depend on a variety of information technology systems for the efficient functioning of our business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Damage or interruption to these systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruptions may have a material adverse effect on our business or results of operations.
We also rely heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain vendors to maintain and
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periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology, such as the implementation of our new supply chain solution, or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations.
Failure to attract and retain qualified employees, particularly field, store and distribution center managers, and to control labor costs, as well as other labor issues, could adversely affect our financial performance.
Our future growth and performance depends on our ability to attract, retain and motivate qualified employees, many of whom are in positions with historically high rates of turnover such as field managers and distribution center managers. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulation (including changes in entitlement programs such as health insurance and paid leave programs). To the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. In addition, we are evaluating the potential future impact of recently enacted comprehensive healthcare reform legislation, which will likely cause our healthcare costs to increase. While the significant costs of the healthcare reform legislation will occur after 2013 due to provisions of the legislation being phased in over time, changes to our healthcare costs structure could have a significant negative effect on our business. Our ability to pass along labor costs to our customers is constrained by our low price model.
Our profitability may be negatively affected by inventory shrinkage.
We are subject to the risk of inventory loss and theft. We experience significant inventory shrinkage, and we cannot assure you that incidences of inventory loss and theft will decrease in the future or that the measures we are taking will effectively address the problem of inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, our financial condition could be affected adversely.
Our cash flows from operations may be negatively affected if we are not successful in managing our inventory balances.
Our inventory balance represented approximately 45% of our total assets exclusive of goodwill and other intangible assets as of January 28, 2011. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels to meet our customers’ demands without allowing those levels to
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increase to such an extent that the costs to store and hold the goods unduly impacts our financial results. If our buying decisions do not accurately predict customer trends or purchasing actions, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impact our financial results. We continue to focus on ways to reduce these risks, but we cannot assure you that we will be successful in our inventory management. If we are not successful in managing our inventory balances, our cash flows from operations may be negatively affected.
Because our business is seasonal to a certain extent, with the highest volume of net sales during the fourth quarter, adverse events during the fourth quarter could materially affect our financial statements as a whole.
We generally recognize our highest volume of net sales during the Christmas selling season, which occurs in the fourth quarter of our fiscal year. In anticipation of this holiday, we purchase substantial amounts of seasonal inventory and hire many temporary employees. An excess of seasonal merchandise inventory could result if our net sales during the Christmas selling season were to fall below either seasonal norms or expectations. If our fourth quarter sales results were substantially below expectations, our financial performance and operating results could be adversely affected by unanticipated markdowns, especially in seasonal merchandise. Lower than anticipated sales in the Christmas selling season would also negatively affect our ability to absorb the increased seasonal labor costs.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on the dispersion of our operations. However, there are types of losses we may incur but against which we cannot be insured or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime and some natural disasters. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative insurance market trends, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, automobile liability, general liability and group health insurance programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including expected increases in medical and indemnity costs, could result in materially different expenses than expected under these programs, which could have a material adverse effect on our financial condition and results of operations. In addition, we are evaluating the potential future impact of recently enacted comprehensive healthcare reform legislation, which may cause our healthcare costs to increase. Although we continue to maintain property insurance for catastrophic events at our store support center and distribution centers, we are effectively self-insured for other property losses. If we experience a greater number of these losses than we anticipate, our financial performance could be adversely affected.
If we fail to protect our brand name, competitors may adopt tradenames that dilute the value of our brand name.
We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our trademarks against competitors, or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition, and could cause customer confusion, which could, in turn, adversely affect our sales and profitability.
Our success depends on our executive officers and other key personnel. If we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and other key personnel. The loss of the services of any of our executive officers, particularly Richard W. Dreiling, our Chief Executive Officer, could have a material adverse effect on our operations. Our future success will also depend on our ability to attract and retain qualified personnel and a failure to attract and retain new qualified personnel could have an adverse effect on our operations. We do not currently maintain key person life insurance policies with respect to our executive officers or key personnel.
We face risks related to protection of customers’ credit and debt card data and private data relating to us or our customers or employees.
In connection with credit card sales, we transmit confidential credit and debit card information. We also have access to, collect or maintain private or confidential information regarding our customers and employees, as well as our business. We have procedures and technology in place to safeguard our customers’ debit and credit card information, our employees’ private data, and our confidential business information. However, third parties may have the technology or know-how to breach the security of this information, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. A security breach of any kind could expose us to risks of data loss, litigation, government enforcement actions and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation which could cause us to lose market share and have an adverse effect in our financial results.
While we have reduced our debt levels since 2007, we continue to have substantial debt that will need to be repaid or refinanced at or prior to applicable maturity dates which could adversely affect our ability to raise additional capital to fund our operations and financial condition.
At January 28, 2011, we had total outstanding debt (including the current portion of long-term obligations) of $3.29 billion, including a $1.964 billion senior secured term loan facility which matures on July 6, 2014, $864.3 million aggregate principal amount of 10.625% senior notes due 2015 and $450.7 million aggregate principal amount of 11.875% / 12.625% senior
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subordinated toggle notes due 2017. We also had an additional $959.3 million available for borrowing under our senior secured asset-based revolving credit facility of up to $1.031 billion, which matures July 6, 2013. This level of debt and our ability to repay or refinance this debt prior to maturity could have important negative consequences to our business, including:
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increasing our vulnerability to general economic and industry conditions because our debt payment obligations may limit our ability to use our cash to respond to or defend against changes in Parent,the industry or the economy;
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requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities or pay dividends;
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limiting our ability to pursue our growth strategy;
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placing us at a disadvantage compared to our competitors who are less highly leveraged and may be better able to use their cash flow to fund competitive responses to changing industry, market or economic conditions;
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limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and
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increasing the difficulty of our ability to make payments on our outstanding debt.
Our variable rate debt exposes us to interest rate risk which could adversely affect our cash flow.
The borrowings under the term loan facility and the senior secured asset-based revolving credit facility comprise our credit facilities and bear interest at variable rates. Other debt we incur also could be variable rate debt. If market interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flow. While we have entered and may in the future enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.
Our debt agreements contain restrictions that could limit our flexibility in operating our business.
Our credit facilities and the indentures governing our notes contain various covenants that could limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:
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incur additional indebtedness, issue disqualified stock or issue certain preferred stock;
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pay dividends and make certain distributions, investments and other restricted payments;
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create certain liens or encumbrances;
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sell assets;
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enter into transactions with our affiliates;
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allow payments to us by our restricted subsidiaries;
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merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and
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designate our subsidiaries as unrestricted subsidiaries.
A breach of any of these covenants could result in a default under the agreement governing such indebtedness. Upon our failure to maintain compliance with these covenants, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit thereunder. If the lenders under such indebtedness accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings, as well as our other indebtedness, including our outstanding notes. We have pledged a significant portion of our assets as collateral under our credit facilities. If we were unable to repay those amounts, the lenders under our credit facilities could proceed against the collateral granted to them to secure that indebtedness. Additional borrowings under the senior secured asset-based revolving credit facility will, if excess availability under that facility is less than a certain amount, be subject to the satisfaction of a specified financial ratio. Accordingly, our ability to access the full availability under our senior secured asset-based revolving credit facility may be constrained. Our ability to meet this financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio, if applicable, and other covenants.
New accounting guidance or changes in the interpretation or application of existing accounting guidance could adversely affect our financial performance.
The implementation of proposed new accounting standards may require extensive systems, internal process and other changes that could increase our operating costs, and may also result in changes to our financial statements. In particular, the implementation of expected future accounting standards related to leases, as currently being contemplated by the convergence project between the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB"), as well as the possible adoption of international financial reporting standards by U.S. registrants, could require us to make significant changes to our lease management, fixed asset, and other accounting systems, and in all likelihood would result in changes to our financial statements.
U.S. generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. The outcome of such changes could include litigation or regulatory actions which could have an adverse effect on our financial condition and results of operations.
Kohlberg Kravis Roberts & Co. L.P. (“KKR”), certain affiliates of Goldman, Sachs & Co. (the “GS Investors”), and other equity co-investors (collectively, the "Investors") have significant influence over us, including control over decisions that require the approval of shareholders, which could limit your ability to influence the outcome of key transactions, including a change of control.
We are controlled by the Investors. The Investors have an indirect interest in approximately 71% of our outstanding common stock.stock through their investment in Buck
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Holdings, L.P. In addition, the Investors have the ability to elect our entire Board of Directors. As a result, the Investors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires theshareholder approval of shareholders regardless of whether others believe that any such transactions arethe transaction is in our own best interests. For example,As long as the Investors could cause uscontinue to make acquisitionshave an indirect interest in a majority of our outstanding common stock, they will have the ability to control the vote in any election of directors. In addition, pursuant to a shareholders’ agreement that increasewe entered into with Buck Holdings, L.P., KKR and the amount of indebtedness that is secured or that is seniorGS Investors, KKR has a consent right over certain significant corporate actions and KKR and the GS Investors have certain rights to appoint directors to our outstanding debt securities or
The Investors are also in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The Investors may also pursue acquisition opportunities that may beare complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as the Investors, or other funds controlled by or associated with the Investors, continue to indirectly own a significant amount of theour outstanding shares of our common stock, even if such amount is less than 50%, the Investors will continue to be able to strongly influence or effectively control our decisions. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
If we, the Investors or other significant shareholders sell shares of our common stock, the market price of our common stock could decline.
The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to issue equity securities in the future at a time and at a price that we deem appropriate. As of January 28, 2011, we had approximately 341.5 million shares of common stock outstanding, of which less than 29% were freely tradable on the New York Stock Exchange.
Pursuant to shareholders agreements, we have granted the Investors the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act of 1933, as amended, covering resales of our common stock held by them or to piggyback on a registration statement in certain circumstances. Certain members of management hold similar piggyback registration rights. Collectively, these shares represent approximately 71% of our outstanding common stock. To the extent that such registration rights are exercised, the resulting sale of a substantial number of shares of our common stock into the market could cause the market price of our common stock to decline. These shares also may be sold pursuant to Rule 144 under the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of February 29, 2008,25, 2011, we operated 8,2229,414 retail stores located in 35 states as follows:
State | Number of Stores |
| State | Number of Stores | ||
Alabama | 512 |
|
| Nebraska | 79 |
|
Arizona | 61 |
|
| New Jersey | 44 |
|
Arkansas | 268 |
|
| New Mexico | 46 |
|
Colorado | 27 |
|
| New York | 245 |
|
Delaware | 29 |
|
| North Carolina | 536 |
|
Florida | 505 |
|
| Ohio | 510 |
|
Georgia | 541 |
|
| Oklahoma | 295 |
|
Illinois | 352 |
|
| Pennsylvania | 421 |
|
Indiana | 358 |
|
| South Carolina | 375 |
|
Iowa | 169 |
|
| South Dakota | 12 |
|
Kansas | 173 |
|
| Tennessee | 489 |
|
Kentucky | 363 |
|
| Texas | 1,081 |
|
Louisiana | 369 |
|
| Utah | 8 |
|
Maryland | 72 |
|
| Vermont | 11 |
|
Michigan | 270 |
|
| Virginia | 265 |
|
Minnesota | 16 |
|
| West Virginia | 161 |
|
Mississippi | 310 |
|
| Wisconsin | 93 |
|
Missouri | 348 |
|
|
|
|
|
State | Number of Stores | State | Number of Stores | |||
Alabama | 446 | Nebraska | 80 | |||
Arizona | 51 | New Jersey | 22 | |||
Arkansas | 224 | New Mexico | 42 | |||
Colorado | 19 | New York | 223 | |||
Delaware | 24 | North Carolina | 467 | |||
Florida | 415 | Ohio | 465 | |||
Georgia | 464 | Oklahoma | 271 | |||
Illinois | 306 | Pennsylvania | 393 | |||
Indiana | 302 | South Carolina | 316 | |||
Iowa | 170 | South Dakota | 12 | |||
Kansas | 144 | Tennessee | 403 | |||
Kentucky | 300 | Texas | 969 | |||
Louisiana | 326 | Utah | 9 | |||
Maryland | 57 | Vermont | 3 | |||
Michigan | 238 | Virginia | 243 | |||
Minnesota | 16 | West Virginia | 149 | |||
Mississippi | 256 | Wisconsin | 88 | |||
Missouri | 309 |
Most of our stores are located in leased premises. Individual store leases vary as to their terms, rental provisions and expiration dates. The majority of our leasesMany stores are relatively low-cost, short-term leases (usually with initial or primary terms of three to five years) often with multiple renewal options. We also have stores subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of between 7 and 1010-15 years with multiple renewal options. We also have stores subject to shorter-term leases (usually with initial or current terms of three to five years), and many of these leases have multiple renewal options as well. In recent years, an increasing percentage of our new stores have been subject to build-to-suit arrangements. In 2007,arrangements, including approximately 70%72% of our new stores were build-to-suit arrangements.
As of February 29, 2008,25, 2011, we operated nine distribution centers, as described in the following table:
Location | Year Opened | Approximate Square Footage | Approximate Number of Stores Served | |||
Scottsville, KY | 1959 | 720,000 | 948 | |||
Ardmore, OK | 1994 | 1,310,000 | 1,147 | |||
South Boston, VA | 1997 | 1,250,000 | 779 | |||
Indianola, MS | 1998 | 820,000 | 885 | |||
Fulton, MO | 1999 | 1,150,000 | 1,093 | |||
Alachua, FL | 2000 | 980,000 | 735 | |||
Zanesville, OH | 2001 | 1,170,000 | 1,113 | |||
Jonesville, SC | 2005 | 1,120,000 | 728 | |||
Marion, IN | 2006 | 1,110,000 | 794 |
Location | Year | Approximate Square |
| Approximate Number of Stores Served | ||
Scottsville, KY | 1959 | 720,000 |
|
| 949 |
|
Ardmore, OK | 1994 | 1,310,000 |
|
| 1,402 |
|
South Boston, VA | 1997 | 1,250,000 |
|
| 895 |
|
Indianola, MS | 1998 | 820,000 |
|
| 809 |
|
Fulton, MO | 1999 | 1,150,000 |
|
| 1,273 |
|
Alachua, FL | 2000 | 980,000 |
|
| 876 |
|
Zanesville, OH | 2001 | 1,170,000 |
|
| 1,229 |
|
Jonesville, SC | 2005 | 1,120,000 |
|
| 981 |
|
Marion, IN | 2006 | 1,110,000 |
|
| 1,000 |
|
We lease the distribution centers located in Oklahoma, Mississippi and Missouri and own the other six distribution centers. Approximately 7.25 acres of the land on which our Kentucky distribution center is located is subject to a ground lease. We leaseAs of January 28, 2011, we leased
25
approximately 600,000 square feet of additional temporary warehouse space as necessary to support our distribution needs.
Our executive offices are located in approximately 302,000 square feet of leased spacebuildings in Goodlettsville, Tennessee.
ITEM 3.
LEGAL PROCEEDINGS
The information contained in Note 79 to the consolidated financial statements under the heading “Legal proceedings” contained in Part II, Item 8 of this report is incorporated herein by this reference.
26
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our current executive officers as of March 22, 2011 is set forth below. Each of our executive officers serves at the discretion of our Board of Directors and is elected annually by the Board to serve until a successor is duly elected. There are no familial relationships between any of our directors or executive officers.
Name | Age | Position | ||
Richard W. Dreiling | 57 | Chairman and Chief Executive Officer | ||
David M. Tehle | 54 | Executive Vice President and Chief Financial Officer | ||
Kathleen R. Guion | 59 | Executive Vice President, Division President, Store Operations and Store Development | ||
Todd Vasos | 49 | Executive Vice President, Division President and Chief Merchandising Officer | ||
John W. Flanigan | 59 | Executive Vice President, Global Supply Chain | ||
Susan S. Lanigan | 48 | Executive Vice President and General Counsel | ||
Robert D. Ravener | 52 | Executive Vice President and Chief People Officer | ||
Anita C. Elliott | 46 | Senior Vice President and Controller |
Mr. Dreiling joined Dollar General in January 2008 as Chief Executive Officer and a member of our Board. He was appointed Chairman of the Board on December 2, 2008. Prior to joining Dollar General, Mr. Dreiling served as Chief Executive Officer, President and a director of Duane Reade Holdings, Inc. and Duane Reade Inc., the largest drugstore chain in New York City, from November 2005 until January 2008 and as Chairman of the Board of Duane Reade from March 2007 until January 2008. Prior to that, Mr. Dreiling, beginning in March 2005, served as Executive Vice President—Chief Operating Officer of Longs Drug Stores Corporation, an operator of a chain of retail drug stores on the West Coast and Hawaii, after having joined Longs in July 2003 as Executive Vice President and Chief Operations Officer. From 2000 to 2003, Mr. Dreiling served as Executive Vice President—Marketing, Manufacturing and Distribution at Safeway, Inc., a food and drug retailer. Prior to that, Mr. Dreiling served from 1998 to 2000 as President of Vons, a Southern California food and drug division of Safeway.
Mr. Tehle joined Dollar General in June 2004 as Executive Vice President and Chief Financial Officer. He served from 1997 to June 2004 as Executive Vice President and Chief Financial Officer of Haggar Corporation, a manufacturing, marketing and retail corporation. From 1996 to 1997, he was Vice President of Finance for a division of The Stanley Works, one of the world's largest manufacturers of tools, and from 1993 to 1996, he was Vice President and Chief Financial Officer of Hat Brands, Inc., a hat manufacturer. Earlier in his career, Mr. Tehle served in a variety of financial-related roles at Ryder System, Inc. and Texas Instruments. Mr. Tehle currently serves as a director of Jack in the Box, Inc.
Ms. Guion joined Dollar General in October 2003 as Executive Vice President, Store Operations. She was named Executive Vice President, Store Operations and Store Development in February 2005, and was promoted to Executive Vice President, Division President, Store
27
Operations and Store Development in November 2005. From 2000 until joining Dollar General, Ms. Guion served as President and Chief Executive Officer of Duke and Long Distributing Company. Prior to that time, she served as an operating partner for Devon Partners (1999-2000), where she developed operating plans and assisted in the identification of acquisition targets in the convenience store industry, and as President and Chief Operating Officer of E-Z Serve Corporation (1997-1998), an owner/operator of convenience stores, mini-marts and gas marts. From 1987 to 1997, Ms. Guion served as the Vice President and General Manager of the largest division (Chesapeake Division) of company-owned stores at 7-Eleven, Inc., a convenience store chain. Other positions held by Ms. Guion during her tenure at 7-Eleven include District Manager, Zone Manager, Operations Manager, and Division Manager (Midwest Division).
Mr. Vasos joined Dollar General in December 2008 as Executive Vice President, Division President and Chief Merchandising Officer. Prior to joining Dollar General, Mr. Vasos served in executive positions with Longs Drug Stores Corporation for 7 years, including Executive Vice President and Chief Operating Officer (February 2008 through November 2008) and Senior Vice President and Chief Merchandising Officer (2001-2008), where he was responsible for all pharmacy and front-end marketing, merchandising, procurement, supply chain, advertising, store development, store layout and space allocation, and the operation of three distribution centers. He also previously served in leadership positions at Phar-Mor Food and Drug Inc. and Eckerd Drug Corp.
Mr. Flanigan joined Dollar General as Senior Vice President, Global Supply Chain, in May 2008. He was promoted to Executive Vice President in March 2010. He has 25 years of management experience in retail logistics. Prior to joining Dollar General, he was group vice president of logistics and distribution for Longs Drug Stores Corporation from October 2005 to April 2008. In this role, he was responsible for overseeing warehousing, inbound and outbound transportation and facility maintenance to service over 500 retail outlets. From September 2001 to October 2005 he served as the Vice President of Logistics for Safeway Inc. where he oversaw distribution of food products from Safeway distribution centers to all retail outlets, inbound traffic and transportation. He also held distribution and logistics leadership positions at Vons—a Safeway company, Specialized Distribution Management Inc., and Crum & Crum Logistics.
Ms. Lanigan joined Dollar General in July 2002 as Vice President, General Counsel and Corporate Secretary. She was promoted to Senior Vice President in October 2003 and to Executive Vice President in March 2005. Prior to joining Dollar General, Ms. Lanigan served as Senior Vice President, General Counsel and Secretary at Zale Corporation, a specialty retailer of fine jewelry. During her six years with Zale, Ms. Lanigan held various positions, including Associate General Counsel. Prior to that, she held legal positions with both Turner Broadcasting System, Inc. and the law firm of Troutman Sanders LLP.
Mr. Ravener joined Dollar General as Senior Vice President and Chief People Officer in August 2008. He was promoted to Executive Vice President in March 2010. Prior to joining Dollar General, he served in human resources executive roles with Starbucks Coffee Company from September 2005 until August 2008 as both Senior Vice President of U.S. Partner Resources and as the Vice President, Partner Resources—Eastern Division. As the Senior Vice President of U.S. Partner Resources at Starbucks, Mr. Ravener oversaw all aspects of human resources
28
activity for more than 10,000 stores. Prior to serving at Starbucks, Mr. Ravener held Vice President of Human Resources roles for The Home Depot's Store Support Center and a domestic field division from April 2003 to September 2005. Mr. Ravener also served in executive roles in both human resources and operations at Footstar, Inc. and roles of increasing leadership at PepsiCo.
Ms. Elliott joined Dollar General as Senior Vice President and Controller in August 2005. Prior to joining Dollar General, she served as Vice President and Controller of Big Lots, Inc., a closeout retailer, from May 2001 to August 2005. Overseeing a staff of 140 employees at Big Lots, she was responsible for accounting operations, financial reporting and internal audit. Prior to serving at Big Lots, she served as Vice President and Controller for Jitney-Jungle Stores of America, Inc., a grocery retailer, from April 1998 to March 2001. At Jitney-Jungle, Ms. Elliott was responsible for the accounting operations and the internal and external financial reporting functions. Prior to serving at Jitney-Jungle, she practiced public accounting for 12 years, 6 of which were submitted to a vote of shareholders during the fourth quarter of 2007.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
Our outstanding common stock is privately held, and there istraded on the New York Stock Exchange under the symbol “DG.” There was no established public trading market for our common stock.stock after our merger that occurred on July 6, 2007 until our initial public offering of our common stock (“IPO”) on November 13, 2009. The range of the high and low sales prices of our common stock during our fourth quarter of fiscal 2009, as reported in the consolidated transaction reporting system, were $24.90 (high) and $21.75 (low). The high and low sales prices during fiscal 2010 were as follows:
2010 |
| First |
| Second |
| Third |
| Fourth | ||||||||
High |
| $ | 29.91 |
|
| $ | 31.41 |
|
| $ | 30.20 |
|
| $ | 33.73 |
|
Low |
| $ | 21.30 |
|
| $ | 26.61 |
|
| $ | 26.64 |
|
| $ | 27.29 |
|
Our stock price at the close of the market on March 16, 2011, was $29.78. There were approximately 1451,044 shareholders of record of our common stock as of March 17, 2008.
Dividends
We have not declared or paid recurring dividends since prior to our 2007 merger. However, prior to our IPO, on September 8, 2009, our Board of Directors declared a quarterlyspecial dividend on our outstanding common stock of approximately $239.3 million in the amountaggregate. The special dividend was paid on September 11, 2009 to shareholders of $0.05 per share:
29
2009 with cash generated from operations. We have no current plans to pay any cash dividends on our common stock and instead may retain earnings, if any, for future operation and expansion and debt repayment. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors did not declare a dividend thereafter.and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our Credit Facilities and in the indentures governing our outstanding 10.625% senior notes due 2015 (the “Senior Notes”) and 11.875%/12.625% senior subordinated toggle notes due 2017 (the “Senior Subordinated Notes” and, collectively with the Senior Notes, the “Notes”). See Item 7, “Management’s"Liquidity and Capital Resources" in the Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”Operations section of this report for a description of the restrictions on our ability to pay dividends.
Issuer Purchases of Equity Securities
The Rollover Options remain outstanding in accordance with the terms of the governing stock incentive plan and grant agreements pursuant to which the holder originally received the stock option grants. However, immediately after the Merger, the exercise price and number of shares underlying the Rollover Options were adjusted as a result of the Merger and the exercise price for all of the options was adjusted to $1.25 per option.
Period |
| Total Number |
| Average |
| Total Number |
| Maximum Number | |||
10/30/10-11/30/10 |
| - |
|
| $ | - |
| - |
| - | |
12/01/10-12/31/10 |
| 11,270 |
|
| $ | 29.34 |
| - |
| - | |
1/1/11-1/28/11 |
| - |
|
| $ | - |
| - |
| - | |
Total |
| 11,270 |
|
| $ | 29.34 |
| - |
| - | |
|
|
|
|
|
|
|
|
|
| ||
(a) Represents shares repurchased from employees pursuant to the terms of management stockholder’s agreements. |
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information of Dollar General Corporation as of the dates and for the periods indicated. The selected historical statement of operations data and statement of cash flows data for the fiscal years ended February 1, 2008, February 2, 2007January 28, 2011, January 29, 2010 and February 3, 2006,January 30, 2009, and balance sheet data as of February 1, 2008January 28, 2011 and February 2, 2007January 29, 2010, have been derived from our historical audited consolidated financial statements included elsewhere in this report. The selected historical statement of operations data and statement of cash flows data for the fiscal years or periods, as applicable, ended January 28, 2005February 1, 2008, July 6, 2007 and January 30, 2004February 2, 2007 and balance sheet data as of February 3, 2006, January 28, 2005, and January 30, 20042009, February 1, 2008 and February 2, 2007 presented in this table have been derived from audited consolidated financial statements not included in this report.
We completed a merger with Buck Acquisition Corp. (“BAC”) on July 6, 2007, and, as a result, we are majority owned by a Delaware limited partnership controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. As a result of the Merger,merger, the related purchase accounting adjustments, and a new basis of accounting beginning on July 7, 2007, the 2007 financial reporting periods presented below include the 22-week Predecessor period of the Company reflecting 22 weeks of operating results from February 3, 2007 to July 6, 2007 and 30 weeks of operating results for the 30-week Successor period, reflecting the merger of the Company and Buck Acquisition Corp. (“Buck”) from July 7, 2007 to February 1, 2008. Buck’sBAC’s results of operations for the period from March 6, 2007 to July 6, 2007 (prior to the Mergermerger on July 6, 2007) are also included in the consolidated financial statements for the periods2007 Successor period described above, where applicable, as a result of certain derivative financial instruments entered into by BuckBAC prior to the Merger as further described below.merger. Other than these financial instruments, BuckBAC had no assets, liabilities, or operations prior to the Merger.merger. The 2006 fiscal yearsyear presented from 2003 to 2006 reflectreflects the Predecessor.
Due to the significance of the Mergermerger and related transactions that occurred in 2007, the 2010, 2009, 2008 and 2007 Successor financial information mayis not be comparable to that of previousthe Predecessor periods presented in the accompanying table.
The information set forth below should be read in conjunction with, and is qualified by reference to, the Consolidated Financial Statements and related notes included in Part II, Item 8 of this report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.
| Successor | Predecessor | ||||||||||
| Year Ended |
|
|
| Year Ended | |||||||
(Amounts in millions, excluding per share data, number of stores, selling square feet, and net sales per square foot) |
| January 28, |
| January 29, |
| January 30, |
| March 6, |
| February 3, |
| February 2, |
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | $ | 13,035.0 | $ | 11,796.4 | $ | 10,457.7 | $ | 5,571.5 | $ | 3,923.8 | $ | 9,169.8 |
Cost of goods sold |
| 8,858.4 |
| 8,106.5 |
| 7,396.6 |
| 3,999.6 |
| 2,852.2 |
| 6,801.6 |
Gross profit |
| 4,176.6 |
| 3,689.9 |
| 3,061.1 |
| 1,571.9 |
| 1,071.6 |
| 2,368.2 |
Selling, general and |
| 2,902.5 |
| 2,736.6 |
| 2,448.6 |
| 1,324.5 |
| 960.9 |
| 2,119.9 |
Litigation settlement and related costs, net |
| - |
| - |
| 32.0 |
| - |
| - |
| - |
Transaction and related costs |
| - |
| - |
| - |
| 1.2 |
| 101.4 |
| - |
Operating profit |
| 1,274.1 |
| 953.3 |
| 580.5 |
| 246.1 |
| 9.2 |
| 248.3 |
Interest income |
| (0.2) |
| (0.1) |
| (3.1) |
| (3.8) |
| (5.0) |
| (7.0) |
Interest expense |
| 274.2 |
| 345.7 |
| 391.9 |
| 252.9 |
| 10.3 |
| 34.9 |
Other (income) expense |
| 15.1 |
| 55.5 |
| (2.8) |
| 3.6 |
| - |
| - |
Income (loss) before income taxes |
| 985.0 |
| 552.1 |
| 194.4 |
| (6.6) |
| 4.0 |
| 220.4 |
Income tax expense (benefit) |
| 357.1 |
| 212.7 |
| 86.2 |
| (1.8) |
| 12.0 |
| 82.4 |
Net income (loss) | $ | 627.9 | $ | 339.4 | $ | 108.2 | $ | (4.8) | $ | (8.0) | $ | 137.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – basic | $ | 1.84 | $ | 1.05 | $ | 0.34 | $ | (0.02) |
|
|
|
|
Earnings (loss) per share - diluted |
| 1.82 |
| 1.04 |
| 0.34 |
| (0.02) |
|
|
|
|
Dividends per share |
| - |
| 0.7525 |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities | $ | 824.7 | $ | 672.8 | $ | 575.2 | $ | 239.6 | $ | 201.9 | $ | 405.4 |
Investing activities |
| (418.9) |
| (248.0) |
| (152.6) |
| (6,848.4) |
| (66.9) |
| (282.0) |
Financing activities |
| (130.4) |
| (580.7) |
| (144.8) |
| 6,709.0 |
| 25.3 |
| (134.7) |
Total capital expenditures |
| (420.4) |
| (250.7) |
| (205.5) |
| (83.6) |
| (56.2) |
| (261.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial and Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Same store sales growth (3) |
| 4.9% |
| 9.5% |
| 9.0% |
| 1.9% |
| 2.6% |
| 3.3% |
Same store sales (3) | $ | 12,227.1 | $ | 11,356.5 | $ | 10,118.5 | $ | 5,264.2 | $ | 3,656.6 | $ | 8,327.2 |
Number of stores included in same store sales calculation |
| 8,712 |
| 8,324 |
| 8,153 |
| 7,735 |
| 7,655 |
| 7,627 |
Number of stores (at period end) |
| 9,372 |
| 8,828 |
| 8,362 |
| 8,194 |
| 8,205 |
| 8,229 |
Selling square feet (in thousands at period end) |
| 67,094 |
| 62,494 |
| 58,803 |
| 57,376 |
| 57,379 |
| 57,299 |
Net sales per square foot (4) | $ | 201 | $ | 195 | $ | 180 | $ | 165 | $ | 164 | $ | 163 |
Consumables sales |
| 71.6% |
| 70.8% |
| 69.3% |
| 66.4% |
| 66.7% |
| 65.7% |
Seasonal sales |
| 14.5% |
| 14.5% |
| 14.6% |
| 16.3% |
| 15.4% |
| 16.4% |
Home products sales |
| 7.0% |
| 7.4% |
| 8.2% |
| 9.1% |
| 9.2% |
| 10.0% |
Apparel sales |
| 6.9% |
| 7.3% |
| 7.9% |
| 8.2% |
| 8.7% |
| 7.9% |
Rent expense | $ | 489.3 | $ | 428.6 | $ | 389.6 | $ | 214.5 | $ | 150.2 | $ | 343.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments | $ | 497.4 | $ | 222.1 | $ | 378.0 | $ | 119.8 |
|
| $ | 219.2 |
Total assets |
| 9,546.2 |
| 8,863.5 |
| 8,889.2 |
| 8,656.4 |
|
|
| 3,040.5 |
Total debt |
| 3,288.2 |
| 3,403.4 |
| 4,137.1 |
| 4,282.0 |
|
|
| 270.0 |
Total shareholders’ equity |
| 4,054.5 |
| 3,390.3 |
| 2,831.7 |
| 2,703.9 |
|
|
| 1,745.7 |
Predecessor | ||||||||||||||||||||||||
Successor | Fiscal Year Ended | |||||||||||||||||||||||
July 7, 2007 through February 1, 2008 (1) | February 3, 2007 through July 6, 2007 | February 2, 2007 (2) | February 3, 2006 (3) | January 28, 2005 | January 30, 2004 | |||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||
Net sales | $ | 5,571.5 | $ | 3,923.8 | $ | 9,169.8 | $ | 8,582.2 | $ | 7,660.9 | $ | 6,872.0 | ||||||||||||
Cost of goods sold | 3,999.6 | 2,852.2 | 6,801.6 | 6,117.4 | 5,397.7 | 4,853.9 | ||||||||||||||||||
Gross profit | 1,571.9 | 1,071.6 | 2,368.2 | 2,464.8 | 2,263.2 | 2,018.1 | ||||||||||||||||||
Selling, general and administrative (4) | 1,324.5 | 960.9 | 2,119.9 | 1,903.0 | 1,706.2 | 1,510.1 | ||||||||||||||||||
Transaction and related costs | 1.2 | 101.4 | - | - | - | - | ||||||||||||||||||
Operating profit | 246.1 | 9.2 | 248.3 | 561.9 | 557.0 | 508.0 | ||||||||||||||||||
Interest income | (3.8 | ) | (5.0 | ) | (7.0 | ) | (9.0 | ) | (6.6 | ) | (4.1 | ) | ||||||||||||
Interest expense | 252.9 | 10.3 | 34.9 | 26.2 | 28.8 | 35.6 | ||||||||||||||||||
Loss on interest rate swaps | 2.4 | - | - | - | - | - | ||||||||||||||||||
Loss on debt retirement, net | 1.2 | - | - | - | - | - | ||||||||||||||||||
Income (loss) before taxes | (6.6 | ) | 4.0 | 220.4 | 544.6 | 534.8 | 476.5 | |||||||||||||||||
Income tax expense (benefit) | (1.8 | ) | 12.0 | 82.4 | 194.5 | 190.6 | 177.5 | |||||||||||||||||
Net income (loss) | $ | (4.8 | ) | $ | (8.0 | ) | $ | 137.9 | $ | 350.2 | $ | 344.2 | $ | 299.0 | ||||||||||
Statement of Cash Flows Data: | ||||||||||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||||||||||
Operating activities | $ | 239.6 | $ | 201.9 | $ | 405.4 | $ | 555.5 | $ | 391.5 | $ | 514.1 | ||||||||||||
Investing activities | (6,848.4 | ) | (66.9 | ) | (282.0 | ) | (264.4 | ) | (259.2 | ) | (256.7 | ) | ||||||||||||
Financing activities | 6,709.0 | 25.3 | (134.7 | ) | (323.3 | ) | (245.4 | ) | (43.3 | ) | ||||||||||||||
Total capital expenditures | (83.6 | ) | (56.2 | ) | (261.5 | ) | (284.1 | ) | (288.3 | ) | (140.1 | ) | ||||||||||||
Other Financial and Operating Data: | ||||||||||||||||||||||||
Same store sales growth | 1.9 | % | 2.6 | % | 3.3 | % | 2.2 | % | 3.2 | % | 4.0 | % | ||||||||||||
Number of stores (at period end) | 8,194 | 8,205 | 8,229 | 7,929 | 7,320 | 6,700 | ||||||||||||||||||
Selling square feet (in thousands at period end) | 57,376 | 57,379 | 57,299 | 54,753 | 50,015 | 45,354 | ||||||||||||||||||
Net sales per square foot (5) | $ | 165.4 | $ | 163.9 | $ | 162.6 | $ | 159.8 | $ | 159.6 | $ | 157.5 | ||||||||||||
Highly consumable sales | 66.4 | % | 66.7 | % | 65.7 | % | 65.3 | % | 63.0 | % | 61.2 | % | ||||||||||||
Seasonal sales | 16.3 | % | 15.4 | % | 16.4 | % | 15.7 | % | 16.5 | % | 16.8 | % | ||||||||||||
Home product sales | 9.1 | % | 9.2 | % | 10.0 | % | 10.6 | % | 11.5 | % | 12.5 | % | ||||||||||||
Basic clothing sales | 8.2 | % | 8.7 | % | 7.9 | % | 8.4 | % | 9.0 | % | 9.5 | % | ||||||||||||
Rent expense | $ | 214.5 | $ | 150.2 | $ | 343.9 | $ | 312.3 | $ | 268.8 | $ | 232.0 | ||||||||||||
Balance Sheet Data (at period end): | ||||||||||||||||||||||||
Cash and cash equivalents and short-term investments | $ | 119.8 | $ | 219.2 | $ | 209.5 | $ | 275.8 | $ | 414.6 | ||||||||||||||
Total assets | 8,656.4 | 3,040.5 | 2,980.3 | 2,841.0 | 2,621.1 | |||||||||||||||||||
Total debt | 4,282.0 | 270.0 | 278.7 | 271.3 | 282.0 | |||||||||||||||||||
Total shareholders’ equity | 2,703.9 | 1,745.7 | 1,720.8 | 1,684.5 | 1,554.3 |
(1) Includes the results of BAC for the period prior to its merger with and into Dollar General Corporation from March 6, 2007 (the date of BAC’s formation) through July 6, |
(2)
Includes the effects of certain strategic merchandising and real estate initiatives that resulted in the closing of approximately 460 stores and changes in our inventory management model which resulted in greater inventory markdowns than in previous years.
(3)
Same-store sales are calculated based upon stores that were open at least 13 full fiscal months and remain open at the end of the reporting period. When applicable, we exclude the sales in the 53rd week of a 53-week year from the same-store sales calculation.
(4)
Net sales per square foot was calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. For the period from February 3, 2007 through July 6, 2007, reflectingaverage selling square footage was calculated using the historical basisaverage square footage as of accounting,July 6, 2007 and a 30-weekas of the end of each of the four preceding quarters.
Successor | Predecessor | |||||||||||
Year Ended | Year Ended | |||||||||||
January 28, | January 29, | January 30, | March 6, | February 3, | February 2, | |||||||
Ratio of earnings to fixed charges (1): | 3.1x | 2.1x | 1.4x | (2) | 1.1x | 2.5x |
(1)
For purposes of computing the ratio of earnings to fixed charges, (a) earnings consist of income (loss) before income taxes, plus fixed charges less capitalized expenses related to indebtedness (amortization expense for capitalized interest is not significant) and (b) fixed charges consist of interest expense (whether expensed or capitalized), the amortization of debt issuance costs and discounts related to indebtedness, and the interest portion of rent expense.
(2)
For the Successor period reflecting the impact of the business combination and associated purchase price allocation of the merger of Dollar General Corporation and Buck Acquisition Corp. (“Buck”), from July 7,March 6, 2007 to February 1, 2008. For comparison purposes, the discussion of results of operations below is generally based on the mathematical combination of the Successor and Predecessor periods for the 52-week fiscal year endedthrough February 1, 2008, compared to the Predecessor 2006 fiscal year ended February 2, 2007, which we believe provides a meaningful understanding of the underlying business. Transactions relating to or resulting from the Merger are discussed separately. The combined results do not reflect the actual results we would have achieved absent the Merger and should not be considered indicative of future results of operations. fixed charges exceeded earnings by $6.6 million.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and the notes thereto. It also should be read in conjunction with the Cautionary Disclosure Regarding Forward-Looking Statements/Statements and the Risk Factors disclosures set forth in the Introduction and in Item 1A of this report.
Executive Overview
We are the largest discount retailer in the United States by number of Discussion
On July 6, 2007, we completed a merger (the “Merger”) in which our former shareholders received $22.00 in cash, or approximately $6.9 billion in total, for each share of our common stock held. Asand, as a result, of the Merger, we are a subsidiary ofmajority owned by Buck Holdings, L.P. (“Parent”Buck”), a Delaware limited partnership controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P. (“KKR” or “Sponsor”(collectively, “KKR”). The membership interests of Buck and Buck Holdings, LLC (“Buck LLC”), the general partner of Buck, are held by a private investor group, including affiliates of each of KKR GS Capital Partners VI Fund, L.P. and affiliated funds (affiliates of Goldman, Sachs & Co.), Citi Private Equity, Wellington Management Company, LLP, CPP Investment Board (USRE II) Inc., and other equity co-investorsinvestors (collectively, the “Investors”) indirectly own a substantial portion of our capital stock through their investment in Parent.
33
respectively, all of which were sold by selling shareholders. We did not receive any proceeds from either of the secondary offerings in 2010.
The customers we serve are value-conscious, and Dollar General has always been intensely focused on helping our customers make the most of their spending dollars. We believe our convenient store format and broad selection of high quality products at compelling values have driven our substantial growth and financial success over the years. Like other companies, we have been operating in an environment with heightened economic challenges and uncertainties. Consumers are facing very high rates of unemployment, fluctuating food, gasoline and energy costs, rising medical costs, and a continued weakness in housing and credit markets, and the timetable for economic recovery is uncertain. Nonetheless, as a result of our long-term mission of serving the value-conscious customer, coupled with a vigorous focus on improving our operating and financial performance, our 2010 and 2009 financial results were strong, and we remain optimistic with regard to executing our operating priorities in 2011.
At the beginning of 2008, we defined four operating priorities, which we remain keenly focused on executing. These priorities are: 1) drive productive sales growth, 2) increase our gross margins, 3) leverage process improvements and information technology to reduce costs, and 4) strengthen and expand Dollar General's culture of serving others.
Our outstanding common stockfirst priority is now owneddriving productive sales growth by Parentincreasing shopper frequency and certain members of management.transaction amount and maximizing sales per square foot. Our common stock is no longer registered withcategory management processes allow us to identify opportunities to add more productive items and remove unproductive items in a timely manner and have allowed us to continue expanding our consumables offerings while also improving profitability. We raised the Securities and Exchange Commission (“SEC”) and is no longer traded on a national securities exchange.
Our second priority is to increase gross profit through effective category management, the largest discount retailer in the United States by numberexpansion of stores, with approximately 8,200 stores located in 35 states, primarily in the southern, southwestern, midwesternprivate brand offerings and eastern United States.increased foreign sourcing, shrink reduction, distribution efficiencies and improvements to our pricing and markdown model, while remaining committed to our everyday low price strategy. We serve a broad customer baseconstantly review our pricing strategy and offer a focused assortment of everyday items, including basic consumable merchandise and other home, apparel and seasonal products. A majority of our products are priced at $10 or less and approximately 30% of our products are priced at $1 or less. We seekwork diligently to offer a compelling value proposition forminimize vendor cost increases as we focus on providing our customers based on convenient store locations, easy in and out shopping and quality merchandise at highly competitivegreat values. In our consumables category, we strive to offer the optimal balance of the most popular nationally advertised brands and our own private brands, which generally have higher gross profit rates than national brands. In 2011, we expect increased product costs. We saw the costs of certain commodities (including cotton, wheat, corn, sugar, coffee, resin) and the costs of diesel fuel begin to escalate in our 2010 fourth quarter. The market prices of these commodities, including the cost of diesel fuel, are outside of our control. However, we will be diligent in our efforts to keep product costs as low as possible in the face of these increases while still working to optimize gross profit and meet the needs of our customers.
Our third priority is leveraging process improvements and information technology to reduce costs. We are committed as an organization to extract costs that do not affect the customer experience. Examples of ongoing cost reduction initiatives include the installation of
34
energy management systems, continued preventive maintenance with the goal of reducing overall repairs and maintenance costs, and recycling of cardboard to reduce waste management costs. Our real estate team continues to seek out opportunities to negotiate favorable lease renewals. We are focusing our information technology resources on improving systems to create greater efficiencies in merchandising and retail store operations, evidenced by our intention to implement a new store staffing module in 2011 to better align store labor hours with our customer’s shopping needs. In 2010, we centralized our procurement system which we expect to aid us in reducing the cost of purchases throughout the company in 2011 and beyond. We plan to continue our diligent efforts with regard to our cost reduction initiatives in 2011.
Our fourth priority is to strengthen and expand Dollar General’s culture of serving others. For customers this means helping them “Save time. Save money. Every day!” by providing clean, well-stocked stores with quality products at low prices. For employees, this means creating an environment that attracts and retains key employees throughout the organization. For the public, this means giving back to our store communities. For shareholders, this means meeting their expectations of an efficiently and profitably run organization that operates with compassion and integrity.
For the year ended January 28, 2011, our continued focus on our four priorities resulted in improved financial performance over the year ended January 29, 2010 in each of our key financial metrics, as follows. Basis points, as referred to below, are equal to 0.01 percent of total sales.
·
Total sales in fiscal 2010 increased 10.5 percent over 2009. Sales in same-stores increased 4.9 percent, following a strong 9.5 percent increase in 2009. Customer traffic and average transaction amount increased in both 2010 and 2009. Average sales per square foot in 2010 were $201, up from $195 in 2009.
·
Gross profit, as a percentage of sales, was 32.0 percent in 2010, an increase of 76 basis points over 2009. This improvement was primarily attributable to increased purchase markups, net of increased markdowns, resulting from increased volume, which enabled us to lower our average costs from vendors. The improvement also reflected the continued impact of our comprehensive category management enhancements.
·
SG&A, as a percentage of sales, for fiscal 2010 was 22.3 percent compared to 23.2 percent in 2009. SG&A in 2009 included incremental expenses of $68.3 million, or 58 basis points, resulting from the termination of our sponsor advisory agreement and the accelerated vesting of certain equity-based compensation related to our initial public offering. SG&A in 2010 included incremental expenses of $19.7 million, or 15 basis points, resulting from costs related to two secondary offerings of our common stock during the year by certain of our shareholders. Excluding the impact of these costs, SG&A, as a percentage of sales declined primarily due to lower employee incentive compensation, which is based on financial targets set at the beginning of each fiscal year (our results exceeded those targets in 2010 but not to the same degree as in 2009), lower healthcare expense, and the impact of other cost reduction and
35
productivity initiatives which resulted in various expenses decreasing or increasing at a rate lower than the 10.5 percent increase in sales.
·
Interest expense decreased by $71.5 million in 2010 to $274.2 million, primarily as the result of lower average outstanding long-term obligations. Net proceeds from our initial public offering and excess cash were utilized in our fiscal 2009 fourth quarter to voluntarily reduce long-term obligations by $725.9 million, and in 2010 we repurchased an additional $115.0 million of long-term obligations utilizing operating cash flow. Other non-operating expenses include charges totaling $14.7 million in 2010 and $55.3 million in 2009 resulting from these repurchases.
·
We reported net income of $627.9 million, or $1.82 per diluted share, for fiscal 2010, compared to net income of $339.4 million, or $1.04 per diluted share, in 2009. Charges relating to secondary stock offerings by certain of our shareholders, including the acceleration of certain equity appreciation rights, and losses from the repurchase of long-term obligations, reduced 2010 net income by $21.3 million, or $0.06 per diluted share. In 2009, charges resulting from the termination of our sponsor advisory agreement, the acceleration of certain equity-based compensation and the repurchase of long-term obligations, related to or resulting from our initial public offering, reduced net income by $82.9 million, or $0.26 per diluted share.
·
We generated approximately $825 million of cash flows from operating activities in 2010, an increase of over 22 percent compared to 2009. Cash flow was primarily utilized to support our capital expenditures and repurchase long-term obligations.
·
During 2010, we opened 600 new stores, remodeled or relocated 504 stores, and closed 56 stores, resulting in a store count of 9,372 on January 28, 2011.
As discussed in more detail below, in recent years, we have generated significant cash flows from operating activities. We have used a portion of these cash flows to pay down debt and to invest in new store growth through our traditional leased stores. During 2010 we made a strategic decision to purchase certain of our leased stores. We believe that the current environment in the real estate markets provides an opportunity to make these investments at levels which are expected to result in favorable returns and positively impact our combinationoperating results. We initiated the store purchase program in the second half of value2010 and convenience distinguishes us fromhave plans to purchase additional stores during 2011.
Like other discount, conveniencecompanies, we face uncertainties with regard to the future impact of healthcare reform legislation, including the Patient Protection and drugstore retailers, who typicallyAffordable Care Act and the HealthCare and Education Reconciliation Act of 2010, signed into law in March 2010, which will likely affect the cost associated with employer-sponsored medical plans. Specifically, this legislation requires that employers provide a minimum level of coverage for full-time employees or pay penalties. Some of the plan coverage requirements may have an impact on our costs such as bans on exclusions for pre-existing conditions, extension of dependent coverage to age 26, and caps on employee premium sharing costs. Certain coverage provisions do not go into effect until 2014, but there are a number of dependent coverage and insurance market reforms that took
36
effect immediately. Although this legislation did not have a material effect on our consolidated financial statements in 2010, we continue to evaluate the impact it will have on our costs in future years, and those costs could be material. Due to the breadth and complexity of the healthcare reform legislation, the current lack of implementing regulations and interpretive guidance, the phased-in nature of the implementation, and uncertainty with respect to the outcome of pending litigation with respect to the legislation, it is difficult to predict its overall impact on our business in the coming years.
In 2011, we plan to continue to focus on either valueour four key operating priorities. We will continue to refine and improve our store standards in order to increase sales, focusing on achieving a consistent look and feel across the chain. We have begun and will continue to measure customer satisfaction which will allow us to identify areas needing improvement. We expect to continue the process of raising the height of certain merchandise fixtures, allowing us to better utilize our store square footage. As part of our overall category management processes, we plan to further expand our private brand consumables offerings and to continue to upgrade the selection, quality and presentation of our private brand offerings in our apparel, seasonal and home categories, and we expect a greater impact on gross margin from our foreign sourcing efforts in 2011. As noted above, we expect cost increases in certain commodities, including diesel fuel, to present a challenge as we focus on improving our gross profit rate, while managing our everyday low prices.
We now have improved processes and tools in place to assist us in our ongoing inventory shrink reduction efforts. Our work on shrink remains a high priority, and we plan to use the information supplied by these analytical and monitoring tools to help improve on our recent successes.
With regard to leveraging information technology and process improvements to reduce costs, we will continue to focus on making improvements that benefit our merchandising and operations efforts, including item profitability analysis, merchandise selection and allocation and labor scheduling. In 2010, we completed the installation of back office computers in all of our stores, which we will utilize to improve reporting and communications with the stores and, consequently, we believe will assist in improving store productivity. Also in 2010, we completed the rollout of a new voice pick system in our distribution centers, allowing our distribution associates to communicate with warehouse software systems using speech recognition.
Finally, we are very pleased with the performance of our 2010 new stores, remodels and relocations, and in 2011 we plan to increase our new store openings to 625 stores within the 35 states in which we currently operate as well as three new states, Connecticut, Nevada and New Hampshire, and to increase our number of remodels or convenience.
37
determined based on the need, the opportunity for sales improvement at the location and an expectation of a desirable return on investment.
Key Financial Metrics. We have identified the following as our most critical financial metrics for 2011:
·
Same-store sales growth;
·
Sales per square foot;
·
Gross profit, as a percentage of sales;
·
Operating profit;
·
Inventory turnover;
·
Cash flow;
·
Net income;
·
Earnings per share;
·
Earnings before interest, income taxes, depreciation and amortization; and
·
Return on invested capital.
Readers should refer to the detailed discussion of our operating results below for additional comments on financial performance in the current year periods as compared with the prior year periods.
Results of Operations
Accounting Periods. The following text contains references to years 2010, 2009 and 2008, which represent fiscal years ended January 28, 2011, January 29, 2010 and January 30, 2009, respectively. Our fiscal year ends on the Friday closest to January 31. Fiscal years 2010, 2009 and 2008 were 52-week accounting periods.
Seasonality. The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, sales in theour fourth quarter (November, December and January) have historically been higher than sales achieved in each of the first three quarters of the fiscal year. Expenses and, to a greater extent, operating income,profit vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.
38
The following table contains results of operations data for the 2007, 2006fiscal years 2010, 2009 and 2005 fiscal years,2008, and the dollar and percentage variances among those years.
|
|
|
|
| 2010 vs. 2009 | 2009 vs. 2008 | |||||||||
(amounts in millions, except per share amounts) | 2010 | 2009 | 2008 | Amount Change | % Change | Amount Change | % | ||||||||
Net sales by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables | $ | 9,332.1 | $ | 8,356.4 | $ | 7,248.4 |
| $ | 975.7 | 11.7 | % | $ | 1,108.0 | 15.3 | % |
% of net sales |
| 71.59% |
| 70.84% |
| 69.31% |
|
|
|
|
|
|
|
|
|
Seasonal |
| 1,887.9 |
| 1,711.5 |
| 1,521.5 |
|
| 176.4 | 10.3 |
|
| 190.0 | 12.5 |
|
% of net sales |
| 14.48% |
| 14.51% |
| 14.55% |
|
|
|
|
|
|
|
|
|
Home products |
| 917.6 |
| 869.8 |
| 862.2 |
|
| 47.9 | 5.5 |
|
| 7.5 | 0.9 |
|
% of net sales |
| 7.04% |
| 7.37% |
| 8.24% |
|
|
|
|
|
|
|
|
|
Apparel |
| 897.3 |
| 858.8 |
| 825.6 |
|
| 38.6 | 4.5 |
|
| 33.2 | 4.0 |
|
% of net sales |
| 6.88% |
| 7.28% |
| 7.89% |
|
|
|
|
|
|
|
|
|
Net sales | $ | 13,035.0 | $ | 11,796.4 | $ | 10,457.7 |
| $ | 1,238.6 | 10.5 | % | $ | 1,338.7 | 12.8 | % |
Cost of goods sold |
| 8,858.4 |
| 8,106.5 |
| 7,396.6 |
|
| 751.9 | 9.3 |
|
| 709.9 | 9.6 |
|
% of net sales |
| 67.96% |
| 68.72% |
| 70.73% |
|
|
|
|
|
|
|
|
|
Gross profit |
| 4,176.6 |
| 3,689.9 |
| 3,061.1 |
|
| 486.7 | 13.2 |
|
| 628.8 | 20.5 |
|
% of net sales |
| 32.04% |
| 31.28% |
| 29.27% |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
| 2,902.5 |
| 2,736.6 |
| 2,448.6 |
|
| 165.9 | 6.1 |
|
| 288.0 | 11.8 |
|
% of net sales |
| 22.27% |
| 23.20% |
| 23.41% |
|
|
|
|
|
|
|
|
|
Litigation settlement and related costs, net |
| - |
| - |
| 32.0 |
|
| - | - |
|
| (32.0) | - |
|
% of net sales |
| - |
| - |
| 0.31% |
|
|
|
|
|
|
|
|
|
Operating profit |
| 1,274.1 |
| 953.3 |
| 580.5 |
|
| 320.8 | 33.7 |
|
| 372.8 | 64.2 |
|
% of net sales |
| 9.77% |
| 8.08% |
| 5.55% |
|
|
|
|
|
|
|
|
|
Interest income |
| (0.2) |
| (0.1) |
| (3.1) |
|
| (0.1) | 52.8 |
|
| 2.9 | (95.3) |
|
% of net sales |
| (0.00)% |
| (0.00)% |
| (0.03)% |
|
|
|
|
|
|
|
|
|
Interest expense |
| 274.2 |
| 345.7 |
| 391.9 |
|
| (71.5) | (20.7) |
|
| (46.2) | (11.8) |
|
% of net sales |
| 2.10% |
| 2.93% |
| 3.75% |
|
|
|
|
|
|
|
|
|
Other (income) expense |
| 15.1 |
| 55.5 |
| (2.8) |
|
| (40.4) | (72.8) |
|
| 58.3 | - |
|
% of net sales |
| 0.12% |
| 0.47% |
| (0.03)% |
|
|
|
|
|
|
|
|
|
Income before income taxes |
| 985.0 |
| 552.1 |
| 194.4 |
|
| 432.9 | 78.4 |
|
| 357.7 | 184.0 |
|
% of net sales |
| 7.56% |
| 4.68% |
| 1.86% |
|
|
|
|
|
|
|
|
|
Income taxes |
| 357.1 |
| 212.7 |
| 86.2 |
|
| 144.4 | 67.9 |
|
| 126.5 | 146.7 |
|
% of net sales |
| 2.74% |
| 1.80% |
| 0.82% |
|
|
|
|
|
|
|
|
|
Net income | $ | 627.9 | $ | 339.4 | $ | 108.2 |
| $ | 288.4 | 85.0 | % | $ | 231.3 | 213.8 | % |
% of net sales |
| 4.82% |
| 2.88% |
| 1.03% |
|
|
|
|
|
|
|
|
|
Diluted earnings per share | $ | 1.82 | $ | 1.04 | $ | 0.34 |
| $ | 0.78 | 75.0 | % | $ | 0.70 | 205.9 | % |
2007 vs. 2006 | 2006 vs. 2005 | ||||||||||||||||||||||||||||
(amounts in millions) | 2007 (a) | 2006 (b) | 2005 (c) | $ change | % change | $ change | % change | ||||||||||||||||||||||
Net sales by category: | |||||||||||||||||||||||||||||
Highly consumable | $ | 6,316.8 | $ | 6,022.0 | $ | 5,606.5 | $ | 294.8 | 4.9 | % | $ | 415.5 | 7.4 | % | |||||||||||||||
% of net sales | 66.53 | % | 65.67 | % | 65.33 | % | |||||||||||||||||||||||
Seasonal | 1,513.2 | 1,510.0 | 1,348.8 | 3.2 | 0.2 | 161.2 | 12.0 | ||||||||||||||||||||||
% of net sales | 15.94 | % | 16.47 | % | 15.72 | % | |||||||||||||||||||||||
Home products | 869.8 | 914.4 | 907.8 | (44.6 | ) | (4.9 | ) | 6.5 | 0.7 | ||||||||||||||||||||
% of net sales | 9.16 | % | 9.97 | % | 10.58 | % | |||||||||||||||||||||||
Basic clothing | 795.4 | 723.5 | 719.2 | 72.0 | 9.9 | 4.3 | 0.6 | ||||||||||||||||||||||
% of net sales | 8.38 | % | 7.89 | % | 8.38 | % | |||||||||||||||||||||||
Net sales | $ | 9,495.2 | $ | 9,169.8 | $ | 8,582.2 | $ | 325.4 | 3.5 | % | $ | 587.6 | 6.8 | % | |||||||||||||||
Cost of goods sold | 6,851.8 | 6,801.6 | 6,117.4 | 50.2 | 0.7 | 684.2 | 11.2 | ||||||||||||||||||||||
% of net sales | 72.16 | % | 74.17 | % | 71.28 | % | |||||||||||||||||||||||
Gross profit | 2,643.5 | 2,368.2 | 2,464.8 | 275.3 | 11.6 | (96.6 | ) | (3.9 | ) | ||||||||||||||||||||
% of net sales | 27.84 | % | 25.83 | % | 28.72 | % | |||||||||||||||||||||||
Selling, general and administrative expenses | 2,285.4 | 2,119.9 | 1,903.0 | 165.5 | 7.8 | 217.0 | 11.4 | ||||||||||||||||||||||
% of net sales | 24.07 | % | 23.12 | % | 22.17 | % | |||||||||||||||||||||||
Transaction and related costs | 102.6 | - | - | 102.6 | 100.0 | - | - | ||||||||||||||||||||||
% of net sales | 1.08 | % | - | - | - | - | |||||||||||||||||||||||
Operating profit | 255.4 | 248.3 | 561.9 | 7.2 | 2.9 | (313.6 | ) | (55.8 | ) | ||||||||||||||||||||
% of net sales | 2.69 | % | 2.71 | % | 6.55 | % | |||||||||||||||||||||||
Interest income | (8.8 | ) | (7.0 | ) | (9.0 | ) | (1.8 | ) | 26.3 | 2.0 | (22.2 | ) | |||||||||||||||||
% of net sales | (0.09 | )% | (0.08 | )% | (0.10 | )% | |||||||||||||||||||||||
Interest expense | 263.2 | 34.9 | 26.2 | 228.3 | 653.8 | 8.7 | 33.1 | ||||||||||||||||||||||
% of net sales | 2.78 | % | 0.38 | % | 0.31 | % | |||||||||||||||||||||||
Loss on interest rate swaps, net | 2.4 | - | - | 2.4 | 100.0 | - | - | ||||||||||||||||||||||
% of net sales | 0.03 | % | - | - | |||||||||||||||||||||||||
Loss on debt retirements, net | 1.2 | - | - | 1.2 | 100.0 | - | - | ||||||||||||||||||||||
% of net sales | 0.01 | % | - | - | |||||||||||||||||||||||||
Income (loss) before income taxes | (2.6 | ) | 220.4 | 544.6 | (222.9 | ) | (101.1 | ) | (324.3 | ) | (59.5 | ) | |||||||||||||||||
% of net sales | (0.03 | )% | 2.40 | % | 6.35 | % | |||||||||||||||||||||||
Income taxes | 10.2 | 82.4 | 194.5 | (72.2 | ) | (87.6 | ) | (112.1 | ) | (57.6 | ) | ||||||||||||||||||
% of net sales | 0.11 | % | 0.90 | % | 2.27 | % | |||||||||||||||||||||||
Net income (loss) | $ | (12.8 | ) | $ | 137.9 | $ | 350.2 | $ | (150.7 | ) | (109.3 | )% | $ | (212.2 | ) | (60.6 | )% |
Net Sales
.The net sales increase in average customer purchase, offset by a slight decrease in customer traffic.
39
remainder of the increase in sales whilein 2009 was attributable to new stores, were the primary contributors to the remaining $322.2 millionpartially offset by sales increase during 2006.from closed stores. The increase in same-store sales is primarily attributable to an increase in average customer purchase. We also believe that the strategic merchandising and real estate initiatives discussed above in the “Executive Overview” had a positive impact on net sales in the fourth quarter. By merchandise category, our sales increase in 2006 compared to 2005 was primarily attributable to the highly consumable category, which increased by $415.5 million, or 7.4%. Anstrong increase in sales reflects the results of seasonalour various initiatives implemented throughout 2008 and 2009, including the impact of improved store standards, the expansion of our merchandise of $161.2 million, or 12.0%, also contributed to overall sales growth. We believe that our increased sales in 2006 were supported by additionsofferings, including significant enhancements to our product offeringsconvenience food and increased promotional activities, including the usebeverages and health and beauty products, in addition to improved utilization of advertising circularssquare footage, extended store hours and clearance activities.
Of our sales internally by the following four major categories: highly consumable, seasonal, home products and basic clothing. The highly consumablemerchandise categories, the consumables category has grown most significantly over the past several years. Although this category generally has a lower gross profit rate than the other three categories, as discussed below, we were able to increase our overall gross profit rate in both 2010 and has grown significantly over2009 as compared to the past several years. We expect the move away from our packaway inventory strategy to have a positive impact on sales in our non-consumable merchandise categories.previous year. Because of the impact of sales mix on gross profit, we continually review our merchandise mix and strive to adjust it when appropriate. Maintaining an appropriate sales mix is an integral part of achieving our gross profit and sales goals.
Gross Profit
. The gross profit rateThe gross profit rate as a percentage of sales was 31.3% in 2009 compared to 29.3% in 2008. Factors contributing to the increase in the 2009 gross profit rate include increased markups resulting primarily from higher purchase markups, partially offset by increased markdowns. In addition, our increased sales volumes have contributed to our ability to reduce purchase costs from our vendors. Transportation and distribution costs decreased for the year driven by lower fuel costs as well as the impact of cost reduction initiatives. Higher sales volumes and productivity initiatives also contributed to improved leverage of our distribution costs. In addition, inventory shrinkage as a percentage of sales declined in 2009 from 2008, contributing to our gross profit rate improvement. In 2009 we recorded a LIFO benefit of $2.5 million, reflecting a flattening of merchandise costs in 2009, compared to a LIFO provision of $43.9 million in 2008, when we faced increased commodity cost pressures mainly related to food and pet products which were driven by rising fruit and vegetable prices and freight costs. Increases in petroleum, resin, metals, pulp and other raw material commodity driven costs also resulted in multiple product cost increases in 2008. Also in 2008, we marked down merchandise as the result of our interpretation of the related effect on costphthalates provision of goods sold, were total markdownsthe Consumer Product Safety Improvement Act of $279.1 million at cost taken during 2006, compared with total markdowns2008, resulting in a charge of $106.5 million at cost taken in 2005. The 2006 markdowns reflect $179.9 million at cost taken during the fourth quarter of 2006 compared to $39.0 million markdowns at cost taken during the fourth quarter of 2005. Other factors included, but were not limited to: a decrease in the markups on purchases, primarily attributable to purchases of highly consumable products (including nationally branded products, which generally have lower average markups); and an increase in our shrink rate.
Selling, General and Administrative (“SG&A”) Expense
40
2010 included expenses totaling $19.7 million, or 15 basis points, relating to two secondary offerings of our common stock, consisting of $1.1 million of legal and other transaction expenses and $18.6 million relating to the acceleration of certain equity appreciation rights. SG&A in 2009 included expenses totaling $68.3 million, or 58 basis points, including increases in$58.8 million relating to the following expense categories: impairment charges on leasehold improvementstermination of an advisory agreement among us, KKR and store fixtures totalingGoldman, Sachs & Co. and $9.4 million including $8.0 millionresulting from the acceleration of certain equity based compensation related to the planned closingscompletion of approximately 400 underperforming stores, 128our initial public offering. Decreases in incentive compensation, the cost of health benefits, consulting fees and severance costs contributed to the overall decrease in SG&A as a percentage of sales, as did other cost reduction and productivity initiatives. Other costs increasing at a rate lower than our 10.5% increase in sales include utilities, which closedreflect lower waste management costs resulting from our recycling efforts, as well as repairs and maintenance. Our increased sales levels in 2006 and2010 also favorably impacted SG&A, as a percentage of sales. Debit card fees increased at a higher rate than the remainderincrease in sales, primarily as a result of which closedincreased usage.
SG&A, as a percentage of sales, was 23.2% in 2007, lease contract terminations totaling $5.7 million related2009 compared to these stores; higher23.4% in 2008, representing an improvement of 21 basis points before taking into account the impact of our initial public offering as discussed above. Our increased sales levels in 2009 favorably impacted SG&A, as a percentage of sales, with the most significant impact on store occupancy costs, (increased 12.1%) due to higher average monthly rentals associated withincluding rent and utilities. Our cost of utilities, as a percentage of sales, was further reduced by energy savings resulting from our leased store locations; higher debit and credit card fees (increased 40.6%) due to theenergy management initiatives, including forward purchase contracts, increased customer usage of debit cardspreventive maintenance and the acceptanceinstallation of VISA creditenergy management systems in substantially all of our new and check cards at all locations; higher administrative labor costs (increased 29.9%) primarilyrelocated stores. In addition, we continued to significantly reduce our workers’ compensation expense through safety initiatives implemented over the last several years, and legal expenses were lower in 2009 than 2008, which included expenses incurred in connection with a shareholder litigation settlement in 2008 relating to our 2007 merger. Also during 2008, we recorded a $5.0 million gain relating to potential losses on distribution center leases indirectly related to additionsour 2007 merger.
Litigation Settlement and Related Costs, Net. Expenses in 2008 included $32.0 million which represents the settlement of a class action lawsuit filed in response to our executive team, particularly in merchandising2007 merger, and real estate, and the expensingincludes a $40.0 million settlement plus related expenses of stock options; higher advertising costs (increased 198.3%) related primarily to the distribution$2.0 million, net of several advertising circulars$10.0 million of insurance proceeds received in the year and to promotional activities related to the inventory clearance and store closing activities discussed above; and higher incentive compensation primarily related to the $9.6 million discretionary bonus authorized by the Boardfourth quarter of Directors for the 2006 fiscal year. These
Interest Income.
We had outstanding variable-rate debt of $787.0$931 million and $560 million as of January 28, 2011 and January 29, 2010, respectively, after taking into consideration the impact of interest rate swaps, as of
See the detailed discussion under “Liquidity and Capital Resources” regarding indebtedness incurred to finance our 2007 merger along with subsequent repurchases of various long-term obligations and the related effect on interest expense in 2006 wasthe periods presented.
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Other (Income) Expense. In2010, we recorded pretax losses of $14.7 million resulting from the repurchase in the open market of $115.0 million aggregate principal amount of our Senior Notes plus accrued and unpaid interest.
In2009, we recorded charges totaling $55.5 million, which primarily attributable to increased interestrepresents losses on debt retirement totaling $55.3 million, and also includes expense of $6.5 million under a revolving credit agreement primarily due to increased borrowings, an increase in tax-related interest of $4.1 million, offset by a reduction in interest expense associated with the elimination of a financing obligation on the South Boston distribution center.
In 2008, we recorded $6.2a gain of $3.8 million of expenses related to consent fees and other costs associated with a tender offer for certain notes payable maturing in June 2010 (“2010 Notes”). Approximately 99% of the 2010 Notes were retired as a result of the tender offer. The costs related to the tender of the 2010 Notes were partially offset by a $4.9 million gain resulting from the repurchase of $25.0$44.1 million of our 11.875%/12.625% Senior Subordinated Notes, due July 15, 2017.
Income Taxes
. The effective income tax rates forThe income2010 effective tax rate for the Successor period ended February 1, 2008 is a benefit of 26.9%. This benefit is lessgreater than the expected U.S. statutorytax rate of 35% due primarily to the incurrenceinclusion of state income taxes in several of the group’s subsidiaries that file theirtotal effective tax rate. The 2010 effective rate is less than the 2009 rate due principally to reductions in state income tax returns on a separate entity basis and the election to include, effective February 3, 2007,expense, income tax related interest expense and penaltiesother expense items. The 2010 effective resolution of various examinations by the taxing authorities, when combined with unfavorable examination results in 2009, resulted in a decrease in the amount reported asyear-to-year state income tax expense.
The 2009 effective tax rate for the Predecessor period ended July 6, 2007 is an expense of 300.2%. This expense is highergreater than the expected U.S. statutorytax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 2009 effective tax rate is less than the 2008 rate due principally to the unfavorable impact that the non-deductible, merger-related lawsuit settlement had on the 2008 rate. This reduction in the effective tax rate was partially offset by a decrease in the tax rate benefit related to federal jobs credits. While the total amount of jobs credits earned in 2009 was similar to the amount earned in 2008, the impact of this benefit on the effective tax rate was reduced due to the 2009 increase in income before tax. The 2009 rate was also increased by accruals associated with uncertain tax benefits.
The 2008 effective income tax rate was greater than the expected tax rate of 35% principally due to the non-deductibility of certain acquisitionthe settlement and related expenses.
Off Balance Sheet Arrangements
We lease three of our distribution centers. The 2006 income tax rate was higherentities involved in the ownership structure underlying these leases meet the accounting definition of a Variable Interest Entity (‘‘VIE’’). One of these distribution centers has been recorded as a financing obligation whereby its property and equipment are reflected in our consolidated balance sheets. The land and
42
buildings of the other two distribution centers have been recorded as operating leases. We are not the primary beneficiary of these VIEs and, accordingly, have not included these entities in our consolidated financial statements. Other than the 2005 rate by 1.7%. Factors contributingforegoing, we are not party to this increase include additional expenseany off balance sheet arrangements.
Effects of Inflation
In 2008, increased commodity cost pressures mainly related to food and pet products, which were driven by fruit and vegetable prices and rising freight costs, increased the adoptioncosts of a new tax systemcertain products. Increases in the State of Texas; a reductionpetroleum, resin, metals, pulp and other raw material commodity driven costs also resulted in the contingent income tax reserve due to the resolution of contingent liabilities that is less than the decrease that occurred in 2005; an increase in the deferred tax valuation allowance; and an increase related to a non-recurring benefit recognized in 2005 related to an internal restructuring. Offsetting these rate increases was a reduction in the income tax rate related to federal income tax credits. Due to the reduction in our 2006 income before tax, a small increase in the amount of federal income tax credits earned yielded a much larger percentage reduction in the income tax rate for 2006 versus 2005.
Liquidity and Capital Resources
Current Financial Condition /and Recent Developments
During the past three years, we have generated an aggregate of approximately $1.4$2.07 billion in cash flows from operating activities. During that period, we expanded the number of stores we operate by 1,178, or over 14%, remodeled or relocated 1,358 stores, or approximately 12% (874 stores)14% of stores we operated as of February 25, 2011, and incurred approximately $685$877 million in capital expenditures. As noted above, weWe made certain strategic decisions which slowed our store growth in 2007.
At February 1, 2008,January 28, 2011, we had total outstanding debt (including the current portion of long-term obligations) of $4.282$3.29 billion. We also had an additional $769.2$959.3 million available for borrowing under our new senior secured asset-based revolving credit facility (“ABL Facility” and, together with the Term Loan Facility, the “Credit Facilities”) at that date. Our liquidity needs are significant, primarily due to our debt service and other obligations.
Nevertheless, management believes our cash flow from operations and existing cash balances, combined with availability under the New Credit Facilities (described below), will provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes the next twelve months.
Credit Facilities
Overview. We have two senior secured credit agreements, each with Goldman Sachs Credit Partners L.P., Citicorp Global Markets Inc., Lehman Brothers Inc. and Wachovia Capital Markets, LLC, each as joint lead arranger and joint bookrunner. The CIT Group/Business Credit, Inc. is administrative agent under the senior secured credit agreement for the asset-based revolving credit facility and Citicorp North America, Inc. is administrative agent under the senior secured credit agreement for the term loan facility.
43
letters of ours are designated as borrowers under this facility.credit), subject to borrowing base availability. The asset-based credit facilityABL Facility includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swingline loans.
The amount from time to time available under the senior secured asset-based credit facilityABL Facility (including in respect of letters of credit) shall not exceed the sum of the tranche A borrowing base and the tranche A-1 borrowing base. The tranche A borrowing base equals the sum of (i) 85% of the net orderly liquidation value of all our eligible inventory and that of each guarantor thereunder and (ii) 90% of all our accounts receivable and credit/debit card receivables and that of each guarantor thereunder, in each case, subject to a reserve equal to the principal amount of the 2010 Notes that remain outstanding at any time and other customary reserves and eligibility criteria. An additional 10% to 12% of the net orderly liquidation value of all of our eligible inventory and that of each guarantor thereunder is made available to us in the form of a “last out” tranche in respect ofunder which we may borrow up to a maximum amount of $125.0
Interest RateRates and Fees
Prepayments.
The senior secured credit agreement for the·
50% of our annual excess cash flow (as defined in the credit agreement) which will be reduced to 25% and 0% if we achieve and maintain a total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0, respectively;
·
100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property in excess of $25.0 million in the aggregate and subject to our right to reinvest the proceeds; and
·
100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the senior secured credit agreement.
44
The mandatory prepayments discussed above will be applied to the term loan facilityTerm Loan Facility as directed by the senior secured credit agreement.
In addition, the senior secured credit agreement for the asset-based revolving credit facilityABL Facility requires us to prepay the asset-based revolving credit facility,ABL Facility, subject to certain exceptions, with:
·
With 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of Revolving Facility Collateral (as defined below) in excess of $1.0 million in the aggregate and subject to our right to reinvest the proceeds; and
·
To the extent such extensions of credit exceed the then current borrowing base (as defined in the senior secured credit agreement for the ABL Facility).
The mandatory prepayments discussed above will be obligatedapplied to pay a prepayment premium on the amount repaidABL Facility as directed by the senior secured credit agreement for the ABL Facility. Through January 28, 2011, no prepayments have been required under the term loan facility if the term loans are voluntarily repaid in whole or in part before July 6, 2009. We may voluntarily repay outstanding loans under the asset-based revolving credit facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.
An event of default under the senior secured credit agreements will occur upon a change of control as defined in the senior secured credit agreements governing our New Credit Facilities. Upon an event of default, indebtedness under the New Credit Facilities may be accelerated, in which case we will be required to repay all outstanding loans plus accrued and unpaid interest and all other amounts outstanding under the New Credit Facilities.
Amortization.The original terms of Credit.
Guarantee and Security.
All obligations under theAll obligations and related guarantees under the term loan credit facilityTerm Loan Facility are secured by:
·
a second-priority security interest in all existing and after-acquired inventory, accounts receivable, and other assets arising from such inventory and accounts receivable, of our company and each U.S. Guarantor (the “Revolving Facility Collateral”), subject to certain exceptions;
·
a first-priority security interest in, and mortgages on, substantially all of our and each U.S. Guarantor’s tangible and intangible assets (other than the Revolving Facility Collateral); and
·
a first-priority pledge of 100% of the capital stock held by us, or any of our domestic subsidiaries that are directly owned by us or one of the U.S. Guarantors and 65% of the voting capital stock of each of our existing and future foreign subsidiaries that are directly owned by us or one of the U.S. Guarantors.
All obligations and related guarantees under the asset-based credit facilityABL Facility are secured by the Revolving Facility Collateral, subject to certain exceptions.
Certain Covenants and Events of Default.
The senior secured credit agreements contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:·
incur additional indebtedness;
·
sell assets;
·
pay dividends and distributions or repurchase our capital stock;
·
make investments or acquisitions;
·
repay or repurchase subordinated indebtedness (including the Senior Subordinated Notes discussed below) and the Senior Notes discussed below;
·
amend material agreements governing our subordinated indebtedness (including the Senior Subordinated Notes discussed below) or our Senior Notes discussed below;
·
change our lines of business.
The senior secured credit agreements also contain certain customary affirmative covenants and events of default.
At February 1, 2008,January 28, 2011, we had $102.5no borrowings, $52.7 million of borrowings, $28.8standby letters of credit, and $19.1 million of commercial letters of credit, and $69.2 million of standby letters of credit outstanding under our asset-based revolving credit facility.
Senior Notes due 2015 and Senior Subordinated Toggle Notes due 2017
Overview. As of January 28, 2011, we issued $1,175.0have $864.3 million aggregate principal amount of 10.625% senior notes due 2015 (the “senior notes”“Senior Notes”) outstanding (reflected in our consolidated balance sheet net of a $11.2 million discount), which mature on July 15, 2015, pursuant to an
Interest on the notesNotes is payable on January 15 and July 15 of each year, commencing January 15, 2008.year. Interest on the senior notes will beSenior Notes is payable in cash. Cash interest on the senior subordinated notes will accrueSenior Subordinated Notes accrues at a rate of 11.875% per annum, and PIK interest (as that term is defined below) will accrue at a rate of 12.625% per annum. The initial interest payment onFor the senior subordinated notes will be payable in cash. For any interest period thereafter through July 15, 2011,Senior Subordinated Notes, we maypreviously had the ability to elect to pay interest on the senior subordinated notes (i) in cash, (ii) by increasing the principal amount of the senior subordinated notesSenior Subordinated Notes or issuing new senior subordinated notesSenior Subordinated Notes (“PIK interest”) or (iii) byinstead of paying interest on halfcash interest. Due to the
46
expiration of the principal amount of the senior subordinated notes in cash interest and half in PIK interest. After July 15, 2011,notification period for such option, all interest on the senior subordinated notesNotes has been and will be payablepaid in cash.
The notesNotes are fully and unconditionally guaranteed by each of the existing and future direct or indirect wholly owned domestic subsidiaries that guarantee the obligations under our New Credit Facilities.
We intend to redeem some or all of the Senior Notes at the first scheduled call date in July 2011 or later. We may redeem some or all of the notesNotes at any time at redemption prices described or set forth in the indentures. We also may seek, from time to time, to retire some or all of the Notes through cash purchases on the open market, in privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. We repurchased $115.0 million aggregate principal amount of outstanding Senior Notes during 2010. In connection with our initial public offering in 2009, we redeemed $195.7 million principal amount of outstanding Senior Notes and $205.2 million principal amount of outstanding Senior Subordinated Notes. We repurchased $44.1 million and $25.0 million of the 11.875%/12.625% senior subordinated toggle notesSenior Subordinated Notes in the fourth quarter of 2007.
Change of Control.
Upon the occurrence of a change of control, which is defined in the indentures, each holder of theCovenants.
The indentures contain covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to (subject to certain exceptions):·
incur additional debt, issue disqualified stock or issue certain preferred stock;
·
pay dividends and or make certain distributions, investments and other restricted payments;
·
create certain liens or encumbrances;
·
sell assets;
·
enter into transactions with our affiliates;
·
allow payments to us by our restricted subsidiaries;
·
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
·
designate our subsidiaries as unrestricted subsidiaries.
Events of Default.
The indentures also provide for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the47
Adjusted EBITDA
Under the Newagreements governing the Credit Facilities and the indentures, certain limitations and restrictions could occurarise if we are not able to satisfy and remain in compliance with specified financial ratios. Management believes the most significant of such ratios is the senior secured incurrence test under the New Credit Facilities. This test measures the ratio of the senior secured debt to Adjusted EBITDA. This ratio would need to be no greater than 4.25 to 1 to avoid such limitations and restrictions. As of February 1, 2008,January 28, 2011, this ratio was 3.41.0 to 1. Senior secured debt is defined as our total debt secured by liens or similar encumbrances less cash and cash equivalents. EBITDA is defined as income (loss) from continuing operations before cumulative effect of change in accounting principle plus interest and other financing costs, net, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA, further adjusted to give effect to adjustments required in calculating this covenant ratio under our New Credit Facilities. EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP,generally accepted accounting principles in the United States (“U.S. GAAP”), are not measures of financial performance or condition, liquidity or profitability, and should not be considered as an alternative to (1)(i) net income, operating income or any other performance measures determined in accordance with U.S. GAAP or (2)(ii) operating cash flows determined in accordance with U.S. GAAP. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements and replacements of fixed assets.
Our presentation of EBITDA and Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because not all companies use identical calculations, these presentations of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of
48
The calculation of Adjusted EBITDA under the New Credit Facilities is as follows:
(in millions) | Year Ended | |||
January 28, | January 29, | |||
Net income | $ | 627.9 | $ | 339.4 |
Add (subtract): |
|
|
|
|
Interest income |
| (0.2) |
| (0.1) |
Interest expense |
| 274.1 |
| 345.6 |
Depreciation and amortization |
| 242.3 |
| 241.7 |
Income taxes |
| 357.1 |
| 212.7 |
EBITDA |
| 1,501.2 |
| 1,139.3 |
|
|
|
|
|
Adjustments: |
|
|
|
|
Loss on debt retirements |
| 14.6 |
| 55.3 |
Loss on hedging instruments |
| 0.4 |
| 0.5 |
Impact of markdowns related to inventory clearance |
| - |
| (7.3) |
Advisory and consulting fees to affiliates |
| 0.1 |
| 63.5 |
Non-cash expense for share-based awards |
| 16.0 |
| 18.7 |
Indirect merger-related costs |
| 1.3 |
| 10.6 |
Other non-cash charges (including LIFO) |
| 11.5 |
| 6.6 |
Total Adjustments |
| 43.9 |
| 147.9 |
|
|
|
|
|
Adjusted EBITDA | $ | 1,545.1 | $ | 1,287.2 |
(In millions) | Year Ended February 1, 2008 | |||
Net income (loss) | $ | (12.8 | ) | |
Add (subtract): | ||||
Interest income | (8.8 | ) | ||
Interest expense | 263.2 | |||
Depreciation and amortization | 226.4 | |||
Income taxes | 10.2 | |||
EBITDA | 478.2 | |||
Adjustments: | ||||
Transaction and related costs | 102.6 | |||
Loss on debt retirements, net | 1.2 | |||
Loss on interest rate swaps | 2.4 | |||
Contingent loss on distribution center leases | 12.0 | |||
Impact of markdowns related to inventory clearance activities, including LCM adjustments, net of purchase accounting adjustments | 5.7 | |||
SG&A related to store closing and inventory clearance activities | 54.0 | |||
Operating losses (cash) of stores to be closed | 10.5 | |||
Monitoring and consulting fees to affiliates | 4.8 | |||
Stock option and restricted stock unit expense | 6.5 | |||
Indirect merger-related costs | 4.6 | |||
Other | 1.0 | |||
Total Adjustments | 205.3 | |||
Adjusted EBITDA | $ | 683.5 |
Interest Rate Swaps
We use interest rate swaps to minimize the risk of adverse changes in interest rates. These swaps are intended to reduce risk by hedging an underlying economic exposure. Because of high correlation between the derivative 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. Our principal interest rate exposure relates to outstanding amounts under our Credit Facilities. At January 28, 2011, we had interest rate swaps with a total notional amount of approximately $1.05 billion. For more information see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” below.
Fair Value Accounting
We have classified our interest rate swaps, as further discussed in Item 7A. below, in Level 2 of the fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by market-observable data, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value a derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. We use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For our
49
derivatives, all of which trade in liquid markets, model inputs can generally be verified and model selection does not involve significant management judgment.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of our derivatives. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying each counterparty’s credit spread to the applicable exposure. For derivatives with two-way exposure, such as interest rate swaps, the counterparty’s credit spread is applied to our exposure to the counterparty, and our own credit spread is applied to the counterparty’s exposure to us, and the net credit valuation adjustment is reflected in our derivative valuations. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. The inputs utilized for our own credit spread are based on implied spreads from our publicly-traded debt. For counterparties with publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third party credit data provider. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Additionally, we actively monitor counterparty credit ratings for any significant changes.
As of January 28, 2011, the net credit valuation adjustments reduced the settlement values of our derivative liabilities by $0.7 million. Various factors impact changes in the credit valuation adjustments over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments. When appropriate, valuations are also adjusted for various factors such as liquidity and bid/offer spreads, which factors we deemed to be immaterial as of January 28, 2011.
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Contractual Obligations
The following table summarizes our significant contractual obligations and commercial commitments as of January 28, 2011 (in thousands):
| Payments Due by Period | |||||||||||||
Contractual obligations | Total | 1 year | 1-3 years | 3-5 years | 5+ years | |||||||||
Long-term debt obligations | $ | 3,293,025 |
| $ | - |
| $ | - |
| $ | 2,827,923 |
| $ | 465,102 |
Capital lease obligations |
| 6,363 |
|
| 1,157 |
|
| 999 |
|
| 679 |
|
| 3,528 |
Interest (a) |
| 1,093,039 |
|
| 243,435 |
|
| 486,754 |
|
| 282,408 |
|
| 80,442 |
Self-insurance liabilities (b) |
| 213,736 |
|
| 78,540 |
|
| 85,881 |
|
| 30,265 |
|
| 19,050 |
Operating leases (c) |
| 3,003,342 |
|
| 481,921 |
|
| 839,585 |
|
| 614,080 |
|
| 1,067,756 |
Subtotal | $ | 7,609,505 |
| $ | 805,053 |
| $ | 1,413,219 |
| $ | 3,755,355 |
| $ | 1,635,878 |
| Commitments Expiring by Period | |||||||||||||
Commercial commitments (d) | Total | 1 year | 1-3 years | 3-5 years | 5+ years | |||||||||
Letters of credit | $ | 19,059 |
| $ | 19,059 |
| $ | - |
| $ | - |
| $ | - |
Purchase obligations (e) |
| 853,862 |
|
| 850,871 |
|
| 2,991 |
|
| - |
|
| - |
Subtotal | $ | 872,921 |
| $ | 869,930 |
| $ | 2,991 |
| $ | - |
| $ | - |
Total contractual obligations and commercial commitments (f) | $ | 8,482,426 |
| $ | 1,674,983 |
| $ | 1,416,210 |
| $ | 3,755,355 |
| $ | 1,635,878 |
(a)
Represents obligations for interest payments on long-term debt and capital lease obligations, and includes projected interest on variable rate long-term debt, using 2010 year end rates.
(b)
We retain a significant portion of the risk for our workers’ compensation, employee health insurance, general liability, property loss and automobile insurance. As these obligations do not have scheduled maturities, these amounts represent undiscounted estimates based upon actuarial assumptions. Reserves for workers’ compensation and general liability which existed as of the date of our 2007 merger were discounted in order to arrive at estimated fair value. All other amounts are reflected on an undiscounted basis in our consolidated balance sheets.
(c)
Operating lease obligations are inclusive of amounts included in deferred rent and closed store obligations in our consolidated balance sheets.
(d)
Commercial commitments include information technology license and support agreements, supplies, fixtures, letters of credit for import merchandise, and other inventory purchase obligations.
(e)
Purchase obligations include legally binding agreements for software licenses and support, supplies, fixtures, and merchandise purchases (excluding such purchases subject to letters of credit).
(f)
We have potential payment obligations associated with uncertain tax positions that are not reflected in these totals. We anticipate that approximately $0.2 million of such amounts will be paid in the coming year. We are currently unable to make reasonably reliable estimates of the period of cash settlement with the taxing authorities for our remaining $27.3 million of reserves for uncertain tax positions.
Other Considerations
We have no current plans to pay any cash dividends on our common stock and instead may retain earnings, if any, for future operation and expansion and debt repayment. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors, subject to certain limitations found in covenants in our Credit Facilities and in the indentures governing the Notes as discussed in more detail above, and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.
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Our inventory balance represented approximately 44%45% of our total assets exclusive of goodwill and other intangible assets as of February 1, 2008.January 28, 2011. Our proficiency in managing our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year. We have made moreAs a result, efficient inventory management a strategic priority, as more fully discussed in the “Executive Overview” above.
Payments Due by Period | ||||||||||||||||
Contractual obligations | Total | < 1 yr | 1-3 yrs | 3-5 yrs | > 5 yrs | |||||||||||
Long-term debt obligations | $ | 4,293,718 | $ | - | $ | 36,223 | $ | 46,000 | $ | 4,211,495 | ||||||
Capital lease obligations | 10,268 | 3,246 | 1,957 | 526 | 4,539 | |||||||||||
Interest (a) | 2,817,237 | 382,587 | 762,872 | 756,070 | 915,708 | |||||||||||
Self-insurance liabilities (b) | 203,600 | 68,613 | 89,815 | 26,612 | 18,560 | |||||||||||
Operating leases (c) | 1,614,215 | 335,457 | 524,363 | 357,418 | 396,977 | |||||||||||
Monitoring agreement (d) | 24,903 | 5,250 | 10,763 | 8,890 | - | |||||||||||
Subtotal | $ | 8,963,941 | $ | 795,153 | $ | 1,425,993 | $ | 1,195,516 | $ | 5,547,279 | ||||||
Commitments Expiring by Period | ||||||||||||||||
Commercial commitments (e) | Total | < 1 yr | 1-3 yrs | 3-5 yrs | > 5 yrs | |||||||||||
Letters of credit | $ | 28,778 | $ | 28,778 | $ | - | $ | - | $ | - | ||||||
Purchase obligations (f) | 385,366 | 384,892 | 474 | - | - | |||||||||||
Subtotal | $ | 414,144 | $ | 413,670 | $ | 474 | $ | - | $ | - | ||||||
Total contractual obligations and commercial commitments | $ | 9,378,085 | $ | 1,208,823 | $ | 1,426,467 | $ | 1,195,516 | $ | 5,547,279 |
As described in Note 79 to the Consolidated Financial Statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments. Adverse developments in those actions could materially and adversely affect our liquidity. As discussed in Note 56 to the Consolidated Financial Statements, we also have certain income tax-related contingencies as more fully described below under “Critical Accounting Policies and Estimates.”contingencies. Future negative developments could have a material adverse effect on our liquidity.
In that event, our additional cost of acquiring the underlying land and building assets could approximate $112 million. At this time, we do not believe such issues would result in the purchase of these distribution centers; however, the payments associated with such an outcome would have a negative impact on our liquidity. To minimize the uncertainty associated with such possible interpretations, we are negotiating the restructuring of these leases and the related underlying debt. We have concluded that a probable loss exists in connection with the restructurings and have recorded associated SG&A expenses in the Successor financial statements for the period ended February 1, 2008 totaling $12.0 million. The ultimate resolution of these negotiations may result in changes in the amounts of such losses, which changes may be material.
Cash flows
Cash flows from operating activities.
A significant component of $150.8 million, as described in detail under “Results of Operations” above, and which is partially attributable to $102.6 million of Transaction and related costs in 2007. Other significant components of the changeour increase in cash flows from operating activities in 2007 as2010 compared to 20062009 was the increase in net income due to greater sales, higher gross margins and lower SG&A expenses as a percentage of sales, as described in more detail above under “Results of Operations.” Partially offsetting this increase in cash flows were changes in inventory balances, which decreasedincreased by approximately 10% during 200716% in 2010 compared to a decreasean increase of approximately 3% during 2006.7% in 2009. Although we continue to closely monitor our inventory balances, they often fluctuate from period to period and from year to year based on new store openings, the timing of purchases, merchandising initiatives and other factors. Inventory levels in the consumables category increased by $133.9 million, or 16%, in 2010 compared to an increase of $111.4 million, or 15%, in 2009. The seasonal category declinedincreased by $84.5
Our increase in cash flows from operating activities in 20062009 compared to 2008 was also driven by an increase in net income due to greater sales, higher gross margins and lower SG&A expenses as a percentage of sales. In addition, we experienced increased inventory turns in 2009 as compared to 2005 was2008. Changes in inventory balances increased by 7% in 2009 compared to an increase of 10% in 2008. Inventory levels in the reductionconsumables category increased by $111.4
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million, or 15%, in 2009 compared to an increase of $77.8 million, or 12%, in 2008. The seasonal category increased by $25.3 million, or 9%, in 2009 compared to an increase of $20.9 million, or 8%, in 2008. The home products category declined $9.1 million, or 6%, in 2009 compared to a decline of $2.6 million, or 2%, in 2008. The apparel category declined by $22.9 million, or 10%, in 2009 compared to an increase of $30.2 million, or 15%, in 2008. In addition, increased net income as described in detail2009 compared to 2008 was a principal factor in the increase in income taxes paid in 2009 compared to 2008. Changes in Accrued expenses and other were affected in part by the timing of the payments related to the Litigation settlement and related costs discussed above under “Results of Operations” above. Partially offsetting this decline are certain noncash charges included in net income, including below-cost markdowns on inventory balances and property and equipment impairment charges totaling $78.1Operations,” as the associated insurance proceeds of $10.0 million and a $13.8 million increase in noncash depreciation and amortization charges in 2006 as compared to 2005. In addition, the reduction in 2006 year end inventory balances reflect the effect of below-cost markdowns and our efforts to sell through excess inventories, as compared with increases in 2005 and 2004. Seasonal inventory levels increased by 2% in 2006 as compared to a 10% increase in 2005, home products inventory levels declined by 25% in 2006 as compared to a 2% increase in 2005, while basic clothing inventory levels declined by 21% in 2006 as compared to a 5% decline in 2005. Total merchandise inventorieswere received at the end of 2006 were $1.43 billion compared to $1.47 billion2008 while the payment of the $40.0 million settlement occurred at the endbeginning of 2005, a 2.9% decrease overall, and a 6.4% decrease on a per store basis, reflecting both our focus on liquidating packaway merchandise and the effect of below-cost markdowns.
Cash flows from investing activities
.Cash flows used in investing activities totaling $282.0$248.0 million in 20062009 were also primarily related to capital expenditures. Significant components of our property and equipment purchases in 2009 included the following approximate amounts: $114 million for improvements, upgrades, remodels and relocations of existing stores; $69 million for new leased stores; $28 million for distribution and transportation-related capital expenditures; $24 million for various administrative capital costs; and $11 million for information systems upgrades and technology-related projects. During 2009 we opened 500 new stores and remodeled or relocated 450 stores.
Cash flows used in investing activities totaling $152.6 million in 2008 were primarily related to capital expenditures, and, to a lesser degree, purchasesoffset by sales of long-term investments. Significant components of our property and equipment purchases in 20062008 included the following approximate amounts: $66$149 million for distributionimprovements, upgrades, remodels and transportation-related capital expenditures (including approximately $30 million related to our distribution center in Marion, Indiana which opened in 2006); $66relocations of existing stores; $22 million for new leased stores; $50 million for the EZstoreTM project; and $38 million for capital projects in existing stores. During 2006 we opened 537 new stores and remodeled or relocated 64 stores.
Purchases and transportation expenditures in 2005 included costs associated with the construction of our new distribution centers in South Carolina and Indiana.
Capital expenditures during 20082011 are projected to be approximately $200 to $220in the range of $550-$600 million. We anticipate funding 20082011 capital requirements with cash flows from operations, and if necessary, we also have significant availability under our revolving credit facility, if necessary.ABL Facility. Significant components of the 20082011 capital plan include growth initiatives, such as well asapproximately 625 new stores including the purchase of existing stores and the construction of new stores; costs related to new leased stores including leasehold improvements, fixtures and equipment; continued investment in our existing store base with plans for remodeling and relocating approximately 400 stores,550 stores; the
53
construction of a new distribution center in Alabama; as well as additional investments in our supply chain and leasehold improvements and fixtures and equipment for approximately 200 new stores.information technology. We plan to undertake these expenditures in orderas part of our efforts to improve our infrastructure and enhanceincrease our cash generated from operating activities.
Cash flows from financing activities
.In 2009, we had cash dividends paid of $62.5 million, or $0.20 per share, on our outstanding common stock, and $14.1 million to reduce our outstanding capital lease and financing obligations. These uses of cash were partially offset by proceeds from the exercise of stock options during 2006 of $19.9 million.
In February 2008, we repaid outstanding borrowings of activity associated with periodic cash needs.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In addition to the estimates presented below, there are other items within our financial statements that require estimation, but are not deemed critical as defined below. We believe these estimates are reasonable and appropriate. However, if actual experience differs from the assumptions and other considerations used, the resulting changes could have a material effect on the financial statements taken as a whole.
Management believes the following policies and estimates are critical because they involve significant judgments, assumptions, and estimates. Management has discussed the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates.
Merchandise Inventories
. Merchandise inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out (“LIFO”) method. Under our retail inventory method (“RIM”), the calculation of gross profit and the resulting valuation of inventories at cost are computed by applying a calculated cost-to-retail inventory ratio to the retail value of54
Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, initial markups, markdowns, and shrinkage, which significantly impact the gross profit calculation as well as the ending inventory valuation at cost. These significant estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted cost figures. Factors that can lead to distortion in the calculation of the inventory balance include:
·
applying the RIM to a group of products that is not fairly uniform in terms of its cost and selling price relationship and turnover;
·
applying the RIM to transactions over a period of time that include different rates of gross profit, such as those relating to seasonal merchandise;
·
inaccurate estimates of inventory shrinkage between the date of the last physical inventory at a store and the financial statement date; and
·
inaccurate estimates of LCM and/or LIFO reserves.
Factors that reduce potential distortion include the use of historical experience in estimating the shrink provision (see discussion below) and recent improvements in thean annual LIFO analysis whereby all SKUs are considered in the index formulation. As partAn actual valuation of this process weinventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation/deflation for the year and are thus subject to adjustment in the final year-end LIFO inventory valuation. We also perform an inventory-aginginterim inventory analysis for determining obsolete inventory. Our policy is to write down inventory to an LCM value based on various management assumptions including estimated markdowns and sales required to liquidate such aged inventory in future periods. Inventory is reviewed on a quarterly basis and adjusted as appropriate to reflect write-downs determined to be necessary.
Factors such as slower inventory turnover due to changes in competitors’ tactics,practices, consumer preferences, consumer spending and unseasonable weather patterns, among other factors, could cause excess inventory requiring greater than estimated markdowns to entice consumer purchases, resulting in an unfavorable impact on our consolidated financial statements. Sales shortfalls due to the above factors could cause reduced purchases from vendors and associated vendor allowances that would also result in an unfavorable impact on our consolidated financial statements.
We calculate our shrink provision based on actual physical inventory results during the fiscal period and an accrual for estimated shrink occurring subsequent to a physical inventory through the end of the fiscal reporting period. This accrual is calculated as a percentage of sales at each retail store, at a department level, and is determined by dividing the book-to-physical inventory adjustments recorded during the previous twelve months by the related sales for the same period for each store. To the extent that subsequent physical inventories yield different results than this estimated accrual, our effective shrink rate for a given reporting period will
55
include the impact of adjusting the estimated results to the actual results. Although we perform physical inventories in virtually all of our stores on an annual basis, the same stores do not necessarily get counted in the same reporting periods from year to year, which could impact comparability in a given reporting period.
We believe our estimates and Indefinite-Lived Intangible Assets.
Goodwill and Other Intangible Assets”, we are required to test goodwill andAssets. We amortize intangible assets with indefiniteover their estimated useful lives for
Under accounting standards for goodwill and other intangible assets, we are required to test such assets with indefinite lives for impairment annually, or more frequently if impairment indicators occur. The Merger was accounted for asgoodwill impairment test is a reverse acquisitiontwo-step process that requires management to make judgments in accordancedetermining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of our reporting unit based on valuation techniques (including a discounted cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the purchase accounting provisionsrecorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of SFAS 141, “Business Combinations,” under whichthe impairment by determining an “implied fair value” of goodwill. The determination of the implied fair value of goodwill would require us to allocate the estimated fair value of our reporting unit to its assets and liabilities have been accountedliabilities. Any unallocated fair value represents the implied fair value of goodwill, which would be compared to its corresponding carrying value.
The impairment test for at their estimatedindefinite-lived intangible assets consists of a comparison of the fair valuesvalue of the intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during the third quarter of 2010 based on conditions as of the dateend of the Merger.second quarter of 2010. The aggregate purchase pricetests indicated that no impairment charge was allocatednecessary. We are not currently projecting a decline in cash flows that could be expected to the tangible and intangible assets acquired and liabilities assumed, based uponhave an assessmentadverse effect such as a violation of their relative fair values as of the date of the Merger. These estimates of fair values, the allocation of the purchase price and other factors related to the accounting for the Merger are subject to significant judgments and the use of estimates.
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Property and Equipment
. Property and equipment are recorded at cost. We group our assets into relatively homogeneous classes and generally provide for depreciation on a straight-line basis over the estimated average useful life of each asset class, except for leasehold improvements, which are amortized over theImpairment of Long-lived Assets.
We review the carrying value of all long-lived assets for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In accordance withInsurance Liabilities
. We retain a significant portion of the risk for our workers’ compensation, employee health,Contingent Liabilities – Income Taxes
57
change or varying interpretation. If our determinations and estimates prove to be inaccurate, the resulting adjustments could be material to our future financial results.
Contingent Liabilities - Legal Matters
.We are subject to legal, regulatory and other proceedings and claims. We establish liabilities as appropriate for these claims and proceedings based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in our financial statements and SEC filings, management’s view of our exposure. We review outstanding claims and proceedings with external counsel to assess probability and estimates of loss. We re-evaluate these assessments on a quarterly basis or as new and significant information becomes available to determine whether a liability should be established or if any existing liability should be adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded liability. In addition, because it is not permissible under U.S. GAAP to establish a litigation liability until the loss is both probable and estimable, in some cases there may be insufficient time to establish a liability prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).Lease Accounting and Excess Facilities
.For store closures (excluding those associated with a business combination) where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the date the store is closed in accordance with SFAS 146, “Accountingaccounting standards for Costs Associatedcosts associated with Exitexit or Disposal Activities.”disposal activities. Based on an overall analysis of store performance and expected trends, management periodically evaluates the need to close underperforming stores. Liabilities are established at the point of closure for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by SFAS 146.costs. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. IfHistorically, these estimates have not been materially inaccurate; however, if actual timing and potential termination costs or realization of sublease
58
income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.
Share-Based Payments
. Our share-based stock option awards are valued on an individual grant basis using the Black-Scholes-Merton closed form option pricing model. We believe that this model fairly estimates the value of our share-based awards. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the valuation of stock options, which affects compensation expense related to these options. These assumptions include an estimate of the fair value of our common stock, the term that the options are expected to be outstanding, an estimate of the volatility of our stock price (which is based on a peer group of publicly traded companies), applicable interest rates and the dividend yield of our stock. Our volatility estimates are based on a peer group due to the fact that our stock has been publicly traded for a relatively short period of time in relation to the expected term of outstanding options. Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of share-based awards.Fair Value Measurements. We measure fair value of Accounting Standard
Our fair value measurements are primarily associated with our derivative financial instruments, intangible assets, property and equipment, and to a lesser degree our investments. The values of our derivative financial instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. In recent years, these methodologies have produced materially accurate valuations.
Derivative Financial Instruments. We adopted the provisions of FIN 48 effective February 3, 2007. The adoption resultedaccount for our derivative instruments in an $8.9 million decreaseaccordance with accounting standards for derivative instruments (including certain derivative instruments embedded in retained earningsother contracts) and a reclassification of certain amounts between deferred income taxeshedging activities, as amended and other noncurrent liabilities to conform tointerpreted,
59
which establish accounting and reporting requirements for such instruments and activities. These standards require that every derivative instrument be recorded in the balance sheet presentation requirements of FIN 48. As of the date of adoption, the total reserve for uncertain tax benefits was $77.9 million. This reserve excludes the federal income tax benefit for the uncertain tax positions related to state income taxes which is now included in deferred tax assets. As a result of the adoption of FIN 48, the reserve for interest expense related to income taxes was increased to $15.3 million and a reserve for potential penalties of $1.9 million related to uncertain income tax positions was recorded. As of the date of adoption, approximately $27.1 million of the reserve for uncertain tax positions would impact our effective income tax rate if we were to recognize the tax benefit for these positions. After the Merger and the related application of purchase accounting, no portion of the reserve for uncertain tax positions that existed as of the date of adoption would impact our effective tax rate but would, if subsequently recognized, reduce the amount of goodwill recorded in relation to the Merger.
In addition to making valuation estimates, we also bear the risk that certain derivative instruments that have been designated as hedges and currently meet the strict hedge accounting requirements may not qualify in the future as “highly effective,” as defined, as well as the risk that hedged transactions in cash flow hedging relationships may no longer be measured at fair value. The standard does not expandconsidered probable to occur. Further, new interpretations and guidance related to these instruments may be issued in the future, and we cannot predict the possible impact that such guidance may have on our use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. For non-financial assets and liabilities, the effective date has been delayed to fiscal years beginning after November 15, 2008. We currently expect to adopt SFAS 157 during our 2008 and 2009 fiscal years. We are in the process of evaluating the potential impact of this standard on our consolidated financial statements.derivative instruments going forward.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
We are exposed to market risk primarily from adverse changes in interest rates.rates, and to a lesser degree commodity prices. To minimize this risk, we may periodically use financial instruments, including derivatives. As a matter of policy, we do not buy or sell financial instruments for speculative or trading purposes and all derivative financial instrument transactions must be authorized and executed pursuant to approval by the Board of Directors. All financial instrument positions taken by us are intended to be used to reduce risk by hedging an underlying economic exposure. Because of high correlation between the derivative 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 we use are straightforward instruments with liquid markets.
Interest Rate Risk
We manage our interest rate risk through the strategic use of fixed and variable interest rate debt and, from time to time, derivative financial instruments. Our principal interest rate exposure relates to outstanding amounts under our New Credit Facilities. Our NewAs of January 28, 2011, our Credit Facilities provide for variable rate borrowings of up to $3,425.0 million$2.995 billion including availability of $1,125.0 millionup to $1.031 billion under our senior secured asset-based revolving credit facility,ABL Facility, subject to the borrowing base. In order to mitigate a portion of the variable rate interest exposure under the New Credit Facilities, we entered into certain interest rate swaps with affiliates of Goldman, Sachs & Co., Lehman Brothers Inc. and Wachovia Capital Markets, LLC. Pursuant to the swaps which became effective on July 31, 2007,2007. Pursuant to these swaps, we swapped three month LIBOR rates for fixed interest rates, which will resultresulting in the payment of aan all-in fixed rate of 7.68% on aan original notional amount of $2,000.0 million which will$2.0 billion originally scheduled to amortize on a quarterly basis until maturity at July 31, 2012. At February 1,
In October 2008, a counterparty to one of our 2007 swap agreements defaulted. We terminated this agreement and in November 2008 we subsequently cash settled the swap. Representatives of the counterparty have challenged our calculation of the cash settlement. See “Legal Proceedings” under Note 9 of the footnotes to the consolidated financial statements. As of January 28, 2011, the notional amount was $1,630.0under the remaining 2007 swaps is $646.7 million.
Effective December 31, 2008, we entered into a $475.0 million interest rate swap in order to mitigate an additional portion of the variable rate interest exposure under the Credit Facilities. This swap is scheduled to mature on January 31, 2013. Under the terms of this agreement we swapped one month LIBOR rates for fixed interest rates, resulting in the payment of a fixed rate of 5.06% on a notional amount of $475.0 million through April 2010, $400.0 million from May 2010 through October 2011, and $300.0 million to maturity.
A change in interest rates on variable rate debt impacts our pre-tax earnings and cash flows; whereas a change in interest rates on fixed rate debt impacts the economic fair value of debt but not our pre-tax earnings and cash flows. Our derivativesinterest rate swaps qualify for hedge accounting as cash flow hedges. Therefore, changes in market fluctuations related to the
61
effective portion of these cash flow hedges do not impact our pre-tax earnings until the accrued interest is recognized on the derivatives and the associated hedged debt. Based on our variable rate borrowing levels and interest rate swaps outstanding debt as of February 1, 2008during 2010 and assuming that our mix of debt instruments, derivative instruments and other variables remain the same,2009, the annualized effect of a one percentage point change in variable interest rates would have resulted in a pretax impact onreduction of our earnings and cash flows of approximately $7.9 million.
The conditions and uncertainties in the global credit markets have increased the credit risk of other counterparties to our swap agreements. In the event such counterparties fail to perform under our swap agreements and we are unable to enter into new swap agreements on terms favorable to us, our ability to effectively manage our interest rate swaps are accountedrisk may be materially impaired. We attempt to manage counterparty credit risk by periodically evaluating the financial position and creditworthiness of such counterparties, monitoring the amount for in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted (collectively, “SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized as either assets or liabilities at fair value. Beginning October 12, 2007,which we are accounting forat risk with each counterparty, and where possible, dispersing the swaps described above as cash flow hedges and record the effective portion of changes in fair value of the swaps within accumulated other comprehensive income.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Dollar General Corporation
We have audited the accompanying consolidated balance sheets of Dollar General Corporation and subsidiaries as of February 1, 2008 (Successor)January 28, 2011 and February 2, 2007 (Predecessor),January 29, 2010, and the related consolidated statements of operations,income, shareholders' equity, and cash flows for the periods from March 6, 2007 to February 1, 2008 (Successor), February 3, 2007 to July 6, 2007 (Predecessor) and for the years ended February 2, 2007January 28, 2011, January 29, 2010 and February 3, 2006 (Predecessor).January 30, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes, assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dollar General Corporation and subsidiaries at February 1, 2008 (Successor)January 28, 2011 and February 2, 2007 (Predecessor),January 29, 2010, and the consolidated results of their operations and their cash flows for the periods from March 6, 2007 to February 1, 2008 (Successor), February 3, 2007 to July 6, 2007 (Predecessor) and for the years ended February 2, 2007January 28, 2011, January 29, 2010 and February 3, 2006 (Predecessor),January 30, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in Notes 1 and 9 to the consolidated financial statements, effective February 4, 2006, the Company changed its method of accounting for stock-based compensation in connectionaccordance with the adoptionstandards of Statementthe Public Company Accounting Oversight Board (United States), Dollar General Corporation's internal control over financial reporting as of Financial Accounting Standards No. 123(R), “Share-Based Payment”.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 25, 2008
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| January 28, |
| January 29, | ||
ASSETS |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 497,446 |
| $ | 222,076 |
Merchandise inventories |
| 1,765,433 |
|
| 1,519,578 |
Income taxes receivable |
| - |
|
| 7,543 |
Prepaid expenses and other current assets |
| 104,946 |
|
| 96,252 |
Total current assets |
| 2,367,825 |
|
| 1,845,449 |
Net property and equipment |
| 1,524,575 |
|
| 1,328,386 |
Goodwill |
| 4,338,589 |
|
| 4,338,589 |
Intangible assets, net |
| 1,256,922 |
|
| 1,284,283 |
Other assets, net |
| 58,311 |
|
| 66,812 |
Total assets | $ | 9,546,222 |
| $ | 8,863,519 |
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Current portion of long-term obligations | $ | 1,157 |
| $ | 3,671 |
Accounts payable |
| 953,641 |
|
| 830,953 |
Accrued expenses and other |
| 347,741 |
|
| 342,290 |
Income taxes payable |
| 25,980 |
|
| 4,525 |
Deferred income taxes payable |
| 36,854 |
|
| 25,061 |
Total current liabilities |
| 1,365,373 |
|
| 1,206,500 |
Long-term obligations |
| 3,287,070 |
|
| 3,399,715 |
Deferred income taxes payable |
| 598,565 |
|
| 546,172 |
Other liabilities |
| 231,582 |
|
| 302,348 |
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock |
| 9,153 |
|
| 18,486 |
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
Preferred stock, 1,000 shares authorized |
| - |
|
| - |
Common stock; $0.875 par value, 1,000,000 shares authorized, 341,507 and 340,586 shares issued and outstanding at January 28, 2011 and January 29, 2010, respectively |
| 298,819 |
|
| 298,013 |
Additional paid-in capital |
| 2,945,024 |
|
| 2,923,377 |
Retained earnings |
| 830,932 |
|
| 203,075 |
Accumulated other comprehensive loss |
| (20,296) |
|
| (34,167) |
Total shareholders’ equity |
| 4,054,479 |
|
| 3,390,298 |
Total liabilities and shareholders’ equity | $ | 9,546,222 |
| $ | 8,863,519 |
Successor | Predecessor | |||||||
February 1, 2008 | February 2, 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 100,209 | $ | 189,288 | ||||
Short-term investments | 19,611 | 29,950 | ||||||
Merchandise inventories | 1,288,661 | 1,432,336 | ||||||
Income taxes receivable | 32,501 | 9,833 | ||||||
Deferred income taxes | 17,297 | 24,321 | ||||||
Prepaid expenses and other current assets | 59,465 | 57,020 | ||||||
Total current assets | 1,517,744 | 1,742,748 | ||||||
Net property and equipment | 1,274,245 | 1,236,874 | ||||||
Goodwill | 4,344,930 | 2,337 | ||||||
Intangible assets, net | 1,370,557 | 86 | ||||||
Other assets, net | 148,955 | 58,469 | ||||||
Total assets | $ | 8,656,431 | $ | 3,040,514 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term obligations | $ | 3,246 | $ | 8,080 | ||||
Accounts payable | 551,040 | 555,274 | ||||||
Accrued expenses and other | 300,956 | 253,558 | ||||||
Income taxes payable | 2,999 | 15,959 | ||||||
Total current liabilities | 858,241 | 832,871 | ||||||
Long-term obligations | 4,278,756 | 261,958 | ||||||
Deferred income taxes | 486,725 | 41,597 | ||||||
Other liabilities | 319,714 | 158,341 | ||||||
Commitments and contingencies | ||||||||
Redeemable common stock | 9,122 | - | ||||||
Shareholders’ equity: | ||||||||
Preferred stock, Shares authorized: 1,000,000 | - | |||||||
Series B junior participating preferred stock, stated value $0.50 per share; Shares authorized: 10,000; Issued: None | - | |||||||
Common stock; $0.50 par value, 1,000,000 shares authorized, 555,482 shares issued and outstanding at February 1, 2008 and 500,000 shares authorized, 312,436 shares issued and outstanding at February 2, 2007, respectively. | 277,741 | 156,218 | ||||||
Additional paid-in capital | 2,480,062 | 486,145 | ||||||
Retained earnings (accumulated deficit) | (4,818 | ) | 1,103,951 | |||||
Accumulated other comprehensive loss | (49,112 | ) | (987 | ) | ||||
Other shareholders’ equity | - | 420 | ||||||
Total shareholders’ equity | 2,703,873 | 1,745,747 | ||||||
Total liabilities and shareholders’ equity | $ | 8,656,431 | $ | 3,040,514 |
The accompanying notes are an integral part of the consolidated financial statements.
64
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Successor | Predecessor | |||||||||||||||
For the years ended | ||||||||||||||||
July 7, 2007 through February 1, 2008 (a) | February 3, 2007 through July 6, 2007 | February 2, 2007 | February 3, 2006 | |||||||||||||
(30 weeks) | (22 weeks) | (52 weeks) | (53 weeks) | |||||||||||||
Net sales | $ | 5,571,493 | $ | 3,923,753 | $ | 9,169,822 | $ | 8,582,237 | ||||||||
Cost of goods sold | 3,999,599 | 2,852,178 | 6,801,617 | 6,117,413 | ||||||||||||
Gross profit | �� | 1,571,894 | 1,071,575 | 2,368,205 | 2,464,824 | |||||||||||
Selling, general and administrative | 1,324,508 | 960,930 | 2,119,929 | 1,902,957 | ||||||||||||
Transaction and related costs | 1,242 | 101,397 | - | - | ||||||||||||
Operating profit | 246,144 | 9,248 | 248,276 | 561,867 | ||||||||||||
Interest income | (3,799 | ) | (5,046 | ) | (7,002 | ) | (9,001 | ) | ||||||||
Interest expense | 252,897 | 10,299 | 34,915 | 26,226 | ||||||||||||
Loss on interest rate swaps | 2,390 | - | - | - | ||||||||||||
Loss on debt retirement, net | 1,249 | - | - | - | ||||||||||||
Income (loss) before income taxes | (6,593 | ) | 3,995 | 220,363 | 544,642 | |||||||||||
Income tax expense (benefit) | (1,775 | ) | 11,993 | 82,420 | 194,487 | |||||||||||
Net income (loss) | $ | (4,818 | ) | $ | (7,998 | ) | $ | 137,943 | $ | 350,155 |
| For the Year Ended | |||||||
January 28, |
| January 29, |
| January 30, | ||||
|
|
|
|
|
|
|
|
|
Net sales | $ | 13,035,000 |
| $ | 11,796,380 |
| $ | 10,457,668 |
Cost of goods sold |
| 8,858,444 |
|
| 8,106,509 |
|
| 7,396,571 |
Gross profit |
| 4,176,556 |
|
| 3,689,871 |
|
| 3,061,097 |
Selling, general and administrative expenses |
| 2,902,491 |
|
| 2,736,613 |
|
| 2,448,611 |
Litigation settlement and related costs, net |
| - |
|
| - |
|
| 32,000 |
Operating profit |
| 1,274,065 |
|
| 953,258 |
|
| 580,486 |
Interest income |
| (220) |
|
| (144) |
|
| (3,061) |
Interest expense |
| 274,212 |
|
| 345,744 |
|
| 391,932 |
Other (income) expense |
| 15,101 |
|
| 55,542 |
|
| (2,788) |
Income before income taxes |
| 984,972 |
|
| 552,116 |
|
| 194,403 |
Income tax expense |
| 357,115 |
|
| 212,674 |
|
| 86,221 |
Net income | $ | 627,857 |
| $ | 339,442 |
| $ | 108,182 |
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic | $ | 1.84 |
| $ | 1.05 |
| $ | 0.34 |
Diluted | $ | 1.82 |
| $ | 1.04 |
| $ | 0.34 |
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
| 341,047 |
|
| 322,778 |
|
| 317,024 |
Diluted |
| 344,800 |
|
| 324,836 |
|
| 317,503 |
The accompanying notes are an integral part of the consolidated financial statements.
65
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except per share amounts)
| Common | Common | Additional | Retained | Accumulated | Total | |||||
Balances, February 1, 2008 | 317,418 | $ | 277,741 | $ | 2,480,062 | $ | (4,818) | $ | (49,112) | $ | 2,703,873 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Net income | - |
| - |
| - |
| 108,182 |
| - |
| 108,182 |
Unrealized net gain on hedged transactions, net of income tax expense of $4,518 | - |
| - |
| - |
| - |
| 9,682 |
| 9,682 |
Comprehensive income |
|
|
|
|
|
|
|
|
|
| 117,864 |
Issuance of common stock under stock incentive plans | 484 |
| 423 |
| (423) |
| - |
| - |
| - |
Repurchases of common stock | (57) |
| (50) |
| 50 |
| - |
| - |
| - |
Share-based compensation expense | - |
| - |
| 9,958 |
| - |
| - |
| 9,958 |
Balances, January 30, 2009 | 317,845 | $ | 278,114 | $ | 2,489,647 | $ | 103,364 | $ | (39,430) | $ | 2,831,695 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Net income | - |
| - |
| - |
| 339,442 |
| - |
| 339,442 |
Unrealized net gain on hedged transactions, net of income tax expense of $2,553 | - |
| - |
| - |
| - |
| 5,263 |
| 5,263 |
Comprehensive income |
|
|
|
|
|
|
|
|
|
| 344,705 |
Issuance of common stock | 22,700 |
| 19,863 |
| 421,299 |
| - |
| - |
| 441,162 |
Cash dividends, $0.7525 per common share, and related amounts | - |
| - |
| - |
| (239,731) |
| - |
| (239,731) |
Share-based compensation expense | - |
| - |
| 15,009 |
| - |
| - |
| 15,009 |
Tax benefit from stock option exercises | - |
| - |
| 3,072 |
| - |
| - |
| 3,072 |
Issuance of common stock under stock incentive plans | 304 |
| 266 |
| 2,020 |
| - |
| - |
| 2,286 |
Equity settlements under stock incentive plans | (263) |
| (230) |
| (7,670) |
| - |
| - |
| (7,900) |
Balances, January 29, 2010 | 340,586 | $ | 298,013 | $ | 2,923,377 | $ | 203,075 | $ | (34,167) | $ | 3,390,298 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Net income | - |
| - |
| - |
| 627,857 |
| - |
| 627,857 |
Unrealized net gain on hedged transactions, net of income tax expense of $9,406 | - |
| - |
| - |
| - |
| 13,871 |
| 13,871 |
Comprehensive income |
|
|
|
|
|
|
|
|
|
| 641,728 |
Share-based compensation expense | - |
| - |
| 12,805 |
| - |
| - |
| 12,805 |
Tax benefit from stock option exercises | - |
| - |
| 10,110 |
| - |
| - |
| 10,110 |
Issuance of common stock under stock incentive plans | 93 |
| 82 |
| 1,943 |
| - |
| - |
| 2,025 |
Exercise of stock options | 872 |
| 763 |
| (8,399) |
| - |
| - |
| (7,636) |
Other equity settlements under stock incentive plans | (44) |
| (39) |
| 5,188 |
| - |
| - |
| 5,149 |
Balances, January 28, 2011 | 341,507 | $ | 298,819 | $ | 2,945,024 | $ | 830,932 | $ | (20,296) | $ | 4,054,479 |
Common Stock Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Other Shareholders’ Equity | Total | ||||||||||||||||||||||
Predecessor Balances, January 28, 2005 | 328,172 | $ | 164,086 | $ | 421,600 | $ | 1,102,457 | $ | (973 | ) | $ | (2,705 | ) | $ | 1,684,465 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | - | 350,155 | - | - | 350,155 | |||||||||||||||||||||
Reclassification of net loss on derivatives | - | - | - | - | 179 | - | 179 | |||||||||||||||||||||
Comprehensive income | 350,334 | |||||||||||||||||||||||||||
Cash dividends, $0.175 per common share | - | - | - | (56,183 | ) | - | - | (56,183 | ) | |||||||||||||||||||
Issuance of common stock under stock incentive plans | 2,249 | 1,125 | 28,280 | - | - | - | 29,405 | |||||||||||||||||||||
Tax benefit from stock option exercises | - | - | 6,457 | - | - | - | 6,457 | |||||||||||||||||||||
Repurchases of common stock | (14,977 | ) | (7,489 | ) | - | (290,113 | ) | - | - | (297,602 | ) | |||||||||||||||||
Sales of common stock by employee deferred compensation trust, net (42 shares) | - | - | 95 | - | - | 788 | 883 | |||||||||||||||||||||
Issuance of restricted stock and restricted stock units, net | 249 | 125 | 5,151 | - | - | (5,276 | ) | - | ||||||||||||||||||||
Amortization of unearned compensation on restricted stock and restricted stock units | - | - | - | - | - | 2,394 | 2,394 | |||||||||||||||||||||
Acceleration of vesting of stock options (see Note 9) | - | - | 938 | - | - | - | 938 | |||||||||||||||||||||
Other equity transactions | (14 | ) | (7 | ) | (138 | ) | (151 | ) | - | - | (296 | ) | ||||||||||||||||
Predecessor Balances, February 3, 2006 | 315,679 | $ | 157,840 | $ | 462,383 | $ | 1,106,165 | $ | (794 | ) | $ | (4,799 | ) | $ | 1,720,795 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | - | 137,943 | - | - | 137,943 | |||||||||||||||||||||
Reclassification of net loss on derivatives | - | - | - | - | 188 | - | 188 | |||||||||||||||||||||
Comprehensive income | 138,131 | |||||||||||||||||||||||||||
Cash dividends, $0.20 per common share | - | - | - | (62,472 | ) | - | - | (62,472 | ) | |||||||||||||||||||
Issuance of common stock under stock incentive plans | 1,573 | 786 | 19,108 | - | - | - | 19,894 | |||||||||||||||||||||
Tax benefit from share-based payments | - | - | 2,513 | - | - | - | 2,513 | |||||||||||||||||||||
Repurchases of common stock | (4,483 | ) | (2,242 | ) | - | (77,705 | ) | - | - | (79,947 | ) | |||||||||||||||||
Purchases of common stock by employee deferred compensation trust, net (3 shares) | - | - | (2 | ) | - | - | 40 | 38 | ||||||||||||||||||||
Reversal of unearned compensation upon adoption of SFAS 123(R) (see Note 9) | (364 | ) | (182 | ) | (4,997 | ) | - | - | 5,179 | - | ||||||||||||||||||
Share-based compensation expense | - | - | 7,578 | - | - | - | 7,578 | |||||||||||||||||||||
Vesting of restricted stock and restricted stock units | 149 | 75 | (75 | ) | - | - | - | - | ||||||||||||||||||||
Transition adjustment upon adoption of SFAS 158 | - | - | - | - | (381 | ) | - | (381 | ) | |||||||||||||||||||
Other equity transactions | (118 | ) | (59 | ) | (363 | ) | 20 | - | - | (402 | ) | |||||||||||||||||
Predecessor Balances, February 2, 2007 | 312,436 | $ | 156,218 | $ | 486,145 | $ | 1,103,951 | $ | (987 | ) | $ | 420 | $ | 1,745,747 | ||||||||||||||
Adoption of FIN 48 | - | - | - | (8,917 | ) | - | - | (8,917 | ) | |||||||||||||||||||
Predecessor Balances as adjusted, February 2, 2007 | 312,436 | 156,218 | 486,145 | 1,095,034 | (987 | ) | 420 | 1,736,830 | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net loss | - | - | - | (7,998 | ) | - | - | (7,998 | ) | |||||||||||||||||||
Reclassification of net loss on derivatives | - | - | - | - | 76 | - | 76 | |||||||||||||||||||||
Comprehensive loss | - | - | - | - | - | - | (7,922 | ) | ||||||||||||||||||||
Cash dividends, $0.05 per common share | - | - | - | (15,710 | ) | - | - | (15,710 | ) | |||||||||||||||||||
Issuance of common stock under stock incentive plans | 2,496 | 1,248 | 40,294 | - | - | - | 41,542 | |||||||||||||||||||||
Tax benefit from stock option exercises | - | - | 3,927 | - | - | - | 3,927 | |||||||||||||||||||||
Share-based compensation expense | - | - | 45,458 | - | - | - | 45,458 | |||||||||||||||||||||
Vesting of restricted stock and restricted stock units | 126 | 63 | (63 | ) | - | - | - | - | ||||||||||||||||||||
Other equity transactions | (28 | ) | (13 | ) | (580 | ) | (48 | ) | - | 7 | (634 | ) | ||||||||||||||||
Elimination of Predecessor equity in connection with Merger (see Notes 1 and 2) | (315,030 | ) | (157,516 | ) | (575,181 | ) | (1,071,278 | ) | 911 | (427 | ) | (1,803,491 | ) | |||||||||||||||
Predecessor Balances subsequent to Merger | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Common Stock Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Other Shareholders’ Equity | Total | ||||||||||||||||||||||
Successor capital contribution, net | 554,035 | 277,018 | 2,476,958 | - | - | - | 2,753,976 | |||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | - | - | - | (4,818 | ) | - | - | (4,818 | ) | |||||||||||||||||||
Unrealized net loss on hedged transactions | - | - | - | - | (49,112 | ) | - | (49,112 | ) | |||||||||||||||||||
Comprehensive loss | (53,930 | ) | ||||||||||||||||||||||||||
Issuance of common stock under stock incentive plans | 574 | 287 | (287 | ) | - | - | - | - | ||||||||||||||||||||
Issuance of restricted common stock under stock incentive plans | 890 | 445 | (445 | ) | - | - | - | - | ||||||||||||||||||||
Repurchases of common stock | (17 | ) | (9 | ) | 9 | - | - | - | - | |||||||||||||||||||
Share-based compensation expense | - | - | 3,827 | - | - | - | 3,827 | |||||||||||||||||||||
Successor Balances, February 1, 2008 | 555,482 | $ | 277,741 | $ | 2,480,062 | $ | (4,818 | ) | $ | (49,112 | ) | - | $ | 2,703,873 |
The accompanying notes are an integral part of the consolidated financial statements.
66
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Year Ended | |||||||
January 28, 2011 |
| January 29, 2010 |
| January 30, 2009 | ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income | $ | 627,857 |
| $ | 339,442 |
| $ | 108,182 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 254,927 |
|
| 256,771 |
|
| 247,899 |
Deferred income taxes |
| 50,985 |
|
| 14,860 |
|
| 73,434 |
Tax benefit of stock options |
| (13,905) |
|
| (5,390) |
|
| (950) |
Loss (gain) on debt retirement |
| 14,576 |
|
| 55,265 |
|
| (3,818) |
Noncash share-based compensation |
| 15,956 |
|
| 17,295 |
|
| 9,958 |
Noncash inventory adjustments and asset impairments |
| 7,607 |
|
| 647 |
|
| 50,671 |
Other noncash gains and losses |
| 5,942 |
|
| 7,920 |
|
| 6,252 |
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Merchandise inventories |
| (251,809) |
|
| (100,248) |
|
| (173,014) |
Prepaid expenses and other current assets |
| (10,157) |
|
| (7,298) |
|
| (598) |
Accounts payable |
| 123,424 |
|
| 106,049 |
|
| 140,356 |
Accrued expenses and other liabilities |
| (42,428) |
|
| (12,643) |
|
| 68,736 |
Income taxes |
| 42,903 |
|
| 1,153 |
|
| 33,986 |
Other |
| (1,194) |
|
| (1,000) |
|
| 14,084 |
Net cash provided by operating activities |
| 824,684 |
|
| 672,823 |
|
| 575,178 |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| (420,395) |
|
| (250,747) |
|
| (205,546) |
Purchases of short-term investments |
| - |
|
| - |
|
| (9,903) |
Sales of short-term investments |
| - |
|
| - |
|
| 61,547 |
Sales of property and equipment |
| 1,448 |
|
| 2,701 |
|
| 1,266 |
Net cash used in investing activities |
| (418,947) |
|
| (248,046) |
|
| (152,636) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock |
| 631 |
|
| 443,753 |
|
| 4,228 |
Repayments under revolving credit facility |
| - |
|
| - |
|
| (102,500) |
Issuance of long-term obligations |
| - |
|
| 1,080 |
|
| - |
Repayments of long-term obligations |
| (131,180) |
|
| (785,260) |
|
| (44,425) |
Payment of cash dividends and related amounts |
| - |
|
| (239,731) |
|
| - |
Repurchases of common stock and settlement of equity awards, net of employee taxes paid |
| (13,723) |
|
| (5,928) |
|
| (3,009) |
Tax benefit of stock options |
| 13,905 |
|
| 5,390 |
|
| 950 |
Net cash used in financing activities |
| (130,367) |
|
| (580,696) |
|
| (144,756) |
Net increase (decrease) in cash and cash equivalents |
| 275,370 |
|
| (155,919) |
|
| 277,786 |
Cash and cash equivalents, beginning of year |
| 222,076 |
|
| 377,995 |
|
| 100,209 |
Cash and cash equivalents, end of year | $ | 497,446 |
| $ | 222,076 |
| $ | 377,995 |
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest | $ | 244,752 |
| $ | 328,433 |
| $ | 377,022 |
Income taxes |
| 314,123 |
|
| 187,983 |
|
| 7,091 |
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment awaiting processing for payment, included in Accounts payable | $ | 29,658 |
| $ | 30,393 |
| $ | 7,474 |
Purchases of property and equipment under capital lease obligations |
| - |
|
| 50 |
|
| 3,806 |
Expiration of equity repurchase rights |
| - |
|
| - |
|
| 2,548 |
Successor | Predecessor | |||||||||||||||
July 7, 2007 through February 1, 2008 (a) | February 3, 2007 through July 6, 2007 | Year Ended February 2, 2007 | Year Ended February 3, 2006 | |||||||||||||
(30 weeks) | (22 weeks) | (52 weeks) | (53 weeks) | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | (4,818 | ) | $ | (7,998 | ) | $ | 137,943 | $ | 350,155 | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 150,213 | 83,917 | 200,608 | 186,824 | ||||||||||||
Deferred income taxes | 19,551 | (20,874 | ) | (38,218 | ) | 8,244 | ||||||||||
Tax benefit from stock option exercises | - | (3,927 | ) | (2,513 | ) | 6,457 | ||||||||||
Loss on debt retirement, net | 1,249 | - | - | - | ||||||||||||
Noncash share-based compensation | 3,827 | 45,433 | 7,578 | 3,332 | ||||||||||||
Noncash unrealized loss on interest rate swap | 3,705 | - | - | - | ||||||||||||
Noncash inventory adjustments and asset impairments | - | - | 78,115 | - | ||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||
Merchandise inventories | 79,469 | 16,424 | (28,057 | ) | (97,877 | ) | ||||||||||
Prepaid expenses and other current assets | 3,739 | (6,184 | ) | (5,411 | ) | (10,630 | ) | |||||||||
Accounts payable | (41,395 | ) | 34,794 | 53,544 | 87,230 | |||||||||||
Accrued expenses and other liabilities | 16,061 | 52,995 | 38,353 | 40,376 | ||||||||||||
Income taxes | 7,348 | 2,809 | (35,165 | ) | (26,017 | ) | ||||||||||
Other | 655 | 4,557 | (1,420 | ) | 7,391 | |||||||||||
Net cash provided by operating activities | 239,604 | 201,946 | 405,357 | 555,485 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Merger, net of cash acquired | (6,738,391 | ) | - | - | - | |||||||||||
Purchases of property and equipment | (83,641 | ) | (56,153 | ) | (261,515 | ) | (284,112 | ) | ||||||||
Purchases of short-term investments | (3,800 | ) | (5,100 | ) | (49,675 | ) | (132,775 | ) | ||||||||
Sales of short-term investments | 21,445 | 9,505 | 51,525 | 166,850 | ||||||||||||
Purchases of long-term investments | (7,473 | ) | (15,754 | ) | (25,756 | ) | (16,995 | ) | ||||||||
Purchases of promissory notes | (37,047 | ) | - | - | - | |||||||||||
Insurance proceeds related to property and equipment | - | - | 1,807 | 1,210 | ||||||||||||
Proceeds from sale of property and equipment | 533 | 620 | 1,650 | 1,419 | ||||||||||||
Net cash used in investing activities | (6,848,374 | ) | (66,882 | ) | (281,964 | ) | (264,403 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Issuance of common stock | 2,759,540 | - | - | - | ||||||||||||
Borrowings under revolving credit facility | 1,522,100 | - | 2,012,700 | 232,200 | ||||||||||||
Repayments of borrowings under revolving credit facility | (1,419,600 | ) | - | (2,012,700 | ) | (232,200 | ) | |||||||||
Issuance of long-term obligations | 4,176,817 | - | - | 14,495 | ||||||||||||
Repayments of long-term obligations | (241,945 | ) | (4,500 | ) | (14,118 | ) | (14,310 | ) | ||||||||
Debt issuance costs | (87,392 | ) | - | - | - | |||||||||||
Payment of cash dividends | - | (15,710 | ) | (62,472 | ) | (56,183 | ) | |||||||||
Proceeds from exercise of stock options | - | 41,546 | 19,894 | 29,405 | ||||||||||||
Repurchases of common stock | (541 | ) | - | (79,947 | ) | (297,602 | ) | |||||||||
Tax benefit of stock options | - | 3,927 | 2,513 | - | ||||||||||||
Other financing activities | - | - | (584 | ) | 892 | |||||||||||
Net cash provided by (used in) financing activities | 6,708,979 | 25,263 | (134,714 | ) | (323,303 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 100,209 | 160,327 | (11,321 | ) | (32,221 | ) | ||||||||||
Cash and cash equivalents, beginning of period | - | 189,288 | 200,609 | 232,830 | ||||||||||||
Cash and cash equivalents, end of period | $ | 100,209 | $ | 349,615 | $ | 189,288 | $ | 200,609 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid (received) for: | ||||||||||||||||
Interest | $ | 226,738 | $ | 11,246 | $ | 24,180 | $ | 25,747 | ||||||||
Income taxes | $ | (30,574 | ) | $ | 26,012 | $ | 155,825 | $ | 205,802 | |||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||||||||||
Purchases of property and equipment awaiting processing for payment, included in Accounts payable | $ | 20,449 | $ | 13,544 | $ | 18,094 | $ | 24,750 | ||||||||
Exchange of shares and stock options in business combination | $ | 7,685 | $ | - | $ | - | $ | - | ||||||||
Purchases of property and equipment under capital lease obligations | $ | 592 | $ | 1,036 | $ | 5,366 | $ | 7,197 | ||||||||
Elimination of financing obligations (See Note 7) | $ | - | $ | - | $ | 46,608 | $ | - | ||||||||
Elimination of promissory notes receivable (See Note 7) | $ | - | $ | - | $ | 46,608 | $ | - |
The accompanying notes are an integral part of the consolidated financial statements.
68
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of presentation
Basis of presentation
These notes contain references to the years 2008, 2007, 2006,2010, 2009 and 2005,2008, which represent fiscal years ending or ended January 28, 2011, January 29, 2010 and January 30, 2009, February 1, 2008, February 2, 2007, and February 3, 2006, respectively. Fiscal 2008 will be, andrespectively, each of fiscal years 2007 and 2006which were a 52-week accounting period while fiscal 2005 was a 53-week accounting period.periods. The Company’s fiscal year ends on the Friday closest to January 31. The consolidated financial statements include all subsidiaries of the Company, except for its not-for-profit subsidiary which the assets and revenues of which areCompany does not material.control. Intercompany transactions have been eliminated.
Business description
The Company sells general merchandise on a retail basis through 8,1949,372 stores (as of February 1, 2008) located primarilyJanuary 28, 2011) in 35 states covering most of the southern, southwestern, midwestern and eastern United States. The Company has DCsdistribution centers (“DCs”) in Scottsville, Kentucky; Ardmore, Oklahoma; South Boston, Virginia; Indianola, Mississippi; Fulton, Missouri; Alachua, Florida; Zanesville, Ohio; Jonesville, South Carolina and Marion, Indiana.
The Company purchases its merchandise from a wide variety of suppliers. Approximately 12%9% and 7% of the Company’s purchases in 20072010 were made from The Procter & Gamble Company. The Company’s next largest supplier accounted for approximately 6% of the Company’s purchases in 2007.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with insignificant interest rate risk and original maturities of three months or less when purchased. Such investments primarily consist of money market funds, bank deposits, certificates of deposit (which may include foreign time deposits), and commercial paper. The carrying amounts of these items are a reasonable estimate of their fair value due to the short maturity of these investments. The Company held foreign time deposits of $5.2 million as of February 1, 2008.
Payments due from banksprocessors for third-party credit card, debit card and electronic benefittender transactions classified as cash and cash equivalents totaled approximately $13.9$26.1 million and $11.6$23.2 million at February 1, 2008January 28, 2011 and February 2, 2007,January 29, 2010, respectively.
The Company’s cash management system provides for daily investment of available balances and the funding of outstanding checks when presented for payment. Outstanding but unpresented checks totaling approximately $107.9$153.6 million and $122.3$159.6 million at February 1, 2008January 28, 2011 and February 2, 2007,January 29, 2010, respectively, have been included in Accounts payable in the consolidated balance sheets. Upon presentation for payment, these checks are funded through available cash balances or the Company’s credit facilities.
69
At January 28, 2011, the Company has certainmaintained cash and cash equivalents balances that, along with certain other assets, are being held as requiredto meet a $20 million minimum threshold set by certain insurance-related regulatory requirements and are therefore not available for general corporate purposes,insurance regulators, as further described below under “Investments in debt and equity securities.“Insurance liabilities.”
Investments in debt and equity securities
The Company accounts for its investmentinvestments in debt and marketable equity securities in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and accordingly, classifies them as held-to-maturity, available-for-sale, or trading.trading, depending on their classification. Debt
As of January 28, 2011 and January 29, 2010, the Company invests excess cashhad investments in shorter-dated, highly liquidtrading securities of $8.3 million and $8.8 million, respectively, $2.2 million and $1.6 million of which were classified as Prepaid expenses and other current assets, respectively, and $6.1 million and $7.2 million of which were classified as Other assets, net, respectively, in the consolidated balance sheets. Historical cost information pertaining to these investments such as money marketin mutual funds certificates of deposit, and commercial paper. Such securities have been classified either as held-to-maturity or available-for-sale, depending on the type of securities purchased (debt versus equity) as well asby participants in the Company’s intentions with respectsupplemental retirement and compensation deferral plans is not readily available to the potential sale of such securities before their stated maturity dates. Given the short maturities of such investments (except for those securities described in further detail below), the carrying amounts approximate the fair values of such securities.
During 2008, or February 2, 2007.
Successor February 1, 2008 | Cost | Gross Unrealized | Estimated Fair Value | |||||||||||||
Gains | Losses | |||||||||||||||
Held-to-maturity securities | ||||||||||||||||
Bank and corporate debt | $ | 24,254 | $ | 244 | $ | 107 | $ | 24,391 | ||||||||
U.S. Government securities | 16,652 | 676 | - | 17,328 | ||||||||||||
Obligations of Government sponsored enterprises | 9,834 | 40 | - | 9,874 | ||||||||||||
Asset-backed securities | 1,815 | 21 | 5 | 1,831 | ||||||||||||
Other debt securities (see Note 7) | 33,453 | - | 709 | 32,744 | ||||||||||||
86,008 | 981 | 821 | 86,168 | |||||||||||||
Trading securities | ||||||||||||||||
Equity securities | 15,066 | - | - | 15,066 | ||||||||||||
Total debt and equity securities | $ | 101,074 | $ | 981 | $ | 821 | $ | 101,234 | ||||||||
Predecessor February 2, 2007 | Cost | Gross Unrealized | Estimated Fair Value | |||||||||||||
Gains | Losses | |||||||||||||||
Held-to-maturity securities | ||||||||||||||||
Bank and corporate debt | $ | 100,386 | $ | 2 | $ | 80 | $ | 100,308 | ||||||||
U.S. Government securities | 17,026 | 1 | 29 | 16,998 | ||||||||||||
Obligations of Government sponsored enterprises | 9,192 | 3 | 9 | 9,186 | ||||||||||||
Asset-backed securities | 2,833 | 4 | 10 | 2,827 | ||||||||||||
129,437 | 10 | 128 | 129,319 | |||||||||||||
Available-for-sale securities | ||||||||||||||||
Equity securities | 13,512 | - | - | 13,512 | ||||||||||||
Trading securities | ||||||||||||||||
Equity securities | 13,591 | - | - | 13,591 | ||||||||||||
Total debt and equity securities | $ | 156,540 | $ | 10 | $ | 128 | $ | 156,422 | ||||||||
Successor February 1, 2008 | Held-to- Maturity Securities | Available- for-Sale Securities | Trading Securities | ||||||||
Cash and cash equivalents | $ | 1,000 | $ | - | $ | - | |||||
Short-term investments | 19,611 | - | - | ||||||||
Prepaid expenses and other current assets | - | - | 2,166 | ||||||||
Other assets, net | 31,944 | - | 12,900 | ||||||||
Long-term obligations (see Note 7) | 33,453 | - | - | ||||||||
$ | 86,008 | $ | - | $ | 15,066 |
Predecessor February 2, 2007 | Held-to- Maturity Securities | Available- for-Sale Securities | Trading Securities | ||||||||
Cash and cash equivalents | $ | 79,764 | $ | 13,512 | $ | - | |||||
Short-term investments | 29,950 | - | - | ||||||||
Prepaid expenses and other current assets | - | - | 1,090 | ||||||||
Other assets, net | 19,723 | - | 12,501 | ||||||||
$ | 129,437 | $ | 13,512 | $ | 13,591 |
Successor | Cost | Fair Value | ||||||
Less than one year | $ | 20,522 | $ | 20,614 | ||||
One to three years | 31,021 | 31,790 | ||||||
Greater than three years | 34,465 | 33,764 | ||||||
$ | 86,008 | $ | 86,168 |
For the years ended February 1, 2008, February 2, 2007January 28, 2011, January 29, 2010 and February 3, 2006,January 30, 2009, gross realized gains and losses on the sales of available-for-sale securities were not material. The cost of securities sold is based upon the specific identification method.
Merchandise inventories
Inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out (“LIFO”) method.method as this method results in a better matching of costs and revenues. Under the Company’s retail inventory method (“RIM”), the calculation of gross profit and the resulting valuation of inventories at cost are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales.sales at a department level. Costs directly associated with warehousing and distribution are capitalized into inventory. The excess of current cost over LIFO cost was approximately $6.1$52.8 million and $47.5 million at February 1, 2008January 28, 2011 and $4.3 million at February 2, 2007.January
70
29, 2010, respectively. Current cost is determined using the retailRIM on a first-in, first-out method.basis. Under the LIFO inventory method, the impacts of rising or falling market price changes increase or decrease cost of sales (the LIFO provision or benefit). The Company’sCompany recorded a LIFO reserves were adjusted to zero at July 6, 2007 as a resultprovision of the Merger. The Successor recorded LIFO reserves of $6.1 million during 2007. LIFO reserves of the Predecessor decreased $1.5 million and $0.5$5.3 million in 2006 and 2005, respectively. Costs directly associated with warehousing and distribution are capitalized into inventory.
The 2008 LIFO provision was impacted by increased commodity costs related to new store openingsfood and pet products which were driven by fruit and vegetable prices and rising freight costs. In addition, increases in petroleum, resin, metals, pulp and other raw material commodity costs also resulted in multiple product cost increases. These trends generally stabilized or reversed in 2009 and 2010.
Vendor rebates
The Company accounts for all cash consideration received from vendors in accordance with applicable accounting standards pertaining to such arrangements. Cash consideration received from a vendor is generally presumed to be a rebate or an allowance and is accounted for as a reduction of merchandise purchase costs as earned. However, certain specific, incremental and otherwise qualifying SG&A expenses related to the construction periods are expensedpromotion or sale of vendor products may be offset by cash consideration received from vendors, in accordance with arrangements such as incurred.
Prepaid expenses and other current assets
Prepaid expenses and other current assets include prepaid amounts for rent, maintenance, advertising, and insurance, as well as amounts receivable for certain vendor rebates (primarily those expected to be collected in cash), coupons, and other items.
Property and equipment
Property and equipment are recorded at cost. The Company provides for depreciation and amortization on a straight-line basis over the following estimated useful lives:
Land improvements | 20 | |
Buildings | 39-40 | |
Furniture, fixtures and equipment | 3-10 |
Improvements of leased properties are amortized over the shorter of the life of the applicable lease term or the estimated useful life of the asset.
Impairment of long-lived assets
When indicators of impairment are present, the Company evaluates the carrying value of long-lived assets, other than goodwill, in relation to the operating performance and future cash
71
flows or the appraised values of the underlying assets. In accordance with SFAS 144, “Accountingaccounting standards for the Impairment or Disposal of Long-Lived Assets,”long-lived assets, the Company reviews for impairment stores open more than two years for which current cash flows from operations are negative. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the life of the lease. The Company’s estimate of undiscounted future cash flows over the lease term is based upon historical operations of the stores and estimates of future store profitability which encompasses many factors that are subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s estimated fair value. The fair value is estimated based primarily upon estimated future cash flows (discounted at the Company’s credit adjusted risk-free rate) or other reasonable estimates of fair market value. Assets to be disposed of are adjusted to the fair value less the cost to sell if less than the book value.
The Company recorded impairment charges included in SG&A expense of approximately $0.2$1.7 million in the 2007 Predecessor period, $9.42010, $5.0 million in 20062009 and $0.6$4.0 million in 20052008, to reduce the carrying value of certain of its stores’ assets asassets. Such action was deemed necessary based on the Company’s evaluation that such amounts would not be recoverable primarily due to insufficient sales or excessive costs resulting in negative sales trendscurrent and projected future cash flows at these locations. The majority
Capitalized interest
To assure that interest costs properly reflect only that portion relating to current operations, interest on borrowed funds during the construction of the 2006 chargesproperty and equipment is capitalized where applicable. No interest costs were recorded pursuant to certain strategic initiatives discussedcapitalized in Note 3.
Goodwill and other intangible assets
The Company amortizes intangible assets over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment when indicators of impairment are present, based on undiscounted cash flows, and if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible
Goodwill and intangible assets with indefinite lives are tested annually for impairment annually or more frequently if indicators of impairment are present and written down to fair value as required. No impairment of intangible assets has been identified during any of the periods presented.
The goodwill impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting unit based on valuation techniques (including a discounted cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the recorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the implied fair value of goodwill would require the Company to allocate the estimated fair value of its reporting unit to its assets and liabilities. Any unallocated fair value would represent the implied fair value of goodwill, which would be compared to its corresponding carrying value.
72
Other assets
Non-current Other assets consist primarily of long-term investments, qualifying prepaid expenses, debt issuance costs which are amortized over the life of the related obligations, and utility and security deposits and life insurance policies. Such debt issuance costs increased substantially subsequent to the Merger as further discussed in Notes 2 and 6.
Accrued expenses and other liabilities
Accrued expenses and other consist of the following:
(In thousands) | Successor 2007 | Predecessor 2006 | |||
Compensation and benefits | $ | 60,720 | $ | 41,957 | |
Insurance | 64,418 | 76,062 | |||
Taxes (other than taxes on income) | 55,990 | 50,502 | |||
Other | 119,828 | 85,037 | |||
$ | 300,956 | $ | 253,558 |
(In thousands) | January 28, 2011 |
| January 29, 2010 | ||
Compensation and benefits | $ | 81,786 |
| $ | 100,843 |
Insurance |
| 76,372 |
|
| 65,408 |
Taxes (other than taxes on income) |
| 74,900 |
|
| 72,902 |
Other |
| 114,683 |
|
| 103,137 |
| $ | 347,741 |
| $ | 342,290 |
Other accrued expenses primarily include the current portion of liabilities for deferred rent,legal settlements, freight expense, contingent rent expense, interest, electricity, lease contract termination liabilities for closed stores,utilities, common area and other maintenance charges, and income tax related reserves, and common area maintenance charges.
Insurance liabilities
The Company retains a significant portion of risk for its workers’ compensation, employee health, general liability, property and automobile claim exposures. Accordingly, provisions are made for the Company’s estimates of such risks. The undiscounted future claim costs for the workers’ compensation, general liability, and health claim risks are derived using actuarial methods. To the extent that subsequent claim costs vary from those estimates, future results of operations will be affected. Ashley River Insurance Company (or ARIC, as defined above), a South Carolina-based wholly owned captive insurance subsidiary of the Company, charges the operating subsidiary companies premiums to insure the retained workers’ compensation and non-property general liability exposures. Pursuant to South Carolina insurance regulations, ARIC hasis required to maintain certain levels of cash and cash equivalents and investment balances that are not available for general corporate purposes, as further described above under “Investments in debt and equity securities.”related to its self insured exposures. ARIC currently insures no unrelated third-party risk.
As a result of the Merger discussed in Note 3, the Company recorded its assumed self-insurance reserves as of the Merger date at their present value in accordance with SFAS 141, “Business Combinations”,applicable accounting standards for business combinations, using a discount rate of 5.4%. The balance of the resulting discount was $18.7$4.8 million and $7.4 million at February 1, 2008.January 28, 2011 and January 29, 2010, respectively. Other than for reserves assumed in a business combination, the Company’s policy is to record self-insurance reserves on an undiscounted basis.
Operating leases and related liabilities
Rent expense is recognized over the term of the lease. The Company records minimum rental expense on a straight-line basis over the base, non-cancelable lease term commencing on the date that the Company takes physical possession of the property from the landlord, which
73
normally includes a period prior to the store opening to make necessary leasehold improvements and install store fixtures. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. Tenant allowances, to the extent received, are recorded as deferred incentive rent and are amortized as a reduction to rent expense over the term of the lease. Any difference between the calculated expense and the amounts actually paid are reflected as a liability, with the current portion in Accrued expenses and other and the long-term portion in Other liabilities
The Company recognizes contingent rental expense when the achievement of specified sales targets are considered probable, in accordance with applicable accounting standards for contingent rent. The amount expensed but not paid as of January 28, 2011 and January 29, 2010 was approximately $9.2 million and $10.8 million, respectively, and is included in Accrued expenses and other in the consolidated balance sheets (See Note 9).
In the normal course of business, based on an overall analysis of store performance and expected trends, management periodically evaluates the need to close underperforming stores. Generally, for store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the date the store is closed in accordance with applicable accounting standards for costs associated with exit or disposal activities. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. Liabilities are reviewed periodically and adjusted when necessary. The current portion of the closed store rent liability is reflected in Accrued expenses and other and the long-term portion in Other non-currentliabilities in the consolidated balance sheets, and totaled approximately $7.0 million and $7.6 million at January 28, 2011 and January 29, 2010, respectively.
Other liabilities
Non-current Other liabilities consist of the following:
(In thousands) | Successor 2007 | Predecessor 2006 | |||
Compensation and benefits | $ | 13,744 | $ | 15,344 | |
Insurance | 123,276 | 107,476 | |||
Income tax related reserves | 78,277 | - | |||
Derivatives | 82,319 | - | |||
Other | 22,098 | 35,521 | |||
$ | 319,714 | $ | 158,341 |
(In thousands) | January 28, 2011 |
| January 29, 2010 | ||
Compensation and benefits | $ | 14,531 |
| $ | 12,441 |
Insurance |
| 131,912 |
|
| 140,633 |
Income tax related reserves |
| 27,255 |
|
| 68,021 |
Derivatives |
| 34,923 |
|
| 57,058 |
Other |
| 22,961 |
|
| 24,195 |
| $ | 231,582 |
| $ | 302,348 |
Amounts reflected as “other” in the table above consist primarily of deferred rent, lease contract termination liabilities for closed stores, leasehold interests liabilities, and redeemable stock options.
74
Fair value accounting
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The valuation of the Company’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
The Company incorporates credit valuation adjustments (CVAs) to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. However, the CVAs associated with its derivatives
75
utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of January 28, 2011, the Company has assessed the significance of the impact of the CVAs on the overall valuation of its derivative positions and has determined that the CVAs are not significant to the overall valuation of its derivatives. Based on the Company's review of the CVAs by counterparty portfolio, the Company has determined that the CVAs are not significant to the overall portfolio valuations, as the CVAs are deemed to be immaterial in terms of basis points and are a very small percentage of the aggregate notional value. Although some of the CVAs as a percentage of termination value appear to be more significant, primary emphasis was placed on a review of the CVA in basis points and the percentage of the notional value. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of January 28, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.
(In thousands) | Quoted Prices |
| Significant |
| Significant |
| Balance at | |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |
Trading securities (a) | $ | 8,289 |
| $ | - |
| $ | - |
| $ | 8,289 | |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |
Long-term obligations (b) |
| 3,450,812 |
|
| 20,858 |
|
| - |
|
| 3,471,670 | |
Derivative financial instruments (c) |
| - |
|
| 34,923 |
|
| - |
|
| 34,923 | |
Deferred compensation (d) |
| 16,710 |
|
| - |
|
| - |
|
| 16,710 | |
|
|
|
|
|
|
|
|
|
|
|
| |
(a) | Reflected at fair value in the consolidated balance sheet as Prepaid expenses and other current assets of $2,179 and Other assets, net of $6,110. | |||||||||||
(b) | Reflected at book value in the consolidated balance sheet as Current portion of long-term obligations of $1,157 and Long-term obligations of $3,287,070. | |||||||||||
(c) | Reflected at fair value in the consolidated balance sheet as noncurrent Other liabilities. | |||||||||||
(d) | Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $2,179 and non-current Other liabilities of $14,531. |
The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, short-term investments, receivables and payables approximate their respective fair values. At February 1, 2008, theThe Company does not have any fair value measurements using significant unobservable inputs (Level 3) as of the Company’s debt, excluding capital lease obligations, was approximately $3,782.6 million, or approximately $489.2 million less than the carrying values of the debt, compared to a fair value of $265.7 million at February 2, 2007, or approximately $14.0 million greater than the carrying value. The fair value (estimated market value) of the debt is based primarily on quoted prices for those or similar instruments.
Derivative financial instruments
The Company accounts for derivative financial instruments in accordance with SFAS No. 133 “Accountingaccounting standards for Derivative Instruments and Hedging Activities”, as amended and interpreted (collectively, “SFAS 133”). This literature requires the Company to recognize all derivative instruments on the balance sheet at fair value, and contains accounting rules for hedging instruments, which depend on the nature of the hedge relationship.activities. All financial instrument positions taken by the Company are intended to be used to reduce risk by hedging an underlying economic exposure.
76
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards.
The Company’s derivative financial instruments, in the form of interest rate swaps at January 28, 2011, are related to variable interest rate risk exposures associated with the Company’s long-term debt and were entered into in an attempteffort to manage that risk. The counterparties to the Company’s derivative agreements are all major international financial institutions. The Company continually monitors its position and the credit ratings of its counterparties and does not anticipate nonperformance by the counterparties. counterparties; however, there can be no assurance that such nonperformance will not occur.
Revenue and gain recognition
The Company does not offset fairrecognizes retail sales in its stores at the time the customer takes possession of merchandise. All sales are net of discounts and estimated returns and are presented net of taxes assessed by governmental authorities that are imposed concurrent with those sales. The liability for retail merchandise returns is based on the Company’s prior experience. The Company records gain contingencies when realized.
The Company recognizes gift card sales revenue at the time of redemption. The liability for the gift cards is established for the cash value amountsat the time of derivativespurchase. The liability for outstanding gift cards was approximately $2.4 million and associated cash collateral.
Advertising costs
Advertising costs are expensed upon performance, “first showing” or distribution, and are reflected net of 7.683% on a notional amount of $2.0 billion as of July 31, 2007, qualifying cooperative advertising funds provided by vendors in SG&A expenses. Advertising costs were $46.9 million, $41.5 million and $27.8 million in 2010, 2009 and 2008, respectively. These costs primarily include promotional circulars, targeted circulars supporting new stores, television and radio advertising, in-store signage, and costs associated
77
with the notional amountsponsorships of these swaps amortizing on a quarterly basis through July 31, 2012. Such notional amount was $1.6 billion as of February 1, 2008. The swaps were designated as cash flow hedges on October 12, 2007. For the period prior to hedge designation, an unrealized loss of $3.7certain automobile racing activities. Vendor funding for cooperative advertising offset reported expenses by $14.2 million, for the Successor period has been recognized$9.0 million and $7.8 million in Loss on interest rate swaps in the consolidated statements of operations, reflecting the changes in fair value of the swaps prior to their designation as qualifying cash flow hedging relationships, which were offset by earnings under the contractual provisions of the swaps of $1.7 million during the same time period.
Share-based payments
The Company also recorded expense related to hedge ineffectiveness of $0.4 million during the Successor period ended February 1, 2008.
The fair value of each option grant is separately estimated and amortized into compensation expense on a straight-line basis between the applicable grant date and each vesting date. The Company has estimated the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.
The Company also accountscalculates compensation expense for nonvested restricted stock and similar awards in accordance with the provisions of SFAS 123(R). The Company calculates compensation expense as the difference between the market price of the underlying stock on the grant date and the purchase price, if any, and recognizes such amount on a straight-line basis over the period in which the recipient earns the nonvested restricted stock and restricted stock unit award. Under the provisions of SFAS 123(R), unearned compensation is not recorded within shareholders’ equity.
Store pre-opening costs
Pre-opening costs related to determine its excess tax benefit pool upon adoption of SFAS 123(R) in accordance with the provisions of FASB Staff Position (“FSP”) 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Under the provisions of this FSP, the cumulative benefit of stock option exercises included in additional paid-in capital for the periods after the effective date of SFAS 123 is reduced by the cumulative income tax effect of the pro forma stock option expense previously disclosed in accordance with the requirements of SFAS 123. (The provision of this FSP applied only to options that were fully vested before the date of adoption of SFAS 123(R). The amount of any excess tax benefit for options that are either granted after the adoption of SFAS 123(R) or are partially vested on the date of adoption were computed in accordance with the provisions of SFAS 123(R).) The amount of any excess deferred tax asset over the actual income tax benefit realized for options that are exercised after the adoption of SFAS 123(R) will be absorbed by the excess tax benefit pool. Income tax expense will be increased should the Company’s excess tax benefit pool be insufficient to absorb any future deferred tax asset amounts in excess of the actual tax benefit realized. The Company has determined that its excess tax benefit pool was approximately $68 million as of the adoption of SFAS 123(R) on February 4, 2006. After the Mergernew store openings and the related application of purchase accounting, the excess tax benefit pool has been reduced to zero.
Income taxes
Under the 2007 Successor and Predecessor periods, 2006 and 2005, respectively. These costs primarily include promotional circulars, targeted circulars supporting new stores, television and radio advertising, in-store signage, and costs associated with the sponsorship of a National Associationaccounting standards for Stock Car Auto Racing team. Vendor funding for cooperative advertising offset reported expenses by $6.6 million, $2.0 million, $7.9 million and $0.8 million in the 2007 Successor and Predecessor periods, 2006 and 2005, respectively.
The adoption resulted in an $8.9 million decrease in retained earnings and a reclassification of certain amounts between deferred income taxes and other noncurrent liabilities to conform to the balance sheet presentation requirements of FIN 48. As of the date of adoption, the total reserve for uncertain tax benefits was $77.9 million. This reserve excludes the federal income tax benefit for the uncertain tax positions related to state income taxes, which is now included in deferred tax assets. As a result of the adoption of FIN 48, the reserve for interest expense related to income taxes was increased to $15.3 million and a reserve for potential penalties of $1.9 million related to uncertain income tax positions was recorded. As of the date of adoption, approximately $27.1 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions. After the Merger and the related application of purchase accounting, no portion of the reserve for uncertain tax positions that existed as of the date of adoption would impact our effective tax rate but would, if subsequently recognized, reduce the amount of goodwill recorded in relation to the Merger.
Income tax reserves are determined using thea methodology established by FIN 48. FIN 48which requires companies to assess each income tax position taken using a two step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the
78
more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company'sCompany’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to the Company’s future financial results.
Management estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Accounting pronouncements
In March 2008,June 2009 the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsa new accounting standard relating to variable interest entities. This standard amends previous standards and Hedging Activities”,requires an amendmententerprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity, specifies updated criteria for determining the primary beneficiary, requires ongoing reassessments of FASB Statement No. 133. SFAS 161 applies to all derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 37 and 42whether an enterprise is the primary beneficiary of SFAS 133 and related hedged items accounteda variable interest entity, eliminates the quantitative approach previously required for under SFAS 133. SFAS 161determining the primary beneficiary of a variable interest entity, amends certain guidance for determining whether an entity is a variable interest entity, requires entities to provide greater transparency through additionalenhanced disclosures about how and why an enterprise’s involvement in a variable interest entity, uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. SFAS 161 isamong other provisions. This standard was effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2008.the Company’s 2010 reporting periods. The Company currently plans to adopt SFAS 161 during its 2009 fiscal year. No determination has yet been made regarding the potential impactadoption of this standard did not have a material effect on the Company’s consolidated financial statements.
Reclassifications
Certain reclassifications of the 20062008 and 2009 amounts have been made to conform to the 20072010 presentation.
2.
Initial public offering and special dividend
On March 11, 2007,November 18, 2009, the Company entered intocompleted the initial public offering of its common stock. The Company issued 22,700,000 shares in the offering, and an Agreement and Plan of Merger (the “Merger Agreement”) with Buck Holdings L.P., a Delaware limited partnership (“Parent”), and Buck, a Tennessee corporation and wholly owned subsidiary of Parent. Parent is and Buck was (priorexisting shareholder sold an additional 16,515,000 outstanding shares. Net proceeds to the Merger) controlled by investment funds affiliated withCompany from the offering of $446.0 million were used to redeem outstanding debt, as discussed in more detail in Note 7 below. The Company paid a $4.8 million transaction fee to Kohlberg Kravis Roberts & Co., L.P. (“KKR”). and Goldman, Sachs & Co. in connection with the offering. Although this transaction fee was not paid from the net proceeds of the offering, it was directly related to the offering and accounted for as a cost of raising equity.
79
Upon the completion of the offering, the Company incurred additional charges of $58.8 million for fees paid to terminate its advisory agreement with KKR and Goldman, Sachs & Co. The transaction and termination fees paid to such parties are discussed in more detail in Note 12 below. The Company also incurred charges of $9.4 million for the accelerated vesting of certain share-based awards as discussed in more detail in Note 11 below.
On September 8, 2009, the Company’s Board of Directors declared a special dividend on the Company’s outstanding common stock (including shares of restricted stock) of $0.7525 per share, or approximately $239.3 million in the aggregate, which was paid on September 11, 2009 to shareholders of record on September 8, 2009. The special dividend was paid with cash generated from operations. Pursuant to the terms of the Company’s stock option plans, holders of stock options received either a pro-rata adjustment to the terms of their share-based awards or a cash payment (totaling approximately $0.5 million for all such grantees) in substitution for such adjustment as a result of the dividend.
3.
Merger
On July 6, 2007, the transaction wasCompany consummated through a merger transaction (the “Merger”) of Buck with, and intoas a result, the Company. The Company survived the Merger asis a subsidiary of Parent. The Company’s results of operations after July 6, 2007 include the effects of the Merger.
The Merger was accounted for as a reverse acquisition in accordance with theapplicable purchase accounting provisions of SFAS 141, “Business Combinations”.provisions. Because of this accounting treatment, the Company’s assets and liabilities havewere properly been accounted for at their estimated fair values as of the Merger date. The aggregate purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon an assessment of their relative fair values as of the Merger date.
The goodwill balance at February 1, 2008 increased by $21.3 million over the balance reported at August 3, 2007, representing a refinement of the purchase price allocation related toas of the Merger. The February 1, 2008 purchase price allocationMerger date also included approximately $1.4 billion of other intangible assets,assets. As of January 28, 2011 and January 29, 2010, these balances were as follows:
|
| As of January 28, 2011 | |||||||||
(In thousands) | Estimated |
|
| Amount |
|
| Accumulated Amortization |
|
| Net | |
Leasehold interests | 2 to 17.5 years |
| $ | 141,180 |
| $ | 83,458 |
| $ | 57,722 | |
Trade names and trademarks | Indefinite |
|
| 1,199,200 |
|
| - |
|
| 1,199,200 | |
|
|
| $ | 1,340,380 |
| $ | 83,458 |
| $ | 1,256,922 |
|
| As of January 29, 2010 | |||||||||
(In thousands) | Estimated |
|
| Amount |
|
| Accumulated Amortization |
|
| Net | |
Leasehold interests | 2 to 17.5 years |
| $ | 184,168 |
| $ | 100,793 |
| $ | 83,375 | |
Internally developed software | 3 years |
|
| 12,300 |
|
| 10,592 |
|
| 1,708 | |
|
|
|
| 196,468 |
|
| 111,385 |
|
| 85,083 | |
Trade names and trademarks | Indefinite |
|
| 1,199,200 |
|
| - |
|
| 1,199,200 | |
|
|
| $ | 1,395,668 |
| $ | 111,385 |
| $ | 1,284,283 |
As of February 1, 2008 | ||||||||||
(In thousands) | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net | ||||||
Leasehold interests | 2 to 17.5 years | $ | 185,112 | $ | 23,663 | $ | 161,449 | |||
Internally developed software | 3 years | 12,300 | 2,392 | 9,908 | ||||||
197,412 | 26,055 | 171,357 | ||||||||
Trade names and trademarks | Indefinite | 1,199,200 | - | 1,199,200 | ||||||
$ | 1,396,612 | $ | 26,055 | $ | 1,370,557 |
The Company recorded amortization expense related to amortizable intangible assets for the year-to-date Successor period ended February 1,2010, 2009 and 2008 of $26.1$27.4 million, $41.3 million and $45.0 million, respectively, ($23.725.7 million, $37.2 million and $40.9 million, respectively, of which is included in rent expense). AmortizableExpected future cash flows associated with the Company’s intangible assets willare not expected to be amortized over a weighted average period of 5.4 years.
For intangible assets subject to amortization, the estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: 2008 - $44.7 million, 2009 - $41.2 million, 2010 - $27.3 million, 2011 - $21.0– $20.9 million, 2012 - - $17.1– $17.0 million, 2013 – $12.0 million, 2014 – $5.8 million and 2015 – $0.9 million.
4.
Earnings per share
Earnings per share is computed as follows (in thousands except per share data):
| 2010 | ||||||||
| Net Income |
| Weighted Average Shares | Per Share Amount | |||||
Basic earnings per share | $ | 627,857 |
|
| 341,047 |
| $ | 1.84 |
|
Effect of dilutive share-based awards |
|
|
|
| 3,753 |
|
|
|
|
Diluted earnings per share | $ | 627,857 |
|
| 344,800 |
| $ | 1.82 |
|
| 2009 | |||||||||
| Net Income |
| Weighted Average Shares | Per Share Amount | ||||||
Basic earnings per share | $ | 339,442 |
|
| 322,778 |
| $ | 1.05 |
| |
Effect of dilutive share-based awards |
|
|
|
| 2,058 |
|
|
|
| |
Diluted earnings per share | $ | 339,442 |
|
| 324,836 |
| $ | 1.04 |
|
| 2008 | |||||||||
| Net Income |
| Weighted Average Shares | Per Share Amount | ||||||
Basic earnings per share | $ | 108,182 |
|
| 317,024 |
| $ | 0.34 |
| |
Effect of dilutive share-based awards |
|
|
|
| 479 |
|
|
|
| |
Diluted earnings per share | $ | 108,182 |
|
| 317,503 |
| $ | 0.34 |
|
Basic earnings per share was computed by dividing net income by the Merger totaled $102.6 million, principally consistingweighted average number of investment banking fees, legal fees andshares of common stock compensation ($39.4 million as further discussed in Note 9), and are reflected inoutstanding during the 2007 results of operations. Capitalized debt issuance costs, related to financing the Merger of $87.4 million as of the Merger date are reflected in other long-term assets in the consolidated balance sheet.
(In thousands) | Year Ended February 1, 2008 | Year ended February 2, 2007 | |||
Revenue | $ | 9,495,246 | $ | 9,169,822 | |
Net loss | (57,939) | (156,188) |
Options to be indicativepurchase shares of what the Company's results of operations would have been if the acquisition had in fact occurredcommon stock that were outstanding at the beginning of the periods presented, and is not intended to be a projection of the Company's future results of operations.
5.
Property and in 2007 than in comparable prior-year periods. As a result of the Merger and in accordance with SFAS 141, the Company’s inventory balances, including the inventory associated with this strategic change, were adjusted to fair value and the related reserve was eliminated.
Total (a) | Incurred in 2006 | Incurred in 2007 | Merger Additions (b) | Remaining | |||||||||||
Lease contract termination costs (c) | $ | 34.3 | $ | 5.7 | $ | 16.3 | $ | 12.3 | $ | - | |||||
One-time employee termination benefits | 1.0 | 0.3 | 0.5 | 0.2 | - | ||||||||||
Other associated store closing costs | 8.6 | 0.2 | 7.2 | 1.2 | - | ||||||||||
Inventory liquidation fees | 4.4 | 1.6 | 2.8 | - | - | ||||||||||
Asset impairment & accelerated depreciation | 12.8 | 8.3 | 3.6 | 0.9 | - | ||||||||||
Inventory markdowns below cost | 8.3 | 6.7 | 0.9 | 0.7 | - | ||||||||||
Total | $ | 69.4 | $ | 22.8 | $ | 31.3 | $ | 15.3 | $ | - |
Balance, February 2, 2007 | 2007 Expenses (a) | 2007 Payments and Other | Merger Additions (b) | Balance, February 1, 2008 | |||||||||||
Lease contract termination costs | $ | 5.0 | $ | 16.9 | $ | 14.1 | $ | 12.3 | $ | 20.1 | |||||
One-time employee termination benefits | 0.3 | 0.5 | 1.0 | 0.2 | - | ||||||||||
Other associated store closing costs (c) | 0.2 | 7.2 | 7.6 | 1.2 | 1.0 | ||||||||||
Inventory liquidation fees | 0.3 | 2.8 | 3.1 | - | - | ||||||||||
Total | $ | 5.8 | $ | 27.4 | $ | 25.8 | $ | 13.7 | $ | 21.1 |
Property and equipment is recorded at cost and summarized as follows:
(In thousands) | January 28, 2011 |
| January 29, 2010 | ||
Land and land improvements | $ | 174,439 |
| $ | 137,903 |
Buildings |
| 575,305 |
|
| 520,867 |
Leasehold improvements |
| 173,836 |
|
| 130,774 |
Furniture, fixtures and equipment |
| 1,235,756 |
|
| 992,423 |
Construction in progress |
| 17,933 |
|
| 10,406 |
|
| 2,177,269 |
|
| 1,792,373 |
Less accumulated depreciation and amortization |
| 652,694 |
|
| 463,987 |
Net property and equipment | $ | 1,524,575 |
| $ | 1,328,386 |
(In thousands) | Successor 2007 | Predecessor 2006 | |||
Land and land improvements | $ | 137,539 | $ | 147,447 | |
Buildings | 516,482 | 437,368 | |||
Leasehold improvements | 87,343 | 212,078 | |||
Furniture, fixtures and equipment | 645,376 | 1,617,163 | |||
Construction in progress | 2,823 | 16,755 | |||
1,389,563 | 2,430,811 | ||||
Less accumulated depreciation and amortization | 115,318 | 1,193,937 | |||
Net property and equipment | $ | 1,274,245 | $ | 1,236,874 |
Depreciation expense related to property and equipment was approximately $116.9$215.7 million, $201.1 million and $190.5 million for the Successor period from July 7, 2007 through February 1, 2008 compared to $83.5 million for the February 3, 2007 through July 6, 2007 Predecessor period, $199.6 million for 20062010, 2009 and $186.1 million for 2005.2008. Amortization of capital lease assets is included in depreciation expense.
6.
Income taxes
The provision (benefit) for income taxes consists of the following:
Successor | Predecessor | |||||||||||||||
(In thousands) | July 7, 2007 to February 1, 2008 | February 3, 2007 to July 6, 2007 | 2006 | 2005 | ||||||||||||
Current: | ||||||||||||||||
Federal | $ | (25,726 | ) | $ | 31,114 | $ | 101,919 | $ | 175,344 | |||||||
Foreign | 409 | 495 | 1,200 | 1,205 | ||||||||||||
State | 4,306 | 1,258 | 17,519 | 9,694 | ||||||||||||
(21,011 | ) | 32,867 | 120,638 | 186,243 | ||||||||||||
Deferred: | ||||||||||||||||
Federal | 22,157 | (18,750 | ) | (34,807 | ) | 8,479 | ||||||||||
Foreign | - | - | 13 | 17 | ||||||||||||
State | (2,921 | ) | (2,124 | ) | (3,424 | ) | (252 | ) | ||||||||
19,236 | (20,874 | ) | (38,218 | ) | 8,244 | |||||||||||
$ | (1,775 | ) | $ | 11,993 | $ | 82,420 | $ | 194,487 |
(In thousands) | 2010 |
| 2009 |
| 2008 | |||
Current: |
|
|
|
|
|
|
|
|
Federal | $ | 273,005 |
| $ | 173,027 |
| $ | 10,489 |
Foreign |
| 1,269 |
|
| 1,465 |
|
| 1,084 |
State |
| 28,062 |
|
| 21,002 |
|
| 1,214 |
|
| 302,336 |
|
| 195,494 |
|
| 12,787 |
Deferred: |
|
|
|
|
|
|
|
|
Federal |
| 42,024 |
|
| 12,412 |
|
| 64,403 |
Foreign |
| - |
|
| (49) |
|
| (3) |
State |
| 12,755 |
|
| 4,817 |
|
| 9,034 |
|
| 54,779 |
|
| 17,180 |
|
| 73,434 |
| $ | 357,115 |
| $ | 212,674 |
| $ | 86,221 |
A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate to income before income taxes is summarized as follows:
(Dollars in thousands) | 2010 | 2009 |
| 2008 |
| |||||||
U.S. federal statutory rate on earnings before income taxes | $ | 344,740 | 35.0 | % | $ |
193,241 | 35.0 | % | $ | 68,041 | 35.0 | % |
State income taxes, net of federal income tax benefit |
| 26,877 | 2.7 |
| 18,375 | 3.3 |
|
| 5,361 | 2.8 |
| |
Jobs credits, net of federal income taxes |
| (8,845) | (0.9) |
|
| (8,590) | (1.6) |
|
| (9,149) | (4.7) |
|
Increase (decrease) in valuation allowances |
| (1,003) | (0.1) |
|
| (1,722) | (0.3) |
|
| 3,038 | 1.6 |
|
Income tax related interest expense (benefit), net of federal income taxes | (5,004) | (0.5) |
|
| 1,289 | 0.2 |
|
| (2,015) | (1.0) |
| |
Nondeductible Merger-related lawsuit settlement |
| - | - |
|
| (366) | (0.1) |
|
| 18,130 | 9.3 |
|
Other, net | 350 | 0.1 |
| 10,447 | 2.0 |
|
| 2,815 | 1.4 |
| ||
| $ | 357,115 | 36.3 | % | $ | 212,674 | 38.5 | % | $ | 86,221 | 44.4 | % |
Successor | Predecessor | |||||||||||||||||||||||||||||||
(Dollars in thousands) | July 7, 2007 to February 1, 2008 | February 3, 2007 to July 6, 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||
U.S. federal statutory rate on earnings before income taxes | $ | (2,308 | ) | 35.0 | % | $ | 1,399 | 35.0 | % | $ | 77,127 | 35.0 | % | $ | 190,625 | 35.0 | % | |||||||||||||||
State income taxes, net of federal income tax benefit | 904 | (13.7 | ) | (1,135 | ) | (28.4 | ) | 5,855 | 2.7 | 6,223 | 1.1 | |||||||||||||||||||||
Jobs credits, net of federal income taxes | (3,022 | ) | 45.8 | (2,227 | ) | (55.7 | ) | (5,008 | ) | (2.3 | ) | (4,503 | ) | (0.8 | ) | |||||||||||||||||
Increase (decrease) in valuation allowances | - | - | 551 | 13.8 | 3,211 | 1.5 | (88 | ) | (0.0 | ) | ||||||||||||||||||||||
Income tax related interest expense, net of federal income tax benefit | 2,738 | (41.5 | ) | (172 | ) | (4.3 | ) | - | - | - | - | |||||||||||||||||||||
Nondeductible transaction costs | - | - | 13,501 | 337.9 | - | - | - | - | ||||||||||||||||||||||||
Other, net | (87 | ) | 1.3 | 76 | 1.9 | 1,235 | 0.5 | 2,230 | 0.4 | |||||||||||||||||||||||
$ | (1,775 | ) | 26.9 | % | $ | 11,993 | 300.2 | % | $ | 82,420 | 37.4 | % | $ | 194,487 | 35.7 | % |
The 2010 effective tax rate is an expense of 36.3%. This expense is greater than the expected tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 2010 effective rate is less than the 2009 rate of 38.5% due principally to reductions in state income tax expense, income tax related interest expense and other expense items. The 2010 effective resolution of various examinations by the taxing authorities, when combined with unfavorable examination results in 2009, resulted in a decrease in the year-to-year state income tax expense rate (net of federal income tax expense) of approximately 1.8%. This decrease in state income tax expense was partially offset by an increase in state income tax expense due to a shift in income to companies within the group that have a higher effective state income tax rate. In addition, income tax related interest accruals and income tax related penalty accruals (with the penalty accruals being included in Other, net) were also reduced due to favorable income tax examination results, thereby resulting in a decrease in income tax related interest expense and a decrease in Other income tax expense. Additional decreases in Other, net items occurred due to favorable outcomes in 2010 associated with the completion of a federal income tax examination and reductions in expense associated with uncertain tax benefit accruals.
The 2009 effective tax rate is an expense of 38.5%. This expense is greater than the expected tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The 2009 effective tax rate is less than the 2008 rate of 44.4% due principally to the unfavorable impact that the non-deductible, Merger-related lawsuit settlement had on the 2008 rate. This reduction in the effective tax rate was partially offset by a decrease in the tax rate benefit related to federal jobs credits. While the total amount of jobs credits earned in 2009 was similar to the amount earned in 2008, the impact of this benefit on the effective tax rate was reduced due to the 2009 increase in income before tax. The 2009 rate was also increased by accruals associated with uncertain tax benefits, which are included in Other, net.
The 2008 effective income tax rate for the Successor period ended February 1, 2008 is a benefitan expense of 26.9%44.4%. This benefitexpense is lessgreater than the expected U.S. statutory tax rate of 35% principally due to the incurrence of state income taxes in several of the group’s subsidiaries that file their state income tax returns on a separate entity basis and the election to include, effective February 3, 2007, income tax related interest and penalties in the amount reported as income tax expense.
83
Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
(In thousands) | January 28, |
|
| January 29, |
| |
Deferred tax assets: |
|
|
|
|
|
|
Deferred compensation expense | $ | 6,653 |
| $ | 7,214 |
|
Accrued expenses and other |
| 4,798 |
|
| 4,223 |
|
Accrued rent |
| 8,581 |
|
| 5,329 |
|
Accrued insurance |
| 67,634 |
|
| 67,124 |
|
Accrued bonuses |
| 20,116 |
|
| 26,112 |
|
Interest rate hedges |
| 13,650 |
|
| 22,249 |
|
Tax benefit of income tax and interest reserves related to |
| 2,520 |
|
| 9,498 |
|
Other |
| 16,321 |
|
| 15,399 |
|
State tax net operating loss carryforwards, net of federal tax |
| 4,697 |
|
| 7,000 |
|
State tax credit carryforwards, net of federal tax |
| 12,511 |
|
| 15,696 |
|
|
| 157,481 |
|
| 179,844 |
|
Less valuation allowances |
| (7,083 | ) |
| (8,086 | ) |
Total deferred tax assets |
| 150,398 |
|
| 171,758 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
Property and equipment |
| (222,757 | ) |
| (177,171 | ) |
Inventories |
| (68,314 | ) |
| (66,002 | ) |
Trademarks |
| (435,543 | ) |
| (435,336 | ) |
Amortizable assets |
| (21,288 | ) |
| (31,724 | ) |
Insurance related tax method change |
| (14,844 | ) |
| (30,059 | ) |
Bonus related tax method change |
| (19,520 | ) |
| - |
|
Other |
| (3,551 | ) |
| (2,699 | ) |
Total deferred tax liabilities |
| (785,817 | ) |
| (742,991 | ) |
Net deferred tax liabilities | $ | (635,419 | ) | $ | (571,233 | ) |
(In thousands) | Successor February 1, 2008 | Predecessor February 2, 2007 | |||
Deferred tax assets: | |||||
Deferred compensation expense | $ | 6,354 | $ | 10,090 | |
Accrued expenses and other | 4,379 | 4,037 | |||
Accrued rent | 5,909 | 10,487 | |||
Accrued insurance | 61,887 | 9,899 | |||
Deferred gain on sale/leasebacks | - | 2,312 | |||
Inventories | - | 5,874 | |||
Interest rate hedges | 30,891 | - | |||
Tax benefit of FIN 48 income tax and interest reserves | 16,209 | - | |||
Other | 9,947 | 4,609 | |||
State tax net operating loss carryforwards, net of federal tax | 10,342 | 4,004 | |||
State tax credit carryforwards, net of federal tax | 8,727 | 8,604 | |||
154,645 | 59,916 | ||||
Less valuation allowances | (1,560) | (5,249) | |||
Total deferred tax assets | 153,085 | 54,667 | |||
Deferred tax liabilities: | |||||
Property and equipment | (108,675) | (71,465) | |||
Inventories | (20,291) | - | |||
Trademarks | (428,627) | - | |||
Amortizable assets | (64,419) | - | |||
Other | (501) | (478) | |||
Total deferred tax liabilities | (622,513) | (71,943) | |||
Net deferred tax liabilities | $ | (469,428) | $ | (17,276) |
Net deferred tax liabilities are reflected separately on the consolidated balance sheets as current and noncurrent deferred income taxes. The following table summarizes net deferred tax liabilities as recorded in the consolidated balance sheets:
(In thousands) | Successor February 1, 2008 | Predecessor February 2, 2007 | ||||||
Current deferred income tax assets, net | $ | 17,297 | $ | 24,321 | ||||
Noncurrent deferred income tax liabilities, net | (486,725 | ) | (41,597 | ) | ||||
Net deferred tax liabilities | $ | (469,428 | ) | $ | (17,276 | ) |
(In thousands) | January 28, |
| January 29, 2010 | ||
Current deferred income tax liabilities, net | $ | (36,854) |
| $ | (25,061) |
Noncurrent deferred income tax liabilities, net |
| (598,565) |
|
| (546,172) |
Net deferred tax liabilities | $ | (635,419) |
| $ | (571,233) |
The Company has a federal net operating loss carryforward as of February 1, 2008 of approximately $44.5 million which will expire in 2027. The Company also has state net operating loss carryforwards as of January 28, 2011 that total approximately $261.1$136.7 million andwhich will expire beginning in 20122022 through 2027 and2029. The Company also has state tax credit carryforwards of approximately $13.4$19.2 million that will expire beginning in 20082011 through 2027.
The valuation allowance has been provided principally for state tax credit carryforwards.carryforwards and federal capital losses. The full amount2010 and 2009 decreases of the change$1.0 and $1.7 million, respectively, were recorded as a reduction in the valuation allowance for the 2007 Successor period, a decreaseincome tax expense. The 2008 increase of $4.2$8.2 million was recorded
84
as income tax expense of $3.0 million and an adjustment to goodwill. The increasegoodwill of $0.6 million in the Predecessor period ended July 6, 2007, the increase of $3.2 million in 2006 and the decrease of $0.1 million in 2005 were included in income tax expense for the respective periods.$5.2 million. Based upon expected future income, and available tax planning strategies, management believes that it is more likely than not that the results of operations will generate sufficient taxable income
The Predecessor adopted the provisions of FIN 48 effective February 3, 2007. The adoption resulted in an $8.9 million decrease in retained earnings and a reclassification of certain amounts between deferred income taxes and other noncurrent liabilities to conform to the balance sheet presentation requirements of FIN 48. As of the date of adoption, the total reserve for uncertain tax benefits was $77.9 million. This reserve excludes the federal income tax benefit for the uncertain tax positions related to state income taxes, which is now included in deferred tax assets. As a result of the adoption of FIN 48, the reserve for interest expense related to income taxes was increased to $15.3 million and a reserve for potential penalties of $1.9 million related to uncertain income tax positions was recorded.
As of February 1, 2008, the total reservesJanuary 28, 2011, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $96.6$26.4 million, $19.7$1.9 million and $1.5$0.5 million, respectively, for a total of $117.8$28.8 million. Of this amount, $23.2$0.2 million and $78.3$27.3 million are reflected in current liabilities as accruedAccrued expenses and other and in other noncurrent Other liabilities, respectively, in the consolidated balance sheet with the remaining $16.3$1.3 million reducing deferred tax assets related to net operating loss carry forwards.
As of adoption, through the end of the Predecessor period ended July 6, 2007 in the reservesJanuary 29, 2010, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties that impactedwere $67.6 million, $8.8 million and $1.7 million, respectively, for a total of $78.1 million. Of this amount, $8.5 million and $68.0 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the consolidated statement of operations was a net increase of $10.4balance sheet with the remaining $1.6 million and $0.2 million and a decrease of $0.4 million, respectively. The change, from the end of the Predecessor period ended July 6, 2007, through the end of the Successor period ended February 1, 2008, in the reserves for uncertainreducing deferred tax benefits and interest expenseassets related to income taxes that impacted the consolidated statement of operations was a net increase of $0.2 million and $4.2 million, respectively. There was no change in the reserve for potential income tax penalties during the Successor period.
The Company believes that it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $64.8$1.4 million in the coming twelve months principally as a result of the settlement of currently ongoing state income tax examinations and the anticipated filing of an income tax accounting method change request that is expected to resolve certain uncertainties related to accounting methods employed by the Company.examinations. The reasonably possible change of $64.8$1.4 million is included in both current liabilities in Accrued expenses and other ($21.20.2 million) and otherin noncurrent Other liabilities ($43.61.2 million) in the consolidated balance sheet as of February 1, 2008.January 28, 2011. Also, as of February 1, 2008 (after the merger and the related application of purchase accounting),January 28, 2011, approximately $0.3$26.4 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.
The consolidated statements of income for the respective years reflected below include the following amounts:
(In thousands) | 2010 | 2009 | 2008 |
| |||||
Income tax expense (benefit) | $ | (12,000 | ) | $ | 11,900 |
| $ | 800 |
|
Income tax related interest expense (benefit) |
| (5,800 | ) |
| 2,300 |
|
| (1,000 | ) |
Income tax related penalty expense (benefit) |
| (700 | ) |
| 400 |
|
| 300 |
|
85
A reconciliation of the reserve associated with uncertain income tax positions from February 3, 2007 (the date of adoption)1, 2008 through February 1, 2008January 28, 2011 is as follows:
(In thousands) | 2010 | 2009 | 2008 |
| |||||
Beginning balance | $ | 67,636 |
| $ | 59,057 |
| $ | 96,600 |
|
Increases – tax positions taken in the current year |
| 125 |
|
| 13,701 |
|
| 25,977 |
|
Decreases – tax positions taken in the current year |
| - |
|
| - |
|
| (2,250 | ) |
Increases – tax positions taken in prior years |
| - |
|
| 4,039 |
|
| 3,271 |
|
Decreases – tax positions taken in prior years |
| (36,973 | ) |
| (1,111 | ) |
| (58,607 | ) |
Statute expirations |
| (1,570 | ) |
| - |
|
| (1,955 | ) |
Settlements |
| (2,789 | ) |
| (8,050 | ) |
| (3,979 | ) |
|
|
|
|
|
|
|
|
|
|
Ending balance | $ | 26,429 |
| $ | 67,636 |
| $ | 59,057 |
|
(In thousands) | ||
Balance as of February 3, 2007 | $ | 77,864 |
Increases – tax positions taken in the current year | 19,568 | |
Increases – tax positions taken in prior years | 1,149 | |
Decrease – tax positions taken in prior years | (9) | |
Statute expirations | (185) | |
Settlements | (1,787) | |
Balance as of February 1, 2008 | $ | 96,600 |
7.
Current and long-term obligations
Current and long-term obligations consist of the following:
Successor | Predecessor | |||||||
(In thousands) | February 1, 2008 | February 2, 2007 | ||||||
Senior secured term loan facility | $ | 2,300,000 | $ | - | ||||
Senior secured asset-based revolving credit facility | 102,500 | - | ||||||
10 5/8% Senior Notes due July 15, 2015, net of discount of $22,083 | 1,152,917 | - | ||||||
11 7/8/12 5/8% Senior Subordinated Notes due July 15, 2017 | 700,000 | - | ||||||
8 5/8% Notes due June 15, 2010, net of discount of $- and $146, respectively | 1,822 | 199,832 | ||||||
Capital lease obligations | 10,268 | 55,711 | ||||||
Tax increment financing due February 1, 2035 | 14,495 | 14,495 | ||||||
4,282,002 | 270,038 | |||||||
Less: current portion | (3,246 | ) | (8,080 | ) | ||||
Long-term portion | $ | 4,278,756 | $ | 261,958 |
(In thousands) | January 28, 2011 |
| January 29, 2010 | |||
Senior secured term loan facility | $ | 1,963,500 |
| $ | 1,963,500 |
|
ABL Facility |
| - |
|
| - |
|
10 5/8% Senior Notes due July 15, 2015, net of discount of |
| 853,172 |
|
| 964,545 |
|
11 7/8/12 5/8% Senior Subordinated Notes due July 15, 2017 |
| 450,697 |
|
| 450,697 |
|
8 5/8% Notes due June 15, 2010 |
| - |
|
| 1,822 |
|
Capital lease obligations |
| 6,363 |
|
| 8,327 |
|
Tax increment financing due February 1, 2035 |
| 14,495 |
|
| 14,495 |
|
|
| 3,288,227 |
|
| 3,403,386 |
|
Less: current portion |
| (1,157) |
|
| (3,671) |
|
Long-term portion | $ | 3,287,070 |
| $ | 3,399,715 |
|
The Company entered into two senior secured credit agreements (the “New Credit“Credit Facilities”). The New at the time of the Merger. As of January 28, 2011, the Credit Facilities provide total financing of $3,425.0 million,$2.995 billion, consisting of $2,300.0 million$1.964 billion in a senior secured term loan facility (“Term Loan Facility”) which matures on July 6, 2014, and a senior secured asset-based revolving credit facility (“ABL Facility”) of up to $1,125.0 million,$1.031 billion, subject to borrowing base availability, which matures on July 6, 2013.
The amount from time to time available under the senior secured asset-based revolving credit facilityABL Facility (including in respect ofup to $350.0 million for letters of credit) may not exceed the borrowing base (consisting of specified percentages of eligible inventory and credit card receivables less any applicable availability reserves). The senior secured asset-based revolving credit facilityABL Facility includes a $1.0 billion$930.0 million tranche and a $125.0$101.0 million (“last out”) tranche. Repayments of the senior secured asset-based revolving credit facilityABL Facility will be applied to the $125.0$101.0 million tranche only after all other tranches have been fully paid down. As of February 1, 2008, the Company had borrowed $102.5 million under the “last out” tranche.
Borrowings under the New Credit Facilities bear interest at a rate equal to an applicable margin plus, at the Company’s option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable margin for borrowings is (i) under the term loan facility,Term Loan, 2.75% with respect tofor LIBOR borrowings and 1.75% with respect tofor base-rate borrowings and (ii) as of February 1, 2008, under the asset-based revolving credit facilityABL Facility (except in the last out tranche described above), 1.50% with respect to as of January 28, 2011 and January 29, 2010, 1.25% for
86
LIBOR borrowings and 0.50% with respect to0.25% for base-rate borrowings and for any last out borrowings, 2.25% with respect tofor LIBOR borrowings and 1.25% with respect tofor base-rate borrowings. The applicable margins for borrowings under the asset-based revolving credit facilityABL Facility (except in the case of last out borrowings) are subject to adjustment each quarter based on average daily excess availability under the asset-based revolving credit facility. As of February 1, 2008, the average interest rate for borrowings under the revolving credit facility was 6.35%.ABL Facility. The interest rate for borrowings under the term loan facilityTerm Loan Facility was 6.22%3.0% (without giving effect to the interest rate swapswaps discussed in Note 1)8) as of February 1, 2008.
In addition to paying interest on outstanding principal under the New Credit Facilities, the Company is required to pay a commitment fee to the lenders under the asset-based revolving credit facility in respect of theABL Facility for any unutilized commitments thereunder.commitments. The commitment fee rate wasis 0.375% per annum. The commitment fee rate will be reduced (except with regard to the last out tranche) to 0.25% per annum at any time that the unutilized commitments under the asset-based credit facilityABL Facility are equal to or less than 50% of the aggregate commitments under the asset-based revolving credit facility.ABL Facility. The Company also must pay customary letter of credit fees.
The senior secured credit agreement for the term loan facilityTerm Loan Facility requires the Company to prepay outstanding term loans, subject to certain exceptions, with percentages of excess cash flow, proceeds of non-ordinary course asset sales or dispositions of property, and proceeds of incurrences of certain debt. In addition, the senior secured credit agreement for the asset-based revolving credit facilityABL Facility requires the Company to prepay the asset-based revolving credit facility,ABL Facility, subject to certain exceptions, with proceeds of non-ordinary course asset sales or dispositions of property and any borrowings in excess of the then current borrowing base. The Term Loan Facility can be prepaid in whole or in part at any time.
Beginning September 30, 2009, the Company iswas required to repay installments on the loans under the term loan credit
All obligations under the New Credit Facilities are unconditionally guaranteed by substantially all of the Company’s existing and future domestic subsidiaries (excluding certain immaterial subsidiaries and certain subsidiaries designated by the Company under the New Credit Facilities as “unrestricted subsidiaries”).
All obligations and guarantees of those obligations under the term loan credit facilityTerm Loan Facility are secured by, subject to certain exceptions, a second-priority security interest in all existing and after-acquired inventory and accounts receivable; a first priority security interest in substantially all of the Company’s and the guarantors’ tangible and intangible assets (other than the inventory and accounts receivable collateral just described)collateral); and a first-priority pledge of the capital stock held by the Company. All obligations under the asset-based revolving credit facilityABL Facility are secured by all existing and after-acquireafter-acquired inventory and accounts receivable, subject to certain exceptions.
87
The New Credit Facilities contain certain covenants, including, among other things, covenants that limit the Company’s ability to incur additional indebtedness, sell assets, incur additional liens, pay dividends, make investments or acquisitions, or repay certain indebtedness.
Under the ABL facility, for the years ended January 28, 2011 and January 29, 2010, the Company had no borrowings or repayments; for the year ended January 30, 2009, the Company had no borrowings and repayments of $102.5 million. As of January 28, 2011 and January 29, 2010, respectively, amounts outstanding under the ABL Facility included $52.7 million in borrowings, $28.8and $85.1 million of standby letters of credit, and $19.1 million and $15.4 million of commercial letters of credit, and $69.2 million of standby letters of credit outstanding under the asset-based revolving credit facility, withwhile excess availability under that facility of $769.2 million. As of February 1, 2008, the Company had $2,300.0ABL Facility was $959.3 million outstanding under the term loan facility.
On July 6, 2007, in conjunction with the Merger, the Company issued $1,175.0 million$1.175 billion aggregate principal amount of 10.625% senior notes due 2015 (the “senior notes”“Senior Notes”) which were issued net of a discount of $23.2 million and which mature on July 15, 2015 pursuant to an indenture, dated as of July 6, 2007 (the “senior indenture”), and $725 million aggregate principal amount of 11.875%/12.625% senior subordinated toggle notes due 2017 (the “senior subordinated notes”“Senior Subordinated Notes”), which mature on July 15, 2017, pursuant to an indenture, dated as of July 6, 2007 (the “senior subordinated indenture”). The senior notesSenior Notes and the senior subordinated notesSenior Subordinated Notes are collectively referred to herein as the “notes”“Notes”. The senior indenture and the senior subordinated indenture are collectively referred to herein as the “indentures”.
Interest on the notesNotes is payable on January 15 and July 15 of each year, commencing on January 15, 2008.year. Interest on the senior notes will beSenior Notes and Senior Subordinated Notes is payable in cash. Cash interestedinterest on the senior subordinated notes will accrueSenior Subordinated Notes accrues at a rate of 11.875% per annum and PIK interest (as that term is defined below) will accrue at a rate of 12.625% per annum. The initial interest payment on the senior subordinated notes was paid in cash. For certain subsequent interest periods, the Company maypreviously had the ability to elect to pay interest on the senior subordinated notesSenior Subordinated Notes by increasing the principal amount of the senior subordinated notesSenior Subordinated Notes or issuing new senior subordinated notes (“PIK interest”).
The notesNotes are fully and unconditionally guaranteed by each of the existing and future direct or indirect wholly owned domestic subsidiaries that guarantee the obligations under the Company’s New Credit Facilities.
The Company may redeem some or all of the notesNotes at any time at redemption prices described or set forth in the indentures. DuringIn addition, the fourth quarterholders of fiscal 2007, wethe Notes can require the Company to redeem the Notes at 101% of the aggregate principal amount outstanding in the event of certain change in control events.
In May 2010, the Company repurchased $25.0in the open market $50.0 million aggregate principal amount of 10.625% senior notes due 2015 at a price of 111.0% plus accrued and unpaid interest. In September 2010, the Company repurchased in the open market $65.0 million aggregate principal amount of 10.625% senior notes due 2015 at a price of 110.75% plus accrued and unpaid interest. The 2010 repurchases resulted in pretax losses totaling $14.7 million. In connection with the Company’s November 2009 initial public offering, as further discussed in Note 2, the Company repurchased $195.7 million of the 11.875%/12.625% senior subordinated toggle notes due 2017,Senior Notes and $205.2 million of the
88
Senior Subordinated Notes at redemption prices of 110.625% and 111.875%, respectively, plus accrued and unpaid interest, resulting in pretax losses totaling $50.6 million. In January 2009, the Company repurchased $44.1 million of the Senior Subordinated Notes, resulting in a pretax gain of $4.9$3.8 million.
The indentures contain certain covenants, including, among other things, covenants that limit the Company’s ability to incur additional indebtedness, create liens, sell assets, enter into transactions with affiliates, or consolidate or dispose of all of its assets.
Scheduled debt maturities, including capital lease obligations, for the Company’s fiscal years listed below are as follows (in thousands): 2008 - $3,246; 2009 - $13,009; 2010 - $25,171; 2011 - $23,254;$1,157; 2012 - $707; 2013 - $23,272;$292; 2014 - $1,963,815; 2015 - $864,787; thereafter - $4,216,034.
8.
Derivative financial instruments
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the completionamount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined primarily by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Merger,Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
In addition, the Company completedis exposed to certain risks arising from uncertainties of future market values caused by the fluctuation in the prices of commodities. From time to time the Company has entered into derivative financial instruments to protect against future price changes related to transportation costs associated with forecasted distribution of inventory.
Cash flow hedges of interest rate risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate changes. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash tender offerflow hedges is recorded in Accumulated other comprehensive income (loss) (also referred to purchase anyas “OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Subsequent to the Merger, these transactions represent the only amounts reflected in Accumulated other comprehensive income (loss) in the
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consolidated statements of shareholders’ equity. During the year ended January 28, 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
As of January 28, 2011, the Company had three interest rate swaps with a combined notional value of $1.05 billion that were designated as cash flow hedges of interest rate risk. Amounts reported in Accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company terminated an interest rate swap in October 2008 due to the bankruptcy declaration of the counterparty bank. The Company continues to report the net gain or loss related to the discontinued cash flow hedge in OCI and such net gain or loss is being reclassified into earnings during the original contractual terms of the swap agreement as the hedged interest payments are expected to occur as forecasted. During the next 52-week period, the Company estimates that an additional $27.2 million will be reclassified as an increase to interest expense for all of its $200 million principal amountinterest rate swaps.
Non-designated hedges of 8 5/8% Notes due June 2010 (the “2010 Notes”). Approximately 99%commodity risk
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet strict hedge accounting requirements. In February 2009, the Company entered into a commodity hedge related to diesel fuel to limit its exposure to variability in diesel fuel prices and their effect on transportation costs. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of January 28, 2011, the 2010 Notes were validly tendered and accepted for payment. Company had no outstanding commodity hedges. During 2009, the Company entered into one diesel fuel commodity swap hedging monthly usage of diesel fuel that was not designated as a hedge in a qualifying hedging relationship, which expired prior to January 29, 2010.
The tender offer included a consent payment equal to 3% oftable below presents the parfair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of January 28, 2011 and January 29, 2010 Notes,(in thousands):
Tabular Disclosure of Fair Values of Derivative Instruments | ||||||||
|
|
| ||||||
| Asset Derivatives | Liability Derivatives | ||||||
| Balance Sheet |
| Fair Value | Balance Sheet |
| Fair Value | ||
Derivatives designated as hedging |
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|
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|
|
Interest rate swaps: |
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|
|
|
|
|
|
As of January 28, 2011 |
|
|
|
| Other liabilities |
| $ | 34,923 |
As of January 29, 2010 |
|
|
|
| Other liabilities |
| $ | 57,058 |
The tables below present the pre-tax effect of the Company’s derivative financial instruments on the consolidated statement of operations (including OCI) for the years ended January 28, 2011 and such payments alongJanuary 29, 2010:
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations | |||||||||||
| |||||||||||
Derivatives in |
| Amount of | Location of Gain or |
| Amount of | Location of Gain or |
| Amount of (Gain) | |||
Interest rate swaps |
| $ | 42,324 | Interest expense |
| $ | 50,140 | Other (income) |
| $ | 618 |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging | Location of Gain or |
| Amount of |
|
|
|
| ||||
Commodity hedges | Other (income) |
| $ | (341) |
|
|
|
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Credit-risk-related contingent features
The Company has agreements with associated settlement costs totaling $6.2 million were paid and reflected asall of its interest rate swap counterparties that contain a loss on debt retirement in the 2007 Successor period presented. Additionally, becauseprovision providing that the Company receivedcould be declared in default on its derivative obligations if repayment of the requisite consentsunderlying indebtedness is accelerated by the lender due to the proposed amendmentsCompany's default on such indebtedness.
As of January 28, 2011, the fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $44.0 million. If the Company had breached any of these provisions at January 28, 2011, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value equal to the indenture pursuant to which the 2010 Notes were issued, a supplemental indenture to effect such amendments was executed and delivered. The amendments, which eliminated substantially allfair value of the restrictive covenants contained in the indenture, became operative upon the purchase of the tendered 2010 Notes.
9.
Commitments and contingencies
Leases
As of January 28, 2011, the Company was committed under capital and operating lease agreements and financing obligations for most of its retail stores, three of its DCs, and certain of its furniture, fixtures and equipment. The majoritystores. Many of the Company’s stores are subject to short-term leases (an average of three to five years) with multiple renewal options when available. The Company also has stores subject to build-to-suit arrangements with landlords which typically carry a primary lease term of 1010-15 years with multiple renewal options. The Company also has stores subject to shorter-term leases (usually with initial or current terms of three to five years), and many of these leases have multiple renewal options. Approximately 44%35% of the leased stores have provisions for contingent rentals based upon a specified percentage of defined sales volume. The Company leases three of its DCs. The land and buildings of two of the DCs are subject to operating lease agreements and the third DC is subject to a financing arrangement. The entities involved in the ownership structure underlying these leases meet the accounting definition of a Variable Interest Entity (“VIE”). The Company is not the primary beneficiary of these VIEs and, accordingly, has not included these entities in its consolidated financial statements. Certain leases contain restrictive covenants. As of February 1, 2008,January 28, 2011, the Company is not aware of any material violations of such covenants, however, there is a degree of uncertainty with regard to the Company’s DC leases as discussed below.
In January 1999, and April 1997, the Company sold its DCsDC located in Ardmore, Oklahoma and South Boston, Virginia, respectively, for 100% cash consideration. Concurrent with the sale transactions,transaction, the Company leased the propertiesproperty back for periodsa period of 23 and 25 years, respectively.years. The transactions weretransaction was recorded as a financing obligationsobligation rather than salesa sale as a result of, among other things, the lessor’s ability to put the propertiesproperty back to the Company under certain circumstances. The property and equipment, along with the related lease obligations,obligation associated with these transactions werethis transaction are recorded in the consolidated balance sheets.
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Future minimum payments as of February 1, 2008January 28, 2011 for capital and operating leases are as follows:
(In thousands) | Capital Leases | Operating Leases | ||||||
2008 | $ | 3,740 | $ | 335,457 | ||||
2009 | 1,909 | 286,490 | ||||||
2010 | 810 | 237,873 | ||||||
2011 | 599 | 198,954 | ||||||
2012 | 599 | 158,464 | ||||||
Thereafter | 6,476 | 396,977 | ||||||
Total minimum payments | 14,133 | $ | 1,614,215 | |||||
Less: imputed interest | (3,865 | ) | ||||||
Present value of net minimum lease payments | 10,268 | |||||||
Less: current portion, net | (3,246 | ) | ||||||
Long-term portion | $ | 7,022 |
(In thousands) | Capital Leases |
| Operating Leases | ||||||
2011 | $ | 1,535 |
| $ | 481,921 |
| |||
2012 |
| 1,040 |
|
| 444,804 |
| |||
2013 |
| 599 |
|
| 394,781 |
| |||
2014 |
| 602 |
|
| 338,781 |
| |||
2015 |
| 627 |
|
| 275,299 |
| |||
Thereafter |
| 4,609 |
|
| 1,067,756 |
| |||
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| |||
Total minimum payments |
| 9,012 |
| $ | 3,003,342 |
| |||
Less: imputed interest |
| (2,649) |
|
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|
| |||
Present value of net minimum lease payments |
| 6,363 |
|
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|
| |||
Less: current portion, net |
| (1,157) |
|
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|
| |||
Long-term portion | $ | 5,206 |
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|
|
|
Capital leases were discounted at an effective interest rate of approximately 5.43%6.3% at February 1, 2008.January 28, 2011. The gross amount of property and equipment recorded under capital leases and financing obligations at February 1, 2008January 28, 2011 and February 2, 2007,at January 29, 2010, was $33.5$31.0 million and $85.1$34.8 million, respectively. Accumulated depreciation on property and equipment under capital leases and financing obligations at February 1, 2008January 28, 2011 and February 2, 2007,January 29, 2010, was $2.7$7.4 million and $41.0$6.9 million, respectively.
Rent expense under all operating leases is as follows:
Successor | Predecessor | ||||||||||||||||
(In thousands) | July 7, 2007 through February 1, 2008 | February 3, 2007 through July 6, 2007 | 2006 | 2005 | |||||||||||||
Minimum rentals (a) | $ | 205,672 | $ | 143,188 | $ | 327,911 | $ | 295,061 | |||||||||
Contingent rentals | 8,780 | 6,964 | 16,029 | 17,245 | |||||||||||||
$ | 214,452 | $ | 150,152 | $ | 343,940 | $ | 312,306 | ||||||||||
(In thousands) | 2010 |
| 2009 |
| 2008 | |||
Minimum rentals (a) | $ | 471,402 |
| $ | 407,379 |
| $ | 370,827 |
Contingent rentals |
| 17,882 |
|
| 21,248 |
|
| 18,796 |
| $ | 489,284 |
| $ | 428,627 |
| $ | 389,623 |
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(a) Excludes amortization of leasehold interests of $25.7 million, $37.2 million and $40.9 million included in rent expense for the years ended January 28, 2011, January 29, 2010 and January 30, 2009, respectively. |
Legal proceedings
On August 7, 2006, a lawsuit entitled Cynthia Richter, et al. v. Dolgencorp, Inc., et al. was filed in the United States District Court for the Northern District of Alabama (Case No. 7:06-cv-01537-LSC) (“Richter”) in which the plaintiff alleges that she and other current and former Dollar General store managers were improperly classified as exempt executive employees under the FLSAFair Labor Standards Act (“FLSA”) and seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs. On August 15, 2006, the Richter plaintiff filed a motion in which she asked the court to certify a nationwide
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opted into the class has not been determined, andlawsuit. In September 2010, the court has not approved the Noticeentered a scheduling order that will be sent to the class.
On July 20, 2010, a lawsuit was filed in the judicial district in which the Richter matter is pending in the Eleventh Circuit involving claimswhich a former store manager made allegations substantially similar to those raised in this action. That stay has been extended through June 30, 2008. DuringRichter and sought to represent a nationwide class of current and former store managers (Lisa Beard v. Dollar General Corporation, et al., Case No. 7:10-cv-01956-SLB). The plaintiff in Beard seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs. On March 4, 2011, the stay, the statute of limitations will be tolled for potentialBeard plaintiff moved to amend her complaint to strike all class members. At its conclusion,allegations and notified the court will determine whetherof her withdrawal of the consent forms previously filed by approximately 95 opt-in plaintiffs. The plaintiff’s motion to extendamend was granted on March 7, 2011, which had the stay or to permit thiseffect of rendering the Beard action to proceed.a single-plaintiff case. If the court ultimately permits Notice to issue,case remains a single-plaintiff case, it is extremely unlikely that the Company willcase could have an opportunity ata material impact on the close of the discovery period to seek decertification of the class, and the Company expects to file suchCompany’s financial statements as a motion.
The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that thisthe Richter action is not appropriate for collective action treatment. The Company has obtained summary judgment in some, although not all, of its pending individual or single-plaintiff store manager exemption cases in which it has filed such a motion.
The Company intends to vigorously defend this action.the Richter and Beard matters. However, at this time, it is not possible to predict whether the courtRichter ultimately will permit this actionbe permitted to proceed collectively, and no assurances can be given that the Company will be successful in the defense of either action on the merits or otherwise. IfSimilarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted in Richter. For these reasons, the Company is unable to estimate any potential loss or range of loss in that action; however, if the Company is not successful in its defense efforts, to defend this action, the resolution of the Richter action could have a material adverse effect on the Company’s financial statements as a whole.
On May 18, 2006, the Company was served with a lawsuit entitled Tammy Brickey, Becky Norman, Rose Rochow, Sandra Cogswell and Melinda Sappington v. Dolgencorp, Inc. and Dollar General Corporation (Western District of New York, Case No. 6:06-cv-06084-DGL, originally filed on February 9, 2006 and amended on May 12, 2006 (“Brickey”)). The Brickey plaintiffs seek to proceed collectively under the FLSA and as a class under New York, Ohio, Maryland and North Carolina wage and hour statutes on behalf of, among others, assistant store managers who claim to be owed wages (including overtime wages) under those statutes. At this time, it is not possible to predict whetherOn February 22, 2011, the court will permit this actiondenied the plaintiffs’ class certification motion in its entirety and ordered that the matter proceed only as to proceed collectively orthe named plaintiffs. To date, the plaintiffs have not appealed that order. If the case proceeds only as a class. However,to the named plaintiffs, the Company believes that this action isdoes not appropriate for either collective or class treatment and thatexpect the Company’s wage and hour policies and practices comply with both federal and state law. The Company plansoutcome to vigorously defend this action; however, no assurances can be given that the Company will be successful in the defense on the merits or otherwise, and, if it is not successful, the resolution of this action could have a material adverse effect on the Company’sto its financial statements as a whole.
On March 7, 2006, a complaint was filed in the United States District Court for the Northern District of Alabama (Janet Calvert v. Dolgencorp, Inc., Case No. 2:06-cv-00465-VEH
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(“Calvert”)), in which the plaintiff, a former store manager, alleged that she was paid less than male store managers because of her sex, in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964, as amended (“Title VII”). The complaint subsequently was amended to include additional plaintiffs, who also allege to have been paid less than males because of their sex, and to add allegations that the Company’s compensation practices disparately impactedimpact females. Under the amended complaint, Plaintiffs seek to proceed collectively under the Equal Pay Act and as a class under Title VII, and request back wages, injunctive and declaratory relief, liquidated damages, punitive damages and attorney’sattorneys’ fees and costs.
On July 9, 2007, the plaintiffs filed a motion in which they asked the court to approve the issuance of notice to a class of current and former female store managers under the Equal Pay Act. The Company opposed plaintiffs’ motion. On November 30, 2007, the court conditionally certified a nationwide class of females under the Equal Pay Act who worked for Dollar General as store managers between November 30, 2004 and November 30, 2007. The notice was issued on January 11, 2008, and persons to whom the notice was sent were required to opt into the suit by March 11, 2008. Approximately 2,100 individuals have opted into the lawsuit.
On April 19, 2010, the plaintiffs moved for class certification relating to their Title VII claims. The Company will have an opportunity atfiled its response to the close ofcertification motion in June 2010. Briefing has closed, and the discovery periodparties are awaiting a ruling. The Company’s motion to seek decertification ofdecertify the Equal Pay Act class and thewas denied as premature. The Company expects to file such motion.
The parties have agreed to mediate this action, and the mediation is scheduled to begin on March 24, 2011. The court has stayed the action during the period in which the parties attempt to resolve the matter.
The Company has tendered the matter to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy. At this time, the Company expects that the EPLI carrier will participate in any resolution of some or all of the plaintiffs’ claims.
At this time, it is not possible to predict whether the court ultimately will permit the Calvert action to proceed collectively under the Equal Pay Act or as a class under the Title VII. However,Although the Company believes that the case is not appropriate for class or collective treatment and that its policies and practices comply with the Equal Pay Act and Title VII. The Company intends to vigorously defend the action;action, no assurances can be given that it will be successful in the defense on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims raised in this action. For these reasons, the Company is unable to estimate any potential loss or range of loss; however, if the Company is not successful in defending this action, its resolution could have a material adverse effect on the Company’s financial statements as a whole.
On June 16, 2010, a lawsuit entitled Shaleka Gross, et al v. Dollar General Corporation was filed in the United States District Court for the Southern District of Mississippi (Civil Action No. 3:10CV340WHB-LR) in which three former non-exempt store employees, on behalf of themselves and certain other non-exempt Dollar General store employees, alleged that they were not paid for all hours worked in violation of the FLSA. Specifically, plaintiffs alleged that they were not properly paid for certain breaks and sought back wages (including overtime wages), liquidated damages and attorneys’ fees and costs.
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Before the Company was served with the Gross complaint, the plaintiffs dismissed the action and re-filed it in the United States District Court for the Northern District of Mississippi, now captioned as Cynthia Walker, et al. v. Dollar General Corporation, et al. (Civil Action No. 4:10-CV119-P-S). The Walker complaint was filed on September 16, 2010, and although it adds approximately eight additional plaintiffs, it adds no substantive allegations beyond those alleged in the Gross complaint. The Company filed a motion to transfer the case back to the Southern District of Mississippi and a motion to dismiss for lack of personal jurisdiction over two corporate defendants and for failure to state a claim as to Dollar General Corporation, all of which are pending. The court stayed the matter pending resolution of the motion to dismiss. To date, no other individuals have opted into the Walker matter, and the plaintiffs have not asked the court to certify any class.
On August 26, 2010, a lawsuit containing allegations substantially similar to those raised in the Walker matter was filed by a single plaintiff in the United States District Court for the Eastern District of Kentucky (Brenda McCown v. Dollar General Corporation, Case No.210-297 (WOB)). On December 22, 2010, the court entered an order establishing certain deadlines, including the deadline for discovery related to certification issues (June 1, 2011) and for plaintiff’s certification motion, if any (June 30, 2011). No trial date has been set. To date, approximately three other individuals have opted into the McCown matter. The plaintiff has not asked the court to certify any class.
At this time, it is not possible to predict whether the courts will permit the Walker or McCown actions to proceed collectively. However, the Company believes that those actions are not appropriate for collective treatment and that its wage and hour policies and practices comply with both federal and state law. Although the Company plans to vigorously defend Walker and McCown, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. IfSimilarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims raised in these actions. For these reasons, the Company is unable to estimate any potential loss or range of loss; however if the Company is not successful in defendingits defense efforts, the Calvert action, its resolution of either or both of these actions could have a material adverse effect on the Company’s financial statements as a whole.
In October 2008, the Company was served withterminated an action entitled Sheneica Nunn, et al. v. Dollar General Corporation, et al. (Circuit Courtinterest rate swap as a result of the counterparty’s declaration of bankruptcy. This declaration of bankruptcy constituted a default under the contract governing the swap, giving the Company the right to terminate. The Company subsequently settled the swap in November 2008 for Dane County, Wisconsin, Case No. 07CV4178) in whichapproximately $7.6 million, including interest accrued to the plaintiff, on behalfdate of herself andtermination. On May 14, 2010, the Company received a putative classdemand from the counterparty for an additional payment of African-American applicants, allegesapproximately $19 million plus interest, claiming that the Company’s criminal background check process disparately impacts African-Americansvaluation used to calculate the $7.6 million was commercially unreasonable, and seeking to invoke the alternative dispute resolution procedures established by the bankruptcy court. The Company is participating in violation of Title VIIthe alternative dispute resolution procedures because it believes a reasonable settlement would be in the best interest of the Civil Rights ActCompany to avoid the substantial risk and costs of 1964, as amended, and the Wisconsin Fair Employment Act.litigation, but does not believe that additional payment is owed. The Company has removedbelieves the casemethodology it used to federal court,calculate the settlement amount was commercially reasonable and it currently is pending in the United States District Court for the Western District of Wisconsin. At this time, it is not possible to predict whether the court will permit this action to proceed as a class under either Title VII or the Wisconsin statute. However, the Company believes that this action is not appropriate for class treatment and that the Company’s background check policies and practices comply with both federal and state law. The Company plans to vigorously defend this action;appropriate; however, no assurances can be given that the Company will be successful in theits defense on the merits or otherwise, and, if itotherwise. If the Company is successful in its defense,
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no loss will occur. If the Company is not successful or it deems it advisable to resolve the matter prior to trial through the continuing mediation, the resolution of this action could haveresult in a material adverse effect on the Company’s financial statements as a whole.
From time to time, the Company is a party to various other legal actions involving claims incidental to the conduct of its business, including actions by employees, consumers, suppliers, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation, including without limitation under federal and state employment laws and wage and hour laws. The Company believes, based upon information currently available, that such other litigation and claims, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s results of operations, cash flows, or financial position. In addition, certain of these lawsuits, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’s financial position or may negatively affect our operating results if changes to the Company’s business operation are required.
10.
Benefit plans
The Dollar General Corporation 401(k) Savings and Retirement Plan, which became effective on January 1, 1998, is a safe harbor defined contribution plan and is subject to the Employee Retirement and Income Security Act (“ERISA”).
Participants are permitted to contribute between 1% and 25% of their pre-tax annual eligible compensation as defined in the 401(k) plan document, subject to certain limitations under the Internal Revenue Code. Employees who are over age 50 are permitted to contribute additional amounts on a pre-tax basis under the catch-up provision of the 401(k) plan subject to Internal Revenue Code limitations. The Company currently matches employee contributions, including catch-up contributions, at a rate of 100% of employee contributions up to 5% of
A participant’s right to claim a distribution of his or her account balance is dependent on the plan, ERISA guidelines and Internal Revenue Service regulations. All active employeesparticipants are fully vested in all contributions to the 401(k) plan. During the 2007 Successor2010, 2009 and Predecessor periods, 2006 and 2005,2008, the Company expensed approximately $3.0$9.5 million, $4.3 million, $6.4$8.4 million and $5.8$8.0 million, respectively, for matching contributions. The Merger did not significantly impact the comparability of such expense amounts between periods.
The Company also has a nonqualified supplemental retirement plan (“SERP”) and compensation deferral plan (called(“CDP”), known as the Dollar General Corporation CDP/SERP Plan)Plan, for a select group of management and highly compensated employees. The supplemental retirement planSERP is a noncontributory defined contribution plan with annual Company contributions ranging from 2% to 12%10% of base pay plus bonus depending upon age, plus years of service and job grade. Under the compensation deferral plan,CDP, participants may defer up to 65% of base pay and up to 100% of bonus pay. An employee may be designated for participation in one or both of the plans, according to the eligibility
97
requirements of the plans. The Company matches base pay deferrals at a rate of 100% of base pay deferral, up to 5% of annual salary, with annual salary offset by the amount of match-eligible salary in the 401(k) plan. All participants are 100% vested in their compensation deferral planCDP accounts.
The supplemental retirement plan and compensation deferral planCDP/SERP Plan assets are invested at the option of the participant in an account that mirrors the performance of a fund or fundsaccounts selected by the Company’s Compensation Committee or its delegate (the “Mutual Fund Options”) or, priordelegate. Effective August 2, 2008, the deemed fund options under the CDP/SERP Plan were changed to mirror the Merger, in an account that mirroredsame fund options offered under the performance of the Company’s common stock (the “Common Stock Option”). A participant’s compensation deferral401(k) plan and supplemental retirement plan account balances will be paid in accordance with the participant’s election by (a) lump sum, (b) monthly installments over a 5, 10 or 15 year period or (c)which include a combination of lump sumregistered mutual funds and installments. The vested amount will bea collective trust fund.
Vested amounts are payable at the time designated by the plan upon the participant’s termination of employment, disability, death or retirement, except that participants may elect to receive an in-service distribution or an “unforeseeable emergency hardship” distribution of vested amounts credited to the compensation deferralCDP account. Account balances deemed to be invested in the Mutual Fund Options are payable in cash and, prior to the Merger, account balances deemed to be invested in the Common Stock Option were payable in shares of Dollar General common stock and cash in lieu of fractional shares.
Asset balances in the Mutual Funds Optionfund options that mirror the registered mutual funds are stated at fair market value, which is based on quoted market prices. The current portionAsset balances in the collective trust fund are stated at contract value of these balances is included in Prepaid expenses and other current assets and the long term portion is included in Other assets, netunderlying fund assets. These investments are classified as trading securities in the consolidated balance sheets. In accordance with EITF 97-14 “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Heldsheets as further discussed in a Rabbi Trust and Invested,” the Company’s stock was recorded at historical cost and included in Other shareholders’ equity, prior to the Merger. Also, prior to the Merger, the deferred compensation liability related to the Company stock for active plan participants was included in shareholders’ equity and subsequent changes to the fair value of the obligation were not recognized, in accordance with the provisions of EITF 97-14. However, as a result of the Merger, Plan participants no longer have the option of investing in the Company’s stock.Note 1. The deferred compensation liability related to the Mutual Funds Optionfund options is recorded at the fair value of the investments held in the trust. The current portion of these balances is included in Accrued expenses and other and the long term portion is included in Other liabilities in the consolidated balance sheets.
11.
Share-based payments
The Company accounts for share-based payments in accordance with SFAS 123(R).applicable accounting standards. Under SFAS 123(R),these standards, the fair value of each award is separately estimated and amortized into compensation expense over the service period. The fair value of the Company’s stock option grants are estimated on the grant date using the Black-Scholes-Merton valuation model. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.
Prior to the Merger, the Company maintained various share-based compensation programs which included options, restricted stock and restricted stock units. In connection with the Merger, the Company’s outstanding stock options, restricted stock and restricted stock units became fully vested immediately prior to the closing of the Merger and were settled in cash, canceled or, in limited circumstances, exchanged for new options of the Company, as described below. Unless exchanged for new options, each option holder received an amount in cash, without interest and less applicable withholding taxes, equal to $22.00 less the exercise price of each in-the-money option. Additionally, each restricted stock and restricted stock unit holder received $22.00 in cash, without interest and less applicable withholding taxes. Certaincertain stock options held by Company management were exchanged for new options to purchase common stock in the Company (the “Rollover Options”). The exercise price of the Rollover Options and the number of shares of Company common stock underlying the Rollover Options were adjusted as a result of the Merger. The Rollover Options otherwise continue under the terms of the equity plan under which the original options were issued.
On July 6, 2007, the Company’s Board of Directors adopted the 2007 Stock Incentive Plan for Key Employees, (thewhich plan was subsequently amended (as so amended, the “Plan”).
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The Plan provides for the granting of stock options, stock appreciation rights, and other stock-based awards or dividend equivalent rights to key employees, directors, consultants or other persons having a service relationship with the Company, its subsidiaries and certain of its affiliates. The number of shares of Company common stock authorized for grant under the Plan is 24,000,000.31,142,858. No more than 4.5 million shares may be granted to any one Plan participant in the form of stock options and stock appreciation rights in any given fiscal year of the Company, and no more than 1.5 million shares may be granted to any one Plan participant in the form of other stock-based awards in any given fiscal year of the Company. As of February 1, 2008, 3,470,200January 28, 2011, 17,837,497 of such shares are available for future grants.
Since the Successor period ended February 1, 2008,Merger, the Company has granted options under the Plan that vest solely upon the continued employment of the recipient (“Time Options”) as well as options that vest upon the achievement of predetermined annual or cumulative financial-based targets that coincide with(“Performance Options”). Through November 2009, 20% of each of the Time Options and Performance Options generally vest annually over a five-year period. Beginning in December 2009, the Company began granting awards whereby 25% of each of the Time Options and Performance Options generally vest annually over a four-year period. Assuming the financial targets are met, the Performance Options vest as of the Company’s fiscal year (“Performance Options”). According toend, and as a result the award terms, 20% of the Time Options vest on each of the five successive anniversary dates of the merger transaction,initial and 20% of the Performance Options vests at the endfinal tranche of each Performance Option grant is prorated based upon the date of the successive five fiscal years in which the performance target is achieved.grant. In the event the performance target is not achieved in any given year, such optionsannual performance period, the Performance Options for that year willperiod may still subsequently vest, upon the achievement ofprovided that a cumulative performance target.target is achieved. Vesting of the Time Options and Performance Options is also subject to acceleration in the event of an earlier change in control or certain public offering.offerings of the Company’s common stock. Each of these options, whether Time Options or Performance Options have a contractual term of 10 years and an exercise price equal to the fair value of the underlying common stock on the date of grant.
Both the Time Options and the Performance Options are subject to various provisions set forth in a management stockholder’s agreement entered into with each option holder by which the Company may require the employee, upon termination, to sell to the Company any vested options or shares received upon exercise of the Time Options or Performance Options at amounts that differ based upon the reason for the termination. In particular, in the event that the employee resigns “without good reason” (as defined in the management stockholdersstockholder’s agreement), then any options whether or not then exercisable are forfeited and any shares received upon prior exercise of such options are callable at the Company’s option at an amount equal to the lesser of fair value or the amount paid for the shares (i.e., the exercise price). In such
Each of the Company’s management-owned shares, Rollover Options, and vested new options include certain provisions by which the holder of such shares, Rollover Options, or
99
vested new options may require the Company to repurchase such instruments in limited circumstances. Specifically, each such instrument is subject to a repurchaseput right for a period of 365 days after termination due to the death or disability of the holder of the instrument that occurs generally within five years from the closing date of the Merger.grant. In such circumstances, the holder of such instruments may require the Company to repurchase any shares at the fair market value of such shares and any Rollover Options or vested new options at a price equal to the intrinsic value of such rolloverRollover or vested new options. Because the Company does not have control over the circumstances in which it may be required to repurchase the outstanding shares or Rollover Options, such shares and Rollover Options, valued at a fair value and intrinsic value of $6.0$8.8 million and $3.2$0.4 million, respectively, at January 28, 2011, and $14.4 million and $4.1 million, respectively, at January 29, 2010, have been classified as Redeemable common stock in the accompanying consolidated balance sheetsheets as of these dates. The values of these equity instruments are based upon the fair value and intrinsic value, respectively, of the underlying stock and Rollover Options at February 1, 2008.the date of issuance. Because redemption of such shares is uncertain, such shares are not subject to re-measurement until their redemption becomes probable.
Subsequent to the repurchaseMerger, the Company’s Board of Directors adopted an Equity Appreciation Rights Plan, which plan was later amended and restated (as amended and restated, the “Rights Plan”). The Rights Plan provides for the granting of equity appreciation rights upon death or disabilityto nonexecutive managerial employees. In 2009, the Rights Plan was modified such that are common to all management held shares, Rollover Options, andcertain equity appreciation rights vested new options,as a result of the management stockholder’s agreement whichCompany’s initial public offering discussed in Note 2 that otherwise would not have vested. At January 29, 2010, 697,762 equity appreciation rights were outstanding. During 2010, 783,322 equity appreciation rights were granted, 1,406,237 of such rights, affecting 1,028 employees, vested in conjunction with the Company entered into with certain executive officers providesstock offerings, 21,557 of such officers with an additional repurchase right in the event their employment terminates for any reason prior to July 21, 2008. Such executive officers may require the Company to repurchase their outstanding shares and Rollover Options atrights vested as a priceresult of $5 per share in the case of shares and the difference in $5 per share and the exercise price of any Rollover Options that they hold. This repurchase right exists for a period of 365 days following their termination within the required timeframe. As noted above, eachother provisions of the shares, whether held by general membersRights Plan, 53,290 of management or executive officers, has been classified within Redeemable common stock onsuch rights were cancelled and no such rights remain outstanding at January 28, 2011.
For the accompanying consolidated balance sheet as of February 1, 2008. In the case of the Rollover Options held by the executive officers, however, the additional repurchase rights in the event of their termination prior to July 21, 2008 are considered within the control of the employee, and as such, $3.6 million (representing the fixed repurchase price) related to such Rollover Options have been classified in Other (noncurrent) liabilities in the accompanying consolidated balance sheet at February 1, 2008 pursuant to SFAS 123(R).
For the Company had appliedyear ended January 29, 2010, the fair value
For the year ended February 3, 2006. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes-Merton option pricing model for all option grants.
(In thousands) | Year Ended February 3, 2006 | |||
Net income – as reported | $ | 350,155 | ||
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects per SFAS 123 | 32,621 | |||
Net income – pro forma | $ | 317,534 |
100
million ($6.1 million net of tax) of which $8.9 million ($5.4 million net of tax) was reversedrelated to reduce pro forma expense for that year.
The fair value of each option grant is separately estimated by applying the Black-Scholes-Merton option pricing valuation model. The weighted average for key assumptions used in determining the fair value of options granted in the Successor period ended February 1, 2008 and Predecessor period ended July 6, 2007 and years ended February 2, 2007January 28, 2011, January 29, 2010 and February 3, 2006,January 30, 2009, and a summary of the methodology applied to develop each assumption, are as follows:
February 1, 2008 | July 6, 2007 | February 2, 2007 | February 3, 2006 | |||||
Expected dividend yield | 0 | % | 0.91 | % | 0.82 | % | 0.85 | % |
Expected stock price volatility | 41.9 | % | 18.5 | % | 28.8 | % | 27.1 | % |
Weighted average risk-free interest rate | 4.6 | % | 4.5 | % | 4.7 | % | 4.2 | % |
Expected term of options (years) | 7.5 | 5.7 | 5.7 | 5.0 |
| January 28, 2011 | January 29, 2010 | January 30, 2009 | |||
Expected dividend yield | 0 | % | 0 | % | 0 | % |
Expected stock price volatility | 39.1 | % | 41.2 | % | 40.2 | % |
Weighted average risk-free interest rate | 2.8 | % | 2.8 | % | 2.8 | % |
Expected term of options (years) | 7.0 |
| 7.4 |
| 7.4 |
|
Expected dividend yield - This is an estimate of the expected dividend yield on the Company’s stock. Prior to the Merger this estimate was based on historical dividend payment trends. Subsequent to the Merger, theThe Company is subject to limitations on the payment of dividends under its credit facilitiesCredit Facilities as further discussed in Note 6.7. An increase in the dividend yield will decrease compensation expense.
Expected stock price volatility - This is a measure of the amount by which the price of the Company’s common stock has fluctuated or is expected to fluctuate. Prior to the Merger, the Company used actual historical changes in the market price of the Company’s common stock
Weighted average risk-free interest rate - This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
Expected term of options - This is the period of time over which the options granted are expected to remain outstanding. For options issued prior to the Merger, the Company took into consideration that its stock option grants prior to August 2002 were significantly different than grants issued on and after that date, and therefore that the historical and post-vesting employee behavior patterns for grants prior to that date were of little or no value in determining future expectations. As a result, the Company excluded these pre-August 2002 grants from its analysis of expected term. For pre-Merger options, the Company estimated expected term using a computation based on an assumption that outstanding options would be exercised approximately halfway through their contractual term, taking into consideration such factors as grant date, expiration date, weighted-average time-to-vest, actual exercises and post-vesting cancellations. Options granted have a maximum term of 10 years. Due to the absence ofrelatively limited historical data for grants issued subsequent to the Merger, the Company has estimated the expected term as the mid-point between the vesting date and the contractual term of the option. An increase in the expected term will increase compensation expense.
At January 28, 2011, 53,434 Rollover Options were outstanding, all of which were exercisable. The aggregate intrinsic value of these outstanding Rollover Options was $1.4 million with a weighted average remaining contractual term of 4.3 years, and a weighted average exercise price of $2.1875.
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A summary of Time Options activity during the period ended January 28, 2011 is as follows:
(Intrinsic value amounts reflected in thousands) | Options | Average Exercise Price | Remaining Contractual Term in Years | Intrinsic | ||||||||
Balance, January 29, 2010 |
| 6,123,052 |
| $ | 8.68 |
|
|
|
|
|
|
|
Granted |
| 348,784 |
|
| 27.39 |
|
|
|
|
|
|
|
Exercised |
| (342,293) |
|
| 8.15 |
|
|
|
|
|
|
|
Canceled |
| (351,412) |
|
| 10.53 |
|
|
|
|
|
|
|
Balance, January 28, 2011 |
| 5,778,131 |
| $ | 9.73 |
|
| 7.3 |
| $ | 108,104 |
|
Vested or expected to vest at January 28, 2011 |
| 5,491,477 |
| $ | 9.55 |
|
| 7.2 |
| $ | 103,695 |
|
Exercisable at January 28, 2011 |
| 2,773,235 |
| $ | 8.31 |
|
| 7.0 |
| $ | 55,706 |
|
The weighted average grant date fair value of Time Options granted during 2010, 2009 and 2008 was $12.61, $6.73 and $4.17, respectively.
A summary of Performance Options activity during the period ended January 28, 2011 is as follows:
(Intrinsic value amounts reflected in thousands) | Options | Average Exercise Price | Remaining Contractual Term in Years | Intrinsic | ||||||||
Balance, January 29, 2010 |
| 6,251,623 |
| $ | 8.67 |
|
|
|
|
|
|
|
Granted |
| 348,784 |
|
| 27.39 |
|
|
|
|
|
|
|
Exercised |
| (777,249) |
|
| 8.13 |
|
|
|
|
|
|
|
Canceled |
| (326,134) |
|
| 10.58 |
|
|
|
|
|
|
|
Balance, January 28, 2011 |
| 5,497,024 |
| $ | 9.82 |
|
| 7.3 |
| $ | 102,369 |
|
Vested or expected to vest at January 28, 2011 |
| 5,198,923 |
| $ | 9.62 |
|
| 7.3 |
| $ | 97,838 |
|
Exercisable at January 28, 2011 |
| 3,426,809 |
| $ | 8.68 |
|
| 7.0 |
| $ | 67,597 |
|
The weighted average grant date fair value of Performance Options granted was $12.61, $6.73 and $4.17 during 2010, 2009 and 2008, respectively.
In April 2010, the Company granted 100,000 options to its Chief Executive Officer with an exercise price of $29.38 and a vesting period of one year from the date of grant.
The total intrinsic value of all stock options repurchased by the Company under terms of the management stockholders’ agreements during 2010, 2009 and 2008 was $0.1 million, $0.8 million and $2.5 million, respectively.
At January 28, 2011, the total unrecognized compensation cost related to non-vested stock options was $30.8 million with an expected weighted average expense recognition period of 2.8 years.
The Company currently believes that the performance targets related to the unvested Performance Options will be achieved. If such goals are not met, and there is no change in control or certain public offerings of the Company’s common stock which would result in the
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acceleration of vesting of the Performance Options, future compensation cost relating to unvested Performance Options will not be recognized.
Through January 28, 2011, all Time Options and Performance Options have been granted to employees. During the fourth quarter of 2009, the Company granted 33,051 non-qualified stock options to members of its Board of Directors. These options vest ratably on an annual basis over a four year period from the date of grant.
In January 2008, the Company granted 508,572 nonvested restricted shares to its Chief Executive Officer. As a result of the Company’s initial public offering these shares vested, at a total fair value equal to $11.5 million. Subsequent to the offering, the Company granted a total of 9,084 restricted stock unit awards to members of its Board of Directors. For 2010, 2009 and 2008, the share-based compensation expense related to nonvested shares before income taxes was less than $0.1 million, $3.3 million ($2.0 million net of tax) and $1.1 million ($0.7 million net of tax), respectively. At January 28, 2011, the total compensation cost related to nonvested restricted stock awards not yet recognized was approximately $0.1 million.
All nonvested restricted stock and restricted stock unit awards granted for the Predecessor and Successor periods in the year ended February 1, 2008periods presented had a purchase price of zero. The Company records compensation expense on a straight-line basis over the restriction period based on the market price of the underlying stock on the date of grant. The nonvested restricted stock and restricted stock unit awards granted under the plan to employees during the Predecessor period ended July 6, 2007 were originally scheduled to vest and become payable ratably over a three-year period from the respective grant dates. The nonvested restricted stock unit awards granted under the plan to non-employee directors during the Predecessor period ended July 6, 2007 were originally2009 vested or are scheduled to vest over a one-year period from the respective grant dates, but became payable as a result of the Merger as discussed above.
Options Issued | Weighted Average Exercise Price | |||||||
Balance, February 2, 2007 | 19,398,881 | $ | 18.38 | |||||
Granted | 1,997,198 | 21.15 | ||||||
Exercised | (2,496,006) | 16.64 | ||||||
Exchanged for cash in Merger | (14,829,364) | 18.53 | ||||||
Exchanged for Rollover Options | (2,225,175) | 18.76 | ||||||
Canceled | (1,845,534) | 22.17 | ||||||
Balance, July 6, 2007 | - | $ | - |
Nonvested Shares | Weighted Average Grant Date Fair Value | |||||||
Balance, February 2, 2007 | 748,631 | $ | 16.63 | |||||
Granted | 749,508 | 21.17 | ||||||
Vested | (1,476,044) | 18.83 | ||||||
Canceled | (22,095) | 20.72 | ||||||
Balance, July 6, 2007 | - | $ | - |
Options Issued | Weighted Average Exercise Price | |||||||
Granted | 9,945,000 | $ | 5.00 | |||||
Exercised | - | - | ||||||
Canceled | (410,000) | 5.00 | ||||||
Balance, February 1, 2008 | 9,535,000 | $ | 5.00 |
Options Issued | Weighted Average Exercise Price | |||||||
Granted | 9,945,000 | $ | 5.00 | |||||
Exercised | - | - | ||||||
Canceled | (410,000) | 5.00 | ||||||
Balance, February 1, 2008 | 9,535,000 | $ | 5.00 |
12.
Related party transactions
Affiliates of certain of the Investors participated as (i) lenders in the Company’s New Credit Facilities discussed in Note 6;7; (ii) initial purchasers of the Company’s notesNotes discussed in Note 6;7; (iii) counterparties to certain interest rate swaps discussed in Note 18 and (iv) as advisors in the Merger. Certain fees were paid upon closing
The Company believes affiliates of KKR and Goldman, Sachs & Co. (among other entities) are lenders under the Term Loan Facility. The amount of principal outstanding under the Term Loan Facility from the date of the Merger to affiliatesSeptember 30, 2009, was $2.3 billion. The Company paid principal of certain of the Investors. These fees primarily included underwriting fees, advisory fees, equity commitment fees, syndication fees, merger and acquisition fees, sponsor fees, costs of raising equity, and out of pocket expenses. The aggregate fees paid to these related parties$336.5 million during the Successor period ended February 1,remainder of 2009 and approximately $53.4 million, $74.8 million and $133.4 million of interest on the Term Loan Facility during 2010, 2009 and 2008, totaled $134.9respectively.
Goldman, Sachs & Co. is a counterparty to an amortizing interest rate swap with a notional amount of $323.3 million portionsand $396.7 million as of which have been capitalizedJanuary 28, 2011 and January 29, 2010, respectively, entered into in connection with the Term Loan Facility. The Company paid Goldman, Sachs & Co. approximately $12.9 million, $17.9 million and $9.5 million in 2010, 2009 and 2008, respectively, pursuant to the interest rate swap as debt financing costs or as direct acquisition costs.
The Company entered into a monitoringsponsor advisory agreement, dated July 6, 2007, with affiliates of certain of the InvestorsKKR and Goldman, Sachs & Co. pursuant to which those entities will provideprovided management and advisory services to the Company. Under the terms of the monitoringsponsor advisory agreement, among other things, the Company iswas obliged to pay to those entities an aggregate, annualinitial management fee of $5.0
103
$5.0 million payable in arrears at the end of each calendar quarter plus all reasonable out of pocket expenses incurred in connection with the provision of services under the agreement upon request. The fees incurred for the Successor period ended February 1, 2008 totaled $2.9 million. Afterannually. Upon the completion of the Company’s first fiscal year,initial public offering discussed in Note 2, pursuant to the managementadvisory agreement, the Company paid a fee will increase atof $63.6 million from cash generated from operations to KKR and Goldman, Sachs & Co., which amount included a rate of 5% per year. Those entities also are entitled to receive atransaction fee equal to 1%, or $4.8 million, of the gross transaction valueprimary proceeds from the offering accounted for as a cost of raising equity and a corresponding reduction to Additional paid-in capital; and approximately $58.8 million in connection with certain subsequent financing, acquisition, disposition,its termination, which is included in SG&A expenses for 2009. Including the transaction and change in control transactions, as well as a termination fee infees discussed above, the event of an initial public offering or under certaintotal management fees and other circumstances.expenses incurred for the years ended January 28, 2011, January 29, 2010 and January 30, 2009 totaled $0.2 million, $68.0 million and $6.6 million, respectively. In addition, on July 6, 2007, the Company also entered into a separate indemnification agreement with the parties to the monitoringsponsor advisory agreement, pursuant to which the Company agreed to provide customary indemnification to such parties and their affiliates.
From time to time, the Company uses Capstone Consulting, LLC, a team of executives who work exclusively with KKR portfolio companies providing certain consulting services. The Chief Executive Officer of Capstone servesserved on our Board.the Company’s Board of Directors until March 2009. Although neither KKR nor any entity affiliated with KKR owns any of the equity of Capstone, prior to January 1, 2007 KKR had provided financing to Capstone. The aggregate fees incurred for Capstone services for the Successor periodperiods ended February 1, 2008January 28, 2011, January 29, 2010 and January 30, 2009 totaled $1.9 million.
The Company purchased a totalentered into an underwriting agreement with KKR Capital Markets (an affiliate of $25 million of the 11.857%/12.625% senior subordinated notes held byKKR), Goldman, Sachs & Co., Citigroup Global Markets Inc., and several other entities to serve as further discussed in Note 6 and paid a commission of less than $0.1 millionunderwriters in connection therewith.
Affiliates of KKR and of Goldman, Sachs & Co. served as underwriters in connection with the secondary offerings of the Company’s common stock evidenced the right to receive eight-tenths of a Right. Such Rights attached to all additionalheld by certain existing shareholders that were completed in April 2010 and December 2010. The Company did not sell shares of common stock, issued prior to the Plan’s termination immediately prior to the effective date of the Merger. The Rights entitled the holders to purchasereceive proceeds from the Company one one-hundredthsecondary sales, or pay any underwriting fees in connection with either secondary offering. Certain members of a share (a “Unit”)our management, including certain of Series B Junior Participating Preferred Stock, no par value, at a purchase price of $100 per Unit, subject to adjustment, upon certain triggering events definedour executive officers, exercised registration rights in the Plan. The Rights Plan terminated by its terms immediately prior to the effective date of the Merger. No Rights were exercised prior to that date.
13.
Segment reporting
The Company manages its business on the basis of one reportable segment. See Note 1 for a brief description of the Company’s business. As of February 1, 2008,January 28, 2011, all of the Company’s operations were located within the United States with the exception of an immateriala Hong Kong subsidiary, formed to assistand a liaison office in India, the processcollective assets and revenues of importing certain merchandise that began operations in 2004.which are not material. The following net sales data is presented in accordance with SFAS 131, “Disclosuresaccounting standards related to disclosures about Segmentssegments of an Enterprise and Related Information.”
(In thousands) | 2010 |
| 2009 |
| 2008 | |||
Classes of similar products: |
|
|
|
|
|
|
|
|
Consumables | $ | 9,332,119 |
| $ | 8,356,381 |
| $ | 7,248,418 |
Seasonal |
| 1,887,917 |
|
| 1,711,471 |
|
| 1,521,450 |
Home products |
| 917,638 |
|
| 869,772 |
|
| 862,226 |
Apparel |
| 897,326 |
|
| 858,756 |
|
| 825,574 |
Net sales | $ | 13,035,000 |
| $ | 11,796,380 |
| $ | 10,457,668 |
Successor | Predecessor | |||||||||||||||
(In thousands) | July 7, 2007 through February 1, 2008 | February 1, 2007 through July 6, 2007 | 2006 | 2005 | ||||||||||||
Classes of similar products: | ||||||||||||||||
Highly consumable | $ | 3,701,724 | $ | 2,615,110 | $ | 6,022,014 | $ | 5,606,466 | ||||||||
Seasonal | 908,301 | 604,935 | 1,509,999 | 1,348,769 | ||||||||||||
Home products | 507,027 | 362,725 | 914,357 | 907,826 | ||||||||||||
Basic clothing | 454,441 | 340,983 | 723,452 | 719,176 | ||||||||||||
Net sales | $ | 5,571,493 | $ | 3,923,753 | $ | 9,169,822 | $ | 8,582,237 |
14.
Quarterly financial data (unaudited)
The following is selected unaudited quarterly financial data for the fiscal years ended February 1, 2008January 28, 2011 and February 2, 2007.January 29, 2010. Each quarterquarterly period listed below was a 13-week accounting period. The sum of the four quarters for any given year may not equal annual totals due to rounding.
(In thousands) |
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | $ | 3,111,314 |
| $ | 3,214,155 |
| $ | 3,223,427 |
| $ | 3,486,104 |
|
Gross profit |
| 999,756 |
|
| 1,035,979 |
|
| 1,010,668 |
|
| 1,130,153 |
|
Operating profit |
| 290,723 |
|
| 300,757 |
|
| 274,334 |
|
| 408,251 |
|
Net income |
| 135,996 |
|
| 141,195 |
|
| 128,120 |
|
| 222,546 |
|
Basic earnings per share |
| 0.40 |
|
| 0.41 |
|
| 0.38 |
|
| 0.65 |
|
Diluted earnings per share |
| 0.39 |
|
| 0.41 |
|
| 0.37 |
|
| 0.64 |
|
(In thousands) |
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | $ | 2,779,937 |
| $ | 2,901,907 |
| $ | 2,928,751 |
| $ | 3,185,785 |
|
Gross profit |
| 855,358 |
|
| 906,042 |
|
| 903,082 |
|
| 1,025,389 |
|
Operating profit |
| 224,869 |
|
| 233,217 |
|
| 216,239 |
|
| 278,933 |
|
Net income |
| 83,006 |
|
| 93,590 |
|
| 75,649 |
|
| 87,197 |
|
Basic earnings per share |
| 0.26 |
|
| 0.29 |
|
| 0.24 |
|
| 0.26 |
|
Diluted earnings per share |
| 0.26 |
|
| 0.29 |
|
| 0.24 |
|
| 0.26 |
|
Predecessor | Successor | |||||||||||||||||||
(In thousands) | First Quarter | May 5, 2007- July 6, 2007 | July 7, 2007- August 3, 2007 (a) | Third Quarter | Fourth Quarter | |||||||||||||||
2007: | ||||||||||||||||||||
Net sales | $ | 2,275,267 | $ | 1,648,486 | $ | 699,078 | $ | 2,312,842 | $ | 2,559,573 | ||||||||||
Gross profit | 633,060 | 438,515 | 184,723 | 646,800 | 740,371 | |||||||||||||||
Operating profit (loss) | 55,368 | (46,120 | ) | (6,025 | ) | 65,703 | 186,466 | |||||||||||||
Net income (loss) | 34,875 | (42,873 | ) | (27,175 | ) | (33,032 | ) | 55,389 | ||||||||||||
Predecessor | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
2006: | ||||||||||||||||
Net sales | $ | 2,151,387 | $ | 2,251,053 | $ | 2,213,396 | $ | 2,553,986 | ||||||||
Gross profit | 584,274 | 611,534 | 526,447 | 645,950 | ||||||||||||
Operating profit | 81,285 | 80,577 | 3,339 | 83,075 | ||||||||||||
Net income (loss) | 47,670 | 45,468 | (5,285 | ) | 50,090 |
As discussed in Note 2,11, in the Predecessor period ended July 6, 2007,first quarter of 2010 the Company recorded transaction and other costs related to the Merger of $56.7 million andincurred share-based compensation expense related directly toexpenses of $13.3 million ($8.1 million net of tax, or $0.02 per diluted share) for the Mergeraccelerated vesting of $39.4 million as discussedcertain share-based awards in Note 9. conjunction with a secondary offering of the Company’s common stock which is included in SG&A expenses.
105
As discussed in Note 2,7, in the Successor period ended August 3, 2007,second quarter of 2010, the Company recorded transaction and other costs related to the Mergerrepurchased $50.0 million principal amount of $5.6its outstanding Senior Notes, resulting in a pretax loss of $6.5 million a loss on debt retirement related to the Merger($4.0 million net of $6.2 million; a contingent loss related to certain DC leases of $8.6 milliontax, or $0.01 per diluted share) which is recognized as Other (income) expense.
As discussed in Note 7; and a gain on certain interest rate swaps discussed7, in Note 1 of $6.8 million.
As discussed in Note 6,11, in the fourth quarter of 2007,2010 the Company recordedincurred share-based compensation expenses of $3.8 million ($2.3 million net of tax, or $0.01 per diluted share) for the accelerated vesting of certain share-based awards in conjunction with a gain on debt retirementsecondary offering of $4.9 million.
As discussed in Note 12, during the first and third quarters of 2006, the Company received proceeds, net of taxes, of $3.2 million and $5.0 million, respectively, representing insurance recoveries for destroyed and damaged assets, costs incurred and business interruption coverage related to Hurricane Katrina, which is reflected in results of operations for these periods as a reduction of SG&A expenses.
As discussed in Note 7, in the fourth quarter of 2009, the Company repurchased $195.7 million principal amount of its outstanding Senior Notes, $205.2 million principal amount of its outstanding Senior Subordinated Notes, and repaid $325.0 million principal amount on the Term Loan Facility, resulting in a pretax loss of $55.3 million ($33.8 million net income.
As discussed in Note 11, in the fourth quarter of 2009 the Company incurred share-based compensation expenses of $9.4 million ($5.8 million net of tax, or $0.02 per diluted share) for the accelerated vesting of certain share-based awards in conjunction with the Company’s initial public offering, which is included in SG&A expenses.
15.
Guarantor subsidiaries
Certain 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 debt obligations. Each of the Guarantors is a direct or indirect wholly-owned subsidiary of the Company. The following consolidating schedules present condensed financial information on a combined basis, in thousands.
| January 28, 2011 | ||||||||||||||
| DOLLAR | GUARANTOR | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
BALANCE SHEET: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 111,545 |
| $ | 364,404 |
| $ | 21,497 |
| $ | - |
| $ | 497,446 |
|
Merchandise inventories |
| - |
|
| 1,765,433 |
|
| - |
|
| - |
|
| 1,765,433 |
|
Income taxes receivable |
| 13,529 |
|
| - |
|
| - |
|
| (13,529 | ) |
| - |
|
Deferred income taxes receivable |
| 8,877 |
|
| - |
|
| 6,825 |
|
| (15,702 | ) |
| - |
|
Prepaid expenses and other current assets |
| 741,352 |
|
| 3,698,117 |
|
| 4,454 |
|
| (4,338,977 | ) |
| 104,946 |
|
Total current assets |
| 875,303 |
|
| 5,827,954 |
|
| 32,776 |
|
| (4,368,208 | ) |
| 2,367,825 |
|
Net property and equipment |
| 105,155 |
|
| 1,419,133 |
|
| 287 |
|
| - |
|
| 1,524,575 |
|
Goodwill |
| 4,338,589 |
|
| - |
|
| - |
|
| - |
|
| 4,338,589 |
|
Intangible assets, net |
| 1,199,200 |
|
| 57,722 |
|
| - |
|
| - |
|
| 1,256,922 |
|
Deferred income taxes receivable |
| - |
|
| - |
|
| 47,690 |
|
| (47,690 | ) |
| - |
|
Other assets, net |
| 5,337,522 |
|
| 12,675 |
|
| 304,285 |
|
| (5,596,171 | ) |
| 58,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets | $ | 11,855,769 |
| $ | 7,317,484 |
| $ | 385,038 |
| $ | (10,012,069 | ) | $ | 9,546,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations | $ | - |
| $ | 1,157 |
| $ | - |
| $ | - |
| $ | 1,157 |
|
Accounts payable |
| 3,691,564 |
|
| 1,541,593 |
|
| 50,824 |
|
| (4,330,340 | ) |
| 953,641 |
|
Accrued expenses and other |
| 68,398 |
|
| 226,225 |
|
| 61,755 |
|
| (8,637 | ) |
| 347,741 |
|
Income taxes payable |
| 11,922 |
|
| 13,246 |
|
| 14,341 |
|
| (13,529 | ) |
| 25,980 |
|
Deferred income taxes payable |
| - |
|
| 52,556 |
|
| - |
|
| (15,702 | ) |
| 36,854 |
|
Total current liabilities |
| 3,771,884 |
|
| 1,834,777 |
|
| 126,920 |
|
| (4,368,208 | ) |
| 1,365,373 |
|
Long-term obligations |
| 3,534,447 |
|
| 3,000,877 |
|
| - |
|
| (3,248,254 | ) |
| 3,287,070 |
|
Deferred income taxes payable |
| 417,874 |
|
| 228,381 |
|
| - |
|
| (47,690 | ) |
| 598,565 |
|
Other liabilities |
| 67,932 |
|
| 27,250 |
|
| 136,400 |
|
| - |
|
| 231,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock |
| 9,153 |
|
| - |
|
| - |
|
| - |
|
| 9,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
Common stock |
| 298,819 |
|
| 23,855 |
|
| 100 |
|
| (23,955 | ) |
| 298,819 |
|
Additional paid-in capital |
| 2,945,024 |
|
| 431,253 |
|
| 19,900 |
|
| (451,153 | ) |
| 2,945,024 |
|
Retained earnings |
| 830,932 |
|
| 1,771,091 |
|
| 101,718 |
|
| (1,872,809 | ) |
| 830,932 |
|
Accumulated other comprehensive loss |
| (20,296 | ) |
| - |
|
| - |
|
| - |
|
| (20,296 | ) |
Total shareholders’ equity |
| 4,054,479 |
|
| 2,226,199 |
|
| 121,718 |
|
| (2,347,917 | ) |
| 4,054,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity | $ | 11,855,769 |
| $ | 7,317,484 |
| $ | 385,038 |
| $ | (10,012,069 | ) | $ | 9,546,222 |
|
As of February 1, 2008 | ||||||||||||||||||||
SUCCESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
BALANCE SHEET: | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 8,320 | $ | 59,379 | $ | 32,510 | $ | - | $ | 100,209 | ||||||||||
Short-term investments | - | - | 19,611 | - | 19,611 | |||||||||||||||
Merchandise inventories | - | 1,288,661 | - | - | 1,288,661 | |||||||||||||||
Income tax receivable | 102,273 | - | - | (69,772 | ) | 32,501 | ||||||||||||||
Deferred income taxes | 6,090 | - | 18,501 | (7,294 | ) | 17,297 | ||||||||||||||
Prepaid expenses and other current assets | 221,408 | 337,741 | 9,341 | (509,025 | ) | 59,465 | ||||||||||||||
Total current assets | 338,091 | 1,685,781 | 79,963 | (586,091 | ) | 1,517,744 | ||||||||||||||
Net property and equipment | 83,658 | 1,190,131 | 456 | - | 1,274,245 | |||||||||||||||
Goodwill | 4,344,930 | - | - | - | 4,344,930 | |||||||||||||||
Intangible assets | 10,911 | 1,359,646 | - | - | 1,370,557 | |||||||||||||||
Deferred income taxes | 47,299 | - | 43,658 | (90,957 | ) | - | ||||||||||||||
Other assets, net | 2,629,967 | 1,652 | 175,238 | (2,657,902 | ) | 148,955 | ||||||||||||||
Total assets | $ | 7,454,856 | $ | 4,237,210 | $ | 299,315 | $ | (3,334,950 | ) | $ | 8,656,431 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Current portion of long-term obligations | $ | - | $ | 3,246 | $ | - | $ | - | $ | 3,246 | ||||||||||
Accounts payable | 317,116 | 736,844 | 40 | (502,960 | ) | 551,040 | ||||||||||||||
Accrued expenses and other | 48,431 | 188,877 | 69,712 | (6,064 | ) | 300,956 | ||||||||||||||
Income taxes payable | - | 59,264 | 13,507 | (69,772 | ) | 2,999 | ||||||||||||||
Total current liabilities | 365,547 | 988,231 | 83,259 | (578,796 | ) | 858,241 | ||||||||||||||
Long-term obligations | 4,257,250 | 1,837,715 | - | (1,816,209 | ) | 4,278,756 | ||||||||||||||
Deferred income taxes | - | 584,976 | - | (98,251 | ) | 486,725 | ||||||||||||||
Other liabilities | 119,064 | 21,191 | 179,459 | - | 319,714 | |||||||||||||||
Redeemable common stock | 9,122 | - | - | - | 9,122 | |||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Preferred stock | - | - | - | - | - | |||||||||||||||
Common stock | 277,741 | 23,753 | 100 | (23,853 | ) | 277,741 | ||||||||||||||
Additional paid-in capital | 2,480,062 | 653,711 | 19,900 | (673,611 | ) | 2,480,062 | ||||||||||||||
Retained earnings | (4,818 | ) | 127,633 | 16,597 | (144,230 | ) | (4,818 | ) | ||||||||||||
Accumulated other comprehensive loss | (49,112 | ) | - | - | - | (49,112 | ) | |||||||||||||
Other shareholders’ equity | - | - | - | - | - | |||||||||||||||
Total shareholders’ equity | 2,703,873 | 805,097 | 36,597 | (841,694 | ) | 2,703,873 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 7,454,856 | $ | 4,237,210 | $ | 299,315 | $ | (3,334,950 | ) | $ | 8,656,431 |
As of February 2, 2007 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
BALANCE SHEET: | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 114,310 | $ | 58,107 | $ | 16,871 | $ | - | $ | 189,288 | ||||||||||
Short-term investments | - | - | 29,950 | - | 29,950 | |||||||||||||||
Merchandise inventories | - | 1,432,336 | - | - | 1,432,336 | |||||||||||||||
Income tax receivable | 4,884 | 4,949 | - | - | 9,833 | |||||||||||||||
Deferred income taxes | 7,422 | 13,482 | 3,417 | - | 24,321 | |||||||||||||||
Prepaid expenses and other current assets | 139,913 | 928,854 | 166,468 | (1,178,215 | ) | 57,020 | ||||||||||||||
Total current assets | 266,529 | 2,437,728 | 216,706 | (1,178,215 | ) | 1,742,748 | ||||||||||||||
Net property and equipment | 98,580 | 1,137,710 | 584 | - | 1,236,874 | |||||||||||||||
Deferred income taxes | 581 | - | 5,536 | (6,117 | ) | - | ||||||||||||||
Other assets, net | 2,693,030 | 23,489 | 20,133 | (2,675,760 | ) | 60,892 | ||||||||||||||
Total assets | $ | 3,058,720 | $ | 3,598,927 | $ | 242,959 | $ | (3,860,092 | ) | $ | 3,040,514 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Current portion of long-term obligations | $ | - | $ | 8,080 | $ | - | $ | - | $ | 8,080 | ||||||||||
Accounts payable | 1,084,460 | 577,443 | 69,710 | (1,176,339 | ) | 555,274 | ||||||||||||||
Accrued expenses and other | 13,327 | 241,849 | 258 | (1,876 | ) | 253,558 | ||||||||||||||
Income taxes payable | - | 6,453 | 9,506 | - | 15,959 | |||||||||||||||
Total current liabilities | 1,097,787 | 833,825 | 79,474 | (1,178,215 | ) | 832,871 | ||||||||||||||
Long-term obligations | 199,842 | 1,584,526 | - | (1,522,410 | ) | 261,958 | ||||||||||||||
Deferred income taxes | - | 47,714 | - | (6,117 | ) | 41,597 | ||||||||||||||
Other non-current liabilities | 15,344 | 35,521 | 107,476 | - | 158,341 | |||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Preferred stock | - | - | - | - | - | |||||||||||||||
Common stock | 156,218 | 23,753 | 100 | (23,853 | ) | 156,218 | ||||||||||||||
Additional paid-in capital | 486,145 | 653,711 | 19,900 | (673,611 | ) | 486,145 | ||||||||||||||
Retained earnings | 1,103,951 | 419,877 | 36,009 | (455,886 | ) | 1,103,951 | ||||||||||||||
Accumulated other comprehensive loss | (987 | ) | - | - | - | (987 | ) | |||||||||||||
Other shareholders’ equity | 420 | - | - | - | 420 | |||||||||||||||
Total shareholders’ equity | 1,745,747 | 1,097,341 | 56,009 | (1,153,350 | ) | 1,745,747 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,058,720 | $ | 3,598,927 | $ | 242,959 | $ | (3,860,092 | ) | $ | 3,040,514 |
July 7, 2007 through February 1, 2008 | ||||||||||||||||||||
SUCCESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF OPERATIONS: | ||||||||||||||||||||
Net sales | $ | 96,300 | $ | 5,571,493 | $ | 65,057 | $ | (161,357 | ) | $ | 5,571,493 | |||||||||
Cost of goods sold | - | 3,999,599 | - | - | 3,999,599 | |||||||||||||||
Gross profit | 96,300 | 1,571,894 | 65,057 | (161,357 | ) | 1,571,894 | ||||||||||||||
Selling, general and administrative | 103,272 | 1,337,311 | 46,524 | (161,357 | ) | 1,325,750 | ||||||||||||||
Operating profit (loss) | (6,972 | ) | 234,583 | 18,533 | - | 246,144 | ||||||||||||||
Interest income | (58,786 | ) | (23,206 | ) | (8,013 | ) | 86,206 | (3,799 | ) | |||||||||||
Interest expense | 274,104 | 64,991 | 8 | (86,206 | ) | 252,897 | ||||||||||||||
Loss on interest rate swaps | 2,390 | - | - | - | 2,390 | |||||||||||||||
Loss on debt retirement, net | 1,249 | - | - | - | 1,249 | |||||||||||||||
Income (loss) before income taxes | (225,929 | ) | 192,798 | 26,538 | - | (6,593 | ) | |||||||||||||
Income taxes | (76,881 | ) | 65,166 | 9,940 | - | (1,775 | ) | |||||||||||||
Equity in subsidiaries’ earnings, net of taxes | 144,230 | - | - | (144,230 | ) | - | ||||||||||||||
Net income (loss) | $ | (4,818 | ) | $ | 127,632 | $ | 16,598 | $ | (144,230 | ) | $ | (4,818 | ) |
February 3, 2007 through July 6, 2007 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF OPERATIONS: | ||||||||||||||||||||
Net sales | $ | 76,945 | $ | 3,923,753 | $ | 44,206 | $ | (121,151 | ) | $ | 3,923,753 | |||||||||
Cost of goods sold | - | 2,852,178 | - | - | 2,852,178 | |||||||||||||||
Gross profit | 76,945 | 1,071,575 | 44,206 | (121,151 | ) | 1,071,575 | ||||||||||||||
Selling, general and administrative | 166,224 | 982,321 | 34,933 | (121,151 | ) | 1,062,327 | ||||||||||||||
Operating profit (loss) | (89,279 | ) | 89,254 | 9,273 | - | 9,248 | ||||||||||||||
Interest income | (53,278 | ) | (11,472 | ) | (5,626 | ) | 65,330 | (5,046 | ) | |||||||||||
Interest expense | 19,796 | 55,828 | 5 | (65,330 | ) | 10,299 | ||||||||||||||
Income (loss) before income taxes | (55,797 | ) | 44,898 | 14,894 | - | 3,995 | ||||||||||||||
Income taxes | (4,814 | ) | 11,924 | 4,883 | - | 11,993 | ||||||||||||||
Equity in subsidiaries’ earnings, net of taxes | 42,985 | - | - | (42,985 | ) | - | ||||||||||||||
Net income (loss) | $ | (7,998 | ) | $ | 32,974 | $ | 10,011 | $ | (42,985 | ) | $ | (7,998 | ) |
For the year ended February 2, 2007 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF OPERATIONS: | ||||||||||||||||||||
Net sales | $ | 165,463 | $ | 9,169,822 | $ | 107,383 | $ | (272,846 | ) | $ | 9,169,822 | |||||||||
Cost of goods sold | - | 6,801,617 | - | - | 6,801,617 | |||||||||||||||
Gross profit | 165,463 | 2,368,205 | 107,383 | (272,846 | ) | 2,368,205 | ||||||||||||||
Selling, general and administrative | 149,272 | 2,154,371 | 89,132 | (272,846 | ) | 2,119,929 | ||||||||||||||
Operating profit | 16,191 | 213,834 | 18,251 | - | 248,276 | |||||||||||||||
Interest income | (126,628 | ) | (33,521 | ) | (11,543 | ) | 164,690 | (7,002 | ) | |||||||||||
Interest expense | 60,856 | 138,749 | - | (164,690 | ) | 34,915 | ||||||||||||||
Income before income taxes | 81,963 | 108,606 | 29,794 | - | 220,363 | |||||||||||||||
Income taxes | 36,513 | 36,568 | 9,339 | - | 82,420 | |||||||||||||||
Equity in subsidiaries’ earnings, net of taxes | 92,493 | - | - | (92,493 | ) | - | ||||||||||||||
Net income | $ | 137,943 | $ | 72,038 | $ | 20,455 | $ | (92,493 | ) | $ | 137,943 |
For the year ended February 3, 2006 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF OPERATIONS: | ||||||||||||||||||||
Net sales | $ | 162,805 | $ | 8,582,237 | $ | 184,889 | $ | (347,694 | ) | $ | 8,582,237 | |||||||||
Cost of goods sold | - | 6,117,413 | - | - | 6,117,413 | |||||||||||||||
Gross profit | 162,805 | 2,464,824 | 184,889 | (347,694 | ) | 2,464,824 | ||||||||||||||
Selling, general and administrative | 139,879 | 1,936,514 | 174,258 | (347,694 | ) | 1,902,957 | ||||||||||||||
Operating profit | 22,926 | 528,310 | 10,631 | - | 561,867 | |||||||||||||||
Interest income | (97,005 | ) | (65,428 | ) | (3,504 | ) | 156,936 | (9,001 | ) | |||||||||||
Interest expense | 85,536 | 97,626 | - | (156,936 | ) | 26,226 | ||||||||||||||
Income before income taxes | 34,395 | 496,112 | 14,135 | - | 544,642 | |||||||||||||||
Income taxes | 17,824 | 172,892 | 3,771 | - | 194,487 | |||||||||||||||
Equity in subsidiaries’ earnings, net of taxes | 333,584 | - | - | (333,584 | ) | - | ||||||||||||||
Net income | $ | 350,155 | $ | 323,220 | $ | 10,364 | $ | (333,584 | ) | $ | 350,155 |
July 7, 2007 through February 1, 2008 | ||||||||||||||||||||
SUCCESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF CASH FLOWS: | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (4,818 | ) | $ | 127,632 | $ | 16,598 | $ | (144,230 | ) | $ | (4,818 | ) | |||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation and amortization | 21,634 | 128,431 | 148 | - | 150,213 | |||||||||||||||
Deferred income taxes | (2,120 | ) | 20,208 | 1,463 | - | 19,551 | ||||||||||||||
Loss on debt retirement, net | 1,249 | - | - | - | 1,249 | |||||||||||||||
Noncash share-based compensation | 3,827 | - | - | - | 3,827 | |||||||||||||||
Equity in subsidiaries’ earnings, net | (144,230 | ) | - | - | 144,230 | - | ||||||||||||||
Noncash unrealized loss on interest rate swap | 3,705 | - | - | - | 3,705 | |||||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||||||
Merchandise inventories | - | 79,469 | - | - | 79,469 | |||||||||||||||
Prepaid expenses and other current assets | (1,120 | ) | 4,783 | 76 | - | 3,739 | ||||||||||||||
Accounts payable | (40,745 | ) | 12,428 | (13,078 | ) | - | (41,395 | ) | ||||||||||||
Accrued expenses and other | (7,456 | ) | 6,418 | 17,099 | - | 16,061 | ||||||||||||||
Income taxes | (45,416 | ) | 44,829 | 7,935 | - | 7,348 | ||||||||||||||
Other | (3,169 | ) | 4,246 | (422 | ) | - | 655 | |||||||||||||
Net cash provided by (used in) operating activities | (218,659 | ) | 428,444 | 29,819 | - | 239,604 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Acquisition, net of cash acquired | (5,649,182 | ) | (1,129,953 | ) | 40,744 | - | (6,738,391 | ) | ||||||||||||
Purchases of property and equipment | (1,617 | ) | (82,003 | ) | (21 | ) | - | (83,641 | ) | |||||||||||
Purchases of short-term investments | - | - | (3,800 | ) | - | (3,800 | ) | |||||||||||||
Sales of short-term investments | - | - | 21,445 | - | 21,445 | |||||||||||||||
Purchases of long-term investments | - | - | (7,473 | ) | - | (7,473 | ) | |||||||||||||
Purchase of promissory note | - | (37,047 | ) | - | - | (37,047 | ) | |||||||||||||
Proceeds from sale of property and equipment | - | 533 | - | - | 533 | |||||||||||||||
Net cash provided by (used in) investing activities | (5,650,799 | ) | (1,248,470 | ) | 50,895 | - | (6,848,374 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Issuance of common stock | 2,759,540 | - | - | - | 2,759,540 | |||||||||||||||
Borrowings under revolving credit facility | 1,522,100 | - | - | - | 1,522,100 | |||||||||||||||
Repayments of borrowings under revolving credit facility | (1,419,600 | ) | - | - | - | (1,419,600 | ) | |||||||||||||
Issuance of long-term obligations | 4,176,817 | - | - | - | 4,176,817 | |||||||||||||||
Repayments of long-term obligations | (236,084 | ) | (5,861 | ) | - | - | (241,945 | ) | ||||||||||||
Repurchase of common stock | (541 | ) | - | - | - | (541 | ) | |||||||||||||
Changes in intercompany note balances, net | (837,062 | ) | 885,266 | (48,204 | ) | - | - | |||||||||||||
Debt issuance costs | (87,392 | ) | - | - | - | (87,392 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 5,877,778 | 879,405 | (48,204 | ) | - | 6,708,979 | ||||||||||||||
Net increase in cash and cash equivalents | 8,320 | 59,379 | 32,510 | - | 100,209 | |||||||||||||||
Cash and cash equivalents, beginning of period | - | - | - | - | - | |||||||||||||||
Cash and cash equivalents, end of year | $ | 8,320 | $ | 59,379 | $ | 32,510 | $ | - | $ | 100,209 |
February 3, 2007 through July 6, 2007 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF CASH FLOWS: | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (7,998 | ) | $ | 32,974 | $ | 10,011 | $ | (42,985 | ) | $ | (7,998 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | 9,051 | 74,770 | 96 | - | 83,917 | |||||||||||||||
Deferred income taxes | (7,982 | ) | (9,194 | ) | (3,698 | ) | - | (20,874 | ) | |||||||||||
Noncash share-based compensation | 45,433 | - | - | - | 45,433 | |||||||||||||||
Tax benefit from stock option exercises | (3,927 | ) | - | - | - | (3,927 | ) | |||||||||||||
Equity in subsidiaries’ earnings, net | (42,985 | ) | - | - | 42,985 | - | ||||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||||||
Merchandise inventories | - | 16,424 | - | - | 16,424 | |||||||||||||||
Prepaid expenses and other current assets | 5,758 | (11,762 | ) | (180 | ) | - | (6,184 | ) | ||||||||||||
Accounts payable | 44,909 | (23,103 | ) | 12,988 | - | 34,794 | ||||||||||||||
Accrued expenses and other | 7,897 | 36,021 | 9,077 | - | 52,995 | |||||||||||||||
Income taxes | (24,998 | ) | 31,741 | (3,934 | ) | - | 2,809 | |||||||||||||
Other | 21 | 4,726 | (190 | ) | - | 4,557 | ||||||||||||||
Net cash provided by operating activities | 25,179 | 152,597 | 24,170 | - | 201,946 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment | (5,321 | ) | (50,737 | ) | (95 | ) | - | (56,153 | ) | |||||||||||
Purchases of short-term investments | - | - | (5,100 | ) | - | (5,100 | ) | |||||||||||||
Sales of short-term investments | - | - | 9,505 | - | 9,505 | |||||||||||||||
Purchases of long-term investments | - | - | (15,754 | ) | - | (15,754 | ) | |||||||||||||
Proceeds from sale of property and equipment | - | 620 | - | - | 620 | |||||||||||||||
Net cash used in investing activities | (5,321 | ) | (50,117 | ) | (11,444 | ) | - | (66,882 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Repayments of long-term obligations | (148 | ) | (4,352 | ) | - | - | (4,500 | ) | ||||||||||||
Payment of cash dividends | (15,710 | ) | - | - | - | (15,710 | ) | |||||||||||||
Proceeds from exercise of stock options | 41,546 | - | - | - | 41,546 | |||||||||||||||
Tax benefit of stock options | 3,927 | - | - | - | 3,927 | |||||||||||||||
Changes in intercompany note balances, net | 75,840 | (86,988 | ) | 11,148 | - | - | ||||||||||||||
Net cash provided by (used in) financing activities | 105,455 | (91,340 | ) | 11,148 | - | 25,263 | ||||||||||||||
Net increase in cash and cash equivalents | 125,313 | 11,140 | 23,874 | - | 160,327 | |||||||||||||||
Cash and cash equivalents, beginning of year | 114,310 | 58,107 | 16,871 | - | 189,288 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 239,623 | $ | 69,247 | $ | 40,745 | $ | - | $ | 349,615 |
| January 29, 2010 | ||||||||||||||
| DOLLAR | GUARANTOR | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
BALANCE SHEET: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 97,620 |
| $ | 103,001 |
| $ | 21,455 |
| $ | - |
| $ | 222,076 |
|
Merchandise inventories |
| - |
|
| 1,519,578 |
|
| - |
|
| - |
|
| 1,519,578 |
|
Income taxes receivable |
| 9,924 |
|
| 1,645 |
|
| - |
|
| (4,026 | ) |
| 7,543 |
|
Deferred income taxes receivable |
| 16,066 |
|
| - |
|
| 3,559 |
|
| (19,625 | ) |
| - |
|
Prepaid expenses and other current assets |
| 625,157 |
|
| 3,040,792 |
|
| 704 |
|
| (3,570,401 | ) |
| 96,252 |
|
Total current assets |
| 748,767 |
|
| 4,665,016 |
|
| 25,718 |
|
| (3,594,052 | ) |
| 1,845,449 |
|
Net property and equipment |
| 99,452 |
|
| 1,228,829 |
|
| 105 |
|
| - |
|
| 1,328,386 |
|
Goodwill |
| 4,338,589 |
|
| - |
|
| - |
|
| - |
|
| 4,338,589 |
|
Intangible assets, net |
| 1,201,223 |
|
| 83,060 |
|
| - |
|
| - |
|
| 1,284,283 |
|
Deferred income taxes receivable |
| - |
|
| - |
|
| 36,405 |
|
| (36,405 | ) |
| - |
|
Other assets, net |
| 4,288,270 |
|
| 8,920 |
|
| 297,757 |
|
| (4,528,135 | ) |
| 66,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets | $ | 10,676,301 |
| $ | 5,985,825 |
| $ | 359,985 |
| $ | (8,158,592 | ) | $ | 8,863,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations | $ | 1,822 |
| $ | 1,849 |
| $ | - |
| $ | - |
| $ | 3,671 |
|
Accounts payable |
| 3,033,723 |
|
| 1,311,063 |
|
| 46,818 |
|
| (3,560,651 | ) |
| 830,953 |
|
Accrued expenses and other |
| 72,320 |
|
| 226,571 |
|
| 53,149 |
|
| (9,750 | ) |
| 342,290 |
|
Income taxes payable |
| 4,086 |
|
| - |
|
| 4,465 |
|
| (4,026 | ) |
| 4,525 |
|
Deferred income taxes payable |
| - |
|
| 44,686 |
|
| - |
|
| (19,625 | ) |
| 25,061 |
|
Total current liabilities |
| 3,111,951 |
|
| 1,584,169 |
|
| 104,432 |
|
| (3,594,052 | ) |
| 1,206,500 |
|
Long-term obligations |
| 3,645,820 |
|
| 2,689,492 |
|
| 13,178 |
|
| (2,948,775 | ) |
| 3,399,715 |
|
Deferred income taxes payable |
| 394,045 |
|
| 188,532 |
|
| - |
|
| (36,405 | ) |
| 546,172 |
|
Other liabilities |
| 115,701 |
|
| 40,065 |
|
| 146,582 |
|
| - |
|
| 302,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock |
| 18,486 |
|
| - |
|
| - |
|
| - |
|
| 18,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
Common stock |
| 298,013 |
|
| 23,855 |
|
| 100 |
|
| (23,955 | ) |
| 298,013 |
|
Additional paid-in capital |
| 2,923,377 |
|
| 431,253 |
|
| 19,900 |
|
| (451,153 | ) |
| 2,923,377 |
|
Retained earnings |
| 203,075 |
|
| 1,028,459 |
|
| 75,793 |
|
| (1,104,252 | ) |
| 203,075 |
|
Accumulated other comprehensive loss |
| (34,167 | ) |
| - |
|
| - |
|
| - |
|
| (34,167 | ) |
Total shareholders’ equity |
| 3,390,298 |
|
| 1,483,567 |
|
| 95,793 |
|
| (1,579,360 | ) |
| 3,390,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity | $ | 10,676,301 |
| $ | 5,985,825 |
| $ | 359,985 |
| $ | (8,158,592 | ) | $ | 8,863,519 |
|
| For the year ended January 28, 2011 | ||||||||||||||
| DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
STATEMENTS OF INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | $ | 311,280 |
| $ | 13,035,000 |
| $ | 84,878 |
| $ | (396,158 | ) | $ | 13,035,000 |
|
Cost of goods sold |
| - |
|
| 8,858,444 |
|
| - |
|
| - |
|
| 8,858,444 |
|
Gross profit |
| 311,280 |
|
| 4,176,556 |
|
| 84,878 |
|
| (396,158 | ) |
| 4,176,556 |
|
Selling, general and administrative expenses |
| 283,069 |
|
| 2,948,346 |
|
| 67,234 |
|
| (396,158 | ) |
| 2,902,491 |
|
Operating profit |
| 28,211 |
|
| 1,228,210 |
|
| 17,644 |
|
| - |
|
| 1,274,065 |
|
Interest income |
| (44,677 | ) |
| (7,025 | ) |
| (19,986 | ) |
| 71,468 |
|
| (220 | ) |
Interest expense |
| 300,934 |
|
| 44,723 |
|
| 23 |
|
| (71,468 | ) |
| 274,212 |
|
Other (income) expense |
| 15,101 |
|
| - |
|
| - |
|
| - |
|
| 15,101 |
|
Income (loss) before income taxes |
| (243,147 | ) |
| 1,190,512 |
|
| 37,607 |
|
| - |
|
| 984,972 |
|
Income tax expense (benefit) |
| (102,448 | ) |
| 447,881 |
|
| 11,682 |
|
| - |
|
| 357,115 |
|
Equity in subsidiaries’ earnings, net of taxes |
| 768,556 |
|
| - |
|
| - |
|
| (768,556 | ) |
| - |
|
Net income | $ | 627,857 |
| $ | 742,631 |
| $ | 25,925 |
| $ | (768,556 | ) | $ | 627,857 |
|
For the year ended February 2, 2007 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF CASH FLOWS: | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 137,943 | $ | 72,038 | $ | 20,455 | $ | (92,493 | ) | $ | 137,943 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | 21,436 | 178,920 | 252 | - | 200,608 | |||||||||||||||
Deferred income taxes | (1,845 | ) | (35,118 | ) | (1,255 | ) | - | (38,218 | ) | |||||||||||
Noncash share-based compensation | 7,578 | - | - | - | 7,578 | |||||||||||||||
Tax benefit from stock option exercises | (2,513 | ) | - | - | - | (2,513 | ) | |||||||||||||
Noncash inventory adjustments and asset impairments | - | 78,115 | - | - | 78,115 | |||||||||||||||
Equity in subsidiaries’ earnings, net | (92,493 | ) | - | - | 92,493 | - | ||||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||||||
Merchandise inventories | - | (28,057 | ) | - | - | (28,057 | ) | |||||||||||||
Prepaid expenses and other current assets | (1,042 | ) | (13,655 | ) | 9,286 | - | (5,411 | ) | ||||||||||||
Accounts payable | (4,246 | ) | 39,189 | 18,601 | - | 53,544 | ||||||||||||||
Accrued expenses and other | (225 | ) | 38,564 | 14 | - | 38,353 | ||||||||||||||
Income taxes | (2,558 | ) | (29,524 | ) | (3,083 | ) | - | (35,165 | ) | |||||||||||
Other | 430 | (1,850 | ) | - | - | (1,420 | ) | |||||||||||||
Net cash provided by operating activities | 62,465 | 298,622 | 44,270 | - | 405,357 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment | (13,270 | ) | (247,788 | ) | (457 | ) | - | (261,515 | ) | |||||||||||
Purchases of short-term investments | (38,700 | ) | - | (10,975 | ) | - | (49,675 | ) | ||||||||||||
Sales of short-term investments | 38,700 | - | 12,825 | - | 51,525 | |||||||||||||||
Purchases of long-term investments | - | - | (25,756 | ) | - | (25,756 | ) | |||||||||||||
Insurance proceeds related to property and equipment | - | 1,807 | - | - | 1,807 | |||||||||||||||
Proceeds from sale of property and equipment | 143 | 1,496 | 11 | - | 1,650 | |||||||||||||||
Net cash used in investing activities | (13,127 | ) | (244,485 | ) | (24,352 | ) | - | (281,964 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Borrowings under revolving credit facility | 2,012,700 | - | - | - | 2,012,700 | |||||||||||||||
Repayments of borrowings under revolving credit facility | (2,012,700 | ) | - | - | - | (2,012,700 | ) | |||||||||||||
Repayments of long-term obligations | 97 | (14,215 | ) | - | - | (14,118 | ) | |||||||||||||
Payment of cash dividends | (62,472 | ) | - | - | - | (62,472 | ) | |||||||||||||
Proceeds from exercise of stock options | 19,894 | - | - | - | 19,894 | |||||||||||||||
Repurchases of common stock | (79,947 | ) | - | - | - | (79,947 | ) | |||||||||||||
Tax benefit of stock options | 2,513 | - | - | - | 2,513 | |||||||||||||||
Changes in intercompany note balances, net | 74,438 | (39,676 | ) | (34,762 | ) | - | - | |||||||||||||
Other financing activities | 39 | (623 | ) | - | - | (584 | ) | |||||||||||||
Net cash used in financing activities | (45,438 | ) | (54,514 | ) | (34,762 | ) | - | (134,714 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | 3,900 | (377 | ) | (14,844 | ) | - | (11,321 | ) | ||||||||||||
Cash and cash equivalents, beginning of year | 110,410 | 58,484 | 31,715 | - | 200,609 | |||||||||||||||
Cash and cash equivalents, end of year | $ | 114,310 | $ | 58,107 | $ | 16,871 | $ | - | $ | 189,288 |
| For the year ended January 29, 2010 | ||||||||||||||
| DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
STATEMENTS OF INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | $ | 306,036 |
| $ | 11,796,380 |
| $ | 91,265 |
| $ | (397,301 | ) | $ | 11,796,380 |
|
Cost of goods sold |
| - |
|
| 8,106,509 |
|
| - |
|
| - |
|
| 8,106,509 |
|
Gross profit |
| 306,036 |
|
| 3,689,871 |
|
| 91,265 |
|
| (397,301 | ) |
| 3,689,871 |
|
Selling, general and administrative expenses |
| 337,224 |
|
| 2,734,793 |
|
| 61,897 |
|
| (397,301 | ) |
| 2,736,613 |
|
Operating profit (loss) |
| (31,188 | ) |
| 955,078 |
|
| 29,368 |
|
| - |
|
| 953,258 |
|
Interest income |
| (52,047 | ) |
| (10,968 | ) |
| (19,674 | ) |
| 82,545 |
|
| (144 | ) |
Interest expense |
| 375,280 |
|
| 52,980 |
|
| 29 |
|
| (82,545 | ) |
| 345,744 |
|
Other (income) expense |
| 55,542 |
|
| - |
|
| - |
|
| - |
|
| 55,542 |
|
Income (loss) before income taxes |
| (409,963 | ) |
| 913,066 |
|
| 49,013 |
|
| - |
|
| 552,116 |
|
Income tax expense (benefit) |
| (149,478 | ) |
| 346,117 |
|
| 16,035 |
|
| - |
|
| 212,674 |
|
Equity in subsidiaries’ earnings, net of taxes |
| 599,927 |
|
| - |
|
| - |
|
| (599,927 | ) |
| - |
|
Net income | $ | 339,442 |
| $ | 566,949 |
| $ | 32,978 |
| $ | (599,927 | ) | $ | 339,442 |
|
For the year ended February 3, 2006 | ||||||||||||||||||||
PREDECESSOR | DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED TOTAL | |||||||||||||||
STATEMENTS OF CASH FLOWS: | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 350,155 | $ | 323,220 | $ | 10,364 | $ | (333,584 | ) | $ | 350,155 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | 20,046 | 166,600 | 178 | - | 186,824 | |||||||||||||||
Deferred income taxes | (750 | ) | 16,692 | (7,698 | ) | - | 8,244 | |||||||||||||
Noncash share-based compensation | 3,332 | - | - | - | 3,332 | |||||||||||||||
Tax benefit from stock option exercises | 6,457 | - | - | - | 6,457 | |||||||||||||||
Equity in subsidiaries’ earnings, net | (333,584 | ) | - | - | 333,584 | - | ||||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||||||
Merchandise inventories | - | (97,877 | ) | - | - | (97,877 | ) | |||||||||||||
Prepaid expenses and other current assets | (4,546 | ) | 23,200 | (29,284 | ) | - | (10,630 | ) | ||||||||||||
Accounts payable | (26,052 | ) | (54,502 | ) | 167,784 | - | 87,230 | |||||||||||||
Accrued expenses and other | (12,210 | ) | 52,719 | (133 | ) | - | 40,376 | |||||||||||||
Income taxes | 13 | (38,619 | ) | 12,589 | - | (26,017 | ) | |||||||||||||
Other | 2,919 | 4,472 | - | - | 7,391 | |||||||||||||||
Net cash provided by operating activities | 5,780 | 395,905 | 153,800 | - | 555,485 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment | (18,089 | ) | (265,954 | ) | (69 | ) | - | (284,112 | ) | |||||||||||
Purchases of short-term investments | (123,925 | ) | - | (8,850 | ) | - | (132,775 | ) | ||||||||||||
Sales of short-term investments | 166,350 | 500 | - | - | 166,850 | |||||||||||||||
Purchases of long-term investments | - | - | (16,995 | ) | - | (16,995 | ) | |||||||||||||
Insurance proceeds related to property and equipment | - | 1,210 | - | - | 1,210 | |||||||||||||||
Proceeds from sale of property and equipment | 100 | 1,319 | - | - | 1,419 | |||||||||||||||
Net cash provided by (used in) investing activities | 24,436 | (262,925 | ) | (25,914 | ) | - | (264,403 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Borrowings under revolving credit facility | 232,200 | - | - | - | 232,200 | |||||||||||||||
Repayments of borrowings under revolving credit facility | (232,200 | ) | - | - | - | (232,200 | ) | |||||||||||||
Issuance of long-term borrowing | - | 14,495 | - | - | 14,495 | |||||||||||||||
Repayments of long-term obligations | (4,969 | ) | (9,341 | ) | - | - | (14,310 | ) | ||||||||||||
Payment of cash dividends | (56,183 | ) | - | - | - | (56,183 | ) | |||||||||||||
Proceeds from exercise of stock options | 29,405 | - | - | - | 29,405 | |||||||||||||||
Repurchases of common stock | (297,602 | ) | - | - | - | (297,602 | ) | |||||||||||||
Changes in intercompany note balances, net | 281,481 | (165,005 | ) | (116,476 | ) | - | - | |||||||||||||
Other financing activities | 892 | - | - | - | 892 | |||||||||||||||
Net cash used in financing activities | (46,976 | ) | (159,851 | ) | (116,476 | ) | - | (323,303 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | (16,760 | ) | (26,871 | ) | 11,410 | - | (32,221 | ) | ||||||||||||
Cash and cash equivalents, beginning of year | 127,170 | 85,355 | 20,305 | - | 232,830 | |||||||||||||||
Cash and cash equivalents, end of year | $ | 110,410 | $ | 58,484 | $ | 31,715 | $ | - | $ | 200,609 |
| For the year ended January 30, 2009 | ||||||||||||||
| DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
STATEMENTS OF INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | $ | 236,682 |
| $ | 10,457,668 |
| $ | 97,917 |
| $ | (334,599 | ) | $ | 10,457,668 |
|
Cost of goods sold |
| - |
|
| 7,396,571 |
|
| - |
|
| - |
|
| 7,396,571 |
|
Gross profit |
| 236,682 |
|
| 3,061,097 |
|
| 97,917 |
|
| (334,599 | ) |
| 3,061,097 |
|
Selling, general and administrative expenses |
| 210,665 |
|
| 2,499,331 |
|
| 73,214 |
|
| (334,599 | ) |
| 2,448,611 |
|
Litigation settlement and related costs, net |
| 32,000 |
|
| - |
|
| - |
|
| - |
|
| 32,000 |
|
Operating profit (loss) |
| (5,983) |
|
| 561,766 |
|
| 24,703 |
|
| - |
|
| 580,486 |
|
Interest income |
| (62,722 | ) |
| (36,844 | ) |
| (13,532 | ) |
| 110,037 |
|
| (3,061 | ) |
Interest expense |
| 427,365 |
|
| 74,586 |
|
| 18 |
|
| (110,037 | ) |
| 391,932 |
|
Other (income) expense |
| (2,788 | ) |
| - |
|
| - |
|
| - |
|
| (2,788 | ) |
Income (loss) before income taxes |
| (367,838 | ) |
| 524,024 |
|
| 38,217 |
|
| - |
|
| 194,403 |
|
Income tax expense (benefit) |
| (115,924 | ) |
| 190,146 |
|
| 11,999 |
|
| - |
|
| 86,221 |
|
Equity in subsidiaries’ earnings, net of taxes |
| 360,096 |
|
| - |
|
| - |
|
| (360,096 | ) |
| - |
|
Net income | $ | 108,182 |
| $ | 333,878 |
| $ | 26,218 |
| $ | (360,096 | ) | $ | 108,182 |
|
| For the year ended January 28, 2011 | ||||||||||||||
| DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
STATEMENTS OF CASH FLOWS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 627,857 |
| $ | 742,631 |
| $ | 25,925 |
| $ | (768,556 | ) | $ | 627,857 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 33,015 |
|
| 221,851 |
|
| 61 |
|
| - |
|
| 254,927 |
|
Deferred income taxes |
| 17,817 |
|
| 47,719 |
|
| (14,551 | ) |
| - |
|
| 50,985 |
|
Tax benefit of stock options |
| (13,905 | ) |
| - |
|
| - |
|
| - |
|
| (13,905 | ) |
Loss on debt retirement, net |
| 14,576 |
|
| - |
|
| - |
|
| - |
|
| 14,576 |
|
Non-cash share-based compensation |
| 15,956 |
|
| - |
|
| - |
|
| - |
|
| 15,956 |
|
Noncash inventory adjustments and asset impairments |
| - |
|
| 7,607 |
|
| - |
|
| - |
|
| 7,607 |
|
Other non-cash gains and losses |
| 1,395 |
|
| 4,547 |
|
| - |
|
| - |
|
| 5,942 |
|
Equity in subsidiaries’ earnings, net |
| (768,556 | ) |
| - |
|
| - |
|
| 768,556 |
|
| - |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories |
| - |
|
| (251,809 | ) |
| - |
|
| - |
|
| (251,809 | ) |
Prepaid expenses and other current assets |
| (1,646 | ) |
| (3,642 | ) |
| (4,869 | ) |
| - |
|
| (10,157 | ) |
Accounts payable |
| (5,446 | ) |
| 124,120 |
|
| 4,750 |
|
| - |
|
| 123,424 |
|
Accrued expenses and other |
| (28,442 | ) |
| (12,410 | ) |
| (1,576 | ) |
| - |
|
| (42,428 | ) |
Income taxes |
| 18,136 |
|
| 14,891 |
|
| 9,876 |
|
| - |
|
| 42,903 |
|
Other |
| 816 |
|
| (2,008 | ) |
| (2 | ) |
| - |
|
| (1,194 | ) |
Net cash provided by (used in) operating activities |
| (88,427 | ) |
| 893,497 |
|
| 19,614 |
|
| - |
|
| 824,684 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| (22,830 | ) |
| (397,322 | ) |
| (243 | ) |
| - |
|
| (420,395 | ) |
Sales of property and equipment |
| - |
|
| 1,448 |
|
| - |
|
| - |
|
| 1,448 |
|
Net cash used in investing activities |
| (22,830 | ) |
| (395,874 | ) |
| (243 | ) |
| - |
|
| (418,947 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
| 631 |
|
| - |
|
| - |
|
| - |
|
| 631 |
|
Repayments of long-term obligations |
| (129,217 | ) |
| (1,963 | ) |
| - |
|
| - |
|
| (131,180 | ) |
Repurchases of common stock and settlement of equity awards, net of employee taxes paid |
| (13,723 | ) |
| - |
|
| - |
|
| - |
|
| (13,723 | ) |
Tax benefit of stock options |
| 13,905 |
|
| - |
|
| - |
|
| - |
|
| 13,905 |
|
Changes in intercompany note balances, net |
| 253,586 |
|
| (234,257 | ) |
| (19,329 | ) |
| - |
|
| - |
|
Net cash provided by (used in) financing activities |
| 125,182 |
|
| (236,220 | ) |
| (19,329 | ) |
| - |
|
| (130,367 | ) |
Net increase in cash and cash equivalents |
| 13,925 |
|
| 261,403 |
|
| 42 |
|
| - |
|
| 275,370 |
|
Cash and cash equivalents, beginning of year |
| 97,620 |
|
| 103,001 |
|
| 21,455 |
|
| - |
|
| 222,076 |
|
Cash and cash equivalents, end of year | $ | 111,545 |
| $ | 364,404 |
| $ | 21,497 |
| $ | - |
| $ | 497,446 |
|
| For the year ended January 29, 2010 | ||||||||||||||
| DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
STATEMENTS OF CASH FLOWS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 339,442 |
| $ | 566,949 |
| $ | 32,978 |
| $ | (599,927 | ) | $ | 339,442 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 36,541 |
|
| 220,048 |
|
| 182 |
|
| - |
|
| 256,771 |
|
Deferred income taxes |
| (18,571 | ) |
| 67,317 |
|
| (33,886 | ) |
| - |
|
| 14,860 |
|
Tax benefit of stock options |
| (5,390 | ) |
| - |
|
| - |
|
| - |
|
| (5,390 | ) |
Loss on debt retirement, net |
| 55,265 |
|
| - |
|
| - |
|
| - |
|
| 55,265 |
|
Non-cash share-based compensation |
| 17,295 |
|
| - |
|
| - |
|
| - |
|
| 17,295 |
|
Noncash inventory adjustments and asset impairments |
| - |
|
| 647 |
|
| - |
|
| - |
|
| 647 |
|
Other non-cash gains and losses |
| 3,221 |
|
| 4,699 |
|
| - |
|
| - |
|
| 7,920 |
|
Equity in subsidiaries’ earnings, net |
| (599,927 | ) |
| - |
|
| - |
|
| 599,927 |
|
| - |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories |
| - |
|
| (100,248 | ) |
| - |
|
| - |
|
| (100,248 | ) |
Prepaid expenses and other current assets |
| 2,582 |
|
| (10,252 | ) |
| 372 |
|
| - |
|
| (7,298 | ) |
Accounts payable |
| 26,535 |
|
| 79,515 |
|
| (1 | ) |
| - |
|
| 106,049 |
|
Accrued expenses and other |
| (20,672 | ) |
| 10,494 |
|
| (2,465 | ) |
| - |
|
| (12,643 | ) |
Income taxes |
| 48,494 |
|
| (50,112 | ) |
| 2,771 |
|
| - |
|
| 1,153 |
|
Other |
| (3,203 | ) |
| 2,171 |
|
| 32 |
|
| - |
|
| (1,000 | ) |
Net cash provided by (used in) operating activities |
| (118,388 | ) |
| 791,228 |
|
| (17 | ) |
| - |
|
| 672,823 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| (34,647 | ) |
| (216,032) |
|
| (68 | ) |
| - |
|
| (250,747 | ) |
Sales of property and equipment |
| - |
|
| 2,701 |
|
| - |
|
| - |
|
| 2,701 |
|
Net cash used in investing activities |
| (34,647 | ) |
| (213,331 | ) |
| (68 | ) |
| - |
|
| (248,046 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
| 443,753 |
|
| - |
|
| - |
|
| - |
|
| 443,753 |
|
Issuance of long-term obligations |
| - |
|
| 1,080 |
|
| - |
|
| - |
|
| 1,080 |
|
Repayments of long-term obligations |
| (782,518 | ) |
| (2,742 | ) |
| - |
|
| - |
|
| (785,260 | ) |
Payment of cash dividends and related amounts |
| (239,731 | ) |
| - |
|
| - |
|
| - |
|
| (239,731 | ) |
Repurchases of common stock and settlement of equity awards, net of employee taxes paid |
| (5,928 | ) |
| - |
|
| - |
|
| - |
|
| (5,928 | ) |
Tax benefit of stock options |
| 5,390 |
|
| - |
|
| - |
|
| - |
|
| 5,390 |
|
Changes in intercompany note balances, net |
| 537,052 |
|
| (537,638 | ) |
| 586 |
|
| - |
|
| - |
|
Net cash provided by (used in) financing activities |
| (41,982 | ) |
| (539,300 | ) |
| 586 |
|
| - |
|
| (580,696 | ) |
Net increase (decrease) in cash and cash equivalents |
| (195,017 | ) |
| 38,597 |
|
| 501 |
|
| - |
|
| (155,919 | ) |
Cash and cash equivalents, beginning of year |
| 292,637 |
|
| 64,404 |
|
| 20,954 |
|
| - |
|
| 377,995 |
|
Cash and cash equivalents, end of year | $ | 97,620 |
| $ | 103,001 |
| $ | 21,455 |
| $ | - |
| $ | 222,076 |
|
| For the year ended January 30, 2009 | ||||||||||||||
| DOLLAR GENERAL CORPORATION | GUARANTOR SUBSIDIARIES | OTHER | ELIMINATIONS | CONSOLIDATED TOTAL | ||||||||||
STATEMENTS OF CASH FLOWS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 108,182 |
| $ | 333,878 |
| $ | 26,218 |
| $ | (360,096 | ) | $ | 108,182 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 34,638 |
|
| 213,003 |
|
| 258 |
|
| - |
|
| 247,899 |
|
Deferred income taxes |
| (4,681 | ) |
| 16,500 |
|
| 61,615 |
|
| - |
|
| 73,434 |
|
Tax benefit of stock options |
| (950 | ) |
| - |
|
| - |
|
| - |
|
| (950 | ) |
Gain on debt retirement, net |
| (3,818 | ) |
| - |
|
| - |
|
| - |
|
| (3,818 | ) |
Non-cash share-based compensation |
| 9,958 |
|
| - |
|
| - |
|
| - |
|
| 9,958 |
|
Noncash inventory adjustments and asset impairments |
| - |
|
| 50,671 |
|
| - |
|
| - |
|
| 50,671 |
|
Other non-cash gains and losses |
| 714 |
|
| 5,538 |
|
| - |
|
| - |
|
| 6,252 |
|
Equity in subsidiaries’ earnings, net |
| (360,096 | ) |
| - |
|
| - |
|
| 360,096 |
|
| - |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories |
| - |
|
| (173,014 | ) |
| - |
|
| - |
|
| (173,014 | ) |
Prepaid expenses and other current assets |
| (2,310 | ) |
| 3,765 |
|
| (2,053 | ) |
| - |
|
| (598 | ) |
Accounts payable |
| 18,717 |
|
| 121,546 |
|
| 93 |
|
| - |
|
| 140,356 |
|
Accrued expenses and other |
| 11,427 |
|
| 46,177 |
|
| 11,132 |
|
| - |
|
| 68,736 |
|
Income taxes |
| 56,596 |
|
| (10,797 | ) |
| (11,813 | ) |
| - |
|
| 33,986 |
|
Other |
| 2,529 |
|
| 11,643 |
|
| (88 | ) |
| - |
|
| 14,084 |
|
Net cash provided by (used in) operating activities |
| (129,094 | ) |
| 618,910 |
|
| 85,362 |
|
| - |
|
| 575,178 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| (16,467 | ) |
| (189,058 | ) |
| (21 | ) |
| - |
|
| (205,546 | ) |
Purchases of short-term investments |
| - |
|
| - |
|
| (9,903 | ) |
| - |
|
| (9,903 | ) |
Sales of short-term investments |
| - |
|
| - |
|
| 61,547 |
|
| - |
|
| 61,547 |
|
Sales of property and equipment |
| - |
|
| 1,266 |
|
| - |
|
| - |
|
| 1,266 |
|
Net cash provided by (used in) investing activities |
| (16,467 | ) |
| (187,792 | ) |
| 51,623 |
|
| - |
|
| (152,636 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
| 4,228 |
|
| - |
|
| - |
|
| - |
|
| 4,228 |
|
Repayments under revolving credit facility |
| (102,500 | ) |
| - |
|
| - |
|
| - |
|
| (102,500 | ) |
Repayments of long-term obligations |
| (40,780 | ) |
| (3,645 | ) |
| - |
|
| - |
|
| (44,425 | ) |
Repurchases of common stock and settlement of equity awards, net of employee taxes paid |
| (3,009 | ) |
| - |
|
| - |
|
| - |
|
| (3,009 | ) |
Tax benefit of stock options |
| 950 |
|
| - |
|
| - |
|
| - |
|
| 950 |
|
Changes in intercompany note balances, net |
| 570,989 |
|
| (422,448 | ) |
| (148,541 | ) |
| - |
|
| - |
|
Net cash provided by (used in) financing activities |
| 429,878 |
|
| (426,093 | ) |
| (148,541 | ) |
| - |
|
| (144,756 | ) |
Net increase (decrease) in cash and cash equivalents |
| 284,317 |
|
| 5,025 |
|
| (11,556 | ) |
| - |
|
| 277,786 |
|
Cash and cash equivalents, beginning of year |
| 8,320 |
|
| 59,379 |
|
| 32,510 |
|
| - |
|
| 100,209 |
|
Cash and cash equivalents, end of year | $ | 292,637 |
| $ | 64,404 |
| $ | 20,954 |
| $ | - |
| $ | 377,995 |
|
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.(b)
Management’s Annual Report on Internal Control Over Financial Reporting.
Our management prepared and is responsible for the consolidated financial statements and all related financial information contained in this report. This responsibility includes establishing and maintainingTo comply with the requirements of Section 404 of the Sarbanes–Oxley Act of 2002, management designed and implemented a structured and comprehensive assessment process to evaluate the effectiveness of its internal control over financial reporting. TheSuch assessment of the effectiveness of our internal control over financial reporting was based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Management regularly monitors our internal control over financial reporting, and actions are taken to correct any deficiencies as they are identified. Based on its assessment, management has concluded that Dollar General’sour internal control over financial reporting is effective as of February 1, 2008.
Ernst & Young LLP, regardingthe independent registered public accounting firm that audited our consolidated financial statements, has issued an attestation report on management's assessment of our internal control over financial reporting. Such attestation report is contained below.
114
(c) Attestation Report of Independent Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Dollar General Corporation
We have audited Dollar General Corporation and subsidiaries’ internal control over financial reporting as of January 28, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Dollar General Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s reportAnnual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to attestation bythe risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
115
In our opinion, Dollar General Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 28, 2011, based onthe COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Dollar General Corporation and subsidiaries as of January 28, 2011 and January 29, 2010, and the related consolidated statements of income, shareholders' equity, and cash flows for the years ended January 28, 2011, January 29, 2010, and January 30, 2009 of Dollar General Corporation and subsidiaries and our report dated March 22, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Nashville, Tennessee
March 22, 2011
(d)
Changes in Internal Control Over Financial Reporting
. There have been no changes during the quarter endedITEM 9B.
OTHER INFORMATION
Not applicable.
116
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
Information Regarding Directors and Executive Officers.
(b)
Compliance with Warburg Pincus, where he was involvedSection 16(a) of the Exchange Act. Information required by this Item 10 regarding compliance with Section 16(a) of the Exchange Act is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the execution and oversight of a number of investments in the energy sector. Mr. Agrawal’s prior experience also includes Thayer Capital Partners, where he played a role in the firm’s business services investments, and McKinsey & Co., where he provided strategic and M&A advice to clients in a variety of industries. He has been a member of our Board of Directors since July 2007. KKR2011 Proxy Statement, which information under such caption is an affiliate of Dollar General.
(c) Audit Committee Financial Expert.
Code of Business Conduct and Ethics.
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and Board members. This Code is posted on our Internet website at www.dollargeneral.com. If we choose to no longer post such Code, we will provide a free copy to any person upon written request to Dollar General Corporation, c/o Investor Relations Department, 100 Mission Ridge, Goodlettsville, TN 37072. We intend to provide any required disclosure of an amendment to or waiver from the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar(d)
Procedures for Shareholders to the persons included in the Summary Compensation Table below as our “named executive officers” (or “NEOs”). In addition, references to “2007” mean our fiscal year ended February 1, 2008, references to the “Merger” mean our merger that occurred on July 6, 2007 discussed more fully elsewhere inNominate Directors. Information required by this document, references to the “Merger Agreement” mean the agreement governing the Merger and references to “Project Alpha” refer to certain strategic initiatives discussed in the “Executive Overview” section of "Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this document.
(e)
Audit Committee Information. Information required by this Item 10 regarding our audit committee and our audit committee financial expert is contained under the position of Interim CEO upon Mr. Perdue’s resignation on July 6, 2007. At that time,captions “Corporate Governance—Does the Board set Mr. Beré’s potential Teamshare payout percentages at 35% (threshold), 140% (target)have standing Audit, Compensation and 280% (maximum) of base salary upon achievement of EBITDA-based performance levels of $630 million (threshold), $700 million (target),Nominating Committees” and $770 million (maximum). Mr. Beré’s performance target level, as well as the calculation of the related EBITDA-based performance metric, were chosen to match the level used for vesting purposes for the performance-based options (discussed below under “Long-Term Incentive Program”) granted to the NEOs“—Does Dollar General have an audit committee financial expert serving on July 6, 2007. Threshold and maximum performance levels were set at 90% and 110% of the target level. Mr. Beré’s fiscal 2007 bonus opportunity was not based on a prorated graduated scale for performance between the threshold and target and the target and maximum levels.
ITEM 11.
EXECUTIVE COMPENSATION
The Compensation Committee targeted a certain economic value to be delivered through these incentives which an NEO would realize only if our stock price increased. Long-term incentives are also important to our compensation program’s recruiting and retention objectives because most of the companies in our market comparator group offer them. Following the Merger, our long-term incentives are designed to compensate NEOs for a long-term commitment to us, while motivating sustained increases in our financial performance.
Name and Principal Position | Year | Salary ($)(2) | Bonus ($)(3) | Stock Awards ($)(4) | Option Awards ($)(5) | Non-Equity Incentive Plan Compensation ($)(6) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
Richard W. Dreiling, Chief Executive Officer(1) | 2007 | 34,615 | 2,000,000 | 36,777 | 42,174 | 41,760 | -- | 62,141 | (7) | 2,217,467 | |||||||||||||||||||||||
David A. Perdue, Former Chairman & Chief Executive Officer(1) | 2007 | 488,390 | -- | 8,259,225 | 1,690,873 | -- | 4,179,884 | (8) | 11,238,529 | (9) | 25,856,901 | ||||||||||||||||||||||
2006 | 1,037,540 | -- | 1,472,904 | 87,582 | -- | 677,541 | (8) | 151,448 | 3,427,015 | ||||||||||||||||||||||||
David L. Beré, President and Chief Operating Officer(1) | 2007 | 717,528 | -- | 974,231 | 1,381,712 | 1,009,400 | -- | 187,046 | (10) | 4,269,917 | |||||||||||||||||||||||
David M. Tehle, Executive Vice President & Chief Financial Officer | 2007 | 594,523 | -- | 632,162 | 1,149,922 | 493,213 | -- | 130,464 | (11) | 3,000,284 | |||||||||||||||||||||||
2006 | 580,022 | 188,500 | 235,247 | 194,127 | -- | -- | 121,126 | 1,319,022 | |||||||||||||||||||||||||
Beryl J. Buley, Division President, Merchandising, Marketing & Supply Chain | 2007 | 589,398 | -- | 690,116 | 1,065,045 | 488,962 | -- | 111,234 | (12) | 2,944,755 | |||||||||||||||||||||||
2006 | 575,022 | 186,875 | 183,223 | 180,669 | -- | -- | 273,801 | 1,399,590 | |||||||||||||||||||||||||
Kathleen R. Guion, Division President, Store Operations & Store Development | 2007 | 512,520 | -- | 521,453 | 917,214 | 425,184 | -- | 115,011 | (13) | 2,491,382 | |||||||||||||||||||||||
2006 | 500,019 | 162,500 | 206,455 | 154,982 | -- | -- | 151,971 | 1,175,927 | |||||||||||||||||||||||||
Challis M. Lowe, Executive Vice President, Human Resources | 2007 | 420,266 | -- | 512,771 | 768,251 | 348,651 | -- | 118,133 | (14) | 2,168,072 | |||||||||||||||||||||||
2006 | 404,182 | 133,250 | 130,813 | 117,933 | -- | -- | 174,322 | 960,500 |
March 15, 2005 | September 1, 2005 | January 24, 2006 | March 16, 2006 | March 23, 2007 | July 7, 2007 | |||||||||||||||||||
Expected dividend yield | .85 | % | .85 | % | 1.0 | % | .82 | % | .91 | % | 0 | % | ||||||||||||
Expected stock price volatility | 27.4 | % | 25.9 | % | 24.7 | % | 28.7 | % | 18.5 | % | 42.3 | % | ||||||||||||
Risk-free interest rate | 4.25 | % | 3.71 | % | 4.31 | % | 4.7 | % | 4.5 | % | 4.9 | % | ||||||||||||
Expected life of options (years) | 5.0 | 5.0 | 4.5 | 5.7 | 5.7 | 7.5 | ||||||||||||||||||
Exercise price | $ | 22.35 | $ | 18.51 | $ | 16.94 | $ | 17.54 | $ | 21.25 | $ | 5.00 | ||||||||||||
Stock price on date of grant | $ | 22.35 | $ | 18.51 | $ | 16.94 | $ | 17.54 | $ | 21.25 | $ | 5.00 |
Name | Grant Date | Date of Board Action(1) | Estimated Possible Payouts Under Non- Equity Incentive Plan Awards(2) Threshold Target Maximum ($) ($) ($) | Estimated Future Payouts Under Equity Incentive Plan Awards Target(#)(3) | All Other Stock Awards: Number of Shares of Stock or Units (#)(4) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) | ||||||||||||||||||||||||||
Mr. Dreiling | 16,438 | 32,877 | 65,753 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
1/21/08 | 1/11/08 | -- | -- | -- | -- | -- | 1,250,000 | (5) | 5.00 | (5) | 3,120,875 | |||||||||||||||||||||||
1/21/08 | 1/11/08 | -- | -- | -- | 1,250,000 | -- | -- | 5.00 | (3) | 3,120,875 | ||||||||||||||||||||||||
1/21/08 | 1/11/08 | -- | -- | -- | -- | 890,000 | -- | -- | 4,450,000 | |||||||||||||||||||||||||
Mr. Perdue | 566,500 | 1,133,000 | 2,266,000 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
3/23/07 | 3/20/07 | -- | -- | -- | -- | -- | 313,630 | (6) | 21.25 | (6) | 1,690,873 | |||||||||||||||||||||||
3/23/07 | 3/20/07 | -- | -- | -- | -- | 110,693 | -- | -- | 2,325,226 | |||||||||||||||||||||||||
Mr. Beré | 252,350 | 1,009,400 | 2,018,800 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | -- | 126,565 | (6) | 21.25 | (6) | 682,350 | |||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | 44,670 | -- | -- | 949,238 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 1,125,000 | (5) | 5.00 | (5) | 3,042,225 | ||||||||||||||||||||||||
7/6/07 | -- | -- | -- | 1,125,000 | -- | -- | 5.00 | (3) | 3,042,225 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 5,809 | (7) | 1.25 | (7) | 21,784 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 17,590 | (7) | 1.25 | (7) | 65,963 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 25,313 | (7) | 1.25 | (7) | 94,924 | (7) | |||||||||||||||||||||||
Mr. Tehle | 194,155 | 388,310 | 776,620 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | -- | 49,917 | (6) | 21.25 | 269,118 | ||||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | 17,618 | -- | -- | 374,383 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 550,000 | (5) | 5.00 | (5) | 1,487,310 | ||||||||||||||||||||||||
7/6/07 | -- | -- | -- | 550,000 | -- | -- | 5.00 | (3) | 1,487,310 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 54,426 | (7) | 1.25 | (7) | 204,098 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 44,464 | (7) | 1.25 | (7) | 166,740 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 83,134 | (7) | 1.25 | (7) | 311,753 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 9,983 | (7) | 1.25 | (7) | 37,436 | (7) | |||||||||||||||||||||||
Mr. Buley | 192,481 | 384,963 | 769,925 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | -- | 39,883 | (6) | 21.25 | (6) | 215,021 | |||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | 14,076 | -- | -- | 299,115 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 437,500 | (5) | 5.00 | (5) | 1,183,088 | ||||||||||||||||||||||||
7/6/07 | -- | -- | -- | 437,500 | -- | -- | 5.00 | (3) | 1,183,088 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 134,933 | (7) | 1.25 | (7) | 505,999 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 66,364 | (7) | 1.25 | (7) | 248,865 | (7) | |||||||||||||||||||||||
Ms. Guion | 167,375 | 334,750 | 669,500 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | -- | 39,883 | (6) | 21.25 | (6) | 215,021 | |||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | 14,076 | -- | -- | 299,115 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 437,500 | (5) | 5.00 | (5) | 1,183,088 | ||||||||||||||||||||||||
7/6/07 | -- | -- | -- | 437,500 | -- | -- | 5.00 | (3) | 1,183,088 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 22,942 | (7) | 1.25 | (7) | 86,033 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 35,504 | (7) | 1.25 | (7) | 133,140 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 66,364 | (7) | 1.25 | (7) | 248,865 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 7,976 | (7) | 1.25 | (7) | 29,910 | (7) | |||||||||||||||||||||||
Ms. Lowe | 137,248 | 274,495 | 548,990 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | -- | 35,733 | (6) | 21.25 | (6) | 192,647 | |||||||||||||||||||||||
3/23/07 | 3/19/07 | -- | -- | -- | -- | 12,612 | -- | -- | 268,005 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 337,500 | (5) | 5.00 | (5) | 912,668 | ||||||||||||||||||||||||
7/6/07 | -- | -- | -- | 337,500 | -- | -- | 5.00 | (3) | 912,668 | |||||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 39,088 | (7) | 1.25 | (7) | 146,580 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 59,466 | (7) | 1.25 | (7) | 222,998 | (7) | |||||||||||||||||||||||
7/6/07 | -- | -- | -- | -- | -- | 7,146 | (7) | 1.25 | (7) | 26,798 | (7) |
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Option Awards | Stock Awards | |||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1) | |||||||||||||||||||||
Mr. Dreiling | -- | 1,250,000 | (2) | -- | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||
250,000 | (3) | -- | 1,000,000 | (4) | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||
-- | -- | -- | -- | -- | 890,000 | (5) | 4,450,000 | |||||||||||||||||||||
Mr. Perdue | -- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||
Mr. Beré | 5,809 | (6) | -- | -- | 1.25 | 8/12/2012 | -- | -- | ||||||||||||||||||||
17,590 | (7) | -- | -- | 1.25 | 3/13/2013 | -- | -- | |||||||||||||||||||||
25,313 | (8) | -- | -- | 1.25 | 3/23/2017 | -- | -- | |||||||||||||||||||||
-- | 1,125,000 | (2) | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||||
225,000 | (3) | -- | 900,000 | (4) | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||
Mr. Tehle(9) | 54,426 | (10) | -- | -- | 1.25 | 8/9/2014 | -- | -- | ||||||||||||||||||||
44,464 | (11) | -- | -- | 1.25 | 8/24/2014 | -- | -- | |||||||||||||||||||||
83,134 | (12) | -- | -- | 1.25 | 3/16/2016 | -- | -- | |||||||||||||||||||||
9,983 | (8) | -- | -- | 1.25 | 3/23/2017 | -- | -- | |||||||||||||||||||||
-- | 550,000 | (2) | -- | 5.00 | 7/6/2017 | -- | -- | |||||||||||||||||||||
110,000 | (3) | -- | 440,000 | (4) | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||
Mr. Buley | 134,933 | (13) | -- | -- | 1.25 | 1/24/2016 | -- | -- | ||||||||||||||||||||
66,364 | (12) | -- | -- | 1.25 | 3/16/2016 | -- | -- | |||||||||||||||||||||
-- | 437,500 | (2) | -- | 5.00 | 7/6/2017 | -- | -- | |||||||||||||||||||||
87,500 | (3) | -- | 350,000 | (4) | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||
Ms. Guion(14) | 22,942 | (15) | -- | -- | 1.25 | 12/2/2013 | -- | -- | ||||||||||||||||||||
35,504 | (11) | -- | -- | 1.25 | 8/24/2014 | -- | -- | |||||||||||||||||||||
66,364 | (12) | -- | -- | 1.25 | 3/16/2016 | -- | -- | |||||||||||||||||||||
7,976 | (8) | -- | -- | 1.25 | 3/23/2017 | -- | -- | |||||||||||||||||||||
-- | 437,500 | (2) | -- | 5.00 | 7/6/2017 | -- | -- | |||||||||||||||||||||
87,500 | (3) | -- | 350,000 | (4) | 5.00 | 7/6/2017 | -- | -- | ||||||||||||||||||||
Ms. Lowe | 39,088 | (16) | -- | -- | 1.25 | 9/1/2015 | -- | -- | ||||||||||||||||||||
59,466 | (11) | -- | -- | 1.25 | 3/16/2016 | -- | -- | |||||||||||||||||||||
7,146 | (8) | -- | -- | 1.25 | 3/23/2017 | -- | -- | |||||||||||||||||||||
-- | 337,500 | (2) | -- | 5.00 | 7/6/2017 | -- | -- | |||||||||||||||||||||
67,500 | (3) | -- | 270,000 | (4) | 5.00 | 7/6/2017 | -- | -- |
Option Awards(1) | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||
Mr. Dreiling | -- | -- | -- | -- | ||||||||||||
Mr. Perdue | 1,313,630 | 9,555,223 | 587,516 | 12,888,955 | ||||||||||||
Mr. Beré | 136,009 | 182,675 | 49,443 | 1,085,841 | ||||||||||||
Mr. Tehle | 235,217 | 720,034 | 40,113 | 877,225 | ||||||||||||
Mr. Buley | 195,683 | 784,780 | 39,692 | 870,668 | ||||||||||||
Ms. Guion | 200,483 | 497,956 | 33,107 | 724,171 | ||||||||||||
Ms. Lowe | 127,733 | 396,380 | 30,693 | 672,946 |
Name | Plan Name | Number of Years Credited Service (#) | Present Value of Accumulated Benefit ($) | Payments During Last Fiscal Year ($)(1) | ||||
Mr. Perdue | Supplemental Executive Retirement Plan for David A. Perdue | N/A | 0 | 6,208,966 |
Name | Executive Contributions in Last FY ($)(1) | Registrant Contributions in Last FY ($)(2) | Aggregate Earnings in Last FY ($)(3) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last FYE ($) |
Mr. Dreiling | -- | -- | -- | -- | -- |
Mr. Perdue | 24,420 | 17,753 | 13,568 | -- | 397,753(4) |
Mr. Beré | 35,876 | 86,555 | (185) | -- | 128,081 |
Mr. Tehle | 40,621 | 77,021 | 6,932 | -- | 332,588(5) |
Mr. Buley | 39,307 | 53,016 | (646) | -- | 193,336(6) |
Ms. Guion | 33,751 | 64,846 | 8,550 | -- | 296,607(7) |
Ms. Lowe | 21,013 | 51,149 | 3,310 | -- | 176,064(8) |
Name | Voluntary Without Good Reason | Involuntary Without Cause or Voluntary With Good Reason | Involuntary With Cause | Death | Disability | Retirement | Change-in-Control(1) |
Richard W. Dreiling | |||||||
Vested Options Prior To Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Options Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Restricted Stock & RSUs Due to the Event | $0 | $4,450,000 | $0 | $4,450,000 | $4,450,000 | $0 | $4,450,000 |
SERP Benefits Prior to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
SERP Benefits Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Deferred Comp Plan Balance Prior to and After the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Cash Severance | $0 | $4,041,760 | $0 | $0 | $41,760 | $0 | $4,041,760 |
Health & Welfare Continuation Payment | $0 | $10,305 | $0 | $0 | $0 | $0 | $10,305 |
Health & Welfare Continuation Gross-Up Payment To IRS | $0 | $15,000 | $0 | $0 | $0 | $0 | $15,000 |
Section 280(G) Excise Tax & Gross-Up Payment to IRS | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
Life Insurance Proceeds | N/A | N/A | N/A | $2,500,000 | N/A | N/A | N/A |
Total | $0 | $8,517,065 | $0 | $6,950,000 | $4,541,760 | $0 | $8,567,065 |
David A. Perdue | As of July 6, 2007 | ||||||
Vested Options Prior To Event | N/A | N/A | N/A | N/A | N/A | N/A | $9,320,000 |
Vesting of Options Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $235,223 |
Vesting of Restricted Stock & RSUs Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $11,669,109 |
SERP Benefits Prior to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
SERP Benefits Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $6,208,966 |
Deferred Comp Plan Balance Prior to and After the Event | N/A | N/A | N/A | N/A | N/A | N/A | $415,519 |
Cash Severance | N/A | N/A | N/A | N/A | N/A | N/A | $6,798,000 |
Health & Welfare Continuation Payment | N/A | N/A | N/A | N/A | N/A | N/A | $24,892 |
Health & Welfare Continuation Gross-Up Payment To IRS | N/A | N/A | N/A | N/A | N/A | N/A | $14,277 |
Section 280(G) Excise Tax & Gross-Up Payment to IRS | N/A | N/A | N/A | N/A | N/A | N/A | $5,279,760 |
Life Insurance Proceeds | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
Total | N/A | N/A | N/A | N/A | N/A | N/A | $39,965,747 |
David L. Beré | |||||||
Vested Options Prior To Event | $182,671 | $182,671 | $182,671 | $182,671 | $182,671 | $182,671 | $182,671 |
Vesting of Options Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Restricted Stock & RSUs Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
SERP Benefits Prior to the Event | $54,280 | $54,280 | $54,280 | $54,280 | $54,280 | $54,280 | $54,280 |
SERP Benefits Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Deferred Comp Plan Balance Prior to and After the Event | $73,801 | $73,801 | $73,801 | $73,801 | $73,801 | $73,801 | $73,801 |
Cash Severance | $0 | $2,451,400 | $0 | $0 | $0 | $0 | $2,451,400 |
Health & Welfare Continuation Payment | $0 | $16,518 | $0 | $0 | $0 | $0 | $16,518 |
Outplacement | $0 | $15,000 | $0 | $0 | $0 | $0 | $15,000 |
Section 280(G) Excise Tax & Gross-Up Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
Life Insurance Proceeds | N/A | N/A | N/A | $1,802,500 | N/A | N/A | N/A |
Total | $310,752 | $2,793,670 | $310,752 | $2,113,252 | $310,752 | $310,752 | $2,793,670 |
David M. Tehle | |||||||
Vested Options Prior To Event | $720,027 | $720,027 | $720,027 | $720,027 | $720,027 | $720,027 | $720,027 |
Vesting of Options Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Restricted Stock & RSUs Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
SERP Benefits Prior to the Event | $159,579 | $159,579 | $159,579 | $159,579 | $159,579 | $159,579 | $159,579 |
SERP Benefits Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Deferred Comp Plan Balance Prior to and After the Event | $173,009 | $173,009 | $173,009 | $173,009 | $173,009 | $173,009 | $173,009 |
Cash Severance | $0 | $1,971,420 | $0 | $0 | $0 | $0 | $1,971,420 |
Health & Welfare Continuation Payment | $0 | $16,518 | $0 | $0 | $0 | $0 | $16,518 |
Outplacement | $0 | $15,000 | $0 | $0 | $0 | $0 | $15,000 |
Section 280(G) Excise Tax & Gross-Up Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
Life Insurance Proceeds | N/A | N/A | N/A | $1,492,500 | N/A | N/A | N/A |
Total | $1,052,615 | $3,055,553 | $1,052,615 | $2,545,115 | $1,052,615 | $1,052,615 | $3,055,533 |
Beryl J. Buley | |||||||
Vested Options Prior To Event | $754,864 | $754,864 | $754,864 | $754,864 | $754,864 | $754,864 | $754,864 |
Vesting of Options Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Restricted Stock & RSUs Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
SERP Benefits Prior to the Event | $71,024 | $71,024 | $71,024 | $71,024 | $71,024 | $71,024 | $71,024 |
SERP Benefits Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $34,285 |
Deferred Comp Plan Balance Prior to and After the Event | $122,312 | $122,312 | $122,312 | $122,312 | $122,312 | $122,312 | $122,312 |
Cash Severance | $0 | $1,954,425 | $0 | $0 | $0 | $0 | $1,954,425 |
Health & Welfare Continuation Payment | $0 | $16,518 | $0 | $0 | $0 | $0 | $16,518 |
Outplacement | $0 | $15,000 | $0 | $0 | $0 | $0 | $15,000 |
Section 280(G) Excise Tax & Gross-Up Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
Life Insurance Proceeds | N/A | N/A | N/A | $1,480,625 | N/A | N/A | N/A |
Total | $948,200 | $2,934,143 | $948,200 | $2,428,825 | $948,200 | $948,200 | $2,968,428 |
Kathleen R. Guion | |||||||
Vested Options Prior To Event | $497,948 | $497,948 | $497,948 | $497,948 | $497,948 | $497,948 | $497,948 |
Vesting of Options Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Restricted Stock & RSUs Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
SERP Benefits Prior to the Event | $132,742 | $132,742 | $132,742 | $132,742 | $132,742 | $132,742 | $132,742 |
SERP Benefits Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Deferred Comp Plan Balance Prior to and After the Event | $163,865 | $163,865 | $163,865 | $163,865 | $163,865 | $163,865 | $163,865 |
Cash Severance | $0 | $1,699,500 | $0 | $0 | $0 | $0 | $1,699,500 |
Health & Welfare Continuation Payment | $0 | $10,305 | $0 | $0 | $0 | $0 | $10,305 |
Outplacement | $0 | $15,000 | $0 | $0 | $0 | $0 | $15,000 |
Section 280(G) Excise Tax & Gross-Up Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
Life Insurance Proceeds | N/A | N/A | N/A | $1,287,500 | N/A | N/A | N/A |
Total | $794,555 | $2,776,276 | $794,555 | $2,338,971 | $794,555 | $794,555 | $2,776,276 |
Challis M. Lowe | |||||||
Vested Options Prior To Event | $396,376 | $396,376 | $396,376 | $396,376 | $396,376 | $396,376 | $396,376 |
Vesting of Options Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Vesting of Restricted Stock & RSUs Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
SERP Benefits Prior to the Event | $82,663 | $82,663 | $82,663 | $82,663 | $82,663 | $82,663 | $82,663 |
SERP Benefits Due to the Event | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Deferred Comp Plan Balance Prior to and After the Event | $93,401 | $93,401 | $93,401 | $93,401 | $93,401 | $93,401 | $93,401 |
Cash Severance | $0 | $1,393,590 | $0 | $0 | $0 | $0 | $1,393,590 |
Health & Welfare Continuation Payment | $0 | $10,305 | $0 | $0 | $0 | $0 | $10,305 |
Outplacement | $0 | $15,000 | $0 | $0 | $0 | $0 | $15,000 |
Section 280(G) Excise Tax & Gross-Up Due to the Event | N/A | N/A | N/A | N/A | N/A | N/A | $0 |
Life Insurance Proceeds | N/A | N/A | N/A | $1,055,750 | N/A | N/A | N/A |
Total | $572,440 | $1,991,335 | $572,440 | $1,628,190 | $572,440 | $572,440 | $1,991,335 |
Name(1) | Fees Earned or Paid in Cash ($)(2) | Stock Awards ($)(3)(4)(5) | Option Awards ($)(5)(6) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($)(7) | Total ($) |
Raj Agrawal | 23,333 | - | - | - | - | - | 23,333 |
Michael M. Calbert | 23,333 | - | - | - | - | - | 23,333 |
Adrian Jones | 23,333 | - | - | - | - | - | 23,333 |
Dean B. Nelson | 23,333 | - | - | - | - | - | 23,333 |
Sumit Rajpal | - | - | - | - | - | - | - |
Dennis C. Bottorff | 38,625 | 124,353 | - | - | - | - | 162,978 |
Barbara L. Bowles | 33,625 | 124,353 | - | - | - | - | 157,978 |
Reginald D. Dickson | 22,500 | 124,353 | - | - | - | - | 146,853 |
E. Gordon Gee | 23,750 | 124,353 | - | - | - | - | 148,103 |
Barbara M. Knuckles | 22,500 | 124,353 | - | - | - | - | 146,853 |
J. Neal Purcell | 26,750 | 124,353 | - | - | - | - | 151,103 |
James D. Robbins | 35,500 | 124,353 | - | - | - | - | 159,853 |
Richard E. Thornburgh | 23,125 | 129,628 | - | - | - | - | 152,753 |
David M. Wilds | 36,250 | 124,353 | - | - | - | - | 160,603 |
Annual Cash Retainer | Other Annual Retainers | In-Person Meeting Attendance Fees | Telephonic Meeting Attendance Fee | ||||
Audit Committee Chairman | Other Committee Chairman | Presiding Director | Board Meeting | Audit Committee Meeting | Other Committee Meeting | ||
$35,000 | $20,000 | $10,000 | $15,000 | $1,250 | $1,500 | $1,250 | $625 |
Name | # of Committees Chaired | Presiding Director | In-Person Meetings Attended | Telephonic Meetings Attended (Board/Committee) | ||
Board | Audit Committee | Other Committee Meeting | ||||
Mr. Bottorff | 2 | 3 | 2 | 2 | 3 | |
Ms. Bowles | 1 | 3 | 2 | 1 | 5 | |
Mr. Dickson | - | 2 | - | 1 | 2 | |
Mr. Gee | - | 2 | - | 2 | 2 | |
Ms. Knuckles | - | 3 | - | 1 | - | |
Mr. Purcell | - | 3 | 2 | - | 4 | |
Mr. Robbins | 1 (Audit) | 3 | 2 | - | 2 | |
Mr. Thornburgh | - | 3 | - | - | 3 | |
Mr. Wilds | 1 | X | 3 | - | 1 | 2 |
Equity Compensation Plan Information.
The following table sets forth information about securities authorized for issuance under ourPlan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
Equity compensation plans approved by security holders(1) | 20,869,102 | $ | 4.68 | 3,470,200 | ||||||||
Equity compensation plans not approved by security holders | -- | -- | -- | |||||||||
Total(1) | 20,869,102 | $ | 4.68 | 3,470,200 |
Plan category | Number of securities | Weighted-average exercise price of outstanding options, warrants and rights | Number of |
|
|
|
|
Equity compensation plans approved by security holders(1) | 11,469,706 | $9.95 | 17,837,497 |
|
| ||
Equity compensation plans not approved by security holders | -- | -- | -- |
|
| ||
Total(1) | 11,469,706 | $9.95 | 17,837,497 |
|
|
|
|
(1) Column (a) consists of shares of common stock issuable upon exercise of outstanding options and upon vesting and payment of restricted stock units under the 2007 Stock Incentive Plan and shares of common stock issuable upon exercise of outstanding options under the 1998 Stock Incentive Plan. Restricted stock units are settled for shares of common stock on a one-for-one basis and have no exercise price. Accordingly, those units have been excluded for purposes of computing the weighted-average exercise price in column (b). Column (c) consists of shares reserved for issuance pursuant to the 2007 Stock Incentive Plan, whether in the form of stock, restricted stock, restricted stock units, or other stock-based awards or upon the exercise of an option or right. Although certain options remain outstanding under the 1998 Stock Incentive Plan, no future awards may be granted thereunder. |
(b) Security OwnershipOther Information. The information required by this Item 12 regarding security ownership of Certain Beneficial Ownerscertain beneficial owners and Management.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following table showsinformation required by this Item 13 regarding certain relationships and related transactions is contained under the amount of our common stock beneficially owned, as of March 17, 2008,caption “Transactions with Management and Others” in the 2011 Proxy Statement, which information under such caption is incorporated herein by those who were knownreference.
The information required by us to beneficially own more than 5% of our common stock,this Item 13 regarding director independence is contained under the caption “Director Independence” in the 2011 Proxy Statement, which information under such caption is incorporated herein by our directors and named executive officers individually andreference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by our directors and all of our executive officers as a group, all calculated in accordance with Rule 13d-3 of the Exchange Act under which a person generally is deemed to beneficially own a security if he has or shares voting or investment power over the security or if he has the right to acquire beneficial ownership within 60 days. Unless otherwise noted, these persons may be contacted at our executive offices and,this Item 14 regarding fees we paid to our knowledge, have sole votingprincipal accountant and investment power over the shares listed. Percentage computations are based on 555,481,897 shares of our stock outstanding as of March 17, 2008.
Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | |||||||
KKR(1)(2) | 288,399,897 | 51.92 | % | ||||||
The Goldman Sachs Group, Inc.(2)(3) | 119,999,943 | 21.60 | % | ||||||
Citigroup Capital Partners(2)(4) | 39,999,981 | 7.20 | % | ||||||
CPP Investment Board (USRE II) Inc.(2)(5) | 40,000,000 | 7.20 | % | ||||||
Wellington Management Company, LLP(2)(6) | 40,000,000 | 7.20 | % | ||||||
Michael M. Calbert(7) | 288,399,897 | 51.92 | % | ||||||
Raj Agrawal(7) | 288,399,897 | 51.92 | % | ||||||
Adrian Jones(8) | 119,999,943 | 21.60 | % | ||||||
Dean B. Nelson | -- | -- | |||||||
Richard W. Dreiling(9)(10) | 1,140,000 | * | |||||||
David L. Beré(10) | 687,177 | * | |||||||
David A. Perdue | -- | -- | |||||||
David M. Tehle(10) | 318,001 | * | |||||||
Beryl J. Buley(10) | 288,797 | * | |||||||
Kathleen R. Guion(10) | 250,698 | * | |||||||
Challis M. Lowe(10) | 199,255 | * | |||||||
All current directors and executive officers as a group (13 persons)(7)(8)(10) | 411,722,995 | 73.86 | % |
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Service | 2007 Aggregate Fees Billed ($) | 2006 Aggregate Fees Billed ($) |
Audit Fees(1) | 2,586,426 | 2,521,920 |
Audit-Related Fees(2) | 119,514 | 45,225 |
Tax Fees(3) | 163,645 | 182,937 |
All Other Fees(4) | 6,000 | 6,000 |
(a) | |
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements | ||
(b) | All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, are inapplicable or the information is included in the Consolidated Financial Statements and, therefore, have been omitted. | |
(c) | Exhibits: See Exhibit Index immediately following the signature pages hereto, which Exhibit Index is incorporated by reference as if fully set forth herein. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||||
Date: March 22, 2011 | By: | /s/ Richard W. Dreiling | ||
Richard W. Dreiling, Chairman and Chief Executive Officer |
We, the undersigned directors and officers of the Registrant,registrant, hereby severally constitute Richard W. Dreiling and David M. Tehle, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||||||
/s/ Richard W. Dreiling | Chairman & Chief Executive Officer (Principal Executive Officer) | March | 22, 2011 | |||||
RICHARD W. DREILING | ||||||||
/s/ David M. Tehle | Executive Vice President | March | 22, 2011 | |||||
DAVID M. TEHLE | ||||||||
/s/ Raj Agrawal | Director | March 22, 2011 | ||||||
RAJ AGRAWAL | ||||||||
/s/ Warren F. Bryant | Director | March 16, 2011 | ||||||
WARREN F. BRYANT | ||||||||
/s/ Michael M. Calbert | Director | March | 22, 2011 | |||||
MICHAEL | ||||||||
/s/ Adrian Jones | Director | March | 22, 2011 | |||||
ADRIAN JONES | ||||||||
/s/ | Director | March | 22, 2011 | ||
WILLIAM C. RHODES, III | |||||
/s/ David B. | Director | March 15, 2011 | |||
DAVID B. RICKARD |
EXHIBIT INDEX
3.1
Amended and Restated Charter of Dollar General Corporation (incorporated by reference to Exhibit 3.1 to Dollar General Corporation’s Current Report on Form 8-K dated November 18, 2009, filed with the SEC on November 18, 2009 (file no. 001-11421))
3.2
Amended and Restated Bylaws of Dollar General Corporation (incorporated by reference to Exhibit 3.2 to Dollar General Corporation’s Current Report on Form 8-K dated November 18, 2009, filed with the SEC on November 18, 2009 (file no. 001-11421))
4.1
Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to Dollar General Corporation’s Registration Statement on Form S-1 (file no. 333-161464))
4.2
Shareholders' Agreement of Dollar General Corporation, dated as of November 9, 2009 (incorporated by reference to Exhibit 4.1 to Dollar General Corporation’s Current Report on Form 8-K dated November 18, 2009, filed with the SEC on November 18, 2009 (file no. 001-11421))
4.3
Senior Indenture, dated July 6, 2007, among Buck Acquisition Corp., Dollar General Corporation, the guarantors named therein and U.S. Bank National Association (the successor trustee), as trustee (incorporated by reference to Exhibit 4.8 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.4
Form of 10.625% Senior Notes due 2015 (included in Exhibit 4.3)
4.5
First Supplemental Indenture to the Senior Indenture, dated as of September 25, 2007, between DC Financial, LLC, the Guaranteeing Subsidiary, and U.S. Bank National Association (the successor trustee), as trustee (incorporated by reference to Exhibit 4.14 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.6
Second Supplemental Indenture to the Senior Indenture, dated as of December 31, 2007, between Retail Risk Solutions, LLC, the Guaranteeing Subsidiary, and U.S. Bank National Association (the successor trustee), as trustee (incorporated by reference to Exhibit 4.32 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.7
Third Supplemental Indenture to the Senior Indenture, dated as of March 23, 2009, between the Guaranteeing Subsidiaries referenced therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.17 to Dollar General Corporation's Registration Statement on Form S-1 (file no. 333-158281))
4.8
Fourth Supplemental Indenture to the Senior Indenture, dated as of March 25, 2010, between the Guaranteeing Subsidiaries referenced therein and U.S. Bank National
123
Association, as trustee (incorporated by reference to Exhibit 4.18 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.9
Fifth Supplemental Indenture to the Senior Indenture, dated as of August 30, 2010, among Retail Property Investments, LLC and U.S. Bank National Association, as successor trustee (incorporated by reference to Exhibit 4.55 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.10
Instrument of Resignation, Appointment and Acceptance, effective as of February 25, 2009, by and among Dollar General Corporation, Wells Fargo Bank, National Association, and U.S. Bank National Association (incorporated by reference to Exhibit 99 to Dollar General Corporation’s Current Report on Form 8-K dated February 25, 2009, filed with the SEC on February 25, 2009 (file no. 001-11421))
4.11
Senior Subordinated Indenture, dated July 6, 2007, among Buck Acquisition Corp., Dollar General Corporation, the guarantors named therein and U.S. Bank National Association (the successor trustee), as trustee (incorporated by reference to Exhibit 4.9 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.12
Form of 11.875% / 12.625% Senior Subordinated Toggle Notes due 2017 (included in Exhibit 4.11)
4.13
First Supplemental Indenture to the Senior Subordinated Indenture, dated as of September 25, 2007, between DC Financial, LLC, the Guaranteeing Subsidiary, and U.S. Bank National Association (the successor trustee), as trustee (incorporated by reference to Exhibit 4.16 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.14
Second Supplemental Indenture to the Senior Subordinated Indenture, dated as of December 31, 2007, between Retail Risk Solutions, LLC, the Guaranteeing Subsidiary, and U.S. Bank National Association (the successor trustee), as trustee (incorporated by reference to Exhibit 4.33 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.15
Third Supplemental Indenture to the Senior Subordinated Indenture, dated as of March 23, 2009, between the Guaranteeing Subsidiaries referenced therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.23 to Dollar General Corporation's Registration Statement on Form S-1 (file no. 333-158281))
4.16
Fourth Supplemental Indenture to the Senior Subordinated Indenture, dated as of March 25, 2010, between the Guaranteeing Subsidiaries referenced therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.25 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.17
Fifth Supplemental Indenture to the Senior Subordinated Indenture, dated as of August 30, 2010, among Retail Property Investments, LLC and U.S. Bank National Association, as successor trustee (incorporated by reference to Exhibit 4.56 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.18
Registration Rights Agreement, dated July 6, 2007, among Buck Acquisition Corp., Dollar General Corporation, the guarantors named therein and the initial purchasers named therein (incorporated by reference to Exhibit 4.10 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.19
Registration Rights Agreement, dated July 6, 2007, among Buck Holdings, L.P., Buck Holdings, LLC, Dollar General Corporation and Shareholders named therein (incorporated by reference to Exhibit 4.18 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.20
Credit Agreement, dated as of July 6, 2007, among Dollar General Corporation, as Borrower, Citicorp North America, Inc., as Administrative Agent, and the other lending institutions from time to time party thereto (incorporated by reference to Exhibit 4.2 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.21
Guarantee to the Credit Agreement, dated as of July 6, 2007, among certain domestic subsidiaries of Dollar General Corporation, as Guarantors and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.3 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.22
Supplement No.1, dated as of September 11, 2007, to the Guarantee to the Credit Agreement, between DC Financial, LLC, as New Guarantor, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.23 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.23
Supplement No. 2, dated as of December 31, 2007, to the Guarantee to the Credit Agreement, between Retail Risk Solutions, LLC, as New Guarantor, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.34 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.24
Supplement No. 3, dated as of March 23, 2009, to the Guarantee to the Credit Agreement, between the New Guarantors referenced therein and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.30 to Dollar General Corporation's Registration Statement on Form S-1 (file no. 333-158281))
4.25
Supplement No. 4, dated as of March 25, 2010, to the Guarantee to the Credit Agreement, between the New Guarantors referenced therein and Citicorp North America, Inc., as
125
Collateral Agent (incorporated by reference to Exhibit 4.33 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.26
Supplement No. 5 to the Guarantee to the Credit Agreement, dated as of August 30, 2010, by and between Retail Property Investments, LLC and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.57 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.27
Security Agreement, dated as of July 6, 2007, among Dollar General Corporation and certain domestic subsidiaries of Dollar General Corporation, as Grantors, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.4 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.28
Supplement No.1, dated as of September 11, 2007, to the Security Agreement, between DC Financial, LLC, as New Grantor, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.25 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.29
Supplement No. 2, dated as of December 31, 2007, to the Security Agreement, between Retail Risk Solutions, LLC, as New Grantor, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.35 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.30
Supplement No. 3, dated as of March 23, 2009, to the Security Agreement, between the New Grantors referenced therein and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.34 to Dollar General Corporation's Registration Statement on Form S-1 (file no. 333-158281))
4.31
Supplement No. 4, dated as of March 25, 2010, to the Security Agreement, between the New Grantors referenced therein and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.38 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.32
Supplement No. 5 to the Security Agreement, dated as of August 30, 2010, between Retail Property Investments, LLC and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.58 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.33
Pledge Agreement, dated as of July 6, 2007, among Dollar General Corporation and certain domestic subsidiaries of Dollar General Corporation, as Pledgors, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.5 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.34
Supplement No.1, dated as of September 11, 2007, to the Pledge Agreement, between DC Financial, LLC, as Additional Pledgor, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.27 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.35
Supplement No. 2, dated as of December 31, 2007, to the Pledge Agreement, between Retail Risk Solutions, LLC, as Additional Pledgor, and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.36 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.36
Supplement No. 3, dated as of March 23, 2009, to the Pledge Agreement, between the Additional Pledgors referenced therein and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.38 to Dollar General Corporation's Registration Statement on Form S-1 (file no. 333-158281))
4.37
Supplement No. 4, dated as of March 25, 2010, to the Pledge Agreement, between the Additional Pledgors referenced therein and Citicorp North America, Inc., as Collateral Agent (incorporated by reference to Exhibit 4.43 to Dollar General Corporation's Registration Statement on Form S-3 (file no. 333-165799))
4.38
Supplement No. 5 to the Pledge Agreement, dated as of August 30, 2010, between Retail Property Investments, LLC and Citicorp North America, inc., as Collateral Agent (incorporated by reference to Exhibit 4.59 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.39
ABL Credit Agreement, dated as of July 6, 2007, among Dollar General Corporation, as Parent Borrower, certain domestic subsidiaries of Dollar General Corporation, as Subsidiary Borrowers, The CIT Group/Business Credit Inc., as ABL Administrative Agent, and the other lending institutions from time to time party thereto (incorporated by reference to Exhibit 4.6 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.40
Appointment of Successor Agent and Amendment No. 1 to the ABL Credit Agreement entered into as of July 31, 2009, by and among The CIT Group/Business Credit, Inc., Wells Fargo Retail Finance, LLC, Dollar General Corporation and the Subsidiary Borrowers and the Lenders signatory thereto (incorporated by reference to Exhibit 99 to Dollar General Corporation's Current Report on Form 8-K dated July 31, 2009, filed with the SEC on August 4, 2009 (file no. 001-11421))
4.41
Guarantee, dated as of September 11, 2007, to the ABL Credit Agreement, between DC Financial, LLC and The CIT Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.29 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.42
Supplement No. 1, dated as of December 31, 2007, to the Guarantee to the ABL Credit Agreement, between Retail Risk Solutions, LLC, as New Guarantor, and The CIT
127
Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.37 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.43
Supplement No. 2, dated as of March 23, 2009, to the Guarantee to the ABL Credit Agreement, between the New Guarantors referenced therein and The CIT Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.42 to Dollar General Corporation's Registration Statement on Form S-1 (file no. 333-158281))
4.44
Supplement No. 3, dated as of March 30, 2010, to the Guarantee to the ABL Credit Agreement, between the New Guarantors referenced therein and Wells Fargo Retail Finance, LLC, as ABL Collateral Agent (incorporated by reference to Exhibit 4.49 to Dollar General Corporation's Registration Statement on Form S-3 (file no. 333-165799))
4.45
Supplement No. 4 to the Guarantee to the ABL Credit Agreement, dated as of August 30, 2010, between Retail Property Investments, LLC and Wells Fargo Retail Finance, LLC, as Collateral Agent (incorporated by reference to Exhibit 4.60 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.46
ABL Security Agreement, dated as of July 6, 2007, among Dollar General Corporation, as Parent Borrower, certain domestic subsidiaries of Dollar General Corporation, as Subsidiary Borrowers, collectively the Grantors, and The CIT Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.7 to Dollar General Corporation’s Current Report on Form 8-K dated July 6, 2007, filed with the SEC on July 12, 2007 (file no. 001-11421))
4.47
Supplement No. 1, dated as of September 11, 2007, to the ABL Security Agreement, between DC Financial, LLC, as New Grantor, and The CIT Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.31 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.48
Supplement No. 2, dated as of December 31, 2007, to the ABL Security Agreement, between Retail Risk Solutions, LLC, as New Grantor, and The CIT Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.38 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
4.49
Supplement No. 3, dated as of March 23, 2009, to the ABL Security Agreement, between the New Grantors referenced therein and The CIT Group/Business Credit Inc., as ABL Collateral Agent (incorporated by reference to Exhibit 4.46 to Dollar General Corporation’s Registration Statement on Form S-1 (file no. 333-158281))
4.50
Supplement No. 4, dated as of March 30, 2010, to the ABL Security Agreement, between the New Grantors referenced therein and Wells Fargo Retail Finance, LLC, as ABL Collateral Agent (incorporated by reference to Exhibit 4.54 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
4.51
Supplement No. 5 to the Security Agreement to the ABL Credit Agreement, dated as of August 30, 2010, between Retail Property Investments, LLC and Wells Fargo Retail Finance, LLC, as Collateral Agent (incorporated by reference to Exhibit 4.61 to Dollar General Corporation’s Registration Statement on Form S-3 (file no. 333-165799))
10.1
Amended and Restated 2007 Stock Incentive Plan for Key Employees of Dollar General Corporation and its affiliates (as approved by shareholders on October 23, 2009) ((incorporated by reference to Exhibit 10.1 to Dollar General Corporation’s Registration Statement on Form S-1 (file no. 333-161464))*
10.2
Form of Stock Option Agreement between Dollar General Corporation and certain officers of Dollar General Corporation granting stock options pursuant to the 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.3
Form of Option Rollover Agreement between Dollar General Corporation and certain officers of Dollar General Corporation (incorporated by reference to Exhibit 10.3 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.4
Waiver of Certain Limitations Pertaining to Options Previously Granted under the Amended and Restated 2007 Stock Incentive Plan, effective August 26, 2010 (incorporated by reference to Exhibit 10.2 to Dollar General Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2010, filed with the SEC on August 31, 2010 (file no. 001-11421))*
10.5
Form of Management Stockholder’s Agreement among Dollar General Corporation, Buck Holdings, L.P. and certain officers of Dollar General Corporation (incorporated by reference to Exhibit 10.4 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.6
Amendment to Management Stockholder's Agreement among Dollar General Corporation, Buck Holdings, L.P. and key employees of Dollar General Corporation (July 2007 grant group) (incorporated by reference to Exhibit 10.2 to Dollar General Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 2009, filed with the SEC on December 12, 2009 (file no. 001-11421))*
10.7
Amendment to Management Stockholder's Agreement among Dollar General Corporation, Buck Holdings, L.P. and key employees of Dollar General Corporation (post-July 2007 grant group) (incorporated by reference to Exhibit 10.3 to Dollar General Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 2009, filed with the SEC on December 12, 2009 (file no. 001-11421))*
10.8
Second Amendment to Management Stockholder’s Agreements, effective June 3, 2010 (incorporated by reference to Exhibit 10.4 to Dollar General Corporation’s Quarterly
129
Report on Form 10-Q for the fiscal quarter ended April 30, 2010, filed with the SEC on June 8, 2010 (file no. 001-11421))*
10.9
Form of Director Restricted Stock Unit Award Agreement in connection with restricted stock unit grants made to outside directors pursuant to the Company’s Amended and Restated 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.15 to Dollar General Corporation’s Registration Statement on Form S-1 (file no. 333-161464))
10.10
Form of Director Stock Option Agreement in connection with option grants made to outside directors pursuant to the Company’s Amended and Restated 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to Dollar General Corporation’s Registration Statement on Form S-1 (file no. 333-161464))
10.11
1998 Stock Incentive Plan (As Amended and Restated effective as of May 31, 2006) (incorporated by reference to Exhibit 99 to Dollar General Corporation’s Current Report on Form 8-K dated May 31, 2006, filed with the SEC on June 2, 2006 (file no. 001-11421))*
10.12
Amendment to Dollar General Corporation 1998 Stock Incentive Plan, effective November 28, 2006 (incorporated by reference to Exhibit 10.8 to Dollar General Corporation’s Annual Report on Form 10-K for the fiscal year ended February 2, 2007, filed with the SEC on March 29, 2007 (file no. 001-11421))*
10.13
Amendment to Dollar General Corporation 1998 Stock Incentive Plan, effective August 26, 2010 (incorporated by reference to Exhibit 10.1 to Dollar General Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2010, filed with the SEC on August 31, 2010 (file no. 001-11421))*
10.14
Form of Stock Option Grant Notice in connection with option grants made pursuant to the 1998 Stock Incentive Plan (incorporated by reference to Dollar General Corporation’s Quarterly Report on Form 10-Q for the quarter ended July 29, 2005, filed with the SEC on August 25, 2005 (file no. 001-11421))*
10.15
Dollar General Corporation CDP/SERP Plan (as amended and restated effective December 31, 2007) (incorporated by reference to Exhibit 10.10 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.16
First Amendment to the Dollar General Corporation CDP/SERP Plan (as amended and restated effective December 31, 2007) (incorporated by reference to Exhibit 10.11 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.17
Second Amendment to the Dollar General Corporation CDP/SERP Plan (as amended and restated effective December 31, 2007), dated as of June 3, 2008 (incorporated by reference to Exhibit 10.6 to Dollar General Corporation’s Quarterly Report on Form 10-
130
Q for the quarter ended August 1, 2008, filed with the SEC on September 3, 2008 (file no. 001-11421))*
10.18
Amended and Restated Dollar General Corporation Annual Incentive Plan (incorporated by reference to Exhibit 10.14 to Dollar General Corporation’s Registration Statement on Form S-1 (file no. 333-161464))*
10.19
Dollar General Corporation 2010 Teamshare Bonus Program for Named Executive Officers (incorporated by reference to Exhibit 10.3 to Dollar General Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010, filed with the SEC on June 8, 2010 (file no. 001-11421))*
10.20
Summary of Dollar General Corporation Life Insurance Program as Applicable to Executive Officers (incorporated by reference to Exhibit 10.19 to Dollar General Corporation’s Annual Report on Form 10-K for the fiscal year ended February 2, 2007, filed with the SEC on March 29, 2007) (file no. 001-11421))*
10.21
Dollar General Corporation Domestic Relocation Policy for Officers *
10.22
Summary of Director Compensation
10.23
Amended and Restated Employment Agreement effective April 23, 2010, by and between Dollar General Corporation and Richard Dreiling (incorporated by reference to Exhibit 99.1 to Dollar General Corporation’s Current Report on Form 8-K dated April 23, 2010, filed with the SEC on April 27, 2010 (file no. 001-11421))*
10.24
Stock Option Agreement, dated as of January 21, 2008, between Dollar General Corporation and Richard Dreiling (incorporated by reference to Exhibit 10.29 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.25
Stock Option Agreement dated April 23, 2010, by and between Dollar General Corporation and Richard Dreiling (incorporated by reference to Exhibit 99.2 to Dollar General Corporation’s Current Report on Form 8-K dated April 23, 2010, filed with the SEC on April 27, 2010 (file no. 001-11421))*
10.26
Restricted Stock Award Agreement, effective as of January 21, 2008, between Dollar General Corporation and Richard Dreiling (incorporated by reference to Exhibit 10.32 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.27
Management Stockholder’s Agreement, dated as of January 21, 2008, among Dollar General Corporation, Buck Holdings, L.P. and Richard Dreiling (incorporated by reference to Exhibit 10.30 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))*
10.28
Employment Agreement effective April 1, 2009, by and between Dollar General Corporation and David M. Tehle (incorporated by reference to Exhibit 99.1 to Dollar
131
General Corporation's Current Report on Form 8-K dated March 30, 2009, filed with the SEC on April 3, 2009 (file no. 001-11421))*
10.29
Employment Agreement effective April 1, 2009, by and between Dollar General Corporation and Kathleen R. Guion (incorporated by reference to Exhibit 99.2 to Dollar General Corporation's Current Report on Form 8-K dated March 30, 2009, filed with the SEC on April 3, 2009 (file no. 001-11421))*
10.30
Employment Agreement, dated December 1, 2008, between Dollar General Corporation and Todd Vasos (incorporated by reference to Exhibit 10.35 to Dollar General Corporation's Annual Report on Form 10-K for the fiscal year ended January 29, 2010, filed with the SEC on March 24, 2009 (file no. 001-11421))*
10.31
Stock Option Agreement, dated December 19, 2008, between Dollar General Corporation and Todd Vasos (incorporated by reference to Exhibit 10.36 to Dollar General Corporation's Annual Report on Form 10-K for the fiscal year ended January 29, 2010, filed with the SEC on March 24, 2009 (file no. 001-11421))*
10.32
Management Stockholder's Agreement, dated December 19, 2008, among Dollar General Corporation, Buck Holdings, L.P., and Todd Vasos (incorporated by reference to Exhibit 10.37 to Dollar General Corporation's Annual Report on Form 10-K for the fiscal year ended January 29, 2010, filed with the SEC on March 24, 2009 (file no. 001-11421))*
10.33
Employment Agreement, effective March 24, 2010, by and between Dollar General Corporation and John Flanigan*
10.34
Stock Option Agreement, dated as of August 28, 2008, by and between Dollar General Corporation and John Flanigan*
10.35
Stock Option Agreement, dated as of May 28, 2009, by and between Dollar General Corporation and John Flanigan*
10.36
Stock Option Agreement, dated as of March 24, 2010, by and between Dollar General Corporation and John Flanigan*
10.37
Subscription Agreement entered into as of March 24, 2010, by and between Dollar General Corporation and John Flanigan*
10.38
Management Stockholder’s Agreement, dated as of August 28, 2008, by and between Dollar General Corporation, Buck Holdings, L.P., and John Flanigan*
10.39
Employment Agreement, effective March 24, 2010, by and between Dollar General Corporation and Robert Ravener*
10.40
Stock Option Agreement, dated as of August 28, 2008, by and between Dollar General Corporation and Robert Ravener*
10.41
Stock Option Agreement, dated as of December 19, 2008, by and between Dollar General Corporation and Robert Ravener*
10.42
Stock Option Agreement, dated as of March 24, 2010, by and between Dollar General Corporation and Robert Ravener*
10.43
Subscription Agreement entered into as of December 19, 2008 by and between Dollar General Corporation and Robert Ravener*
10.44
Management Stockholder’s Agreement entered into as of August 28, 2008 among Dollar General Corporation, Buck Holdings, L.P., and Robert Ravener*
10.45
Indemnification Agreement, dated July 6, 2007, among Buck Holdings, L.P., Dollar General Corporation, Kohlberg Kravis Roberts & Co L.P., and Goldman, Sachs & Co. (incorporated by reference to Exhibit 10.26 to Dollar General Corporation’s Registration Statement on Form S-4 (file no. 333-148320))
10.46
Indemnification Priority and Information Sharing Agreement, dated as of June 30, 2009, among Kohlberg Kravis Roberts & Co. L.P., the funds named therein and Dollar General Corporation (incorporated by reference to be Furnished With Reports Filed PursuantExhibit 10.42 to Section 15(d)
21
List of Subsidiaries of Dollar General Corporation
23
Consent of Independent Registered Public Accounting Firm
24
Powers of Attorney (included as part of the signature pages hereto)
31
Certifications of CEO and CFO under Exchange Act by Registrants Which Have Not Registered Securities Pursuant to Section 12Rule 13a-14(a)
32
Certifications of the Act
*
Management Contract or other proxy soliciting material since such time as the registration of Registrant’s securities under Section 12 of the Act was terminated.Compensatory Plan
133